Financial Instruments

3 Months Ended

Apr. 01, 2018

Financial Instruments

F. 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

Effective January 1, 2018, Teradyne adopted ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” using the modified retrospective approach. This guidance requires that changes in fair value of equity securities be accounted for directly in earnings. Prior to 2018, the changes in fair value of equity securities were recorded in accumulated other comprehensive income on the balance sheet.

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 months ended April 1, 2018 and April 2, 2017. 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 securities are classified as Level 2, and equity securities are classified as Level 1. Acquisition-related contingent consideration is classified as 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 months ended April 1, 2018 and April 2, 2017 were $0.3 million and $0.3 million, respectively. Realized losses recorded in the three months ended April 1, 2018 and April 2, 2017 were $1.5 million and $0.2 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss). Changes in fair value of equity securities are included in other (income) expense, net. The cost of securities sold is based on the specific identification method.

During the three months ended April 1, 2018 and April 2, 2017, 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 April 1, 2018 and December 31, 2017.

	April 1, 2018
	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	$	155,543	$	—	$	—	$	155,543
Cash equivalents		306,710		175,620		—		482,330
Available-for-sale debt securities:
U.S. Treasury securities		—		611,946		—		611,946
Commercial paper		—		252,158		—		252,158
Corporate debt securities		—		44,218		—		44,218
U.S. government agency securities		—		10,726		—		10,726
Certificates of deposit and time deposits		—		4,824		—		4,824
Debt mutual funds		2,741		—		—		2,741
Non-U.S. government securities		—		559		—		559
Equity securities:
Mutual funds		22,613		—		—		22,613
	$	487,607	$	1,100,051	$	—	$	1,587,658
Derivative assets		—		12		—		12
Total	$	487,607	$	1,100,063	$	—	$	1,587,670
Liabilities
Contingent consideration	$	—	$	—	$	15,581	$	15,581
Derivative liabilities		—		224		—		224
Total	$	—	$	224	$	15,581	$	15,805

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	462,253	$	175,620	$	—	$	637,873
Marketable securities		—		860,526		—		860,526
Long-term marketable securities		25,354		63,905		—		89,259
Prepayments		—		12		—		12
Total	$	487,607	$	1,100,063	$	—	$	1,587,670
Liabilities		.
Other current liabilities	$	—	$	224	$	—	$	224
Contingent consideration		—		—		15,581		15,581
Total	$	—	$	224	$	15,581	$	15,805

	December 31, 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	$	197,955	$	—	$	—	$	197,955
Cash equivalents		206,335		25,553		—		231,888
Available-for-sale securities:
U.S. Treasury securities		—		855,795		—		855,795
Commercial paper		—		282,840		—		282,840
Certificates of deposit and time deposits		—		167,342		—		167,342
Corporate debt securities		—		133,186		—		133,186
Equity and debt mutual funds		23,430		—		—		23,430
U.S. government agency securities		—		10,726		—		10,726
Non-U.S. government securities		—		586		—		586
	$	427,720	$	1,476,028	$	—	$	1,903,748
Derivative assets		—		389		—		389
Total	$	427,720	$	1,476,417	$	—	$	1,904,137
Liabilities
Contingent consideration	$	—	$	—	$	45,102	$	45,102
Derivative liabilities		—		446		—		446
Total	$	—	$	446	$	45,102	$	45,548

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	404,290	$	25,553	$	—	$	429,843
Marketable securities		—		1,347,979		—		1,347,979
Long-term marketable securities		23,430		102,496		—		125,926
Prepayments		—		389		—		389
Total	$	427,720	$	1,476,417	$	—	$	1,904,137
Liabilities
Other accrued liabilities	$	—	$	446	$	—	$	446
Contingent consideration		—		—		24,497		24,497
Long-term contingent consideration		—		—		20,605		20,605
Total	$	—	$	446	$	45,102	$	45,548

Changes in the fair value of Level 3 contingent consideration for the three months ended April 1, 2018 and April 2, 2017 were as follows:

	For the Three Months Ended
	April 1, 2018			April 2, 2017
	(in thousands)
Balance at beginning of period	$	45,102		$	38,332
Payments (a)		(24,553	)		(1,050	)
Fair value adjustment (b)		(4,968	)		634
Balance at end of period	$	15,581		$	37,916

(a) In the three months ended April 1, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots A/S (“Universal Robots”). In the three months ended April 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”).

