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Note 1 Description of Business, Basis of Presentation and Significant Accounting Policies
Description of the Business. Teradata Corporation ("Teradata" or "the Company") provides analytic data solutions for customers worldwide that combine software (including the Teradata database and tools, data mining and analytical applications), hardware and related consulting and support services.
Basis of Presentation. The financial statements are presented on a consolidated basis and include the accounts of the Company and its wholly-owned subsidiaries in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. On an ongoing basis, management evaluates these estimates and judgments, including those related to allowances for doubtful accounts, the valuation of inventory to net realizable value, share-based compensation and income taxes and any changes will be accounted for on a prospective basis. Actual results could differ from those estimates.
Revenue Recognition. Teradata's solution offerings typically include software, software subscriptions (unspecified when-and-if-available upgrades), hardware, maintenance support services, and other consulting, implementation and installation-related ("consulting") services. Teradata records revenue when it is realized, or realizable, and earned. Teradata considers these requirements met when:
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Persuasive evidence of an arrangement exists |
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The products or services have been delivered to the customer |
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The sales price is fixed or determinable and free of contingencies or significant uncertainties |
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Collectibility is reasonably assured |
Teradata reports revenue net of any taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The Company assesses whether fees are fixed or determinable at the time of sale. Standard payment terms may vary based on the country in which the agreement is executed, but are generally between 30 and 90 days. Payments that are due within six months are generally deemed to be fixed or determinable based on a successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition. Teradata delivers its solutions primarily through direct sales channels, as well as through alliances with system integrators, other independent software vendors and distributors, and value-added resellers (collectively referred to as "resellers"). In assessing whether the sales price to a reseller is fixed or determinable, the Company considers, among other things, past business practices with the reseller, the reseller's operating history, payment terms, return rights and the financial wherewithal of the reseller. When Teradata determines that the contract fee to a reseller is not fixed or determinable, that transaction is deferred and recognized upon sell-through to the end customer.
The Company's deliverables often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware once title and risk of loss have been transferred. Revenue for software subscriptions, which provide for unspecified upgrades or enhancements on a when-and-if-available basis, is recognized straight-line over the term of the subscription arrangement. Revenue for maintenance support services is also recognized on a straight-line basis over the term of the contract. Revenue for other consulting, implementation and installation services is recognized as services are provided. In certain instances, acceptance of the product or service is specified by the customer. In such cases, revenue is deferred until the acceptance criteria have been met. Delivery and acceptance generally occur in the same reporting period. The Company's arrangements generally do not include any customer negotiated provisions for cancellation, termination or refunds that would significantly impact recognized revenue.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product's essential functionality from the scope of the industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
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Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
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Require an entity to allocate revenue in an arrangement using its best estimate of selling prices ("BESP") for deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and |
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Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Teradata adopted these standards on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after January 1, 2011.
The Company evaluates all deliverables in an arrangement to determine whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of Teradata. This new guidance does not generally change the units of accounting for the Company's revenue transactions. Most of the Company's products and services qualify as separate units of accounting and are recognized upon meeting the criteria as described above.
For multiple deliverable arrangements that contain non-software related deliverables, the Company allocates revenue to each deliverable based upon the relative selling price hierarchy and if software and software-related deliverables are also included in the arrangement, to those deliverables as a group based on the BESP for the group. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is available. The Company then recognizes revenue when the remaining revenue recognition criteria are met for each deliverable. For the software group or arrangements that contain only software and software-related deliverables, the revenue recognition criteria utilizing the residual method remains unchanged as further described below.
Teradata's data warehousing software and hardware products are sold and delivered together in the form of a "Node" of capacity as an integrated technology solution. Because both the database software and hardware platform are necessary to deliver the data warehouse's essential functionality, the database software and hardware (Node) are excluded from the software rules and considered a non-software related deliverable. Teradata software applications and related support are considered software-related deliverables. Additionally, the amount of revenue allocated to the delivered items utilizing the relative selling price method is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions (the non-contingent amount).
VSOE is based upon the normal pricing and discounting practices for those products and services when sold separately. Teradata uses the stated renewal rate approach in establishing VSOE for maintenance and subscriptions (collectively referred to as postcontract customer support "PCS"). Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and consistent with the Company's normal pricing practices. Renewal rates greater than the lower level of our targeted pricing ranges are considered to be substantive and, therefore, meet the requirements to support VSOE. In instances where there is not a substantive renewal rate in the arrangement, the Company allocates revenue based upon BESP, using the minimum established pricing targets as supported by the renewal rates for similar customers utilizing the bell-curve method. Teradata also offers consulting and installation-related services to its customers, which are considered non-software deliverables if they relate to the nodes. These services are rarely considered essential to the functionality of the data warehouse solution deliverable and there is never software customization of the proprietary database software. VSOE for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of the Company's customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
In nearly all multiple-deliverable arrangements, the Company is unable to establish VSOE for all deliverables in the arrangement. This is due to infrequently selling each deliverable separately (such is the case with our nodes), not pricing products or services within a narrow range, or only having limited sales history. When VSOE cannot be established, attempts are made to establish TPE of the selling price for each deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. However, Teradata's offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. This is because Teradata's products contain a significant amount of proprietary technology and its solutions offer substantially different features and functionality than other available products. As Teradata's products are significantly different from those of its competitors, the Company is unable to establish TPE for the vast majority of its products.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, product life cycles, competitive landscape, internal costs, gross margin objectives, purchase volumes and pricing practices.
The primary consideration in developing BESP for the Company's nodes is the bell-curve method based on historical transactions. The BESP analysis is at the geography level in order to align it with the way in which the Company goes to market and establishes pricing for its products. The Company has established discount ranges off of published list prices for different geographies based on strategy and maturity of Teradata's presence in the respective geography. There are distinctions in each geography and product group which support the use of geographies and markets for the determination of BESP. For example, the Company's U.S. market is relatively mature and most of the large transactions are captured in this market, whereas EMEA and APJ are less mature markets with generally smaller deal size. Additionally, the prices and margins for the Company's products vary by geography and by product class. BESP is analyzed on a quarterly basis using a rolling previous 4-quarters of data, which the Company believes best reflects most recent pricing practices in a changing marketplace.
The Company reviews VSOE, TPE and its determination of BESP on a periodic basis and updates it, when appropriate, to ensure that the practices employed reflect the Company's recent pricing experience. The Company maintains internal controls over the establishment and updates of these estimates, which includes review and approval by the Company's management. For the twelve months ended December 31, 2011 there was no material impact to revenue resulting from changes in VSOE, TPE or BESP, nor does the Company expect a material impact from such changes in the near term. Additionally, the adoption of the amended revenue recognition guidelines had no material net impact on the Company's results of operations for the twelve months ended December 31, 2011.
Term licenses, hosting arrangements and software-as-a-service ("SaaS"). As a result of the Company's acquisition of Aprimo, Inc. ("Aprimo") on January 21, 2011 (see Note 12), Teradata's application offerings were be expanded to include, term licenses, hosting arrangements and SaaS. Teradata previously offered its software applications primarily through a perpetual licensing arrangement. In cases where the contract requires the software to be hosted by the Company and provided via an on-demand arrangement, the software is considered a subscription. If the license is of limited life and does not require the Company to host the software for the customer, the software is considered a term license. In both types of these arrangements, revenues are recognized over the term of the agreement. For hosting arrangements where customers have the right to take possession of the Company's software at any time during the hosting period, the customer's rights to the software in these circumstances are not dependent on additional software payments or significant penalties.
Accounting for arrangements prior to January 1, 2011. For transactions entered into prior to January 1, 2011, the Company allocates revenue for multiple deliverable arrangements for which VSOE exists for undelivered elements but not for the delivered elements, using the "residual method". Teradata does not typically have VSOE for its hardware and software products. Therefore, in a substantial majority of Teradata arrangements entered into prior to January 1, 2011, the residual method is used to allocate the arrangement consideration. Under the residual method, the VSOE of the undelivered elements is deferred and accounted for under the applicable revenue recognition guidance, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. For arrangements in which VSOE does not exist for each undelivered element, revenue for the entire arrangement is deferred and not recognized until delivery of all the elements without VSOE has occurred, unless the only undelivered element is PCS in which case the entire contract is recognized ratably over the PCS period.
Contract accounting. If an arrangement involves significant production, modification or customization of the application software or the undelivered services are essential to the functionality of the delivered software then the Company uses the percentage-of-completion or completed-contract method of accounting. The percentage-of-completion method is used when estimates of costs to complete and extent of progress toward completion are reasonably dependable. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project's progress toward completion. In circumstances when reasonable and reliable cost estimates for a project cannot be made, the completed-contract method is used whereas no revenue is recognized until the project is complete. When total cost estimates exceed revenues, the Company accrues the estimated losses immediately. For purposes of allocation of the arrangement consideration, any products for which the services are not essential are separated utilizing the relative selling price method discussed above. PCS is also separated and allocated based on VSOE and then recognized ratably over the term. The remaining contract value, which typically includes application software and essential services, is then recognized utilizing the percentage-of-completion or completed-contract methods discussed above.
Shipping and Handling. Product shipping and handling costs are included in cost of products in the Consolidated Statements of Income.
Cash and Cash Equivalents. All short-term, highly-liquid investments having original maturities of three months or less are considered to be cash equivalents.
Allowance for Doubtful Accounts. Teradata establishes provisions for doubtful accounts using both percentages of accounts receivable balances to reflect historical average credit losses and specific provisions for known issues.
Inventories. Inventories are stated at the lower of cost or market, using the average cost method.
Long-Lived Assets
Property and Equipment. Property and equipment, leasehold improvements and rental equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets primarily on a straight-line basis. Equipment is depreciated over 3 to 20 years and buildings over 25 to 45 years. Leasehold improvements are depreciated over the life of the lease or the asset, whichever is shorter. Total depreciation expense on the Company's property and equipment for the years ended December 31, 2011, 2010 and 2009 was $33 million, $25 million and $22 million, respectively.
Capitalized Software. Direct development costs associated with internal-use software are capitalized and amortized over the estimated useful lives of the resulting software. The costs are capitalized when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Teradata typically amortizes capitalized internal-use software on a straight-line basis over three years beginning when the asset is substantially ready for use. Costs incurred for the development of software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. Technological feasibility is established when planning, designing and initial coding activities that are necessary to establish the product can be produced to meet its design specifications. In the absence of a program design, a working model is used to establish technological feasibility. These costs are included within capitalized software and are amortized over the estimated useful lives of the resulting software. The Company amortizes capitalized software over periods up to four years using the greater of the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the product beginning when the product is available for general release. Costs capitalized include direct labor and related overhead costs. Costs incurred prior to technological feasibility and after general release are expensed as incurred. The following table identifies the activity relating to capitalized software:
Internal-use Software | External-use Software | |||||||||||||||||||||||
In millions | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
Capitalized |
5 | 5 | 5 | 63 | 44 | 54 | ||||||||||||||||||
Amortization |
(5 | ) | (6 | ) | (4 | ) | (39 | ) | (29 | ) | (33 | ) | ||||||||||||
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Ending balance at December 31 |
$ | 11 | $ | 11 | $ | 12 | $ | 129 | $ | 105 | $ | 90 | ||||||||||||
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Valuation of Long-Lived Assets. Long-lived assets such as property and equipment, acquired intangible assets and internal capitalized software are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount.
Goodwill. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment annually or upon occurrence of an event or change in circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company did not recognize any goodwill impairment charges in 2011, 2010 or 2009.
Warranty. Provisions for product warranties are recorded in the period in which the related revenue is recognized. The Company accrues warranty reserves using percentages of revenue to reflect the Company's historical average warranty claims.
Research and Development Costs. Research and development costs are expensed as incurred (with the exception of the capitalized software development costs discussed above). Research and development costs primarily include payroll and headcount-related costs, contractor fees, facilities, infrastructure costs, and administrative expenses directly related to research and development support.
Pension and Postemployment Benefits. The Company accounts for its pension and postemployment benefit obligations using actuarial models. The measurement of plan obligations was made as of December 31, 2011. Liabilities are computed using the projected unit credit method. The objective under this method is to expense each participant's benefits under the plan as they accrue, taking into consideration salary increases and the plan's benefit allocation formula. Thus, the total pension or postemployment benefit to which each participant is expected to become entitled is broken down into units, each associated with a year of past or future credited service.
The Company recognizes the funded status of its pension and postemployment plan obligations in its consolidated balance sheet and records in other comprehensive income certain gains and losses that arise during the period, but are deferred under pension accounting rules.
