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 securities are classified as Level 1 and Level 2. Contingent consideration is classified as Level 3. The vast majority of Level 2 securities are fixed income securities 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.

Realized losses recorded in 2015 were $0.4 million. There were no realized losses recorded in 2014 and 2013. Realized gains recorded in 2015, 2014 and 2013 were $1.7 million, $2.4 million and $1.0 million, respectively. Realized gains are included in interest income, and realized losses are included in interest expense. 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, 2015 and 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 December 31, 2015 and 2014:


	December 31, 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	$	213,336	$	—	$	—	$	213,336
Cash equivalents		49,241		2,128		—		51,369
Available for sale securities:
U.S. Treasury securities		—		419,958		—		419,958
Corporate debt securities		—		161,634		—		161,634
U.S. government agency securities		—		83,952		—		83,952
Certificates of deposit and time deposits		—		43,394		—		43,394
Commercial paper		—		20,308		—		20,308
Equity and debt mutual funds		13,954		—		—		13,954
Non-U.S. government securities		—		424		—		424

Total	$	276,531	$	731,798	$	—	$	1,008,329

Derivative assets		—		109		—		109

Total	$	276,531	$	731,907	$	—	$	1,008,438

Liabilities
Contingent consideration	$	—	$	—	$	37,436	$	37,436
Derivative liabilities		—		146		—		146

Total	$	—	$	146	$	37,436	$	37,582

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	262,577	$	2,128	$	—	$	264,705
Marketable securities		—		477,696		—		477,696
Long-term marketable securities		13,954		251,974		—		265,928
Prepayments		—		109		—		109

	$	276,531	$	731,907	$	—	$	1,008,438

Liabilities
Other current liabilities	$	—	$	146	$	—	$	146
Contingent consideration		—		—		15,500		15,500
Long-term contingent consideration		—		—		21,936		21,936

	$	—	$	146	$	37,436	$	37,582


	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

Derivative assets		—		220		—		220

Total	$	284,022	$	1,015,030	$	—	$	1,299,052

Liabilities
Contingent consideration	$	—	$	—	$	3,350	$	3,350
Derivative liabilities		—		369		—		369

Total	$	—	$	369	$	3,350	$	3,719

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
Prepayments		—		220		—		220

	$	284,022	$	1,015,030	$	—	$	1,299,052

Liabilities
Other current liabilities	$	—	$	369	$	—	$	369
Contingent consideration		—		—		895		895
Long-term other accrued liabilities		—		—		2,455		2,455

	$	—	$	369	$	3,350	$	3,719

Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2015 and 2014 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2013	$	2,230
Acquisition of AIT		1,750
Fair value adjustment of ZTEC		(630	)

Balance at December 31, 2014		3,350
Acquisition of Universal Robots		31,597
Fair value adjustment of ZTEC		(1,600	)
Fair value adjustment of AIT		(1,250	)
Fair value adjustment of Universal Robots		5,339

Balance at December 31, 2015	$	37,436

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


Liability	December 31, 2015 Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$	21,936	Monte Carlo simulation	Revenue for the period July 1, 2015—December 31, 2017 volatility	15%
				Discount Rate	5.5%
				Revenue for the period July 1, 2015—December 31, 2018 volatility	15%
				Discount Rate	5.5%

Contingent consideration (AIT)	$	500	Income approach- discounted cash flow	Revenue for calendar year 2016 probability	48%
Contingent consideration (AIT)			Income approach- discounted cash flow	Discount rate	4.7%

Based on Universal Robots’ calendar 2015 EBITDA results, Teradyne will pay, in first quarter of 2016, $15 million or 100% of the eligible EBITDA contingent consideration amount.

As of December 31, 2015, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots contingent consideration include forecasted revenue, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement.

The significant unobservable inputs used in the AIT fair value measurement of contingent consideration are the probabilities of successful achievement of calendar year 2016 revenue threshold and target, and a discount rate. Increases or decreases in the revenue probabilities would result in a higher or lower fair value measurement.

