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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission File Number 001-33458
(Exact name of registrant as specified in its charter)
10000 Innovation Drive
Dayton, Ohio 45342
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (866) 548-8348
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At April 27, 2012, the registrant had approximately 168.7 million shares of common stock outstanding.
PART IFINANCIAL INFORMATION
Part 1FINANCIAL INFORMATION
Condensed Consolidated Statements of Income (Unaudited)
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets (Unaudited)
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Cash Flows (Unaudited)
See Notes to Condensed Consolidated Financial Statements (Unaudited).
1. Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the results of operations, financial position and cash flows of Teradata Corporation (Teradata or the Company) for the interim periods presented herein. The year-end 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teradatas most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the 2011 Annual Report). The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
2. New Accounting Pronouncements
Comprehensive Income. In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance regarding the disclosure of comprehensive income. Under the new guidance, an entity will have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity will be required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update will eliminate the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. Additionally, entities will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Portions of this new guidance were made effective for fiscal years, and interim periods, beginning after December 15, 2011, with amendments applied retrospectively. The Company adopted the effective portions of the new disclosure guidance as of January 1, 2012.
3. Supplemental Financial Information
4. Goodwill and Acquired Intangible Assets
The following table identifies the activity relating to goodwill by operating segment:
The only changes in goodwill for the three months ended March 31, 2012 were due to changes in foreign currency exchange rates.
Acquired intangible assets were specifically identified when acquired, and are deemed to have finite lives. The gross carrying amount and accumulated amortization for Teradatas acquired intangible assets were as follows:
The aggregate amortization expense (actual and estimated) for acquired intangible assets for the following periods is as follows:
5. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Companys intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that apply a broad range of statutory income tax rates, certain of which are less than the U.S. statutory rate.
The effective tax rate was 28% for both the three months ended March 31, 2012 and March 31, 2011. There were no material discrete tax items reflected in the effective tax rate for the three months ended March 31, 2012 and March 31, 2011.
6. Derivative Instruments and Hedging Activities
As a portion of the Companys operations and revenue occur outside the United States and in currencies other than the U.S. dollar, the Company is exposed to potential gains and losses from changes in foreign currency exchange rates. In an attempt to mitigate the impact of currency fluctuations, the Company uses foreign exchange forward contracts to hedge transactional exposures resulting predominantly from foreign currency denominated inter-company receivables and payables. The forward contracts are designated as fair value hedges of specified foreign currency denominated inter-company receivables and payables and generally mature in three months or less. The Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to changes in exchange rates, the Company exposes itself to credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.
All derivatives are recognized in the Consolidated Balance Sheet at their fair value. The fair values of foreign exchange contracts are based on market spot and forward exchange rates and represent estimates of possible value that may not be realized in the future. Changes in the fair value of derivative financial instruments, along with the loss or gain on the hedged asset or liability, are recorded in current period earnings. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based, and are an indication of the extent of Teradatas 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, Teradatas net involvement is less than the total contract notional amount of the Companys foreign exchange forward contracts.
The contract notional amount of the Companys foreign exchange forward contracts was $88 million ($36 million on a net basis) at March 31, 2012, and $102 million ($19 million on a net basis) at December 31, 2011. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at March 31, 2012 and December 31, 2011, were not material.
Gains and losses from the Companys fair value hedges (foreign currency forward contracts and related hedged items) were immaterial for the three months ended March 31, 2012 and March 31, 2011. Gains and losses from foreign exchange forward contracts are fully recognized each period and reported along with the offsetting gain or loss of the related hedged item, either in cost of products or in other income, depending on the nature of the related hedged item.
7. Commitments and Contingencies
In the normal course of business, the Company is subject to proceedings, lawsuits, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, intellectual property, tax matters, and other regulatory compliance and general matters, including those described below.
