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Stock-Based Compensation | 3 Months Ended
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Apr. 02, 2023
Stock-Based Compensation | J . STOCK-BASED COMPENSATION On February 1, 2023 (the” Retirement Date”), Mark E. Jagiela retired as Chief Executive Officer of Teradyne and a member of Teradyne’s Board of Directors, and Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Jagiela. Under the Retirement Agreement, Mr. Jagiela’s unvested time-based restricted stock units and stock options granted prior to his Retirement Date were modified to allow continued vesting; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. During the three months ended April 2, 2023, Teradyne recorded a stock based compensation expense of $5.9 million related to the Retirement Agreement. Under Teradyne’s stock compensation plans, Teradyne grants time-based restricted stock units, performance-based restricted stock units and stock options, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”). Service-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. Performance-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 0% to 200% of the target shares. 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 executive officers meeting the retirement provisions prior to the grant date is recognized during the year following 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 0% to 200% 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 executive officers meeting the retirement provisions prior to the grant date is recognized during the year following the 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 the three months ended April 2, 2023 and April 3, 2022, Teradyne granted 0.5 million and 0.4 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $102.36 and $111.31, respectively. During the three months ended April 2, 2023 and April 3, 2022, Teradyne granted 0.1 million of PBIT PRSUs with a grant date fair value of $102.23 and $110.84, respectively. During the three months ended April 2, 2023 and April 3, 2022, Teradyne granted 0.1 million of TSR PRSUs, with a grant date fair value of $137.64 and $101.06, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:
|  | For the Three Months Ended |
|  | April 2, 2023 |  |  | April 3, 2022 |
Risk-free interest rate |  |  | 3.9 | % |  |  | 1.4 | %
Teradyne volatility-historical |  |  | 50.2 | % |  |  | 47.1 | %
NYSE Composite Index volatility-historical |  |  | 24.8 | % |  |  | 22.7 | %
Dividend yield |  |  | 0.4 | % |  |  | 0.4 | %
Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index 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 $0.44 per share divided by Teradyne’s stock price on the grant date of $103.44 for the 2023 grant and an estimated annual dividend amount of $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant. During the three months ended April 2, 2023 and April 3, 2022, Teradyne granted 0.1 million of service-based stock options to executive officers at a weighted average grant date fair value of $40.90 and $39.01, respectively. The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:
|  | For the Three Months Ended |
|  | April 2, 2023 |  |  | April 3, 2022 |
Expected life (years) |  |  | 4.0 |  |  |  | 4.0 |
Risk-free interest rate |  |  | 3.7 | % |  |  | 1.6 | %
Volatility-historical |  |  | 46.7 | % |  |  | 43.7 | %
Dividend yield |  |  | 0.4 | % |  |  | 0.4 | %
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 $0.44 per share divided by Teradyne’s stock price on the grant date of $103.44 for the 2023 grant and an estimated annual dividend amount of $0.44 per share divided by Teradyne’s stock price on the grant date of $112.12 for the 2022 grant.

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