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Financial Instruments and Derivatives | 3 Months Ended
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Mar. 30, 2014
Financial Instruments and Derivatives | D. Financial Instruments and Derivatives Cash Equivalents Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. Financial Instruments 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. As of March 30, 2014, Teradyne’s investments in debt and equity securities were classified as available-for-sale and recorded at their fair market value. 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 three months ended March 30, 2014. 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 the three months ended March 30, 2014 and March 31, 2013. Realized gains recorded in the three months ended March 30, 2014 and March 31, 2013, were $0.3 million and $0.3 million, respectively. Realized gains are included in interest income. During the three months ended March 30, 2014 and March 31, 2013, 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 March 30, 2014 and December 31, 2013.
|  | March 30, 2014 |
|  | 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 |  | $ | 131,722 |  |  | $ | — |  |  | $ | — |  |  | $ | 131,722 |
Cash equivalents |  |  | 87,894 |  |  |  | 13,010 |  |  |  | — |  |  |  | 100,904 |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 321,296 |  |  |  | — |  |  |  | — |  |  |  | 321,296 |
U.S. government agency securities |  |  | — |  |  |  | 191,863 |  |  |  | — |  |  |  | 191,863 |
Commercial paper |  |  | — |  |  |  | 116,767 |  |  |  | — |  |  |  | 116,767 |
Corporate debt securities |  |  | — |  |  |  | 82,787 |  |  |  | — |  |  |  | 82,787 |
Equity and debt mutual funds |  |  | 14,171 |  |  |  | — |  |  |  | — |  |  |  | 14,171 |
Certificates of deposit and time deposits |  |  | — |  |  |  | 7,257 |  |  |  | — |  |  |  | 7,257 |
Non-U.S. government securities |  |  | — |  |  |  | 77 |  |  |  | — |  |  |  | 77 |
Total |  |  | 555,083 |  |  |  | 411,761 |  |  |  | — |  |  |  | 966,844 |
Derivatives |  |  | — |  |  |  | 209 |  |  |  | — |  |  |  | 209 |
Total |  | $ | 555,083 |  |  | $ | 411,970 |  |  | $ | — |  |  | $ | 967,053 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
Reported as follows:
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 219,616 |  |  | $ | 13,010 |  |  | $ | — |  |  | $ | 232,626 |
Marketable securities |  |  | 214,230 |  |  |  | 247,920 |  |  |  | — |  |  |  | 462,150 |
Long-term marketable securities |  |  | 121,237 |  |  |  | 150,831 |  |  |  | — |  |  |  | 272,068 |
Other current assets |  |  | — |  |  |  | 209 |  |  |  | — |  |  |  | 209 |
|  | $ | 555,083 |  |  | $ | 411,970 |  |  | $ | — |  |  | $ | 967,053 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term other accrued liabilities |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
|  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
|  | December 31, 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 |  | $ | 117,242 |  |  | $ | — |  |  | $ | — |  |  | $ | 117,242 |
Cash equivalents |  |  | 165,865 |  |  |  | 58,531 |  |  |  | — |  |  |  | 224,396 |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 467,895 |  |  |  | — |  |  |  | — |  |  |  | 467,895 |
U.S. government agency securities |  |  | — |  |  |  | 202,588 |  |  |  | — |  |  |  | 202,588 |
Commercial paper |  |  | — |  |  |  | 105,598 |  |  |  | — |  |  |  | 105,598 |
Corporate debt securities |  |  | — |  |  |  | 65,387 |  |  |  | — |  |  |  | 65,387 |
Equity and debt mutual funds |  |  | 13,156 |  |  |  | — |  |  |  | — |  |  |  | 13,156 |
Certificates of deposit and time deposits |  |  | — |  |  |  | 3,258 |  |  |  | — |  |  |  | 3,258 |
Non-U.S. government securities |  |  | — |  |  |  | 78 |  |  |  | — |  |  |  | 78 |
Total |  |  | 764,158 |  |  |  | 435,440 |  |  |  | — |  |  |  | 1,199,598 |
Derivatives |  |  | — |  |  |  | 153 |  |  |  | — |  |  |  | 153 |
Total |  | $ | 764,158 |  |  | $ | 435,593 |  |  | $ | — |  |  | $ | 1,199,751 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
Reported as follows:
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
|  | (in thousands) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 283,107 |  |  | $ | 58,531 |  |  | $ | — |  |  | $ | 341,638 |
Marketable securities |  |  | 371,101 |  |  |  | 215,781 |  |  |  | — |  |  |  | 586,882 |
