F. 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 fixed income securities are classified as Level 2. Contingent consideration is classified as Level 3. The vast 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 2014, 2013 and 2012. Realized gains recorded in 2014, 2013 and 2012 were $2.4 million, $1.0 million and $1.4 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, 2014 and 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 December 31, 2014 and 2013.


	December 31, 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	$	111,471	$	—	$	—	$	111,471
Cash equivalents		160,218		22,567		—		182,785
Available for sale securities:
U.S. Treasury securities		—		402,154		—		402,154
U.S. government agency securities		—		258,502		—		258,502
Corporate debt securities		—		141,467		—		141,467
Commercial paper		—		140,638		—		140,638
Certificates of deposit and time deposits		—		49,036		—		49,036
Equity and debt mutual funds		12,333		—		—		12,333
Non-U.S. government securities		—		446		—		446

Total	$	284,022	$	1,014,810	$	—	$	1,298,832

Liabilities
Contingent consideration	$	—	$	—	$	3,350	$	3,350
Derivatives		—		149		—		149

Total	$	—	$	149	$	3,350	$	3,499

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	271,689	$	22,567	$	—	$	294,256
Marketable securities		—		533,787		—		533,787
Long-term marketable securities		12,333		458,456		—		470,789

	$	284,022	$	1,014,810	$	—	$	1,298,832

Liabilities
Other current liabilities	$	—	$	149	$	1,750	$	1,899
Long-term other accrued liabilities		—		—		1,600		1,600

	$	—	$	149	$	3,350		3,499


	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		296,263		903,335		—		1,199,598
Derivatives		—		153		—		153

Total	$	296,263	$	903,488	$	—	$	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		—		586,882		—		586,882
Long-term marketable securities		13,156		257,922		—		271,078
Other current assets		—		153		—		153

	$	296,263	$	903,488	$	—	$	1,199,751

Liabilities
Long-term other accrued liabilities	$	—	$	—	$	2,230	$	2,230

	$	—	$	—	$	2,230	$	2,230

Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2014 and 2013 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2012	$	388
Acquisition of ZTEC		2,230
Payments		(388	)

Balance at December 31, 2013		2,230
Fair value adjustment		(630	)
Acquisition of AIT		1,750

Balance at December 31, 2014	$	3,350

The following table provides quantitative information associated with the fair value measurement of Teradyne’s Level 3 financial instrument:


Liability	December 31, 2014 Fair Value	Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (ZTEC)	$1,600	Income approach- discounted cash flow	Revenue earn-out-probability for calendar year 2015 revenue.	0%
Contingent consideration (ZTEC)		Income approach- discounted cash flow	Customer orders-probability of achievement during earn out period (acquisition date through December 31, 2015)	40%
			Discount rate for revenue earn-out	N/A
			Discount rate for customer orders	5.2%

The significant unobservable inputs used in the fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 revenue, customer orders, and a discount rate. Increases or decreases in the revenue and customer order probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement.

The carrying amounts and fair values of financial instruments at December 31, 2014 and 2013 were as follows:


	December 31, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Cash and cash equivalents	$	294,256	$	294,256	$	341,638	$	341,638
Marketable securities		1,004,576		1,004,576		857,960		857,960
Convertible debt (1)		—		—		185,708		611,433
Japan loan		—		—		955		955

(1)	The carrying value represented the bifurcated debt component only, while the fair value was based on quoted market prices for the convertible note which included the equity conversion feature.

The fair values of 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 December 31, 2014 and 2013:


	December 31, 2014
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	402,197	$	362	$	(405	)	$	402,154	$	317,771
U.S. government agency securities		258,452		135		(85	)		258,502		104,642
Corporate debt securities		139,374		2,414		(321	)		141,467		96,998
Commercial paper		140,616		26		(4	)		140,638		41,747
Certificates of deposit and time deposits		49,048		11		(23	)		49,036		20,684
Equity and debt mutual funds		10,492		1,870		(29	)		12,333		1,234
Non-U.S. government securities		446		—		—			446		—

	$	1,000,625	$	4,818	$	(867	)	$	1,004,576	$	583,076

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	533,833	$	99	$	(145	)	$	533,787	$	240,234
Long-term marketable securities		466,792		4,719		(722	)		470,789		342,842

	$	1,000,625	$	4,818	$	(867	)	$	1,004,576	$	583,076


	December 31, 2013
	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(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 December 31, 2014, the fair market value of investments with unrealized losses totaled $583.1 million. Of this value, $2.3 million had unrealized losses for greater than one year and $580.8 million had unrealized losses for less than one year.

