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 and six months ended July 1, 2018 and July 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, earnings before interest and taxes, 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 1, 2018 were $0.1 million and $0.4 million, respectively. Realized losses recorded in the three and six months ended July 1, 2018 were $0.0 million and $1.5 million, respectively. 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 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 and six months ended July 1, 2018 and July 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 July 1, 2018 and December 31, 2017.


	July 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	$	209,827	$	—	$	—	$	209,827
Cash equivalents		247,525		23,032		—		270,557
Available-for-sale securities:
U.S. Treasury securities		—		528,857		—		528,857
Commercial paper		—		218,520		—		218,520
Corporate debt securities		—		38,372		—		38,372
U.S. government agency securities		—		10,009		—		10,009
Certificates of deposit and time deposits		—		1,318		—		1,318
Debt mutual funds		2,810		—		—		2,810
Non-U.S. government securities		—		551		—		551
Equity securities:
Mutual funds		23,289		—		—		23,289

	$	483,451	$	820,659	$	—	$	1,304,110
Derivative assets		—		7		—		7

Total	$	483,451	$	820,666	$	—	$	1,304,117

Liabilities
Contingent consideration	$	—	$	—	$	60,914	$	60,914
Derivative liabilities		—		253		—		253

Total	$	—	$	253	$	60,914	$	61,167

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	457,352	$	23,032	$	—	$	480,384
Marketable securities		—		712,309		—		712,309
Long-term marketable securities		26,099		85,318		—		111,417
Prepayments		—		7		—		7

Total	$	483,451	$	820,666	$	—	$	1,304,117

Liabilities		.
Other current liabilities	$	—	$	253	$	—	$	253
Contingent consideration		—		—		35,911		35,911
Long-term contingent consideration		—		—		25,003		25,003

Total	$	—	$	253	$	60,914	$	61,167


	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 and six months ended July 1, 2018 and July 2, 2017 were as follows:


	For the Three Months Ended					For the Six Months Ended
	July 1, 2018			July 2, 2017		July 1, 2018			July 2, 2017
	(in thousands)
Balance at beginning of period	$	15,581		$	37,916	$	45,102		$	38,332
Acquisition of MiR		51,399			—		51,399			—
Foreign currency impact		(2,566	)		—		(2,566	)		—
Payments (a)		—			—		(24,553	)		(1,050	)
Fair value adjustment (b)		(3,500	)		1,499		(8,468	)		2,133

Balance at end of period	$	60,914		$	39,415	$	60,914		$	39,415

(a)

In the six months ended July 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 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”).

(b)

In the three and six months ended July 1, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $3.5 million and $8.5 million, respectively, primarily due to a decrease in forecasted revenue. 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.

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


Liability	July 1, 2018 Fair Value	Valuation Technique	Unobservable Inputs
	(in thousands)
Contingent consideration (Universal Robots)	$12,081	Monte Carlo Simulation	Revenue volatility	11.4%
			Discount Rate	3.2%
Contingent consideration (MiR)	$48,833	Monte Carlo Simulation	Revenue volatility	18.0%
			Discount Rate	0.5%

As of July 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.

As of July 1, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR 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. As of July 1, 2018, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $117.0 million. The earn-out periods in connection with the MiR acquisition end on December 31, 2018, December 31, 2019 and December 31, 2020.

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


	July 1, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	480,384	$	480,384	$	429,843	$	429,843
Marketable securities		823,726		823,726		1,473,905		1,473,905
Derivative assets		7		7		389		389
Liabilities
Contingent consideration		60,914		60,914		45,102		45,102
Derivative liabilities		253		253		446		446
Convertible debt (1)		372,897		612,693		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 summarizes the composition of available-for-sale marketable securities at July 1, 2018:


	July 1, 2018
	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	$	530,944	$	29	$	(2,116	)	$	528,857	$	477,385
Commercial paper		218,594		9		(83	)		218,520		184,349
Corporate debt securities		38,709		668		(1,005	)		38,372		20,956
U.S. government agency securities		10,066		1		(58	)		10,009		7,034
Debt mutual funds		2,878		—		(68	)		2,810		1,681
Certificates of deposit and time deposits		1,318		—		—			1,318		—
Non-U.S. government securities		552		—		(1	)		551		179

	$	803,061	$	707	$	(3,331	)	$	800,437	$	691,584

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	712,732	$	68	$	(491	)	$	712,309	$	620,327
Long-term marketable securities		90,329		639		(2,840	)		88,128		71,257

	$	803,061	$	707	$	(3,331	)	$	800,437	$	691,584

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


	December 31, 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	$	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	$	1,350,895

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		62,051

	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,895

As of July 1, 2018, the fair market value of investments in available-for-sale debt securities with unrealized losses totaled $691.6 million. Of this value, $32.7 million had unrealized losses of $1.6 million for greater than one year and $658.9 million had unrealized losses of $1.7 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 July 1, 2018 and December 31, 2017 were temporary.

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


	July 1, 2018
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	712,732	$	712,309
Due after 1 year through 5 years		32,201		32,080
Due after 5 years through 10 years		15,455		14,587
Due after 10 years		39,795		38,651

Total	$	800,183	$	797,627

Contractual maturities of investments in debt securities held at July 1, 2018 exclude $2.8 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 July 1, 2018 and December 31, 2017 was $93.4 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 July 1, 2018 and December 31, 2017:


	Balance Sheet Location	July 1, 2018			December 31, 2017
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts assets	Prepayments	$	7		$	389
Foreign currency forward contracts liabilities	Other current liabilities		(253	)		(446	)

Total derivatives		$	(246	)	$	(57	)

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


	Location of Losses (Gains) Recognized in Statement of Operations		For the Three Months Ended					For the Six Months Ended
			July 1, 2018		July 2, 2017			July 1, 2018		July 2, 2017
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Other (income) expense, net	$	1,826	$	(1,586	)	$	3,401	$	(575	)

(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 and six months ended July 1, 2018, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.9 million and $2.5 million, respectively.

(3)	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.

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