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Financial Instruments

9 Months Ended

Oct. 01, 2017

Financial Instruments

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 October 1, 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 and nine months ended October 1, 2017 and October 2, 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 as 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, revenue 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 and nine months ended October 1, 2017 were $0.2 million and $0.7 million, respectively. Realized losses recorded in the three and nine months ended October 1, 2017 were $0.0 million and $0.3 million, respectively. Realized gains in the three and nine months ended October 2, 2016 were $0.7 million and $1.2 million, respectively. Realized losses recorded in the three and nine months ended October 2, 2016 were $0.1 million and $0.4 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 and nine months ended October 1, 2017 and October 2, 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 October 1, 2017 and December 31, 2016.

		October 1, 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		$	213,664			$	—			$	—			$	213,664
Cash equivalents			166,803				38,210				—				205,013
Available-for-sale securities:
U.S. Treasury securities			—				942,250				—				942,250
Commercial paper			—				194,948				—				194,948
Corporate debt securities			—				118,487				—				118,487
Certificates of deposit and time deposits			—				95,469				—				95,469
U.S. government agency securities			—				55,938				—				55,938
Equity and debt mutual funds			22,104				—				—				22,104
Non-U.S. government securities			—				577				—				577
			402,571				1,445,879				—				1,848,450
Derivative assets			—				157				—				157
Total		$	402,571			$	1,446,036			$	—			$	1,848,607
Liabilities
Contingent consideration		$	—			$	—			$	39,129			$	39,129
Derivative liabilities			—				190				—				190
Total		$	—			$	190			$	39,129			$	39,319

Reported as follows:

		(Level 1)				(Level 2)				(Level 3)				Total
		(in thousands)
Assets
Cash and cash equivalents		$	380,467			$	38,210			$	—			$	418,677
Marketable securities			—				1,217,830				—				1,217,830
Long-term marketable securities			22,104				189,839				—				211,943
Prepayments			—				157				—				157
Total		$	402,571			$	1,446,036			$	—			$	1,848,607
Liabilities			.
Other current liabilities		$	—			$	190			$	—			$	190
Contingent consideration			—				—				21,818				21,818
Long-term contingent consideration			—				—				17,311				17,311
Total		$	—			$	190			$	39,129			$	39,319

		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			—				902,800				—				902,800
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			—				39,252				—				39,252
Equity and debt mutual funds			18,171				—				—				18,171
Non-U.S. government securities			—				728				—				728
			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
Total		$	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
Total		$	—			$	131			$	38,332			$	38,463

Changes in the fair value of Level 3 contingent consideration for the three and nine months ended October 1, 2017 and October 2, 2016 were as follows:

		For the Three Months Ended								For the Nine Months Ended
		October 1, 2017				October 2, 2016				October 1, 2017				October 2, 2016
		(in thousands)
Balance at beginning of period		$	39,415			$	24,914			$	38,332			$	37,436
Payments (a)			—				—				(1,050	)			(15,000	)
Fair value adjustment (b)(c)			(286	)			7,973				1,847				10,451
Balance at end of period		$	39,129			$	32,887			$	39,129			$	32,887

(a) In the nine months ended October 1, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of Avionics Interface Technology, LLC (“AIT”). In the nine months ended October 2, 2016, based on Universal Robots’ calendar year 2015 EBITDA results, Teradyne paid $15.0 million or 100% of the eligible EBITDA contingent consideration amount in connection with the acquisition of Universal Robots.

(b) In the nine months ended October 1, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $1.8 million due to an increase in forecasted revenue. In the three and nine months ended October 2, 2016, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $8.0 million and $9.9 million, respectively, primarily due to an increase in forecasted revenue and a decrease in the discount rate.

(c) In the nine months ended October 2, 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 revenue.

