Edgar Filing: CA, INC.

Incentive Plans
for Fiscal Years

Performance Period

Shares of Common Stock
(in millions)

Weighted Average Grant Date Fair Value

10-Q

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, 2015

¨ 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 January 20, 2016
par value $0.10 per share		416,762,791

Table of Contents

CA, INC. AND SUBSIDIARIES

INDEX



		Page
PART I.	Financial Information

	Report of Independent Registered Public Accounting Firm	1

Item 1.	Condensed Consolidated Financial Statements	2

	Condensed Consolidated Balance Sheets – December 31, 2015 and March 31, 2015	2

	Condensed Consolidated Statements of Operations – Three and Nine Months Ended December 31, 2015 and 2014	3

	Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended December 31, 2015 and 2014	4

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended December 31, 2015 and 2014	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

	Overview	25

	Executive Summary	26

	Quarterly Update	27

	Performance Indicators	28

	Results of Operations	31

	Liquidity and Capital Resources	41

	Critical Accounting Policies and Business Practices	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

PART II.	Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

	Signatures	58

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, 2015, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended December 31, 2015 and 2014, and the related condensed consolidated statements of cash flows for the nine-month periods ended December 31, 2015 and 2014. 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, 2015, 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 8, 2015, 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, 2015, 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 27, 2016

Table of Contents

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)



	December 31, 2015			March 31, 2015
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,353		$	2,804
Trade accounts receivable, net	618			652
Deferred income taxes	341			318
Other current assets	142			213
Total current assets	$	3,454		$	3,987
Property and equipment, net of accumulated depreciation of $846 and $812, respectively	$	249		$	252
Goodwill	6,123			5,806
Capitalized software and other intangible assets, net	866			731
Deferred income taxes	55			92
Other noncurrent assets, net	110			111
Total assets	$	10,857		$	10,979
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	8		$	10
Accounts payable	84			105
Accrued salaries, wages and commissions	179			219
Accrued expenses and other current liabilities	371			428
Deferred revenue (billed or collected)	1,983			2,114
Taxes payable, other than income taxes payable	65			55
Federal, state and foreign income taxes payable	2			—
Deferred income taxes	7			7
Total current liabilities	$	2,699		$	2,938
Long-term debt, net of current portion	$	1,956		$	1,253
Federal, state and foreign income taxes payable	154			150
Deferred income taxes	53			45
Deferred revenue (billed or collected)	667			863
Other noncurrent liabilities	101			105
Total liabilities	$	5,630		$	5,354
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; 412,442,259 and 435,502,730 shares outstanding, respectively	59			59
Additional paid-in capital	3,638			3,631
Retained earnings	6,506			6,221
Accumulated other comprehensive loss	(469		)	(418		)
Treasury stock, at cost, 177,252,822 and 154,192,351 shares, respectively	(4,507		)	(3,868		)
Total stockholders’ equity	$	5,227		$	5,625
Total liabilities and stockholders’ equity	$	10,857		$	10,979

See accompanying Notes to the Condensed Consolidated Financial Statements

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,
	2015		2014		2015		2014
Revenue:
Subscription and maintenance	$	828	$	892	$	2,496	$	2,709
Professional services	82		90		244		268
Software fees and other	124		109		276		262
Total revenue	$	1,034	$	1,091	$	3,016	$	3,239
Expenses:
Costs of licensing and maintenance	$	73	$	74	$	209	$	217
Cost of professional services	75		84		224		253
Amortization of capitalized software costs	65		62		192		204
Selling and marketing	277		283		751		782
General and administrative	90		90		279		269
Product development and enhancements	133		143		420		443
Depreciation and amortization of other intangible assets	27		31		83		99
Other expenses, net	1		6		2		21
Total expenses before interest and income taxes	$	741	$	773	$	2,160	$	2,288
Income from continuing operations before interest and income taxes	$	293	$	318	$	856	$	951
Interest expense, net	15		12		36		38
Income from continuing operations before income taxes	$	278	$	306	$	820	$	913
Income tax expense	59		88		222		248
Income from continuing operations	$	219	$	218	$	598	$	665
Income from discontinued operations, net of income taxes	4		4		11		30
Net income	$	223	$	222	$	609	$	695

Basic income per common share:
Income from continuing operations	$	0.52	$	0.49	$	1.37	$	1.50
Income from discontinued operations	0.01		0.01		0.03		0.07
Net income	$	0.53	$	0.50	$	1.40	$	1.57
Basic weighted average shares used in computation	420		440		431		440

Diluted income per common share:
Income from continuing operations	$	0.52	$	0.49	$	1.37	$	1.49
Income from discontinued operations	0.01		0.01		0.03		0.07
Net income	$	0.53	$	0.50	$	1.40	$	1.56
Diluted weighted average shares used in computation	421		441		432		441

See accompanying Notes to the Condensed Consolidated Financial Statements

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,
	2015			2014			2015			2014
Net income	$	223		$	222		$	609		$	695
Other comprehensive loss:
Foreign currency translation adjustments	(30		)	(78		)	(51		)	(162		)
Total other comprehensive loss	$	(30	)	$	(78	)	$	(51	)	$	(162	)
Comprehensive income	$	193		$	144		$	558		$	533

See accompanying Notes to the Condensed Consolidated Financial Statements

Table of Contents

CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)



