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Financial Instruments

9 Months Ended

Sep. 27, 2020

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

debt securities are classified as Level 2 and equity and debt mutual funds are classified as Level 1. 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.

During the three and nine months ended September 27, 2020 and September 29, 2019, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

Realized gains recorded in the three and nine months ended September 27, 2020 were $1.1 million and $4.1 million, respectively. Realized losses recorded in the three and nine months ended September 27, 2020 were $0.1 million and $0.3 million, respectively. Realized gains recorded in the three and nine months ended September 29, 2019 were $0.5 million and $0.7 million, respectively. Realized losses recorded in the nine months ended September 29, 2019 were $0.2 million. Realized gains and losses are included in other (income) expense, net.

Unrealized gains on equity securities recorded in the three and nine months ended September 27, 2020 were $2.0 million and $5.7 million, respectively. Unrealized losses on equity securities recorded in the nine months ended September 27, 2020 were $6.0 million. Unrealized gains on equity securities recorded in the three and nine months ended September 29, 2019 were $0.1 million and $3.8 million, respectively. Unrealized losses on equity securities recorded in the three and nine months ended September 29, 2019 were $0.2 million. Unrealized gains and losses on equity securities are included in other (income) expense, net. Unrealized gains and losses on

available-for-sale

debt securities are included in accumulated other comprehensive income (loss).

The cost of securities sold is based on the

first-in

first-out

method.

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 September 27, 2020 and December 31, 2019.


	September 27, 2020
	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	$	267,013	$	—	$	—	$	267,013
Cash equivalents		663,301		14,866		—		678,167
Available-for-sale securities:
U.S. Treasury securities		—		202,766		—		202,766
Commercial paper		—		102,149		—		102,149
Corporate debt securities		—		50,715		—		50,715
Debt mutual funds		6,852		—		—		6,852
U.S. government agency securities		—		4,346		—		4,346
Certificates of deposit and time deposits		—		2,416		—		2,416
Non-U.S. government securities		—		619		—		619
Equity securities:
Mutual funds		26,180		—		—		26,180

	$	963,346	$	377,877	$	—	$	1,341,223
Derivative assets		—		25		—		25

Total	$	963,346	$	377,902	$	—	$	1,341,248

Liabilities
Contingent consideration	$	—	$	—	$	22,531	$	22,531
Derivative liabilities		—		185		—		185

Total	$	—	$	185	$	22,531	$	22,716


Reported as follow s :



	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	930,314	$	14,866	$	—	$	945,180
Marketable securities		—		287,789		—		287,789
Long-term marketable securities		33,032		75,222		—		108,254
Prepayments and other current assets		—		25		—		25

Total	$	963,346	$	377,902	$	—	$	1,341,248

Liabilities		.
Other current liabilities	$	—	$	185	$	—	$	185
Long-term contingent consideration		—		—		22,531		22,531

Tota l	$	—	$	185	$	22,531	$	22,716


	December 31, 2019
	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	$	311,975	$	—	$	—	$	311,975
Cash equivalents		410,285		51,664		—		461,949
Available-for-sale securities:
Corporate debt securities		—		97,307		—		97,307
Commercial paper		—		54,149		—		54,149
U.S. Treasury securities		—		42,382		—		42,382
U.S. government agency securities		—		9,952		—		9,952
Debt mutual funds		6,888		—		—		6,888
Certificates of deposit and time deposits		—		4,751		—		4,751
Non-U.S. government securities		—		592		—		592
Equity securities:
Equity mutual funds		25,772		—		—		25,772

	$	754,920	$	260,797	$	—	$	1,015,717
Derivative assets		—		528		—		528


Total	$	754,920	$	261,325	$	—	$	1,016,245

Liabilities
Contingent consideration	$	—	$	—	$	39,705	$	39,705
Derivative liabilities		—		203		—		203

Total	$	—	$	203	$	39,705	$	39,908


Reported as follows:



	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	722,260	$	51,664	$	—	$	773,924
Marketable securities		—		137,303		—		137,303
Long-term marketable securities		32,660		71,830		—		104,490
Prepayments and other current assets		—		528		—		528

Total	$	754,920	$	261,325	$	—	$	1,016,245

Liabilities
Other accrued liabilities	$	—	$	203	$	—	$	203
Contingent consideration		—		—		9,106		9,106
Long-term contingent consideration		—		—		30,599		30,599

Total	$	—	$	203	$	39,705	$	39,908

Changes in the fair value of Level 3 contingent consideration for the three and nine months ended September 27, 2020 and September 29, 2019 were as follows:


	For the Three Months Ended						For the Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019
	(in thousands)
Balance at beginning of period	$	49,737		$	26,847		$	39,705		$	70,543
Fair value adjustment ( a)(b)(c)		(27,206	)		(7,759	)		(7,967	)		(16,460	)
Payments (d )(e)		—			—			(8,852	)		(34,590	)
Foreign currency impact		—			(1,008	)		(355	)		(1,413	)

Balance at end of period	$	22,531		$	18,080		$	22,531		$	18,080

(a)

In the three and nine months ended September 27, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide decreased by $27.2 million and $4.4 million, respectively, due to lower forecasted results. Teradyne has received a letter from the sellers of AutoGuide alleging

non-compliance

with the

earn-out

provisions of the AutoGuide acquisition agreement. Teradyne disputes the allegations of

non-compliance.

The ultimate amount of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide may be affected by the outcome of the dispute.

(b)	In the nine months ended September 27, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of MiR decreased by $3.5 million due to lower forecasted results.

