| 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.
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 six months ended July 2, 2017
and July 3, 2016. As defined in ASC 820-10, “ Fair
Value Measurements and Disclosures,
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,
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 six months ended
July 2, 2017 were $0.2 million and $0.5 million,
respectively. Realized losses recorded in the three and six months
ended July 2, 2017 were $0.1 million and
$0.2 million, respectively. Realized gains in the three and
six months ended July 3, 2016 were $0.3 million and $0.4
million, respectively. Realized losses recorded in the three and
six months ended July 3, 2016 were $0.2 million and $0.3
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 six months ended July 2, 2017 and
July 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 July 2, 2017
and December 31, 2016.
July 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 $ 295,337 $
— $
— $ 295,337
Cash equivalents 179,293 123,719
— 303,012
Available-for-sale securities:
U.S. Treasury securities
— 812,477
— 812,477
Commercial paper
— 73,275
— 73,275
Corporate debt securities
— 64,453
— 64,453
U.S. government agency securities
— 28,121
— 28,121
Certificates of deposit and time deposits
— 22,253
— 22,253
Equity and debt mutual funds 20,675
—
— 20,675
Non-U.S. government securities
— 585
— 585
Total $ 495,305 $ 1,124,883 $
— $ 1,620,188
Derivative assets
— 23
— 23
Total $ 495,305 $ 1,124,906 $
— $ 1,620,211
Liabilities
Contingent consideration $
— $
— $ 39,415 $ 39,415
Derivative liabilities
— 304
— 304
Total $
— $ 304 $ 39,415 $ 39,719
Reported as follows:
(Level 1) (Level 2) (Level 3) Total
(in
thousands)
Assets
Cash and cash equivalents $ 474,630 $ 123,719 $
— $ 598,349
Marketable securities
— 809,338
— 809,338
Long-term marketable securities 20,675 191,826
— 212,501
Prepayments
— 23
— 23
$ 495,305 $ 1,124,906 $
— $ 1,620,211
Liabilities .
Other current liabilities $
— $ 304 $
— $ 304
Contingent consideration
—
— 22,432 22,432
Long-term contingent consideration
—
— 16,983 16,983
$
— $ 304 $ 39,415 $ 39,719
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 and six months ended July 2, 2017 and
July 3, 2016 were as follows:
For the Three Months Ended For the Six Months Ended
July 2, July 3, July 2, July 3,
(in
thousands)
Balance at beginning of period $ 37,916 $ 23,609 $ 38,332 $ 37,436
Payments (a)
—
— (1,050 ) (15,000 )
Fair value adjustment (b)(c) 1,499 1,305 2,133 2,478
Balance at end of period $ 39,415 $ 24,914 $ 39,415 $ 24,914
(a) In the six months ended July 2,
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 six months
ended July 3, 2016, based on Universal Robot’s calendar
year 2015 EBITA results, Teradyne paid $15.0 million or 100%
of the eligible EBITA contingent consideration amount in connection
with the acquisition of Universal Robots.
(b) In the three and six months ended
July, 2, 2017, the fair value of contingent consideration for the
earn-out in connection with the acquisition of Universal Robots was
increased by $1.5 million and $2.1 million, respectively, primarily
due to a decrease in the discount rate. In the three and six months
ended July 3, 2016, the fair value of contingent consideration
for the earn-out in connection with the acquisition of Universal
Robots was increased by $0.8 million and $1.9 million,
respectively, primarily due to a decrease in the discount
rate.
(c) In the three and six months ended
July 3, 2016, the fair value of contingent consideration for
the earn-out in connection with 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 July 2, Valuation Technique
Unobservable Inputs Weighted Average
(in thousands)
Contingent consideration
(Universal Robots) $22,432 Monte Carlo
Simulation
Revenue for the period July 1, 2015—
December 31, 2017 volatility 12.8 %
Discount Rate 2.9 %
$16,983 Monte Carlo
Simulation
Revenue for the period July 1, 2015—
December 31, 2018 volatility 12.8 %
Discount Rate 2.9 %
As of July 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 July 2, 2017 and December 31, 2016 were as
follows:
July 2, 2017 December 31, 2016
Carrying Value Fair Value Carrying Value Fair Value
(in
thousands)
Assets
Cash and cash equivalents $ 598,349 $ 598,349 $ 307,884 $ 307,884
Marketable securities 1,021,839 1,021,839 1,304,867 1,304,867
Derivative assets 23 23 1 1
Liabilities
Contingent consideration 39,415 39,415 38,332 38,332
Derivative liabilities 304 304 131 131
Convertible debt (1) 359,245 526,976 352,669 486,754
(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 July 2, 2017 and
December 31, 2016:
July 2, 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 $ 814,699 $ 69 $ (2,291 ) $ 812,477 $ 808,057
Commercial paper 73,291
— (16 ) 73,275 65,401
Corporate debt securities 62,766 1,954 (267 ) 64,453 33,059
U.S. government agency securities 28,135 7 (21 ) 28,121 20,800
Certificates of deposit and time deposits 22,245 8
— 22,253
—
Equity and debt mutual funds 17,570 3,122 (17 ) 20,675 1,371
Non-U.S. government securities 578 7
— 585
—
$ 1,019,284 $ 5,167 $ (2,612 ) $ 1,021,839 $ 928,688
Reported as follows:
Cost Unrealized Gain Unrealized (Loss) Fair Market Value Fair Market Value of Investments with Unrealized Losses
(in
thousands)
Marketable securities $ 810,544 $ 15 $ (1,221 ) $ 809,338 $ 770,963
Long-term marketable securities 208,740 5,152 (1,391 ) 212,501 157,725
$ 1,019,284 $ 5,167 $ (2,612 ) $ 1,021,839 $ 928,688
December 31, 2016
Available-for-Sale Fair Market Value of Investments with Unrealized Losses
Cost Unrealized Gain Unrealized (Loss) Fair 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. 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 July 2, 2017, the fair market value of investments with
unrealized losses totaled $928.7 million. Of this value,
$1.8 million had unrealized losses of $0.2 million for
greater than one year and $926.9 million had unrealized losses
of $2.4 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 July 2, 2017 and
December 31, 2016 were temporary.
The contractual maturities of investments held at July 2, 2017
were as follows:
July 2, 2017
Cost Fair Market Value
(in
thousands)
Due within one year $ 810,544 $ 809,338
Due after 1 year through 5 years 139,051 138,811
Due after 5 years through 10 years 14,062 13,731
Due after 10 years 38,057 39,284
Total $ 1,001,714 $ 1,001,164
Contractual maturities of investments held at July 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
July 2, 2017 and December 31, 2016 was $94.1 million
and $83.9 million, respectively. The fair value of the
outstanding contracts was a loss of $0.3 million at
July 2, 2017 and a loss of $0.1 million at
December 31, 2016.
For the three and six months ended July 2, 2017, Teradyne
recorded net realized gains related to foreign currency forward
contracts hedging net monetary assets and liabilities of
$1.6 million and $0.6 million, respectively.
For the three and six months ended July 3, 2016, Teradyne
recorded net realized losses related to foreign currency forward
contracts hedging net monetary positions of $6.9 million and $10.2
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 at July 2, 2017 and December 31, 2016:
Balance Sheet Location July 2, December 31,
(in
thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts assets Prepayments $ 23 $ 1
Foreign exchange contracts liabilities Other current liabilities (304 ) (131 )
Total derivatives $ (281 ) $ (130 )
The following table summarizes the effect of derivative instruments
recognized in the statement of operations during the three and six
months ended July 2, 2017 and July 3, 2016.
Location of (Gains)
Losses
For the Three Months Ended
For the Six Months Ended
July 2, July 3, July 2, July 3,
(in
thousands)
Derivatives not designated as
hedging instruments:
Foreign exchange contracts
Other (income) expense, net $ (1,586 ) $ 6,901 $ (575 ) $ 10,199
Total Derivatives $ (1,586 ) $ 6,901 $ (575 ) $ 10,199
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 and six months ended July 2,
2017, net losses from the remeasurement of monetary assets and
liabilities denominated in foreign currencies were
$2.4 million and $0.9 million, respectively. For the
three and six months ended July 3, 2016, net gains from the
remeasurement of monetary assets and liabilities denominated in
foreign currencies were $6.9 million and $10.4 million,
respectively. |
