UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 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 March 6, 2018 was 187,542,645. 

KEYSIGHT TECHNOLOGIES, INC.

TABLE OF CONTENTS

			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
		Condensed Consolidated Statement of Operations	3
		Condensed Consolidated Statement of Comprehensive Income	4
		Condensed Consolidated Balance Sheet	5
		Condensed Consolidated Statement of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	36
Part II.	Other Information		36
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 6.	Exhibits	49
Signature			50

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PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share data)

(Unaudited)

	Three Months Ended
	January 31,
	2018			2017
Net revenue:
Products	$	684		$	606
Services and other	153			120
Total net revenue	837			726
Costs and expenses:
Cost of products	337			255
Cost of services and other	73			67
Total costs	410			322
Research and development	146			108
Selling, general and administrative	289			213
Other operating expense (income), net	(3		)	(79		)
Total costs and expenses	842			564
Income (loss) from operations	(5		)	162
Interest income	3			1
Interest expense	(22		)	(12		)
Other income (expense), net	1			1
Income (loss) before taxes	(23		)	152
Provision (benefit) for income taxes	(117		)	43
Net income	$	94		$	109
Net income per share:
Basic	$	0.50		$	0.64
Diluted	$	0.50		$	0.63
Weighted average shares used in computing net income per share:
Basic	187			171
Diluted	189			173

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
	January 31,
	2018			2017
Net income	$	94		$	109
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net of tax benefit (expense) of zero and ($1)	(2		)	4
Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of zero and $1	2			2
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of zero	(2		)	1
Foreign currency translation, net of tax benefit (expense) of zero	41			(24		)
Net defined benefit pension cost and post retirement plan costs:
Change in actuarial net loss, net of tax expense of $3 and $13	10			28
Change in net prior service credit, net of tax benefit of $1 and $2	(4		)	(4		)
Other comprehensive income	45			7
Total comprehensive income	$	139		$	116

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)

	January 31, 2018			October 31, 2017
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	980		$	818
Accounts receivable, net	454			547
Inventory	609			588
Other current assets	232			224
Total current assets	2,275			2,177
Property, plant and equipment, net	539			530
Goodwill	1,894			1,882
Other intangible assets, net	807			855
Long-term investments	61			63
Long-term deferred tax assets	204			186
Other assets	270			240
Total assets	$	6,050		$	5,933
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	20		$	10
Accounts payable	229			211
Employee compensation and benefits	170			217
Deferred revenue	354			291
Income and other taxes payable	35			28
Other accrued liabilities	78			62
Total current liabilities	886			819
Long-term debt	2,028			2,038
Retirement and post-retirement benefits	315			309
Long-term deferred revenue	105			101
Other long-term liabilities	232			356
Total liabilities	3,566			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 January 31, 2018 and 188 million shares at October 31, 2017 issued	2			2
Treasury stock at cost; 2.3 million shares at January 31, 2018 and at October 31, 2017	(62		)	(62		)
Additional paid-in-capital	1,815			1,786
Retained earnings	1,141			1,041
Accumulated other comprehensive loss	(412		)	(457		)
Total stockholders' equity	2,484			2,310
Total liabilities and equity	$	6,050		$	5,933

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

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

	Three Months Ended
	January 31,
	2018			2017
Cash flows from operating activities:
Net income	$	94		$	109
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	78			32
Share-based compensation	19			18
Deferred tax expense (benefit)	(235		)	40
Excess and obsolete inventory-related charges	6			3
Gain on sale of land	—			(8		)
Pension curtailment and settlement gains	—			(68		)
Other non-cash expenses, net	2			—
Changes in assets and liabilities:
Accounts receivable	99			40
Inventory	(20		)	(10		)
Accounts payable	14			(12		)
Employee compensation and benefits	(50		)	(36		)
Retirement and post-retirement benefits	(12		)	(3		)
Deferred revenue	61			15
Income taxes payable	115			(15		)
Other assets and liabilities	—			10
Net cash provided by operating activities	171			115
Cash flows from investing activities:
Investments in property, plant and equipment	(24		)	(16		)
Proceeds from sale of land	—			8
Acquisition of businesses and intangible assets, net of cash acquired	(3		)	—
Net cash used in investing activities	(27		)	(8		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	24			19
Payment of taxes related to net share settlement of equity awards	(15		)	(11		)
Proceeds from revolving credit facility	40			—
Repayment of revolving credit facility	(40		)	—
Net cash provided by financing activities	9			8
Effect of exchange rate movements	9			(2		)
Net increase in cash and cash equivalents	162			113
Cash and cash equivalents at beginning of period	818			783
Cash and cash equivalents at end of period	$	980		$	896

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 January 31, 2018 and October 31, 2017, condensed consolidated statement of comprehensive income for the three months ended January 31, 2018 and 2017, condensed consolidated statement of operations for the three months ended January 31, 2018 and 2017, and condensed consolidated statement of cash flows for the three months ended January 31, 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 three months ended January 31, 2017, we recognized a gain of $8 million on the sale of the land tracts in other operating expense (income).

Restricted Cash. As of January 31, 2018, 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. As of 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

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.

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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; however, we have not completed our assessment, including the impact of our recent acquisitions of Ixia and ScienLab. 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 billing 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 the deferral of commissions that were previously expensed as incurred and may qualify for capitalization under the new standard.

