avatar Keysight Technologies, Inc. Manufacturing
  • Location: California 
  • Founded:
  • Website:

Pages

  • Page 1

    Keysight Technologies Annual Report 2014


  • Page 2

    31JAN201502523632


  • Page 3

    To Our Stockholders, It has been 18 months since Agilent announced it would spin-off its electronic measurement business into a new company. The intention of the spin-off was to create two great companies with increased strategic and management focus, each well-positioned for growth in their respective markets. On November 1, 2014, Keysight Technologies became an independent company and closed the books on a successful year. It was quite a year. As you read on, you will gain some insight into how we launched a $2.9 billion start-up. Launching Keysight On January 7, 2014, although still a business within Agilent, we attached a tangible identity to our new electronic measurement company by announcing its name as Keysight Technologies. Our name conveys the ability to see what others cannot. It means we have the critical insight to understand and unlock the answers to a rapidly and ever-changing technology landscape. Our initial tagline of ‘‘unlocking measurement insights for 75 years’’ acknowledges our roots in the original Hewlett-Packard Company from which our company was born. The Keysight name is meant to represent the value that we bring to our customers. With our industry- leading measurement insights, engineers accelerate their understanding of new technology and their successes—whether it is being first to market, increasing differentiation, ramping production, or achieving lower cost of test. We exist to unlock key insights for our customers, and as a result, we create value for our stockholders. As you can imagine, it takes work and focus to launch a new company while continuing to meet our commitments to customers and stockholders. We created a global team to separate our business and to bring our customers smoothly along this journey. We partnered with our customer base of more than 10,000 to transition their business from Agilent to Keysight without impacting order rates, shipments or satisfaction. On November 1, we became an independent company, and the separation went exceptionally well. Two days later, on Monday, November 3, a small group of employees representing all those who did such an outstanding job of launching our company joined me on the podium of the New York Stock Exchange. Together, we rang the opening bell as Keysight Technologies stock began to trade on the NYSE under the ticker symbol ‘‘KEYS.’’ It was a proud moment for all 9,500 of us. 2014 Results and Operations Even while separating from Agilent, our key focus was on running the day-to-day operations of our global business. Here’s a recap of 2014: For the full year, as Agilent’s Electronic Measurement Group, Keysight generated revenues of $2.93 billion, growing 2 percent on both an absolute and core basis, with an operating margin of 19.1 percent. With only modest topline growth in FY14, Keysight generated $559 million in total operating profit, while investing 12.2 percent of revenue in research and development. For the year, our Aerospace Defense business was down 4 percent, marked by a distinct contrast between the halves, and largely driven by the U.S. market. In the first half, Aerospace Defense was down 18 percent as it took time for the U.S. budget approvals to work their way through the government and prime contractors, and for spending to ramp. As we expected, the second half of the year improved and our Aerospace Defense revenues grew 11 percent year-over-year as a more typical seasonal demand returned. 1


  • Page 4

    Communications revenues grew 3 percent year-over-year with wireless manufacturing growth driven by strength in base station and component test. Industrial, Computers, and Semiconductor revenues grew 4 percent year-over-year with growth trends balanced across these end markets. Turning to our products, in FY14, we reached several milestones for our key product categories. As an example of our ability to drive growth when we focus our efforts over time, we achieved record revenue for our oscilloscope product line. Our success in oscilloscopes is a result of a multi-year effort to invest in, and grow that business. And while we have been technology leaders in hardware for 75 years, in 2014, our annual software sales surpassed $300 million. 2014 was a great year for Keysight. And we are just getting started. As an independent public company, we are focused—from our front-line employees to our executive team—on creating long-term value for our stockholders. Strategy We enable our customers to bring leading electronic products to market faster and at a lower cost. Our key differentiation is that we provide value to our customers across their entire electronic product development cycle—from design simulation, to prototype test, to volume manufacturing. We deliver this value with leading technology and world-class support. Our strategic imperative is to grow the business in order to create long-term shareholder value. We will do this by leveraging the strength of our business model, which delivers solid profitability and generates sustainable cash flows throughout the cycle, and by focusing on higher growth market opportunities, including wireless communications, modular solutions, and software. In all these areas, the ongoing evolution of technology creates demand for new measurement contributions and insights from Keysight. I firmly believe that our focus to maintain strong profitability while increasing our growth rate, and our innate drive to innovate, will deliver long-term value for both our stockholders and customers. Thank You At this point in our journey, I extend my heartfelt thanks to many key people: • To you, our stockholders for your trust, and funding our commitment to create value. • To our customers in more than 100 countries. Every day they challenge us to be better, and to help them bring electronic products to market faster and at a lower cost. • To our Keysight employees for delivering excellent results while launching a new company. I am grateful for the many long hours our employees worked, as well as for their families and the sacrifices they made in support of launching Keysight. While we deeply thank our past partners from Hewlett Packard and Agilent for bringing us to this pivotal time, we know that our success is not about the past 75 years, but about our future. ‘‘This is our time’’ has been our rallying cry inside Keysight since announcing the decision to launch our company. This is our time to innovate and grow in electronic measurement, and this is our time to create value for you. 29JAN201519560659 Ron Nersesian President and Chief Executive Officer February 6, 2015 2


  • Page 5

    Keysight at a Glance Keysight is the world’s premier electronic measurement company providing electronic measurement solutions to communications and electronics industries. We provide electronic measurement instruments and systems and related software, software design tools, and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer’s product lifecycle. On September 19, 2013, Agilent Technologies, Inc. (‘‘Agilent’’) announced plans to separate into two publicly-traded companies, one comprised of the life sciences, diagnostics and chemical analysis businesses that retained the Agilent name and the other comprised of the electronic measurement business (‘‘Keysight’’). The separation was completed on November 1, 2014 through a pro rata distribution of Keysight shares to Agilent shareholders that is intended to be tax-free for U.S. federal income tax purposes. In fiscal 2014, in conjunction with the planned separation, we reorganized our business into two operating segments, the measurement solutions segment and customer support and services segment. The measurement solutions segment consists of businesses that sell hardware and software products including radio frequency, microwave, digital and other test technology solutions. The customer support and services segment consists of businesses that provide repair and calibration services for our customers’ installed base of instruments and facilitates the resale of refurbished used equipment. We have a comprehensive sales strategy that uses our direct sales force, distributors, resellers and manufacturer’s representatives. The strategy varies based on the size of customer, the complexity of products and geographical coverage. Of our total net revenue of $2.9 billion for the fiscal year ended October 31, 2014, we generated 36 percent in the United States and 64 percent outside the United States. As of October 31, 2014, we employed approximately 9,600 people worldwide. We generated $2.9 billion of net revenue in fiscal year 2014, $2.9 billion in fiscal year 2013 and $3.3 billion in fiscal year 2012. Our primary research and development and manufacturing sites are in California and Colorado in the United States and outside the United States in China, Germany, India, Japan, Malaysia, Singapore and Spain. Operating Segments 2014 Net Revenue Description Measurement $2.5 billion Summary: Our measurement solutions business provides Solutions electronic measurement instruments and systems with related software and software design tools that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. We provide startup assistance, consulting, optimization and application support throughout the customer’s product lifecycle. We employed approximately 8,500 people as of October 31, 2014 in our measurement solutions business. Markets: The market for our measurement solutions segment include communications test market; aerospace and defense test market; and industrial, computer and semiconductor test market. 3


  • Page 6

    Communications Test Market: this market includes, network equipment manufacturers (‘‘NEM’’), wireless device manufacturers, and communication service providers (which include component manufacturers within the supply chain for these customers). NEMs require test and measurement instruments, systems and solutions for the development, production and installation of their network technology. Wireless device manufacturers require test and measurement products for the design, development, manufacture and repair of mobile devices. Communications service providers require a wide range of sophisticated test instruments and systems to ensure conformance to communication standards and network requirement and evaluate network performance. The component manufacturers require test and measurement products to verify that the performance of their components and modules meet the specifications of their NEM and devise customers. Aerospace and Defense Test Market: this market includes commercial and government customers and their contract suppliers. The modernization of satellite, radar and surveillance systems worldwide are drivers of test demand within the aerospace and defense market. Customers in this market use our electronic measurement instruments to develop and manufacture a wide variety of electronic components and systems used in aerospace and defense industry including commercial and military aircraft, space, satellite, radar, intelligence and surveillance. Industrial, Computer and Semiconductor Test Market: this market includes customers in the design, development and manufacturing of a wide range of products, such as computers, computer peripherals, electronic components, consumer electronics, enterprise servers, storage networks and automotive electronics. These customers use test solutions in developing and manufacturing a wide variety of electronic components and systems, including testing the electrical parameters of digital, radio frequency, and microwave frequency components and assemblies; testing multiple parameters of the printed circuit boards used in almost every electronic device; testing of the final product; and testing of systems containing multiples electronic instruments. For semiconductor and board test applications, customers use our solutions in the design, development, manufacture, installation, deployment, and operation of semiconductor and printed circuit assemblies. 4


  • Page 7

    Product Areas: We divide our measurement solutions products into radio frequency and microwave instruments, digital instruments and various other general purpose test instruments and targeted test solutions. We offer these products and related software in a variety of form factors, including bench top, modular and handheld, depending on the specific requirements of the customer application. Customer $400 million Summary: The customer support and services business Support and provides accredited repair and calibration services for our installed base instrument customers and facilitates the Services resale of used equipment. Our customer support and services business enables our customers to maximize the value from their electronic measurement equipment through system uptime support, customer site resident professionals, on-site calibrations and localized service centers. Providing these services assures a high level of instrument performance and availability while minimizing the cost of ownership and equipment downtime. We employed approximately 1,100 people as of October 31, 2014 in our customer support and services business. Markets: Our customer support and services business broadly addresses the same markets as the measurement solutions business, which includes the communications, aerospace and defense and industrial, computer and semiconductor test markets. Product Areas: Our customer support and services business provides accredited repair and calibration services for our electronic measurement instruments. We also manage instrument trade-in programs and refurbish and sell used instruments. 5


  • Page 8

    Senior Board Executives Directors Committee Ronald S. Nersesian* Paul N. Clark, Audit and Finance Committee President and Non-executive Chairman, Charles J. Dockendorff, Chief Executive Officer Keysight Technologies, Inc. Chairperson Operating Partner of Genstar Paul N. Clark Jay Alexander* Capital, LLC Senior Vice President and Compensation Committee Chief Technology Officer Ronald S. Nersesian, James G. Cullen, Chief Executive Officer, Chairperson Neil Dougherty* Keysight Technologies, Inc. Richard Hamada Senior Vice President and Chief Financial Officer James G. Cullen, Non-executive Nominating/Corporate Governance Chairman, Agilent Committee Ingrid Estrada* Technologies, Inc. Paul N. Clark Senior Vice President, Former President and Chief Chairperson Human Resources Operating Officer, Bell Atlantic James G. Cullen Michael Gasparian* Charles J. Dockendorff Charles J. Dockendorff, Senior Vice President, Richard Hamada Executive Vice President and Customer Support and Services & Chief Financial Officer, Executive Committee Worldwide Marketing Covidien, PLC Paul N. Clark, Soon Chai Gooi* Chairperson Jean M. Halloran, Former Senior Vice President, Ronald S. Nersesian Senior Vice President, Agilent Order Fulfillment & Technologies, Inc. Infrastructure Richard Hamada, Chief Hamish Gray Executive Officer, Avnet, Inc. Senior Vice President. Corporate Services and Chief of Staff Guy Séné* Senior Vice President, Measurement Solutions and Worldwide Sales John Skinner* Vice President, Corporate Controller and Principal Accounting Officer Stephen D. Williams* Senior Vice President, General Counsel and Secretary *These individuals are executive officers of Keysight under Section 16 of the Securities Act of 1934 6


