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Financial Instruments and Derivatives
6 Months Ended
Jul. 05, 2015
Financial Instruments and Derivatives

E. Financial Instruments and Derivatives

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 Accounting Standards Codification (“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. As of July 5, 2015, Teradyne’s investments in debt and equity securities were classified as available-for-sale and recorded at their fair market value.

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 three and six months ended July 5, 2015. 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 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.

Teradyne’s available-for-sale fixed income securities are classified as Level 2. Contingent consideration is classified as Level 3. The vast 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.

Realized losses recorded in the three and six months ended July 5, 2015 were $0.1 million and $0.1 million, respectively. There were no realized losses recorded in the three and six months ended June 29, 2014. Realized gains recorded in the three and six months ended July 5, 2015 were $0.4 million and $1.0 million, respectively. Realized gains recorded in the three and six months ended June 29, 2014 were $0.4 million and $0.7 million, respectively. Realized gains and realized losses are included in interest income and interest expense, respectively. 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 six months ended July 5, 2015 and June 29, 2014, 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 July 5, 2015 and December 31, 2014.

 

     July 5, 2015  
     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

   $ 154,396       $ —        $ —        $ 154,396   

Cash equivalents

     145,256         1,033         —          146,289   

Available-for-sale securities:

           

U.S. Treasury securities

     —          281,522         —          281,522   

U.S. government agency securities

     —          183,768         —          183,768   

Corporate debt securities

     —          122,696         —          122,696   

Certificates of deposit and time deposits

     —          76,876         —          76,876   

Commercial paper

     —          48,446         —          48,446   

Equity and debt mutual funds

     14,174         —          —          14,174   

Non-U.S. government securities

     —          440         —          440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 313,826       $ 714,781       $ —        $ 1,028,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 35,595       $ 35,595   

Derivatives

     —          87         —          87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 87       $ 35,595       $ 35,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 299,652       $ 1,033       $ —        $ 300,685   

Marketable securities

     —          452,040         —          452,040   

Long-term marketable securities

     14,174         261,708         —          275,882   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 313,826       $ 714,781       $ —        $ 1,028,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other current liabilities

   $ —        $ 87      $ —        $ 87   

Contingent consideration

     —          —          15,092         15,092   

Long-term contingent consideration

     —          —          20,503         20,503   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 87      $ 35,595       $ 35,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     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

   $ 111,471       $ —        $ —        $ 111,471   

Cash equivalents

     160,218         22,567         —          182,785   

Available-for-sale securities:

           

U.S. Treasury securities

     —           402,154         —          402,154   

U.S. government agency securities

     —          258,502         —          258,502   

Corporate debt securities

     —          141,467         —          141,467   

Commercial paper

     —          140,638         —          140,638   

Certificates of deposit and time deposits

     —          49,036         —          49,036   

Equity and debt mutual funds

     12,333         —          —          12,333   

Non-U.S. government securities

     —          446         —          446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 284,022       $ 1,014,810       $ —        $ 1,298,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —        $ —        $ 3,350       $ 3,350   

Derivatives

     —           149         —           149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 149      $ 3,350       $ 3,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

     (Level 1)      (Level 2)      (Level 3)      Total  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 271,689       $ 22,567       $ —        $ 294,256   

Marketable securities

     —           533,787         —          533,787   

Long-term marketable securities

     12,333         458,456         —          470,789   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 284,022       $ 1,014,810       $ —        $ 1,298,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other current liabilities

   $ —        $ 149       $ —         $ 149   

Contingent consideration

     —          —           895         895   

Long-term contingent consideration

     —          —           2,455         2,455   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 149       $ 3,350       $ 3,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

Changes in the fair value of Level 3 contingent consideration for the three and six months ended July 5, 2015 and June 29, 2014 were as follows:

 

     For the Three Months
Ended
     For the Six Months
Ended
 
     July 5,
2015
     June 29,
2014
     July 5,
2015
     June 29,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 3,350       $ 2,230       $ 3,350       $ 2,230   

Acquisition of Universal Robots

     33,845         —           33,845         —     

Fair value adjustment(a)

     (1,600      —           (1,600      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 35,595       $ 2,230       $ 35,595       $ 2,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. was reduced to $0 because Teradyne and the Securityholder Representative, on behalf of the ZTEC securityholders, agreed to terminate the earn out prior to the end of the December 31, 2015 earn-out period, with no payout in connection with the resolution of indemnity claims asserted by both Teradyne and the Securityholder Representative.