	For the Nine Months Ended December 31,
	2015			2014
Operating activities from continuing operations:
Net income	$	609		$	695
Income from discontinued operations	(11		)	(30		)
Income from continuing operations	$	598		$	665
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	275			303
Deferred income taxes	(53		)	(62		)
Provision for bad debts	—			1
Share-based compensation expense	70			65
Asset impairments and other non-cash items	1			1
Foreign currency transaction losses	5			1
Changes in other operating assets and liabilities, net of effect of acquisitions:
Decrease in trade accounts receivable	50			91
Decrease in deferred revenue	(353		)	(445		)
Increase in taxes payable, net	53			34
Decrease in accounts payable, accrued expenses and other	(50		)	(38		)
Decrease in accrued salaries, wages and commissions	(43		)	(62		)
Changes in other operating assets and liabilities	10			(9		)
Net cash provided by operating activities - continuing operations	$	563		$	545
Investing activities from continuing operations:
Acquisitions of businesses, net of cash acquired, and purchased software	$	(648	)	$	(32	)
Purchases of property and equipment	(34		)	(46		)
Proceeds from sale of short-term investments	48			—
Net cash used in investing activities - continuing operations	$	(634	)	$	(78	)
Financing activities from continuing operations:
Dividends paid	$	(325	)	$	(333	)
Purchases of common stock	(705		)	(125		)
Notional pooling borrowings	3,237			4,226
Notional pooling repayments	(3,230		)	(4,145		)
Debt borrowings	1,100			—
Debt repayments	(408		)	(507		)
Debt issuance costs	(4		)	—
Exercise of common stock options	5			25
Other financing activities	(23		)	—
Net cash used in financing activities - continuing operations	$	(353	)	$	(859	)
Effect of exchange rate changes on cash	$	(38	)	$	(310	)
Net change in cash and cash equivalents - continuing operations	$	(462	)	$	(702	)
Cash provided by (used in) operating activities - discontinued operations	$	11		$	(37	)
Cash provided by investing activities - discontinued operations	—			170
Net effect of discontinued operations on cash and cash equivalents	$	11		$	133
Decrease in cash and cash equivalents	$	(451	)	$	(569	)
Cash and cash equivalents at beginning of period	$	2,804		$	3,252
Cash and cash equivalents at end of period	$	2,353		$	2,683

See accompanying Notes to the Condensed Consolidated Financial Statements

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, 2015 (2015 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016.

Divestitures: In the second quarter of fiscal year 2015, the Company sold its CA arcserve data protection solution assets (arcserve). In the fourth quarter of fiscal year 2014, the Company identified its CA ERwin Data Modeling solution assets (ERwin) as available for sale. The results of operations associated with these businesses have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows. The effects of the discontinued operations were immaterial to the Company’s Condensed Consolidated Balance Sheets at December 31, 2015 and March 31, 2015. See Note C, “Divestitures,” for additional information.

Cash and Cash Equivalents: The Company’s cash and cash equivalents are held in numerous locations throughout the world, with approximately 84% being held by the Company’s foreign subsidiaries outside the United States at December 31, 2015.

New Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606), which 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. ASU 2014-09 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. 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 evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. ASU 2014-09 is expected to have a significant impact on the Company’s revenue recognition policies and disclosures. The Company has not yet selected a transition method nor has it determined when it will adopt the standard and the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Simplifying the Presentation of Debt Issuance Costs (Topic 835), which changes the required presentation of debt issuance costs from an asset on the balance sheet to a deduction from the related debt liability. This guidance will be effective for the Company in its first quarter of fiscal year 2017 and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes (Topic 740), to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as non-current in the consolidated balance sheets. The standard will be effective for the Company’s first quarter of fiscal year 2018 and early adoption is permitted. This guidance may be applied either prospectively to all deferred tax assets and liabilities, or retrospectively to all periods presented. The Company is currently in the process of assessing the impact on its consolidated financial statements and evaluating the adoption methods.

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 preliminary purchase price allocation for Rally is provided within the table below.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The preliminary 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	176			96			5-7 years
Goodwill	261			60			Indefinite
Deferred tax liabilities, net	(46		)	(25		)	—
Other assets net of other liabilities assumed ⁽²⁾	50			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 excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The preliminary allocation of the 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 acquisition of Rally is not expected to be deductible for tax purposes and is 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 analysis of the historical tax records for Rally. The goodwill relating to the Company’s other fiscal year 2016 acquisitions is not expected to be deductible for tax purposes and is allocated to the Enterprise Solutions segment.

Transaction costs for the Company’s fiscal year 2016 acquisitions, which are primarily included in “General and administrative” in the Company’s Condensed Consolidated Statements of Operations, were less than $1 million and $20 million for the three and nine months ended December 31, 2015, respectively.

The pro forma effects of the Company’s fiscal year 2016 acquisitions on the Company’s revenues and results of operations during fiscal years 2016 and 2015 were considered immaterial.

The Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2015 included total revenue of $38 million and $63 million, respectively, since the date of acquisition through December 31, 2015 for the Company’s fiscal year 2016 acquisitions of Rally and Xceedium. The Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2015 included net loss of $22 million and $35 million, respectively, since the date of acquisition through December 31, 2015 for the Company’s fiscal year 2016 acquisitions of Rally and Xceedium. Revenues and results of operations since the date of acquisition for the Company’s other fiscal 2016 acquisitions were considered immaterial.

The Company had approximately $5 million and $27 million of accrued acquisition-related costs at December 31, 2015 and March 31, 2015, respectively, related to purchase price amounts withheld subject to indemnification protections.

NOTE C – DIVESTITURES

In the second quarter of fiscal year 2015, the Company sold arcserve for approximately $170 million and recognized a gain on disposal of approximately $20 million, including tax expense of approximately $77 million. The effective tax rate on the disposal was unfavorably affected by non-deductible goodwill of approximately $109 million. In the fourth quarter of fiscal year 2014, the Company identified ERwin as available for sale. The divestiture of arcserve and the planned divestiture of ERwin result from an effort to rationalize the Company’s product portfolio within the Enterprise Solutions segment.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The income from discontinued operations relating to both ERwin and the sale of arcserve for the three and nine months ended December 31, 2015 and 2014 consisted of the following:



	Three Months Ended December 31,
(in millions)	2015		2014
Subscription and maintenance	$	5	$	7
Software fees and other	2		2
Total revenue	$	7	$	9
Income from operations of discontinued components, net of tax expense of $2 million and $2 million, respectively	$	4	$	4



	Nine Months Ended December 31,
(in millions)	2015		2014
Subscription and maintenance	$	16	$	38
Software fees and other	6		17
Total revenue	$	22	$	55
Income from operations of discontinued components, net of tax expense of $6 million and $8 million, respectively	$	11	$	10
Gain on disposal of discontinued component, net of tax	—		20
Income from discontinued operations, net of tax	$	11	$	30

NOTE D – SEVERANCE AND EXIT COSTS

Fiscal Year 2015 Severance Actions: During the fourth quarter of fiscal year 2015, the Company committed to and initiated severance actions (Fiscal 2015 Severance Actions) to further improve efficiencies in its operations and align its business with strategic objectives and cost savings initiatives. These actions comprised the termination of approximately 690 employees and resulted in a charge of approximately $40 million during the fourth quarter of fiscal year 2015. The Fiscal 2015 Severance Actions were substantially completed by the first quarter of fiscal year 2016.

