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Stock-Based Compensation | 12 Months Ended
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Dec. 31, 2019
Stock-Based Compensation | Q. STOCK-BASED COMPENSATION Stock Compensation Plans On July 17, 2019 (the “Retirement Date”), former Chief Financial Officer Gregory Beecher retired as Vice President and Senior Advisor of Teradyne, and Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Beecher. Under the Retirement Agreement, Mr. Beecher’s unvested time-based restricted stock units and stock options granted prior to 2019 were modified to allow continued vesting; unvested time-based restricted stock units and stock options granted in 2019 were modified to allow continued vesting through January 31, 2023 (the “Non-Competition Period”) in a pro-rated amount based on the number of days that Mr. Beecher was employed during 2019; unvested, performance-based restricted stock units awarded in 2019 will vest on the date the amount of shares underlying the performance-based restricted stock units are determined in a pro-rated amount of shares based on the number of days that Mr. Beecher was employed during 2019; vested options or options that vest during the Non-Competition Period may be exercised for the remainder of the applicable option term. During 2019, Teradyne recorded a stock based compensation expense of $2.1 million related to the Retirement Agreement. Under Teradyne’s stock compensation plans, Teradyne grants time-based restricted stock units , performance-based restricted stock units, stock option s 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-y ear p eriod, with 100% o f t he 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. P erformance - based restricted stock units (“PRSUs”) granted to Teradyne’ s executive officers may have 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 for grants prior to 2019. 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. PRSUs granted to Teradyne’s executive officers may also have 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. 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. During 2019, 2018 and 2017, Teradyne granted 0.8 million, 0.6 million and 0.8 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $37.65, $45.92 and $28.19, respectively. During 2019, 2018 and 2017, 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 $48.03, $35.81 and $34.48, respectively. During 2019, 2018 and 2017, Teradyne granted 0.1 million TSR PRSUs, with a grant date fair value of $51.51, $54.85 and $35.66 respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
|  | 2019 |  |  | 2018 |  |  | 2017 |
Risk-free interest rate |  |  | 2.6 | % |  |  | 2.2 | % |  |  | 1.5 | %
Teradyne volatility-historical |  |  | 31.9 | % |  |  | 26.8 | % |  |  | 26.6 | %
NYSE Composite Index volatility-historical |  |  | 11.9 | % |  |  | 12.4 | % |  |  | 13.4 | %
Dividend yield |  |  | 1.0 | % |  |  | 0.8 | % |  |  | 1.0 | %
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for each of the 2019, 2018 and 2017 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 each of the grants . Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2019 and 2018 and $0.28 per share for 2017 , divided by Teradyne’s stock price on the grant date of $37.95 for the 2019 grants , $47.70 for the 2018 grants and $28.56 for 2017 grants . During 2019, 2018 and 2017, Teradyne granted 0.1 million of PBIT PRSUs with a grant date fair value of $36.88, $46.62 and $27.72, respectively. During 2019 , 2018 and 2017 , Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $ 10.64 , $ 12.17 and $ 7.13 , respectively. The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
|  | 2019 |  |  | 2018 |  |  | 2017 |
Expected life (years) |  |  | 5.0 |  |  |  | 5.0 |  |  |  | 5.0 |
Risk-free interest rate |  |  | 2.5 | % |  |  | 2.4 | % |  |  | 2.0 | %
Volatility-historical |  |  | 30.1 | % |  |  | 26.4 | % |  |  | 27.8 | %
Dividend yield |  |  | 1.00 | % |  |  | 0.80 | % |  |  | 1.00 | %
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 divided by Teradyne’s stock price on the grant date of $37.95 for the 2019 grants, $47.70 for the 2018 grants and $28.56 for the 2017 grants. Stock compensation plan activity for the years 2019, 2018, and 2017, is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Restricted Stock Units: |  |  |  |  |  |  |  |  |  |  |  |
Non-vested at January 1 |  |  | 2,454 |  |  |  | 3,174 |  |  |  | 3,778 |
Awarded |  |  | 1,139 |  |  |  | 790 |  |  |  | 939 |
Vested |  |  | (1,237 | ) |  |  | (1,382 | ) |  |  | (1,434 | )
Forfeited |  |  | (87 | ) |  |  | (128 | ) |  |  | (109 | )
Non-vested at December 31 |  |  | 2,269 |  |  |  | 2,454 |  |  |  | 3,174 |
Stock Options: |  |  |  |  |  |  |  |  |  |  |  |
Outstanding at January 1 |  |  | 506 |  |  |  | 531 |  |  |  | 926 |
Granted |  |  | 102 |  |  |  | 69 |  |  |  | 111 |
Exercised |  |  | (280 | ) |  |  | (94 | ) |  |  | (501 | )
