TERADATA CORP /DE/, 10-Q filed on 5/6/2011
Quarterly Report
Document and Entity Information
In Millions
3 Months Ended
Mar. 31, 2011
Apr. 29, 2011
Document and Entity Information
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
2011-03-31 
 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
tdc 
 
Entity Registrant Name
TERADATA CORP /DE/ 
 
Entity Central Index Key
0000816761 
 
Current Fiscal Year End Date
12/31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
169 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Revenue
 
 
Product revenue
$ 235 1
$ 200 1
Service revenue
271 
229 
Total revenue
506 
429 
Costs and operating expenses
 
 
Cost of products
79 
72 
Cost of services
152 
121 
Selling, general and administrative expenses
150 
118 
Research and development expenses
34 
32 
Total costs and operating expenses
415 
343 
Income from operations
91 
86 
Other expense, net
(1)
Income before income taxes
90 
86 
Income tax expense
25 
19 
Net income
65 
67 
Net income per weighted average common share
 
 
Basic
0.39 
0.40 
Diluted
$ 0.38 
$ 0.39 
Weighted average common shares outstanding
 
 
Basic
168 
168 
Diluted
172 
171 
Condensed Consolidated Balance Sheets (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
Assets
 
 
Cash and cash equivalents
$ 778 
$ 883 
Accounts receivable, net
467 
402 
Inventories
66 
65 
Other current assets
56 
56 
Total current assets
1,367 
1,406 
Property and equipment, net
111 
105 
Capitalized software, net
125 
116 
Goodwill
516 
136 
Acquired intangible assets
131 
12 
Deferred income taxes
62 
59 
Other assets
47 
49 
Total assets
2,359 
1,883 
Liabilities and stockholders' equity
 
 
Accounts payable
98 
102 
Payroll and benefits liabilities
99 
134 
Deferred revenue
400 
263 
Other current liabilities
63 
70 
Total current liabilities
660 
569 
Long-term debt
300 
Pension and other postemployment plan liabilities
83 
85 
Other liabilities
42 
40 
Total liabilities
1,085 
694 
Commitments and contingencies (Note 7)
 
 
Stockholders' equity
 
 
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding at March 31, 2011 and December 31, 2010
Common stock: par value $0.01 per share, 500.0 shares authorized, 185.5 and 184.9 shares issued at March 31, 2011 and December 31, 2010, respectively
Paid-in capital
706 
690 
Treasury stock: 16.8 shares at March 31, 2011 and December 31, 2010
(399)
(399)
Retained earnings
949 
884 
Accumulated other comprehensive income
16 
12 
Total stockholders' equity
1,274 
1,189 
Total liabilities and stockholders' equity
$ 2,359 
$ 1,883 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Mar. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
100 
100 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
500 
500 
Common stock, shares issued
186 
185 
Treasury stock, shares
17 
17 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Operating activities
 
 
Net income
$ 65 
$ 67 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
18 
14 
Stock-based compensation expense
Excess tax benefit from stock-based compensation
(3)
(1)
Deferred income taxes
Changes in assets and liabilities:
 
 
Receivables
(43)
52 
Inventories
(1)
(10)
Current payables and accrued expenses
(49)
(67)
Deferred revenue
113 
72 
Other assets and liabilities
(9)
(3)
Net cash provided by operating activities
106 
138 
Investing activities
 
 
Expenditures for property and equipment
(8)
(6)
Additions to capitalized software
(19)
(15)
Business acquisitions and other investing activities, net
(499)
Net cash used in investing activities
(526)
(21)
Financing activities
 
 
Proceeds from credit facility borrowings
300 
Repurchases of common stock
(71)
Excess tax benefit from stock-based compensation
Other financing activities, net
Net cash provided by (used in) financing activities
311 
(65)
Effect of exchange rate changes on cash and cash equivalents
(1)
(Decrease) increase in cash and cash equivalents
(105)
51 
Cash and cash equivalents at beginning of period
883 
661 
Cash and cash equivalents at end of period
$ 778 
$ 712 
Basis of Presentation
Basis of Presentation

1. Basis of Presentation

These statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the results of operations, financial position and cash flows of Teradata Corporation ("Teradata" or the "Company") for the interim periods presented herein. The year-end 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teradata's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the "2010 Annual Report"). The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year. Certain prior-year amounts have been reclassified to conform to the 2011 presentation.

