M. 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. Teradyne uses a December 31 measurement date for all of its plans.

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.

The December 31 balances of these defined benefit pension plans assets and obligations are shown below:


	2014						2013
	United States			Foreign			United States			Foreign
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	293,912		$	52,182		$	325,118		$	51,380
Service cost		2,218			897			2,393			1,034
Interest cost		12,875			1,837			11,318			1,948
Actuarial loss (gain)		72,596			8,975			(31,259	)		(1,020	)
Benefits paid		(13,982	)		(1,265	)		(13,658	)		(2,511	)
Plan participants’ contributions		—			88			—			95
Non-U.S. currency movement		—			(4,504	)		—			1,256

End of year		367,619			58,210			293,912			52,182

Change in plan assets:
Fair value of plan assets:
Beginning of year		256,373			25,756			278,856			24,043
Company contributions		31,753			1,168			1,738			2,522
Plan participants’ contributions		—			88			—			95
Actual return on plan assets		41,928			5,192			(10,563	)		1,190
Benefits paid		(13,982	)		(1,265	)		(13,658	)		(2,511	)
Non-U.S. currency movement		—			(1,428	)		—			417

End of year		316,072			29,511			256,373			25,756

Funded status	$	(51,547	)	$	(28,699	)	$	(37,539	)	$	(26,426	)

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


	2014						2013
	United States			Foreign			United States			Foreign
	(in thousands)
Retirement plans assets	$	3,090		$	9,806		$	4,259		$	5,083
Accrued employees’ compensation and withholdings		(2,492	)		(906	)		(1,781	)		(1,143	)
Retirement plans liabilities		(52,145	)		(37,599	)		(40,017	)		(30,366	)

Funded status	$	(51,547	)	$	(28,699	)	$	(37,539	)	$	(26,426	)

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


	2014				2013
	United States		Foreign		United States		Foreign
	(in thousands)
Prior service cost, before tax	$	358	$	—	$	493	$	—
Deferred taxes		429		—		380		—

Total recognized in other comprehensive income, net of tax	$	787	$	—	$	873	$	—

The estimated portion of prior service cost remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic pension cost in 2015 is $0.1 million.

The accumulated benefit obligation for the United States defined benefit pension plans was $357.0 million and $286.2 million at December 31, 2014 and 2013, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $49.8 million and $45.0 million at December 31, 2014 and 2013, respectively.

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


	2014				2013
	United States		Foreign		United States		Foreign
	(in millions)
Projected benefit obligation	$	54.6	$	39.5	$	41.8	$	32.4
Accumulated benefit obligation		48.5		32.7		37.9		27.5
Fair value of plan assets		—		1.0		—		0.9

Expense

For the years ended December 31, 2014, 2013 and 2012, Teradyne’s net periodic pension cost (income) was comprised of the following:


	2014						2013						2012
	United States			Foreign			United States			Foreign			United States			Foreign
	(in thousands)
Components of Net Periodic Pension Cost (Income):
Service cost	$	2,218		$	897		$	2,393		$	1,034		$	2,102		$	686
Interest cost		12,875			1,837			11,318			1,948			13,713			1,956
Expected return on plan assets		(12,500	)		(868	)		(13,632	)		(959	)		(15,248	)		(698	)
Amortization of prior service cost		135			—			164			—			232			—
Net actuarial loss (gain)		43,168			4,651			(7,063	)		(1,252	)		15,458			7,779

Total net periodic pension cost (income)	$	45,896		$	6,517		$	(6,820	)	$	771		$	16,257		$	9,723

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Reversal of amortization items:
Prior service cost		(135	)		—			(164	)		—			(232	)		—

Total recognized in other comprehensive income		(135	)		—			(164	)		—			(232	)		—

Total recognized in net periodic pension cost (income) and other comprehensive income	$	45,761		$	6,517		$	(6,984	)	$	771		$	16,025		$	9,723

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


	2014						2013						2012
	United States			Foreign			United States			Foreign			United States			Foreign
Discount rate		4.5	%		3.8	%		3.6	%		3.7	%		4.2	%		4.9	%
Expected return on plan assets		5.0			3.4			5.0			3.7			5.0			3.1
Salary progression rate		3.0			3.5			3.0			3.5			3.0			3.4

Weighted Average Assumptions to Determine Pension Obligations at December 31:


	2014						2013
	United States			Foreign			United States			Foreign
Discount rate		3.7	%		2.6	%		4.5	%		3.8	%
Salary progression rate		2.9			3.2			3.0			3.5

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 2014 for the U.S. Qualified Pension Plan (“U.S. Plan”).

Effective January 1, 2012, Teradyne 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 3.7% at December 31, 2014, down from 4.5% at December 31, 2013.

Plan Assets

As of December 31, 2014, the fair value of Teradyne’s pension plans’ assets totaled $345.6 million of which $316.1 million was related to the U.S. Plan, $28.5 million was related to the U.K. defined benefit pension plan, and $1.0 million was related to the Taiwan defined benefit pension plan. Substantially all Teradyne’s pension plans’ 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, 2014 and 2013, by asset category is as follows:


	2014						2013
	United States			Foreign			United States			Foreign
Fixed Income Securities		83.3	%		78.2	%		86.7	%		77.1	%
Equity Securities		15.4			20.7			12.1			21.6
Other		1.3			1.1			1.2			1.3

		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 and the Policy Index.

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

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.

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. The target asset allocation for the U.K. defined benefit pension plan, per the investment policy, is 80% fixed-income securities and 20% equity securities.

