CA Technologies
CA, INC. (Form: 10-Q, Received: 07/25/2013 16:08:36)
Table of Contents


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

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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 1-9247
__________________________________________
CA, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________
Delaware
13-2857434
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
One CA Plaza
Islandia, New York
11749
(Address of principal executive offices)
(Zip Code)
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:)
 
 
 
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨   (Do not check if a smaller reporting company)
Smaller reporting company
¨
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:
Title of Class
 
Shares Outstanding
Common Stock
 
as of July 18, 2013
par value $0.10 per share
 
455,629,273


Table of Contents

CA, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page
PART I.
Financial Information
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


Table of Contents

PART 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 June 30, 2013 , and the related condensed consolidated statements of operations, comprehensive income, and cash flows for the three -month periods ended June 30, 2013 and 2012 . 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, 2013 , and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 9, 2013, 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, 2013 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
July 25, 2013     


1


Item 1.
CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
 
 
June 30,
2013
 
March 31,
2013
 
(unaudited)
 
 
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,461

 
$
2,593

Short-term investments

 
183

Trade accounts receivable, net
537

 
856

Deferred income taxes
383

 
346

Other current assets
243

 
148

Total current assets
$
3,624

 
$
4,126

Property and equipment, net of accumulated depreciation of $798 and $786, respectively
$
298

 
$
311

Goodwill
5,916

 
5,871

Capitalized software and other intangible assets, net
1,293

 
1,231

Deferred income taxes
75

 
77

Other noncurrent assets, net
160

 
195

Total assets
$
11,366

 
$
11,811

Liabilities and stockholders' equity:
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
14

 
$
16

Accounts payable
84

 
93

Accrued salaries, wages and commissions
263

 
304

Accrued expenses and other current liabilities
397

 
406

Deferred revenue (billed or collected)
2,230

 
2,482

Taxes payable, other than income taxes payable
32

 
77

Federal, state and foreign income taxes payable
47

 
151

Deferred income taxes
12

 
12

Total current liabilities
$
3,079

 
$
3,541

Long-term debt, net of current portion
$
1,271

 
$
1,274

Federal, state and foreign income taxes payable
187

 
338

Deferred income taxes
165

 
120

Deferred revenue (billed or collected)
899

 
975

Other noncurrent liabilities
135

 
113

Total liabilities
$
5,736

 
$
6,361

Stockholders' equity:
 
 
 
Preferred stock, no par value, 10,000,000 shares authorized; No shares issued and outstanding
$

 
$

Common stock, $0.10 par value, 1,100,000,000 shares authorized; 589,695,081 and 589,695,081 shares issued; 450,556,679 and 448,149,131 shares outstanding, respectively
59

 
59

Additional paid-in capital
3,546

 
3,593

Retained earnings
5,578

 
5,357

Accumulated other comprehensive loss
(198
)
 
(155
)
Treasury stock, at cost, 139,138,402 and 141,545,950 shares, respectively
(3,355
)
 
(3,404
)
Total stockholders' equity
$
5,630

 
$
5,450

Total liabilities and stockholders' equity
$
11,366

 
$
11,811

See accompanying Notes to the Condensed Consolidated Financial Statements

2

Table of Contents


CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)
 
 
For the Three
Months Ended
June 30,
 
2013
 
2012
Revenue:
 
 
 
Subscription and maintenance revenue
$
944

 
$
977

Professional services
98

 
91

Software fees and other
86

 
77

Total revenue
$
1,128

 
$
1,145

Expenses:
 
 
 
Costs of licensing and maintenance
$
71

 
$
69

Cost of professional services
88

 
86

Amortization of capitalized software costs
69

 
64

Selling and marketing
281

 
305

General and administrative
91

 
110

Product development and enhancements
135

 
125

Depreciation and amortization of other intangible assets
36

 
41

Other (gains) expenses, net
129

 
(36
)
Total expenses before interest and income taxes
$
900

 
$
764

Income before interest and income taxes
$
228

 
$
381

Interest expense, net
11

 
11

Income before income taxes
$
217

 
$
370

Income tax (benefit) expense
(118
)
 
130

Net income
$
335

 
$
240

 
 
 
 
Basic income per common share
$
0.74

 
$
0.51

Basic weighted average shares used in computation
450

 
465

 
 
 
 
Diluted income per common share
$
0.73

 
$
0.51

Diluted weighted average shares used in computation
451

 
467

See accompanying Notes to the Condensed Consolidated Financial Statements

3

Table of Contents

CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
For the Three
Months Ended
June 30,
 
2013
 
2012
Net income
$
335

 
$
240

Other comprehensive loss
 
 
 
Foreign currency translation adjustments
(43
)
 
(26
)
Total other comprehensive loss
$
(43
)
 
$
(26
)
Comprehensive income
$
292

 
$
214

See accompanying Notes to the Condensed Consolidated Financial Statements

4

Table of Contents

CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
For the Three
Months Ended
June 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
335

 
$
240

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
105

 
105

Provision for deferred income taxes
(48
)
 
25

Provision for bad debts
2

 
1

Share-based compensation expense
20

 
23

Asset impairments and other non-cash items
2

 
1

Foreign currency transaction (gains) losses
(1
)
 
12

Changes in other operating assets and liabilities, net of effect of acquisitions:
 
 
 
Decrease in trade accounts receivable
316

 
398

Decrease in deferred revenue
(317
)
 
(394
)
Decrease in taxes payable, net
(338
)
 
(93
)
Increase in accounts payable, accrued expenses and other
8

 
18

Decrease in accrued salaries, wages and commissions
(38
)
 
(141
)
Changes in other operating assets and liabilities
(35
)
 
(12
)
Net cash provided by operating activities
$
11

 
$
183

Investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired, and purchased software
$
(122
)
 
$
(5
)
Purchases of property and equipment
(13
)
 
(22
)
Capitalized software development costs
(25
)
 
(36
)
Maturities of short-term investments
184

 

Other investing activities

 
2

Net cash provided by (used in) investing activities
$
24

 
$
(61
)
Financing activities:
 
 
 
Dividends paid
$
(114
)
 
$
(119
)
Purchases of common stock
(49
)
 
(86
)
Debt borrowings
725

 
253

Debt repayments
(727
)
 
(248
)
Debt issuance costs
(1
)
 

Exercise of common stock options and other
28

 
17

Net cash used in financing activities
$
(138
)
 
$
(183
)
Effect of exchange rate changes on cash
$
(29
)
 
$
(77
)
Decrease in cash and cash equivalents
$
(132
)
 
$
(138
)
Cash and cash equivalents at beginning of period
$
2,593

 
$
2,679

Cash and cash equivalents at end of period
$
2,461

 
$
2,541


See accompanying Notes to the Condensed Consolidated Financial Statements

5

Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE A – ACCOUNTING POLICIES
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 Securities and Exchange Commission 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, 2013 ( 2013 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 months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2014 .
Cash and Cash Equivalents: The Company’s cash and cash equivalents are held in numerous locations throughout the world, with approximately 65% being held by the Company’s foreign subsidiaries outside the United States at June 30, 2013 .
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:
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for identical assets and liabilities in markets that are not active, or quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
See Note I, “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. See Note F, “Deferred Revenue,” for additional information.
Other Matters: As part of the Company’s efforts to more fully utilize its intellectual property assets, in the first quarter of fiscal 2013, the Company closed a transaction that assigned the rights to certain of these assets to a large technology company for $35 million . The entire contract amount is included in the “Other (gains) expenses, net” line of the Company’s Condensed Consolidated Statement of Operations for the three months ended June 30, 2012 . The Company will continue to have the ability to use these intellectual property assets in current and future product offerings.
New Accounting Pronouncements: In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220) —Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), requiring an entity to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. The Company adopted ASU 2013-02 in the first quarter of fiscal year 2014 and the current and prior periods have been presented in accordance with ASU 2013-02.

