SHARE-BASED COMPENSATION

12 Months Ended

Oct. 31, 2021

Share-based Payment Arrangement, Noncash Expense [Abstract]

4. SHARE-BASED COMPENSATION

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 RSUs, ESPP, employee stock option awards, and performance share awards granted to selected members of our senior management under the 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 our board of directors on July 16, 2014, subsequently amended and restated by our board of directors on September 29, 2014 and on January 22, 2015 and became effective as of November 1, 2014. Our board of directors 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 2014 Stock Plan was further amended and restated by our board of directors on November 16, 2017 to increase the maximum aggregate number of shares that may be issued under the 2014 Stock 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, 2021, approximately 6 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, 2015 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 and Human Capital Committee of our board of directors approved the performance awards, part of the 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. The performance targets for operating margin-based performance grants are set each year in the first quarter for that respective year. 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.

RSUs 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. RSUs 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 ESPP. The ESPP allows eligible employees to contribute up to 10 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 and Human Capital 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 541,241 shares for $56 million in 2021, 628,449 shares for $53 million in 2020 and 810,172 shares for $48 million in 2019. As of October 31, 2021, common stock authorized and available for issuance under our ESPP was 19,322,516 shares, which includes shares issued in November 2021 to participants in consideration of the aggregate contribution of $30 million as of October 31, 2021.

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,
	2021		2020		2019
	(in millions)
Cost of products and services	$	19	$	16	$	14
Research and development	21		19		16
Selling, general and administrative	64		58		52
Total share-based compensation expense	$	104	$	93	$	82
Income tax benefit realized from exercised stock options and similar awards	$	10	$	12	$	9

The expense for 2021, 2020 and 2019 includes mark-to-market adjustments for financial metrics-based performance awards of $5 million, $2 million and $8 million, respectively. At October 31, 2021 and 2020, there was no share-based compensation expense capitalized within inventory.

Valuation Assumptions

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


	Year Ended October 31,
	2021	2020	2019
Volatility of Keysight shares	36%	28%	25%
Volatility of index	23%	13%	12%
Price-wise correlation with selected peers	67%	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 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

We have not granted any stock options post fiscal year 2015. As of October 31, 2021 and 2020, the options outstanding were approximately 0.3 million and 0.4 million, respectively, having a weighted average exercise price of $29 and $28, respectively. During the year, 0.1 million options, with an intrinsic value of $14 million were exercised at the weighted average exercise price of $26. The intrinsic value of the options exercised during 2020 and 2019 was $14 million and $39 million, respectively, at the weighted average exercise price of $27. The options outstanding as of October 31, 2021 have a weighted average contractual remaining life of 2.4 years and an intrinsic value of $39 million, based on Keysight's closing stock price of $180.02 at October 31, 2021.

Non-vested Awards

The following table summarizes non-vested award activity in 2021 for our LTP Program and restricted stock unit awards:


	Shares	Weighted Average Grant Date Fair Value
	(in thousands)
Non-vested at October 31, 2020	2,634	$	67
Granted	743	124
Vested	(1,377)	54
Forfeited	(47)	87
LTP Program incremental	228	52
Non-vested at October 31, 2021	2,181	$	93

As of October 31, 2021, the unrecognized share-based compensation cost for non-vested stock awards was approximately $62 million, which is expected to be amortized over a weighted average period of 2.4 years. Unrecognized share-based compensation cost does not include expense for operating margin based performance awards for which the target have not yet been set. The total fair value of stock awards vested was $165 million for 2021, $167 million for 2020 and $89 million for 2019. See Note 5, "Income Taxes," for the tax impact on share-based award exercises and vesting.