10-Q 1 keys-01312019x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(MARK ONE) 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2019 
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 every Interactive Data File required to be submitted 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 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 ¨
 
 
 
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 1, 2019 was 187,988,723




KEYSIGHT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 

2


PART I
— FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
January 31,
 
2019
 
2018
Net revenue:
 
 
 
Products
$
837

 
$
684

Services and other
169

 
153

Total net revenue
1,006

 
837

Costs and expenses:
 
 
 
Cost of products
347

 
339

Cost of services and other
81

 
73

Total costs
428

 
412

Research and development
173

 
150

Selling, general and administrative
288

 
295

Other operating expense (income), net
(4
)
 
(3
)
Total costs and expenses
885

 
854

Income (loss) from operations
121

 
(17
)
Interest income
4

 
3

Interest expense
(20
)
 
(22
)
Other income (expense), net
15

 
13

Income (loss) before taxes
120

 
(23
)
Provision (benefit) for income taxes
6

 
(117
)
Net income
$
114

 
$
94

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.61

 
$
0.50

Diluted
$
0.60

 
$
0.50

 
 
 
 
Weighted average shares used in computing net income per share:
 
 
 
Basic
187

 
187

Diluted
190

 
189


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,
 
2019
 
2018
Net income
$
114

 
$
94

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

 
(2
)
Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of zero
(2
)
 
2

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

 
(2
)
Foreign currency translation, net of tax benefit (expense) of zero
30

 
41

Net defined benefit pension cost and post retirement plan costs:
 
 
 
Change in actuarial net loss, net of tax expense of $3
13

 
10

Change in net prior service credit, net of tax benefit of $1
(3
)
 
(4
)
Other comprehensive income (loss)
39

 
45

Total comprehensive income
$
153

 
$
139


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,
2019
 
October 31,
2018
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,098

 
$
913

Accounts receivable, net
580

 
624

Inventory
641

 
619

Other current assets
225

 
222

Total current assets
2,544

 
2,378

Property, plant and equipment, net
558

 
555

Goodwill
1,181

 
1,171

Other intangible assets, net
594

 
645

Long-term investments
52

 
46

Long-term deferred tax assets
741

 
750

Other assets
308

 
279

Total assets
$
5,978

 
$
5,824

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 

 
 

Short-term debt
$
499

 
$
499

Accounts payable
222

 
242

Employee compensation and benefits
210

 
276

Deferred revenue
317

 
334

Income and other taxes payable
56

 
42

Other accrued liabilities
96

 
69

Total current liabilities
1,400

 
1,462

Long-term debt
1,291

 
1,291

Retirement and post-retirement benefits
219

 
224

Long-term deferred revenue
126

 
127

Other long-term liabilities
284

 
287

Total liabilities
3,320

 
3,391

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; 193 million shares at January 31, 2019 and 191 million shares at October 31, 2018 issued
2

 
2

Treasury stock at cost; 5.1 million shares at January 31, 2019 and 4.4 million shares at October 31, 2018
(222
)
 
(182
)
Additional paid-in-capital
1,925

 
1,889

Retained earnings
1,402

 
1,212

Accumulated other comprehensive loss
(449
)
 
(488
)
Total stockholders' equity
2,658

 
2,433

Total liabilities and equity
$
5,978

 
$
5,824

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

5


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended
 
January 31,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net income
$
114

 
$
94

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

 
 

Depreciation
24

 
26

Amortization
52

 
52

Share-based compensation
27

 
19

Deferred tax benefit
(12
)
 
(235
)
Excess and obsolete inventory-related charges
7

 
6

Gain on divestiture
(1
)
 

Pension curtailment and settlement loss
2

 

Net unrealized gains on equity investments
(5
)
 

Other non-cash expenses, net

 
2

Changes in assets and liabilities:
 

 
 

Accounts receivable
56

 
99

Inventory
(26
)
 
(20
)
Accounts payable
(10
)
 
14

Employee compensation and benefits
(68
)
 
(50
)
Deferred revenue
43

 
61

Income taxes payable
10

 
115

Retirement and post-retirement benefits
(12
)
 
(12
)
Other assets and liabilities
39

 

Net cash provided by operating activities
240

 
171

 
 
 
 
Cash flows from investing activities:
 

 
 

Investments in property, plant and equipment
(31
)
 
(24
)
Proceeds from divestiture
2

 

Net cash used in investing activities
(29
)
 
(24
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock under employee stock plans
30

 
24

Payment of taxes related to net share settlement of equity awards
(23
)
 
(15
)
Payment of acquisition-related contingent consideration

 
(3
)
Proceeds from revolving credit facility

 
40

Repayment of revolving credit facility

 
(40
)
Treasury stock repurchases
(40
)
 

Net cash provided (used) by financing activities
(33
)
 
6

 
 
 
 
Effect of exchange rate movements
7

 
9

 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
185

 
162

Cash, cash equivalents, and restricted cash at beginning of period
917

 
820

Cash, cash equivalents, and restricted cash at end of period
$
1,102

 
$
982


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

6


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions, except number of shares in thousands)
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
Number of Shares
 
Par Value
 
Additional Paid-in Capital
 
Number of Shares
 
Treasury Stock at Cost
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Total Stockholders' Equity
Balance as of October 31, 2018
191,204