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-contact 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 include application software and essential services, is then recognized utilizing the percentage-of-completion method or completed-contract methods discussed above.

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 will 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.

New Accounting Pronouncements
New Accounting Pronouncements

2. New Accounting Pronouncements

Accounting standards updates not effective until after March 31, 2011, are not expected to have a material impact on the Company's consolidated financial position or results of operations.

Supplemental Financial Information
Supplemental Financial Information

3. Supplemental Financial Information

 

     Three Months Ended
March 31,
 
In millions    2011      2010  

Comprehensive Income

     

Net income

   $ 65       $ 67   

Other comprehensive income, net of tax:

     

Net change in unrealized components of defined benefit plans, net of tax

     2         0   

Currency translation adjustments

     2         1   
                 

Total comprehensive income

   $ 69       $ 68   
                 
     As of  
In millions    March 31,
2011
     December 31,
2010
 

Inventories

     

Finished goods

   $ 38       $ 39   

Service parts

     28         26   
                 

Total inventories

   $ 66       $ 65   
                 
Goodwill And Acquired Intangible Assets
Goodwill And Acquired Intangible Assets

4. 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
March 31,
2011
 

Goodwill

           

Americas

   $ 85       $ 228       $ 1       $ 314   

EMEA

     17         86         0         103   

APJ

     34         65         0         99   
                                   

Total goodwill

   $ 136       $ 379       $ 1       $ 516   
                                   

The change in goodwill for the three months ended March 31, 2011 was primarily due to the acquisition of Aprimo, Inc. ("Aprimo"), which was completed during the period. There was no change in goodwill for the three months ended March 31, 2010.

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)
     March 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         79         (8     18         (6

Customer relationships

     4 to 10         52         (2     0         0   

Trademarks/trade names

             10         0        0         0   
                                     

Total

     4 to 10         141         (10     18         (6
                                     

The increase in acquired intangible assets since December 31, 2010 was due to developed technology, trademark/trade name and customer relationship assets added through the Aprimo acquisition. 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:

 

     Three Months  Ended
March 31, 2011
     For the year ended (estimated)  
In millions       2011      2012      2013      2014      2015  

Amortization expense

   $ 4       $ 19       $ 20       $ 19       $ 19       $ 15   
Income Taxes
Income Taxes

5. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. 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 forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that apply a broad range of statutory income tax rates, certain of which are less than the U.S. statutory rate.

The effective tax rate for the three months ended March 31, 2011 and March 31, 2010 was 28% and 22%, respectively. The tax rate for the three months ended March 31, 2011 was not impacted by any material discrete tax adjustments. The tax rate for the three months ended March 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.

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

6. 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. To mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting 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 Condensed Consolidated Balance Sheet at their fair value. The fair values of foreign exchange contracts are based on market spot and forward exchange rates. As these fair value amounts relate to open foreign exchange contracts which have not yet reached maturity, they represent possible gains or losses 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 instrument's fair value. Across its portfolio of contracts, Teradata has both long and short positions relative to the U.S. dollar. As a result, Teradata's net exposure 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 $84 million ($34 million on a net basis) at March 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 March 31, 2011 and December 31, 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 three months ended March 31, 2011 and March 31, 2010. 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.

Commitments and Contingencies
Commitments and Contingencies

7. 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, 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. During 2008 the Company shared evidence with the Justice Department of questionable conduct that the Company uncovered and is continuing to cooperate with the Justice Department in its investigation, and is in 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 are participating 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 March 31, 2011, the maximum future payment obligation of this guaranteed value and the associated liability balance was $3 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 three months ended March 31:

 

In millions    2011     2010  

Warranty reserve liability

    

Beginning balance at January 1

   $ 6      $ 5   

Provisions for warranties issued

     3        3   

Settlements (in cash or in kind)

     (4     (3
                

Balance at March 31

   $ 5      $ 5   
                

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 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.

Fair Value Measurements
Fair Value Measurements

8. 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 foreign exchange currency contracts in effect at March 31, 2011 and December 31, 2010 had no material fair value gains and losses. 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 at March 31, 2011 were as follows:

 

            Fair Value Measurements at Reporting Date Using  
In millions    March 31, 2011      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Money market funds

   $ 342       $ 342       $ 0       $ 0   
                                   

The Company's assets and liabilities measured at fair value on a recurring basis 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)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Money market funds

   $ 534       $ 534       $ 0       $ 0   
                                   
Debt
Debt

9. 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 March 31, 2011, the Company was in compliance with all covenants of the Credit Facility.

On January 21, 2011, the Company borrowed $300 million from the Credit Facility in connection with its acquisition of Aprimo. As of March 31, 2011, $300 million in borrowings remained outstanding, and carried an interest rate of 0.57% based upon a 30-day LIBOR rate plus a 32 basis point spread. The Company had no additional funds available under the Credit Facility as of March 31, 2011. For additional information concerning the Credit Facility, refer to Note 13.

Earnings Per Share
Earnings Per Share

10. 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 resulting from stock options and unvested restricted stock awards.

The components of basic and diluted earnings per share are as follows:

 

     Three Months Ended
March 31,
 
In millions, except per share amounts    2011      2010  

Net income available for common stockholders

   $ 65       $ 67   
                 

Weighted average outstanding shares of common stock

     168.4         167.8   

Dilutive effect of employee stock options and restricted stock

     3.4         2.7   
                 

Common stock and common stock equivalents

     171.8         170.5   
                 

Earnings per share:

     

Basic

   $ 0.39       $ 0.40   

Diluted

   $ 0.38       $ 0.39   

Employee stock options to purchase 1.2 million shares for the three months ended March 31, 2010 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 for the respective periods and, therefore, the effect would have been anti-dilutive. No stock options were excluded from the computation of diluted earnings per share for the three months ended March 31, 2011.

Segment and Other Supplemental Information
Segment and Other Supplemental Information

11. Segment and Other Supplemental Information

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 gross margin for the Company:

 

     Three Months Ended
March 31,
 
In millions    2011      2010  

Revenue

     

Americas

   $ 307       $ 252   

EMEA

     125         106   

APJ

     74         71   
                 

Total revenue

     506         429   
                 

Gross margin

     

Americas

     175         146   

EMEA

     70         57   

APJ

     30         33   
                 

Total gross margin

     275         236   
                 

Selling, general and administrative expenses

     150         118   

Research and development expenses

     34         32   
                 

Total income from operations

   $ 91       $ 86   
                 

The following table presents revenue by product and services for the Company:

 

Business Combinations
Business Combinations

12. Business Combinations

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 is being integrated into Teradata's operations, and the Aprimo organization will support Teradata's applications strategy, including development, marketing, sales and services. The purpose of this acquisition is to advance Teradata's position in integrated marketing management, building on Aprimo's established and well-positioned business. Aprimo's operations are being integrated into, and its actual results will be 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 closing working capital and 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, (see Note 9). Additionally, for the three months ended March 31, 2011, Teradata recognized approximately $3 million in acquisition-related expenses, which were recorded as General and Administrative expenses.

 

Preliminary Purchase Price Allocation

Pursuant to our business combinations accounting policy, the total preliminary purchase price for Aprimo was allocated to the net tangible and intangible assets based upon their preliminary fair values as of January 21, 2011 as set forth below. The excess of the preliminary purchase price over the preliminary net tangible and intangible assets was recorded as goodwill, which represents synergies of combining the businesses. The preliminary allocation of the purchase price was based upon a preliminary valuation and certain of our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the purchase price allocation that are not yet finalized relate to the fair values of certain deferred taxes, tax contingencies and residual goodwill. It is expected that none of the goodwill will be deductible for tax purposes. We expect to continue to obtain information to assist us in determining the fair value related to certain of the net assets acquired at the acquisition date during the measurement period. Our preliminary purchase price allocation for Aprimo is as follows.

 

In millions       

Cash and cash equivalents

   $ 26   

Accounts receivables

     22   

Goodwill

     379   

Intangible assets

     123   

Other assets

     12   

Deferred revenue

     (25

Other liabilities

     (12
        

Total preliminary purchase price

   $ 525   
        

Preliminary 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    Preliminary
Fair Value
     Weighted Average
Useful Life
 

Customer relationships—subscription, hosting, maintenance and perpetual software

   $ 37         10 years   

Customer relationships—professional services

     15         4 years   

Developed technology

     61         7 years   

Trademarks/trade names

     10         10 years   
           

Total intangible assets

   $ 123         8 years   
           

Unaudited Supplemental Financial Information

The following table presents the unaudited amounts of Aprimo revenue and income included in Teradata's condensed consolidated results of operations since the acquisition on January 21, 2011, as well as pro forma results of Teradata (including Aprimo) for the three month periods ended March 31, 2011 and March 31, 2010, had the acquisition 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 acquisition had taken place at the beginning of fiscal 2010.

The actual impact of results from Aprimo from January 21, 2011 through March 31, 2011 included:

 

   

a $7 million reduction in the recognition of deferred revenue and a $1 million reduction in the recognition of associated cost of revenue for which there was no further performance obligation, and

 

   

a $3 million increase in amortization of intangible assets as a result of purchase price allocations.

 

The unaudited pro forma results for the three months ended March 31, 2011 include:

 

   

$1 million in additional amortization charges for acquired intangible assets,

 

   

$5 million in additional revenue assuming that the majority of the required acquisition-related revenue eliminations had taken place in the prior-year period, and

 

   

$4 million in eliminated transaction and integration expenses as if those costs had been recognized in the prior-year period.

The unaudited pro forma results for the three months ended March 31, 2010 include:

 

   

$4 million in additional amortization charges for acquired intangible assets,

 

   

$8 million in elimination of deferred revenue recognition and $1 million in associated elimination of deferred cost of revenue for which there was no further performance obligation,

 

   

$4 million in transaction and integration expenses associated with the acquisition, and

 

   

$1 million in interest expense for acquisition-related borrowings from the Company's revolving credit facility.

Certain of these adjustments reflect preliminary estimates.

 

In millions    Revenue      Net Income  

Actual impact of Aprimo results from 1/21/2011 to 3/31/2011

   $ 9       ($ 9

Pro forma condensed combined results from 1/1/2011 to 3/31/2011

   $ 517       $ 70   

Pro forma condensed combined results from 1/1/2010 to 3/31/2010

   $ 443       $ 58   
Subsequent Events
Subsequent Events

13. Subsequent Events

On April 5, 2011, Teradata completed its acquisition of the remaining stock of Aster Data Systems, Inc. ("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, unstructured data. The combination of Teradata and Aster Data technologies will enable businesses to perform better analytics on large sets of unstructured data, also known as "big data."

The aggregate consideration payable with respect to all of the outstanding stock and equity interests (including all outstanding warrants and vested stock options) of Aster Data is approximately $260 million, after adjustment for Aster Data's net indebtedness, transaction expenses and any severance or other change-in-control related liabilities. The aggregate consideration payable excludes the value of Teradata's pre-existing 11.2% equity investment in Aster Data and cash retention payments to be made following the completion of the acquisition in lieu of Aster Data's unvested and committed equity awards, which amounts will generally be paid on pre-existing vesting schedules on a quarterly basis over the next four years subject to employees meeting the retention and other terms and conditions thereof.

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. 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 Teradata's acquisition of Aster Data closed on April 5, 2011, management is still determining the purchase price allocation. However, the substantial majority of the purchase price is expected to be allocated to goodwill and intangible assets. Additionally, the pro forma impact of the Aster Data acquisition on the Company's 2011 results of operations excluding acquisition and integration-related costs, is not expected to be material.

On April 21, 2011, the Company repaid $280 million of the outstanding balance of its revolving Credit Facility borrowings (see Note 9).

Basis of Presentation (Policy)
Revenue Recognition
Supplemental Financial Information (Tables)

     Three Months Ended
March 31,
 
In millions    2011      2010  

Comprehensive Income

     

Net income

   $ 65       $ 67   

Other comprehensive income, net of tax:

     

Net change in unrealized components of defined benefit plans, net of tax

     2         0   

Currency translation adjustments

     2         1   
                 

Total comprehensive income

   $ 69       $ 68   
                 

   As of  
In millions    March 31,
2011
     December 31,
2010
 

Inventories

     

Finished goods

   $ 38       $ 39   

Service parts

     28         26   
                 

Total inventories

   $ 66       $ 65   
                 
Goodwill And Acquired Intangible Assets (Tables)
In millions    Balance
December 31,
2010
     Additions      Currency
Translation
Adjustments
     Balance
March 31,
2011
 

Goodwill

           

Americas

   $ 85       $ 228       $ 1       $ 314   

EMEA

     17         86         0         103   

APJ

     34         65         0         99   
                                   

Total goodwill

   $ 136       $ 379       $ 1       $ 516   
                                   
     Original
Amortization
Life (in
Years)
     March 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         79         (8     18         (6

Customer relationships

     4 to 10         52         (2     0         0   

Trademarks/trade names

             10         0        0         0   
                                     

Total

     4 to 10         141         (10     18         (6
                                     
     Three Months  Ended
March 31, 2011
     For the year ended (estimated)  
In millions       2011      2012      2013      2014      2015  

Amortization expense

   $ 4       $ 19       $ 20       $ 19       $ 19       $ 15   
Commitments and Contingencies (Tables)
Schedule of Warranty Reserve Liability
In millions    2011     2010  

Warranty reserve liability

    

Beginning balance at January 1

   $ 6      $ 5   

Provisions for warranties issued

     3        3   

Settlements (in cash or in kind)

     (4     (3
                

Balance at March 31

   $ 5      $ 5   
                
Fair Value Measurements (Tables)
Schedule of Assets and Liabilities Measured at Fair Value on a Recurring Basis and Subject to Fair Value Disclosure Requirements

            Fair Value Measurements at Reporting Date Using  
In millions    March 31, 2011      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Money market funds

   $ 342       $ 342       $ 0       $ 0   
                                   

            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)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Money market funds

   $ 534       $ 534       $ 0       $ 0   
                                   
Earnings Per Share (Tables)
Components of Basic and Diluted Earnings Per Share
     Three Months Ended
March 31,
 
In millions, except per share amounts    2011      2010  

Net income available for common stockholders

   $ 65       $ 67   
                 

Weighted average outstanding shares of common stock

     168.4         167.8   

Dilutive effect of employee stock options and restricted stock

     3.4         2.7   
                 

Common stock and common stock equivalents

     171.8         170.5   
                 

Earnings per share:

     

Basic

   $ 0.39       $ 0.40   

Diluted

   $ 0.38       $ 0.39   
Segment and Other Supplemental Information (Tables)
     Three Months Ended
March 31,
 
In millions    2011      2010  

Revenue

     

Americas

   $ 307       $ 252   

EMEA

     125         106   

APJ

     74         71   
                 

Total revenue

     506         429   
                 

Gross margin

     

Americas

     175         146   

EMEA

     70         57   

APJ

     30         33   
                 

Total gross margin

     275         236   
                 

Selling, general and administrative expenses

     150         118   

Research and development expenses

     34         32   
                 

Total income from operations

   $ 91       $ 86   
                 
Business Combinations (Tables)
In millions       

Cash and cash equivalents

   $ 26   

Accounts receivables

     22   

Goodwill

     379   

Intangible assets

     123   

Other assets

     12   

Deferred revenue

     (25

Other liabilities

     (12
        

Total preliminary purchase price

   $ 525   
        
Dollars in millions    Preliminary
Fair Value
     Weighted Average
Useful Life
 

Customer relationships—subscription, hosting, maintenance and perpetual software

   $ 37         10 years   

Customer relationships—professional services

     15         4 years   

Developed technology

     61         7 years   

Trademarks/trade names

     10         10 years   
           

Total intangible assets

   $ 123         8 years   
           
In millions    Revenue      Net Income  

Actual impact of Aprimo results from 1/21/2011 to 3/31/2011

   $ 9       ($ 9

Pro forma condensed combined results from 1/1/2011 to 3/31/2011

   $ 517       $ 70   

Pro forma condensed combined results from 1/1/2010 to 3/31/2010

   $ 443       $ 58   
Supplemental Financial Information (Schedule of Comprehensive Income) (Details) (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Supplemental Financial Information
 
 
Net income
$ 65 
$ 67 
Net change in unrealized components of defined benefit plans, net of tax
Currency translation adjustment
Total comprehensive income
$ 69 
$ 68 
Supplemental Financial Information (Schedule of Inventory) (Details) (USD $)
In Millions
Mar. 31, 2011
Dec. 31, 2010
Supplemental Financial Information
 
 
Finished goods
$ 38 
$ 39 
Service parts
28 
26 
Total inventories
$ 66 
$ 65 
Goodwill And Acquired Intangible Assets (Schedule of Goodwill By Operating Segment) (Details) (USD $)
In Millions
Mar. 31, 2011
Goodwill Q1 beginning balance
$ 516 
Goodwill Q1 ending balance
516 
Americas [Member]
 