  • Page 9

    Keysight’s annual meeting of stockholders will take place on Thursday, March 19, 2015 at 8:00 a.m. at Keysight’s headquarters located at 1400 Fountaingrove Parkway, Santa Rosa, California 95403. Investor Information Please see the full and audited financial statements and footnotes contained in this booklet. To receive paper copies of the annual report, proxy statement, Form 10-K, earnings announcements and other financial information, you should call (707) 577-6915. In addition, you can access this financial information at Keysight’s Investor Relations Website. The address is http://www/investor.keysight.com. This information is also available by writing to the address provided under the Investor Contact heading below. Corporate Governance, Business Conduct and Ethics Keysight’s Corporate Governance Standards, the charter of our Audit and Finance Committee, our Compensation Committee, our Executive Committee and our Nominating/Corporate Governance Committee, as well as our Standard of Business Conduct (including code of ethics provisions that apply to our principal executive officer, principal financial officer, principal accounting officer and senior financial officers) are available on our website at www.investor.keysight,com under ‘‘Corporate Governance.’’ These items are also available in print to any stockholder by calling (707) 577-6915. This information is also available by writing to the company at the address provided below. Keysight Headquarters Keysight Technologies, Inc. 1400 Fountaingrove Parkway Santa Rosa, CA 95403 Phone: (800) 829-4444 Transfer Agent and Registrar Please contact our transfer agent, at the phone number or address listed below, with any questions about stock certificates, transfer of ownership or other matters pertaining to you stock account. Written Request: Computershare P.O. Box 30170 College Station, TX 77842-3170 Overnight Delivery: Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 Telephone Inquiries: Within the U.S., Canada, or Puerto Rico: (877) 373-6374 Non-U.S.: (781) 575-2879 Investor Center Website: www-us.computershare.com/investor/contact Email for Computershare: web.queries@computershare.com 7


  • Page 10

    Investor Contact Keysight Technologies, Inc. Investor Relations Department 1400 Fountaingrove Parkway Santa Rosa, CA 95403 Email: investor.relations@keysight.com Phone: (707) 577-6915 Additional Information This annual report, including the letter titled ‘‘To Our Stockholders,’’ 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, uncertainties relating to regulatory approvals, the integration of our acquisitions and other transactions, the separation from Agilent, our transition to lower-cost regions, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those detailed in Keysight’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended October 31, 2014. The materials contained in this annual report are as of December 22, 2014, unless otherwise noted. The content of this annual report contains time-sensitive information that is accurate only as of this date. If any portion of this annual report is redistributed at a later date, Keysight will not be reviewing or updating the material in this report. The information on page 6 regarding our senior executives and directors is current as of February 6, 2015. This annual report contains Keysight’s 2014 audited financial statements and notes thereto in the following section of this booklet with the tab ‘‘Annual Report Financials.’’ Within the Annual Report Financials, please refer to ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Risks, Uncertainties and Other Factors That May Affect Future Results’’ for more complete information on each of our businesses and Keysight as a whole. 8


  • Page 11

    31JAN201502523845


  • Page 12

    TABLE OF CONTENTS Page Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Management’s Discussion and Analysis of Financial Conditions and Results of Operations . . . . . 2 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Combined and Consolidated Statement of Operations for each of the three years in the period ended October 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Combined and Consolidated Statement of Comprehensive Income for the three years in the period ended October 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Combined and Consolidated Balance Sheet at October 31, 2014 and 2013 . . . . . . . . . . . . . . . . . 23 Combined and Consolidated Statement of Cash Flows for each of the three years in the period ended October 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Combined and Consolidated Statement of Equity for each of the three years in the period ended October 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Notes to Combined and Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Quarterly Summary (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Risks, Uncertainties and Other Factors That May Affect Future Results . . . . . . . . . . . . . . . . . . . 79 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98


  • Page 13

    SELECTED FINANCIAL DATA (unaudited) Years Ended October 31, 2014 2013 2012 2011 2010 (in millions, except per share data) Combined and Consolidated Statement of Operations Data: Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,933 $ 2,888 $ 3,315 $ 3,316 $ 2,706 Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 475 $ 501 $ 746 $ 749 $ 360 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392 $ 457 $ 841 $ 787 $ 355 Basic and diluted net income per share(a) . . . . . . . . . . . $ 2.35 $ 2.74 $ 5.04 $ 4.71 $ 2.13 Basic and diluted average shares outstanding(a) . . . . . . . 167 167 167 167 167 October 31, 2014 2013 2012 2011 2010 (in millions) Combined and Consolidated Balance Sheet Data: Cash and cash equivalents and short-term investments . . $ 810 $ — $ — $ — $ — Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,081 $ 412 $ 398 $ 272 $ 199 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,050 $ 2,028 $ 2,133 $ 1,908 $ 1,766 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,099 $ — $ — $ — $ — Stockholders’/Invested equity . . . . . . . . . . . . . . . . . . . . . $ 769 $ 1,245 $ 1,305 $ 996 $ 817 (a) On November 1, 2014, Agilent Technologies, Inc. distributed 167 million shares of Keysight common stock to existing holders of Agilent common stock. Basic and diluted net income per share for all periods through October 31, 2014 is calculated using the shares distributed on November 1, 2014. Refer to Note 6 of the combined and consolidated financial statements for information regarding earnings per common share. 1


  • Page 14

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the combined and consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The forward-looking statements contained herein include, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, the ability of our products to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our acquisitions and other transactions, our transition to lower-cost regions, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Item 1A and elsewhere in this Form 10-K. Basis of Presentation and Separation from Agilent On November 1, 2014, Keysight Technologies, Inc. (‘‘we,’’ ‘‘our,’’ ‘‘Keysight’’ or ‘‘the company’’) became an independent publicly-traded company through the distribution by Agilent Technologies, Inc. (‘‘Agilent’’) of 100 percent of the outstanding common stock of Keysight to Agilent’s shareholders (the ‘‘Separation’’). Each Agilent shareholder of record as of the close of business on October 22, 2014, received one share of Keysight common stock for every two shares of Agilent common stock held on the record date. Keysight was incorporated in Delaware on December 6, 2013 and is comprised of Agilent’s former electronic measurement business. Keysight’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on October 6, 2014. Keysight’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘KEYS’’ on the New York Stock Exchange on November 3, 2014. Our fiscal year end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods. Prior to the distribution, Agilent transferred substantially all of the assets and liabilities and operations of the electronic measurement business to Keysight in August 2014 (‘‘the Capitalization’’). Combined financial statements prior to the Capitalization were prepared on a stand-alone basis and were derived from Agilent’s consolidated financial statements and accounting records. The combined financial statements included elsewhere in this Annual Report on Form 10-K reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of Agilent prior to the Capitalization. Following the Capitalization the consolidated financial statements include the accounts of the company and our wholly-owned subsidiaries. All periods have been accounted for in conformity with U.S. generally accepted accounting principles. For periods prior to the Capitalization, the combined and consolidated financial statements included the allocation of certain assets and liabilities that were historically held at the Agilent level but which were specifically identified or allocated to us. Cash and cash equivalents held by Agilent were not allocated to us. Agilent’s debt and related interest expense were not allocated to us since we are not the legal obligor of the debt and Agilent’s borrowings were not directly attributable to us. In addition, prior to the 2


  • Page 15

    Capitalization, all intercompany transactions between us and Agilent were considered to be effectively settled at the time the transactions were recorded. All cash generated by our business was assumed to be remitted to the Agilent subsidiary located in the same legal entity or country. The total net effect of the settlement of these intercompany transactions prior to the Capitalization is reflected in the combined and consolidated statement of cash flows as a financing activity and in the combined and consolidated balance sheet as Agilent net investment. On October 15, 2014, we issued $500 million of 3.30 percent senior notes due in 2019 and $600 million of 4.55 percent senior notes due in 2024. A portion of the proceeds from the offering was used to make a $900 million cash distribution to Agilent in October 2014. We intend to use the remaining proceeds to fund working capital and other liquidity needs. The combined and consolidated statement of operations includes our direct expenses for cost of products and services sold, research and development, sales and marketing, distribution, and administration as well as allocations of expenses arising from shared services and infrastructure provided by Agilent to us. These allocated expenses include costs of information technology, accounting and legal services, real estate and facilities, corporate advertising, insurance services, treasury and other corporate and infrastructure services. In addition, other costs allocated to us include restructuring costs, share-based compensation expense and retirement plan expenses related to Agilent’s corporate and shared services employees. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. These costs have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of revenue, square footage, headcount or other measures. We expect Agilent to continue to provide some of these services related to these functions on a transitional basis for a fee, which will be partially offset by other income from Keysight services provided to Agilent. These services will be received or provided under a transition services agreement. We do not expect the net costs associated with the transition services agreement to be materially different than the historical costs that have been allocated to us related to these same services. We also expect to incur other incremental costs as an independent, publicly traded company as compared to the costs historically allocated to us by Agilent. These incremental costs are estimated to be approximately $20 million on an annual pre-tax basis. For the fiscal year 2014, we recognized $78 million of non-recurring transaction and pre-separation costs. We expect to recognize additional non-recurring transaction and separation costs, which are currently estimated to range from $25 million to $30 million through fiscal 2016. These costs are expected to include, among other things, branding, legal, accounting and other advisory fees and other costs to separate and transition from Agilent. Overview and Executive Summary We provide electronic measurement instruments and systems and related software, software design tools, and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer’s product lifecycle. Historically, we conducted our business in one reportable operating segment for Agilent. In fiscal 2014, in conjunction with the planned separation, we implemented changes in our organizational structure which resulted in the formation of two reportable operating segments, measurement solutions and customer support and services. The measurement solutions segment is primarily the hardware and associated software businesses serving the electronic measurement market. The customer support and services segment provides repair and calibration of the hardware measurement solutions and the resale of used instrument equipment. 3


