O. STOCK-BASED COMPENSATION

Stock Compensation Plans

Under Teradyne’s stock compensation plans, Teradyne grants stock options, restricted stock units and performance-based restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date vest in equal annual installments over four years from the grant date and have a maximum term of seven years.

Time-based restricted stock unit awards granted to employees vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the first anniversary of the grant date. Teradyne expenses the cost of the restricted stock unit awards subject to time-based vesting, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Commencing in January 2014, Teradyne granted performance-based restricted stock units (“PRSUs”) to its executive officers with a performance metric based on relative total shareholder return (“TSR”). For TSR grants issued in 2014 and 2015, Teradyne’s three-year TSR performance is measured against the Philadelphia Semiconductor Index. For TSR grants issued in January 2016, Teradyne’s three-year TSR performance will be measured against the New York Stock Exchange (“NYSE”) Composite Index. The final number of TSR PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The TSR PRSUs will vest upon the three-year anniversary of the grant date. The TSR PRSUs are valued using a Monte Carlo simulation model. The number of units expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized regardless of the eventual number of units that are earned based upon the market condition, provided the executive officer remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period the executive officer is no longer an employee, subject to the retirement and termination eligibility provisions noted below.

In January 2016, Teradyne granted PRSUs to its executive officers with a performance metric based on three-year cumulative non-GAAP profit before interest and tax (“PBIT”). Non-GAAP PBIT is a financial measure equal to GAAP income from operations less restructuring and other, net; amortization of acquired intangible assets; acquisition and divestiture related charges or credits; pension actuarial gains and losses; non-cash convertible debt interest expense; and other non-recurring gains and charges. The final number of PBIT PRSUs that vest will vary based upon the level of performance achieved from 200% to 0% of the target shares. The PBIT PRSUs will vest upon the three-year anniversary of the grant date. Compensation expense is recognized on a straight-line basis over the three-year service period. Compensation expense is recognized based on the number of units that are earned based upon the three-year Teradyne PBIT as a percent of Teradyne’s revenue, provided the executive officer remains an employee at the end of the three-year period subject to the retirement and termination eligibility provisions noted below.

Beginning with PRSUs granted in January 2014, if the recipient’s employment ends prior to the determination of the performance percentage due to (1) permanent disability or death or (2) retirement or termination other than for cause, after attaining both at least age sixty and at least ten years of service, then all or a portion of the recipient’s PRSUs (based on the actual performance percentage achieved on the determination date) will vest on the date the performance percentage is determined. Except as set forth in the preceding sentence, no PRSUs will vest if the executive officer is no longer an employee at the end of the three-year period.

The TSR PRSUs are valued using a Monte Carlo simulation model. During 2016, 2015 and 2014 Teradyne granted 0.1 million, 0.2 million and 0.1 million TSR PRSUs, respectively, with a grant date fair value of $20.29, $18.21 and $22.06, respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2016			2015			2014
Risk-free interest rate		0.97	%		0.77	%		0.75	%
Teradyne volatility-historical		27.0	%		28.2	%		36.1	%
NYSE Composite Index volatility-historical		13.1	%		—	%		—	%
Philadelphia Semiconductor Index volatility-historical		—	%		19.7	%		24.6	%
Dividend yield		1.24	%		1.33	%		1.25	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for the 2016 grant and Philadelphia Semiconductor Index for the 2015 and 2014 grants, over the most recent three-year period. The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield for 2016, 2015 and 2014 was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s stock price on the grant date of $19.43 for the 2016 grants, $18.10 for the 2015 grants, and $19.16 for the 2014 grants.

Stock Options Valuation Assumptions:

The total number of stock options granted in 2016, 2015 and 2014 were 0.1 million, 0.1 million and 0.1 million, respectively, at the weighted average grant date fair value of $5.30, $4.43 and $5.49 per share, respectively. The fair value of the stock options at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2016			2015			2014
Expected life (years)		5.0			4.0			4.0
Risk-free interest rate		1.4	%		1.1	%		1.2	%
Volatility-historical		32.9	%		33.4	%		38.8	%
Dividend yield		1.24	%		1.33	%		1.25	%

Teradyne determined the stock option’s expected life based upon historical exercise data for executive officers, the age of executives and the terms of the stock option award. Volatility was determined using historical volatility for a period equal to the expected life. The interest rate was determined using the U.S. Treasury yield curve in effect at the time of grant. Dividend yield was based upon an estimated annual dividend amount of $0.24 per share divided by Teradyne’s stock price on the grant date of $19.43 for the 2016 grants, $18.10 for the 2015 grants, and $19.16 for the 2014 grants.

