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 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. available-for-sale The cost of securities sold is based on the first-in first-out 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 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 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 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 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. — 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 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 earn-out non-compliance. (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 earn-out (d) In the nine months ended September 27, 2020, Teradyne paid $8.9 million of contingent consideration for the earn-out (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, 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 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 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 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 December 31, 2019 Available-for-Sale Cost Unrealized Gain Unrealized (Loss) Fair 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. 592 — — 592 — $ 211,596 $ 4,687 $ (262 ) $ 216,021 $ 23,999 Reported as follows: Cost Unrealized Gain Unrealized (Loss) Fair 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 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 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, December 31, (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 $ (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 H |