Foreign Currency. Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average exchange rates prevailing during the period. Adjustments arising from the translation are included in accumulated other comprehensive income (loss), a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in determining net income.
Income Taxes. Income tax expense is provided based on income before income taxes in the various jurisdictions in which the Company conducts its business. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are determined based on the enacted tax rates expected to apply in the periods in which the deferred assets or liabilities are expected to be settled or realized. Teradata recognizes tax benefits from uncertain tax positions only if it is more likely than not the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Share-based Compensation. Share-based payments to employees, including grants of stock options, are recognized in the financial statements based on their fair value. The fair value of each stock option award on the grant date is estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock price volatility, weighted-average risk-free interest rate and weighted average expected term of the options. As of October 2011, the Company's expected volatility assumption used in the Black-Scholes option-pricing model is based on a blend of peer group volatility and Teradata volatility. Prior to that date, because the Company did not have a sufficient trading history as a stand-alone public company, the volatility was purely based on the peer group volatility. The expected term assumption is based on the simplified method under GAAP, which is based on the vesting period and contractual term for each vesting tranche of awards. The mid-point between the vesting date and the expiration date is used as the expected term under this method. The risk-free interest rate used in the Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the Company's expected term assumption. The Company has never declared or paid a cash dividend.
Treasury Stock. Shares of the Company's common stock repurchased through the share repurchase programs is held as treasury stock. Treasury stock is accounted for using the cost method.
Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted-average number of shares outstanding includes the dilution from potential shares added from stock options, restricted stock awards and other stock awards. Refer to Note 5 for share information on the Company's stock compensation plans.
The components of basic and diluted earnings per share are as follows:
For the year ended December 31 | ||||||||||||
In millions, except earnings per share | 2011 | 2010 | 2009 | |||||||||
Net income available for common stockholders |
$ | 353 | $ | 301 | $ | 254 | ||||||
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Weighted average outstanding shares of common stock |
168.1 | 167.4 | 171.9 | |||||||||
Dilutive effect of employee stock options and restricted stock |
3.8 | 3.0 | 2.0 | |||||||||
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Common stock and common stock equivalents |
171.9 | 170.4 | 173.9 | |||||||||
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Earnings per share: |
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Basic |
$ | 2.10 | $ | 1.80 | $ | 1.48 | ||||||
Diluted |
$ | 2.05 | $ | 1.77 | $ | 1.46 |
No stock options were excluded from the computation of diluted earnings per share for the twelve months ended December 31, 2011. Options to purchase 0.6 million shares of common stock for 2010 and 1.8 million shares of common stock for 2009 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
Recently Issued Accounting Pronouncements
Goodwill. In September 2011, the FASB issued new guidance regarding the testing of Goodwill for potential impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company elected not to early adopt this new guidance.
Retirement Benefits. In September 2011, the FASB issued new guidance regarding the disclosure requirements for multiemployer pension plans. The amendments in this update require that employers provide additional separate qualitative and quantitative disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans, to provide users with more detailed information about an employer's involvement in such plans. Additional disclosures would include details as to the significant multiemployer plans in which an employer participates; the level of an employer's participation in the significant multiemployer plans; the financial health of the significant multiemployer plans; and the nature of the employer commitments to the plan. The amendments in this update are effective for annual periods for fiscal years ending after December 15, 2011. The new guidance is not expected to have an impact on the Company's disclosure requirements.
Comprehensive Income. In June 2011, the FASB issued new guidance regarding the disclosure of comprehensive income. Under the new guidance, an entity will have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity will be required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update will eliminate the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Additionally, entities will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Portions of this new guidance will be made effective for fiscal years, and interim periods, beginning after December 15, 2011, with amendments applied retrospectively.
Fair Value Measurements. In May 2011, the FASB issued new guidance regarding the measurement and disclosure of fair value. The amendments in this new guidance generally represent clarifications of existing GAAP, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements will change. This new guidance will result in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards ("IFRS"). The principles that will be changed as a result of this new guidance primarily relate to: measuring the fair value of financial instruments that are managed within a portfolio, the application of premiums and discounts in a fair value measurement, and some additional disclosures about fair value measurements. This new guidance will be effective for interim and annual periods beginning after December 15, 2011, with amendments applied prospectively. The Company is currently evaluating the impact of this guidance.
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Note 2 Supplemental Financial Information
At December 31 | ||||||||
In millions | 2011 | 2010 | ||||||
Accounts receivable |
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Trade |
$ | 499 | $ | 408 | ||||
Other |
8 | 3 | ||||||
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Accounts receivable, gross |
507 | 411 | ||||||
Less: allowance for doubtful accounts |
(13 | ) | (9 | ) | ||||
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Total accounts receivable, net |
$ | 494 | $ | 402 | ||||
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Inventories |
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Finished goods |
$ | 41 | $ | 39 | ||||
Service parts |
20 | 26 | ||||||
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Total inventories |
$ | 61 | $ | 65 | ||||
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Other current assets |
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Current deferred tax assets |
$ | 34 | $ | 31 | ||||
Other |
51 | 25 | ||||||
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Total other current assets |
$ | 85 | $ | 56 | ||||
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Property and equipment |
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Land |
$ | 8 | $ | 8 | ||||
Buildings and improvements |
64 | 63 | ||||||
Machinery and other equipment |
230 | 213 | ||||||
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Property and equipment, gross |
302 | 284 | ||||||
Less: accumulated depreciation |
(182 | ) | (179 | ) | ||||
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Total property and equipment, net |
$ | 120 | $ | 105 | ||||
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Other current liabilities |
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Sales and value-added taxes |
$ | 23 | $ | 19 | ||||
Other |
67 | 51 | ||||||
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Total other current liabilities |
$ | 90 | $ | 70 | ||||
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Accumulated other comprehensive income, net of tax |
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Currency translation adjustments |
$ | 25 | $ | 31 | ||||
Actuarial losses and prior service costs on employee benefit plans |
(9 | ) | (19 | ) | ||||
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Total accumulated other comprehensive income |
$ | 16 | $ | 12 | ||||
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Note 3 Goodwill and Acquired Intangible Assets
The following table identifies the activity relating to goodwill by operating segment:
In millions | Balance December 31, 2010 |
Additions | Currency Translation Adjustments |
Balance December 31, 2011 |
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Goodwill |
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Americas |
$ | 85 | $ | 457 | $ | 1 | $ | 543 | ||||||||
EMEA |
17 | 107 | (4 | ) | 120 | |||||||||||
APJ |
34 | 43 | 2 | 79 | ||||||||||||
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Total goodwill |
$ | 136 | $ | 607 | ($ | 1 | ) | $ | 742 | |||||||
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The change in goodwill for the twelve months ended December 31, 2011 was primarily due to the acquisitions of Aprimo and Aster Data Systems, Inc. ("Aster Data") which were completed during the period. The only change in goodwill for the twelve months ended December 31, 2010 was due to an immaterial acquisition consummated during 2010, as well as changes in foreign currency exchange rates. In the fourth quarter of 2011, the Company performed its annual test of goodwill impairment and determined that no impairment to the carrying value of goodwill was necessary, as the fair value of each reporting unit exceeded their respective carrying amounts, including goodwill.
Acquired intangible assets were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for Teradata's acquired intangible assets were as follows:
Original Amortization Life (in Years) |
December 31, 2011 | December 31, 2010 | ||||||||||||||||||
In millions | Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
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Acquired intangible assets |
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Intellectual property/developed technology |
5 to 7 | 122 | (23 | ) | 18 | (6 | ) | |||||||||||||
Customer relationships |
4 to 10 | 55 | (6 | ) | 0 | 0 | ||||||||||||||
Trademarks/trade names |
5 to 10 | 11 | (1 | ) | 0 | 0 | ||||||||||||||
In-process research and development |
5 | 5 | 0 | 0 | 0 | |||||||||||||||
Non-compete agreements |
2 | 1 | (1 | ) | 0 | 0 | ||||||||||||||
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Total |
2 to 10 | 194 | (31 | ) | 18 | (6 | ) | |||||||||||||
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The increase in acquired intangible assets for the twelve months ended December 31, 2011 was primarily due to developed technology, trademark/trade name, customer relationship, in-process research and development ("IPR&D"), and non-compete agreement assets added through the Aprimo and Aster Data acquisitions. The amortization of IPR&D intangible assets acquired as part of the Aster Data acquisition will not begin until the associated product development has been completed, which is currently estimated to be sometime in 2012. Further information on the intangible assets acquired as part of this acquisition is included in Note 12.
The aggregate amortization expense (actual and estimated) for acquired intangible assets for the following periods is:
Actual 2011 |
For the year ended (estimated) | |||||||||||||||||||||||
In millions | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
Amortization expense |
$ | 25 | $ | 30 | $ | 29 | $ | 29 | $ | 27 | $ | 19 |
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Note 4 Income Taxes
For the years ended December 31, income before income taxes consisted of the following:
In millions | 2011 | 2010 | 2009 | |||||||||
Income before income taxes |
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United States |
$ | 309 | $ | 272 | $ | 179 | ||||||
Foreign |
172 | 142 | 155 | |||||||||
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Total income before income taxes |
$ | 481 | $ | 414 | $ | 334 | ||||||
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For the years ended December 31, income tax expense consisted of the following:
In millions | 2011 | 2010 | 2009 | |||||||||
Income tax expense |
||||||||||||
Current |
||||||||||||
Federal |
$ | 26 | $ | 53 | $ | 24 | ||||||
State and local |
3 | 5 | 4 | |||||||||
Foreign |
29 | 14 | 11 | |||||||||
Deferred |
||||||||||||
Federal |
64 | 35 | 30 | |||||||||
State and local |
8 | 4 | 4 | |||||||||
Foreign |
(2 | ) | 2 | 7 | ||||||||
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Total income tax expense |
$ | 128 | $ | 113 | $ | 80 | ||||||
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The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:
In millions | 2011 | 2010 | 2009 | |||||||||
Income tax expense at the U.S. federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign income tax differential |
(7.4 | %) | (8.1 | %) | (11.0 | %) | ||||||
State and local income taxes |
1.3 | % | 1.5 | % | 1.0 | % | ||||||
U.S. permanent book/tax differences |
(1.8 | %) | (0.9 | %) | (0.5 | %) | ||||||
Other, net |
(0.1 | %) | (0.2 | %) | (0.5 | %) | ||||||
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Total income tax expense |
27.0 | % | 27.3 | % | 24.0 | % | ||||||
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The tax rate for the twelve months ended December 31, 2011 included a $4 million tax benefit recorded in the second quarter of 2011 related to the book gain recorded on the Company's previous equity investment in Aster Data, which was reflected as a permanent non-taxable item. For further information regarding the Company's acquisition of Aster Data, refer to Note 12. The effective tax rate for the year ended December 31, 2010 included a $5 million tax benefit associated with the recognition of certain foreign net operating loss carryforwards resulting from an audit settlement in the first quarter of 2010. The effective tax rate for the year ended December 31, 2009 included a net tax benefit of a recurring state and local income tax credit that was not recognized in the 2008 income tax rate. The provision for income taxes is based on the pre-tax earnings mix by jurisdiction of Teradata and its subsidiaries under the Company's current structure.
Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:
In millions | 2011 | 2010 | ||||||
Deferred income tax assets |
||||||||
Employee pensions and other liabilities |
$ | 47 | $ | 47 | ||||
Other balance sheet reserves and allowances |
28 | 24 | ||||||
Deferred revenue |
4 | 0 | ||||||
Tax loss and credit carryforwards |
71 | 29 | ||||||
Capitalized research and development |
28 | 45 | ||||||
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Total deferred income tax assets |
178 | 145 | ||||||
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Deferred income tax liabilities |
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Intangibles and capitalized software |
109 | 42 | ||||||
Property and equipment |
23 | 10 | ||||||
Other |
7 | 4 | ||||||
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Total deferred income tax liabilities |
139 | 56 | ||||||
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Total net deferred income tax assets |
$ | 39 | $ | 89 | ||||
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As of December 31, 2011, Teradata had total net operating loss carryforwards in the United States and certain foreign jurisdictions of approximately $66 million (tax effected), which begin to expire in 2012. In addition, Teradata has U.S. foreign tax credit carryforwards of $8 million, which will begin expiring in 2018, and Research and Development Tax Credit carryforwards of $13 million, which begin to expire in 2014. As of December 31, 2011, the Company has recorded $71 million of these tax attributes on its balance sheet as deferred tax assets; the remaining $16 million of deferred tax assets are associated with certain tax attributes acquired from Aprimo and Aster Data, which do not meet the recognition criteria for uncertain tax positions and therefore are not recorded for financial reporting purposes.