Stock compensation plan activity for the years 2016, 2015 and 2014 follows:


	2016			2015			2014
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		4,070			4,352			4,636
Awarded		1,471			1,681			1,870
Vested		(1,530	)		(1,679	)		(1,965	)
Forfeited		(233	)		(284	)		(189	)

Non-vested at December 31		3,778			4,070			4,352

Stock Options:
Outstanding at January 1		1,121			1,507			2,706
Granted		130			132			89
Exercised		(324	)		(518	)		(1,248	)
Forfeited		—			—			(38	)
Expired		(2	)		—			(2	)

Outstanding at December 31		926			1,121			1,507

Vested and expected to vest at December 31		926			1,121			1,507

Exercisable at December 31		598			779			1,089

Total shares available for the years 2016, 2015 and 2014:


	2016			2015			2014
	(in thousands)
Shares available:
Available for grant at January 1		10,914			12,443			14,213
Options granted		(130	)		(132	)		(89	)
Restricted stock units awarded		(1,471	)		(1,681	)		(1,870	)
Restricted stock units forfeited		233			284			189

Available for grant at December 31		9,546			10,914			12,443

Weighted average restricted stock unit award date fair value information for the years 2016, 2015 and 2014 follows:


	2016		2015		2014
Non-vested at January 1	$	17.46	$	17.24	$	15.60
Awarded		18.68		17.36		18.41
Vested		17.21		16.85		14.38
Forfeited		17.57		17.08		16.97
Non-vested at December 31	$	18.03	$	17.46	$	17.24

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2016, 2015 and 2014 follows:


	2016		2015		2014
	(in thousands)
Vested	$	30,008	$	32,200	$	37,160
Outstanding		95,952		84,129		86,113
Expected to vest		91,871		79,611		81,582

Restricted stock units weighted average remaining contractual terms (in years) information at December 31, for the years 2016, 2015 and 2014 follows:


	2016		2015		2014
Outstanding		1.04		1.09		1.11
Expected to vest		1.03		1.08		1.10

Weighted average stock options exercise price information for the year ended December 31, 2016 follows:


	2016
Outstanding at January 1	$	10.21
Options granted		19.43
Options exercised		9.06
Options expired		3.07
Outstanding at December 31		11.93
Exercisable at December 31		8.32

The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2016, 2015 and 2014, was $2.9 million, $2.8 million and $6.7 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2016, 2015 and 2014, was $0.8 million, $2.1 million and $5.7 million, respectively.

Stock option aggregate intrinsic value information for the years ended December 31, 2016, 2015 and 2014 follows:


	2016		2015		2014
	(in thousands)
Exercised	$	3,729	$	7,255	$	17,847
Outstanding		12,468		11,729		17,936
Vested and expected to vest		12,468		11,729		17,936
Exercisable		10,217		10,716		16,101

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2016, 2015 and 2014 follows:


	2016		2015		2014
Outstanding		3.9		4.2		4.5
Vested and expected to vest		3.9		4.2		4.5
Exercisable		3.2		3.9		4.2

Significant option groups outstanding at December 31, 2016 and related weighted average price and remaining contractual life information follow:


	Options Outstanding						Options Exercisable
Range Of Exercise Prices	Weighted- Average Remaining Contractual Life (Years)		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
	(shares in thousands)
$1.48 – $2.67		3.74		294	$	2.31		294	$	2.31
$3.23 – $7.71		1.77		75		4.26		75		4.26
$16.23 – $18.10		3.51		338		17.18		185		16.87
$19.16 – $19.43		5.26		219		19.32		44		19.16

				926		11.93		598		8.32

As of December 31, 2016, total unrecognized expense related to non-vested restricted stock unit awards and stock options was $40.6 million, and is expected to be recognized over a weighted average period of 2.3 years.

Effective January 31, 2014, Michael Bradley retired as Chief Executive Officer of Teradyne. On January 22, 2014, Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Bradley. Under the Retirement Agreement, Mr. Bradley’s unvested restricted stock units and stock options granted prior to his retirement date will continue to vest in accordance with their terms through January 31, 2017; and any vested options or options that vest during that period may be exercised for the remainder of the applicable option term. In the Retirement Agreement, Mr. Bradley agreed to be bound by non-competition and non-solicitation restrictions through January 31, 2017. In January 2014, Teradyne recorded a one-time charge to stock-based compensation expense of $6.6 million related to the Retirement Agreement.

Employee Stock Purchase Plan

Under the Teradyne 1996 Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of common stock through regular payroll deductions of up to 10% of their compensation, to a maximum of shares with a fair market value of $25,000 per calendar year, not to exceed 6,000 shares. Under the plan, the price paid for the common stock is equal to 85% of the stock price on the last business day of the six-month purchase period.

In July 2016, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2016, at the price of $16.74 per share. In January 2017, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2016, at the price of $21.59 per share.

In July 2015, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2015, at the price of $16.40 per share. In January 2016, Teradyne issued 0.5 million shares of common stock to employees who participated in the plan during the second half of 2015, at the price of $17.57 per share.

In July 2014, 0.5 million shares of common stock were issued to employees who participated in the plan during the first half of 2014, at the price of $16.66 per share. In January 2015, Teradyne issued 0.5 million shares of common stock to employees who participated in the plan during the second half of 2014, at the price of $16.82 per share.

As of December 31, 2016, there were 3.9 million shares available for grant under the ESPP.

The effect to income from operations for recording stock-based compensation for the years ended December 31 was as follows:


	2016			2015			2014
	(in thousands)
Cost of revenues	$	3,153		$	3,065		$	3,675
Engineering and development		9,458			9,362			10,146
Selling and administrative		18,139			18,024			26,486

Stock-based compensation		30,750			30,451			40,307
Income tax benefit		(8,752	)		(8,528	)		(11,537	)

Total stock-based compensation expense after income taxes	$	21,998		$	21,923		$	28,770