Financial Instruments

9 Months Ended

Oct. 02, 2022

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 equity and debt mutual funds are classified as Level 1 and available-for-sale debt securities are classified as Level 2. 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 2, 2022 and October 3, 2021, 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 2, 2022 were $0.1 million and $0.6 million, respectively. Realized gains recorded in the three and nine months ended October 3, 2021 were $0.5 million and $2.6 million, respectively. Realized losses recorded in the three and nine months ended October 2, 2022 were $0.3 million and $0.9 million, respectively. No realized losses were recorded in the three and nine months ended October 3, 2021. Realized gains and losses are included in other (income) expense, net.

Unrealized losses on equity securities recorded in the three and nine months ended October 2, 2022 were $2.3 million and $11.1 million, respectively. No unrealized gains on equity securities were recorded in the three and nine months ended October 2, 2022. 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 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 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 2, 2022 and December 31, 2021.

	October 2, 2022
	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	$	464,744	$	—	$	—	$	464,744
Cash equivalents		51,243		194,759		—		246,002
Available-for-sale securities:
U.S. Treasury securities		—		65,354		—		65,354
Corporate debt securities		—		45,864		—		45,864
Commercial paper		—		17,719		—		17,719
Debt mutual funds		6,441		—		—		6,441
U.S. government agency securities		—		4,681		—		4,681
Certificates of deposit and time deposits		—		1,205		—		1,205
Non-U.S. government securities		—		512		—		512
Equity securities:
Mutual funds		34,573		—		—		34,573
	$	557,001	$	330,094	$	—	$	887,095
Derivative assets		—		546		—		546
Total	$	557,001	$	330,640	$	—	$	887,641
Liabilities
Derivative liabilities	$	—	$	1,106	$	—	$	1,106
Total	$	—	$	1,106	$	—	$	1,106
Reported as follows:
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	515,987	$	194,759	$	—	$	710,746
Marketable securities		—		65,310		—		65,310
Long-term marketable securities		41,014		70,025		—		111,039
Prepayments and other current assets		—		546		—		546
Total	$	557,001	$	330,640	$	—	$	887,641
Liabilities		.
Other current liabilities	$	—	$	1,106	$	—	$	1,106
Total	$	—	$	1,106	$	—	$	1,106

	December 31, 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	$	628,740	$	—	$	—	$	628,740
Cash equivalents		412,212		81,247		—		493,459
Available-for-sale securities:								—
Commercial paper		—		189,620		—		189,620
U.S. Treasury securities		—		77,789		—		77,789
Corporate debt securities		—		56,901		—		56,901
Debt mutual funds		7,971		—		—		7,971
U.S. government agency securities		—		4,610		—		4,610
Certificates of deposit and time deposits		—		1,356		—		1,356
Non-U.S. government securities		—		589		—		589
Equity securities:
Mutual Funds		39,253		—		—		39,253
	$	1,088,176	$	412,112	$	—	$	1,500,288
Derivative assets		—		92		—		92
Total	$	1,088,176	$	412,204	$	—	$	1,500,380
Liabilities
Derivative liabilities		—		118		—		118
Total	$	—	$	118	$	—	$	118
Reported as follows:
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	1,040,952	$	81,247	$	—	$	1,122,199
Marketable securities		—		244,231		—		244,231
Long-term marketable securities		47,224		86,634		—		133,858
Prepayments and other current assets		—		92		—		92
Total	$	1,088,176	$	412,204	$	—	$	1,500,380
Liabilities
Other current liabilities	$	—	$	118	$	—	$	118
Total	$	—	$	118	$	—	$	118

Changes in the fair value of Level 3 contingent consideration for the nine months ended October 2, 2022, and October 3, 2021 were as follows:

	For the Three Months Ended				For the Nine Months Ended
	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
	(in thousands)
Balance at beginning of period	$	—	$	—	$	—	$	7,227
Fair value adjustment (a)		—		—		—		(7,227	)
Balance at end of period	$	—	$	—	$	—	$	—

(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.

