CA Technologies
CA, INC. (Form: 10-Q, Received: 10/25/2013 16:03:49)
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 September 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 October 18, 2013
par value $0.10 per share
 
451,274,478


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 September 30, 2013 , and the related condensed consolidated statements of operations and comprehensive income for the three-month and six -month periods ended September 30, 2013 and 2012 , and the condensed consolidated statements of cash flows for the six -month periods ended September 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
October 25, 2013     


1


Item 1.
CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
 
 
September 30,
2013
 
March 31,
2013
 
(unaudited)
 
 
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,790

 
$
2,593

Short-term investments
9

 
183

Trade accounts receivable, net
588

 
856

Deferred income taxes
358

 
346

Other current assets
166

 
148

Total current assets
$
3,911

 
$
4,126

Property and equipment, net of accumulated depreciation of $826 and $786, respectively
$
306

 
$
311

Goodwill
5,920

 
5,871

Capitalized software and other intangible assets, net
1,214

 
1,231

Deferred income taxes
76

 
77

Other noncurrent assets, net
168

 
195

Total assets
$
11,595

 
$
11,811

Liabilities and stockholders' equity:
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
11

 
$
16

Accounts payable
80

 
93

Accrued salaries, wages and commissions
232

 
304

Accrued expenses and other current liabilities
381

 
406

Deferred revenue (billed or collected)
2,038

 
2,482

Taxes payable, other than income taxes payable
43

 
77

Federal, state and foreign income taxes payable
58

 
151

Deferred income taxes
12

 
12

Total current liabilities
$
2,855

 
$
3,541

Long-term debt, net of current portion
$
1,768

 
$
1,274

Federal, state and foreign income taxes payable
175

 
338

Deferred income taxes
122

 
120

Deferred revenue (billed or collected)
856

 
975

Other noncurrent liabilities
144

 
113

Total liabilities
$
5,920

 
$
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; 446 ,646,793  and 448,149,131 shares outstanding, respectively
59

 
59

Additional paid-in capital
3,566

 
3,593

Retained earnings
5,704

 
5,357

Accumulated other comprehensive loss
(175
)
 
(155
)
Treasury stock, at cost, 143 ,048,288  and 141,545,950 shares, respectively
(3,479
)
 
(3,404
)
Total stockholders' equity
$
5,675

 
$
5,450

Total liabilities and stockholders' equity
$
11,595

 
$
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
September 30,
 
For the Six
Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
Subscription and maintenance
$
945

 
$
963

 
$
1,889

 
$
1,940

Professional services
97

 
95

 
195

 
186

Software fees and other
98

 
94

 
184

 
171

Total revenue
$
1,140

 
$
1,152

 
$
2,268

 
$
2,297

Expenses:
 
 
 
 
 
 
 
Costs of licensing and maintenance
$
73

 
$
69

 
$
144

 
$
138

Cost of professional services
88

 
88

 
176

 
174

Amortization of capitalized software costs
73

 
67

 
142

 
131

Selling and marketing
260

 
317

 
541

 
622

General and administrative
91

 
98

 
182

 
208

Product development and enhancements
145

 
123

 
280

 
248

Depreciation and amortization of other intangible assets
37

 
40

 
73

 
81

Other (gains) expenses, net
14

 
13

 
143

 
(23
)
Total expenses before interest and income taxes
$
781

 
$
815

 
$
1,681

 
$
1,579

Income before interest and income taxes
$
359

 
$
337

 
$
587

 
$
718

Interest expense, net
13

 
10

 
24

 
21

Income before income taxes
$
346

 
$
327

 
$
563

 
$
697

Income tax expense (benefit)
106

 
105

 
(12
)
 
235

Net income
$
240

 
$
222

 
$
575

 
$
462

 
 
 
 
 
 
 
 
Basic income per common share
$
0.53

 
$
0.48

 
$
1.27

 
$
0.99

Basic weighted average shares used in computation
448

 
458

 
449

 
462

 
 
 
 
 
 
 
 
Diluted income per common share
$
0.53

 
$
0.48

 
$
1.26

 
$
0.99

Diluted weighted average shares used in computation
450

 
459

 
450

 
463

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
September 30,
 
For the Six
Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
240

 
$
222

 
$
575

 
$
462

Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation adjustments
23

 
16

 
(20
)
 
(10
)
Total other comprehensive (loss) income
$
23

 
$
16

 
$
(20
)
 
$
(10
)
Comprehensive income
$
263

 
$
238

 
$
555

 
$
452

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 Six
Months Ended
September 30,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
575

 
$
462

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
215

 
212

Deferred income taxes
(59
)
 
(2
)
Provision for bad debts
5

 
3

Share-based compensation expense
41

 
44

Asset impairments and other non-cash items
4

 
3

Foreign currency transaction losses
2

 
19

Changes in other operating assets and liabilities, net of effect of acquisitions:
 
 
 
Decrease in trade accounts receivable
259

 
306

Decrease in deferred revenue
(580
)
 
(677
)
(Decrease) increase in taxes payable, net
(270
)
 
17

Increase in accounts payable, accrued expenses and other
12

 
11

Decrease in accrued salaries, wages and commissions
(71
)
 
(113
)
Changes in other operating assets and liabilities
(35
)
 
(13
)
Net cash provided by operating activities
$
98

 
$
272

Investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired, and purchased software
$
(125
)
 
$
(12
)
Purchases of property and equipment
(35
)
 
(32
)
Capitalized software development costs
(35
)
 
(78
)
Purchases of short-term investments
(9
)
 
(154
)
Maturities of short-term investments
184

 

Other investing activities

 
2

Net cash used in investing activities
$
(20
)
 
$
(274
)
Financing activities:
 
 
 
Dividends paid
$
(228
)
 
$
(235
)
Purchases of common stock
(200
)
 
(344
)
Notional pooling borrowings
1,609

 
513

Notional pooling repayments
(1,639
)
 
(481
)
Debt borrowings
498

 

Debt repayments
(8
)
 
(6
)
Debt issuance costs
(4
)
 

Exercise of common stock options and other
55

 
22

Net cash provided by (used in) financing activities
$
83

 
$
(531
)
Effect of exchange rate changes on cash
$
36

 
$
(60
)
Increase (decrease) in cash and cash equivalents
$
197

 
$
(593
)
Cash and cash equivalents at beginning of period
$
2,593

 
$
2,679

Cash and cash equivalents at end of period
$
2,790

 
$
2,086


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 and six months ended September 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 59% being held by the Company’s foreign subsidiaries outside the United States at September 30, 2013 .
Investments: Short-term investments consisted of time deposits held by foreign subsidiaries that are denominated in currencies other than the U.S. dollar. These investments have maturities greater than three months, but less than one year.
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 approximately $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 six months ended September 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 preliminary purchase price allocation is 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 $34 million and $14 million of accrued acquisition-related costs at September 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 more than 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 six months of fiscal year 2014 was approximately $103 million and $19 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 $130 million and global facility consolidation costs of approximately $20 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 six months ended September 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
September 30, 2013
Severance charges
$
16

 
$
111

 
$
(9
)
 
$
(69
)
 
$
3

 
$
52

Facility exit charges
23

 
19

 

 
(6
)
 
(3
)
 
33

Total accrued liabilities
$
39

 
 
 
 
 
 
 
 
 
$
85

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

 
$

 
$
(3
)
 
$
(7
)
 
$

 
$
3

Facility exit charges
40

 

 

 
(5
)
 
(3
)
 
32

Total accrued liabilities
$
53

 
 
 
 
 
 
 
 
 
$
35


7

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

Balances at September 30, 2013 and 2012 include severance accruals of approximately $7 million and $3 million , respectively, and facility exit accruals of approximately $15 million and $32 million , respectively, for plans and actions prior to fiscal year 2014.
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:
 
September 30,
2013
 
March 31,
2013
 
(in millions)
Accounts receivable – billed
$
523

 
$
796

Accounts receivable – unbilled
67

 
63

Other receivables
19

 
21

Less: Allowances
(21
)
 
(24
)
Trade accounts receivable, net
$
588

 
$
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 September 30, 2013 were as follows:
 
At September 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
$
5,703

 
$
4,779

 
$
924

 
$
323

 
$
601

Internally developed software products
1,559

 
675

 
884

 
396

 
488

Other intangible assets
832

 
480

 
352

 
227

 
125

Total capitalized software and other intangible assets
$
8,094

 
$
5,934

 
$
2,160

 
$
946

 
$
1,214


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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 September 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
$
118

