CA Technologies
CA, INC. (Form: 10-Q, Received: 10/28/2016 16:06:52)
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, 2016
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)
 
 
520 Madison Avenue,
New York, New York
10022
(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 21, 2016
par value $0.10 per share
 
417,837,016


Table of Contents

CA, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page
PART I.
 
 
 
 
 
 
 
 
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, 2016 , and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended September 30, 2016 and 2015 , and the related condensed consolidated statements of cash flows for the six-month periods ended September 30, 2016 and 2015 . These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews 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 reviews, 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, 2016 , 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 12, 2016, 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, 2016 , 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 28, 2016

1


Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
 
September 30,
2016
 
March 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,585

 
$
2,812

Trade accounts receivable, net
445

 
625

Other current assets
148

 
124

Total current assets
$
3,178

 
$
3,561

Property and equipment, net of accumulated depreciation of $842 and $832, respectively
$
222

 
$
242

Goodwill
6,083

 
6,086

Capitalized software and other intangible assets, net
662

 
795

Deferred income taxes
422

 
407

Other noncurrent assets, net
120

 
113

Total assets
$
10,687

 
$
11,204

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
4

 
$
6

Accounts payable
76

 
77

Accrued salaries, wages and commissions
159

 
205

Accrued expenses and other current liabilities
352

 
352

Deferred revenue (billed or collected)
1,790

 
2,197

Taxes payable, other than income taxes payable
27

 
55

Federal, state and foreign income taxes payable

 
2

Total current liabilities
$
2,408

 
$
2,894

Long-term debt, net of current portion
$
1,946

 
$
1,947

Federal, state and foreign income taxes payable
135

 
148

Deferred income taxes
3

 
3

Deferred revenue (billed or collected)
580

 
737

Other noncurrent liabilities
86

 
97

Total liabilities
$
5,158

 
$
5,826

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; 413,149,727 and 412,596,452 shares outstanding, respectively
59

 
59

Additional paid-in capital
3,652

 
3,664

Retained earnings
6,771

 
6,575

Accumulated other comprehensive loss
(435
)
 
(416
)
Treasury stock, at cost, 176,545,354 and 177,098,629 shares, respectively
(4,518
)
 
(4,504
)
Total stockholders’ equity
$
5,529

 
$
5,378

Total liabilities and stockholders’ equity
$
10,687

 
$
11,204

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,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Subscription and maintenance
$
824

 
$
832

 
$
1,650

 
$
1,668

Professional services
75

 
83

 
152

 
162

Software fees and other
119

 
90

 
215

 
152

Total revenue
$
1,018

 
$
1,005

 
$
2,017

 
$
1,982

Expenses:
 
 
 
 
 
 
 
Costs of licensing and maintenance
$
66

 
$
70

 
$
134

 
$
136

Cost of professional services
73

 
78

 
148

 
149

Amortization of capitalized software costs
59

 
67

 
125

 
127

Selling and marketing
235

 
248

 
477

 
474

General and administrative
84

 
99

 
172

 
189

Product development and enhancements
136

 
151

 
284

 
287

Depreciation and amortization of other intangible assets
18

 
29

 
38

 
56

Other expenses, net
27

 
4

 
27

 
1

Total expenses before interest and income taxes
$
698

 
$
746

 
$
1,405

 
$
1,419

Income from continuing operations before interest and income taxes
$
320

 
$
259

 
$
612

 
$
563

Interest expense, net
14

 
12

 
29

 
21

Income from continuing operations before income taxes
$
306

 
$
247

 
$
583

 
$
542

Income tax expense
94

 
75

 
173

 
163

Income from continuing operations
$
212

 
$
172

 
$
410

 
$
379

Income from discontinued operations, net of income taxes

 
2

 

 
7

Net income
$
212

 
$
174

 
$
410

 
$
386

 
 
 
 
 
 
 
 
Basic income per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.50

 
$
0.39

 
$
0.98

 
$
0.86

Income from discontinued operations

 

 

 
0.02

Net income
$
0.50

 
$
0.39

 
$
0.98

 
$
0.88

Basic weighted average shares used in computation
414

 
436

 
414

 
436


 
 
 
 
 
 
 
Diluted income per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.50

 
$
0.39

 
$
0.98

 
$
0.86

Income from discontinued operations

 

 

 
0.02

Net income
$
0.50

 
$
0.39

 
$
0.98

 
$
0.88

Diluted weighted average shares used in computation
415

 
437

 
415

 
437

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,
 
2016
 
2015
 
2016
 
2015
Net income
$
212

 
$
174

 
$
410

 
$
386

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
10

 
(53
)
 
(19
)
 
(21
)
Total other comprehensive income (loss)
$
10

 
$
(53
)
 
$
(19
)
 
$
(21
)
Comprehensive income
$
222

 
$
121

 
$
391

 
$
365

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,
 
2016
 
2015
Operating activities from continuing operations:
 
 
 
Net income
$
410

 
$
386

Income from discontinued operations

 
(7
)
Income from continuing operations
$
410

 
$
379

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation and amortization
163

 
183

Deferred income taxes
(11
)
 
(28
)
Provision for bad debts
2

 
1

Share-based compensation expense
54

 
45

Other non-cash items
3

 

Foreign currency transaction (gains) losses
(1
)
 
6

Changes in other operating assets and liabilities, net of effect of acquisitions:
 
 
 
Decrease in trade accounts receivable
176

 
231

Decrease in deferred revenue
(562
)
 
(496
)
(Decrease) increase in taxes payable, net
(86
)
 
2

Increase (decrease) in accounts payable, accrued expenses and other
19

 
(9
)
Decrease in accrued salaries, wages and commissions
(47
)
 
(66
)
Changes in other operating assets and liabilities
(17
)
 
(17
)
Net cash provided by operating activities - continuing operations
$
103

 
$
231

Investing activities from continuing operations:
 
 
 
Acquisitions of businesses, net of cash acquired, and purchased software
$
(1
)

$
(647
)
Purchases of property and equipment
(16
)

(23
)
Proceeds from sale of short-term investments

 
48

Net cash used in investing activities - continuing operations
$
(17
)
 
$
(622
)
Financing activities from continuing operations:
 
 
 
Dividends paid
$
(214
)

$
(220
)
Purchases of common stock
(100
)

