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CA 10-Q 2012 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended December 31, 2011 or
For the transition period from to Commission File Number 1-9247
CA, Inc. (Exact name of registrant as specified in its charter)
1-800-225-5224 (Registrant’s telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report)
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 þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Table of ContentsCA, INC. AND SUBSIDIARIES INDEX
Table of ContentsPART I. FINANCIAL INFORMATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders CA, Inc.: We have reviewed the condensed consolidated balance sheet of CA, Inc. and subsidiaries as of December 31, 2011, the related condensed consolidated statements of operations for the three-month and nine-month periods ended December 31, 2011 and 2010, and the related condensed consolidated statements of cash flows for the nine-month periods ended December 31, 2011 and 2010. These condensed consolidated financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CA, Inc. and subsidiaries as of March 31, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 16, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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Table of ContentsItem 1. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share and per share amounts)
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in millions, except per share amounts)
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in millions)
See accompanying Notes to the Condensed Consolidated Financial Statements.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited) NOTES TO FINANCIAL STATEMENTS Basis of Presentation: The accompanying unaudited Condensed Consolidated Financial Statements of CA, Inc. (Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270, for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (2011 Form 10-K). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Operating results for the three and nine months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012. Divestitures: In June 2011, the Company sold its Internet Security business and in June 2010, the Company sold its Information Governance business. The results of operations for these businesses, and the related gain (loss) on disposal have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows. The effects of the discontinued components were immaterial to the Company’s Condensed Consolidated Balance Sheet at March 31, 2011. See Note C, “Divestitures,” for additional information. In September 2010, the Company sold an equity investment and recognized a gain of approximately $10 million, which is included in “Other expenses (gains), net” in the Company’s Condensed Consolidated Statements of Operations for the nine months ended December 31, 2010. Cash and Cash Equivalents: The Company’s cash and cash equivalents are held in numerous locations throughout the world, with approximately 64% being held by the Company’s foreign subsidiaries outside the United States at December 31, 2011. Fair Value Measurements: Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
See Note K, “Fair Value Measurements,” for additional information. Deferred Revenue (Billed or Collected): The Company accounts for unearned revenue on billed amounts due from customers on a gross basis. Unearned revenue on billed installments (collected or uncollected) is reported as deferred revenue in the liability section of the Company’s Condensed Consolidated Balance Sheets. Deferred revenue (billed or collected) excludes unbilled contractual commitments executed under license and maintenance agreements that will be billed in future periods. Statements of Cash Flows: For the nine months ended December 31, 2011 and 2010, interest payments, net were approximately $56 million and $67 million, respectively, and income taxes paid were approximately $252 million and $161 million, respectively.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The Company uses a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either cash deposit or borrowing positions through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because the bank maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both cash deposits and borrowings. At December 31, 2011, while the overall pool was positive, there was approximately $120 million of borrowing positions outstanding under this cash pooling arrangement which is included in the “Accrued expenses and other current liabilities” line item on the Company’s Condensed Consolidated Balance Sheet. Borrowings and repayments were approximately $240 million and $112 million, respectively, for the nine months ended December 31, 2011. At March 31, 2011, there were no borrowings outstanding under the cash pooling arrangement. Non-cash financing activities for the nine months ended December 31, 2011 and 2010 consisted of treasury shares issued in connection with the following: share-based incentive awards granted under the Company’s equity compensation plans of approximately $54 million (net of approximately $26 million of taxes withheld) and $63 million (net of approximately $27 million of taxes withheld), respectively; and discretionary stock contributions to the CA, Inc. Savings Harvest Plan of approximately $13 million and $25 million, respectively. NOTE B – ACQUISITIONS Acquisitions of businesses are accounted for as purchases and, accordingly, their results of operations have been included in the Company’s Condensed Consolidated Financial Statements since the respective dates of the acquisitions. The purchase price for each of the Company’s acquisitions is allocated to the assets acquired and liabilities assumed from the acquired entity. In August 2011, the Company acquired 100% of the voting equity interest of Interactive TKO, Inc. (ITKO), a privately held provider of service simulation solutions for developing applications in composite and cloud environments. The acquisition expands solutions the Company offers enterprises and service providers for using and providing cloud computing to deliver business services. The total purchase price of the acquisition was approximately $316 million. The pro forma effects of the Company’s fiscal year 2012 acquisitions to the Company’s revenues and results of operations during fiscal year 2011 and 2012 were considered immaterial. The purchase price allocation of the Company’s fiscal year 2012 acquisitions is as follows:
Transaction costs for acquisitions were immaterial. The excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The preliminary allocation of a significant portion of the purchase price to goodwill was predominantly due to synergies the Company expects from marketing and integration with other products of the Company and intangible assets that are not separable, such as assembled workforce and going concern. The goodwill relating to the Company’s second quarter fiscal year 2012 acquisition of ITKO is not expected to be deductible for tax purposes. A majority of the goodwill relating to the Company’s other fiscal year 2012 acquisitions is expected to be deductible for tax purposes.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The Company’s acquisitions during the first three quarters of fiscal year 2011 were considered immaterial, both individually and in the aggregate, compared with the results of the Company’s operations. Therefore, purchase accounting and pro forma disclosures are not presented. During the third quarter of fiscal year 2011, the Company acquired 100% of the voting equity interests of Arcot Systems, Inc. (Arcot), a privately held provider of authentication and fraud prevention solutions through on-premises software or cloud services. The purchase price allocation was finalized in the second quarter of fiscal 2012 and no material adjustments were made to amounts previously reported. The following represents the allocation of the purchase price and estimated useful lives to the acquired net assets of Arcot:
The Company had liabilities of approximately $39 million and $77 million at December 31, 2011 and March 31, 2011, respectively, related to purchase price amounts withheld subject to indemnification protections. NOTE C – DIVESTITURES In June 2011, the Company sold its Internet Security business for approximately $14 million and recognized a gain on disposal of approximately $23 million, including tax expense of approximately $18 million. In June 2010, the Company sold its Information Governance business for approximately $19 million and recognized a loss on disposal of approximately $5 million, including tax expense of approximately $4 million. The income (loss) from discontinued components for the sale of the Company’s Internet Security business, which occurred during the first quarter of fiscal 2012, consists of the following:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The income (loss) from discontinued components, relating to both the Internet Security business and the sale of the Company’s Information Governance business for the three and nine months ended December 31, 2010 consists of the following:
NOTE D – SEVERANCE AND EXIT COSTS Fiscal 2012 workforce reduction: The Fiscal 2012 workforce reduction plan (Fiscal 2012 Plan) was announced in July 2011 and consisted of a workforce reduction of approximately 400 positions. This action is part of the Company’s efforts to reallocate resources and divest nonstrategic parts of the business. The total amounts incurred with respect to severance under the Fiscal 2012 Plan were $44 million, of which approximately $27 million is included in “Selling and marketing,” $9 million is included in “Product development and enhancements,” $5 million is included in “General and administrative,” $2 million is included in “Costs of licensing and maintenance” and $1 million is included in “Cost of professional services” on the Condensed Consolidated Statements of Operations. Actions under the Fiscal 2012 Plan are expected to be substantially completed by the end of fiscal year 2012. Fiscal 2010 restructuring plan: The Fiscal 2010 restructuring plan (Fiscal 2010 Plan) was announced in March 2010 and consisted of a workforce reduction of approximately 1,000 positions and global facilities consolidations. These actions were intended to better align the Company’s cost structure with the skills and resources required to more effectively pursue opportunities in the marketplace and execute the Company’s long-term growth strategy. The total amounts incurred with respect to severance and facilities abandonment under the Fiscal 2010 Plan were $43 million and $2 million, respectively. Actions under the Fiscal 2010 Plan were substantially completed by the end of fiscal year 2011. Fiscal 2007 restructuring plan: In August 2006, the Company announced the Fiscal 2007 restructuring plan (Fiscal 2007 Plan) to significantly improve the Company’s expense structure and increase its competitiveness. The Fiscal 2007 Plan consisted of a workforce reduction of approximately 3,100 employees, global facilities consolidations and other cost reductions. The total amounts incurred with respect to severance and facilities abandonment under the Fiscal 2007 Plan were $220 million and $119 million, respectively. Actions under the Fiscal 2007 Plan were substantially completed by the end of fiscal year 2010.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Accrued severance and exit costs at December 31, 2011 and changes in the accruals during the nine months ended December 31, 2011 and 2010 associated with the Fiscal 2012, Fiscal 2010 and Fiscal 2007 Plans were as follows:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The severance liability is included in the “Accrued salaries, wages and commissions” line item on the Condensed Consolidated Balance Sheets. The facilities abandonment liability is included in the “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” line items on the Condensed Consolidated Balance Sheets. The Fiscal 2010 Plan and Fiscal 2007 Plan costs are included in the “Other expenses (gains), net” line item on the Condensed Consolidated Statements of Operations. Accretion and other includes accretion of the Company’s lease obligations related to facilities abandonment as well as changes in the assumptions related to future sublease income. These costs are included in the “General and administrative” expense line item on the Condensed Consolidated Statements of Operations. NOTE E – MARKETABLE SECURITIES At December 31, 2011, available-for-sale securities consisted of the following:
At December 31, 2011, the Company did not have any debt securities that were in a continuous unrealized loss position for greater than 12 months. Proceeds from the sale of marketable securities and realized gains and realized losses for the nine months ended December 31, 2011 were approximately $27 million and less than $1 million, respectively. At December 31, 2011, $102 million of marketable securities had scheduled maturities of less than one year, and approximately $79 million had maturities of greater than one year but not exceeding three years. At March 31, 2011, available-for-sale securities consisted of the following:
At March 31, 2011, the Company did not have any debt securities that were in a continuous unrealized loss position for greater than 12 months. At March 31, 2011, $75 million of marketable securities had scheduled maturities of less than one year, and approximately $104 million had scheduled maturities of greater than one year but not exceeding three years.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
NOTE F – TRADE ACCOUNTS RECEIVABLE Trade accounts receivable, net represents amounts due from the Company’s customers and is presented net of allowance for doubtful accounts. These balances include revenue recognized in advance of customer billings but do not include unbilled contractual commitments executed under license agreements. The components of “Trade accounts receivable, net” were as follows:
NOTE G – GOODWILL, CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at December 31, 2011 were approximately $7,763 million and $6,337 million, respectively. These amounts include fully amortized intangible assets of approximately $5,686 million, which were composed of purchased software of approximately $4,731 million, internally developed software products of approximately $552 million and other identified intangible assets subject to amortization of approximately $403 million. The gross carrying amounts and accumulated amortization for identified intangible assets that were not fully amortized were as follows:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at March 31, 2011 were approximately $7,417 million and $6,133 million, respectively. These amounts included fully amortized assets of approximately $5,290 million, which were composed of purchased software of approximately $4,662 million, internally developed software products of approximately $508 million and other identified intangible assets subject to amortization of approximately $120 million. The gross carrying amounts and accumulated amortization for identified intangible assets that were not fully amortized were as follows:
Based on the capitalized software and other identified intangible assets recorded through December 31, 2011, the projected annual amortization expense for fiscal year 2012 and over the next four fiscal years is expected to be as follows:
Goodwill activity for the nine months ended December 31, 2011 was as follows:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
NOTE H – DEFERRED REVENUE The components of “Deferred revenue (billed or collected) – current” and “Deferred revenue (billed or collected) – noncurrent” at December 31, 2011 and March 31, 2011 were as follows:
NOTE I – DEBT Revolving Credit Facility: In April 2011, the Company repaid the outstanding balance of $250 million on the revolving credit facility that was due August 2012. In August 2011, the Company replaced the revolving credit facility due August 2012 with a new revolving credit facility due August 2016. The maximum committed amount available under the revolving credit facility due August 2016 is $1 billion. The facility also provides the Company with an option to increase the available credit by an amount up to $500 million. This option is subject to certain conditions and the agreement of the facility lenders. Advances under the revolving credit facility bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowings and are calculated according to a Base Rate or a Eurocurrency Rate, as the case may be, plus an applicable margin. The Company must also pay facility commitment fees quarterly on the full revolving credit commitment at rates dependent on the Company’s credit ratings. At December 31, 2011, there were no outstanding borrowings under the revolving credit facility due August 2016 and, based on the Company’s current credit ratings, the rates applicable to the facility at December 31, 2011 were as follows:
The interest rate that would have applied at December 31, 2011 to a borrowing under the revolving credit facility due August 2016 would have been 3.50% for Base Rate borrowings and 1.40% for Eurocurrency Rate borrowings. The Company capitalized the transaction fees of approximately $2 million associated with the revolving credit facility due August 2016. These fees are being amortized to “Interest expense, net” in the Condensed Consolidated Statements of Operations.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The revolving credit facility due August 2016 contains customary covenants for borrowings of this type, including two financial covenants: (i) for the 12 months ending each quarter-end, the ratio of consolidated debt for borrowed money to consolidated cash flow, each as defined in the facility Credit Agreement, must not exceed 4.00 to 1.00; and (ii) for the 12 months ending at any date, the ratio of consolidated cash flow to the sum of interest payable on, and amortization of debt discount in respect of, all consolidated debt for borrowed money, as defined in the facility Credit Agreement, must not be less than 3.50 to 1.00. At December 31, 2011, the Company was in compliance with all covenants. In addition, future borrowings under the revolving credit facility require, at the date of a borrowing, that (i) no event of default shall have occurred and be continuing and (ii) the Company reaffirm the representations and warranties it made in the facility Credit Agreement. NOTE J – DERIVATIVES The Company is exposed to financial market risks arising from changes in interest rates and foreign exchange rates. Changes in interest rates could affect the Company’s monetary assets and liabilities, and foreign exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted transactions. The Company enters into derivative contracts with the intent of mitigating a portion of these risks. Interest rate swaps: The Company has interest rate swaps with a total notional value of $500 million, that swap a total of $500 million of its 6.125% Senior Notes due December 2014 into floating interest rate debt through December 1, 2014. These swaps are designated as fair value hedges. At December 31, 2011, the fair value of these derivatives was an asset of approximately $27 million, of which approximately $10 million is included in “Other current assets” and approximately $17 million is included in “Other noncurrent assets, net” in the Company’s Condensed Consolidated Balance Sheet. At March 31, 2011, the fair value of these derivatives was an asset of approximately $15 million, of which approximately $11 million is included in “Other current assets” and approximately $4 million is included in “Other noncurrent assets, net” in the Company’s Condensed Consolidated Balance Sheet. During fiscal year 2009, the Company entered into interest rate swaps with a total notional value of $250 million to hedge a portion of its variable interest rate payments on its revolving credit facility. The amount of loss reclassified from “Accumulated other comprehensive income” into “Interest expense, net” in the Company’s Condensed Consolidated Statements of Operations was approximately $1 million and $4 million for the three and nine months ended December 31, 2010, respectively. These derivatives were designated as cash flow hedges and matured in October 2010. Foreign currency contracts: The Company enters into foreign currency option and forward contracts to manage foreign currency risks. The Company has not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other expenses (gains), net” in the Company’s Condensed Consolidated Statements of Operations. At December 31, 2011, foreign currency contracts outstanding consisted of purchase and sales contracts with a total notional value of approximately $826 million and durations of less than three months. The net fair value of these contracts at December 31, 2011 was approximately $10 million, of which approximately $16 million is included in “Other current assets” and approximately $6 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet. The net fair value of these contracts at March 31, 2011 was approximately $6 million, of which approximately $7 million is included in “Other current assets” and approximately $1 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
A summary of the effect of the interest rate and foreign exchange derivatives on the Company’s Condensed Consolidated Statements of Operations is as follows:
The Company is subject to collateral security arrangements with most of its major counterparties. These arrangements require the Company to hold or post collateral when the derivative fair values exceed contractually established thresholds. The aggregate fair values of all derivative instruments under these collateralized arrangements were in a net asset position at December 31, 2011 and March 31, 2011. The Company posted no collateral at December 31, 2011 or March 31, 2011. Under these agreements, if the Company’s credit ratings had been downgraded one rating level, the Company would still not have been required to post collateral.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
NOTE K – FAIR VALUE MEASUREMENTS The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011 and March 31, 2011:
At December 31, 2011 and March 31, 2011, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis at December 31, 2011 and March 31, 2011:
The carrying values of financial instruments classified as current assets and current liabilities, such as cash and cash equivalents, accounts payable, accrued expenses, and short-term debt, approximate fair value due to the short-term maturity of the instruments. The fair values of total debt, including current maturities, have been based on quoted market prices. NOTE L – COMMITMENTS AND CONTINGENCIES The Company, various subsidiaries, and certain current and former officers have been named as defendants in various lawsuits and claims arising in the normal course of business. The Company believes that it has meritorious defenses in connection with these lawsuits and claims, and intends to vigorously contest each of them. Based on the Company’s experience, management believes that the damages amounts claimed in a case are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of cases. In the opinion of the Company’s management based upon information currently available to the Company, while the outcome of these lawsuits and claims is uncertain, the likely results of these lawsuits and claims against the Company, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows, although the effect could be material to the Company’s results of operations or cash flows for any interim reporting period. The Company is obligated to indemnify its officers and directors under certain circumstances to the fullest extent permitted by Delaware law. As a part of that obligation, the Company has advanced and will continue to advance certain attorneys’ fees and expenses incurred by current and former officers and directors in various lawsuits and investigations. NOTE M – STOCKHOLDERS’ EQUITY Stock Repurchases: On May 12, 2011, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to acquire up to an additional $500 million of its common stock. At December 31, 2011, the Company remained authorized to purchase up to approximately $232 million of additional shares of common stock under its stock repurchase programs. During the nine months ended December 31, 2011, the Company repurchased approximately 25.7 million shares of its common stock for approximately $550 million, which included shares repurchased under both of the Company’s previously authorized share repurchase programs.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Comprehensive Income: Comprehensive income includes net income, unrealized gains on cash flow hedges, unrealized gains and losses on marketable securities and foreign currency translation adjustments. The components of comprehensive income for the three and nine months ended December 31, 2011 and 2010 are as follows:
Cash Dividends: The Company’s Board of Directors declared the following dividends during the nine months ended December 31, 2011 and 2010: Nine Months Ended December 31, 2011: (in millions, except per share amounts)
Nine Months Ended December 31, 2010: (in millions, except per share amounts)
NOTE N – INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE Basic net income per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted net income per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares at the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The following table presents basic and diluted income from continuing operations per common share information for the three and nine months ended December 31, 2011 and 2010.
