Financial Instruments

9 Months Ended

Sep. 29, 2019

Financial Instruments

G. 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’s available-for-sale debt securities are classified as Level 2 and equity securities are classified as Level 1. Contingent consideration is classified as Level 3. 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 29, 2019 and September 30, 2018, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three and nine months ended September 29, 2019 were $0.5 million and $0.7 million, respectively. Realized losses recorded in the nine months ended September 29, 2019 were $0.2 million. Realized gains recorded in the three and nine months ended September 30, 2018 were $0.2 million and $0.6 million, respectively. Realized losses recorded in the nine months ended September 30, 2018 were $1.6 million. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains on equity securities recorded in the three and nine months ended September 29, 2019 were $0.1 million and $3.8 million, respectively. Unrealized losses on equity securities recorded in the three and nine months ended September 29, 2019 were $0.2 million. Unrealized gains on equity securities recorded in the three and nine months ended September 30, 2018 were $1.0 million and $1.4 million, respectively. Unrealized gains on equity securities are included in interest income and unrealized losses are included in interest expense. Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss) on the balance sheet.

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 29, 2019 and December 31, 2018.

	September 29, 2019
	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	$	257,235	$	—	$	—	$	257,235
Cash equivalents		198,519		138,185		—		336,704
Available-for-sale securities:
U.S. Treasury securities		—		185,025		—		185,025
Commercial paper		—		117,714		—		117,714
Corporate debt securities		—		90,898		—		90,898
Certificates of deposit and time deposits		—		14,086		—		14,086
U.S. government agency securities		—		8,024		—		8,024
Debt mutual funds		3,968		—		—		3,968
Non-U.S. government securities		—		380		—		380
Equity securities:
Mutual funds		26,001		—		—		26,001
	$	485,723	$	554,312	$	—	$	1,040,035
Derivative assets		—		119		—		119
Total	$	485,723	$	554,431	$	—	$	1,040,154
Liabilities
Contingent consideration	$	—	$	—	$	18,080	$	18,080
Derivative liabilities		—		489		—		489
Total	$	—	$	489	$	18,080	$	18,569

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	455,754	$	138,185	$	—	$	593,939
Marketable securities		—		342,538		—		342,538
Long-term marketable securities		29,969		73,589		—		103,558
Prepayments		—		119		—		119
Total	$	485,723	$	554,431	$	—	$	1,040,154
Liabilities
Other current liabilities	$	—	$	489	$	—	$	489
Contingent consideration		—		—		6,297		6,297
Long-term contingent consideration		—		—		11,783		11,783
Total	$	—	$	489	$	18,080	$	18,569

	December 31, 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	$	312,512	$	—	$	—	$	312,512
Cash equivalents		253,525		360,715		—		614,240
Available-for-sale securities:
U.S. Treasury securities		—		109,721		—		109,721
Commercial paper		—		86,117		—		86,117
Corporate debt securities		—		40,020		—		40,020
U.S. government agency securities		—		9,611		—		9,611
Certificates of deposit and time deposits		—		7,604		—		7,604
Debt mutual funds		3,187		—		—		3,187
Non-U.S. government securities		—		376		—		376
Equity securities:								—
Mutual funds		21,191		—		—		21,191
	$	590,415	$	614,164	$	—	$	1,204,579
Derivative assets		—		79		—		79
Total	$	590,415	$	614,243	$	—	$	1,204,658
Liabilities
Contingent consideration	$	—	$	—	$	70,543	$	70,543
Derivative liabilities		—		514		—		514
Total	$	—	$	514	$	70,543	$	71,057

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	566,037	$	360,715	$	—	$	926,752
Marketable securities		—		190,096		—		190,096
Long-term marketable securities		24,378		63,353		—		87,731
Prepayments		—		79		—		79
Total	$	590,415	$	614,243	$	—	$	1,204,658
Liabilities
Other accrued liabilities	$	—	$	514	$	—	$	514
Contingent consideration		—		—		34,865		34,865
Long-term contingent consideration		—		—		35,678		35,678
Total	$	—	$	514	$	70,543	$	71,057

Changes in the fair value of Level 3 contingent consideration for the three and nine months ended September 29, 2019 and September 30, 2018 were as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
	(in thousands)
Balance at beginning of period	$	26,847		$	60,914		$	70,543		$	45,102
Fair value adjustment (a)		(7,759	)		(768	)		(16,460	)		(9,236	)
Foreign currency impact		(1,008	)		796			(1,413	)		(1,770	)
Payments (b)		—			—			(34,590	)		(24,553	)
Acquisition of MiR		—			—			—			51,399
Balance at end of period	$	18,080		$	60,942		$	18,080		$	60,942

(a) In the three and nine months ended September 29, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was decreased by $7.8 million and $16.5 million, respectively, primarily due to a decrease in the forecasted revenue, partially offset by impact from the modification, in the three months ended September 29, 2019, of the earn-out structure. 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 A/S (“Universal Robots”) was decreased by $0.8 million and $9.2 million, respectively, primarily due to a decrease in forecasted revenue.