  • Page 16

    Years ended October 31, 2014, 2013 and 2012 Total orders in 2014 were $2,963 million, an increase of 3 percent when compared to 2013. Orders increased in all market segments including aerospace and defense; industrial, computer, and semiconductor test; and communications test. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year comparison. Orders of $2,866 million in 2013 declined 13 percent when compared to 2012 on declines in all market segments, including aerospace and defense; industrial, computer and semiconductor test; and communications test. Net revenue of $2,933 million in 2014 increased 2 percent when compared to 2013, with industrial, computer and semiconductor test contributing 2 percentage points of the increase, and communication test contributing 1 percentage point of the increase, partially offset by a decline in aerospace and defense revenue. Foreign currency movements had an unfavorable impact of 1 percentage point on the year over year comparison. Net revenue of $2,888 million in 2013 declined 13 percent when compared to 2012, with lower communications test revenue contributing 8 percentage points of the decline, and lower industrial, computer and semiconductor test revenue further decreasing revenue by approximately 5 percentage points, while aerospace and defense was flat year over year. Net income was $392 million in 2014 compared to net income of $457 million in 2013 and $841 million in 2012. In 2014, 2013 and 2012, we generated operating cash flows of $563 million, $566 million and $724 million, respectively. Looking forward, while we believe the long-term growth rate of our markets is 3 to 4 percent, we expect lower fiscal 2015 market growth in the range of 2.5 to 3.5 percent. As an independent publicly- traded company, we are focused on growing in our markets while meeting our financial commitments. We intend to leverage our unique formula of hardware plus software plus people to create value for our customers and shareholders. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, allocation methods and allocated expenses from Agilent, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and purchased intangible assets, restructuring and accounting for income taxes. Revenue recognition. We enter into agreements to sell products (hardware and/or software), services, and other arrangements (multiple-element arrangements) that include combinations of products and services. Revenue from product sales, net of trade discounts and allowances, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, for products, or when the service has been provided. Revenue is reduced for estimated product returns, when appropriate. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon 4


  • Page 17

    delivery, and recognition of installation revenue occurs when the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete. Revenue from services is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor specific objective evidence (‘‘VSOE’’) if available, third-party evidence (‘‘TPE’’) if VSOE is not available, or estimated selling price (‘‘ESP’’) if neither VSOE nor TPE is available. Revenue from the sale of software products that are not required to deliver the tangible product’s essential functionality are accounted for under software revenue recognition rules. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements. We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve, changes may occur in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple-element arrangements, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement. Inventory valuation. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based upon estimates about future demand and actual usage. Such estimates are difficult to make under most economic conditions. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of sales and higher income from operations than expected in that period. Allocations. Agilent allocated certain costs such as share-based compensation expense and retirement and post-retirement benefit plan expense relating to our employees and Agilent’s corporate and shared services employees. These expenses were subject to certain underlying assumptions mentioned below. Share-based compensation. Prior to the Separation, Keysight employees participated in Agilent’s stock program. Share-based compensation expense has been allocated to us based on Keysight employees participating in Agilent’s stock plan and our share of Agilent’s corporate and shared services employee costs based on our share of revenue. Agilent accounts for share-based awards in accordance with the authoritative guidance where share-based compensation expense is primarily based on estimated grant date fair value and is recognized on a straight-line basis. The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the Long-Term Performance (‘‘LTP’’) Program were valued using the Monte Carlo simulation model. The 5


  • Page 18

    estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield. The Employee Stock Purchase Plan (‘‘ESPP’’) allows eligible employees to purchase shares of Agilent’s common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value. Both the Black-Scholes and Monte Carlo simulation fair-value models require the use of highly subjective and complex assumptions used by Agilent, including the option’s expected life and the price volatility of Agilent stock. The assumptions used in calculating the fair value of share-based awards represent Agilent’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Retirement and post-retirement benefit plan assumptions. Prior to the Capitalization, substantially all of our employees were covered under various defined benefit and/or defined contribution retirement plans sponsored by Agilent. We have accounted for our employee participation in Agilent’s defined benefit retirement plans and the post-retirement health care plan as multiemployer plans. As a result, no asset or liability was recorded by us to recognize the funded status of such plans in our combined and consolidated balance sheet prior to the Capitalization. At the Capitalization, the assets and liabilities of these plans that were allocable to Keysight employees were transferred to Keysight plans; therefore, the plans are no longer considered multi-employer plans. Our combined and consolidated statements of operations include expense that has been allocated to us based on Keysight employees participating in these plans and our share of Agilent’s corporate and shared services employee costs. We consider the expense allocation methodology and results to be reasonable for all periods presented. At Capitalization, we established defined benefit retirement and post-retirement plans for our current and former employees. The defined benefit retirement and post- retirement obligations relating to those participants in these plans were transferred from Agilent’s plans to our defined benefit plans. A proportionate share of the defined benefit plan assets was allocated from the Agilent pension trust in each applicable country to a newly established Keysight pension trust. Subject to local law, it is anticipated that the share of assets allocated to us will be in the same proportion as the projected benefit obligation of our participants to the total projected benefit obligation of Agilent. Retirement and post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees’ average expected future service to Keysight based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of accounting principles generally accepted in the U.S. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and investment portfolio composition. We evaluate these assumptions at least annually. The discount rate is used to determine the present value of future benefit payments at the measurement date, which is October 31 for both U.S. and non-U.S. plans. For 2014, the U.S. discount rates were based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. For 2014, the discount rate for non-U.S. plans was generally based on published rates for high-quality corporate bonds. If we changed our discount rate by 1 percent, the impact would be $4 million on U.S. net periodic benefit cost and $12 million on non-U.S. net periodic benefit cost. Lower discount rates increase the present value of the liability and subsequent year pension expense; higher discount rates decrease the present value of the liability and subsequent year pension expense. 6


  • Page 19

    The company uses alternate methods of amortization, as allowed by the authoritative guidance, that amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. plans, gains and losses are amortized over the average future working lifetime. For most non-U.S. plans and U.S. post-retirement benefit plans, gains and losses are amortized using a separate layer for each year’s gains and losses. The expected long-term return on plan assets is estimated using current and expected asset allocations as well as historical and expected returns. Plan assets are valued at fair value. If we changed our estimated return on assets by 1 percent, the impact would be $7 million on U.S. net periodic benefit cost and $13 million on non-U.S. net periodic benefit cost. Goodwill and other intangible assets. We review goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregated components of an operating segment that have similar economic characteristics into our reporting units. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination. Companies have the option to perform a qualitative assessment to determine whether performing the two-step quantitative test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. > 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. The guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These examples include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers. The qualitative indicators replace those previously used to determine whether an interim goodwill impairment test is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step, if necessary, measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. Historically we conducted our business in a single operating segment and reporting unit. In fiscal 2014, in conjunction with the planned separation, we implemented changes in our organizational structure which resulted in the formation of two reportable operating segments. In fiscal year 2014, we assessed goodwill impairment for our two reporting units which consisted of our two segments, Measurement Solutions and Customer Support and Services. We performed a quantitative test of goodwill impairment for both reporting units as of September 30, 2014. Based on the results of our testing, the fair value for both reporting units was significantly in excess of the carrying value. There was no impairment of goodwill during the years ended October 31, 2014, 2013 and 2012. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated. Warranty. Our standard warranty term for most of our products from the date of delivery is typically three years, which increased from one year in the second quarter of fiscal 2013. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product revenue. 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. We also sell extended warranties that provide warranty coverage beyond the standard warranty term. Revenue associated with extended warranties is deferred and recognized over the extended coverage period. 7


  • Page 20

    Restructuring. The main component of our restructuring plan is related to workforce reductions. Workforce reduction charges are accrued when payment of benefits becomes probable and the amounts can be estimated. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and other related charges could be materially different, either higher or lower, than those we have recorded. Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of losses in recent years and our forecast of future taxable income. In the fourth quarter of fiscal 2012 we released the valuation allowance for the majority of our U.S. deferred tax assets. At October 31, 2014, we continue to maintain a valuation allowance for certain U.S. state and foreign deferred tax assets. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support its reversal. We have not provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of our foreign subsidiaries because we intend to reinvest such earnings permanently. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes will increase materially in that period. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the combined and consolidated statements of operations. We have calculated our taxes on a separate return basis. However, the amounts recorded are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Agilent. It is possible that we will make different tax accounting elections and assertions, such as the amount of earnings that will be permanently reinvested outside the U.S. following our distribution from Agilent. Consequently, our future results after our separation from Agilent may be materially different from our historical results. 8


  • Page 21

    Adoption of New Pronouncements See Note 2, ‘‘New Accounting Pronouncements,’’ to the combined and consolidated financial statements for a description of new accounting pronouncements. Restructuring In fiscal 2013, we recognized $15 million of restructuring charges associated with the targeted headcount reduction of approximately 200 regular employees, representing approximately 2 percent of our global workforce. Through the end of fiscal 2014, approximately $11 million was paid out under this program for the termination of 145 employees and $3 million of accrual has been reversed related to 40 employees who have been redeployed within the company. As of October 31, 2014, we have a remaining accrual of $1 million and have substantially completed this program. 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 on our behalf. The result of the hedging has been included in our combined and consolidated statement of operations. We do experience some fluctuations within individual lines of the combined and consolidated balance sheet and 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 (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. Prior to the Capitalization, we were under Agilent’s hedging program and none of the financial instruments used in Agilent’s hedging program were included in our combined and consolidated balance sheet. Results from Operations-Years ended October 31, 2014, 2013 and 2012 Orders and Net Revenue In general, recorded orders represent firm purchase commitments from our customers with established terms and conditions for products and services that will be delivered within six months. Revenue reflects the delivery and acceptance of the products and services as defined on the customer’s terms and conditions. Cancellations are recorded in the period received from the customer and historically have not been material. 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 % Change % Change (in millions) Orders . . . . . . . . . . . . . . . . . . . . . $ 2,963 $ 2,866 $ 3,280 3% (13)% Net revenue: Products . . . . . . . . . . . . . . . . . . $ 2,479 $ 2,434 $ 2,862 2% (15)% Services and other . . . . . . . . . . . 454 454 453 —% —% Total net revenue . . . . . . . . . . . . . $ 2,933 $ 2,888 $ 3,315 2% (13)% 9


