Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

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 in full, on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. 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.

Teradyne grants 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 2018, 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 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 shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. 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 2018, 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.

If a PRSU 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 2018, 2017, and 2016, Teradyne granted 0.1 million TSR PRSUs, with a grant date fair value of $54.85, $35.66 and $20.29, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:

	2018			2017			2016
Risk-free interest rate		2.2	%		1.5	%		1.0	%
Teradyne volatility-historical		26.8	%		26.6	%		27.0	%
NYSE Composite Index volatility-historical		12.4	%		13.4	%		13.1	%
Dividend yield		0.8	%		1.0	%		1.2	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2018, 2017 and 2016 grants, 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 2018, 2017 and 2016 was based upon an estimated annual dividend amount of $0.36 per share for 2018, $0.28 per share for 2017 and $0.24 per share for 2016 divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grant, $28.56 for the 2017 grant, and $19.43 for the 2016 grant.

During 2018, 2017, and 2016, Teradyne granted 0.1 million PBIT PRSUs with a grant date fair value of $46.62, $27.72 and $18.71, respectively.

During 2018, 2017, and 2016, Teradyne granted 0.6 million, 0.8 million, and 1.2 million of service-based restricted stock unit awards to employees, respectively, at a weighted average grant date fair value of $45.92, $28.19, and $18.88, respectively.

During 2018, 2017, and 2016, 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 $35.81, $34.48, and $18.71, respectively.

During 2018, 2017, and 2016, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17, $7.13, and $5.30, respectively.

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

	2018			2017			2016
Expected life (years)		5.0			5.0			5.0
Risk-free interest rate		2.4	%		2.0	%		1.4	%
Volatility-historical		26.4	%		27.8	%		32.9	%
Dividend yield		0.80	%		1.00	%		1.20	%

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 $0.36 per share for 2018, $0.28 per share for 2017, and $0.24 per share for 2016 divided by Teradyne’s stock price on the grant date of $47.70 for the 2018 grants, $28.56 for the 2017 grants, and $19.43 for the 2016 grants.

Stock compensation plan activity for the years 2018, 2017, and 2016 is as follows:

	2018			2017			2016
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		3,174			3,778			4,070
Awarded		790			939			1,471
Vested		(1,382	)		(1,434	)		(1,530	)
Forfeited		(128	)		(109	)		(233	)
Non-vested at December 31		2,454			3,174			3,778
Stock Options:
Outstanding at January 1		531			926			1,121
Granted		69			111			130
Exercised		(94	)		(501	)		(324	)
Expired		—			(5	)		(2	)
Outstanding at December 31		506			531			926
Vested and expected to vest at December 31		506			531			926
Exercisable at December 31		256			233			598

Total shares available for the years 2018, 2017, and 2016:

	2018			2017			2016
	(in thousands)
Shares available:
Available for grant at January 1		8,605			9,546			10,914
Options granted		(69	)		(111	)		(130	)
Restricted stock units awarded		(790	)		(939	)		(1,471	)
Restricted stock units forfeited		128			109			233
Available for grant at December 31		7,874			8,605			9,546

Weighted average restricted stock unit award date fair value information for the years 2018, 2017, and 2016 is as follows:

	2018		2017		2016
Non-vested at January 1	$	21.71	$	18.27	$	17.66
Awarded		45.99		28.91		18.95
Vested		20.20		17.90		17.36
Forfeited		24.67		20.35		17.80
Non-vested at December 31	$	29.22	$	21.71	$	18.27

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2018, 2017, and 2016 is as follows:

	2018		2017		2016
	(in thousands)
Vested	$	63,688	$	40,649	$	30,008
Outstanding		77,015		132,875		95,952
Expected to vest		77,187		130,594		91,871

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:

	2018		2017		2016
Outstanding		0.92		1.00		1.04
Expected to vest		0.91		0.99		1.03

Weighted average stock options exercise price information for the year ended December 31, 2018 is as follows:

	2018
Outstanding at January 1	$	13.92
Options granted		47.70
Options exercised		10.89
Outstanding at December 31		19.06
Exercisable at December 31		8.31

The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2018, 2017, and 2016, was $1.0 million, $6.8 million and $2.9 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2018, 2017, and 2016, was $0.4 million, $2.5 million, and $0.8 million, respectively.

Stock option aggregate intrinsic value information for the years ended December 31, 2018, 2017, and 2016 is as follows:

	2018		2017		2016
	(in thousands)
Exercised	$	2,960	$	8,035	$	3,729
Outstanding		7,359		14,831		12,468
Vested and expected to vest		7,359		14,831		12,468
Exercisable		5,905		9,076		10,217

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2018, 2017, and 2016 is as follows:

	2018		2017		2016
Outstanding		3.6		4.1		3.9
Vested and expected to vest		3.6		4.1		3.9
Exercisable		2.4		2.8		3.2

Significant option groups outstanding at December 31, 2018 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		1.23		67	$	1.83		67	$	1.83
$2.67 – $3.28		2.20		103		2.69		103		2.69
$7.71 – $19.43		3.41		166		18.59		68		18.02
$28.56 – $47.70		5.62		170		36.30		18		28.56
				506	$	19.06		256	$	8.31

As of December 31, 2018, total unrecognized expense related to

non-vested

restricted stock unit awards and stock options was $44 million, and is expected to be recognized over a weighted average period of 2.4 years.

Employee Stock Purchase Plan

Under the 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 2018, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2018 at the price of $32.36 per share. In January 2019, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2018 at the price of $26.67 per share.

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.

As of December 31, 2018, there were 2.5 million shares available for grant under the ESPP.

The following table provides the effect to income from operations for recording stock-based compensation for the years ended December 31, 2018, 2017, and 2016:

	2018			2017			2016
	(in thousands)
Cost of revenues	$	3,129		$	3,212		$	3,153
Engineering and development		9,181			9,370			9,458
Selling and administrative		21,267			21,515			18,139
Stock-based compensation		33,577			34,097			30,750
Income tax benefit		(12,036	)		(10,462	)		(8,752	)
Total stock-based compensation expense after income taxes	$	21,541		$	23,635		$	21,998