E. 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.

Marketable Securities

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of Accounting Standards Codification (“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 April 5, 2015, 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 April 5, 2015. 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 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.

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 the three months ended April 5, 2015 and March 30, 2014. Realized gains recorded in the three months ended April 5, 2015 and March 30, 2014, were $0.5 million and $0.3 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 three months ended April 5, 2015 and March 30, 2014, 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 April 5, 2015 and December 31, 2014.


	April 5, 2015
	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	$	115,982	$	—	$	—	$	115,982
Cash equivalents		100,794		2,169		—		102,963
Available-for-sale securities:
U.S. Treasury securities		—		427,119		—		427,119
U.S. government agency securities		—		232,187		—		232,187
Corporate debt securities		—		160,877		—		160,877
Commercial paper		—		130,298		—		130,298
Certificates of deposit and time deposits		—		87,052		—		87,052
Equity and debt mutual funds		13,962		—		—		13,962
Non-U.S. government securities		—		446		—		446

Total	$	230,738	$	1,040,148	$	—	$	1,270,886

Liabilities
Contingent consideration	$	—	$	—	$	3,350	$	3,350
Derivatives		—		19		—		19

Total	$	—	$	19	$	3,350	$	3,369

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	216,776	$	2,169	$	—	$	218,945
Marketable securities		—		649,219		—		649,219
Long-term marketable securities		13,962		388,760		—		402,722

	$	230,738	$	1,040,148	$	—	$	1,270,886

Liabilities
Other accrued liabilities	$	—	$	19	$	3,350	$	3,369

	$	—	$	19	$	3,350	$	3,369


	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

Changes in the fair value of Level 3 contingent consideration for the three months ended April 5, 2015 and March 30, 2014 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2013	$	2,230
Payments		—

Balance at March 30, 2014		2,230
Payments		—

Balance at June 29, 2014		2,230
Fair value adjustment		(630	)

Balance at September 28, 2014		1,600
Acquisition of AIT		1,750

Balance at December 31, 2014		3,350
Payments		—

Balance at April 5, 2015	$	3,350

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


Liability	April 5, 2015 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	%
				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	%

Contingent consideration (AIT)	$	1,750	Income approach- discounted cash flow	Revenue earn-out-probability for calendar year 2015 and 2016		90	%
				Discount rate for revenue earn-out		4.7	%

The significant unobservable inputs used in the ZTEC Instruments, Inc. (“ZTEC”) fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2015 revenue and 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 maximum amount of contingent consideration in connection with the acquisition of ZTEC that could be paid is $5.0 million. The earn-out period in connection with the ZTEC acquisition ends on December 31, 2015.

The significant unobservable inputs used in the AIT fair value measurement of contingent considerations are the probabilities of successful achievement of calendar year 2015 and 2016 revenue, and a discount rate. Increases or decreases in the revenue probabilities and the period in which results will be achieved would result in a higher or lower fair value measurement. The maximum amount of contingent consideration in connection with the acquisition of AIT that could be paid is $2.1 million. The earn-out periods in connection with the AIT acquisition end on December 31, 2015 and December 31, 2016, respectively.

The carrying amounts and fair values of Teradyne’s financial instruments at April 5, 2015 and December 31, 2014 were as follows:


	April 5, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Cash and cash equivalents	$	218,945	$	218,945	$	294,256	$	294,256
Marketable securities		1,051,941		1,051,941		1,004,576		1,004,576
Contingent consideration		3,350		3,350		3,350		3,350
Derivatives		19		19		149		149

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 April 5, 2015 and December 31, 2014:


	April 5, 2015
	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	$	426,637	$	625	$	(143	)	$	427,119	$	217,722
U.S. government agency securities		231,747		443		(3	)		232,187		15,032
Corporate debt securities		158,051		2,986		(160	)		160,877		51,495
Commercial paper		130,227		72		(1	)		130,298		8,945
Certificates of deposit and time deposits		87,043		24		(15	)		87,052		25,705
Equity and debt mutual funds		11,823		2,147		(8	)		13,962		161
Non-U.S. government securities		446		—		—			446		—

	$	1,045,974	$	6,297	$	(330	)	$	1,051,941	$	319,060

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	649,066	$	224	$	(71	)	$	649,219	$	223,414
Long-term marketable securities		396,908		6,073		(259	)		402,722		95,646

	$	1,045,974	$	6,297	$	(330	)	$	1,051,941	$	319,060


	December 31, 2014
	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	$	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

As of April 5, 2015, the fair market value of investments with unrealized losses was $319.1 million. Of this value, $0.3 million had unrealized losses greater than one year and $318.8 million had unrealized losses less than one year. As of December 31, 2014, the fair market value of investments with unrealized losses was $583.1 million. Of this value, $2.3 million had unrealized losses greater than one year and $580.8 million had unrealized losses 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 April 5, 2015 and December 31, 2014, were temporary.

The contractual maturities of investments held at April 5, 2015 were as follows:


	April 5, 2015
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	649,066	$	649,219
Due after 1 year through 5 years		343,120		343,744
Due after 5 years through 10 years		5,663		5,952
Due after 10 years		36,302		39,064

Total	$	1,034,151	$	1,037,979

Contractual maturities of investments held at April 5, 2015 exclude equity and debt mutual funds as they do not have contractual maturity dates.

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 $96.2 million and $73.0 million at April 5, 2015 and December 31, 2014, respectively. The fair value of the outstanding contracts was $0.0 million and a loss of $0.1 million at April 5, 2015 and December 31, 2014, respectively.

In the three months ended April 5, 2015 and March 30, 2014, Teradyne recorded net realized losses of $3.4 million and $0.7 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 at April 5, 2015 and December 31, 2014:


	Balance Sheet Location	April 5, 2015		December 31, 2014
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	$	19	$	149

Total derivatives		$	19	$	149

Teradyne had no offsetting foreign exchange contracts at April 5, 2015 and December 31, 2014.

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three months ended April 5, 2015 and March 30, 2014. The table does not reflect the corresponding gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the three months ended April 5, 2015 and March 30, 2014, gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $4.3 million and $0.6 million, respectively.


		For the Three Months Ended
	Location of Losses (Gains) Recognized in Statements of Operations	April 5, 2015		March 30, 2014
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	3,425	$	747

Total derivatives		$	3,425	$	747

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