Financial Instruments and Derivatives |
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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 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 October 2, 2016, 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:
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 nine months ended October 2, 2016. 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; or 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 debt and equity securities are classified as Level 1 and Level 2. Acquisition-related contingent consideration is classified as Level 3. Teradyne’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The majority of Level 2 securities are fixed income securities 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 gains recorded in the three and nine months ended October 2, 2016 were $0.7 million and $1.2 million, respectively. Realized losses recorded in the three and nine months ended October 2, 2016 were $0.1 million and $0.4 million, respectively. Realized gains recorded in the three and nine months ended October 4, 2015 were $0.4 million and $1.4 million, respectively. Realized losses recorded in the nine months ended October 4, 2015 were $0.2 million. Realized gains are included in interest income and realized losses are included in interest expense. 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 three and nine months ended October 2, 2016 and October 4, 2015, 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 October 2, 2016 and December 31, 2015.
Reported as follows:
Reported as follows:
Changes in the fair value of Level 3 contingent consideration for the three and nine months ended October 2, 2016 and October 4, 2015 were as follows:
The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instruments:
As of October 2, 2016, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots contingent consideration include forecasted revenue, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. The maximum payment for each of the two Universal Robots revenue earn-outs is $25.0 million.
The significant unobservable inputs used in the AIT fair value measurement of contingent consideration are the probabilities of successful achievement of the calendar year 2016 revenue threshold and target, and a discount rate. Increases or decreases in the revenue probabilities would result in a higher or lower fair value measurement. The maximum payment for the AIT earn-out is $1.05 million. The carrying amounts and fair values of Teradyne’s financial instruments at October 2, 2016 and December 31, 2015 were as follows:
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 October 2, 2016 and December 31, 2015:
Reported as follows:
Reported as follows:
As of October 2, 2016, the fair market value of investments with unrealized losses totaled $458.8 million. Of this value, $3.1 million had unrealized losses of $0.2 million for greater than one year and $455.7 million had unrealized losses of $0.4 million for less than one year. As of December 31, 2015, the fair market value of investments with unrealized losses totaled $601.7 million. Of this value, $0.9 million had unrealized losses of $0.5 million for greater than one year and $600.8 million had unrealized losses of $3.6 million 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 October 2, 2016 and December 31, 2015, were temporary. The contractual maturities of investments held at October 2, 2016 were as follows:
Contractual maturities of investments held at October 2, 2016 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 at October 2, 2016 and December 31, 2015 was $76.5 million and $114.1 million, respectively. The fair value of the outstanding contracts was a loss of $0.4 million and $0.0 million at October 2, 2016 and December 31, 2015, respectively. For the three and nine months ended October 2, 2016, Teradyne recorded net realized losses of $0.7 million and $10.8 million, respectively, related to foreign currency forward contracts hedging net monetary positions. For the three and nine months ended October 4, 2015, Teradyne recorded net realized losses of $0.8 million and $2.7 million, respectively, related to foreign currency forward contracts hedging net monetary positions. The following table summarizes the fair value of derivative instruments at October 2, 2016 and December 31, 2015:
Teradyne’s foreign exchange contracts are subject to master netting agreements. The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and nine months ended October 2, 2016 and October 4, 2015.
The table above does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies recorded in other (income) expense, net. For the three and nine months ended October 2, 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.9 million and $12.2 million, respectively. For the three and nine months ended October 4, 2015, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.1 million and $2.3 million, respectively. |