E. 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 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 April 2, 2017, 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 2, 2017 and April 3, 2016. 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; or

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 debt and equity securities are classified as Level 1 and Level 2. Acquisition-related contingent consideration is classified within Level 3. Teradyne determines the fair value of acquisition-related contingent consideration using a Monte Carlo simulation model. Assumptions utilized in the model include forecasted revenues, revenues volatility and discount rate. 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 the three months ended April 2, 2017 and April 3, 2016 were $0.3 million and $0.2 million, respectively. Realized losses recorded in the three months ended April 2, 2017 and April 3, 2016 were $0.2 million and $0.2 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 three months ended April 2, 2017 and April 3, 2016, 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 2, 2017 and December 31, 2016.


	April 2, 2017
	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	$	202,925	$	—	$	—	$	202,925
Cash equivalents		115,578		6,243		—		121,821
Available-for-sale securities:
U.S. Treasury securities		—		854,547		—		854,547
Commercial paper		—		121,065		—		121,065
Corporate debt securities		—		89,731		—		89,731
Certificates of deposit and time deposits		—		50,578		—		50,578
U.S. government agency securities		—		21,149		—		21,149
Equity and debt mutual funds		19,986		—		—		19,986
Non-U.S. government securities		—		583		—		583

Total	$	338,489	$	1,143,896	$	—	$	1,482,385

Derivative assets		—		145		—		145

Total	$	338,489	$	1,144,041	$	—	$	1,482,530

Liabilities
Contingent consideration	$	—	$	—	$	37,916	$	37,916
Derivative liabilities		—		107		—		107

Total	$	—	$	107	$	37,916	$	38,023

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	318,503	$	6,243	$	—	$	324,746
Marketable securities		—		895,578		—		895,578
Long-term marketable securities		19,986		242,075		—		262,061
Prepayments		—		145		—		145

	$	338,489	$	1,144,041	$	—	$	1,482,530

Liabilities		.
Other current liabilities	$	—	$	107	$	—	$	107
Contingent consideration		—		—		21,711		21,711
Long-term contingent consideration		—		—		16,205		16,205

	$	—	$	107	$	37,916	$	38,023


	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 accrued liabilities	$	—	$	131	$	—	$	131
Contingent consideration		—		—		1,050		1,050
Long-term contingent consideration		—		—		37,282		37,282

	$	—	$	131	$	38,332	$	38,463

Changes in the fair value of Level 3 contingent consideration for the three months ended April 2, 2017 and April 3, 2016 were as follows:


	For the Three Months Ended
	April 2,			April 3,
	2017			2016
	(in thousands)
Balance at beginning of period	$	38,332		$	37,436
Payments (a)		(1,050	)		(15,000	)
Fair value adjustment (b)		634			1,173

Balance at end of period	$	37,916		$	23,609

(a)	In the three months ended April 2, 2017, Teradyne paid $1.1 million of the AIT contingent consideration. In the three months ended April 3, 2016 based on Universal Robots’ calendar year 2015 EBITDA results, Teradyne paid $15.0 million or 100% of the eligible EBITDA contingent consideration amount.

(b)	In the three months ended April 2, 2017 and April 3, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $0.6 million and $1.2 million, respectively, primarily due to a decrease in the discount rate.

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


Liability	April 2, 2017 Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$	21,711	Monte Carlo Simulation	Revenues for the period July 1, 2015—December 31, 2017 volatility		12.2	%
				Discount Rate		2.8	%
	$	16,205	Monte Carlo Simulation	Revenues for the period July 1, 2015—December 31, 2018 volatility		12.2	%
				Discount Rate		2.8	%

As of April 2, 2017, 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 maximum payment for each of the two Universal Robots revenue earn-outs is $25.0 million.

The carrying amounts and fair values of Teradyne’s financial instruments at April 2, 2017 and December 31, 2016 were as follows:


	April 2, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	324,746	$	324,746	$	307,884	$	307,884
Marketable securities		1,157,639		1,157,639		1,304,867		1,304,867
Derivative assets		145		145		1		1
Liabilities
Contingent consideration		37,916		37,916		38,332		38,332
Derivative liabilities		107		107		131		131
Convertible debt (1)		355,937		534,750		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 value due to the short-term nature of these instruments.

The following tables summarize the composition of available-for-sale marketable securities at April 2, 2017 and December 31, 2016:


	April 2, 2017
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
U.S. Treasury securities	$	856,714	$	37	$	(2,204	)	$	854,547	$	846,287
Commercial paper		121,073		7		(15	)		121,065		76,050
Corporate debt securities		89,164		1,151		(584	)		89,731		56,678
Certificates of deposit and time deposits		50,541		37		—			50,578		—
U.S. government agency securities		21,174		8		(33	)		21,149		10,024
Equity and debt mutual funds		17,472		2,546		(32	)		19,986		1,415
Non-U.S. government securities		578		5		—			583		—

	$	1,156,716	$	3,791	$	(2,868	)	$	1,157,639	$	990,454

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	896,345	$	56	$	(823	)	$	895,578	$	774,974
Long-term marketable securities		260,371		3,735		(2,045	)		262,061		215,480

	$	1,156,716	$	3,791	$	(2,868	)	$	1,157,639	$	990,454


	December 31, 2016
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(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

As of April 2, 2017, the fair market value of investments with unrealized losses totaled $990.5 million. Of this value, $2.2 million had unrealized losses of $0.2 million for greater than one year and $988.3 million had unrealized losses of $2.6 million for less than one year.

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 for greater than one year and $730.1 million had unrealized losses of $2.5 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 April 2, 2017 and December 31, 2016, were temporary.

The contractual maturities of investments held at April 2, 2017 were as follows:


	April 2, 2017
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	896,345	$	895,578
Due after 1 year through 5 years		190,557		190,252
Due after 5 years through 10 years		12,270		11,812
Due after 10 years		40,072		40,011

Total	$	1,139,244	$	1,137,653

Contractual maturities of investments held at April 2, 2017 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 monetary assets and liabilities denominated in foreign currencies.

The notional amount of foreign currency forward contracts at April 2, 2017 and December 31, 2016 was $89.2 million and $83.9 million, respectively. The fair value of the outstanding contracts was $0.0 million at April 2, 2017 and a loss of $0.1 million at December 31, 2016.

For the three months ended April 2, 2017 and April 3, 2016, Teradyne recorded net realized losses related to foreign currency forward contracts hedging net monetary assets and liabilities of $1.0 million and $3.3 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 at April 2, 2017 and December 31, 2016:


	Balance Sheet Location		April 2, 2017			December 31, 2016
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts assets		Prepayments	$	145		$	1
Foreign exchange contracts liabilities		Other current liabilities		(107	)		(131	)

Total derivatives			$	38		$	(130	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three months ended April 2, 2017 and April 3, 2016.


	Location of Losses	For the Three Months Ended
	Recognized in	April 2,		April 3,
	Statements of Operations	2017		2016
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	1,011	$	3,298

Total Derivatives		$	1,011	$	3,298

The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies. For the three months ended April 2, 2017 and April 3, 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.5 million and $3.4 million, respectively.