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

In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting, 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 $1 million for the first quarter of 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 three months ended January 31, 2017:

	Three Months Ended January 31, 2017
	As Originally Reported		As Adjusted		Change
	(in millions)
Net cash provided by operating activities	$	102	$	115	$	13
Net cash provided by financing activities	$	21	$	8	$	(13	)

In March 2017, the FASB issued guidance that requires the service cost component of net periodic pension cost and net periodic post-retirement benefit cost to be included in operating expenses (together with other employee compensation costs) and the other components of the cost to be included in non-operating expenses. The standard is effective for annual and interim periods beginning after December 31, 2017. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

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 are evaluating the impact of adopting this guidance on our consolidated financial statements.

8

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.

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

Acquisitions in 2017

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"). Pursuant to the Merger Agreement, any outstanding and unexercised Ixia stock options with an exercise price below the Merger Consideration and any outstanding Ixia restricted stock awards were cancelled and converted into the right to receive a cash payment equal to the merger consideration of $19.65 per share (minus the exercise price for the Ixia stock options). The vested portion of the awards associated with prior service of Ixia employees represented approximately $47 million of the total consideration. We funded the acquisition with a combination of cash and proceeds from debt and equity financings. As a result of the acquisition, Ixia has become 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 Ixia acquisition was accounted for in accordance with the authoritative accounting guidance. The acquired assets and assumed liabilities were recorded by Keysight at their estimated fair values. Keysight determined the estimated fair values with the assistance of appraisals or valuations performed by third party specialists, discounted cash flow analysis, and estimates made by management. We expect to leverage and expand the existing sales channels and product development resources, and utilize the assembled workforce. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Ixia's net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

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.

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 below.

9

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 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

The fair values of cash and cash equivalents, short-term investments, accounts receivable, short-term investments, other current assets, accounts payable, employee compensation and benefits, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment, intangible assets, and deferred revenue were determined with the input from third-party valuation specialists. The fair values of certain other assets and certain other liabilities were determined internally using historical carrying values and estimates made by management. If 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.

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

As noted above, the intangible assets were valued with input from valuation specialists using the income approach, which includes the discounted cash flow, cost-savings, and relief from royalty methods. The in-process research and development was valued using the multi-period excess earnings method under the income approach by discounting forecasted cash flows directly related to the products expecting to result from the projects, net of returns on contributory assets. A discount rate of 14% was used to value the research and development projects, adjusted to reflect additional risks inherent in the acquired projects. The primary in-process projects acquired relate to next generation products which will be released in the near future. Total costs to complete for all Ixia in-process research and development were estimated at approximately $12 million as of the close date.

10

Acquisition and integration costs directly related to the Ixia acquisition were recorded in the condensed consolidated statement of operations as follows:

	Three Months Ended
	January 31,
	2018		2017
	(in millions)
Cost of products and services	$	2	$	—
Research and development	1		—
Selling, general and administrative	15		2
Total acquisition and integration costs	$	18	$	2

Such costs are expensed in accordance with the authoritative accounting guidance.

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. ScienLab is a Germany-based company that provides test solutions to automotive original equipment manufacturers and Tier 1 suppliers in the automotive and energy markets. This acquisition complements our portfolio, allowing end-to-end solutions for hybrid electric vehicles, electric vehicles, and battery test solutions that address e-mobility market dynamics. We funded the acquisition using existing cash. As a result of the acquisition, ScienLab has become 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 ScienLab acquisition was accounted for in accordance with the authoritative accounting guidance. The acquired assets and assumed liabilities were recorded by Keysight at their estimated fair values. Keysight determined the estimated fair values with the assistance of appraisals or valuations performed by third party specialists, discounted cash flow analysis, and estimates made by management. We expect to leverage and expand the existing sales channels and product development resources, and utilize the assembled workforce. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of ScienLab's net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

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.

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 below.

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

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The fair values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, deferred revenue, and current portion of long-term debt were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory and intangible assets were determined with the input from third-party valuation specialists. The fair values of certain other liabilities were determined internally using historical carrying values and estimates made by management. 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.

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

As noted above, the intangible assets were valued with input from valuation specialists using the income approach, which includes the discounted cash flow, cost-savings, and relief from royalty methods.

Acquisition and integration costs directly related to the ScienLab acquisition totaled $1 million for the three months ended January 31, 2018 which were recorded in selling, general and administrative expenses.

Supplemental Pro Forma Information (Unaudited)

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.

	Three Months Ended
in millions, except per share amounts	January 31, 2017
Net revenue	$	846
Net income	$	39
Net income per share - Basic	$	0.21
Net income per share - Diluted	$	0.21

The unaudited pro forma financial information for the three months ended January 31, 2017 combines the historical results of Keysight and Ixia for the three months ended January 31, 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. 

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

	Three Months Ended
	January 31,
	2018		2017
	(in millions)
Cost of products and services	$	3	$	3
Research and development	4		4
Selling, general and administrative	12		11
Total share-based compensation expense	$	19	$	18

 At both January 31, 2018 and 2017, share-based compensation capitalized within inventory was $1 million.

The following assumptions were used to estimate the fair value of LTP Program grants:

	Three Months Ended
	January 31,
	2018		2017
LTP Program:
Volatility of Keysight shares	25	%	27	%
Volatility of selected index	14	%	15	%
Price-wise correlation with selected peers	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. The awards based on TSR were valued using a Monte Carlo simulation model and those based on financial metrics were valued based on the market price of Keysight’s common stock on the date of grant. We did not grant any option awards for the three months ended January 31, 2018 and 2017, respectively. 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.