NOTE B – ACQUISITIONS
In June 2013, the Company acquired 100% of the voting equity interest of Layer 7 Technologies (Layer 7), a provider of application programming interface (API) management and security software. The acquisition of Layer 7 will enable the Company to provide security and management technology to the API marketplace that complements its current identity and access management software suite. The total purchase price of the Layer 7 acquisition was approximately $155 million .

6

Table of Contents

The pro forma effects of the Company’s first quarter fiscal year 2014 acquisition of Layer 7 on the Company’s revenues and results of operations during fiscal year 2013 were considered immaterial. The purchase price allocation was as follows:
(dollars in millions)
Layer 7
 
Estimated
Useful Life
Finite-lived intangible assets (1)
$
12

 
5 years

Purchased software
99

 
5 years

Goodwill
54

 
Indefinite

Deferred tax liabilities
(14
)
 

Other assets net of other liabilities assumed (2)
4

 

Purchase price
$
155

 
 
(1)
Includes customer relationships and trade names.
(2)
Includes approximately $9 million of cash acquired.
Transaction costs for the acquisition 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 of the Layer 7 products 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 acquisition of Layer 7 is not deductible for tax purposes and was allocated to the Enterprise Solutions segment. The allocation of purchase price to acquired identifiable assets, including intangible assets, is preliminary because the Company has not completed its fair value analysis and review of historical tax records of Layer 7. 
The Company had approximately $37 million and $14 million of accrued acquisition-related costs at June 30, 2013 and March 31, 2013 , respectively, related to purchase price amounts withheld to support indemnification obligations by the sellers.

NOTE C – SEVERANCE AND EXIT COSTS
Fiscal year 2014 re-balancing plan : The fiscal year 2014 re-balancing plan (Fiscal 2014 Plan) was announced in May 2013 and will consist of a termination of approximately 1,200 employees and consolidations of several facilities. The reduction in the number of employees is expected to be temporary as the Company intends to hire additional personnel with skills that will enable the Company to better focus its resources on key products and market segments. The total amount incurred for severance and facility exit costs under the Fiscal 2014 Plan for the first quarter of fiscal year 2014 was $103 million and $17 million , respectively, and is presented in "Other (gains) expenses, net" in the Company's Condensed Consolidated Statement of Operations. The Company expects total costs of the Fiscal 2014 Plan to be approximately $150 million (including severance costs of approximately $120 million and global facility consolidation costs of approximately $30 million ). Actions under the Fiscal 2014 Plan are expected to be substantially completed by the end of fiscal year 2014.
Accrued severance and exit costs and changes in the accruals during the three months ended June 30, 2013 and 2012 were as follows:
(in millions)
Accrued
Balance at
March 31, 2013
 
Expense
 
Change in
Estimate
 
Payments
 
Accretion
and Other
 
Accrued
Balance at
June 30, 2013
Severance charges
$
16

 
$
103

 
$
(1
)
 
$
(28
)
 
$
3

 
$
93

Facility exit charges
23

 
17

 

 
(4
)
 
(3
)
 
33

Total accrued liabilities
$
39

 
 
 
 
 
 
 
 
 
$
126

 
(in millions)
Accrued
Balance at
March 31, 2012
 
Expense
 
Change in
Estimate
 
Payments
 
Accretion
and Other
 
Accrued
Balance at
June 30, 2012
Severance charges
$
13

 
$

 
$
(3
)
 
$
(5
)
 
$

 
$
5

Facility exit charges
40

 

 

 
(3
)
 
(1
)
 
36

Total accrued liabilities
$
53

 
 
 
 
 
 
 
 
 
$
41

Balances at June 30, 2013 and 2012 include severance accruals of approximately $10 million and $5 million , respectively, and facility exit accruals of approximately $16 million and $36 million , respectively, for plans and actions prior to fiscal year 2014.

7

Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The severance liability is included in “Accrued salaries, wages and commissions” in the Condensed Consolidated Balance Sheets. The facility exit liabilities are included in “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” in the Condensed Consolidated Balance Sheets.
Accretion and other includes accretion of the Company’s lease obligations related to facility exits as well as changes in the assumptions related to future sublease income. These costs are included in “General and administrative” expense in the Condensed Consolidated Statements of Operations.

NOTE D – TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable, net represents amounts due from the Company’s customers and is presented net of allowances. 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:
 
June 30,
2013
 
March 31,
2013
 
(in millions)
Accounts receivable – billed
$
496

 
$
796

Accounts receivable – unbilled
50

 
63

Other receivables
16

 
21

Less: Allowances
(25
)
 
(24
)
Trade accounts receivable, net
$
537

 
$
856


NOTE E – GOODWILL, CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at June 30, 2013 were as follows:
 
At June 30, 2013
 
Gross
Amortizable
Assets
 
Less: Fully
Amortized
Assets
 
Remaining
Amortizable
Assets
 
Accumulated
Amortization
on Remaining
Amortizable
Assets
 
Net
Assets
 
(in millions)
Purchased software products
$
5,707

 
$
4,735

 
$
972

 
$
337

 
$
635

Internally developed software products
1,552

 
656

 
896

 
373

 
523

Other intangible assets
827

 
429

 
398

 
263

 
135

Total capitalized software and other intangible assets
$
8,086

 
$
5,820

 
$
2,266

 
$
973

 
$
1,293


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Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at March 31, 2013 were as follows:
 
At March 31, 2013
 
Gross
Amortizable
Assets
 
Less: Fully
Amortized
Assets
 
Remaining
Amortizable
Assets
 
Accumulated
Amortization
on Remaining
Amortizable
Assets
 
Net
Assets
 
(in millions)
Purchased software products
$
5,597

 
$
4,735

 
$
862

 
$
309

 
$
553

Internally developed software products
1,528

 
661

 
867

 
327

 
540

Other intangible assets
816

 
429

 
387

 
249

 
138

Total capitalized software and other intangible assets
$
7,941

 
$
5,825

 
$
2,116

 
$
885

 
$
1,231

 
Based on the capitalized software and other intangible assets recorded through June 30, 2013 , the projected annual amortization expense for fiscal year 2014 and the next four fiscal years is expected to be as follows:
 