 
$
2

 
$
1,889

 
(4,364
)
 
$
(182
)
 
$
1,212

 
$
(488
)
 
$
2,433

Adjustment due to adoption of new accounting standards

 

 

 

 

 
76

 

 
76

Net income

 

 

 

 

 
114

 

 
114

Other comprehensive income, net of tax

 

 

 

 

 

 
39

 
39

Issuance of common stock
1,597

 

 
8

 

 

 

 

 
8

Share-based compensation

 

 
28

 

 

 

 

 
28

Repurchase of common stock

 

 

 
(686
)
 
(40
)
 

 

 
(40
)
Balance as of January 31, 2019
192,801

 
$
2

 
$
1,925

 
(5,050
)
 
$
(222
)
 
$
1,402

 
$
(449
)
 
$
2,658

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2017
188,310

 
$
2

 
$
1,786

 
(2,289
)
 
$
(62
)
 
$
1,041

 
$
(457
)
 
$
2,310

Adjustment due to adoption of new accounting standards

 

 

 

 

 
6

 

 
6

Net income

 

 

 

 

 
94

 

 
94

Other comprehensive income, net of tax

 

 

 

 

 

 
45

 
45

Issuance of common stock
1,490

 

 
9

 

 

 

 

 
9

Share-based compensation

 

 
20

 

 

 

 

 
20

Repurchase of common stock

 

 

 

 

 

 

 

Balance as of January 31, 2018
189,800

 
$
2

 
$
1,815

 
(2,289
)
 
$
(62
)
 
$
1,141

 
$
(412
)
 
$
2,484


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



7


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 technology company providing electronic design and test solutions that are used in the design, development, manufacture, installation, deployment, validation, optimization and secure operation of electronics systems to communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product lifecycle, including start-up assistance, instrument productivity, application services and instrument calibration and repair.
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 financial position as of January 31, 2019 and October 31, 2018, our results of operations and cash flows for the three months ended January 31, 2019 and 2018.
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, loss contingencies, restructuring, and accounting for income taxes.
Update to Significant Accounting Policies. Except as set forth in Note 2, "New Accounting Pronouncements," there have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
2.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 and has since modified the standard with several ASUs (collectively, the “new revenue standard” or "ASC 606"). The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. We adopted the new revenue standard on November 1, 2018, using the modified retrospective method with the cumulative effect of initially applying the guidance recognized at the date of adoption. Comparative information has not been restated and continues to be reported under the standards in effect for the prior periods presented. We have applied the new revenue standard only to contracts not completed as of the date of adoption, referred to as open contracts. We have elected the practical expedient that permits an entity to reflect the aggregate effect of all modifications (on a contract-by-contract basis) that occurred before the date of adoption in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.
The most significant impact of the new revenue standard was our accounting for software license revenue. Historically, we have deferred revenue for certain types of license arrangements and recognize the revenue ratably over the license term. Under the new revenue standard, we are no longer required to establish vendor-specific objective evidence to recognize software license revenue separately from the other elements, and we are required to recognize software license revenue once the customer obtains control of the license, which will generally occur at the start of each license term. The new revenue standard further requires certain costs, primarily sales-related commissions on contracts, to be capitalized rather than expensed. We reclassified our allowance for sales returns from accounts receivable, net to other accrued liabilities due to the adoption of the new revenue standard. See Note 3, "Revenue."

8


The cumulative effect of initially applying the new revenue standard to all open contracts as of November 1, 2018 was as follows:
 
October 31,
2018
 
Adjustments Due to ASC 606
 
November 1,
2018
 
(in millions)
Assets:
 
 
 
 
 
Accounts receivable, net
$
624

 
$
7

 
$
631

Other current assets
222

 
28

 
250

Long-term deferred tax assets
750

 
(15
)
 
735

Other assets
279

 
3

 
282

Liabilities:
 
 
 
 
 
Deferred revenue
$
334

 
$
(53
)
 
$
281

Income and other taxes payable
42

 
1

 
43

Other accrued liabilities
69

 
7

 
76

Long-term deferred revenue
127

 
(11
)
 
116

Other long-term liabilities
287

 
3

 
290

Stockholders' equity:
 
 
 
 
 
Retained earnings
$
1,212

 
$
76

 
$
1,288

The following tables summarize the impact of ASC 606 on our condensed consolidated financial statements:
 
Three months ended
 
January 31, 2019
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
(in millions)
Net revenue:
 
 
 
 
 
Products
$
837

 
$
822

 
$
15

Services and other
169

 
170

 
(1
)
Total net revenue
1,006

 
992

 
14

Costs and expenses:
 
 
 
 
 
Cost of products
347

 
346

 
1

Cost of services and other
81

 
81

 

Total costs
428

 
427

 
1

Research and development
173

 
173

 

Selling, general and administrative
288

 
287

 
1

Other operating expense (income), net
(4
)
 
(4
)
 

Total costs and expenses
885

 
883

 
2

Income from operations
121

 
109

 
12

Interest income
4

 
4

 

Interest expense
(20
)
 
(20
)
 

Other income (expense), net
15

 
15

 

