CA, INC.
Item 1 “Business,” our business strategy is designed to build on our portfolio of software and services to meet next-generation market opportunities. The success of this strategy could be affected by many of the risk factors discussed in this Form 10-K and also by our ability to:
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Effectively rebalance our sales force to increase penetration in Large New Enterprises and Growth Markets where we currently may not have a strong presence and where we may have a dependence on unfamiliar distribution partners and routes;
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Enable our sales force to sell new products, including instances where our offerings are of a type not previously provided by us, to our traditional core and new customers, or where a competitor already has an established relationship with a potential new customer;
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Improve the CA Technologies brand in the marketplace; and
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Ensure our cloud computing, SaaS and other new offerings address the needs of a rapidly changing market, while not adversely affecting the demand for our traditional products or our profitability.
Failure to achieve success with this strategy could materially adversely affect our business, financial condition, operating results and cash flow.
Given the global nature of our business, economic factors or political events beyond our control and other business risks associated with non-U.S. operations can affect our business in unpredictable ways.
International revenue has historically represented a significant percentage of our total worldwide revenue. Success in selling and developing our products outside the United States will depend on a variety of factors in various non-U.S. locations, including:
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Foreign exchange currency rates;
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Local economic conditions;
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Political stability and acts of terrorism;
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Workforce reorganizations in various locations, including global reorganizations of sales, research and development, technical services, finance, human resources and facilities functions;
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Effectively staffing key managerial and technical positions;
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Successfully localizing software products for a significant number of international markets;
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Restrictive employment regulation;
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Trade restrictions such as tariffs, duties, taxes or other controls;
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International intellectual property laws, which may be more restrictive or may offer lower levels of protection than U.S. law;
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Complying with differing and changing local laws and regulations in multiple international locations as well as complying with U.S. laws and regulations where applicable in these international locations; and
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Developing and executing an effective go-to-market strategy in various locations.
Any of the foregoing factors could materially adversely affect our business, financial condition, operating results and cash flow.
General economic conditions and credit constraints, or unfavorable economic conditions in a particular region, business or industry sector, may lead our customers to delay or forgo technology investments and could have other impacts, any of which could materially adversely affect our business, financial condition, operating results and cash flow.
Our products are designed to improve the productivity and efficiency of our customers’ information processing resources. However, a general slowdown in the global economy, or in a particular region (such as Europe), or disruption in a business or industry sector (such as the financial services sector), or tightening of credit markets, could cause customers to: have difficulty accessing credit sources; delay contractual payments; or delay or forgo decisions to (i) license new products (particularly with respect to discretionary spending for software), (ii) upgrade their existing environments or (iii) purchase services. Any such impacts could materially adversely affect our business, financial condition, operating results and cash flow.
Such a general slowdown in the global economy may also materially affect the global banking system, including individual institutions as well as a particular business or industry sector, which could cause further consolidations or failures in such a sector. Approximately one third of our revenue is derived from arrangements with financial institutions (i.e., banking, brokerage and insurance companies). The majority of these arrangements are for the renewal of mainframe capacity and maintenance associated with transactions processed by our financial institution customers. While we cannot predict what impact there may be on our business from further consolidation of the financial industry sector, or the impact from the economy in general on our business, to date the impact has not been material to our balance sheet, results of operations or cash flows. The vast majority of our subscription and maintenance revenue in any particular reporting period comes from contracts signed in prior periods, generally pursuant to contracts ranging in duration from three to five years.
Any of these events could affect the manner in which we are able to conduct business, including within a particular industry sector or market and could materially adversely affect our business, financial condition, operating results and cash flow.
Failure to adapt to technological changes and introduce new software products and services in a timely manner could materially adversely affect our business.
If we fail to keep pace with, or in certain cases lead, technological change in our industry, that failure could materially adversely affect our business. We operate in a highly competitive industry characterized by rapid technological change, evolving industry standards, and changes in customer requirements and delivery methods. During the past several years, many new technological advancements and competing products entered the marketplace. The distributed systems and application management markets in which we operate are far more crowded and competitive than our traditional mainframe systems management markets.
Our ability to compete effectively and our growth prospects for all of our products, including those associated with our business strategy, depend upon many factors, including the success of our existing distributed systems products, the timely introduction and success of future software products and related delivery methods, and the ability of our products to perform well with existing and future leading databases and other platforms supported by our products that address customer needs and are accepted by the market. We have experienced long development cycles and product delays in the past, particularly with some of our distributed systems products, and may experience delays in the future. In addition, we have incurred, and expect to continue to incur, significant research and development costs as we introduce new products and integrate products into solution sets. If there are delays in new product introduction or solution set integration, or if there is less-than-anticipated market acceptance of these new products or solution sets, we will have invested substantial resources without realizing adequate revenues in return, which could materially adversely affect our business, financial condition, operating results and cash flow.
We are subject to intense competition in product and service offerings and pricing, and we expect to face increased competition in the future, which could either diminish demand for or inhibit growth of our products and, therefore, reduce our sales, revenue and market presence.
The markets for our products are intensely competitive, and we expect product and service offerings and pricing competition to increase. Some of our competitors have longer operating histories, greater name recognition, a larger installed base of customers in any particular market niche, larger technical staffs, established relationships with hardware vendors, or greater financial, technical and marketing resources. Furthermore, our business strategy is predicated upon our ability to develop and acquire products and services that address customer needs and are accepted by the market better than those of our competitors.
We also face competition from numerous smaller companies that specialize in specific aspects of the highly fragmented software industry, and from shareware authors that may develop competing products. In addition, new companies enter the market on a frequent and regular basis, offering products that compete with those offered by us. Moreover, certain customers historically have developed their own products that compete with those offered by us. The competition may affect our ability to attract and retain the technical skills needed to provide services to our customers, forcing us to become more reliant on delivery of services through third parties. This, in turn, could increase operating costs and decrease our revenue, profitability and cash flow. Additionally, competition from any of these sources could result in price reductions or displacement of our products, which could materially adversely affect our business, financial condition, operating results and cash flow.
Our competitors include large vendors of hardware and operating system software and service providers. The widespread inclusion of products that perform the same or similar functions as our products bundled within computer hardware or other companies’ software products, or services similar to those provided by us, could reduce the perceived need for our products and services, or render our products obsolete and unmarketable. Furthermore, even if these incorporated products are inferior or more limited than our products, customers may elect to accept the incorporated products rather than purchase our products. In addition, the software industry is currently undergoing consolidation as software companies seek to offer more extensive suites and broader arrays of software products and services, as well as integrated software and hardware solutions. This consolidation may adversely affect our competitive position, which could materially adversely affect our business, financial condition, operating results and cash flow. Refer to Part I, Item 1, “Business - (c) Narrative Description of the Business - Competition,” for additional information.
Failure to expand our partner programs related to the sale of our solutions may result in lost sales opportunities, increases in expenses and a weakening in our competitive position.
We sell our solutions through global systems integrators, technology partners, managed service providers, solution providers, distributors of volume partners and exclusive representatives in partner programs that require training and expertise to sell these solutions, and global penetration to grow these aspects of our business. The failure to expand these partner programs and penetrate these markets could materially adversely affect our success with partners, resulting in lost sales opportunities and an increase in expenses, and could also weaken our competitive position.
Our business may suffer if we are not able to retain and attract adequate qualified personnel, including key managerial, technical, marketing and sales personnel.
We operate in a business where there is intense competition for experienced personnel in all of our global markets. We depend on our ability to identify, recruit, hire, train, develop and retain qualified and effective personnel and to attract and retain talent needed to execute our business strategy. Our ability to do so depends on numerous factors, including factors that we cannot control, such as competition and conditions in the local employment markets in which we operate. Our future success depends in a large part on the continued contribution of our senior management and other key employees. A loss of a significant number of skilled managerial, technical, marketing or other personnel could have a negative effect on the quality of our products. A loss of a significant number of experienced and effective sales personnel could result in fewer sales of our products. Our failure to retain qualified employees in these categories could materially adversely affect our business, financial condition, operating results and cash flow.
We may encounter difficulties in successfully integrating companies and products that we have acquired or may acquire into our existing business, which could materially adversely affect our infrastructure, market presence, business, financial condition, operating results and cash flow.
In the past we have acquired, and in the future we expect to acquire, complementary companies, products, services and technologies (including through mergers, asset acquisitions, joint ventures, partnerships, strategic alliances and equity investments). Additionally, we expect to acquire technology and software that are consistent with our business strategy. The risks we may encounter include:
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We may find that the acquired company or assets do not improve our financial and strategic position as planned;
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We may have difficulty integrating the operations, facilities, personnel and commission plans of the acquired business;
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We may have difficulty forecasting or reporting results subsequent to acquisitions;
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We may have difficulty retaining the skills needed to further market, sell or provide services on the acquired products in a manner that will be accepted by the market;
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We may have difficulty incorporating the acquired technologies or products into our existing product lines;
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We may have product liability, customer liability or intellectual property liability associated with the sale of the acquired company’s products;
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Our ongoing business may be disrupted by transition or integration issues and our management’s attention may be diverted from other business initiatives;
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We may be unable to obtain timely approvals from governmental authorities under applicable competition and antitrust laws;
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We may have difficulty maintaining uniform standards, controls, procedures and policies;
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Our relationships with current and new employees, customers and distributors could be impaired;
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An acquisition may result in increased litigation risk, including litigation from terminated employees or third parties; and
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Our due diligence process may fail to identify significant issues with the acquired company’s product quality, financial disclosures, accounting practices, internal control deficiencies, including material weaknesses, product architecture, legal and tax contingencies and other matters.
These factors could materially adversely affect our business, results of operations, financial condition and cash flow, particularly in the case of a large acquisition or number of acquisitions. To the extent we issue shares of stock or other rights to purchase stock, including options, to pay for acquisitions or to retain employees, existing stockholders’ interests may be diluted and income per share may decrease.
If we do not adequately manage and evolve our financial reporting and managerial systems and processes, including the successful implementation of our enterprise resource planning software, our ability to manage and grow our business may be harmed.
Our ability to successfully implement our business plan and comply with regulations requires effective planning and management systems and processes. We need to continue to improve and implement existing and new operational and financial systems, procedures and controls to manage our business effectively in the future. As a result, we have licensed enterprise resource planning software, consolidated certain finance functions into regional locations, and are in the process of expanding and upgrading our operational and financial systems. Any delay in the implementation of, or disruption in the transition to, our new or enhanced systems, procedures or internal controls, could adversely affect our ability to accurately forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and records, and report financial and management information, including the filing of our quarterly or annual reports with the SEC, on a timely and accurate basis. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, adversely affect our ability to manage our business and materially adversely affect our business, financial condition, results of operations and cash flow. Refer to Item 9A, “Controls and Procedures,” for additional information.
If our products do not remain compatible with ever-changing operating environments we could lose customers and the demand for our products and services could decrease, which could materially adversely affect our business, financial condition, operating results and cash flow.
The largest suppliers of systems and computing software are, in most cases, the manufacturers of the computer hardware systems used by most of our customers. Historically, these companies have from time to time modified or introduced new operating systems, systems software and computer hardware. In the future, new products from these companies could incorporate features that perform functions currently performed by our products, or could require substantial modification of our products to maintain compatibility with these companies’ hardware or software. Recently, many established enterprise hardware vendors have begun to bundle in basic management functionality software with their hardware offerings, putting additional competitive pressures on independent management software vendors like us. Although we have to date been able to adapt our products and our business to changes introduced by hardware manufacturers and system software developers, there can be no assurance that we will be able to do so in the future. Failure to deliver distinctive management functionality, beyond the basic functionality now being bundled by many hardware vendors, that delivers significant and differentiating value to customers could materially adversely affect our business, financial condition, operating results and cash flow.
In addition, the emergence of cloud computing means that many of our enterprise solutions customers are themselves undergoing a radical shift in the way they deliver IT services to their businesses. The shift towards delivering infrastructure and Software-as-a-Service (SaaS) from the cloud may negatively affect our ability to sell IT management solutions to our traditional enterprise solutions customers. While we believe we adequately understand this risk and are taking steps in our product and business strategy to plan for it, failure to adapt our products, solutions, delivery models and sales approaches to effectively plan for cloud computing may adversely affect our business. If we are not successful in anticipating the rate of market change towards the cloud computing paradigm and evolving with it by delivering solutions for IT management in the cloud computing environment, customers may forgo the use of our products in favor of those with comparable functionality delivered via the cloud, which could materially adversely affect our business, financial condition, operating results and cash flow.
Our customers’ data centers and IT environments may be subject to hacking or other cybersecurity threats, harming customer relationships and the market perception of the effectiveness of our products.
An actual or perceived breach of our customers’ network security allowing access to our customers’ data centers or other parts of their IT environments, including access to confidential and personally identifiable information maintained by a customer, regardless of whether the breach is attributable to our products, may cause contractual disputes and may negatively affect the market perception of the effectiveness of our products and our reputation. Because the techniques used by computer hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Alleviating any of these problems could require significant expenditures of our capital and diversion of our resources from development efforts. Additionally, these efforts could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers, and/or subject us to legal action by government authorities or private parties, which could materially adversely affect our business, financial condition, operating results and cash flow.
Our software products, data centers and IT environments may be subject to hacking or other cybersecurity threats, resulting in a loss or misuse of proprietary, personally identifiable and confidential information and harm to the market perception of the effectiveness of our products.