(115
)
Notional pooling borrowings
467

 
2,494

Notional pooling repayments
(456
)
 
(2,497
)
Debt borrowings

 
800

Debt repayments
(4
)
 
(406
)
Debt issuance costs

 
(3
)
Exercise of common stock options
26


4

Other financing activities

 
(18
)
Net cash (used in) provided by financing activities - continuing operations
$
(281
)
 
$
39

Effect of exchange rate changes on cash
$
(32
)

$
(1
)
Net change in cash and cash equivalents - continuing operations
$
(227
)
 
$
(353
)
Cash provided by operating activities - discontinued operations
$


$
7

Net effect of discontinued operations on cash and cash equivalents
$

 
$
7

Decrease in cash and cash equivalents
$
(227
)
 
$
(346
)
Cash and cash equivalents at beginning of period
$
2,812

 
$
2,804

Cash and cash equivalents at end of period
$
2,585

 
$
2,458

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 in accordance 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, 2016 ( 2016 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, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017 .
Divestitures: In the fourth quarter of fiscal year 2016, the Company sold its CA ERwin Data Modeling solution assets (ERwin). The results of operations associated with this business have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2015 and Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2015 .
Cash and Cash Equivalents: The Company’s cash and cash equivalents are held in numerous locations throughout the world, with approximately 83% being held by the Company’s foreign subsidiaries outside the United States at September 30, 2016 .
New Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers , which creates new ASC Topic 606 (Topic 606) that will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB issued a one-year deferral of the effective date of the new revenue recognition standard. In March 2016, April 2016 and May 2016, the FASB issued additional amendments to the technical guidance of Topic 606. Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will be effective for the Company’s first quarter of fiscal year 2019 and early application for fiscal year 2018 is permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures. Topic 606 is expected to have a significant effect on the Company’s revenue recognition policies and disclosures. The Company has not yet selected a transition method nor has it determined the effect the standard will have on its ongoing financial reporting.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842), which requires a lessee to recognize assets and liabilities on its consolidated balance sheet for leases with accounting lease terms of more than 12 months. ASU 2016-02 will replace most existing lease accounting guidance in U.S. GAAP when it becomes effective. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. ASU 2016-02 will be effective for the Company’s first quarter of fiscal year 2020 and requires the modified retrospective method of adoption. Early adoption is permitted. Although the Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment Accounting (Topic 718), which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company’s first quarter of fiscal year 2018 and early adoption is permitted. The Company is currently evaluating the guidance to determine the adoption methods and the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

6

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

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15), Classification of Certain Cash Receipts and Cash Payments (Topic 230), which is intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for the Company’s first quarter of fiscal year 2019 and requires a retrospective transition method of adoption. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16), Intra-Equity Transfers of Assets Other Than Inventory (Topic 740), which is intended to eliminate diversity in practice and provide a more accurate depiction of the tax consequences on intercompany asset transfers (excluding inventory). ASU 2016-16 requires entities to immediately recognize the tax consequences on intercompany asset transfers (excluding inventory) at the transaction date, rather than deferring the tax consequences under current GAAP. ASU 2016-16 will be effective for the Company’s first quarter of fiscal year 2019 and requires a modified retrospective method of adoption. Early adoption is permitted, but only in the first quarter of an entity’s annual fiscal year. The Company is currently evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.

NOTE B – ACQUISITIONS
On July 8, 2015, the Company completed its acquisition of Rally Software Development Corp. (Rally), a provider of Agile development software and services. The acquisition of Rally broadens the Company’s solution set and capabilities to better serve customers in the application economy. Pursuant to the terms of the acquisition agreement and related tender offer, the Company acquired 100% of the outstanding shares of Rally common stock for approximately $519 million . The purchase price allocation for Rally is provided in the table below.
The purchase price allocation for the Company’s other acquisitions during fiscal year 2016, including the second quarter acquisition of Xceedium, Inc. (Xceedium), is included within the “Other Fiscal Year 2016 Acquisitions” column below. The acquisition of Xceedium and the Company’s other acquisitions during fiscal year 2016 were immaterial, both individually and in the aggregate.
(dollars in millions)
Rally
 
Other Fiscal Year 2016 Acquisitions
 
Estimated
Useful Life
Finite-lived intangible assets (1)
$
78

 
$
14

 
1-15 years
Purchased software
178

 
96

 
5-7 years
Goodwill
257

 
59

 
Indefinite
Deferred tax liabilities, net
(45
)
 
(24
)
 
Other assets net of other liabilities assumed (2)
51

 
2

 
Purchase price
$
519

 
$
147

 
 
(1)
Includes customer relationships and trade names.
(2)
Includes approximately $13 million of cash acquired and approximately $48 million of short-term investments acquired relating to Rally.
The allocation of purchase price to acquired identifiable assets, including intangible assets, for Rally was finalized during the first quarter of fiscal year 2017. The excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The allocation of purchase price to goodwill was predominantly due to synergies the Company expects to achieve through integration of the acquired technology with the Company’s existing product portfolio and the intangible assets that are not separable, such as assembled workforce and going concern. The goodwill relating to the Company’s fiscal year 2016 acquisitions was not deductible for tax purposes and was allocated to the Enterprise Solutions segment. The pro forma effects of the Company’s fiscal year 2016 acquisitions on the Company’s revenues and results of operations during fiscal year 2016 were considered immaterial.
Transaction costs for the Company’s fiscal year 2016 acquisitions, which were primarily included in “General and administrative” in the Company’s Condensed Consolidated Statements of Operations, were  $17 million and $20 million for the three and six months ended September 30, 2015, respectively.
Since Rally and Xceedium were acquired during the second quarter of fiscal year 2016, the Condensed Consolidated Statements of Operations for the six months ended September 30, 2015 included three months of activity for revenue and expenses associated with these acquisitions. During the first quarter of fiscal 2017, the Condensed Consolidated Statements of Operations included total revenue of  $35 million  and net loss of  $5 million  for the Company’s fiscal year 2016 acquisitions of Rally and Xceedium.

7

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

The Company had approximately $3 million of accrued acquisition-related costs at September 30, 2016 and March 31, 2016 related to purchase price amounts withheld subject to indemnification protections.