  • Page 22

    2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Ppts Change Ppts Change % of total net revenue: Products . . . . . . . . . . . . . . . . . . 85% 84% 86% 1 ppt (2) ppt Services and other . . . . . . . . . . . 15% 16% 14% (1) ppt 2 ppt Total . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% Total orders increased 3 percent in 2014 compared to 2013. Orders increased in all market segments including aerospace and defense; industrial, computer, and semiconductor test; and communications test. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year compare. Our orders declined 13 percent in 2013 compared to 2012. Orders were lower for all market segments, including aerospace and defense; industrial, computer, and semiconductor test; and communications test. Net revenue of $2,933 million for 2014 increased 2 percent as compared to 2013, with modest growth in industrial, computer and semiconductor test contributing 2 percentage points of the increase, and communication test contributing 1 percentage point of the increase, partially offset by a decline in aerospace and defense revenue. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year compare. Revenue from Asia Pacific, excluding Japan, grew 8 percent driven by growth in communication test and industrials, computer and semiconductor test. Europe revenue increased 5 percent year-over-year from growth in communications test. Americas revenues declined 3 percent year-over-year with lower aerospace and defense and communications test. Japan revenues declined 9 percent year-over-year, with declines in all market segments. Revenue from products increased 2 percent in 2014 compared to 2013 while service related revenue was flat. Revenue declined 13 percent in 2013 compared to 2012 primarily due to lower wireless manufacturing and industrial, computer and semiconductor test demand. Communications test revenue, representing approximately 34 percent of our total revenue, increased year-over-year with increases in wireless manufacturing and broadband communications business, partially offset by modest declines in Wireless R&D. Wireless manufacturing growth continues to be driven by 4G base station investments, mainly for China. Broadband showed solid growth impacted by demand for datacom bandwidth. Wireless R&D continues to be affected by cautious customer spending driven by consolidation and restructuring activities throughout the industry, across device, network equipment, chipset and component manufacturers. In 2013, communications test revenue declined compared to 2012 due to significantly lower wireless manufacturing demand and modest declines in wireless R&D. Aerospace and defense business, representing approximately 22 percent of our total revenue, decreased compared to 2013, with declines in all regions, however we saw positive growth in the last half of fiscal 2014. In 2013, aerospace and defense test, representing approximately 23 percent of total revenue, was flat compared to 2012, with lower demand in the Americas offset by stronger spending in Europe. Industrial, computer and semiconductor test revenue, representing approximately 44 percent of total business, increased year-over-year compared to 2013. The computer and semiconductor increase was driven by investment in capacity growth and the overall strength in the semiconductor market. The industrial test business grew for the year with particular strength in the last fiscal quarter driven by growth in the Americas and Asia Pacific, excluding Japan. In 2012, industrial, computer and semiconductor test represented approximately 43 percent of the total business with slight growth in computer and semiconductor business. 10


  • Page 23

    Backlog Backlog represents the amount of revenue expected from orders that have already been booked, including orders for goods and services that have not been delivered to customers, orders invoiced but not yet recognized as revenue, and orders for goods that were shipped but not invoiced, awaiting acceptance by customers. At October 31, 2014, our unfilled backlog was approximately $781 million as compared to approximately $761 million at October 31, 2013. For the measurement solutions business, our unfilled backlog was approximately $627 million at October 31, 2014 as compared to approximately $563 million at October 31, 2013. Within our customer services and support business, our unfilled backlog was approximately $154 million at October 31, 2014 as compared to approximately $198 million at October 31, 2013. The reduction in the customer services and support business backlog in fiscal 2014 was primarily due to a change in our standard warranty term, which increased from one to three years for most of our products in the second quarter of fiscal 2013. Revenue associated with extended warranties, which provide coverage beyond the standard warranty term, is deferred and amortized over the extended period of coverage. As a result of the extension of the standard warranty term, backlog associated with extended warranties has declined. Three year warranty is now included as part of the total solution, and the value is captured as part of the system sale. We expect that a majority of the unfilled backlog will be recognized as revenue within six months. On average, our unfilled backlog represents approximately three months’ worth of revenue. We believe backlog on any particular date, while indicative of short-term revenue performance, is not necessarily a reliable indicator of medium or long-term revenue performance. Costs and Expenses 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Change Change Gross margin on products . . . . . . . 56.3% 57.1% 57.8% (1) ppt (1) ppt Gross margin on services and other 49.4% 51.3% 50.1% (2) ppt 1 ppt Total gross margin . . . . . . . . . . . . 55.2% 56.2% 56.7% (1) ppt (1) ppt Operating margin . . . . . . . . . . . . . 16.0% 17.2% 22.1% (1) ppt (5) ppts (in millions) Research and development . . . . . . $ 361 $ 375 $ 377 (4)% (1)% Selling, general and administrative . $ 790 $ 752 $ 771 5% (2)% Gross margin declined 1 percentage point in 2014 compared to 2013 on slightly higher revenue. Higher inventory charges and pricing pressure in the wireless manufacturing market were the primary reasons for the lower gross margin. Gross margin declined 1 percentage point in 2013 compared to 2012 primarily due to lower sales volume, while declines in variable and incentive pay and reduced infrastructure spending were offset by higher excess and obsolete inventory charges, wage increases, acquisition and integration costs, and restructuring expenses. Excess and obsolete inventory charges were $33 million in 2014, $21 million in 2013 and $14 million in 2012. Sales of previously written-down inventory were $1 million in each of 2014, 2013 and 2012. Research and development expenses declined 4 percent in 2014 compared to 2013 primarily due to lower infrastructure-related expenses. Research and development expenses declined 1 percent in 2013 compared to 2012. Reductions in development spending, variable and incentive pay, and infrastructure- related expenses, and the favorable impact of currency movements were partially offset by investments in acquisitions and wage increases. 11


  • Page 24

    Selling, general and administrative expenses increased 5 percent in 2014 compared to 2013 primarily due to higher costs related to non-recurring pre-separation transaction costs and an increase in marketing expenses, partially offset by reductions in infrastructure costs and the favorable impact of currency movements. Selling, general and administrative expenses decreased 2 percent in 2013 compared to 2012. Reductions in discretionary spending, lower variable and incentive pay, and the favorable impact of currency movements were partially offset by wage increases. Operating margins declined 1 percentage point in 2014 compared to 2013 primarily driven by one-time separation costs. Operating margins declined by 5 percentage points in 2013 compared to 2012 on lower revenue partially offset by reduced operating expenses. As of October 31, 2014, our headcount was approximately 9,600. Income Taxes Years Ended October 31, 2014 2013 2012 (in millions) Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 83 $ 44 $ (95) For 2014, the effective tax rate was 18 percent. The 18 percent effective tax is lower than the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower statutory tax rates; in particular Singapore, where we enjoyed tax holidays for the first three quarters of 2014, which resulted in a decrease to income tax expense of $40 million. The current year rate was also favorably impacted by a $55 million benefit from a prior year reserve release, which was offset by $62M tax expense as a result of the repatriation of foreign earnings. For 2013, the effective tax rate was 9 percent. The 9 percent effective tax is lower than the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower statutory tax rates; in particular Singapore where we enjoy tax holidays. For 2012, the effective tax rate was 13 percent. The 13 percent effective tax rate reflects tax on earnings in jurisdictions that have low effective tax rates and includes a $227 million tax benefit due to the reversal of a valuation allowance for our U.S. federal deferred tax assets. Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. In the fourth quarter of 2012, management concluded that the valuation allowance for our U.S. federal deferred tax assets is no longer needed primarily due to the emergence from cumulative losses in recent years, the return to sustainable U.S. operating profits and the expectation of sustainable profitability in future periods. As of October 31, 2012, the cumulative positive evidence outweighed the negative evidence regarding the likelihood that most of the deferred tax asset for our U.S. combined income tax group will be realized. Accordingly, we recognized a non-recurring tax benefit of $227 million in 2012 relating to the valuation allowance reversal. The effective tax rate also included a non-recurring tax expense of $80 million relating to an increase in the overall residual tax expected to be imposed upon the repatriation of unremitted foreign earnings previously considered permanently reinvested. During the fourth quarter of 2012, we assessed the forecasted cash needs and the overall financial position of our foreign subsidiaries and determined that a portion of previously permanently reinvested earnings would no longer be reinvested overseas. We enjoyed tax holidays in several different jurisdictions, most significantly in Singapore through the third quarter of fiscal 2014, and several jurisdictions have granted or are anticipated to grant us tax incentives that require renewal at various times in the future, most significant being in Singapore. The tax holidays provide lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific types of income in those jurisdictions. The tax holidays are due for 12


  • Page 25

    renewal between 2015 and 2023. As a result of the incentives, the impact of the tax holidays decreased income taxes by $40 million, $68 million and $96 million in 2014, 2013, and 2012, respectively. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the combined and condensed statements of operations. In the United States, Agilent’s tax years remain open back to the year 2008 for federal income tax purposes and the year 2000 for significant states. On January 29, 2014 Agilent reached an agreement with the IRS for the tax years 2006 through 2007 that, in the first quarter of fiscal 2014, resulted in $55 million of tax benefit associated with the recognition of previously unrecognized U.S. federal and state tax benefits and the reversal of the related interest accruals resulting from this agreement. Agilent’s U.S. federal income tax returns for 2008 through 2011 are currently under audit by the IRS. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2003. With these jurisdictions and the United States, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits. We have calculated our taxes on a separate return basis. However, the amounts recorded are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Agilent. Consequently our future results after our separation from Agilent may be materially different from our historical results. Segment Overview We have two reportable operating segments, measurement solutions and customer support and services. The measurement solutions segment is primarily the hardware and associated software businesses serving the electronic measurement market. The customer support and services segment provides repair and calibration of the hardware measurement solutions and the resale of used instrument equipment. Measurement Solutions Business Our measurement solutions business provides electronic measurement instruments and systems with related software and software design tools that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. We provide start-up assistance, consulting, optimization and application support throughout the customer’s product lifecycle. Our electronic measurement solutions serve the following markets: communications test, aerospace and defense test, and industrial, computer and semiconductor test. Net Revenue 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Change Change (in millions) Total net revenue . . . . . . . . . . . . . $ 2,533 $ 2,493 $ 2,942 2% (15)% 13


  • Page 26

    Measurement solutions net revenue in 2014 increased 2 percent compared to 2013, with modest growth in industrial, computer and semiconductor test contributing to 2 percentage points of the increase, and communication test contributing 1 percentage point of the increase, partially offset by a decline in aerospace and defense revenue. Measurement solutions net revenue in 2013 declined 15 percent compared to 2012 primarily on lower communications test and industrial, computer and semiconductor test demand. Gross Margin and Operating Margin The following table shows the measurement solutions business’ margins, expenses and income from operations for 2014 versus 2013, and 2013 versus 2012. 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Change Change Total gross margin . . . . . . . . . . . . . . . . . 57.2% 58.3% 58.0% (1) ppt — ppt Operating margin . . . . . . . . . . . . . . . . . 18.6% 18.1% 22.8% 1 ppt (5) ppts (in millions) Research and development . . . . . . . . . . . $ 348 $ 356 $ 367 (2)% (3)% Selling, general and administrative . . . . . $ 630 $ 646 $ 672 (2)% (4)% Income from operations . . . . . . . . . . . . . $ 472 $ 451 $ 669 5% (33)% Gross margin in 2014 decreased 1 percentage point when compared to 2013 primarily due to higher inventory charges and and pricing pressure in the wireless manufacturing market. Gross margin in 2013 remained flat when compared to 2012 primarily due to the lower sales volume, offset by the favorable impact of a lower proportion of wireless manufacturing business. Research and development expenses decreased 2 percent in 2014 compared to 2013 primarily driven by lower infrastructure costs. Research and development expenses decreased 3 percent in 2013 compared to 2012 primarily driven by reductions in variable and incentive pay, discretionary spending and infrastructure related expenses. We remain committed to invest in research and development and have focused our development efforts on key strategic opportunities in order to align our business with available markets. Selling, general and administrative expenses decreased 2 percent in 2014 compared to 2013. Decreases in infrastructure costs were partially offset by increases in marketing and discretionary spending. Selling, general and administrative expenses decreased 4 percent in 2013 compared to 2012. Reductions in discretionary spending, lower variable and incentive pay, and favorable impact of currency movements were partially offset by wage increases. Operating margin increased by 1 percentage point in 2014 compared to 2013 on higher revenue and lower operating expenses. Operating margin decreased by 5 percentage points in 2013 compared to 2012 on lower revenue partially offset by reduced operating expenses. Income from Operations Income from operations in 2014 increased by $21 million or 5 percent on increased revenue of $40 million. Income from operations in 2013 decreased by $218 million or 33 percent on a revenue decrease of $449 million. Customer Support and Services Business Our customer support and services business provides repair and calibration services for our installed base measurement solutions customers and facilitates the resale of used equipment. Our customer support and services business enables our customers to maximize the value from their electronic measurement 14