 
$
111

 
$
109

 
$
107

 
$
104

Internally developed software products
166

 
150

 
120

 
86

 
40

Other intangible assets
54

 
46

 
28

 
11

 
7

Total
$
338

 
$
307

 
$
257

 
$
204

 
$
151

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 six months ended September 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 preliminary purchase price allocation of prior year acquisition

 
(6
)
 

 
(6
)
Balance at March 31, 2013 as revised
$
4,178

 
$
1,606

 
$
81

 
$
5,865

Acquisitions

 
54

 

 
54

Foreign currency translation adjustment

 
1

 

 
1

Balance at September 30, 2013
$
4,178

 
$
1,661

 
$
81

 
$
5,920



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 September 30, 2013 and March 31, 2013 were as follows:
 
September 30,
2013
 
March 31,
2013
 
(in millions)
Current:
 
 
 
Subscription and maintenance
$
1,882

 
$
2,307

Professional services
136

 
154

Software fees and other
20

 
21

Total deferred revenue (billed or collected) – current
$
2,038

 
$
2,482

Noncurrent:
 
 
 
Subscription and maintenance
$
824

 
$
940

Professional services
30

 
33

Software fees and other
2

 
2

Total deferred revenue (billed or collected) – noncurrent
$
856

 
$
975

Total deferred revenue (billed or collected)
$
2,894

 
$
3,457


NOTE G – DEBT
Senior Notes: In August 2013, the Company issued $250 million of 2.875% Senior Notes due August 2018 (2.875% Notes) and $250 million of 4.500% Senior Notes due August 2023 (4.500% Notes), for proceeds of approximately $498 million , reflecting a discount of approximately $2 million . The 2.875% Notes and 4.500% Notes are senior unsecured obligations that rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations and are redeemable by the Company at any time, subject to a “make-whole” premium of 25 basis points and 30 basis points for the 2.875% Notes and 4.500% Notes, respectively. Interest on the 2.875% Notes and 4.500% Notes is payable semiannually in August and February, beginning February 201 4. The 2.875% Notes and 4.500% Notes contain customary covenants and events of default. Th e maturity of the 2.875% Notes and the 4.500% Notes may be accelerated by holders upon certain events of default, including failure to make payments when due and failure to comply with covenants.
The Company capitalized finance costs of approximately $4 million associated with the 2.875% Notes and 4.500% Notes and will amortize these costs to “Interest expense, net” in the Company's Consolidated Statements of Operations.
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 September 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 September 30, 2013 and March 31, 2013 were as follows:
  
September 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
%

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

The interest rate that would have applied at September 30, 2013 to a borrowing under the revolving credit facility due June 2018 would have been 3.38% for Base Rate borrowings and 1.18% 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 six months ended September 30, 2013 . 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 September 30, 2013, 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 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 September 30, 2013 , the fair value of these derivatives was an asset of approximately $14 million , of which approximately $12 million is included in “Other current assets” and approximately $2 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 September 30, 2013 , foreign currency contracts outstanding consisted of purchase and sales contracts with a total gross notional value of approximately $746 million , and durations of less than six months . The net fair value of these contracts at September 30, 2013 was a net asset o f approximately $2 million , of which approximately $9 million is included in “Other current assets” and approximately $7 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
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(in millions)
2013
 
2012
 
2013
 
2012
Interest expense, net – interest rate swaps designated as fair value hedges
$
(3
)
 
$
(3
)
 
$
(6
)
 
$
(6
)
Other (gains) expenses, net – foreign currency contracts
$
(6
)
 
$
2

 
$
(15
)
 
$
10


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

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 September 30, 2013 and March 31, 2013 . The Company posted no collateral at September 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.