NOTE C – 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,
2016
 
March 31,
2016
 
(in millions)
Accounts receivable – billed
$
385

 
$
566

Accounts receivable – unbilled
60

 
55

Other receivables
10

 
13

Less: Allowances
(10
)
 
(9
)
Trade accounts receivable, net
$
445

 
$
625


NOTE D – GOODWILL, CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at September 30, 2016 were as follows:
 
At September 30, 2016
 
Gross
Amortizable
Assets
 
Less: Fully
Amortized
Assets
 
Remaining
Amortizable
Assets
 
Accumulated
Amortization
on Remaining
Amortizable
Assets
 
Net
Assets
 
(in millions)
Purchased software products
$
5,991

 
$
4,908

 
$
1,083

 
$
590

 
$
493

Internally developed software products
1,467

 
1,030

 
437

 
356

 
81

Other intangible assets
927

 
762

 
165

 
77

 
88

Total capitalized software and other intangible assets
$
8,385

 
$
6,700

 
$
1,685

 
$
1,023

 
$
662

The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at March 31, 2016 were as follows:
 
At March 31, 2016
 
Gross
Amortizable
Assets
 
Less: Fully
Amortized
Assets
 
Remaining
Amortizable
Assets
 
Accumulated
Amortization
on Remaining
Amortizable
Assets
 
Net
Assets
 
(in millions)
Purchased software products
$
5,990

 
$
4,865

 
$
1,125

 
$
552

 
$
573

Internally developed software products
1,467

 
1,009

 
458

 
333

 
125

Other intangible assets
927

 
728

 
199

 
102

 
97

Total capitalized software and other intangible assets
$
8,384

 
$
6,602

 
$
1,782

 
$
987

 
$
795

 

8

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

Based on the capitalized software and other intangible assets recorded through September 30, 2016 , the projected annual amortization expense for fiscal year 2017 and the next four fiscal years is expected to be as follows:
 
Year Ended March 31,
 
2017
 
2018
 
2019
 
2020
 
2021
 
(in millions)
Purchased software products
$
156

 
$
147

 
$
107

 
$
82

 
$
40

Internally developed software products
79

 
36

 
9

 
1

 

Other intangible assets
16

 
8

 
7

 
6

 
6

Total
$
251

 
$
191

 
$
123

 
$
89

 
$
46

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, 2016 was as follows:
(in millions)
Mainframe Solutions
 
Enterprise Solutions
 
Services
 
Total
Balance at March 31, 2016
$
4,178

 
$
1,827

 
$
81

 
$
6,086

Foreign currency translation adjustment

 
(3
)
 

 
(3
)
Balance at September 30, 2016
$
4,178

 
$
1,824

 
$
81

 
$
6,083


NOTE E – DEFERRED REVENUE
The current and noncurrent components of “Deferred revenue (billed or collected)” at September 30, 2016 and March 31, 2016 were as follows:
 
September 30,
2016
 
March 31,
2016
 
(in millions)
Current:
 
 
 
Subscription and maintenance
$
1,596

 
$
1,990

Professional services
122

 
116

Software fees and other
72

 
91

Total deferred revenue (billed or collected) – current
$
1,790

 
$
2,197

Noncurrent:
 
 
 
Subscription and maintenance
$
558

 
$
712

Professional services
18

 
21

Software fees and other
4

 
4

Total deferred revenue (billed or collected) – noncurrent
$
580

 
$
737

Total deferred revenue (billed or collected)
$
2,370

 
$
2,934



9

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

NOTE F – 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.
Foreign Currency Contracts: The Company enters into foreign currency option and forward contracts to manage foreign currency risks. The Company has not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other expenses, net” in the Company’s Condensed Consolidated Statements of Operations.
At September 30, 2016 , foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $900 million and durations of less than six months . The net fair value of these contracts at September 30, 2016 was a net asset of approximately $4 million , of which approximately $8 million is included in “Other current assets” and approximately $4 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.
At March 31, 2016 , foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $332 million and durations of less than three months . The net fair value of these contracts at March 31, 2016 was a net liability of approximately $1 million , of which approximately $2 million is included in “Other current assets” and approximately $3 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.
A summary of the effect of the 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)
2016
 
2015
 
2016
 
2015
Other expenses, net – foreign currency contracts
$
3

 
$
(8
)
 
$
6

 
$
3

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 either in a net asset position or under the established threshold at September 30, 2016 and March 31, 2016 . The Company posted no collateral at September 30, 2016 or March 31, 2016 . 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.


10

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

NOTE G – 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, 2016 and March 31, 2016 :
 
At September 30, 2016
 
At March 31, 2016
 
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)
$
347

 
$

 
$
347

 
$
617

 
$

 
$
617

Foreign exchange derivatives (2)

 
8

 
8

 

 
2

 
2

Total assets
$
347

 
$
8

 
$
355

 
$
617

 
$
2

 
$
619

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivatives (2)
$

 
$
4

 
$
4

 
$

 
$
3

 
$
3

Total liabilities
$

 
$
4

 
$
4

 
$

 
$
3

 
$
3

(1)
The Company’s investments in money market funds are classified as “Cash and cash equivalents” in its Condensed Consolidated Balance Sheets.
(2)
Refer to Note F, “Derivatives” for additional information.
At September 30, 2016 and March 31, 2016 , 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, 2016 and March 31, 2016 :
 
 
At September 30, 2016
 
At March 31, 2016
(in millions)
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Liabilities:
 
 
 
 
 
 
 
Total debt (1)
$
1,950

 
$
2,079

 
$
1,953

 
$
2,058

Facility exit reserve (2)
$
13

 
$
14

 
$
16

 
$
17

(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, 2016 and March 31, 2016 . At September 30, 2016 and March 31, 2016 , the facility exit reserve included carrying values of approximately $4 million and $4 million , respectively, in “Accrued expenses and other current liabilities” and approximately $9 million and $12 million , respectively, in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets (Level 3).