Income before taxes
120

 
108

 
12

Provision for income taxes
6

 
4

 
2

Net income
$
114

 
$
104

 
$
10

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
0.61

 
$
0.55

 
$
0.06

Diluted
$
0.60

 
$
0.55

 
$
0.05


9


 
January 31, 2019
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
(in millions)
Assets:
 
 
 
 
 
Accounts receivable, net
$
580

 
$
572

 
$
8

Inventory
641

 
642

 
(1
)
Other current assets
225

 
198

 
27

Long-term deferred tax assets
741

 
758

 
(17
)
Other assets
308

 
304

 
4

Liabilities:
 
 
 
 
 
Deferred revenue
$
317

 
$
377

 
$
(60
)
Income and other taxes payable
56

 
54

 
2

Other accrued liabilities
96

 
89

 
7

Long-term deferred revenue
126

 
143

 
(17
)
Other long-term liabilities
284

 
281

 
3

Stockholders' equity:
 
 
 
 
 
Retained earnings
$
1,402

 
$
1,316

 
$
86

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized in net income rather than other comprehensive income. We adopted the standard effective November 1, 2018 using a modified retrospective approach. We elected to prospectively measure equity investments without readily determinable fair values at cost with adjustments for observable changes in price or impairments. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.
ASU 2016-02, Leases. In February 2016, the FASB issued guidance that will require substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We expect our leases designated as operating leases in Note 16 to the consolidated financial statements in our Annual Report on Form 10-K for fiscal year ended October 31, 2018 will be reported in the consolidated balance sheet upon adoption. 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. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. We expect to adopt the new standard on November 1, 2019 and will elect the transition package of practical expedients, which among other things, allows us to carry forward the historical lease classification. We do not plan to elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. The company has selected a leasing software solution and is in the process of identifying changes to our business processes, systems, and controls to support adoption of the new standard.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued guidance that adds or clarifies guidance on eight cash flow classification issues that had been creating diversity in practice. We adopted this guidance during the first quarter of 2019 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, 2018 related to the classification of acquisition-related contingent consideration.
 
Three Months Ended
January 31, 2018
 
As Originally
Reported
 
As
Adjusted
 
Change
 
(in millions)
Net cash provided by operating activities
$
171

 
$
171

 
$

Net cash used in investing activities
$
(27
)
 
$
(24
)
 
$
3

Net cash provided by financing activities
$
9

 
$
6

 
$
(3
)
ASU 2016-18, Restricted Cash. In November 2016, the FASB issued guidance that requires an entity to include in its cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. We adopted this guidance during the first quarter of 2019 retrospectively to all periods presented. See Note 7, "Supplemental Cash Flow Information."

10


ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost. 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 presented in the statement of operations separately from the service cost component and outside of income from operations. We retrospectively adopted this guidance during the first quarter of 2019. The interest cost, expected return on assets, amortization of prior service credits and other costs have been reclassified from cost of products, research and development, selling, general and administrative, and other operating expenses (income) to other income (expense).
We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in our retirement plans and post-retirement benefit plans note as the basis for applying retrospective presentation for comparative periods as it is impractical to determine the disaggregation of the components for amounts capitalized and reclassified in those periods. On a prospective basis, the service cost component of net periodic pension and post-retirement benefit cost is presented with other current compensation costs in operating income. The remaining components are included in other operating expense (income) and will not be included in amounts capitalized in inventory or property, plant, and equipment. The effect of the retrospective presentation change related to the retirement plans and post-retirement benefit plans to our previously reported condensed consolidated statement of operations for the three months ended January 31, 2018 was as follows:
 
Three Months Ended
January 31, 2018
 
As Originally Reported
 
As Adjusted
 
Effect of Change
Higher/(Lower)
 
(in millions)
Cost of products
$
337

 
$
339

 
$
2

Research and development
146

 
150

 
4

Selling, general and administrative
289

 
295

 
6

Other income (expense), net
1

 
13

 
12

ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued guidance to enable entities to better portray the economics of their risk management activities in the financial statements and enhance transparency and understandability of hedge results. We adopted this guidance during the first quarter of 2019 and elected to continue to record changes in the fair value of components excluded from the effectiveness assessment of cash flow hedges in earnings. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017. The standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted this guidance on November 1, 2018. We elected to retain the income tax effects of the Tax Act as a component of accumulated other comprehensive income. Given this election, the adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued guidance that requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance to determine which implementation costs to defer and recognize as an asset and aligns the recognition of implementation costs to those incurred in an arrangement that includes an internal-use software license. Further, new disclosures about implementation costs for both internal-use software and hosting arrangements are required. The standard is effective for fiscal years beginning after December 15, 2019 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.
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.