Fiscal Year 2014 Rebalancing Plan: In fiscal year 2014, the Company’s Board of Directors (the Board) approved and committed to a rebalancing plan (Fiscal 2014 Plan) to better align its business priorities. This included a termination of approximately 1,900 employees and global facility consolidations. Costs associated with the Fiscal 2014 Plan are presented in “Other expenses, net” in the Company’s Condensed Consolidated Statements of Operations. The total amount incurred under the Fiscal 2014 Plan was approximately $188 million. Severance and facility consolidation actions under the Fiscal 2014 Plan were 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, 2015 and 2014 were as follows:



(in millions)	Accrued Balance at March 31, 2015		Expense		Change in Estimate			Payments			Accretion and Other		Accrued Balance at December 31, 2015
Severance charges	$	28	$	—	$	(2	)	$	(22	)	$	—	$	4
Facility exit charges	21		—		—			(3		)	—		18
Total accrued liabilities	$	49											$	22

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(in millions)	Accrued Balance at March 31, 2014		Expense		Change in Estimate			Payments			Accretion and Other			Accrued Balance at December 31, 2014
Severance charges	$	55	$	21	$	(3	)	$	(50	)	$	(1	)	$	22
Facility exit charges	29		—		—			(7		)	(1		)	21
Total accrued liabilities	$	84												$	43

The balance at December 31, 2015 includes a severance accrual of approximately $2 million for plans and actions prior to the Fiscal 2015 Severance Actions.

The severance liabilities are 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 E – 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, 2015			March 31, 2015
	(in millions)
Accounts receivable – billed	$	562		$	591
Accounts receivable – unbilled	55			63
Other receivables	13			15
Less: Allowances	(12		)	(17		)
Trade accounts receivable, net	$	618		$	652

NOTE F – GOODWILL, CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS

The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at December 31, 2015 were as follows:



	At December 31, 2015
	Gross Amortizable Assets		Less: Fully Amortized Assets		Remaining Amortizable Assets		Accumulated Amortization on Remaining Amortizable Assets		Net Assets
	(in millions)
Purchased software products	$	5,987	$	4,863	$	1,124	$	513	$	611
Internally developed software products	1,485		994		491		341		150
Other intangible assets	926		608		318		213		105
Total capitalized software and other intangible assets	$	8,398	$	6,465	$	1,933	$	1,067	$	866

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, 2015 were as follows:



	At March 31, 2015
	Gross Amortizable Assets		Less: Fully Amortized Assets		Remaining Amortizable Assets		Accumulated Amortization on Remaining Amortizable Assets		Net Assets
	(in millions)
Purchased software products	$	5,717	$	4,859	$	858	$	413	$	445
Internally developed software products	1,486		835		651		414		237
Other intangible assets	836		556		280		231		49
Total capitalized software and other intangible assets	$	8,039	$	6,250	$	1,789	$	1,058	$	731

Based on the capitalized software and other intangible assets recorded through December 31, 2015, the projected annual amortization expense for fiscal year 2016 and the next four fiscal years is expected to be as follows:



	Year Ended March 31,
	2016		2017		2018		2019		2020
	(in millions)
Purchased software products	$	145	$	152	$	147	$	104	$	85
Internally developed software products	110		79		37		10		1
Other intangible assets	43		15		8		7		6
Total	$	298	$	246	$	192	$	121	$	92

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, 2015 was as follows:



(in millions)	Mainframe Solutions		Enterprise Solutions			Services		Total
Balance at March 31, 2015	$	4,178	$	1,547		$	81	$	5,806
Acquisitions	—		321			—		321
Foreign currency translation adjustment	—		(4		)	—		(4		)
Balance at December 31, 2015	$	4,178	$	1,864		$	81	$	6,123

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE G – DEFERRED REVENUE

The current and noncurrent components of “Deferred revenue (billed or collected)” at December 31, 2015 and March 31, 2015 were as follows:



	December 31, 2015		March 31, 2015
	(in millions)
Current:
Subscription and maintenance	$	1,793	$	1,966
Professional services	113		115
Software fees and other	77		33
Total deferred revenue (billed or collected) – current	$	1,983	$	2,114
Noncurrent:
Subscription and maintenance	$	640	$	832
Professional services	24		28
Software fees and other	3		3
Total deferred revenue (billed or collected) – noncurrent	$	667	$	863
Total deferred revenue (billed or collected)	$	2,650	$	2,977

NOTE H – DEBT

Term Loan: On October 20, 2015, the Company entered into a Term Loan Agreement with Bank of America, N.A. (Term Loan Agreement). The Term Loan Agreement provides for a $300 million term loan (Term Loan) with a maturity date of April 20, 2022.

From April 1, 2017 through January 1, 2021, the Term Loan Agreement will require quarterly principal amortization payments in an amount equal to 1.25%, and, commencing April 1, 2021 and thereafter, 2.50%, of the stated principal amount of the Term Loan made on the funding date of October 22, 2015. The Company may, at any time on or after October 20, 2016, prepay the outstanding principal amount of the Term Loan in whole or in part without premium or penalty.

The Term Loan will bear interest at a rate dependent on the Company’s credit ratings applicable from time to time and, at the Company’s option, will be calculated according to a base rate or a Eurodollar rate, as the case may be, plus an applicable margin. Depending on the Company’s credit ratings, the applicable margin for any portion of the Term Loan accruing interest based on the base rate ranges from 0.125% to 1.000% and the applicable margin for any portion of the Term Loan accruing interest based on the Eurodollar rate ranges from 1.125% to 2.000%. At the Company’s current credit ratings, the applicable margin would be 0.500% for interest at the base rate and 1.500% for interest at the Eurodollar rate.

The Term Loan Agreement provides that the Company may use the proceeds of the Term Loan for general corporate purposes of the Company and its subsidiaries, which may include, but is not limited to, share repurchases, acquisitions and the refinancing of existing indebtedness. The Term Loan Agreement also contains covenants and events of default consistent with the Company’s revolving credit facility.