11

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

NOTE H – 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.
On March 24, 2014, the U.S. Department of Justice (DOJ) filed under seal in the United States District Court for the District of Columbia a complaint against the Company in partial intervention under the qui tam provisions of the civil False Claims Act (FCA). The underlying complaint was filed under seal by an individual plaintiff on August 24, 2009. On May 29, 2014, the case was unsealed. Both the DOJ and the individual plaintiff have filed amended complaints. The current complaints relate to government sales transactions under the Company’s General Services Administration (GSA) schedule contract, entered into in 2002 and extended until present through subsequent amendments. In sum and substance, the current complaints allege that the Company provided inaccurate commercial discounting information to the GSA during contract negotiations and that, as a result, the GSA’s contract discount was lower than it otherwise would have been. In addition, the complaints allege that the Company failed to apply the full negotiated discount in some instances and to pay sufficient rebates pursuant to the contract’s price reduction clause. In addition to FCA claims, the current complaints also assert common law causes of action. The DOJ complaint seeks an unspecified amount of damages, including treble damages and civil penalties. The complaint by the individual plaintiff alleges that the U.S. government has suffered damages in excess of $100 million and seeks an unspecified amount of damages, including treble damages and civil penalties. The Company filed motions to dismiss the current complaints. On March 31, 2015, the court issued decisions denying the Company's motion to dismiss the DOJ complaint, and granting in part and denying in part the Company's motion to dismiss the individual plaintiff's complaint. The discovery phase of the case is proceeding pursuant to the court’s scheduling orders. On October 30, 2014, the GSA Suspension and Debarment Division issued a Show Cause Letter to the Company in response to the complaints summarized above. In sum, the letter called on the Company to demonstrate why the U.S. government should continue to contract with the Company, given the litigation allegations made in these complaints. On December 19, 2014, the Company provided a detailed response to the Show Cause Letter. In July 2015, after the Company agreed to assume certain additional reporting requirements during the pendency of the litigation, the GSA Suspension and Debarment Division advised the Company that it had concluded its review and determined that the Company is a responsible contractor with which government agencies could continue to contract. The parties have periodically been engaged in settlement negotiations and, on October 24, 2016, the parties filed a joint motion advising the court that they have reached an agreement-in-principle to resolve the litigation and requesting a 45-day extension of the current court schedule to permit the parties to draft and execute a formal settlement agreement. Also on October 24, 2016, the court granted the joint motion. The agreement-in-principle reached by the parties calls for settlement of the litigation for a payment of $45 million without admitting any wrongdoing. This agreement-in-principle is subject to the negotiation and execution of a definitive settlement agreement, concurrence of the GSA and approval by the United States District Court. As a result of this agreement-in-principle, the legal accrual for this litigation has increased in the current quarter and is recorded in “Other expenses, net” in the Company’s Condensed Consolidated Statements of Operations. As the legal accrual for this litigation has increased, there has been a reduction to the estimated range of reasonably possible loss reflected below. There can be no assurance that the settlement of this litigation will be finalized and approved by the United States District Court. In the event that the settlement of this litigation is not ultimately finalized and approved, this litigation would continue. In that event, the Company cannot predict the amount of damages likely to result from the litigation summarized above. Although the timing and ultimate outcome of this litigation cannot be determined, the Company believes that the material aspects of the liability theories set forth in the litigation complaints are unfounded. The Company also believes that it has meritorious defenses and intends to vigorously contest the lawsuit should a settlement agreement not be executed.
With respect to litigation in general, 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. 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.
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. The agreement-in-principle of the litigation detailed above, if finalized and approved by the United States District Court, would also have a negative effect on quarterly and full fiscal year cash flows. 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.

12

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

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 may, from time to time, advance certain attorneys’ fees and expenses incurred by officers and directors in various lawsuits and investigations, as permitted under Delaware law.

NOTE I – STOCKHOLDERS’ EQUITY
Stock Repurchases:  On November 13, 2015, the Board approved a stock repurchase program that authorized the Company to acquire up to $750 million of its common stock. During the six months ended September 30, 2016 , the Company repurchased approximately 3.1 million shares of its common stock for approximately $100 million . At September 30, 2016 , the Company remained authorized to purchase approximately $650 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, 2016 and March 31, 2016 were approximately $435 million and $416 million , respectively.
Cash Dividends: The Board declared the following dividends during the six months ended September 30, 2016 and 2015 :
Six Months Ended September 30, 2016 :
(in millions, except per share amounts)
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
May 4, 2016
 
$0.255
 
May 26, 2016
 
$107
 
June 14, 2016
August 3, 2016
 
$0.255
 
August 25, 2016
 
$107
 
September 13, 2016
Six Months Ended September 30, 2015 :
(in millions, except per share amounts)
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount
 
Payment Date
May 5, 2015
 
$0.25
 
May 28, 2015
 
$110
 
June 16, 2015
August 6, 2015
 
$0.25
 
August 27, 2015
 
$110
 
September 15, 2015


13

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

NOTE J – INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic net income per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted net income per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares, as adjusted for the potential dilutive effect of non-participating share-based awards.
The following table presents basic and diluted income from continuing operations per common share information for the three and six months ended September 30, 2016 and 2015 :
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions, except per share amounts)
Basic income from continuing operations per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
212

 
$
172

 
$
410

 
$
379

Less: Income from continuing operations allocable to participating securities
(3
)
 
(2
)
 
(5
)
 
(4
)
Income from continuing operations allocable to common shares
$
209

 
$
170

 
$
405

 
$
375

Weighted average common shares outstanding
414

 
436

 
414

 
436

Basic income from continuing operations per common share
$
0.50

 
$
0.39

 
$
0.98

 
$
0.86

 
 
 
 
 
 
 
 
Diluted income from continuing operations per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
212

 
$
172

 
$
410

 
$
379

Less: Income from continuing operations allocable to participating securities
(3
)
 
(2
)
 
(5
)
 
(4
)
Income from continuing operations allocable to common shares
$
209

 
$
170

 
$
405

 
$
375

Weighted average shares outstanding and common share equivalents:
 
 
 
 
 
 
 
Weighted average common shares outstanding
414

 
436

 
414

 
436

Weighted average effect of share-based payment awards
1

 
1

 
1

 
1

Denominator in calculation of diluted income per share
415

 
437

 
415

 
437

Diluted income from continuing operations per common share
$
0.50

 
$
0.39

 
$
0.98

 
$
0.86

For the three months ended September 30, 2016 and 2015 , respectively, approximately 1 million and 2 million shares of Company common stock underlying restricted stock awards (RSAs) 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 for the three months ended September 30, 2016 and 2015 were considered participating securities in the calculation of net income allocable to common stockholders.
For the six months ended September 30, 2016 and 2015 , respectively, approximately 1 million and 2 million shares of Company common stock underlying RSAs 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 4 million for the six months ended September 30, 2016 and 2015 , respectively, were considered participating securities in the calculation of net income allocable to common stockholders.