11


3.
REVENUE
Revenue Recognition
Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We primarily generate revenue from the sale of products (hardware and/or software), services, or a combination thereof. We enter into contracts that may involve multiple performance obligations, and we allocate the transaction price between each performance obligation on the basis of relative standalone selling price. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services
Product revenues are generated predominantly from the sales of various types of design and test hardware and associated software. Products consist of hardware, generally installed with basic software and software licenses that consist of perpetual and term-based licenses for optional software. Our hardware products generally do not have any substantive acceptance terms that would otherwise preclude the transfer of control. Performance obligations related to our software licenses, including the license portion of our software subscriptions, grant the customer the right to use our software via electronic delivery.
Service revenues consist of repair and calibration services, extended warranties, technical support for hardware and software, when-and-if available software updates and upgrades, and professional services, including installation and implementation, consulting, and training. Repair and calibration services for hardware products are sold both as per-incident customer services and as customer agreements to provide such services over the contractual period. Extended warranties are optional to the customer and provide warranty on hardware products for additional years beyond the standard one-year warranty. Technical support for software and when-and-if available software updates and upgrades are sold either together with our software licenses and software subscriptions, or separately as part of our customer support programs. These are considered stand-ready performance obligations where customers benefit from the services evenly throughout the license or service period. These performance obligations provide the customer access evenly over the contract period. Our professional services may be sold on a time and material basis (e.g., consulting) or on a fixed-fee basis (e.g., non-recurring engineering).
We also generate revenues from a combination of products and services ("custom solutions"), including combinations of hardware, software, installation or other start-up services, software subscriptions, and/or software support services. Custom solutions provide the customer with a combination of hardware, software and professional services to meet customers' unique specifications.
For our contracts with customers, we account for individual performance obligations separately if they are distinct. Our standard payment terms are net 30 to 90 days, and we generally do not offer extended payment terms beyond one year. Our contracts typically contain various forms of variable consideration, including trade discounts, trade-in credits, rebates, and rights of return. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices for a majority of our products and services are estimated based on our established pricing practices and maximize the use of observable inputs. We have elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by Keysight from a customer (e.g., sales, use, value added, and some excise taxes). We have also elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.

12


Our typical performance obligations include the following:
Performance Obligation
When performance obligation is typically satisfied
When payment is typically due
How standalone selling price is typically determined
Product Revenues
 
 
 
Hardware
When customer obtains control of the product, typically at delivery (point in time)
Within 30-90 days of shipment
Estimated based on established pricing practices or observable based on standalone sales for certain hardware products
Software licenses
Upon electronic delivery of the software, and the applicable license period has begun (point in time)
Within 30-90 days of the beginning of license period
Estimated based on established pricing practices or observable based on standalone sales for certain software products
Threat intelligence solutions

Ratably over the subscription period (over time)
Within 30-90 days of the beginning of subscription period
Estimated based on established pricing practices
Service Revenues
 
 
 
Calibration contracts
Ratably over the service contract period (over time)
Within 30-90 days of the beginning of service contract period
Estimated based on established pricing practices
Repair and calibration (per- incident)

As services are performed (point in time)

Within 30-90 days of invoicing for services rendered
Estimated based on established pricing practices

Extended hardware warranty
Ratably over the warranty period (over time)
Within 30-90 days of the beginning of warranty period
Estimated based on established pricing practices or observable based on standalone sales of certain hardware warranty contracts
Technical support and when-and-if-available software updates
Ratably over the license service contract period (over time)
Within 30-90 days of the beginning of license or service contract period
Estimated based on established pricing practices or observable based on standalone sales for certain support contracts
Professional services
As services are performed based on measures of progress (over time) or at a point in time
Within 30-90 days invoicing for services rendered
Estimated based on established pricing practices
Custom Solutions
 
 
 
Custom solutions (milestone-based)
As milestones are achieved based on transfer of control to customer (over time)
Within 30-90 days of milestone achievement
Transaction price, as pricing is custom and can vary significantly from contract to contract
Custom solutions (point in time)
When customer obtains control of the solution, typically at delivery (point in time)
Within 30-90 days of delivery of solution
Transaction price, as pricing is custom and can vary significantly from contract to contract
Significant Judgments
Judgment is required to determine the standalone selling price for each distinct performance obligation. As most of our products and services are not sold on a standalone basis, we typically estimate the standalone selling price. In doing so, we consider our internal price list for each product and service, which reflects our desired profitability, based on an expected level of sales, and adjust for factors such as competition, customer relationship, discount provided in the contract, geographic location, and the products and services purchased in the arrangement. We use a range based on actual historical sales to determine whether the calculated standalone selling price for a product or service is a fair representation of the standalone selling price.
For capitalized contract costs, we use judgment in determining the capitalized amount.

13


Our products are generally sold with a right of return and we may provide other credits, discounts, or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns, credits, and discounts are estimated at contract inception and updated at the end of each reporting period as additional information becomes available to the extent that it is probable a significant reversal of the cumulative amount of revenue recognized will not occur once the variability is subsequently resolved.
Disaggregation of Revenue
We disaggregate our revenue from contracts with customers by geographic region, end market, and timing of transfer of products and services to customers, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregated revenue is presented for each of our three reportable segments.
 