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

Liability		October 1, 2017 Fair Value				Valuation Technique				Unobservable Inputs						Weighted Average
		(in thousands)
Contingent consideration (Universal Robots)			$21,818				Monte Carlo Simulation			Revenue for the period July 1, 2015—December 31, 2017 volatility							11.5	%
										Discount rate							2.6	%
				$17,311				Monte Carlo Simulation			Revenue for the period July 1, 2015—December 31, 2018 volatility							11.5	%
										Discount rate							2.6	%

As of October 1, 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 October 1, 2017 and December 31, 2016 were as follows:

		October 1, 2017								December 31, 2016
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(in thousands)
Assets
Cash and cash equivalents		$	418,677			$	418,677			$	307,884			$	307,884
Marketable securities			1,429,773				1,429,773				1,304,867				1,304,867
Derivative assets			157				157				1				1
Liabilities
Contingent consideration			39,129				39,129				38,332				38,332
Derivative liabilities			190				190				131				131
Convertible debt (1)			362,595				613,238				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 October 1, 2017 and December 31, 2016:

		October 1, 2017
		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		$	944,120			$	64			$	(1,934	)		$	942,250			$	936,195
Commercial paper			194,985				11				(48	)			194,948				140,562
Corporate debt securities			116,687				2,046				(246	)			118,487				79,119
Certificates of deposit and time deposits			95,447				29				(7	)			95,469				33,238
U.S. government agency securities			55,936				20				(18	)			55,938				52,997
Equity and debt mutual funds			18,202				3,923				(21	)			22,104				1,529
Non-U.S. government securities			570				7				—				577				—
Total		$	1,425,947			$	6,100			$	(2,274	)		$	1,429,773			$	1,243,640

Reported as follows:

		Cost				Unrealized Gain				Unrealized (Loss)				Fair Market Value				Fair Market Value of Investments with Unrealized Losses
		(in thousands)
Marketable securities		$	1,218,752			$	65			$	(987	)		$	1,217,830			$	1,088,881
Long-term marketable securities			207,195				6,035				(1,287	)			211,943				154,759
Total		$	1,425,947			$	6,100			$	(2,274	)		$	1,429,773			$	1,243,640

		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		$	904,737			$	97			$	(2,034	)		$	902,800			$	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			39,264				7				(19	)			39,252				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
Total		$	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
Total		$	1,304,711			$	2,977			$	(2,821	)		$	1,304,867			$	732,979

As of October 1, 2017, the fair market value of investments with unrealized losses totaled $1,243.6 million. Of this value, $113.3 million had unrealized losses of $0.9 million for greater than one year and $1,130.3 million had unrealized losses of $1.4 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 October 1, 2017 and December 31, 2016 were temporary.

The contractual maturities of investments held at October 1, 2017 were as follows:

		October 1, 2017
		Cost				Fair Market Value
		(in thousands)
Due within one year		$	1,218,752			$	1,217,830
Due after 1 year through 5 years			136,081				135,889
Due after 5 years through 10 years			14,129				13,818
Due after 10 years			38,783				40,132
Total		$	1,407,745			$	1,407,669

Contractual maturities of investments held at October 1, 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 October 1, 2017 and December 31, 2016 was $79.2 million and $83.9 million, respectively.

The following table summarizes the fair value of derivative instruments at October 1, 2017 and December 31, 2016:

		Balance Sheet Location				October 1, 2017				December 31, 2016
						(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts assets			Prepayments			$	157			$	1
Foreign currency forward contracts liabilities			Other current liabilities				(190	)			(131	)
Total						$	(33	)		$	(130	)

The following table summarizes the effect of derivative instruments recognized in the statement of operations during the three and nine months ended October 1, 2017 and October 2, 2016.

		Location of (Gains) Losses Recognized in Statement of Operations		For the Three Months Ended								For the Nine Months Ended
				October 1, 2017				October 2, 2016				October 1, 2017				October 2, 2016
											(in thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Other (income) expense, net		$	(939	)		$	941			$	(1,514	)		$	11,140
Total				$	(939	)		$	941			$	(1,514	)		$	11,140

(1) The table does not reflect the corresponding gains and losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies.

(2) For the three and nine months ended October 1, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.4 million and $2.3 million, respectively.

(3) For the three and nine months ended October 2, 2016, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.9 million and $12.2 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.

X

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

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