O. RETIREMENT PLANS

ASC 715, “Compensation — Retirement Benefits” requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by ASC 715. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31.

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a portion of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of fixed income and equity securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “IRC”), as well as unfunded qualified foreign plans.

Teradyne uses a December 31 measurement date for all of its plans. The December 31 balances of these defined benefit pension plans assets and obligations are shown below:


	2012			2011
*Assets and Obligations*		(in thousands)
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	390,278		$	337,796
Service cost		2,787			2,735
Interest cost		15,670			17,466
Actuarial loss		31,912			54,248
Benefits paid		(65,650	)		(13,260	)
Curtailment		—			210
Settlement		—			(7,637	)
Transfers		—			(564	)
Non-U.S. currency movement		1,501			(716	)

End of year		376,498			390,278

Change in plan assets:
Fair value of plan assets:
Beginning of year		339,580			294,988
Company contributions		3,306			10,169
Plan participants’ contributions		108			51
Actual return on plan assets		24,621			55,345
Benefits paid		(65,650	)		(13,260	)
Settlement		—			(7,637	)
Non-U.S. currency movement		934			(76	)

End of year		302,899			339,580

Funded status	$	(73,599	)	$	(50,698	)

During the year ended December 31, 2012, Teradyne offered to certain former U.S. employees the option to receive their vested pension benefit as a one-time, lump sum payment. Approximately 2,000 former employees elected to receive a one-time, lump sum payment. Total one-time, lump sum payments were approximately $52.0 million.

The following table provides amounts recorded within the account line items of the statement of financial position as of December 31:


	2012			2011
	(in thousands)
Retirement plans assets	$	3,282		$	8,840
Accrued employees’ compensation and withholdings		(2,810	)		(2,524	)
Retirement plans liabilities		(74,071	)		(57,014	)

Funded status	$	(73,599	)	$	(50,698	)

The following table provides amounts recognized in accumulated other comprehensive income (loss) as of December 31:


	2012		2011
	(in thousands)
Prior service cost	$	656	$	888

Total recognized in other comprehensive income (loss), before tax		656		888

Deferred taxes		321		236

Total recognized in other comprehensive income (loss), net of tax	$	977	$	1,124

The estimated portion of prior service cost remaining in accumulated other comprehensive income (loss) that is expected to be recognized as a component of net periodic pension cost in 2013 is $0.2 million.

The accumulated benefit obligation for all defined benefit pension plans was $360.4 million and $370.1 million at December 31, 2012 and 2011, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:


	2012		2011
	(in millions)
Projected benefit obligation	$	75.6	$	60.2
Accumulated benefit obligation		65.7		52.2
Fair value of plan assets		0.8		0.7

Expense

For the years ended December 31, 2012, 2011 and 2010, Teradyne’s net periodic pension cost was comprised of the following:


	2012			2011			2010
	(in thousands)
Components of Net Periodic Pension Cost:
Service cost	$	2,787		$	2,735		$	3,655
Interest cost		15,670			17,466			17,716
Expected return on plan assets		(15,946	)		(15,602	)		(17,585	)
Amortization of prior service cost		232			621			726
Net actuarial loss (gain)		23,237			12,583			(469	)
Settlement loss (gain)		—			1,567			(3,113	)

Total net periodic pension cost	$	25,980		$	19,370		$	930

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Reversal of amortization items:
Prior service cost		(232	)		(621	)		(726	)

Total recognized in other comprehensive income		(232	)		(621	)		(726	)

Total recognized in net periodic pension cost and other comprehensive income	$	25,748		$	18,749		$	204

Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1


	United States Plans									Foreign Plans
	2012			2011			2010			2012			2011			2010
Discount rate		4.2	%		5.3	%		5.8	%		4.9	%		5.0	%		5.4	%
Expected return on plan assets		5.0			5.5			7.5			3.1			3.5			3.7
Salary progression rate		3.0			4.0			4.0			3.4			4.0			4.2

Weighted Average Assumptions to Determine Pension Obligations at December 31


	United States Plans						Foreign Plans
	2012			2011			2012			2011
Discount rate		3.6	%		4.2	%		3.7	%		4.9	%
Salary progression rate		3.0			3.0			3.5			3.4

In developing the expected return on plan assets assumption, Teradyne evaluates input from its investment manager and pension consultants, including their review of asset class return expectations. Based on this review, Teradyne believes that 5.0% was an appropriate rate to use for fiscal 2012 for the U.S. Qualified Pension Plan (“U.S. Plan”).

Effective January 1, 2012, 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.

The discount rate utilized to determine future pension obligations for the U.S. Plan is based on Citigroup Pension Index adjusted for the plan’s expected cash flows and was 3.6% at December 31, 2012, down from 4.2% at December 31, 2011.