The Company's intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business; these jurisdictions apply a broad range of statutory income tax rates. At December 31, 2011 the Company had not provided for federal income taxes on earnings of approximately $728 million from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and potential withholding taxes in various international jurisdictions. The U.S. taxes would potentially be partially offset by U.S. foreign tax credits. Determination of the amount of unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company reflects any interest and penalties recorded in connection with its uncertain tax positions as a component of income tax expense.
As of December 31, 2011, the Company's uncertain tax positions totaled approximately $28 million, of which $12 million is reflected in the "Other liabilities" section of the Company's balance sheet as a non-current liability. The remaining balance of $16 million of uncertain tax positions relates to certain tax attributes acquired by the Company in the acquisitions of Aprimo and Aster Data in 2011, which are netted against the underlying deferred tax assets recorded on the opening balance sheets under purchase accounting. For further information related to the Company's acquisitions, refer to Note 12. The entire balance of $28 million in uncertain tax positions would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded $1 million of interest accruals related to its uncertain tax liabilities as of December 31, 2011.
Below is a rollforward of the Company's liability related to uncertain tax positions at December 31:
In millions | 2011 | 2010 | ||||||
Balance at January 1 |
$ | 8 | $ | 6 | ||||
Gross increases for prior period tax positions |
1 | 1 | ||||||
Gross decreases for prior period tax positions |
0 | (1 | ) | |||||
Gross increases for current period tax positions |
4 | 2 | ||||||
Increases from acquired businesses |
16 | 0 | ||||||
Decreases relating to settlements with taxing authorities |
(1 | ) | 0 | |||||
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Balance at December 31 |
$ | 28 | $ | 8 | ||||
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The Company and its subsidiaries file income tax returns in the U.S. federal and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2011, the examination of the Company's U.S. federal tax returns for the 2007 and 2008 tax years was completed with no changes to the income tax liability as originally reported in those periods, as well as tax examinations in a limited number of foreign jurisdictions with no material tax assessments. As of December 31, 2011, the Company has ongoing tax audits in a limited number of state and foreign jurisdictions; however, no material adjustments have been made in any of these examinations.
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Note 6 Employee Benefit Plans
Pension and Postemployment Plans. Teradata currently sponsors defined benefit pension plans for certain of its international employees. For those international pension plans for which the Company holds asset balances, those assets are primarily invested in common/collective trust funds (which include publicly traded common stocks, corporate and government debt securities, real estate indirect investments, cash or cash equivalents) and insurance contracts.
Postemployment obligations relate to benefits provided to involuntarily terminated employees and certain inactive employees after employment but before retirement. These benefits are paid in accordance with various foreign statutory laws and regulations, and Teradata's established postemployment benefit practices and policies. Postemployment benefits may include disability benefits, supplemental unemployment benefits, severance, workers' compensation benefits, continuation of health care benefits and life insurance coverage, and are funded on a pay-as-you-go basis.
Pension and postemployment benefit costs for the years ended December 31 were as follows:
2011 | 2010 | 2009 | ||||||||||||||||||||||
In millions | Pension | Postemployment | Pension | Postemployment | Pension | Postemployment | ||||||||||||||||||
Service cost |
$ | 9 | $ | 4 | $ | 8 | $ | 4 | $ | 7 | $ | 4 | ||||||||||||
Interest cost |
4 | 2 | 4 | 2 | 3 | 2 | ||||||||||||||||||
Expected return on plan assets |
(3 | ) | 0 | (3 | ) | 0 | (2 | ) | 0 | |||||||||||||||
Settlement charge |
3 | 0 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Employee contributions |
(1 | ) | 0 | (1 | ) | 0 | (1 | ) | 0 | |||||||||||||||
Amortization of actuarial loss |
1 | 0 | 1 | 0 | 1 | 0 | ||||||||||||||||||
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Total costs |
$ | 13 | $ | 6 | $ | 9 | $ | 6 | $ | 9 | $ | 6 | ||||||||||||
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The underfunded amount of pension and postemployment obligations is recorded as a liability in the Company's consolidated balance sheet. The following tables present the changes in benefit obligations, plan assets, funded status and the reconciliation of the funded status to amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income at December 31:
Pension | Postemployment | |||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at January 1 |
$ | 111 | $ | 96 | $ | 40 | $ | 38 | ||||||||
Service cost |
8 | 7 | 4 | 4 | ||||||||||||
Interest cost |
4 | 4 | 2 | 2 | ||||||||||||
Plan participant contributions |
1 | 1 | 0 | 0 | ||||||||||||
Amendments |
0 | 0 | 0 | (1 | ) | |||||||||||
Actuarial (gain) loss |
(5 | ) | 4 | (8 | ) | (1 | ) | |||||||||
Benefits paid |
(12 | ) | (7 | ) | (6 | ) | (2 | ) | ||||||||
Currency translation adjustments |
1 | 6 | 1 | 0 | ||||||||||||
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Benefit obligation at December 31 |
108 | 111 | 33 | 40 | ||||||||||||
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Change in plan assets |
||||||||||||||||
Fair value of plan assets at January 1 |
59 | 45 | 0 | 0 | ||||||||||||
Actual return on plan assets |
(2 | ) | 2 | 0 | 0 | |||||||||||
Company contributions |
12 | 13 | 0 | 0 | ||||||||||||
Benefits paid |
(12 | ) | (7 | ) | 0 | 0 | ||||||||||
Currency translation adjustments |
1 | 5 | 0 | 0 | ||||||||||||
Plan participant contribution |
1 | 1 | 0 | 0 | ||||||||||||
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Fair value of plan assets at December 31 |
59 | 59 | 0 | 0 | ||||||||||||
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Funded status (underfunded) |
($ | 49 | ) | ($ | 52 | ) | ($ | 33 | ) | ($ | 40 | ) | ||||
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Amounts Recognized in the Balance Sheet |
||||||||||||||||
Current liabilities |
$ | 0 | ($ | 1 | ) | ($ | 5 | ) | ($ | 6 | ) | |||||
Noncurrent liabilities |
(49 | ) | (51 | ) | (28 | ) | (34 | ) | ||||||||
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Net amounts recognized |
($ | 49 | ) | ($ | 52 | ) | ($ | 33 | ) | ($ | 40 | ) | ||||
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Amounts Recognized in Accumulated Other Comprehensive Income |
||||||||||||||||
Net actuarial loss (gain) |
$ | 28 | $ | 33 | ($ | 4 | ) | $ | 3 | |||||||
Prior service credit |
(3 | ) | (3 | ) | 0 | 0 | ||||||||||
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Total |
$ | 25 | $ | 30 | ($ | 4 | ) | $ | 3 | |||||||
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The accumulated pension benefit obligation was $100 million at December 31, 2011 and $103 million at December 31, 2010. For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of assets were $84 million, $78 million and $35 million, respectively, at December 31, 2011, and $110 million, $102 million and $58 million, respectively, at December 31, 2010.
The following table presents the pre-tax net changes in projected benefit obligations recognized in other comprehensive income during 2011 and 2010:
Pension | Postemployment | |||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Actuarial (gain)/loss arising during the year |
($ | 1 | ) | $ | 5 | ($ | 7 | ) | ($ | 1 | ) | |||||
Amortization of (gain)/loss included in net periodic benefit cost |
(1 | ) | (1 | ) | 0 | 0 | ||||||||||
Prior service credit arising during the year |
0 | 0 | 0 | (1 | ) | |||||||||||
Recognition of loss due to settlement |
(3 | ) | 0 | 0 | 0 | |||||||||||
Foreign currency exchange |
1 | 2 | 0 | 0 | ||||||||||||
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Total recognized in other comprehensive expense (income) |
($ | 4 | ) | $ | 6 | ($ | 7 | ) | ($ | 2 | ) | |||||
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The following table presents the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost during 2012:
In millions | Pension | Postemployment | ||||||
Net loss/(gain) |
$ | 1 | $ | 0 | ||||
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Total recognized in other comprehensive loss/(income) |
$ | 1 | $ | 0 | ||||
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The weighted-average rates and assumptions used to determine benefit obligations at December 31, 2011 and 2010, and net periodic benefit cost for the year ended December 31, 2011 and 2010, were as follows:
Pension Benefit Obligations | Pension Benefit Cost | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Discount rate |
3.7 | % | 3.9 | % | 3.9 | % | 4.2 | % | ||||||||
Rate of compensation increase |
3.3 | % | 3.3 | % | 3.3 | % | 3.3 | % | ||||||||
Expected return on plan assets |
N/A | N/A | 4.3 | % | 4.7 | % | ||||||||||
Postemployment Benefit Obligations | Postemployment Benefit Cost | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Discount rate |
4.1 | % | 4.4 | % | 4.4 | % | 4.8 | % | ||||||||
Rate of compensation increase |
3.7 | % | 3.7 | % | 3.7 | % | 3.7 | % | ||||||||
Involuntary turnover rate |
1.5 | % | 2.0 | % | 2.0 | % | 2.0 | % |
The Company determines the expected return on assets based on individual plan asset allocations, historical capital market returns, and long-run interest rate assumptions, with input from its actuaries, investment managers, and independent investment advisors. The company emphasizes long-term expectations in its evaluation of return factors, discounting or ignoring short-term market fluctuations. Expected asset returns are reviewed annually, but generally modified only when asset allocation strategies change or long-term economic trends are identified.
The discount rate used to determine year-end 2011 U.S. benefit obligations was derived by matching the plans' expected future cash flows to the corresponding yields from the Citigroup Pension Discount Curve. This yield curve has been constructed to represent the available yields on high-quality fixed-income investments across a broad range of future maturities. International discount rates were determined by examining interest rate levels and trends within each country, particularly yields on high-quality long-term corporate bonds, relative to our future expected cash flows.
Gains and losses have resulted from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and differences between actual and assumed asset returns. These gains and losses (except those differences being amortized to the market-related value) are only amortized to the extent that they exceed 10% of the higher of the market-related value or the projected benefit obligation of each respective plan.
Plan Assets. The weighted-average asset allocations at December 31, 2011 and 2010, by asset category are as follows:
Actual Asset Allocation As of December 31 |
Target Asset Allocation |
|||||||||||
2011 | 2010 | |||||||||||
Equity securities |
39 | % | 41 | % | 39 | % | ||||||
Debt securities |
33 | % | 38 | % | 37 | % | ||||||
Insurance (annuity) contracts |
11 | % | 10 | % | 11 | % | ||||||
Real estate |
5 | % | 5 | % | 3 | % | ||||||
Other |
12 | % | 6 | % | 10 | % | ||||||
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Total |
100 | % | 100 | % | 100 | % | ||||||
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Fair Value. GAAP has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following is a description of the valuation methodologies used for pension assets as of December 31, 2011.
Common/collective trust funds (which include money market funds, equity funds, bond funds, real-estate indirect investment, etc): Valued at the net asset value ("NAV") of shares held by the Plan at year end, as reported to the Plan by the trustee, which represents the fair value of shares held by the Plan. Because the NAV of the shares held in the common/collective trust funds are derived by the value of the underlying investments, which are detailed in the table below, the Company has classified these underlying investments as Level 2 fair value measurements.
Insurance contracts: Valued by discounting the related future benefit payments using a current year-end market discount rate, which represents the fair value of the insurance contract. The Company has classified these contracts as Level 3 assets for fair value measurement purposes.
The following table sets forth by level, within the fair value hierarchy, the pension plan assets at fair value as of December 31, 2011:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In Millions | December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Cash/cash equivalents/money market funds |
$ | 5 | $ | 0 | $ | 5 | $ | 0 | ||||||||
Equity funds |
23 | 0 | 23 | 0 | ||||||||||||
Bond/fixed-income funds |
19 | 0 | 19 | 0 | ||||||||||||
Real-estate indirect investment |
3 | 0 | 3 | 0 | ||||||||||||
Commodities/Other |
2 | 0 | 2 | 0 | ||||||||||||
Insurance contracts |
7 | 0 | 0 | 7 | ||||||||||||
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Total Assets at fair value |
$ | 59 | $ | 0 | $ | 52 | $ | 7 | ||||||||
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The table below sets forth a summary of changes in the fair value of the pension plan level 3 assets for the year ended December 31, 2011:
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2011 |
$ | 6 | ||
Purchases, sales and settlements, net |
1 | |||
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|||
Balance as of December 31, 2011 |
$ | 7 | ||
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The following table sets forth by level, within the fair value hierarchy, the pension plan assets at fair value as of December 31, 2010:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In Millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Cash/cash equivalents/money market funds |
$ | 2 | $ | 0 | $ | 2 | $ | 0 | ||||||||
Equity funds |
24 | 0 | 24 | 0 | ||||||||||||
Bond/fixed-income funds |
22 | 0 | 22 | 0 | ||||||||||||
Real-estate indirect investment |
3 | 0 | 3 | 0 | ||||||||||||
Commodities/Other |
2 | 0 | 2 | 0 | ||||||||||||
Insurance contracts |
6 | 0 | 0 | 6 | ||||||||||||
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Total Assets at fair value |
$ | 59 | $ | 0 | $ | 53 | $ | 6 | ||||||||
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The table below sets forth a summary of changes in the fair value of the pension plan level 3 assets for the year ended December 31, 2010:
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2010 |
$ | 6 | ||
Purchases, sales and settlements, net |
0 | |||
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|||
Balance as of December 31, 2010 |
$ | 6 | ||
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Investment Strategy. Teradata employs a number of investment strategies across its various international pension plans. In some countries, particularly where Teradata does not have a large employee base, the Company may use insurance (annuity) contracts to satisfy its future pension payment obligations, whereby the Company makes pension plan contributions to an insurance company in exchange for which the pension plan benefits will be paid when the members reach a specified retirement age or on earlier exit of members from the plan. In other countries, the Company may employ local asset managers to manage investment portfolios according to the investment policies and guidelines established by the Company, and with consideration to individual plan liability structure and local market environment and risk tolerances. The Company's investment policies and guidelines primarily emphasize diversification across and within asset classes to maximize long-term returns subject to prudent levels of risk, with the overall objective of enabling the plans to meet their future obligations. The investment portfolios contain a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across domestic and international stocks, small and large capitalization stocks, and growth and value stocks. Fixed-income assets are diversified across government and corporate bonds. Where applicable, real estate investments are made through real estate securities, partnership interests or direct investment, and are diversified by property type and location.
Cash Flows Related to Employee Benefit Plans
Cash Contributions. The Company expects to contribute approximately $11 million to the international pension plans and $5 million to postemployment benefit obligations in 2012.
Estimated Future Benefit Payments. The Company expects to make the following benefit payments reflecting past and future service from its pension and postemployment plans:
In millions | Pension Benefits |
Postemployment Benefits |
||||||
Year |
||||||||
2012 |
$ | 8 | $ | 5 | ||||
2013 |
$ | 8 | $ | 5 | ||||
2014 |
$ | 7 | $ | 5 | ||||
2015 |
$ | 8 | $ | 5 | ||||
2016 |
$ | 8 | $ | 4 | ||||
2017-2021 |
$ | 41 | $ | 19 |
Savings Plans. U.S. employees and many international employees participate in defined contribution savings plans. These plans generally provide either a specified percent of pay or a matching contribution on participating employees' voluntary elections. The Company's matching contributions typically are subject to a maximum percentage or level of compensation. Employee contributions can be made pre-tax, after-tax or a combination thereof. The expense for the U.S. savings plan was $19 million in 2011, $15 million in 2010 and $15 million in 2009. The expense for international subsidiary savings plans was $14 million in 2011, $11 million in 2010 and $10 million in 2009.
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Note 7 Derivative Instruments and Hedging Activities
As a portion of the Company's operations and revenue occur outside the United States and in currencies other than the U.S. dollar, the Company is exposed to potential gains and losses from changes in foreign currency exchange rates. In an attempt to mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting predominantly from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.
All derivatives are recognized in the Consolidated Balance Sheet at their fair value. The fair values of foreign exchange contracts are based on market spot and forward exchange rates and represent estimates of possible value that may not be realized in the future. Changes in the fair value of derivative financial instruments, along with the loss or gain on the hedged asset or liability, are recorded in current period earnings. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based, and are an indication of the extent of Teradata's involvement in such instruments. These notional amounts do not represent amounts exchanged by the parties and, therefore, are not a measure of the instruments. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata's net involvement is less than the total contract notional amount of the Company's foreign exchange forward contracts.
The contract notional amount of the Company's foreign exchange forward contracts was $102 million ($19 million on a net basis) at December 31, 2011, and $91 million ($51 million on a net basis) at December 31, 2010. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at December 31, 2011 and 2010, were not material.
Gains and losses from the Company's fair value hedges (foreign currency forward contracts and related hedged items) were immaterial for the years ended December 31, 2011, 2010 and 2009. Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of products or in other income, depending on the nature of the related hedged item.
|
Note 8 Commitments and Contingencies
In the normal course of business, the Company is subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters, and other regulatory compliance and general matters, including those described below.
The Company is subject to governmental investigations and requests for information from time to time. As previously reported prior to Teradata's separation from NCR Corporation ("NCR"), the United States Department of Justice is conducting an investigation regarding the propriety of the Company's arrangements or understandings with others in connection with certain federal contracts and the adequacy of certain disclosures related to such contracts. The investigation arises in connection with civil litigation in federal district court filed under the qui tam provisions of the civil False Claims Act against a number of information technology companies, including the Company. The complaints against the Company remain under seal. The Company has conducted its analysis of such claims focusing on the propriety of certain transactions under federal programs under which Teradata was a contractor. The Company has shared evidence with the Justice Department of questionable conduct that the Company uncovered, has cooperated with the Justice Department in its investigation, and is in settlement discussions with the government to resolve this matter.
A separate portion of the government's investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of NCR's General Services Administration Federal Supply Schedule as it relates to Teradata, prior to the Company's separation from NCR, and to whether certain subsequent price reductions were properly passed on to the government. Both NCR and the Company have participated in this aspect of the investigation, with respect to certain products and services of each, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other.
The Company has an accrual of approximately $3 million related to the current best estimate of probable liability relating to these matters. The Company believes the amounts provided in its financial statements are adequate in light of the probable and estimable liabilities. The Company believes that there is not a reasonable possibility that the loss in respect of these contingent matters will materially exceed the liability reflected in the Company's financial statements, although there can be no assurance that this will in fact be the case.
Guarantees and Product Warranties.
Guarantees associated with the Company's business activities are reviewed for appropriateness and impact to the Company's financial statements. Periodically, the Company's customers enter into various leasing arrangements coordinated with a leasing company. In some instances, the Company guarantees the leasing company a minimum value at the end of the lease term on the leased equipment. As of December 31, 2011, the maximum future payment obligation of this guaranteed value and the associated liability balance was $2 million.
The Company provides its customers a standard manufacturer's warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls and cost of replacement parts. For each consummated sale, the Company recognizes the total customer revenue and records the associated warranty liability using pre-established warranty percentages for that product class.
The following table identifies the activity relating to the warranty reserve for the years ended December 31:
In millions | 2011 | 2010 | 2009 | |||||||||
Warranty reserve liability |
||||||||||||
Beginning balance at January 1 |
$ | 6 | $ | 5 | $ | 6 | ||||||
Accruals for warranties issued |
13 | 14 | 11 | |||||||||
Settlements (in cash or kind) |
(13 | ) | (13 | ) | (12 | ) | ||||||
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Balance at end of period |
$ | 6 | $ | 6 | $ | 5 | ||||||
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The Company also offers extended and/or enhanced coverage to its customers in the form of maintenance contracts. The Company accounts for these contracts by deferring the related maintenance revenue over the extended and/or enhanced coverage period. Costs associated with maintenance support are expensed as incurred. Amounts associated with these maintenance contracts are not included in the table above.
In addition, the Company provides its customers with certain indemnification rights. In general, the Company agrees to indemnify the customer if a third party asserts patent or other infringement on the part of the customer for its use of the Company's products. The Company has indemnification obligations under its charter and bylaws to its officers and directors, and has entered into indemnification agreements with the officers and directors of its subsidiaries. From time to time, the Company also enters into agreements in connection with its acquisition and divesture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is not readily determinable due to the conditional nature of the Company's potential obligations and the specific facts and circumstances involved with each particular agreement, and as such the Company has not recorded a liability in connection with these indemnification arrangements. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company's consolidated financial condition, results of operations or cash flows.
Leases. Teradata conducts certain of its sales and administrative operations using leased facilities, the initial lease terms of which vary in length. Many of the leases contain renewal options and escalation clauses that are not material to the overall lease portfolio. Future minimum operating lease payments and committed subleases under non-cancelable leases as of December 31, 2011, for the following fiscal years were:
In millions | Total Amounts |
2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
Operating lease obligations |
$ | 50 | $ | 19 | $ | 13 | $ | 8 | $ | 6 | $ | 4 | ||||||||||||
Sublease rentals |
(15 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||
Total committed operating Leases less sublease rentals |
$ | 35 | $ | 16 | $ | 10 | $ | 5 | $ | 3 | $ | 1 |
The Company's actual rental expense was $23 million, $17 million and $17 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company had no contingent rentals for these periods, but received sublease rental income of $3 million, $4 million and $5 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Concentrations of Risk. The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments, and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the balance sheet. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions (as counterparties to hedging transactions) and monitoring procedures. Teradata's business often involves large transactions with customers, and if one or more of those customers were to default in its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses were adequate at December 31, 2011 and 2010.
The Company is also potentially subject to concentrations of supplier risk. Our hardware components are assembled exclusively by Flextronics Corporation. Flextronics procures a wide variety of components used in the manufacturing process on our behalf. Although many of these components are available from multiple sources, Teradata utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. Typically, these preferred suppliers maintain alternative processes and/or facilities to ensure continuity of supply. Given the Company's strategy to outsource its manufacturing activities to Flextronics and to source certain components from single suppliers, a disruption in production at Flextronics or at a supplier could impact the timing of customer shipments and/or Teradata's operating results.
|
Note 9 Fair Value Measurements
GAAP has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company's assets and liabilities measured at fair value on a recurring basis include money market funds and foreign currency exchange contracts. A portion of the Company's excess cash reserves are held in money market funds which generate interest income based on the prevailing market rates. Money market funds are included in cash and cash equivalents in the Company's balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, forward foreign exchange contracts. The fair value of these contracts are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value gains for open contracts are recognized as assets and fair value losses are recognized as liabilities. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at December 31, 2011 and 2010, were not material. Any realized gains or losses would be mitigated by corresponding gains or losses on the underlying exposures.
The Company's assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2011 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 471 | $ | 471 | $ | 0 | $ | 0 |
The Company's assets measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2010 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 534 | $ | 534 | $ | 0 | $ | 0 |
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Note 10 Debt
On October 1, 2007, Teradata entered into a five-year revolving credit agreement (the "Credit Facility"), under which the Company may borrow up to $300 million. The current Credit Facility agreement ends on September 30, 2012, at which point any remaining outstanding borrowings would be due for repayment. The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option the Company chooses to utilize and the Company's leverage ratio at the time of the borrowing. In the near term, Teradata would anticipate choosing a floating rate based on the London Interbank Offered Rate ("LIBOR"). The Credit Facility is unsecured and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities.
As of December 31, 2011, the Company had no borrowings outstanding under the Credit Facility, leaving $300 million in additional borrowing capacity available under the Credit Facility.
On April 5, 2011, Teradata obtained a new senior unsecured $300 million five-year term loan. The term loan is payable in quarterly installments, commencing on June 30, 2012, with all remaining principal due on April 5, 2016. The outstanding principal amount of the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus in each case a margin based on the leverage ratio of the Company. As of December 31, 2011, the term loan principal outstanding was $300 million, and carried an interest rate of 1.31%.
Annual contractual maturities of principal on debt outstanding at December 31, 2011, are as follows:
In millions | ||||
2012 |
$ | 11 | ||
2013 |
$ | 15 | ||
2014 |
$ | 26 | ||
2015 |
$ | 53 | ||
2016 |
$ | 195 | ||
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Total |
$ | 300 | ||
|
|
Interest expense on borrowings was $4 million for the twelve months ended December 31, 2011, and $0 million for the twelve months ended December 31, 2010 and 2009, respectively.
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Note 11 Segment, Other Supplemental Information and Concentrations
Teradata manages its business in three geographic regions, which are also the Company's operating segments: (1) the North America and Latin America ("Americas") region; (2) the Europe, Middle East and Africa ("EMEA") region; and (3) the Asia Pacific and Japan ("APJ") region. Management evaluates the performance of its segments based on revenue and segment margin, and does not include segment assets for management reporting purposes. Corporate-related costs are fully-allocated to the segments.
The following table presents regional segment revenue and segment gross margin for the Company for the years ended December 31:
In millions | 2011 | % of Revenue |
2010 | % of Revenue |
2009 | % of Revenue |
||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Americas (1) |
$ | 1,436 | 61 | % | $ | 1,166 | 60 | % | $ | 981 | 57 | % | ||||||||||||
EMEA |
548 | 23 | % | 442 | 23 | % | 430 | 25 | % | |||||||||||||||
APJ |
378 | 16 | % | 328 | 17 | % | 298 | 18 | % | |||||||||||||||
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Total revenue |
2,362 | 100 | % | 1,936 | 100 | % | 1,709 | 100 | % | |||||||||||||||
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Segment gross margin |
||||||||||||||||||||||||
Americas |
837 | 58 | % | 702 | 60 | % | 570 | 58 | % | |||||||||||||||
EMEA |
281 | 51 | % | 232 | 52 | % | 230 | 53 | % | |||||||||||||||
APJ |
175 | 46 | % | 154 | 47 | % | 138 | 46 | % | |||||||||||||||
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Total gross margin |
1,293 | 55 | % | 1,088 | 56 | % | 938 | 55 | % | |||||||||||||||
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Selling, general and administrative expenses |
663 | 28 | % | 526 | 27 | % | 483 | 28 | % | |||||||||||||||
Research and development expenses |
174 | 7 | % | 147 | 8 | % | 117 | 7 | % | |||||||||||||||
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Total income from operations |
$ | 456 | 19 | % | $ | 415 | 21 | % | $ | 338 | 20 | % | ||||||||||||
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(1) |
The Americas region includes revenue from the United States of $1,315 million in 2011, $1,059 million in 2010 and $871 million in 2009. |
The following table presents revenue by product and services revenue for the Company for the years ended December 31:
In millions | 2011 | 2010 | 2009 | |||||||||
Products (software and hardware)(1) |
$ | 1,122 | $ | 933 | $ | 772 | ||||||
Consulting services |
695 | 536 | 497 | |||||||||
Maintenance services |
545 | 467 | 440 | |||||||||
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|||||||
Total services |
1,240 | 1,003 | 937 | |||||||||
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Total revenue |
$ | 2,362 | $ | 1,936 | $ | 1,709 | ||||||
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(1) |
Our data warehousing software and hardware products are often sold and delivered together in the form of a "node" of capacity as an integrated technology solution. Accordingly, it is impracticable to provide the breakdown of revenue from various types of software and hardware products. |
The following table presents property and equipment by geographic area at December 31:
In millions | 2011 | 2010 | ||||||
United States |
$ | 100 | $ | 87 | ||||
Americas (excluding United States) |
3 | 2 | ||||||
EMEA |
4 | 4 | ||||||
APJ |
13 | 12 | ||||||
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|||||
Property and equipment, net |
$ | 120 | $ | 105 | ||||
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Concentrations. No single customer accounts for more than 10% of the Company's revenue. As of December 31, 2011, the Company is not aware of any significant concentration of business transacted with a particular customer that could, if suddenly eliminated, have a material adverse effect on the Company's operations. The Company also has no concentration of available sources of labor, services, licenses or other rights that could, if suddenly eliminated, have a material adverse effect on its operations.
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Note 12 Business Combinations
Aprimo, Inc.
On January 21, 2011, Teradata completed its acquisition of 100 percent of the stock of Aprimo, pursuant to an Agreement and Plan of Merger, dated December 21, 2010. Aprimo is a global provider of integrated marketing software solutions. Aprimo has been integrated into Teradata's operations, and the Aprimo organization now supports Teradata's applications strategy, including development, marketing, sales and services. The purpose of this acquisition was to advance Teradata's position in integrated marketing management, building on Aprimo's established and well-positioned business. Aprimo's operations have been integrated into, and its actual results are reflected in, the Company's three geographic operating regions.
The aggregate consideration payable with respect to all of the outstanding stock and equity interests (including all outstanding warrants, stock options and restricted stock units) of Aprimo in the acquisition was $525 million in cash, subject to potential adjustments for certain of Aprimo's indemnification obligations under the merger agreement. The purchase price was funded in part by using existing U.S. cash, and in part by drawing-down in full the Company's Credit Facility. Additionally, for the twelve months ended December 31, 2011, Teradata recognized approximately $3 million in acquisition-related expenses, which were recorded as General and Administrative expenses.
Purchase Price Allocation
Pursuant to our business combinations accounting policy, the total purchase price for Aprimo was allocated to the net tangible and intangible assets based upon their fair values as of January 21, 2011 as set forth below. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill, which represents synergies of combining the businesses. It is expected that none of the goodwill will be deductible for tax purposes.
Our purchase price allocation for Aprimo is as follows.
In millions | ||||
Cash and cash equivalents |
$ | 26 | ||
Accounts receivables |
22 | |||
Goodwill |
386 | |||
Intangible assets |
123 | |||
Other assets |
5 | |||
Deferred revenue |
(25 | ) | ||
Other liabilities |
(12 | ) | ||
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|
|||
Total purchase price |
$ | 525 | ||
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|
Valuations of Intangible Assets Acquired
The following table sets forth the components of intangible assets acquired in connection with the Aprimo acquisition:
Dollars in millions | Fair Value | Weighted Average Useful Life | ||||
Customer relationships - subscription, hosting, maintenance and perpetual software |
$ | 37 | 10 years | |||
Customer relationships - professional services |
15 | 6 years | ||||
Developed technology |
61 | 7 years | ||||
Trademarks/trade names |
10 | 10 years | ||||
|
|
|||||
Total intangible assets |
$ | 123 | 8 years | |||
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Aster Data Systems
On April 5, 2011, Teradata completed its acquisition of all remaining equity of Aster Data, pursuant to an Agreement and Plan of Merger, dated March 2, 2011. Aster Data is a market leader in advanced analytics and the management of diverse, multi-structured data. The combination of Teradata and Aster Data technologies enables businesses to perform better analytics on large sets of multi-structured data, also known as "big data."
The aggregate consideration with respect to all of the outstanding stock and equity interests (including all outstanding warrants and vested stock options) of Aster Data was $259 million. The aggregate consideration excluded the value of Teradata's pre-existing 11.2% equity investment in Aster Data. On April 5, 2011, the fair value of Teradata's previous 11.2% equity interest in Aster Data was $36 million. Teradata recorded a gain of $11 million related to this existing equity interest in Aster Data, and that gain was recorded in other income and (expense) in the Consolidated Statements of Income. Additionally, for the twelve months ended December 31, 2011, Teradata recognized approximately $4 million in acquisition-related expenses, which were recorded primarily as General and Administrative expenses.
Teradata financed the acquisition of Aster Data using a portion of the funds from a new $300 million five-year, unsecured term loan, which closed on April 5, 2011. Further information on the term loan is included in Note 10.
Purchase Price Allocation
Pursuant to our business combinations accounting policy, the total purchase price for Aster Data was allocated to the net tangible and intangible assets based upon their fair values as of April 5, 2011 as set forth below. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill, which represents synergies of combining the businesses. It is expected that none of the goodwill will be deductible for tax purposes.
Our purchase price allocation for Aster Data is as follows.
In millions | ||||
Cash and cash equivalents |
$ | 14 | ||
Goodwill |
221 | |||
Intangible assets |
50 | |||
Other assets |
13 | |||
Deferred revenue |
(3 | ) | ||
|
|
|||
Total purchase price |
$ | 295 | ||
|
|
The difference between the total purchase price and the cash consideration paid represents the fair value of the Company's previous equity investment in Aster Data.
Valuations of Intangible Assets Acquired
The following table sets forth the components of intangible assets acquired in connection with the Aster Data acquisition:
Dollars in millions | Fair Value | Weighted Average Useful Life | ||||
Developed technology |
$ | 40 | 5 years | |||
In-process research and development |
5 | 5 years | ||||
Customer relationships |
3 | 4 years | ||||
Trademarks/trade names |
1 | 5 years | ||||
Non-compete agreements |
1 | 2 years | ||||
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|
|||||
Total intangible assets |
$ | 50 | 5 years | |||
|
|
Unaudited Supplemental Financial Information
The following table presents the amounts of Aprimo and Aster Data revenue and income included in Teradata's condensed consolidated results of operations for the twelve months ended December 31, 2011 (from their respective dates of acquisition), as well as unaudited pro forma results of Teradata (including Aprimo and Aster Data) for the twelve month periods ended December 31, 2011 and December 31, 2010, had both acquisitions been completed on January 1, 2010. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2010.
In millions | Revenue | Net Income | ||||||
Actual impact of Aprimo and Aster Data results for the twelve months ended December 31, 2011 |
$ | 72 | ($ | 13 | ) | |||
Pro forma condensed combined results for the twelve months ended December 31, 2011 |
$ | 2,387 | $ | 357 | ||||
Pro forma condensed combined results for the twelve months ended December 31, 2010 |
$ | 2,007 | $ | 250 |
The unaudited pro forma results for the twelve months ended December 31, 2011 include:
|
$5 million in additional amortization charges for acquired intangible assets, |
|
$17 million in additional revenue and $1 million in additional cost of revenue assuming that the majority of the required acquisition accounting-related revenue eliminations had taken place in the prior-year period, and |
|
$22 million in eliminated transaction and integration expenses as if certain of those costs had been recognized in the prior-year period. |
The unaudited pro forma results for the twelve months ended December 31, 2010 include:
|
$25 million in additional amortization charges for acquired intangible assets, |
|
$20 million in elimination of deferred revenue recognition and $4 million in associated elimination of deferred cost of revenue for which there was no further performance obligation, and |
|
$22 million in transaction and integration expenses associated with the acquisition. |
Other Activity
On May 24, 2011, the Company completed the sale of an equity investment in Pliant Technology, Inc. The Company received proceeds of $30 million and recognized a net gain of $17 million on the transaction. The gain was recorded in other income and (expense) in the Consolidated Statements of Income.
|
Note 13 Quarterly Information (unaudited)
In millions, except per share amounts | First | Second | Third | Fourth | ||||||||||||
2011 |
||||||||||||||||
Total revenues |
$ | 506 | $ | 581 | $ | 602 | $ | 673 | ||||||||
Gross margin |
$ | 275 | $ | 316 | $ | 328 | $ | 374 | ||||||||
Operating income |
$ | 91 | $ | 110 | $ | 122 | $ | 133 | ||||||||
Net income |
$ | 65 | $ | 103 | $ | 87 | $ | 98 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.39 | $ | 0.61 | $ | 0.52 | $ | 0.59 | ||||||||
Diluted |
$ | 0.38 | $ | 0.60 | $ | 0.51 | $ | 0.57 | ||||||||
2010 |
||||||||||||||||
Total revenues |
$ | 429 | $ | 470 | $ | 489 | $ | 548 | ||||||||
Gross margin |
$ | 236 | $ | 268 | $ | 279 | $ | 305 | ||||||||
Operating income |
$ | 86 | $ | 106 | $ | 106 | $ | 117 | ||||||||
Net income |
$ | 67 | $ | 74 | $ | 75 | $ | 85 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.40 | $ | 0.44 | $ | 0.45 | $ | 0.51 | ||||||||
Diluted |
$ | 0.39 | $ | 0.44 | $ | 0.44 | $ | 0.50 |
|
TERADATA CORPORATION
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Description |
Balance at Beginning of Period |
Additions Charged to Costs & Expenses |
Charged to Other Accounts |
Deductions | Balance at End of Period |
|||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||
Year ended December 31, 2011 |
$ | 9 | $ | 5 | $ | 0 | $ | 1 | $ | 13 | ||||||||||
Year ended December 31, 2010 |
$ | 9 | $ | 0 | $ | 0 | $ | 0 | $ | 9 | ||||||||||
Year ended December 31, 2009 |
$ | 11 | $ | 1 | $ | 0 | $ | 3 | $ | 9 |
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Basis of Presentation. The financial statements are presented on a consolidated basis and include the accounts of the Company and its wholly-owned subsidiaries in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. On an ongoing basis, management evaluates these estimates and judgments, including those related to allowances for doubtful accounts, the valuation of inventory to net realizable value, share-based compensation and income taxes and any changes will be accounted for on a prospective basis. Actual results could differ from those estimates.
