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. Effective January 1, 2012, Teradyne 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 obligation 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 Annual Report on Form 10-K have been adjusted to apply the new accounting method retrospectively.

Had these changes not been made, net income for the year ended December 31, 2012 would have been $207.0 million compared to $217.0 million actually recorded. Diluted earnings per share would have been $0.90 compared to $0.94 for the year ended December 31, 2012.

The effects of the change in accounting principle on the condensed consolidated financial statements for 2011 and 2010 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 Year Ended December 31, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands, except per share amounts)
Net revenues	$	1,429,061		$	—		$	1,429,061
Cost of revenues		715,368			1,870			717,238

Gross profit		713,693			(1,870	)		711,823
Operating expenses:
Engineering and development		195,600			2,198			197,798
Selling and administrative		233,711			1,608			235,319
Acquired intangible asset amortization		40,465			—			40,465
Restructuring and other		8,203			(1,460	)		6,743

Total operating expenses		477,979			2,346			480,325

Income from operations		235,714			(4,216	)		231,498
Interest income		6,617			—			6,617
Interest expense and other		(23,694	)		—			(23,694	)

Income from continuing operations before income taxes		218,637			(4,216	)		214,421
Income tax benefit		(129,256	)		(280	)		(129,536	)

Income from continuing operations		347,893			(3,936	)		343,957
Income from discontinued operations before income taxes		1,278			—			1,278
Benefit from income taxes		(267	)		—			(267	)

Income from discontinued operations		1,545			—			1,545
Gain on disposal of discontinued operations (net of tax of $4,578)		24,371			—			24,371

Net income	$	373,809		$	(3,936	)	$	369,873

Net income per common share from continuing operations:
Basic	$	1.88		$	(0.02	)	$	1.86

Diluted	$	1.53		$	(0.01	)	$	1.52

Net income per common share:
Basic	$	2.02		$	(0.02	)	$	2.00

Diluted	$	1.65		$	(0.02	)	$	1.63

Weighted average common shares—basic		184,683						184,683

Weighted average common shares—diluted		226,820						226,820


	For the Year Ended December 31, 2010
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands, except per share amounts)
Net revenues	$	1,566,162		$	—		$	1,566,162
Cost of revenues		710,196			(1,617	)		708,579

Gross profit		855,966			1,617			857,583
Operating expenses:
Engineering and development		193,017			(1,154	)		191,863
Selling and administrative		226,820			(1,487	)		225,333
Acquired intangible asset amortization		29,250			—			29,250
Restructuring and other		(817	)		(2,983	)		(3,800	)

Total operating expenses		448,270			(5,624	)		442,646

Income from operations		407,696			7,241			414,937
Interest income		5,861			—			5,861
Interest expense and other		(24,451	)		—			(24,451	)

Income from continuing operations before income taxes		389,106			7,241			396,347
Provision for income taxes		14,504			2,151			16,655

Income from continuing operations		374,602			5,090			379,692
Income from discontinued operations before income taxes		5,406			—			5,406
Provision for income taxes		278			—			278

Income from discontinued operations		5,128			—			5,128

Net income	$	379,730		$	5,090		$	384,820

Net income per common share from continuing operations:
Basic	$	2.08		$	0.03		$	2.11

Diluted	$	1.71		$	0.02		$	1.73

Net income per common share:
Basic	$	2.11		$	0.03		$	2.14

Diluted	$	1.73		$	0.02		$	1.75

Weighted average common share—basic		179,924						179,924

Weighted average common share—diluted		226,807						226,807

Condensed Consolidated Statements of Comprehensive Income


	For the Year Ended December 31, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Net income	$	373,809		$	(3,936	)	$	369,873
Other comprehensive income, net of tax:
Foreign currency translation reclassification adjustment included in net income		2,266			—			2,266
Unrealized gains on marketable securities		(3	)		—			(3	)
Defined benefit pension and post-retirement plans:
Actuarial losses arising during period, net of tax of ($3,427), $3,427		(9,496	)		9,496			—
Less: Amortization included in net periodic pension and postretirement costs:
Actuarial losses, net of tax of $3,385, ($3,385)		5,560			(5,560	)		—
Prior service costs, net of tax of $9		14			—			14