5.     INCOME TAXES

The company’s effective tax rate was a benefit of 515.8 percent for the three months ended January 31, 2018 and expense of 28.3 percent for the three months ended January 31, 2017. The income tax benefit was $117 million for the three months ended January 31, 2018, and income tax expense was $43 million for the three months ended January 31, 2017. The increase in the total income tax benefit and discrete benefit for the three months ended January 31, 2018 is primarily due to changes in U.S. tax law. The income tax benefit for the three months ended January 31, 2018 included a net discrete benefit of $115 million, primarily due to $117 million of benefit resulting from changes in U.S. tax law. The income tax provision for the three months ended January 31, 2017 included a net discrete expense of $23 million, 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, and several jurisdictions have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions. The 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 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 (“SCIT”) in Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed and the income in question

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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: a federal corporate income tax rate reduction from 35 percent to 21 percent; limitations on the deductibility of interest expense and executive compensation; creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and 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”).

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 23.3 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. This 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 $176 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. 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 January 31, 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 $117 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, remeasurement of the deferred tax liability recorded on the undistributed earnings of foreign subsidiaries that were not considered reinvested and 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 $117 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.

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
	January 31,
	2018		2017
	(in millions)
Numerator:
Net income	$	94	$	109
Denominator:
Basic weighted-average shares	187		171
Potential common shares— stock options and other employee stock plans	2		2
Diluted weighted-average shares	189		173

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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 months ended January 31, 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 months ended January 31, 2018 and 2017, we excluded approximately 668,100 shares and 424,400 shares, respectively.

7. SUPPLEMENTAL CASH FLOW INFORMATION

Net cash paid for income taxes was $1 million and $17 million for the three months ended January 31, 2018 and 2017, respectively. Cash paid for interest was $2 million and zero for the three months ended January 31, 2018 and 2017, respectively. The following table summarizes our non-cash investing activities that are not reflected in the condensed consolidated statement of cash flows:

	Three Months Ended
	January 31,
	2018			2017
	(in millions)
Capital expenditures in accounts payable	$	(3	)	$	(5	)
	$	(3	)	$	(5	)

8. INVENTORY

	January 31, 2018		October 31, 2017
	(in millions)
Finished goods	$	296	$	286
Purchased parts and fabricated assemblies	313		302
Total inventory	$	609	$	588

9. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill balances and the movements for each of our reportable operating segments as of and for the three months ended January 31, 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		3		—		1		12
Goodwill as of January 31, 2018	$	449	$	243	$	1,117	$	85	$	1,894

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Other intangible assets as of January 31, 2018 and October 31, 2017 consisted of the following:

	Other Intangible Assets as of January 31, 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	$	821	$	291	$	530	$	808	$	252	$	556
Backlog	13		13		—		13		12		1
Trademark/Tradename	33		10		23		33		8		25
Customer relationships	304		70		234		304		61		243
Non-compete agreements	1		—		1		1		—		1
Total amortizable intangible assets	1,172		384		788		1,159		333		826
In-Process R&D	19		—		19		29		—		29
Total	$	1,191	$	384	$	807	$	1,188	$	333	$	855

 During the three months ended January 31, 2018, we recognized no additions to goodwill and other intangible assets.During the three months ended January 31, 2018, there was a $3 million foreign exchange translation impact to other intangible assets. During the three months ended January 31, 2018, we transferred $10 million from in-process R&D to developed technology as projects were successfully completed.

Amortization of other intangible assets was $51 million and $11 million for the three months ended January 31, 2018 and 2017, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $152 million for the remainder of 2018, $202 million for 2019, $194 million for 2020, $127 million for 2021, $50 million for 2022 and $63 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 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.

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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 January 31, 2018 and October 31, 2017 were as follows:

	Fair Value Measurements at January 31, 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	$	451	$	451	$	—	$	—	$	403	$	403	$	—	$	—
Derivative instruments (foreign exchange contracts)	9		—		9		—		6		—		6		—
Long-term
Trading securities	13		13		—		—		13		13		—		—
Available-for-sale investments	31		31		—		—		34		34		—		—
Total assets measured at fair value	$	504	$	495	$	9	$	—	$	456	$	450	$	6	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	4	$	—	$	4	$	—	$	1	$	—	$	1	$	—
Long-term
Deferred compensation liability	13		—		13		—		13		—		13		—
Total liabilities measured at fair value	$	17	$	—	$	17	$	—	$	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 months ended January 31, 2018 and 2017 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.

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

17

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 January 31, 2018 was $2 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of January 31, 2018.

There were 121 foreign exchange forward contracts open as of January 31, 2018 that were designated as cash flow hedges. There were 63 foreign exchange forward contracts as of January 31, 2018 that were not designated as hedging instruments. The aggregated notional amounts by currency and designation as of January 31, 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	$	—		$	45
British Pound	—			(6		)
Singapore Dollar	11			1
Malaysian Ringgit	77			(5		)
Japanese Yen	(96		)	(34		)
Other currencies	(15		)	(10		)
Total	$	(23	)	$	(9	)

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 January 31, 2018 and October 31, 2017 were as follows:

Fair Values of Derivative Instruments
Asset Derivatives					Liability Derivatives
	Fair Value					Fair Value
Balance Sheet Location	January 31, 2018		October 31, 2017		Balance Sheet Location	January 31, 2018		October 31, 2017
(in millions)
Derivatives designated as hedging instruments:
Cash flow hedges
Foreign exchange contracts
Other current assets	$	7	$	5	Other accrued liabilities	$	2	$	—
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Other current assets	2		1		Other accrued liabilities	2		1
Total derivatives	$	9	$	6		$	4	$	1

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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
	January 31,
	2018		2017
	(in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Foreign exchange contracts:
Gain (loss) recognized in accumulated other comprehensive income	$	2	$	3
Gain (loss) reclassified from accumulated other comprehensive income into cost of sales	$	2	$	(1	)
Derivatives not designated as hedging instruments:
Gain (loss) recognized in other income (expense), net	$	1	$	2

The estimated amount of existing net gain at January 31, 2018 expected to be reclassified from accumulated other comprehensive income to cost of sales within the next twelve months is $4 million.

12. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS

For the three months ended January 31, 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 January 31,
	2018			2017			2018			2017			2018			2017
	(in millions)
Service cost—benefits earned during the period	$	6		$	5		$	3		$	4		$	—		$	—
Interest cost on benefit obligation	6			5			6			6			2			2
Expected return on plan assets	(9		)	(8		)	(21		)	(19		)	(4		)	(3		)
Amortization:
Net actuarial loss	3			4			6			9			4			5
Prior service credit	(2		)	(2		)	—			—			(3		)	(4		)
Settlement gain	—			—			—			(68		)	—			—
Net periodic benefit cost (benefit)	$	4		$	4		$	(6	)	$	(68	)	$	(1	)	$	—

We did not contribute to our U.S. Defined Benefit Plans and U.S. Post-Retirement Benefit Plan during the three months ended January 31, 2018 and 2017. We contributed $9 million and $7 million to our Non-U.S. Defined Benefit Plans during the three months ended January 31, 2018 and 2017, respectively.

During the remainder of 2018, we do not expect to contribute to our U.S. Defined Benefit Plans, and we expect to contribute $29 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

19

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:

	Three Months Ended
	January 31,
	2018			2017
	(in millions)
Beginning balance	$	45		$	44
Accruals for warranties including change in estimate	10			7
Settlements made during the period	(8		)	(8		)
Ending balance	$	47		$	43
Accruals for warranties due within one year	$	26		$	22
Accruals for warranties due after one year	21			21
Ending balance	$	47		$	43

Commitments

There were no material changes during the three months ended January 31, 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.

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 three months ended January 31, 2018, we borrowed and repaid $40 million of borrowings outstanding under the Revolving Credit Facility. As of January 31, 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 three months ended January 31, 2018.

Long-Term Debt

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

	January 31, 2018		October 31, 2017
	(in millions)
2019 Senior Notes at 3.30% ($500 face amount less unamortized costs of $2 and $2)	$	498	$	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
Term loan ($260 face amount less unamortized costs of zero)	260		260
	2,048		2,048
Less: Current portion of long-term debt	20		10
Total	$	2,028	$	2,038

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There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the three months ended January 31, 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. As of January 31, 2018, we had borrowings outstanding under the term loan of $260 million, which was repaid in February 2018.

As of January 31, 2018 and October 31, 2017, we had $27 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 $58 million and $91 million as of January 31, 2018 and October 31, 2017, respectively.

15. STOCKHOLDERS' EQUITY

Stock Repurchase Program

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

For the three months ended January 31, 2018, we did not repurchase any shares of common stock under the stock repurchase program.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component and related tax effects for the three months ended January 31, 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 October 31, 2017	$	14		$	(39	)	$	(468	)	$	35		$	1		$	(457	)
Other comprehensive income (loss) before reclassifications	(2		)	41			—			—			2			41
Amounts reclassified out of accumulated other comprehensive loss	—			—			13			(5		)	(2		)	6
Tax (expense) benefit	—			—			(3		)	1			—			(2		)
Other comprehensive income (loss)	(2		)	41			10			(4		)	—			45
As of January 31, 2018	$	12		$	2		$	(458	)	$	31		$	1		$	(412	)
As of October 31, 2016	$	10		$	(29	)	$	(646	)	$	50		$	(3	)	$	(618	)
Other comprehensive income (loss) before reclassifications	5			(24		)	24			—			3			8
Amounts reclassified out of accumulated other comprehensive loss	—			—			17			(6		)	1			12
Tax (expense) benefit	(1		)	—			(13		)	2			(1		)	(13		)
Other comprehensive income (loss)	4			(24		)	28			(4		)	3			7
As of January 31, 2017	$	14		$	(53	)	$	(618	)	$	46		$	—		$	(611	)

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Reclassifications out of accumulated other comprehensive loss for the three months ended January 31, 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
	January 31,
	2018			2017
	(in millions)
Unrealized gain (loss) on derivatives	$	2		$	(1	)	Cost of products
	—			—			Provision for income taxes
	2			(1		)	Net of income tax
Net defined benefit pension cost and post retirement plan costs:
Actuarial net loss	(13		)	(17		)
Prior service credits	5			6
	(8		)	(11		)	Total before income tax
	2			3			Provision for income taxes
	(6		)	(8		)	Net of income tax
Total reclassifications for the period	$	(4	)	$	(9	)

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

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").

16. SEGMENT INFORMATION

We provide electronic design and test instruments and systems and related software, software design tools, and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. Additionally, we provide test, security and visibility solutions that validate, secure and optimize networks and applications from engineering concept to live deployment. We also offer customization, consulting and optimization services throughout the customer's product life cycle.

On April 18, 2017, we completed the acquisition of Ixia, which became our fourth reportable operating segment, the Ixia Solutions Group (“ISG”). As a result, Keysight now has four segments, Communications Solutions Group, Electronic Industrial Solutions Group, Ixia Solutions Group and Services Solutions Group.