Long-term marketable securities |  |  | 109,950 |  |  |  | 161,128 |  |  |  | — |  |  |  | 271,078 |
Other current assets |  |  | — |  |  |  | 153 |  |  |  | — |  |  |  | 153 |
|  | $ | 764,158 |  |  | $ | 435,593 |  |  | $ | — |  |  | $ | 1,199,751 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term other accrued liabilities |  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
|  | $ | — |  |  | $ | — |  |  | $ | 2,230 |  |  | $ | 2,230 |
Contingent consideration relates to Teradyne’s acquisition of ZTEC on October 25, 2013. The total purchase price included $2.2 million in fair value of contingent consideration payable upon achievement of certain customer order and revenue targets through 2015. The maximum amount of contingent consideration that could be paid is $5.0 million. Based on the projected results for the acquisition, no value was assigned to the revenue component of the contingent consideration. The valuation of the customer order component of the contingent consideration utilized the following assumptions: (1) probability of meeting each benchmark; (2) expected timing of meeting each benchmark; and (3) discount rate reflecting the risk associated with the expected payments. The probabilities and timing for each benchmark were estimated based on a review of the historical and projected results. A discount rate of 5.2 percent was selected based on the cost of debt for the business, as a significant portion of the risk in achieving the customer order contingent consideration was captured in the probabilities assigned to meeting each benchmark. There were no changes to the fair value of the contingent consideration during the three months ended March 30, 2014. Changes in the fair value of Level 3 contingent consideration for the three months ended March 30, 2014 and March 31, 2013 were as follows:
|  | For the Three Months Ended March 30, 2014 |
|  | (in thousands) |
Balance at December 31, 2013 |  | $ | 2,230 |
Contingent consideration payments |  |  | — |
Balance at March 30, 2014 |  | $ | 2,230 |
|  | For the Three Months Ended March 31, 2013 |
|  | (in thousands) |
Balance at December 31, 2012 |  | $ | 388 |
Contingent consideration payments |  |  | (313 | )
Balance at March 31, 2013 |  | $ | 75 |
The carrying amounts and fair values of Teradyne’s financial instruments at March 30, 2014 and December 31, 2013 were as follows:
|  | March 30, 2014 |  |  | December 31, 2013 |
|  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
|  | (in thousands) |
Cash and cash equivalents |  | $ | 232,626 |  |  | $ | 232,626 |  |  | $ | 341,638 |  |  | $ | 341,638 |
Marketable securities |  |  | 734,218 |  |  |  | 734,218 |  |  |  | 857,960 |  |  |  | 857,960 |
Convertible debt(1) |  |  | — |  |  |  | — |  |  |  | 185,708 |  |  |  | 611,433 |
Japan loan |  |  | — |  |  |  | — |  |  |  | 955 |  |  |  | 955 |
(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 March 30, 2014 and December 31, 2013:
|  | March 30, 2014 |
|  | Available-for-Sale |  |  | Fair Market Value of Investment with Unrealized Losses |
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |
|  | (in thousands) |
U.S. Treasury securities |  | $ | 321,184 |  |  | $ | 236 |  |  | $ | (124 | ) |  | $ | 321,296 |  |  | $ | 23,205 |
U.S. government agency securities |  |  | 191,856 |  |  |  | 92 |  |  |  | (85 | ) |  |  | 191,863 |  |  |  | 91,951 |
Commercial paper |  |  | 116,758 |  |  |  | 13 |  |  |  | (4 | ) |  |  | 116,767 |  |  |  | 38,906 |
Corporate debt securities |  |  | 81,913 |  |  |  | 1,337 |  |  |  | (463 | ) |  |  | 82,787 |  |  |  | 49,413 |
Equity and debt mutual funds |  |  | 11,483 |  |  |  | 2,725 |  |  |  | (37 | ) |  |  | 14,171 |  |  |  | 810 |
Certificates of deposit and time deposits |  |  | 7,257 |  |  |  | — |  |  |  | — |  |  |  | 7,257 |  |  |  | — |
Non-U.S. government securities |  |  | 77 |  |  |  | — |  |  |  | — |  |  |  | 77 |  |  |  | — |
|  | $ | 730,528 |  |  | $ | 4,403 |  |  | $ | (713 | ) |  | $ | 734,218 |  |  | $ | 204,285 |
Reported as follows:
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | (in thousands) |
Marketable securities |  | $ | 462,031 |  |  | $ | 146 |  |  | $ | (27 | ) |  | $ | 462,150 |  |  | $ | 99,303 |
Long-term marketable securities |  |  | 268,497 |  |  |  | 4,257 |  |  |  | (686 | ) |  |  | 272,068 |  |  |  | 104,982 |
|  | $ | 730,528 |  |  | $ | 4,403 |  |  | $ | (713 | ) |  | $ | 734,218 |  |  | $ | 204,285 |
|  | December 31, 2013 |
