F. 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 three months ended April 1, 2012 and April 3, 2011. 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.

During the three months ended April 1, 2012 and April 3, 2011, there were no significant transfers in and out of Level 1, Level 2 and Level 3.

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 April 1, 2012 and December 31, 2011.


	April 1, 2012
	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	$	350,544	$	—	$	—	$	350,544
U.S government agency securities		—		91,293		—		91,293
Corporate debt securities		—		46,069		—		46,069
Commercial paper		—		33,539		—		33,539
U.S Treasury securities		23,600		—		—		23,600
Certificates of deposit and time deposits		—		16,183		—		16,183
Equity and debt mutual funds		9,167		—		—		9,167
Non-U.S. government securities		282		—		—		282

Total		383,593		187,084		—		570,677
Derivatives		—		146		—		146

Total	$	383,593	$	187,230	$	—	$	570,823

Liabilities
Contingent consideration	$	—	$	—	$	61,210	$	61,210

Total	$	—	$	—	$	61,210	$	61,210

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	350,544	$	11,398	$	—	$	361,942
Marketable securities		4,011		83,212		—		87,223
Long-term marketable securities		29,038		92,474		—		121,512
Prepayments and other current assets		—		146		—		146

	$	383,593	$	187,230	$	—	$	570,823

Liabilities
Contingent consideration	$	—	$	—	$	61,210	$	61,210

	$	—	$	—	$	61,210	$	61,210


	December 31, 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	$	396,329	$	—	$	—	$	396,329
U.S government agency securities		—		83,197		—		83,197
Corporate debt securities		—		44,829		—		44,829
Commercial paper		—		29,924		—		29,924
Certificates of deposit and time deposits		—		16,432		—		16,432
U.S Treasury securities		14,180		—		—		14,180
Equity and debt mutual funds		8,237		—		—		8,237
Non-U.S. government securities		274		—		—		274

Total	$	419,020	$	174,382	$	—	$	593,402

Liabilities
Derivatives	$	—	$	314	$	—	$	314
Contingent consideration		—		—		68,892		68,892

Total	$	—	$	314	$	68,892	$	69,206

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	396,329	$	16,164	$	—	$	412,493
Marketable securities		9,044		87,458		—		96,502
Long-term marketable securities		13,647		70,760		—		84,407

	$	419,020	$	174,382	$	—	$	593,402

Liabilities
Other accrued liabilities	$	—	$	314	$	—	$	314
Contingent consideration		—		—		68,892		68,892

	$	—	$	314	$	68,892	$	69,206

Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes for the contingent consideration. Teradyne assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of operations.

The following table provides quantitative information associated with the fair value measurement of the Teradyne's Level 3 inputs:


Liability	Fair Value (Thousands)		Valuation Technique	Unobservable Inputs	Weighted Average
Contingent consideration	$	61,210	Income approach— discounted cash flow	Revenue earn-out—probability of low case (scenario) for calendar year 2012 revenue.		70	%
			Income approach— discounted cash flow	Revenue earn-out—probability of high case (scenario) for calendar year 2012 revenue.		30	%
				Discount rate for revenue earn-out		3.5	%
				Discount rate for cellular earn-out		3.5	%

The significant unobservable inputs used in the fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2012 revenues, the quarterly period in which the revenues are expected to be achieved and a discount rate. Increases or decreases in any of the probabilities of success would result in a higher or lower fair value measurement. Increases or decreases in the period in which milestones will be achieved would result in a lower or higher fair value measurement, respectively.

The following table represents changes in the fair value of Level 3 contingent consideration:


	Contingent consideration
	(in thousands)
Balance at December 31, 2011	$	68,892
Fair value adjustment		(1,858	)
Payment		(5,824	)

Balance at April 1, 2012	$	61,210

During the three months ended April 1, 2012, Teradyne recorded a net gain of $0.3 million from sales of marketable securities. During the three months ended April 3, 2011, Teradyne recorded a net loss of $0.2 million from sales of marketable securities.

Realized losses from sales of marketable securities are included in interest expense and other. Realized gains from sales of marketable securities are included in interest income.

The carrying amounts and fair values of financial instruments at April 1, 2012 and December 31, 2011 were as follows:


	April 1, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Cash equivalents	$	361,942	$	361,942	$	412,493	$	412,493
Marketable securities		208,735		208,735		180,909		180,909
Convertible debt(1)		159,373		595,175		156,098		485,925
Japan loan		4,861		4,861		6,431		6,431

(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 and cash equivalents, accounts receivable, net and accounts payable approximate the carrying amount due to the short-term maturities of these instruments.

At April 1, 2012 and December 31, 2011, these investments were reported as follows:


	April 1, 2012
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Money market funds	$	350,544	$	—	$	—		$	350,544	$	—
U.S. government agency securities		91,178		163		(48	)		91,293		26,014
Corporate debt securities		44,602		1,514		(47	)		46,069		13,295
Commercial paper		33,542		6		(9	)		33,539		9,482
U.S. Treasury securities		23,568		50		(18	)		23,600		6,968
Certificates of deposit and time deposits		16,186		—		(3	)		16,183		5,810
Equity and debt mutual funds		8,230		939		(2	)		9,167		135
Non-U.S. government securities		265		17		—			282		—

	$	568,115	$	2,689	$	(127	)	$	570,677	$	61,704

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	$	361,942	$	—	$	—		$	361,942	$	—
Marketable securities		87,222		19		(18	)		87,223		28,698
Long-term marketable securities		118,951		2,670		(109	)		121,512		33,006

	$	568,115	$	2,689	$	(127	)	$	570,677	$	61,704


	December 31, 2011
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Money market funds	$	396,329	$	—	$	—		$	396,329	$	—
U.S. government agency securities		83,070		152		(25	)		83,197		28,510
Corporate debt securities		43,077		1,893		(141	)		44,829		17,033
Commercial paper		29,932		2		(10	)		29,924		9,479
Certificates of deposit and time deposits		16,437		—		(5	)		16,432		5,800
U.S. Treasury securities		14,141		39		—			14,180		—
Equity and debt mutual funds		7,876		477		(116	)		8,237		3,749
Non-U.S. government securities		256		18		—			274		—

	$	591,118	$	2,581	$	(297	)	$	593,402	$	64,571

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	$	412,493	$	—	$	—		$	412,493	$	—
Marketable securities		96,518		24		(40	)		96,502		35,595
Long-term marketable securities		82,107		2,557		(257	)		84,407		28,976

	$	591,118	$	2,581	$	(297	)	$	593,402	$	64,571

As of April 1, 2012, the fair market value of investments with unrealized losses totaled $61.7 million. Of this value, $1.1 million had unrealized losses greater than one year and $60.6 million had unrealized losses less than one year. As of December 31, 2011, the fair market value of investments with unrealized losses totaled $64.6 million. Of this value, $2.4 million had unrealized losses greater than one year and $62.2 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 currency 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 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 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 $71.4 million and $85.4 million at April 1, 2012 and December 31, 2011, respectively.

The following table summarizes the fair value of derivative instruments at April 1, 2012 and December 31, 2011.


	Balance Sheet Location	April 1, 2012		December 31, 2011
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments and other current assets	$	146	$	—
Foreign exchange contracts	Other accrued liabilities		—		314

		$	146	$	314

The following table summarizes the effect of derivative instruments in the statement of operations recognized during the three months ended April 1, 2012 and April 3, 2011. 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 Recognized in Statement of Operations	For the Three Months Ended
	Location of Gains Recognized in Statement of Operations	April 1, 2012		April 3, 2011
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Interest expense and other, net	$	2,880	$	827

		$	2,880	$	827

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