For the three months ended December 31, 2011 and 2010, respectively, approximately 6 million and 5 million shares of Company common stock underlying restricted stock awards and options to purchase common stock were excluded from the calculation because their effect on income per share was anti-dilutive during the respective periods. For the nine months ended December 31, 2011 and 2010, respectively, approximately 6 million and 8 million restricted stock awards and options to purchase common stock were excluded from the calculation because their effect on income per share was anti-dilutive during the respective periods. Weighted average restricted stock awards of approximately 6 million and 6 million for the three and nine months ended December 31, 2011 and 2010, respectively, were considered participating securities in the calculation of net income available to common stockholders.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
NOTE O – ACCOUNTING FOR SHARE-BASED COMPENSATION The Company recognized share-based compensation in the following line items on the Condensed Consolidated Statements of Operations for the periods indicated:
The following table summarizes information about unrecognized share-based compensation costs at December 31, 2011:
There were no capitalized share-based compensation costs for the three and nine months ended December 31, 2011 or 2010. Under the Company’s long-term incentive plans, the value of performance share unit (PSU) awards is determined using the closing price of the Company’s common stock on the last trading day of the quarter until the PSUs are granted. Compensation costs for the PSUs are amortized over the requisite service periods based on the expected level of achievement of the performance targets. At the conclusion of the performance periods for the PSUs, the applicable number of shares of restricted stock awards (RSAs), restricted stock units (RSUs) or unrestricted shares granted may vary based upon the level of achievement of the performance targets and the approval of the Company’s Compensation and Human Resources Committee (which may reduce any award for any reason in its discretion).
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
For the nine months ended December 31, 2011 and 2010, the Company issued options for approximately 0.6 million shares and 1.2 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:
The table below summarizes all of the RSUs and RSAs, including grants made pursuant to the long-term incentive plans discussed above, granted during the three and nine months ended December 31, 2011 and 2010:
Employee Stock Purchase Plan: At the Company’s August 3, 2011 Annual Meeting of Stockholders, the Company’s 2012 Employee Stock Purchase Plan (ESPP) was approved. The ESPP offer period is semi-annual and allows participants to purchase the Company’s common stock at 95% of the closing price of the stock on the last day of the plan period. A total of 30,000,000 shares may be issued under the ESPP. Shares will not be issued until the end of the first offer period, which occurs at the end of the first quarter of fiscal year 2013. NOTE P – INCOME TAXES Income tax expense for the three and nine months ended December 31, 2011 was $141 million and $337 million, respectively, compared with the three and nine months ended December 31, 2010 of $126 million and $284 million, respectively. For the three and nine months ended December 31, 2011, the Company recognized a net tax expense of approximately $10 million and a net tax benefit of approximately $8 million, respectively, resulting primarily from international tax rate changes and the recognition of tax benefits related to an investment in a foreign subsidiary.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
For the three and nine months ended December 31, 2010, the Company recognized a net tax expense of approximately $26 million and a net tax benefit of approximately $10 million, respectively, resulting primarily from refinements of tax positions taken in prior periods, assertion of affirmative claims in the context of tax audits, the resolutions and accruals of uncertain tax positions relating to non-U.S. jurisdictions, and the retroactive reinstatement in December 2010 of the research and development tax credit in the United States. In April 2011, the U.S. Internal Revenue Service (IRS) completed its examination of the Company’s federal income tax returns for the tax years ended March 31, 2005, March 31, 2006 and March 31, 2007 and issued a report of its findings in connection with the examination. The Company disagrees with certain proposed adjustments in the report and is vigorously disputing these matters through the IRS appellate process. While the Company believes that it has recorded reserves sufficient to cover exposures related to these issues, such that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations, the resolution of such matters involves uncertainties and there are no assurances that the ultimate resolution will not exceed the amounts recorded. The Company does not believe it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company’s effective income tax rate, excluding the impact of discrete items, for the nine months ended December 31, 2011 and December 31, 2010 was 32.4% and 31.9%, respectively. Changes in the anticipated results of the Company’s international operations, the outcome of tax audits and any other changes in potential tax liabilities may result in additional tax expense or benefit in future periods, which are not considered in the Company’s estimated annual effective tax rate. While the Company does not currently view any such items as individually material to the results of the Company’s consolidated financial position or results of operations, the impact of such items may yield additional tax expense or benefit in the remaining quarter of fiscal year 2012 and future periods and the Company is anticipating a fiscal year 2012 effective tax rate of approximately 31% to 32%. NOTE Q – SEGMENT INFORMATION In the first quarter of fiscal year 2012, the Company changed the internal reporting used by its Chief Executive Officer for evaluating segment performance and allocating resources. The new reporting disaggregates the Company’s operations into Mainframe Solutions, Enterprise Solutions and Services segments, and represented a change in the Company’s operating segments under ASC 280, “Segment Reporting.” Prior to fiscal year 2012, the Company reported and managed its business based on a single operating segment under ASC 280. The Company’s Mainframe Solutions and Enterprise Solutions operating segments comprise its software business organized by the nature of the Company’s software offerings and the product hierarchy in which the platform operates. The Services operating segment comprises implementation, consulting, education and training services, including those directly related to the Mainframe Solutions and Enterprise Solutions software that the Company sells to its customers. The Company regularly enters into a single arrangement with a customer that includes Mainframe Solutions segment software products, Enterprise Solutions segment software products and Services. The amount of contract revenue assigned to segments is generally based on the manner in which the proposal is made to the customer. The software product revenue is assigned to the Mainframe Solutions and Enterprise Solutions segments based on either: (1) a list price allocation method (which allocates a discount in the total contract price to the individual products in proportion to the list price of the products); (2) allocations included within internal contract approval documents; or (3) the value for individual software products as stated in the customer contract. The price for the implementation, consulting, education and training services is separately stated in the contract and these amounts of contract revenue are assigned to the Services segment. The contract value assigned to each segment is then recognized in a manner consistent with the revenue recognition policies the Company applies to the customer contract for purposes of preparing the Condensed Consolidated Financial Statements.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Segment expenses include costs that are controllable by segment managers (i.e., direct costs) and, in the case of the Mainframe Solutions and Enterprise Solutions segments, an allocation of shared and indirect costs (i.e., allocated costs). Segment-specific direct costs include a portion of selling and marketing costs, licensing and maintenance costs, product development costs, general and administrative costs and amortization of the cost of internally developed software. Allocated segment costs primarily include indirect selling and marketing costs and general and administrative costs that are not directly attributable to a specific segment. The basis for allocating shared and indirect costs between the Mainframe Solutions and Enterprise Solutions segments is dependent on the nature of the cost being allocated and is either in proportion to segment revenues or in proportion to the related direct cost category. Expenses for the Services segment consist only of direct costs and there are no allocated or indirect costs for the Services segment. During the first nine months of fiscal year 2012, the Company incurred severance costs associated with the Fiscal 2012 Plan, of which $23 million, $20 million and $1 million were assigned to the Mainframe Solutions, Enterprise Solutions and Services segments, respectively. See Note D, “Severance and Exit Costs,” for additional information. Segment expenses do not include the following: share-based compensation expense; amortization of purchased software; amortization of other intangible assets; derivative hedging gains and losses; and severance, exit costs and related charges associated with the Company’s Fiscal 2007 Plan. A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed. Also, goodwill by segment has not been disclosed because the Company has not yet completed its allocation of goodwill among the segments.