The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:

 

Liability

  July 5,
2015
Fair Value
  Valuation
Technique
 

Unobservable Inputs

  Weighted
Average
 
    (in thousands)              

Contingent consideration

(Universal Robots)

  $33,845   Income approach-
discounted cash
flow
  EBITDA earn-out for calendar year 2015 probability     99
      Discount rate     6.0
      Revenue earn-out for period July 1, 2015—December 31, 2017 probability     72
      Discount rate     8.0
      Revenue earn-out for period July 1, 2015—December 31, 2018 probability     29
      Discount rate     10.0

Contingent consideration

(AIT)

  $1,750   Income approach-
discounted cash
flow
  Revenue earn-out for calendar years 2015 and 2016 probability     90
      Discount rate     4.7

The significant unobservable inputs used in the Universal Robots fair value measurement of contingent consideration are the probabilities of successful achievement of revenue thresholds and targets in the periods July 1, 2015—December 31, 2017 and July 1, 2015—December 31, 2018 and EBITDA threshold and target for calendar year 2015, and respective discount rates. Increases or decreases in the revenue and EBITDA probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of Universal Robots that could be paid is $65 million. The earn-out periods in connection with the Universal Robots acquisition end on December 31, 2015, December 31, 2017 and December 31, 2018.

The significant unobservable inputs used in the AIT fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 and 2016 revenue thresholds and targets, and a discount rate. Increases or decreases in the revenue probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of AIT that could be paid is $2.1 million. The earn-out periods in connection with the AIT acquisition end on December 31, 2015 and December 31, 2016.

The carrying amounts and fair values of Teradyne’s financial instruments at July 5, 2015 and December 31, 2014 were as follows:

 

     July 5, 2015      December 31, 2014  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 300,685       $ 300,685       $ 294,256       $ 294,256   

Marketable securities

     727,922         727,922         1,004,576         1,004,576   

Contingent consideration

     35,595         35,595         3,350         3,350   

Liabilities

           

Derivatives

   $ 87       $ 87       $ 149       $ 149   

The fair values of accounts receivable, net and accounts payable approximate the carrying value due to the short-term nature of these instruments.

 

The following tables summarize the composition of available-for-sale marketable securities at July 5, 2015 and December 31, 2014:

 

     July 5, 2015  
    

 

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

   $ 281,963       $ 221       $ (662   $ 281,522       $ 21,403   

U.S. government agency securities

     183,601         170         (3     183,768         10,341   

Corporate debt securities

     123,176         1,021         (1,501     122,696         61,348   

Certificates of deposit and time deposits

     76,849         32        (5     76,876         11,009   

Commercial paper

     48,438         10         (2     48,446         13,233   

Equity and debt mutual funds

     12,083         2,118         (27     14,174         1,074   

Non-U.S. government securities

     440         —          —         440         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 726,550       $ 3,572       $ (2,200   $ 727,922       $ 118,408   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
     Fair Market
Value of
Investments
with Unrealized
Losses
 
     (in thousands)  

Marketable securities

   $ 451,854       $ 196       $ (10   $ 452,040       $ 53,028   

Long-term marketable securities

     274,696         3,376         (2,190     275,882         65,380   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 726,550       $ 3,572       $ (2,200   $ 727,922       $ 118,408   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2014  
    

 

