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Retirement Plans
12 Months Ended
Dec. 31, 2017
Defined Benefit Pension Plans  
Retirement Plans

N.    RETIREMENT PLANS

ASC 715Compensation—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:

 

     2017     2016  
     United States     Foreign     United States     Foreign  
     (in thousands)  

Assets and Obligations

        

Change in benefit obligation:

        

Projected benefit obligation:

        

Beginning of year

   $ 353,616     $ 60,738     $ 351,117     $ 62,290  

Service cost

     2,239       818       2,302       761  

Interest cost

     13,151       852       13,630       1,185  

Actuarial loss

     12,702       262       6,053       5,621  

Benefits paid

     (18,682     (994     (19,486     (1,385

Settlements

     —         (28,560     —         —    

Expenses paid

     —         (40     —         (609

Non-U.S. currency movement

     —         6,277       —         (7,125
  

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     363,026       39,353       353,616       60,738  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

        

Fair value of plan assets:

        

Beginning of year

     307,304       27,571       298,404       28,141  

Company contributions

     4,462       883       4,489       867  

Actual return on plan assets

     31,422       737       23,897       5,142  

Benefits paid

     (18,682     (994     (19,486     (1,148

Settlements

     —         (28,560     —         —    

Expenses paid

     —         (40     —         (609

Non-U.S. currency movement

     —         1,710       —         (4,822
  

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     324,506       1,307       307,304       27,571  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status

   $ (38,520   $ (38,046   $ (46,312   $ (33,167
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     2017     2016  
     United States     Foreign     United States     Foreign  
     (in thousands)  

Retirement plans assets

   $ 17,491     $ —       $ 7,712     $ —    

Accrued employees’ compensation and withholdings

     (2,524     (863     (2,591     (772

Retirement plans liabilities

     (53,487     (37,183     (51,433     (32,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status

   $ (38,520   $ (38,046   $ (46,312   $ (33,167
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     2017      2016  
     United States      Foreign      United States      Foreign  
     (in thousands)  

Prior service cost, before tax

   $ 58      $ —        $ 127      $ —    

Deferred taxes

     539        —          514        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total recognized in other comprehensive income, net of tax

   $ 597      $ —        $ 641      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 2018 is $0.1 million.

The accumulated benefit obligation for the United States defined benefit pension plans was $354.3 million and $342.9 million at December 31, 2017 and 2016, respectively. The accumulated benefit obligation for foreign defined benefit pension plans was $34.7 million and $56.6 million at December 31, 2017 and 2016, respectively.

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

 

     2017      2016  
     United States      Foreign      United States      Foreign  
     (in millions)  

Projected benefit obligation

   $ 56.0      $ 39.4      $ 54.0      $ 34.3  

Accumulated benefit obligation

     51.6        34.7        48.0        30.1  

Fair value of plan assets

     —          1.3        —          1.1  

Expense

For the years ended December 31, 2017, 2016, and 2015, Teradyne’s net periodic pension (income) cost was comprised of the following:

 

    2017     2016     2015  
    United
States
    Foreign     United
States
    Foreign     United
States
    Foreign  
    (in thousands)  

Components of Net Periodic Pension (Income) Cost:

     

Service cost

  $ 2,239     $ 818     $ 2,302     $ 761     $ 2,462     $ 1,006  

Interest cost

    13,151       852       13,630       1,185       13,142       1,444  

Expected return on plan assets

    (12,008     (165     (13,830     (443     (14,517     (781

Amortization of prior service cost

    70       —         96       —         134       —    

Net actuarial (gain) loss

    (6,712     (310     (4,013     815       10,596       8,415  

Curtailment

    —         —         —         —         —         (634
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic pension (income) cost

  $ (3,260   $ 1,195     $ (1,815   $ 2,318     $ 11,817     $ 9,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:

           

Reversal of amortization items:

           

Prior service cost

    (70     —         (96     —         (134     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in other comprehensive income

    (70     —         (96     —         (134     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in net periodic pension (income) cost and other comprehensive income

  $ (3,330   $ 1,195     $ (1,911   $ 2,318     $ 11,683     $ 9,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     2017     2016     2015  
     United States     Foreign     United States     Foreign     United States     Foreign  

Discount rate

     3.9     1.8     4.0     2.3     3.7     2.6

Expected return on plan assets

     4.0       2.0       4.8       2.0       4.8       2.6  

Salary progression rate

     2.6       2.7       2.7       3.2       2.9       3.2  

 

Weighted Average Assumptions to Determine Pension Obligations at December 31:

 

     2017     2016  
     United States     Foreign     United States     Foreign  

Discount rate

     3.4     1.8     3.9     1.8

Salary progression rate

     2.3       2.7       2.6       2.7  

In developing the expected return on plan assets assumption, Teradyne evaluates input from its investment manager and pension consultants, including their forecast of asset class return expectations. Teradyne believes that 4.0% was an appropriate rate to use for fiscal 2017 for the U.S. Qualified Pension Plan (“U.S. Plan”).

