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 nine months ended September 30, 2018 and October 1, 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.

During the three and nine months ended September 30, 2018 and October 1, 2017, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains related to available-for-sale debt securities recorded in the three and nine months ended September 30, 2018 were $0.2 million, $0.6 million, respectively. Realized losses related to available-for-sale debt securities recorded in the nine months ended September 30, 2018 were $1.6 million. Realized gains related toavailable-for-sale debt securities recorded in the three and nine months ended October 1, 2017 were $0.2 million and $0.7 million, respectively. Realized losses related to available-for-sale debt securities recorded in the nine months ended October 1, 2017 were $0.3 million.

Realized gains related to available-for-sale debt securities 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).

Unrealized gains related to equity securities held at September 30, 2018 recorded in the three and nine months ended September 30, 2018 were $1.0 million and $1.4 million, respectively. Unrealized and realized gains related to equity securities are included in interest income and unrealized and realized losses are included in interest expense.

The cost of securities sold is based on the specific identification method.

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 September 30, 2018 and December 31, 2017.


	September 30, 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	$	275,614	$	—	$	—	$	275,614
Cash equivalents		477,869		60,536		—		538,405
Available-for-sale securities:
U.S. Treasury securities		—		363,414		—		363,414
Commercial paper		—		67,202		—		67,202
Corporate debt securities		—		40,271		—		40,271
U.S. government agency securities		—		9,004		—		9,004
Debt mutual funds		3,055		—		—		3,055
Certificates of deposit and time deposits		—		2,218		—		2,218
Non-U.S. government securities		—		543		—		543
Equity securities:
Mutual Funds		24,685		—		—		24,685

	$	781,223	$	543,188	$	—	$	1,324,411
Derivative assets		—		3		—		3

Total	$	781,223	$	543,191	$	—	$	1,324,414

Liabilities
Contingent consideration	$	—	$	—	$	60,942	$	60,942
Derivative liabilities		—		455		—		455

Total	$	—	$	455	$	60,942	$	61,397

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	753,483	$	60,536	$	—	$	814,019
Marketable securities		—		418,410		—		418,410
Long-term marketable securities		27,740		64,242		—		91,982
Prepayments		—		3		—		3

Total	$	781,223	$	543,191	$	—	$	1,324,414

Liabilities
Other current liabilities	$	—	$	455	$	—	$	455
Contingent consideration		—		—		35,532		35,532
Long-term contingent consideration		—		—		25,410		25,410

Total	$	—	$	455	$	60,942	$	61,397


	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 nine months ended September 30, 2018 and October 1, 2017 were as follows:


	For the Three Months Ended						For the Nine Months Ended
	September 30,			October 1,			September 30,			October 1,
	2018			2017			2018			2017
	(in thousands)
Balance at beginning of period	$	60,914		$	39,415		$	45,102		$	38,332
Acquisition of MiR		—			—			51,399			—
Foreign currency impact		796			—			(1,770	)		—
Payments (a)		—			—			(24,553	)		(1,050	)
Fair value adjustment (b)		(768	)		(286	)		(9,236	)		1,847

Balance at end of period	$	60,942		$	39,129		$	60,942		$	39,129

(a)

In the nine months ended September 30, 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 nine months ended October 1, 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 nine months ended September 30, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $0.8 million and $9.2 million, respectively, primarily due to a decrease in forecasted revenue. In the nine months ended October 1, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $1.8 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	September 30, 2018 Fair Value	Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$11,314	Monte Carlo Simulation	Revenue volatility	12.9%
			Discount Rate	3.7%
Contingent consideration (Mobile Industrial Robots)	$49,628	Monte Carlo Simulation	Revenue volatility	18.0%
			Discount Rate	0.5%

As of September 30, 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 September 30, 2018, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR contingent consideration include forecasted revenue, revenue volatility, earnings before interest and taxes, and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. As of September 30, 2018, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $118.9 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 September 30, 2018 and December 31, 2017 were as follows:


	September 30, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	814,019	$	814,019	$	429,843	$	429,843
Marketable securities		510,392		510,392		1,473,905		1,473,905
Derivative assets		3		3		389		389
Liabilities
Contingent consideration		60,942		60,942		45,102		45,102
Derivative liabilities		455		455		446		446
Convertible debt (1)		376,417		599,438		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 September 30, 2018:


	September 30, 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	$	365,701	$	—	$	(2,287	)	$	363,414	$	362,167
Commercial paper		67,208		7		(13	)		67,202		66,186
Corporate debt securities		40,669		537		(935	)		40,271		22,030
U.S. government agency securities		9,065		—		(61	)		9,004		9,004
Debt mutual funds		3,128		—		(73	)		3,055		1,786
Certificates of deposit and time deposits		2,218		—		—			2,218		—
Non-U.S. government securities		543		—		—			543		176

	$	488,532	$	544	$	(3,369	)	$	485,707	$	461,349

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	418,554	$	52	$	(196	)	$	418,410	$	405,959
Long-term marketable securities		69,978		492		(3,173	)		67,297		55,390

	$	488,532	$	544	$	(3,369	)	$	485,707	$	461,349

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	$	1,350,896

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 September 30, 2018, the fair market value of investments in available-for-sale securities with unrealized losses totaled $461.3 million. Of this value, $76.1 million had unrealized losses of $2.1 million for greater than one year and $385.3 million had unrealized losses of $1.3 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 September 30, 2018 and December 31, 2017 were temporary.

The contractual maturities of investments in available-for-sale securities held at September 30, 2018 were as follows:


	September 30, 2018
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	418,554	$	418,410
Due after 1 year through 5 years		11,477		11,368
Due after 5 years through 10 years		14,906		13,949
Due after 10 years		40,467		38,925

Total	$	485,404	$	482,652

Contractual maturities of investments in available-for-sale securities held at September 30, 2018 exclude $3.1 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 September 30, 2018 and December 31, 2017 was $166.6 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 September 30, 2018 and December 31, 2017:


	Balance Sheet Location		September 30, 2018			December 31, 2017
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts assets		Prepayments	$	3		$	389
Foreign currency forward contracts liabilities		Other current liabilities		(455	)		(446	)

Total derivatives			$	(452	)	$	(57	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended September 30, 2018 and October 1, 2017.


	Location of Losses (Gains) Recognized in Statement of Operations		For the Three Months Ended						For the Nine Months Ended
			September 30, 2018			October 1, 2017			September 30, 2018		October 1, 2017
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Other (income) expense, net	$	(899	)	$	(939	)	$	2,502	$	(1,514	)

(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 nine months ended September 30, 2018, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.7 million and $1.2 million, respectively.

(3)	For the three and nine months ended October 1, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.4 million and $2.3 million, respectively.

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