On March 25, 2022, the arbitration claim filed by Industrial Automation LLC, sellers of AutoGuide, against Teradyne alleging non-compliance with the earn-out provisions of the Membership Interests Purchase Agreement, dated as of October 18, 2019, among Industrial Automation LLC, Teradyne and AutoGuide was settled for $26.7 million. As a result, Teradyne has no remaining earn-out obligations.

The carrying amounts and fair values of Teradyne’s financial instruments at October 2, 2022 and December 31, 2021 were as follows:

	October 2, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	710,746	$	710,746	$	1,122,199	$	1,122,199
Marketable securities		176,349		176,349		378,089		378,089
Derivative assets		546		546		92		92
Liabilities
Derivative liabilities		1,106		1,106		118		118
Convertible debt		64,791		154,486		108,426		604,648

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 2, 2022:

	October 2, 2022
	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	$	69,598	$	—	$	(4,244	)	$	65,354	$	65,354
Corporate debt securities		52,926		1		(7,063	)		45,864		45,622
Commercial paper		17,691		35		(7	)		17,719		8,983
Debt mutual funds		6,897		—		(456	)		6,441		3,075
U.S. government agency securities		4,790		—		(109	)		4,681		4,681
Certificates of deposit and time deposits		1,205		—		—			1,205		—
Non-U.S. government securities		512		—		—			512		—
	$	153,619	$	36	$	(11,879	)	$	141,776	$	127,715

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	65,744	$	35	$	(469	)	$	65,310	$	55,369
Long-term marketable securities		87,875		1		(11,410	)		76,466		72,346
	$	153,619	$	36	$	(11,879	)	$	141,776	$	127,715

The following table summarizes the composition of available-for-sale marketable securities at December 31, 2021:

	December 31, 2021
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Commercial paper	$	189,614	$	15	$	(9	)	$	189,620	$	22,784
U.S. Treasury securities		77,707		551		(470	)		77,789		46,435
Corporate debt securities		52,266		4,863		(227	)		56,901		19,422
Debt mutual funds		7,928		43		—			7,971		—
U.S. government agency securities		4,617		5		(12	)		4,610		3,296
Certificates of deposit and time deposits		1,356		—		—			1,356		—
Non-U.S. government securities		589		—		—			589		—
	$	334,077	$	5,477	$	(718	)	$	338,836	$	91,937

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	244,213	$	64	$	(46	)	$	244,231	$	54,798
Long-term marketable securities		89,864		5,413		(672	)		94,605		37,139
	$	334,077	$	5,477	$	(718	)	$	338,836	$	91,937

As of October 2, 2022, the fair market value of investments with unrealized losses less than one year and greater than one year totaled $99.7 million and $28.0 million, respectively. As of December 31, 2021, the fair market value of investments with unrealized losses for less than one year and greater than one year totaled $85.4 million and $6.5 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 October 2, 2022 and December 31, 2021 were not other than temporary.

The contractual maturities of investments in available-for-sale securities held at October 2, 2022 were as follows:

	October 2, 2022
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	65,744	$	65,310
Due after 1 year through 5 years		35,934		34,116
Due after 5 years through 10 years		4,800		4,209
Due after 10 years		40,244		31,700
Total	$	146,722	$	135,335

Contractual maturities of investments in available-for-sale securities held at October 2, 2022 exclude debt mutual funds with a fair market value of $6.4 million, as they do not have a contractual maturity date.

Derivatives

Teradyne conducts business in various foreign countries, with certain transactions denominated in local currencies. As a result, Teradyne is exposed to risks relating to changes in foreign currency exchange rates. Teradyne’s foreign currency risk management objective is to minimize the effect of exchange rate fluctuations associated with the remeasurement of monetary assets and liabilities denominated in foreign currencies, and changes in its cash inflows attributable to the forecasted cash flows from certain foreign currency denominated revenues.

