SHARE-BASED COMPENSATION

9 Months Ended

Jul. 31, 2019

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,
	2019		2018		2019		2018
	(in millions)
Cost of products and services	$	2	$	2	$	11	$	9
Research and development	4		2		13		8
Selling, general and administrative	10		10		42		31
Total share-based compensation expense	$	16	$	14	$	66	$	48

The expense for the three and nine months ended July 31, 2019 includes a mark-to-market adjustment of $1 million and $5 million, respectively, for financial metrics-based performance awards. At both July 31, 2019 and 2018, there was no share-based compensation capitalized within inventory.

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				Nine Months Ended
	July 31,				July 31,
	2019		2018		2019		2018
Volatility of Keysight shares	25	%	25	%	25	%	25	%
Volatility of selected index	13	%	14	%	12	%	14	%
Price-wise correlation with selected peers	57	%	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. We did not grant any option awards for the three and nine months ended July 31, 2019 and 2018, respectively.