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FINANCIAL INSTRUMENTS | 62 Months Ended
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Dec. 31, 2012
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 Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of ASC 320-10, “Investments—Debt and Equity Securities.” ASC 320-10 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. On a quarterly basis, Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:
| • |  | The length of time and the extent to which the market value has been less than cost;
| • |  | The financial condition and near-term prospects of the issuer; and
| • |  | The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the years ended December 31, 2012, 2011 and 2010. As defined in ASC 820-10 “Fair Value Measurements and Disclosures”, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted prices in active markets for identical assets as of the reporting date. Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, and therefore is considered a Level 2 input. Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data. Most of Teradyne’s fixed income securities are classified as Level 2, with the exception of U.S. Treasury securities and investments in equity and debt mutual funds, which are classified as Level 1, and contingent consideration, which is classified as Level 3. The majority of Level 2 securities are 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. There were no realized losses recorded in 2012, 2011 and 2010. Realized gains recorded in 2012, 2011 and 2010 were $1.4 million, $2.7 million and $3.2 million, respectively. Realized gains are included in interest income. Unrealized gains and losses are included in accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method. During the years ended December 31, 2012 and 2011, there were no transfers in or out of Level 1, Level 2 or Level 3 financial instruments. 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, 2012 and 2011.
|  | December 31, 2012 |
|  | 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 |  | $ | 139,354 |  |  | $ | — |  |  | $ | — |  |  | $ | 139,354 |
Cash equivalents |  |  | 183,039 |  |  |  | 16,527 |  |  |  | — |  |  |  | 199,566 |
Available for sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 312,116 |  |  |  | — |  |  |  | — |  |  |  | 312,116 |
U.S. government agency securities |  |  | — |  |  |  | 217,655 |  |  |  | — |  |  |  | 217,655 |
Commercial paper |  |  | — |  |  |  | 70,434 |  |  |  | — |  |  |  | 70,434 |
Corporate debt securities |  |  | — |  |  |  | 55,755 |  |  |  | — |  |  |  | 55,755 |
Equity and debt mutual funds |  |  | 9,717 |  |  |  | — |  |  |  | — |  |  |  | 9,717 |
Certificates of deposit and time deposits |  |  | — |  |  |  | 1,627 |  |  |  | — |  |  |  | 1,627 |
Non-U.S. government securities |  |  | — |  |  |  | 84 |  |  |  | — |  |  |  | 84 |
Total |  |  | 644,226 |  |  |  | 362,082 |  |  |  | — |  |  |  | 1,006,308 |
Derivatives |  |  | — |  |  |  | 121 |  |  |  | — |  |  |  | 121 |
Total |  | $ | 644,226 |  |  | $ | 362,203 |  |  | $ | — |  |  | $ | 1,006,429 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
Reported as follows:
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 322,393 |  |  | $ | 16,527 |  |  | $ | — |  |  | $ | 338,920 |
Marketable securities |  |  | 239,192 |  |  |  | 192,324 |  |  |  | — |  |  |  | 431,516 |
Long-term marketable securities |  |  | 82,641 |  |  |  | 153,231 |  |  |  | — |  |  |  | 235,872 |
Prepayments and other current assets |  |  | — |  |  |  | 121 |  |  |  | — |  |  |  | 121 |
|  | $ | 644,226 |  |  | $ | 362,203 |  |  | $ | — |  |  | $ | 1,006,429 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
|  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
|  | December 31, 2011 |
|  | 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 |  | $ | 161,243 |  |  | $ | — |  |  | $ | — |  |  | $ | 161,243 |
Cash equivalents |  |  | 396,329 |  |  |  | 16,164 |  |  |  | — |  |  |  | 412,493 |
Available for sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency securities |  |  | — |  |  |  | 83,197 |  |  |  | — |  |  |  | 83,197 |
Corporate debt securities |  |  | — |  |  |  | 44,829 |  |  |  | — |  |  |  | 44,829 |
Commercial paper |  |  | — |  |  |  | 22,075 |  |  |  | — |  |  |  | 22,075 |
U.S. Treasury securities |  |  | 14,180 |  |  |  | — |  |  |  | — |  |  |  | 14,180 |
Equity and debt mutual funds |  |  | 8,237 |  |  |  | — |  |  |  | — |  |  |  | 8,237 |
Certificates of deposit and time deposits |  |  | — |  |  |  | 8,117 |  |  |  | — |  |  |  | 8,117 |