|  | 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 |  | $ | 468,084 |  |  | $ | 94 |  |  | $ | (283 | ) |  | $ | 467,895 |  |  | $ | 108,212 |
U.S. government agency securities |  |  | 202,573 |  |  |  | 75 |  |  |  | (60 | ) |  |  | 202,588 |  |  |  | 84,498 |
Commercial paper |  |  | 105,583 |  |  |  | 16 |  |  |  | (1 | ) |  |  | 105,598 |  |  |  | 7,993 |
Corporate debt securities |  |  | 65,747 |  |  |  | 762 |  |  |  | (1,122 | ) |  |  | 65,387 |  |  |  | 40,355 |
Equity and debt mutual funds |  |  | 10,463 |  |  |  | 2,742 |  |  |  | (49 | ) |  |  | 13,156 |  |  |  | 702 |
Certificates of deposit and time deposits |  |  | 3,258 |  |  |  | — |  |  |  | — |  |  |  | 3,258 |  |  |  | — |
Non-U.S. government securities |  |  | 78 |  |  |  | — |  |  |  | — |  |  |  | 78 |  |  |  | — |
|  | $ | 855,786 |  |  | $ | 3,689 |  |  | $ | (1,515 | ) |  | $ | 857,960 |  |  | $ | 241,760 |
Reported as follows:
|  | Cost |  |  | Unrealized Gain |  |  | Unrealized (Loss) |  |  | Fair Market Value |  |  | Fair Market Value of Investments with Unrealized Losses |
|  | (in thousands) |
Marketable securities |  | $ | 586,818 |  |  | $ | 85 |  |  | $ | (21 | ) |  | $ | 586,882 |  |  | $ | 137,670 |
Long-term marketable securities |  |  | 268,968 |  |  |  | 3,604 |  |  |  | (1,494 | ) |  |  | 271,078 |  |  |  | 104,090 |
|  | $ | 855,786 |  |  | $ | 3,689 |  |  | $ | (1,515 | ) |  | $ | 857,960 |  |  | $ | 241,760 |
As of March 30, 2014, the fair market value of investments with unrealized losses was $204.3 million. Of this value, $0.9 million had unrealized losses greater than one year and $203.4 million had unrealized losses less than one year. As of December 31, 2013, the fair market value of investments with unrealized losses was $241.8 million. Of this value, $0.9 million had unrealized losses greater than one year and $240.9 million had unrealized losses less than one year. The contractual maturities of investments held at March 30, 2014 were as follows:
|  | March 30, 2014 |
|  | Cost |  |  | Fair Market Value |
|  | (in thousands) |
Due within one year |  | $ | 462,031 |  |  | $ | 462,150 |
Due after 1 year through 5 years |  |  | 226,558 |  |  |  | 226,607 |
Due after 5 years through 10 years |  |  | 5,854 |  |  |  | 5,954 |
Due after 10 years |  |  | 24,602 |  |  |  | 25,336 |
Total |  | $ | 719,045 |  |  | $ | 720,047 |
Contractual maturities of investments held at March 30, 2014 exclude equity and 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 the monetary assets and liabilities denominated in foreign currencies. The notional amount of foreign currency forward contracts was $66.8 million and $74.8 million at March 30, 2014 and December 31, 2013, respectively. The fair value of the outstanding contracts was a gain of $0.2 million and $0.2 million at March 30, 2014 and December 31, 2013, respectively. The following table summarizes the fair value of derivative instruments at March 30, 2014 and December 31, 2013:
|  | Balance Sheet Location |  |  | March 30, 2014 |  |  | December 31, 2013 |
|  |  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  |  | Other current assets |  |  | $ | 209 |  |  | $ | 153 |
|  |  |  |  |  | $ | 209 |  |  | $ | 153 |
Teradyne had no offsetting foreign exchange contracts at March 30, 2014 and December 31, 2013. In the three months ended March 30, 2014 and March 31, 2013, Teradyne recorded net realized losses of $0.7 million and net realized gains of $2.2 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 effect of derivative instruments recognized in the statement of operations during the three months ended March 30, 2014 and March 31, 2013. The table does not reflect the corresponding gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three months ended March 30, 2014 and March 31, 2013, gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $0.6 million and $(2.8) million, respectively.
|  | Location of (Losses) Gains Recognized in Statement of Operations |  | For the Three Months Ended |
|  | March 30, 2014 |  |  | March 31, 2013 |
|  |  |  | (in thousands) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Interest expense and other |  | $ | (747 | ) |  | $ | 2,248 |
|  |  |  | $ | (747 | ) |  | $ | 2,248 |
See Note E: “Debt” regarding derivatives related to convertible senior notes.

X
- 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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