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Note 1 Description of Business, Separation, Basis of Presentation and Significant Accounting Policies
Description of the Business. Teradata Corporation ("Teradata" or "the Company") provides data warehousing 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.
The Separation. On August 27, 2007, the Board of Directors of NCR Corporation ("NCR"), the Company's former parent, approved the separation of NCR into two independent, publicly traded companies through the distribution of 100% of its Teradata data warehousing business to shareholders of NCR (the "Separation").
To effect the Separation, Teradata Corporation, a Delaware corporation, was formed on March 27, 2007, as a wholly-owned subsidiary of NCR. Immediately prior to the Separation, the assets and liabilities of the Teradata data warehousing business of NCR were transferred to Teradata Corporation in return for 180.7 million shares of Teradata Corporation common shares. NCR accomplished the Separation through a distribution of one share of Teradata Corporation common stock for each share of NCR common stock on September 30, 2007, to NCR shareholders of record as of September 14, 2007.
During the year ended December 31, 2008, the Company recorded Separation-related adjustments of $25 million and $2 million to additional paid-in capital and other comprehensive income, respectively. These adjustments were primarily made to reflect certain deferred tax assets that were not initially recorded at the Separation. These adjustments had no impact on net income or cash flows for any periods presented.
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, 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: (a) persuasive evidence of an arrangement exists; (b) the products or services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) 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. 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 accounted for upon sell-through to the end customer.
Substantially all of Teradata's solutions contain software that is more than incidental to the hardware and services. The typical solution requires no significant production, modification or customization of the software or hardware, and the software is not essential to the functionality of the hardware. Therefore, hardware and related services are considered non-software deliverables. For software and software-related deliverables, Teradata allocates revenue to each software deliverable based upon its fair value as determined by vendor-specific objective evidence ("VSOE") using the residual method as discussed below. VSOE of fair value is based upon the normal pricing and discounting practices for those products and services when sold separately. For non-software related deliverables, fair value is based upon Verifiable Objective Evidence ("VOE"). VOE is based on the price when similar products or services are sold separately by Teradata or other companies. These elements often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware using the residual method described below. 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, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, no revenue is recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
For arrangements involving multiple deliverables, where the deliverables include software and non-software products and services, Teradata evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a stand-alone basis; (b) whether there is objective and reliable evidence of the fair value of the undelivered items; and (c) 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. If objective and reliable evidence of fair value exists for all units of accounting in the arrangement, revenue is allocated to each unit of accounting based on relative fair values. Each unit of accounting is then accounted for under the applicable revenue recognition guidance. In situations where there is objective and reliable evidence of fair value for all undelivered elements, but not for delivered elements, the residual method is used to allocate the arrangement's consideration. Teradata does not typically have VSOE of fair value for software products. Therefore, in a substantial majority of Teradata arrangements, the residual method is used to allocate arrangement consideration. Under the residual method, the fair value 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.
Teradata uses the stated renewal rate approach in establishing VSOE of fair value for maintenance and subscriptions. Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and in line 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 reallocates revenue from the delivered elements to increase the allocation of revenue for undelivered elements to the minimum established pricing targets as supported by the renewal rates for similar customers.
Teradata also offers consulting and installation-related services to its customers, which are considered software-related. These services are rarely considered essential to the functionality of the enterprise data warehouse ("EDW") solution deliverable and there is never any software customization of the proprietary database software. VSOE of fair value for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of our customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
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, 2010, 2009 and 2008 was $25 million, $22 million and $24 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 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 12 | $ | 11 | $ | 12 | $ | 90 | $ | 69 | $ | 49 | ||||||||||||
Capitalized |
5 | 5 | 4 | 44 | 54 | 48 | ||||||||||||||||||
Amortization |
(6 | ) | (4 | ) | (5 | ) | (29 | ) | (33 | ) | (28 | ) | ||||||||||||
Ending balance at December 31 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
Valuation of Long-Lived Assets. Long-lived assets such as property and equipment and 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 if an event occurs or 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 2010, 2009 or 2008.
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 costs, 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, 2010. 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. The Company's expected volatility assumption used in the Black-Scholes option-pricing model is based on 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. Prior to the second quarter of 2008, stock repurchased through the share repurchase programs was retired. Beginning in the second quarter of 2008, stock repurchased through the share repurchase programs was 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 | 2010 | 2009 | 2008 | |||||||||
Net income available for common stockholders |
$ | 301 | $ | 254 | $ | 250 | ||||||
Weighted average outstanding shares of common stock |
167.4 | 171.9 | 178.1 | |||||||||
Dilutive effect of employee stock options and restricted stock |
3.0 | 2.0 | 1.7 | |||||||||
Common stock and common stock equivalents |
170.4 | 173.9 | 179.8 | |||||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.80 | $ | 1.48 | $ | 1.40 | ||||||
Diluted |
$ | 1.77 | $ | 1.46 | $ | 1.39 |
Options to purchase 0.6 million shares of common stock for 2010, 1.8 million shares of common stock for 2009 and 1.7 million shares of common stock for 2008 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
Multiple-Deliverable Revenue Arrangements. In October 2009, the Financial Accounting Standards Board ("FASB") issued new guidance regarding the accounting for revenue arrangements with multiple deliverables. This new guidance provides principles for allocation of consideration among its multiple-elements, allowing more alternatives in identifying and accounting for separate deliverables under an arrangement. The guidance will eliminate the residual method of allocation and require use of the relative selling price method. The guidance also introduces the best estimate selling price ("BESP") for valuing the deliverables of a bundled arrangement if vendor specific objective evidence ("VSOE") or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This guidance is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company will adopt this guidance, on a prospective basis, for applicable transactions originating or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of adopting this standard, but does not expect it to have a material impact on reported revenues.
Certain Revenue Arrangements That Include Software Elements. In October 2009, the FASB issued new guidance for revenue arrangements that include software elements. This new guidance changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software and nonsoftware elements that function together to deliver the tangible product's essential functionality will no longer be within the scope of software revenue guidance. The new guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early application is permitted. The Company will adopt this guidance, on a prospective basis, for applicable transactions originating or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of adopting this standard, but does not expect it to have a material impact on reported revenues.
Fair Value Measurements. In January 2010, the FASB issued an update to provide new disclosures, and clarifications of existing disclosures related to fair value measurements. The new disclosures will require reporting entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, in the Level 3 reconciliations, a reporting entity should present separately information about purchases, sales, issuances, and settlements. The update also clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements in Level 2 and Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
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Note 2 Supplemental Financial Information
At December 31 | ||||||||
In millions | 2010 | 2009 | ||||||
Accounts receivable |
||||||||
Trade |
$ | 408 | $ | 392 | ||||
Other |
3 | 4 | ||||||
Accounts receivable, gross |
411 | 396 | ||||||
Less: allowance for doubtful accounts |
(9 | ) | (9 | ) | ||||
Total accounts receivable, net |
$ | 402 | $ | 387 | ||||
Inventories |
||||||||
Finished goods |
$ | 39 | $ | 27 | ||||
Service parts |
26 | 20 | ||||||
Total inventories |
$ | 65 | $ | 47 | ||||
Other current assets |
||||||||
Current deferred tax assets |
$ | 31 | $ | 30 | ||||
Other |
25 | 27 | ||||||
Total other current assets |
$ | 56 | $ | 57 | ||||
Property and equipment |
||||||||
Land |
$ | 8 | $ | 8 | ||||
Buildings and improvements |
63 | 64 | ||||||
Machinery and other equipment |
213 | 192 | ||||||
Property and equipment, gross |
284 | 264 | ||||||
Less: accumulated depreciation |
(179 | ) | (169 | ) | ||||
Total property and equipment, net |
$ | 105 | $ | 95 | ||||
Other current liabilities |
||||||||
Sales and value-added taxes |
$ | 19 | $ | 17 | ||||
Other |
51 | 59 | ||||||
Total other current liabilities |
$ | 70 | $ | 76 | ||||
Accumulated other comprehensive income, net of tax |
||||||||
Currency translation adjustments |
$ | 31 | $ | 34 | ||||
Actuarial losses and prior service costs on employee benefit plans |
(19 | ) | (20 | ) | ||||
Total accumulated other comprehensive income |
$ | 12 | $ | 14 | ||||
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Note 3 Goodwill and Other Intangible Assets
The following table identifies the activity relating to goodwill by operating segment:
In millions | Balance December 31, 2009 |
Additions | Currency Translation Adjustments |
Balance December 31, 2010 |
||||||||||||
Goodwill |
||||||||||||||||
Americas |
$ | 71 | $ | 14 | $ | 0 | $ | 85 | ||||||||
EMEA |
10 | 7 | 0 | 17 | ||||||||||||
APJ |
28 | 3 | 3 | 34 | ||||||||||||
Total goodwill |
$ | 109 | $ | 24 | $ | 3 | $ | 136 | ||||||||
The change in goodwill for the twelve months ended December 31, 2010 was primarily due to an immaterial acquisition consummated during 2010, as well as changes in foreign currency exchange rates. The only change in goodwill for the twelve months ended December 31, 2009 was due to immaterial fluctuations in foreign currency exchange rates. In the fourth quarter of 2010, 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 segment was significantly in excess of their respective carrying amounts, including goodwill.
The Company's identifiable intangible assets, reported under Other Assets in the balance sheets, were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for Teradata's identifiable intangible assets were as follows:
In millions | Original Amortization Life (in Years) |
December 31, 2010 | December 31, 2009 | |||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||||||
Identifiable intangible assets |
||||||||||||||||||||
Intellectual property |
5 | 18 | (6 | ) | 6 | (3 | ) |
The increase in intellectual property since December 31, 2009 was due to software and technology assets acquired through immaterial business acquisitions.
The aggregate amortization expense (actual and estimated) for identifiable intangible assets for the following periods is:
In millions | Actual 2010 |
For the year ended (estimated) | ||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||||
Amortization expense |
$ | 2 | $ | 3 | $ | 3 | $ | 2 | $ | 2 | $ | 1 |
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Note 4 Income Taxes
For the years ended December 31, income before income taxes consisted of the following:
In millions | 2010 | 2009 | 2008 | |||||||||
Income before income taxes |
||||||||||||
United States |
$ | 272 | $ | 179 | $ | 190 | ||||||
Foreign |
142 | 155 | 148 | |||||||||
Total income before income taxes |
$ | 414 | $ | 334 | $ | 338 | ||||||
For the years ended December 31, income tax expense consisted of the following:
In millions | 2010 | 2009 | 2008 | |||||||||
Income tax expense |
||||||||||||
Current |
||||||||||||
Federal |
$ | 53 | $ | 24 | $ | 8 | ||||||
State and local |
5 | 4 | 5 | |||||||||
Foreign |
14 | 11 | 37 | |||||||||
Deferred |
||||||||||||
Federal |
35 | 30 | 60 | |||||||||
State and local |
4 | 4 | 5 | |||||||||
Foreign |
2 | 7 | (27 | ) | ||||||||
Total income tax expense |
$ | 113 | $ | 80 | $ | 88 | ||||||
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 | 2010 | 2009 | 2008 | |||||||||
Income tax expense at the U.S. federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign income tax differential |
(8.1 | %) | (11.0 | %) | (12.5 | %) | ||||||
State and local income taxes |
1.5 | % | 1.0 | % | 2.0 | % | ||||||
U.S. permanent book/tax differences |
(0.9 | %) | (0.5 | %) | 0.5 | % | ||||||
Other, net |
(0.2 | %) | (0.5 | %) | 1.0 | % | ||||||
Total income tax expense |
27.3 | % | 24.0 | % | 26.0 | % | ||||||
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 effective tax rate for the year ended December 31, 2008 included a $3 million charge to reflect a change in estimate identified in conjunction with filing the Company's 2007 U.S. federal tax return. 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 | 2010 | 2009 | ||||||
Deferred income tax assets |
||||||||
Employee pensions and other liabilities |
$ | 47 | $ | 40 | ||||
Other balance sheet reserves and allowances |
24 | 22 | ||||||
Deferred revenue |
0 | 5 | ||||||
Tax loss and credit carryforwards |
29 | 19 | ||||||
Capitalized research and development |
45 | 66 | ||||||
Other |
0 | 3 | ||||||
Total deferred income tax assets |
145 | 155 | ||||||
Deferred income tax liabilities |
||||||||
Capitalized software |
42 | 35 | ||||||
Property and equipment |
10 | 0 | ||||||
Other |
4 | 6 | ||||||
Total deferred income tax liabilities |
56 | 41 | ||||||
Total net deferred income tax assets |
$ | 89 | $ | 114 | ||||
As of December 31, 2010, Teradata had net operating loss carryforwards in the United States and certain foreign jurisdictions of approximately $17 million (tax effected), which begin to expire in 2012. In addition, Teradata has U.S. foreign tax credit carryforwards of $7 million, which will begin expiring in 2017, and Research and Development Tax Credit carryforwards of $6 million, which begin to expire in 2027.
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, 2010 the Company had not provided for federal income taxes on earnings of approximately $591 million from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both 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.
At the end of 2010, the Company's tax liability related to uncertain tax positions totaled approximately $8 million and is reflected in the "Other liabilities" section of the Company's balance sheet as a non-current liability. The entire balance would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded less than $1 million of interest accruals related to its uncertain tax liabilities as of December 31, 2010.
Below is a rollforward of the Company's liability related to uncertain tax positions at December 31:
In millions | 2010 | 2009 | ||||||
Balance at January 1 |
$ | 6 | $ | 1 | ||||
Gross increases for prior period tax positions |
1 | 2 | ||||||
Gross decreases for prior period tax positions |
(1 | ) | 0 | |||||
Gross increases for current period tax positions |
2 | 3 | ||||||
Balance at December 31 |
$ | 8 | $ | 6 | ||||
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, 2010, the Company is in the process of undergoing a U.S. federal tax examination for the 2007 and 2008 tax years, as well as tax examinations in a limited number of foreign jurisdictions; however, no material adjustments have been made nor are currently anticipated 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:
2010 | 2009 | 2008 | ||||||||||||||||||||||
In millions | Pension | Postemployment | Pension | Postemployment | Pension | Postemployment | ||||||||||||||||||
Service cost |
$ | 8 | $ | 4 | $ | 7 | $ | 4 | $ | 7 | $ | 5 | ||||||||||||
Interest cost |
4 | 2 | 3 | 2 | 4 | 3 | ||||||||||||||||||
Expected return on plan assets |
(3 | ) | 0 | (2 | ) | 0 | (3 | ) | 0 | |||||||||||||||
Settlement charge |
0 | 0 | 1 | 0 | 1 | 0 | ||||||||||||||||||
Employee contributions |
(1 | ) | 0 | (1 | ) | 0 | (1 | ) | 0 | |||||||||||||||
Amortization of actuarial loss |
1 | 0 | 1 | 0 | 0 | 3 | ||||||||||||||||||
Total costs |
$ | 9 | $ | 6 | $ | 9 | $ | 6 | $ | 8 | $ | 11 | ||||||||||||
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:
In millions | Pension | Postemployment | ||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at January 1 |
$ | 96 | $ | 89 | $ | 38 | $ | 36 | ||||||||
Service cost |
7 | 6 | 4 | 4 | ||||||||||||
Interest cost |
4 | 3 | 2 | 2 | ||||||||||||
Plan participant contributions |
1 | 1 | 0 | 0 | ||||||||||||
Amendments |
0 | 0 | (1 | ) | 0 | |||||||||||
Actuarial loss (gain) |
4 | (2 | ) | (1 | ) | 2 | ||||||||||
Benefits paid |
(7 | ) | (6 | ) | (2 | ) | (6 | ) | ||||||||
Currency translation adjustments |
6 | 5 | 0 | 0 | ||||||||||||
Benefit obligation at December 31 |
111 | 96 | 40 | 38 | ||||||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at January 1 |
45 | 36 | 0 | 0 | ||||||||||||
Actual return on plan assets |
2 | (1 | ) | 0 | 0 | |||||||||||
Company contributions |
13 | 10 | 0 | 0 | ||||||||||||
Benefits paid |
(7 | ) | (6 | ) | 0 | 0 | ||||||||||
Currency translation adjustments |
5 | 5 | 0 | 0 | ||||||||||||
Plan participant contribution |
1 | 1 | 0 | 0 | ||||||||||||
Fair value of plan assets at December 31 |
59 | 45 | 0 | 0 | ||||||||||||
Funded status (underfunded) |
($ | 52 | ) | ($ | 51 | ) | ($ | 40 | ) | ($ | 38 | ) | ||||
Amounts Recognized in the Balance Sheet |
||||||||||||||||
Current liabilities |
($ | 1 | ) | $ | 0 | ($ | 6 | ) | ($ | 6 | ) | |||||
Noncurrent liabilities |
(51 | ) | (51 | ) | (34 | ) | (32 | ) | ||||||||
Net amounts recognized |
($ | 52 | ) | ($ | 51 | ) | ($ | 40 | ) | ($ | 38 | ) | ||||
Amounts Recognized in Accumulated Other Comprehensive Income |
||||||||||||||||
Net actuarial loss |
$ | 33 | $ | 27 | $ | 3 | $ | 5 | ||||||||
Prior service credit |
(3 | ) | (3 | ) | 0 | 0 | ||||||||||
Total |
$ | 30 | $ | 24 | $ | 3 | $ | 5 | ||||||||
The accumulated pension benefit obligation was $103 million at December 31, 2010 and $90 million at December 31, 2009. 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 $110 million, $102 million and $58 million, respectively, at December 31, 2010, and $67 million, $61 million and $17 million, respectively, at December 31, 2009.
The following table presents the pre-tax net changes in projected benefit obligations recognized in other comprehensive income during 2010:
Pension | Postemployment | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Actuarial loss/(gain) arising during the year |
$ | 5 | $ | 2 | ($ | 1 | ) | $ | 2 | |||||||
Amortization of loss included in net periodic benefit cost |
(1 | ) | (1 | ) | 0 | 0 | ||||||||||
Prior service credit arising during the year |
0 | 0 | (1 | ) | 0 | |||||||||||
Recognition of loss due to settlement |
0 | (1 | ) | 0 | 0 | |||||||||||
Foreign currency exchange |
2 | 2 | 0 | 0 | ||||||||||||
Total recognized in other comprehensive expense (income) |
$ | 6 | $ | 2 | ($ | 2 | ) | $ | 2 | |||||||
The following table presents the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost during 2011:
In millions | Pension | Postemployment | ||||||
Net loss |
$ | 4 | $ | 0 | ||||
Total recognized in other comprehensive loss/(income) |
$ | 4 | $ | 0 | ||||
The weighted-average rates and assumptions used to determine benefit obligations at December 31, 2010 and 2009, and net periodic benefit cost for the year ended December 31, 2010 and 2009, were as follows:
Pension Benefit Obligations | Pension Benefit Cost | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Discount rate |
3.9 | % | 4.2 | % | 4.2 | % | 4.2 | % | ||||||||
Rate of compensation increase |
3.3 | % | 3.3 | % | 3.3 | % | 3.2 | % | ||||||||
Expected return on plan assets |
N/A | N/A | 4.7 | % | 5.2 | % | ||||||||||
Postemployment Benefit Obligations | Postemployment Benefit Cost | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Discount rate |
4.4 | % | 4.8 | % | 4.8 | % | 4.8 | % | ||||||||
Rate of compensation increase |
3.7 | % | 3.7 | % | 3.7 | % | 3.7 | % | ||||||||
Involuntary turnover rate |
2.0 | % | 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 2010 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, 2010 and 2009, by asset category are as follows:
Actual Asset Allocation As of December 31 |
Target Asset Allocation |
|||||||||||
2010 | 2009 | |||||||||||
Equity securities |
41 | % | 42 | % | 40 | % | ||||||
Debt securities |
38 | % | 34 | % | 41 | % | ||||||
Insurance (annuity) contracts |
10 | % | 13 | % | 10 | % | ||||||
Real estate |
5 | % | 4 | % | 4 | % | ||||||
Other |
6 | % | 7 | % | 5 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
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, 2010.