Plan Assets

As of December 31, 2012, the fair value of Teradyne’s pension plans’ assets totaled $302.9 million of which $278.9 million was related to the U.S. Plan, $23.2 million was related to the U.K. defined benefit pension plan, and $0.8 million was related to the Taiwan defined benefit pension plan. Teradyne’s pension plans’ assets consisted primarily of investments in fixed-income and equity securities. Substantially all our pension plan assets are held in individual trusts, which were established for the investment of assets of Teradyne’s sponsored retirement plans.

Teradyne’s weighted average pension asset allocation at December 31, 2012 and 2011, by asset category is as follows:


	United States Plan						Foreign Plans
	2012			2011			2012			2011
Fixed Income Securities		85.8	%		86.7	%		49.2	%		49.7	%
Equity Securities		13.0			12.3			49.6			48.3
Other		1.2			1.0			1.2			2.0

		100.0	%		100.0	%		100.0	%		100.0	%

The assets of the U.S. Plan are overseen by the Teradyne Fiduciary Committee which is comprised of members of senior management drawn from appropriate diversified levels of the management team. The Fiduciary Committee is responsible for setting the policy that provides the framework for management of the U.S. Plan assets. In accordance with its responsibilities, the Fiduciary Committee meets on a regular basis to review the performance of the U.S. Plan assets and compliance with the investment policy. The policy sets forth an investment structure for managing U.S. Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification required to maximize the long-term return on plan assets for a prudent and reasonable level of risk given prevailing market conditions, total investment return over the long term, and preservation of capital, while maintaining sufficient liquidity to pay the benefits of the U.S. Plan. The investment portfolio will not, at any time, have a direct investment in Teradyne stock. It may have indirect investment in Teradyne stock, if one of the funds selected by the investment manager invests in Teradyne stock. In developing the asset allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and funded status. Based on this study and other appropriate information, the Fiduciary Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns. The investment return objectives are to avoid excessive volatility and produce a rate of return that at least matches the Policy Index identified below. The manager’s investment performance is reviewed at least annually. Results for the total portfolio and for each major category of assets are evaluated in comparison with appropriate market indices, the Policy Index, other similarly managed portfolios and the Consumer Price Index.

The target asset allocation and the index for each asset category for the U.S. Plan, per the investment policy, is as follows:


Asset Category:	Policy Index:	Target Allocation
Passive and Active Fixed Income	Barclays Capital Long Government Credit Index	85%
Equity (Large cap)	S&P 500 Stock Index	10
International Equity	MSCI EAFE Index (Net Dividends)	5

The assets of Teradyne’s foreign pension plans are invested in funds which seek to combine long-term growth potential offered through equity exposure with the relative security provided by bonds, and are governed locally by local management in accordance with specific jurisdictional requirements. Investments in the non-U.S. plans consist primarily of fixed-income and equity securities. These investments are valued using significant observable inputs (Level 2). The fair market value of assets for the international pension plans was $24.0 million as of December 31, 2012. There were no investments with significant unobservable inputs (Level 3) in the non-U.S. pension plans. During the years ended December 31, 2012 and 2011, there were no transfers of pension assets in or out of Level 1, Level 2 or Level 3.

Teradyne’s U.S. Plan invests primarily in common trust funds and fixed income securities. Units held in the common trust funds are valued at the unit price as reported by the investment managers based on the asset value of the underlying investments; underlying investments in equity securities are valued at the last reported sales price, and underlying investments in fixed-income securities are generally valued using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Substantially all of these investments are valued using significant observable inputs (Level 2). The fair market value of assets for the U.S. Plan was $278.9 million as of December 31, 2012. There were no investments with significant unobservable inputs (Level 3) in the U.S. Plan. During the years ended December 31, 2012 and 2011, there were no transfers of pension assets in or out of Level 1, Level 2 or Level 3.

The fair value of pension plan assets by asset category and by level at December 31, 2012 and December 31, 2011 were as follows:


	December 31, 2012
	Level 1		Level 2		Level 3		Total
			(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	157,263	$	—	$	157,263
U.S. government securities		23,712		58,962		—		82,674
U.K. government securities		—		8,593		—		8,593
Asset backed securities		—		2,042		—		2,042
U.S. equity (large cap)		—		23,832		—		23,832
International equity		—		23,990		—		23,990
Guarantee annuity contract		—		3,108		—		3,108
Other		—		839		—		839
Cash and cash equivalents		—		558		—		558

Total	$	23,712	$	279,187	$	—	$	302,899


	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	172,401	$	—	$	172,401
U.S. government securities		5,136		96,891		—		102,027
U.K. government securities		—		7,553		—		7,553
Asset backed securities		—		4,604		—		4,604
U.S. equity (large cap)		—		27,725		—		27,725
International equity		—		21,285		—		21,285
Guarantee annuity contract		—		2,863		—		2,863
Other		—		711		—		711
Cash and cash equivalents		—		411		—		411