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

Descriptions of our four reportable operating segments are as follows:

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

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

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The Ixia Solutions Group helps customers validate the performance and security resilience of their networks and associated applications. The test, visibility and security solutions help organizations and their customers strengthen their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on the group's solutions to validate new products before shipping and secure ongoing operation of their networks with better visibility and security. The group’s solutions consist of high-performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight equipment. In addition to providing repair and calibration support for Keysight equipment, we also calibrate non-Keysight equipment. The group serves the same markets as Keysight’s Communications Solutions and Electronic Industrial Solutions Groups, providing industry-specific services to deliver complete Keysight solutions and help customers reduce their total cost of ownership for their design and test equipment.

A significant portion of the segments' expenses, other than the Ixia Solutions Group expenses, arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The Ixia Solutions Group will not be allocated these charges until integrated into the shared services and infrastructure.

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

The profitability of each of the segments is measured after excluding share-based compensation expense, restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, separation and related costs, amortization related to acquisition-related balances and other items as noted in the reconciliations below.

	Communications Solutions Group		Electronic Industrial Solutions Group		Ixia Solutions Group		Services Solutions Group		Total Segments
	(in millions)
Three Months Ended January 31, 2018:
Total net revenue	$	420	$	203	$	108	$	106	$	837
Amortization of acquisition-related balances	—		—		19		—		19
Total segment revenue	$	420	$	203	$	127	$	106	$	856
Segment income from operations	$	59	$	37	$	18	$	17	$	131
Three Months Ended January 31, 2017:
Total net revenue	$	434	$	192	$	—	$	100	$	726
Amortization of acquisition-related balances	—		—		—		—		—
Total segment revenue	$	434	$	192	$	—	$	100	$	726
Segment income from operations	$	72	$	42	$	—	$	14	$	128

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

	Three Months Ended
	January 31,
	2018			2017
	(in millions)
Total reportable operating segments' income from operations	$	131		$	128
Share-based compensation expense	(19		)	(18		)
Restructuring and related costs	(2		)	(2		)
Amortization of acquisition-related balances	(89		)	(10		)
Acquisition and integration costs	(19		)	(6		)
Separation and related costs	(1		)	(6		)
Japan pension settlement gain	—			68
Northern California wildfire-related costs	(7		)	—
Other	1			8
Income (loss) from operations, as reported	(5		)	162
Interest income	3			1
Interest expense	(22		)	(12		)
Other income (expense), net	1			1
Income (loss) before taxes, as reported	$	(23	)	$	152

There has been no material change in total assets by segment since October 31, 2017.

17. IMPACT OF NORTHERN CALIFORNIA WILDFIRES

During the week of October 8, 2017, wildfires in northern California adversely impacted the Keysight corporate headquarters site in Santa Rosa, CA. Our headquarters was under mandatory evacuation for more than three weeks, and while direct damage to our core facilities was limited, our buildings did experience some smoke and other fire-related impacts. Cleaning and additional restoration efforts are ongoing in both production and non-production areas of the site. To ensure business continuity, the company leased temporary office space to support Santa Rosa employees who could not immediately reoccupy the site. Keysight is insured for the damage caused by the fire, including business interruption insurance, and though we do not expect the fire to have a significant impact on our business results, the disruption will impact the seasonality of revenue in the first half of fiscal 2018.

For the three months ended January 31, 2018, we recognized costs of $7 million, net of $31 million of estimated insurance recovery. Expenses included primarily cleaning, unabsorbed overhead, and other direct costs related to the impact of this event.

A summary of the net charges in the consolidated statement of operations resulting from the impact of the fire is shown below:

	Three months ended January 31, 2018
	(in millions)
Cost of products and services	$	5
Research and development	1
Selling, general and administrative	1
Total	$	7

As of January 31, 2018, we have received insurance proceeds of $10 million. We have increased our insurance receivable from $1.7 million at October 31, 2017 to $23 million at January 31, 2018 for known losses for which insurance reimbursement is probable. The receivable is included in other current assets in the condensed consolidated balance sheet. In many cases, our insurance coverage exceeds the amount of these covered losses, but no gain contingencies have been recognized as our ability to realize those gains remains uncertain for financial reporting purposes. We currently estimate that insurance recovery will range from $80 million to $110 million, which we believe will cover our expected losses and expenses related to the wildfires. There may be a difference in timing of costs incurred and the related insurance reimbursement.

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

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

Basis of Presentation

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

Overview and Executive Summary

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

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

On April 18, 2017, we completed the acquisition of Ixia, which became our fourth reportable operating segment, the Ixia Solutions Group (“ISG”). The group provides testing, visibility and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers and network equipment manufacturers. As a result, Keysight now has four segments, Communications Solutions Group, Electronic Industrial Solutions Group, Ixia Solutions Group and Services Solutions Group. Also, our global team of experts provides startup assistance, consulting, optimization and application support across all of our end markets.

Three months ended January 31, 2018 and 2017

Total orders for the three months ended January 31, 2018 were $964 million, an increase of 39 percent when compared to the same period last year and an increase of 37 percent excluding the impact of currency fluctuations. Orders associated with acquisitions accounted for 22 percentage points of order growth for the three months ended January 31, 2018 when compared to the same period last year.

Net revenue of $837 million for the three months ended January 31, 2018 increased 15 percent when compared to the same period last year and increased 14 percent excluding the impact of currency fluctuations. For the three months ended January 31, 2018, acquisitions added approximately 16 percentage points of revenue growth. The disruption from the northern California wildfires unfavorably impacted the seasonality of our first quarter revenue. While the recovery is progressing faster than our original projections due to the strong response and execution of our teams, full recovery is projected to extend at least into our third fiscal quarter. Across the business groups, strength in revenue from the Electronic Industrial Solutions Group and Services Solutions Group was partially offset by a decline in the Communications Solutions Group, which was most impacted by the wildfire disruption.