Revenue Recognition. Teradata's solution offerings typically include software, software subscriptions (unspecified when-and-if-available upgrades), hardware, maintenance support services, and other consulting, implementation and installation-related ("consulting") services. Teradata records revenue when it is realized, or realizable, and earned. Teradata considers these requirements met when:
|
Persuasive evidence of an arrangement exists |
|
The products or services have been delivered to the customer |
|
The sales price is fixed or determinable and free of contingencies or significant uncertainties |
|
Collectibility is reasonably assured |
Teradata reports revenue net of any taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. The Company assesses whether fees are fixed or determinable at the time of sale. Standard payment terms may vary based on the country in which the agreement is executed, but are generally between 30 and 90 days. Payments that are due within six months are generally deemed to be fixed or determinable based on a successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition. Teradata delivers its solutions primarily through direct sales channels, as well as through alliances with system integrators, other independent software vendors and distributors, and value-added resellers (collectively referred to as "resellers"). In assessing whether the sales price to a reseller is fixed or determinable, the Company considers, among other things, past business practices with the reseller, the reseller's operating history, payment terms, return rights and the financial wherewithal of the reseller. When Teradata determines that the contract fee to a reseller is not fixed or determinable, that transaction is deferred and recognized upon sell-through to the end customer.
The Company's deliverables often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware once title and risk of loss have been transferred. Revenue for software subscriptions, which provide for unspecified upgrades or enhancements on a when-and-if-available basis, is recognized straight-line over the term of the subscription arrangement. Revenue for maintenance support services is also recognized on a straight-line basis over the term of the contract. Revenue for other consulting, implementation and installation services is recognized as services are provided. In certain instances, acceptance of the product or service is specified by the customer. In such cases, revenue is deferred until the acceptance criteria have been met. Delivery and acceptance generally occur in the same reporting period. The Company's arrangements generally do not include any customer negotiated provisions for cancellation, termination or refunds that would significantly impact recognized revenue.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product's essential functionality from the scope of the industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
|
Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; |
|
Require an entity to allocate revenue in an arrangement using its best estimate of selling prices ("BESP") for deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and |
|
Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Teradata adopted these standards on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after January 1, 2011.
The Company evaluates all deliverables in an arrangement to determine whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value, and if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of Teradata. This new guidance does not generally change the units of accounting for the Company's revenue transactions. Most of the Company's products and services qualify as separate units of accounting and are recognized upon meeting the criteria as described above.
For multiple deliverable arrangements that contain non-software related deliverables, the Company allocates revenue to each deliverable based upon the relative selling price hierarchy and if software and software-related deliverables are also included in the arrangement, to those deliverables as a group based on the BESP for the group. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is available. The Company then recognizes revenue when the remaining revenue recognition criteria are met for each deliverable. For the software group or arrangements that contain only software and software-related deliverables, the revenue recognition criteria utilizing the residual method remains unchanged as further described below.
Teradata's data warehousing software and hardware products are sold and delivered together in the form of a "Node" of capacity as an integrated technology solution. Because both the database software and hardware platform are necessary to deliver the data warehouse's essential functionality, the database software and hardware (Node) are excluded from the software rules and considered a non-software related deliverable. Teradata software applications and related support are considered software-related deliverables. Additionally, the amount of revenue allocated to the delivered items utilizing the relative selling price method is limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions (the non-contingent amount).
VSOE is based upon the normal pricing and discounting practices for those products and services when sold separately. Teradata uses the stated renewal rate approach in establishing VSOE for maintenance and subscriptions (collectively referred to as postcontract customer support "PCS"). Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and consistent with the Company's normal pricing practices. Renewal rates greater than the lower level of our targeted pricing ranges are considered to be substantive and, therefore, meet the requirements to support VSOE. In instances where there is not a substantive renewal rate in the arrangement, the Company allocates revenue based upon BESP, using the minimum established pricing targets as supported by the renewal rates for similar customers utilizing the bell-curve method. Teradata also offers consulting and installation-related services to its customers, which are considered non-software deliverables if they relate to the nodes. These services are rarely considered essential to the functionality of the data warehouse solution deliverable and there is never software customization of the proprietary database software. VSOE for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of the Company's customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
In nearly all multiple-deliverable arrangements, the Company is unable to establish VSOE for all deliverables in the arrangement. This is due to infrequently selling each deliverable separately (such is the case with our nodes), not pricing products or services within a narrow range, or only having limited sales history. When VSOE cannot be established, attempts are made to establish TPE of the selling price for each deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. However, Teradata's offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. This is because Teradata's products contain a significant amount of proprietary technology and its solutions offer substantially different features and functionality than other available products. As Teradata's products are significantly different from those of its competitors, the Company is unable to establish TPE for the vast majority of its products.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, product life cycles, competitive landscape, internal costs, gross margin objectives, purchase volumes and pricing practices.
The primary consideration in developing BESP for the Company's nodes is the bell-curve method based on historical transactions. The BESP analysis is at the geography level in order to align it with the way in which the Company goes to market and establishes pricing for its products. The Company has established discount ranges off of published list prices for different geographies based on strategy and maturity of Teradata's presence in the respective geography. There are distinctions in each geography and product group which support the use of geographies and markets for the determination of BESP. For example, the Company's U.S. market is relatively mature and most of the large transactions are captured in this market, whereas EMEA and APJ are less mature markets with generally smaller deal size. Additionally, the prices and margins for the Company's products vary by geography and by product class. BESP is analyzed on a quarterly basis using a rolling previous 4-quarters of data, which the Company believes best reflects most recent pricing practices in a changing marketplace.
The Company reviews VSOE, TPE and its determination of BESP on a periodic basis and updates it, when appropriate, to ensure that the practices employed reflect the Company's recent pricing experience. The Company maintains internal controls over the establishment and updates of these estimates, which includes review and approval by the Company's management. For the twelve months ended December 31, 2011 there was no material impact to revenue resulting from changes in VSOE, TPE or BESP, nor does the Company expect a material impact from such changes in the near term. Additionally, the adoption of the amended revenue recognition guidelines had no material net impact on the Company's results of operations for the twelve months ended December 31, 2011.
Term licenses, hosting arrangements and software-as-a-service ("SaaS"). As a result of the Company's acquisition of Aprimo, Inc. ("Aprimo") on January 21, 2011 (see Note 12), Teradata's application offerings were be expanded to include, term licenses, hosting arrangements and SaaS. Teradata previously offered its software applications primarily through a perpetual licensing arrangement. In cases where the contract requires the software to be hosted by the Company and provided via an on-demand arrangement, the software is considered a subscription. If the license is of limited life and does not require the Company to host the software for the customer, the software is considered a term license. In both types of these arrangements, revenues are recognized over the term of the agreement. For hosting arrangements where customers have the right to take possession of the Company's software at any time during the hosting period, the customer's rights to the software in these circumstances are not dependent on additional software payments or significant penalties.
Accounting for arrangements prior to January 1, 2011. For transactions entered into prior to January 1, 2011, the Company allocates revenue for multiple deliverable arrangements for which VSOE exists for undelivered elements but not for the delivered elements, using the "residual method". Teradata does not typically have VSOE for its hardware and software products. Therefore, in a substantial majority of Teradata arrangements entered into prior to January 1, 2011, the residual method is used to allocate the arrangement consideration. Under the residual method, the VSOE of the undelivered elements is deferred and accounted for under the applicable revenue recognition guidance, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. For arrangements in which VSOE does not exist for each undelivered element, revenue for the entire arrangement is deferred and not recognized until delivery of all the elements without VSOE has occurred, unless the only undelivered element is PCS in which case the entire contract is recognized ratably over the PCS period.
Contract accounting. If an arrangement involves significant production, modification or customization of the application software or the undelivered services are essential to the functionality of the delivered software then the Company uses the percentage-of-completion or completed-contract method of accounting. The percentage-of-completion method is used when estimates of costs to complete and extent of progress toward completion are reasonably dependable. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project's progress toward completion. In circumstances when reasonable and reliable cost estimates for a project cannot be made, the completed-contract method is used whereas no revenue is recognized until the project is complete. When total cost estimates exceed revenues, the Company accrues the estimated losses immediately. For purposes of allocation of the arrangement consideration, any products for which the services are not essential are separated utilizing the relative selling price method discussed above. PCS is also separated and allocated based on VSOE and then recognized ratably over the term. The remaining contract value, which typically includes application software and essential services, is then recognized utilizing the percentage-of-completion or completed-contract methods discussed above.
Shipping and Handling. Product shipping and handling costs are included in cost of products in the Consolidated Statements of Income.
Cash and Cash Equivalents. All short-term, highly-liquid investments having original maturities of three months or less are considered to be cash equivalents.
Allowance for Doubtful Accounts. Teradata establishes provisions for doubtful accounts using both percentages of accounts receivable balances to reflect historical average credit losses and specific provisions for known issues.
Inventories. Inventories are stated at the lower of cost or market, using the average cost method.
Property and Equipment. Property and equipment, leasehold improvements and rental equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets primarily on a straight-line basis. Equipment is depreciated over 3 to 20 years and buildings over 25 to 45 years. Leasehold improvements are depreciated over the life of the lease or the asset, whichever is shorter. Total depreciation expense on the Company's property and equipment for the years ended December 31, 2011, 2010 and 2009 was $33 million, $25 million and $22 million, respectively.
Capitalized Software. Direct development costs associated with internal-use software are capitalized and amortized over the estimated useful lives of the resulting software. The costs are capitalized when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Teradata typically amortizes capitalized internal-use software on a straight-line basis over three years beginning when the asset is substantially ready for use. Costs incurred for the development of software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. Technological feasibility is established when planning, designing and initial coding activities that are necessary to establish the product can be produced to meet its design specifications. In the absence of a program design, a working model is used to establish technological feasibility. These costs are included within capitalized software and are amortized over the estimated useful lives of the resulting software. The Company amortizes capitalized software over periods up to four years using the greater of the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the product beginning when the product is available for general release. Costs capitalized include direct labor and related overhead costs. Costs incurred prior to technological feasibility and after general release are expensed as incurred. The following table identifies the activity relating to capitalized software:
Internal-use Software | External-use Software | |||||||||||||||||||||||
In millions | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
Capitalized |
5 | 5 | 5 | 63 | 44 | 54 | ||||||||||||||||||
Amortization |
(5 | ) | (6 | ) | (4 | ) | (39 | ) | (29 | ) | (33 | ) | ||||||||||||
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Ending balance at December 31 |
$ | 11 | $ | 11 | $ | 12 | $ | 129 | $ | 105 | $ | 90 | ||||||||||||
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Valuation of Long-Lived Assets. Long-lived assets such as property and equipment, acquired intangible assets and internal capitalized software are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount.
Goodwill. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment annually or upon occurrence of an event or change in circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company did not recognize any goodwill impairment charges in 2011, 2010 or 2009.
Warranty. Provisions for product warranties are recorded in the period in which the related revenue is recognized. The Company accrues warranty reserves using percentages of revenue to reflect the Company's historical average warranty claims.
Research and Development Costs. Research and development costs are expensed as incurred (with the exception of the capitalized software development costs discussed above). Research and development costs primarily include payroll and headcount-related costs, contractor fees, facilities, infrastructure costs, and administrative expenses directly related to research and development support.
Pension and Postemployment Benefits. The Company accounts for its pension and postemployment benefit obligations using actuarial models. The measurement of plan obligations was made as of December 31, 2011. Liabilities are computed using the projected unit credit method. The objective under this method is to expense each participant's benefits under the plan as they accrue, taking into consideration salary increases and the plan's benefit allocation formula. Thus, the total pension or postemployment benefit to which each participant is expected to become entitled is broken down into units, each associated with a year of past or future credited service.
The Company recognizes the funded status of its pension and postemployment plan obligations in its consolidated balance sheet and records in other comprehensive income certain gains and losses that arise during the period, but are deferred under pension accounting rules.
Foreign Currency. Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average exchange rates prevailing during the period. Adjustments arising from the translation are included in accumulated other comprehensive income (loss), a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in determining net income.
Income Taxes. Income tax expense is provided based on income before income taxes in the various jurisdictions in which the Company conducts its business. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are determined based on the enacted tax rates expected to apply in the periods in which the deferred assets or liabilities are expected to be settled or realized. Teradata recognizes tax benefits from uncertain tax positions only if it is more likely than not the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Share-based Compensation. Share-based payments to employees, including grants of stock options, are recognized in the financial statements based on their fair value. The fair value of each stock option award on the grant date is estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock price volatility, weighted-average risk-free interest rate and weighted average expected term of the options. As of October 2011, the Company's expected volatility assumption used in the Black-Scholes option-pricing model is based on a blend of peer group volatility and Teradata volatility. Prior to that date, because the Company did not have a sufficient trading history as a stand-alone public company, the volatility was purely based on the peer group volatility. The expected term assumption is based on the simplified method under GAAP, which is based on the vesting period and contractual term for each vesting tranche of awards. The mid-point between the vesting date and the expiration date is used as the expected term under this method. The risk-free interest rate used in the Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the Company's expected term assumption. The Company has never declared or paid a cash dividend.
