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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-33458
TERADATA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-3236470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17095 Via Del Campo
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (866548-8348
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading SymbolName of Each Exchange on which Registered:
Common Stock, $0.01 par valueTDCNew York Stock Exchange
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company 
  Emerging growth company 
1


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  ý
At October 31, 2020, the registrant had approximately 109.3 million shares of common stock outstanding.
2



TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
 
  
DescriptionPage
Item 1.Financial Statements
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
  
DescriptionPage
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
3

Table of Contents
Part 1—FINANCIAL INFORMATION
A
Item 1.Financial Statements.
Teradata Corporation
Condensed Consolidated Statements of (Loss) Income (Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
In millions, except per share amounts2020201920202019
Revenue
Recurring $365 $343 $1,068 $1,012 
Perpetual software licenses and hardware17 16 48 76 
Consulting services72 100 229 317 
Total revenue454 459 1,345 1,405 
Cost of revenue
Cost of recurring 123 110 359 323 
Cost of perpetual software licenses and hardware7 9 27 60 
Cost of consulting services70 93 224 315 
Total cost of revenue200 212 610 698 
Gross profit254 247 735 707 
Operating expenses
Selling, general and administrative expenses163 151 486 447 
Research and development expenses90 86 246 245 
Total operating expenses253 237 732 692 
Income from operations1 10 3 15 
Other expense, net
Interest expense(7)(8)(21)(19)
Interest income1 4 4 10 
Other expense(5)(2)(13)(7)
Total other expense, net(11)(6)(30)(16)
(Loss) income before income taxes(10)4 (27)(1)
Income tax benefit(9)(6)(151) 
Net (loss) income$(1)$10 $124 $(1)
Net (loss) income per common share
Basic$(0.01)$0.09 $1.13 $(0.01)
Diluted$(0.01)$0.09 $1.12 $(0.01)
Weighted average common shares outstanding
Basic109.1 113.2 109.3 115.2 
Diluted109.1 114.2 110.9 115.2 
See Notes to Condensed Consolidated Financial Statements (Unaudited).

4


Teradata Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
In millions2020201920202019
Net (loss) income$(1)$10 $124 $(1)
Other comprehensive income (loss):
Foreign currency translation adjustments6 (11)(11)(18)
Derivatives:
Unrealized gain (loss) on derivatives, before tax3 (2)(10)(15)
Unrealized gain (loss) on derivatives, tax portion(1)1 2 4 
Unrealized gain (loss) on derivatives, net of tax2 (1)(8)(11)
Defined benefit plans:
Defined benefit plan adjustment, before tax3 2 7 4 
Defined benefit plan adjustment, tax portion(1)(1)(2)(1)
Defined benefit plan adjustment, net of tax2 1 5 3 
Other comprehensive income (loss)10 (11)(14)(26)
Comprehensive income (loss)$9 $(1)$110 $(27)
See Notes to Condensed Consolidated Financial Statements (Unaudited).

5

Table of Contents
Teradata Corporation
Condensed Consolidated Balance Sheets (Unaudited)
In millions, except per share amountsSeptember 30,
2020
December 31,
2019
Assets
Current assets
Cash and cash equivalents$533 $494 
Accounts receivable, net321 398 
Inventories14 31 
Other current assets97 91 
Total current assets965 1,014 
Property and equipment, net336 350 
Capitalized software, net19 36 
Right of use assets - operating lease, net42 51 
Goodwill397 396 
Capitalized contract costs, net89 91 
Deferred income taxes238 87 
Other assets31 32 
Total assets$2,117 $2,057 
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt$38 $25 
Current portion of finance lease liability75 55 
Current portion of operating lease liability17 20 
Accounts payable59 66 
Payroll and benefits liabilities131 157 
Deferred revenue482 472 
Other current liabilities93 91 
Total current liabilities895 886 
Long-term debt423 454 
Finance lease liability70 75 
Operating lease liability30 38 
Pension and other postemployment plan liabilities136 137 
Long-term deferred revenue38 61 
Deferred tax liabilities6 6 
Other liabilities135 138 
Total liabilities1,733 1,795 
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock: par value $0.01 per share, 100.0 shares authorized, no shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
  
