N. RETIREMENT PLANS

ASC 715, “Compensation—Retirement Benefits,” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. Teradyne uses a December 31 measurement date for all of its plans.

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “IRC”), as well as unfunded qualified foreign plans.

The December 31 balances of these defined benefit pension plans assets and obligations are shown below:


	2016						2015
	United States			Foreign			United States			Foreign
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	351,117		$	62,290		$	367,619		$	58,210
Service cost		2,302			761			2,462			1,006
Interest cost		13,630			1,185			13,142			1,444
Actuarial gain (loss)		6,053			5,621			(13,221	)		7,498
Benefits paid		(19,486	)		(1,385	)		(18,885	)		(859	)
Curtailment		—			—			—			(634	)
Plan participants’ contributions		—			—			—			64
Expenses paid		—			(609	)		—			—
Non-U.S. currency movement		—			(7,125	)		—			(4,439	)

End of year		353,616			60,738			351,117			62,290

Change in plan assets:
Fair value of plan assets:
Beginning of year		298,404			28,141			316,072			29,511
Company contributions		4,489			867			10,517			808
Plan participants’ contributions		—			—			—			64
Actual return on plan assets		23,897			5,142			(9,300	)		(136	)
Benefits paid		(19,486	)		(1,148	)		(18,885	)		(859	)
Settlements		—			—			—			—
Expenses paid		—			(609	)		—			(43	)
Non-U.S. currency movement		—			(4,822	)		—			(1,204	)

End of year		307,304			27,571			298,404			28,141

Funded status	$	(46,312	)	$	(33,167	)	$	(52,713	)	$	(34,149	)

The following table provides amounts recorded within the account line items of the statements of financial position as of December 31:


	2016						2015
	United States			Foreign			United States			Foreign
	(in thousands)
Retirement plans assets	$	7,712		$	—		$	636		$	—
Accrued employees’ compensation and withholdings		(2,591	)		(772	)		(2,564	)		(695	)
Retirement plans liabilities		(51,433	)		(32,395	)		(50,785	)		(33,454	)

Funded status	$	(46,312	)	$	(33,167	)	$	(52,713	)	$	(34,149	)

The following table provides amounts recognized in accumulated other comprehensive income as of December 31:


	2016				2015
	United States		Foreign		United States		Foreign
	(in thousands)
Prior service cost, before tax	$	127	$	—	$	224	$	—
Deferred taxes		514		—		479		—

Total recognized in other comprehensive income, net of tax	$	641	$	—	$	703	$	—

The estimated portion of prior service cost remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic pension cost in 2017 is $0.1 million.

The accumulated benefit obligation for the United States defined benefit pension plans was $342.9 million and $340.1 million at December 31, 2016 and 2015, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $56.6 million at December 31, 2016 and 2015.

Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:


	2016				2015
	United States		Foreign		United States		Foreign
	(in millions)
Projected benefit obligation	$	54.0	$	34.3	$	53.3	$	35.2
Accumulated benefit obligation		48.0		30.1		47.3		29.5
Fair value of plan assets		—		1.1		—		1.0

Expense

For the years ended December 31, 2016, 2015 and 2014, Teradyne’s net periodic pension (income) cost was comprised of the following:


	2016						2015						2014
	United States			Foreign			United States			Foreign			United States			Foreign
	(in thousands)
Components of Net Periodic Pension (Income) Cost:
Service cost	$	2,302		$	761		$	2,462		$	1,006		$	2,218		$	897
Interest cost		13,630			1,185			13,142			1,444			12,875			1,837
Expected return on plan assets		(13,830	)		(443	)		(14,517	)		(781	)		(12,500	)		(868	)
Amortization of prior service cost		96			—			134			—			135			—
Net actuarial (gain) loss		(4,013	)		815			10,596			8,415			43,168			4,651
Curtailment		—			—			—			(634	)		—			—

Total net periodic pension (income) cost	$	(1,815	)	$	2,318		$	11,817		$	9,450		$	45,896		$	6,517

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Reversal of amortization items:
Prior service cost		(96	)		—			(134	)		—			(135	)		—

Total recognized in other comprehensive income		(96	)		—			(134	)		—			(135	)		—

Total recognized in net periodic pension (income) cost and other comprehensive income	$	(1,911	)	$	2,318		$	11,683		$	9,450		$	45,761		$	6,517

Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1:


	2016						2015						2014
	United States			Foreign			United States			Foreign			United States			Foreign
Discount rate		4.0	%		2.3	%		3.7	%		2.6	%		4.5	%		3.8	%
Expected return on plan assets		4.8			2.0			4.8			2.6			5.0			3.4
Salary progression rate		2.7			3.2			2.9			3.2			3.0			3.5

Weighted Average Assumptions to Determine Pension Obligations at December 31 :


	2016						2015
	United States			Foreign			United States			Foreign
Discount rate		3.9	%		1.8	%		4.0	%		2.3	%
Salary progression rate		2.6			2.7			2.7			3.2

In developing the expected return on plan assets assumption, Teradyne evaluates input from its investment manager and pension consultants, including their forecast of asset class return expectations. Teradyne believes that 4.8% was an appropriate rate to use for fiscal 2016 for the U.S. Qualified Pension Plan (“U.S. Plan”).