Non-U.S. government securities |  |  | — |  |  |  | 274 |  |  |  | — |  |  |  | 274 |
Total |  | $ | 579,989 |  |  | $ | 174,656 |  |  | $ | — |  |  | $ | 754,645 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  | $ | — |  |  | $ | 314 |  |  | $ | — |  |  | $ | 314 |
Contingent consideration |  |  | — |  |  |  | — |  |  |  | 68,892 |  |  |  | 68,892 |
Total |  | $ | — |  |  | $ | 314 |  |  | $ | 68,892 |  |  | $ | 69,206 |
Reported as follows:
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 557,572 |  |  | $ | 16,164 |  |  | $ | — |  |  | $ | 573,736 |
Marketable securities |  |  | 9,044 |  |  |  | 87,458 |  |  |  | — |  |  |  | 96,502 |
Long-term marketable securities |  |  | 13,373 |  |  |  | 71,034 |  |  |  | — |  |  |  | 84,407 |
|  | $ | 579,989 |  |  | $ | 174,656 |  |  | $ | — |  |  | $ | 754,645 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other accrued liabilities |  | $ | — |  |  | $ | 314 |  |  | $ | — |  |  | $ | 314 |
Contingent consideration |  |  | — |  |  |  | — |  |  |  | 68,892 |  |  |  | 68,892 |
|  |  | — |  |  | $ | 314 |  |  | $ | 68,892 |  |  | $ | 69,206 |
Changes in the fair value of Level 3 contingent consideration for the year ended December 31, 2012 and December 31, 2011 were as follows:
|  | Contingent Consideration |
|  | (in thousands) |
Balance at December 31, 2010 |  | $ | — |
Acquisition of LitePoint |  |  | 68,892 |
Balance at December 31, 2011 |  |  | 68,892 |
Fair value adjustment |  |  | (8,794 | )
Payments |  |  | (59,710 | )
Balance at December 31, 2012 |  | $ | 388 |
The carrying amounts and fair values of financial instruments at December 31, 2012 and 2011 were as follows:
|  | December 31, 2012 |  |  | December 31, 2011 |
|  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
|  | (in thousands) |
Cash and cash equivalents |  | $ | 338,920 |  |  | $ | 338,920 |  |  | $ | 573,736 |  |  | $ | 573,736 |
Marketable securities |  |  | 667,388 |  |  |  | 667,388 |  |  |  | 180,909 |  |  |  | 180,909 |
Convertible debt (1) |  |  | 169,896 |  |  |  | 589,000 |  |  |  | 156,098 |  |  |  | 485,925 |
Japan loan |  |  | 3,491 |  |  |  | 3,491 |  |  |  | 6,431 |  |  |  | 6,431 |
(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 feature.
The fair values of cash and cash equivalents, accounts receivable, net and accounts payable approximate the carrying amount due to the short term maturities of these instruments. The following tables summarize the composition of available for sale marketable securities at December 31, 2012 and 2011:
|  | December 31, 2012 |
|  | Available-for-Sale |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |
|  | (in thousands) |
U.S. Treasury securities |  | $ | 311,915 |  |  | $ | 216 |  |  | $ | (15 | ) |  | $ | 312,116 |  |  | $ | 1,018 |
U.S. government agency securities |  |  | 217,396 |  |  |  | 262 |  |  |  | (3 | ) |  |  | 217,655 |  |  |  | 9,018 |
Commercial paper |  |  | 70,431 |  |  |  | 9 |  |  |  | (6 | ) |  |  | 70,434 |  |  |  | 25,209 |
Corporate debt securities |  |  | 53,405 |  |  |  | 2,414 |  |  |  | (64 | ) |  |  | 55,755 |  |  |  | 23,255 |
Equity and debt mutual funds |  |  | 8,767 |  |  |  | 961 |  |  |  | (11 | ) |  |  | 9,717 |  |  |  | 600 |
Certificates of deposit and time deposits |  |  | 1,627 |  |  |  | — |  |  |  | — |  |  |  | 1,627 |  |  |  | — |
Non-U.S. government securities |  |  | 84 |  |  |  | — |  |  |  | — |  |  |  | 84 |  |  |  | — |
|  | $ | 663,625 |  |  | $ | 3,862 |  |  | $ | (99 | ) |  | $ | 667,388 |  |  | $ | 59,100 |
Reported as follows:
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | (in thousands) |
Marketable securities |  | $ | 431,324 |  |  | $ | 203 |  |  | $ | (11 | ) |  | $ | 431,516 |  |  | $ | 41,110 |
Long-term marketable securities |  |  | 232,301 |  |  |  | 3,659 |  |  |  | (88 | ) |  |  | 235,872 |  |  |  | 17,990 |
|  | $ | 663,625 |  |  | $ | 3,862 |  |  | $ | (99 | ) |  | $ | 667,388 |  |  | $ | 59,100 |
|  | December 31, 2011 |
|  | Available-for-Sale |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |
|  | (in thousands) |
U.S. government agency securities |  | $ | 83,070 |  |  | $ | 152 |  |  | $ | (25 | ) |  | $ | 83,197 |  |  | $ | 28,510 |
Corporate debt securities |  |  | 43,077 |  |  |  | 1,893 |  |  |  | (141 | ) |  |  | 44,829 |  |  |  | 17,033 |
Commercial paper |  |  | 22,083 |  |  |  | 2 |  |  |  | (10 | ) |  |  | 22,075 |  |  |  | 9,479 |
U.S. Treasury securities |  |  | 14,141 |  |  |  | 39 |  |  |  | — |  |  |  | 14,180 |  |  |  | — |
Equity and debt mutual funds |  |  | 7,876 |  |  |  | 477 |  |  |  | (116 | ) |  |  | 8,237 |  |  |  | 3,749 |