Senior Notes: In August 2015, the Company issued $400 million of 3.600% Senior Notes due August 2020 (3.600% Notes) for proceeds of approximately $400 million, reflecting a discount of less than $1 million. The 3.600% Notes are senior unsecured obligations that rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated obligations and are redeemable by the Company at any time, subject to a “make-whole” premium of 30 basis points. Interest on the 3.600% Notes is payable semiannually in February and August, beginning February 2016. In the event of a change of control, each note holder will have the right to require the Company to repurchase all or any part of the holder’s 3.600% Notes in cash at a price equal to 101% of the principal amount of such 3.600% Notes plus accrued and unpaid interest, if any, to the date of repurchase. This is subject to the right of holders of record on the relevant interest payment date to receive interest due. The 3.600% Notes contain customary covenants and events of default. The maturity of the 3.600% 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 transaction costs of approximately $3 million associated with the 3.600% Notes and will amortize these costs to “Interest expense, net” in the Company's Condensed Consolidated Statements of Operations.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revolving Credit Facility: In April 2015, the Company amended its revolving credit facility to extend the termination date from June 2018 to June 2019. The maximum committed amount available under the revolving credit facility 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. The Company capitalized transaction costs of less than $1 million associated with the April 2015 amendment of the revolving credit facility. These fees are being amortized to “Interest expense, net” in the Company’s Condensed Consolidated Statements of Operations.

In July 2015 and in connection with the acquisition of Rally, the Company borrowed $400 million under its revolving credit facility. The interest rate applicable to the Company at the time of borrowing under the revolving credit facility was approximately 1.19%. In August 2015, the Company repaid the $400 million borrowing under its revolving credit facility with proceeds received from the Company’s issuance of the 3.600% Notes described above. Interest expense in connection with the borrowing under the revolving credit facility was less than $1 million for the nine months ended December 31, 2015.

At December 31, 2015 and March 31, 2015, there were no outstanding borrowings under the revolving credit facility.

For additional information concerning the Company’s debt obligations, refer to the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2015 Form 10-K.

NOTE I – 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: At December 31, 2015 and March 31, 2015, the Company had no interest rate swap derivatives outstanding.

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 December 31, 2015, foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $1,128 million and durations of less than three months. The net fair value of these contracts at December 31, 2015 was a net asset of approximately $10 million, of which approximately $16 million is included in “Other current assets” and approximately $6 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.

At March 31, 2015, foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $298 million and durations of less than three months. The net fair value of these contracts at March 31, 2015 was a net asset of approximately $2 million, of which approximately $5 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 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)	2015			2014			2015		2014
Interest expense, net – interest rate swaps designated as fair value hedges	$	—		$	(2	)	$	—	$	(8	)
Other expenses, net – foreign currency contracts	$	(3	)	$	(10	)	$	—	$	(22	)

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 December 31, 2015 and March 31, 2015. The Company posted no collateral at December 31, 2015 or March 31, 2015. 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.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE J – 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, 2015 and March 31, 2015:



	At December 31, 2015						At March 31, 2015
	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⁾	$	593	$	—	$	593	$	749	$	—	$	749
Foreign exchange derivatives ⁽²⁾	—		16		16		—		5		5
Total assets	$	593	$	16	$	609	$	749	$	5	$	754
Liabilities:
Foreign exchange derivatives ⁽²⁾	$	—	$	6	$	6	$	—	$	3	$	3
Total liabilities	$	—	$	6	$	6	$	—	$	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)	See Note I, “Derivatives” for additional information.

At December 31, 2015 and March 31, 2015, 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, 2015 and March 31, 2015:



	At December 31, 2015				At March 31, 2015
(in millions)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Liabilities:
Total debt ⁽¹⁾	$	1,964	$	2,041	$	1,263	$	1,376
Facility exit reserve ⁽²⁾	$	18	$	20	$	21	$	23


(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, 2015 and March 31, 2015. At December 31, 2015 and March 31, 2015, the facility exit reserve included approximately $4 million and $4 million, respectively, in “Accrued expenses and other current liabilities” and approximately $14 million and $17 million, respectively, in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets (Level 3).

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE K – 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 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.

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. 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 $35 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 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.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE L – STOCKHOLDERS’ EQUITY

Stock Repurchases: On May 14, 2014, the Board approved a stock repurchase program that authorized the Company to acquire up to $1 billion of its common stock.

In November 2015, the Company entered into and closed on an arrangement with Careal Holding AG (Careal) to repurchase 22 million shares of its common stock in a private transaction. The transaction was valued with an effective share repurchase price of $26.81 per share, which represented a 3% discount to the 10-trading day volume weighted average price of the Company’s common stock using a reference date of November 5, 2015. The Company’s payment to Careal upon closing was reduced by $0.25 per share to account for the Company’s dividend that was paid on December 8, 2015 to stockholders of record on November 19, 2015. As a result of the share repurchase and dividend payment, in total the Company paid Careal approximately $590 million during the third quarter of fiscal year 2016 in connection with the 22 million shares repurchased. The transaction was funded with U.S. cash on hand and effectively concludes CA's prior $1 billion stock repurchase program approved by the Board on May 14, 2014.

Including the November 2015 share repurchase arrangement with Careal, the Company repurchased approximately 26 million shares of its common stock for approximately $707 million during the nine months ended December 31, 2015.

Prior to entering into and closing on the share repurchase arrangement, Careal held approximately 28.7% of the Company’s total outstanding stock. In connection with the share repurchase arrangement, Careal transferred an additional 37 million shares of the Company’s common stock to an entity wholly owned by Martin Haefner, a 50% owner of Careal. Upon completion of the share repurchase arrangement and the share transfer described above, Careal’s and Martin Haefner’s ownership interests are approximately 16.0% and 8.9%, respectively, of the Company’s total outstanding common stock. Thus, Careal and its shareholders collectively own, directly and indirectly, approximately 24.9% of the Company’s total outstanding common stock.

In connection with the share repurchase arrangement with Careal, the Company agreed that it will indemnify Careal for certain potential tax matters resulting solely from the Company’s breach of the covenant relating to the post-closing holding of the repurchased shares under this arrangement. The Company believes that the occurrence of an event that could trigger the indemnification is within its control and is remote. Therefore, the Company has not recorded a liability related to such indemnification. The maximum potential future payment under this indemnification, excluding interest and penalties, if any, is estimated to be approximately CHF 101 million (which translated to approximately $101 million at December 31, 2015). Any changes to the Company’s assessment of the probability of the occurrence of an event that could trigger the indemnification provision may result in the Company recording a liability in the future, which would impact the results of operations for that period.

