Financial Instruments

9 Months Ended

Oct. 03, 2021

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 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 and nine months ended October 3, 2021 and September 27, 2020, 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 October 3, 2021 were $0.5 million and $2.6 million, respectively. Realized gains recorded in the three and nine months ended September 27, 2020 were $1.1 million and $4.1 million, respectively. No realized losses were recorded in the three and nine months ended October 3, 2021. Realized losses recorded in the three and nine months ended September 27, 2020 were $0.1 million and $0.3 million, respectively. Realized gains and losses are included in other (income) expense, net.

Unrealized gains on equity securities recorded in the nine months ended October 3, 2021 were $3.3 million. Unrealized losses on equity securities recorded in the three and nine months ended October 3, 2021 were $0.4 million and $1.1 million, respectively. Unrealized gains on equity securities recorded in the three and nine months ended September 27, 2020 were $2.0 million and $5.7 million, respectively. Unrealized losses on equity securities recorded in the nine months ended September 27, 2020 were $6.0 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.

The cost of securities sold is based on average cost.

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 October 3, 2021 and December 31, 2020.

	October 3, 2021
	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	$	577,752	$	—	$	—	$	577,752
Cash equivalents		176,703		324,999		—		501,702
Available-for-sale securities:
Commercial paper		—		179,629		—		179,629
U.S. Treasury securities		—		80,519		—		80,519
Corporate debt securities		—		58,648		—		58,648
Debt mutual funds		8,937		—		—		8,937
U.S. government agency securities		—		4,616		—		4,616
Certificates of deposit and time deposits		—		1,346		—		1,346
Non-U.S. government securities		—		590		—		590
Equity securities:
Mutual funds		35,776		—		—		35,776
	$	799,168	$	650,347	$	—	$	1,449,515
Derivative assets		—		93		—		93
Total	$	799,168	$	650,440	$	—	$	1,449,608
Liabilities
Derivative liabilities		—		433		—		433
Total	$	—	$	433	$	—	$	433
Reported as follows:
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	754,455	$	324,999	$	—	$	1,079,454
Marketable securities		—		233,397		—		233,397
Long-term marketable securities		44,713		91,951		—		136,664
Prepayments and other current assets		—		93		—		93
Total	$	799,168	$	650,440	$	—	$	1,449,608
Liabilities
Other current liabilities	$	—	$	433	$	—	$	433
Total	$	—	$	433	$	—	$	433

	December 31, 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	$	443,166	$	—	$	—	$	443,166
Cash equivalents		347,768		123,187		—		470,955
Available-for-sale securities:								—
U.S. Treasury securities		—		258,304		—		258,304
Commercial paper		—		254,413		—		254,413
Corporate debt securities		—		83,615		—		83,615
Debt mutual funds		8,565		—		—		8,565
U.S. government agency securities		—		4,339		—		4,339
Certificates of deposit and time deposits		—		979		—		979
Non-U.S. government securities		—		625		—		625
Equity securities:
Equity mutual funds		29,420		—		—		29,420
	$	828,919	$	725,462	$	—	$	1,554,381
Derivative assets		—		95		—		95
Total	$	828,919	$	725,557	$	—	$	1,554,476
Liabilities
Contingent consideration	$	—	$	—	$	7,227	$	7,227
Derivative liabilities		—		504		—		504
Total	$	—	$	504	$	7,227	$	7,731
Reported as follows:
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	790,934	$	123,187	$	—	$	914,121
Marketable securities		—		522,280		—		522,280
Long-term marketable securities		37,985		79,995		—		117,980
Prepayments and other current assets		—		95		—		95
Total	$	828,919	$	725,557	$	—	$	1,554,476
Liabilities
Other accrued liabilities	$	—	$	504	$	—	$	504
Long-term contingent consideration		—		—		7,227		7,227
Total	$	—	$	504	$	7,227	$	7,731

Changes in the fair value of Level 3 contingent consideration for the three and nine months ended October 3, 2021 and September 27, 2020 were as follows:

	For the Three Months Ended					For the Nine Months Ended
	October 3, 2021		September 27, 2020			October 3, 2021			September 27, 2020
	(in thousands)
Balance at beginning of period	$	—	$	49,737		$	7,227		$	39,705
Fair value adjustment (a)(b)(c)		—		(27,206	)		(7,227	)		(7,967	)
Foreign currency impact		—		—			—			(355	)
Payments (d)		—		—			—			(8,852	)
Balance at end of period	$	—	$	22,531		$	—		$	22,531

(a) In the nine months ended October 3, 2021, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide was reduced to zero, which resulted in a benefit of $7.2 million, primarily due to a decrease in forecasted revenues and earnings before interest and taxes. As of October 3, 2021, the maximum amount of contingent consideration that could be paid in connection with the acquisition of AutoGuide is $100.2 million. The remaining earn-out periods end on December 31, 2021 and December 31, 2022. The sellers of AutoGuide have filed an arbitration claim against Teradyne related to allegations of non-compliance with its earn-out obligations. The ultimate amount of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide may be affected by the outcome of the arbitration (see Note R: “Commitments and Contingencies”).