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
The Company’s segment information for the three and nine months ended December 31, 2011 and 2010 is as follows:
Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended December 31, 2011:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Reconciliation of segment profit to income from continuing operations before income taxes for the nine months ended December 31, 2011:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended December 31, 2010:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
Reconciliation of segment profit to income from continuing operations before income taxes for the nine months ended December 31, 2010:
The table below summarizes the Company’s revenue from the United States and from international (i.e., non-U.S.) locations:
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Table of ContentsCA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 (unaudited)
NOTE R – SUBSEQUENT EVENTS On January 24, 2012, the Company announced that the Board of Directors approved a capital allocation program that targets the return of up to $2.5 billion to the Company’s stockholders through fiscal year 2014. The capital allocation program includes a planned increase in the Company’s annual dividend from $0.20 to $1.00 per share of common stock and the authorization for the Company to acquire up to $1.5 billion of its common stock, including $232 million remaining at December 31, 2011 under the Company’s current share repurchase authorization. The Company has declared a quarterly dividend of $0.25 per share of common stock for the fourth quarter of fiscal year 2012.
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Table of ContentsItem 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statement This Quarterly Report on Form 10-Q (Form 10-Q) contains certain forward-looking information relating to CA, Inc. (the “Company,” “Registrant,” “CA Technologies,” “CA,” “we,” “our” or “us”), that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-Q,words like “believes,” “plans,” “anticipates,” “expects,” “estimates,” “targets” and similar expressions are intended to identify forward-looking information. Such information includes, for example, the statements made in this Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also appears in other parts of this Form 10-Q. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions. The declaration and payment of future dividends is subject to the determination of the Company’s Board of Directors, in its sole discretion, after considering various factors, including the Company’s financial condition, historical and forecast operating results, and available cash flow, as well as any applicable laws and contractual covenants and any other relevant factors. The Company’s practice regarding payment of dividends may be modified at any time and from time to time. Repurchases under the Company’s stock repurchase program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. The program, which is authorized through fiscal year 2014, does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company’s strategy by, among other things, increasing sales in new and emerging enterprises and markets, enabling the sales force to sell new products, improving the Company’s brand in the marketplace and ensuring the Company’s set of cloud computing, Software-as-a-Service and other new offerings address the needs of a rapidly changing market, while not adversely affecting the demand for the Company’s traditional products or its profitability; global economic factors or political events beyond the Company’s control; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business sector; failure to expand partner programs; the ability to adequately manage and evolve financial reporting and managerial systems and processes; acquisition opportunities that may or may not arise; the ability to integrate acquired companies and products into existing businesses; competition in product and service offerings and pricing; the ability to retain and attract qualified key personnel; the ability to adapt to rapid technological and market changes; the ability of the Company’s products to remain compatible with ever-changing operating environments; access to software licensed from third parties; use of software from open source code sources; discovery of errors in the Company’s software and potential product liability claims; significant amounts of debt and possible future credit rating changes; the failure to protect the Company’s intellectual property rights and source code; fluctuations in the number, terms and duration of our license agreements as well as the timing of orders from customers and channel partners; reliance upon large transactions with customers; risks associated with sales to government customers; breaches of the Company’s software products and the Company’s and customers’ data centers and IT environments; third-party claims of intellectual property infringement or royalty payments; fluctuations in foreign currencies; failure to effectively execute the Company’s workforce reductions; successful outsourcing of various functions to third parties; potential tax liabilities; and other factors described more fully in this Form 10-Q and the Company’s other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Form 10-Q as believed, planned, anticipated, expected, estimated, or targeted. We do not intend to update these forward-looking statements, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements. References in this Form 10-Q to fiscal 2012 and fiscal 2011 are to our fiscal years ending on March 31, 2012 and 2011, respectively.
