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Financial Instruments and Derivatives | 9 Months Ended
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Sep. 29, 2013
Financial Instruments and Derivatives | D. Financial Instruments and Derivatives Financial Instruments Teradyne uses the market and income approach to value its financial instruments and there was no change in valuation techniques used by Teradyne during the three and nine months ended September 29, 2013 and September 30, 2012. 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 are carried at fair value and are classified 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. 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 the three and nine months ended September 29, 2013 and September 30, 2012. Realized gains recorded in the three and nine months ended September 29, 2013, were $0.2 million and $0.5 million, respectively. Realized gains recorded in the three and nine months ended September 30, 2012, were $0.3 million and $0.9 million, respectively. Realized gains are included in interest income. During the nine months ended September 29, 2013 and September 30, 2012, 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 September 29, 2013 and December 31, 2012.
|  | September 29, 2013 |
|  | 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 |  | $ | 147,819 |  |  | $ | — |  |  | $ | — |  |  | $ | 147,819 |
Cash equivalents |  |  | 417,823 |  |  |  | 7,226 |  |  |  | — |  |  |  | 425,049 |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency securities |  |  | — |  |  |  | 229,129 |  |  |  | — |  |  |  | 229,129 |
U.S. Treasury securities |  |  | 211,956 |  |  |  | — |  |  |  | — |  |  |  | 211,956 |
Commercial paper |  |  | — |  |  |  | 88,891 |  |  |  | — |  |  |  | 88,891 |
Corporate debt securities |  |  | — |  |  |  | 43,982 |  |  |  | — |  |  |  | 43,982 |
Equity and debt mutual funds |  |  | 12,122 |  |  |  | — |  |  |  | — |  |  |  | 12,122 |
Certificates of deposit and time deposits |  |  | — |  |  |  | 261 |  |  |  | — |  |  |  | 261 |
Non-U.S. government securities |  |  | — |  |  |  | 80 |  |  |  | — |  |  |  | 80 |
Total |  |  | 789,720 |  |  |  | 369,569 |  |  |  | — |  |  |  | 1,159,289 |
Derivatives |  |  | — |  |  |  | 276 |  |  |  | — |  |  |  | 276 |
Total |  | $ | 789,720 |  |  | $ | 369,845 |  |  | $ | — |  |  | $ | 1,159,565 |
Reported as follows:
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 565,642 |  |  | $ | 7,226 |  |  | $ | — |  |  | $ | 572,868 |
Marketable securities |  |  | 185,085 |  |  |  | 199,249 |  |  |  | — |  |  |  | 384,334 |
Long-term marketable securities |  |  | 38,993 |  |  |  | 163,094 |  |  |  | — |  |  |  | 202,087 |
Other current assets |  |  | — |  |  |  | 276 |  |  |  | — |  |  |  | 276 |
|  | $ | 789,720 |  |  | $ | 369,845 |  |  | $ | — |  |  | $ | 1,159,565 |
|  | 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 |
Other current assets |  |  | — |  |  |  | 121 |  |  |  | — |  |  |  | 121 |
|  | $ | 644,226 |  |  | $ | 362,203 |  |  | $ | — |  |  | $ | 1,006,429 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other accrued liabilities |  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
|  | $ | — |  |  | $ | — |  |  | $ | 388 |  |  | $ | 388 |
During the nine months ended September 29, 2013, Teradyne made the final payment for Level 3 contingent consideration of $0.4 million. The carrying amounts and fair values of financial instruments at September 29, 2013 and December 31, 2012 were as follows:
|  | September 29, 2013 |  |  | December 31, 2012 |
|  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
|  | (in thousands) |
Cash and cash equivalents |  | $ | 572,868 |  |  | $ | 572,868 |  |  | $ | 338,920 |  |  | $ | 338,920 |
Marketable securities |  |  | 586,421 |  |  |  | 586,421 |  |  |  | 667,388 |  |  |  | 667,388 |
Convertible debt(1) |  |  | 181,550 |  |  |  | 580,206 |  |  |  | 169,896 |  |  |  | 589,000 |
Japan loan |  |  | 2,023 |  |  |  | 2,023 |  |  |  | 3,491 |  |  |  | 3,491 |
(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 nature of these instruments. The following tables summarize the composition of available-for-sale marketable securities at September 29, 2013 and December 31, 2012:
|  | September 29, 2013 |
