Financial Instruments And Derivatives

6 Months Ended

Jul. 03, 2011

Financial Instruments And Derivatives

Financial Instruments And Derivatives

E. Financial Instruments and Derivatives

Financial Instruments

Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the six months ended July 3, 2011 and July 4, 2010. As defined in ASC 820-10, "Fair Value Measurements and Disclosures", fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities are carried at fair value and are classified in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date.

Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities' relationship to other benchmark quoted prices.

Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne's own data.

For the right to sell the auction rate securities, held by Teradyne, back to UBS ("UBS Put"), Teradyne elected fair value treatment under ASC 825-10, "Financial Instruments." The UBS Put was the only instrument of this nature or type that Teradyne held and for which Teradyne has elected the fair value option under ASC 825-10. The UBS Put was exercised in June 2010.

During the six months ended July 3, 2011 and July 4, 2010, there were no significant transfers in and out of Level 1 and Level 2.

The following table sets forth by fair value hierarchy Teradyne's financial assets and liabilities that were measured at fair value on a recurring basis as of July 3, 2011 and December 31, 2010.

	July 3, 2011
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets
Available for sale securities:
Money market funds	$	288,944	$	—	$	—	$	288,944
U.S. government agency securities		—		240,102		—		240,102
Commercial paper		—		235,540		—		235,540
U.S. Treasury securities		138,455		—		—		138,455
Corporate debt securities		—		129,084		—		129,084
Equity and debt mutual funds		8,754		—		—		8,754
Certificates of deposit and time deposits		—		8,381		—		8,381
Non-U.S. government securities		298		—		—		298
Total		436,451		613,107		—		1,049,558
Derivatives		—		135		—		135
Total	$	436,451	$	613,242	$	—	$	1,049,693

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	288,944	$	24,694	$	—	$	313,638
Marketable securities		64,529		389,413		—		453,942
Long-term marketable securities		82,978		199,000		—		281,978
Prepayments and other current assets		—		135		—		135
	$	436,451	$	613,242	$	—	$	1,049,693

	December 31, 2010
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets
Available for sale securities:
U.S. government agency securities	$	—	$	341,510	$	—	$	341,510
Money market funds		238,607		—		—		238,607
U.S. Treasury securities		138,707		—		—		138,707
Commercial paper		—		103,448		—		103,448
Corporate debt securities		—		92,578		—		92,578
Certificates of deposit and time deposits		—		11,076		—		11,076
Equity and debt mutual funds		8,003		—		—		8,003
Non-U.S. government securities		278		—		—		278
Total	$	385,595	$	548,612	$	—	$	934,207
Liabilities
Derivatives	$	—	$	157	$	—	$	157
Total	$	—	$	157	$	—	$	157

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	238,607	$	37,843	$	—	$	276,450
Marketable securities		62,294		346,767		—		409,061
Long-term marketable securities		84,694		164,002		—		248,696
	$	385,595	$	548,612	$	—	$	934,207
Liabilities
Other accrued liabilities	$	—	$	157	$	—	$	157

The following table represents changes in the fair value of Level 3 financial assets:

	For the Three Months Ended
	July 3, 2011				July 4, 2010
	Long-Term Auction Rate Securities		UBS Put		Long-Term Auction Rate Securities			UBS Put
	(in thousands)
Balance at beginning of period	$	—	$	—	$	23,697		$	2,687
Sale of auction rate securities and exercise of UBS Put		—		—		(20,863	)		(2,687	)
Change in unrealized gain included in interest income		—		—		2			—
Balance at end of period	$	—	$	—	$	2,836		$	—
	For the Six Months Ended
	July 3, 2011				July 4, 2010
	Long-Term Auction Rate Securities		UBS Put		Long-Term Auction Rate Securities			UBS Put
	(in thousands)
Balance at beginning of period	$	—	$	—	$	23,649		$	2,830
Sale of auction rate securities and exercise of UBS Put		—		—		(21,013	)		(2,687	)
Change in unrealized gain included in interest income		—		—		200			—
Change in unrealized loss included in interest expense and other		—		—		—			(143	)
Balance at end of period	$	—	$	—	$	2,836		$	—

During the three and six months ended July 3, 2011, Teradyne recorded a net gain of $0.1 million and a net loss $0.1 million, respectively, from sales of marketable securities. During the three and six months ended July 4, 2010, Teradyne recorded a loss of $0.1 million and $0.4 million, respectively, from sales of marketable securities and exercise of UBS Put.

