H. FINANCIAL INSTRUMENTS

Cash Equivalents

Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.

Marketable Securities

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, “Investments—Debt and Equity Securities.” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. 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.

Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the years ended December 31, 2012, 2011 and 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 carried at fair value be classified and disclosed 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, and therefore is considered a Level 2 input.

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.

Most of Teradyne’s fixed income securities are classified as Level 2, with the exception of U.S. Treasury securities and investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which is classified as Level 3. The majority of Level 2 securities are priced by third party pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available, use other observable inputs like market transactions involving identical or comparable securities.

There were no realized losses recorded in 2012, 2011 and 2010. Realized gains recorded in 2012, 2011 and 2010 were $1.4 million, $2.7 million and $3.2 million, respectively. Realized gains are included in interest income. Unrealized gains and losses are included in accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method.

During the years ended December 31, 2012 and 2011, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments.

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 December 31, 2012 and 2011.


	December 31, 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
Cash	$	139,354	$	—	$	—	$	139,354
Cash equivalents		183,039		16,527		—		199,566
Available for sale securities:
U.S. Treasury securities		312,116		—		—		312,116
U.S. government agency securities		—		217,655		—		217,655
Commercial paper		—		70,434		—		70,434
Corporate debt securities		—		55,755		—		55,755
Equity and debt mutual funds		9,717		—		—		9,717
Certificates of deposit and time deposits		—		1,627		—		1,627
Non-U.S. government securities		—		84		—		84

Total		644,226		362,082		—		1,006,308
Derivatives		—		121		—		121

Total	$	644,226	$	362,203	$	—	$	1,006,429

Liabilities
Contingent consideration	$	—	$	—	$	388	$	388

Total	$	—	$	—	$	388	$	388

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	322,393	$	16,527	$	—	$	338,920
Marketable securities		239,192		192,324		—		431,516
Long-term marketable securities		82,641		153,231		—		235,872
Prepayments and other current assets		—		121		—		121

	$	644,226	$	362,203	$	—	$	1,006,429

Liabilities
Contingent consideration	$	—	$	—	$	388	$	388

	$	—	$	—	$	388	$	388


	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
Cash	$	161,243	$	—	$	—	$	161,243
Cash equivalents		396,329		16,164		—		412,493
Available for sale securities:
U.S. government agency securities		—		83,197		—		83,197
Corporate debt securities		—		44,829		—		44,829
Commercial paper		—		22,075		—		22,075
U.S. Treasury securities		14,180		—		—		14,180
Equity and debt mutual funds		8,237		—		—		8,237
Certificates of deposit and time deposits		—		8,117		—		8,117
Non-U.S. government securities		—		274		—		274

Total	$	579,989	$	174,656	$	—	$	754,645

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	$	557,572	$	16,164	$	—	$	573,736
Marketable securities		9,044		87,458		—		96,502
Long-term marketable securities		13,373		71,034		—		84,407

	$	579,989	$	174,656	$	—	$	754,645

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

		—	$	314	$	68,892	$	69,206

Changes in the fair value of Level 3 contingent consideration for the year ended December 31, 2012 and December 31, 2011 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2010	$	—
Acquisition of LitePoint		68,892

Balance at December 31, 2011		68,892
Fair value adjustment		(8,794	)
Payments		(59,710	)

Balance at December 31, 2012	$	388

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


	December 31, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Cash and cash equivalents	$	338,920	$	338,920	$	573,736	$	573,736
Marketable securities		667,388		667,388		180,909		180,909
Convertible debt (1)		169,896		589,000		156,098		485,925
Japan loan		3,491		3,491		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.