Common stock: par value $0.01 per share, 500.0 shares authorized, 109.2 and 110.9 shares issued at September 30, 2020 and December 31, 2019, respectively
1 1 
Paid-in capital1,632 1,545 
Accumulated deficit(1,094)(1,143)
Accumulated other comprehensive loss(155)(141)
Total stockholders’ equity384 262 
Total liabilities and stockholders’ equity$2,117 $2,057 
See Notes to Condensed Consolidated Financial Statements (Unaudited).
6

Table of Contents
Teradata Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended
September 30,
In millions20202019
Operating activities
Net income (loss) $124 $(1)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization126113
Stock-based compensation expense79 59 
Deferred income taxes(152)1 
Changes in assets and liabilities:
Receivables77 260 
Inventories17 (8)
Current payables and accrued expenses(24)(156)
Deferred revenue(13)(119)
Other assets and liabilities(23)(55)
Net cash provided by operating activities211 94 
Investing activities
Expenditures for property and equipment(34)(43)
Additions to capitalized software(6)(3)
Net cash used in investing activities(40)(46)
Financing activities
Repurchases of common stock(75)(239)
Repayments of long-term borrowings(19)(12)
Payments of finance leases(43)(18)
Other financing activities, net7 40 
Net cash used in financing activities(130)(229)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(3)(6)
Increase (decrease) in cash, cash equivalents and restricted cash38 (187)
Cash, cash equivalents and restricted cash at beginning of period496 716 
Cash, cash equivalents and restricted cash at end of period$534 $529 
Supplemental cash flow disclosure:
Assets acquired under operating lease$6 $5 
Assets acquired under finance lease$58 $78 
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:
September 30, 2020December 31, 2019
Cash and cash equivalents$533 $494 
Restricted cash1 2 
Total cash, cash equivalents and restricted cash$534 $496 

See Notes to Condensed Consolidated Financial Statements (Unaudited).
7

Table of Contents
Teradata Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


Common StockPaid-inAccumulated Accumulated Other Comprehensive 
In millionsSharesAmountCapitalDeficitLossTotal
December 31, 2019111 $1 $1,545 $(1,143)$(141)$262 
Net income— — — 168 — 168 
Employee stock compensation, employee stock purchase programs and option exercises, net of tax1 — 22 — — 22 
Repurchases of common stock, retired(4)— — (75)— (75)
Pension and postemployment benefit plans, net of tax— — — — 2 2 
Unrealized loss on derivatives, net of tax— — — — (11)(11)
Currency translation adjustment— — — — (19)(19)
March 31, 2020108 $1 $1,567 $(1,050)$(169)$349 
Net loss— (43)(43)
Employee stock compensation, employee stock purchase programs and option exercises, net of tax1 36 — — 36 
Pension and postemployment benefit plans, net of tax— — — — 1 1 
Unrealized gain on derivatives, net of tax— — — — 1 1 
Currency translation adjustment— — — — 2 2 
June 30, 2020109 $1 $1,603 $(1,093)$(165)$346 
Net loss— — — (1)— (1)
Employee stock compensation, employee stock purchase programs and option exercises, net of tax — 29 — — 29 
Pension and postemployment benefit plans, net of tax— — — — 2 2 
Unrealized gain on derivatives, net of tax— — — — 2 2 
Currency translation adjustment— — — — 6 6 
September 30, 2020109 $1 $1,632 $(1,094)$(155)$384 