On November 13, 2015, the Board approved a new stock repurchase program that authorized the Company to acquire up to $750 million of its common stock, which remained fully outstanding at December 31, 2015.

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, 2015 and March 31, 2015 were approximately $469 million and $418 million, respectively.

Cash Dividends: The Board declared the following dividends during the nine months ended December 31, 2015 and 2014:

Nine Months Ended December 31, 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
November 5, 2015	$0.25	November 19, 2015	$105	December 8, 2015

Nine Months Ended December 31, 2014:

(in millions, except per share amounts)



Declaration Date	Dividend Per Share	Record Date	Total Amount	Payment Date
May 15, 2014	$0.25	May 29, 2014	$111	June 17, 2014
July 31, 2014	$0.25	August 21, 2014	$111	September 9, 2014
November 6, 2014	$0.25	November 20, 2014	$111	December 9, 2014

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Rights Plan: Under the Stockholder Protection Rights Agreement dated November 30, 2015 (Rights Agreement), each outstanding share of the Company's common stock carries a right (Right). The Rights will trade with the common stock until the Separation Time, which is the next business day following the earlier of (i) the tenth business day (or such later day designated by resolution of the Board) after any person commences a tender or exchange offer that would result in such person (together with its affiliates and associates) becoming the beneficial owner of 20% or more of the Company’s common stock (other than Martin Haefner and Eva Maria Bucher-Haefner and their respective affiliates and associates, who are “grandfathered” under this provision so long as their aggregate ownership of common stock does not exceed 25% of the shares of the Company’s outstanding common stock) (Acquiring Person); or (ii) the date of a “Flip-in” Trigger. A “Flip-in” Trigger will occur upon the earlier of (i) a public announcement by the Company that any person has become an Acquiring Person or (ii) an Acquiring Person acquires more than 50% of the Company’s outstanding shares of common stock. On or after the Separation Time, each Right would initially entitle the holder to purchase, for $120, one one-thousandth (0.001) of a share of the Company’s participating preferred stock. The participating preferred stock would be designed so that each one one-thousandth of a share of participating preferred stock has economic and voting terms similar to those of one share of common stock. If a “Flip-in” Trigger occurs, the Rights owned by the Acquiring Person, its affiliates and associates, or transferees thereof would automatically become void and each other Right will automatically become a right to buy, for the exercise price of $120, that number of shares of the Company’s common stock (or, at the Company’s option, participating preferred stock) having a market value of twice the exercise price. The Rights may also be redeemed by the Board, at any time until a “Flip‑in” Trigger has occurred, at a redemption price of $0.001 per Right. In addition, in connection with a Qualified Offer, holders of 10% of the Company’s common stock (excluding shares held by the offeror and its affiliates and associates), upon providing proper written notice, may direct the Board to call a special meeting of shareholders for the purposes of voting on a resolution authorizing the redemption of the Rights pursuant to the provisions of the Rights Agreement. Such meeting must be held on or prior to the 90^th business day following the Company’s receipt of such written notice. A Qualified Offer means an offer that, among other things, is a fully financed all-cash tender offer or an exchange offer offering common shares of the offeror or a combination thereof; is an offer with respect to which the Board has not received an inadequacy opinion from its financial advisors; is an offer that is subject only to the minimum tender condition and other usual and customary terms and conditions; is an offer that includes a commitment of the offeror that the offer will remain open for a certain prescribed period of time; is an offer that contains a minimum tender condition of at least 50%; and is an offer pursuant to which the offeror has committed to consummate a prompt second step transaction. The Rights will expire on November 30, 2018, unless earlier redeemed by the Board, provided that if the stockholders do not ratify the Rights Agreement, the Rights will expire on November 30, 2016.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE M – 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 nine months ended December 31, 2015 and 2014:



	Three Months Ended December 31,						Nine Months Ended December 31,
	2015			2014			2015			2014
	(in millions, except per share amounts)
Basic income from continuing operations per common share:
Income from continuing operations	$	219		$	218		$	598		$	665
Less: Income from continuing operations allocable to participating securities	(2		)	(2		)	(6		)	(7		)
Income from continuing operations allocable to common shares	$	217		$	216		$	592		$	658
Weighted average common shares outstanding	420			440			431			440
Basic income from continuing operations per common share	$	0.52		$	0.49		$	1.37		$	1.50

Diluted income from continuing operations per common share:
Income from continuing operations	$	219		$	218		$	598		$	665
Less: Income from continuing operations allocable to participating securities	(2		)	(2		)	(6		)	(7		)
Income from continuing operations allocable to common shares	$	217		$	216		$	592		$	658
Weighted average shares outstanding and common share equivalents:
Weighted average common shares outstanding	420			440			431			440
Weighted average effect of share-based payment awards	1			1			1			1
Denominator in calculation of diluted income per share	421			441			432			441
Diluted income from continuing operations per common share	$	0.52		$	0.49		$	1.37		$	1.49

For the three months ended December 31, 2015 and 2014, respectively, approximately 2 million and 1 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 4 million and 5 million for the three months ended December 31, 2015 and 2014, respectively, were considered participating securities in the calculation of net income allocable to common stockholders.

For the nine months ended December 31, 2015 and 2014, respectively, approximately 2 million and 1 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 4 million and 4 million for the nine months ended December 31, 2015 and 2014, respectively, were considered participating securities in the calculation of net income allocable to common stockholders.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE N – 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,
	2015			2014			2015			2014
	(in millions)
Costs of licensing and maintenance	$	2		$	2		$	5		$	4
Cost of professional services	1			1			3			3
Selling and marketing	9			8			25			23
General and administrative	9			8			25			21
Product development and enhancements	4			4			12			14
Share-based compensation expense before tax	$	25		$	23		$	70		$	65
Income tax benefit	(8		)	(7		)	(22		)	(20		)
Net share-based compensation expense	$	17		$	16		$	48		$	45

The following table summarizes information about unrecognized share-based compensation costs at December 31, 2015:



	Unrecognized Share-Based Compensation Costs		Weighted Average Period Expected to be Recognized
	(in millions)		(in years)
Stock option awards	$	5	1.9
Restricted stock units	20		2.0
Restricted stock awards	68		2.0
Performance share units	27		2.4
Total unrecognized share-based compensation costs	$	120	2.1

There were no capitalized share-based compensation costs for the three and nine months ended December 31, 2015 and 2014.