Year Ended March 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
(in millions)
Purchased software products
$
119

 
$
111

 
$
110

 
$
108

 
$
105

Internally developed software products
166

 
148

 
118

 
85

 
38

Other intangible assets
52

 
45

 
28

 
11

 
7

Total
$
337

 
$
304

 
$
256

 
$
204

 
$
150

The Company evaluates the useful lives and recoverability of capitalized software and other intangible assets when events or changes in circumstances indicate that an impairment may exist. These evaluations require complex assumptions about key factors such as future customer demand, technology trends and the impact of those factors on the technology the Company acquires and develops for its products. Impairments or revisions to useful lives could result from the use of alternative assumptions that reflect reasonably possible outcomes related to future customer demand or technology trends for assets within the Enterprise Solutions segment.
Goodwill activity by segment for the three months ended June 30, 2013 was as follows:
(in millions)
Mainframe Solutions
 
Enterprise Solutions
 
Services
 
Total
Balance at March 31, 2013
$
4,178

 
$
1,612

 
$
81

 
$
5,871

Revision to purchase price allocation of prior year acquisition

 
(9
)
 

 
(9
)
Balance at March 31, 2013 as revised
$
4,178

 
$
1,603

 
$
81

 
$
5,862

Acquisitions

 
54

 

 
54

Balance at June 30, 2013
$
4,178

 
$
1,657

 
$
81

 
$
5,916



9

Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – DEFERRED REVENUE
The current and noncurrent components of “Deferred revenue (billed or collected)” at June 30, 2013 and March 31, 2013 were as follows:
 
June 30,
2013
 
March 31,
2013
 
(in millions)
Current:
 
 
 
Subscription and maintenance
$
2,064

 
$
2,307

Professional services
145

 
154

Software fees and other
21

 
21

Total deferred revenue (billed or collected) – current
$
2,230

 
$
2,482

Noncurrent:
 
 
 
Subscription and maintenance
$
867

 
$
940

Professional services
31

 
33

Software fees and other
1

 
2

Total deferred revenue (billed or collected) – noncurrent
$
899

 
$
975

Total deferred revenue (billed or collected)
$
3,129

 
$
3,457


NOTE G – DEBT
Revolving Credit Facility: In June 2013, the Company amended its revolving credit facility to extend the termination date to June 2018.
The maximum committed amount available under the revolving credit facility due June 2018 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 due June 2018 bear interest at a rate dependent on the Company's credit ratings at the time of those 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 June 30, 2013 and March 31, 2013 , there were no outstanding borrowings under the revolving credit facility and, based on the Company's credit ratings, the rates applicable to the facility at June 30, 2013 and March 31, 2013 were as follows:
  
June 30, 2013
 
March 31, 2013
Applicable margin on Base Rate borrowing
0.125
%
 
0.250
%
Weighted average interest rate on outstanding borrowings
%
 
%
Applicable margin on Eurocurrency Rate borrowing
1.000
%
 
1.100
%
Facility commitment fee
0.125
%
 
0.150
%
The interest rate that would have applied at June 30, 2013 to a borrowing under the revolving credit facility due June 2018 would have been 3.38% for Base Rate borrowings and 1.19% for Eurocurrency Rate borrowings. The Company capitalized the transaction fees of approximately $1 million associated with the extension of the revolving credit facility due June 2018. These fees are being amortized to “Interest expense, net” in the Condensed Consolidated Statements of Operations.
There was no borrowing activity under the revolving credit facility for the first quarter of fiscal year 2014. The revolving credit facility due June 2018 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 revolving credit facility 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 credit agreement, must not be less than 3.50 to 1.00. At June 30, 2013, the Company was in compliance with all covenants.

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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 credit agreement.

NOTE H – 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 , which 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 June 30, 2013 , the fair value of these derivatives was an asset of approximately $16 million , of which approximately $12 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.
At March 31, 2013 , the fair value of these derivatives was an asset of approximately $19 million , of which approximately $11 million is included in “Other current assets” and approximately $8 million is included in “Other noncurrent assets, net” in the Company’s Condensed Consolidated Balance Sheet.
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 (gains) expenses, net” in the Company’s Condensed Consolidated Statements of Operations.
At June 30, 2013 , foreign currency contracts outstanding consisted of purchase and sales contracts with a total gross notional value of approximately $1,009 million , which protects the value of U.S. dollar investments held by a non-U.S. subsidiary outside of that subsidiary’s functional currency, and durations of less than nine months . The net fair value of these contracts at June 30, 2013 was a net asset o f approximately $6 million , o f which approximately $14 million is included in “Other current assets” and approximately $8 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.
At March 31, 2013 , foreign currency contracts outstanding consisted of purchase and sales contracts with a total notional value of approximately $597 million and durations of less than one month . The net fair value of these contracts at March 31, 2013 was a net asset of approximately $1 million , of which approximately $1 million is included in “Other current assets” in the Company’s Condensed Consolidated Balance Sheet.
A summary of the effect of the interest rate and foreign exchange derivatives on the Company’s Condensed Consolidated Statements of Operations was as follows:
   
Amount of Net (Gain)/Loss Recognized in 
the Condensed Consolidated 
Statements of Operations
(in millions)
 
Three Months Ended
June 30, 2013
 
Three Months Ended
June 30, 2012
Interest expense, net – interest rate swaps designated as fair value hedges
$
(3
)
 
$
(3
)
Other (gains) expenses, net – foreign currency contracts
$
(9
)
 
$
8

The Company is subject to collateral security arrangements with most of its major counterparties. These arrangements require the Company or the counterparty to 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 June 30, 2013 and March 31, 2013 . The Company posted no collateral at June 30, 2013 or March 31, 2013 . 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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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I – FAIR VALUE MEASUREMENTS
The following table presents the Company’s assets and liabilities that were measured at fair value on a recurring basis at June 30, 2013 and March 31, 2013 :
 
At June 30, 2013
 
At March 31, 2013
 
 
Fair Value
Measurement Using
Input Types
 
Estimated
Fair
Value
 
Fair Value
Measurement Using
Input Types
 
Estimated
Fair
Value
 
(in millions)
Level 1
 
Level 2  
 
Total
 
Level 1
 
Level 2  
 
Total
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
981

 
$

 
$
981

(1)  
$
1,280

 
$

 
$
1,280

(2)  
Foreign exchange derivatives (3)

 
14

 
14

 

 
1

 
1

  
Interest rate derivatives (3)

 
16

 
16

 