|  | 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 |  | $ | 229,133 |  |  | $ | 142 |  |  | $ | (146 | ) |  | $ | 229,129 |  |  | $ | 103,165 |
U.S. Treasury securities |  |  | 211,966 |  |  |  | 140 |  |  |  | (150 | ) |  |  | 211,956 |  |  |  | 5,605 |
Commercial paper |  |  | 88,884 |  |  |  | 12 |  |  |  | (5 | ) |  |  | 88,891 |  |  |  | 25,169 |
Corporate debt securities |  |  | 44,132 |  |  |  | 905 |  |  |  | (1,055 | ) |  |  | 43,982 |  |  |  | 16,439 |
Equity and debt mutual funds |  |  | 9,843 |  |  |  | 2,315 |  |  |  | (36 | ) |  |  | 12,122 |  |  |  | 595 |
Certificates of deposit and time deposits |  |  | 261 |  |  |  | — |  |  |  | — |  |  |  | 261 |  |  |  | — |
Non-U.S. government securities |  |  | 80 |  |  |  | — |  |  |  | — |  |  |  | 80 |  |  |  | — |
|  | $ | 584,299 |  |  | $ | 3,514 |  |  | $ | (1,392 | ) |  | $ | 586,421 |  |  | $ | 150,973 |
Reported as follows:
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | (in thousands) |
Marketable securities |  | $ | 384,180 |  |  | $ | 168 |  |  | $ | (14 | ) |  | $ | 384,334 |  |  | $ | 37,823 |
Long-term marketable securities |  |  | 200,119 |  |  |  | 3,346 |  |  |  | (1,378 | ) |  |  | 202,087 |  |  |  | 113,150 |
|  | $ | 584,299 |  |  | $ | 3,514 |  |  | $ | (1,392 | ) |  | $ | 586,421 |  |  | $ | 150,973 |
|  | 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 |
As of September 29, 2013, the fair market value of marketable securities with unrealized losses totaled $151.0 million. Of this value, $0.5 million had unrealized losses greater than one year and $150.5 million had unrealized losses less than one year. As of December 31, 2012, the fair market value of marketable securities with unrealized losses totaled $59.1 million and none of the unrealized losses were greater than one year. The contractual maturities of available-for-sale marketable securities at September 29, 2013 were as follows:
|  | September 29, 2013 |
|  | Cost |  |  | Fair Market Value |
|  | (in thousands) |
Due within one year |  | $ | 384,180 |  |  | $ | 384,334 |
Due after 1 year through 5 years |  |  | 173,407 |  |  |  | 175,657 |
Due after 5 years through 10 years |  |  | 3,131 |  |  |  | 3,188 |
Due after 10 years |  |  | 23,581 |  |  |  | 23,242 |
Total |  | $ | 584,299 |  |  | $ | 586,421 |
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 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 fair value of the monetary assets and liabilities denominated in foreign currencies. The notional amount of foreign exchange contracts hedging monetary assets and liabilities denominated in foreign currencies was $64.1 million and $64.1 million at September 29, 2013 and December 31, 2012, respectively. The following table summarizes the fair value of derivative instruments at September 29, 2013 and December 31, 2012:
|  | Balance Sheet Location |  |  | September 29, 2013 |  |  | December 31, 2012 |
|  |  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  | Other current assets |  |  | $ | 276 |  |  | $ | 121 |
|  |  |  |  |  | $ | 276 |  |  | $ | 121 |
Teradyne had no offsetting foreign exchange contracts at September 29, 2013 and December 31, 2012. The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and nine months ended September 29, 2013 and September 30, 2012. The table does not reflect the corresponding (losses) gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three and nine months ended September 29, 2013, losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $(0.4) million and $(5.0) million, respectively. For the three and nine months ended September 30, 2012, gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $1.2 million and $0.8 million, respectively.
|  | Location of Gains (Losses) Recognized in Statement of Operations |  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 29, 2013 |  |  | September 30, 2012 |  |  | September 29, 2013 |  |  | September 30, 2012 |
|  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Interest expense and other |  | $ | 1 |  |  | $ | (1,197 | ) |  | $ | 4,068 |  |  | $ | (677 | )
|  |  |  | $ | 1 |  |  | $ | (1,197 | ) |  | $ | 4,068 |  |  | $ | (677 | )
See Note E “Debt” regarding derivatives related to convertible senior notes.

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- 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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