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 2015 and 2014, Teradyne granted 0.2 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $18.21 and $22.06, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2015			2014
Risk-free interest rate		0.77	%		0.75	%
Teradyne volatility-historical		28.2	%		36.1	%
Philadelphia Semiconductor Index volatility-historical		19.7	%		24.6	%
Dividend yield		1.33	%		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 for 2015 and 2014 was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s stock price on the grant date of $18.10 for 2015 grants and $19.16 for 2014 grants.

Stock Options Valuation Assumptions:

The total number of stock options granted in 2015, 2014 and 2013 were 0.1 million, 0.1 million and 0.2 million, respectively, at the weighted average grant date fair value of $4.43, $5.49 and $6.09 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:


	2015			2014			2013
Expected life (years)		4.0			4.0			4.0
Risk-free interest rate		1.1	%		1.2	%		0.6	%
Volatility-historical		33.4	%		38.8	%		46.8	%
Dividend yield		1.33	%		1.25	%		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 2015, 2014 and 2013 follows:


	2015			2014			2013
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		4,352			4,636			4,970
Awarded		1,681			1,870			2,110
Vested		(1,679	)		(1,965	)		(2,322	)
Forfeited		(284	)		(189	)		(122	)

Non-vested at December 31		4,070			4,352			4,636

Stock Options:
Outstanding at January 1		1,507			2,706			3,841
Granted		132			89			213
Exercised		(518	)		(1,248	)		(1,220	)
Forfeited		—			(38	)		(104	)
Expired		—			(2	)		(24	)

Outstanding at December 31		1,121			1,507			2,706

Vested and expected to vest at December 31		1,121			1,507			2,694

Exercisable at December 31		779			1,089			1,814

Total shares available for the years 2015, 2014 and 2013:


	2015			2014			2013
	(in thousands)
Shares available:
Available for grant at January 1		12,443			14,213			6,414
Options granted		(132	)		(89	)		(213	)
Restricted stock units awarded		(1,681	)		(1,870	)		(2,110	)
Restricted stock units forfeited		284			189			122
Additional shares reserved		—			—			10,000

Available for grant at December 31		10,914			12,443			14,213

Weighted average restricted stock unit award date fair value information for the years 2015, 2014 and 2013 follows:


	2015		2014		2013
Non-vested at January 1	$	17.24	$	15.60	$	12.72
Awarded		17.36		18.41		16.62
Vested		16.85		14.38		10.40
Forfeited		17.08		16.97		15.48
Non-vested at December 31	$	17.46	$	17.24	$	15.60

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2015, 2014 and 2013 follows:


	2015		2014		2013
	(in thousands)
Outstanding	$	84,129	$	86,113	$	81,680
Expected to vest		79,611		81,582		77,388

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2015, 2014 and 2013 follows:


	2015		2014		2013
Outstanding		1.09		1.11		1.14
Expected to vest		1.08		1.10		1.13

Weighted average stock options exercise price information for the years 2015, 2014 and 2013 follows:


	2015		2014		2013
Outstanding at January 1	$	7.89	$	6.29	$	4.64
Options granted		18.10		19.16		16.56
Options exercised		5.49		5.34		3.28
Options forfeited		8.67		3.59		2.57
Options cancelled		3.28		2.21		8.05
Outstanding at December 31		10.21		7.89		6.29
Exercisable at December 31		6.92		5.00		4.55

Stock option aggregate intrinsic value information for the years ended December 31, 2015, 2014 and 2013 follows:


	2015		2014		2013
	(in thousands)
Exercised	$	7,255	$	17,847	$	16,848
Outstanding		11,729		17,936		30,673
Vested and expected to vest		11,729		17,936		30,512
Exercisable		10,716		16,101		23,707

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2015, 2014 and 2013 follows:


	2015		2014		2013
Outstanding		4.2		4.5		4.9
Vested and expected to vest		4.2		4.5		4.9
Exercisable		3.9		4.2		4.3

Significant option groups outstanding at December 31, 2015 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 – $2.67		4.58		416	$	2.33		416	$	2.33
$3.23 – $7.71		2.71		139		4.60		139		4.60
$11.37 – $16.95		3.54		345		16.63		202		16.62
$18.10 – $19.16		5.68		221		18.53		22		19.16

				1,121	$	10.21		779	$	6.92

As of December 31, 2015, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $44.9 million, and is expected to be recognized over a weighted average period of 2.3 years.

Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. 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 (“ESPP”), 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 is equal to 85% of the stock price on the last business day of the six month purchase period.

In July 2015, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2015, at the price of $16.40 per share. In January 2016, Teradyne issued 0.5 million shares of common stock to employees who participated in the plan during the second half of 2015, at the price of $17.57 per share.

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.

As of December 31, 2015, there were 4.9 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:


	2015			2014			2013
	(in thousands)
Cost of revenues	$	3,065		$	3,675		$	4,338
Engineering and development		9,362			10,146			12,452
Selling and administrative		18,024			26,486			19,822

Stock-based compensation		30,451			40,307			36,612
Income tax benefit		(8,528	)		(11,537	)		(9,762	)

Total stock-based compensation expense after income taxes	$	21,923		$	28,770		$	26,850