C. Change in Accounting Principle

Effective January 1, 2012, Teradyne changed the method of recognizing actuarial gains and losses for its defined benefit pension plans and postretirement benefit plan and calculating the expected return on plan assets for its defined benefit pension plans. Historically, Teradyne recognized net actuarial gains and losses in accumulated other comprehensive income within shareholders' equity on the consolidated balance sheets on an annual basis and amortized them into operating results over the average remaining years of service of the plan participants, to the extent such gains and losses were outside of a corridor. In addition, Teradyne, historically, calculated the expected return on plan assets using a calculated market-related value of plan assets. Teradyne has elected to immediately recognize net actuarial gains and losses and the change in the fair value of the plan assets in its operating results in the year in which they occur or upon any interim remeasurement of the plans. Teradyne has also elected to calculate the expected return on plan assets using the fair value of the plan assets.

While the previous method of recognizing pension and other postretirement benefit expense was considered acceptable, Teradyne believes that this new method is preferable as it eliminates the delay in recognizing gains and losses in its operating results and it will improve the transparency by faster recognition of the effects of economic and interest rate trends on plan obligations and investments. These actuarial gains and losses are generally measured annually as of December 31 and, accordingly, will be recorded during the fourth quarter of each year or upon any interim remeasurement of the plans. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, all prior periods presented in this Quarterly Report on Form 10-Q have been adjusted to apply the new accounting method retrospectively. This accounting change did not impact the financial position of the reportable segments.

Had these changes not been made, net income for the three months ended April 1, 2012 would have been $29.7 million compared to the $33.6 million actually recorded. Diluted earnings per share would have been $0.13 compared to $0.15.

The effects of the change in accounting principle on the condensed consolidated financial statements for 2011 are presented below. We have condensed the comparative financial statements for financial statement line items that were not affected by the change in accounting principle.

Condensed Consolidated Balance Sheets


	December 31, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Assets:

Total assets	$	2,188,639			—		$	2,188,639

Liabilities:

Total liabilities		683,579			—			683,579

Shareholders' Equity:
Common stock		22,948			—			22,948
Additional paid-in capital		1,293,130			—			1,293,130
Accumulated other comprehensive (loss) income		(129,875	)		134,621			4,746
Retained earnings		318,857			(134,621	)		184,236

Total shareholders' equity		1,505,060			—			1,505,060

Total liabilities and shareholders' equity	$	2,188,639			—		$	2,188,639

Condensed Consolidated Statements of Operations


	For the Three Months Ended April 3, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands, except per share amounts)
Net revenues		377,161			—			377,161
Cost of revenues		184,752			(483	)		184,269

Gross profit		192,409			483			192,892
Operating expenses:
Engineering and development		47,977			(833	)		47,144
Selling and administrative		58,229			(498	)		57,731
Acquired intangible asset amortization		7,291			—			7,291
Restructuring and other		413			—			413

Total operating expenses		113,910			(1,331	)		112,579

Income from operations		78,499			1,814			80,313
Interest income		1,287			—			1,287
Interest expense and other, net		(6,176	)		—			(6,176	)

Income from continuing operations before income taxes		73,610			1,814			75,424
Provision for income taxes		5,486			—			5,486

Income from continuing operations		68,124			1,814			69,938
Income from discontinued operations before income taxes		1,278			158			1,436
Benefit from income taxes		(267	)		—			(267	)

Income from discontinued operations		1,545			158			1,703
Gain on disposal of discontinued operations (net of tax of $4,578)		25,203			—			25,203

Net income	$	94,872		$	1,972		$	96,844

Net income per common share from continuing operations:
Basic	$	0.37		$	0.01		$	0.38

Diluted	$	0.29		$	0.01		$	0.30

Net income per common share:
Basic	$	0.51		$	0.01		$	0.52

Diluted	$	0.41		$	0.01		$	0.42

Weighted average common share—basic		184,720						184,720

Weighted average common share—diluted		232,080						232,080

Condensed Consolidated Statements of Comprehensive Income


	For the Three Months Ended April 3, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Net income	$	94,872		$	1,972		$	96,844

Other comprehensive income, net of tax:
Foreign currency translation reclassification adjustment included in net income		2,266			—			2,266
Unrealized gains on investments		15			—			15
Defined benefit pension and post-retirement plans:
Actuarial losses arising during period, net of tax of ($15), $15		(51	)		51			—
Settlement gain, net of tax of $35, ($35)		60			(60	)		—
Less Amortization included in net periodic pension and post-retirement costs:
Actuarial losses, net of tax of $11, ($11)		2,078			(2,078	)		—
Prior service costs, net of tax of $0		6			—			6

		2,093			(2,087	)		6

Other comprehensive income		4,374			(2,087	)		2,287

Comprehensive income	$	99,246		$	(115	)	$	99,131

Condensed Consolidated Statements of Cash Flows


	For the Three Months Ended April 3, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Cash flows from operating activities:
Net income	$	94,872		$	1,972		$	96,844
Less: Income from discontinued operations		1,545			158			1,703
Less: Gain on disposal of discontinued operations		25,203			—			25,203

Income from continuing operations		68,124			1,814			69,938
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		13,057			—			13,057
Amortization		12,442			(2,087	)		10,355
Stock-based compensation		7,464			—			7,464
Provision for excess and obsolete inventory		4,627			—			4,627
Other		618			—			618
Changes in operating assets and liabilities, net of businesses sold:
Accounts receivable		(17,498	)		—			(17,498	)
Inventories		(10,709	)		—			(10,709	)
Other assets		(2,539	)		273			(2,266	)
Deferred revenue and customer advances		(24,553	)		—			(24,553	)
Accounts payable and other accrued expenses		(26,014	)		—			(26,014	)
Retirement plan contributions		(1,176	)		—			(1,176	)

Net cash provided by continuing operations		23,843			—			23,843
Net cash used for discontinued operations		(4,225	)		—			(4,225	)

Net cash provided by operating activities		19,618			—			19,618
Net cash used for investing activities		(5,942	)		—			(5,942	)
Net cash provided by financing activities		8,854			—			8,854

Increase in cash and cash equivalents		22,530			—			22,530
Cash and cash equivalents at beginning of period		397,737			—			397,737

Cash and cash equivalents at end of period	$	420,267		$	—		$	420,267