  • Page 27

    equipment and strengthen customer loyalty. Providing these services assures a high level of instrument performance and availability while minimizing the cost of ownership and downtime. Net Revenue 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Change Change (in millions) Total net revenue . . . . . . . . . . . . . . . . . . . $ 400 $ 395 $ 373 1% 6% Customer support and business net revenue in 2014 increased 1 percent compared to 2013. Growth in calibration services and remarketing sales of used equipment was partially offset by declines in the equipment repair business due to a reduction in extended warranty revenue as a result of extension of the standard warranty term from one to three years, as discussed previously under ‘‘Backlog.’’ Customer support and services net revenue in 2013 increased 6 percent compared to 2012 on slightly higher repair and calibration services and stronger demand for remarketed equipment. Gross Margin and Operating Margin The following table shows the customer support and services business’ margins, expenses and income from operations for 2014 versus 2013, and 2013 versus 2012. 2014 over 2013 over Years Ended October 31, 2013 2012 2014 2013 2012 Change Change Total gross margin . . . . . . . . . . . . . . . . . 46.1% 48.1% 48.2% (2) ppts — Operating margin . . . . . . . . . . . . . . . . . 21.8% 23.5% 22.0% (2) ppts 2 ppts (in millions) Research and development . . . . . . . . . . . $ 10 $ 10 $ 8 —% 20% Selling, general and administrative . . . . . $ 87 $ 87 $ 90 —% (3)% Income from operations . . . . . . . . . . . . . $ 87 $ 93 $ 82 (6)% 14% Gross margins in 2014 decreased 2 percentage points compared to 2013. Increased costs for extended warranty contracts and the service mix change with increased calibrations were the primary reasons for the lower gross margins. Gross margin in 2013 was flat compared to 2012. Research and development expenses for customer support and services represent the segment’s share of centralized investment. Research and development expenses were flat in 2014 compared to 2013, driven mainly by our continued investment in instrument products. Research and development expenses increased 20 percent in 2013 compared to 2012 due to an increase in centralized research and development allocations. Selling, general, and administrative expenses were flat in 2014 compared to 2013. Selling, general, and administrative expenses were 3 percent lower in 2013 compared to 2012. Reductions in discretionary spending, lower variable and incentive pay, and the favorable impact of currency movements were offset by wage increases. Operating margins decreased by 2 percentage points in 2014 compared to 2013. Revenue growth was more than offset by the reductions in gross margins. Operating margin increased by 2 percentage points in 2013 compared to 2012 mainly due to favorable gross margin from higher revenue with slightly lower operating expenses. 15


  • Page 28

    Income from Operations Income from operations in 2014 decreased by $6 million, or 6 percent on a revenue increase of $5 million. Income from operations in 2013 increased by $11 million or 14 percent on a revenue increase of $22 million. Financial Condition Liquidity and Capital Resources Historically, Agilent has provided financing, cash management and other treasury services to us. Cash transferred to and from Agilent has been recorded as intercompany payables and receivables which are reflected in Agilent net investment in the accompanying historical combined and consolidated financial statements. We believe our cash generated from operations and our ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, and other liquidity requirements associated with our operations. Although the cash generated in the U.S. from future operations, including any cash and non-permanently invested earnings repatriated to the U.S., is expected to cover our normal operating requirements and debt service requirements, a substantial amount of additional cash could be required for other purposes, such as the maturity of our current and future debt obligations, any dividends that may be declared, any future stock repurchase programs and any U.S. acquisitions. If in the future, after our separation from Agilent, we encounter a significant need for liquidity domestically or at a particular location that it cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may determine that cash repatriations are necessary. Repatriation could result in additional material U.S. federal and state income tax payments in future years. Such adverse consequences would occur, for example, if the transfer of cash into the U.S. is taxed and no foreign tax credit is available to offset the U.S. tax liability, resulting in higher taxes. These factors may cause us to have an overall tax rate higher than our tax rates have been in the past. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. Our financial position as of October 31, 2014 consisted of cash and cash equivalents of $810 million as compared to zero as of October 31, 2013. Cash of approximately $74 million, which amount is subject to final determination as provided in the separation and distribution agreement, will be returned to Agilent. As of October 31, 2014, approximately $598 million of our cash and cash equivalents is held outside of the U.S. in our foreign subsidiaries. Net Cash Provided by Operating Activities Net cash provided by operating activities was $563 million in 2014 as compared to $566 million provided in 2013 and $724 million provided in 2012. Agilent paid most taxes and pension contributions on our behalf. We paid net taxes of approximately $4 million in 2014. In 2014, accounts receivable used cash of $25 million, provided cash of $44 million in 2013 and used cash of $3 million in 2012. Days’ sales outstanding were 44 days in 2014, 42 days in 2013 and 43 days in 2012. Accounts payable provided cash of $32 million in 2014, used cash of $24 million in 2013 and used cash of $23 million in 2012. Cash used in inventory was $31 million in 2014, $53 million in 2013 and $46 million in 2012. Inventory days on-hand decreased to 137 days in 2014 compared to 143 days in 2013 and 118 days in 2012. The increase in days on-hand between 2013 and 2012 was due to the reduced shipment volume within our business. Agilent contributed $15 million on our behalf to our U.S. multi-employer plans in each of 2014, 2013 and 2012. Agilent contributed $41 million, $45 million and $30 million to our non-U.S. multi-employer plans in 2014, 2013 and 2012, respectively. There were no contributions to the U.S. multi-employer post-retirement health care plan for the years ended October 31, 2014, 2013, and 2012, respectively. At the 16


  • Page 29

    Capitalization, the assets and liabilities of these plans that were allocable to Keysight employees were transferred to Keysight plans; therefore, the plans are no longer considered multi-employer plans. Net Cash Provided by/Used in Investing Activities Net cash used in investing activities in 2014 was $82 million as compared to net cash used of $85 million in 2013 and $172 million in 2012. Purchases of property, plant and equipment were $70 million in 2014, $69 million in 2013 and $103 million in 2012. Acquisitions of businesses and intangible assets were $11 million in 2014, $1 million in 2013 and $69 million in 2012. In 2012 we acquired two businesses for $44 million along with some smaller acquisitions. We purchased investments of $15 million in 2013, as compared to zero in 2014 and 2012. Proceeds from the sale of investment securities were zero in each of the fiscal years 2014, 2013 and 2012. Net Cash Provided by/Used in Financing Activities Net cash provided by financing activities in 2014 was $335 million compared to $481 million used in 2013 and $552 million used in 2012, respectively. We issued senior notes of $1.1 billion and made a repayment of capital of $940 million to Agilent in the year ended October 31, 2014. Credit Facility On September 15, 2014, we entered into a five-year credit agreement, which provides for a $300 million unsecured credit facility that will expire on November 1, 2019. The company may use amounts borrowed under the facility for general corporate purposes. As of October 31, 2014, the company has no borrowings outstanding under the facility. We were in compliance with the covenants of the credit facility during the year ended October 31, 2014. Short-term debt On July 10, 2014, our wholly owned subsidiary in India entered into a short-term loan agreement with a financial institution, which provided up to $50 million of unsecured borrowings. On July 25, 2014, we borrowed $35 million against the loan agreement at an interest rate of 9.95 percent per annum. The loan was repaid during the year and as of October 31, 2014, no balance was outstanding. Long-term debt In October 2014, the company issued an aggregate principal amount of $500 million in senior notes (‘‘2019 senior notes’’). The 2019 senior notes were issued at 99.902% of their principal amount. The notes will mature on October 30, 2019, and bear interest at a fixed rate of 3.30% per annum. The interest is payable semi-annually on April 30 and October 30 of each year, commencing on April 30, 2015. In October 2014, the company issued an aggregate principal amount of $600 million in senior notes (‘‘2024 senior notes’’). The 2024 senior notes were issued at 99.966% of their principal amount. The notes will mature on October 30, 2024, and bear interest at a fixed rate of 4.55% per annum. The interest is payable semi-annually on April 30 and October 30 of each year, commencing on April 30, 2015. Off Balance Sheet Arrangements and Other We have contractual commitments for non-cancellable operating leases. See Note 17, ‘‘Commitments and Contingencies,’’ to our combined and consolidated financial statements for further information on our non-cancellable operating leases. Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Local government regulations 17


  • Page 30

    may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization. Contractual Commitments Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors. The following table summarizes our total contractual obligations at October 31, 2014 for operations and excludes amounts recorded in our combined and consolidated balance sheet (in millions): Less than One to Three to More than one year three years five years five years Operating leases . . . . . . . . . . . . . . . . . . . . ....... . $ 32 $ 54 $ 35 $ 41 Interest on senior notes . . . . . . . . . . . . . . . ....... . 44 88 88 136 Commitments to contract manufacturers and suppliers . 240 2 — — Retirement plans . . . . . . . . . . . . . . . . . . . . ....... . 46 — — — Other purchase commitments . . . . . . . . . . . ....... . 33 — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395 $ 144 $ 123 $ 177 Operating leases. Commitments under operating leases relate primarily to leasehold property, see Note 17, ‘‘Commitments and Contingencies.’’ Interest on senior notes. We have contractual obligations for interest payments on our senior notes. Interest rates and payment dates are detailed above under ‘‘Long-term debt.’’ Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. However, our agreements with these suppliers usually provide us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. Typically purchase orders outstanding with delivery dates within 30 days are non-cancellable. Therefore, approximately 86% percent of our reported purchase commitments arising from these agreements are firm, non-cancellable, and unconditional commitments. We expect to fulfill most of our purchase commitments for inventory within one year. In addition to the above-mentioned commitments to contract manufacturers and suppliers, we record a liability for firm, non-cancellable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with our policy relating to excess inventory. As of October 31, 2014, the liability for our excess firm, non-cancellable and unconditional purchase commitments was $5 million, compared to $5 million as of October 31, 2013 and $4 million as of October 31, 2012. These amounts are included in other accrued liabilities in our combined and consolidated balance sheet. Retirement Plans. Commitments under the retirement plans relate to expected contributions to be made to our non-U.S. defined benefit plans and to our post-retirement medical plans for the next year only. Contributions after next year are impractical to estimate. Other purchase commitments. Other purchase commitments relate to contracts with professional services suppliers. Typically we can cancel these contracts within 90 days without penalties. For those contracts that are not cancellable within 90 days without penalties, we are disclosing the amounts we are obligated to pay to a supplier under each contract in that period before such contract can be canceled. As 18


