Financial Instruments

12 Months Ended

Dec. 31, 2019

Financial Instruments

H.    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 (loss) on the balance sheet.

Teradyne’s available-for-sale debt securities are classified as Level 2, and equity and debt mutual funds 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 years ended December 31, 2019 and 2018, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in 2019, 2018, and 2017 were $1.3 million, $4.0 million, and $1.1 million, respectively. Realized losses recorded in 2019, 2018, and 2017 were $0.2 million, $1.6 million, and $0.3 million, respectively. Realized gains are included in interest income and realized losses are included in interest expense.

Unrealized gains on equity securities recorded during the years ended December 31, 2019 and 2018 were $5.3 million and $1.4 million, respectively. Unrealized losses on equity securities recorded during the years ended December 31, 2019 and 2018 were $0.4 million and $7.4 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 December 31, 2019 and 2018:

	December 31, 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	$	311,975	$	—	$	—	$	311,975
Cash equivalents		410,285		51,664		—		461,949
Available for sale securities:
Corporate debt securities		—		97,307		—		97,307
Commercial paper		—		54,149		—		54,149
U.S. Treasury securities		—		42,382		—		42,382
U.S. government agency securities		—		9,952		—		9,952
Debt mutual funds		6,888		—		—		6,888
Certificates of deposit and time deposits		—		4,751		—		4,751
Non-U.S. government securities		—		592		—		592
Equity securities:
Equity mutual funds		25,772		—		—		25,772
Total	$	754,920	$	260,797	$	—	$	1,015,717
Derivative assets		—		528		—		528
Total	$	754,920	$	261,325	$	—	$	1,016,245
Liabilities
Contingent consideration	$	—	$	—	$	39,705	$	39,705
Derivative liabilities		—		203		—		203
Total	$	—	$	203	$	39,705	$	39,908

Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	722,260	$	51,664	$	—	$	773,924
Marketable securities		—		137,303		—		137,303
Long-term marketable securities		32,660		71,830		—		104,490
Prepayments		—		528		—		528
Total	$	754,920	$	261,325	$	—	$	1,016,245
Liabilities
Other current liabilities	$	—	$	203	$	—	$	203
Contingent consideration		—		—		9,106		9,106
Long-term contingent consideration		—		—		30,599		30,599
Total	$	—	$	203	$	39,705	$	39,908

	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:
Equity 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
	$	590,415	$	614,243	$	—	$	1,204,658
Liabilities
Other current liabilities	$	—	$	514	$	—	$	514
Contingent consideration		—		—		34,865		34,865
Long-term contingent consideration		—		—		35,678		35,678
	$	—	$	514	$	70,543	$	71,057

Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2019 and 2018 were as follows:

	Contingent Consideration
	(in thousands)
Balance at December 31, 2017	$	45,102
Acquisition of MiR		52,547
Foreign currency impact		(3,540	)
Payments (1)		(24,553	)
Fair value adjustment (2)		987
Balance at December 31, 2018		70,543
Acquisition of AutoGuide		23,976
Foreign currency impact		(967	)
Payments (3)		(34,590	)
Fair value adjustment (4)		(19,257	)
Balance at December 31, 2019	$	39,705

(1) During the year ended December 31, 2018, Teradyne paid $24.6 million of contingent consideration for the earn-out in connection with the acquisition of Universal Robots.

(2) During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was increased by $17.7 million primarily due to an increase in forecasted revenues. During the year ended December 31, 2018, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was decreased by $16.7 million primarily due to a decrease in forecasted revenues.

(3) During the year ended December 31, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisitions of MiR and Universal Robots, respectively.

(4) During the year ended December 31, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR was decreased by $22.2 million primarily due to a decrease in forecasted revenues partially offset by the impact from modification of the earn-out structure. During the year ended December 31, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of AutoGuide was increased by $3.0 million primarily due to an  increase in forecasted revenues.