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, restricted stock awards (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).

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended December 31, 2015 and 2014, the Company issued stock options for approximately 0.9 million shares and 0.6 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:



	Nine Months Ended December 31,
	2015			2014
Weighted average fair value	$	4.68		$	5.87
Dividend yield	3.37		%	3.29		%
Expected volatility factor ⁽¹⁾	23		%	29		%
Risk-free interest rate ⁽²⁾	1.9		%	2.1		%
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 2015 and 2014 incentive plan years. The RSAs and RSUs were granted in the first quarter of fiscal years 2016 and 2015, 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
2015	1 year	0.5	$31.41	0.1	$30.42
2014	1 year	0.7	$29.91	0.1	$28.92

The table below summarizes the shares of common stock issued under the 3-year PSUs for the Company’s fiscal year 2013 incentive plan year in the first quarter of fiscal year 2016.

The table below summarizes the RSAs and RSUs granted under the 1-year PSUs for the Company’s fiscal year 2015 and 2014 sales retention equity programs. The RSAs and RSUs were granted in the first quarter of fiscal years 2016 and 2015, 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
2015	1 year	0.2	$30.45	0.1	$27.50
2014	1 year	0.2	$28.69	0.1	$25.73

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, 2015 and 2014:



	Three Months Ended December 31,						Nine Months Ended December 31,
	2015			2014			2015		2014
	(shares in millions)
RSAs:
Shares	—		⁽³⁾	0.1			2.8		3.1
Weighted average grant date fair value ⁽¹⁾	$	26.53		$	29.72		$	30.63	$	28.97
RSUs:
Shares	—			—		⁽³⁾	0.9		0.8
Weighted average grant date fair value ⁽²⁾	$	—		$	27.98		$	28.72	$	26.92


(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, 2015, the Company issued approximately 0.1 million shares under the ESPP at $27.83 per share. For the six-month offer period ended December 31, 2015, the Company issued approximately 0.1 million shares under the ESPP at $27.13 per share. As of December 31, 2015, approximately 29.2 million shares are available for future issuances under the ESPP.

NOTE O – INCOME TAXES

Income tax expense for the three and nine months ended December 31, 2015 was approximately $59 million and $222 million, respectively, compared with income tax expense for the three and nine months ended December 31, 2014 of approximately $88 million and $248 million, respectively. For the three and nine months ended December 31, 2015, the Company recognized a net discrete tax benefit of approximately $19 million and $16 million, respectively, resulting primarily from the resolution of uncertain tax positions for non-U.S. jurisdictions, refinements of tax positions taken in prior periods and the retroactive reinstatement in December 2015 of the research and development tax credit in the U.S. For the three and nine months ended December 31, 2014, the Company recognized a net discrete tax benefit of approximately $6 million and $23 million, respectively, resulting from the resolution 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, 2012 and 2011, the expiration of the statute of limitations relating to uncertain tax positions for a non-U.S. jurisdiction and the retroactive reinstatement in December 2014 of the research and development tax credit in the U.S.

The Company’s estimated annual effective tax rate, which excludes the impact of discrete items, for the nine months ended December 31, 2015 and 2014 was 29.0% and 29.7%, 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 2016, 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 2016 and the Company is anticipating a fiscal year 2016 effective tax rate between 28% and 29%.

NOTE P – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

For the nine months ended December 31, 2015 and 2014, interest payments, net were approximately $56 million and $65 million, respectively, and income taxes paid, net from continuing operations were approximately $199 million and $238 million, respectively. For the nine months ended December 31, 2015 and 2014, the excess tax benefits from share-based incentive awards included in financing activities from continuing operations were approximately $3 million and $3 million, respectively.

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-cash financing activities for the nine months ended December 31, 2015 and 2014 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 $42 million (net of approximately $28 million of income taxes withheld) and $43 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 and $26 million, respectively; and treasury common shares issued in connection with the Company’s Employee Stock Purchase Plan of approximately $5 million and $5 million, respectively.

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 nine months ended December 31, 2015 and 2014 was as follows:



	Nine Months Ended December 31,
	2015			2014
	(in millions)
Total borrowings outstanding at beginning of period ⁽¹⁾	$	138		$	139
Borrowings	3,237			4,226
Repayments	(3,230		)	(4,145		)
Foreign exchange effect	(6		)	(82		)
Total borrowings outstanding at end of period ⁽¹⁾	$	139		$	138


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

NOTE Q – 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 platform on which the products operate. The Services segment comprises product implementation, consulting, customer education and customer training, including those directly related to the Mainframe Solutions and Enterprise Solutions software that the Company sells to its customers.

Segment expenses do not include share-based compensation expense; amortization of purchased software; amortization of other intangible assets; certain foreign exchange derivative hedging gains and losses; charges relating to rebalancing initiatives that are large enough to require approval from the Board (i.e., costs associated with the Company’s Fiscal 2014 Plan); and other miscellaneous costs. The Company considers all costs of internally developed software as segment expense in the period the costs are incurred and as a result, the Company excludes amortization of internally developed software costs previously capitalized from segment expenses. 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 nine months ended December 31, 2015 and 2014 was as follows:



Three Months Ended December 31, 2015	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	554		$	398		$	82		$	1,034
Expenses	218			349			77			644
Segment profit	$	336		$	49		$	5		$	390
Segment operating margin	61		%	12		%	6		%	38		%
Depreciation	$	9		$	7		$	—		$	16

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended December 31, 2015:



(in millions)
Segment profit	$	390
Less:
Purchased software amortization	39
Other intangibles amortization	11
Internally developed software products amortization	26
Share-based compensation expense	25
Other gains, net ⁽¹⁾	(4		)
Interest expense, net	15
Income from continuing operations before income taxes	$	278


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



Nine Months Ended December 31, 2015	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	1,668		$	1,104		$	244		$	3,016
Expenses	641			996			227			1,864
Segment profit	$	1,027		$	108		$	17		$	1,152
Segment operating margin	62		%	10		%	7		%	38		%
Depreciation	$	27		$	20		$	—		$	47

Reconciliation of segment profit to income from continuing operations before income taxes for the nine months ended December 31, 2015:



(in millions)
Segment profit	$	1,152
Less:
Purchased software amortization	106
Other intangibles amortization	36
Internally developed software products amortization	86
Share-based compensation expense	70
Other gains, net ⁽¹⁾	(2		)
Interest expense, net	36
Income from continuing operations before income taxes	$	820


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



Three Months Ended December 31, 2014	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	596		$	405		$	90		$	1,091
Expenses	248			347			85			680
Segment profit	$	348		$	58		$	5		$	411
Segment operating margin	58		%	14		%	6		%	38		%
Depreciation	$	10		$	7		$	—		$	17

Table of Contents

CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended December 31, 2014:



(in millions)
Segment profit	$	411
Less:
Purchased software amortization	28
Other intangibles amortization	14
Internally developed software products amortization	34
Share-based compensation expense	23
Other gains, net ⁽¹⁾	(6		)
Interest expense, net	12
Income from continuing operations before income taxes	$	306


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



Nine Months Ended December 31, 2014	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	1,820		$	1,151		$	268		$	3,239
Expenses	717			999			256			1,972
Segment profit	$	1,103		$	152		$	12		$	1,267
Segment operating margin	61		%	13		%	4		%	39		%
Depreciation	$	33		$	21		$	—		$	54

Reconciliation of segment profit to income from continuing operations before income taxes for the nine months ended December 31, 2014:



(in millions)
Segment profit	$	1,267
Less:
Purchased software amortization	87
Other intangibles amortization	45
Internally developed software products amortization	117
Share-based compensation expense	65
Other expenses, net ⁽¹⁾	2
Interest expense, net	38
Income from continuing operations before income taxes	$	913


(1)	Other expenses, net consists of costs associated with the Fiscal 2014 Plan, 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,
	2015		2014		2015		2014
	(in millions)
United States	$	671	$	668	$	1,935	$	1,967
EMEA ⁽¹⁾	230		263		679		781
Other	133		160		402		491
Total revenue	$	1,034	$	1,091	$	3,016	$	3,239


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

Table of Contents

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, 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 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.

A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company’s strategy by, among other things, enabling the Company’s sales force to accelerate growth of new product sales (at levels sufficient to offset any decline in revenue in the Company’s Mainframe Solutions segment), improving the Company’s brand, technology and innovation awareness in the marketplace, ensuring the Company’s offerings for cloud computing, application development and IT operations (DevOps), Software-as-a-Service (SaaS), and mobile device management, as well as 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 to an extent greater than anticipated, and effectively managing the strategic shift in the Company’s business model to develop more easily installed software, provide additional 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 performance to an extent greater than anticipated; 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; the ability to retain and attract qualified professionals; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business 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; 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; the failure to renew large license transactions on a satisfactory basis; 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; 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; changes in generally accepted accounting principles; 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 2016 and fiscal 2015 are to our fiscal years ending on March 31, 2016 and 2015, respectively.

Table of Contents

OVERVIEW

We are one of the world’s leading providers of information technology (IT) management software and solutions. Our solutions help organizations of all sizes plan, develop, manage, and secure applications and IT infrastructure that increase productivity and enhance competitiveness of their businesses in the digital economy. We do this across a wide range of environments, such as mainframe, distributed, cloud and mobile. The majority of the Global Fortune 500 relies on us to help manage their IT environments.

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 IT architectures, across mainframe, distributed, cloud and mobile environments. To accomplish this, key elements of our strategy include:


•	Innovating in key product areas to extend our market position and differentiation. Our product development strategy is built around three key growth areas, where we are focused on innovating and delivering differentiated products and solutions: application development and IT operations (DevOps), Agile Management and Security across multiple platforms.

•

Addressing shifts in market dynamics and technology. We will innovate to deliver new, relevant, and differentiated solutions that enable our customers to build and manage increasingly complex IT environments and to embrace and benefit from the rapidly emerging application economy. We are investing in areas such as Open Source, big data (the massive amounts of data generated and stored within and outside the enterprise) and data analytics, the Internet of Things (the ubiquitously connected network of devices, from servers to sensors, that has changed how we view computing), containers (a better approach to implementing code), making use of Application Programming Interfaces to deliver revenue, and an Agile approach to software development.

•

Accelerating growth in our global customer base. We are focused on maintaining strong relationships with our core, large enterprise customer base, and will proactively target growth with these customers as well as new enterprises we do not currently serve. In parallel, we are broadening our customer base to new buyer segments beyond the customer’s Chief Information Officer and IT department and increasingly to geographic regions we have underserved.

•

Pursuing new business models and expanded routes to market. While our traditional on-premise software delivery remains core to many large enterprise customers, we see cloud-based and lightweight try-and-buy models as increasingly attractive for our customers. Our platform agnostic strategy allows customers to plan, develop, manage and secure their IT environment regardless of whether an application resides in the cloud or on a mainframe or whether it’s on-demand or on-premise.

We have a broad and deep portfolio of software solutions with which to execute our business strategy. We organize our offerings in Mainframe Solutions, Enterprise Solutions and Services operating segments.


•	Mainframe Solutions products are designed mainly for the IBM System z mainframe platform, which runs many of our largest customers’ mission-critical applications. We help customers seamlessly manage the mainframe as part of their strategy to succeed in the Application Economy through unified management approaches, end-to-end visibility and application portability.

•

Enterprise Solutions products operate on mainly non-mainframe platforms and include our DevOps, Agile Management and Security product groups. Our DevOps solutions include Application Delivery solutions, Application Performance Management solutions and Infrastructure Management solutions. Our suite of management applications delivered from the cloud enables increased speed and scale and includes our IT Business Management solutions, API Management solutions and Enterprise Mobility Management solutions. Our Security solutions focus on smart authentication and deliver identity-centric security solutions to meet the needs of today’s mobile, cloud-connected, open enterprises to succeed in the Application Economy.


•	Services helps customers reach their IT and business goals by enabling the rapid implementation and adoption of our mainframe solutions and enterprise solutions.

Our traditional core customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We currently serve customers across most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, global service providers, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions.

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–which we refer to as our “Platinum” accounts, consisting of approximately our top 500 accounts–through product leadership, account management and a differentiated customer experience. We believe enhanced relationships in our traditional customer base of large enterprises with multi-year enterprise license agreements will drive renewals and provide opportunities to increase account penetration that will help to drive revenue growth.