Teradyne recognizes net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

The discount rate utilized to determine future pension obligations for the U.S. Plan is based on Citigroup Pension Index adjusted for the plan’s expected cash flows and was 3.9% at December 31, 2016, down from 4.0% at December 31, 2015.

Plan Assets

As of December 31, 2016, the fair value of Teradyne’s pension plans’ assets totaled $334.9 million of which $307.3 million was related to the U.S. Plan, $26.5 million was related to the U.K. defined benefit pension plan, and $1.1 million was related to the Taiwan defined benefit pension plan. Substantially all Teradyne’s pension plans’ assets are held in individual trusts, which were established for the investment of assets of Teradyne’s sponsored retirement plans.

The following table provides weighted average pension asset allocation by asset category at December 31, 2016 and 2015:


	2016						2015
	United States			Foreign			United States			Foreign
Fixed income securities		88.1	%		—	%		88.6	%		—	%
Equity securities		9.9			—			9.8			—
Other		2.0			100.0			1.6			100.0

		100.0	%		100.0	%		100.0	%		100.0	%

The assets of the U.S. Plan are overseen by the Teradyne Fiduciary Committee which is comprised of members of senior management drawn from appropriate diversified levels of the management team. The Fiduciary Committee is responsible for setting the policy that provides the framework for management of the U.S. Plan assets. In accordance with its responsibilities, the Fiduciary Committee meets on a regular basis to review the performance of the U.S. Plan assets and compliance with the investment policy. The policy sets forth an investment structure for managing U.S. Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification required to maximize the long-term return on plan assets for a prudent and reasonable level of risk given prevailing market conditions, total investment return over the long term, and preservation of capital, while maintaining sufficient liquidity to pay the benefits of the U.S. Plan. The investment portfolio will not, at any time, have a direct investment in Teradyne stock. It may have indirect investment in Teradyne stock, if one of the funds selected by the investment manager invests in Teradyne stock. In developing the asset allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and funded status. Based on this study and other appropriate information, the Fiduciary Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns. The investment return objectives are to avoid excessive volatility and produce a rate of return that at least matches the Policy Index identified below. The manager’s investment performance is reviewed at least annually. Results for the total portfolio and for each major category of assets are evaluated in comparison with appropriate market indices and the Policy Index.

The target asset allocation and the index for each asset category for the U.S. Plan, per the investment policy, are as follows:


Asset Category:	Policy Index:	Target Allocation
U.S. corporate fixed income	Barclays U.S. Corporate A or Better Index		76	%
Global equity	MSCI World Minimum Volatility Index		10
U.S. government fixed income	Barclays U.S. Long Government Bond Index		8
High yield fixed income	Barclays U.S. Corporate High Yield 2% Issuer Cap Index		5
Cash	Citigroup Three Month U.S. Treasury Bill Index		1

Teradyne’s U.S. Plan invests primarily in common trust funds. Units held in the common trust funds are valued at the unit price as reported by the investment manager based on the asset value of the underlying investments; underlying investments in equity securities are valued at the last reported sales price, and underlying investments in fixed-income securities are generally valued using methods based upon market transactions for comparable securities.

In the fourth quarter of 2015, the Trustees of the U.K. defined benefit pension plan purchased group annuity insurance contracts. The cash flows from the contracts are intended to match the plan’s obligations.

During the years ended December 31, 2016 and 2015, there were no transfers of pension assets in or out of Level 1, Level 2 or Level 3.

The fair value of pension plan assets by asset category and by level at December 31, 2016 and December 31, 2015 were as follows:


	December 31, 2016
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	246,528	$	—	$	246,528	$	—	$	—	$	—	$	—
U.S. government securities		—		24,322		—		24,322		—		—		—		—
Global equity		—		30,360		—		30,360		—		—		—		—
Group annuity insurance contracts		—		—		3,071		3,071		—		—		26,385		26,385
Other		—		—		—		—		—		1,124		—		1,124
Cash and cash equivalents		3,023		—		—		3,023		62		—		—		62

Total	$	3,023	$	301,210	$	3,071	$	307,304	$	62	$	1,124	$	26,385	$	27,571


	December 31, 2015
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	240,695	$	—	$	240,695	$	—	$	—	$	—	$	—
U.S. government securities		—		23,761		—		23,761		—		—		—		—
Global equity		—		29,193		—		29,193		—		—		—		—
Group annuity insurance contracts		—		—		2,982		2,982		—		—		26,410		26,410
Other		—		—		—		—		—		1,029		—		1,029
Cash and cash equivalents		1,773		—		—		1,773		702		—		—		702

Total	$	1,773	$	293,649	$	2,982	$	298,404	$	702	$	1,029	$	26,410	$	28,141

The pension plan assets identified as Level 3 above are related to group annuity insurance contracts held by the U.K. defined benefit pension plan and the U.S. Plan. The fair value of these assets was calculated using the present value of future pension payments due under the group annuity insurance contracts.