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

   $ 402,197       $ 362       $ (405   $ 402,154       $ 317,771   

U.S. government agency securities

     258,452         135         (85     258,502         104,642   

Corporate debt securities

     139,374         2,414         (321     141,467         96,998   

Commercial paper

     140,616         26         (4     140,638         41,747   

Certificates of deposit and time deposits

     49,048         11         (23     49,036         20,684   

Equity and debt mutual funds

     10,492         1,870         (29 )     12,333         1,234   

Non-U.S. government securities

     446         —          —         446         —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,000,625       $ 4,818       $ (867   $ 1,004,576       $ 583,076   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Market
Value
     Fair Market
Value of
Investments
with Unrealized
Losses
 
     (in thousands)  

Marketable securities

   $ 533,833       $ 99       $ (145   $ 533,787       $ 240,234   

Long-term marketable securities

     466,792         4,719         (722     470,789         342,842   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,000,625       $ 4,818       $ (867   $ 1,004,576       $ 583,076   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

As of July 5, 2015, the fair market value of investments with unrealized losses was $118.4 million. Of this value, $0.2 million had unrealized losses greater than one year and $118.2 million had unrealized losses less than one year. As of December 31, 2014, the fair market value of investments with unrealized losses was $583.1 million. Of this value, $2.3 million had unrealized losses greater than one year and $580.8 million had unrealized losses 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 July 5, 2015 and December 31, 2014, were temporary.

The contractual maturities of investments held at July 5, 2015 were as follows:

 

     July 5, 2015  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 451,854       $ 452,040   

Due after 1 year through 5 years

     218,798         219,045   

Due after 5 years through 10 years

     6,481         6,512   

Due after 10 years

     37,334         36,151   
  

 

 

    

 

 

 

Total

   $ 714,467       $ 713,748   
  

 

 

    

 

 

 

Contractual maturities of investments held at July 5, 2015 exclude equity and debt mutual funds as they do not have contractual maturity dates.

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 monetary assets and liabilities. 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 value of monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign currency forward contracts was $100.7 million and $73.0 million at July 5, 2015 and December 31, 2014, respectively. The fair value of the outstanding contracts at July 5, 2015 and December 31, 2014 were losses of $0.1 million and $0.1 million, respectively.

In the three months ended July 5, 2015, Teradyne recorded a net realized gain of $1.6 million related to foreign currency forward contracts hedging net monetary positions. In the six months ended July 5, 2015, Teradyne recorded a net realized loss of $1.9 million related to foreign currency forward contracts hedging net monetary positions.

In the three and six months ended June 29, 2014, Teradyne recorded net realized losses of $1.1 million and $1.9 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 other (income) expense, net.

 

The following table summarizes the fair value of derivative instruments at July 5, 2015 and December 31, 2014:

 

     Balance Sheet Location    July 5,
2015
     December 31,
2014
 
          (in thousands)  

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

   Other current liabilities    $ 87       $ 149   
     

 

 

    

 

 

 

Total derivatives

      $ 87       $ 149   
     

 

 

    

 

 

 

Teradyne had no offsetting foreign exchange contracts at July 5, 2015 and December 31, 2014.

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and six months ended July 5, 2015 and June 29, 2014. The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies. For the three months ended July 5, 2015, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.1 million. For the six months ended July 5, 2015, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.2 million. For the three and six months ended June 29, 2014, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.7 million and $1.3 million, respectively.

 

    

Location of (Gains) Losses
Recognized in

Statement

of Operations

   For the Three Months
Ended
     For the Six Months
Ended
 
      July 5,
2015
    June 29,
2014
     July 5,
2015
     June 29,
2014
 
          (in thousands)  

Derivatives not designated as hedging instruments:

          

Foreign exchange contracts

   Other (income) expense, net    $ (1,547   $ 1,122       $ 1,878       $ 1,869   
     

 

 

   

 

 

    

 

 

    

 

 

 

Total Derivatives

      $ (1,547   $ 1,122       $ 1,878       $ 1,869   
     

 

 

   

 

 

    

 

 

    

 

 

 

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