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Table of ContentsOVERVIEW We are the leading independent enterprise information technology (IT) management software and solutions company with expertise across IT environments — from mainframe and physical to virtual and cloud. We develop and deliver software and services that help organizations manage, secure and automate their IT infrastructures and deliver more flexible IT services. This allows companies to more effectively and efficiently respond to business needs. We address components of the computing environment, including people, information, processes, systems, networks, applications and databases, regardless of the hardware or software customers are using. We license our products worldwide. We service companies across most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, manufacturers, technology companies, retailers, educational organizations and health care institutions. These customers typically maintain IT infrastructures that are both complex and central to their objectives for operational excellence. We are the leading independent software vendor in the mainframe space, and we continue to innovate on the mainframe platform, which runs many of our largest customers’ most important applications. As the IT landscape continues to evolve, more companies are seeking to improve the efficiency and availability of their IT resources and applications through virtualization, which enables users to run multiple virtual machines on each physical machine and thereby reduce operating costs associated with physical infrastructure. Virtualization is essential to the evolution of cloud computing, the on-demand access to a shared pool of computing resources that can be configured and used as needed. At the same time, the consumption of IT assets is evolving through the adoption of Software-as-a-Service (SaaS), where customers can obtain software on a subscription, “pay-as-you go” model. As more companies begin to adopt virtualization and cloud computing, data centers are becoming more complex, with mainframes, physical servers, virtualized servers and private, public and hybrid (a combination of public and private) cloud environments. We believe it is essential for companies to effectively manage and secure all of their various computing environments. We expect this evolution will allow business models to change more rapidly than in the past. While these technologies increase flexibility, they can also introduce significant management complexity. We believe that our years of experience and core strength in traditional IT management and security combined with our significant investments will position us as a leader in this portion of the IT industry. We have a broad portfolio of software solutions that address customer needs, including mainframe; service assurance; security (identity and access management); project and portfolio management; service management; virtualization and service automation; and cloud computing. We deliver our products on-premises or, for certain products, using SaaS. Our strategy is to help our customers manage, secure and automate IT and to make us their strategic partner as they deploy new technologies and maximize their investments in current systems and applications. This strategy emphasizes accelerating our growth by continuing to build on our portfolio of software and services to address customer needs in the above-mentioned areas of focus through a combination of internal development and acquired technologies. We believe this strategy builds on our core strengths in IT management while also positioning us to compete in high-growth markets, including virtualization, cloud and SaaS. We are also seeking to expand our business beyond our traditional core customers, generally consisting of large enterprises, to reach what we refer to as “emerging enterprises” or “growth accounts” (which we define as companies with annual revenue of $300 million to $2 billion) and customers in “emerging geographies” or “growth geographies.” We are increasing the number of our relationships and expanding existing relationships with various types of service providers, particularly global outsourcers, regional managed service providers and communication network operators.
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Table of ContentsIn the third quarter of fiscal 2012, we started rebalancing our sales force to add new quota carrying sales representatives in order to increase our focus on selling new products to new customers. Their compensation structure is designed to reward new business with new customers to the Company – some of these in new geographies, driving new product sales and improving penetration of our acquisition products, particularly in markets outside the United States. On January 24, 2012, we announced that our Board of Directors has approved a capital allocation program that targets the return of up to $2.5 billion to shareholders through the fiscal year ending March 31, 2014. This includes a planned increase in the annual dividend from $0.20 to $1.00 per share of common stock and authorizes us to acquire up to $1.5 billion of our common stock, including $232 million remaining at December 31, 2011 under our current share repurchase authorization. We have declared a quarterly dividend of $0.25 per share of common stock for the fourth quarter of fiscal year 2012 and a total of $500 million of the planned repurchase is expected to be an accelerated share repurchase under an agreement executed in the fourth quarter of fiscal 2012. The timing and amount of share repurchases will be determined by our management based on evaluation of market conditions, trading price, legal requirements, and other factors. As our business strategy has evolved, our management also looks within bookings at total new product and capacity sales, which we define as sales of products or mainframe capacity that are new or in addition to products or mainframe capacity previously contracted for by a customer. The amount of new product and capacity sales for a period, as currently tracked by us, requires estimation by management and has not been historically reported. Within a given period, the amount of new product and capacity sales may not be material to the change in our total bookings or revenue compared with prior periods. New product and capacity sales can be reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract) or in software fees and other bookings (which are recognized as software fees and other revenue in the current period). In the first quarter of fiscal 2012, we changed our internal reporting used by our Chief Executive Officer for evaluating segment performance and allocating resources. The new reporting disaggregates our operations into three segments, two software segments and one service segment, which are described as follows:
The Company’s performance is evaluated by our Chief Executive Officer based on a review of revenue and operating income for each of our operating segments. While our Chief Executive Officer evaluates results in a number of different ways, the operating segments are the primary basis on which resources are allocated and financial results are assessed.
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Table of ContentsEXECUTIVE SUMMARY The following is a summary of the analysis of our results contained in our MD&A. During the first quarter of fiscal 2012, we sold our Internet Security business and during the first quarter of fiscal 2011, we sold our Information Governance business. The results of these business operations are presented in income from discontinued operations. Total revenue for the third quarter of fiscal 2012 increased 10% to $1,263 million compared with $1,144 million in the year-ago period. The increase in revenue was primarily attributable to an increase in our software fees and other revenue and an increase in subscription and maintenance revenue. The increase in software fees and other revenue was primarily due to a $39 million license fee received as a final payment pursuant to a litigation settlement with Rocket Software, Inc. Revenue increased 8% from existing products and services and 2% from acquired technologies (which we define as technology acquired within the prior 12 months). The effect of foreign currency exchange rates was not material for the third quarter of fiscal 2012. Total bookings in the third quarter of fiscal 2012 increased 1% from the year-ago period to $1,284 million primarily due to the license fee received as final payment, referenced above, and to a lesser extent due to the increase in our bookings associated with our fiscal 2012 acquisitions of Base Technologies and Interactive TKO, Inc. (ITKO). These increases were partially offset by a decrease in new product sales within our Enterprise Solutions segment and mainframe capacity sales. Renewal bookings for the third quarter of fiscal 2012, which generally do not include new product and capacity sales and professional services arrangements, increased 1% for the third quarter of fiscal 2012. Total new product and capacity sales have increased by a low single digit percentage from the year-ago period. This increase was primarily the result of an increase in new product sales within the Mainframe Solutions segment (primarily attributable to the license fee received as final payment), offset by a decrease in mainframe capacity and sales of Enterprise Solutions new products. For the third quarter of fiscal 2012 compared with the third quarter of fiscal 2011, there was an increase in license agreement duration due to several transactions that were renewed during the quarter with contract terms greater than five years. We continue to expect our fiscal 2012 renewal portfolio to be approximately 15% lower than fiscal 2011. For the third quarter of fiscal 2012, renewal yield was slightly below 90%. During the quarter, we executed an agreement with an entity that had merged with another customer which caused an unusually low yield that affected this metric. Excluding this agreement, renewal yield would have been in the mid 90% range. Total expense before interest and income taxes of $850 million for the third quarter of fiscal 2012 grew 5%, compared with $812 million in the year-ago period. Operating expenses for the third quarter of fiscal 2012 compared with the third quarter of fiscal 2011 increased primarily due to the increase in cost of professional services and an increase in product development and enhancement costs. Income before interest and income taxes increased $81 million, or 24%, in the third quarter of fiscal 2012 compared with the year-ago period, which reflects the growth rates in revenue and expenses over the same period. Tax expense increased $15 million for the third quarter of fiscal 2012 compared with the year-ago period, primarily as a result of an increase in income before taxes in the third quarter of fiscal 2012. Diluted income from continuing operations per share for the third quarter of fiscal 2012 was $0.54, compared with $0.38 in the year-ago period, primarily reflecting an increase in operating income and our repurchases of common shares. For the third quarter of fiscal 2012, our segment performance results were as follows: Mainframe Solutions revenue increased $54 million from the year-ago period primarily due to the license fee received as final payment (as referenced above), as well as a license agreement with one large IT outsourcer executed in the fourth quarter of fiscal 2011 and an increase in revenue recognized from new mainframe capacity sales booked in prior periods. Mainframe Solutions operating margin for the third quarter of fiscal 2012 was 59% compared with 54% in the third quarter of fiscal 2011. The increase in margin for the period was primarily due to the license received as final payment.