Changes in the fair value of Level 3 group annuity insurance contracts for the years ended December 31, 2016 and 2015 were as follows:


	Group Annuity Insurance Contracts
	(in thousands)
Balance at December 31, 2014	$	2,990
Purchases of group annuity insurance contracts		27,313
Interest and market value adjustments		(825	)
Benefits paid		(67	)
Other		(19	)

Balance at December 31, 2015		29,392
Purchases of group annuity insurance contracts		709
Interest and market value adjustments		5,308
Benefits paid		(611	)
Other		(634	)
Non-U.S. currency movement		(4,708	)

Balance at December 31, 2016	$	29,456

Contributions

Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2016, Teradyne contributed $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. During 2015, Teradyne contributed $8.0 million to the U.S. Plan, $2.5 million to the U.S. supplemental executive defined benefit pension plan and $0.8 million to certain qualified plans for non-U.S. subsidiaries. In 2017, contributions to the U.S. supplemental executive defined benefit pension plan, U.S. Plan and certain qualified plans from non-U.S. subsidiaries will be approximately $2.6 million, $1.9 million and $0.8 million, respectively.

Expected Future Pension Benefit Payments

Future benefit payments are expected to be paid as follows:


	United States		Foreign
	(in thousands)
2017	$	19,205	$	788
2018		18,568		754
2019		19,046		780
2020		19,768		1,054
2021		20,390		882
2022-2026		111,334		5,209

Postretirement Benefit Plans

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

The December 31 balances of the postretirement assets and obligations are shown below:


	2016			2015
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	6,030		$	7,162
Service cost		37			48
Interest cost		218			237
Plan amendments		(93	)		—
Actuarial loss (gain)		5			(648	)
Benefits paid		(687	)		(769	)

End of year		5,510			6,030

Change in plan assets:
Fair value of plan assets:
Beginning of year		—			—
Company contributions		687			769
Benefits paid		(687	)		(769	)

End of year		—			—

Funded status	$	(5,510	)	$	(6,030	)

The following table provides amounts recorded within the account line items of financial position as of December 31:


	2016			2015
	(in thousands)
Accrued employees’ compensation and withholdings	$	(571	)	$	(692	)
Retirement plans liability		(4,939	)		(5,338	)

Funded status	$	(5,510	)	$	(6,030	)

The following table provides amounts recognized in accumulated other comprehensive income as of December 31:


	2016			2015
	(in thousands)
Prior service credit, before tax	$	(1,118	)	$	(1,632	)
Deferred taxes		(1,292	)		(1,100	)

Total recognized in other comprehensive income, net of tax	$	(2,410	)	$	(2,732	)

The estimated portion of prior service credit remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic postretirement benefit income in 2017 is $(0.5) million.

Expense

For the years ended December 31, 2016, 2015 and 2014, Teradyne’s net periodic postretirement benefit income was comprised of the following:


	2016			2015			2014
	(in thousands)
Components of Net Periodic Postretirement Benefit Income:
Service cost	$	37		$	48		$	59
Interest cost		218			237			335
Amortization of prior service credit		(607	)		(598	)		(598	)
Net actuarial loss (gain)		5			(648	)		(1,255	)

Total net periodic postretirement benefit income		(347	)		(961	)		(1,459	)

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Prior service benefit		(93	)		—			—
Reversal of amortization items:
Prior service credit		607			598			598

Total recognized in other comprehensive income		514			598			598

Total recognized in net periodic postretirement cost (income) and other comprehensive income	$	167		$	(363	)	$	(861	)

Weighted Average Assumptions to Determine Net Periodic Postretirement Benefit Income as of January 1:


	2016			2015			2014
Discount rate		3.9	%		3.5	%		4.1	%
Initial health care cost trend rate		7.5			7.5			8.0
Ultimate health care cost trend rate		5.0			5.0			5.0
Year in which ultimate health care cost trend rate is reached		2023			2022			2020

Weighted Average Assumptions to Determine Postretirement Benefit Obligation as of December 31:


	2016			2015			2014
Discount rate		3.9	%		3.9	%		3.5	%
Initial medical trend		7.3			7.5			7.5
Ultimate health care trend		5.0			5.0			5.0
Medical cost trend rate decrease to ultimate rate in year		2023			2023			2022

Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2016 would have the following effects:


	1 Percentage Point Increase		1 Percentage Point Decrease
	(in thousands)
Effect on total service and interest cost components	$	2	$	(2	)
Effect on postretirement benefit obligations		44		(42	)

Expected Future Benefit Payments

Future benefit payments are expected to be paid as follows:


	Benefit Payments
	(in thousands)
2017	$	571
2018		529
2019		456
2020		409
2021		367
2022-2026		1,536