Given that our products are intended to manage and secure IT infrastructures and environments, we expect to be an ongoing target of attacks specifically designed to impede the performance of our products. Similarly, experienced computer programmers or hackers may attempt to penetrate our network security or the security of our data centers and IT environments. These hackers, or others, which may include our employees or vendors, may misappropriate proprietary, personally identifiable and confidential information of the Company, our customers, our employees or our business partners or other individuals or cause interruptions of our services. Although we continually seek to improve our countermeasures to prevent and detect such incidents, if these efforts are not successful, our business operations, and those of our customers, could be adversely affected, losses or theft of data could occur, our reputation and future sales could be harmed, governmental regulatory action or litigation could be commenced against us and our business, financial condition, operating results and cash flow could be materially adversely affected.
Discovery of errors in our software could materially adversely affect our revenue and earnings and subject us to costly and time consuming product liability claims.
The software products we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in current versions, new versions or enhancements of our products after commencement of commercial shipments. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our operating margins could be adversely affected. We could also face possible claims and higher development costs if our software contains errors that we have not detected or if our software otherwise fails to meet our customers’ expectations. Significant technical challenges also arise with our products because our customers license and deploy our products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. These combinations increase our risk further because, in the event of a system-wide failure, it may be difficult to determine which product is at fault. As a result, we may be harmed by the failure of another supplier’s products. As a result of the foregoing, we could experience:
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Loss of or delay in revenue and loss of market share;
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Loss of customers, including the inability to obtain repeat business with existing key customers;
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Damage to our reputation;
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Failure to achieve market acceptance;
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Diversion of development resources;
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Remediation efforts that may be required;
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Increased service and warranty costs;
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Legal actions by customers or government authorities against us that could, whether or not successful, be costly, distracting and time-consuming;
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Increased insurance costs; and
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Failure to successfully complete service engagements for product installations and implementations.
Consequently, the discovery of errors in our products after delivery could materially adversely affect our business, financial condition, operating results and cash flow.
Failure to protect our intellectual property rights and source code would weaken our competitive position.
Our future success is highly dependent upon our proprietary technology, including our software and our source code for that software. Failure to protect such technology could lead to the loss of valuable assets and our competitive advantage. We protect our proprietary information through the use of patents, copyrights, trademarks, trade secret laws, confidentiality procedures and contractual provisions. Notwithstanding our efforts to protect our proprietary rights, policing unauthorized use or copying of our proprietary information is difficult. Unauthorized use or copying occurs from time to time and litigation to enforce intellectual property rights could result in significant costs and diversion of resources. Moreover, the laws of some foreign jurisdictions do not afford the same degree of protection to our proprietary rights as do the laws of the United States. For example, for some of our products, we rely on “shrink-wrap” or “click-on” licenses, which may be unenforceable in whole or in part in some jurisdictions in which we operate. In addition, patents we have obtained may be circumvented, challenged, invalidated or designed around by other companies. If we do not adequately protect our intellectual property for these or other reasons, our business, financial condition, operating results and cash flow could be materially adversely affected. Refer to Part I , Item 1, “Business - (c) Narrative Description of the Business - Intellectual Property,” for additional information.
Our sales to government clients subject us to risks, including early termination, renegotiation, audits, investigations, sanctions and penalties.
Approximately 9% of our total revenue backlog at March 31, 2012 is associated with multi-year contracts signed with the U.S. federal government and other U.S. state and local government agencies. These contracts are generally subject to annual fiscal funding approval, may be renegotiated or terminated at the discretion of the government, or all of these. Termination, renegotiation or funding approval for a contract could adversely affect our sales, revenue and reputation. Additionally, our government contracts are generally subject to audits and investigations, which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government, which could materially adversely affect our business, financial condition, operating results and cash flow.
Certain software that we use in our products is licensed from third parties and, for that reason, may not be available to us in the future, which has the potential to delay product development and production or cause us to incur additional expense, which could materially adversely affect our business, financial condition, operating results and cash flow.
Some of our solutions contain software licensed from third parties. Some of these licenses may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. We may also choose to pay a premium price for such a license in certain circumstances where continuity of the licensed product would outweigh the premium cost of the license. The unavailability of these licenses or the necessity of agreeing to commercially unreasonable terms for such licenses could materially adversely affect our business, financial condition, operating results and cash flow.
Certain software we use is from open source code sources, which, under certain circumstances, may lead to unintended consequences and, therefore, could materially adversely affect our business, financial condition, operating results and cash flow.
Some of our products contain software from open source code sources. The use of such open source code may subject us to certain conditions, including the obligation to offer our products that use open source code for no cost. We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. However, the use of such open source code may
ultimately subject some of our products to unintended conditions, which could require us to take remedial action that may divert resources away from our development efforts and, therefore, could materially adversely affect our business, financial condition, operating results and cash flow.
We may lose access to third-party code and specifications for the development of code, which could materially adversely affect our ability to develop software compatible with third-party software products in the future.
Our solutions interact with a variety of software and hardware developed by third parties. Some software providers and hardware manufacturers, including some of the largest vendors, have a policy of restricting the use or availability of their code or technical documentation for some of their operating systems, applications, or hardware. To date, this policy has not had a material effect on us. Some companies, however, may adopt more restrictive policies in the future or impose unfavorable terms and conditions for such access. These restrictions may, in the future, result in higher research and development costs for us in connection with the enhancement and modification of our existing products and the development of new products. Any additional restrictions could materially adversely affect our business, financial condition, operating results and cash flow.
Third parties could claim that our products infringe or contribute to the infringement of their intellectual property rights or that we owe royalty payments to them, which could result in significant litigation expense or settlement with unfavorable terms, which could materially adversely affect our business, financial condition, operating results and cash flow.
From time to time, third parties have claimed and may claim that our products infringe various forms of their intellectual property or that we owe royalty payments to them. Investigation of these claims can be expensive and could affect development, marketing or shipment of our products. As the number of software patents issued increases, it is likely that additional claims will be asserted. Defending against such claims is time consuming and could result in significant litigation expense or settlement on unfavorable terms, which could materially adversely affect our business, financial condition, operating results and cash flow.
The number, terms and duration of our license agreements as well as the timing of orders from our customers and channel partners, may cause fluctuations in some of our key financial metrics, which may affect our quarterly financial results.
Historically, a substantial portion of our license agreements are executed in the last month of a quarter and the number of contracts executed during a given quarter can vary substantially. In addition, we experience a historically long sales cycle, which is driven in part by the varying terms and conditions of our software contracts. These factors can make it difficult for us to predict sales and cash flow on a quarterly basis. Any failure or delay in executing new or renewed license agreements in a given quarter could cause declines in some of our key financial metrics (e.g., revenue or cash flow), and, accordingly, increases the risk of unanticipated variations in our quarterly results and financial condition.
Failure to renew large license agreement transactions on a satisfactory basis could materially adversely affect our business, financial condition, operating results and cash flow.
Our core customers are large enterprises with multi-year enterprise license agreements each of which involves substantial aggregate fee amounts. The failure to renew those transactions in the future, or to replace those enterprise license agreements with new transactions of similar scope, on terms that are commercially attractive to us could materially adversely affect our business, financial condition, operating results and cash flow.
Changes in market conditions or our ratings could increase our interest costs and adversely affect the cost of refinancing our debt and our ability to refinance our debt, which could materially adversely affect our business, financial condition, operating results and cash flow.
At March 31, 2012, we had $1,301 million of debt outstanding, consisting mostly of unsecured fixed-rate senior note obligations and credit facility borrowings. Refer to Note 9, “Debt,” in the Notes to the Consolidated Financial Statements for the payment schedule of our long-term debt obligations. Our senior unsecured notes are rated by Moody’s Investors Service, Fitch Ratings, and Standard and Poor’s. These agencies or any other credit rating agency could downgrade or take other negative action with respect to our credit ratings in the future. If our credit ratings were downgraded or other negative action is taken, we could be required to, among other things, pay additional interest on outstanding borrowings under our principal revolving credit agreement. Any downgrades could affect our ability to obtain additional financing in the future and may affect the terms of any such financing.
We expect that existing cash, cash equivalents, marketable securities, cash provided from operations and our bank credit facilities will be sufficient to meet ongoing cash requirements. However, our failure to generate sufficient cash as our debt becomes due or to renew credit lines prior to their expiration could materially adversely affect our business, financial condition, operating results and cash flow.
Fluctuations in foreign currencies could result in translation losses.
Our consolidated financial results are reported in U.S. dollars. Most of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Given that cash is typically received over an extended period of time for many of our license agreements and given that a substantial portion of our revenue is generated outside of the U.S., fluctuations in foreign currency exchange rates (such as the euro) against the U.S. dollar could result in substantial changes in reported revenues and operating results due to the foreign currency impact upon translation of these transactions into U.S. dollars.
In the normal course of business, we employ various strategies to manage these risks, including the use of derivative instruments. These strategies may not be effective in protecting us against the effects of fluctuations from movements in foreign exchange rates. Fluctuations of the foreign currency exchange rates could materially adversely affect our business, financial condition, operating results and cash flow.
Failure by us to effectively execute on our announced workforce reductions could result in total costs that are greater than expected or revenues that are less than anticipated.
We have previously announced workforce reductions and other cost reduction initiatives to reallocate resources to growth areas of our business as part of our strategy. We may have further workforce reductions in the future. Risks associated with these actions and other workforce management issues include delays in implementation, changes in plans that increase or decrease the number of employees affected, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business, which could materially adversely affect our financial condition, operating results and cash flow.
We have outsourced various functions to third parties and use third parties as vendors pursuant to arrangements that may not be successful or fully secure, thereby resulting in increased costs or an increased chance of a cybersecurity threat, which may adversely affect service levels and our public reporting.
We have outsourced various functions to third parties, including certain development and administrative functions and hosting for our SaaS business, and may outsource additional functions to third-party providers in the future. We use third party vendors for a variety of functions including a number of which expressly involve confidential and/or personally identifiable information. We rely on all of these third parties to provide services on a timely and effective basis and to adequately address their own cybersecurity threats. Although we periodically monitor the performance of these third parties and maintain contingency plans in case the third parties are unable to perform as agreed, we do not ultimately control the performance of our outsourcing partners. The failure of third-party outsourcing partners or vendors to perform as expected or as contractually required could result in significant disruptions and costs to our operations or our customers’ operations, including the potential loss of personally identifiable data of our customers, employees and business partners and could subject us to legal action by government authorities or private parties, which could materially adversely affect our business, financial condition, operating results and cash flow, and our ability to file our financial statements with the SEC timely or accurately.
We may encounter events or circumstances that would require us to record an impairment charge relating to our goodwill asset balance.
Under GAAP, we are required to evaluate goodwill for impairment at least annually, and more frequently if impairment indicators are present. Prior to fiscal 2012, we evaluated goodwill impairment based on a single operating segment. In the first quarter of fiscal 2012, we disaggregated our operations into three operating segments. This change required the allocation of our goodwill across these operating segments, as well as a change in our evaluation approach with respect to each of these operating segments. We completed our analysis for allocating goodwill by operating segment during the fourth quarter of fiscal 2012. Going forward, absent any indicators of impairment, we expect to perform an annual impairment analysis during the fourth quarter of each fiscal year.
In future periods, we may be subject to factors that may constitute a change in circumstances, indicating that the full carrying value of our goodwill may not be recoverable. These changes may consist of, but are not limited to, declines in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. Any of these factors, or others, could require us to record a significant non-cash impairment charge in our financial statements during a period. If we determine that a significant impairment of our goodwill has occurred in any of our operating segments, this could materially adversely affect our business, financial condition and operating results.
Potential tax liabilities may materially adversely affect our results.
We are subject to income taxes in the United States and in numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, we engage in many transactions and calculations where the ultimate tax determination is uncertain.
We are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from that which is reflected in our income tax provisions and accruals. Additional tax assessments resulting from audit, litigation or changes in tax laws may result in increased tax provisions or payments which could materially adversely affect our business, financial condition, operating results and cash flow in the period or periods in which that determination is made.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal real estate properties are located in areas necessary to meet our operating requirements. All of the properties are considered to be both suitable and adequate to meet our current and anticipated operating requirements.
As of March 31, 2012, we leased 62 facilities throughout the United States, including our corporate headquarters located in Islandia, New York, and 93 facilities outside the United States. Our lease obligations expire on various dates with the longest commitment extending to 2023. We believe that substantially all of our leases will be renewable at market terms at our option as they become due.
We own one facility in Germany totaling approximately 100,000 square feet, two facilities in Italy totaling approximately 140,000 square feet, two facilities in India totaling approximately 455,000 square feet and one facility in the United Kingdom totaling approximately 215,000 square feet.
We utilize our leased and owned facilities for sales, technical support, research and development and administrative functions.
Item 3. Legal Proceedings.
Refer to Note 12, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements for information regarding certain legal proceedings, the contents of which are herein incorporated by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
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Executive Officers of the Registrant.
