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 range (“corridor”). 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. In addition, Teradyne used to calculate the expected return on plan assets using a calculated market-related value of plan assets. Teradyne has also elected to calculate the expected return on plan assets using the fair value of the plan assets.

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 and nine months ended September 30, 2012 would have been $73.2 million and $213.4 million, respectively, compared to $88.6 million and $233.6 million actually recorded. Diluted earnings per share would have been $0.32 and $0.93 compared to $0.39 and $1.02 for the three and nine months ended September 30, 2012, respectively.

The effects of the change in accounting principle on the condensed consolidated financial statements for 2011 are presented below. Teradyne has 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 October 2, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands, except per share amounts)
Net revenues	$	344,389		$	—		$	344,389
Cost of revenues		174,544			(529	)		174,015

Gross profit		169,845			529			170,374
Operating expenses:
Engineering and development		46,799			(903	)		45,896
Selling and administrative		55,304			(529	)		54,775
Acquired intangible asset amortization		6,754			—			6,754
Restructuring and other		1,465			—			1,465

Total operating expenses		110,322			(1,432	)		108,890

Income from operations		59,523			1,961			61,484
Interest income		3,049			—			3,049
Interest expense and other, net		(6,068	)		—			(6,068	)

Income before income taxes		56,504			1,961			58,465
Provision for income taxes		1,759			—			1,759

Net income	$	54,745		$	1,961		$	56,706

Net income per common share:
Basic	$	0.30		$	0.01		$	0.31

Diluted	$	0.25		$	0.01		$	0.26

Weighted average common share—basic		185,102						185,102

Weighted average common share—diluted		221,892						221,892


	For the Nine Months Ended October 2, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands, except per share amounts)
Net revenues	$	1,132,069		$	—		$	1,132,069
Cost of revenues		554,729			(604	)		554,125

Gross profit		577,340			604			577,944
Operating expenses:
Engineering and development		142,169			(737	)		141,432
Selling and administrative		171,014			(628	)		170,386
Acquired intangible asset amortization		21,336			—			21,336
Restructuring and other		3,157			—			3,157

Total operating expenses		337,676			(1,365	)		336,311

Income from operations		239,664			1,969			241,633
Interest income		5,739			—			5,739
Interest expense and other, net		(17,560	)		—			(17,560	)

Income from continuing operations before income taxes		227,843			1,969			229,812
Provision for income taxes		15,084			—			15,084

Income from continuing operations		212,759			1,969			214,728
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)		24,371			—			24,371

Net income	$	238,675		$	2,127		$	240,802

Net income per common share from continuing operations:
Basic	$	1.15		$	0.01		$	1.16

Diluted	$	0.93		$	0.01		$	0.94

Net income per common share:
Basic	$	1.29		$	0.01		$	1.30

Diluted	$	1.05		$	0.01		$	1.06

Weighted average common share—basic		185,063						185,063

Weighted average common share—diluted		228,141						228,141

Condensed Consolidated Statements of Comprehensive Income


	For the Three Months Ended October 2, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Net income	$	54,745		$	1,961		$	56,706

Other comprehensive income (loss), net of tax:
Unrealized gains on marketable securities		(1,057	)		—			(1,057	)
Defined benefit pension and post-retirement plans:
Actuarial losses arising during period, net of tax of ($0), $0		(5	)		5			—
Less: Amortization included in net periodic pension and post- retirement costs:
Actuarial losses, net of tax of $11, ($11)		2,226			(2,226	)		—
Prior service costs, net of tax of $0		5			—			5

		2,231			(2,226	)		5

Other comprehensive income (loss)		1,169			(2,221	)		(1,052	)

Comprehensive income	$	55,914		$	(260	)	$	55,654


	For the Nine Months Ended October 2, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Net income	$	238,675		$	2,127		$	240,802

Other comprehensive income, net of tax:
Foreign currency translation reclassification adjustment included in net income		2,266			—			2,266
Unrealized gains on marketable securities		256			—			256
Defined benefit pension and post-retirement plans:
Actuarial losses arising during period, net of tax of ($5), $5		(4,206	)		4,206			—
Settlement loss, net of tax of $73, ($73)		277			(277	)		—
Less: Amortization included in net periodic pension and post-retirement costs:
Actuarial losses, net of tax of $30, ($30)		6,681			(6,681	)		—
Prior service costs, net of tax of $0		17			—			17

		6,698			(6,681	)		17

Other comprehensive income		5,291			(2,752	)		2,539

Comprehensive income	$	243,966		$	(625	)	$	243,341

Condensed Consolidated Statements of Cash Flows


	For the Nine Months Ended October 2, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Cash flows from operating activities:
Net income	$	238,675		$	2,127		$	240,802
Less: Income from discontinued operations		1,545			158			1,703
Less: Gain on disposal of discontinued operations		24,371			—			24,371

Income from continuing operations		212,759			1,969			214,728
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		38,426			—			38,426
Amortization		37,547			(6,709	)		30,838
Stock-based compensation		22,514			—			22,514
Provision for excess and obsolete inventory		10,756			—			10,756
Other		1,379			4,740			6,119
Changes in operating assets and liabilities, net of businesses sold:
Accounts receivable		25,233			—			25,233
Inventories		(1,034	)		—			(1,034	)
Other assets		(13,553	)		—			(13,553	)
Deferred revenue and customer advances		(58,304	)		—			(58,304	)
Accounts payable and other accrued expenses		(47,483	)		—			(47,483	)
Retirement plan contributions		(6,393	)		—			(6,393	)
Accrued income taxes		(3,064	)		—			(3,064	)

Net cash provided by continuing operations		218,783			—			218,783
Net cash used for discontinued operations		(4,225	)		—			(4,225	)

Net cash provided by operating activities		214,558			—			214,558
Net cash provided by investing activities		492,033			—			492,033
Net cash used for financing activities		(9,165	)		—			(9,165	)

Increase in cash and cash equivalents		697,426			—			697,426
Cash and cash equivalents at beginning of period		397,737			—			397,737

Cash and cash equivalents at end of period	$	1,095,163		$	—		$	1,095,163