N. STOCK BASED COMPENSATION

Stock Compensation Plans

At Teradyne’s annual meeting of stockholders held May 21, 2013, Teradyne’s stockholders approved an amendment to Teradyne’s 2006 Equity and Cash Compensation Incentive Plan to increase the number of shares issuable by 10.0 million for an aggregate of 32.0 million shares issuable thereunder. Teradyne’s stockholders also approved an amendment to Teradyne’s 1996 Employee Stock Purchase Plan to increase the number of shares issuable by 5.0 million, for an aggregate of 30.4 million shares issuable thereunder.

Under its stock compensation plans, Teradyne has granted stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.

Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the first anniversary of the grant date. Teradyne expenses the cost of the restricted stock unit awards subject to time-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

For grants prior to January 2014, performance-based restricted stock units (“PRSUs”) granted to executive officers were subject to time-based vesting and performance-based vesting. The percentage level of performance satisfied for performance-based grants was assessed on or near the anniversary of the grant date and, in turn, that percentage level determined the number of performance-based restricted stock units available for vesting over a four-year vesting period; portions of the performance-based grants not available for vesting were forfeited.

Commencing in January 2014, Teradyne granted PRSUs to its executive officers with a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance will be measured against the Philadelphia Semiconductor Index, which consists of thirty companies in the semiconductor device and capital equipment industries. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% of the target shares to 0% of the target shares. The TSR PRSUs will vest upon the three-year anniversary of the grant date. No TSR PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period. Beginning with PRSUs granted in January 2014, if the recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined.

The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted above. During the year ended December 31, 2014, Teradyne granted 0.1 million TSR PRSUs with a grant date fair value of $22.06 per unit. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2014
Risk-free interest rate		0.75	%
Teradyne volatility-historical		36.1	%
Philadelphia Semiconductor Index volatility-historical		24.6	%
Dividend yield		1.25	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the Philadelphia Semiconductor Index over the most recent three year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by $19.16, Teradyne’s stock price on January 24, 2014, the date the awards were granted.

Stock Options Valuation Assumptions:

The total number of stock options granted in 2014, 2013 and 2012 were 0.1 million, 0.2 million and 0.2 million, respectively, at the weighted average grant date fair value of $5.49, $6.09 and $6.85 per share, respectively. The fair value of the stock options at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2014			2013			2012
Expected life (years)		4.00			4.00			3.50
Risk-free interest rate		1.2	%		0.6	%		0.4	%
Volatility-historical		38.8	%		46.8	%		56.0	%
Dividend yield		1.25	%		0.0	%		0.0	%

Teradyne determined the stock option’s expected life based upon historical exercise data for executive officers, the age of executives and the terms of the stock option award. Volatility was determined using historical volatility for a period equal to the expected life. The interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant.

Stock compensation plan activity for the years 2014, 2013 and 2012 follows:


	2014			2013			2012
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		4,636			4,970			5,840
Awarded		1,870			2,110			1,844
Vested		(1,965	)		(2,322	)		(2,510	)
Forfeited		(190	)		(122	)		(204	)

Non-vested at December 31		4,351			4,636			4,970

Stock Options:
Outstanding at January 1		2,706			3,841			5,335
Granted		89			213			151
Exercised		(1,248	)		(1,220	)		(1,396	)
Forfeited		(38	)		(104	)		(203	)
Cancelled		(2	)		(24	)		(46	)

Outstanding at December 31		1,507			2,706			3,841

Vested and expected to vest at December 31		1,507			2,694			3,785

Exercisable at December 31		1,089			1,814			2,004

Total shares available for the years 2014, 2013 and 2012:


	2014			2013			2012
	(in thousands)
Shares available:
Available for grant at January 1		14,213			6,414			8,205
Options granted		(89	)		(213	)		(151	)
Restricted stock units awarded		(1,870	)		(2,110	)		(1,844	)
Restricted stock units forfeited		189			122			204
Additional shares reserved		—			10,000			—

Available for grant at December 31		12,443			14,213			6,414

Weighted-average restricted stock unit award date fair value information for the years 2014, 2013 and 2012 follows:


	2014		2013		2012
Non-vested at January 1	$	15.56	$	12.72	$	10.01
Awarded		19.30		16.53		16.67
Vested		14.38		10.40		9.29
Forfeited		17.21		15.48		13.32
Non-vested at December 31	$	17.58	$	15.56	$	12.72

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2014, 2013 and 2012 follows:


	2014		2013		2012
	(in thousands)
Outstanding	$	86,113	$	81,680	$	83,949
Expected to vest		81,582		77,388		78,718