The name, age, present position, and business experience for at least the past five years of our executive officers at May 11, 2012 are listed below:
William E. McCracken, 69, has been Chief Executive Officer of the Company since January 2010 and a director of the Company since 2005. He was non-executive Chairman of the Board from June 2007 to September 2009 and interim Executive Chairman of the Board from September 2009 to January 2010, and he served as executive Chairman of the Board from January 2010 to May 2010. He was President of Executive Consulting Group, LLC from 2002 to January 2010. During a 36-year tenure at International Business Machines Corporation (IBM), a manufacturer of information processing products and a technology, software and networking systems manufacturer and developer, Mr. McCracken held several executive positions, including General Manager of the IBM Printing Systems Division and General Manager of Worldwide Marketing of IBM PC Company. From 1995 to 2001, he served on IBM’s Worldwide Management Council, a group of the top 30 executives at IBM.
Richard J. Beckert, 50, has been Executive Vice President and Chief Financial Officer of the Company since May 2011. He served as the Company’s Corporate Controller from June 2008 to May 2011 and as Senior Vice President, Strategic Pricing and Offerings from September 2006, when he joined the Company, through June 2008.
Adam Elster, 44, has been Executive Vice President and Group Executive, Mainframe and Customer Success Group since February 2012. He is responsible for innovation and growth of our mainframe business and customer success, which includes customer support, portfolio management and integration of acquisitions. In addition, he leads a business transformation program that focuses on organizational alignment initiatives with our business strategy to meet long-term goals and objectives. Since joining the Company in 1999, Mr. Elster has held a number of senior management positions, including Executive Vice President, Global Business Organization and Business Transformation from August 2011 to February 2012, General Manager, CA Services, Support and Education from June 2011 to August 2011, Corporate Senior Vice President and General Manager, CA Services from November 2009 to June 2011, and Senior Vice President, Area Sales Manager for the Eastern United States, from July 2007 to November 2009.
George J. Fischer, 49, has been the Company’s Executive Vice President and Group Executive, Worldwide Sales and Services since February 2012. He is responsible for all revenue for the Company and for building and maintaining customer and partner relationships across all sectors (Large Existing Enterprises, Large New Enterprises and Growth Markets) and geographies. Since joining the Company in 1999, Mr. Fischer has held a number of senior management positions, including Executive Vice President and Group Executive, Worldwide Sales and Operations from June 2010 to February 2012, Executive Vice President, Global Sales and Marketing from 2009 to June 2010, Executive Vice President and General Manager, Worldwide Sales from 2007 to 2009, and Senior Vice President and General Manager of North America Sales from 2004 to 2007.
Amy Fliegelman Olli, 48, has been Executive Vice President and General Counsel of the Company since February 2007. She is responsible for all of the Company’s legal, compliance and internal audit functions worldwide. Ms. Fliegelman Olli joined the Company in September 2006. From September 2006 to February 2007, she served as Executive Vice President and Co-General Counsel of the Company.
Peter JL Griffiths, 48, has been the Company’s Executive Vice President and Group Executive, Enterprise Solutions and Technology Group since February 2012. He is responsible for managing a broad portfolio of products and solutions for enterprise and growth markets. Mr. Griffiths joined the Company in May 2011 as Executive Vice President, Technology and Development and held that position until February 2012. Prior to that, he was Vice President of Worldwide Research and Development Business, Analytics and Applications at IBM from January 2008 to May 2011, and Senior Vice President, Products at Cognos, Incorporated, a global leader of business intelligence and performance management software, from April 2002 to January 2008, until its acquisition by IBM. Mr. Griffiths joined Cognos in 1998 upon its acquisition of Relational Matters PLC, a data analytics company, where he was Chief Executive Officer.
Phillip J. Harrington, Jr., 55, has been the Company’s Executive Vice President, Risk, and Chief Administrative Officer since June 2010. He is responsible for the Company’s human resources, education, administrative services, risk management, information services and government relations operations globally. Previously, Mr. Harrington served as a director at Deloitte & Touche LLP, a provider of audit, tax, consulting, enterprise risk and financial advisory services, where he served clients in the areas of general management consulting, operational risk management and regulation. Prior to joining Deloitte & Touche in 2008, he spent 20 years at Prudential Financial, Inc., a provider of insurance, investment management, and other financial products and services, where he held a number of leadership positions.
Jacob Lamm, 47, has been the Company’s Executive Vice President, Strategy and Corporate Development since February 2009. He is responsible for directing the Company’s overall business strategy, as well as the Company’s strategy for acquisitions. Mr. Lamm has held various management positions since joining the Company in 1998. He served as the Company’s Executive Vice President, Governance Group from January 2008 to February 2009, as Executive Vice President and General Manager, Business Service Optimization Business Unit from March 2007 to January 2008 and as Senior Vice President, General Manager and Business Unit Executive from April 2005 to March 2007.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on The NASDAQ Global Select Market tier of The NASDAQ Stock Market LLC (NASDAQ) under the symbol “CA.” The following table sets forth, for the fiscal quarters indicated, the quarterly high and low closing sales prices on NASDAQ:
At April 30, 2012, we had approximately 6,500 stockholders of record.
We have paid cash dividends each year since July 1990. For fiscal 2012, 2011 and 2010, we paid annual cash dividends of $0.40, $0.16 and $0.16 per share, respectively. We paid cash dividends of $0.05 per share in each of the first three quarters of fiscal 2012.
On January 23, 2012, our Board of Directors approved a capital allocation program that targets the return of up to $2.5 billion to shareholders through fiscal 2014. This includes an increase in the annual dividend from $0.20 to $1.00 per share on our common stock as and when declared by the Board of Directors and the authorization to acquire up to $1.5 billion of our common stock. We paid a cash dividend of $0.25 per share for the fourth quarter of fiscal 2012. For fiscal 2011 and 2010, we paid quarterly cash dividends of $0.04 per share.
Purchases of Equity Securities by the Issuer
The following table sets forth, for the months indicated, our purchases of common stock in the fourth quarter of fiscal 2012:
Issuer Purchases of Equity Securities
On May 12, 2011, our Board of Directors approved a stock repurchase program that authorized us to acquire up to an additional $500 million of our common stock, in addition to the previous $500 million program approved on May 12, 2010.
Under the $2.5 billion capital allocation program approved by our Board of Directors in January 2012, we are authorized to acquire up to $1.5 billion of our common stock through fiscal 2014, including $232 million remaining at December 31, 2011 under our previous share repurchase authorizations described above. As part of the capital allocation program, we entered into an accelerated share repurchase agreement in the fourth quarter of fiscal 2012 with a bank to purchase $500 million of our common stock. The total number of shares repurchased will depend on our average stock price during the period of the agreement. Under the agreement, we paid $500 million to the bank for an initial delivery of approximately 15 million shares of our common stock and will either receive or deliver additional shares at settlement. The fair market value of approximately 15 million shares on the date received was approximately $375 million. The accelerated share repurchase transaction is expected to be completed by the end of the first quarter of fiscal 2013.
Under these programs as described above, we repurchased approximately 15 million shares of our common stock for approximately $500 million during the fourth quarter of fiscal 2012. At March 31, 2012, we remained authorized to repurchase approximately $1 billion of our common stock under the capital allocation program. The timing and amount of share repurchases will be determined by our management based on evaluation of market conditions, trading price, legal requirements and other factors.
Item 6. Selected Financial Data.
The information set forth below should be read in conjunction with the “Results of Operations” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(1) In fiscal 2010, 2009 and 2008, we incurred after-tax charges of $33 million, $64 million and $74 million, respectively, for restructuring and other costs.
(2) Dividends declared per common share were $0.05 for the each of the first three quarters of fiscal 2012 and $0.25 for the fourth quarter of fiscal 2012. For fiscal 2008 through fiscal 2011, dividends declared per common share were $0.04 per quarter.
(3) Deferred revenue includes amounts billed or collected in advance of revenue recognition, including subscription license agreements, maintenance and professional services. It does not include unearned revenue on future installments not yet billed at the respective balance sheet dates.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K and the Risk Factors included in Part I,
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and debt. We have a prescribed methodology whereby we invest our excess cash in investments that are composed of money market funds, debt instruments of government agencies and investment grade corporate issuers (Standard and Poor’s single “BBB+” rating and higher).
At March 31, 2012, our outstanding debt was $1,301 million, all of which was in fixed rate obligations. Refer to Note 9, “Debt,” in the Notes to the Consolidated Financial Statements for additional information.
At March 31, 2012, we had interest rate swaps with a total notional value of $500 million that swap a total of $500 million of our 6.125% Senior Notes due December 2014 into floating interest rate debt through December 1, 2014. These swaps are designated as fair value hedges and are being accounted for in accordance with the shortcut method of FASB ASC Topic 815. Under the terms of the swaps, we will pay quarterly interest at an average rate of 2.88%, plus the three-month LIBOR rate, and will receive payment at 5.625%. The LIBOR-based rate is set quarterly three months prior to date of the interest payment.
At March 31, 2012, the fair value of these derivatives was an asset of approximately $27 million, of which approximately $11 million is included in “Other current assets” and approximately $16 million is included in “Other noncurrent assets, net” in our Consolidated Balance Sheet. At March 31, 2011, the fair value of these derivatives was an asset of approximately $15 million, of which approximately $11 million is included in “Other current assets” and approximately $4 million is included in “Other noncurrent assets, net” in our Consolidated Balance Sheet.
Each 25 basis point increase or decrease in interest rates would have a corresponding effect on the annual interest expense related to our interest rates swaps that relate to the 6.125% Notes of approximately $1 million at March 31, 2012.
During fiscal 2009, we entered into interest rate swaps with a total notional value of $250 million to hedge a portion of our variable interest rate payments on the revolving credit facility. These derivatives were designated as cash flow hedges and matured in October 2010. During fiscal 2011, under the terms of the interest rate swaps, we paid interest at an average annualized rate of 2.83% and received interest payment at the one-month LIBOR rate.
Foreign Currency Exchange Risk
We conduct business on a worldwide basis through subsidiaries in 47 foreign countries and, as such, a portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities. In October 2005, our Board of Directors adopted our Risk Management Policy and Procedures, which authorize us to manage, based on management’s assessment, our risks and exposures to foreign currency exchange rates through the use of derivative financial instruments (e.g., forward contracts, options and swaps) or other means. We only use derivative financial instruments in the context of hedging and do not use them for speculative purposes.
During fiscal 2012 and 2011, we did not designate our foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives are recorded in our Consolidated Balance Sheets at fair value and unrealized or realized changes in fair value from these contracts are recorded as “Other expenses, net” in our Consolidated Statements of Operations.
Refer to Note 10, “Derivatives” for additional information regarding our derivative activities.
If foreign currency exchange rates affecting our business weakened by 10% on an overall basis in comparison to the U.S. dollar, the amount of cash and cash equivalents we would report in U.S. dollars would decrease by approximately $172 million.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements are included in Part IV, Item 15 of this Form 10-K and are incorporated herein by reference.
The supplementary data specified by Item 302 of Regulation S-K as it relates to selected quarterly data is included in the “Selected Quarterly Information” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information on the effects of changing prices is not required.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at the end of the period covered by this Form 10-K.
(b) Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted its evaluation of the effectiveness of internal control over financial reporting at March 31, 2012 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s evaluation included the design of the Company’s internal control over financial reporting and the operating effectiveness of the Company’s internal control over financial reporting. Based on that evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of the end of the period covered by this Form 10-K.
The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company’s internal control over financial reporting as stated in their report which appears on page 54 of this Form 10-K.
(c) Changes in Internal Control Over Financial Reporting
Except as disclosed in the following paragraph, there were no changes in the Company’s internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As disclosed above, in the first quarter of fiscal 2012, the Company changed its operating segments under ASC 280, “Segment Reporting.” This change in segments gave rise to changes in the Company’s internal control over financial reporting that included the implementation of control procedures to address the completeness, accuracy and consistency of the processing of our business transactions to derive the segment information disclosed in our financial statements. Changes to the Company’s internal control over financial reporting associated with our segment reporting were completed during the fourth quarter of fiscal 2012 as these procedures were further improved and enhanced.
Item 9B. Other Information.
Not applicable
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this Item that will appear under the headings “Election of Directors,” “Director Nominating Procedures,” “Board Committees and Meetings” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive proxy statement to be filed with the SEC relating to our 2012 Annual Meeting of Stockholders is incorporated herein by reference. Also, refer to Part I under the heading “Executive Officers of the Registrant” for information concerning our executive officers.
We maintain a “code of ethics” (within the meaning of Item 406 of the SEC’s Regulation S-K) entitled “CA Code of Conduct: Information and Resource Guide” (Code of Conduct). Our Code of Conduct is applicable to all employees and directors, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. Our Code of Conduct is available on our website at www.ca.com/invest. Any amendment or waiver to the “code of ethics” provisions of our Code of Conduct that applies to our directors or executive officers will be included in a report filed with the SEC on Form 8-K or will be otherwise disclosed to the extent required and as permitted by law or regulation. The Code of Conduct is available without charge in print to any stockholder who requests a copy by writing to our Corporate Secretary, at CA, Inc., One CA Plaza, Islandia, New York 11749.
Item 11. Executive Compensation.