14

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

NOTE K – 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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Costs of licensing and maintenance
$
1

 
$
1

 
$
3

 
$
3

Cost of professional services
1

 
1

 
2

 
2

Selling and marketing
9

 
8

 
19

 
16

General and administrative
8

 
9

 
19

 
16

Product development and enhancements
6

 
4

 
11

 
8

Share-based compensation expense before tax
$
25

 
$
23

 
$
54

 
$
45

Income tax benefit
(8
)
 
(7
)
 
(18
)
 
(14
)
Net share-based compensation expense
$
17

 
$
16

 
$
36

 
$
31

The following table summarizes information about unrecognized share-based compensation costs at September 30, 2016 :
 
Unrecognized Share-Based Compensation Costs
 
Weighted Average Period Expected to be Recognized
 
(in millions)
 
(in years)
Stock option awards
$
5

 
2.2
Restricted stock units
24

 
2.2
Restricted stock awards
89

 
2.1
Performance share units
40

 
2.7
Total unrecognized share-based compensation costs
$
158

 
2.3
There were no capitalized share-based compensation costs for the three and six months ended September 30, 2016 and 2015 .
The value of performance share units (PSUs) is determined using the closing price of the Company’s common stock on the last trading day of the quarter until the awards 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 common stock, RSAs or restricted stock units (RSUs) 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, 2016 and 2015 , the Company issued stock options for approximately 1.1 million shares and 0.9 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:
 
Six Months Ended
September 30,
 
2016
 
2015
Weighted average fair value
$
4.41

 
$
4.68

Dividend yield
3.57
%
 
3.37
%
Expected volatility factor (1)
22
%
 
23
%
Risk-free interest rate (2)
1.5
%
 
1.9
%
Expected life (in years) (3)
6.0

 
6.0

(1)
Expected volatility is measured using historical daily price changes of the Company’s common 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 table below summarizes the RSAs and RSUs granted under the 1-year PSUs for the Company’s fiscal year 2016 and 2015 incentive plan years. The RSAs and RSUs were granted in the first quarter of fiscal years 2017 and 2016 , respectively. The RSAs and RSUs vest 34% on the date of grant and 33% on the first and second anniversaries of the grant date.
 
 
 
 
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
2016
 
1 year
 
0.6
 
$31.53
 
0.1
 
$30.53
2015
 
1 year
 
0.5
 
$31.41
 
0.1
 
$30.42
The table below summarizes the shares of common stock issued under the 3-year PSUs for the Company’s fiscal year 2014 and 2013 incentive plan years in the first quarter of fiscal years 2017 and 2016 , respectively.
Incentive Plans
for Fiscal Years
 
Performance Period
 
Shares of Common Stock
(in millions)
 
Weighted Average Grant Date Fair Value
2014
 
3 years
 
0.3
 
$31.53
2013
 
3 years
 
0.1
 
$31.41
The table below summarizes the RSAs and RSUs granted under the 1-year PSUs for the Company’s fiscal year 2016 and 2015 sales retention equity programs. The RSAs and RSUs were granted in the first quarter of fiscal years 2017 and 2016 , respectively. The RSAs and RSUs vest on the third anniversary of the grant date.
 
 
 
 
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
2016
 
1 year
 
0.3
 
$31.53
 
0.1
 
$28.52
2015
 
1 year
 
0.2
 
$30.45
 
0.1
 
$27.50

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, 2016 and 2015 :
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(shares in millions)
RSAs:
 
 
 
 
 
 
 
Shares

(3)  
0.1

 
2.9

 
2.8

Weighted average grant date fair value (1)
$
34.31

 
$
29.86

 
$
31.55

 
$
30.64

RSUs:
 
 
 
 
 
 
 
Shares

(3)  
0.1

 
1.0

 
0.9

Weighted average grant date fair value (2)
$
31.82

 
$
27.72

 
$
30.16

 
$
28.72

(1)
The fair value is based on the quoted market value of the Company’s common stock on the grant date.
(2)
The fair value is based on the quoted market value of the Company’s common stock on the grant date reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting of the RSUs, which is calculated using a risk-free interest rate.
(3)
Less than 0.1 million.
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, 2016 , the Company issued approximately 0.1 million shares under the ESPP at $31.19 per share. As of September 30, 2016 , approximately 29.1 million shares are available for future issuances under the ESPP.

NOTE L – INCOME TAXES
Income tax expense for the three and six months ended September 30, 2016 was approximately $94 million and $173 million , respectively, compared with income tax expense for the three and six months ended September 30, 2015 of approximately $75 million and $163 million , respectively.
The Company’s estimated annual effective tax rate, which excludes the impact of discrete items, for the six months ended September 30, 2016 and 2015 was 29.0% and 29.6% , 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 2017 , 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 2017 . The Company is anticipating a fiscal year 2017 effective tax rate between 28% and 29% .

NOTE M – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
For the six months ended September 30, 2016 and 2015 , interest payments were approximately $43 million and $32 million , respectively, and income taxes paid, net from continuing operations were approximately $202 million and $131 million , respectively. For the six months ended September 30, 2016 and 2015 , the excess tax benefits from share-based incentive awards included in financing activities from continuing operations were approximately $4 million and $3 million , respectively.
Non-cash financing activities for the six months ended September 30, 2016 and 2015 consisted of treasury common shares issued in connection with the following: share-based incentive awards issued under the Company’s equity compensation plans of approximately $43 million (net of approximately $33 million of income taxes withheld) and $41 million (net of approximately $27 million of income taxes withheld), respectively; discretionary stock contributions to the CA, Inc. Savings Harvest Plan of approximately $24 million for each period; and treasury common shares issued in connection with the Company’s ESPP of approximately $2 million for each period.