Forfeited |  |  | (7 | ) |  |  | — |  |  |  | — |
Expired |  |  | (2 | ) |  |  | — |  |  |  | (5 | )
Outstanding at December 31 |  |  | 319 |  |  |  | 506 |  |  |  | 531 |
Vested and expected to vest at December 31 |  |  | 319 |  |  |  | 506 |  |  |  | 531 |
Exercisable at December 31 |  |  | 85 |  |  |  | 256 |  |  |  | 233 |
Total shares available for the years 2019, 2018, and 2017:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Shares available: |  |  |  |  |  |  |  |  |  |  |  |
Available for grant at January 1 |  |  | 7,874 |  |  |  | 8,605 |  |  |  | 9,546 |
Options granted |  |  | (102 | ) |  |  | (69 | ) |  |  | (111 | )
Options forfeited |  |  | 7 |  |  |  | — |  |  |  | — |
Restricted stock units awarded |  |  | (1,139 | ) |  |  | (790 | ) |  |  | (939 | )
Restricted stock units forfeited |  |  | 87 |  |  |  | 128 |  |  |  | 109 |
Available for grant at December 31 |  |  | 6,727 |  |  |  | 7,874 |  |  |  | 8,605 |
Weighted average restricted stock unit award date fair value information for the years 2019, 2018, and 2017 , is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
Non-vested at January 1 |  | $ | 29.22 |  |  | $ | 21.71 |  |  | $ | 18.27 |
Awarded |  |  | 39.08 |  |  |  | 45.99 |  |  |  | 28.91 |
Vested |  |  | 23.59 |  |  |  | 20.20 |  |  |  | 17.90 |
Forfeited |  |  | 35.60 |  |  |  | 24.67 |  |  |  | 20.35 |
Non-vested at December 31 |  | $ | 35.58 |  |  | $ | 29.22 |  |  | $ | 21.71 |
Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2019, 2018 , and 2017 is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Vested |  | $ | 46,110 |  |  | $ | 63,688 |  |  | $ | 40,649 |
Outstanding |  |  | 154,752 |  |  |  | 77,015 |  |  |  | 132,875 |
Expected to vest |  |  | 152,374 |  |  |  | 77,187 |  |  |  | 130,594 |
Restricted stock units weighted average remaining contractual terms (in years) information at December 31 for the years 2019, 2018, and 2017 is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
Outstanding |  |  | 1.02 |  |  |  | 0.92 |  |  |  | 1.00 |
Expected to vest |  |  | 1.02 |  |  |  | 0.91 |  |  |  | 0.99 |
Weighted average stock options exercise price information for the year ended December 31, 2019 is as follows:
|  | 2019 |
Outstanding at January 1 |  | $ | 19.06 |
Options granted |  |  | 37.95 |
Options exercised |  |  | 13.20 |
Options forfeited |  |  | 36.75 |
Options cancelled |  |  | 1.48 |
Outstanding at December 31 |  |  | 29.91 |
Exercisable at December 31 |  |  | 14.97 |
The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2019, 2018, and 2017, was $3.7 million, $1.0 million and $6.8 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2019, 2018, and 2017, was $2.0 million, $0.4 million, and $2.5 million, respectively. Stock option aggregate intrinsic value information for the years ended December 31, 2019, 2018, and 2017 is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Exercised |  | $ | 9,232 |  |  | $ | 2,960 |  |  | $ | 8,035 |
Outstanding |  |  | 12,218 |  |  |  | 7,359 |  |  |  | 14,831 |
Vested and expected to vest |  |  | 7,701 |  |  |  | 7,359 |  |  |  | 14,831 |
Exercisable |  |  | 4,517 |  |  |  | 5,905 |  |  |  | 9,076 |
Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2019, 2018, and 2017 is as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
Outstanding |  |  | 4.2 |  |  |  | 3.6 |  |  |  | 4.1 |
Vested and expected to vest |  |  | 5.0 |  |  |  | 3.6 |  |  |  | 4.1 |
Exercisable |  |  | 2.1 |  |  |  | 2.4 |  |  |  | 2.8 |
As of December 31, 2019, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $45 million, and is expected to be recognized over a weighted average period of 1.8 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 2019, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2019 at the price of $40.72 per share. In January 2020, Teradyne issued 0.2 million shares of common stock to employees who participated in the plan during the second half of 2019 at the price of $57.96 per share. 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. As of December 31, 2019, there were 1.8 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, 2019, 2018, and 2017:
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in thousands) |
Cost of revenues |  | $ | 3,480 |  |  | $ | 3,129 |  |  | $ | 3,212 |
Engineering and development |  |  | 9,913 |  |  |  | 9,181 |  |  |  | 9,370 |
Selling and administrative |  |  | 24,504 |  |  |  | 21,267 |  |  |  | 21,515 |
Stock-based compensation |  |  | 37,897 |  |  |  | 33,577 |  |  |  | 34,097 |
Income tax benefit |  |  | (8,360 | ) |  |  | (12,036 | ) |  |  | (10,462 | )
Total stock-based compensation expense after income taxes |  | $ | 29,537 |  |  | $ | 21,541 |  |  | $ | 23,635 |

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- Definition The entire disclosure for share-based payment arrangement. + 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 + Details
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