Information required by this Item that will appear under the headings “Compensation and Other Information Concerning Executive Officers,” “Compensation Discussion and Analysis,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Compensation and Human Resources Committee Report on Executive Compensation” in the definitive proxy statement to be filed with the SEC relating to our 2012 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this Item that will appear under the headings “Information Regarding Beneficial Ownership of Principal Stockholders, the Board and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” in the definitive proxy statement to be filed with the SEC relating to our 2012 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item that will appear under the headings “Related Person Transactions,” “Election of Directors,” “Board Committees and Meetings” and “Corporate Governance” in the definitive proxy statement to be filed with the SEC relating to our 2012 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information required by this Item that will appear under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the definitive proxy statement to be filed with the SEC relating to our 2012 Annual Meeting of Stockholders is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) The Registrant’s financial statements together with a separate table of contents are annexed hereto.
(2) Financial Statement Schedules are listed in the separate table of contents annexed hereto.
(3) Exhibits.
Regulation S-K
Exhibit Number
3.1
Restated Certificate of Incorporation.
Filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K dated March 6, 2006.*
3.2
By-Laws of the Company, as amended.
Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated February 23, 2007.*
4.1
Restated Certificate of Designation of Series One Junior Participating Preferred Stock, Class A of the Company.
Filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K dated March 6, 2006.*
4.2
Stockholder Protection Rights Agreement dated November 5, 2009 between the Company and Mellon Investor Services LLC, as Rights Agent, including as Exhibit A the forms of Rights Certificate and of Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of the Participating Preferred Stock of the Company.
Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 5, 2009.*
4.3
Indenture with respect to the Company’s 4.75% Senior Notes due 2009 and 6.125% Senior Notes due 2014 dated November 18, 2004 between the Company and The Bank of New York, as Trustee.
Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 15, 2004.*
4.4
Purchase Agreement dated November 15, 2004 among the Initial Purchasers of the 4.75% Senior Notes due 2009 and 6.125% Senior Notes due 2014 and the Company.
Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 15, 2004.*
4.5
First Supplemental Indenture dated November 30, 2007 to the Indenture dated November 18, 2004 between the Company and The Bank of New York, as trustee.
Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated January 3, 2008.*
4.6
Indenture dated June 1, 2008 between the Company and U.S. Bank National Association, as trustee, relating to the senior debt securities, the senior subordinated debt securities and the junior subordinated debt securities, as applicable.
Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-3, Registration Number 333-151619, dated June 12, 2008.*
4.7
Officers’ Certificates dated November 13, 2009 establishing the terms of the Company’s 5.375% Senior Notes due 2019 pursuant to the Indenture dated June 1, 2008 (including the form of the Notes).
Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated November 13, 2009.*
4.8
Addendum to Registration Rights Agreement dated November 30, 2007 relating to $500,000,000 6.125% Senior Notes Due 2014.
Filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated January 3, 2008.*
10.1**
1993 Stock Option Plan for Non-Employee Directors.
Filed as Annex 1 to the Company’s definitive Proxy Statement dated July 7, 1993.*
10.2**
Amendment No. 1 to the 1993 Stock Option Plan for Non-Employee Directors dated October 20, 1993.
Filed as Exhibit E to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1994.*
10.3**
1996 Deferred Stock Plan for Non-Employee Directors.
Filed as Exhibit A to the Company’s definitive Proxy Statement dated July 8, 1996.*
10.4**
Amendment No. 1 to the 1996 Deferred Stock Plan for Non-Employee Directors.
Filed as Exhibit A to the Company’s definitive Proxy Statement dated July 6, 1998.*
10.5**
2001 Stock Option Plan.
Filed as Exhibit B to the Company’s definitive Proxy Statement dated July 18, 2001.*
10.6**
CA, Inc. 2002 Incentive Plan (amended and restated effective as of April 27, 2007).
Filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007.*
10.7**
CA, Inc. 2002 Compensation Plan for Non-Employee Directors.
Filed as Exhibit C to the Company’s definitive Proxy Statement dated July 26, 2002.*
10.8
Deferred Prosecution Agreement, including the related Information and Stipulation of Facts.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 22, 2004.*
10.9
Final Consent Judgment of Permanent Injunction and Other Relief, including SEC complaint.
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated September 22, 2004.*
10.10**
Form of Restricted Stock Unit Certificate under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004.*
10.11**
Form of Non-Qualified Stock Option Certificate under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004.*
10.12**
Form of Non-Qualified Stock Option Award Certificate under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K dated June 2, 2006.*
10.13**
Form of Non-Qualified Stock Option Award Certificate (Employment Agreement) under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K dated June 2, 2006.*
10.14**
Form of Incentive Stock Option Award Certificate under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K dated June 2, 2006.*
10.15**
Form of Incentive Stock Option Award Certificate (Employment Agreement) under the CA, Inc. 2002 Incentive Plan.
Filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K dated June 2, 2006.*
10.16**
Program whereby certain designated employees, including the Company’s Named Executive Officers, are provided with certain covered medical services, effective August 1, 2005.
Filed as Item 1.01 and Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 1, 2005.*
10.17**
Amended and Restated CA, Inc. Executive Deferred Compensation Plan, effective November 20, 2006.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006.*
10.18**
Form of Deferral Election.
Filed as Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.*
10.19
Lease dated August 15, 2006 among the Company, Island Headquarters Operators LLC and Islandia Operators LLC.
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 15, 2006.*
10.20**
CA, Inc. 2007 Incentive Plan.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 21, 2007.*
10.21**
Form of Award Agreement under the CA, Inc. 2007 Incentive Plan - Restricted Stock Units.
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 21, 2007.*
10.22**
Form of Award Agreement under the CA, Inc. 2007 Incentive Plan - Restricted Stock Awards.
Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated August 21, 2007.*
10.23**
Form of Award Agreement under the CA, Inc. 2007 Incentive Plan - Non-Qualified Stock Awards.
Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated August 21, 2007.*
10.24
Settlement Agreement dated December 21, 2007 between the Company and The Bank of New York, as trustee, Linden Capital L.P. and Swiss Re Financial Products Corporation.
Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated January 3, 2008.*
10.25**
First Amendment to CA, Inc. Executive Deferred Compensation Plan, effective February 25, 2008.
Filed as Exhibit 10.68 to the Company Annual Report on Form 10-K for the fiscal year ended March 31, 2008.*
10.26**
First Amendment to Adoption Agreement for CA, Inc. Executive Deferred Compensation Plan, effective February 25, 2008.
Filed as Exhibit 10.69 to the Company Annual Report on Form 10-K for the fiscal year ended March 31, 2008.*
10.27**
CA, Inc. Change in Control Severance Policy (amended and restated effective September 10, 2008).
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008.*
10.28**
Amended and Restated Employment Agreement dated September 30, 2009 between the Company and Nancy E. Cooper.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.29**
Amended and Restated Employment Agreement dated September 30, 2009 between the Company and Amy Fliegelman Olli.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.30**
Retention Letter Agreement dated October 1, 2009 between the Company and Nancy E. Cooper.
Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.31**
Retention Letter Agreement dated October 1, 2009 between the Company and Amy Fliegelman Olli.
Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.32**
Summary description of special retirement vesting provisions available to certain Senior Management.
Filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.33**
Director Retirement Donation Policy.
Filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.34**
Non-Qualified Stock Option Certificate for William E. McCracken.
Filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.*
10.35**
Summary description of financial planning benefit available to certain executives.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009.*
10.36**
Form of Restricted Stock Unit Award Agreement for certain Named Executive Officers.
Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009.*
10.37**
Homeowners Relocation Policy for Senior Executives.
Filed as Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.*
10.38**
Renters Relocation Policy for Senior Executives.
Filed as Exhibit 10.58 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.*
10.39**
Employment Agreement dated May 6, 2010 between the Company and William E. McCracken.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 6, 2010.*
10.40**
Employment Agreement dated June 23, 2010 between the Company and David C. Dobson.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.*
10.41**
Summary description of Director compensation.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010.*
10.42**
CA, Inc. Special Retirement Vesting Benefit Policy.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2010.*
10.43**
CA, Inc. 2003 Compensation Plan for Non-Employee Directors (amended and restated dated December 31, 2010).
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2010.*
10.44**
Letter dated May 18, 2011 from the Company to Richard J. Beckert regarding terms of employment.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.*
10.45**
Letter dated April 26, 2011 from the Company to Peter JL Griffiths regarding terms of employment.
Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.*
10.46**
CA, Inc. 2011 Incentive Plan.
Filed as Exhibit B to the Company’s definitive Proxy Statement dated June 10, 2011.*
10.47**
Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Units.
Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.*
10.48**
Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Awards.
Filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.*
10.49**
Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Awards (special retirement vesting).
Filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.*
10.50**
Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Non-Qualified Stock Options.
Filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.*
10.51**
CA, Inc. 2012 Employee Stock Purchase Plan.
Filed as Exhibit C to the Company’s definitive Proxy Statement dated June 10, 2011.*
10.52
Credit Agreement dated August 19, 2011.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 19, 2011.*
10.53
Confirmation for accelerated share repurchase transaction dated January 26, 2012 between the Company and Bank of America, N.A.
Filed herewith.
10.54**
Schedules A, B, and C (as amended) to CA, Inc. Change in Control Severance Policy.
Filed herewith.
10.55**
Form of Transitional Award Agreement under the CA, Inc. 2007 Incentive Plan - Restricted Stock Awards.
Filed herewith.
10.56**
Form of Transitional Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Awards.
Filed herewith.
10.57**
Amended Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Units.
Filed herewith.
10.58**
Amended Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Awards.
Filed herewith.
10.59**
Amended Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Restricted Stock Awards (special retirement vesting).
Filed herewith.
10.60**
Amended Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Non-Qualified Stock Options.
Filed herewith.
10.61**
Form of Award Agreement under the CA, Inc. 2011 Incentive Plan - Non-Qualified Stock Options (Canadian employees).
Filed herewith.
12.1
Statement of Ratios of Earnings to Fixed Charges.
Filed herewith.
Subsidiaries of the Registrant.
Filed herewith.
Consent of Independent Registered Public Accounting Firm.
Filed herewith.
Power of Attorney
Filed herewith.
31.1
Certification of the CEO pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
31.2
Certification of the CFO pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
The following financial statements from CA, Inc.’s Annual Report on Form 10-K for the year ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language):
Filed herewith.
(i) Consolidated Statements of Operations - Years Ended March 31, 2012, 2011 and 2010.
(ii) Consolidated Balance Sheets - March 31, 2012 and March 31, 2011.
(iii) Consolidated Statements of Stockholders’ Equity - Years Ended March 31, 2012, 2011 and 2010.
(iv) Consolidated Statements of Cash Flows - Years Ended March 31, 2012, 2011 and 2010.
(v) Notes to Consolidated Financial Statements - March 31, 2012.
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CA, INC.
By:
/s/ William E. McCracken
William E. McCracken
Chief Executive Officer
Dated: May 11, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ William E. McCracken
William E. McCracken
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Richard J. Beckert
Richard J. Beckert
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
/s/ Neil A. Manna
Neil A. Manna
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Dated: May 11, 2012
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
*
Jens Alder
Director
*
Raymond J. Bromark
Director
*
Gary J. Fernandes
Director
*
Rohit Kapoor
Director
*
Kay Koplovitz
Director
*
Christopher B. Lofgren
Director
*
William E. McCracken
Director
*
Richard Sulpizio
Director
*
Laura S. Unger
Director
*
Arthur F. Weinbach
Director
*
Renato (Ron) Zambonini
Director
*By:
/s/ C.H.R. DuPree
C.H.R. DuPree
Attorney-in-fact
Dated: May 11, 2012
CA, Inc. and Subsidiaries
Islandia, New York
Annual Report on Form 10-K Item 8, Item 9A, Item 15(a)(1) and (2), and Item 15(c)
List of Consolidated Financial Statements and Financial Statement Schedule
Consolidated Financial Statements and Financial Statement Schedule
Year ended March 31, 2012
PAGE
The following Consolidated Financial Statements of CA, Inc.
and subsidiaries are included in Items 8 and 9A:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations - Years Ended March 31, 2012, 2011 and 2010
Consolidated Balance Sheets - March 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity - Years Ended March 31, 2012, 2011 and
Consolidated Statements of Cash Flows - Years Ended March 31, 2012, 2011 and 2010
Notes to the Consolidated Financial Statements
The following Consolidated Financial Statement Schedule of CA, Inc.
and subsidiaries is included in Item 15(c):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CA, Inc.:
We have audited the accompanying consolidated balance sheets of CA, Inc. and subsidiaries as of March 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended March 31, 2012. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in Item 15(c). We also have audited CA, Inc.’s internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CA, Inc.’s management is responsible for these consolidated financial statements and the consolidated financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting under Item 9A(b). Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CA, Inc. and subsidiaries as of March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Also, in our opinion, CA, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by COSO.
/s/ KPMG LLP
New York, New York
May 11, 2012
CA, Inc. and Subsidiaries
Consolidated Statements of Operations
See accompanying Notes to the Consolidated Financial Statements
CA, Inc. and Subsidiaries
Consolidated Balance Sheets
See accompanying Notes to the Consolidated Financial Statements
CA, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
See accompanying Notes to the Consolidated Financial Statements
CA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Note 1 - Significant Accounting Policies
(a) Description of Business: CA, Inc. and subsidiaries (the Company) develops, markets, delivers and licenses software products and services.