Three Months Ended January 31, 2019
 
Communications Solutions Group
 
Electronic Industrial Solutions Group
 
Ixia Solutions Group
 
Total
 
(in millions)
Region
 
 
 
 
 
 
 
Americas
$
272

 
$
57

 
$
74

 
$
403

Europe
96

 
63

 
19

 
178

Asia Pacific
255

 
137

 
33

 
425

Total net revenue
$
623

 
$
257

 
$
126

 
$
1,006

 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
Aerospace, Defense & Government
$
223

 
$

 
$

 
$
223

Commercial Communications
400

 

 

 
400

Electronic Industrial

 
257

 

 
257

Ixia Solutions

 

 
126

 
126

Total net revenue
$
623

 
$
257

 
$
126

 
$
1,006

 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
Revenue recognized at a point in time
$
570

 
$
235

 
$
82

 
$
887

Revenue recognized over time
53

 
22

 
44

 
119

Total net revenue
$
623

 
$
257

 
$
126

 
$
1,006

Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue (contract liabilities) on our condensed consolidated balance sheet. In addition, we defer and capitalize certain costs incurred to obtain a contract (contract costs).
Contract assets - Contract assets represent unbilled amounts from arrangements for which we have performed by transferring goods or services to the customer in advance of receiving all or partial consideration for such goods and services from the customer. Contract assets arise primarily from service agreements and products delivered pending a formal customer acceptance, which generally occurs within 30 days. The contract assets balance was $19 million at January 31, 2019 and is included in "accounts receivables, net" in our condensed consolidated balance sheet.
Contract costs - We recognize an asset for the incremental costs of obtaining a contract with a customer. We have determined that certain employee and third-party representative commissions programs meet the requirements to be capitalized. Employee commissions are based on the achievement of order volume compared to a sales target. Third-party representative commission costs relate directly to a customer contract as the commission is tied to orders contracted through and contracts arranged by our third-party representatives. Without obtaining the contracts, the commissions would not be paid and, as such, are determined to be an incremental cost to obtaining a contract. We only defer these costs when we have determined the commissions are, in fact, incremental and would not have been incurred absent the customer contract.
Capitalized incremental costs are allocated to the individual performance obligations in proportion to the transaction price allocated to each performance obligation and amortized based on the pattern of performance for the underlying performance obligation. Contract costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another.

14


The following table provides a roll-forward of our capitalized contract costs, current and non-current:
 
Three months ended
 
January 31, 2019
 
(in millions)
Balance at October 31, 2018
$

Costs capitalized on November 1, 2018 due to ASC 606 adoption
29

Costs capitalized during the period
17

Costs amortized during the period
(18
)
Foreign currency translation impact
1

Balance at January 31, 2019
$
29


Contract liabilities - Our contract liabilities consist of deferred revenue that arises when we receive consideration in advance of providing the goods or services promised in the contract. Contract liabilities are primarily generated from customer deposits received in advance of shipments for products or rendering of services and are recognized as revenue when services are provided to the customer. We classify deferred revenue as current or non-current based on the timing of when we expect to recognize revenue. Contract liabilities are recognized as revenue when services are provided to the customer.
Changes in contract liabilities, current and non-current, during the three months ended January 31, 2019 were as follows:
 
Contract Liabilities
 
(in millions)
Balance at October 31, 2018
$
461

Impact of adopting new revenue standard
(64
)
Balance at November 1, 2018
397

Deferral of revenue billed in current period, net of recognition
167

Revenue recognized that was deferred as of the beginning of the period
(124
)
Foreign currency translation impact
3

Balance at January 31, 2019
$
443

Remaining Performance Obligations
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, was approximately $260 million as of January 31, 2019, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. Since we typically invoice customers at contract inception, this amount is included in our current and long-term deferred revenue balances. As of January 31, 2019, we expect to recognize approximately 41 percent of the revenue related to these unsatisfied performance obligations during the remainder of 2019, 32 percent during 2020, and 27 percent thereafter.

15


Practical Expedients
As discussed in Note 2, "New Accounting Pronouncements," and previously in this note, we have elected the following practical expedients in accordance with ASC 606:
We do not disclose the value of remaining performance obligations for contracts with an original expected length of one year or less.
We determine incremental costs of obtaining a contract for a portfolio of contracts with similar characteristics as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
We exclude from the transaction price certain taxes (e.g., sales, use, value added, and some excise taxes).
We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
We treat shipping and handling costs associated with outbound freight after control of a product has transferred to a customer as a fulfillment cost, included in cost of products.
We have applied the guidance only to contracts that have not been completed as of the date of adoption (November 1, 2018).
We did not evaluate individual modifications for those periods prior to the adoption date, but rather evaluated the aggregate effect of all modifications as of the adoption date.
4.    SHARE-BASED COMPENSATION
Keysight accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock option awards, restricted stock units ("RSUs"), employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”) and performance share awards granted to selected members of our senior management under the Long-Term Performance (“LTP”) Program based on estimated fair values. 
The impact of share-based compensation on our results was as follows:

Three Months Ended

January 31,
 
2019
 
2018
 
(in millions)
Cost of products and services
$
4

 
$
3

Research and development
6

 
4

Selling, general and administrative
17

 
12

Total share-based compensation expense
$
27

 
$
19

 Share-based compensation capitalized within inventory was $1 million at both January 31, 2019 and 2018.
The following assumptions were used to estimate the fair value of awards granted under the LTP Program that are based on total shareholder return ("TSR"):
 
Three Months Ended
 
January 31,
 
2019
 
2018
Volatility of Keysight shares
25
%
 
25
%
Volatility of selected index
12
%
 
14
%
Price-wise correlation with selected peers
57
%
 
57
%
The TSR-based performance awards were valued using a Monte Carlo simulation model, which requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. The estimated fair value of restricted stock awards and the financial metrics-based performance awards is determined based on the market price of Keysight’s common stock on the grant date. We did not grant any option awards for the three months ended January 31, 2019 and 2018, respectively.