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Net income for the three months ended January 31, 2018 was $94 million compared to $109 million for the corresponding period last year. The decline in net income was driven by one-time gains in the three months ended January 31, 2017 from a Japan pension settlement and land sale, increases in the current period in amortization of acquisition-related balances, acquisition and integration costs, people-related costs and an unfavorable impact from the northern California wildfires, partially offset by favorable impacts from new U.S. tax legislation and higher revenue volume.

Impact of Northern California Wildfires

During the week of October 8, 2017, wildfires in northern California adversely impacted the Keysight corporate headquarters site in Santa Rosa, CA. Our headquarters was under mandatory evacuation for more than three weeks, and while direct damage to our core facilities was limited, our buildings did experience some smoke and other fire-related impacts. Cleaning and additional restoration efforts are ongoing in both production and non-production areas of the site. To ensure business continuity, the company leased temporary office space to support Santa Rosa employees who could not immediately reoccupy the site. Keysight is insured for the damage caused by the fire, including business interruption insurance, and though we do not expect the fire to have a significant impact on our business results, the disruption will impact the seasonality of revenue in the first half of fiscal 2018.

 For the three months ended January 31, 2018, we recognized costs of $7 million, net of $31 million of estimated insurance recovery. Expenses included primarily cleaning, unabsorbed overhead, and other direct costs related to the impact of this event.

As of January 31, 2018, we have received insurance proceeds of $10 million. We have increased our insurance receivable from $1.7 million at October 31, 2017 to $23 million at January 31, 2018 for known losses for which insurance reimbursement is probable. The receivable is included in other current assets in the condensed consolidated balance sheet. In many cases, our insurance coverage exceeds the amount of these covered losses, but no gain contingencies have been recognized as our ability to realize those gains remains uncertain for financial reporting purposes. We currently estimate that insurance recovery will range from $80 million to $110 million, which we believe will cover our expected losses and expenses related to the wildfires. There may be a difference in timing of costs incurred and the related insurance reimbursement.

Outlook

Looking forward, we believe our investments in R&D combined with our completed acquisitions, which have expanded of our technology portfolio and the size of our addressable market, position Keysight for growth. We remain focused on delivering value through innovative solutions targeted at faster growing markets where customers are investing in next-generation digital and electronic technologies. Internally, we are continuously working to improve operational efficiency within, and across, all functions. 

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. GAAP ("GAAP"). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and other intangible assets, warranty, restructuring and accounting for income taxes. For a detailed description of our critical accounting policies and estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2017. Management bases estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

Adoption of New Pronouncements

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

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Foreign Currency

Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our consolidated statement of operations. We experience some fluctuations within individual lines of the consolidated balance sheet and consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis of up to a rolling twelve-month period. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.

Results from Operations

Orders and Net Revenue

In general, recorded orders represent firm purchase commitments from our customers with established terms and conditions for products and services. Consistent with our strategy, we are seeing an increase in solution sales, which have a longer order-to-revenue conversion cycle; however, the majority of recorded orders will be delivered within six months.

Revenue reflects the delivery and acceptance of the products and services as defined on the customer's terms and conditions. Cancellations are recorded in the period received from the customer and historically have not been material.

	Three Months Ended				Year over Year Change
	January 31,				Three
	2018		2017		Months
	(in millions)
Orders	$	964	$	695	39%
Net revenue:
Products	$	684	$	606	13%
Services and other	153		120		27%
Total net revenue	$	837	$	726	15%

Orders

Total orders for the three months ended January 31, 2018 were $964 million, an increase of 39 percent when compared to the same period last year and an increase of 37 percent excluding the impact of currency fluctuations. Orders associated with acquisitions accounted for 22 percentage points of order growth for the three months ended January 31, 2018 when compared to the same period last year. For the three months ended January 31, 2018, orders grew across all geographies.

Net Revenue

The following table provides the percent change in net revenue for the three months ended January 31, 2018 by geographic region including and excluding the impact of currency changes as compared to the same period last year.

	Year over Year % Change
	Three Months Ended
	January 31, 2018
Geographic Region	actual		currency adjusted
Americas	31	%	31	%
Europe	18	%	12	%
Japan	(10	)%	(10	)%
Asia Pacific ex-Japan	6	%	4	%
Total net revenue	15	%	14	%

Net revenue of $837 million for the three months ended January 31, 2018 increased 15 percent when compared to the same periods last year and increased 14 percent excluding the impact of currency fluctuations. Revenue associated with acquisitions

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accounted for 16 percentage points of revenue growth for the three months ended January 31, 2018 when compared to the same period last year.

Revenue from the Communications Solutions Group represented approximately 50 percent of total revenue for the three months ended January 31, 2018 and decreased 3 percent year-over-year. For the three months ended January 31, 2018, the Communications Solutions Group's contribution to the total revenue growth was a decline of 2 percentage points. The revenue decline was primarily driven by the impact of the northern California wildfires. While the recovery is progressing faster than our original projections due to the strong response and execution of our teams, full recovery is projected to extend at least into our third fiscal quarter. Revenue decline in Japan and Europe was partially offset by growth in the Americas, while Asia Pacific excluding Japan was flat.

Revenue from the Electronic Industrial Solutions Group represented approximately 24 percent of total revenue for the three months ended January 31, 2018 and grew 6 percent year-over-year. For the three months ended January 31, 2018, the Electronic Industrial Solutions Group's contribution to the total revenue growth was an increase of 1 percentage point, with growth in Europe and the Americas, partially offset by declines in Asia Pacific including Japan.