(b) Presentation of Financial Statements: The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 205. 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. Significant items subject to such estimates and assumptions include: (i) the useful lives of long-lived assets, (ii) allowances for doubtful accounts, (iii) the valuation of derivatives, goodwill, deferred tax assets, assets acquired in business combinations and long-lived assets, (iv) share-based compensation, (v) reserves for employee severance benefit obligations, (vi) income tax uncertainties, (vii) legal contingencies and (viii) the fair value of the Company’s reporting units.
(c) Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and its majority-owned and controlled subsidiaries. Investments in affiliates owned 50% or less are accounted for by the equity method. Intercompany balances and transactions have been eliminated in consolidation. Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The purchase price for each of the Company’s acquisitions is allocated to the assets acquired and liabilities assumed from the acquired entity. For additional information, refer to Note 2, “Acquisitions.”
(d) Divestitures: In June 2011, the Company sold its Internet Security business and in June 2010, the Company sold its Information Governance business. The results of operations associated with the sales of these businesses have been presented as discontinued operations in the accompanying Consolidated Statements of Operations and Consolidated Statement of Cash Flows for fiscal years 2012, 2011 and 2010. The effects of the discontinued operations were immaterial to the Company’s Consolidated Balance Sheet at March 31, 2011. See Note 3, “Discontinued Operations,” for additional information.
In September 2010, the Company recognized a gain of approximately $10 million from the sale of its interest in an investment accounted for using the equity method. The gain is included in “Other expenses, net” in the Company’s Consolidated Statements of Operations for fiscal year 2011.
(e) Foreign Currencies: Assets and liabilities of the Company’s international subsidiaries are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars are reported as currency translation adjustments in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets.
Foreign currency transaction losses were approximately $4 million, $18 million and $10 million in fiscal years 2012, 2011 and 2010, respectively, and are included in “Other expenses, net” in the Consolidated Statements of Operations in the period in which they occurred.
(f) Revenue Recognition: The Company begins to recognize revenue from software licensing and maintenance when all of the following criteria are met: (1) the Company has evidence of an arrangement with a customer; (2) the Company delivers the specified products; (3) license agreement terms are fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it may not be complete and final; and (4) collection is probable. Revenue is recorded net of applicable sales taxes.
The Company’s software licenses generally do not include acceptance provisions. An acceptance provision allows a customer to test the software for a defined period of time before committing to license the software. If a license agreement includes an acceptance provision, the Company does not recognize revenue until the earlier of the receipt of a written customer acceptance or, if not notified
by the customer to cancel the license agreement, the expiration of the acceptance period. The Company’s standard licensing agreements include a product warranty provision for all products. The likelihood that the Company will be required to make refunds to customers under such provisions is considered remote.
Subscription and Maintenance Revenue: Software licenses that include the right to receive unspecified future software products are considered subscription arrangements under GAAP and are recognized ratably over the term of the license agreement. Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from either: (i) subscription license agreements that were in effect during the period, which generally include maintenance that is bundled with and not separately identifiable from software usage fees or product sales; (ii) maintenance agreements associated with providing customer technical support and access to software fixes and upgrades which are separately identifiable from software usage fees or product sales; or (iii) software license agreements bundled with maintenance for which vendor specific objective evidence (VSOE) has not been established for maintenance. Revenue for these arrangements is recognized ratably over the term of the subscription or maintenance term.
Professional Services: Revenue from professional service arrangements is generally recognized as the services are performed. Revenue and costs from committed professional services that are sold as part of a subscription license agreement are deferred and recognized on a ratable basis over the term of the related software license. VSOE of professional services is established based on daily rates when sold on a stand-alone basis. If it is not probable that a project will be completed or the payment will be received, revenue recognition is deferred until the uncertainty is removed.
Software Fees and Other: Software fees and other revenue primarily consists of revenue from the sale of perpetual software licenses that do not include the right to unspecified software products, on a stand-alone basis or in a bundled arrangement where VSOE exists for any undelivered elements. For bundled arrangements that include either maintenance or both maintenance and professional services, the Company uses the residual method to determine the amount of license revenue to be recognized. Under the residual method, consideration is allocated to undelivered elements based upon VSOE of those elements, with the residual of the arrangement fee allocated to and recognized as license revenue. The Company determines VSOE of maintenance, depending on the product, from either contractually stated renewal rates or the bell-shaped curve method.
In the event that agreements with the Company’s customers are executed in close proximity of the other license agreements with the same customer, the Company evaluates whether the separate arrangements are linked, and, if so, the agreements are considered a single multi-element arrangement for which revenue is recognized ratably as subscription and maintenance revenue or, in the case of a linked professional services arrangement, as professional services revenue, in the Consolidated Statements of Operations.
(g) Sales Commissions: Sales commissions are recognized in the period the commissions are earned by employees, which is typically upon signing of the contract. Under the Company’s sales commissions programs, the amount of sales commissions expense attributable to the license agreements signed in the period would be recognized fully, but the revenue from the license agreements may be recognized ratably over the subscription and maintenance term.
(h) Accounting for Share-Based Compensation: Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date, based on the fair value of the award. The expense for awards expected to vest is recognized over the employee’s requisite service period (generally the vesting period of the award). Awards expected to vest are estimated based on a combination of historical experience and future expectations.
The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of share-based awards in the form of options. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term of the option and risk-free interest rates.
In addition to stock options and restricted share awards (RSAs) with time-based vesting, the Company issues performance share units (PSUs). 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, the applicable number of shares of RSAs, restricted stock units (RSUs) or unrestricted shares granted may vary based on the level of achievement of the performance targets. Additionally, the grants are subject to the approval of the Company’s Compensation and Human Resources Committee of the Board of Directors (the
Compensation Committee), which has discretion to reduce any award for any reason. The value of the PSU awards is remeasured each reporting period until the Compensation Committee approves attainment of the specified performance targets, at which time a grant date is deemed to have been achieved for accounting purposes, the value of the award is fixed and any remaining unrecognized compensation expense is recognized over the remaining time-based vesting period. See Note 15, “Stock Plans,” for additional information.
(i) Net Income Per Common Share: Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of net income per share under the two-class method. Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed income is then allocated to common stock and participating securities as if all of the net income for the period had been distributed. 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 outstanding at the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards and convertible notes. See Note 14, “Income from Continuing Operations Per Common Share,” for additional information.
(j) Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash equivalents, derivatives and accounts receivable. The Company historically has not experienced any losses in its cash and cash equivalent portfolios.
Amounts included in accounts receivable expected to be collected from customers, as disclosed in Note 6, “Trade Accounts Receivable,” have limited exposure to concentration of credit risk due to the diverse customer base and geographic areas covered by operations.
(k) Cash and Cash Equivalents: All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. The Company’s cash and cash equivalents are held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency which may not be the U.S. dollar. Approximately 64% and 47% of cash and cash equivalents were maintained outside the United States at March 31, 2012 and 2011, respectively.
Total interest income, which primarily relates to the Company’s cash and cash equivalent balances and marketable securities, for fiscal years 2012, 2011 and 2010 was approximately $30 million, $24 million and $26 million, respectively, and is included in “Interest expense, net” in the Consolidated Statements of Operations.
(l) Marketable Securities: All marketable securities are classified as available-for-sale securities and are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income until realized. Premiums and discounts on debt securities recorded at the date of purchase are recognized in “Interest expense, net” using the effective interest method. Realized gains and losses on sales of all such investments are reported in “Interest expense, net” and are computed using the specific identification cost method.
For marketable securities in an unrealized loss position, the Company is required to assess whether it intends to sell the security or will more likely than not be required to sell the security before the recovery of its amortized cost basis less any current-period credit loss. If either of these conditions is met, an other-than-temporary impairment on the security is recognized in “Interest expense, net” equal to the difference between its fair value and amortized cost basis. See Note 5, “Marketable Securities,” for additional information.
(m) Fair Value Measurements: Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
-
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
-
Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
-
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
See Note 11, “Fair Value Measurements,” for additional information.
(n) Long-Lived Assets:
Impairment of Long-Lived Assets, Excluding Goodwill and Other Intangibles: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization expense is calculated based on the estimated useful lives of the assets, and is recognized by using the straight-line method. Building and improvements are estimated to have 5 to 40 year lives, and the remaining property and equipment are estimated to have 3 to 7 year lives.
Capitalized Development Costs: Capitalized development costs in the accompanying Consolidated Balance Sheets include costs associated with the development of computer software to be sold, leased or otherwise marketed. Software development costs associated with new products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established. Costs incurred thereafter are capitalized until the product is made generally available. Annual amortization of capitalized software costs is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the software product, generally estimated to be 5 years from the date the product became available for general release to customers. The Company generally recognizes amortization expense for capitalized software costs using the straight-line method.
Purchased Software Products: Purchased software products primarily include the cost of software technology acquired in business combinations. The cost of such products is equal to the fair value of the acquired software technology at the acquisition date. The Company records straight-line amortization of purchased software costs over their remaining economic lives, estimated to be between 3 and 10 years from the date of acquisition. Purchased software products are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Other Intangible Assets: Other intangible assets include both customer relationships and trademarks/trade names. The Company amortizes all other intangible assets over their remaining economic lives, estimated to be between 2 and 12 years from the date of acquisition. Other intangible assets subject to amortization are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and intangible assets, including in-process research and development, acquired by the Company in a purchase business combination. Goodwill is not amortized into results of operations but instead is reviewed for impairment.
The Company adopted the Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08) during the fourth quarter of fiscal year 2012. The implementation of this accounting guidance did not have a material impact on the Company’s goodwill impairment evaluations.
In the first quarter of fiscal year 2012, the Company changed the internal reporting used by its Chief Executive Officer for evaluating segment performance and allocating resources. The new reporting disaggregates the Company’s operations into Mainframe Solutions, Enterprise Solutions and Services segments, and represented a change in the Company’s operating segments under ASC 280, “Segment Reporting.” As a result of this change, the Company was required to allocate its goodwill based on the new reporting structure and test goodwill for impairment at the reporting unit level, which would be the operating segment or one level below an operating segment.
Goodwill is tested for impairment at least annually in the fourth quarter of each fiscal year. In accordance with ASU 2011-08, the Company first performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount, and, if so, the Company then applies the two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting units, which are the same as its operating segments, to their carrying (i.e., book) value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.
The Company determines the fair value of its reporting units based on a weighting of income and market approaches. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates the fair value based on market multiples of revenue or earnings for comparable companies. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include the revenue growth rates and operating profit margins that are used to project future cash flows, discount rates, future economic and market conditions and determination of appropriate market comparables. The Company makes certain judgments and assumptions in allocating shared costs among operating segments. The Company bases its fair value estimates on assumptions that are consistent with information used by the business for planning purposes and that it believes to be reasonable, however, actual future results may differ from those estimates. Changes in judgments on any of these factors could materially affect the value of the reporting unit.
During the fourth quarter of fiscal year 2012, the Company completed its allocation of goodwill, tested for goodwill impairment for each of its reporting units and concluded that no goodwill impairment exists. See Note 18, “Segment and Geographic Information,” for the Company’s allocation of goodwill by operating segment.
See Note 7, “Long-Lived Assets,” for additional information.
(o) Restricted Cash: The Company’s insurance subsidiary requires a minimum restricted cash balance of $50 million. In addition, the Company has other restricted cash balances, including cash collateral for letters of credit. The total amount of restricted cash at each of March 31, 2012 and 2011 was approximately $56 million and is included in “Other noncurrent assets, net” in the Consolidated Balance Sheets.
(p) Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in income tax expense. See Note 16, “Income Taxes,” for additional information.
(q) Deferred Revenue (Billed or Collected): The Company accounts for unearned revenue on billed amounts due from customers on a gross basis. Unearned revenue on billed installments (collected or uncollected) is reported as deferred revenue in the liabilities section of the Consolidated Balance Sheets.
Deferred revenue (billed or collected) excludes contractual commitments executed under license and maintenance agreements that will be billed in future periods. See Note 8, “Deferred Revenue,” for additional information.
(r) Litigation: The Company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and proceedings are reviewed at least quarterly and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. See Note 12, “Commitments and Contingencies,” for additional information.
(s) Reclassifications: Certain prior year balances have been reclassified to conform to the current period’s presentation.
Consolidated Statement of Operations: The Company has changed the presentation of the fiscal year 2010 restructuring plan (Fiscal 2010 Plan) expenses in the fiscal year 2010 Consolidated Statement of Operations. The Company previously presented the Fiscal 2010 Plan expenses in “Restructuring and other” in the Consolidated Statements of Operations. For fiscal year 2012, the Company has reclassified these expenses for fiscal year 2010 into their respective individual line descriptions. This expense reclassification had no effect on previously reported total expense or total revenue. The total expense incurred in fiscal year 2010 was approximately $48 million and has been reclassified as follows: $19 million into “Product development and enhancements;” $18 million into “Selling and marketing;” $7 million into “General and administrative;” $2 million into “Costs of licensing and maintenance;” and $2 million into “Cost of professional services” in the Consolidated Statement of Operations.
Note 2 - Acquisitions
During fiscal year 2012, the Company acquired 100% of the voting equity interest of Interactive TKO, Inc. (ITKO), a privately held provider of service simulation solutions for developing applications in composite and cloud environments. The acquisition expands solutions the Company offers enterprises and service providers for using and providing cloud computing to deliver business services. The total purchase price of the acquisition was approximately $315 million. The Company’s other acquisitions during fiscal year 2012 were immaterial, both individually and in the aggregate.