  • Page 31

    of October 31, 2014, our contractual obligations with these suppliers are approximately $33 million within the next fiscal year, as compared to approximately $26 million as of October 31, 2013. The increase is due to additional contracts associated with our pre-separation expenditures and additional contracts put in place related to our operational separation from Agilent on August 1, 2014. We had no material off-balance sheet arrangements as of October 31, 2014 or October 31, 2013. On Balance Sheet Arrangements. The following table summarizes our total contractual obligations recorded in our combined and consolidated balance sheet pertaining to our long-term debt as of October 31, 2014 (in millions): Less than One to Three to More than one year three years five years five years Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 500 $ 600 Other long-term liabilities include $82 million and $92 million of liabilities for uncertain tax positions as of October 31, 2014 and October 31, 2013, respectively. We are unable to accurately predict when these amounts will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next 12 months due to either the expiration of a statute of limitations or a tax audit settlement. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. We hedge future cash flows denominated in currencies other than the functional currency using sales and expense forecasts up to twelve months in advance. Our exposure to exchange rate risks is managed on an enterprise-wide basis. This strategy utilizes derivative financial instruments, including option and forward contracts, to hedge certain foreign currency exposures with the intent of offsetting gains and losses that occur on the underlying exposures with gains and losses on the derivative contracts hedging them. We do not currently and do not intend to utilize derivative financial instruments for speculative trading purposes. Our operations generate non-functional currency cash flows such as revenues, third party vendor payments and inter-company payments. In anticipation of these foreign currency cash flows and in view of volatility of the currency market, we enter into such foreign exchange contracts as are described above to manage our currency risk. Approximately 74 percent of our revenues in 2014, 75 percent of our revenues in 2013 and 76 percent of our revenues in 2012 were generated in U.S. dollars. We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of October 31, 2014 and 2013, the analysis indicated that these hypothetical market movements would not have a material effect on our combined and consolidated financial position, results of operations or cash flows. We are also exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. We believe that the fair value of our fixed rate debt changes when the underlying market rates of interest change, and we may use interest rate swaps to modify such market risk. We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in interest rates relating to the underlying fair value of our fixed rate debt. As of October 31, 2014 , the sensitivity analyses indicated that a hypothetical 10 percent adverse movement in interest rates would result in an immaterial impact to the fair value of our fixed rate debt. 19


  • Page 32

    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Keysight Technologies, Inc.: In our opinion, the combined and consolidated financial statements listed in the index appearing under Item 8 present fairly, in all material respects, the financial position of Keysight Technologies, Inc. and its subsidiaries at October 31, 2014 and October 31 2013, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined and consolidated financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP December 22, 2014 20


  • Page 33

    KEYSIGHT TECHNOLOGIES, INC. COMBINED AND CONSOLIDATED STATEMENT OF OPERATIONS Years Ended October 31, 2014 2013 2012 (in millions, except per share data) Net revenue: Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,479 $ 2,434 $ 2,862 Services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 454 453 Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,933 2,888 3,315 Costs and expenses: Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,083 1,044 1,208 Cost of services and other . . . . . . . . . . . . . . . . . . . . . . . . . 230 221 226 Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,313 1,265 1,434 Research and development . . . . . . . . . . . . . . . . . . . . . . . . 361 375 377 Selling, general and administrative . . . . . . . . . . . . . . . . . . . 790 752 771 Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,464 2,392 2,582 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 496 733 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) — — Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . 9 5 13 Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475 501 746 Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . 83 44 (95) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392 $ 457 $ 841 Net income per share—basic and diluted(a) . . . . . . . . . . . . . . $ 2.35 $ 2.74 $ 5.04 Basic and diluted average shares outstanding(a) . . . . . . . . . . . 167 167 167 (a) On November 1, 2014, Agilent Technologies, Inc. distributed 167 million shares of Keysight common stock to existing holders of Agilent common stock. Basic and diluted net income per share for all periods through October 31, 2014 is calculated using the shares distributed on November 1, 2014. The accompanying notes are an integral part of these combined and consolidated financial statements. 21


  • Page 34

    KEYSIGHT TECHNOLOGIES, INC. COMBINED AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Years Ended October 31, 2014 2013 2012 (in millions) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392 $ 457 $ 841 Other comprehensive income (loss): Unrealized gain on investments, net of tax (expense) of $(4), $(3) and zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5 — Unrealized gain on derivative instruments, net of tax (expense) of $(2), zero and zero . . . . . . . . . . . . . . . . . . . 3 — — Foreign currency translation, net of tax (expense) benefit of $1, $(6) and zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (72) (75) (14) Net defined benefit pension cost and post-retirement plan costs: Change in actuarial net loss, net of tax benefit of $13, zero and zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) — — Change in net prior service credit, net of tax benefit of $3, zero and zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) — — Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (104) (70) (14) Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . $ 288 $ 387 $ 827 The accompanying notes are an integral part of these combined and consolidated financial statements. 22


  • Page 35

    KEYSIGHT TECHNOLOGIES, INC. COMBINED AND CONSOLIDATED BALANCE SHEET October 31, 2014 2013 (in millions, except par value and share data) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 810 $ — Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 340 Receivable from Agilent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 — Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 502 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 65 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 65 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,850 972 Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 469 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 419 Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 20 Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 44 Long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 88 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 16 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,050 $ 2,028 LIABILITIES AND EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173 $ 131 Payable to Agilent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 — Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 142 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 190 Income and other taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 55 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 42 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 560 Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 94 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,099 — Retirement and post-retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 — Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 129 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,281 783 Commitments and contingencies (Note 17) Stockholders’ equity: Agilent net investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,214 Common stock; $0.01 par value; 1 billion shares authorized; 167 million shares issued and outstanding at October 31, 2014, and no shares issued and outstanding at October 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 — Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . (336) 31 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 1,245 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,050 $ 2,028 The accompanying notes are an integral part of these consolidated financial statements. 23


  • Page 36

    KEYSIGHT TECHNOLOGIES, INC. COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended October 31, 2014 2013 2012 (in millions) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392 $ 457 $ 841 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 84 77 65 Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . 43 41 38 Excess tax benefit on share based plans . . . . . . . . . . . . . . . (4) — — Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14 (118) Excess and obsolete inventory . . . . . . . . . . . . . . . . . . . . . . 33 21 14 Asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . — 1 — Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1 1 Changes in assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . (25) 44 (3) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (53) (46) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (24) (23) Related party, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 — — Employee compensation and benefits . . . . . . . . . . . . . . . 30 — (32) Income and other taxes payable . . . . . . . . . . . . . . . . . . . 63 (2) (5) Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . (99) (11) (8) Net cash provided by operating activities . . . . . . . . . . . 563 566 724 Cash flows from investing activities: Purchases of property, plant and equipment . . . . . . . . . . . . (70) (69) (103) Acquisitions of businesses and intangible assets, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (1) (69) Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . — (15) — Change in restricted cash, cash equivalents and investments . (2) — — Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — — Net cash used in investing activities . .............. (82) (85) (172) Cash flows from financing activities: Issuance of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,099 — — Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) — — Proceeds from short term borrowings . . . . . . . . . . . . . . . . . 2 — — Repayment of debts and credit facility . . . . . . . . . . . . . . . . (37) — — Excess tax benefit from share-based plans . . . . . . . . . . . . . . 4 — — Return of capital to Agilent . . . . . . . . . . . . . . . . . . . . . . . . (940) — — Net transfers from (to) Agilent . . . . . . . . . . . . . . . . . . . . . 217 (481) (552) Net cash provided by (used in) financing activities . . . . 335 (481) (552) Effect of exchange rate movements . . . . . . . . . . . . . . . . . . . . (6) — — Net increase in cash and cash equivalents . . . . . . . . . . . 810 — — Cash and cash equivalents at beginning of year . . . . . . . . . . . . — — — Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . $ 810 $ — $ — The accompanying notes are an integral part of these combined and consolidated financial statements. 24


  • Page 37

    KEYSIGHT TECHNOLOGIES, INC. COMBINED AND CONSOLIDATED STATEMENT OF EQUITY Common Stock Accumulated Additional Other Agilent Number Par Paid-in Retained Comprehensive Net Total of Shares Value Capital Earnings Income/(Loss) Investment Equity (in millions, except number of shares in thousands) Balance as of October 31, 2011 . . . . — $ — $ — $ — $ 115 $ 881 $ 996 Components of comprehensive income, net of tax: Net income . . . . . . . . . . . . . . — — — — — 841 841 Other comprehensive loss . . . . . . — — — — (14) — (14) Total comprehensive income . . . . . . 827 Net transfers to Agilent . . . . . . . . — — — — — (518) (518) Balance as of October 31, 2012 . . . . — $ — $ — $ — $ 101 $ 1,204 $ 1,305 Components of comprehensive income, net of tax: Net income . . . . . . . . . . . . . . — — — — — 457 457 Other comprehensive loss . . . . . . — — — — (70) — (70) Total comprehensive income . . . . . . 387 Net transfers to Agilent . . . . . . . . — — — — — (447) (447) Balance as of October 31, 2013 . . . . — $ — $ — $ — $ 31 $ 1,214 $ 1,245 Components of comprehensive income, net of tax: Net income (pre-capitalization) . . . — — — — — 291 291 Net income (post-capitalization) . . — — — 101 — — 101 Total net income . . . . . . . . . . 392 Other comprehensive loss (pre-capitalization) . . . . . . . . . — — — — (8) — (8) Other comprehensive loss (post-capitalization) . . . . . . . . — — — — (96) — (96) Total other comprehensive loss . . (104) Total comprehensive income . . . . . . 288 Net transfers to Agilent (pre-capitalization) . . . . . . . . . . — — — — — (267) (267) Transfers due to Capitalization . . . . — — — — (263) 780 517 Return of capital to Agilent (post-capitalization) . . . . . . . . . — — — — — (900) (900) Excess cash paid or payable to Agilent . . . . . . . . . . . . . . . . . — — — — — (114) (114) Issuance of common stock and reclassification of parent company investment in connection with separation . . . . . . . . . . . . . . . 167,483 2 1,002 — — (1,004) — Balance as of October 31, 2014 . . . . 167,483 $ 2 $ 1,002 $ 101 $ (336) $ — $ 769 The accompanying notes are an integral part of these combined and consolidated financial statements. 25