16


5.    INCOME TAXES
The company’s effective tax rate was 5.2 percent and 515.8 percent for the three months ended January 31, 2019 and 2018, respectively. The income tax expense was $6 million for the three months ended January 31, 2019 and an income tax benefit of $117 million for the three months ended January 31, 2018. The income tax expense for the three months ended January 31, 2019 included a net discrete benefit of $23 million, primarily related to a change in tax reserves resulting from a change in judgment. 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.
Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore, that have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions. The Singapore tax incentive is due for renewal in fiscal 2024. The impact of the tax incentives decreased the income tax provision for the three months ended January 31, 2019 by $8 million, resulting in a benefit to net income per share (diluted) of approximately $0.04 for the three months ended January 31, 2019.
The open tax years for the IRS and most states are from November 1, 2014 through the current tax year. For the majority of our foreign entities, the open tax years are from August 1, 2014 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. 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 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.
The Tax Act, as enacted by the U.S. government on December 22, 2017, includes significant changes to the U.S. corporate income tax system, including but not limited to: the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which resulted in a one-time U.S. tax liability on those earnings which were not previously repatriated to the U.S. (the “Transition Tax”); creation of new minimum taxes such as the Global Intangible Low Taxed Income (“GILTI”) tax and the base erosion anti-abuse tax; creation of the foreign-derived intangible income (“FDII”) deduction; a federal corporate income tax rate reduction from 35 percent to 21 percent; and limitations on the deductibility of interest expense and executive compensation.
The company completed its accounting for the income tax effects of the Tax Act during the first quarter of fiscal 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. Finalizing the provisional adjustments related to the Tax Act did not have a material impact on our consolidated financial statements as of January 31, 2019. Legislation and clarifying guidance is expected to continue to be issued by the U.S. Treasury and various states in 2019, which could result in significant changes to currently computed income tax liabilities for past and current tax periods.
The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to impact the GILTI tax expense in future years or provide for the tax expense related to GILTI in each year in which the tax is incurred. The company has elected to recognize the tax on GILTI as a period expense in each period in which the tax is incurred.

17


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,
 
2019
 
2018
 
(in millions)
Numerator:
 
 
 
Net income
$
114

 
$
94

Denominator:
 
 
 
Basic weighted-average shares
187

 
187

Potential common shares— stock options and other employee stock plans
3

 
2

Diluted weighted-average shares
190

 
189

 
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are collectively assumed to be used to repurchase hypothetical shares.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For each of the three-month periods ended January 31, 2019 and 2018, we excluded zero options from the calculation of diluted earnings per share. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTP Program and restricted stock awards, whose combined exercise price, unamortized fair value and excess tax benefits collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. For the three months ended January 31, 2019 and 2018, we excluded approximately 417,400 shares and 668,100 shares, respectively.
7.    SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes was $1 million for the three months ended January 31, 2019 and 2018. Cash paid for interest was zero and $2 million for the three months ended January 31, 2019 and 2018, 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,
 
2019
 
2018
 
(in millions)
Increase (decrease) in unpaid capital expenditures in accounts payable
$
11

 
$
(3
)
 
$
11

 
$
(3
)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet to the amount shown in the condensed consolidated statement of cash flows:
 
Three months ended
 
January 31,
 
2019
 
2018
 
(in millions)
Cash and cash equivalents
$
1,098

 
$
980

Restricted cash included in other current assets
2

 

Restricted cash included in other assets
2

 
2

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
1,102

 
$
982

Restricted cash consisted primarily of deposits held as collateral against bank guarantees.

18


8.    INVENTORY
 
January 31,
2019
 
October 31,
2018
 
(in millions)
Finished goods
$
286

 
$
283

Purchased parts and fabricated assemblies
355

 
336

Total inventory
$
641

 
$
619

Inventory-related excess and obsolescence charges recorded in total cost of products were $7 million and $6 million for the three months ended January 31, 2019 and January 31, 2018, respectively. We record excess and obsolete inventory charges for inventory at our sites as well as inventory at our contract manufacturers and suppliers, where we have non-cancellable purchase commitments.
9.
GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balances as of January 31, 2019 and October 31, 2018 and the activity for the three months ended January 31, 2019 for each of our reportable operating segments were as follows. Prior period amounts have been reclassified to conform to our organizational change as described in Note 16, "Segment Information."
 