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, 2010:
In Millions | December 31, 2010 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant 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 | ||||||||
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 | ||
Actual return on plan assets |
0 | |||
Purchases, sales and settlements, net |
0 | |||
Balance as of December 31, 2010 |
$ | 6 | ||
The following table sets forth by level, within the fair value hierarchy, the pension plan assets at fair value as of December 31, 2009:
In Millions | December 31, 2009 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 |
19 | 0 | 19 | 0 | ||||||||||||
Bond/fixed-income funds |
15 | 0 | 15 | 0 | ||||||||||||
Real-estate indirect investment |
2 | 0 | 2 | 0 | ||||||||||||
Commodities/Other |
1 | 0 | 1 | 0 | ||||||||||||
Insurance contracts |
6 | 0 | 0 | 6 | ||||||||||||
Total Assets at fair value |
$ | 45 | $ | 0 | $ | 39 | $ | 6 | ||||||||
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, 2009:
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2009 |
$ | 6 | ||
Actual return on plan assets |
0 | |||
Purchases, sales and settlements, net |
0 | |||
Balance as of December 31, 2009 |
$ | 6 | ||
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 plans to contribute approximately $11 million to the international pension plans and $6 million to postemployment benefit obligations in 2011.
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 |
||||||||
2011 |
$ | 9 | $ | 6 | ||||
2012 |
$ | 9 | $ | 6 | ||||
2013 |
$ | 8 | $ | 6 | ||||
2014 |
$ | 8 | $ | 6 | ||||
2015 |
$ | 9 | $ | 5 | ||||
2016-2020 |
$ | 43 | $ | 21 |
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 $15 million in 2010, $15 million in 2009 and $15 million in 2008. The expense for international subsidiary savings plans was $11 million in 2010, $10 million in 2009 and $10 million in 2008.
|
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 may be exposed to potential 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 inventory purchases. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company payables and generally mature in three months or less. The Company does not hold or issue 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 attempts to manage 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 agreement.
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 $91 million ($51 million on a net basis) at December 31, 2010, and $67 million ($45 million on a net basis) at December 31, 2009. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at December 31, 2010 and 2009, were not material.
The aggregate net foreign currency transaction gains and losses in 2010, 2009 and 2008 were not material to the results of operations. The aggregate foreign currency transaction amounts include the gains/losses on the Company's foreign currency fair value hedges for all periods presented.
|
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, 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 continues to conduct 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 has initiated discussions 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. At this time, the Company is unable to determine the extent of its liability with respect to this aspect of the investigation.
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. However, because such matters are subject to many uncertainties, the outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above and other matters, and to comply with applicable laws and regulations, will not exceed the amounts reflected in the Company's financial statements or will not have a material adverse effect on its results of operations, financial condition or cash flows.
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, 2010, 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 years ended December 31:
In millions | 2010 | 2009 | 2008 | |||||||||
Warranty reserve liability |
||||||||||||
Beginning balance at January 1 |
$ | 5 | $ | 6 | $ | 6 | ||||||
Accruals for warranties issued |
14 | 11 | 13 | |||||||||
Settlements (in cash or kind) |
(13 | ) | (12 | ) | (13 | ) | ||||||
Balance at end of period |
$ | 6 | $ | 5 | $ | 6 | ||||||
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.
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, 2010, for the following fiscal years were:
In millions | Total Amounts |
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||
Operating lease obligations |
$ | 54 | $ | 18 | $ | 15 | $ | 9 | $ | 6 | $ | 6 | ||||||||||||
Sublease rentals |
(15 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||
Total committed operating Leases less sublease rentals |
$ | 39 | $ | 15 | $ | 12 | $ | 6 | $ | 3 | $ | 3 | ||||||||||||
The Company's actual rental expense was $17 million, $17 million and $18 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Company had no contingent rentals for these periods, but received sublease rental income of $4 million, $5 million and $5 million for the years ended December 31, 2010, 2009 and 2008, 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, 2010 and 2009.
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.
|
Note 9 Fair Value Measurements
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. 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 December 31, 2010 and 2009 had no material fair value gains and losses. Any gains and losses would be mitigated by corresponding gains 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, 2010 were as follows:
In millions | December 31, 2010 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 |
The Company's assets measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2009 were as follows:
In millions | December 31, 2009 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 |
$ | 403 | $ | 403 | $ | 0 | $ | 0 |
|
Note 10 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 | 2010 | % of Revenue |
2009 | % of Revenue |
2008 | % of Revenue |
||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Americas(1) |
$ | 1,166 | 60 | % | $ | 981 | 57 | % | $ | 984 | 56 | % | ||||||||||||
EMEA |
442 | 23 | % | 430 | 25 | % | 451 | 26 | % | |||||||||||||||
APJ |
328 | 17 | % | 298 | 18 | % | 327 | 18 | % | |||||||||||||||
Total revenue |
1,936 | 100 | % | 1,709 | 100 | % | 1,762 | 100 | % | |||||||||||||||
Segment gross margin |
||||||||||||||||||||||||
Americas |
702 | 60 | % | 570 | 58 | % | 557 | 57 | % | |||||||||||||||
EMEA |
232 | 52 | % | 230 | 53 | % | 234 | 52 | % | |||||||||||||||
APJ |
154 | 47 | % | 138 | 46 | % | 158 | 48 | % | |||||||||||||||
Total gross margin |
1,088 | 56 | % | 938 | 55 | % | 949 | 54 | % | |||||||||||||||
Selling, general and administrative expenses |
526 | 27 | % | 483 | 28 | % | 508 | 29 | % | |||||||||||||||
Research and development expenses |
147 | 8 | % | 117 | 7 | % | 108 | 6 | % | |||||||||||||||
Total income from operations |
$ | 415 | 21 | % | $ | 338 | 20 | % | $ | 333 | 19 | % | ||||||||||||
(1) |
The Americas region includes revenue from the United States of $1,059 million in 2010, $871 million in 2009 and $894 million in 2008. |
The following table presents revenue by product and services revenue for the Company for the years ended December 31:
In millions | 2010 | 2009 | 2008 | |||||||||
Products (software and hardware)(1) |
$ | 933 | $ | 772 | $ | 849 | ||||||
Consulting services |
536 | 497 | 485 | |||||||||
Maintenance services |
467 | 440 | 428 | |||||||||
Total services |
1,003 | 937 | 913 | |||||||||
Total revenue |
$ | 1,936 | $ | 1,709 | $ | 1,762 | ||||||
(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 | 2010 | 2009 | ||||||
United States |
$ | 87 | $ | 82 | ||||
Americas (excluding United States) |
2 | 2 | ||||||
EMEA |
4 | 3 | ||||||
APJ |
12 | 8 | ||||||
Property and equipment, net |
$ | 105 | $ | 95 | ||||
Concentrations. No single customer accounts for more than 10% of the Company's revenue. As of December 31, 2010, 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.