 
19

 
19

  
Total assets
$
981

 
$
30

 
$
1,011

 
$
1,280

 
$
20

 
$
1,300

  
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivatives (3)
$

 
$
8

 
$
8

 
$

 
$

 
$

  
Total liabilities
$

 
$
8

 
$
8

 
$

 
$

 
$

  
(1)
At June 30, 2013 , the Company had approximately $931 million and $50 million of investments in money market funds classified as “Cash and cash equivalents” and “Other noncurrent assets, net” for restricted cash amounts, respectively, in its Condensed Consolidated Balance Sheet.
(2)
At March 31, 2013 , the Company had approximately $1,230 million and $50 million of investments in money market funds classified as “Cash and cash equivalents” and “Other noncurrent assets, net” for restricted cash amounts, respectively, in its Condensed Consolidated Balance Sheet.
(3)
See Note H, “Derivatives” for additional information. Interest rate derivatives fair value excludes accrued interest.
At June 30, 2013 and March 31, 2013 , the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
The carrying values of financial instruments classified as current assets and current liabilities, such as cash and cash equivalents, short-term investments, accounts payable, accrued expenses, and short-term borrowings, approximate fair value due to the short-term maturity of the instruments.
The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments that were not measured at fair value on a recurring basis at June 30, 2013 and March 31, 2013 :
 
 
At June 30, 2013
 
At March 31, 2013
(in millions)
  Carrying  
Value
 
Estimated
Fair Value
 
  Carrying  
Value
 
Estimated
Fair Value
Liabilities:
 
 
 
 
 
 
 
Total debt (1)
$
1,285

 
$
1,392

 
$
1,290

 
$
1,413

Facility exit reserve (2)
$
33

 
$
36

 
$
23

 
$
27

(1)
Estimated fair value of total debt is based on quoted prices for similar liabilities for which significant inputs are observable except for certain long-term lease obligations, for which fair value approximates carrying value (Level 2).
(2)
Estimated fair value for the facility exit reserve is determined using the Company’s incremental borrowing rate at June 30, 2013 and March 31, 2013 . At June 30, 2013 and March 31, 2013 , the facility exit reserve included approximately $12 million and $6 million , respectively, in “Accrued expenses and other current liabilities” and approximately $21 million and $17 million , respectively, in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets (Level 3).

NOTE J – COMMITMENTS AND CONTINGENCIES
The Company, various subsidiaries, and certain current and former officers have been or, from time to time, may be named as defendants in various lawsuits and claims arising in the normal course of business. The Company may also become involved with contract issues and disputes with customers, including government customers. The Company believes that it has meritorious defenses in connection with these lawsuits, claims and disputes, 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.

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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 are not expected, either individually or in the aggregate, 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. For some of these matters, the Company is unable to estimate a range of reasonably possible loss due to the stage of the matter and/or other particular circumstances of the matter. For others, a range of reasonably possible loss can be estimated. For those matters for which such a range can be estimated, the Company estimates that, in the aggregate, the range of reasonably possible loss is from zero to $25 million . This is in addition to amounts, if any, that have been accrued for those matters.
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 K – STOCKHOLDERS’ EQUITY
Stock Repurchases:  During the three months ended June 30, 2013 , the Company repurchased approximately 2 million shares of its common stock for approximately $53 million . At June 30, 2013 , the Company remained authorized to purchase approximately $452 million of its common stock under its current stock repurchase program.
Accumulated Other Comprehensive Loss: Foreign currency translation losses included in accumulated other comprehensive loss at June 30, 2013 and March 31, 2013 were approximately $198 million and $155 million , respectively.
Cash Dividends: The Company’s Board of Directors declared the following dividends during the three months ended June 30, 2013 and 2012 :
Three Months Ended June 30, 2013:
(in millions, except per share amounts)
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
May 9, 2013
 
$0.25
 
May 23, 2013
 
$114
 
June 11, 2013
Three Months Ended June 30, 2012:
(in millions, except per share amounts)
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
May 8, 2012
 
$0.25
 
May 22, 2012
 
$119
 
June 12, 2012

NOTE L – INCOME 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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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents basic and diluted income per common share information for the three months ended June 30, 2013 and 2012 .
 
Three Months Ended
June 30,
 
2013
 
2012
 
(in millions, except per share amounts)
Basic income per common share:
 
 
 
Net income
$
335

 
$
240

Less: Net income allocable to participating securities
(4
)
 
(3
)
Net income allocable to common shares
$
331

 
$
237

Weighted average common shares outstanding
450

 
465

Basic income per common share
$
0.74

 
$
0.51

 
 
 
 
Diluted income per common share:
 
 
 
Net income
$
335

 
$
240

Less: Net income allocable to participating securities
(4
)
 
(3
)
Net income allocable to common shares
$
331

 
$
237

Weighted average shares outstanding and common share equivalents:
 
 
 
Weighted average common shares outstanding
450

 
465

Weighted average effect of share-based payment awards
1

 
2

Denominator in calculation of diluted income per share
451

 
467

Diluted income per common share
$
0.73

 
$
0.51

For the three months ended June 30, 2013 and 2012 , respectively, approximately 4 million and 3 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. Weighted average restricted stock awards of approximately 5 million and 6 million for the three months ended June 30, 2013 and 2012 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.

NOTE M – ACCOUNTING FOR SHARE-BASED COMPENSATION
The Company recognized share-based compensation in the following line items in the Condensed Consolidated Statements of Operations for the periods indicated:
 
Three Months Ended
June 30,
 
2013
 
2012
 
(in millions)
Costs of licensing and maintenance
$
1

 
$

Cost of professional services
1

 
1

Selling and marketing
7

 
10

General and administrative
6

 
8

Product development and enhancements
5

 
4

Share-based compensation expense before tax
$
20

 
$
23

Income tax benefit
(7
)
 
(8
)
Net share-based compensation expense
$
13

 
$
15


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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about unrecognized share-based compensation costs at June 30, 2013 :
 
Unrecognized Share-Based Compensation Costs
 
Weighted Average Period Expected to be Recognized
 
(in millions)
 
(in years)
Stock option awards
$
9

 
2.5
Restricted stock units
26

 
2.4
Restricted stock awards
89

 
2.3
Performance share units
24

 
3.0
Total unrecognized share-based compensation costs
$
148

 
2.5
There were no capitalized share-based compensation costs for the three months ended June 30, 2013 or 2012 .
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).
For the three months ended June 30, 2013 and 2012 , the Company issued options for 1.2 million shares and 0.7 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:
 
Three Months Ended
June 30,
 
2013
 
2012
Weighted average fair value
4.89

 
4.84

Dividend yield
4.09
%
 
3.96
%
Expected volatility factor (1)
30
%
 
34
%
Risk-free interest rate (2)
1.3
%
 
0.8
%
Expected life (in years) (3)
6.0

 
4.5

(1)
Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s traded options.
(2)
The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.
(3)
The expected life is the number of years the Company estimates that options will be outstanding prior to exercise. The Company’s computation of expected life was determined based on the simplified method (the average of the vesting period and option term).
The shares under the 1-year PSU awards for the fiscal year 2013 and 2012 incentive plan years under the Company's long-term incentive plans were granted in the first quarter of fiscal years 2014 and 2013 , respectively. The awards vest 34% on the date of grant and 33% on the first and second anniversaries of the grant date. The table below summarizes the RSAs and RSUs granted under these PSUs:
 