The pro forma effects of the Company’s fiscal year 2012 acquisitions on the Company’s revenues and results of operations during fiscal years 2012 and 2011 were considered immaterial. The purchase price allocation of the Company’s fiscal year 2012 acquisitions is as follows:
(1) Includes customer relationships and trade names.
(2) Purchase price allocation is preliminary due to ongoing analysis to determine the fair value of acquired intangibles and the tax basis of acquired assets and liabilities.
(3) Includes approximately $20 million of cash acquired relating to ITKO.
Transaction costs for acquisitions were immaterial for fiscal year 2012. The excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The preliminary allocation of a significant portion of the purchase price to goodwill was predominantly due to synergies the Company expects from marketing and integration with other products of the Company and intangible assets that are not separable, such as assembled workforce and going concern. The goodwill relating to the Company’s second quarter fiscal year 2012 acquisition of ITKO is not expected to be deductible for tax purposes and was allocated to the Enterprise Solutions segment. The allocation of purchase price to acquired identifiable assets, including intangible assets, is preliminary because the final tax returns of ITKO relating to the pre-acquisition period have not yet been filed. A majority of the goodwill relating to the Company’s other fiscal year 2012 acquisitions is expected to be deductible for tax purposes and was primarily allocated to the Services segment.
During fiscal year 2011, the Company acquired 100% of the voting equity interests of Arcot Systems, Inc. (Arcot), a privately held provider of authentication and fraud prevention solutions through on-premises software or cloud services. The acquisition of Arcot adds technology for fraud prevention and authentication to the Company’s Identity and Access Management offerings. The purchase price of the acquisition was approximately $197 million.
The purchase price allocation was finalized in the second quarter of fiscal year 2012 and no material adjustments were made to amounts previously reported. The Company’s other acquisitions during fiscal year 2011 were immaterial, both individually and in the aggregate. The following represents the allocation of the purchase price and estimated useful lives to the acquired net assets of Arcot and the Company’s other fiscal year 2011 acquisitions:
(1) Includes customer relationships and trade names.
The excess purchase price over the estimated value of the net tangible and intangible assets was recorded as goodwill. Goodwill recognized in the purchase price allocation includes synergies expected to be achieved 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 Arcot is not deductible for tax purposes. A majority of the goodwill relating to the Company’s other fiscal year 2011 acquisitions is deductible for tax purposes.
The Company had approximately $24 million and $77 million of accrued acquisition-related costs at March 31, 2012 and 2011, respectively, related to purchase price amounts withheld subject to indemnification protections.
Note 3 - Discontinued Operations
In the first quarter of fiscal year 2012, the Company sold its Internet Security business for approximately $14 million and recognized a gain on disposal of approximately $23 million, including tax expense of approximately $18 million. In the first quarter of fiscal year 2011, the Company sold its Information Governance business, consisting primarily of the CA Records Manager and CA Message Manager software offerings and related professional services for approximately $19 million and recognized a loss on disposal of approximately $5 million, including tax expense of approximately $4 million.
The income (loss) from the discontinued components for fiscal years 2012, 2011 and 2010 consisted of the following:
Note 4 - Severance and Exit Costs
Fiscal Year 2012 Workforce Reduction: The fiscal year 2012 workforce reduction plan (Fiscal 2012 Plan) was announced in July 2011 and consisted of a workforce reduction of approximately 400 positions.
This action is part of the Company’s efforts to reallocate resources and divest non-strategic parts of the business. The total amounts incurred with respect to severance under the Fiscal 2012 Plan were $42 million, of which approximately $22 million is included in “Selling and marketing,” $9 million is included in “General and administrative,” $8 million is included in “Product development and enhancements,” $2 million is included in “Costs of licensing and maintenance” and $1 million is included in “Cost of professional services” in the Consolidated Statements of Operations. Actions under the Fiscal 2012 Plan were substantially completed by the end of fiscal year 2012.
Fiscal Year 2010 Restructuring Plan: The fiscal year 2010 restructuring plan (Fiscal 2010 Plan) was announced in March 2010 and consisted of a workforce reduction of approximately 1,000 positions and global facilities consolidations. These actions were intended to better align the Company’s cost structure with the skills and resources required to more effectively pursue opportunities in the marketplace and execute the Company’s long-term growth strategy. The total amounts incurred with respect to severance and facilities abandonment under the Fiscal 2010 Plan were $43 million and $2 million, respectively. Actions under the Fiscal 2010 Plan were substantially completed by the end of fiscal year 2011.
Fiscal Year 2007 Restructuring Plan: In August 2006, the Company announced the fiscal year 2007 restructuring plan (Fiscal 2007 Plan) to significantly improve the Company’s expense structure and increase its competitiveness. The Fiscal 2007 Plan consisted of a workforce reduction of approximately 3,100 employees, global facilities consolidations and other cost reductions. The total amounts incurred with respect to severance and facilities abandonment under the Fiscal 2007 Plan were $220 million and $122 million, respectively. Actions under the Fiscal 2007 Plan were substantially completed by the end of fiscal year 2010.
Accrued severance and exit costs and changes in the accruals for fiscal years 2012, 2011 and 2010 associated with the Fiscal 2012, Fiscal 2010 and Fiscal 2007 Plans were as follows:
The severance liability is included in “Accrued salaries, wages and commissions” in the Consolidated Balance Sheets. The facilities abandonment liability is included in “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” in the Consolidated Balance Sheets. Changes in estimates relating to the Fiscal 2010 Plan and Fiscal 2007 Plan are included in “Other expenses, net” in the Consolidated Statements of Operations.
Accretion and other includes accretion of the Company’s lease obligations related to facilities abandonment as well as changes in the assumptions related to future sublease income. These costs are included in “General and administrative” expense in the Consolidated Statements of Operations.
Note 5 - Marketable Securities
In the fourth quarter of fiscal year 2012, the Company liquidated a majority of its marketable securities portfolio. At March 31, 2012, the remaining marketable securities balances were less than $1 million.
For fiscal year 2012, proceeds from the sale of marketable securities and realized gains (losses), net were approximately $207 million and less than $1 million, respectively.
At March 31, 2011, available-for-sale securities consisted of the following:
At March 31, 2011, the Company did not have any debt securities that were in a continuous unrealized loss position for greater than 12 months. At March 31, 2011, $75 million of marketable securities had scheduled maturities of less than one year, and approximately $104 million had maturities of greater than one year but did not exceed three years.
For fiscal year 2011, proceeds from the sale of marketable securities and realized gains (losses), net were approximately $9 million and less than $1 million, respectively.
Note 6 - Trade Accounts Receivable
Trade accounts receivable, net represents amounts due from the Company’s customers and is presented net of allowance for doubtful accounts. 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:
Note 7 - Long-Lived Assets
Property and Equipment: A summary of property and equipment is as follows:
Capitalized Software and Other Intangible Assets: The gross carrying amounts and accumulated amortization for capitalized software and other identified intangible assets at March 31, 2012 were as follows:
The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at March 31, 2011 were as follows:
During fiscal years 2012 and 2010, the Company recorded impairment charges of approximately $9 million and $3 million, respectively, for internally developed software. No impairment charge was recorded during fiscal year 2011.
Depreciation and Amortization Expense: A summary of depreciation and amortization expense is as follows:
Based on the intangible assets recognized at March 31, 2012, the annual amortization expense over the next five fiscal years is expected to be as follows:
Goodwill: The accumulated goodwill impairment losses previously recognized by the Company totaled approximately $111 million at March 31, 2012 and 2011. These losses were recognized in fiscal years 2003 and 2002. There were no impairments recognized for fiscal years 2012, 2011 and 2010.
Goodwill activity for fiscal years 2012 and 2011 was as follows:
Note 8 - Deferred Revenue
The current and noncurrent components of “Deferred revenue (billed or collected)” at March 31, 2012 and March 31, 2011 were as follows:
Note 9 - Debt
At March 31, 2012 and 2011, the Company’s debt obligations consisted of the following:
Interest expense for fiscal years 2012, 2011 and 2010 was $64 million, $68 million and $102 million, respectively.
The maturities of outstanding debt are as follows:
Revolving Credit Facility: In April 2011, the Company repaid the outstanding balance of $250 million on the revolving credit facility that was due August 2012. In August 2011, the Company replaced the revolving credit facility due August 2012 with a new revolving credit facility due August 2016.
The maximum committed amount available under the revolving credit facility due August 2016 is $1 billion. The facility also provides the Company with an option to increase the available credit by an amount up to $500 million. This option is subject to certain conditions and the agreement of the facility lenders.
Advances under the revolving credit facility due August 2016 bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowings and are calculated according to a Base Rate or a Eurocurrency Rate, as the case may be, plus an applicable margin. The Company must also pay facility commitment fees quarterly on the full revolving credit commitment at rates dependent on the Company’s credit ratings.
At March 31, 2012, there were no outstanding borrowings under the revolving credit facility due August 2016 and, based on the Company’s credit ratings, the rates applicable to the facility at March 31, 2012 and 2011 were as follows:
The interest rate that would have applied at March 31, 2012 to a borrowing under the revolving credit facility due August 2016 would have been 3.50% for Base Rate borrowings and 1.34% for Eurocurrency Rate borrowings. The Company capitalized the transaction fees of approximately $2 million associated with the revolving credit facility due August 2016. These fees are being amortized to “Interest expense, net” in the Consolidated Statements of Operations.
Total interest expense relating to borrowings under the revolving credit facility for fiscal years 2012, 2011 and 2010 was less than $1 million, $2 million and $5 million, respectively. The revolving credit facility due August 2016 contains customary covenants for borrowings of this type, including two financial covenants: (i) for the 12 months ending each quarter-end, the ratio of consolidated debt for borrowed money to consolidated cash flow, each as defined in the revolving credit facility Credit Agreement, must not exceed 4.00 to 1.00; and (ii) for the 12 months ending at any date, the ratio of consolidated cash flow to the sum of interest payable
on, and amortization of debt discount in respect of, all consolidated debt for borrowed money, as defined in the Credit Agreement, must not be less than 3.50 to 1.00. At March 31, 2012, the Company was in compliance with all covenants.
In addition, future borrowings under the revolving credit facility require, at the date of a borrowing, that (i) no event of default shall have occurred and be continuing and (ii) the Company reaffirm the representations and warranties it made in the Credit Agreement.
Notes: The Company’s 5.375% Notes and 6.125% Senior Notes (collectively, the “Notes”) are senior unsecured obligations and rank equally in right of payment with all of the Company’s other existing and future senior unsecured indebtedness. The Notes are subordinated to any future secured indebtedness to the extent of the assets securing such future indebtedness and structurally subordinated to any indebtedness of the Company’s subsidiaries. The Company has the option to redeem the Notes at any time, at redemption prices equal to the greater of (i) the principal amount of the securities to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal thereof and interest thereon that would be due on the securities to be redeemed, discounted to the date of redemption on a semi-annual basis at the treasury rate plus 30 basis points and 20 basis points for the 5.375% Notes and the 6.125% Notes, respectively.
The maturity of the Notes may be accelerated by the holders upon certain events of default, including failure to make payments when due and failure to comply with covenants or agreements of the Company set forth in the Notes or the Indenture after notice and failure to cure.
5.375% Notes Due November 2019: During the third quarter of fiscal year 2010, the Company issued approximately $750 million principal amount of 5.375% Notes due 2019 (the 5.375% Notes). The net proceeds of the offering were approximately $738 million, after being issued at a discount and deducting expenses, underwriting fees and commissions of approximately $6 million. The discount is being amortized over the term to maturity. In the event of a change of control, each noteholder will have the right to require the Company to repurchase all or any part of such holder’s 5.375% Notes in cash at a price equal to 101% of the principal amount of such 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.
6.125% Notes Due December 2014: The Company has entered into interest rate swaps to convert $500 million of its 6.125% Notes into floating interest rate payments through December 1, 2014. Under the terms of the swaps, the Company will pay quarterly interest at an average rate of 2.88% plus the three-month London Interbank Offered Rate (LIBOR), and will receive payment at 5.625%. The LIBOR based rate is set quarterly three months prior to the date of the interest payment. The Company designated these swaps as fair value hedges and accounting for them in accordance with the shortcut method of FASB ASC Topic 815. The carrying value of the 6.125% Notes has been adjusted by an amount that is equal and offsetting to the fair value of the swaps.
Other Indebtedness: The Company has available an unsecured and uncommitted multi-currency line of credit to meet short-term working capital needs for the Company’s subsidiaries operating outside the United States and uses guarantees and letters of credit issued by financial institutions to guarantee performance on certain contracts. At each of March 31, 2012 and 2011, approximately $55 million was pledged in support of bank guarantees and other local credit lines and none of these arrangements had been drawn down by third parties.
The Company uses a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either cash deposit or borrowing positions through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both. At March 31, 2012 and 2011, the borrowing positions outstanding under this cash pooling arrangement were as follows:
(1) Included in “Accrued expenses and other current liabilities” in the Company’s Consolidated Balance Sheet.
Note 10 - Derivatives
The Company is exposed to financial market risks arising from changes in interest rates and foreign exchange rates. Changes in interest rates could affect the Company’s monetary assets and liabilities, and foreign exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted transactions. The Company enters into derivative contracts with the intent of mitigating a portion of these risks.