Communications Solutions Group
 
Electronic Industrial Solutions Group
 
Ixia Solutions Group
 
Total
 
(in millions)
Balance as of October 31, 2018:
 
 
 
 
 
 
 
Goodwill
$
497

 
$
267

 
$
1,116

 
$
1,880

Accumulated impairment losses

 

 
(709
)
 
(709
)
Goodwill as reported
497

 
267

 
407

 
1,171

Foreign currency translation impact
9

 
1

 

 
10

Balance as of January 31, 2019
$
506

 
$
268

 
$
407

 
$
1,181

 
 
 
 
 
 
 
 
Components of goodwill as of January 31, 2019:
 
 
 
 
 
 
 
Goodwill
$
506

 
$
268

 
$
1,116

 
$
1,890

Accumulated impairment losses

 

 
(709
)
 
(709
)
Goodwill as reported
$
506

 
$
268

 
$
407

 
$
1,181

The company has not identified any triggering events that indicate an impairment of goodwill in the three months ended January 31, 2019.
Other intangible assets as of January 31, 2019 and October 31, 2018 consisted of the following:
 
Other Intangible Assets as of January 31, 2019
 
Other Intangible Assets as of October 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairments
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairments
 
Net Book
Value
 
(in millions)
Developed technology
$
835

 
$
455

 
$
380

 
$
835

 
$
415

 
$
420

Backlog
13

 
13

 

 
13

 
13

 

Trademark/Tradename
33

 
16

 
17

 
33

 
14

 
19

Customer relationships
304

 
109

 
195

 
304

 
100

 
204

Non-compete agreements
1

 

 
1

 
1

 

 
1

Total amortizable intangible assets
1,186

 
593


593

 
1,186

 
542

 
644

In-Process R&D
1

 

 
1

 
1

 

 
1

Total
$
1,187

 
$
593

 
$
594

 
$
1,187

 
$
542

 
$
645

During the three months ended January 31, 2019, there was no foreign exchange translation impact to other intangible assets. Amortization of other intangible assets was $51 million for each of the three-month periods ended January 31, 2019 and 2018.

19


Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
 
Amortization expense
 
(in millions)
2019 (remainder)
$
152

2020
196

2021
128

2022
52

2023
44

Thereafter
21

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.

20


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, 2019 and October 31, 2018 were as follows:
 
Fair Value Measurements at
 
January 31, 2019
 
October 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Other
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Other
 
(in millions)
 
 
Assets:
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 
Short-term
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
603

 
$
603

 
$

 
$

 
$

 
$
484

 
$
484

 
$

 
$

 
$

Derivative instruments (foreign exchange contracts)
3

 

 
3

 

 

 
6

 

 
6

 

 

Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity investments
36

 
36

 

 

 

 
30

 
30

 

 

 

Equity investments - other
16

 

 

 

 
16

 
16

 

 

 

 
16

Total assets measured at fair value
$
658

 
$
639

 
$
3

 
$

 
$
16

 
$
536

 
$
514

 
$
6

 
$

 
$
16

Liabilities:
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 
Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (foreign exchange contracts)
$
5

 
$

 
$
5

 
$

 
$

 
$
6

 
$

 
$
6

 
$

 
$

Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liability
13

 

 
13

 

 

 
13

 

 
13

 

 

Total liabilities measured at fair value
$
18

 
$

 
$
18

 
$

 
$

 
$
19

 
$

 
$
19

 
$

 
$

Net recognized gains (losses) on equity investments were as follows:
 
Three Months Ended
 
January 31,
 
2019
 
(in millions)
Net realized gains on investments sold
$

Net unrealized gains on investments still held
5

Other-than-temporary impairments of investments

Total
$
5

Our money market funds and equity investments with readily determinable fair values are measured at fair value using quoted market prices and, therefore, are classified within Level 1 of the fair value hierarchy. Equity investments without readily determinable fair values that are measured at cost adjusted for observable changes in price or impairments are not categorized in the fair value hierarchy and are presented as "other" in the tables above. 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.
Equity investments including securities that are earmarked to pay the deferred compensation liability and the deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. 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.

21


Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in the value of the derivative instrument included in the assessment of effectiveness are recognized in accumulated other comprehensive income and reclassified into earnings when the forecasted transaction occurs in the same financial statement line item in the consolidated statement of operations where the earnings effect of the hedged item is presented. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified into earnings in the current period. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness (forward points) are recognized immediately in earnings and are presented in the same financial statement line of the consolidated statement of operations where the earnings effect of the hedged item is presented. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings over the life of the option contract.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions that are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of January 31, 2019 was $3 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of January 31, 2019.
There were 177 foreign exchange forward contracts open as of January 31, 2019 that were designated as cash flow hedges. There were 66 foreign exchange forward contracts as of January 31, 2019 that were not designated as hedging instruments. The aggregated notional amounts by currency and designation as of January 31, 2019 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
 
$
13

 
$
48

British Pound
 

 
(39
)
Singapore Dollar
 
16

 

Malaysian Ringgit
 
87

 
(4
)
Japanese Yen
 
(75
)
 
(38
)
Other currencies
 
(14
)
 
(5
)
Total
 
$
27

 
$
(38
)

22


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, 2019 and October 31, 2018 were as follows:
Fair Values of Derivative Instruments
Derivative Assets
 
Derivative Liabilities
 
 
Fair Value
 
 
 
Fair Value
Balance Sheet Location
 
January 31,
2019
 
October 31,
2018
 
Balance Sheet Location
 
January 31,
2019
 
October 31,
2018
 
 
(in millions)
 
 
 
(in millions)
Derivatives designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
2

 
$
5

 
Other accrued liabilities
 
$
3

 
$
4

Derivatives not designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Foreign exchange contracts
 
 

 
 