|
Note 11 Subsequent Events
On January 21, 2011, Teradata completed its acquisition of 100 percent of the stock of Aprimo, Inc. ("Aprimo"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") 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 position.
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 $225 million of existing U.S. cash, and in part by drawing-down in full the Company's $300 million credit facility. Additionally, Teradata is expected to incur acquisition-related transaction and integration costs of approximately $13 million for the year ended December 31, 2011. These costs include investment banking, legal and accounting fees, severance and retention payments, and other costs directly related to the acquisition.
As Teradata's acquisition of Aprimo was closed on January 21, 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 Aprimo acquisition on 2011 results is not expected to be material.
|
Note 12 Quarterly Information (unaudited)
In millions, except per share amounts | First | Second | Third | Fourth | ||||||||||||
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 | ||||||||
2009 |
||||||||||||||||
Total revenues |
$ | 367 | $ | 421 | $ | 425 | $ | 496 | ||||||||
Gross margin |
$ | 200 | $ | 233 | $ | 227 | $ | 278 | ||||||||
Operating income |
$ | 60 | $ | 84 | $ | 88 | $ | 106 | ||||||||
Net income |
$ | 45 | $ | 62 | $ | 63 | $ | 84 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.26 | $ | 0.36 | $ | 0.37 | $ | 0.49 | ||||||||
Diluted |
$ | 0.26 | $ | 0.36 | $ | 0.36 | $ | 0.48 |
|
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, 2010 |
$ | 9 | $ | 0 | $ | 0 | $ | 0 | $ | 9 | ||||||||||
Year ended December 31, 2009 |
$ | 11 | $ | 1 | $ | 0 | $ | 3 | $ | 9 | ||||||||||
Year ended December 31, 2008 |
$ | 5 | $ | 6 | $ | 0 | $ | 0 | $ | 11 |
|
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, 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: (a) persuasive evidence of an arrangement exists; (b) the products or services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) 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. 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 accounted for upon sell-through to the end customer.
Substantially all of Teradata's solutions contain software that is more than incidental to the hardware and services. The typical solution requires no significant production, modification or customization of the software or hardware, and the software is not essential to the functionality of the hardware. Therefore, hardware and related services are considered non-software deliverables. For software and software-related deliverables, Teradata allocates revenue to each software deliverable based upon its fair value as determined by vendor-specific objective evidence ("VSOE") using the residual method as discussed below. VSOE of fair value is based upon the normal pricing and discounting practices for those products and services when sold separately. For non-software related deliverables, fair value is based upon Verifiable Objective Evidence ("VOE"). VOE is based on the price when similar products or services are sold separately by Teradata or other companies. These elements often involve delivery or performance at different periods of time. Revenue for software is generally recognized upon delivery with the hardware using the residual method described below. 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, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, no revenue is recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
For arrangements involving multiple deliverables, where the deliverables include software and non-software products and services, Teradata evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a stand-alone basis; (b) whether there is objective and reliable evidence of the fair value of the undelivered items; and (c) 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. If objective and reliable evidence of fair value exists for all units of accounting in the arrangement, revenue is allocated to each unit of accounting based on relative fair values. Each unit of accounting is then accounted for under the applicable revenue recognition guidance. In situations where there is objective and reliable evidence of fair value for all undelivered elements, but not for delivered elements, the residual method is used to allocate the arrangement's consideration. Teradata does not typically have VSOE of fair value for software products. Therefore, in a substantial majority of Teradata arrangements, the residual method is used to allocate arrangement consideration. Under the residual method, the fair value 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.
Teradata uses the stated renewal rate approach in establishing VSOE of fair value for maintenance and subscriptions. Under this approach, the Company assesses whether the contractually stated renewal rates are substantive and in line 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 reallocates revenue from the delivered elements to increase the allocation of revenue for undelivered elements to the minimum established pricing targets as supported by the renewal rates for similar customers.
Teradata also offers consulting and installation-related services to its customers, which are considered software-related. These services are rarely considered essential to the functionality of the enterprise data warehouse ("EDW") solution deliverable and there is never any software customization of the proprietary database software. VSOE of fair value for consulting services is based on the hourly rates for standalone consulting services projects by geographic region and are indicative of our customary pricing practices. Pricing in each market is structured to obtain a reasonable margin based on input costs.
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.
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 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 12 | $ | 11 | $ | 12 | $ | 90 | $ | 69 | $ | 49 | ||||||||||||
Capitalized |
5 | 5 | 4 | 44 | 54 | 48 | ||||||||||||||||||
Amortization |
(6 | ) | (4 | ) | (5 | ) | (29 | ) | (33 | ) | (28 | ) | ||||||||||||
Ending balance at December 31 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
Valuation of Long-Lived Assets. Long-lived assets such as property and equipment and 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.
Valuation of Long-Lived Assets. Long-lived assets such as property and equipment and 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 if an event occurs or 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 2010, 2009 or 2008.
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 costs, 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, 2010. 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. The Company's expected volatility assumption used in the Black-Scholes option-pricing model is based on 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. Prior to the second quarter of 2008, stock repurchased through the share repurchase programs was retired. Beginning in the second quarter of 2008, stock repurchased through the share repurchase programs was 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.
Recently Issued Accounting Pronouncements
Multiple-Deliverable Revenue Arrangements. In October 2009, the Financial Accounting Standards Board ("FASB") issued new guidance regarding the accounting for revenue arrangements with multiple deliverables. This new guidance provides principles for allocation of consideration among its multiple-elements, allowing more alternatives in identifying and accounting for separate deliverables under an arrangement. The guidance will eliminate the residual method of allocation and require use of the relative selling price method. The guidance also introduces the best estimate selling price ("BESP") for valuing the deliverables of a bundled arrangement if vendor specific objective evidence ("VSOE") or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This guidance is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company will adopt this guidance, on a prospective basis, for applicable transactions originating or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of adopting this standard, but does not expect it to have a material impact on reported revenues.