Goodwill Q1 beginning balance
85 
Additions
228 
Currency translation adjustments
Goodwill Q1 ending balance
314 
EMEA [Member]
 
Goodwill Q1 beginning balance
17 
Additions
86 
Currency translation adjustments
Goodwill Q1 ending balance
103 
APJ [Member]
 
Goodwill Q1 beginning balance
34 
Additions
65 
Currency translation adjustments
Goodwill Q1 ending balance
99 
Total goodwill [Member]
 
Goodwill Q1 beginning balance
136 
Additions
379 
Currency translation adjustments
Goodwill Q1 ending balance
$ 516 
Goodwill And Acquired Intangible Assets (Schedules of Gross Carrying Amount and Accumulated Amortization for Teradata's Identifiable Intangible Assets and Aggregate Amortization Expense for Identifiable Intangible Assets) (Details)
In Millions
Year Ended
Dec. 31,
3 Months Ended
Mar. 31,
3 Months Ended
Mar. 31, 2011
2015
2014
2013
2012
2011
2011
2011
2011
2011
2011
2011
Mar. 31, 2011
Dec. 31, 2010
Mar. 31, 2011
Dec. 31, 2010
3 Months Ended
Mar. 31, 2011
Dec. 31, 2010
Mar. 31, 2011
Dec. 31, 2010
Original Amortization Life (in years)
 
 
 
 
 
 
10 
10 
 
 
 
 
10 
 
 
 
Gross Carrying Amount
 
 
 
 
 
 
 
 
 
 
 
 
79 
18 
52 
10 
141 
18 
Accumulated Amortization
 
 
 
 
 
 
 
 
 
 
 
 
(8)
(6)
(2)
(10)
(6)
Amortization expense - Actual 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense - 2011
 
 
 
 
 
19 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense - 2012
 
 
 
 
20 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense - 2013
 
 
 
19 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense - 2014
 
 
19 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense - 2015
 
15 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes (Narrative) (Details)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Income Taxes
 
 
Tax benefit from audit settlement in the first quarter of 2010
 
Effective tax rate
0.28 
0.22 
Derivative Instruments and Hedging Activities (Narrative) (Details)
3 Months Ended
Mar. 31,
2011
2010
Dec. 31, 2010
Derivative Instruments and Hedging Activities
 
 
 
Notional amount of foreign exchange forward contracts
84,000,000 
 
91,000,000 
Notional amount of foreign exchange forward contracts on a net basis
34,000,000 
 
51,000,000 
Fair value derivative liabilities
 
Fair value derivative assets
 
Fair value gain (loss) on foreign currency forward contracts
 
Commitments and Contingencies (Narrative and Schedule of Warranty Reserve Liability) (Details) (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Commitments and Contingencies
 
 
Current best estimate of probable liabilities related to government investigation
 
Maximum future payment obligation of the guaranteed value and associated liabilities
 
Beginning balance at January 1
Provisions for warranties issued
Settlements (in cash or kind)
(4)
(3)
Balance at March 31
$ 5 
$ 5 
Fair Value Measurements (Narrative and Schedule of Assets and Liabilities Measured at Fair Value on a Recurring Basis and Subject to Fair Value Disclosure Requirements) (Details) (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
Money market funds
$ 342 
$ 534 
Fair value gain (loss) on foreign exchange currency contracts
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
 
 
Money market funds
342 
534 
Significant Other Observable Inputs (Level 2) [Member]
 
 
Money market funds
Significant Unobservable Inputs (Level 3) [Member]
 
 
Money market funds
$ 0 
$ 0 
Debt (Details) (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Debt
 
Credit facility maximum borrowing capacity
$ 300 
Borrowings from credit facility
300 
Credit facility outstanding balance
300 
Credit facility floating interest rate on borrowings
0.0057 
Interest rate spread over 30-day LIBOR
0.0032 
Credit facility agreement expiration date
September 30, 2012 
Credit facility remaining borrowing capacity
$ 0 
Earnings Per Share (Details) (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Earnings Per Share
 