 
 
RSAs
 
RSUs
Incentive Plans for Fiscal Years
Performance Period
 
Shares
(in millions)
 
Weighted Average Grant Date Fair Value
 
Shares
(in millions)
 
Weighted Average Grant Date Fair Value
2013
1 year
 
0.4
 
$27.11
 
0.1
 
$26.12
2012
1 year
 
1.2
 
$26.39
 
0.2
 
$25.40

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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The shares under the 3-year PSUs for the fiscal year 2010 incentive plan year under the Company's long-term incentive plans were granted in the first quarter of fiscal year 2013 . Unrestricted shares of common stock were issued in settlement immediately upon grant as follows:
Incentive Plans
for Fiscal Years
Performance
Period
 
Unrestricted Shares
(in millions)
 
Weighted Average
Grant Date Fair Value
2010
3 years
 
0.2
 
$26.39
Share-based awards were granted under the Company's fiscal year 2013 and 2012 Sales Retention Equity Programs in the first quarter of fiscal years 2014 and 2013 , respectively. These awards vest on the third anniversary of the grant date. The table below summarizes the RSAs and RSUs granted under these programs:
 
 
 
RSAs
 
RSUs
Incentive Plans for Fiscal Years
Performance Period
 
Shares
(in millions)
 
Weighted Average Grant Date Fair Value
 
Shares
(in millions)
 
Weighted Average Grant Date Fair Value
2013
1 year
 
0.2
 
$27.11
 
0.1
 
$24.13
2012
1 year
 
0.2
 
$26.39
 
0.1
 
$23.41
The table below summarizes all of the RSAs and RSUs, including grants made pursuant to the long-term incentive plans discussed above, granted during the three months ended June 30, 2013 and 2012 :
 
Three Months Ended
June 30,
 
2013
 
2012
 
(shares in millions)
RSAs
 
 
 
Shares
2.7

 
3.5

Weighted average grant date fair value (1)
$
27.01

 
$
26.23

RSUs
 
 
 
Shares
0.7

 
0.7

Weighted average grant date fair value (2)
$
25.00

 
$
24.30

(1)
The fair value is based on the quoted market value of the Company's common stock on the grant date.
(2)
The fair value is based on the quoted market value of the Company's common stock on the grant date reduced by the present value of dividends expected to be paid on the Company's common stock prior to vesting of the RSUs, which is calculated using a risk-free interest rate.
Employee Stock Purchase Plan: The Company maintains the 2012 Employee Stock Purchase Plan (ESPP) for all eligible employees. 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 offer period. The ESPP is non-compensatory. For the six-month offer period ended June 30, 2013 , the Company issued approximately 0.1 million shares under the ESPP at an average price of $27.19 per share. As of June 30, 2013 , approximately 29.7 million shares are available for future issuances under the ESPP.

NOTE N – INCOME TAXES
Income tax benefit for the three months ended June 30, 2013 was $118 million compared with income tax expense of $130 million for the three months ended June 30, 2012 . For the three months ended June 30, 2013 , the Company recognized a net discrete tax benefit of approximately $181 million , resulting primarily from the resolutions of uncertain tax positions upon the completion of the examination of the Company's U.S. federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007.

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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s estimated annual effective tax rate, which excludes the impact of discrete items, for the three months ended June 30, 2013 and 2012 was 29.1% and 32.4% , respectively. Legislative changes in tax laws, the outcome of tax audits and any other changes in potential tax liabilities may result in additional tax expense or benefit in fiscal year 2014 , 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 certain items may yield additional tax expense or benefit in the remaining quarters of fiscal year 2014 and the Company is anticipating a fiscal year 2014 effective tax rate of approximately 14% , which includes the impact of the aforementioned completion of the examination.
The completion of the examination of the Company's U.S. federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007 resulted in a reduction of approximately $221 million in the Company's uncertain tax positions as disclosed in Note 15, “Income Taxes” of the Company's Form 10-K for the year ended March 31, 2013. The Company also expects to receive a cash refund of approximately $70 million as a result of the completion of this examination, which has been recorded in "Other current assets" in the Condensed Consolidated Balance Sheet at June 30, 2013.

NOTE O – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
For the three months ended June 30, 2013 and 2012 , interest payments, net were approximately $26 million and $26 million , respectively, and income taxes paid, net were approximately $199 million and $125 million , respectively. For the three months ended June 30, 2013 and 2012 , the excess tax benefits from options exercised included in financing activities were approximately $3 million and $5 million , respectively.
Non-cash financing activities for the three months ended June 30, 2013 and 2012 consisted of treasury shares issued in connection with the following: share-based incentive awards granted under the Company’s equity compensation plans of approximately $46 million (net of approximately $27 million of taxes withheld) and $57 million (net of approximately $30 million of taxes withheld), respectively; and discretionary stock contributions to the CA, Inc. Savings Harvest Plan of approximately $28 million and $29 million , respectively.
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 it 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. The activity under this cash pooling arrangement for the three months ended June 30, 2013 and 2012 was as follows:
 
Three Months Ended
June 30,
 
2013
 
2012
 
(in millions)
Total borrowing position outstanding at beginning of period (1)
$
136

 
$
139

Borrowings
725

 
253

Repayments
(723
)
 
(247
)
Foreign currency exchange effect

 
(5
)
Total borrowing position outstanding at end of period (1)
$
138

 
$
140

(1)
Included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheets.

NOTE P – SEGMENT INFORMATION
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 platform on which the products operate. 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.