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 September 30, 2013 and March 31, 2013 :
 
At September 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
$
1,003

 
$

 
$
1,003

(1)  
$
1,280

 
$

 
$
1,280

(2)  
Foreign exchange derivatives (3)

 
9

 
9

 

 
1

 
1

  
Interest rate derivatives (3)

 
14

 
14

 

 
19

 
19

  
Total assets
$
1,003

 
$
23

 
$
1,026

 
$
1,280

 
$
20

 
$
1,300

  
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivatives (3)
$

 
$
7

 
$
7

 
$

 
$

 
$

  
Total liabilities
$

 
$
7

 
$
7

 
$

 
$

 
$

  
(1)
At September 30, 2013 , the Company had approximately $953 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 September 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 September 30, 2013 and March 31, 2013 :
 
 
At September 30, 2013
 
At March 31, 2013
(in millions)
  Carrying  
Value
 
Estimated
Fair Value
 
  Carrying  
Value
 
Estimated
Fair Value
Liabilities:
 
 
 
 
 
 
 
Total debt (1)
$
1,779

 
$
1,892

 
$
1,290

 
$
1,413

Facility exit reserve (2)
$
32

 
$
35

 
$
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 September 30, 2013 and March 31, 2013 . At September 30, 2013 and March 31, 2013 , the facility exit reserve included approximately $10 million and $6 million , respectively, in “Accrued expenses and other current liabilities” and approximately $22 million and $17 million , respe ctively, in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets (Level 3).


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

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.
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 officers and directors in various lawsuits and investigations, as required under Delaware law.

NOTE K – STOCKHOLDERS’ EQUITY
Stock Repurchases:  During the six months ended September 30, 2013 , the Company repurchased approximately 7 million shares of its common stock for approximately $198 million . At September 30, 2013 , the Company remained authorized to purchase approximately $307 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" in the Company’s Condensed Consolidated Balance Sheets at September 30, 2013 and March 31, 2013 were approximately $175 million and $155 million , respectively.
Cash Dividends: The Company’s Board of Directors declared the following dividends during the six months ended September 30, 2013 and 2012 :
Six Months Ended September 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
August 1, 2013
 
$0.25
 
August 22, 2013
 
$114
 
September 10, 2013
Six Months Ended September 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
August 2, 2012
 
$0.25
 
August 14, 2012
 
$116
 
September 11, 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, as adjusted for the potential dilutive effect of non-participating share-based awards.

13

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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 and six months ended September 30, 2013 and 2012 :
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions, except per share amounts)
Basic income per common share:
 
 
 
 
 
 
 
Net income
$
240

 
$
222

 
$
575

 
$
462

Less: Net income allocable to participating securities
(2
)
 
(2
)
 
(6
)
 
(5
)
Net income allocable to common shares
$
238

 
$
220

 
$
569

 
$
457

Weighted average common shares outstanding
448

 
458

 
449

 
462

Basic income per common share
$
0.53

 
$
0.48

 
$
1.27

 
$
0.99

 
 
 
 
 
 
 
 
Diluted income per common share:
 
 
 
 
 
 
 
Net income
$
240

 
$
222

 
$
575

 
$
462

Less: Net income allocable to participating securities
(2
)
 
(2
)
 
(6
)
 
(5
)
Net income allocable to common shares
$
238

 
$
220

 
$
569

 
$
457

Weighted average shares outstanding and common share equivalents:
 
 
 
 
 
 
 
Weighted average common shares outstanding
448

 
458

 
449

 
462

Weighted average effect of share-based payment awards
2

 
1

 
1

 
1

Denominator in calculation of diluted income per share
450

 
459

 
450

 
463

Diluted income per common share
$
0.53

 
$
0.48

 
$
1.26

 
$
0.99

For the three months ended September 30, 2013 and 2012 , respectively, approximately 2 million and 4 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 5 million for the three months ended September 30, 2013 and 2012 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.
For the six months ended September 30, 2013 and 2012 , respectively, approximately 2 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 six months ended September 30, 2013 and 2012 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.


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

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
September 30,
 
Six Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Costs of licensing and maintenance
$
1

 
$
1

 
$
2

 
$
1

Cost of professional services
1

 
1

 
2

 
2

Selling and marketing
8

 
8

 
15

 
18

General and administrative
6

 
7

 
12

 
15

Product development and enhancements
5

 
4

 
10

 
8

Share-based compensation expense before tax
$
21

 
$
21

 
$
41

 
$
44

Income tax benefit
(6
)
 
(8
)
 
(13
)
 
(16
)
Net share-based compensation expense
$
15

 
$
13

 
$
28

 
$
28

The following table summarizes information about unrecognized share-based compensation costs at September 30, 2013 :
 
Unrecognized Share-Based Compensation Costs
 
Weighted Average Period Expected to be Recognized
 
(in millions)
 
(in years)
Stock option awards
$
10

 
2.4
Restricted stock units
24

 
2.2
Restricted stock awards
75

 
2.1
Performance share units
22

 
2.8
Total unrecognized share-based compensation costs
$
131

 
2.3
There were no capitalized share-based compensation costs for the three and six months ended September 30, 2013 and 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).

15

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

For the six months ended September 30, 2013 and 2012 , the Company issued options for approximately 1.6 million shares and 0.7 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:
 
Six Months Ended
September 30,
 
2013
 
2012
Weighted average fair value
5.19

 
4.84

Dividend yield
4.05
%
 
3.96
%
Expected volatility factor (1)
30
%
 
34
%
Risk-free interest rate (2)
1.5
%
 
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 six months 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
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 six months 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 six months 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

16

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

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 and six months ended September 30, 2013 and 2012 :
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(shares in millions)
RSAs
 
 
 
 
 
 
 
Shares

(1)  

(1)  
2.7

 
3.6

Weighted average grant date fair value (2)
$
30.39

 
$
25.54

 
$
27.01

 
$
26.23

RSUs
 
 
 
 
 
 
 
Shares

(1)  

(1)  
0.8

 
0.7

Weighted average grant date fair value (3)
$
30.13

 
$
23.63

 
$
25.37

 
$
24.29

(1)
Less than 0.1 million.
(2)
The fair value is based on the quoted market value of the Company's common stock on the grant date.
(3)
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 September 30, 2013 , approximately 29.7 million shares are available for future issuances under the ESPP.

NOTE N – INCOME TAXES
Income tax expense for the three months ended September 30, 2013 was approximately $106 million and income tax benefit for the six months ended September 30, 2013 was approximately $12 million , compared with income tax expense for the three and six months ended September 30, 2012 of approximately $105 million and $235 million , respectively. For the six months ended September 30, 2013 , the Company recognized a net discrete tax benefit of approximately $179 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.
The Company’s estimated annual effective tax rate, which excludes the impact of discrete items, for the six months ended September 30, 2013 and 2012 was 29.7% and 33.0% , 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 received a cash refund of approximately $70 million upon the completion of this examination.

NOTE O – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
For the six months ended September 30, 2013 and 2012 , interest payments, net were approximately $31 million and $31 million , respectively, and income taxes paid, net were approximately $255 million and $150 million , respectively. For the six months ended September 30, 2013 and 2012 , the excess tax benefits from options exercised included in financing activities were approximately $3 million and $5 million , respectively.

17

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

Non-cash financing activities for the six months ended September 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 $62 million (net of approximately $34 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 six months ended September 30, 2013 and 2012 was as follows:
 
Six Months Ended
September 30,
 
2013
 
2012
 
(in millions)
Total borrowing position outstanding at beginning of period (1)
$
136

 
$
139

Borrowings
1,609

 
513

Repayments
(1,639
)
 
(481
)
Foreign currency exchange effect
20

 
(7
)
Total borrowing position outstanding at end of period (1)
$
126

 
$
164

(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.
Segment expenses do not include share-based 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 approximately $35 million . The entire contract amount is included in the Enterprise Solutions segment for the six months ended September 30, 2012 . The Company will continue to have the ability to use these intellectual property assets in current and future product offerings.

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

The Company’s segment information for the three and six months ended September 30, 2013 and 2012 was as follows:
Three Months Ended September 30, 2013
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
624

 
$
419

 
$
97

 
$
1,140

Expenses
 
228

 
357

 
88

 
673

Segment profit
 
$
396

 
$
62

 
$
9

 
$
467

Segment operating margin
 
63
%
 
15
%
 
9
%
 
41
%
Depreciation
 
$
13

 
$
9

 
$

 
$
22

Reconciliation of segment profit to income before income taxes for the three months ended September 30, 2013 :
(in millions)
 
Segment profit
$
467

Less:
 
Purchased software amortization
31

Other intangibles amortization
15

Software development costs capitalized
(8
)
Internally developed software products amortization
42

Share-based compensation expense
21

Other (gains) expenses, net (1)
7

Interest expense, net
13

Income before income taxes
$
346

(1)
Other (gains) expenses, net consist s of approximately $2 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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CA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended September 30, 2013
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
1,243

