SHARE-BASED COMPENSATION

9 Months Ended

Jul. 31, 2016

Keysight accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock option awards, restricted stock units ("RSUs"), employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”) and performance share awards granted to selected members of our senior management under the Long-Term Performance (“LTP”) Program based on estimated fair values.

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



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2016		2015		2016		2015
	(in millions)
Cost of products and services	$	2	$	2	$	9	$	10
Research and development	2		2		7		8
Selling, general and administrative	6		3		23		31
Total share-based compensation expense	$	10	$	7	$	39	$	49

At July 31, 2016 and 2015, there was no share-based compensation capitalized within inventory. The expense for the three and nine months ended July 31, 2016 includes $1 million and $4 million, respectively, related to special inaugural RSU awards granted during the three months ended January 31, 2015. The expense for the three and nine months ended July 31, 2015 includes $1 million and $16 million, respectively, related to these special inaugural RSU grants. These awards will vest over three years from the date of grant.

The following assumptions were used to estimate the fair value of employee stock options and LTP Program grants.



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2016		2015		2016		2015
Stock Option Plans:
Weighted average risk-free interest rate	—		—		—		1.6	%
Dividend yield	—		—		—		—	%
Weighted average volatility	—		—		—		31	%
Expected life	—		—		—		4.9 years
LTP Program:
Volatility of Keysight shares	25	%	26	%	25	%	26	%
Volatility of selected peer-company shares	14%-54%		17%-67%		14%-54%		17%-67%
Price-wise correlation with selected peers	38	%	38	%	38	%	38	%

The fair value of employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTP Program were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock awards is determined based on the market price of Keysight’s common stock on the date of grant.

We did not grant any option awards for the three and nine months ended July 31, 2016 and three months ended July 31, 2015. For the nine months ended July 31, 2015, we used the average historical volatility of eleven peer companies to estimate the volatility for our stock option awards. We considered our ability to find traded options of peer companies in the current market with similar terms and prices to our options. In estimating the expected life of our options, we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.