The following tables summarize the composition of available for sale marketable securities at December 31, 2012 and 2011:


	December 31, 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)
U.S. Treasury securities	$	311,915	$	216	$	(15	)	$	312,116	$	1,018
U.S. government agency securities		217,396		262		(3	)		217,655		9,018
Commercial paper		70,431		9		(6	)		70,434		25,209
Corporate debt securities		53,405		2,414		(64	)		55,755		23,255
Equity and debt mutual funds		8,767		961		(11	)		9,717		600
Certificates of deposit and time deposits		1,627		—		—			1,627		—
Non-U.S. government securities		84		—		—			84		—

	$	663,625	$	3,862	$	(99	)	$	667,388	$	59,100

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	431,324	$	203	$	(11	)	$	431,516	$	41,110
Long-term marketable securities		232,301		3,659		(88	)		235,872		17,990

	$	663,625	$	3,862	$	(99	)	$	667,388	$	59,100


	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)
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		22,083		2		(10	)		22,075		9,479
U.S. Treasury securities		14,141		39		—			14,180		—
Equity and debt mutual funds		7,876		477		(116	)		8,237		3,749
Certificates of deposit and time deposits		8,122		—		(5	)		8,117		5,800
Non-U.S. government securities		256		18		—			274		—

	$	178,625	$	2,581	$	(297	)	$	180,909	$	64,571

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	96,518	$	24	$	(40	)	$	96,502	$	35,595
Long-term marketable securities		82,107		2,557		(257	)		84,407		28,976

	$	178,625	$	2,581	$	(297	)	$	180,909	$	64,571

As of December 31, 2012, the fair market value of investments with unrealized losses totaled $59.1 million. There were no unrealized losses greater 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 for greater than one year and $62.2 million had unrealized losses for less than one year. Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Based on this review, Teradyne determined that the unrealized losses related to these investments, at December 31, 2012 and 2011, were temporary.

The contractual maturities of investments held at December 31, 2012 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	431,324	$	431,516
Due after 1 year through 5 years		208,754		209,902
Due after 5 years through 10 years		7,493		7,773
Due after 10 years		16,054		18,197

Total	$	663,625	$	667,388

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 net monetary assets 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 value of the net monetary assets denominated in foreign currencies.

At December 31, 2012 and 2011, Teradyne had the following contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:


	December 31, 2012								December 31, 2011
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	—		$	36.3	$	36.3		$	—		$	50.8	$	50.8
Taiwan Dollar		—			4.2		4.2			(0.8	)		6.3		5.5
British Pound Sterling		—			5.5		5.5			—			10.1		10.1
Euro		(16.8	)		1.3		(15.5	)		(15.2	)		2.1		(13.1	)

Total	$	(16.8	)	$	47.3	$	30.5		$	(16.0	)	$	69.3	$	53.3

The fair value of the outstanding contracts was a gain of $0.1 million and a loss of $0.3 million at December 31, 2012 and 2011, respectively.

In 2012, Teradyne recorded net realized gains of $4.0 million related to foreign currency forward contracts hedging net monetary positions. In 2011 and 2010, Teradyne recorded net realized losses of $1.3 million and $2.3 million, respectively, related to foreign currency forward contracts hedging net monetary positions. Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in interest expense and other.

The following table summarizes the fair value of derivative instruments as of December 31, 2012 and 2011:


	Balance Sheet Location	December 31, 2012		December 31, 2011
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments and other current assets	$	121	$	—
Foreign exchange contracts	Other accrued liabilities		—		314

Total derivatives		$	121	$	314

The following table summarizes the effect of derivative instruments in the statement of operations recognized for the years ended December 31, 2012, 2011 and 2010 (the table does not reflect the corresponding gain (loss) from the remeasurement of the balance sheet):


	Location of Gains (Losses) Recognized in Statement of Operations		December 31, 2012		December 31, 2011			December 31, 2010
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Interest expense and other	$	3,974	$	(1,327	)	$	(2,289	)

Total derivatives			$	3,974	$	(1,327	)	$	(2,289	)

See Note I: “Debt” regarding derivatives related to the convertible senior notes.

Concentration of Credit Risk

Financial instruments which potentially subject Teradyne to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Teradyne’s cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Teradyne’s fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. Teradyne places foreign currency forward contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. Teradyne performs ongoing credit evaluations of its customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable.