CA Technologies
CA, INC. (Form: 10-Q, Received: 01/22/2014 16:07:34)
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 December 31, 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 January 15, 2014
par value $0.10 per share
 
447,768,051


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 December 31, 2013 , and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine -month periods ended December 31, 2013 and 2012 , and the related condensed consolidated statements of cash flows for the nine -month periods ended December 31, 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
January 22, 2014     


1


Item 1.
CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
 
 
December 31,
2013
 
March 31,
2013
 
(unaudited)
 
 
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,974

 
$
2,593

Short-term investments
8

 
183

Trade accounts receivable, net
714

 
856

Deferred income taxes
338

 
346

Other current assets
156

 
148

Total current assets
$
4,190

 
$
4,126

Property and equipment, net of accumulated depreciation of $826  and $786, respectively
$
290

 
$
311

Goodwill
5,922

 
5,871

Capitalized software and other intangible assets, net
1,129

 
1,231

Deferred income taxes
74

 
77

Other noncurrent assets, net
172

 
195

Total assets
$
11,777

 
$
11,811

Liabilities and stockholders' equity:
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
519

 
$
16

Accounts payable
79

 
93

Accrued salaries, wages and commissions
245

 
304

Accrued expenses and other current liabilities
411

 
406

Deferred revenue (billed or collected)
2,151

 
2,482

Taxes payable, other than income taxes payable
72

 
77

Federal, state and foreign income taxes payable
47

 
151

Deferred income taxes
13

 
12

Total current liabilities
$
3,537

 
$
3,541

Long-term debt, net of current portion
$
1,253

 
$
1,274

Federal, state and foreign income taxes payable
180

 
338

Deferred income taxes
89

 
120

Deferred revenue (billed or collected)
893

 
975

Other noncurrent liabilities
135

 
113

Total liabilities
$
6,087

 
$
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; 443,170,508 and 448,149,131 shares outstanding, respectively
59

 
59

Additional paid-in capital
3,590

 
3,593

Retained earnings
5,823

 
5,357

Accumulated other comprehensive loss
(185
)
 
(155
)
Treasury stock, at cost, 146,524,573 and 141,545,950 shares, respectively
(3,597
)
 
(3,404
)
Total stockholders' equity
$
5,690

 
$
5,450

Total liabilities and stockholders' equity
$
11,777

 
$
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
December 31,
 
For the Nine
Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
Subscription and maintenance
$
951

 
$
966

 
$
2,840

 
$
2,906

Professional services
94

 
97

 
289

 
283

Software fees and other
118

 
132

 
302

 
303

Total revenue
$
1,163

 
$
1,195

 
$
3,431

 
$
3,492

Expenses:
 
 
 
 
 
 
 
Costs of licensing and maintenance
$
79

 
$
72

 
$
223

 
$
210

Cost of professional services
88

 
92

 
264

 
266

Amortization of capitalized software costs
72

 
66

 
214

 
197

Selling and marketing
293

 
331

 
834

 
953

General and administrative
95

 
96

 
277

 
304

Product development and enhancements
149

 
120

 
429

 
368

Depreciation and amortization of other intangible assets
40

 
39

 
113

 
120

Other (gains) expenses, net
13

 
9

 
156

 
(14
)
Total expenses before interest and income taxes
$
829

 
$
825

 
$
2,510

 
$
2,404

Income before interest and income taxes
$
334

 
$
370

 
$
921

 
$
1,088

Interest expense, net
15

 
12

 
39

 
33

Income before income taxes
$
319

 
$
358

 
$
882

 
$
1,055

Income tax expense
87

 
107

 
75

 
342

Net income
$
232

 
$
251

 
$
807

 
$
713

 
 
 
 
 
 
 
 
Basic income per common share
$
0.52

 
$
0.55

 
$
1.78

 
$
1.54

Basic weighted average shares used in computation
446

 
452

 
448

 
458

 
 
 
 
 
 
 
 
Diluted income per common share
$
0.51

 
$
0.55

 
$
1.78

 
$
1.53

Diluted weighted average shares used in computation
448

 
453

 
449

 
460

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
December 31,
 
For the Nine
Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
Net income
$
232

 
$
251

 
$
807

 
$
713

Other comprehensive loss
 
 
 
 
 
 
 
Foreign currency translation adjustments
(10
)
 
(1
)
 
(30
)
 
(11
)
Total other comprehensive loss
$
(10
)
 
$
(1
)
 
$
(30
)
 
$
(11
)
Comprehensive income
$
222

 
$
250

 
$
777

 
$
702

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 Nine
Months Ended
December 31,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
807

 
$
713

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
327

 
317

Deferred income taxes
(75
)
 
46

Provision for bad debts
5

 
4

Share-based compensation expense
64

 
62

Asset impairments and other non-cash items
9

 
6

Foreign currency transaction losses
3

 
19

Changes in other operating assets and liabilities, net of effect of acquisitions:
 
 
 
Decrease in trade accounts receivable
133

 
105

Decrease in deferred revenue
(429
)
 
(420
)
(Decrease) increase in taxes payable, net
(247
)
 
74

Increase (decrease) in accounts payable, accrued expenses and other
20

 
(37
)
Decrease in accrued salaries, wages and commissions
(57
)
 
(66
)
Changes in other operating assets and liabilities
(33
)
 
15

Net cash provided by operating activities
$
527

 
$
838

Investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired, and purchased software
$
(127
)
 
$
(18
)
Purchases of property and equipment
(52
)
 
(41
)
Proceeds from sale of assets
12

 

Capitalized software development costs
(39
)
 
(122
)
Purchases of short-term investments
(9
)
 
(346
)
Maturities of short-term investments
184

 
163

Other investing activities
(1
)
 
2

Net cash used in investing activities
$
(32
)
 
$
(362
)
Financing activities:
 
 
 
Dividends paid
$
(341
)
 
$
(349
)
Purchases of common stock
(340
)
 
(421
)
Notional pooling borrowings
2,577

 
791

Notional pooling repayments
(2,603
)
 
(787
)
Debt borrowings
498

 

Debt repayments
(12
)
 
(9
)
Debt issuance costs
(5
)
 

Exercise of common stock options and other
74

 
22

Net cash used in financing activities
$
(152
)
 
$
(753
)
Effect of exchange rate changes on cash
$
38

 
$
(49
)
Increase (decrease) in cash and cash equivalents
$
381

 
$
(326
)
Cash and cash equivalents at beginning of period
$
2,593

 
$
2,679

Cash and cash equivalents at end of period
$
2,974

 
$
2,353

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 nine months ended December 31, 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 December 31, 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 nine months ended December 31, 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 as of December 31, 2013 is as follows:
(dollars in millions)
Layer 7
 
Estimated
Useful Life
Finite-lived intangible assets (1)
$
26

 
2-4 years

Purchased software
87

 
5 years

Goodwill
55

 
Indefinite

Deferred tax liabilities
(13
)
 

Other assets net of other liabilities assumed (2)

 

Purchase price
$
155

 
 
(1)
Includes customer relationships and trade names.
(2)
Includes approximately $9 million of cash acquired.
Revisions to the purchase price allocation made since the date of acquisition were to account for changes in our fair value analysis and deferred taxes. The revisions to the purchase price allocation were not material to the Company's financial statements for the third quarter and first nine months of fiscal year 2014 . 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 $33 million and $14 million of accrued acquisition-related costs at December 31, 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 nine months of fiscal year 2014 was approximately $114 million and $20 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 nine months ended December 31, 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
December 31, 2013
Severance charges
$
16

 
$
123

 
$
(9
)
 
$
(88
)
 
$
3

 
$
45

Facility exit charges
23

 
20

 

 
(9
)
 
(3
)
 
31

Total accrued liabilities
$
39

 
 
 
 
 
 
 
 
 
$
76


7

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

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

 
$
18

 
$
(3
)
 
$
(8
)
 
$

 
$
20

Facility exit charges
40

 

 

 
(11
)
 
(4
)
 
25

Total accrued liabilities
$
53

 
 
 
 
 
 
 
 
 
$
45

Balances at December 31, 2013 and 2012 include severance accruals of approximately $5 million and $20 million , respectively, and facility exit accruals of approximately $14 million and $25 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:
 
December 31,
2013
 
March 31,
2013
 
(in millions)
Accounts receivable – billed
$
644

 
$
796

Accounts receivable – unbilled
68

 
63

Other receivables
23

 
21

Less: Allowances
(21
)
 
(24
)
Trade accounts receivable, net
$
714

 
$
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 December 31, 2013 were as follows:
 
At December 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
$
5,693

 
$
4,797

 
$
896

 
$
334

 
$
562

Internally developed software products
1,560

 
722

 
838

 
391

 
447

Other intangible assets
846

 
486

 
360

 
240

 
120

Total capitalized software and other intangible assets
$
8,099

 
$
6,005

 
$
2,094

 
$
965

 
$
1,129


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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 December 31, 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
$
117

 
$
109

 
$
107

 
$
105

 
$
102

Internally developed software products
166

 
151

 
119

 
85

 
40

Other intangible assets
63

 
57

 
28

 
9

 
5

Total
$
346

 
$
317

 
$
254

 
$
199

 
$
147

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 nine months ended December 31, 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

 
55

 

 
55

Foreign currency translation adjustment

 
2

 

 
2

Balance at December 31, 2013
$
4,178

 
$
1,663

 
$
81

 
$
5,922



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 December 31, 2013 and March 31, 2013 were as follows:
 
December 31,
2013
 
March 31,
2013
 
(in millions)
Current:
 
 
 
Subscription and maintenance
$
1,987

 
$
2,307

Professional services
142

 
154

Software fees and other
22

 
21

Total deferred revenue (billed or collected) – current
$
2,151

 
$
2,482

Noncurrent:
 
 
 
Subscription and maintenance
$
862

 
$
940

Professional services
30

 
33

Software fees and other
1

 
2

Total deferred revenue (billed or collected) – noncurrent
$
893

 
$
975

Total deferred revenue (billed or collected)
$
3,044

 
$
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 2014. The 2.875% Notes and 4.500% Notes contain customary covenants and events of default. The 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 December 31, 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 December 31, 2013 and March 31, 2013 were as follows:
  
December 31, 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 December 31, 2013 to a borrowing under the revolving credit facility due June 2018 would have been 3.38% for Base Rate borrowings and 1.17% 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 nine months ended December 31, 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 December 31, 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 December 31, 2013 , the fair value of these derivatives was an asset of approximately $11 million , of which approximately $11 million is included in “Other current assets” 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 December 31, 2013 , foreign currency contracts outstanding consisted of purchase and sales contracts with a total gross notional value of approximately $662 million , and durations of less than three months . The net fair value of these contracts at December 31, 2013 was a net asset o f approximately $5 million , of which approximately $10 million is included in “Other current assets” and approximately $5 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
December 31,
 
Nine Months Ended
December 31,
(in millions)
2013
 
2012
 
2013
 
2012
Interest expense, net – interest rate swaps designated as fair value hedges
$
(3
)
 
$
(3
)
 
$
(9
)
 
$
(9
)
Other (gains) expenses, net – foreign currency contracts
$
(5
)
 
$
(7
)
 
$
(20
)
 
$
2


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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 December 31, 2013 and March 31, 2013 . The Company posted no collateral at December 31, 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 December 31, 2013 and March 31, 2013 :
 
At December 31, 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
$
1,154

 
$

 
$
1,154

(1)  
$
1,280

 
$

 
$
1,280

(2)  
Foreign exchange derivatives (3)

 
10

 
10

 

 
1

 
1

  
Interest rate derivatives (3)

 
11

 
11

 

 
19

 
19

  
Total assets
$
1,154

 
$
21

 
$
1,175

 
$
1,280

 
$
20

 
$
1,300

  
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivatives (3)
$

 
$
5

 
$
5

 
$

 
$

 
$

  
Total liabilities
$

 
$
5

 
$
5

 
$

 
$

 
$

  
(1)
At December 31, 2013 , the Company had approximately $1,104 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 December 31, 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 December 31, 2013 and March 31, 2013 :
 
 
At December 31, 2013
 
At March 31, 2013
(in millions)
  Carrying  
Value
 
Estimated
Fair Value
 
  Carrying  
Value
 
Estimated
Fair Value
Liabilities:
 
 
 
 
 
 
 
Total debt (1)
$
1,772

 
$
1,873

 
$
1,290

 
$
1,413

Facility exit reserve (2)
$
31

 
$
34

 
$
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 December 31, 2013 and March 31, 2013 . At December 31, 2013 and March 31, 2013 , the facility exit reserve included approximately $11 million and $6 million , respectively, in “Accrued expenses and other current liabilities” and approximately $20 million and $17 million , respectively, 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. For example, the Company, the General Services Administration (GSA) and the U.S. Department of Justice (DOJ) have been and continue to be in discussions and document production related to the pricing of the Company’s government sales transactions under the Company’s GSA schedule contract, entered into in 2002 and extended through subsequent amendments. In the course of those discussions, the government has indicated that it may file a complaint under the civil False Claims Act. The Company cannot predict if, or when, the government may choose to file a complaint or the amount of damages the government may seek if it does file a complaint in this matter. Although the timing and ultimate outcome of this matter cannot be determined, the Company believes that the material aspects of the government’s liability theories are unfounded.
The Company believes that it has meritorious defenses in connection with its current lawsuits and material 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, claims and disputes is uncertain, the likely results of these lawsuits, claims and disputes 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 nine months ended December 31, 2013 , the Company repurchased approximately 11 million shares of its common stock for approximately $338 million . At December 31, 2013 , the Company remained authorized to purchase approximately $167 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 December 31, 2013 and March 31, 2013 were approximately $185 million and $155 million , respectively.
Cash Dividends: The Company’s Board of Directors declared the following dividends during the nine months ended December 31, 2013 and 2012 :
Nine Months Ended December 31, 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
November 6, 2013
 
$0.25
 
November 21, 2013
 
$113
 
December 10, 2013

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

Nine Months Ended December 31, 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
November 7, 2012
 
$0.25
 
November 20, 2012
 
$114
 
December 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.
The following table presents basic and diluted income per common share information for the three and nine months ended December 31, 2013 and 2012 :
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
 
(in millions, except per share amounts)
Basic income per common share:
 
 
 
 
 
 
 
Net income
$
232

 
$
251

 
$
807

 
$
713

Less: Net income allocable to participating securities
(2
)
 
(3
)
 
(8
)
 
(8
)
Net income allocable to common shares
$
230

 
$
248

 
$
799

 
$
705

Weighted average common shares outstanding
446

 
452

 
448

 
458

Basic income per common share
$
0.52

 
$
0.55

 
$
1.78

 
$
1.54

 
 
 
 
 
 
 
 
Diluted income per common share:
 
 
 
 
 
 
 
Net income
$
232

 
$
251

 
$
807

 
$
713

Less: Net income allocable to participating securities
(2
)
 
(3
)
 
(8
)
 
(8
)
Net income allocable to common shares
$
230

 
$
248

 
$
799

 
$
705

Weighted average shares outstanding and common share equivalents:
 
 
 
 
 
 
 
Weighted average common shares outstanding
446

 
452

 
448

 
458

Weighted average effect of share-based payment awards
2

 
1

 
1

 
2

Denominator in calculation of diluted income per share
448

 
453

 
449

 
460

Diluted income per common share
$
0.51

 
$
0.55

 
$
1.78

 
$
1.53

For the three months ended December 31, 2013 and 2012 , respectively, approximately 1 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 December 31, 2013 and 2012 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.
For the nine months ended December 31, 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 6 million for the nine months ended December 31, 2013 and 2012 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.


14

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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
December 31,
 
Nine Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
Costs of licensing and maintenance
$
1

 
$
1

 
$
3

 
$
2

Cost of professional services
1

 
1

 
3

 
3

Selling and marketing
8

 
6

 
23

 
24

General and administrative
8

 
6

 
20

 
21

Product development and enhancements
5

 
4

 
15

 
12

Share-based compensation expense before tax
$
23

 
$
18

 
$
64

 
$
62

Income tax benefit
(7
)
 
(4
)
 
(20
)
 
(20
)
Net share-based compensation expense
$
16

 
$
14

 
$
44

 
$
42

The following table summarizes information about unrecognized share-based compensation costs at December 31, 2013 :
 
Unrecognized Share-Based Compensation Costs
 
Weighted Average Period Expected to be Recognized
 
(in millions)
 
(in years)
Stock option awards
$
9

 
2.2
Restricted stock units
20

 
2.0
Restricted stock awards
63

 
2.0
Performance share units
24

 
2.5
Total unrecognized share-based compensation costs
$
116

 
2.1
There were no capitalized share-based compensation costs for the three and nine months ended December 31, 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 nine months ended December 31, 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:
 
Nine Months Ended
December 31,
 
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 nine 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 nine 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 nine 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 nine months ended December 31, 2013 and 2012 :
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
 
(shares in millions)
RSAs
 
 
 
 
 
 
 
Shares

(1)  

(1)  
2.7

 
3.6

Weighted average grant date fair value (2)
$
32.51

 
$
23.04

 
$
27.03

 
$
26.21

RSUs
 
 
 
 
 
 
 
Shares

 
0.1

 
0.8

 
0.8

Weighted average grant date fair value (3)
$

 
$
20.81

 
$
25.37

 
$
24.05

(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. For the six-month offer period ended December 31, 2013 , the Company issued approximately 0.1 million shares under the ESPP at an average price of $31.97 per share. As of December 31, 2013 , approximately 29.6 million shares are available for future issuances under the ESPP.

NOTE N – INCOME TAXES
Income tax expense for the three and nine months ended December 31, 2013 was approximately $87 million and $75 million , respectively, compared with income tax expense for the three and nine months ended December 31, 2012 of approximately $107 million and $342 million , respectively. For the nine months ended December 31, 2013 , the Company recognized a net discrete tax benefit of approximately $184 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.
In November 2013, the Company received a tax assessment of approximately Brazilian reais 211 million (which translated to approximately $89 million at December 31, 2013 ), including interest and penalties, from the Brazilian tax authority relating to fiscal years 2008-2013. The assessment included a report of findings in connection with the examination. The Company disagrees with the proposed adjustments in the assessment and intends to vigorously dispute these matters through applicable administrative and judicial procedures, as appropriate. While the Company believes that it will ultimately prevail, if not resolved in favor of the Company, the assessment could have an impact on the Company’s consolidated financial position, cash flows or results of operations. The Company does not believe it is reasonably possible that the amount of unrecognized tax benefits for this matter will significantly increase or decrease within the next 12 months .
While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its financial statements reflect the probable outcome of uncertain tax positions. The Company may adjust these uncertain tax positions, as well as any related interest or penalties, in light of changing facts and circumstances, including the settlement of income tax audits and the expirations of statutes of limitation. To the extent a settlement differs from the amounts previously reserved, that difference generally would be recognized as a component of income tax expense in the period of resolution. Although the timing of the resolution of income tax examinations is highly uncertain, it is reasonably possible that settlements, payments and new information in the next 12 months may result in changes to the Company’s uncertain tax positions related to certain federal, foreign and state tax issues, including issues involving taxation of international operations and other matters. The Company believes that such reasonably possible changes within the next 12 months may reduce the balance of unrecognized tax benefits by an amount up to $40 million .

17

Table of Contents
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 nine months ended December 31, 2013 and 2012 was 29.4% and 32.6% , respectively. 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 quarter 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 U.S. federal 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 following the completion of this examination.

NOTE O – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
For the nine months ended December 31, 2013 and 2012 , interest payments, net were approximately $56 million and $56 million , respectively, and income taxes paid, net were approximately $368 million and $190 million , respectively. For the nine months ended December 31, 2013 and 2012 , the excess tax benefits from options exercised included in financing activities were approximately $4 million and $6 million , respectively.
Non-cash investing activities for the nine months ended December 31, 2012 consisted of assets acquired under capital leases of
$9 million and the purchase of a software license for $20 million , which was paid during the fourth quarter of fiscal year
2013.
Non-cash financing activities for the nine months ended December 31, 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 $47 million (net of approximately $28 million of taxes withheld) and $63 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 nine months ended December 31, 2013 and 2012 was as follows:
 
Nine Months Ended
December 31,
 
2013
 
2012
 
(in millions)
Total borrowing position outstanding at beginning of period (1)
$
136

 
$
139

Borrowings
2,577

 
791

Repayments
(2,603
)
 
(787
)
Foreign currency exchange effect
28

 
(3
)
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.

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

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 period 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 nine months ended December 31, 2012 . The Company will continue to have the ability to use these intellectual property assets in current and future product offerings.
During the third quarter of fiscal year 2013 , the Company incurred severance costs of which $5 million , $11 million and $2 million were assigned to the Mainframe Solutions, Enterprise Solutions and Services segments, respectively. Refer to Note C, “Severance and Exit Costs.”
The Company’s segment information for the three and nine months ended December 31, 2013 and 2012 was as follows:
Three Months Ended December 31, 2013
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
622

 
$
447

 
$
94

 
$
1,163

Expenses
 
239

 
378

 
90

 
707

Segment profit
 
$
383

 
$
69

 
$
4

 
$
456

Segment operating margin
 
62
%
 
15
%
 
4
%
 
39
%
Depreciation
 
$
13

 
$
8

 
$

 
$
21

Reconciliation of segment profit to income before income taxes for the three months ended December 31, 2013 :
(in millions)
 
Segment profit
$
456

Less:
 
Purchased software amortization
29

Other intangibles amortization
19

Software development costs capitalized
(1
)
Internally developed software products amortization
43

Share-based compensation expense
23

Other (gains) expenses, net (1)
9

Interest expense, net
15

Income before income taxes
$
319

(1)
Other (gains) expenses, net consists of approximately $12 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

Nine Months Ended December 31, 2013
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
1,865

 
$
1,277

 
$
289

 
$
3,431

Expenses
 
709

 
1,105

 
268

 
2,082

Segment profit
 
$
1,156

 
$
172

 
$
21

 
$
1,349

Segment operating margin
 
62
%
 
13
%
 
7
%
 
39
%
Depreciation
 
$
39

 
$
26

 
$

 
$
65

Reconciliation of segment profit to income before income taxes for the nine months ended December 31, 2013 :
(in millions)
 
Segment profit
$
1,349

Less:
 
Purchased software amortization
88

Other intangibles amortization
48

Software development costs capitalized
(32
)
Internally developed software products amortization
126

Share-based compensation expense
64

Other (gains) expenses, net (1)
134

Interest expense, net
39

Income before income taxes
$
882

(1)
Other (gains) expenses, net consists of approximately $134 million of costs associated with the Fiscal 2014 Plan, certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.
Three Months Ended December 31, 2012
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
622

 
$
476

 
$
97

 
$
1,195

Expenses
 
253

 
425

 
93

 
771

Segment profit
 
$
369

 
$
51

 
$
4

 
$
424

Segment operating margin
 
59
%
 
11
%
 
4
%
 
35
%
Depreciation
 
$
14

 
$
11

 
$

 
$
25

Reconciliation of segment profit to income before income taxes for the three months ended December 31, 2012 :
(in millions)
 
Segment profit
$
424

Less:
 
Purchased software amortization
26

Other intangibles amortization
14

Software development costs capitalized
(44
)
Internally developed software products amortization
40

Share-based compensation expense
18

Other (gains) expenses, net (1)

Interest expense, net
12

Income before income taxes
$
358

(1)
Other (gains) expenses, net consists of 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

Nine Months Ended December 31, 2012
 
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
 
$
1,869

 
$
1,340

 
$
283

 
$
3,492

Expenses
 
764

 
1,191

 
269

 
2,224

Segment profit
 
$
1,105

 
$
149

 
$
14

 
$
1,268

Segment operating margin
 
59
%
 
11
%
 
5
%
 
36
%
Depreciation
 
$
46

 
$
33

 
$

 
$
79

Reconciliation of segment profit to income before income taxes for the nine months ended December 31, 2012 :
(in millions)
 
Segment profit
$
1,268

Less:
 
Purchased software amortization
80

Other intangibles amortization
41

Software development costs capitalized
(122
)
Internally developed software products amortization
117

Share-based compensation expense
62

Other (gains) expenses, net (1)
2

Interest expense, net
33

Income before income taxes
$
1,055

(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
December 31,
 
Nine Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
 
(in millions)
United States
$
684

 
$
701

 
$
2,044

 
$
2,068

Europe
288

 
291

 
819

 
830

Other
191

 
203

 
568

 
594

Total revenue
$
1,163

 
$
1,195

 
$
3,431

 
$
3,492


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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 expected to be completed by the end of 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,