Stock-Based Compensation

12 Months Ended

Dec. 31, 2019

Q. STOCK-BASED COMPENSATION

Stock Compensation Plans

On July 17, 2019 (the “Retirement Date”), former Chief Financial Officer Gregory Beecher retired as Vice President and Senior Advisor of Teradyne, and Teradyne entered into an agreement (the “Retirement Agreement”) with Mr. Beecher. Under the Retirement Agreement, Mr. Beecher’s unvested time-based restricted stock units and stock options granted prior to 2019 were modified to allow continued vesting; unvested time-based restricted stock units and stock options granted in 2019 were modified to allow continued vesting through January 31, 2023 (the

“Non-Competition

Period”) in a

pro-rated

amount based on the number of days that Mr. Beecher was employed during 2019; unvested, performance-based restricted stock units awarded in 2019 will vest on the date the amount of shares underlying the performance-based restricted stock units are determined in a

pro-rated

amount of shares based on the number of days that Mr. Beecher was employed during 2019; vested options or options that vest during the

Non-Competition

Period may be exercised for the remainder of the applicable option term. During 2019, Teradyne recorded a stock based compensation expense of $2.1 million related to the Retirement Agreement.

Under Teradyne’s stock compensation plans, Teradyne grants

time-based

restricted stock units

performance-based restricted stock units,

stock

option

and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

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

one-y

ear

eriod,

with

100%

award

vesting

on the earlier of (a) the first anniversary of the grant date or (b) the date of the following year’s Annual Meeting of Shareholders. 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.

erformance

based restricted stock units (“PRSUs”)

granted

Teradyne’

executive officers

may

have

a performance metric based on relative total shareholder return (“TSR”). Teradyne’s three-year TSR performance is 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 capped at four times the grant date value for grants prior to 2019. 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 shorter of the three-year service period or the period from the grant to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of the grant. 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.

PRSUs

granted to

Teradyne’s

executive officers

may also have

a performance metric based on three-year cumulative

non-GAAP

profit before interest and tax (“PBIT”) as a percent of Teradyne’s revenue.

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

shorter of the

three-year service period

or the period from the grant date to the date described in the retirement provisions below. Compensation expense for employees meeting the retirement provisions prior to the grant date will be recognized in full on the date of grant

. 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.

If a PRSU 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.

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.

During 2019, 2018 and 2017, Teradyne granted 0.8 million, 0.6 million and 0.8 million of service-based restricted stock unit awards to employees at a weighted average grant date fair value of $37.65, $45.92 and $28.19, respectively.

During 2019, 2018 and 2017, Teradyne granted 0.1 million of service-based restricted stock unit awards to non-employee directors at a weighted average grant date fair value of $48.03, $35.81 and $34.48, respectively.

During 2019, 2018 and 2017, Teradyne granted

0.1 million TSR PRSUs, with a grant date fair value of $51.51, $54.85 and $35.66 respectively. The fair value was estimated using the Monte Carlo simulation model with the following assumptions:


	2019			2018			2017
Risk-free interest rate		2.6	%		2.2	%		1.5	%
Teradyne volatility-historical		31.9	%		26.8	%		26.6	%
NYSE Composite Index volatility-historical		11.9	%		12.4	%		13.4	%
Dividend yield		1.0	%		0.8	%		1.0	%

Expected volatility was based on the historical volatility of Teradyne’s stock and the NYSE Composite Index for

each of

the 2019, 2018 and 2017 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

each of the grants

. Dividend yield was based upon an estimated annual dividend amount of $0.36 per share for 2019

and

2018 and $0.28 per share for 2017

divided by Teradyne’s stock price on the grant date of $37.95 for the 2019

grants

, $47.70 for the 2018

grants

and $28.56 for 2017

grants

During 2019, 2018 and 2017, Teradyne granted 0.1 million

PBIT PRSUs with a grant date fair value of $36.88, $46.62 and $27.72, respectively.

During

2019

2018

and

2017

Teradyne

granted

0.1

million of service-based stock options to executive officers at a weighted average grant date fair value of $

10.64

12.17

and $

7.13

, respectively.

The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2019			2018			2017
Expected life (years)		5.0			5.0			5.0
Risk-free interest rate		2.5	%		2.4	%		2.0	%
Volatility-historical		30.1	%		26.4	%		27.8	%
Dividend yield		1.00	%		0.80	%		1.00	%

Teradyne determined the stock

options’

expected life based upon historical exercise data for executive officers, the age of

the executive officers

and the terms of the stock option

grant

. Volatility was determined using historical volatility for a period equal to the expected life. The

risk-free

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 $0.36 per share divided by Teradyne’s stock price on the grant date of $37.95 for the 2019 grants, $47.70 for the 2018 grants and $28.56 for the 2017 grants.