Certain Revenue Arrangements That Include Software Elements. In October 2009, the FASB issued new guidance for revenue arrangements that include software elements. This new guidance changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software and nonsoftware elements that function together to deliver the tangible product's essential functionality will no longer be within the scope of software revenue guidance. The new guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early application is permitted. The Company will adopt this guidance, on a prospective basis, for applicable transactions originating or materially modified on or after January 1, 2011. The Company is currently evaluating the impact of adopting this standard, but does not expect it to have a material impact on reported revenues.
Fair Value Measurements. In January 2010, the FASB issued an update to provide new disclosures, and clarifications of existing disclosures related to fair value measurements. The new disclosures will require reporting entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, in the Level 3 reconciliations, a reporting entity should present separately information about purchases, sales, issuances, and settlements. The update also clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements in Level 2 and Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
|
Internal-use Software | External-use Software | |||||||||||||||||||||||
In millions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Beginning balance at January 1 |
$ | 12 | $ | 11 | $ | 12 | $ | 90 | $ | 69 | $ | 49 | ||||||||||||
Capitalized |
5 | 5 | 4 | 44 | 54 | 48 | ||||||||||||||||||
Amortization |
(6 | ) | (4 | ) | (5 | ) | (29 | ) | (33 | ) | (28 | ) | ||||||||||||
Ending balance at December 31 |
$ | 11 | $ | 12 | $ | 11 | $ | 105 | $ | 90 | $ | 69 | ||||||||||||
For the year ended December 31 | ||||||||||||
In millions, except earnings per share | 2010 | 2009 | 2008 | |||||||||
Net income available for common stockholders |
$ | 301 | $ | 254 | $ | 250 | ||||||
Weighted average outstanding shares of common stock |
167.4 | 171.9 | 178.1 | |||||||||
Dilutive effect of employee stock options and restricted stock |
3.0 | 2.0 | 1.7 | |||||||||
Common stock and common stock equivalents |
170.4 | 173.9 | 179.8 | |||||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.80 | $ | 1.48 | $ | 1.40 | ||||||
Diluted |
$ | 1.77 | $ | 1.46 | $ | 1.39 |
|
At December 31 | ||||||||
In millions | 2010 | 2009 | ||||||
Accounts receivable |
||||||||
Trade |
$ | 408 | $ | 392 | ||||
Other |
3 | 4 | ||||||
Accounts receivable, gross |
411 | 396 | ||||||
Less: allowance for doubtful accounts |
(9 | ) | (9 | ) | ||||
Total accounts receivable, net |
$ | 402 | $ | 387 | ||||
Inventories |
||||||||
Finished goods |
$ | 39 | $ | 27 | ||||
Service parts |
26 | 20 | ||||||
Total inventories |
$ | 65 | $ | 47 | ||||
Other current assets |
||||||||
Current deferred tax assets |
$ | 31 | $ | 30 | ||||
Other |
25 | 27 | ||||||
Total other current assets |
$ | 56 | $ | 57 | ||||
Property and equipment |
||||||||
Land |
$ | 8 | $ | 8 | ||||
Buildings and improvements |
63 | 64 | ||||||
Machinery and other equipment |
213 | 192 | ||||||
Property and equipment, gross |
284 | 264 | ||||||
Less: accumulated depreciation |
(179 | ) | (169 | ) | ||||
Total property and equipment, net |
$ | 105 | $ | 95 | ||||
Other current liabilities |
||||||||
Sales and value-added taxes |
$ | 19 | $ | 17 | ||||
Other |
51 | 59 | ||||||
Total other current liabilities |
$ | 70 | $ | 76 | ||||
Accumulated other comprehensive income, net of tax |
||||||||
Currency translation adjustments |
$ | 31 | $ | 34 | ||||
Actuarial losses and prior service costs on employee benefit plans |
(19 | ) | (20 | ) | ||||
Total accumulated other comprehensive income |
$ | 12 | $ | 14 | ||||
|
In millions | Balance December 31, 2009 |
Additions | Currency Translation Adjustments |
Balance December 31, 2010 |
||||||||||||
Goodwill |
||||||||||||||||
Americas |
$ | 71 | $ | 14 | $ | 0 | $ | 85 | ||||||||
EMEA |
10 | 7 | 0 | 17 | ||||||||||||
APJ |
28 | 3 | 3 | 34 | ||||||||||||
Total goodwill |
$ | 109 | $ | 24 | $ | 3 | $ | 136 | ||||||||
In millions | Original Amortization Life (in Years) |
December 31, 2010 | December 31, 2009 | |||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||||||
Identifiable intangible assets |
||||||||||||||||||||
Intellectual property |
5 | 18 | (6 | ) | 6 | (3 | ) |
In millions | Actual 2010 |
For the year ended (estimated) | ||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||||
Amortization expense |
$ | 2 | $ | 3 | $ | 3 | $ | 2 | $ | 2 | $ | 1 |
|
In millions | 2010 | 2009 | 2008 | |||||||||
Income before income taxes |
||||||||||||
United States |
$ | 272 | $ | 179 | $ | 190 | ||||||
Foreign |
142 | 155 | 148 | |||||||||
Total income before income taxes |
$ | 414 | $ | 334 | $ | 338 | ||||||
In millions | 2010 | 2009 | 2008 | |||||||||
Income tax expense |
||||||||||||
Current |
||||||||||||
Federal |
$ | 53 | $ | 24 | $ | 8 | ||||||
State and local |
5 | 4 | 5 | |||||||||
Foreign |
14 | 11 | 37 | |||||||||
Deferred |
||||||||||||
Federal |
35 | 30 | 60 | |||||||||
State and local |
4 | 4 | 5 | |||||||||
Foreign |
2 | 7 | (27 | ) | ||||||||
Total income tax expense |
$ | 113 | $ | 80 | $ | 88 | ||||||
In millions | 2010 | 2009 | 2008 | |||||||||