Total	$	5,136	$	334,444	$	—	$	339,580

Contributions

Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2012, Teradyne contributed $1.7 million to the U.S. supplemental executive defined benefit pension plan and $1.6 million to certain qualified plans for non-U.S. subsidiaries. During 2011, Teradyne contributed $1.7 million to the U.S. supplemental executive defined benefit pension plan and $8.5 million to certain qualified plans for non-U.S. subsidiaries. In 2013, contributions to certain qualified plans for non-U.S. subsidiaries are based on local statutory requirements and will be approximately $2.0 million. In 2013, contributions to the U.S. supplemental executive defined benefit pension Plan will be approximately $1.8 million. Teradyne does not expect to make any contributions to the U.S. Plan in 2013.

Expected Future Pension Benefits Payments

Future benefit payments are expected to be paid as follows:


	United States		Foreign
	(in thousands)
2013	$	14,398	$	2,109
2014		15,283		1,499
2015		16,248		1,397
2016		17,368		2,070
2017		17,868		2,206
2018-2022		97,607		10,395

Postretirement Benefit Plans

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Teradyne uses a December 31 measurement date for its plan. The December 31 balances of the postretirement assets and obligations are shown below:


	2012			2011
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	12,793		$	12,896
Service cost		67			59
Interest cost		437			539
Actuarial loss		82			981
Benefits paid		(1,472	)		(1,682	)
Plan amendment		—			—

End of year		11,907			12,793

Change in plan assets:
Fair value of plan assets:
Beginning of year		—			—
Company contributions		1,472			1,682
Benefits paid		(1,472	)		(1,682	)

End of year		—			—

Funded status	$	(11,907	)	$	(12,793	)

The following table provides amounts recorded within the account line items of financial position as of December 31:


	2012			2011
	(in thousands)
Accrued employees’ compensation and withholdings	$	(1,322	)	$	(1,484	)
Retirement plans liability		(10,585	)		(11,309	)

Funded status	$	(11,907	)	$	(12,793	)

The following table provides amounts recognized in accumulated other comprehensive loss (income) as of December 31:


	2012			2011
	(in thousands)
Prior service credit	$	(3,427	)	$	(4,025	)

Total recognized in other comprehensive (income) loss before tax		(3,427	)		(4,025	)

Deferred taxes		(445	)		(227	)

Total recognized in other comprehensive income, net of tax	$	(3,872	)	$	(4,252	)

The estimated portion of prior service credit remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic postretirement benefit cost in 2013 is $(0.6) million.

Expense

For the years ended December 31, 2012, 2011 and 2010, Teradyne’s net periodic postretirement benefit (income) cost was comprised of the following:


	2012			2011			2010
	(in thousands)
Components of Net Periodic Postretirement Benefit (Income) Cost:
Service cost	$	67		$	59		$	57
Interest cost		437			539			668
Amortization of prior service cost		(599	)		(598	)		(416	)
Net actuarial loss (gain)		83			981			(882	)

Total net periodic postretirement (income) cost		(12	)		981			(573	)

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net prior service credit arising during period		—			—			(3,279	)
Reversal of amortization items:
Prior service credit		599			598			416

Total recognized in other comprehensive income		599			598			(2,863	)

Total recognized in net periodic postretirement benefit cost and other comprehensive income	$	587		$	1,579		$	(3,436	)

Weighted Average Assumptions to Determine Net Periodic Postretirement Benefit Cost as of January 1


	2012			2011			2010
Discount rate		3.7	%		4.5	%		5.1	%
Initial Health Care Cost Trend Rate		9.0			8.5			8.5
Ultimate Health Care Cost Trend Rate		5.0			5.0			5.0
Year in which Ultimate Health Care Cost Trend Rate is reached		2018			2018			2018

Weighted Average Assumptions to Determine Postretirement Benefit Obligation as of December 31


	2012			2011			2010
Discount rate		3.1	%		3.7	%		4.5	%
Initial Medical Trend		8.5			9.0			8.5
Ultimate Health Care Trend		5.0			5.0			5.0
Medical cost trend rate decrease to ultimate rate in year		2018			2018			2018

Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2012, would have the following effects:


	1 Percentage Point Increase		1 Percentage Point Decrease
	(in thousands)
Effect on total service and interest cost components	$	16	$	(15	)
Effect on postretirement benefit obligations		322		(302	)

Expected Future Benefits Payments

Future benefit payments are expected to be paid as follows:


	Benefits Payments
	(in thousands)
2013	$	1,322
2014		1,202
2015		1,111
2016		1,106
2017		966
2018-2022		3,943