  • Page 38

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Overview. Keysight Technologies, Inc. (‘‘we’’, ‘‘us’’, ‘‘Keysight’’ or the ‘‘company’’), incorporated in Delaware on December 6, 2013, is a measurement company providing core electronic measurement solutions to communications and electronics industries. On November 1, 2014, Keysight became an independent publicly-traded company through the distribution by Agilent Technologies Inc. (‘‘Agilent’’) of 100 percent of the outstanding common stock of Keysight to Agilent’s shareholders (the ‘‘Separation’’). Each Agilent shareholder of record as of the close of business on October 22, 2014 received one share of Keysight common stock for every two shares of Agilent common stock held on the record date. Approximately 167 million shares of Keysight common stock were distributed on November 1, 2014 to Agilent shareholders. Keysight’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (‘‘SEC’’) on October 6, 2014. Keysight’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘KEYS’’ on the New York Stock Exchange on November 3, 2014. Basis of presentation and separation from Agilent. Prior to the distribution, Agilent transferred substantially all of the assets and liabilities and operations of the electronic measurement business to Keysight in August 2014 (‘‘the Capitalization’’). Combined financial statements prior to the Capitalization were prepared on a stand-alone basis and were derived from Agilent’s consolidated financial statements and accounting records. The combined financial statements reflect our financial position, results of operations, comprehensive income and cash flows as our business was operated as part of Agilent prior to the Capitalization. Following the Capitalization the consolidated financial statements include the accounts of the company and our wholly-owned subsidiaries. All periods have been accounted for in conformity with U.S. generally accepted accounting principles (‘‘GAAP’’). For periods prior to the Capitalization, the combined and consolidated financial statements include the allocation of certain assets and liabilities that were historically held at the Agilent level but which were specifically identified or allocated to us. Cash and cash equivalents held by Agilent were not allocated to us. Agilent’s debt and related interest expense were not allocated to us since we were not the legal obligor of the debt and Agilent’s borrowings were not directly attributable to us. In addition, prior to the Capitalization, all intercompany transactions between us and Agilent were considered to be effectively settled at the time the transactions were recorded. All cash generated by our business was assumed to be remitted to the Agilent subsidiary located in the same legal entity or country. The total net effect of the settlement of these intercompany transactions prior to the Capitalization is reflected in the combined and consolidated statement of cash flows as a financing activity and in the combined and consolidated balance sheet as Agilent net investment. Our fiscal year end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all years and dates refer to our fiscal year. We received significant management and shared administrative services from Agilent and we and Agilent engage in certain intercompany transactions. The combined and consolidated financial statements include allocation of certain Agilent corporate expenses, including information technology resources and support; finance, accounting, and auditing services; real estate and facility management services; human resources activities; certain procurement activities; treasury services, legal advisory services and costs for research and development. In addition, other costs allocated to us include restructuring costs, share-based compensation expense and retirement plan expenses related to Agilent’s corporate and shared services employees. These costs have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of revenue, square footage, headcount or other measures. 26


  • Page 39

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Management believes the assumptions and allocations underlying the combined and consolidated financial statements are reasonable and appropriate. The expenses and cost allocations have been determined on a basis that Agilent and we consider to be a reasonable reflection of the utilization of services provided or the benefit received by us during the periods presented. However, the amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Agilent. Consequently, our future results of operations after our separation from Agilent will include costs and expenses for us to operate as an independent company, and these costs and expenses may be materially different from our historical results of operations, statement of comprehensive income, financial position, and cash flows. Accordingly, the financial statements for these periods are not indicative of our future results of operations, financial position, and cash flows. Management is responsible for the fair presentation of the accompanying combined and consolidated financial statements, prepared in accordance with U.S. GAAP, and has full responsibility for their integrity and accuracy. In the opinion of management, the accompanying combined and consolidated financial statements contain all adjustments necessary to present fairly our combined and consolidated balance sheet, statement of operations, statement of comprehensive income, statement of cash flows and statement of equity for all periods presented. Principles of consolidation. The combined and consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All significant inter-company transactions have been eliminated. All significant transactions between us and other businesses of Agilent are included in these combined and consolidated financial statements. All inter-company transactions prior to the Capitalization are considered to be effectively settled for cash in the combined and consolidated statement of cash flows at the time the transaction is recorded. Agilent net investment. This balance represents the accumulation of our net earnings before our separation from Agilent, including share-based compensation expense recorded, cash transferred to and from Agilent, and net inter-company receivable/payable between us and Agilent. Use of estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best 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, allocated expenses from Agilent and the related allocation methods, including share-based compensation and retirement and post-retirement plan assumptions, restructuring, valuation of goodwill and accounting for income taxes. Revenue recognition. We enter into agreements to sell products (hardware and/or software), services and other arrangements (multiple-element arrangements) that include combinations of products and services. We recognize revenue, net of trade discounts and allowances, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectability 27


  • Page 40

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, for products, or when the service has been provided. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. We consider arrangements with extended payment terms not to be fixed or determinable, and accordingly we defer revenue until amounts become due. At the time of the transaction, we evaluate the creditworthiness of our customers to determine the appropriate timing of revenue recognition. Product revenue. Our product revenue is generated predominantly from the sales of various types of test equipment and associated software. Product revenue, including sales to resellers and distributors, is reduced for estimated returns, when appropriate. For sales or arrangements that include customer- specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete. Where software is licensed separately, revenue is recognized when the software is delivered and has been transferred to the customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs. We also evaluate whether collection of the receivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist on which a portion of the total fee would be allocated based on vendor-specific objective evidence (‘‘VSOE’’). Service revenue. Revenue from services includes repair and calibration services, extended warranty, customer and software support, consulting, training and education. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. For example, customer support contracts are recognized ratably over the contractual period, while training revenue is recognized as the training is provided to the customer. In addition, the four revenue recognition criteria described above must be met before service revenue is recognized. Revenue recognition for arrangements with multiple deliverables. Our multiple-element arrangements are generally comprised of a combination of measurement instruments, installation or other start-up services, and/or software and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized upon delivery once title and risk of loss pass to the customer. Delivery of installation, start-up services and other services varies based on the complexity of the equipment, staffing levels in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Revenue from the sale of software products that are not required to deliver the tangible product’s essential functionality are accounted for under software revenue recognition rules which require VSOE of fair value to allocate revenue in a multiple-element arrangement. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue. We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or 28


  • Page 41

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on VSOE if available, third-party evidence (‘‘TPE’’) if VSOE is not available, or estimated selling price (‘‘ESP’’) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to, customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve, changes may occur in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple-element arrangements, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement. Deferred revenue. Deferred revenue represents the amount that is allocated to undelivered elements in multiple-element arrangements. We limit the revenue recognized to the amount that is not contingent on the future delivery of products or services or meeting other specified performance conditions. In addition, service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Accounts receivable, net. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging of such receivables, among other factors. The allowance for doubtful accounts as of October 31, 2014 and 2013 was not material. We do not have any off-balance-sheet credit exposure related to our customers. Accounts receivable are also recorded net of product returns. Share-based compensation. Our employees have historically participated in Agilent’s various incentive award plans, including employee stock options, restricted stock units and the employee stock purchases made under Agilent’s Employee Stock Purchase Plan (‘‘ESPP’’). Prior to our separation from Agilent, we participated in Agilent’s share-based compensation plans and recorded share-based compensation expense based on the equity awards granted to our employees. We recorded compensation expense based on expenses for the awards to our employees as well as an allocation of Agilent’s corporate and shared services employee expenses. 29


  • Page 42

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In 2014, 2013 and 2012, we accounted for share-based awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under the ESPP and performance share awards under Agilent Technologies, Inc. Long-Term Performance (‘‘LTP’’) Program using the estimated grant date fair value method of accounting. Under the fair value method, we recorded compensation expense for all share-based awards of $44 million in 2014, $43 million in 2013 and $38 million in 2012. Inventory. Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based on estimates about future demand and actual usage. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales unit forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory. Warranty. Our standard warranty term for most of our products from the date of delivery is typically three years, which increased from one year in the second quarter of fiscal 2013. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product revenue. 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. See Note 16, ‘‘Guarantees.’’ We also sell extended warranties that provide warranty coverage beyond the standard warranty term. Revenue associated with extended warranties is deferred and recognized over the extended coverage period. Taxes on income. Income taxes, as presented, are calculated on an ‘‘as if’’ separate tax return basis. Our operations have historically been included in Agilent’s U.S. federal and state income tax returns or non-U.S. jurisdiction tax returns. Agilent’s global tax model has been developed based on its entire portfolio of businesses. Accordingly, the tax results as presented are not necessarily reflective of the results that we would have generated on a standalone basis. It is possible that we will make different tax accounting elections and assertions in future periods, such as the amount of earnings that will be permanently reinvested outside the U.S. Income tax expense is based on reported income or loss before income taxes. Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate due to new information. We classify the liability for unrecognized tax 30


  • Page 43

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) benefits as current to the extent that the company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue, and the associated expense is recorded in cost of products for all periods presented. Goodwill and other intangible assets. In September 2011, the Financial Accounting Standards Board (‘‘FASB’’) approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the two-step test is necessary. The guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. Historically, we conducted our business in a single operating segment and reporting unit. In fiscal 2014, in conjunction with the planned separation, we implemented changes in our organizational structure which resulted in the formation of two reportable operating segments, which are also our reporting units. In fiscal year 2014, we assessed goodwill impairment for our two reporting units, which consisted of our two segments, Measurement Solutions and Customer Support and Services. We performed a quantitative test for goodwill impairment for both reporting units as of September 30, 2014. Based on the results of our testing, the fair value for both reporting units was significantly in excess of the carrying value. There was no impairment of goodwill during the years ended October 31, 2014, 2013 and 2012. Other intangible assets consist primarily of developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 15 years. No impairments of purchased intangible assets were recorded during the year ended October 31, 2014, 2013 and 2012. In July 2012, the FASB simplified the guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. Our indefinite-lived intangible assets are IPR&D intangible assets. The guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the impairment testing guidance for goodwill. It allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The qualitative factors assist in determining whether it is more-likely-than-not (i.e. > 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in 31


  • Page 44

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) any period and proceed directly to calculating its fair value. We adopted this guidance for the year ended October 31, 2012. Due to specific cancellation of an IPR&D project, we recorded an impairment of $1 million in 2013. There were no impairments in fiscal years 2014 and 2012. In all other instances we used the qualitative test and concluded that it was more-likely-than-not that all other indefinite-lived assets were not impaired. Advertising. Advertising costs are expensed as incurred and amounted to $22 million in 2014, $16 million in 2013 and $18 million in 2012. Research and development. Costs related to research, design and development of our products are charged to research and development expense as they are incurred. Sales taxes. Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue. Investments. Cost method investments consisting of non-marketable equity securities are accounted for at historical cost. Trading securities 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 were reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income. Net income per share. Basic net income per share is computed by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator). The denominator for basic and diluted earnings per share for the period is based on the number of shares of Keysight common stock outstanding on the distribution date. Basic and diluted net income per share for all periods through October 31, 2014 is calculated using the shares distributed on November 1, 2014. See Note 6, ‘‘Net Income Per Share’’. Cash, cash equivalents and short term investments. We classify investments as cash equivalents if their original maturity or remaining maturity at the time of purchase is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value. As of October 31, 2014, approximately $598 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries. Under current tax laws, most of the cash could be repatriated to the U.S., but it would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. Our cash and cash equivalents mainly consist of short-term deposits held at major global financial institutions, investments in institutional money market funds, and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and institutional money market funds in which we invest our funds. We classify investments as short-term investments if their original maturities are greater than three months and their remaining maturities are one year or less. Fair value of financial instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the cost or equity method, their carrying value 32


