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Financial Instruments and Derivatives
9 Months Ended
Oct. 02, 2016
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:

 

    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 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.

 

     October 2, 2016  
     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

   $ 241,687       $ —         $ —         $ 241,687   

Cash equivalents

     55,576         674         —           56,250   

Available-for-sale securities:

           

U.S. Treasury securities

     —           676,310         —           676,310   

Corporate debt securities

     —           117,260         —           117,260   

Certificates of deposit and time deposits

     —           66,140         —           66,140   

Commercial paper

     —           52,324         —           52,324   

U.S. government agency securities

     —           25,802         —           25,802   

Equity and debt mutual funds

     17,666         —           —           17,666   

Non-U.S. government securities

     —           750         —           750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     314,929         939,260         —           1,254,189   

Derivative assets

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 314,929       $ 939,261       $ —         $ 1,254,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 32,887       $ 32,887   

Derivative liabilities

     —           361         —           361   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 361       $ 32,887       $ 33,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 297,263       $ 674       $ —         $ 297,937   

Marketable securities

     —           598,501         —           598,501   

Long-term marketable securities

     17,666         340,085         —           357,751   

Prepayments

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 314,929       $ 939,261       $ —         $ 1,254,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

     .            

Other current liabilities

   $ —         $ 361       $ —         $ 361   

Contingent consideration

     —           —           1,050         1,050   

Long-term contingent consideration

     —           —           31,837         31,837   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 361       $ 32,887       $ 33,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 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

   $ 213,336       $ —         $ —         $ 213,336   

Cash equivalents

     49,241         2,128         —           51,369   

Available for sale securities:

           

U.S. Treasury securities

     —           419,958         —           419,958   

Corporate debt securities

     —           161,634         —           161,634   

U.S. government agency securities

     —           83,952         —           83,952   

Certificates of deposit and time deposits

     —           43,394         —           43,394   

Commercial paper

     —           20,308         —           20,308   

Equity and debt mutual funds

     13,954         —           —           13,954   

Non-U.S. government securities

     —           424         —           424   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276,531       $ 731,798       $ —         $ 1,008,329   

Derivative assets

     —           109         —           109   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276,531       $ 731,907       $ —         $ 1,008,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Contingent consideration

   $ —         $ —         $ 37,436       $ 37,436   

Derivative liabilities

     —           146         —           146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 146       $ 37,436       $ 37,582   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as follows:

 

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

Assets

           

Cash and cash equivalents

   $ 262,577       $ 2,128       $ —         $ 264,705   

Marketable securities

     —           477,696         —           477,696   

Long-term marketable securities

     13,954         251,974         —           265,928   

Prepayments

     —           109         —           109   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 276,531       $ 731,907       $ —         $ 1,008,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other accrued liabilities

   $ —         $ 146       $ —         $ 146   

Contingent consideration

     —           —           15,500         15,500   

Long-term contingent consideration

     —           —           21,936         21,936   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 146       $ 37,436       $ 37,582   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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:

 

     For the Three Months
Ended
     For the Nine Months
Ended
 
     October 2,
2016
     October 4,
2015
     October 2,
2016
     October 4,
2015
 
     (in thousands)  

Balance at beginning of period

   $ 24,914       $ 35,595       $ 37,436       $ 3,350   

Acquisition of Universal Robots

     —           —           —           33,845   

Payments (a)

     —           —           (15,000      —     

Fair value adjustment (b)(c)(d)(e)

     7,973         (1,000      10,451         (2,600
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 32,887       $ 34,595       $ 32,887       $ 34,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) In the nine months ended October 2, 2016, based on Universal Robots’ calendar year 2015 EBITDA results, Teradyne paid $15 million or 100% of the eligible EBITDA contingent consideration amount.
(b) In the three and nine months ended October 2, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $8.0 million and $9.9 million, respectively, primarily due to an increase in forecasted revenue and a decrease in the discount rate.
(c) In the nine months ended October 2, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technology, LLC (“AIT”) was increased by $0.6 million due to an increase in forecasted revenue.
(d) In the three and nine months ended October 4, 2015, the fair value of contingent consideration for the earn-out in connection with the acquisition of AIT was reduced by $1.0 million due to a decrease in the revenue probabilities.
(e) In the nine months ended October 4, 2015, the fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. was reduced by $1.6 million, 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

  October 2,
2016 Fair
Value
  Valuation
Technique
 

Unobservable Inputs

  Weighted
Average
 
    (in thousands)              

Contingent consideration

(Universal Robots)

  $19,824   Monte Carlo

Simulation

  Revenue volatility for the period July 1, 2015—December 31, 2017     10.7%   
      Discount Rate     3.2%   
       