(b) In the three and nine months ended September 27, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide decreased by $27.2 million and $4.4 million, respectively, due to lower forecasted revenues and earnings before interest and taxes.

(c) In the nine months ended September 27, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of Mobile Industrial Robots (“MiR”) decreased by $3.5 million due to lower forecasted results.

(d) In the nine months ended September 27, 2020, Teradyne paid $8.9 million of contingent consideration for the earn-out in connection with the acquisition of MiR.

The carrying amounts and fair values of Teradyne’s financial instruments at October 3, 2021 and December 31, 2020 were as follows:

	October 3, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	1,079,454	$	1,079,454	$	914,121	$	914,121
Marketable securities		370,061		370,061		640,260		640,260
Derivative assets		93		93		95		95
Liabilities
Contingent consideration		—		—		7,227		7,227
Derivative liabilities		433		433		504		504
Convertible debt (1)		145,003		546,464		410,111		1,739,553

(1) The carrying value represents the bifurcated debt component only, while the level 2 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 October 3, 2021:

	October 3, 2021
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Commercial paper	$	179,624	$	5	$	—		$	179,629	$	20,799
U.S. Treasury securities		80,370		636		(487	)		80,519		17,336
Corporate debt securities		53,329		5,421		(102	)		58,648		22,010
Debt mutual funds		8,872		65		—			8,937		—
U.S. government agency securities		4,610		11		(5	)		4,616		3,302
Certificates of deposit and time deposits		1,346		—		—			1,346		—
Non-U.S. government securities		590		—		—			590		—
	$	328,741	$	6,138	$	(594	)	$	334,285	$	63,447

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	233,327	$	92	$	(22	)	$	233,397	$	28,773
Long-term marketable securities		95,414		6,046		(572	)		100,888		34,674
	$	328,741	$	6,138	$	(594	)	$	334,285	$	63,447

The following table summarizes the composition of available-for-sale marketable securities at December 31, 2020:

	December 31, 2020
	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	$	257,132	$	1,330	$	(158	)	$	258,304	$	17,243
Commercial paper		254,404		10		(1	)		254,413		12,173
Corporate debt securities		76,129		7,539		(53	)		83,615		39,896
Debt mutual funds		8,413		152		—			8,565		—
U.S. government agency securities		4,294		46		(1	)		4,339		1,106
Certificates of deposit and time deposits		979		—		—			979		—
Non-U.S. government securities		625		—		—			625		—
	$	601,976	$	9,077	$	(213	)	$	610,840	$	70,418

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	522,228	$	92	$	(40	)	$	522,280	$	61,806
Long-term marketable securities		79,748		8,985		(173	)		88,560		8,612
	$	601,976	$	9,077	$	(213	)	$	610,840	$	70,418

As of October 3, 2021 and December 31, 2020, the fair market value of investments with unrealized losses less than one year totaled $57.3 million and $70.4 million, respectively. As of October 3, 2021, the fair market value of investments with unrealized losses for greater than one year totaled $6.2 million.

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 October 3, 2021 and December 31, 2020 were not other than temporary.

The contractual maturities of investments in available-for-sale securities held at October 3, 2021 were as follows:

	October 3, 2021
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	233,327	$	233,397
Due after 1 year through 5 years		46,460		46,744
Due after 5 years through 10 years		6,120		6,586
Due after 10 years		33,962		38,621
Total	$	319,869	$	325,348

Contractual maturities of investments in available-for-sale securities held at October 3, 2021 exclude debt mutual funds with a fair market value of $8.9 million, 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 October 3, 2021 and December 31, 2020 was $181.8 million and $152.9 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 October 3, 2021 and December 31, 2020:

	Balance Sheet Location		October 3, 2021			December 31, 2020
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Prepayments	$	93		$	95
Foreign exchange contracts		Other current liabilities		(433	)		(504	)
Total derivatives			$	(340	)	$	(409	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended October 3, 2021 and September 27, 2020:

	Location of Losses (Gains) Recognized in Statement of Operations		For the Three Months Ended					For the Nine Months Ended
			October 3, 2021		September 27, 2020			October 3, 2021		September 27, 2020
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Other (income) expense, net	$	2,288	$	(551	)	$	5,937	$	3,930

(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 and nine months ended October 3, 2021, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.0 million and $1.3 million, respectively.

(3) For the three months ended September 27, 2020, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.2 million. For the nine months ended September 27, 2020, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.4 million.

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