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Stock-Based Compensation | 3 Months Ended
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Mar. 31, 2019
Stock-Based Compensation | M. STOCK-BASED COMPENSATION 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”). 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 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”). 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 2019 and 2018, 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 shorter of the three year service period or the period from the grant date 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 grant. 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 the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $48.47 and $54.85, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
|  | For the Three Months Ended |
|  | March 31, |  |  | April 1, |
|  | 2019 |  |  | 2018 |
Risk-free interest rate |  |  | 2.6 | % |  |  | 2.2 | %
Teradyne volatility-historical |  |  | 31.8 | % |  |  | 26.8 | %
NYSE Composite Index volatility-historical |  |  | 12.0 | % |  |  | 12.4 | %
Dividend yield |  |  | 1.0 | % |  |  | 0.8 | %
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2019 and 2018 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 was based upon an estimated annual dividend amount of $0.36 per share for 2019 grants and 2018 grants, divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant. During the three months ended March 31, 2019 and April 1, 2018, Teradyne granted 0.1 million and 0.1 million, respectively, of PBIT PRSUs with a grant date fair value of $35.67 and $46.62, respectively. During the three months ended March 31, 2019, Teradyne granted 0.6 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $35.88 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $10.26. During the three months ended April 1, 2018, Teradyne granted 0.5 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $46.58 and 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $12.17. Restricted stock unit awards granted to employees vest in equal annual installments over four years. 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. The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
|  | For the Three Months Ended |
|  | March 31, |  |  | April 1, |
|  | 2019 |  |  | 2018 |
Expected life (years) |  |  | 5.0 |  |  |  | 5.0 |
Risk-free interest rate |  |  | 2.6 | % |  |  | 2.4 | %
Volatility-historical |  |  | 30.1 | % |  |  | 26.4 | %
Dividend yield |  |  | 1.0 | % |  |  | 0.8 | %
Teradyne determined the stock options’ expected life based upon historical exercise data for executive officers, the age of the executive officers and the terms of the stock option grant. Volatility was determined using historical volatility for a period equal to the expected life. 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 $0.36 per share for 2019 and 2018 grants divided by Teradyne’s stock price on the grant date of $36.75 for the 2019 grant and $47.70 for the 2018 grant.

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -URI http://asc.fasb.org/topic&trid=2228938 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -URI http://asc.fasb.org/subtopic&trid=2208855 + Details
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