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Table of ContentsEnterprise Solutions revenue increased $50 million from the year-ago period primarily due to growth in revenue within our virtualization & automation and security products received on an up-front basis. Enterprise Solutions operating margin for the third quarter of fiscal 2012 was 12% compared with 9% in the third quarter of fiscal 2011. The increase in margin for the period was primarily attributable to the increase in revenue for the third quarter of fiscal 2012, offset by an increased investment in our Enterprise Solutions segment. Services revenue and expenses increased $15 million and $13 million, respectively, from the year-ago period primarily due to our fiscal 2012 acquisition of Base Technologies. For the third quarter of fiscal 2012, margins on professional services increased 1% compared with the prior year period. Total revenue backlog at December 31, 2011 of $8,084 million increased 2% compared with $7,962 million at December 31, 2010. The current portion of revenue backlog at December 31, 2011 of $3,576 million increased by 1% compared with the balance of $3,551 million at December 31, 2010. The current portion of revenue backlog represents revenue to be recognized within the next 12 months. Generally, we believe that an increase in the current portion of revenue backlog on a year-over-year basis is a positive indicator of future subscription and maintenance revenue growth. For the third quarter of fiscal 2012, cash flows from continuing operating activities was $396 million and declined 20% compared with the year-ago period. This decline reflects a decrease in cash collections on trade receivables of $108 million, offset by a decrease in other disbursements of $47 million. QUARTERLY UPDATE In November 2011, we held our user conference, CA World. CA World brought together IT professionals from around the world to exchange IT management strategies. During the conference, we announced key initiatives centered on our theme of “IT at the Speed of Business” which supports customers as they transition from simply managing IT to delivering business services.
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Table of ContentsPERFORMANCE INDICATORS Management uses several quantitative performance indicators to assess our financial results and condition. Following is a summary of the principal quantitative performance indicators that management uses to review performance:
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Table of ContentsAnalyses of our performance indicators shown above and Segment performance, including general trends, can be found in the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A. Total Revenue — Total revenue is the amount of revenue recognized during the reporting period from the sale of license, maintenance and professional services agreements. Amounts recognized as subscription and maintenance revenue are recognized ratably over the term of the agreement. Professional services revenue is generally recognized as the services are performed or recognized on a ratable basis over the term of the related software license. Software fees and other revenue generally represents revenue recognized at the inception of a license agreement (up-front basis) and also includes our SaaS revenue, which is recognized as services are provided. Total Bookings — Total bookings or sales includes the incremental value of all subscription, maintenance and professional service contracts and software fees and other contracts entered into during the reporting period and is generally reflective of the amount of products and services during the period that our customers have agreed to purchase from us. Revenue for bookings attributed to sales of software products for which revenue is recognized on an up-front basis is reflected in the “Software fees and other” line item of our Condensed Consolidated Statements of Operations. Subscription and Maintenance Bookings — Subscription and maintenance bookings is the aggregate incremental amount we expect to collect from our customers over the terms of the underlying subscription and maintenance agreements entered into during a reporting period. These amounts include the sale of products directly by us and may include additional products, services or other fees for which we have not established vendor specific objective evidence (VSOE). Subscription and maintenance bookings also includes indirect sales by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts without these rights entered into in close proximity or contemplation of such agreements. These amounts are expected to be recognized ratably as subscription and maintenance revenue over the applicable term of the agreements. Subscription and maintenance bookings excludes the value associated with certain perpetual licenses, license-only indirect sales, SaaS offerings and professional services arrangements. The license and maintenance agreements that contribute to subscription and maintenance bookings represent binding payment commitments by customers over periods that range generally from three to five years on a weighted average basis, although in certain cases customer commitments can be for longer or shorter periods. These current period bookings are often renewals of prior contracts that also had various durations, usually from three to five years. The amount of new subscription and maintenance bookings recorded in a period is affected by the volume, duration and value of contracts renewed during that period. Subscription and maintenance bookings typically increases in each consecutive quarter during a fiscal year, with the first quarter having the least bookings and the fourth quarter having the most bookings. However, subscription and maintenance bookings may not always follow the pattern of increasing in consecutive quarters during a fiscal year, and the quarter-to-quarter differences in subscription and maintenance bookings may vary. Given the varying durations of the contracts being renewed, year-over-year comparisons of bookings are not always indicative of the overall bookings trend. Generally, we believe that an increase in the current portion of revenue backlog on a year-over-year basis is a positive indicator of future subscription and maintenance revenue growth due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably. Within bookings, we also consider the yield on our renewal portfolio. We define “renewal yield” as the percentage of prior contract value realized from renewals during the period. The baseline for calculating renewal yield is an estimate affected by various factors including contractual renewal terms and other conditions. We estimate the yield based on a review of material transactions representing a substantial majority of the dollar value of renewals during the current period. Year-over-year changes in renewal yield may not be material to year-over-year changes in bookings. Additionally, period-to-period changes in subscription and maintenance bookings do not necessarily correlate to changes in cash receipts. The contribution to current period revenue from subscription and maintenance bookings from any single license or maintenance agreement is relatively small, since revenue is recognized ratably over the applicable term for these agreements.