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Common StockPaid-inAccumulatedAccumulated Other Comprehensive 
In millionsSharesAmountCapitalDeficitLossTotal
December 31, 2018117 $1 $1,418 $(823)$(101)$495 
Net loss— — — (10)— (10)
Employee stock compensation, employee stock purchase programs and option exercises, net of tax1 — 48 — — 48 
Repurchases of common stock, retired(1)— — (58)— (58)
Pension and postemployment benefit plans, net of tax— — — — 1 1 
Unrealized loss on derivatives, net of tax— — — — (3)(3)
Currency translation adjustment— — — — (6)(6)
March 31, 2019117 $1 $1,466 $(891)$(109)$467 
Net loss— — — (1)— (1)
Employee stock compensation, employee stock purchase programs and option exercises, net of tax— — 25 — — 25 
Repurchases of common stock, retired(3)— — (117)— (117)
Pension and postemployment benefit plans, net of tax— — — — 1 1 
Unrealized loss on derivatives, net of tax— — — — (7)(7)
Currency translation adjustment— — — — (1)(1)
June 30, 2019114 $1 $1,491 $(1,009)$(116)$367 
Net income— — — 10 — 10 
Employee stock compensation, employee stock purchase programs and option exercises, net of tax— — 26 — — 26 
Repurchases of common stock, retired(2)— — (64)— (64)
Pension and postemployment benefit plans, net of tax— — — — 1 1 
Unrealized loss on derivatives, net of tax— — — — (1)(1)
Currency translation adjustment— — — — (11)(11)
September 30, 2019112 $1 $1,517 $(1,063)$(127)$328 