17

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

The Company uses a notional pooling arrangement with an international bank to help manage global liquidity. 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 notional pooling arrangement for the six months ended September 30, 2016 and 2015 was as follows:
 
Six Months Ended
September 30,
 
2016
 
2015
 
(in millions)
Total borrowings outstanding at beginning of period (1)
$
139

 
$
138

Borrowings
467

 
2,494

Repayments
(456
)
 
(2,497
)
Foreign exchange effect
(11
)
 
4

Total borrowings outstanding at end of period (1)
$
139

 
$
139

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

NOTE N – SEGMENT INFORMATION
The Company’s Mainframe Solutions and Enterprise Solutions segments comprise its software business organized by the nature of the Company’s software offerings and the platforms on which the products operate. The Services segment comprises product implementation, consulting, customer education and customer 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 amortization of purchased software; amortization of other intangible assets; amortization of internally developed software products; share-based compensation expense; certain foreign exchange derivative hedging gains and losses; approved severance and facility actions by the Board; and other miscellaneous costs. A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed.
The Company’s segment information for the three and six months ended September 30, 2016 and 2015 was as follows:
Three Months Ended September 30, 2016
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
$
550

 
$
393

 
$
75

 
$
1,018

Expenses
211

 
324

 
73

 
608

Segment profit
$
339

 
$
69

 
$
2

 
$
410

Segment operating margin
62
%
 
18
%
 
3
%
 
40
%
Depreciation
$
8

 
$
6

 
$

 
$
14

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended September 30, 2016 :
(in millions)
 
Segment profit
$
410

Less:
 
Purchased software amortization
38

Other intangibles amortization
4

Internally developed software products amortization
21

Share-based compensation expense
25

Other expenses, net (1)
2

Interest expense, net
14

Income from continuing operations before income taxes
$
306

(1)
Other expenses, net consists of costs associated with 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

Six Months Ended September 30, 2016
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
$
1,101

 
$
764

 
$
152

 
$
2,017

Expenses
419

 
648

 
148

 
1,215

Segment profit
$
682

 
$
116

 
$
4

 
$
802

Segment operating margin
62
%
 
15
%
 
3
%
 
40
%
Depreciation
$
17

 
$
12

 
$

 
$
29

Reconciliation of segment profit to income from continuing operations before income taxes for the six months ended September 30, 2016 :
(in millions)
 
Segment profit
$
802

Less:
 
Purchased software amortization
81

Other intangibles amortization
9

Internally developed software products amortization
44

Share-based compensation expense
54

Other expenses, net (1)
2

Interest expense, net
29

Income from continuing operations before income taxes
$
583

(1)
Other expenses, net consists of costs associated with certain foreign exchange derivative hedging gains and losses, and other miscellaneous costs.
Three Months Ended September 30, 2015
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
$
554

 
$
368

 
$
83

 
$
1,005

Expenses
212

 
357

 
79

 
648

Segment profit
$
342

 
$
11

 
$
4

 
$
357

Segment operating margin
62
%
 
3
%
 
5
%
 
36
%
Depreciation
$
9

 
$
6

 
$

 
$
15

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended September 30, 2015 :
(in millions)
 
Segment profit
$
357

Less:
 
Purchased software amortization
39

Other intangibles amortization
14

Internally developed software products amortization
28

Share-based compensation expense
23

Other gains, net (1)
(6
)
Interest expense, net
12

Income from continuing operations before income taxes
$
247

(1)
Other gains, net consists of costs associated with 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

Six Months Ended September 30, 2015
Mainframe
Solutions
 
Enterprise
Solutions
 
Services
 
Total
(dollars in millions)
Revenue
$
1,114

 
$
706

 
$
162

 
$
1,982

Expenses
423

 
647

 
150

 
1,220

Segment profit
$
691

 
$
59

 
$
12

 
$
762

Segment operating margin
62
%
 
8
%
 
7
%
 
38
%
Depreciation
$
18

 
$
13

 
$

 
$
31

Reconciliation of segment profit to income from continuing operations before income taxes for the six months ended September 30, 2015 :
(in millions)
 
Segment profit
$
762

Less:
 
Purchased software amortization
67

Other intangibles amortization
25

Internally developed software products amortization
60

Share-based compensation expense
45

Other expenses, net (1)
2

Interest expense, net
21

Income from continuing operations before income taxes
$
542

(1)
Other expenses, net consists of costs associated with 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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
United States
$
657

 
$
645

 
$
1,294

 
$
1,264

EMEA (1)
219

 
228

 
444

 
449

Other
142

 
132

 
279

 
269

Total revenue
$
1,018

 
$
1,005

 
$
2,017

 
$
1,982

(1)
Consists of Europe, the Middle East and Africa.

NOTE O – SUBSEQUENT EVENTS
In October 2016, the Company acquired BlazeMeter Ltd., a privately-held provider of open source-based continuous application performance testing. BlazeMeter will integrate with the Company’s continuous delivery solutions to further improve testing efficiency and accelerate the deployment of applications. The results of operations of BlazeMeter will be reported predominately in the Company’s Enterprise Solutions segment and will be included in the consolidated results of operations of the Company from the date of acquisition. The acquisition of BlazeMeter will not be material to the Company’s financial position or fiscal year 2017 results of operations.


20


Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
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 relating to the future are intended to identify forward-looking information. Forward-looking information includes, for example, not only the statements relating to the future made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also statements relating to the future that appear 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 by the Company is subject to the determination of the Company’s Board of Directors (the Board), in its sole discretion, after considering various factors, including the Company’s financial condition, historical and forecasted 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 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 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.