During the years ended December 31, 2014 and 2013, 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, 2014 and December 31, 2013 were as follows:


	December 31, 2014
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	193,741	$	—	$	193,741	$	—	$	—	$	—	$	—
U.S. government securities		—		65,830		—		65,830		—		—		—		—
U.K. government securities		—		—		—		—		—		22,811		—		22,811
Asset backed securities		—		3,747		—		3,747		—		—		—		—
U.S. equity (large cap)		—		33,970		—		33,970		—		—		—		—
International equity		—		14,631		—		14,631		—		5,610		—		5,610
Guarantee annuity contract		—		2,990		—		2,990		—		—		—		—
Other		—		65		—		65		—		957		—		957
Cash and cash equivalents		1,098		—		—		1,098		133		—		—		133

Total	$	1,098	$	314,974	$	—	$	316,072	$	133	$	29,378	$	—	$	29,511


	December 31, 2013
	United States								Foreign
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)
Fixed income securities:
Corporate debt securities	$	—	$	156,860	$	—	$	156,860	$	—	$	—	$	—	$	—
U.S. government securities		—		62,555		—		62,555		—		—		—		—
U.K. government securities		—		—		—		—		—		19,610		—		19,610
Asset backed securities		—		2,919		—		2,919		—		—		—		—
U.S. equity (large cap)		—		21,309		—		21,309		—		—		—		—
International equity		—		9,599		—		9,599		—		5,204		—		5,204
Guarantee annuity contract		—		2,985		—		2,985		—		—		—		—
Other		—		—		—		—		—		906		—		906
Cash and cash equivalents		146		—		—		146		—		36		—		36

Total	$	146	$	256,227	$	—	$	256,373	$	—	$	25,756	$	—	$	25,756

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 2014, Teradyne contributed $30.0 million to the U.S Plan, $1.8 million to the U.S. supplemental executive defined benefit pension plan and $1.2 million to certain qualified plans for non-U.S. subsidiaries. During 2013, Teradyne contributed $1.7 million to the U.S. supplemental executive defined benefit pension plan and $2.5 million to certain qualified plans for non-U.S. subsidiaries.

Expected Future Pension Benefit Payments

Future benefit payments are expected to be paid as follows:


	United States		Foreign
	(in thousands)
2015	$	24,407	$	1,018
2016		23,399		862
2017		23,129		1,069
2018		22,455		1,076
2019		21,826		1,230
2020-2024		112,546		9,349

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, 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.

The December 31 balances of the postretirement assets and obligations are shown below:


	2014			2013
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	9,019		$	11,907
Service cost		59			75
Interest cost		335			342
Actuarial (gain) loss		(1,255	)		(2,025	)
Benefits paid		(996	)		(1,280	)

End of year		7,162			9,019

Change in plan assets:
Fair value of plan assets:
Beginning of year		—			—
Company contributions		996			1,280
Benefits paid		(996	)		(1,280	)

End of year		—			—

Funded status	$	(7,162	)	$	(9,019	)

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


	2014			2013
	(in thousands)
Accrued employees’ compensation and withholdings	$	(780	)	$	(1,042	)
Retirement plans liability		(6,382	)		(7,977	)

Funded status	$	(7,162	)	$	(9,019	)

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


	2014			2013
	(in thousands)
Prior service credit, before tax	$	(2,230	)	$	(2,829	)
Deferred taxes		(882	)		(664	)

Total recognized in other comprehensive income, net of tax	$	(3,112	)	$	(3,493	)

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 (income) expense in 2015 is $(0.6) million.

Expense

For the years ended December 31, 2014, 2013 and 2012, Teradyne’s net periodic postretirement benefit income was comprised of the following:


	2014			2013			2012
	(in thousands)
Components of Net Periodic Postretirement Benefit Income:
Service cost	$	59		$	75		$	67
Interest cost		335			342			437
Amortization of prior service cost		(598	)		(598	)		(599	)
Net actuarial (gain) loss		(1,255	)		(2,025	)		83

Total net periodic postretirement benefit income		(1,459	)		(2,206	)		(12	)

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Reversal of amortization items:
Prior service credit		598			598			599

Total recognized in other comprehensive income		598			598			599

Total recognized in net periodic postretirement benefit income and other comprehensive income	$	(861	)	$	(1,608	)	$	587

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


	2014			2013			2012
Discount rate		4.1	%		3.1	%		3.7	%
Initial Health Care Cost Trend Rate		8.0			8.5			9.0
Ultimate Health Care Cost Trend Rate		5.0			5.0			5.0
Year in which Ultimate Health Care Cost Trend Rate is reached		2020			2020			2020

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


	2014			2013			2012
Discount rate		3.5	%		4.1	%		3.1	%
Initial Medical Trend		7.5			8.0			8.5
Ultimate Health Care Trend		5.0			5.0			5.0
Medical cost trend rate decrease to ultimate rate in year		2022			2020			2020

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, 2014, would have the following effects:


	1 Percentage Point Increase		1 Percentage Point Decrease
	(in thousands)
Effect on total service and interest cost components	$	6	$	(6	)
Effect on postretirement benefit obligations		87		(83	)

Expected Future Benefit Payments

Future benefit payments are expected to be paid as follows:


	Benefits Payments
	(in thousands)
2015	$	780
2016		738
2017		657
2018		599
2019		535
2020-2024		2,045

Asset Category:

Policy Index:

Target
Allocation

Passive and Active Fixed Income

Barclays U.S. Long Government/Credit Bond Index

Equity (Large cap)

S&P 500 Stock Index

International Equity

MSCI EAFE Index