Financial Instruments and Derivatives

3 Months Ended

Mar. 31, 2013

Financial Instruments and Derivatives

D. 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 March 31, 2013 and April 1, 2012. 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.

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 the three months ended March 31, 2013 and April 1, 2012. Realized gains recorded in the three months ended March 31, 2013 and April 1, 2012 were $0.3 million and $0.3 million, respectively. Realized gains are included in interest income.

During the three months ended March 31, 2013 and April 1, 2012, 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 March 31, 2013 and December 31, 2012.

	March 31, 2013
	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	$	118,176	$	—	$	—	$	118,176
Cash equivalents		179,798		7,245		—		187,043
Available-for-sale securities:
U.S. Treasury securities		315,107		—		—		315,107
U.S. government agency securities		—		211,341		—		211,341
Commercial paper		—		65,349		—		65,349
Corporate debt securities		—		47,704		—		47,704
Equity and debt mutual funds		11,189		—		—		11,189
Certificates of deposit and time deposits		—		259		—		259
Non-U.S. government securities		—		85		—		85
Total	$	624,270	$	331,983	$	—	$	956,253
Liabilities
Contingent consideration	$	—	$	—	$	75	$	75
Derivatives		—		475		—		475
Total	$	—	$	475	$	75	$	550

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	297,974	$	7,245	$	—	$	305,219
Marketable securities		232,452		172,329		—		404,781
Long-term marketable securities		93,844		152,409		—		246,253
	$	624,270	$	331,983	$	—	$	956,253
Liabilities
Other accrued liabilities	$	—	$	475	$	75	$	550
	$	—	$	475	$	75	$	550

	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
Other accrued liabilities	$	—	$	—	$	388	$	388
	$	—	$	—	$	388	$	388

Changes in the fair value of Level 3 contingent consideration for the three months ended March 31, 2013 were as follows:

	Contingent consideration
	(in thousands)
Balance at December 31, 2012	$	388
Payments		(313	)
Balance at March 31, 2013	$	75

The carrying amounts and fair values of financial instruments at March 31, 2013 and December 31, 2012 were as follows:

	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Cash and cash equivalents	$	305,219	$	305,219	$	338,920	$	338,920
Marketable securities		651,034		651,034		667,388		667,388
Convertible debt(1)		173,648		564,294		169,896		589,000
Japan loan		3,187		3,187		3,491		3,491

(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 March 31, 2013 and December 31, 2012:

	March 31, 2013
	Available-for-Sale									Fair Market Value of Investments with  Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(in thousands)
U.S. Treasury securities	$	314,902	$	231	$	(26	)	$	315,107	$	2,827
U.S. government agency securities		211,108		235		(2	)		211,341		8,013
Commercial paper		65,341		13		(5	)		65,349		15,484
Corporate debt securities		45,867		1,937		(100	)		47,704		16,307
Equity and debt mutual funds		9,626		1,577		(14	)		11,189		726
Certificates of deposit and time deposits		259		—		—			259		—
Non-U.S. government securities		85		—		—			85		—
	$	647,188	$	3,993	$	(147	)	$	651,034	$	43,357

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	404,576	$	212	$	(7	)	$	404,781	$	23,651
Long-term marketable securities		242,612		3,781		(140	)		246,253		19,706
	$	647,l88	$	3,993	$	(147	)	$	651,034	$	43,357

	December 31, 2012
	Available-for-Sale									Fair Market Value of Investments with  Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value
	(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

As of March 31, 2013, the fair market value of marketable securities with unrealized losses totaled $43.4 million. Of this value, $0.3 million had unrealized losses greater than one year and $43.1 million had unrealized losses less than one year. As of December 31, 2012, the fair market value of marketable securities with unrealized losses totaled $59.1 million. There were no unrealized losses greater than one year.

The contractual maturities of available-for-sale marketable securities at March 31, 2013 were as follows:

	March 31, 2013
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	404,576	$	404,781
Due after 1 year through 5 years		221,440		223,236
Due after 5 years through 10 years		2,684		2,895
Due after 10 years		18,488		20,122
Total	$	647,188	$	651,034

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 $69.0 million and $64.1 million at March 31, 2013 and December 31, 2012, respectively.

The following table summarizes the fair value of derivative instruments at March 31, 2013 and December 31, 2012.

	Balance Sheet Location	March 31, 2013		December 31, 2012
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments and other current assets	$	—	$	121
Foreign exchange contracts	Other accrued liabilities		475		—
		$	475	$	121

Teradyne had no offsetting foreign exchange contracts at March 31, 2013 and December 31, 2012.

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three months ended March 31, 2013 and April 1, 2012. 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
			March 31, 2013		April 1, 2012
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Interest expense and other	$	2,248	$	2,880
			$	2,248	$	2,880

See Note E “Debt” regarding derivatives related to convertible senior notes.