Financial Instruments

6 Months Ended

Jun. 28, 2020

Financial Instruments

F. 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 six months ended June 28, 2020 and June 30, 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 six months ended June 28, 2020 were $1.6 million and $3.0 million, respectively. Realized losses recorded in the three and six months ended June 28, 2020 were $0.1 million and $0.2 million, respectively. Realized gains recorded in the three and six months ended June 30, 2019 were $0.1 million and $0.2 million, respectively. Realized losses recorded in the six months ended June 30, 2019 were $0.1 million. Realized gains and losses are included in other (income) expense, net.

Unrealized gains on equity securities recorded in the three and six months ended June 28, 2020 were $3.7 million. Unrealized losses on equity securities recorded in the six months ended June 28, 2020 were $6.0 million. Unrealized gains on equity securities recorded in the three and six months ended June 30, 2019 were $0.9 million and $3.7 million, respectively. 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 specific identification 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 June 28, 2020 and December 31, 2019.

	June 28, 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	$	345,312	$	—	$	—	$	345,312
Cash equivalents		326,347		53,772		—		380,119
Available-for-sale securities:								—
U.S. Treasury securities		—		165,305		—		165,305
Commercial paper		—		63,844		—		63,844
Corporate debt securities		—		63,218		—		63,218
Certificates of deposit and time deposits		—		9,506		—		9,506
Debt mutual funds		6,876		—		—		6,876
U.S. government agency securities		—		4,425		—		4,425
Non-U.S. government securities		—		601		—		601
Equity securities:
Mutual funds		22,984		—		—		22,984
	$	701,519	$	360,671	$	—	$	1,062,190
Derivative assets		—		30		—		30
Total	$	701,519	$	360,701	$	—	$	1,062,220
Liabilities
Contingent consideration	$	—	$	—	$	49,737	$	49,737
Derivative liabilities		—		222		—		222
Total	$	—	$	222	$	49,737	$	49,959
Reported as follows:
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets
Cash and cash equivalents	$	671,659	$	53,772	$	—	$	725,431
Marketable securities		—		229,791		—		229,791
Long-term marketable securities		29,860		77,108		—		106,968
Prepayments and other current assets		—		30		—		30
Total	$	701,519	$	360,701	$	—	$	1,062,220
Liabilities		.
Other current liabilities	$	—	$	222	$	—	$	222
Contingent consideration		—		—		16,789		16,789
Long-term contingent consideration		—		—		32,948		32,948
Total	$	—	$	222	$	49,737	$	49,959

	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 six months ended June 28, 2020 and June 30, 2019 were as follows:

	For the Three Months Ended					For the Six Months Ended
	June 28,		June 30,			June 28,			June 30,
	2020		2019			2020			2019
	(in thousands)
Balance at beginning of period	$	20,472	$	38,313		$	39,705		$	70,543
Foreign currency impact		6		206			(355	)		(405	)
Payments (a)(b)		—		—			(8,852	)		(34,590	)
Fair value adjustment (c)(d)		29,259		(11,672	)		19,239			(8,701	)
Balance at end of period	$	49,737	$	26,847		$	49,737		$	26,847

(a) In the six months ended June 28, 2020, Teradyne paid $8.9 million of contingent consideration for the earn-out in connection with the acquisition of MiR.

(b) In the six months ended June 30, 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.

(c) In the three and six months ended June 28, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of MiR decreased by $0.6 million and $3.6 million, respectively, due to lower forecasted results. In the three and six months ended June 28, 2020, the fair value of contingent consideration for the earn-outs in connection with the acquisition of AutoGuide increased by $29.9 million and $22.8 million, respectively, due to higher forecasted results.

(d) In the three and six months ended June 30, 2019, the fair value of contingent consideration for the earn-out in connection with the acquisition of MiR decreased by $11.7 million and $8.7 million, respectively, primarily due to a decrease in the forecasted revenue.

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

Liability	June 28, 2020 Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
	(in thousands)
Contingent consideration (AutoGuide)	$	49,737	Monte Carlo Simulation	Revenue volatility		15.5	%
				Discount Rate		1.8	%
Contingent consideration (MiR)	$	—	Monte Carlo Simulation	Revenue volatility		10.0	%
				Discount Rate		0.8	%

As of June 28, 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 June 28, 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 June 28, 2020, the maximum amount of contingent consideration that could be paid in connection with the acquisition of MiR is $63.5 million. The remaining earn-out period ends on December 31, 2020.

The carrying amounts and fair values of Teradyne’s financial instruments at June 28, 2020 and December 31, 2019 were as follows:

	June 28, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Cash and cash equivalents	$	725,431	$	725,431	$	773,924	$	773,924
Marketable securities		336,759		336,759		241,793		241,793
Derivative assets		30		30		528		528
Liabilities
Contingent consideration		49,737		49,737		39,705		39,705
Derivative liabilities		222		222		203		203
Convertible debt (1)		402,305		1,198,669		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 June 28, 2020:

	June 28, 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	$	163,586	$	1,734	$	(15	)	$	165,305	$	18,709
Commercial paper		63,774		70		—			63,844		—
Corporate debt securities		56,672		6,682		(136	)		63,218		1,447
Certificates of deposit and time deposits		9,498		8		—			9,506		—
Debt mutual funds		6,686		190		—			6,876		—
U.S. government agency securities		4,353		72		—			4,425		—
Non-U.S. government securities		601		—		—			601		—
	$	305,170	$	8,756	$	(151	)	$	313,775	$	20,156

Reported as follows:

	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
Marketable securities	$	229,471	$	331	$	(11	)	$	229,791	$	17,366
Long-term marketable securities		75,699		8,425		(140	)		83,984		2,790
	$	305,170	$	8,756	$	(151	)	$	313,775	$	20,156

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 June 28, 2020 and December 31, 2019, the fair market value of investments with unrealized losses less than one year totaled $20.2 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 June 28, 2020 and December 31, 2019 were not other than temporary.

The contractual maturities of investments in available-for-sale securities held at June 28, 2020 were as follows:

	June 28, 2020
	Cost		Fair Market Value
	(in thousands)
Due within one year	$	229,471	$	229,791
Due after 1 year through 5 years		21,054		21,587
Due after 5 years through 10 years		13,762		14,974
Due after 10 years		34,197		40,547
Total	$	298,484	$	306,899

Contractual maturities of investments in available-for-sale securities held at June 28, 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 June 28, 2020 and December 31, 2019 was $125.0 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 June 28, 2020 and December 31, 2019:

	Balance Sheet Location		June 28, 2020			December 31, 2019
			(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Prepayments	$	30		$	528
Foreign exchange contracts		Other current liabilities		(222	)		(203	)
Total derivatives			$	(192	)	$	325

The following table summarizes the effect of derivative instruments recognized in the statement of operations for the three and six months ended June 28, 2020 and June 30, 2019:

	Location of (Gains) Losses	For the Three Months Ended				For the Six Months Ended
	Recognized in	June 28,		June 30,		June 28,		June 30,
	Statement of Operations	2020		2019		2020		2019
		(in thousands)
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other (income) expense, net		$470		$239		$4,481		$4,173

(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 June 28, 2020, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $0.4 million. For the six months ended June 28, 2020, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.6 million.

(3) For the three months ended June 30, 2019, net losses from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.3 million. For the six months ended June 30, 2019, net gains from the remeasurement of monetary assets and liabilities denominated in foreign currencies were $1.9 million.

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