  $12,013   Monte Carlo

Simulation

  Revenue volatility for the period July 1, 2015—December 31, 2018     10.7%   
      Discount Rate     3.2%   

Contingent consideration

(AIT)

  $1,050   Income approach-

discounted cash

flow

  Revenue probability for calendar year 2016 Discount rate    
 
100%
4.0%
  
  

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:

 

     October 2, 2016      December 31, 2015  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)  

Assets

           

Cash and cash equivalents

   $ 297,937       $ 297,937       $ 264,705       $ 264,705   

Marketable securities

     956,252         956,252         743,624         743,624   

Derivative assets

     1         1         109         109   

Liabilities

           

Contingent consideration

     32,887         32,887         37,436         37,436   

Derivative liabilities

     361         361         146         146   

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:

 

     October 2, 2016  
     Available-for-Sale      Fair Market
Value of
Investments
with Unrealized
Losses
 
     Cost      Unrealized
Gains
     Unrealized
(Losses)
    Fair
Market

Value
    
     (in thousands)  

U.S. Treasury securities

   $ 675,745       $ 906       $ (341   $ 676,310       $ 371,188   

Corporate debt securities

     114,752         2,755         (247     117,260         43,552   

Certificates of deposit and time deposits

     66,115         30         (5     66,140         14,402   

Commercial paper

     52,323         15         (14     52,324         25,317   

U.S. government agency securities

     25,738         64         —          25,802         3,830   

Equity and debt mutual funds

     15,801         1,870         (5     17,666         348   

Non-U.S. government securities

     756         17         (23     750         137   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 951,230       $ 5,657       $ (635   $ 956,252       $ 458,774   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

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

Marketable securities

   $ 598,416       $ 218       $ (133   $ 598,501       $ 273,604   

Long-term marketable securities

     352,814         5,439         (502     357,751         185,170   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 951,230       $ 5,657       $ (635   $ 956,252       $ 458,774   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2015  
     Available-for-Sale      Fair Market
Value of
Investments
with Unrealized
Losses
 
     Cost      Unrealized
Gains
     Unrealized
(Losses)
    Fair
Market

Value
    
     (in thousands)  

U.S. Treasury securities

   $ 421,060       $ 65       $ (1,167   $ 419,958       $ 379,434   

Corporate debt securities

     163,297         902         (2,565     161,634         145,373   

U.S. government agency securities

     84,032         42         (122     83,952         55,120   

Certificates of deposit and time deposits

     43,391         6         (3     43,394         10,527   

Commercial paper

     20,298         11         (1     20,308         8,646   

Equity and debt mutual funds

     12,996         1,119         (161     13,954         2,560   

Non-U.S. government securities

     424         —           —          424         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 745,498       $ 2,145       $ (4,019   $ 743,624       $ 601,660   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Reported as follows:

 

     Cost      Unrealized
Gains
     Unrealized
(Losses)
    Fair
Market

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

Marketable securities

   $ 478,306       $ 38       $ (648   $ 477,696       $ 374,785   

Long-term marketable securities

     267,192         2,107         (3,371     265,928         226,875   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 745,498       $ 2,145       $ (4,019   $ 743,624       $ 601,660   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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:

 

     October 2, 2016  
     Cost      Fair Market
Value
 
     (in thousands)  

Due within one year

   $ 598,416       $ 598,501   

Due after 1 year through 5 years

     288,344         288,370   

Due after 5 years through 10 years

     12,787         13,026   

Due after 10 years

     35,882         38,689   
  

 

 

    

 

 

 

Total

   $ 935,429       $ 938,586   
  

 

 

    

 

 

 

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:

 

     Balance Sheet Location      October 2,
2016
    December 31,
2015
 
            (in thousands)  

Derivatives not designated as hedging instruments:

       

Foreign exchange contracts assets

     Prepayments       $ 1      $ 109   

Foreign exchange contracts liabilities

     Other current liabilities         (361     (146
     

 

 

   

 

 

 

Total derivatives

      $ (360   $ (37
     

 

 

   

 

 

 

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.

 

    Location of (Gains) Losses
Recognized in
Statement of Operations
    For the Three Months
Ended
    For the Nine Months
Ended
 
      October 2,
2016
    October 4,
2015
    October 2,
2016
    October 4,
2015
 
          (in thousands)  

Derivatives not designated as hedging instruments:

         

Foreign exchange contracts

    Other (income) expense, net      $ 941      $ 677      $ 11,140      $ 2,555   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives

    $ 941      $ 677      $ 11,140      $ 2,555   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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.