17

Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Segment expenses do not include share-b ased compensation expense; amortization of purchased software; amortization of other intangible assets; certain foreign exchange derivative hedging gains and losses; costs associated with our Fiscal 2014 Plan; and other miscellaneous costs. Additionally, starting in the first quarter of fiscal year 2014, the measure of segment expenses and segment profit was revised by the Chief Operating Decision Maker, who is the Company's Chief Executive Officer, to treat all costs of internal software development as segment expense in the period the costs are incurred and as a result, the Company will add back capitalized internal software costs and exclude amortization of internally developed software costs previously capitalized from segment expenses. Prior periods segment expense and profit information has been revised to present segment profit and expense on consistent basis. A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed.
As part of the Company’s efforts to more fully utilize its intellectual property assets, in the first quarter of fiscal year 2013 , the Company closed a transaction that assigned the rights to certain of these assets to a large technology company for $35 million . The entire contract amount is included in the Enterprise Solutions segment for the three months ended June 30, 2012 . The Company will continue to have the ability to use these intellectual property assets in current and future product offerings.
The Company’s segment information for the three months ended June 30, 2013 and 2012 was as follows:
Three Months Ended June 30, 2013
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
619

 
$
411

 
$
98

 
$
1,128

Expenses
 
242

 
370

 
90

 
702

Segment profit
 
$
377

 
$
41

 
$
8

 
$
426

Segment operating margin
 
61
%
 
10
%
 
8
%
 
38
%
Depreciation
 
$
13

 
$
9

 
$

 
$
22

Reconciliation of segment profit to income before income taxes for the three months ended June 30, 2013 :
(in millions)
 
Segment profit
$
426

Less:
 
Purchased software amortization
28

Other intangibles amortization
14

Software development costs capitalized
(23
)
Internally developed software products amortization
41

Share-based compensation expense
20

Other (gains) expenses, net (1)
118

Interest expense, net
11

Income before income taxes
$
217

(1)
Other (gains) expenses, net consists of $120 million of costs associated with the Fiscal 2014 Plan, certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.

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Table of Contents
CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Three Months Ended June 30, 2012
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
628

 
$
426

 
$
91

 
$
1,145

Expenses
 
261

 
357

 
87

 
705

Segment profit
 
$
367

 
$
69

 
$
4

 
$
440

Segment operating margin
 
58
%
 
16
%
 
4
%
 
38
%
Depreciation
 
$
16

 
$
11

 
$

 
$
27

Reconciliation of segment profit to income before income taxes for the three months ended June 30, 2012 :
(in millions)
 
Segment profit
$
440

Less:
 
Purchased software amortization
27

Other intangibles amortization
14

Software development costs capitalized
(36
)
Internally developed software products amortization
37

Share-based compensation expense
23

Other (gains) expenses, net (1)
(6
)
Interest expense, net
11

Income before income taxes
$
370

(1)
Other (gains) expenses, net consists of certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.
The table below summarizes the Company’s revenue from the United States and from international (i.e., non-U.S.) locations:
 
Three Months Ended
June 30, 2013
 
Three Months Ended
June 30, 2012
 
(in millions)
United States
$
673

 
$
683

Europe
264

 
273

Other
191

 
189

Total revenue
$
1,128

 
$
1,145


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Table of Contents

Item 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. (which we refer to as 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, the words “believes,” “plans,” “anticipates,” “expects,” “estimates,” “targets” and similar expressions are intended to identify forward-looking information. Forward-looking information includes, for example, the statements made in this Management’s 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 the fiscal year ending March 31, 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 forward-looking statements, including: the ability to achieve success in the Company’s strategy by, among other things, effectively re-balancing the Company’s sales force to increase penetration in growth markets and with large enterprises that have not historically been significant customers, 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, application development and IT operations, Software-as-a-Service, mobile device management 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; the failure to adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the failure to expand partner programs; the ability to retain and attract adequate qualified personnel; the ability to integrate acquired companies and products into existing businesses; the ability to adequately manage, evolve and protect managerial and financial reporting systems and processes; the ability of the Company’s products to remain compatible with ever-changing operating environments; breaches of the Company’s software products and the Company’s and customers’ data centers and IT environments; discovery of errors in the Company’s software and potential product liability claims; the failure to protect the Company’s intellectual property rights and source code; risks associated with sales to government customers; events or circumstances that would require us to record an impairment charge relating to the Company's goodwill or capitalized software and other intangible assets balances; access to software licensed from third parties; risks associated with the use of software from open source code sources; access to third-party code and specifications for the development of code; third-party claims of intellectual property infringement or royalty payments; fluctuations in the number, terms and duration of the Company’s license agreements as well as the timing of orders from customers and channel partners; the failure to renew large license transactions on a satisfactory basis; changes in market conditions or the Company’s credit ratings; fluctuations in foreign currencies; the failure to effectively execute the Company’s workforce reductions workforce re-balancing and facility consolidations; successful outsourcing of various functions to third parties; potential tax liabilities; acquisition opportunities that may or may not arise; 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, targeted or similarly expressed in a forward-looking manner. 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 2014 and fiscal 2013 are to our fiscal years ending on March 31, 2014 and 2013 , respectively.


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OVERVIEW
We are a leading provider of enterprise information technology (IT) management software and solutions. We help customers maximize their existing technology investments and recognize the potential of new technology to drive innovation. We transform IT to simplify complexity, free up resources and focus on service quality. We also secure IT to reduce the risk of improper access and fraud. We do this across our customers' choices of platforms - from mainframe and distributed to virtual, cloud and mobile, and across technologies and vendors.
We deliver solutions across the complete service lifecycle, which ranges from portfolio planning and service modeling in pre-production to service assembly, automation, assurance and management in production. This specialized customer-centric and practical approach helps customers manage and maintain IT systems and deliver new, innovative services with speed and agility, while bridging the gap between what businesses want to compete more effectively and what IT can deliver.
Organizations are looking to IT to gain a competitive edge through faster delivery of products, services and applications, new customer acquisition, and agile responses to market change. To achieve these desired business outcomes, many organizations are improving the efficiency and availability of their IT resources and applications by: adopting server virtualization and cloud computing; delivering an experience that embraces social media and the proliferation of smart devices; leveraging application development and IT operations to speed application release cycles; and looking at the flexibility inherent in the variety of Software-as-a-Service (SaaS) offerings available in the market. While these technologies and new business models can reduce operating costs tied to physical infrastructure and increase agility, they also push IT into more complex and hybrid computing environments comprising mainframes, physical servers, virtualized servers and private, public and hybrid (a combination of public and private) cloud environments.
To address these challenges, we believe it is vital for companies to effectively accelerate IT innovation and transform and secure all of their various computing environments, while being able to deliver new services quickly based on their business needs.
Our core strengths in IT management and security, combined with our investments in innovative technologies, position us to serve a wide range of customers. We have a broad and deep portfolio of software solutions to address customer needs across computing platforms, from mainframe and distributed to virtual, cloud and mobile, and across the service lifecycle. We deliver many of these solutions on-premises and are continuing to transition and offer many of our products through a SaaS delivery model. We organize our offerings into our Mainframe Solutions, Enterprise Solutions and Services operating segments.
Beginning in fiscal 2014 we combined our Large New Enterprises and Growth Markets customer segments into a single sales coverage model to better capture market opportunities which may include smaller transaction sizes as we seek to expand our relationships with these new customers. This is in addition to our Large Existing Enterprises customer segment. These efforts are designed to accelerate new product sales outside of our contract renewal cycle. We continue to dedicate sales resources and deploy additional solutions to address opportunities to sell to new customers. In May 2013, the Company's Board of Directors approved a re-balancing plan (Fiscal 2014 Plan) to better align the Company's business priorities. The Fiscal 2014 Plan includes streamlining the Company's sales structure to eliminate redundancies while maintaining its focus on customers. In addition, the Company will be consolidating its development sites into development hubs to promote collaboration and agile development. We believe we can grow our business and increase market share by delivering differentiated technology and working through partners. We believe our customer segments allow us to better align our go-to-market initiatives with how customers want to buy. We have also implemented broad-based business initiatives to drive accountability for execution. We believe that these initiatives will benefit our performance in the long-term and allows us to sell to new customer accounts.