  • Page 45

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) approximates their estimated fair value. The fair value of our long-term debt, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the carrying value by approximately $1 million as of October 31, 2014. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 12, ‘‘Fair Value Measurements,’’ for additional information on the fair value of financial instruments. Concentration of credit risk. Financial instruments that potentially subject us to significant concentration of credit risk include money market fund investments, time deposits and demand deposit balances. These investments are categorized as cash and cash equivalents and long-term investments. In addition, we have credit risk from derivative financial instruments used in hedging activities and accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis. Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated through collateral such as letters of credit, bank guarantees or payment terms like cash in advance. Credit evaluation is performed by an independent team to ensure proper segregation of duties. No single customer accounted for more than 10 percent of accounts receivable as of October 31, 2014 or 2013. Derivative instruments. We are exposed to global foreign currency exchange rate risk in the normal course of business. We enter into foreign exchange hedging contracts, primarily forward contracts and purchased options to manage financial exposures resulting from changes in foreign currency exchange rates. Foreign currency exposures include committed and anticipated revenue and expense transactions (cash flow exposure) and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary (balance sheet exposure). For cash flow hedges, contracts are designed at inception as hedges of the related foreign currency exposures. For option contracts, we exclude time value from the measurement of effectiveness. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies; foreign exchange hedging contracts generally mature within twelve months. In order to manage foreign currency exposures in a few limited jurisdictions we may enter into foreign exchange contracts that do not qualify for hedge accounting. In such circumstances, the local foreign currency exposure is offset by contracts owned by the parent company. We do not use derivative financial instruments for speculative trading purposes. All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and qualify as a cash flow hedge, changes in the value of the effective portion of the derivative instrument is recognized in accumulated comprehensive income, a component of stockholders’ equity. Amounts associated with cash flow hedges are reclassified and recognized in income when either the forecast transaction occurs or it becomes probable the forecast transaction will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at their fair value and changes in 33


  • Page 46

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) the fair values are recorded in the income statement in the current period. Derivative instruments are subject to master netting arrangements and qualify for net presentation in the balance sheet. Changes in the fair value of the ineffective portion of derivative instruments are recognized in earnings in the current period. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities. Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger, and the resulting gain or loss is reflected in the combined and consolidated statement of operations. Buildings and improvements are depreciated over the lesser of their useful lives or the remaining term of the lease and machinery and equipment over three to ten years. We use the straight-line method to depreciate assets. Leases. We lease buildings, machinery and equipment under operating leases for original terms ranging generally from one to twenty-five years. Certain leases contain renewal options for periods up to ten years. Capitalized software. We capitalize certain internal and external costs incurred to acquire or create internal use software. Capitalized software is included in property, plant and equipment and is depreciated over three to five years once development is complete. Impairment of long-lived assets. We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Restructuring costs. The main component of our restructuring plan is related to workforce reductions. Workforce reduction charges are accrued when payment of benefits becomes probable and the amounts can be estimated. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and other related charges could be materially different, either higher or lower, than those we have recorded. Employee compensation and benefits. Amounts owed to employees, such as accrued salary, bonuses and vacation benefits are accounted for within employee compensation and benefits. The total amount of accrued vacation benefit was $70 million and $58 million as of October 31, 2014 and 2013, respectively. Foreign currency translation. We translate and remeasure balance sheet and income statement items into U.S. dollars. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates which approximate to average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. 34


  • Page 47

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates which approximate average exchange rates in effect during each period. Gains or losses from foreign currency re-measurement are included in net income. Net gains or losses resulting from foreign currency transactions, including hedging gains and losses that are allocated to us by Agilent, are reported in other income (expense), net and were zero for fiscal year 2014, a $4 million loss for 2013 and a $1 million loss for 2012. Retirement plans and post-retirement benefit plan assumptions. Prior to the Capitalization, substantially all of our employees were covered under various defined benefit and/or defined contribution retirement plans sponsored by Agilent. All defined benefit plans and post-retirement health care plans were considered multi-employer plans. As a result, no asset or liability was recorded prior to the Capitalization to recognize the funded status in our combined and consolidated balance sheet. At the Capitalization, the assets and liabilities of these plans that were allocable to Keysight employees were transferred to Keysight plans; therefore, the plans are no longer accounted for as multi-employer plans. Retirement and post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees’ average expected future service to Keysight based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of U.S. GAAP. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and portfolio composition. We evaluate these assumptions at least annually. See Note 15, ‘‘Retirement Plans and Post-Retirement Pension Plans.’’ 2. NEW ACCOUNTING PRONOUNCEMENTS In February 2013, the FASB issued guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective prospectively for annual reporting periods beginning after December 15, 2012 and interim periods within those years. We adopted this guidance in the first quarter of 2014 and have presented the requisite disclosures in the combined and consolidated statement of comprehensive income and in the notes to the combined and consolidated financial statements. In March 2013, the FASB issued an amendment to the accounting guidance on foreign currency matters in order to clarify the guidance for the release of cumulative translation adjustment. The guidance requires that a parent de-consolidate a subsidiary or de-recognize a group of assets that is a nonprofit 35


  • Page 48

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. NEW ACCOUNTING PRONOUNCEMENTS (Continued) activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) if the parent ceases to have a controlling financial interest in that group of assets. The guidance is effective for annual periods beginning on or after December 15, 2013 and interim periods within those years. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance. In July 2013, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2013 and interim periods within those years and is consistent with our current practice. In May 2014, the FASB issued an amendment to the accounting guidance related to revenue recognition. The amendment was the result of a joint project between the FASB and the International Accounting Standards Board (‘‘IASB’’) to clarify the principles for recognizing revenue and to develop common revenue standards for U.S. GAAP and International Financial Reporting Standards (‘‘IFRS’’). To meet those objectives, the FASB amended the FASB Accounting Standards Codification and created a new Topic 606, Revenue from Contracts with Customers, and the IASB issued IFRS 15, Revenue from Contracts with Customers. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those years. Early application is not permitted. We are evaluating the impact of adopting this guidance to our combined and consolidated financial statements. In June 2014, the FASB issued an amendment to the accounting guidance relating to share-based compensation to resolve what it saw as diverse accounting treatment of certain awards. With this amendment, the FASB has given explicit guidance to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting rather than as a non-vesting condition that affects the grant-date fair value of an award. The new guidance is effective for annual periods beginning after December 15, 2015 and for the interim periods within those annual periods. Earlier adoption is permitted. We are evaluating the impact of adopting this prospective guidance to our combined and consolidated financial statements. In August 2014, the FASB issued guidance related to the disclosures around going concern. The standard provided guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provided related footnote disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance. Other amendments to U.S. 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 combined and consolidated financial statements upon adoption. 3. TRANSACTIONS WITH AGILENT Prior to our separation, we were the Electronic Measurement segment of Agilent and thus our transactions with Agilent were considered intercompany. After our separation date, our transactions with 36


  • Page 49

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. TRANSACTIONS WITH AGILENT (Continued) Agilent are considered related party transactions since we were wholly-owned subsidiary of Agilent until October 31, 2014. The amount of materials and services sold by us to other Agilent businesses was immaterial for the years ended October 31, 2014, 2013 and 2012 and we did not purchase any materials from the other Agilent businesses for those respective periods. Allocated Costs The combined and consolidated statement of operations includes our direct expenses for cost of products and services sold, research and development, sales and marketing, distribution, and administration as well as allocations of expenses arising from shared services and infrastructure provided by Agilent to us. These allocated expenses include costs of information technology, accounting and legal services, real estate and facilities, corporate advertising, insurance services, treasury and other corporate and infrastructure services and costs for central research and development efforts. In addition, other costs allocated to us include restructuring costs, share-based compensation expense and retirement plan expenses related to Agilent’s corporate and shared services employees and are included in the table below. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. These costs have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of revenue, square footage, headcount or other measures. Allocated costs included in the accompanying combined statement of operations are as follows: Years ended October 31, 2014 2013 2012 Cost of products and services . . . . . . . . . . . $ 96 $ 93 $ 98 Research and development . . . . . . . . . . . . . 44 54 58 Selling, general and administrative . . . . . . . 273 257 246 Other (income) expense . . . . . . . . . . . . . . . (4) (4) (7) Total allocated costs . . . . . . . . . . . . . . . . . . $ 409 $ 400 $ 395 Fiscal 2014 includes allocated costs related to the period prior to the Capitalization. Receivable from and Payable to Agilent October 31, 2014 2013 Receivable from Agilent . . . . . . . . . . . . . . . . . . . . . . . . . $ 23 $ — Payable to Agilent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ — Payable to Agilent at October 31, 2014 includes an accrual for return of excess cash to Agilent of approximately $74 million, which is subject to final determination as provided in the separation and distribution agreement. Prior to the Capitalization, all intercompany transactions between us and Agilent were considered to be effectively settled at the time the transactions were recorded. 37


  • Page 50

    KEYSIGHT TECHNOLOGIES, INC. NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. TRANSACTIONS WITH AGILENT (Continued) Agreements with Agilent Prior to Capitalization, we shared and operated under agreements executed by Agilent with third parties, including but not limited to: • purchasing, manufacturing, and freight agreements; • the use of facilities owned, leased, and managed by Agilent; and • software, technology and other intellectual property agreements. 4. SHARE-BASED COMPENSATION Prior to the Separation, Keysight employees participated in Agilent’s stock program. The Agilent 2009 Stock Plan provides for the grant of awards in the form of stock options, stock appreciation rights (‘‘SARs’’), restricted stock, restricted stock units (‘‘RSUs’’), performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2009 Plan has a term of ten years. The following disclosures represent the portion of Agilent’s incentive stock program in which Keysight employees participated. All awards granted under the program consisted of Agilent common shares. As such, all related equity account balances are reflected in Agilent’s consolidated statements of stockholders’ equity and have not been reflected in Keysight’s combined and consolidated financial statements. Keysight’s combined and consolidated statements of earnings reflects compensation expense for these stock-based awards associated with the portion of Agilent’s incentive stock program in which Keysight employees participated; accordingly, the amounts presented are not necessarily indicative of future performance and do not necessarily reflect the results that we would have experienced as an independent, publicly-traded company for the periods presented. In conjunction with the Separation, the company adopted the Keysight Technologies, Inc. 2014 Equity and Incentive Compensation Plan (the ‘‘Plan’’). Upon the Separation, the outstanding Agilent equity- based compensation awards were converted into the Keysight equity-based compensation awards issued pursuant to the Plan. Description of Keysight’s Share-Based Plans Incentive compensation plans. The 2014 Equity and Incentive Compensation Plan was originally adopted by the Board on July 16, 2014, subsequently amended and restated by the Board on September 29, 2014 and became effective as of November 1, 2014 (the ‘‘Effective Date’’). The Board subsequently reserved 25 million shares of Company common stock that may be issued under the 2014 Plan, plus any shares forfeited or cancelled under the Plan. The 2014 Stock Plan provides for the grant of awards in the form of stock options, SARs, restricted stock, RSUs, performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2014 Plan has a term of ten years. Options generally vest at a rate of 25 percent per year over a period of four years from the date of grant and generally have a maximum contractual term of ten years. The exercise price for stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted. Restricted stock units generally vest at a rate of 25 percent per year over a period of four years from the date of grant. 38

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!