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.

Teradyne also enters into foreign currency forward and option contracts designated as cash flow hedges to hedge the risk of changes in its cash inflows attributable to changes in foreign currency exchange rates. The cash flow hedges have maturities of less than six months and mature in the period of revenue recognition for certain products and services in backlog and forecasted to be recognized in a future period. Teradyne evaluates cash flow hedges for effectiveness at inception based on the critical terms match method. The hedges are not expected to incur any ineffectiveness however a quarterly qualitative assessment of effectiveness is done to determine if the critical terms match method remains appropriate to use. The change in fair value of the contracts is recorded in accumulated other comprehensive income (loss) and reclassified to earnings at maturity date.

Teradyne does not use derivative financial instruments for speculative purposes.

At October 2, 2022 and December 31, 2021, Teradyne had the following foreign currency forward contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:

	October 2, 2022								December 31, 2021
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(37.5	)	$	—	$	(37.5	)	$	(31.4	)	$	—	$	(31.4	)
Taiwan Dollar		(35.2	)		—		(35.2	)		(35.1	)		—		(35.1	)
Korean Won		(5.4	)		—		(5.4	)		(4.2	)		—		(4.2	)
British Pound Sterling		(1.1	)		—		(1.1	)		(1.8	)		—		(1.8	)
Danish Krone		(0.5	)		—		(0.5	)		—			—		—
Singapore Dollar		—			24.4		24.4			—			61.9		61.9
Euro		—			36.7		36.7			—			44.9		44.9
Philippine Peso		—			2.8		2.8			—			3.9		3.9
Chinese Yuan		—			2.4		2.4			—			2.8		2.8
Total	$	(79.7	)	$	66.3	$	(13.4	)	$	(72.5	)	$	113.5	$	41.0

The fair value of the outstanding foreign currency forward contracts was a loss of $1.1 million and $0.1 million, respectively, at October 2, 2022 and December 31, 2021.

Unrealized 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.

At October 2, 2022 and December 31, 2021, Teradyne had the following cash flow hedge contracts to buy and sell non-U.S. currencies for U.S. dollars with the following notional amounts:

	October 2, 2022							December 31, 2021
	Buy Position			Sell Position		Net Total		Buy Position		Sell Position		Net Total
	(in millions)
Japanese Yen	$	(5.4	)	$	26.6	$	21.2	$	—	$	—	$	—
Taiwan Dollar		(9.2	)		18.3		9.1		—		—		—
Total	$	(14.6	)	$	44.9	$	30.3	$	—	$	—	$	—

The fair value of the outstanding cash flow hedge contracts was a gain of $0.5 million at October 2, 2022.

Unrealized gains and losses on foreign currency cash flow hedge contracts are included in accumulated other comprehensive income (loss). At maturity the gains or losses associated with cash flow hedge contracts are recorded to revenue.

The following table summarizes the fair value of derivative instruments as of October 2, 2022 and December 31, 2021:

	Balance Sheet Location		October 2, 2022			December 31, 2021
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Prepayments	$	9		$	92
Foreign currency forward contracts		Other current liabilities		(1,106	)		(118	)
Derivatives designated as hedging instruments:
Foreign currency option contracts		Prepayments		537			—
Total derivatives			$	(560	)	$	(26	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended October 2, 2022 and October 3, 2021:

	Location of Losses (Gains) Recognized in Statement of Operations	For the Three Months Ended				For the Nine Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022			October 3, 2021
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other (income) expense, net	$	1,246	$	2,288	$	(2,209	)	$	5,937
Derivatives designated as hedging instruments:
Foreign currency option contracts	Revenue		—		—		—			—
Total derivatives		$	1,246	$	2,288	$	(2,209	)	$	5,937

The above table does not reflect the corresponding gains and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and nine months ended October 2, 2022, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.6 million and $9.5 million, respectively. 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.

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