Stock compensation plan activity for the years 2019, 2018, and 2017, is as follows:


	2019			2018			2017
	(in thousands)
Restricted Stock Units:
Non-vested at January 1		2,454			3,174			3,778
Awarded		1,139			790			939
Vested		(1,237	)		(1,382	)		(1,434	)
Forfeited		(87	)		(128	)		(109	)

Non-vested at December 31		2,269			2,454			3,174

Stock Options:
Outstanding at January 1		506			531			926
Granted		102			69			111
Exercised		(280	)		(94	)		(501	)
Forfeited		(7	)		—			—
Expired		(2	)		—			(5	)

Outstanding at December 31		319			506			531

Vested and expected to vest at December 31		319			506			531

Exercisable at December 31		85			256			233

Total shares available for the years 2019, 2018, and 2017:


	2019			2018			2017
	(in thousands)
Shares available:
Available for grant at January 1		7,874			8,605			9,546
Options granted		(102	)		(69	)		(111	)
Options forfeited		7			—			—
Restricted stock units awarded		(1,139	)		(790	)		(939	)
Restricted stock units forfeited		87			128			109

Available for grant at December 31		6,727			7,874			8,605

Weighted average restricted stock unit award date fair value information for the years 2019, 2018, and 2017

is as follows:


	2019		2018		2017
Non-vested at January 1	$	29.22	$	21.71	$	18.27
Awarded		39.08		45.99		28.91
Vested		23.59		20.20		17.90
Forfeited		35.60		24.67		20.35
Non-vested at December 31	$	35.58	$	29.22	$	21.71

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2019, 2018

and 2017 is as follows:


	2019		2018		2017
	(in thousands)
Vested	$	46,110	$	63,688	$	40,649
Outstanding		154,752		77,015		132,875
Expected to vest		152,374		77,187		130,594

Restricted stock units weighted average remaining contractual terms (in years) information at December 31 for the years 2019, 2018,

and

2017 is as follows:


	2019		2018		2017
Outstanding		1.02		0.92		1.00
Expected to vest		1.02		0.91		0.99

Weighted average stock options exercise price information for the year ended December 31, 2019 is as follows:


	2019
Outstanding at January 1	$	19.06
Options granted		37.95
Options exercised		13.20
Options forfeited		36.75
Options cancelled		1.48
Outstanding at December 31		29.91
Exercisable at December 31		14.97

The total cash received from employees as a result of employee stock options exercises during the years ended December 31, 2019, 2018, and 2017, was $3.7 million, $1.0 million and $6.8 million, respectively. In connection with these exercises, the tax benefit realized by Teradyne for the years ended December 31, 2019, 2018, and 2017, was $2.0 million, $0.4 million, and $2.5 million, respectively.

Stock option aggregate intrinsic value information for the years ended December 31, 2019, 2018, and 2017 is as follows:


	2019		2018		2017
	(in thousands)
Exercised	$	9,232	$	2,960	$	8,035
Outstanding		12,218		7,359		14,831
Vested and expected to vest		7,701		7,359		14,831
Exercisable		4,517		5,905		9,076

Stock options weighted average remaining contractual terms (in years) information at December 31, for the years 2019, 2018, and 2017 is as follows:


	2019		2018		2017
Outstanding		4.2		3.6		4.1
Vested and expected to vest		5.0		3.6		4.1
Exercisable		2.1		2.4		2.8

As of December 31, 2019, total unrecognized expense related to

non-vested

restricted stock unit awards and stock options was $45 million, and is expected to be recognized over a weighted average period of 1.8 years.

Employee Stock Purchase Plan

Under the 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 2019, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2019 at the price of $40.72 per share. In January 2020, Teradyne issued 0.2 million shares of common stock to employees who participated in the plan during the second half of 2019 at the price of $57.96 per share.

In July 2018, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2018 at the price of $32.36 per share. In January 2019, Teradyne issued 0.4 million shares of common stock to employees who participated in the plan during the second half of 2018 at the price of $26.67 per share.

In July 2017, 0.3 million shares of common stock were issued to employees who participated in the plan during the first half of 2017 at the price of $25.53 per share. In January 2018, Teradyne issued 0.3 million shares of common stock to employees who participated in the plan during the second half of 2017 at the price of $35.59 per share.

As of December 31, 2019, there were 1.8 million shares available for grant under the ESPP.

The following table provides the effect to income from operations for recording stock-based compensation for the years ended December 31, 2019, 2018, and 2017:


	2019			2018			2017
	(in thousands)
Cost of revenues	$	3,480		$	3,129		$	3,212
Engineering and development		9,913			9,181			9,370
Selling and administrative		24,504			21,267			21,515

Stock-based compensation		37,897			33,577			34,097
Income tax benefit		(8,360	)		(12,036	)		(10,462	)

Total stock-based compensation expense after income taxes	$	29,537		$	21,541		$	23,635