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A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company’s business strategy by, among other things, ensuring that any new offerings address the needs of a rapidly changing market while not adversely affecting the demand for the Company’s traditional products or the Company’s profitability to an extent greater than anticipated, enabling the Company’s sales force to accelerate growth of sales to new customers and expand sales with existing customers, including sales outside of the Company’s renewal cycle and to a broadening set of purchasers outside of traditional information technology operations (with such growth and expansion at levels sufficient to offset any decline in revenue and/or sales in the Company’s Mainframe Solutions segment and in certain mature product lines in the Company’s Enterprise Solutions segment), effectively managing the strategic shift in the Company’s business model to develop more easily installed software, provide additional Software-as-a-Service (SaaS) offerings and refocus the Company’s professional services and education engagements on those engagements that are connected to new product sales, without affecting the Company’s financial performance to an extent greater than anticipated, and effectively managing the Company’s pricing and other go-to-market strategies, as well as improving the Company’s brand, technology and innovation awareness in the marketplace; the failure to innovate or adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the ability of the Company’s products to remain compatible with ever-changing operating environments, platforms or third party products; global economic factors or political events beyond the Company’s control and other business and legal risks associated with non-U.S. operations; the failure to expand partner programs and sales of the Company’s solutions by the Company’s partners; the ability to retain and attract qualified professionals; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, business or industry sector; the ability to successfully integrate acquired companies and products into the Company’s existing business; risks associated with sales to government customers; breaches of the Company’s data center, network, as well as the Company’s software products, and the IT environments of the Company’s vendors and customers; the ability to adequately manage, evolve and protect the Company’s information systems, infrastructure and processes; the failure to renew license transactions on a satisfactory basis; fluctuations in foreign exchange rates; discovery of errors or omissions in the Company’s software products or documentation and potential product liability claims; the failure to protect the Company’s intellectual property rights and source code; access to software licensed from third parties; risks associated with the use of software from open source code sources; 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; events or circumstances that would require the Company to record an impairment charge relating to the Company’s goodwill or capitalized software and other intangible assets balances; potential tax liabilities; changes in market conditions or the Company’s credit ratings; changes in generally accepted accounting principles; the failure to effectively execute the Company’s workforce reductions, workforce rebalancing and facilities consolidations; successful and secure outsourcing of various functions to third parties; 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 the forward-looking information described in this Form 10-Q as believed, planned, anticipated, expected, estimated, targeted or similarly identified. 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 2017 and fiscal 2016 are to our fiscal years ending on March 31, 2017 and 2016 , respectively.

OVERVIEW
CA Technologies is a global leader in software solutions enabling customers to plan, develop, manage and secure applications and enterprise environments across distributed, cloud, mobile and mainframe platforms. Most of the Global Fortune 500, as well as many government agencies around the world, rely on CA to help manage their increasingly dynamic and complex environments.
We have a broad portfolio of software solutions that we use to execute our business strategy, including enabling our customers to gain a competitive advantage in the Application Economy. We organize our offerings in Enterprise Solutions, Mainframe Solutions and Services operating segments.
Enterprise Solutions segment includes products that are designed for distributed and cloud computing environments and run on industry standard servers. Within Enterprise Solutions, our areas of focus include:
Agile Management enables customers to more effectively plan and manage the software development process and the business of IT service delivery. Our solutions enable customers to improve delivery time on large projects, reduce costs and optimize resources.
DevOps is adjacent to Agile Management and comprises a range of solutions that allow customers to efficiently deliver and manage applications and IT infrastructure. With our portfolio of solutions, customers can reduce the delivery time of new applications, increase the frequency of new releases and dramatically improve quality.

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Security includes a comprehensive set of solutions to address the growing concern across all enterprises and organizations regarding external and internal threats to their environments and the critical data they contain. Our identity-centric security portfolio allows customers to manage identities and regulate access from the device to the data center, providing a complete, end-to-end, and multi-channel security solution.
Mainframe Solutions are designed for the IBM z Systems™ mainframe platform, which runs many of our largest customers' mission-critical business applications, with a focus on lowering cost per transaction, while increasing business agility, security and compliance. Within Mainframe Solutions, our areas of focus include:
Application Development solutions help enable agile development processes, modernize applications and enable collaboration across the mobile to mainframe teams.
Databases and Database Management solutions help customers manage the growth and increasing complexity of data and allow them to address their ever-evolving data management needs and enable web and mobile access of data.
Security & Compliance solutions manage risk and ensure regulatory compliance across the enterprise with modern tools. Our solutions reduce risk from unauthorized access, secure mainframe assets, monitor instances that affect compliance and help discover sensitive data. Our solutions secure data at rest and in motion, across the enterprise.
Systems and Operations Management portfolio provides customers with a unified view of their z Systems performance, including their applications, middleware, networks, systems, storage and data.
Services  helps customers reach their IT and business goals primarily by enabling the rapid implementation and adoption of our Mainframe and Enterprise solutions. Our professional services team consists of experienced professionals who provide a variety of services, such as consulting, implementation, application management services, education and support services, to both commercial and government customers. In fiscal 2016, as a result of our Rally acquisition, Agile coaches, whose primary focus is training customers on the implementation of the Agile software development methodology, were incorporated into the Services segment.
Our goal is to be the world’s leading independent software provider for IT management and security solutions that help organizations and enterprises plan, develop, manage, and secure modern software environments across mainframe, distributed, cloud and mobile platforms. To accomplish this, key elements of our strategy include:
Drive organic innovation. Our product development strategy is built around key growth areas, where we are focused on innovating and delivering differentiated products and solutions across both distributed and mainframe. A key element of our organic innovation approach is the broad adoption of the Agile methodology to govern our software development process, which we believe will improve our product development time-to-market, quality and relevance, and support our customer success initiatives.
Incubate technology for next generation products. We are researching and dedicating resources to the development of emerging technologies that are logical extensions of our core areas of focus. We are working on opportunities in areas such as containers, data analytics, big data and open source, some of which may become enhancements or extensions of our current product portfolio and others may evolve to new product categories.
Pursue new business models and expanded routes to market.   While our traditional on-premise software delivery remains core to many enterprise customers, we see cloud-based and try-and-buy models as increasingly attractive for our customers.
Expand relationships with our global customer base and address opportunities with new and underserved customers. We are focused on maintaining and expanding the strong relationships with our established customer base, and will proactively target growth with other potential customers that we do not currently serve. In parallel, we are seeking to broaden our customer base to new buyers in geographic regions we have underserved. The emerging roles of Chief Information Security Officers and Chief Development Officers align with the shifts we are driving across our portfolio to meet the needs of speed and agility.
Execute strategic and disciplined technology acquisitions. We intend to supplement our organic innovation efforts with key technology acquisitions that are within or adjacent to our core areas of focus. We conduct a thorough acquisition process, which includes build vs. buy analysis and opportunity identification, detailed business case modeling, rigorous due diligence and extensive integration, to fully realize the value of our acquisitions.