The Company is subject to governmental investigations and requests for information from time to time. As previously reported prior to Teradatas separation from NCR Corporation (NCR), the United States Department of Justice is conducting an investigation regarding the propriety of the Companys arrangements or understandings with others in connection with certain federal contracts and the adequacy of certain disclosures related to such contracts. The investigation arises in connection with civil litigation in federal district court filed under the qui tam provisions of the civil False Claims Act against a number of information technology companies, including the Company. The complaints against the Company remain under seal. The Company has conducted its analysis of such claims focusing on the propriety of certain transactions under federal programs under which Teradata was a contractor. The Company has shared evidence with the Justice Department of questionable conduct that the Company uncovered, has cooperated with the Justice Department in its investigation, and is in settlement discussions with the government to resolve this matter.
A separate portion of the governments investigation relates to the adequacy of pricing disclosures made to the government in connection with negotiation of NCRs General Services Administration Federal Supply Schedule as it relates to Teradata, prior to the Companys separation from NCR, and to whether certain subsequent price reductions were properly passed on to the government. Both NCR and the Company have participated in this aspect of the investigation, with respect to certain products and services of each, and each will assume financial responsibility for its own exposures, if any, without indemnification from the other.
The Company has an accrual of approximately $3 million related to the current best estimate of probable liability relating to these matters. The Company believes the amounts provided in its financial statements are adequate in light of the probable and estimable liabilities. The Company believes that there is not a reasonable possibility that the loss in respect of these contingent matters will materially exceed the liability reflected in the Companys financial statements, although there can be no assurance that this will in fact be the case.
Guarantees and Product Warranties. Guarantees associated with the Companys business activities are reviewed for appropriateness and impact to the Companys financial statements. Periodically, the Companys customers enter into various leasing arrangements coordinated with a leasing company. In some instances, the Company guarantees the leasing company a minimum value at the end of the lease term on the leased equipment. As of March 31, 2012, the maximum future payment obligation of this guaranteed value and the associated liability balance was $3 million.
The Company provides its customers a standard manufacturers warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls and cost of replacement parts. For each consummated sale, the Company recognizes the total customer revenue and records the associated warranty liability using pre-established warranty percentages for that product class.
The following table identifies the activity relating to the warranty reserve for the three months ended March 31:
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 Companys 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 Companys 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 Companys consolidated financial condition, results of operations or cash flows.
8. Fair Value Measurements
GAAP has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Companys assets and liabilities measured at fair value on a recurring basis include money market funds and foreign currency exchange contracts. A portion of the Companys 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 Companys balance sheet. Money market fund holdings are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. When deemed appropriate, the Company minimizes its exposure to changes in foreign currency exchange rates through the use of derivative financial instruments, specifically, forward foreign exchange contracts. The fair value of these contracts are measured at the end of each interim reporting period using observable inputs other than quoted prices, specifically market spot and forward exchange rates. As such, these derivative instruments are classified within Level 2 of the valuation hierarchy. Fair value gains for open contracts are recognized as assets and fair value losses are recognized as liabilities. The fair value derivative assets and liabilities recorded in other current assets and accrued liabilities at March 31, 2012 and December 31, 2011, were not material. Any realized gains or losses would be mitigated by corresponding gains or losses on the underlying exposures.
The Companys assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at March 31, 2012 were as follows:
The Companys assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at December 31, 2011 were as follows:
Teradatas five-year revolving credit agreement (the Credit Facility), under which the Company may borrow up to $300 million ends on September 30, 2012, at which point any remaining outstanding borrowings would be due for repayment. The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the
interest rate option the Company chooses to utilize and the Companys leverage ratio at the time of the borrowing. In the near term, Teradata would anticipate choosing a floating rate based on the London Interbank Offered Rate (LIBOR). The Credit Facility is unsecured and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. The Company is currently negotiating for a new credit facility and expects to have it in place by September 2012.
As of March 31, 2012, the Company had no borrowings outstanding under the Credit Facility, leaving $300 million in additional borrowing capacity available under the Credit Facility.
Teradatas senior unsecured $300 million five-year term loan is payable in quarterly installments, commencing on June 30, 2012, with all remaining principal due in April 2016. The outstanding principal amount of the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus in each case a margin based on the leverage ratio of the Company. As of March 31, 2012, the term loan principal outstanding was $300 million, and carried an interest rate of 1.25%.
10. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted average number of shares outstanding includes the dilution from potential shares resulting from stock options and unvested restricted stock awards.
The components of basic and diluted earnings per share are as follows:
No stock options were excluded from the computation of diluted earnings per share for the three months ended March 31, 2012, or the three months ended March 31, 2011.
11. Segment and Other Supplemental Information
Teradata manages its business in three geographic regions, which are also the Companys operating segments: (1) the North America and Latin America (Americas) region; (2) the Europe, Middle East and Africa (EMEA) region; and (3) the Asia Pacific and Japan (APJ) region. Management evaluates the performance of its segments based on revenue and segment margin, and does not include segment assets for management reporting purposes. Corporate-related costs are fully allocated to the segments.
The following table presents regional segment revenue and gross margin for the Company:
The following table presents revenue by product and services for the Company:
(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.
12. Business Combinations
Fiscal 2011 Acquisitions
In January 2011, Teradata completed its acquisition of 100 percent of the stock of Aprimo, Inc. (Aprimo). Aprimo is a global provider of cloud-based integrated marketing management (IMM) software solutions. Aprimo has been integrated into Teradatas operations, and the Aprimo organization now supports Teradatas applications strategy, including development, marketing, sales and services. Aprimos operations have been integrated into, and its actual results are reflected in, the Companys three geographic operating regions. The aggregate consideration payable with respect to all of the outstanding stock and equity interests (including all outstanding warrants, stock options and restricted stock units) of Aprimo in the acquisition was $525 million in cash, subject to potential adjustments for certain of Aprimos indemnification obligations under the merger agreement.
In April 2011, Teradata completed its acquisition of all remaining equity of Aster Data Systems, Inc. (Aster Data). Aster Data is a market leader in advanced analytics and the management of diverse, multi-structured data. The combination of Teradata and Aster Data technologies enables businesses to perform better analytics on large sets of multi-structured data, also known as big data. The aggregate consideration with respect to all of the outstanding stock and equity interests of Aster Data was $259 million. The aggregate consideration excluded the value of Teradatas pre-existing 11.2% equity investment in Aster Data. At the date of acquisition, the fair value of Teradatas previous 11.2% equity interest in Aster Data was $36 million. Teradata recorded a gain of $11 million related to this existing equity interest in Aster Data, and that gain was recorded in other income and (expense) in the Condensed Consolidated Statements of Income, during the second quarter of 2011.
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in the 2011 Annual Report on Form 10-K.
First Quarter Financial Overview
As more fully discussed in later sections of this MD&A, the following were significant financial items for the first quarter of 2012:
Teradata is a leader in helping companies manage, integrate, and analyze growing data volumes and complexity, and transform it into actionable business insight for competitive advantage. Teradatas strategy focuses on three large and growing markets data warehousing, big data analytics, and integrated marketing management applications. Additionally, we have four key initiatives underway to broaden our position in the market and take advantage of these market opportunities. These initiatives are to:
We believe that demand for our solutions will continue to increase due to the continued increase in data volumes and types of data, the scale and complexity of business requirements, and the growing use of new data elements and more near real-time analytics over time. The adoption by customers of more near real-time analysis for enterprise intelligence is driving more applications, usage and capacity. We believe there is additional opportunity for Teradata in Integrated Marketing Management (IMM) and Digital Marketing. Marketing organizations have been a leader in leveraging analytics over the years. A significant number of our data warehouses are being used by marketing organizations, and many of them are using our Teradata/Aprimo multi-channel campaign management application.
Furthermore, we believe that Marketing will lead the way in most corporations to drive innovation from new analytics with Big Data. Marketing can use and apply the new insights created from social and mobile data, to impact a corporations revenue and earnings, and leverage the new channels created with social and mobile media to interact with and market to customers.
As a portion of the Companys operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company is exposed to fluctuations in foreign currency exchange rates. In 2012, Teradata would expect approximately one percentage point of adverse impact from currency translation on its reported revenue and a corresponding currency impact on operating income, based on currency rates as of April 26, 2012.