Interest Rate Swaps: The Company has interest rate swaps with a total notional value of $500 million, that swap a total of $500 million of its 6.125% Senior Notes due December 2014 into floating interest rate debt through December 1, 2014. These swaps are designated as fair value hedges.
At March 31, 2012, the fair value of these derivatives was an asset of approximately $27 million, of which approximately $11 million is included in “Other current assets” and approximately $16 million is included in “Other noncurrent assets, net” in the Company’s Consolidated Balance Sheet. At March 31, 2011, the fair value of these derivatives was an asset of approximately $15 million, of which approximately $11 million is included in “Other current assets” and approximately $4 million is included in “Other noncurrent assets, net” in the Company’s Consolidated Balance Sheet.
During fiscal year 2009, the Company entered into interest rate swaps with a total notional value of $250 million to hedge a portion of its variable interest rate payments on the revolving credit facility. These derivatives were designated as cash flow hedges and matured in October 2010. The effective portion of these cash flow hedges is recorded as “Accumulated other comprehensive loss” and is reclassified into “Interest expense, net” in the Company’s Consolidated Statements of Operations in the same period during which the hedged transaction affected earnings. Any ineffective portion of the cash flow hedges would have been recorded immediately to “Interest expense, net;” however, no ineffectiveness existed for fiscal years 2011 and 2010.
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 Consolidated Statements of Operations. At March 31, 2012, foreign currency contracts outstanding consisted of purchase and sales contracts with a total notional value of approximately $893 million, and durations of less than six months. These contracts included $257 million of contracts related to the fiscal year 2013 hedging program. These contracts were entered into at the end of fiscal year 2012. The net fair value of these contracts at March 31, 2012 was a net liability of approximately $2 million, of which approximately $2 million is included in “Other current assets” and approximately $4 million is included in “Accrued expenses and other current liabilities” in the Company’s Consolidated Balance Sheet.
At March 31, 2011, foreign currency contracts outstanding consisted of purchase and sales contracts with a total notional value of approximately $191 million, and durations of less than three months. The net fair value of these contracts at March 31, 2011 was approximately $6 million, of which approximately $7 million is included in “Other current assets” and approximately $1 million is included in “Accrued expenses and other current liabilities” in the Company’s Consolidated Balance Sheet.
A summary of the effect of the interest rate and foreign exchange derivatives in the Company’s Consolidated Statements of Operations is as follows:
The Company is subject to collateral security arrangements with most of its major counterparties. These arrangements require the Company to hold or post collateral when the derivative fair values exceed contractually established thresholds. The aggregate fair values of all derivative instruments under all collateralized arrangements were in a net asset position at each of March 31, 2012 and 2011. The Company posted no collateral at March 31, 2012 or 2011. Under these agreements, if the Company’s credit ratings had been downgraded one rating level, the Company would still not have been required to post collateral.
Note 11 - Fair Value Measurements
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2012 and 2011:
(1) At March 31, 2012, the Company had approximately $1,324 million and $50 million of investments in money market funds classified as “Cash and cash equivalents” and “Other noncurrent assets, net” for restricted cash amounts, respectively, in the Company’s Consolidated Balance Sheet.
(2) At March 31, 2011, the Company had approximately $1,959 million and $50 million of investments in money market funds classified as “Cash and cash equivalents” and “Other noncurrent assets, net” for restricted cash amounts, respectively, in the Company’s Consolidated Balance Sheet.
(3) See Note 5, “Marketable Securities” for additional information.
(4) See Note 10, “Derivatives” for additional information. Interest rate derivatives fair value excludes accrued interest.
At March 31, 2012 and 2011, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis at March 31, 2012 and 2011:
(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 facilities abandonment reserve was determined using the Company’s incremental borrowing rate at each of March 31, 2012 and 2011. At March 31, 2012 and 2011, the facilities abandonment reserve included approximately $16 million and $15 million, respectively, in “Accrued expenses and other current liabilities” and approximately $26 million and $37 million, respectively, in “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheets (Level 3).
Note 12 - Commitments and Contingencies
The Company leases real estate, data processing and other equipment with lease terms expiring through fiscal year 2023. Certain leases provide for renewal options and additional rentals based on escalations in operating expenses and real estate taxes.
Rental expense, including short term leases, maintenance charges and taxes on leased facilities, was approximately $168 million, $150 million and $145 million for fiscal years 2012, 2011 and 2010, respectively. Rental expense for fiscal years 2012, 2011 and 2010 included sublease income of approximately $9 million, $10 million and $18 million, respectively.
Future minimum lease payments under non-cancelable operating leases at March 31, 2012, were as follows:
The Company has additional commitments to purchase goods and services of approximately $199 million in future periods, approximately $195 million of which expires by fiscal year 2017.
Litigation: The Company, various subsidiaries, and certain current and former officers have been named as defendants in various lawsuits and claims arising in the normal course of business. The Company believes that it has meritorious defenses in connection with these lawsuits and claims, and intends to vigorously contest each of them.
Based on the Company’s experience, management believes that the damages amounts claimed in a case are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of cases. In the opinion of the Company’s management based upon information currently available to the Company, while the outcome of these lawsuits and claims is uncertain, the likely results of these lawsuits and claims against the Company, either individually or in the aggregate, are not expected 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 calculation of a range of reasonably possible loss is not possible 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 calculated. For those matters for a which such a range can be calculated, the Company estimates that in the aggregate, the reasonably possible range of loss is from zero to $30 million in addition to amounts, if any, that have been accrued for those matters.
The Company is obligated to indemnify its officers and directors under certain circumstances to the fullest extent permitted by Delaware law. As a part of that obligation, the Company has advanced and will continue to advance certain attorneys’ fees and expenses incurred by current and former officers and directors in various lawsuits and investigations.
Note 13 - Stockholders’ Equity
Stock Repurchases: In January 2012, the Company’s Board of Directors approved a $2.5 billion capital allocation program that includes an authorization for the Company to acquire up to $1.5 billion of its common stock through fiscal year 2014. Included in this amount is approximately $232 million remaining under the Company’s previously approved share repurchase authorization.
In January 2012, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a bank under which the Company will repurchase $500 million of its common stock. The total number of shares repurchased will depend on the Company’s average stock price during the period of the agreement. Under the agreement, the Company paid $500 million to the bank for an initial delivery of approximately 15 million shares and will either receive or deliver additional shares at settlement. The fair market value of approximately 15 million shares on the date received was approximately $375 million and is included in “Treasury stock” in the Company’s Consolidated Balance Sheet at March 31, 2012. The remaining $125 million is included in “Additional paid-in capital” in the Company’s Consolidated Balance Sheet at March 31, 2012. The ASR transaction is expected to be completed by the end of the first quarter of fiscal year 2013.
Including the initial ASR share delivery, the Company repurchased approximately 41 million shares of its common stock for approximately $925 million during fiscal year 2012.
Accumulated Other Comprehensive Loss: The following table summarizes, at each of the balance sheet dates, the components of the Company’s accumulated other comprehensive loss, net of income taxes:
The amount of loss reclassified from “Accumulated other comprehensive loss” into “Interest expense, net” relating to the sale of marketable securities was less than $1 million for fiscal years 2012, 2011 and 2010, respectively.
For the Company’s cash flow hedges, the amount of loss reclassified from “Accumulated other comprehensive loss” into “Interest expense, net” in the Company’s Consolidated Statements of Operations was approximately $4 million and $6 million for fiscal years 2011 and 2010, respectively.
For additional information on the Company’s marketable securities and derivatives, refer to Note 5, “Marketable Securities” and Note 10, “Derivatives,” respectively.
Dividends: In January 2012, the Board of Directors approved a $2.5 billion capital allocation program through fiscal year 2014 that includes an increase in the Company’s annual dividend from $0.20 to $1.00 per share of common stock as and when declared by the Board of Directors.
The Company’s Board of Directors declared the following dividends during fiscal years 2012 and 2011:
Year Ended March 31, 2012:
Year Ended March 31, 2011:
Rights Plan: Each outstanding share of the Company’s common stock carries a right (Right) issued under the Company’s Stockholder Protection Rights Agreement, dated November 5, 2009 (the Rights Agreement). The Rights will trade with the common stock until the Separation Time, which would occur on the next business day after: (i) the Company’s announcement that a person or group (an Acquiring Person) has become the beneficial owner of 20% or more of the Company’s outstanding common stock (other than Walter Haefner and his affiliates and associates, who are “grandfathered” under this provision so long as their aggregate ownership of common stock does not exceed the sum of 126,562,500 shares of common stock and that number of shares equal to 0.1% of the then outstanding shares of common stock); (ii) the date on which any Acquiring Person becomes the beneficial owner of more than 50% of the outstanding shares of common stock; or (iii) the tenth business day after the commencement of a tender offer or exchange offer (or such later date as the Board may from time to time determine prior to the Separation Time) that would result in an Acquiring Person owning 20% or more of the Company’s outstanding common stock. Following the Separation Time, each Right may be exercised to purchase 0.001 shares of the Company’s preferred stock at a purchase price of $100 per share. If the Separation Time occurs pursuant to an event described in (i) or (ii) above, however, each Right, other than rights held by an acquiring person, will
entitle the holder to receive, for an exercise price of $100, that number of shares of the Company’s common stock (or, in certain circumstances, cash, property or other securities) having an aggregate Market Price (as determined under the Rights Agreement) equal to two times the exercise price. The Rights will not be triggered by a Qualifying Offer, as defined in the Rights Agreement, if holders of at least 10 percent of the outstanding shares of the Company’s common stock request pursuant to the terms of the Rights Agreement that a special meeting of stockholders be convened for the purpose of exempting such offer from the Rights Agreement, and thereafter the stockholders vote at such meeting to exempt such Qualifying Offer from the Rights Agreement. The Rights, which are redeemable by the Company at $0.001 per Right, expire November 30, 2012.
Note 14 - Income from Continuing Operations Per Common Share
The following table presents basic and diluted income from continuing operations per common share information for fiscal years 2012, 2011 and 2010, respectively.
(1) Interest expense and weighted average shares outstanding adjustments relate to the Company’s 1.625% Convertible Senior Notes that were due December 2009.
For fiscal years 2012, 2011 and 2010, approximately 4 million, 6 million and 6 million restricted stock units and options to purchase common stock, respectively, were excluded from the calculation of diluted earnings per share, as their effect on net income per share was anti-dilutive during the respective periods. Weighted average restricted stock awards of 6 million, 6 million and 5 million for fiscal years 2012, 2011 and 2010, respectively, were considered participating securities in the calculation of net income available to common shareholders.
Note 15 - Stock Plans
Share-based incentive awards are provided to employees under the terms of the Company’s equity incentive compensation plans (the Plans). The Plans are administered by the Compensation Committee. Awards under the Plans may include stock options, restricted stock awards (RSAs), restricted stock units (RSUs), performance share units (PSUs), stock appreciation rights or any combination thereof. The non-employee members of the Company’s Board of Directors receive deferred stock units under a separate director compensation plan. The Company typically settles awards under employee and non-employee director compensation plans with stock held in treasury.
All Plans, with the exception of acquired companies’ stock plans, have been approved by the Company’s shareholders. The Company grants annual performance cash incentive bonuses, long-term performance bonuses, non-statutory stock options, RSAs, RSUs and other equity-based awards under the 2011 Incentive Plan and 2007 Incentive Plan and long-term performance bonuses under the 2007 Incentive Plan and 2002 Incentive Plan, as amended and restated. These plans are collectively referred to as “the Incentive Plans.” Approximately 45 million, 30 million and 45 million shares of common stock can be granted to select employees and consultants under the Company’s 2002, 2007 and 2011 Incentive Plans, respectively. Under the 2007 and 2011 Incentive Plans, no more than 10 million incentive stock options may be granted. The Incentive Plans will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the respective plan have been issued and restrictions on issued
shares have lapsed. Generally, options expire 10 years from the date of grant unless forfeited by the employee, the Compensation Committee establishes a shorter expiration period or the options are otherwise terminated. Awards to the non-employee directors are granted under the 2003 Compensation Plan for Non-Employee Directors, as amended.
Share-Based Compensation: The Company recognized share-based compensation in the following line items in the Consolidated Statements of Operations for the periods indicated:
The tax benefit from share-based incentive awards provided to employees that was recorded for book purposes exceeded that which was deductible for tax purposes by $4 million, $24 million and $23 million for fiscal years 2012, 2011 and 2010, respectively. The tax effect of this temporary difference in tax expense was recorded to “Additional paid-in capital” in the Consolidated Balance Sheets and did not affect the Company’s Consolidated Statements of Operations.
The following table summarizes information about unrecognized share-based compensation costs at March 31, 2012:
There were no capitalized share-based compensation costs at March 31, 2012, 2011 or 2010.
Stock Option Awards: Stock options are awards issued to employees that entitle the holder to purchase shares of the Company’s stock at a fixed price. Stock option awards are generally granted at an exercise price equal to the Company’s fair market value on the date of grant and with a contractual term of 10 years, unless the Compensation Committee establishes a shorter expiration period. Stock option awards generally vest one-third per year and become fully vested three years from the grant date.