EXECUTIVE SUMMARY
Contract renewals increased in the first quarter of fiscal 2014 due to a higher dollar value of scheduled contract renewals compared with fiscal 2013 and also as a result of several renewals closing prior to their scheduled expiration dates. New product and capacity sales increased a high single digit percentage due to an increase in mainframe new product and capacity sales associated with mainframe renewal activity. Enterprise solutions new product sales were flat.
In the first quarter, we recognized a charge for the Fiscal 2014 Plan. We were also able to improve organizational efficiencies in selling, marketing and general administration expenses. Additionally, we recognized a tax benefit from the completion of the examination of our U.S. federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007. Cash flow from operations decreased year-over-year due to a number of expected factors including higher cash tax payments and cash payments associated with the Fiscal 2014 Plan. Revenue and billings backlogs continued to be affected by sales performance from fiscal 2013.  

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Summary of key results for the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 is as follows:
Revenue:
Declined 1% as a result of a decrease in subscription and maintenance revenue. The decrease in subscription and maintenance revenue was partially offset by an increase in software fees and other revenue and professional service revenue.
Due to our sales performance in fiscal 2013, we continue to expect a year-over-year decrease in total revenue for fiscal 2014 compared with fiscal 2013 due to the high percentage of our revenue that is recognized from license agreements with customers signed in prior periods that are being recognized ratably.
Bookings:
Increased 49% as a result of a year-over-year increase in subscription and maintenance bookings, and to a lesser extent, an increase in professional service bookings.
Subscription and maintenance bookings increase was primarily due to a high double digit increase in renewal bookings, led by mainframe renewals.
New product and capacity sales increased by a high single digit percentage, primarily due to mainframe new product and capacity sales.
We continue to expect the value of our fiscal 2014 renewals to increase by a percentage in the high single digits, excluding a large customer renewal that is expected to occur in the second half of fiscal 2014. We expect a majority of the increase in renewal value to occur in the second half of fiscal 2014.
Expenses:
Total expenses before interest and income taxes increased 18% .
Increase in expenses was primarily a result of the re-balancing plan (Fiscal 2014 Plan) announced in May 2013.
Partially offsetting this increase was a decrease in selling and marketing and general and administrative expenses.
In the first quarter of fiscal 2013, there was $35 million of income from an intellectual property transaction recognized in “Other (gains) expenses, net.”
Product development and enhancements expenses are expected to increase in future periods as the amount capitalized for internally developed software costs decreases. While this would ultimately result in lower future amortization expense for these assets, we do not expect a material effect in fiscal 2014.
Income taxes:
Income tax benefit for the first quarter of fiscal 2014 was $118 million compared with income tax expense of $130 million for the first quarter of fiscal 2013.
For the first quarter of fiscal 2014, we recognized a net discrete tax benefit of approximately $181 million , resulting primarily from the resolutions of uncertain tax positions from final settlement of the examination of our U.S. federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007.
We are anticipating a fiscal 2014 effective tax rate of approximately 14% .
Diluted income per common share:    
Diluted income per common share increased to $0.73 from $0.51 , primarily due to the income tax benefit recognized.
Segment results:
Mainframe Solutions revenue decrease was primarily due to a decrease in prior fiscal years' new product and mainframe capacity sales. The increase in operating margin was primarily a result of a decrease in selling and marketing and general and administrative expenses.
Enterprise Solutions revenue decrease was primarily due to lower new product sales from fiscal 2013 from our security, service assurance and IT business management products. This was partially offset by an increase in sales of new mobile device management products in the first quarter of fiscal 2014. Enterprise Solutions operating margin decreased as a result of the income from the aforementioned $35 million intellectual property transaction in the first quarter of fiscal 2013.
Services revenue increase was primarily due to additional billable time on professional service engagements. Operating margin for Services increased as a result of operating efficiencies under current service engagements.
Cash flows from operations:
Net cash provided by operating activities decreased 94% .
Decrease was primarily due to the increase in income tax payments of $74 million , payments associated with our Fiscal 2014 Plan and a slight decrease in our cash collections.
The first quarter of fiscal 2013 included $35 million in cash proceeds received from the aforementioned intellectual property transaction.

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We expect a year-over-year decrease in cash flows from operations for fiscal 2014 compared with fiscal 2013 due to payments associated with the Fiscal 2014 Plan of over $100 million, an increase in tax payments and an increase in operating cash outflows relating to product development and enhancements as a result of the decrease in amounts capitalized for internally developed software costs.

QUARTERLY UPDATE
In June 2013, we acquired 100% of the voting equity interest of Layer 7 Technologies (Layer 7), a provider of application programming interface (API) management and security software. The acquisition of Layer 7 will enable us to provide security and management technology to the API marketplace that complements our current identity and access management software suite. The total purchase price of the Layer 7 acquisition was $155 million .
In May 2013, our Board of Directors approved a re-balancing plan (Fiscal 2014 Plan) to better align our business priorities. The Fiscal 2014 Plan comprises the termination of approximately 1,200 employees and global facilities consolidations. We intend to fill most of the positions involved in the re-balancing over the next 12 months with new employees that have skills to enable us to better focus our resources on key products and market segments. The Fiscal 2014 Plan includes streamlining our sales structure to eliminate redundancies while maintaining our focus on customers. In addition, we will be consolidating our development sites into development hubs to promote collaboration and agile development.

PERFORMANCE 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:
 
First Quarter Comparison
Fiscal
 

 
Percent
 
2014
 
2013
 
Change
 
Change
 
(dollars in millions)
 
 
Total revenue
$
1,128

 
$
1,145

 
$
(17
)
 
(1
)%
Net income
$
335

 
$
240

 
$
95

 
40
 %
Net cash provided by operating activities
$
11

 
$
183

 
$
(172
)
 
(94
)%
Total bookings
$
824

 
$
553

 
$
271

 
49
 %
Subscription and maintenance bookings
$
634

 
$
383

 
$
251

 
66
 %
Weighted average subscription and maintenance license
agreement duration in years
3.10

 
2.79

 
0.31

 
11
 %
 
June 30, 2013
 
March 31, 2013
 
Change
From
Year End
 
June 30, 2012
 
Change
From Prior
Year Quarter
 
(in millions)
Cash, cash equivalents and investments (1)
$
2,461

 
$
2,776

 
$
(315
)
 
$
2,541

 
$
(80
)
Total debt
$
1,285

 
$
1,290

 
$
(5
)
 
$
1,298

 
$
(13
)
Total expected future cash collections
from committed contracts (2)
$
4,793

 
$
5,173

 
$
(380
)
 
$
5,067

 
$
(274
)
Total revenue backlog (2)
$
7,385

 
$
7,774

 
$
(389
)
 
$
7,771

 
$
(386
)
Total current revenue backlog (2)
$
3,429

 
$
3,563

 
$
(134
)
 
$
3,527

 
$
(98
)
(1)
At June 30, 2013 and March 31, 2013 , investments were less than $1 million and $183 million , respectively. At June 30, 2012 , investments were less than $1 million.
(2)
Refer to the discussion in the “Liquidity and Capital Resources” section of this MD&A for additional information on expected future cash collections from committed contracts and revenue backlog.
Analyses of our performance indicators shown above and segment performance can be found in the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A.