As of December 31, 2013, the fair market value of investments with unrealized losses totaled $241.8 million. Of this value, $0.9 million had unrealized losses for greater than one year and $240.9 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, 2014 and 2013, were temporary.

The contractual maturities of investments held at December 31, 2014 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	533,833	$	533,787
Due after 1 year through 5 years		418,732		418,363
Due after 5 years through 10 years		5,735		5,924
Due after 10 years		31,833		34,169

Total	$	990,133	$	992,243

Contractual maturities of investments held at December 31, 2014, exclude equity and debt mutual funds as they do not have a contractual maturity date.

Assets of Teradyne measured at fair value on a non-recurring basis as of December 31, 2014 are summarized as follows:


			Fair Value Measurements at Reporting Period
	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total Losses
	(in thousands)
Assets
Goodwill	$	273,438	$	—	$	—	$	273,438	$	98,897
Definite lived intangible assets		158,237		—		—		158,237		—
Long-lived assets held and used		10,189		—		10,189		—		—

	$	441,864	$	—	$	10,189	$	431,675	$	98,897

In accordance with the provisions of ASC 350-10, “Intangibles- Goodwill and Other,” goodwill with a carrying amount of $372.3 million was written down to its implied fair value of $273.4 million, resulting in an impairment charge of $98.9 million in the fourth quarter of 2014. See Note I: “Goodwill and Intangibles” regarding goodwill impairment.

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.

At December 31, 2014 and 2013, 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, 2014								December 31, 2013
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	—		$	19.7	$	19.7		$	—		$	32.6	$	32.6
Taiwan Dollar		(0.9	)		5.7		4.8			—			4.0		4.0
British Pound Sterling		—			11.7		11.7			—			6.9		6.9
Korean Won		—			4.4		4.4			—			5.8		5.8
Euro		(30.6	)		—		(30.6	)		(24.8	)		0.7		(24.1	)

Total	$	(31.5	)	$	41.5	$	10.0		$	(24.8	)	$	50.0	$	25.2

The fair value of the outstanding contracts was a loss of $0.1 million at December 31, 2014 and a gain of $0.2 million at December 31, 2013.

In 2014, Teradyne recorded net realized losses of $0.2 million related to foreign currency forward contracts hedging net monetary position. In 2013 and 2012, Teradyne recorded net realized gains of $5.9 million and $4.0 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 other (income) expense, net.

The following table summarizes the fair value of derivative instruments as of December 31, 2014 and 2013:


	Balance Sheet Location	December 31, 2014		December 31, 2013
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	$	149	$	—
Foreign exchange contracts	Other current assets		—		153

Total derivatives		$	149	$	153

The following table summarizes the effect of derivative instruments in the statement of operations recognized for the years ended December 31, 2014, 2013 and 2012. The table does not reflect the corresponding losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the years ended December 31, 2014, 2013, and 2012, losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $0.9 million, $6.9 million, and $4.5 million, respectively.


	Location of Losses (Gains) Recognized in Statement of Operations	December 31, 2014		December 31, 2013			December 31, 2012
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	237	$	(5,933	)	$	(3,974	)

Total derivatives		$	237	$	(5,933	)	$	(3,974	)

See Note G: “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.

Equity Interest

On November 1, 2013, in connection with the acquisition of Empirix, Inc. by Thoma Bravo LLC, Teradyne sold its equity interest in Empirix, Inc., a private company, and received cash proceeds of $34.2 million which was recorded as other income. An additional $4.8 million of cash proceeds that was held in escrow for 15 months, for potential indemnifications to the buyer, was paid to Teradyne in February 2015 and it will be recorded as other income in the first quarter of 2015.