G. 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 gains recorded in 2016, 2015 and 2014 were $1.6 million, $1.7 million and $2.4 million, respectively. Realized losses recorded in 2016 and 2015 were $0.5 million and $0.4 million, respectively. There were no realized losses recorded in 2014. 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, 2016 and 2015, 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, 2016 and 2015:


	December 31, 2016
	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	$	214,722	$	—	$	—	$	214,722
Cash equivalents		37,458		55,704		—		93,162
Available-for-sale securities:
U.S. Treasury securities		—		900,038		—		900,038
Commercial paper		—		161,630		—		161,630
Corporate debt securities		—		100,153		—		100,153
Certificates of deposit and time deposits		—		82,133		—		82,133
U.S. government agency securities		—		42,014		—		42,014
Equity and debt mutual funds		18,171		—		—		18,171
Non-U.S. government securities		—		728		—		728

Total	$	270,351	$	1,342,400	$	—	$	1,612,751

Derivative assets		—		1		—		1

Total	$	270,351	$	1,342,401	$	—	$	1,612,752

Liabilities
Contingent consideration	$	—	$	—	$	38,332	$	38,332
Derivative liabilities		—		131		—		131

Total	$	—	$	131	$	38,332	$	38,463

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	252,180	$	55,704	$	—	$	307,884
Marketable securities		—		871,024		—		871,024
Long-term marketable securities		18,171		415,672		—		433,843
Prepayments		—		1		—		1

	$	270,351	$	1,342,401	$	—	$	1,612,752

Liabilities
Other current liabilities	$	—	$	131	$	—	$	131
Contingent consideration		—		—		1,050		1,050
Long-term contingent consideration		—		—		37,282		37,282

	$	—	$	131	$	38,332	$	38,463


	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

Changes in the fair value of Level 3 contingent consideration for the years ended December 31, 2016 and 2015 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2014	$	3,350
Acquisition of Universal Robots		31,597
Fair value adjustment of Universal Robots (1)		5,339
Fair value adjustment of AIT (2)		(1,250	)
Fair value adjustment of ZTEC (3)		(1,600	)

Balance at December 31, 2015		37,436
Payments (4)		(15,000	)
Fair value adjustment of AIT (5)		550
Fair value adjustment of Universal Robots (5)		15,346

Balance at December 31, 2016	$	38,332

(1)	During the year ended December 31, 2015, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $5.3 million primarily due to an increase in forecasted revenues.

(2)	During the year ended December 31, 2015, the fair value of contingent consideration for the earn-out in connection with the acquisition of AIT was reduced by $1.3 million due to a decrease in the forecasted revenues.

(3)

During the year ended December 31, 2015, the fair value measurement of the contingent consideration for the earn-out in connection with the acquisition of ZTEC Instruments, Inc. (“ZTEC”) was reduced by $1.6 million, to $0, because Teradyne and the Securityholder Representative, on behalf of the ZTEC securityholders, agreed to terminate the earn-out prior to the end of the December 31, 2015 earn-out period, with no payout in connection with the resolution of indemnity claims asserted by both Teradyne and the Securityholder Representative.

(4)	During the year ended December 31, 2016, based on Universal Robots’ calendar year 2015 EBITDA results, Teradyne paid $15 million or 100% of the eligible EBITDA contingent consideration amount.

(5)

During the year ended December 31, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $15.3 million primarily due to an increase in forecasted revenues and a decrease in the discount rate. During the year ended 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of AIT was increased by $0.6 million due to an increase in forecasted revenues. The AIT contingent consideration in the amount of $1.1 million was paid in January 2017.

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

Liability

December 31,
2016
Fair Value

Valuation

Technique

Unobservable Inputs

Weighted
Average

(in thousands)

Contingent consideration

(Universal Robots)

21,301

Monte Carlo

simulation

Revenues for the period July 1, 2015—December 31, 2017 volatility

10.8%

Discount Rate

3.3%

$15,981

Monte Carlo

simulation

Revenues for the period July 1, 2015—December 31, 2018 volatility

10.8%

Discount Rate

3.3%

Contingent consideration (AIT)

1,050(1)

(1)	Teradyne paid this amount in January 2017.

As of December 31, 2016, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Universal Robots contingent consideration include forecasted revenues, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement. The maximum payment for each of the two remaining Universal Robots earn-outs is $25.0 million.

The carrying amounts and fair values of financial instruments at December 31, 2016 and 2015 were as follows:


	December 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	307,884	$	307,884	$	264,705	$	264,705
Marketable securities		1,304,867		1,304,867		743,624		743,624
Derivative assets		1		1		109		109
Liabilities
Contingent consideration		38,332		38,332		37,436		37,436
Derivative liabilities		131		131		146		146
Convertible debt (1)		352,669		486,754		—		—

(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 features.