See Notes to Condensed Consolidated Financial Statements (Unaudited).
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Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the United States 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 2019 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.  
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teradata’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "2019 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
Compensation-Retirement Benefits-Defined Benefit Plans-General.  In August 2018, the Financial Accounting Standards Board ("FASB") issued new guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and is to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.
Accounting for Income Taxes. In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. The new guidance changes various subtopics of accounting for income taxes including, but not limited to, accounting for "hybrid" tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, intraperiod tax allocation exception to incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and year-to-date loss limitation in interim-period tax accounting. The guidance is effective for fiscal years beginning after December 15, 2020 with early adoption permitted, including interim periods within those years. The Company is currently evaluating this new guidance to determine the impact it may have on our financial position, results of operations or cash flows.
Reference Rate Reform. In March 2020, the FASB issued new guidance to provide relief to companies that will be impacted by the expected change in benchmark interest rates at the end of 2021, when participating banks will no longer be required to submit London Interbank Offered Rate ("LIBOR") quotes by the UK Financial Conduct Authority. The new guidance allows companies to, provided the only change to existing contracts are a change to an approved benchmark interest rate, account for modifications as a continuance of the existing contract without additional analysis. For new and existing contracts, companies may elect to apply the amendments as of March 12, 2020 through December 31, 2022. The Company is currently evaluating this new guidance to determine the impact it may have on our financial statements and disclosures.
Recently Adopted Guidance
Fair Value Measurement.  In August 2018, the FASB issued new guidance that modifies disclosure requirements related to fair value measurement. The Company adopted this guidance on January 1, 2020, which did not have a material impact on our condensed consolidated financial statements.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued new guidance that reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing
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implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this guidance on January 1, 2020, which did not have a material impact on our condensed consolidated financial statements.
Codification Improvements to Financial Instruments-Credit Losses, Derivatives and Hedging, and Financial Instruments. In June 2016, the FASB issued Accounting Standards, Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. Since the issuance of this accounting standard, the FASB has identified certain areas that require clarification and improvement. In May 2019, the FASB issued guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets measured at amortized cost (except held-to-maturity securities) using the fair value option. The election is to be applied on an instrument-by-instrument basis. The Company adopted this guidance on January 1, 2020, which did not have a material impact on our condensed consolidated financial statements.
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3. Revenue from Contracts with Customers
Disaggregation of Revenue from Contracts with Customers
The following table presents a disaggregation of revenue:
Three Months Ended September 30,Nine months ended September 30,
in millions2020201920202019
Americas
Recurring $221 $222 $656 $652 
Perpetual software licenses and hardware14  28 31 
Consulting services26 34 80 111 
Total Americas261 256 764 794 
EMEA
Recurring92 75 263 223 
Perpetual software licenses and hardware1 12 14 29 
Consulting services22 31 74 101 
Total EMEA115 118 351 353 
APJ
Recurring52 46 149 137 
Perpetual software licenses and hardware2 4 6 16 
Consulting services24 35 75 105 
Total APJ78 85 230 258 
Total Revenue$454 $459 $1,345 $1,405 
Rental revenue, which is included in recurring revenue in the above table, was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
in millions2020201920202019
Rental revenue* $28 $22 $72 $52 
*Rental revenue includes hardware maintenance.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets, and customer advances and deposits (deferred revenue or contract liabilities) on the condensed consolidated balance sheet. Accounts receivable include amounts due from customers that are unconditional. Contract assets relate to the Company’s rights to consideration for goods delivered or services completed and recognized as revenue but billing and the right to receive payment is conditional upon the completion of other performance obligations. Contract assets are included in Other current assets on the balance sheet and are transferred to accounts receivable when the rights become unconditional. Deferred revenue consists of advance payments and billings in excess of revenue recognized. Deferred revenue is classified as either current or noncurrent based on the timing of when the Company expects to recognize revenue. These assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period. The following table provides information about receivables, contract assets and deferred revenue from contracts with customers:
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As of
in millionsSeptember 30, 2020December 31, 2019
Accounts receivable, net$321 $398 
Contract assets$11 $8 
Current deferred revenue$482 $472 
Long-term deferred revenue$38 $61 
Revenue recognized during the nine months ended September 30, 2020 from amounts included in deferred revenue at the beginning of the period was $370 million.
Transaction Price Allocated to Unsatisfied Obligations
The following table includes estimated revenue expected to be recognized in the future related to the Company's unsatisfied (or partially satisfied) obligations at September 30, 2020:
in millionsTotal at September 30, 2020Year 1Year 2 and Thereafter
Remaining unsatisfied obligations$2,577 $1,393 $1,184 
The amounts above represent the price of firm orders for which work has not been performed or goods have not been delivered and exclude unexercised contract options outside the stated contractual term that do not represent material rights to the customer. Although the Company believes that the contract value in the above table is firm, approximately $1,772 million of the amount is under contracts that are subject to customer-only general cancellation for convenience terms that the Company is contractually obligated to perform unless the customer notifies us of cancellation. The Company expects to recognize revenue of approximately $322 million in the next year from contracts that are non-cancelable. Customers typically do not cancel before the end of the contractual term and historically the Company has not seen significant churn in its customer base. The Company believes the inclusion of this information is important to understanding the obligations that the Company is contractually required to perform and provides useful information regarding the remaining obligations related to these executed contracts.
4. Contract Costs
The Company capitalizes sales commissions and other contract costs that are incremental direct costs of obtaining customer contracts if the expected amortization period of the asset is greater than one year. These costs are recorded in Capitalized contract costs, net on the Company’s balance sheet. The capitalized amounts are calculated based on the annual recurring revenue and total contract value for individual multi-term contracts. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as selling, general and administrative expenses on a straight-line basis over the expected period of benefit, which is typically around four years. These costs are periodically reviewed for impairment. The following table identifies the activity relating to capitalized contract costs:
in millionsDecember 31, 2019CapitalizedAmortizationSeptember 30, 2020
Capitalized contract costs$91 $23 $(25)$89 
in millionsDecember 31, 2018CapitalizedAmortizationSeptember 30, 2019
Capitalized contract costs$54 $37 $(14)$77 
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5. Supplemental Financial Information
 As of
In millionsSeptember 30,
2020
December 31,
2019
Inventories
Finished goods$3 $19 
Service parts11 12 
Total inventories$14 $31 
Deferred revenue
Deferred revenue, current$482 $472 
Long-term deferred revenue38 61 
Total deferred revenue$520 $533 
6. 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. As a result of the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), the Company changed its indefinite reversal assertion related to its undistributed earnings of its foreign subsidiaries and no longer considers a majority of its foreign earnings permanently reinvested outside of the United States ("U.S."). 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.