Certificates of deposit and time deposits |  |  | 8,122 |  |  |  | — |  |  |  | (5 | ) |  |  | 8,117 |  |  |  | 5,800 |
Non-U.S. government securities |  |  | 256 |  |  |  | 18 |  |  |  | — |  |  |  | 274 |  |  |  | — |
|  | $ | 178,625 |  |  | $ | 2,581 |  |  | $ | (297 | ) |  | $ | 180,909 |  |  | $ | 64,571 |
Reported as follows:
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | (in thousands) |
Marketable securities |  | $ | 96,518 |  |  | $ | 24 |  |  | $ | (40 | ) |  | $ | 96,502 |  |  | $ | 35,595 |
Long-term marketable securities |  |  | 82,107 |  |  |  | 2,557 |  |  |  | (257 | ) |  |  | 84,407 |  |  |  | 28,976 |
|  | $ | 178,625 |  |  | $ | 2,581 |  |  | $ | (297 | ) |  | $ | 180,909 |  |  | $ | 64,571 |
As of December 31, 2012, the fair market value of investments with unrealized losses totaled $59.1 million. There were no unrealized losses greater than one year. As of December 31, 2011, the fair market value of investments with unrealized losses totaled $64.6 million. Of this value, $2.4 million had unrealized losses for greater than one year and $62.2 million had unrealized losses 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, 2012 and 2011, were temporary. The contractual maturities of investments held at December 31, 2012 were as follows:
|  | Cost |  |  | Fair Value |
|  | (in thousands) |
Due within one year |  | $ | 431,324 |  |  | $ | 431,516 |
Due after 1 year through 5 years |  |  | 208,754 |  |  |  | 209,902 |
Due after 5 years through 10 years |  |  | 7,493 |  |  |  | 7,773 |
Due after 10 years |  |  | 16,054 |  |  |  | 18,197 |
Total |  | $ | 663,625 |  |  | $ | 667,388 |
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 net monetary assets. 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 net monetary assets 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 the net monetary assets denominated in foreign currencies. At December 31, 2012 and 2011, Teradyne had the following contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:
|  | December 31, 2012 |  |  | December 31, 2011 |
|  | Buy Position |  |  | Sell Position |  |  | Net Total |  |  | Buy Position |  |  | Sell Position |  |  | Net Total |
|  | (in millions) |
Japanese Yen |  | $ | — |  |  | $ | 36.3 |  |  | $ | 36.3 |  |  | $ | — |  |  | $ | 50.8 |  |  | $ | 50.8 |
Taiwan Dollar |  |  | — |  |  |  | 4.2 |  |  |  | 4.2 |  |  |  | (0.8 | ) |  |  | 6.3 |  |  |  | 5.5 |
British Pound Sterling |  |  | — |  |  |  | 5.5 |  |  |  | 5.5 |  |  |  | — |  |  |  | 10.1 |  |  |  | 10.1 |
Euro |  |  | (16.8 | ) |  |  | 1.3 |  |  |  | (15.5 | ) |  |  | (15.2 | ) |  |  | 2.1 |  |  |  | (13.1 | )
Total |  | $ | (16.8 | ) |  | $ | 47.3 |  |  | $ | 30.5 |  |  | $ | (16.0 | ) |  | $ | 69.3 |  |  | $ | 53.3 |
The fair value of the outstanding contracts was a gain of $0.1 million and a loss of $0.3 million at December 31, 2012 and 2011, respectively. In 2012, Teradyne recorded net realized gains of $4.0 million related to foreign currency forward contracts hedging net monetary positions. In 2011 and 2010, Teradyne recorded net realized losses of $1.3 million and $2.3 million, respectively, related to foreign currency forward contracts hedging net monetary positions. Gains and losses on foreign currency forward contracts and foreign currency remeasurement gains and losses on monetary assets and liabilities are included in interest expense and other. The following table summarizes the fair value of derivative instruments as of December 31, 2012 and 2011:
|  | Balance Sheet Location |  | December 31, 2012 |  |  | December 31, 2011 |
|  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Prepayments and other current assets |  | $ | 121 |  |  | $ | — |
Foreign exchange contracts |  | Other accrued liabilities |  |  | — |  |  |  | 314 |
Total derivatives |  |  |  | $ | 121 |  |  | $ | 314 |
The following table summarizes the effect of derivative instruments in the statement of operations recognized for the years ended December 31, 2012, 2011 and 2010 (the table does not reflect the corresponding gain (loss) from the remeasurement of the balance sheet):
|  | Location of Gains (Losses) Recognized in Statement of Operations |  |  | December 31, 2012 |  |  | December 31, 2011 |  |  | December 31, 2010 |
|  |  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  | Interest expense and other |  |  | $ | 3,974 |  |  | $ | (1,327 | ) |  | $ | (2,289 | )
Total derivatives |  |  |  |  |  | $ | 3,974 |  |  | $ | (1,327 | ) |  | $ | (2,289 | )
See Note I: “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.

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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