Financial Instruments

3 Months Ended

Mar. 29, 2020

. 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 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 three months ended March 29, 2020 and March 31, 2019, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three months ended March 29, 2020 and March 31, 2019 were $1.4 million and $0.1 million, respectively. Realized losses recorded in the three months ended March 29, 2020 and March 31, 2019 were $0.1

million. Realized gains and losses are included in other (income) expense, net.

Unrealized losses on equity securities recorded in the three months ended March 29, 2020 were

$6.0

million. Unrealized gains on equity securities recorded in the three months ended March 31, 2019 were

$2.8 million.

Unrealized gains and losses on equity securities are included in other (income) expense, net. Unrealized gains and losses on

available-for-sale

debt securities are included in accumulated other comprehensive income (loss).

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 March 29, 2020 and December 31, 2019.


	March 29, 2020
	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	$	270,460	$	—	$	—	$	270,460
Cash equivalents		244,176		78,858		—		323,034
Available-for-sale securities:
Commercial paper		—		101,947		—		101,947
U.S. Treasury securities		—		85,632		—		85,632
Corporate debt securities		—		67,467		—		67,467
Certificates of deposit and time deposits		—		25,776		—		25,776
Debt mutual funds		5,237		—		—		5,237
U.S. government agency securities		—		4,402		—		4,402
Non-U.S. government securities		—		589		—		589
Equity securities:
Mutual funds		20,464		—		—		20,464

	$	540,337	$	364,671	$	—	$	905,008
Derivative assets		—		344		—		344

Total	$	540,337	$	365,015	$	—	$	905,352

Liabilities
Contingent consideration	$	—	$	—	$	20,472	$	20,472
Derivative liabilities		—		254		—		254

Total	$	—	$	254	$	20,472	$	20,726


Reported as follows:

	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	514,636	$	78,858	$	—	$	593,494
Marketable securities		—		211,001		—		211,001
Long-term marketable securities		25,701		74,812		—		100,513
Prepayments and other current assets		—		344		—		344

Total	$	540,337	$	365,015	$	—	$	905,352

Liabilities
Other current liabilities	$	—	$	254	$	—	$	254
Contingent consideration		—		—		662		662
Long-term contingent consideration		—		—		19,810		19,810


Total	$	—	$	254	$	20,472	$	20,726


	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

	$	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 and other current assets		—		528		—		528

Total	$	754,920	$	261,325	$	—	$	1,016,245

Liabilities
Other accrued liabilities	$	—	$	203	$	—	$	203
Contingent consideration		—		—		9,106		9,106
Long-term contingent consideration		—		—		30,599		30,599

Total	$	—	$	203	$	39,705	$	39,908

Changes in the fair value of Level 3 contingent consideration for the three months ended March 29, 2020 and March 31, 2019 were as follows:


	For the Three Months Ended
	March 29,			March 31,
	2020			2019
	(in thousands)
Balance at beginning of period	$	39,705		$	70,543
Foreign currency impact		(361	)		(610	)
Payments (a)(b)		(8,852	)		(34,590	)
Fair value adjustment (c)(d)		(10,020	)		2,970

Balance at end of period	$	20,472		$	38,313

(a)	In the three months ended March 29, 2020, Teradyne paid $8.9 million of contingent consideration for the earn-out in connection with the acquisition of MiR.

(b)	In the three months ended March 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 A/S (“Universal Robots”), respectively.

(c)	In the three months ended March 29, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisitions of MiR and AutoGuide decreased by $2.9 million and $7.1 million, respectively, due to lower forecasted results.

(d)	In the three months ended March 31, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR increased by $3.0 million.

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


Liability	March 29, 2020 Fair Value		Valuation Technique		Unobservable Inputs		Weighted Average
	(in thousands)
Contingent consideration (AutoGuide)	$	19,810		Monte Carlo Simulation		Revenue volatility		14.0	%
						Discount Rate		4.4	%
Contingent consideration (MiR)	$	662		Monte Carlo Simulation		Revenue volatility		16.0	%
						Discount Rate		2.2	%

As of March 29, 2020, 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 March 29, 2020, 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 March 29, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $61.4 million. The remaining

earn-out

period ends on December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at March 29, 2020 and December 31, 2019 were as follows:


	March 29, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	593,494	$	593,494	$	773,924	$	773,924
Marketable securities		311,514		311,514		241,793		241,793
Derivative assets		344		344		528		528
Liabilities
Contingent consideration		20,472		20,472		39,705		39,705
Derivative liabilities		254		254		203		203
Convertible debt (1)		398,466		829,438		394,687		1,010,275

(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 March 29, 2020:


	March 29, 2020
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Commercial paper	$	101,915	$	33	$	(1	)	$	101,947	$	1,296
U.S. Treasury securities		82,680		2,958		(6	)		85,632		96
Corporate debt securities		65,696		2,951		(1,180	)		67,467		40,891
Certificates of deposit and time deposits		25,769		7		—			25,776		—
Debt mutual funds		5,089		148		—			5,237		—
U.S. government agency securities		4,335		67		—			4,402		—
Non-U.S. government securities		589		—		—			589		—

	$	286,073	$	6,164	$	(1,187	)	$	291,050	$	42,283

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	210,722	$	430	$	(151	)	$	211,001	$	32,037
Long-term marketable securities		75,351		5,734		(1,036	)		80,049		10,246

	$	286,073	$	6,164	$	(1,187	)	$	291,050	$	42,283

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

As of March 29, 2020 and December 31, 2019, the fair market value of investments with unrealized losses less than one year totaled $42.3 million and $23.6 million, respectively.

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 March 29, 2020 and December 31, 2019 were not other than temporary.

The contractual maturities of investments in

available-for-sale

securities held at March 29, 2020 were as follows:


	March 29, 2020
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	210,722	$	211,001
Due after 1 year through 5 years		18,933		19,465
Due after 5 years through 10 years		12,440		13,160
Due after 10 years		38,889		42,187

Total	$	280,984	$	285,813

Contractual maturities of investments in

available-for-sale

securities held at March 29, 2020 exclude $5.2 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 March 29, 2020 and December 31, 2019 was $132.1 million and $144.9 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 March 29, 2020 and December 31, 2019:


	Balance Sheet Location		March 29, 2020			December 31, 2019
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Prepayments	$	344		$	528
Foreign exchange contracts		Other current liabilities		(254	)		(203	)

Total derivatives			$	90		$	325

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three months ended March 29, 2020 and March 31, 2019:


	Location of Losses	For the Three Months Ended
	Recognized in	March 29,		March 31,
	Statement of Operations	2020		2019
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	4,011	$	3,934

(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 three months ended March 29, 2020 and March 31, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.0 million and $3.2 million, respectively.

See Note

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details