Income tax expense at the U.S. federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Foreign income tax differential |
(8.1 | %) | (11.0 | %) | (12.5 | %) | ||||||
State and local income taxes |
1.5 | % | 1.0 | % | 2.0 | % | ||||||
U.S. permanent book/tax differences |
(0.9 | %) | (0.5 | %) | 0.5 | % | ||||||
Other, net |
(0.2 | %) | (0.5 | %) | 1.0 | % | ||||||
Total income tax expense |
27.3 | % | 24.0 | % | 26.0 | % | ||||||
In millions | 2010 | 2009 | ||||||
Deferred income tax assets |
||||||||
Employee pensions and other liabilities |
$ | 47 | $ | 40 | ||||
Other balance sheet reserves and allowances |
24 | 22 | ||||||
Deferred revenue |
0 | 5 | ||||||
Tax loss and credit carryforwards |
29 | 19 | ||||||
Capitalized research and development |
45 | 66 | ||||||
Other |
0 | 3 | ||||||
Total deferred income tax assets |
145 | 155 | ||||||
Deferred income tax liabilities |
||||||||
Capitalized software |
42 | 35 | ||||||
Property and equipment |
10 | 0 | ||||||
Other |
4 | 6 | ||||||
Total deferred income tax liabilities |
56 | 41 | ||||||
Total net deferred income tax assets |
$ | 89 | $ | 114 | ||||
In millions | 2010 | 2009 | ||||||
Balance at January 1 |
$ | 6 | $ | 1 | ||||
Gross increases for prior period tax positions |
1 | 2 | ||||||
Gross decreases for prior period tax positions |
(1 | ) | 0 | |||||
Gross increases for current period tax positions |
2 | 3 | ||||||
Balance at December 31 |
$ | 8 | $ | 6 | ||||
|
2010 | 2009 | 2008 | ||||||||||||||||||||||
In millions | Pension | Postemployment | Pension | Postemployment | Pension | Postemployment | ||||||||||||||||||
Service cost |
$ | 8 | $ | 4 | $ | 7 | $ | 4 | $ | 7 | $ | 5 | ||||||||||||
Interest cost |
4 | 2 | 3 | 2 | 4 | 3 | ||||||||||||||||||
Expected return on plan assets |
(3 | ) | 0 | (2 | ) | 0 | (3 | ) | 0 | |||||||||||||||
Settlement charge |
0 | 0 | 1 | 0 | 1 | 0 | ||||||||||||||||||
Employee contributions |
(1 | ) | 0 | (1 | ) | 0 | (1 | ) | 0 | |||||||||||||||
Amortization of actuarial loss |
1 | 0 | 1 | 0 | 0 | 3 | ||||||||||||||||||
Total costs |
$ | 9 | $ | 6 | $ | 9 | $ | 6 | $ | 8 | $ | 11 | ||||||||||||
In millions | Pension | Postemployment | ||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at January 1 |
$ | 96 | $ | 89 | $ | 38 | $ | 36 | ||||||||
Service cost |
7 | 6 | 4 | 4 | ||||||||||||
Interest cost |
4 | 3 | 2 | 2 | ||||||||||||
Plan participant contributions |
1 | 1 | 0 | 0 | ||||||||||||
Amendments |
0 | 0 | (1 | ) | 0 | |||||||||||
Actuarial loss (gain) |
4 | (2 | ) | (1 | ) | 2 | ||||||||||
Benefits paid |
(7 | ) | (6 | ) | (2 | ) | (6 | ) | ||||||||
Currency translation adjustments |
6 | 5 | 0 | 0 | ||||||||||||
Benefit obligation at December 31 |
111 | 96 | 40 | 38 | ||||||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at January 1 |
45 | 36 | 0 | 0 | ||||||||||||
Actual return on plan assets |
2 | (1 | ) | 0 | 0 | |||||||||||
Company contributions |
13 | 10 | 0 | 0 | ||||||||||||
Benefits paid |
(7 | ) | (6 | ) | 0 | 0 | ||||||||||
Currency translation adjustments |
5 | 5 | 0 | 0 | ||||||||||||
Plan participant contribution |
1 | 1 | 0 | 0 | ||||||||||||
Fair value of plan assets at December 31 |
59 | 45 | 0 | 0 | ||||||||||||
Funded status (underfunded) |
($ | 52 | ) | ($ | 51 | ) | ($ | 40 | ) | ($ | 38 | ) | ||||
Amounts Recognized in the Balance Sheet |
||||||||||||||||
Current liabilities |
($ | 1 | ) | $ | 0 | ($ | 6 | ) | ($ | 6 | ) | |||||
Noncurrent liabilities |
(51 | ) | (51 | ) | (34 | ) | (32 | ) | ||||||||
Net amounts recognized |
($ | 52 | ) | ($ | 51 | ) | ($ | 40 | ) | ($ | 38 | ) | ||||
Amounts Recognized in Accumulated Other Comprehensive Income |
||||||||||||||||
Net actuarial loss |
$ | 33 | $ | 27 | $ | 3 | $ | 5 | ||||||||
Prior service credit |
(3 | ) | (3 | ) | 0 | 0 | ||||||||||
Total |
$ | 30 | $ | 24 | $ | 3 | $ | 5 | ||||||||
Pension | Postemployment | |||||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Actuarial loss/(gain) arising during the year |
$ | 5 | $ | 2 | ($ | 1 | ) | $ | 2 | |||||||
Amortization of loss included in net periodic benefit cost |
(1 | ) | (1 | ) | 0 | 0 | ||||||||||
Prior service credit arising during the year |
0 | 0 | (1 | ) | 0 | |||||||||||
Recognition of loss due to settlement |
0 | (1 | ) | 0 | 0 | |||||||||||
Foreign currency exchange |
2 | 2 | 0 | 0 | ||||||||||||
Total recognized in other comprehensive expense (income) |
$ | 6 | $ | 2 | ($ | 2 | ) | $ | 2 | |||||||
In millions | Pension | Postemployment | ||||||
Net loss |
$ | 4 | $ | 0 | ||||
Total recognized in other comprehensive loss/(income) |
$ | 4 | $ | 0 | ||||
Pension Benefit Obligations | Pension Benefit Cost | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Discount rate |
3.9 | % | 4.2 | % | 4.2 | % | 4.2 | % | ||||||||
Rate of compensation increase |
3.3 | % | 3.3 | % | 3.3 | % | 3.2 | % | ||||||||
Expected return on plan assets |
N/A | N/A | 4.7 | % | 5.2 | % | ||||||||||
Postemployment Benefit Obligations | Postemployment Benefit Cost | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Discount rate |
4.4 | % | 4.8 | % | 4.8 | % | 4.8 | % | ||||||||
Rate of compensation increase |
3.7 | % | 3.7 | % | 3.7 | % | 3.7 | % | ||||||||
Involuntary turnover rate |
2.0 | % | 2.0 | % | 2.0 | % | 2.0 | % |
Actual Asset Allocation As of December 31 |
Target Asset Allocation |
|||||||||||
2010 | 2009 | |||||||||||
Equity securities |
41 | % | 42 | % | 40 | % | ||||||