 
Net income available for common stockholders
$ 65 
$ 67 
Weighted average outstanding shares of common stock
168 
168 
Dilutive effect of employee stock options and restricted stock
Common stock and common stock equivalents
172 
171 
Basic
0.39 
0.40 
Diluted
$ 0.38 
$ 0.39 
Anti-dilutive securities excluded from computation of earnings per share, amount
Segment and Other Supplemental Information (Schedule of Regional Segment Revenue and Segment Gross Margin) (Details) (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Total revenue
$ 506 
$ 429 
Total gross margin
275 
236 
Selling, general and administrative expenses
150 
118 
Research and development expenses
34 
32 
Total income from operations
91 
86 
Americas [Member]
 
 
Total revenue
307 
252 
Total gross margin
175 
146 
EMEA [Member]
 
 
Total revenue
125 
106 
Total gross margin
70 
57 
APJ [Member]
 
 
Total revenue
74 
71 
Total gross margin
30 
33 
Selling, General and Administrative Expenses [Member]
 
 
Selling, general and administrative expenses
150 
118 
Research and Development Expenses [Member]
 
 
Research and development expenses
$ 34 
$ 32 
Segment and Other Supplemental Information (Schedule of Revenue by Product and Services) (Details) (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Segment and Other Supplemental Information
 
 
Products (software and hardware)
$ 235 1
$ 200 1
Consulting services
145 
117 
Maintenance services
126 
112 
Total services
271 
229 
Total revenue
$ 506 
$ 429 
Business Combinations (Preliminary Purchase Price Allocation) (Details) (Aprimo [Member], USD $)
In Millions
Jan. 21, 2011
Cash and cash equivalents
$ 26 
Accounts receivables
22 
Goodwill
379 
Intangible assets
123 
Other assets
12 
Deferred revenue
(25)
Other liabilities
(12)
Total preliminary purchase price
$ 525 
Business Combinations (Preliminary Valuations of Intangible Assets Acquired) (Details) (Aprimo [Member], USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Preliminary Fair Value
$ 123 
Finite-Lived Intangible Assets, Useful Life (in years)
Aprimo [Member] | Customer relationships-subscription, hosting, maintenance and perpetual software [Member]
 
Preliminary Fair Value
37 
Finite-Lived Intangible Assets, Useful Life (in years)
10 
Aprimo [Member] | Customer relationships - professional services [Member]
 
Preliminary Fair Value
15 
Finite-Lived Intangible Assets, Useful Life (in years)
Aprimo [Member] | Developed technology [Member]
 
Preliminary Fair Value
61 
Finite-Lived Intangible Assets, Useful Life (in years)
Aprimo [Member] | Trademarks/trade names [Member]
 
Preliminary Fair Value
$ 10 
Finite-Lived Intangible Assets, Useful Life (in years)
10 
Business Combinations (Narrative and Unaudited Supplemental Financial Information) (Details)
In Millions
3 Months Ended
Mar. 31,
3 Months Ended
Mar. 31, 2011
Jan. 21, 2011
2011
2010
Percentage of stock acquired from Aprimo merger
 
 
 
Cash paid in acquisition
 
525 
 
 
Acquisition-related expenses
 
 
 
Purchase accounting adjustment eliminated revenue
 
 
 
Purchase accounting adjustment eliminated cost of revenue
 
 
 
Purchase accounting adjustment amortization expense
 
 
 
Pro forma additional amortization charges for intangible assets
 
 
Pro forma revenue adjustment
 
 
 
Pro forma elimination of deferred revenue recognition
 
 
 
Pro forma elimination of deferred cost of revenue
 
 
 
Pro forma elimination of transaction and integration expenses
 
 
 
Pro forma business combination transaction and integration expense adjustment
 
 
 
Pro forma interest expense adjustment
 
 
 
Revenue
 
 
 
Net Income
(9)
 
 
 
Revenue
 
 
517 
443 
Net income
 
 
70 
58 
Subsequent Events (Details)
In Millions
Apr. 21, 2011
Apr. 05, 2011
Acquisition date of business
 
April 5, 2011 
Aggregate consideration payable
 
260 
Pre-existing equity investment
 
0.112 
Service period for cash retention award (years)
 
Loan used for acquisition of Aster Data
 
300 
Term of loan
 
Repayment terms
 
The term loan is payable in quarterly installments, commencing on June 30, 2012, with all remaining principal due on April 5, 2016. 
Repayment of credit facility borrowings
(280)