Teradyne recognizes 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. Teradyne calculates the expected return on plan assets using the fair value of the plan assets. Actuarial gains and losses are generally measured annually as of December 31 and, accordingly, recorded during the fourth quarter of each year or upon any interim remeasurement of the plans.

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 3.4% at December 31, 2017, down from 3.9% at December 31, 2016.

Plan Assets

As of December 31, 2017, the fair value of Teradyne’s pension plans’ assets totaled $325.8 million of which $324.5 million was related to the U.S. Plan and $1.3 million was related to the Taiwan defined benefit pension plan. Substantially all of Teradyne’s pension plans’ assets are held in individual trusts, which were established for the investment of assets of Teradyne’s sponsored retirement plans.

The following table provides weighted average pension asset allocation by asset category at December 31, 2017 and 2016:

 

     2017     2016  
     United States     Foreign     United States     Foreign  

Fixed income securities

     88.1     —       88.1     —  

Equity securities

     9.9       —         9.9       —    

Other

     2.0       100.0       2.0       100.0  
  

 

 

   

 

 

   

 

 

   

 

 

 
     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 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:

 

Asset Category:

  

Policy Index:

  Target
Allocation
 
U.S. corporate fixed income    Bloomberg Barclays U.S. Corporate A or Better Index     76
Global equity    MSCI World Minimum Volatility Index     10  
U.S. government fixed income    Bloomberg Barclays U.S. Long Government Bond Index     8  
High yield fixed income    Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Cap Index     5  
Cash    Citigroup Three Month U.S. Treasury Bill Index     1  

Teradyne’s U.S. Plan invests primarily in common trust funds. Units held in the common trust funds are valued at the unit price as reported by the investment manager 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.

In the fourth quarter of 2015, the Trustees of the U.K. defined benefit pension plan purchased group annuity insurance contracts. In 2017, the U.K. defined benefit pension was terminated and the obligations and assets of the plan were transferred to an insurance company.

During the years ended December 31, 2017 and 2016, 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, 2017 and December 31, 2016 were as follows:

 

    December 31, 2017  
    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

  $ —       $ 260,294     $ —       $ 260,294     $ —       $ —       $ —       $ —    

U.S. government debt securities

    —         25,709       —         25,709       —         —         —         —    

Global equity

    —         32,120       —         32,120       —         —         —         —    

Group annuity insurance contracts

    —         —         3,166       3,166       —         —         —         —    

Other

    —         —         —         —         —         1,307       —         1,307  

Cash and cash equivalents

    3,217       —         —         3,217       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,217     $ 318,123     $ 3,166     $ 324,506     $ —       $ 1,307     $ —       $ 1,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The pension plan assets identified as Level 3 above are related to group annuity insurance contracts held by the U.S. Plan. The fair value of these assets was calculated using the present value of future pension payments due under the group annuity insurance contracts.

 

    December 31, 2016  
    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

  $ —       $ 246,528     $ —       $ 246,528     $ —       $ —       $ —       $ —    

U.S. government debt securities

    —         24,322       —         24,322       —         —         —         —    

Global equity

    —         30,360       —         30,360       —         —         —         —    

Group annuity insurance contracts

    —         —         3,071       3,071       —         —         26,385       26,385  

Other

    —         —         —         —         —         1,124       —         1,124  

Cash and cash equivalents

    3,023       —         —         3,023       62       —         —         62  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,023     $ 301,210     $ 3,071     $ 307,304     $ 62     $ 1,124     $ 26,385     $ 27,571  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The pension plan assets identified as Level 3 above are related to group annuity insurance contracts held by the U.K. defined benefit pension plan and the U.S. Plan.

Changes in the fair value of Level 3 group annuity insurance contracts for the years ended December 31, 2017 and 2016 were as follows:

 

     Group Annuity Insurance Contracts  
     (in thousands)  

Balance at December 31, 2015

   $ 29,392  

Purchases of group annuity insurance contracts

     709  

Interest and market value adjustments

     5,308  

Benefits paid

     (611

Other

     (634

Non-U.S. currency movement

     (4,708
  

 

 

 

Balance at December 31, 2016

     29,456  

Settlements

     (28,560

Interest and market value adjustments

     959  

Benefits paid

     (244

Other

     (61

Non-U.S. currency movement

     1,616  
  

 

 

 

Balance at December 31, 2017

   $ 3,166  
  

 

 

 

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 2017, Teradyne contributed $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. During 2016, Teradyne contributed $1.9 million to the U.S. Plan, $2.6 million to the U.S. supplemental executive defined benefit pension plan and $0.9 million to certain qualified plans for non-U.S. subsidiaries. In 2018, contributions to the U.S. supplemental executive defined benefit pension plan, U.S. Plan and certain qualified plans from non-U.S. subsidiaries will be approximately $2.5 million, $1.9 million and $0.9 million, respectively.