The effective tax rate is as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
In millions2020201920202019
Effective tax rate90.0 %(150.0)%559.3 % %

For the three months ended September 30, 2020, the Company recorded $9 million of discrete tax benefit, a majority of which related to the adjustment of the marginal tax rate from the second quarter based on revised full-year forecasted earnings. As a result, the Company recorded income tax benefit of $9 million on a pre-tax net loss of $10 million for the three months ended September 30, 2020, resulting in an effective income tax rate of 90.0%.
For the nine months ended September 30, 2020, the Company recorded $122 million of discrete tax benefit. The year to date discrete tax expense of $29 million recorded for marginal tax rate adjustments based on revised full year forecasted earnings was offset by $152 million of discrete tax benefit recorded in the first quarter, a majority of which related to an intra-entity asset transfer of certain of the Company's intellectual property ("IP") to one of its Irish subsidiaries, which occurred on January 1, 2020. As a result, the Company recorded income tax benefit of $151 million on a pre-tax net loss of $27 million for the nine months ended September 30, 2020, resulting in an effective income tax rate of 559.3%.
For the three months ended September 30, 2019, the Company recorded a $5 million discrete tax benefit related to the reversal of an uncertain tax position resulting from the expiration of the statute of limitations.
For the nine months ended September 30, 2019, the $5 million discrete tax benefit was partially offset by $4 million of discrete tax expense recorded in the second quarter related to the reversal of the United States Tax Court’s decision in the Altera Corp. v. Commissioner case by the Ninth Circuit Court of Appeals on June 7, 2019. The Altera case focused on whether current U.S. Treasury Regulations requiring the inclusion of stock-based compensation expense in a taxpayer's cost-sharing calculations are valid. As a result of these discrete items and incremental tax expense related to equity compensation, the Company recorded insignificant income tax expense on
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a pre-tax net loss of $1 million for the nine months ended September 30, 2019, resulting in an effective income tax rate of zero percent.
The Company estimates its annual effective tax rate for 2020 to be approximately 279%, which takes into consideration, among other things, the forecasted earnings mix by jurisdiction, and the impact of discrete tax items to be recognized in 2020, which includes the $157 million of discrete tax benefit recognized in the first quarter of 2020 related to the intra-entity IP transfer described above. The 2017 Tax Act subjects U.S. shareholders to a tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The Company has elected to provide for the tax expense related to GILTI in the year in which the tax is incurred. The Company does not expect a material amount of tax expense related to GILTI based on our forecasted marginal effective tax rate for 2020.
7. Derivative Instruments and Hedging Activities
As a portion of Teradata’s operations is conducted outside the U.S. 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 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. 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.
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 revenues, operating expenses or in other income (expense), depending on the nature of the related hedged item.
In June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount to hedge the floating interest rate of its term loan, as more fully described in Note 10. The Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan. The notional amount of the hedge steps down according to the amortization schedule of the term loan. The notional amount of the hedge was $463 million as of September 30, 2020.
The Company performed an initial effectiveness assessment in the third quarter of 2018 on the interest rate swap, and the hedge was determined to be effective. The hedge is being evaluated qualitatively on a quarterly basis for effectiveness. Changes in fair value are recorded in Accumulated Other Comprehensive Loss and periodic settlements of the swap will be recorded in interest expense along with the interest on amounts outstanding under the term loan.
The following table identifies the contract notional amount of the Company’s derivative financial instruments:
As of
In millionsSeptember 30,
2020
December 31,
2019
Contract notional amount of foreign exchange forward contracts$124 $150 
Net contract notional amount of foreign exchange forward contracts$34 $41 
Contract notional amount of interest rate swap $463 $482 
All derivatives are recognized in the condensed consolidated balance sheets at their fair value. 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. Refer to Note 9 for disclosures related to the fair value of all derivative assets and liabilities.
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 foreign
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exchange and interest 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.
8. Commitments and Contingencies