Treasury Stock. Shares of the Company's common stock repurchased through the share repurchase programs is held as treasury stock. Treasury stock is accounted for using the cost method.
Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted-average number of shares outstanding includes the dilution from potential shares added from stock options, restricted stock awards and other stock awards. Refer to Note 5 for share information on the Company's stock compensation plans.
The components of basic and diluted earnings per share are as follows:
For the year ended December 31 | ||||||||||||
In millions, except earnings per share | 2011 | 2010 | 2009 | |||||||||
Net income available for common stockholders |
$ | 353 | $ | 301 | $ | 254 | ||||||
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|||||||
Weighted average outstanding shares of common stock |
168.1 | 167.4 | 171.9 | |||||||||
Dilutive effect of employee stock options and restricted stock |
3.8 | 3.0 | 2.0 | |||||||||
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Common stock and common stock equivalents |
171.9 | 170.4 | 173.9 | |||||||||
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Earnings per share: |
||||||||||||
Basic |
$ | 2.10 | $ | 1.80 | $ | 1.48 | ||||||
Diluted |
$ | 2.05 | $ | 1.77 | $ | 1.46 |
No stock options were excluded from the computation of diluted earnings per share for the twelve months ended December 31, 2011. Options to purchase 0.6 million shares of common stock for 2010 and 1.8 million shares of common stock for 2009 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
|
Internal-use Software | External-use Software | |||||||||||||||||||||||
In millions | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
Capitalized |
5 | 5 | 5 | 63 | 44 | 54 | ||||||||||||||||||
Amortization |
(5 | ) | (6 | ) | (4 | ) | (39 | ) | (29 | ) | (33 | ) | ||||||||||||
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Ending balance at December 31 |
$ | 11 | $ | 11 | $ | 12 | $ | 129 | $ | 105 | $ | 90 | ||||||||||||
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For the year ended December 31 | ||||||||||||
In millions, except earnings per share | 2011 | 2010 | 2009 | |||||||||
Net income available for common stockholders |
$ | 353 | $ | 301 | $ | 254 | ||||||
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|
|||||||
Weighted average outstanding shares of common stock |
168.1 | 167.4 | 171.9 | |||||||||
Dilutive effect of employee stock options and restricted stock |
3.8 | 3.0 | 2.0 | |||||||||
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Common stock and common stock equivalents |
171.9 | 170.4 | 173.9 | |||||||||
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Earnings per share: |
||||||||||||
Basic |
$ | 2.10 | $ | 1.80 | $ | 1.48 | ||||||
Diluted |
$ | 2.05 | $ | 1.77 | $ | 1.46 |
|
At December 31 | ||||||||
In millions | 2011 | 2010 | ||||||
Accounts receivable |
||||||||
Trade |
$ | 499 | $ | 408 | ||||
Other |
8 | 3 | ||||||
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Accounts receivable, gross |
507 | 411 | ||||||
Less: allowance for doubtful accounts |
(13 | ) | (9 | ) | ||||
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|||||
Total accounts receivable, net |
$ | 494 | $ | 402 | ||||
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Inventories |
||||||||
Finished goods |
$ | 41 | $ | 39 | ||||
Service parts |
20 | 26 | ||||||
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|
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Total inventories |
$ | 61 | $ | 65 | ||||
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Other current assets |
||||||||
Current deferred tax assets |
$ | 34 | $ | 31 | ||||
Other |
51 | 25 | ||||||
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Total other current assets |
$ | 85 | $ | 56 | ||||
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|||||
Property and equipment |
||||||||
Land |
$ | 8 | $ | 8 | ||||
Buildings and improvements |
64 | 63 | ||||||
Machinery and other equipment |
230 | 213 | ||||||
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|||||
Property and equipment, gross |
302 | 284 | ||||||
Less: accumulated depreciation |
(182 | ) | (179 | ) | ||||
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|||||
Total property and equipment, net |
$ | 120 | $ | 105 | ||||
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|||||
Other current liabilities |
||||||||
Sales and value-added taxes |
$ | 23 | $ | 19 | ||||
Other |
67 | 51 | ||||||
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|||||
Total other current liabilities |
$ | 90 | $ | 70 | ||||
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|
|||||
Accumulated other comprehensive income, net of tax |
||||||||
Currency translation adjustments |
$ | 25 | $ | 31 | ||||
Actuarial losses and prior service costs on employee benefit plans |
(9 | ) | (19 | ) | ||||
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|
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Total accumulated other comprehensive income |
$ | 16 | $ | 12 | ||||
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In millions | Balance December 31, 2010 |
Additions | Currency Translation Adjustments |
Balance December 31, 2011 |
||||||||||||
Goodwill |
||||||||||||||||
Americas |
$ | 85 | $ | 457 | $ | 1 | $ | 543 | ||||||||
EMEA |
17 | 107 | (4 | ) | 120 | |||||||||||
APJ |
34 | 43 | 2 | 79 | ||||||||||||
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Total goodwill |
$ | 136 | $ | 607 | ($ | 1 | ) | $ | 742 | |||||||
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Original Amortization Life (in Years) |
December 31, 2011 | December 31, 2010 | ||||||||||||||||||
In millions | Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||||||
Acquired intangible assets |
||||||||||||||||||||
Intellectual property/developed technology |
5 to 7 | 122 | (23 | ) | 18 | (6 | ) | |||||||||||||
Customer relationships |
4 to 10 | 55 | (6 | ) | 0 | 0 | ||||||||||||||
Trademarks/trade names |
5 to 10 | 11 | (1 | ) | 0 | 0 | ||||||||||||||
In-process research and development |
5 | 5 | 0 | 0 | 0 | |||||||||||||||
Non-compete agreements |
2 | 1 | (1 | ) | 0 | 0 | ||||||||||||||
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Total |
2 to 10 | 194 | (31 | ) | 18 | (6 | ) | |||||||||||||
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|
Actual 2011 |
For the year ended (estimated) | |||||||||||||||||||||||
In millions | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
Amortization expense |
$ | 25 | $ | 30 | $ | 29 | $ | 29 | $ | 27 | $ | 19 |
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In millions | 2011 | 2010 | 2009 | |||||||||
Income before income taxes |
||||||||||||
United States |
$ | 309 | $ | 272 | $ | 179 | ||||||
Foreign |
172 | 142 | 155 | |||||||||
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Total income before income taxes |
$ | 481 | $ | 414 | $ | 334 | ||||||
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In millions | 2011 | 2010 | 2009 | |||||||||
Income tax expense |
||||||||||||
Current |
||||||||||||
Federal |
$ | 26 | $ | 53 | $ | 24 | ||||||
State and local |
3 | 5 | 4 | |||||||||
Foreign |
29 | 14 | 11 | |||||||||
Deferred |
||||||||||||
Federal |
64 | 35 | 30 | |||||||||
State and local |
8 | 4 | 4 | |||||||||
Foreign |
(2 | ) | 2 | 7 | ||||||||
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|
|
|
|
|
|||||||
Total income tax expense |
$ | 128 | $ | 113 | $ | 80 | ||||||
|
|
|
|
|
|
In millions | 2011 | 2010 | 2009 | |||||||||
Income tax expense at the U.S. federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign income tax differential |
(7.4 | %) | (8.1 | %) | (11.0 | %) | ||||||
State and local income taxes |
1.3 | % | 1.5 | % | 1.0 | % | ||||||
U.S. permanent book/tax differences |
(1.8 | %) | (0.9 | %) | (0.5 | %) | ||||||
Other, net |
(0.1 | %) | (0.2 | %) | (0.5 | %) | ||||||
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|
|
|
|
|
|||||||
Total income tax expense |
27.0 | % | 27.3 | % | 24.0 | % | ||||||
|
|
|
|
|
|
In millions | 2011 | 2010 | ||||||
Deferred income tax assets |
||||||||
Employee pensions and other liabilities |
$ | 47 | $ | 47 | ||||
Other balance sheet reserves and allowances |
28 | 24 | ||||||
Deferred revenue |
4 | 0 | ||||||
Tax loss and credit carryforwards |
71 | 29 | ||||||
Capitalized research and development |
28 | 45 | ||||||
|
|
|
|
|||||
Total deferred income tax assets |
178 | 145 | ||||||
|
|
|
|
|||||
Deferred income tax liabilities |
||||||||
Intangibles and capitalized software |
109 | 42 | ||||||
Property and equipment |
23 | 10 | ||||||
Other |
7 | 4 | ||||||
|
|
|
|
|||||
Total deferred income tax liabilities |
139 | 56 | ||||||
|
|
|
|
|||||
Total net deferred income tax assets |
$ | 39 | $ | 89 | ||||
|
|
|
|
In millions | 2011 | 2010 | ||||||
Balance at January 1 |
$ | 8 | $ | 6 | ||||
Gross increases for prior period tax positions |
1 | 1 | ||||||
Gross decreases for prior period tax positions |
0 | (1 | ) | |||||
Gross increases for current period tax positions |
4 | 2 | ||||||
Increases from acquired businesses |
16 | 0 | ||||||
Decreases relating to settlements with taxing authorities |
(1 | ) | 0 | |||||
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|
|
|
|||||
Balance at December 31 |
$ | 28 | $ | 8 | ||||
|
|
|
|
|
2011 | 2010 | 2009 | ||||||||||||||||||||||
In millions | Pension | Postemployment | Pension | Postemployment | Pension | Postemployment | ||||||||||||||||||
Service cost |
$ | 9 | $ | 4 | $ | 8 | $ | 4 | $ | 7 | $ | 4 | ||||||||||||
Interest cost |
4 | 2 | 4 | 2 | 3 | 2 | ||||||||||||||||||
Expected return on plan assets |
(3 | ) | 0 | (3 | ) | 0 | (2 | ) | 0 | |||||||||||||||
Settlement charge |
3 | 0 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Employee contributions |
(1 | ) | 0 | (1 | ) | 0 | (1 | ) | 0 | |||||||||||||||
Amortization of actuarial loss |
1 | 0 | 1 | 0 | 1 | 0 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs |
$ | 13 | $ | 6 | $ | 9 | $ | 6 | $ | 9 | $ | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Pension | Postemployment | |||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at January 1 |
$ | 111 | $ | 96 | $ | 40 | $ | 38 | ||||||||
Service cost |
8 | 7 | 4 | 4 | ||||||||||||
Interest cost |
4 | 4 | 2 | 2 | ||||||||||||
Plan participant contributions |
1 | 1 | 0 | 0 | ||||||||||||
Amendments |
0 | 0 | 0 | (1 | ) | |||||||||||
Actuarial (gain) loss |
(5 | ) | 4 | (8 | ) | (1 | ) | |||||||||
Benefits paid |
(12 | ) | (7 | ) | (6 | ) | (2 | ) | ||||||||
Currency translation adjustments |
1 | 6 | 1 | 0 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Benefit obligation at December 31 |
108 | 111 | 33 | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at January 1 |
59 | 45 | 0 | 0 | ||||||||||||
Actual return on plan assets |
(2 | ) | 2 | 0 | 0 | |||||||||||
Company contributions |
12 | 13 | 0 | 0 | ||||||||||||
Benefits paid |
(12 | ) | (7 | ) | 0 | 0 | ||||||||||
Currency translation adjustments |
1 | 5 | 0 | 0 | ||||||||||||
Plan participant contribution |
1 | 1 | 0 | 0 | ||||||||||||
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|
|
|
|
|
|||||||||
Fair value of plan assets at December 31 |
59 | 59 | 0 | 0 | ||||||||||||
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|
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|
|
|
|||||||||
Funded status (underfunded) |
($ | 49 | ) | ($ | 52 | ) | ($ | 33 | ) | ($ | 40 | ) | ||||
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|