Debt securities |
38 | % | 34 | % | 41 | % | ||||||
Insurance (annuity) contracts |
10 | % | 13 | % | 10 | % | ||||||
Real estate |
5 | % | 4 | % | 4 | % | ||||||
Other |
6 | % | 7 | % | 5 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
In Millions | December 31, 2010 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant 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 | December 31, 2009 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 |
19 | 0 | 19 | 0 | ||||||||||||
Bond/fixed-income funds |
15 | 0 | 15 | 0 | ||||||||||||
Real-estate indirect investment |
2 | 0 | 2 | 0 | ||||||||||||
Commodities/Other |
1 | 0 | 1 | 0 | ||||||||||||
Insurance contracts |
6 | 0 | 0 | 6 | ||||||||||||
Total Assets at fair value |
$ | 45 | $ | 0 | $ | 39 | $ | 6 | ||||||||
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2010 |
$ | 6 | ||
Actual return on plan assets |
0 | |||
Purchases, sales and settlements, net |
0 | |||
Balance as of December 31, 2010 |
$ | 6 | ||
In Millions | Insurance Contracts |
|||
Balance as of January 1, 2009 |
$ | 6 | ||
Actual return on plan assets |
0 | |||
Purchases, sales and settlements, net |
0 | |||
Balance as of December 31, 2009 |
$ | 6 | ||
In millions | Pension Benefits |
Postemployment Benefits |
||||||
Year |
||||||||
2011 |
$ | 9 | $ | 6 | ||||
2012 |
$ | 9 | $ | 6 | ||||
2013 |
$ | 8 | $ | 6 | ||||
2014 |
$ | 8 | $ | 6 | ||||
2015 |
$ | 9 | $ | 5 | ||||
2016-2020 |
$ | 43 | $ | 21 |
|
In millions | 2010 | 2009 | 2008 | |||||||||
Warranty reserve liability |
||||||||||||
Beginning balance at January 1 |
$ | 5 | $ | 6 | $ | 6 | ||||||
Accruals for warranties issued |
14 | 11 | 13 | |||||||||
Settlements (in cash or kind) |
(13 | ) | (12 | ) | (13 | ) | ||||||
Balance at end of period |
$ | 6 | $ | 5 | $ | 6 | ||||||
In millions | Total Amounts |
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||
Operating lease obligations |
$ | 54 | $ | 18 | $ | 15 | $ | 9 | $ | 6 | $ | 6 | ||||||||||||
Sublease rentals |
(15 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||
Total committed operating Leases less sublease rentals |
$ | 39 | $ | 15 | $ | 12 | $ | 6 | $ | 3 | $ | 3 | ||||||||||||
|
In millions | December 31, 2010 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 | December 31, 2009 | Fair Value Measurements at Reporting Date Using | ||||||||||||||
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 |
$ | 403 | $ | 403 | $ | 0 | $ | 0 |
|
In millions | 2010 | % of Revenue |
2009 | % of Revenue |
2008 | % of Revenue |
||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Americas(1) |
$ | 1,166 | 60 | % | $ | 981 | 57 | % | $ | 984 | 56 | % | ||||||||||||
EMEA |
442 | 23 | % | 430 | 25 | % | 451 | 26 | % | |||||||||||||||
APJ |
328 | 17 | % | 298 | 18 | % | 327 | 18 | % | |||||||||||||||
Total revenue |
1,936 | 100 | % | 1,709 | 100 | % | 1,762 | 100 | % | |||||||||||||||
Segment gross margin |
||||||||||||||||||||||||
Americas |
702 | 60 | % | 570 | 58 | % | 557 | 57 | % | |||||||||||||||
EMEA |
232 | 52 | % | 230 | 53 | % | 234 | 52 | % | |||||||||||||||
APJ |
154 | 47 | % | 138 | 46 | % | 158 | 48 | % | |||||||||||||||
Total gross margin |
1,088 | 56 | % | 938 | 55 | % | 949 | 54 | % | |||||||||||||||
Selling, general and administrative expenses |
526 | 27 | % | 483 | 28 | % | 508 | 29 | % | |||||||||||||||
Research and development expenses |
147 | 8 | % | 117 | 7 | % | 108 | 6 | % | |||||||||||||||
Total income from operations |
$ | 415 | 21 | % | $ | 338 | 20 | % | $ | 333 | 19 | % | ||||||||||||
(1) |
The Americas region includes revenue from the United States of $1,059 million in 2010, $871 million in 2009 and $894 million in 2008. |
In millions | 2010 | 2009 | 2008 | |||||||||
Products (software and hardware)(1) |
$ | 933 | $ | 772 | $ | 849 | ||||||
Consulting services |
536 | 497 | 485 | |||||||||
Maintenance services |
467 | 440 | 428 | |||||||||
Total services |
1,003 | 937 | 913 | |||||||||
Total revenue |
$ | 1,936 | $ | 1,709 | $ | 1,762 | ||||||
(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 | 2010 | 2009 | ||||||
United States |
$ | 87 | $ | 82 | ||||
Americas (excluding United States) |
2 | 2 | ||||||
EMEA |
4 | 3 | ||||||
APJ |
12 | 8 | ||||||
Property and equipment, net |
$ | 105 | $ | 95 | ||||
|
In millions, except per share amounts | First | Second | Third | Fourth | ||||||||||||
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 | ||||||||
2009 |
||||||||||||||||
Total revenues |
$ | 367 | $ | 421 | $ | 425 | $ | 496 | ||||||||
Gross margin |
$ | 200 | $ | 233 | $ | 227 | $ | 278 | ||||||||
Operating income |
$ | 60 | $ | 84 | $ | 88 | $ | 106 | ||||||||
Net income |
$ | 45 | $ | 62 | $ | 63 | $ | 84 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.26 | $ | 0.36 | $ | 0.37 | $ | 0.49 | ||||||||
Diluted |
$ | 0.26 | $ | 0.36 | $ | 0.36 | $ | 0.48 |
|
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, 2010 |
$ | 9 | $ | 0 | $ | 0 | $ | 0 | $ | 9 | ||||||||||
Year ended December 31, 2009 |
$ | 11 | $ | 1 | $ | 0 | $ | 3 | $ | 9 | ||||||||||
Year ended December 31, 2008 |
$ | 5 | $ | 6 | $ | 0 | $ | 0 | $ | 11 |
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Concentrations. No single customer accounts for more than 10% of the Company's revenue. As of December 31, 2010, 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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