Realized losses from sales of marketable securities, decreases in auction rate securities fair value and other-than-temporary impairment losses are included in interest expense and other. Realized gains from sales of marketable securities and increases in auction rate securities fair value are included in interest income.

The carrying amounts and fair values of financial instruments at July 3, 2011 and December 31, 2010 were as follows:

	July 3, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Marketable securities	$	735,920	$	735,920	$	657,757	$	657,757
Cash equivalents		313,638		313,638		276,450		276,450
Convertible debt(1)		149,873		542,213		144,059		506,350
Japan loan		7,423		7,423		8,573		8,573

(1) The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note which includes the equity conversion feature.

The fair values of cash, accounts receivable, net and accounts payable approximate the carrying amount due to the short term maturities of these instruments.

The following table summarizes available-for-sale marketable securities which are recorded at fair value:

	July 3, 2011
	Available-for-Sale									Fair Market Value of Investments with Unrealized  Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(in thousands)
Money market funds	$	288,944	$	—	$	—		$	288,944	$	—
U.S. government agency securities		239,366		764		(28	)		240,102		30,074
Commercial paper		235,556		17		(33	)		235,540		48,880
U.S. Treasury securities		137,934		533		(12	)		138,455		28,665
Corporate debt securities		128,664		497		(77	)		129,084		37,248
Equity and debt mutual funds		7,518		1,236		—			8,754		—
Certificates of deposit and time deposits		8,365		16		—			8,381		—
Non-U.S. government securities		298		—		—			298		—
	$	1,046,645	$	3,063	$	(150	)	$	1,049,558	$	144,867

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Cash and cash equivalents	$	313,639	$	—	$	(1	)	$	313,638	$	10,946
Marketable securities		453,619		367		(44	)		453,942		61,468
Long-term marketable securities		279,387		2,696		(105	)		281,978		72,453
	$	1,046,645	$	3,063	$	(150	)	$	1,049,558	$	144,867

	December 31, 2010
	Available-for-Sale									Fair Market Value of Investments with Unrealized  Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(in thousands)
U.S. government agency securities	$	341,349	$	334	$	(173	)	$	341,510	$	97,542
Money market funds		238,607		—		—			238,607		—
U.S. Treasury securities		138,354		360		(7	)		138,707		10,030
Commercial paper		103,472		1		(25	)		103,448		33,210
Corporate debt securities		92,464		170		(56	)		92,578		43,434
Certificates of deposit and time deposits		11,068		8		—			11,076		—
Equity and debt mutual funds		7,056		1,378		(431	)		8,003		1,088
Non-U.S. government securities		261		17		—			278		—
	$	932,631	$	2,268	$	(692	)	$	934,207	$	185,304

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Cash and cash equivalents	$	276,447	$	3	$	—		$	276,450	$	—
Marketable securities		408,934		178		(51	)		409,061		103,761
Long-term marketable securities		247,250		2,087		(641	)		248,696		81,543
	$	932,631	$	2,268	$	(692	)	$	934,207	$	185,304

On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

• The length of time and the extent to which the market value has been less than cost;

• The financial condition and near-term prospects of the issuer; and

• The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

As of July 3, 2011, the fair market value of investments with unrealized losses less than one year totaled $144.9 million. There were no unrealized losses greater than one year. As of December 31, 2010, the fair market value of investments with unrealized losses totaled $185.3 million. Of this value, $5.0 million had unrealized losses greater than one year and $180.3 million had unrealized losses less than one year.

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne's foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets. Teradyne does not use derivative financial instruments for trading or speculative purposes.

To minimize the effect of exchange rate fluctuations associated with the remeasurement of net monetary assets and liabilities denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in fair value of the net monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $49.5 million and $48.3 million at July 3, 2011 and December 31, 2010, respectively.

The following table summarizes the fair value of derivative instruments at July 3, 2011 and December 31, 2010.

	Balance Sheet Location	July 3, 2011		December 31, 2010
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments and other current assets	$	135	$	—
Foreign exchange contracts	Other accrued liabilities		—		157
		$	135	$	157

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three and six months ended July 3, 2011 and July 4, 2010. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies.

	Location of Gains (Losses) Recognized in Statement of Operations	For the Three Months Ended						For the Six Months Ended
		July 3, 2011			July 4, 2010			July 3, 2011		July 4, 2010
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Interest expense and other	$	(166	)	$	(574	)	$	660	$	(1,260	)
		$	(166	)	$	(574	)	$	660	$	(1,260	)

See Note F "Debt" regarding derivatives related to convertible senior notes.