O. STOCK-BASED COMPENSATION

Stock Compensation Plans

Under Teradyne’s stock compensation plans, Teradyne grants 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.

Commencing in January 2014, Teradyne granted performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). For TSR grants issued in 2015, Teradyne’s three-year TSR performance is measured against the Philadelphia Semiconductor Index. For TSR grants issued in 2017 and 2016, Teradyne’s three-year TSR performance is measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares and is capped at four times the grant date value. The TSR PRSUs will vest upon the three-year anniversary of the grant date. 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 below.

In January 2017 and 2016, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue. Non-GAAP PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; non-cash convertible debt interest expense; and other non-recurring gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.

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 all or a portion of 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. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.

During 2017, 2016, and 2015 Teradyne granted 0.1 million, 0.1 million, and 0.2 million TSR PRSUs, respectively, with a grant date fair value of $35.66, $20.29 and $18.21, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2017			2016			2015
Risk-free interest rate		1.5	%		1.0	%		0.8	%
Teradyne volatility-historical		26.6	%		27.0	%		28.2	%
NYSE Composite Index volatility-historical		13.4	%		13.1	%		—
Philadelphia Semiconductor Index volatility-historical		—			—			19.7	%
Dividend yield		1.0	%		1.2	%		1.3	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2017 and 2016 grants and Philadelphia Semiconductor Index for the 2015 grant, 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 2017, 2016 and 2015 was based upon an estimated annual dividend amount of $0.28 per share for 2017 and $0.24 per share for 2016 and 2015 divided by Teradyne’s stock price on the grant date of $28.56 for the 2017 grant, $19.43 for the 2016 grant, and $18.10 for the 2015 grant.

During 2017 and 2016, Teradyne granted 0.1 million PBIT PRSUs with a grant date fair value of $27.72 and $18.71, respectively.

During 2017, 2016, and 2015, Teradyne granted 0.8 million, 1.2 million, and 1.5 million of service-based restricted stock unit awards to employees, respectively, at a weighted average grant date fair value of $28.19, $18.88, and $17.51, respectively.

During 2017, 2016, and 2015, Teradyne granted 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $34.48, $18.71, and $20.21, respectively.

During 2017, 2016, and 2015, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $7.13, $5.30, and $4.43, respectively.

The fair value of the stock options at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2017			2016			2015
Expected life (years)		5.0			5.0			4.0
Risk-free interest rate		2.0	%		1.4	%		1.1	%
Volatility-historical		27.8	%		32.9	%		33.4	%
Dividend yield		1.0	%		1.2	%		1.3	%

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. Dividend yield was based upon an estimated annual dividend amount of $0.28 per share for 2017 and $0.24 per share for 2016 and 2015 divided by Teradyne’s stock price on the grant date of $28.56 for the 2017 grants, $19.43 for the 2016 grants, and $18.10 for the 2015 grants.

Stock compensation plan activity for the years 2017, 2016, and 2015 follows:


	2017			2016			2015
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		3,778			4,070			4,352
Awarded		939			1,471			1,681
Vested		(1,434	)		(1,530	)		(1,679	)
Forfeited		(109	)		(233	)		(284	)

Non-vested at December 31		3,174			3,778			4,070

Stock Options:
Outstanding at January 1		926			1,121			1,507
Granted		111			130			132
Exercised		(501	)		(324	)		(518	)
Forfeited		—			—			—
Expired		(5	)		(2	)		—

Outstanding at December 31		531			926			1,121

Vested and expected to vest at December 31		531			926			1,121

Exercisable at December 31		233			598			779

Total shares available for the years 2017, 2016, and 2015:


	2017			2016			2015
	(in thousands)
Shares available:
Available for grant at January 1		9,546			10,914			12,443
Options granted		(111	)		(130	)		(132	)
Restricted stock units awarded		(939	)		(1,471	)		(1,681	)
Restricted stock units forfeited		109			233			284
Additional shares reserved		—			—			—

Available for grant at December 31		8,605			9,546			10,914

Weighted average restricted stock unit award date fair value information for the years 2017, 2016, and 2015 follows:


	2017		2016		2015
Non-vested at January 1	$	18.27	$	17.66	$	17.35
Awarded		28.91		18.95		17.66
Vested		17.90		17.36		16.93
Forfeited		20.35		17.80		17.28
Non-vested at December 31	$	21.71	$	18.27	$	17.66

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2017, 2016, and 2015 follows:


	2017		2016		2015
	(in thousands)
Vested	$	40,649	$	30,008	$	32,200
Outstanding		132,875		95,952		84,129
Expected to vest		130,594		91,871		79,611

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2017, 2016, and 2015 follows:


	2017		2016		2015
Outstanding		1.00		1.04		1.09
Expected to vest		0.99		1.03		1.08

Weighted average stock options exercise price information for the year ended December 31, 2017 follows:


	2017
Outstanding at January 1	$	11.93
Options granted		28.56
Options exercised		13.60
Options forfeited		3.04
Options cancelled		—
Outstanding at December 31		13.92
Exercisable at December 31		2.95

The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2017, 2016, and 2015, was $6.8 million, $2.9 million and $2.8 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2017, 2016, and 2015, was $2.5 million, $0.8 million and $2.1 million, respectively.

Stock option aggregate intrinsic value information for the years ended December 31, 2017, 2016, and 2015 follows:


	2017		2016		2015
	(in thousands)
Exercised	$	8,035	$	3,729	$	7,255
Outstanding		14,831		12,468		11,729
Vested and expected to vest		14,831		12,468		11,729
Exercisable		9,076		10,217		10,716

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2017, 2016, and 2015 follows:


	2017		2016		2015
Outstanding		4.1		3.9		4.2
Vested and expected to vest		4.1		3.9		4.2
Exercisable		2.8		3.2		3.9

Significant option groups outstanding at December 31, 2017 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		2.19		99	$	1.81		99	$	1.81
$2.67 – $7.71		3.17		126		2.89		126		2.89
$18.10 – $19.43		4.48		194		18.91		8		18.51
$28.56		6.08		112		28.56		—		—

				531	$	13.92		233	$	2.95

As of December 31, 2017, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $42 million, and is expected to be recognized over a weighted average period of 2.3 years.

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 2017, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2017 at the price of $25.53 per share. In January 2018, Teradyne issued 0.3 million shares of common stock to employees who participated in the plan during the second half of 2017 at the price of $35.59 per share.

In July 2016, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2016 at the price of $16.74 per share. In January 2017, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2016 at the price of $21.59 per share.

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.

As of December 31, 2017, there were 3.1 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:


	2017			2016			2015
	(in thousands)
Cost of revenues	$	3,212		$	3,153		$	3,065
Engineering and development		9,370			9,458			9,362
Selling and administrative		21,515			18,139			18,024

Stock-based compensation		34,097			30,750			30,451
Income tax benefit		(10,462	)		(8,752	)		(8,528	)

Total stock-based compensation expense after income taxes	$	23,635		$	21,998		$	21,923