|||||||||
Amounts Recognized in the Balance Sheet |
||||||||||||||||
Current liabilities |
$ | 0 | ($ | 1 | ) | ($ | 5 | ) | ($ | 6 | ) | |||||
Noncurrent liabilities |
(49 | ) | (51 | ) | (28 | ) | (34 | ) | ||||||||
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|||||||||
Net amounts recognized |
($ | 49 | ) | ($ | 52 | ) | ($ | 33 | ) | ($ | 40 | ) | ||||
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|
|||||||||
Amounts Recognized in Accumulated Other Comprehensive Income |
||||||||||||||||
Net actuarial loss (gain) |
$ | 28 | $ | 33 | ($ | 4 | ) | $ | 3 | |||||||
Prior service credit |
(3 | ) | (3 | ) | 0 | 0 | ||||||||||
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Total |
$ | 25 | $ | 30 | ($ | 4 | ) | $ | 3 | |||||||
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Pension | Postemployment | |||||||||||||||
In millions | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Actuarial (gain)/loss arising during the year |
($ | 1 | ) | $ | 5 | ($ | 7 | ) | ($ | 1 | ) | |||||
Amortization of (gain)/loss included in net periodic benefit cost |
(1 | ) | (1 | ) | 0 | 0 | ||||||||||
Prior service credit arising during the year |
0 | 0 | 0 | (1 | ) | |||||||||||
Recognition of loss due to settlement |
(3 | ) | 0 | 0 | 0 | |||||||||||
Foreign currency exchange |
1 | 2 | 0 | 0 | ||||||||||||
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|
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|
|||||||||
Total recognized in other comprehensive expense (income) |
($ | 4 | ) | $ | 6 | ($ | 7 | ) | ($ | 2 | ) | |||||
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|
In millions | Pension | Postemployment | ||||||
Net loss/(gain) |
$ | 1 | $ | 0 | ||||
|
|
|
|
|||||
Total recognized in other comprehensive loss/(income) |
$ | 1 | $ | 0 | ||||
|
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|
|
Pension Benefit Obligations | Pension Benefit Cost | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Discount rate |
3.7 | % | 3.9 | % | 3.9 | % | 4.2 | % | ||||||||
Rate of compensation increase |
3.3 | % | 3.3 | % | 3.3 | % | 3.3 | % | ||||||||
Expected return on plan assets |
N/A | N/A | 4.3 | % | 4.7 | % | ||||||||||
Postemployment Benefit Obligations | Postemployment Benefit Cost | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Discount rate |
4.1 | % | 4.4 | % | 4.4 | % | 4.8 | % | ||||||||
Rate of compensation increase |
3.7 | % | 3.7 | % | 3.7 | % | 3.7 | % | ||||||||
Involuntary turnover rate |
1.5 | % | 2.0 | % | 2.0 | % | 2.0 | % |
Actual Asset Allocation As of December 31 |
Target Asset Allocation |
|||||||||||
2011 | 2010 | |||||||||||
Equity securities |
39 | % | 41 | % | 39 | % | ||||||
Debt securities |
33 | % | 38 | % | 37 | % | ||||||
Insurance (annuity) contracts |
11 | % | 10 | % | 11 | % | ||||||
Real estate |
5 | % | 5 | % | 3 | % | ||||||
Other |
12 | % | 6 | % | 10 | % | ||||||
|
|
|
|
|
|
|||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In Millions | December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Cash/cash equivalents/money market funds |
$ | 5 | $ | 0 | $ | 5 | $ | 0 | ||||||||
Equity funds |
23 | 0 | 23 | 0 | ||||||||||||
Bond/fixed-income funds |
19 | 0 | 19 | 0 | ||||||||||||
Real-estate indirect investment |
3 | 0 | 3 | 0 | ||||||||||||
Commodities/Other |
2 | 0 | 2 | 0 | ||||||||||||
Insurance contracts |
7 | 0 | 0 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets at fair value |
$ | 59 | $ | 0 | $ | 52 | $ | 7 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In Millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Cash/cash equivalents/money market funds |
$ | 2 | $ | 0 | $ | 2 | $ | 0 | ||||||||
Equity funds |
24 | 0 | 24 | 0 | ||||||||||||
Bond/fixed-income funds |
22 | 0 | 22 | 0 | ||||||||||||
Real-estate indirect investment |
3 | 0 | 3 | 0 | ||||||||||||
Commodities/Other |
2 | 0 | 2 | 0 | ||||||||||||
Insurance contracts |
6 | 0 | 0 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets at fair value |
$ | 59 | $ | 0 | $ | 53 | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2011 |
$ | 6 | ||
Purchases, sales and settlements, net |
1 | |||
|
|
|||
Balance as of December 31, 2011 |
$ | 7 | ||
|
|
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2010 |
$ | 6 | ||
Purchases, sales and settlements, net |
0 | |||
|
|
|||
Balance as of December 31, 2010 |
$ | 6 | ||
|
|
In millions | Pension Benefits |
Postemployment Benefits |
||||||
Year |
||||||||
2012 |
$ | 8 | $ | 5 | ||||
2013 |
$ | 8 | $ | 5 | ||||
2014 |
$ | 7 | $ | 5 | ||||
2015 |
$ | 8 | $ | 5 | ||||
2016 |
$ | 8 | $ | 4 | ||||
2017-2021 |
$ | 41 | $ | 19 |
|
In millions | 2011 | 2010 | 2009 | |||||||||
Warranty reserve liability |
||||||||||||
Beginning balance at January 1 |
$ | 6 | $ | 5 | $ | 6 | ||||||
Accruals for warranties issued |
13 | 14 | 11 | |||||||||
Settlements (in cash or kind) |
(13 | ) | (13 | ) | (12 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | 6 | $ | 6 | $ | 5 | ||||||
|
|
|
|
|
|
In millions | Total Amounts |
2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
Operating lease obligations |
$ | 50 | $ | 19 | $ | 13 | $ | 8 | $ | 6 | $ | 4 | ||||||||||||
Sublease rentals |
(15 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||
Total committed operating Leases less sublease rentals |
$ | 35 | $ | 16 | $ | 10 | $ | 5 | $ | 3 | $ | 1 |
|
The Company's assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2011 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 471 | $ | 471 | $ | 0 | $ | 0 |
The Company's assets measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2010 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
In millions | December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Signficant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 534 | $ | 534 | $ | 0 | $ | 0 |
|
In millions | ||||
2012 |
$ | 11 | ||
2013 |
$ | 15 | ||
2014 |
$ | 26 | ||
2015 |
$ | 53 | ||
2016 |
$ | 195 | ||
|
|
|||
Total |
$ | 300 | ||
|
|
|
In millions | 2011 | % of Revenue |
2010 | % of Revenue |
2009 | % of Revenue |
||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Americas (1) |
$ | 1,436 | 61 | % | $ | 1,166 | 60 | % | $ | 981 | 57 | % | ||||||||||||
EMEA |
548 | 23 | % | 442 | 23 | % | 430 | 25 | % | |||||||||||||||
APJ |
378 | 16 | % | 328 | 17 | % | 298 | 18 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
2,362 | 100 | % | 1,936 | 100 | % | 1,709 | 100 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
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|
|
|||||||||||||
Segment gross margin |
||||||||||||||||||||||||
Americas |
837 | 58 | % | 702 | 60 | % | 570 | 58 | % | |||||||||||||||
EMEA |
281 | 51 | % | 232 | 52 | % | 230 | 53 | % | |||||||||||||||
APJ |
175 | 46 | % | 154 | 47 | % | 138 | 46 | % | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total gross margin |
1,293 | 55 | % | 1,088 | 56 | % | 938 | 55 | % | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Selling, general and administrative expenses |
663 | 28 | % | 526 | 27 | % | 483 | 28 | % | |||||||||||||||
Research and development expenses |
174 | 7 | % | 147 | 8 | % | 117 | 7 | % | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total income from operations |
$ | 456 | 19 | % | $ | 415 | 21 | % | $ | 338 | 20 | % | ||||||||||||
|
|
|
|
|
|
(1) |
The Americas region includes revenue from the United States of $1,315 million in 2011, $1,059 million in 2010 and $871 million in 2009. |
In millions | 2011 | 2010 | 2009 | |||||||||
Products (software and hardware)(1) |
$ | 1,122 | $ | 933 | $ | 772 | ||||||
Consulting services |
695 | 536 | 497 | |||||||||
Maintenance services |
545 | 467 | 440 | |||||||||
|
|
|
|
|
|
|||||||
Total services |
1,240 | 1,003 | 937 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
$ | 2,362 | $ | 1,936 | $ | 1,709 | ||||||
|
|
|
|
|
|
(1) |
Our data warehousing software and hardware products are often sold and delivered together in the form of a "node" of capacity as an integrated technology solution. Accordingly, it is impracticable to provide the breakdown of revenue from various types of software and hardware products. |
In millions | 2011 | 2010 | ||||||
United States |
$ | 100 | $ | 87 | ||||
Americas (excluding United States) |
3 | 2 | ||||||
EMEA |
4 | 4 | ||||||
APJ |
13 | 12 | ||||||
|
|
|
|
|||||
Property and equipment, net |
$ | 120 | $ | 105 | ||||
|
|
|
|
|
In millions | ||||
Cash and cash equivalents |
$ | 26 | ||
Accounts receivables |
22 | |||
Goodwill |
386 | |||
Intangible assets |
123 | |||
Other assets |
5 | |||
Deferred revenue |
(25 | ) | ||
Other liabilities |
(12 | ) | ||
|
|
|||
Total purchase price |
$ | 525 | ||
|
|
Dollars in millions | Fair Value | Weighted Average Useful Life | ||||
Customer relationships - subscription, hosting, maintenance and perpetual software |
$ | 37 | 10 years | |||
Customer relationships - professional services |
15 | 6 years | ||||
Developed technology |
61 | 7 years | ||||
Trademarks/trade names |
10 | 10 years | ||||
|
|
|||||
Total intangible assets |
$ | 123 | 8 years | |||
|
|
In millions | ||||
Cash and cash equivalents |
$ | 14 | ||
Goodwill |
221 | |||
Intangible assets |
50 | |||
Other assets |
13 | |||
Deferred revenue |
(3 | ) | ||
|
|
|||
Total purchase price |
$ | 295 | ||
|
|
Dollars in millions | Fair Value | Weighted Average Useful Life | ||||
Developed technology |
$ | 40 | 5 years | |||
In-process research and development |
5 | 5 years | ||||
Customer relationships |
3 | 4 years | ||||
Trademarks/trade names |
1 | 5 years | ||||
Non-compete agreements |
1 | 2 years | ||||
|
|
|||||
Total intangible assets |
$ | 50 | 5 years | |||
|
|
In millions | Revenue | Net Income | ||||||
Actual impact of Aprimo and Aster Data results for the twelve months ended December 31, 2011 |
$ | 72 | ($ | 13 | ) | |||
Pro forma condensed combined results for the twelve months ended December 31, 2011 |
$ | 2,387 | $ | 357 | ||||
Pro forma condensed combined results for the twelve months ended December 31, 2010 |
$ | 2,007 | $ | 250 |
|
In millions, except per share amounts | First | Second | Third | Fourth | ||||||||||||
2011 |
||||||||||||||||
Total revenues |
$ | 506 | $ | 581 | $ | 602 | $ | 673 | ||||||||
Gross margin |
$ | 275 | $ | 316 | $ | 328 | $ | 374 | ||||||||
Operating income |
$ | 91 | $ | 110 | $ | 122 | $ | 133 | ||||||||
Net income |
$ | 65 | $ | 103 | $ | 87 | $ | 98 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.39 | $ | 0.61 | $ | 0.52 | $ | 0.59 | ||||||||
Diluted |
$ | 0.38 | $ | 0.60 | $ | 0.51 | $ | 0.57 | ||||||||
2010 |
||||||||||||||||
Total revenues |
$ | 429 | $ | 470 | $ | 489 | $ | 548 | ||||||||
Gross margin |
$ | 236 | $ | 268 | $ | 279 | $ | 305 | ||||||||
Operating income |
$ | 86 | $ | 106 | $ | 106 | $ | 117 | ||||||||
Net income |
$ | 67 | $ | 74 | $ | 75 | $ | 85 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.40 | $ | 0.44 | $ | 0.45 | $ | 0.51 | ||||||||
Diluted |
$ | 0.39 | $ | 0.44 | $ | 0.44 | $ | 0.50 |
|
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Description |
Balance at Beginning of Period |
Additions Charged to Costs & Expenses |
Charged to Other Accounts |
Deductions | Balance at End of Period |
|||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||
Year ended December 31, 2011 |
$ | 9 | $ | 5 | $ | 0 | $ | 1 | $ | 13 | ||||||||||
Year ended December 31, 2010 |
$ | 9 | $ | 0 | $ | 0 | $ | 0 | $ | 9 | ||||||||||
Year ended December 31, 2009 |
$ | 11 | $ | 1 | $ | 0 | $ | 3 | $ | 9 |
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