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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 license fee 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 services 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 license fee revenue is recognized on an up-front basis is reflected in “Software fees and other” in our Condensed Consolidated Statements of Operations.
As our business strategy has evolved, our management 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).
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 exclude 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, 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.
Within bookings, we also consider the yield on our renewals. We define “renewal yield” as the percentage of the renewable value of a prior contract ( i.e., the maintenance value and, in the case of non-perpetual licenses, the license value) realized in current period bookings. The renewable value of a prior contract is an estimate affected by various factors including contractual renewal terms, price increases and other conditions. Beginning with the first fiscal quarter of fiscal 2014, we no longer consider price increases after December 31, 2012 as part of the renewable value of the prior period contract. Previously, the renewable portion of a contract would have to be renewed at the previous amount plus the amount of any price increases to be deemed to be renewed at 100%. Management made this change because it believes it provides a truer measure of our ability to renew the renewable value of a prior contract. We estimate the aggregate yield for a quarter based on a review of material transactions representing a substantial majority of the dollar value of renewals during the current period. There may be no correlation between year-over-year changes in bookings and year-over-year changes in renewal yield, since renewal yield is based on the renewable value of contracts of various durations, most of which are longer than one year.
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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Weighted 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 noncurrent 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 noncurrent. 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. Generally, we believe that an increase or decrease in the current portion of revenue backlog on a year-over-year basis is a favorable or unfavorable indicator of future subscription and maintenance revenue performance, respectively, due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.
“Deferred revenue (billed or collected)” is composed of: (i) amounts received from customers in advance of revenue recognition and (ii) amounts billed but not collected for which revenue has not yet been earned.


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RESULTS OF OPERATIONS
The following tables present revenue and expense line items reported in our Condensed Consolidated Statements of Operations for the first quarter of fiscal 2014 and fiscal 2013 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.
 
First Quarter Comparison Fiscal 2014 Versus Fiscal 2013
 
 
 
 
 
Dollar Change
 
Percentage Change
 
Percentage of
Total Revenue
 
2014
 
2013
 
2014 / 2013
 
2014 / 2013
 
2014
 
2013
 
(dollars in millions)
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
Subscription and maintenance revenue
$
944

 
$
977

 
$
(33
)
 
(3
)%
 
84
 %
 
85
 %
Professional services
98

 
91

 
7

 
8

 
9

 
8

Software fees and other
86

 
77

 
9

 
12

 
7

 
7

Total revenue
$
1,128

 
$
1,145

 
$
(17
)
 
(1
)%
 
100
 %
 
100
 %
Expenses
 
 
 
 
 
 
 
 
 
 
 
Costs of licensing and maintenance
$
71

 
$
69

 
$
2

 
3
 %
 
6
 %
 
6
 %
Cost of professional services
88

 
86

 
2

 
2

 
8

 
8

Amortization of capitalized software costs
69

 
64

 
5

 
8

 
6

 
6

Selling and marketing
281

 
305

 
(24
)
 
(8
)
 
25

 
27

General and administrative
91

 
110

 
(19
)
 
(17
)
 
8

 
10

Product development and enhancements
135

 
125

 
10

 
8

 
12

 
11

Depreciation and amortization of other intangible assets
36

 
41

 
(5
)
 
(12
)
 
3

 
4

Other (gains) expenses, net
129

 
(36
)
 
165

 
NM

 
11

 
(3
)
Total expenses before interest and income taxes
$
900

 
$
764

 
$
136

 
18
 %
 
80
 %
 
67
 %
Income before interest and income taxes
$
228

 
$
381

 
$
(153
)
 
(40
)%
 
20
 %
 
33
 %
Interest expense, net
11

 
11

 

 

 
1

 
1

Income before income taxes
$
217

 
$
370

 
$
(153
)
 
(41
)%
 
19
 %
 
32
 %
Income tax (benefit) expense
(118
)
 
130

 
(248
)
 
(191
)
 
(10
)
 
11

Net income
$
335

 
$
240

 
$
95

 
40
 %
 
30
 %
 
21
 %
Note:     Amounts may not add to their respective totals due to rounding.
Revenue
Total Revenue
As more fully described below, the decrease in total revenue in the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 was primarily attributable to a decrease in subscription and maintenance revenue. The decrease in subscription and maintenance revenue was partially offset by an increase in software fees and other revenue and professional services revenue. There was also an unfavorable foreign exchange effect of $9 million for the first quarter of fiscal 2014.
Due to our sales performance in fiscal 2013, we continue to expect a year-over-year decrease in total revenue for fiscal 2014 compared with fiscal 2013 due to the high percentage of our revenue that is recognized from license agreements with customers signed in prior periods that are being recognized ratably.


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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. These 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 decrease in subscription and maintenance revenue in the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 was primarily attributable to a decrease in prior fiscal years' new product and mainframe capacity sales. In addition, the increased percentage of bookings recognized as software fees and other revenue during fiscal 2013 had an unfavorable effect on subscription and maintenance revenue. If the percentage of these bookings increases in the future, this will continue to have an unfavorable effect on subscription and maintenance revenue. There was also an unfavorable foreign exchange effect of $8 million for the first quarter of fiscal 2014 .
Professional Services
Professional services revenue primarily includes product implementation, consulting, customer training and customer education. Professional services revenue for the first quarter of fiscal 2014 increased slightly compared with the first quarter of fiscal 2013 due to an increase in utilization of technicians leading to additional billable time on professional service engagements.
Software Fees and Other
Software fees and other revenue consists primarily 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, generally ratably over the term of the SaaS arrangement, rather than up-front.
Software fees and other revenue increased for the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 in part due to an increase in revenue from our SaaS offerings, an increase in the sale of enterprise solutions products recognized on an upfront basis and non re-occurring fees which have been recognized as other revenue.
Total 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 first quarter of fiscal 2014 and the first quarter of fiscal 2013 .
 
First Quarter Comparison Fiscal 2014 Versus Fiscal 2013
 
2014
 
%
 
2013
 
%
 
Dollar
Change
 
Percentage
Change
 
(dollars in millions)
United States
$
673

 
60
%
 
$
683

&#