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, 2016 and 2015:


	December 31, 2016
	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	$	901,975	$	97	$	(2,034	)	$	900,038	$	572,284
Commercial paper		161,672		24		(66	)		161,630		84,034
Corporate debt securities		99,708		1,065		(620	)		100,153		53,642
Certificates of deposit and time deposits		82,080		54		(1	)		82,133		7,760
U.S. government agency securities		42,026		7		(19	)		42,014		13,461
Equity and debt mutual funds		16,505		1,724		(58	)		18,171		1,661
Non-U.S. government securities		745		6		(23	)		728		137

	$	1,304,711	$	2,977	$	(2,821	)	$	1,304,867	$	732,979

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	871,321	$	134	$	(431	)	$	871,024	$	423,128
Long-term marketable securities		433,390		2,843		(2,390	)		433,843		309,851

	$	1,304,711	$	2,977	$	(2,821	)	$	1,304,867	$	732,979


	December 31, 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	$	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

As of December 31, 2016, the fair market value of investments with unrealized losses totaled $733.0 million. Of this value, $2.9 million had unrealized losses of $0.3 million greater than one year and $730.1 million had unrealized losses of $2.5 million for less than one year.

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.

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, 2016 and 2015, were temporary.

The contractual maturities of investments held at December 31, 2016 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	871,321	$	871,024
Due after 1 year through 5 years		365,873		365,451
Due after 5 years through 10 years		12,839		12,309
Due after 10 years		38,173		37,912

Total	$	1,288,206	$	1,286,696

Contractual maturities of investments held at December 31, 2016, exclude $18 million of equity and debt mutual funds as they do not have a contractual maturity date.

The following table sets forth by fair value hierarchy Teradyne’s non-financial assets that were measured at fair value on a non-recurring basis as of July 3, 2016:


			July 3, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3))		Total		Total Losses
	(in thousands)
Goodwill (1)	$	—	$	—	$	7,976	$	7,976	$	254,946
Definite lived intangible assets (2)		—		—		5,750		5,750		83,339

	$	—	$	—	$	13,726	$	13,726	$	338,285

(1)

In accordance with the provisions of ASC 350-20, “Goodwill” goodwill in the Wireless Test reporting unit with a carrying amount of $262.9 million was written down in the second quarter of 2016 to its implied fair value of $8.0 million, resulting in an impairment charge of $254.9 million. See Note J: “Goodwill and Intangible Assets” regarding goodwill impairment.

(2)

In accordance with the provisions of ASC 360-10, “Property, Plant and Equipment,” definite lived intangible assets in the Wireless Test reporting unit with a carrying amount of $89.2 million were written down in the second quarter of 2016 to their implied fair value of $5.8 million, resulting in an impairment charge of $83.3 million. See Note J: “Goodwill and Intangible Assets” regarding definite lived intangible assets 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, 2016 and 2015, 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, 2016								December 31, 2015
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(17.7	)	$	—	$	(17.7	)	$	(51.9	)	$	—	$	(51.9	)
Korean Won		(8.8	)		—		(8.8	)		(5.5	)		—		(5.5	)
Taiwan Dollar		(6.9	)		—		(6.9	)		(5.0	)		—		(5.0	)
British Pound Sterling		(1.3	)		—		(1.3	)		(9.5	)		—		(9.5	)
Euro		—			25.2		25.2			—			27.2		27.2
Singapore Dollar		—			24.0		24.0			—			15.0		15.0

Total	$	(34.7	)	$	49.2	$	14.5		$	(71.9	)	$	42.2	$	(29.7	)

The fair value of the outstanding contracts was a loss of $0.1 million and $0.0 million, at December 31, 2016 and 2015, respectively.

In 2016, 2015 and 2014, Teradyne recorded net realized losses related to foreign currency forward contracts hedging net monetary assets and liabilities of $8.7 million, $3.0 million and $0.2 million, respectively.

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, 2016 and 2015:


	Balance Sheet Location	December 31, 2016			December 31, 2015
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	1		$	109
Foreign exchange contracts	Other current liabilities		(131	)		(146	)

Total derivatives		$	(130	)	$	(37	)

The following table summarizes the effect of derivative instruments in statements of operations recognized for the years ended December 31, 2016, 2015 and 2014. 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, 2016 and 2015, gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $8.0 million and $2.5 million, respectively. For the year ended December 31, 2014, losses from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $0.9 million.


	Location of Losses Recognized in Statements of Operations	December 31, 2016		December 31, 2015		December 31, 2014
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	8,671	$	3,047	$	237

See Note H: “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. There were no customers who accounted for more than 10% of Teradyne’s accounts receivable balance as of December 31, 2016. One customer accounted for more than 10% of Teradyne’s accounts receivable balance as of December 31, 2015.

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 in the fourth quarter of 2013. 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.