The carrying amounts and fair values of financial instruments at December 31, 2015 and 2014 were as follows:


	December 31, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	264,705	$	264,705	$	294,256	$	294,256
Marketable securities		743,624		743,624		1,004,576		1,004,576
Derivative assets		109		109		220		220
Liabilities
Contingent consideration		37,436		37,436		3,350		3,350
Derivative liabilities		146		146		369		369

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, 2015 and 2014:


	December 31, 2015
	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	$	421,060	$	65	$	(1,167	)	$	419,958	$	379,434
Corporate debt securities		163,297		902		(2,565	)		161,634		145,373
U.S. government agency securities		84,032		42		(122	)		83,952		55,120
Certificates of deposit and time deposits		43,391		6		(3	)		43,394		10,527
Commercial paper		20,298		11		(1	)		20,308		8,646
Equity and debt mutual funds		12,996		1,119		(161	)		13,954		2,560
Non-U.S. government securities		424		—		—			424		—

	$	745,498	$	2,145	$	(4,019	)	$	743,624	$	601,660

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	478,306	$	38	$	(648	)	$	477,696	$	374,785
Long-term marketable securities		267,192		2,107		(3,371	)		265,928		226,875

	$	745,498	$	2,145	$	(4,019	)	$	743,624	$	601,660


	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

As of December 31, 2015, the fair market value of investments with unrealized losses totaled $601.7 million. Of this value, $0.9 million had unrealized losses of $0.5 million greater than one year and $600.8 million had unrealized losses of $3.6 million for less than one year.

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 of $0.1 million greater than one year and $580.8 million had unrealized losses of $0.8 million 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, 2015 and 2014, were temporary.

The contractual maturities of investments held at December 31, 2015 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	478,306	$	477,696
Due after 1 year through 5 years		209,822		209,314
Due after 5 years through 10 years		5,183		5,179
Due after 10 years		39,191		37,481

Total	$	732,502	$	729,670

Contractual maturities of investments held at December 31, 2015, exclude $14 million of equity and debt mutual funds as they do not have a contractual maturity date.

Assets 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 in 2014 to its implied fair value of $273.4 million, resulting in an impairment charge of $98.9 million. See Note I: “Goodwill and Intangible Assets” 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, 2015 and 2014, 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, 2015								December 31, 2014
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(51.9	)	$	—	$	(51.9	)	$	—		$	19.7	$	19.7
British Pound Sterling		(9.5	)		—		(9.5	)		—			11.7		11.7
Korean Won		(5.5	)		—		(5.5	)		—			4.4		4.4
Taiwan Dollar		(5.0	)		—		(5.0	)		(0.9	)		5.7		4.8
Euro		—			27.2		27.2			(30.6	)		—		(30.6	)
Singapore Dollar		—			15.0		15.0			—			—		—

Total	$	(71.9	)	$	42.2	$	(29.7	)	$	(31.5	)	$	41.5	$	10.0

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

In 2015 and 2014, Teradyne recorded net realized losses related to foreign currency forward contracts hedging net monetary assets and liabilities of $3.0 million and $0.2 million, respectively.

In 2013, Teradyne recorded net realized gains related to foreign currency forward contracts hedging net monetary assets and liabilities of $5.9 million. 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, 2015 and 2014:


	Balance Sheet Location	December 31, 2015			December 31, 2014
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	109		$	220
Foreign exchange contracts	Other current liabilities		(146	)		(369	)

Total derivatives		$	(37	)	$	(149	)

The following table summarizes the effect of derivative instruments in the statement of operations recognized for the years ended December 31, 2015, 2014 and 2013. The table does not reflect the corresponding gains and losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies. For the years ended December 31, 2015, 2014, and 2013, gains (losses) from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $2.5 million, $(0.9) million, and $(6.9) million, respectively.


	Location of Losses (Gains) Recognized in Statement of Operations	December 31, 2015		December 31, 2014		December 31, 2013
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	3,047	$	237	$	(5,933	)

Total derivatives		$	3,047	$	237	$	(5,933	)

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. One customer comprised 10% or more of Teradyne’s accounts receivable balance as of December 31, 2015. A different customer comprised 10% or more of Teradyne’s accounts receivable balance as of December 31, 2014.

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 a gain in other (income) expense, net. An additional $5.4 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 was recorded as a gain in other (income) expense, net in the first quarter of 2015.