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

Liability	December 31, 2019 Fair Value		Valuation Technique		Unobservable Inputs		Weighted Average
	(in thousands)
Contingent consideration (AutoGuide)	$	26,952		Monte Carlo simulation		Revenue Volatility		11.5%
						Discount Rate		2.6%
Contingent consideration (MiR)	$	12,753(1)		Monte Carlo simulation		Revenue Volatility		14.0%
						Discount Rate		0.2%

(1) Contingent consideration related to MiR of $9.1 million is expected to be paid in March 2020.

As of December 31, 2019, the significant unobservable inputs used in the Monte Carlo simulation to fair value the AutoGuide and 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 December 31, 2019, the maximum amount of contingent consideration that could be paid in connection with the acquisition of AutoGuide is $106.9 million. The earn-out periods end on December 31, 2020, December 31, 2021 and December 31, 2022. As of December 31, 2019, the remaining maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $63.2 million. The remaining earn-out period ends on December 31, 2020.

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

	December 31, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	773,924	$	773,924	$	926,752	$	926,752
Marketable securities		241,793		241,793		277,827		277,827
Derivative assets		528		528		79		79
Liabilities
Contingent consideration		39,705		39,705		70,543		70,543
Derivative liabilities		203		203		514		514
Convertible debt (1)		394,687		1,010,275		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 amount due to the short term nature of these instruments.  

The following tables summarize the composition of available-for-sale marketable securities at December 31, 2019 and 2018:

	December 31, 2019
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Corporate debt securities	$	93,267	$	4,081	$	(41	)	$	97,307	$	2,009
Commercial paper		54,124		26		(1	)		54,149		1,391
U.S. Treasury securities		42,167		431		(216	)		42,382		17,556
U.S. government agency securities		9,942		14		(4	)		9,952		3,043
Debt mutual funds		6,753		135		—			6,888		—
Certificates of deposit and time deposits		4,751		—		—			4,751		—
Non-U.S. government securities		592		—		—			592		—
	$	211,596	$	4,687	$	(262	)	$	216,021	$	23,999

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	137,144	$	160	$	(1	)	$	137,303	$	2,922
Long-term marketable securities		74,452		4,527		(261	)		78,718		21,077
	$	211,596	$	4,687	$	(262	)	$	216,021	$	23,999

	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 December 31, 2019, the fair market value of investments with unrealized losses less than one year totaled $23.6 million.

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 December 31, 2019 and 2018, were not other than temporary.

The contractual maturities of investments in available-for-sale marketable securities held at December 31, 2019 were as follows:

	Cost		Fair Value
	(in thousands)
Due within one year	$	137,144	$	137,303
Due after 1 year through 5 years		15,264		15,351
Due after 5 years through 10 years		14,436		14,576
Due after 10 years		37,999		41,903
Total	$	204,843	$	209,133

The fair value of the outstanding contracts was a gain of $0.3 million and a loss of $0.4 million, respectively, at December 31, 2019 and 2018.

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 December 31, 2019 and 2018:

	Balance Sheet Location	December 31, 2019			December 31, 2018
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	528		$	79
Foreign exchange contracts	Other current liabilities		(203	)		(514	)
Total		$	325		$	(435	)

The following table summarizes the effect of derivative instruments in the statements of operations recognized for the years ended December 31, 2019, 2018, and 2017.

	Location of (Gains) Losses Recognized in Statement of Operations		December 31, 2019		December 31, 2018		December 31, 2017
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Other (income) expense, net	$	5,960	$	7,386	$	(1,133	)

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

(2) For the years ended December 31, 2019 and 2018, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.6 million and $2.5 million, respectively.

(3) For the year ended December 31, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.9 million.

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

Concentration of Credit Risk

Financial instruments which potentially subject Teradyne to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Teradyne’s cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. Teradyne’s fixed income available-for-sale marketable securities have a minimum rating of AA by one or more of the major credit rating agencies. Teradyne places foreign currency forward contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. Teradyne performs ongoing credit evaluations of its customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable. There were no customers who accounted for 10% or more of Teradyne’s accounts receivable balance as of December 31, 2019 and 2018.