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Table of Contents

We offer our solutions through our direct sales force and indirectly through our partners. We remain focused on strengthening relationships with our core customers and partners - approximately our top 500 accounts, which we refer to as our “Platinum” accounts - through product leadership, account management and a differentiated customer experience. We are working to accelerate the velocity of our sales transactions by dedicating sales resources and deploying additional solutions to address opportunities to sell to new enterprises and to expand our relationship with existing non-Platinum customers - which we refer to as our “Named” and “Growth/Partners” (or Partner-led) customers. Named customers are large potential customers with whom we currently do not have a strong presence and where a competitor often has an established relationship. Growth/Partners customers are mid-size potential customers with whom we currently do not have a strong presence and generally address through partners. Additionally, we have implemented broad-based business initiatives to drive continued improvement in sales execution. We are continuing to shift to a more product-driven sales approach, using real-time data and intelligence to drive on-going evolution of our go-to-market strategy towards the highest potential and highest-yielding markets.
We have sharpened our focus and processes to better reach new customers to drive higher velocity and a broadening customer mix. Our marketing and sales organizations are utilizing common systems and analytics to initiate and respond to market opportunities, optimize resources, maximize efficiency and drive awareness and consideration of the CA brand and portfolio capabilities across our broad base of customers and prospects.

EXECUTIVE SUMMARY
A summary of key results for the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016 is as follows:
Revenue
Total revenue increased $13 million primarily due to an increase in software fees and other revenue, partially offset by decreases in professional services revenue and subscription and maintenance revenue.
We expect revenue for fiscal 2017 to be consistent or increase slightly compared with fiscal 2016. We currently expect foreign exchange not to have a significant effect on revenue for fiscal 2017.
Bookings
Total bookings decreased primarily due to the renewal with a large system integrator in excess of $500 million for a term greater than five years that occurred during the second quarter of fiscal 2016 and, to a lesser extent, a decrease in mainframe renewals.
Renewal bookings decreased by a percentage in the mid-50s primarily due to the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016 and, to a lesser extent, a decrease in mainframe renewals due to the timing of our renewal portfolio. Excluding the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016, renewal bookings decreased by a percentage in the high single digits primarily due to a decrease in mainframe renewals as set forth above.
Total new product sales decreased by a percentage in the mid-20s primarily due to new product sales in connection with the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016 and, to a lesser extent, a decrease in mainframe capacity sales that were not associated with this transaction. Excluding the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016, total new product sales decreased by a percentage in the low teens primarily due to a decrease in mainframe capacity sales.
Mainframe solutions new product sales decreased by a percentage in the mid-40s primarily due to new product sales in connection with the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016 and, to a lesser extent, a decrease in mainframe capacity sales. Excluding the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016, mainframe solutions new product sales decreased by a percentage in the mid-20s primarily due to a decrease in mainframe capacity sales.
Enterprise solutions new product sales decreased by a percentage in the high teens primarily due to new product sales in connection with the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016. Excluding the aforementioned renewal with a large system integrator that occurred during the second quarter of fiscal 2016, enterprise solutions new product sales decreased by a percentage in the high single digits due to the decline in the overall renewal portfolio.
We expect fiscal 2017 renewals to increase by a percentage in the high teens compared with fiscal 2016.
Expenses
Operating expenses decreased primarily due to the overall decreases in personnel-related costs of $18 million as a result of lower headcount, a decrease in amortization expense related to capitalized software and other intangible assets of $18 million and transaction costs of $17 million associated with our acquisitions of Rally Software Development Corp. (Rally) and Xceedium, Inc. (Xceedium) that occurred during the second quarter of fiscal 2016, partially offset by an increase in legal settlement expense included in other expenses, net of $25 million.

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Table of Contents

Income taxes
We anticipate a fiscal 2017 effective tax rate between 28% and 29% .
Diluted income per common share from continuing operations
Diluted income per common share from continuing operations increased to $0.50 from $0.39 primarily due to a decrease in operating expenses.
Segment results
Mainframe Solutions revenue decreased primarily due to insufficient revenue from prior period new sales to offset the decline in revenue contribution from renewals. Mainframe Solutions operating margin was consistent compared with the year-ago period.
Enterprise Solutions revenue increased primarily due to an increase in sales of our enterprise solutions products recognized on an upfront basis and an increase in SaaS revenue, primarily from our CA Agile Central products (acquired from Rally). Enterprise Solutions operating margin increased primarily due to the transaction costs associated with our acquisitions of Rally and Xceedium that occurred during the second quarter of fiscal 2016.
Services revenue decreased primarily due to a decline in professional services engagements from prior periods. This decline in professional services engagements is a result of several factors including our products being easier to install and manage, an increase in the use of partners for services engagements and the completion of non-strategic projects during previous periods. Operating margin for Services decreased primarily due to the overall decline in professional services revenue.
Cash flows from continuing operations
Net cash used in operating activities from continuing operations for the second quarter of fiscal 2017 was $58 million , representing a decrease of $101 million compared with net cash provided by operating activities from continuing operations of $43 million in the second quarter of fiscal 2016 . The decrease in cash from operating activities was due to a decrease in cash collections from billings of $86 million primarily from lower single installment collections of $70 million and an increase in income tax payments, net of $26 million , partially offset by a decrease in vendor disbursements and payroll of $29 million .

QUARTERLY UPDATE
Effective July 26, 2016, the Company’s Board of Directors appointed Kieran J. McGrath as Senior Vice President and interim Chief Financial Officer. Mr. McGrath was previously the Company’s Senior Vice President and Corporate Controller.

PERFORMANCE INDICATORS
Management uses several quantitative performance indicators to assess our financial results and condition. Following is a summary of the principal quantitative performance indicators that management uses to review performance:
 
Second Quarter Comparison
Fiscal
 
 
 
 
 
2017
 
2016
 
Change
 
Percentage Change
 
(dollars in millions)
 
 
Total revenue
$
1,018

 
$
1,005

 
$
13

 
1
 %
Income from continuing operations
$
212

 
$
172

 
$
40

 
23
 %
Net cash (used in) provided by operating activities - continuing operations
$
(58
)
 
$
43

 
$
(101
)
 
(235
)%
Total bookings
$
729

 
$
1,383

 
$
(654
)
 
(47
)%
Subscription and maintenance bookings
$
531

 
$
1,192

 
$
(661
)
 
(55
)%
Weighted average subscription and maintenance license
agreement duration in years
2.99

 
4.46

 
(1.47
)
 
(33
)%

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Table of Contents

 
First Half
Comparison Fiscal
 
 
 
 
 
2017
 
2016
 
Change
 
Percentage Change
 
(dollars in millions)
 
 
Total revenue
$
2,017