SHARE-BASED COMPENSATION

12 Months Ended

Oct. 31, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

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 Restricted Stock Units ("RSUs"), employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”), employee stock option awards, and performance share awards granted to selected members of our senior management under the Long-Term Performance (“LTP”) Program, based on estimated fair values.

Description of Keysight’s Share-Based Plans

Incentive compensation plans. The 2014 Equity and Incentive Compensation Plan (the "2014 Stock Plan") was originally adopted by the Board of Directors ("the Board") on July 16, 2014, subsequently amended and restated by the Board on September 29, 2014 and on January 22, 2015 and became effective as of November 1, 2014 (the “Effective Date”). The Board initially reserved 25 million shares of company common stock that may be issued under the 2014 Stock Plan, plus any shares forfeited or cancelled under the 2014 Stock Plan and subsequently reduced the number to 17 million shares. The Plan was further amended and restated by the Board on November 16, 2017 to increase the maximum aggregate number of shares that may be issued under the Plan to 21.8 million shares. 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 Stock Plan has a term of ten years. As of October 31, 2019, approximately 8 million shares were available for future awards under the 2014 Stock Plan.

Stock options granted under the 2014 Stock Plan may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code, or non-statutory. Options were granted prior to November 1, 2016 and generally vest at a rate of 25 percent per year over a period of four years from the date of grant with 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.

Effective November 1, 2014, the Compensation Committee of the Board of Directors approved the performance awards, part of the Long-Term Performance (“LTP”) Program administered under the 2014 Stock Plan, for the company's executive officers and other key employees. Participants in this program are entitled to receive unrestricted shares of the company's stock after the end of the contractual period if specified performance targets are met. The maximum contractual period for awards under the performance awards program is three years. These awards can be based on a variety of targets, such as total shareholder return ("TSR") or financial metrics, such as operating margin, cost synergies and others. The final award may vary from zero to 200 percent of the target award based on the actual performance. For TSR-based performance awards, the peer group comparisons are set at the beginning of the performance period. We consider the dilutive impact of this program in our diluted net income per share calculation only to the extent that the performance conditions are met.

Restricted stock units under our share-based plans are granted to directors, executives and employees. The estimated fair value of the restricted stock unit awards granted under the 2014 Stock Plan is determined based on the market price of Keysight common stock on the date of grant. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.

Effective November 1, 2014, the company adopted the Employee Stock Purchase Plan. The ESPP allows eligible employees to contribute up to ten percent of their base compensation to purchase shares of Keysight common stock at 85 percent of the closing market price at the purchase date. Shares authorized for issuance in connection with the ESPP are subject to an automatic annual increase of the lesser of one percent of the outstanding shares of Keysight common stock on November 1 or an amount determined by the Compensation Committee of our Board of Directors. Under the terms of the ESPP, in no event shall the number of shares issued under the ESPP exceed 75 million shares.

Under our ESPP, employees purchased 810,172 shares for $48 million in 2019, 885,110 shares for $36 million in 2018 and 1,085,382 shares for $32 million in 2017. As of October 31, 2019, common stock authorized and available for issuance under our ESPP was 20,491,958 shares, which includes shares issued in November 2019 to participants in consideration of the aggregate contribution of $26 million as of October 31, 2019.

Impact of Share-based Compensation Awards

Share-based compensation expense has been recognized using a straight-line amortization method. The impact of share-based compensation expense on our consolidated statement of operations was as follows:



	Year Ended October 31,
	2019		2018		2017
	(in millions)
Cost of products and services	$	14	$	11	$	11
Research and development	16		10		9
Selling, general and administrative	52		38		36
Total share-based compensation expense	$	82	$	59	$	56

The expense for the year ended October 31, 2019 includes a mark-to-market adjustment of $8 million for financial metrics-based performance awards. At October 31, 2019 and 2018, there was no share-based compensation expense capitalized within inventory. The income tax benefit (deficiency) realized from exercised stock options and similar awards recognized was $9 million in 2019 and $5 million in 2018 recorded as a component of income tax expense and $3 million in 2017 recorded as a component of equity.

Valuation Assumptions

The following assumptions were used to estimate the fair value of TSR-based performance awards.



	Year Ended October 31,
	2019	2018	2017
Volatility of Keysight shares	25%	25%	27%
Volatility of index/peer group	12%	14%	15%
Price-wise correlation with selected peers	57%	57%	57%

The TSR-based performance awards were valued using a Monte Carlo simulation model, which requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. The estimated fair value of restricted stock awards and the financial metrics-based performance awards is determined based on the market price of Keysight’s common stock on the grant date. The compensation cost for financial metrics-based performance awards reflect the cost of awards that are probable to vest at the end of the performance period.

Share-based Payment Award Activity

Employee Stock Options: The following table summarizes 2019 activity related to stock option awarded to our employees and directors:



	Options Outstanding		Weighted Average Exercise Price
	(in thousands)
Outstanding at October 31, 2018	1,306		$	27
Granted	—		$	—
Exercised	(747	)	$	27
Forfeited and expired	—		$	—
Outstanding at October 31, 2019	559		$	28

There were no forfeited or expired options in 2019.

The options outstanding and exercisable at October 31, 2019 were as follows:



	Options Outstanding and Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
	(in thousands)	(in years)			(in thousands)
$0 - 25	154	2.7	$	20	$	12,479
$25.01 - 30	164	4.1	$	30	11,652
$30.01 - 40	241	5.0	$	31	16,830
	559	4.1	$	28	$	40,961

The aggregate intrinsic value provided above represents the total pre-tax intrinsic value, based on Keysight's closing stock price of $100.91 at October 31, 2019, that would have been received had all award holders exercised their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable at October 31, 2019 was approximately 0.6 million.

The following table summarizes the aggregate intrinsic value of options exercised in 2019, 2018 and 2017:



	Aggregate Intrinsic Value		Weighted Average Exercise Price
	(in thousands)
Options exercised in fiscal 2017	$	16,385	$	20
Options exercised in fiscal 2018	$	28,985	$	26
Options exercised in fiscal 2019	$	39,094	$	27

As of October 31, 2019, the unrecognized share-based compensation costs for outstanding stock option awards was zero. See Note 6, "Income Taxes," for the tax impact on share-based award exercises.

Non-vested Awards

The following table summarizes non-vested award activity in 2019 for our LTP Program and restricted stock unit awards:



	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Non-vested at October 31, 2018	3,359		$	36
Granted	1,116		$	60
Vested	(1,439	)	$	38
Forfeited	(53	)	$	46
LTP Program incremental	298		$	36
Non-vested at October 31, 2019	3,281		$	48

As of October 31, 2019, the unrecognized share-based compensation cost for non-vested stock awards was approximately $57 million, which is expected to be amortized over a weighted average period of 2.3 years. The total fair value of stock awards vested was $89 million for 2019, $55 million for 2018 and $43 million for 2017.