 
 
 
 

 
 

Other current assets
 
1

 
1

 
Other accrued liabilities
 
2

 
2

Total derivatives
 
$
3

 
$
6

 
 
 
$
5

 
$
6

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,
 
2019
 
2018
 
(in millions)
Derivatives designated as hedging instruments:
 
 
 
Cash Flow Hedges
 
 
 
Foreign exchange contracts:
 
 
 
Gain (loss) recognized in accumulated other comprehensive income
$
(2
)
 
$
2

Gain (loss) reclassified from accumulated other comprehensive income into earnings:
 
 
 
Cost of products
$

 
$
2

Selling, general and administrative
$
(1
)
 
$

Amount excluded from effectiveness testing recognized in earnings based on changes in fair value:
 
 
 
Cost of products
$
1

 
$

Derivatives not designated as hedging instruments:
 
 
 
Gain (loss) recognized in other income (expense), net
$
(3
)
 
$
1

The estimated amount of existing net loss at January 31, 2019 expected to be reclassified from accumulated other comprehensive income to earnings within the next twelve months is $2 million.

23


12.
RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
For the three months ended January 31, 2019 and 2018, 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,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Service cost—benefits earned during the period
$
5

 
$
6

 
$
3

 
$
3

 
$

 
$

Interest cost on benefit obligation
7

 
6

 
6

 
6

 
2

 
2

Expected return on plan assets
(11
)
 
(9
)
 
(19
)
 
(21
)
 
(3
)
 
(4
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss
3

 
3

 
7

 
6

 
2

 
4

Prior service credit
(1
)
 
(2
)
 

 

 
(3
)
 
(3
)
Settlement loss

 

 
2

 

 

 

Net periodic benefit cost (benefit)
$
3

 
$
4

 
$
(1
)
 
$
(6
)
 
$
(2
)
 
$
(1
)
We did not contribute to our U.S. Defined Benefit Plans or U.S. Post-Retirement Benefit Plan during the three months ended January 31, 2019 and 2018. We contributed $8 million and $9 million to our Non-U.S. Defined Benefit Plans during the three months ended January 31, 2019 and 2018, respectively.
For the remainder of 2019, we do not expect to contribute to our U.S. Defined Benefit Plans, and we expect to contribute $23 million to our Non-U.S. Defined Benefit Plans.
On January 1, 2019, we transferred a portion of the assets and liabilities of our Switzerland defined benefit plan to an insurance company, resulting in the recognition of a settlement loss of $2 million, which is included in other income (expense) in the condensed consolidated statement of operations.
13.
WARRANTY, COMMITMENTS AND CONTINGENCIES
Standard Warranty
The Keysight warranty on products sold through direct sales channel is primarily one year. Warranties for products sold through distribution channels continue to be primarily three years. We accrue for standard warranty costs based on historical trends in warranty charges. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.
Activity related to the standard warranty accrual, which is included in other accrued and other long-term liabilities in our condensed consolidated balance sheet, is as follows:
 
Three Months Ended
 
January 31,
 
2019
 
2018
 
(in millions)
Beginning balance
$
45

 
$
45

Accruals for warranties including change in estimate
8

 
10

Settlements made during the period
(9
)
 
(8
)
Ending balance
$
44


$
47

 
 
 
 
Accruals for warranties due within one year
$
25

 
$
26

Accruals for warranties due after one year
19

 
21

Ending balance
$
44

 
$
47


24


Commitments
During the three months ended January 31, 2019, there were no material changes to the operating and capital lease commitments reported in the company’s 2018 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
The following table summarizes the components of our long-term debt:
 
January 31, 2019
 
October 31, 2018
 
(in millions)
2019 senior unsecured notes at 3.30% (net of unamortized costs of $1 and $1)
$
499

 
$
499

2024 senior unsecured notes at 4.55% (net of unamortized costs of $3 and $3)
597

 
597

2027 senior unsecured notes at 4.60% (net of unamortized costs of $6 and $6)
694

 
694

Total debt
1,790

 
1,790

Less: short-term debt
499

 
499

Total long-term debt
$
1,291

 
$
1,291

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. As of January 31, 2019, 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, 2019.
2019 Senior Notes
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, 2019 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
Long-Term Debt
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, 2019 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
As of January 31, 2019 and October 31, 2018, we had $31 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 $25 million and $3 million as of January 31, 2019 and October 31, 2018, respectively.

25


15.    STOCKHOLDERS' EQUITY
Stock Repurchase Program
On March 6, 2018, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to $350 million of the company’s common stock, replacing a previously approved 2016 program authorizing the purchase of up to $200 million of the company’s common stock. Under the new program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date.
For the three months ended January 31, 2019, we repurchased 686,398 shares of common stock for $40 million. 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, 2019 and 2018 were as follows:
 
 
Unrealized gain (loss) on investments
 
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, 2018
 
$

 
$
(60
)
 
$
(445
)
 
$
19

 
$
(2
)
 
$
(488
)
Other comprehensive income (loss) before reclassifications
 

 
30

 
4

 

 
(2
)
 
32

Amounts reclassified out of accumulated other comprehensive loss
 

 

 
12

 
(4
)
 
1

 
9

Tax (expense) benefit