(c)

In the three and nine months ended September 29, 2019, the fair value of contingent consideration for the

earn-out

in connection with the acquisition of MiR decreased by $7.8 million and $16.5 million, respectively, primarily due to a decrease in the forecasted revenue, partially offset by impact from the modification of the

earn-out

structure in the three months ended September 29, 2019.

(d)	In the nine months ended September 27, 2020, Teradyne paid $8.9 million of contingent consideration for the earn-out in connection with the acquisition of MiR.

(e)	In the nine months ended September 29, 2019, Teradyne paid $30.8 million and $3.8 million of contingent consideration for the earn-outs in connection with the acquisition of MiR and Universal Robots A/S (“Universal Robots”), respectively.

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


Liability	September 27, 2020 Fair Value		Valuation Technique		Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (AutoGuide)	$	22,531		Monte Carlo Simulation	Revenue volatility		17.5	%
					Discount Rate		1.4	%
Contingent consideration (MiR)	$	—		Monte Carlo Simulation	Revenue volatility		10.0	%
					Discount Rate		0.8	%

As of September 27, 2020, the significant unobservable inputs used in the Monte Carlo simulation to fair value the AutoGuide and MiR contingent consideration include forecasted revenues, revenue volatility, earnings before interest and taxes, and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement.

As of September 27, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of AutoGuide is $106.9 million. The

earn-out

periods end on December 31, 2020, December 31, 2021 and December 31, 2022.

As of September 27, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $65.8 million. The remaining

earn-out

period ends on December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at September 27, 2020 and December 31, 2019 were as follows:


	September 27, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	945,180	$	945,180	$	773,924	$	773,924
Marketable securities		396,043		396,043		241,793		241,793
Derivative assets		25		25		528		528
Liabilities
Contingent consideration		22,531		22,531		39,705		39,705
Derivative liabilities		185		185		203		203
Convertible debt (1)		406,178		1,151,460		394,687		1,010,275

(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 table summarizes the composition of

available-for-sale

marketable securities at September 27, 2020:


	September 27, 2020
	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	$	201,193	$	1,606	$	(33	)	$	202,766	$	20,611
Commercial paper		102,141		8		—			102,149		500
Corporate debt securities		44,350		6,417		(52	)		50,715		2,207
Debt mutual funds		6,661		191		—			6,852		—
U.S. government agency securities		4,288		60		(2	)		4,346		1,113
Certificates of deposit and time deposits		2,414		2		—			2,416		—
Non-U.S. government securities		619		—		—			619		—

	$	361,666	$	8,284	$	(87	)	$	369,863	$	24,431

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	287,670	$	128	$	(9	)	$	287,789	$	18,953
Long-term marketable securities		73,996		8,156		(78	)		82,074		5,478

	$	361,666	$	8,284	$	(87	)	$	369,863	$	24,431

The following table summarizes the composition of

available-for-sale

marketable securities at December 31, 2019:


	December 31, 2019
	Available-for-Sale
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Corporate debt securities	$	93,267	$	4,081	$	(41	)	$	97,307	$	2,009
Commercial paper		54,124		26		(1	)		54,149		1,391
U.S. Treasury securities		42,167		431		(216	)		42,382		17,556
U.S. government agency securities		9,942		14		(4	)		9,952		3,043
Debt mutual funds		6,753		135		—			6,888		—
Certificates of deposit and time deposits		4,751		—		—			4,751		—
Non-U.S. government securities		592		—		—			592		—

	$	211,596	$	4,687	$	(262	)	$	216,021	$	23,999

Reported as follows:


	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	137,144	$	160	$	(1	)	$	137,303	$	2,922
Long-term marketable securities		74,452		4,527		(261	)		78,718		21,077

	$	211,596	$	4,687	$	(262	)	$	216,021	$	23,999

As of September 27, 2020 and December 31, 2019, the fair market value of investments with unrealized losses less than one year totaled $24.4 million and $23.6 million, respectively.

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 September 27, 2020 and December 31, 2019 were not other than temporary.

The contractual maturities of investments in

available-for-sale

securities held at September 27, 2020 were as follows:


	September 27, 2020
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	287,670	$	287,789
Due after 1 year through 5 years		20,790		21,266
Due after 5 years through 10 years		13,021		14,211
Due after 10 years		33,524		39,745

Total	$	355,005	$	363,011

Contractual maturities of investments in

available-for-sale

securities held at September 27, 2020 exclude debt mutual funds with a fair market value of $6.9 million, as they do not have a contractual maturity date.

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 September 27, 2020 and December 31, 2019 was $111.5 million and $144.9 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 September 27, 2020 and December 31, 2019:


	Balance Sheet Location	September 27, 2020			December 31, 2019
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepayments	$	25		$	528
Foreign exchange contracts	Other current liabilities		(185	)		(203	)

Total derivatives		$	(160	)	$	325

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and nine months ended September 27, 2020 and September 29, 2019:


	Location of (Gains) Losses	For the Three Months Ended					For the Nine Months Ended
	Recognized in	September 27,			September 29,		September 27,		September 29,
	Statement of Operations	2020			2019		2020		2019
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net	$	(551	)	$	3,699	$	3,930	$	7,872

(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 three months ended September 27, 2020, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were

1.2 million. For the nine months ended September 27, 2020, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.4 million.

(3)

For the three months ended September 29, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.5 million. For the nine months ended September 29, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $3.4 million.

See Note

: “Debt” regarding derivatives related to the convertible senior notes.

- 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 + Details