Revenue from the Ixia Solutions Group represented approximately 13 percent of total revenue for the three months ended January 31, 2018. The Ixia Solutions Group contribution to the total revenue growth was 15 percentage points for the three months ended January 31, 2018.

Revenue from the Services Solutions Group represented approximately 13 percent of total revenue for the three months ended January 31, 2018 and grew 6 percent year-over-year. For the three months ended January 31, 2018, the Services Solutions Group's contribution to the total revenue growth was an increase of 1 percentage point, with growth in the Americas and Asia Pacific excluding Japan, partially offset by declines in Japan and Europe.

Costs and Expenses

	Three Months Ended						Year over Year Change
	January 31,						Three
	2018			2017			Months
Total gross margin	51.1		%	55.7		%	(5) ppts
Operating margin	(0.6		)%	22.4		%	(23) ppts
in millions
Research and development	$	146		$	108		35%
Selling, general and administrative	$	290		$	213		36%
Other operating expense (income), net	$	(3	)	$	(79	)	(96)%

Gross margin decreased 5 percentage points for the three months ended January 31, 2018 compared to the same period last year. The decline in gross margin was driven by the unfavorable impact from amortization of acquisition-related balances, the northern California wildfire-related expenses, and an increase in warranty expenses and inventory charges, partially offset by favorable revenue mix.

Research and development expense increased 35 percent for the three months ended January 31, 2018 compared to the same period last year, driven by the addition of Ixia to the cost structure along with higher people-related costs. As a percentage of revenue, research and development expense was 17 percent for the three months ended January 31, 2018, as compared to 15 percent for the same period last year. We remain committed to investment in research and development and have focused our development efforts on strategic opportunities in order to capture future growth.

Selling, general and administrative expenses increased 36 percent for the three months ended January 31, 2018 compared to the same period last year, primarily driven by the addition of Ixia to our cost structure, increases in amortization of acquisition-related balances, people-related costs, acquisition and integration costs, the unfavorable impact of foreign currency movements and the unfavorable impact from the northern California wildfire-related expenses, partially offset by a decline in separation and related costs.

Other operating expense (income), net for the three months ended January 31, 2018 and 2017 was income of $3 million and $79 million, respectively. The other operating income for the three months ended January 31, 2017 was largely driven by $68 million from a Japan pension settlement gain and $8 million of gain on sale of land.

Operating margin for the three months ended January 31, 2018 decreased 23 percentage points when compared to the same period last year, primarily driven by one-time gains in the three months ended January 31, 2017 from a Japan pension settlement

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and sale of land and increases in current period in amortization of acquisition-related balances, acquisition and integration costs, and people-related costs, partially offset by gains related to revenue volume.

As of January 31, 2018, our headcount was approximately 12,700 as compared to approximately 10,400 at January 31, 2017. The increase was primarily driven by acquisitions.

Interest Expense

Interest expense for the three months ended January 31, 2018 was $22 million as compared to $12 million for the comparable period last year. The increase in interest expense for the three months ended January 31, 2018 is primarily due to interest expense and amortization of debt issuance costs on $700 million of senior notes issued in April 2017 and interest on borrowings under a senior unsecured term loan.

Income Taxes

The company’s effective tax rate was a benefit of 515.8 percent for the three months ended January 31, 2018 and an expense of 28.3 percent for the three months ended January 31, 2017. The income tax benefit was $117 million for the three months ended January 31, 2018, and income tax expense was $43 million for the three months ended January 31, 2017. The increase in the total income tax benefit and discrete benefit for the three months ended January 31, 2018 is primarily due to changes in U.S. tax law. The income tax benefit for the three months ended January 31, 2018 included a net discrete benefit of $115 million, primarily due to $117 million of benefit resulting from changes in U.S. tax law. The income tax provision for the three months ended January 31, 2017 included a net discrete expense of $23 million, 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, and several jurisdictions have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions. The 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 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 (“SCIT”) in Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company.

At January 31, 2018, our estimated annual effective tax rate is an expense of 7.5 percent excluding discrete items. We determine our interim tax provision using an estimated annual effective tax rate methodology except in jurisdictions where we anticipate a full year loss or we have a year-to-date ordinary loss for which no tax benefit can be recognized. In these jurisdictions, tax expense is computed separately. Our estimated annual effective tax rate differs from the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower rates, reserves for uncertain tax positions, the U.S. federal research and development tax credit and the impact of permanent differences.

Segment Overview

Keysight has four reportable operating segments: Communications Solutions Group, Electronic Industrial Solutions Group, Ixia Solutions Group and Services Solutions Group. The Communications Solutions Group serves customers spanning the worldwide commercial communications end market, which includes internet infrastructure, and the aerospace, defense and government end market. The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of electronic industrial end markets. Ixia Solutions Group (“ISG”). The group provides testing, visibility and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers and network equipment manufacturers. The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight

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equipment. In addition, our global team of experts provides startup assistance, consulting, optimization and application support across all of our end markets.

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

Communications Solutions Group

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

Net Revenue

	Three Months Ended				Year over Year Change
	January 31,				Three
	2018		2017		Months
	(in millions)
Net revenue	$	420	$	434	(3)%

The Communications Solutions Group revenue for the three months ended January 31, 2018 decreased 3 percent when compared to the same period last year primarily driven by the impact of the northern California wildfires, leading to a decline in revenue from the aerospace, defense and government and commercial communication markets. While the recovery is progressing faster than our original projections due to the strong response and execution of our teams, full recovery is projected to extend at least into our third fiscal quarter.