From time to time in the ordinary course of business, the Company is subject to legal proceedings, governmental investigations, claims and other matters, including those that relate to the environment, health and safety, employee benefits, export compliance, IP, tax matters and other regulatory compliance and general matters. We are not currently a party to any legal proceeding, nor are we aware of any threatened legal proceeding against us, that we believe would materially adversely affect our business, operating results, 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 with a third-party leasing company as part of a revenue transaction, whereby the leasing company purchases equipment from Teradata and leases it to the customer. 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 September 30, 2020, the maximum future payment obligation of this guaranteed value and the associated liability balance was $1 million.
For customers that purchase hardware, the Company provides a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. The estimated liabilities for warranty costs are not material, given that most customers do not purchase hardware under the perpetual model. The Company also offers extended and/or enhanced coverage to its customers in the form of maintenance contracts. Teradata 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.
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 a patent or other IP infringement claim against the customer for its use of the Company’s offerings. The Company has indemnification obligations under its charter and bylaws to its officers and directors, and has entered into indemnification agreements with the officers and directors of its subsidiaries. From time to time, the Company also enters into agreements in connection with its acquisition and divestiture activities that include indemnification obligations by the Company. The fair value of these indemnification obligations is typically 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. As such, the Company has generally 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.
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 September 30, 2020 and December 31, 2019.
The Company is also potentially subject to concentrations of supplier risk. Our hardware components are assembled exclusively by Flex Ltd. ("Flex"). Flex procures a wide variety of components used in the manufacturing process on behalf of the Company. Although many of these components are available from multiple sources, Teradata utilizes preferred supplier relationships to provide more consistent and optimal 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 Flex and to source certain components from single suppliers, a disruption in production at Flex or at a supplier could impact the timing of customer shipments and/or
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Teradata’s operating results. In addition, a significant change in the forecasts to any of these preferred suppliers could result in purchase obligations for components that may be in excess of demand.
9. Fair Value Measurements
Fair value measurements are established utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as significant other observable inputs, such as quoted prices in active markets for similar assets or liabilities, or quoted prices in less-active markets for identical assets; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assets and liabilities measured at fair value on a recurring basis include money market funds, interest rate swaps 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, foreign exchange forward contracts. Additionally, in June 2018, Teradata executed a five-year interest rate swap with a $500 million initial notional amount in order to hedge the floating interest rate on its term loan. The fair value of these contracts and swaps 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 of unrealized gains for open contracts are recorded in other assets and the fair value of unrealized losses are recorded in other liabilities in the Company's balance sheet. The fair value of foreign exchange forward contracts recorded in other assets was $1 million at September 30, 2020 and not material at December 31, 2019. The fair value of foreign exchange liabilities at September 30, 2020 and December 31, 2019 was not material. Realized gains and losses from the Company’s fair value hedges net of corresponding gains or losses on the underlying exposures were immaterial for the three and nine months ended September 30, 2020 and 2019.
The Company’s other assets and liabilities measured at fair value on a recurring basis and subject to fair value disclosure requirements at September 30, 2020 and December 31, 2019 were as follows:
  Fair Value Measurements at Reporting Date Using
In millionsTotalQuoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Money market funds at September 30, 2020$126 $126 $ $ 
Money market funds at December 31, 2019$141 $141 $ $ 
Liabilities
Interest rate swap at September 30, 2020$30 $ $30 $ 
Interest rate swap at December 31, 2019$19 $ $19 $ 
10. Debt
In June 2018, Teradata replaced an existing 5 year, $400 million revolving credit facility with a new $400 million revolving credit facility (the "Credit Facility"). The Credit Facility expires in June 2023, at which point any remaining outstanding borrowings would be due for repayment unless extended by agreement of the parties for up to two additional one-year periods. In addition, under the terms of the Credit Facility, Teradata from time to time and subject to certain conditions may increase the lending commitments under the Credit Facility in an aggregate principal amount up to an additional $200 million, to the extent that existing or new lenders agree to provide such