(b) In the three months ended April 1, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $5.0 million, primarily due to a decrease in forecasted revenue. In the three months ended April 2, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $0.6 million primarily due to an increase in forecasted revenue and a decrease in the discount rate.

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

Liability	April 1, 2018 Fair Value		Valuation Technique		Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$	15,581		Monte Carlo Simulation	Revenue for the period July 1,     2015—December 31, 2018 volatility		13.0	%
					Discount Rate		3.8	%

As of April 1, 2018, 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 the remaining Universal Robots revenue earn-out is $25.0 million.

The carrying amounts and fair values of Teradyne’s financial instruments at April 1, 2018 and December 31, 2017 were as follows:

	April 1, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	637,873	$	637,873	$	429,843	$	429,843
Marketable securities		949,785		949,785		1,473,905		1,473,905
Derivative assets		12		12		389		389
Liabilities
Contingent consideration		15,581		15,581		45,102		45,102
Derivative liabilities		224		224		446		446
Convertible debt (1)		369,421		700,626		365,987		659,525

(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 table summarize the composition of available-for-sale marketable securities at April 1, 2018:

	April 1, 2018
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	614,365	$	19	$	(2,438	)	$	611,946	$	610,938
Commercial paper		252,579		17		(438	)		252,158		249,871
Corporate debt securities		43,472		1,200		(454	)		44,218		17,742
U.S. government agency securities		10,791		—		(65	)		10,726		10,726
Certificates of deposit and time deposits		4,820		4		—			4,824		—
Debt mutual funds		2,799		—		(58	)		2,741		1,679
Non-U.S. government securities		559		—		—			559		—
	$	929,385	$	1,240	$	(3,453	)	$	927,172	$	890,956

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	861,794	$	54	$	(1,322	)	$	860,526	$	847,446
Long-term marketable securities		67,591		1,186		(2,131	)		66,646		43,510
	$	929,385	$	1,240	$	(3,453	)	$	927,172	$	890,956

The following table summarize the composition of available-for-sale marketable securities at December 31, 2017:

	December 31, 2017
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	858,258	$	72	$	(2,535	)	$	855,795	$	850,163
Commercial paper		283,009		18		(187	)		282,840		258,933
Certificates of deposit and time deposits		167,523		6		(187	)		167,342		138,340
Corporate debt securities		131,179		2,380		(373	)		133,186		91,010
Equity and debt mutual funds		19,403		4,102		(75	)		23,430		1,723
U.S. government agency securities		10,775		—		(49	)		10,726		10,726
Non-U.S. government securities		582		4		—			586		—
	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	1,349,970	$	38	$	(2,029	)	$	1,347,979	$	1,288,844
Long-term marketable securities		120,759		6,544		(1,377	)		125,926		62,052
	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896

As of April 1, 2018, the fair market value of investments in debt securities with unrealized losses totaled $891.0 million. Of this value, $62.1 million had unrealized losses of $1.6 million for greater than one year and $828.9 million had unrealized losses of $1.9 million for less than one year.

As of December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million for greater than one year and $1,209.9 million had unrealized losses of $2.2 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 April 1, 2018 and December 31, 2017 were temporary.

The contractual maturities of investments in debt securities held at April 1, 2018 were as follows:

	April 1, 2018
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	861,794	$	860,526
Due after 1 year through 5 years		10,173		10,058
Due after 5 years through 10 years		14,583		13,823
Due after 10 years		40,036		40,024
Total	$	926,586	$	924,431

Contractual maturities of investments in debt securities held at April 1, 2018 exclude $2.7 million of debt mutual funds as they do not have a contractual maturity date.

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 April 1, 2018 and December 31, 2017 was $108.8 million and $116.8 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 as of April 1, 2018 and December 31, 2017:

	Balance Sheet Location		April 1, 2018			December 31, 2017
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts assets		Prepayments	$	12		$	389
Foreign currency forward contracts liabilities		Other current liabilities		(224	)		(446	)
Total derivatives			$	(212	)	$	(57	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended April 1, 2018 and April 2, 2017.

	Location of Losses Recognized in Statement of Operations	For the Three Months Ended
		April 1, 2018		April 2, 2017
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other (income) expense, net	$	1,575	$	1,011

(1) The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.

(2) For the three months ended April 1, 2018 and April 2, 2017, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.6 million and $1.5 million, respectively.

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