SHARE-BASED COMPENSATION

3 Months Ended

Jan. 31, 2020

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.

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



	Three Months Ended
	January 31,
	2020		2019
	(in millions)
Cost of products and services	$	5	$	4
Research and development	8		6
Selling, general and administrative	26		17
Total share-based compensation expense	$	39	$	27

The increase in share-based compensation expense for the three months ended January 31, 2020 was primarily driven by an increase in the fair value of our financial metrics-based performance awards and accelerated expense for retirement eligible employees. Share-based compensation capitalized within inventory was $2 million at January 31, 2020 and $1 million at January 31, 2019.

The following assumptions were used to estimate the fair value of awards granted under the LTP Program that are based on total shareholder return ("TSR"):



	Three Months Ended
	January 31,
	2020		2019
Volatility of Keysight shares	28	%	25	%
Volatility of index/peer group	13	%	12	%
Price-wise correlation with selected peers	61	%	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 reflects the cost of awards that are probable to vest at the end of the performance period. We did not grant option awards in the three months ended January 31, 2020 and 2019.