Table of Contents

At the same time, we continue to dedicate sales resources and deploy 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” 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, while Growth customers are mid-size potential customers with whom we currently do not have a strong presence. In addition to this dedication of additional sales resources, we will service some of these customers through partners. We believe we can grow our business and increase market share by delivering differentiated technology and collaborating with partners to leverage their relationships, market reach and implementation capacity. We are deploying new routes to market, and simplifying the buying and deployment process for our customers.

This customer focus allows us to better align marketing and sales resources with how customers want to buy. We have also implemented broad-based business initiatives to drive accountability for sales execution.

We continue to onboard and integrate new talent, tools and processes to create a contemporary demand capability to support sales. Going forward, we will focus on further enhancing our connection with new and existing customers, contributing directly to business growth and expanding our customer base globally.

EXECUTIVE SUMMARY

A summary of key results for the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015 is as follows:

Revenue


•	Total revenue declined $57 million primarily as a result of an unfavorable foreign exchange effect of $51 million and, to a lesser extent, a decrease in subscription and maintenance revenue. These decreases were partially offset by an increase in revenue associated with our fiscal 2016 acquisitions of Rally and Xceedium, primarily reflected within Software fees and other revenue.

•

As a result of insufficient revenue from new sales to offset the decline in revenue contribution from renewals and an expected unfavorable foreign exchange effect, we expect a year-over-year decrease in total revenue for fiscal 2016 compared with fiscal 2015. Excluding the expected unfavorable foreign exchange effect, we currently expect fiscal 2016 revenue to be consistent or slightly down as compared with fiscal 2015.

Bookings


•	Total bookings increased 16% primarily due to an increase in Mainframe Solutions renewals, an increase in contract duration and bookings related to our second quarter fiscal 2016 acquisitions of Rally and Xceedium.


•	Renewal bookings increased by a percentage in the low twenties compared with the year-ago period primarily due to an increase in Mainframe Solutions renewals. These renewals increased primarily due to the timing of several contracts renewing prior to their scheduled expiration date.


•	Total new product sales increased by a percentage in the mid-single digits compared with the year-ago period due to new product sales in connection with our second quarter fiscal 2016 acquisitions. Our second quarter fiscal 2016 acquisitions contributed approximately ten percent growth in the quarter.


•	Mainframe Solutions new product sales, including capacity, increased by a percentage in the high single digits compared with the year-ago period primarily due to new sales made in connection with the increase in renewals.


•	Enterprise Solutions new product sales increased by a percentage in the low single digits compared with the year-ago period primarily due to new sales that are associated with our second quarter fiscal 2016 acquisitions, which contributed mid-teens growth in the quarter.


•	We expect our fiscal 2016 renewal portfolio to increase by a percentage in the mid-twenties compared with fiscal 2015. Excluding the large system integrator renewal that occurred during the second quarter of fiscal 2016, we currently expect our fiscal 2016 renewal portfolio to be generally consistent or increase by a percentage in the low single digits.

Expenses


•	Operating expenses decreased primarily as a result of a favorable foreign exchange effect and a decrease in non-acquisition personnel-related costs, partially offset by costs from our second quarter fiscal 2016 acquisitions of Rally and Xceedium.

Income taxes


•	We anticipate a fiscal 2016 effective tax rate between 28% and 29%.

Table of Contents

Diluted income per common share from continuing operations

•

Diluted income per common share from continuing operations increased to $0.52 from $0.49 primarily due to a decrease in the effective tax rate for the quarter and a decrease in the weighted average shares outstanding compared with the year-ago period as a result of the share repurchase arrangement with Careal Holding AG (Careal). These items were partially offset by an unfavorable foreign exchange effect.

Segment results


•	Mainframe Solutions revenue decreased primarily due to an unfavorable foreign exchange effect and, to a lesser extent, insufficient revenue from prior period new sales to offset the decline in revenue contribution from renewals. Mainframe Solutions operating margin increased compared with the year-ago period primarily due to the decrease in total operating costs.

•

Enterprise Solutions revenue decreased due to an unfavorable foreign exchange effect. Excluding the unfavorable effect of foreign exchange, Enterprise Solutions revenue increased as a result of additional revenue associated with our second quarter fiscal 2016 acquisitions of Rally and Xceedium. Enterprise Solutions operating margin decreased primarily due to an increase in expenses as a result of our second quarter fiscal 2016 acquisitions of Rally and Xceedium.


•	Services revenue decreased primarily due to an unfavorable foreign exchange effect and, to a lesser extent, a decline in professional services engagements in the first half of fiscal 2016 and fiscal 2015. Operating margin for professional services was consistent with the year-ago period.

Cash flows from continuing operations

•

Net cash provided by operating activities from continuing operations was $332 million, representing an increase of $19 million. Net cash provided by operating activities increased compared with the year-ago period due to the decrease in vendor disbursements and payroll of $59 million, partially offset by the decrease in cash collections of $21 million, primarily as a result of an unfavorable effect of foreign exchange, an increase in income tax payments, net of $11 million and the increase in other disbursements, net of $8 million.

QUARTERLY UPDATE


•	In October 2015, we entered into an agreement with Bank of America, N.A. for a $300 million term loan with a maturity date of April 20, 2022.


•	In November 2015, we entered into and closed on an arrangement with Careal to repurchase 22 million shares of our common stock in a private transaction.


•	In November 2015, we held our user conference, CA World ‘15. This event showcased our unique strength in serving customers in the Application Economy. The event highlighted our solutions as well as our vision of the future to thousands of customers and partners.


•	In November 2015, our Board of Directors (the Board) approved a new stock repurchase program that authorized the Company to acquire up to $750 million of its common stock. At December 31, 2015, the new $750 million stock repurchase program remained fully outstanding. We anticipate repurchasing shares of our common stock under this new stock repurchase program beginning in fiscal 2017.


•	In November 2015, we announced our intention to increase the dividend per share in fiscal 2017, subject to quarterly Board approval, to $1.02 per share for the year, or $0.255 per share on a quarterly basis. This would be an increase from the current $1.00 per share annual dividend, or $0.25 per share on a quarterly basis.

Table of Contents

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:



	Third Quarter Comparison Fiscal
	2016 ⁽¹⁾		2015 ⁽¹⁾		Dollar Change			Percentage Change
	(dollars in millions)
Total revenue	$	1,034	$	1,091	$	(57	)	(5