 

Expected Future Pension Benefit Payments

Future benefit payments are expected to be paid as follows:

 

     United States      Foreign  
     (in thousands)  

2018

   $ 19,387      $ 886  

2019

     19,022        887  

2020

     19,688        1,253  

2021

     20,246        1,002  

2022

     20,994        952  

2023-2027

     110,214        6,294  

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 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:

 

     2017     2016  
     (in thousands)  

Assets and Obligations

    

Change in benefit obligation:

    

Projected benefit obligation:

    

Beginning of year

   $ 5,510     $ 6,030  

Service cost

     34       37  

Interest cost

     201       218  

Actuarial loss

     398       5  

Special termination benefits

     591       —    

Benefits paid

     (557     (687

Plan amendments

     —         (93
  

 

 

   

 

 

 

End of year

     6,177       5,510  
  

 

 

   

 

 

 

Change in plan assets:

    

Fair value of plan assets:

    

Beginning of year

     —         —    

Company contributions

     557       687  

Benefits paid

     (557     (687
  

 

 

   

 

 

 

End of year

     —         —    
  

 

 

   

 

 

 

Funded status

   $ (6,177   $ (5,510
  

 

 

   

 

 

 

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

 

     2017     2016  
     (in thousands)  

Accrued employees’ compensation and withholdings

   $ (591   $ (571

Retirement plans liability

     (5,586     (4,939
  

 

 

   

 

 

 

Funded status

   $ (6,177   $ (5,510
  

 

 

   

 

 

 

 

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

 

     2017     2016  
     (in thousands)  

Prior service credit, before tax

   $ (622   $ (1,118

Deferred taxes

     (1,472     (1,292
  

 

 

   

 

 

 

Total recognized in other comprehensive income, net of tax

   $ (2,094   $ (2,410
  

 

 

   

 

 

 

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 in 2018 is $(0.1) million.

Expense

For the years ended December 31, 2017, 2016, and 2015, Teradyne’s net periodic postretirement benefit cost (income) was comprised of the following:

 

     2017     2016     2015  
     (in thousands)  

Components of Net Periodic Postretirement Benefit Cost (income):

      

Service cost

   $ 34     $ 37     $ 48  

Interest cost

     201       218       237  

Amortization of prior service credit

     (496     (607     (598

Net actuarial loss (gain)

     398       5       (648

Special termination benefits

     591       —         —    
  

 

 

   

 

 

   

 

 

 

Total net periodic postretirement benefit cost (income)

     728       (347     (961
  

 

 

   

 

 

   

 

 

 

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:

      

Prior service cost

     —         (93     —    

Reversal of amortization items:

      

Prior service credit

     496       607       598  
  

 

 

   

 

 

   

 

 

 

Total recognized in other comprehensive income

     496       514       598  
  

 

 

   

 

 

   

 

 

 

Total recognized in net periodic postretirement cost (income) and other comprehensive income

   $ 1,224     $ 167     $ (363
  

 

 

   

 

 

   

 

 

 

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

 

     2017     2016     2015  

Discount rate

     3.9     3.9     3.5

Initial health care cost trend rate

     7.3       7.5       7.5  

Ultimate health care cost trend rate

     5.0       5.0       5.0  

Year in which ultimate health care cost trend rate is reached

     2023       2023       2022  

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

 

     2017     2016     2015  

Discount rate

     3.4     3.9     3.9

Initial medical trend

     7.9       7.3       7.5  

Ultimate health care trend

     4.5       5.0       5.0  

Medical cost trend rate decrease to ultimate rate in year

     2026       2023       2023  

 

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, 2017 would have the following effects:

 

     1 Percentage
Point
Increase
     1 Percentage
Point
Decrease
 
     (in thousands)  

Effect on total service and interest cost components

   $ 3      $ (3

Effect on postretirement benefit obligations

     64        (60

Expected Future Benefit Payments

Future benefit payments are expected to be paid as follows:

 

     Benefit Payments  
     (in thousands)  

2018

   $ 591  

2019

     597  

2020

     535  

2021

     502  

2022

     439  

2023-2027

     1,665