Revenue from the commercial communications market represented approximately 58 percent of the total Communications Solutions Group revenue for the three months ended January 31, 2018, and decreased 4 percent year-over-year. For the three months ended January 31, 2018, revenue declines in Europe and Japan were partially offset by growth in the Americas and Asia Pacific excluding Japan when compared to the same period last year. The commercial communications market revenue decline was primarily driven by impact of the northern California wildfires. Decline in the data center market was partially offset by growth in 5G technologies, while 4G spending has stabilized.

Revenue from the aerospace, defense and government market represented approximately 42 percent of the total Communications Solutions Group revenue for the three months ended January 31, 2018 and decreased 3 percent year-over-year. For the three months ended January 31, 2018, revenue decline in Asia Pacific including Japan was partially offset by growth in Europe and the Americas. The aerospace, defense and government market revenue decline was primarily driven by impact of the northern California wildfires and weakness in China and the rest of Asia.

Gross Margin and Operating Margin

The following table shows the Communications Solutions Group margins, expenses and income from operations for the three months ended January 31, 2018 versus the three months ended January 31, 2017.

	Three Months Ended						Year over Year Change
	January 31,						Three
	2018			2017			Months
Total gross margin	60.9		%	60.5		%	-
Operating margin	14.0		%	16.7		%	(3) ppts
in millions
Research and development	$	80		$	76		6%
Selling, general and administrative	$	118		$	117		1%
Other operating expense (income), net	$	(2	)	$	(2	)	(6)%
Income from operations	$	59		$	72		(19)%

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Gross margin for the three months ended January 31, 2018 increased slightly when compared to the same period last year. The gross margin growth for the three months ended January 31, 2018 was primarily driven by higher revenue from software, partially offset by higher warranty and inventory charges.

Research and development expense for the three months ended January 31, 2018 increased 6 percent compared to the same period last year, driven by continued investments in R&D programs. We remain committed to investment in research and development and have focused our development efforts on strategic opportunities to capture future growth.

Selling, general and administrative expense for the three months ended January 31, 2018 increased 1 percent compared to the same period last year, primarily driven by an increase in infrastructure-related costs.

Other operating expense (income) for the three months ended January 31, 2018 and 2017 was income of $2 million.

Income from Operations

Income from operations for the three months ended January 31, 2018 decreased $13 million on a corresponding revenue decline of $14 million when compared to the same period last year.

Operating margin for the three months ended January 31, 2018 declined 3 percentage points when compared to the same period last year, driven by lower revenue and increased investments in R&D and infrastructure related costs.

Electronic Industrial Solutions Group

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

Net Revenue

	Three Months Ended				Year over Year Change
	January 31,				Three
	2018		2017		Months
	(in millions)
Net revenue	$	203	$	192	6%

The Electronic Industrial Solutions Group revenue for the three months ended January 31, 2018 increased 6 percent when compared to the same period last year and grew 3 percent excluding the impact of acquisitions. Revenue growth was driven by strong growth in automotive and energy and semiconductor measurement markets, partially offset by decline in the general electronics measurement market. Strong revenue growth in Europe and the Americas was partially offset by a decline in Japan and Asia Pacific excluding Japan.

Gross Margin and Operating Margin

The following table shows the Electronic Industrial Solutions Group margins, expenses and income from operations for the three months ended January 31, 2018 versus the three months ended January 31, 2017.

	Three Months Ended						Year over Year Change
	January 31,						Three
	2018			2017			Months
Total gross margin	59.0		%	59.9		%	(1) ppt
Operating margin	18.5		%	21.7		%	(3) ppts
in millions
Research and development	$	33		$	28		19%
Selling, general and administrative	$	50		$	46		8%
Other operating expense (income), net	$	(1	)	$	(1	)	(8)%
Income from operations	$	37		$	42		(10)%

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Gross margin for the three months ended January 31, 2018 declined 1 percentage point when compared to the same period last year, primarily driven by unfavorable revenue mix and an increase in warranty expense. 

Research and development expense for the three months ended January 31, 2018 increased 19 percent compared to the same period last year, primarily driven by continued investments in leading-edge technologies and key growth opportunities in our end markets and acquisition-related costs. We remain committed to investment in research and development and have focused our development efforts on strategic opportunities to capture future growth.

Selling, general and administrative expense for the three months ended January 31, 2018 increased 8 percent compared to the same period last year, primarily due to an increase in people-related costs, investments in sales resources and acquisition-related costs.

Other operating expense (income) for the three months ended January 31, 2018 and 2017 was income of $1 million.

Income from Operations

Income from operations for the three months ended January 31, 2018 decreased $5 million on a corresponding revenue increase of $11 million when compared to the same period last year.

Operating margin for the three months ended January 31, 2018 decreased 3 percentage points when compared to the same period last year, primarily driven by unfavorable mix and increased investments in R&D, sales resources and acquisition-related costs.

Ixia Solutions Group

The Ixia Solutions Group helps customers validate the performance and security resilience of their networks and associated applications. The test,visibility and security solutions help organizations and their customers strengthen their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on the group's solutions to validate new products before shipping and secure ongoing operation of their networks with better visibility and security. The group’s solutions consist of our high-performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

	Three Months Ended				Year over Year Change
	January 31,				Three
	2018		2017		Months
Total gross margin	75.6	%	—	%	n/a
Operating margin	14.5	%	—	%	n/a