ACQUISITION OF ANITE

12 Months Ended

Oct. 31, 2016

Business Combinations [Abstract]

ACQUISITION OF ANITE

ACQUISITION OF ANITE

On August 13, 2015, we acquired all of the share capital of Anite plc ("Anite.") Anite was a U.K.-based global company with strong software expertise and a leading supplier of wireless test solutions. As a result of the acquisition, Anite has become a wholly-owned subsidiary of Keysight. Accordingly, the results of Anite are included in Keysight's consolidated financial statements from the date of the acquisition. For the period from August 14, 2015 to October 31, 2015, Anite's net revenue was $25 million and net loss was $14 million. This acquisition strengthened our wireless software design and test portfolio and its Network Test business expanded our served addressable market. Coupled with Keysight's expertise in helping customers design and test hardware, we can now provide customers with more comprehensive wireless solutions. Anite’s Network Test business will also enable us to provide innovative solutions that help customers deliver an outstanding experience for mobile users in the network.

The consideration paid was approximately $558 million, net of $43 million of cash acquired. We funded the acquisition using our existing cash. In connection with the acquisition of Anite, we entered into several foreign currency forward contracts to mitigate the currency exchange risk associated with the payment of the purchase price in British Pound currency. The aggregate notional amount of the currencies hedged was $608 million. These foreign exchange contracts did not qualify for hedge accounting treatment and were not designated as hedging instruments. The resulting loss on settlement, on the date of acquisition, was $2 million and was recorded in other income (expense) in the consolidated statement of operations for the year ended October 31, 2015.

The Anite acquisition was accounted for in accordance with the authoritative accounting guidance. The acquired assets and assumed liabilities were recorded by Keysight at their estimated fair values. Keysight determined the estimated fair values with the assistance of appraisals or valuations performed by third party specialists, discounted cash flow analysis, and estimates made by management. We expect to leverage and expand the existing sales channels and product development resources, and utilize the assembled workforce. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Anite's net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

All goodwill was allocated to the Communications Solutions Group reporting unit. We do not expect the goodwill recognized to be deductible for income tax purposes. Any impairment charges made in the future associated with goodwill will not be tax deductible.

A portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, a deferred tax liability of approximately $47 million was established primarily for the future amortization of these intangibles and is included in "other long-term liabilities" in the table below.

The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of August 13, 2015 (in millions):

Cash and cash equivalents	$	43
Accounts receivable	32
Inventory	19
Deferred tax assets	1
Other current assets	10
Property, plant and equipment	31
Intangible assets	244
Goodwill	324
Long-term deferred tax assets	5
Total assets acquired	709
Accounts payable	(10		)
Employee compensation and benefits	(3		)
Deferred revenue	(17		)
Income and other taxes payable	—
Other accrued liabilities	(26		)
Other long-term liabilities	(50		)
Net assets acquired	$	603

The fair value of cash and cash equivalents, accounts receivable, other current assets, accounts payable, employee compensation and benefits, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment, intangible assets, and deferred revenue were determined with the input from third-party valuation specialists. The fair values of certain other assets and certain other liabilities were determined internally using historical carrying values and estimates made by management.

Valuations of intangible assets acquired

The components of intangible assets acquired in connection with the Anite acquisition were as follows (in millions):

	Estimated Fair Value		Estimated useful life
Developed product technology	$	182	6 years
Customer relationships	31		8 years
Tradenames and trademarks	19		10 years
Total intangible assets subject to amortization	232
In-process research and development	12
Total intangible assets	$	244

As noted above, the intangible assets were valued with input from valuation specialists using the income approach, which includes the discounted cash flow, cost-savings, and relief from royalty methods. The in-process research and development was valued using the multi-period excess earnings method under the income approach by discounting forecasted cash flows directly related to the products expecting to result from the projects, net of returns on contributory assets. Discount rates of 11% and 11.5% were used to value the research and development projects, adjusted to reflect additional risks inherent in the acquired projects. The primary in-process projects acquired relate to next generation products which will be released in the near future. Total costs to complete for all Anite in-process research and development were estimated at approximately $1 million as of the close date.

Acquisition and integration costs directly related to the Anite acquisition totaled $18 million and $14 million for the years ended October 31, 2016 and 2015, respectively, and were recorded in selling, general and administrative expenses. Such costs are expensed in accordance with the authoritative accounting guidance.

The following represents pro forma operating results as if Anite had been included in the company's combined and consolidated statements of operations as of the beginning of fiscal 2014 (in millions, except per share amounts):

	2015		2014
Net revenue	$	2,998	$	3,096
Net income	$	510	$	422
Net income per share - Basic	$	3.02	$	2.53
Net income per share - Diluted	$	2.98	$	2.53

The pro forma financial information assumes that the companies were combined as of November 1, 2013 and include business combination accounting effects from the acquisition including amortization charges from acquired intangible assets, the impact on cost of sales due to the respective estimated fair value adjustments to inventory, and acquisition-related transaction costs and tax-related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2014.

The unaudited pro forma financial information for the year ended October 31, 2015 combines the historical results of Keysight for the year ended October 31, 2015 (which includes Anite after the acquisition date) and for Anite for the nine months ended July 31, 2015.

The unaudited pro forma financial information for the year ended October 31, 2014 combines the historical results of Keysight and Anite for the year ended October 31, 2014.