There have been continued signs of economic recovery in 2011 and the first quarter of 2012, particularly with respect to information technology spending; however, risks associated with macroeconomic challenges and fluctuations still exist. Even in a strong economic environment, the size, timing and contracted terms of large customer orders for our products and services can impact, both positively and negatively, our operating results.
While macroeconomic risk factors in the IT environment always exist, our long-term outlook remains positive. We did not experience significant changes in the first quarter of 2012 due to competitive and/or pricing trends for our data warehouse or appliance solutions, although there is always a risk that pricing pressure for our solutions could occur in the future. Additionally, as companies look to reduce ongoing operating expenses, customers may choose to go to lower maintenance service level agreements which could lead to revenue and margin pressure on our maintenance services business. We continue to be committed to new product development and achieving a responsive yield from our research and development spending and resources, which are intended to drive future demand. We also continue to evaluate opportunities to increase our market coverage and are committed to continuing to increase our number of sales territories, among other things, to drive future revenue growth. New sales account territories typically take more than two years to become fully productive, given the length of an average sales cycle with a new data warehouse prospect.
Results of Operations for the Three Months Ended March 31, 2012
Compared to the Three Months Ended March 31, 2011
Teradata revenue increased 21% in the first quarter of 2012 compared to the first quarter of 2011. The revenue increase included 1% of adverse impact from foreign currency fluctuations. Product revenue increased 31% in the first quarter of 2012 from the prior-year period, led by growth in the Americas and APJ regions. Service revenue in the first quarter of 2012 increased 13% from the prior-year period, with an underlying 14% increase in consulting services revenue, and 11% increase in maintenance services revenue, as compared to the prior-year period.
Gross margin for the first quarter of 2012 was 55.1% compared to 54.3% in the first quarter of 2011. Product gross margin increased to 66.6% in the first quarter of 2012, compared to 66.4% in the prior-year period. Product gross margin in the first quarter of 2012 included $4 million of costs from acquired intangible assets, as compared to $7 million of combined purchase accounting adjustments and amortization of acquired intangible assets in the first quarter of 2011. The decrease in acquisition-related costs was offset by $3 million of additional amortization of capitalized internal software development costs in the first quarter of 2012. Service gross margin decreased to 43.6% in the first quarter of 2012 compared to 43.9% in the prior-year period. The slight decrease in services margins was influenced by the somewhat higher mix of consulting margins, which are somewhat lower than maintenance gross margins.
Total operating expenses, characterized as SG&A and R&D expenses, were $211 million in the first quarter of 2012 compared to $184 million in the first quarter of 2011. The $15 million increase in SG&A expenses was largely driven by higher selling expense, due primarily to our strategic initiative to add sales headcount (including sales headcount from acquisitions closed in 2011), as well as increased revenue-driven costs for sales commissions. These increases were offset in part by $4 million less in acquisition-related transaction, integration and amortization expenses. The $12 million increase in R&D expenses was driven by higher engineering headcount expenses, including incremental engineering headcount from the Aprimo and Aster Data acquisitions completed in 2011, as well as $2 million less in capitalization of software development expenses.
Certain R&D expenses for internally developed software are capitalized and later amortized over the useful life of the underlying commercial software products. The capitalization entry reduces R&D expense, and the subsequent amortization of those costs is charged against product cost of revenue, which reduces product gross margin.
Revenue and Gross Margin by Operating Segment
As described in Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited), Teradata manages its business in three geographic regions, which are also the Companys operating segments: (1) the Americas region; (2) the Europe, Middle East and Africa (EMEA) region; and (3) the APJ region. Teradata believes this format is useful to investors because it allows analysis and comparability of operating trends by operating segment. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess our financial performance. The discussion of our segment results describes the changes in results as compared to the prior-year period.