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2014, 2013 and 2012 follows:


	2014		2013		2012
Outstanding		1.11		1.14		1.01
Expected to vest		1.10		1.13		1.00

Weighted average stock options exercise price information for the years 2014, 2013 and 2012 follows:


	2014		2013		2012
Outstanding at January 1	$	6.29	$	4.64	$	4.12
Options granted		19.16		16.56		16.95
Options exercised		5.34		3.28		3.87
Options forfeited		3.59		2.57		3.11
Options cancelled		2.21		8.05		16.21
Outstanding at December 31		7.89		6.29		4.64
Exercisable at December 31		5.00		4.55		3.70

Stock option aggregate intrinsic value information for the years ended December 31, 2014, 2013 and 2012 follows:


	2014		2013		2012
	(in thousands)
Exercised	$	17,847	$	16,848	$	17,136
Outstanding		17,936		30,673		47,051
Vested and expected to vest		17,936		30,512		46,283
Exercisable		16,101		23,707		26,436

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2014, 2013 and 2012 follows:


	2014		2013		2012
Outstanding		4.5		4.9		5.7
Vested and Expected to vest		4.5		4.9		5.6
Exercisable		4.2		4.3		4.9

Significant option groups outstanding at December 31, 2014 and related weighted average price and remaining contractual life information follow:


	Options Outstanding						Options Exercisable
Range Of Exercise Prices	Weighted- Average Remaining Contractual Life (Years)		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
	(shares in thousands)
$1.48 – $2.58		5.07		269	$	1.91		269	$	1.91
$2.67 – $2.74		4.40		462		2.69		429		2.69
$3.23 – $16.23		3.61		370		8.47		306		7.69
$16.56 – $19.16		4.99		406		17.25		85		16.79

				1,507	$	7.89		1,089	$	5.00

As of December 31, 2014, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $51.3 million, and is expected to be recognized over a weighted average period of 2.4 years.

Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. Mr. Bradley will continue to serve on Teradyne’s Board of Directors. On January 22, 2014, Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Bradley. Under the Retirement Agreement, Mr. Bradley’s unvested restricted stock units and stock options granted prior to his retirement date will continue to vest in accordance with their terms through January 31, 2017; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. In the Retirement Agreement, Mr. Bradley agreed to be bound by non-competition and non-solicitation restrictions through January 31, 2017. In January 2014, Teradyne recorded a one-time charge to stock-based compensation expense of $6.6 million related to the Retirement Agreement.

Employee Stock Purchase Plan

Under the Teradyne 1996 Employee Stock Purchase Plan, eligible employees may purchase shares of common stock through regular payroll deductions of up to 10% of their compensation, to a maximum of shares with a fair market value of $25,000 per calendar year, not to exceed 6,000 shares. Under the plan, the price paid for the common stock, in 2014 and 2013, is equal to 85% of the stock price on the last business day of the six month purchase period. In 2012, the price paid for the common stock was equal to 85% of the lower of the fair market value of Teradyne’s common stock on the first business day and the last business day of each six month purchase period within each year.

Employee Stock Purchase Rights Valuation Assumptions:

The weighted-average fair value of employee stock purchase rights granted pursuant to the ESPP in the first and last six months of 2012 was $4.09 and $3.42, respectively. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2012
Expected life (years)		0.5
Risk-free interest rate		0.1	%
Volatility-historical		42.7	%
Dividend yield		0.0	%

In July 2014, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2014, at the price of $16.66 per share. In January 2015, Teradyne issued 0.5 million shares of common stock to employees who participated in the plan during the second half of 2014, at the price of $16.82 per share.

In July 2013, 0.4 million shares of common stock were issued to employees who participated in the plan during the first half of 2013, at the price of $14.94 per share. In January 2014, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2013, at the price of $14.98 per share.

In July 2012, 0.6 million shares of common stock were issued to employees who participated in the plan during the first half of 2012, at the price of $11.69 per share. In January 2013, Teradyne issued 0.6 million shares of common stock to employees who participated in the plan during the second half of 2012, at the price of $11.91 per share.

As of December 31, 2014, there were 5.3 million shares available for grant under the ESPP.

The effect to income from operations for recording stock-based compensation for the years ended December 31 was as follows:


	2014			2013			2012
	(in thousands)
Cost of revenues	$	3,675		$	4,338		$	6,604
Engineering and development		10,146			12,452			13,589
Selling and administrative		26,486			19,822			19,727

Stock-based compensation		40,307			36,612			39,920
Income tax benefit		(11,537	)		(9,762	)		(9,548	)

Total stock-based compensation expense after income taxes	$	28,771		$	26,850		$	30,372