 
$
830

 
$
195

 
$
2,268

Expenses
 
470

 
727

 
178

 
1,375

Segment profit
 
$
773

 
$
103

 
$
17

 
$
893

Segment operating margin
 
62
%
 
12
%
 
9
%
 
39
%
Depreciation
 
$
26

 
$
18

 
$

 
$
44

Reconciliation of segment profit to income before income taxes for the six months ended September 30, 2013 :
(in millions)
 
Segment profit
$
893

Less:
 
Purchased software amortization
59

Other intangibles amortization
29

Software development costs capitalized
(31
)
Internally developed software products amortization
83

Share-based compensation expense
41

Other (gains) expenses, net (1)
125

Interest expense, net
24

Income before income taxes
$
563

(1)
Other (gains) expenses, net consists of approximately $122 million of costs associated with the Fiscal 2014 Plan, certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.
Three Months Ended September 30, 2012
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
619

 
$
438

 
$
95

 
$
1,152

Expenses
 
250

 
409

 
89

 
748

Segment profit
 
$
369

 
$
29

 
$
6

 
$
404

Segment operating margin
 
60
%
 
7
%
 
6
%
 
35
%
Depreciation
 
$
16

 
$
11

 
$

 
$
27

Reconciliation of segment profit to income before income taxes for the three months ended September 30, 2012 :
(in millions)
 
Segment profit
$
404

Less:
 
Purchased software amortization
27

Other intangibles amortization
13

Software development costs capitalized
(42
)
Internally developed software products amortization
40

Share-based compensation expense
21

Other (gains) expenses, net (1)
8

Interest expense, net
10

Income before income taxes
$
327

(1)
Other (gains) expenses, net consists of certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.

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

Six Months Ended September 30, 2012
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
1,247

 
$
864

 
$
186

 
$
2,297

Expenses
 
511

 
766

 
176

 
1,453

Segment profit
 
$
736

 
$
98

 
$
10

 
$
844

Segment operating margin
 
59
%
 
11
%
 
5
%
 
37
%
Depreciation
 
$
32

 
$
22

 
$

 
$
54

Reconciliation of segment profit to income before income taxes for the six months ended September 30, 2012 :
(in millions)
 
Segment profit
$
844

Less:
 
Purchased software amortization
54

Other intangibles amortization
27

Software development costs capitalized
(78
)
Internally developed software products amortization
77

Share-based compensation expense
44

Other (gains) expenses, net (1)
2

Interest expense, net
21

Income before income taxes
$
697

(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
September 30,
 
Six Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
United States
$
687

 
$
685

 
$
1,360

 
$
1,368

Europe
267

 
266

 
531

 
538

Other
186

 
201

 
377

 
391

Total revenue
$
1,140

 
$
1,152

 
$
2,268

 
$
2,297


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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). The Fiscal 2014 Plan includes streamlining the Company's sales structure to eliminate redundancies while maintaining its focus on customers. In addition, the Company is consolidating its development sites into development hubs to promote collaboration and agile development process. 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.


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EXECUTIVE SUMMARY
For the second quarter of fiscal 2014, revenue declined primarily as a result of a decrease in subscription and maintenance revenue caused by a decrease in prior fiscal years' new product and mainframe capacity sales. Within total revenue, there was a decline in enterprise solutions revenue, partially offset by an increase in mainframe solutions revenue. Total bookings increased primarily as a result of an increase in mainframe renewals. This increase was partially offset by a decrease in mainframe and enterprise new product sales. Total expenses were positively affected by lower personnel costs within selling and marketing expenses, a decrease in commissions and other operational efficiencies; however, we expect to increase our research and development spending and increase our investment in marketing in the second half of fiscal 2014. Cash flow from operations decreased year-over-year due to a number of expected factors including payments associated with the Fiscal 2014 Plan, 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.
A summary of key results for the second quarter of fiscal 2014 compared with the second quarter of fiscal 2013 is as follows:
Revenue:
Total 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 services revenue.
We continue to expect a year-over-year decrease in total revenue for fiscal 2014 compared with fiscal 2013 due to our sales underperformance in fiscal 2013 and the high percentage of our revenue that is recognized from license agreements with customers signed in prior periods that are being recognized ratably.
Bookings:
Total bookings increased 5%