The following table presents revenue and operating performance by segment for the three months ended March 31:
Americas: Revenue increased 26% in the first quarter of 2012 from the first quarter of 2011, led by a 41% increase in product revenue. The revenue increase included 1% of adverse impact from foreign currency fluctuations. Gross margins increased to 59.8% for the first quarter of 2012, from 57.0% in the first quarter of 2011, driven primarily by improved product deal mix, as well as the impact of a higher proportion of product revenue, as compared to services revenue, compared to the prior-year period. The term deal mix refers to the revenue mix of our product sales consummated in a particular period, including both software versus hardware content and mix, and amount and mix of third-party products re-sold.
EMEA: Revenue increased 9% in the first quarter of 2012 from the first quarter of 2011, led by a 20% increase in consulting revenue. The revenue increase included 4% of adverse impact from foreign currency fluctuations. Gross margins decreased to 48.5% for the first quarter of 2012, from 56.0% in the first quarter of 2011, driven primarily by a greater proportion of consulting services revenue (compared to product revenue), as well as adverse deal mix and the timing of transactions.
APJ: Revenue increased 20% in the first quarter of 2012 from the first quarter of 2011, led by a 37% increase in product revenue. The revenue increase included 2% of benefit from foreign currency fluctuations. Gross margin increased to 44.9% in the first quarter of 2012, from 40.5% in the first quarter of 2011. The gross margin increase was driven primarily by improved consulting services margins, as well as the strong growth in product revenue, compared to the prior-year period.
Provision for Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Companys intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pre-tax earnings mix between the United States and other foreign taxing jurisdictions where the Company conducts its business. The Company estimates its full-year forecasted global effective tax rate for the year ended December 31, 2012 to be approximately 27%. This estimate is based on the forecasted overseas profits being taxed at an overall effective tax rate of approximately 12%, as compared to the statutory tax rate of 35% in the United States.
The effective tax rate in the first quarter of 2012 was 28%, the same as in the first quarter of 2011. There were no material discrete tax items reflected in the effective tax rate for the three months ended March 31, 2012 and March 31, 2011.
Financial Condition, Liquidity and Capital Resources
Cash provided by operating activities increased by $86 million in the first three months of 2012. In comparison to the prior-year period, the increase in cash provided by operating activities in the three months ended March 31, 2012 was principally due to a smaller increase in receivables in the first quarter of 2012, compared to the prior-year period, as well as an increase in net income in the first quarter of 2012 (net of non-cash items such as depreciation and amortization, share-based compensation expense and deferred income taxes).
Teradatas management uses a non-GAAP measure called free cash flow, which we define as net cash provided by operating activities less capital expenditures for property and equipment, and additions to capitalized software, as one measure of assessing the financial performance of the Company. Free cash flow does not have a uniform definition under GAAP; therefore, Teradatas definition of this measure may differ from the definition used by other companies. The components that are used to calculate free cash flow are GAAP measures taken directly from the Condensed Consolidated Statements of Cash Flows (Unaudited). We believe that free cash flow information is useful for investors because it relates the operating cash flow of the Company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash available after certain capital expenditures, for among other things, investments in the Companys existing businesses, strategic acquisitions and repurchase of Teradata common stock. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other non-discretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows from operating activities under GAAP.
The table below shows net cash provided by operating activities and capital expenditures for the following periods:
Financing activities and certain other investing activities are not included in our calculation of free cash flow. There were no other investing activities in the first quarter of 2012. Other investing activities in the first three months of 2011 primarily consisted of Teradatas acquisition of Aprimo. Teradatas financing activities for the three months ended March 31, 2012 consisted of proceeds from the Teradata Employee Stock Purchase Plan (ESPP) and the exercise of stock options, which totaled $24 million for the three months ended March 31, 2012, and $8 million for the three months ended March 31, 2011. These proceeds are included in Other financing activities, net in the Condensed Consolidated Statement of Cash Flows (Unaudited).