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Table of ContentsWeighted Average Subscription and Maintenance License Agreement Duration in Years — The weighted average subscription and maintenance license agreement duration in years reflects the duration of all subscription and maintenance agreements executed during a period, weighted by the total contract value of each individual agreement. Weighted average subscription and maintenance license agreement duration in years can fluctuate from period to period depending on the mix of license agreements entered into during a period. Weighted average duration information is disclosed in order to provide additional understanding of the volume of our bookings. Total Revenue Backlog — Total revenue backlog represents the aggregate amount we expect to recognize as revenue in the future as either subscription and maintenance revenue, professional services revenue or software fees and other revenue associated with contractually committed amounts billed or to be billed as of the balance sheet date. Total revenue backlog is composed of amounts recognized as liabilities in our Condensed Consolidated Balance Sheets as deferred revenue (billed or collected) as well as unearned amounts yet to be billed under subscription and maintenance and software fees and other agreements. Classification of amounts as current and non-current depends on when such amounts are expected to be earned and therefore recognized as revenue. Amounts that are expected to be earned and therefore recognized as revenue in 12 months or less are classified as current, while amounts expected to be earned in greater than 12 months are classified as non-current. The portion of the total revenue backlog that relates to subscription and maintenance agreements is recognized as revenue evenly on a monthly basis over the duration of the underlying agreements and is reported as subscription and maintenance revenue in our Condensed Consolidated Statements of Operations. “Deferred revenue (billed or collected)” is composed of: (i) amounts received from customers in advance of revenue recognition, (ii) amounts billed but not collected for which revenue has not yet been earned, and (iii) amounts received in advance of revenue recognition from financial institutions where we have transferred our interest in committed installments (referred to as “Financing obligations and other” in Note H, “Deferred Revenue” in the Notes to our Condensed Consolidated Financial Statements).
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Table of ContentsRESULTS OF OPERATIONS The following table presents revenue and expense line items reported in our Condensed Consolidated Statements of Operations for the third quarter and the first nine months of fiscal 2012 and fiscal 2011 and the period-over-period dollar and percentage changes for those line items. These comparisons of past financial results are not necessarily indicative of future results.
Note – Amounts may not add to their respective totals due to rounding.
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Table of Contents
Note – Amounts may not add to their respective totals due to rounding.
Revenue Total Revenue The increase in total revenue in the third quarter of fiscal 2012 compared with the third quarter of fiscal 2011 was primarily attributable to an increase in software fees and other revenue and an increase in subscription and maintenance revenue. Total revenue for the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011 increased primarily due to the increase in subscription and maintenance revenue, an increase in software fees and other revenue and an increase in professional services revenue. The increase in revenue both the third quarter and first nine months of fiscal 2012 is more fully described below. During the third quarter and first nine months of fiscal 2012, revenue reflected a favorable foreign exchange effect of $1 million and $96 million, respectively, compared with the third quarter and first nine months of fiscal 2011. Subscription and Maintenance Revenue Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from: (i) subscription license agreements that were in effect during the period, generally including maintenance that is bundled with and not separately identifiable from software usage fees or product sales, (ii) maintenance agreements associated with providing customer technical support and access to software fixes and upgrades that are separately identifiable from software usage fees or product sales, and (iii) license agreements bundled with additional products, maintenance or professional services for which VSOE has not been established.
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Table of ContentsThese amounts include the sale of products directly by us, as well as by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts entered into in close proximity or contemplation of such agreements. The increase in subscription and maintenance revenue for the third quarter and first nine months of fiscal 2012 compared with the third quarter and first nine months of fiscal 2011 was primarily due to revenue associated with a license agreement with one large IT outsourcer for approximately $500 million that was executed in the fourth quarter of fiscal 2011 with a term ending in fiscal 2016 and, to a lesser extent, an increase in subscription and maintenance revenue from sales booked in prior periods. In addition, for the third quarter and first nine months of fiscal 2012, there was a favorable foreign exchange effect of $1 million and $85 million, respectively, compared with the comparable prior year periods. Professional Services Professional services revenue primarily includes product implementation, consulting, customer training and customer education. Professional services revenue increased in the third quarter and first nine months of fiscal 2012 compared with the third quarter and first nine months of fiscal 2011, primarily due to our fiscal 2012 acquisition of Base Technologies. Software Fees and Other Software fees and other revenue primarily consists of revenue that is recognized on an up-front basis. This includes revenue associated with Enterprise Solutions products sold on an up-front basis directly by our sales force or through transactions with distributors and volume partners, value-added resellers and exclusive representatives (sometimes referred to as our “indirect” or “channel” revenue). It also includes our SaaS revenue, which is recognized as the services are provided rather than up-front. During the third quarter of fiscal 2012, we recognized $39 million in revenue under a license agreement we entered into in connection with a litigation settlement with Rocket Software, Inc. (Rocket) during fiscal 2009 that resolved our claims against Rocket for copyright infringement and trade secret misappropriation. Rocket did not admit any wrongdoing in connection with this settlement. As part of this settlement, Rocket agreed to license technology from us, including source code authored several years ago and related trade secrets that were the subject of the litigation. The amount received during the third quarter of fiscal 2012 reflects the final amount owed to us, which was not scheduled to be paid in full until fiscal 2014 (the “Final License Payment”). Rocket paid this amount in advance at their discretion, unsolicited by us and without any discount or concession by us. Also, in the third quarter of fiscal 2012, there was a year-over-year increase in sales associated with our perpetual Enterprise Solutions products of $20 million, of which $10 million was for products that were newly eligible for up-front revenue recognition in the third quarter of fiscal 2012. Software fees and other revenue increased during the first nine months of fiscal 2012 compared with the first nine months of fiscal 2011, primarily due to the activity described above and $28 million in revenue from our SaaS offerings.
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Table of ContentsTotal Revenue by Geography The following table presents the amount of revenue earned from sales to unaffiliated customers in the United States and international regions and corresponding percentage changes for the third quarter and first nine months of fiscal 2012 and the third quarter and first nine months of fiscal 2011. Third Quarter Comparison – Fiscal Year 2012 versus Fiscal Year 2011
First Nine Months Comparison – Fiscal Year 2012 versus Fiscal Year 2011
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