(b) In the nine months ended September 29, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisition of MiR and Universal Robots, respectively. 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.

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

Liability	September 29, 2019 Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (MiR)	$	18,080	Monte Carlo simulation	Revenue volatility		15.0	%
				Discount rate		0.1	%

As of September 29, 2019, the significant unobservable inputs used in the Monte Carlo simulation to fair value the MiR contingent consideration include forecasted revenues, 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 29, 2019, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $81.0 million. The remaining earn-out periods end on December 31, 2019 and December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at September 29, 2019 and December 31, 2018 were as follows:

	September 29, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	593,939	$	593,939	$	926,752	$	926,752
Marketable securities		446,096		446,096		277,827		277,827
Derivative assets		119		119		79		79
Liabilities
Contingent consideration		18,080		18,080		70,543		70,543
Derivative liabilities		489		489		514		514
Convertible debt (1)		390,942		867,388		379,981		547,113

(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 29, 2019:

	September 29, 2019
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	184,229	$	847	$	(51	)	$	185,025	$	25,814
Commercial paper		117,618		99		(3	)		117,714		30,704
Corporate debt securities		86,718		4,229		(49	)		90,898		3,079
Certificates of deposit and time deposits		14,083		3		—			14,086		—
U.S. government agency securities		8,009		17		(2	)		8,024		1,150
Debt mutual funds		3,820		148		—			3,968		—
Non-U.S. government securities		380		—		—			380		—
	$	414,857	$	5,343	$	(105	)	$	420,095	$	60,747

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	342,234	$	313	$	(9	)	$	342,538	$	46,115
Long-term marketable securities		72,623		5,030		(96	)		77,557		14,632
	$	414,857	$	5,343	$	(105	)	$	420,095	$	60,747

The following table summarizes the composition of available-for-sale marketable securities at December 31, 2018:

	December 31, 2018
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	110,969	$	112	$	(1,360	)	$	109,721	$	75,040
Commercial paper		86,130		13		(26	)		86,117		85,094
Corporate debt securities		41,133		432		(1,545	)		40,020		24,767
U.S. government agency securities		9,646		1		(36	)		9,611		7,077
Certificates of deposit and time deposits		7,604		—		—			7,604		—
Debt mutual funds		3,153		34		—			3,187		—
Non-U.S. government securities		376		—		—			376		—
	$	259,011	$	592	$	(2,967	)	$	256,636	$	191,978

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	190,100	$	88	$	(92	)	$	190,096	$	140,262
Long-term marketable securities		68,911		504		(2,875	)		66,540		51,716
	$	259,011	$	592	$	(2,967	)	$	256,636	$	191,978

As of September 29, 2019, the fair market value of investments in available-for-sale securities with unrealized losses totaled $60.7 million. Of this value, $4.9 million had unrealized losses of $0.1 million for greater than one year and $55.8 million had unrealized losses of $0.1 million for less than one year.

As of December 31, 2018, the fair market value of investments with unrealized losses totaled $192.0 million. Of this value, $28.5 million had unrealized losses of $1.6 million greater than one year and $163.5 million had unrealized losses of $1.4 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 29, 2019 and December 31, 2018 were temporary.

The contractual maturities of investments in available-for-sale securities held at September 29, 2019 were as follows:

	September 29, 2019
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	342,234	$	342,538
Due after 1 year through 5 years		16,609		16,718
Due after 5 years through 10 years		15,002		15,297
Due after 10 years		37,192		41,574
Total	$	411,037	$	416,127

Contractual maturities of investments in available-for-sale securities held at September 29, 2019 exclude $4.0 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 29, 2019 and December 31, 2018 was $114.9 million and $163.1 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 29, 2019 and December 31, 2018:

	Balance Sheet Location		September 29, 2019			December 31, 2018
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts - derivative assets		Prepayments	$	119		$	79
Foreign exchange contracts - derivative liabilities		Other current liabilities		(489	)		(514	)
Total derivatives			$	(370	)	$	(435	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended September 29, 2019 and September 30, 2018.

	Location of Losses (Gains) Recognized in Statement of Operations	For the Three Months Ended					For the Nine Months Ended
		September 29, 2019		September 30, 2018			September 29, 2019		September 30, 2018
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	3,699	$	(899	)	$	7,872	$	2,502

(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 September 29, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.5 million. For the nine months ended September 29, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.4 million.

(3) 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.

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