During the first three months of 2012, the Company did not repurchase any of its common stock. Share repurchases are made under the two share repurchase programs authorized by our Board of Directors in 2008. The first program (the dilution offset program) authorizes the Company to purchase Teradata common stock to the extent of cash received from the exercise of stock options and the Teradata Employee Stock Purchase Plan (ESPP) to offset dilution from shares issued pursuant to these plans. On February 6, 2012, the board approved a new, $300 million share repurchase authorization to replace the prior $300 million authorization that was to expire on February 10, 2012. As of March 31, 2012, the Company had $300 million of authorization remaining on the general share
repurchase program to repurchase outstanding shares of Teradata common stock. Share repurchases made by the Company are reported on a trade date basis. Our share repurchase activity depends on factors such as our working capital needs, our cash requirements for capital investments, our stock price, and economic and market conditions.
Our total in cash and cash equivalents held outside the United States in various foreign subsidiaries was $677 million as of March 31, 2012 and $594 million as of December 31, 2011. The remaining balance held in the United States was $301 million as of March 31, 2012 and $178 million as of December 31, 2011. Under current tax laws and regulations, if cash and cash equivalents and short-term investments held outside the United States are distributed to the United States in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. As of March 31, 2012, we have not provided for the U.S. federal tax liability on approximately $782 million of foreign earnings that are considered permanently reinvested outside of the United States.
As of March 31, 2012 the Company had no outstanding borrowings on the Credit Facility, and was in compliance with all covenants. The current credit facility expires in September 2012; the Company is currently negotiating for a new credit facility and expects to have it in place before expiration.
In April 2011, Teradata entered into a $300 million five-year, unsecured term loan. The outstanding principal amount of the term loan agreement bears interest at a floating rate based upon a negotiated base rate or a Eurodollar rate plus in each case a margin based on the leverage ratio of the Company. As of March 31, 2012, the term loan principal outstanding was $300 million, and carried an interest rate of 1.25%.
Management believes current cash and short-term investment resources, Company cash flows from operations and its $300 million Credit Facility will be sufficient to satisfy future working capital, research and development activities, capital expenditures, pension contributions, and other financing requirements for at least the next twelve months. The Company principally holds its cash, cash equivalents and short-term investments in bank deposits and highly-rated money market funds.
The Companys ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in the Companys 2011 Annual Report on Form 10-K (the 2011 Annual Report), and elsewhere in this Quarterly Report. If the Company is unable to generate sufficient cash flows from operations, or otherwise to comply with the terms of the credit facility and term loan agreement, the Company may be required to seek additional financing alternatives.
Contractual and Other Commercial Commitments. There has been no significant change in our contractual and other commercial commitments as described in the 2011 Annual Report. Our guarantees and product warranties are discussed in Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited).
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, we are required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting policies are those that require assumptions to be made about matters that are highly uncertain. Different estimates could have a material impact on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Our management periodically reviews these estimates and assumptions to ensure that our financial statements are presented fairly and are materially correct.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require significant management judgment in its application. There are also areas in which managements judgment in selecting among available alternatives would not produce a materially different result. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are discussed in the 2011 Annual Report. Teradatas senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months ended March 31, 2012. Also, there were no significant changes in our estimates associated with those policies.
New Accounting Pronouncements
See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for new accounting pronouncements.
There have not been any material changes to the market risk factors previously disclosed in Part II, Item 7A of the Companys 2011 Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
Teradata maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance as of March 31, 2012.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The information required by this item is included in the material under Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
There have not been any material changes to the risk factors previously disclosed in Part I, Item IA of the Companys 2011 Annual Report on Form 10-K.
Purchase of Company Common Stock
Teradata made no repurchases of its common stock during the first quarter of 2012. On February 6, 2012, the board approved a new, $300 million share repurchase authorization to replace the prior $300 million authorization that was to expire on February 10, 2012. As of March 31, 2012, the Company had $300 million of authorization remaining on the general share repurchase program to repurchase outstanding shares of Teradata common stock.
Section 16 officers occasionally sell vested shares of restricted stock to the Company at the current market price to cover their withholding taxes. For the three months ended March 31, 2012, the total of these purchases was 36,170 shares at an average price of $62.16 per share.
The following table provides information relating to the Companys share repurchase programs for the three months ended March 31, 2012:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.