E. 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. As of July 2, 2017, 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 2, 2017 and July 3, 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 within Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenue volatility and discount rate. The vast 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 six months ended July 2, 2017 were $0.2 million and $0.5 million, respectively. Realized losses recorded in the three and six months ended July 2, 2017 were $0.1 million and $0.2 million, respectively. Realized gains in the three and six months ended July 3, 2016 were $0.3 million and $0.4 million, respectively. Realized losses recorded in the three and six months ended July 3, 2016 were $0.2 million and $0.3 million, respectively. 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 six months ended July 2, 2017 and July 3, 2016, 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 2, 2017 and December 31, 2016.


	July 2, 2017
	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	$	295,337	$	—	$	—	$	295,337
Cash equivalents		179,293		123,719		—		303,012
Available-for-sale securities:
U.S. Treasury securities		—		812,477		—		812,477
Commercial paper		—		73,275		—		73,275
Corporate debt securities		—		64,453		—		64,453
U.S. government agency securities		—		28,121		—		28,121
Certificates of deposit and time deposits		—		22,253		—		22,253
Equity and debt mutual funds		20,675		—		—		20,675
Non-U.S. government securities		—		585		—		585

Total	$	495,305	$	1,124,883	$	—	$	1,620,188
Derivative assets		—		23		—		23

Total	$	495,305	$	1,124,906	$	—	$	1,620,211

Liabilities
Contingent consideration	$	—	$	—	$	39,415	$	39,415
Derivative liabilities		—		304		—		304

Total	$	—	$	304	$	39,415	$	39,719

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	474,630	$	123,719	$	—	$	598,349
Marketable securities		—		809,338		—		809,338
Long-term marketable securities		20,675		191,826		—		212,501
Prepayments		—		23		—		23

	$	495,305	$	1,124,906	$	—	$	1,620,211

Liabilities		.
Other current liabilities	$	—	$	304	$	—	$	304
Contingent consideration		—		—		22,432		22,432
Long-term contingent consideration		—		—		16,983		16,983

	$	—	$	304	$	39,415	$	39,719


	December 31, 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	$	214,722	$	—	$	—	$	214,722
Cash equivalents		37,458		55,704		—		93,162
Available for sale securities:
U.S. Treasury securities		—		900,038		—		900,038
Commercial paper		—		161,630		—		161,630
Corporate debt securities		—		100,153		—		100,153
Certificates of deposit and time deposits		—		82,133		—		82,133
U.S. government agency securities		—		42,014		—		42,014
Equity and debt mutual funds		18,171		—		—		18,171
Non-U.S. government securities		—		728		—		728

Total	$	270,351	$	1,342,400	$	—	$	1,612,751
Derivative assets		—		1		—		1

Total	$	270,351	$	1,342,401	$	—	$	1,612,752

Liabilities
Contingent consideration	$	—	$	—	$	38,332	$	38,332
Derivative liabilities		—		131		—		131

Total	$	—	$	131	$	38,332	$	38,463

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	252,180	$	55,704	$	—	$	307,884
Marketable securities		—		871,024		—		871,024
Long-term marketable securities		18,171		415,672		—		433,843
Prepayments		—		1		—		1

	$	270,351	$	1,342,401	$	—	$	1,612,752

Liabilities
Other accrued liabilities	$	—	$	131	$	—	$	131
Contingent consideration		—		—		1,050		1,050
Long-term contingent consideration		—		—		37,282		37,282

	$	—	$	131	$	38,332	$	38,463

Changes in the fair value of Level 3 contingent consideration for the three and six months ended July 2, 2017 and July 3, 2016 were as follows:


	For the Three Months Ended				For the Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017			July 3, 2016
	(in thousands)
Balance at beginning of period	$	37,916	$	23,609	$	38,332		$	37,436
Payments (a)		—		—		(1,050	)		(15,000	)
Fair value adjustment (b)(c)		1,499		1,305		2,133			2,478

Balance at end of period	$	39,415	$	24,914	$	39,415		$	24,914

(a)

In the six months ended July 2, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technology, LLC (“AIT”). In the six months ended July 3, 2016, based on Universal Robot’s calendar year 2015 EBITA results, Teradyne paid $15.0 million or 100% of the eligible EBITA contingent consideration amount in connection with the acquisition of Universal Robots.

(b)

In the three and six months ended July, 2, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $1.5 million and $2.1 million, respectively, primarily due to a decrease in the discount rate. In the three and six months ended July 3, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $0.8 million and $1.9 million, respectively, primarily due to a decrease in the discount rate.

(c)	In the three and six months ended July 3, 2016, the fair value of contingent consideration for the earn-out in connection with acquisition of AIT was increased by $0.6 million due to an increase in forecasted revenue.