		5,574			(5,560	)		14

Other comprehensive (loss) income		(1,659	)		3,936			2,277

Comprehensive income	$	372,150		$	—		$	372,150


	For the Year Ended December 31, 2010
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Net income	$	379,730		$	5,090		$	384,820
Other comprehensive income, net of tax:
Foreign currency translation reclassification adjustment included in net income		(349	)		—			(349	)
Unrealized gains on marketable securities		1,559			—			1,559
Defined benefit pension and post-retirement plans:
Actuarial gains arising during period, net of tax of ($1,826), $1,826		(288	)		288			—
Prior service cost arising during period, net of tax of $0		3,279			—			3,279
Less: Amortization included in net periodic pension and post-retirement costs:
Actuarial losses, net of tax of $133, ($133)		5,378			(5,378	)		—
Prior service costs, net of tax of $0		310			—			310

		5,688			(5,378	)		310

Other comprehensive income		9,889			(5,090	)		4,799

Comprehensive income	$	389,619		$	—		$	389,619

Condensed Consolidated Statements of Cash Flows


	For the Year Ended December 31, 2011
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Cash flows from operating activities:
Net income	$	373,809		$	(3,936	)	$	369,873
Less: Income from discontinued operations		1,545			—			1,545
Less: Gain on disposal of discontinued operations		24,371			—			24,371

Income from continuing operations		347,893			(3,936	)		343,957
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		51,040			—			51,040
Amortization		62,284			(8,946	)		53,338
Stock-based compensation		32,337			—			32,337
Provision for excess and obsolete inventory		11,601			—			11,601
Non cash charge for the sale of inventories revalued at the date of acquisition		12,178			—			12,178
Retirement plan actuarial losses		—			13,564			13,564
Deferred taxes		(146,669	)		(280	)		(146,949	)
Other		1,911			(402	)		1,509
Changes in operating assets and liabilities, net of businesses sold and acquired:
Accounts receivable		66,367			—			66,367
Inventories		(615	)		—			(615	)
Other assets		(22,600	)		—			(22,600	)
Deferred revenue and customer advances		(68,359	)		—			(68,359	)
Accounts payable and other accrued expenses		(48,222	)		—			(48,222	)
Retirement plan contributions		(11,851	)		—			(11,851	)
Accrued income taxes		(8,727	)		—			(8,727	)

Net cash provided by continuing operations	$	278,568		$	—		$	278,568
Net cash used for discontinued operations		(4,804	)		—			(4,804	)

Net cash provided by operating activities		273,764			—			273,764
Net cash used for investing activities		(81,457	)		—			(81,457	)
Net cash used for financing activities		(16,308	)		—			(16,308	)

Increase in cash and cash equivalents		175,999			—			175,999
Cash and cash equivalents at beginning of year		397,737			—			397,737

Cash and cash equivalents at end of year	$	573,736		$	—		$	573,736


	For the Year Ended December 31, 2010
	Originally Reported			Effect of Accounting Change			As Adjusted
	(in thousands)
Cash flows from operating activities:
Net income	$	379,730		$	5,090		$	384,820
Less: Income from discontinued operations		5,128			—			5,128

Income from continuing operations		374,602			5,090			379,692
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation		52,810			—			52,810
Amortization		46,217			(5,511	)		40,706
Stock-based compensation		29,777			—			29,777
Provision for excess and obsolete inventory		5,971			—			5,971
Retirement plan actuarial losses		—			(1,351	)		(1,351	)
Deferred taxes		(3,670	)		2,151			(1,519	)
Other		2,907			(379	)		2,528
Changes in operating assets and liabilities, net of businesses sold:
Accounts receivable		(50,418	)		—			(50,418	)
Inventories		3,715			—			3,715
Other assets		8,460			—			8,460
Deferred revenue and customer advances		72,744			—			72,744
Accounts payable and other accrued expenses		62,201			—			62,201
Retirement plan contributions		(52,452	)		—			(52,452	)
Accrued income taxes		8,465			—			8,465

Net cash provided by continuing operations		561,329			—			561,329
Net cash provided by discontinued operations		4,957			—			4,957

Net cash provided by operating activities		566,286			—			566,286
Net cash used for investing activities		(627,660	)		—			(627,660	)
Net cash provided by financing activities		42,374			—			42,374

Decrease in cash and cash equivalents		(19,000	)		—			(19,000	)
Cash and cash equivalents at beginning of year		416,737			—			416,737

Cash and cash equivalents at end of year	$	397,737		$	—		$	397,737