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additional commitments. The outstanding principal amount of the Credit Facility bears interest at a floating rate based upon, at Teradata’s option, a negotiated base rate or a Eurodollar rate plus, in each case, a margin based on Teradata’s leverage ratio. In the near term, Teradata would anticipate choosing a floating rate based on LIBOR. The Credit Facility is unsecured but is guaranteed by certain of Teradata’s material domestic subsidiaries and contains certain representations and warranties, conditions, affirmative, negative and financial covenants, and events of default customary for such facilities. As of September 30, 2020, the Company had no borrowings outstanding under the Credit Facility, leaving $400 million in borrowing capacity available under the Credit Facility. The Company was in compliance with all covenants under the Credit Facility as of September 30, 2020.
Also, in June 2018, Teradata closed on a new senior unsecured $500 million five-year term loan, the proceeds of which plus additional cash-on-hand were used to pay off the remaining $525 million of principal on its previous term loan. The term loan is payable in quarterly installments, which commenced on September 30, 2019, with 1.25% of the initial principal amount due on each of the first eight payment dates; 2.50% of the initial principal amount due on each of the next four payment dates; 5.0% of the initial principal amount due on each of the next three payment dates; and all remaining principal due in June 2023. The outstanding principal amount of the term loan 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 September 30, 2020, the term loan principal outstanding was $463 million. As disclosed in Note 7, Teradata entered into an interest rate swap to hedge the floating interest rate of the term loan. As a result of the swap, Teradata’s fixed rate on the term loan equals 2.86% plus the applicable leverage-based margin as defined in the term loan agreement. As of September 30, 2020, the all-in fixed rate is 4.36%. The Company was in compliance with all covenants under the term loan as of September 30, 2020.
Teradata’s term loan is recognized on the Company’s balance sheet at its unpaid principal balance, net of deferred issuance costs, and is not subject to fair value measurement. However, given that the loan carries a variable rate, the Company estimates that the unpaid principal balance of the term loan would approximate its fair value. If measured at fair value in the financial statements, the Company’s term loan would be classified as Level 2 in the fair value hierarchy.
11. Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the reported period. The calculation of diluted earnings per share is similar to basic earnings per share, except that the weighted average number of shares outstanding includes the dilution from potential shares resulting from stock options, restricted stock awards and other stock awards. The components of basic and diluted earnings per share are as follows:
 Three Months Ended
September 30,
Nine Months Ended
September 30,
In millions, except per share amounts2020201920202019
Net (loss) income attributable to common stockholders$(1)$10 $124 $(1)
Weighted average outstanding shares of common stock109.1 113.2 109.3 115.2 
Dilutive effect of employee stock options, restricted stock and other stock awards 1.0 1.6  
Common stock and common stock equivalents109.1 114.2 110.9 115.2 
Net (loss) income per share:
Basic$(0.01)$0.09 $1.13 $(0.01)
Diluted$(0.01)$0.09 $1.12 $(0.01)
For the three months ended September 30, 2020 and nine months ended September 30, 2019, due to the net loss attributable to Teradata common stockholders, potential common shares that would cause dilution, such as employee stock options, restricted shares and other stock awards, have been excluded from the diluted share count because their effect would have been anti-dilutive. The fully diluted shares would have been 111.1 million for the three months ended September 30, 2020 and 116.6 million for the nine months ended September 30, 2019.
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Options to purchase 2.1 million shares of common stock for the three and nine months ended September 30, 2020 and 1.6 million shares of common stock for the three and nine months ended September 30, 2019 were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common shares for the period, and therefore would have been anti-dilutive.
12. Segment and Other Supplemental Information
Teradata manages its business under three geographic regions, which are also the Company’s operating segments: (1) Americas region (North America and Latin America); (2) EMEA region (Europe, Middle East and Africa) and (3) APJ region (Asia Pacific and Japan). For purposes of discussing results by segment, management excludes the impact of certain items, consistent with the manner by which management evaluates the performance of each segment. This format is useful to investors because it allows analysis and comparability of operating trends. It also includes the same information that is used by Teradata management to make decisions regarding the segments and to assess financial performance. The chief operating decision maker, who is our President and Chief Executive Officer, evaluates the performance of the segments based on revenue and multiple profit measures, including segment gross profit. For management reporting purposes assets are not allocated to the segments.
The following table presents segment revenue and segment gross profit for the Company:
 Three Months Ended
September 30,
Nine Months Ended
September 30,
In millions2020201920202019
Segment revenue
Americas$261 $256 $764 $794 
EMEA115 118 351 353 
APJ78 85 230 258 
Total revenue454 459 1,345 1,405 
Segment gross profit
Americas165 158 470 473 
EMEA69 62 197 169 
APJ43 37 114 108 
Total segment gross profit277 257 781 750 
Stock-based compensation costs5 5