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


Liability	July 2, 2017 Fair Value	Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$22,432	Monte Carlo Simulation	Revenue for the period July 1, 2015— December 31, 2017 volatility		12.8	%
	$22,432	Monte Carlo Simulation	Discount Rate		2.9	%


	$16,983	Monte Carlo Simulation	Revenue for the period July 1, 2015— December 31, 2018 volatility		12.8	%
	$16,983	Monte Carlo Simulation	Discount Rate		2.9	%

As of July 2, 2017, 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 carrying amounts and fair values of Teradyne’s financial instruments at July 2, 2017 and December 31, 2016 were as follows:


	July 2, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	598,349	$	598,349	$	307,884	$	307,884
Marketable securities		1,021,839		1,021,839		1,304,867		1,304,867
Derivative assets		23		23		1		1
Liabilities
Contingent consideration		39,415		39,415		38,332		38,332
Derivative liabilities		304		304		131		131
Convertible debt (1)		359,245		526,976		352,669		486,754

(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 features.

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 2, 2017 and December 31, 2016:


	July 2, 2017
	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	$	814,699	$	69	$	(2,291	)	$	812,477	$	808,057
Commercial paper		73,291		—		(16	)		73,275		65,401
Corporate debt securities		62,766		1,954		(267	)		64,453		33,059
U.S. government agency securities		28,135		7		(21	)		28,121		20,800
Certificates of deposit and time deposits		22,245		8		—			22,253		—
Equity and debt mutual funds		17,570		3,122		(17	)		20,675		1,371
Non-U.S. government securities		578		7		—			585		—

	$	1,019,284	$	5,167	$	(2,612	)	$	1,021,839	$	928,688

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	810,544	$	15	$	(1,221	)	$	809,338	$	770,963
Long-term marketable securities		208,740		5,152		(1,391	)		212,501		157,725

	$	1,019,284	$	5,167	$	(2,612	)	$	1,021,839	$	928,688


	December 31, 2016
	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	$	901,975	$	97	$	(2,034	)	$	900,038	$	572,284
Commercial paper		161,672		24		(66	)		161,630		84,034
Corporate debt securities		99,708		1,065		(620	)		100,153		53,642
Certificates of deposit and time deposits		82,080		54		(1	)		82,133		7,760
U.S. government agency securities		42,026		7		(19	)		42,014		13,461
Equity and debt mutual funds		16,505		1,724		(58	)		18,171		1,661
Non-U.S. government securities		745		6		(23	)		728		137

	$	1,304,711	$	2,977	$	(2,821	)	$	1,304,867	$	732,979

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	871,321	$	134	$	(431	)	$	871,024	$	423,128
Long-term marketable securities		433,390		2,843		(2,390	)		433,843		309,851

	$	1,304,711	$	2,977	$	(2,821	)	$	1,304,867	$	732,979

As of July 2, 2017, the fair market value of investments with unrealized losses totaled $928.7 million. Of this value, $1.8 million had unrealized losses of $0.2 million for greater than one year and $926.9 million had unrealized losses of $2.4 million for less than one year.

As of December 31, 2016, the fair market value of investments with unrealized losses totaled $733.0 million. Of this value, $2.9 million had unrealized losses of $0.3 million for greater than one year and $730.1 million had unrealized losses of $2.5 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 July 2, 2017 and December 31, 2016 were temporary.

The contractual maturities of investments held at July 2, 2017 were as follows:


	July 2, 2017
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	810,544	$	809,338
Due after 1 year through 5 years		139,051		138,811
Due after 5 years through 10 years		14,062		13,731
Due after 10 years		38,057		39,284

Total	$	1,001,714	$	1,001,164

Contractual maturities of investments held at July 2, 2017 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 July 2, 2017 and December 31, 2016 was $94.1 million and $83.9 million, respectively. The fair value of the outstanding contracts was a loss of $0.3 million at July 2, 2017 and a loss of $0.1 million at December 31, 2016.

For the three and six months ended July 2, 2017, Teradyne recorded net realized gains related to foreign currency forward contracts hedging net monetary assets and liabilities of $1.6 million and $0.6 million, respectively.

For the three and six months ended July 3, 2016, Teradyne recorded net realized losses related to foreign currency forward contracts hedging net monetary positions of $6.9 million and $10.2 million, respectively.

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 2, 2017 and December 31, 2016:


	Balance Sheet Location		July 2, 2017			December 31, 2016
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts assets		Prepayments	$	23		$	1
Foreign exchange contracts liabilities		Other current liabilities		(304	)		(131	)

Total derivatives			$	(281	)	$	(130	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and six months ended July 2, 2017 and July 3, 2016.


	Location of (Gains) Losses Recognized in Statement of Operations		For the Three Months Ended					For the Six Months Ended
			July 2, 2017			July 3, 2016		July 2, 2017			July 3, 2016
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Other (income) expense, net	$	(1,586	)	$	6,901	$	(575	)	$	10,199

Total Derivatives			$	(1,586	)	$	6,901	$	(575	)	$	10,199

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 and six months ended July 2, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.4 million and $0.9 million, respectively. For the three and six months ended July 3, 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $6.9 million and $10.4 million, respectively.