Financial Instruments | 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 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 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. — 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 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. — 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 (2) During the year ended December 31, 2015, the fair value of contingent consideration for the earn-out (3) During the year ended December 31, 2015, the fair value measurement of the contingent consideration for the earn-out earn-out earn-out (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 earn-out 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. 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. 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 non-recurring 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 (2) In accordance with the provisions of ASC 360-10, “Property, Plant and Equipment,” 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. non-U.S. 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 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 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. |