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 2017, 2016, and 2015 were $1.1 million, $1.6 million, and $1.7 million, respectively. Realized losses recorded in 2017, 2016, and 2015 were $0.3 million, $0.5 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 years ended December 31, 2017 and 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 December 31, 2017 and 2016:


	December 31, 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	$	197,955	$	—	$	—	$	197,955
Cash equivalents		206,335		25,553		—		231,888
Available for sale securities:
U.S. Treasury securities		—		855,795		—		855,795
Commercial paper		—		282,840		—		282,840
Certificates of deposit and time deposits		—		167,342		—		167,342
Corporate debt securities		—		133,186		—		133,186
Equity and debt mutual funds		23,430		—		—		23,430
U.S. government agency securities		—		10,726		—		10,726
Non-U.S. government securities		—		586		—		586

	$	427,720	$	1,476,028	$	—	$	1,903,748
Derivative assets		—		389		—		389

Total	$	427,720	$	1,476,417	$	—	$	1,904,137

Liabilities
Contingent consideration	$	—	$	—	$	45,102	$	45,102
Derivative liabilities		—		446		—		446

Total	$	—	$	446	$	45,102	$	45,548

Reported as follows:


	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	404,290	$	25,553	$	—	$	429,843
Marketable securities		—		1,347,979		—		1,347,979
Long-term marketable securities		23,430		102,496		—		125,926
Prepayments		—		389		—		389

Total	$	427,720	$	1,476,417	$	—	$	1,904,137

Liabilities
Other current liabilities	$	—	$	446	$	—	$	446
Contingent consideration		—		—		24,497		24,497
Long-term contingent consideration		—		—		20,605		20,605

Total	$	—	$	446	$	45,102	$	45,548


	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 current 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 years ended December 31, 2017 and 2016 were as follows:


	Contingent Consideration
	(in thousands)
Balance at December 31, 2015	$	37,436
Payments (1)		(15,000	)
Fair value adjustment of AIT (2)		550
Fair value adjustment of Universal Robots (2)		15,346

Balance at December 31, 2016		38,332
Payments (3)		(1,050	)
Fair value adjustment of Universal Robots (4)		7,820

Balance at December 31, 2017	$	45,102

(1)	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.

(2)

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 Avionics Interface Technologies, LLC (“AIT”) was increased by $0.6 million due to an increase in forecasted revenues.

(3)	During the year ended December 31, 2017, Teradyne paid $1.1 million of contingent consideration for the earn-out in connection with the acquisition of AIT.

(4)	During the year ended December 31, 2017, the fair value of contingent consideration for the earn-out in connection with the acquisition of Universal Robots was increased by $7.8 million primarily due to an increase in forecasted revenues and decrease in discount rate.

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


Liability	December 31, 2017 Fair Value			Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (Universal Robots)	$	24,497	(1)
	$	20,605		Monte Carlo simulation	Revenue for the period July 1, 2015—December 31, 2018 volatility		11.2%
					Discount Rate		3.3%

(1)	Contingent consideration of $24.5 million is expected to be paid in March 2018.

As of December 31, 2017, 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 the remaining Universal Robots earn-out is $25.0 million.

The carrying amounts and fair values of financial instruments at December 31, 2017 and 2016 were as follows:


	December 31, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	429,843	$	429,843	$	307,884	$	307,884
Marketable securities		1,473,905		1,473,905		1,304,867		1,304,867
Derivative assets		389		389		1		1
Liabilities
Contingent consideration		45,102		45,102		38,332		38,332
Derivative liabilities		446		446		131		131
Convertible debt (1)		365,987		659,525		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, 2017 and 2016:


	December 31, 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	$	858,258	$	72	$	(2,535	)	$	855,795	$	850,163
Commercial paper		283,009		18		(187	)		282,840		258,933
Certificates of deposit and time deposits		167,523		6		(187	)		167,342		138,340
Corporate debt securities		131,179		2,380		(373	)		133,186		91,010
Equity and debt mutual funds		19,403		4,102		(75	)		23,430		1,723
U.S. government agency securities		10,775		—		(49	)		10,726		10,726
Non-U.S. government securities		582		4		—			586		—

	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	1,349,970	$	38	$	(2,029	)	$	1,347,979	$	1,288,844
Long-term marketable securities		120,759		6,544		(1,377	)		125,926		62,052

	$	1,470,729	$	6,582	$	(3,406	)	$	1,473,905	$	1,350,896


	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

	$	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 December 31, 2017, the fair market value of investments with unrealized losses totaled $1,350.9 million. Of this value, $141.0 million had unrealized losses of $1.2 million greater than one year and $1,209.9 million had unrealized losses of $2.2 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 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 December 31, 2017 and 2016, were temporary.

The contractual maturities of investments held at December 31, 2017 were as follows:


	Cost		Fair Value
	(in thousands)
Due within one year	$	1,349,970	$	1,347,979
Due after 1 year through 5 years		48,796		48,599
Due after 5 years through 10 years		13,916		13,489
Due after 10 years		38,644		40,408

Total	$	1,451,326	$	1,450,475

Contractual maturities of investments held at December 31, 2017 exclude $23.4 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)
Assets
Goodwill	$	—	$	—	$	7,976	$	7,976	$	254,946
Definite lived intangible assets		—		—		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, 2017 and 2016, 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, 2017								December 31, 2016
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	(35.7	)	$	—	$	(35.7	)	$	(17.7	)	$	—	$	(17.7	)
Taiwan Dollar		(9.9	)		—		(9.9	)		(6.9	)		—		(6.9	)
Korean Won		(8.9	)		—		(8.9	)		(8.8	)		—		(8.8	)
British Pound Sterling		(1.4	)		—		(1.4	)		(1.3	)		—		(1.3	)
Singapore Dollar		—			33.5		33.5			—			24.0		24.0
Euro		—			27.4		27.4			—			25.2		25.2

Total	$	(55.9	)	$	60.9	$	5.0		$	(34.7	)	$	49.2	$	14.5

The fair value of the outstanding contracts was a loss of $0.1 million, at December 31, 2017 and 2016.

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, 2017 and 2016:


	Balance Sheet Location	2017			2016
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	389		$	1
Foreign exchange contracts	Other current liabilities		(446	)		(131	)

Total derivatives		$	(57	)	$	(130	)

The following table summarizes the effect of derivative instruments in the statements of operations recognized for the years ended December 31, 2017, 2016, and 2015.


	Location of (Gains) Losses Recognized in Statement of Operations	2017			2016		2015
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	(1,133	)	$	8,671	$	3,047

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

(2)	For the year ended December 31, 2017, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $2.9 million.

(3)	For the years ended December 31, 2016, and 2015, net gains from the remeasurement of the monetary assets and liabilities denominated in foreign currencies were $8.0 million and $2.5 million, respectively.

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, 2017 and December 31, 2016.

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.