At March 31, 2012, options outstanding that have vested and are expected to vest are as follows:
(1) These amounts represent the difference between the exercise price and $27.56, the closing price of the Company’s common stock on March 30, 2012, the last trading day of the Company’s fiscal year as reported on the NASDAQ Stock Market for all in-the-money options.
(2) Outstanding options expected to vest are net of estimated future forfeitures.
Additional information with respect to stock option plan activity is as follows:
The following table summarizes stock option information at March 31, 2012:
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the Company’s stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.
The weighted average estimated values of employee stock option grants, as well as the weighted average assumptions that were used in calculating such values during fiscal years 2012, 2011 and 2010 were based on estimates at the date of grant as follows:
(1) Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s traded options.
(2) The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.
(3) The expected life is the number of years the Company estimates, based primarily on historical experience, that options will be outstanding prior to exercise. For stock options granted in fiscal year 2012, the Company’s computation of expected life was determined based on the simplified method (the average of the vesting period and option term).
The following table summarizes information on shares exercised for the periods indicated:
(1) Less than $1 million.
Restricted Stock and Restricted Stock Unit Awards: Restricted Stock Awards (RSAs) are stock awards issued to employees that are subject to specified restrictions and a risk of forfeiture. RSAs entitle holders to dividends. The restrictions typically lapse over a two- or three-year period. The fair value of the awards is determined and fixed based on the closing market value of the Company’s stock on the grant date.
Restricted Stock Units (RSUs) are stock awards issued to employees that entitle the holder to receive shares of common stock as the awards vest, typically over a two- or three-year period. RSUs do not entitle holders to dividends. The fair value of the awards is determined and fixed based on the market value of the Company’s stock on the grant date reduced by the present value of dividends expected to be paid on the Company’s stock prior to vesting of the RSUs which is calculated using a risk-free interest rate.
The following table summarizes the activity of RSAs under the Plans:
The following table summarizes the activity of RSUs under the Plans:
The total vesting date fair value of RSAs and RSUs released during fiscal years 2012, 2011 and 2010 was approximately $73 million, $82 million and $64 million, respectively.
Performance Awards: The Company rewards certain senior executives with performance awards under its long-term incentive plans. These Performance Share Units (PSUs) include 1-year and 3-year performance periods for senior executives and a 1-year performance period for members of the sales team. These PSUs are granted at the conclusion of the performance period and after approval by the Compensation Committee.
The 1-year PSUs for the fiscal 2011, 2010 and 2009 incentive plan years were granted in the first quarter of fiscal years 2012, 2011 and 2010, respectively. One-third of these awards vest upon granting with the second third and final third vesting on the first and second anniversary of the grant, respectively. The table below summarizes the RSAs and RSUs granted under these PSUs:
(1) Shares granted amounted to less than 0.1 million.
The 3-year PSUs for the fiscal year 2009, 2008 and 2007 incentive plan years were granted in the first quarter of fiscal years 2012, 2011 and 2010, respectively. These awards vest immediately upon grant.
Awards were granted under the Fiscal Year 2011, 2010 and 2009 Sales Retention Equity Programs in the first quarter of fiscal years 2012, 2011 and 2010, respectively. These awards cliff vest at the end of a three year period beginning on the first anniversary of the grant date. The table below summarizes the RSAs and RSUs granted under this program:
Employee Stock Purchase Plan: The Company’s stockholders approved the Company’s 2012 Employee Stock Purchase Plan (ESPP) at the August 3, 2011 Annual Meeting of Stockholders. 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. A total of 30 million shares may be issued under the ESPP. Shares will not be issued until the end of the first offer period, which occurs at the end of the first quarter of fiscal year 2013.
Note 16 - Income Taxes
The amounts of income (loss) from continuing operations before taxes attributable to domestic and foreign operations are as follows:
Income tax expense (benefit) from continuing operations consists of the following:
The tax expense from continuing operations is reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:
Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences from continuing operations are as follows:
In management’s judgment, it is more likely than not that the total deferred tax assets, net of valuation allowance, of approximately $750 million will be realized in the foreseeable future. Realization of the net deferred tax assets is dependent on the Company’s generation of sufficient future taxable income in the related tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards, and tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustments in future periods if estimates of future taxable income change.
U.S. federal, state and foreign net operating loss carryforwards (NOLs) totaled approximately $876 million and $891 million at March 31, 2012 and 2011, respectively. The NOLs will expire as follows: $722 million between 2013 and 2032 and $154 million may be carried forward indefinitely.
A valuation allowance has been provided for deferred tax assets that are not expected to be realized. The valuation allowance decreased approximately $17 million and $12 million at March 31, 2012 and 2011, respectively. The decrease in the valuation allowance at March 31, 2012 resulted primarily from the recognition of state NOLs due to a change in forecasted state taxable income. The decrease in the valuation allowance at March 31, 2011 primarily related to the likelihood of utilization of NOLs.
No provision has been made for U.S. federal income taxes on approximately $1,999 million and $1,719 million at March 31, 2012 and 2011, respectively, of unremitted earnings of the Company’s foreign subsidiaries since the Company plans to permanently reinvest all such earnings outside the United States. It is not practicable to determine the amount of tax associated with such unremitted earnings.
At March 31, 2012, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, is approximately $641 million (of which none is classified as current). In addition, at March 31, 2012, the Company has recorded approximately $56 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions. At March 31, 2011, the gross liability for income taxes associated with uncertain tax positions, including interest and penalties, was approximately $620 million (of which approximately $26 million was classified as current). In addition, at March 31, 2011, the Company had recorded approximately $43 million of deferred tax assets for future deductions of interest and state income taxes related to these uncertain tax positions.
A roll-forward of the Company’s uncertain tax positions for all U.S. federal, state and foreign tax jurisdictions is as follows:
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $410 million and $400 million at March 31, 2012 and 2011, respectively. The gross amount of interest and penalties accrued, reported in “Total liabilities,” was approximately $118 million, $98 million and $82 million for fiscal years 2012, 2011 and 2010, respectively. The amount of interest and penalties recognized was approximately $20 million, $16 million and $12 million for fiscal years 2012, 2011 and 2010, respectively.
A number of years may elapse before a particular uncertain tax position for which the Company has not recorded a financial statement benefit is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The Company is subject to tax audits in the following major taxing jurisdictions:
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United States - federal tax years are open for years 2005 and forward;
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Germany - tax years are open for years 2007 and forward;
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Italy - tax years are open for years 2008 and forward;
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Japan- tax years are open for years 2007 and forward; and
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United Kingdom - tax years are open for years 2010 and forward.
In April 2011, the U.S. Internal Revenue Service (IRS) completed its examination of the Company’s federal income tax returns for the tax years ended March 31, 2005, 2006 and 2007 and issued a report of its findings in connection with the examination. The Company disagrees with certain proposed adjustments in the report and is vigorously disputing these matters through the IRS appellate process. While the Company believes that it has recorded reserves sufficient to cover exposures related to these issues, such that the ultimate disposition of this matter will not have a material adverse effect on the Company’s consolidated financial position or results of operations, the resolution of this matter involves uncertainties and the ultimate resolution could differ from the amounts recorded. The IRS is also examining the Company’s federal income tax returns for the tax years ended March 31, 2008, 2009 and 2010.
While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its financial statements reflect the probable outcome of uncertain tax positions. The Company may adjust these reserves, as well as any related interest or penalties, in light of changing facts and circumstances including the settlement of income tax audits and the expiration of statutes of limitations. To the extent a settlement differs from the amounts previously reserved, that difference would be generally recognized as a component of income tax expense in the period of resolution. The Company does not believe it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months, as the Company does not believe the appeals process will be concluded within the next 12 months.
Note 17 - Supplemental Statement of Cash Flows Information
Interest payments, net for fiscal years 2012, 2011 and 2010 were approximately $61 million, $72 million and $64 million, respectively. Income taxes paid for these fiscal years were approximately $420 million, $222 million and $329 million, respectively.
Non-cash financing activities for fiscal years 2012, 2011 and 2010 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 $55 million (net of approximately $26 million of income taxes withheld), $64 million (net of approximately $27 million of income taxes withheld) and $65 million (net of approximately $24 million of income taxes withheld), respectively; and discretionary stock contributions to the CA, Inc. Savings Harvest Plan of approximately $13 million, $25 million and $24 million, respectively. Non-cash financing activities for fiscal year 2010 included approximately $13 million in treasury common shares issued in connection with the Company’s previous Employee Stock Purchase Plan.
Note 18 - Segment and Geographic Information
In the first quarter of fiscal year 2012, the Company changed the internal reporting used by its Chief Executive Officer for evaluating segment performance and allocating resources. The new reporting disaggregates the Company’s operations into Mainframe Solutions, Enterprise Solutions and Services segments, and represented a change in the Company’s operating segments under ASC 280, “Segment Reporting.” Prior to fiscal year 2012, the Company reported and managed its business as a single operating segment under ASC 280.
The Company’s Mainframe Solutions and Enterprise Solutions operating segments comprise its software business organized by the nature of the Company’s software offerings and the product hierarchy in which the platform operates. The Services operating segment comprises implementation, consulting, education and training services, including those directly related to the Mainframe Solutions and Enterprise Solutions software that the Company sells to its customers.
The Company regularly enters into a single arrangement with a customer that includes mainframe solutions, enterprise solutions and services. The amount of contract revenue assigned to segments is generally based on the manner in which the proposal is made to the customer. The software product revenue is assigned to the Mainframe Solutions and Enterprise Solutions segments based on either: (1) a list price allocation method (which allocates a discount in the total contract price to the individual products in proportion to the list price of the products); (2) allocations included within internal contract approval documents; or (3) the value for individual software products as stated in the customer contract. The price for the implementation, consulting, education and training services is separately stated in the contract and these amounts of contract revenue are assigned to the Services segment. The contract value assigned to each segment is then recognized in a manner consistent with the revenue recognition policies the Company applies to the customer contract for purposes of preparing the Consolidated Financial Statements.
Segment expenses include costs that are controllable by segment managers (i.e., direct costs) and, in the case of the Mainframe Solutions and Enterprise Solutions segments, an allocation of shared and indirect costs (i.e., allocated costs). Segment-specific direct costs include a portion of selling and marketing costs, licensing and maintenance costs, product development costs, general and administrative costs and amortization of the cost of internally developed software. Allocated segment costs primarily include indirect selling and marketing costs and general and administrative costs that are not directly attributable to a specific segment. The basis for allocating shared and indirect costs between the Mainframe Solutions and Enterprise Solutions segments is dependent on the nature of the cost being allocated and is either in proportion to segment revenues or in proportion to the related direct cost category. Expenses for the Services segment consist only of direct costs and there are no allocated or indirect costs for the Services segment.
For fiscal year 2012, the Company incurred severance costs associated with the Fiscal 2012 Plan, of which $22 million, $19 million and $1 million were assigned to the Mainframe Solutions, Enterprise Solutions and Services segments, respectively. For fiscal year 2010, the Company incurred severance costs associated with the Fiscal 2010 Plan, of which $23 million, $23 million and $2 million were assigned to the Mainframe Solutions, Enterprise Solutions and Services segments, respectively. See Note 4, “Severance and Exit Costs,” for additional information.
Segment expenses do not include the following: share-based compensation expense; amortization of purchased software; amortization of other intangible assets; derivative hedging gains and losses; and severance, exit costs and related charges associated with the Company’s Fiscal 2007 Plan.
A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed.
The carrying amount of goodwill by operating segment at March 31, 2012 was approximately $4,179 million, $1,596 million and $81 million for Mainframe Solutions, Enterprise Solutions and Services, respectively.
The Company’s segment information for fiscal years 2012, 2011 and 2010 is as follows:
Year Ended March 31, 2012
Reconciliation of segment profit to income from continuing operations before income taxes for fiscal year 2012:
(1) Other unallocated operating gains, net consists of restructuring costs associated with the Company’s Fiscal 2007 Plan, foreign exchange derivative (gains) losses, and other miscellaneous costs.
Year Ended March 31, 2011
Reconciliation of segment profit to income from continuing operations before income taxes for fiscal year 2011:
(1) Other unallocated operating gains, net consists of restructuring costs associated with the Company’s Fiscal 2007 Plan, foreign exchange derivative (gains) losses, and other miscellaneous costs.
Year Ended March 31, 2010
Reconciliation of segment profit to income from continuing operations before income taxes for fiscal year 2010:
(1) Other unallocated operating gains, net consists of restructuring costs associated with the Company’s Fiscal 2007 Plan, foreign exchange derivative (gains) losses, and other miscellaneous costs.
The Company operates through branches and wholly-owned subsidiaries in 47 foreign countries located in North America (4), Europe (21), Asia/Pacific (14), South America (7), and Africa (1). Revenue is allocated to a geographic area based on the location of the sale, which is generally the customer’s country of domicile. The following table presents information about the Company by geographic area for fiscal years 2012, 2011 and 2010:
(1) Represents royalties from foreign subsidiaries determined as a percentage of certain amounts invoiced to customer.
No single customer accounted for 10% or more of total revenue for fiscal year 2012, 2011 or 2010.
Note 19 - Profit Sharing Plan
The Company maintains a defined contribution plan for the benefit of its U.S. employees. The plan is intended to be a tax qualified plan under Section 401(a) of the Internal Revenue Code, and contains a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code. Eligible participants may elect to contribute a percentage of their base compensation and the Company may make matching contributions.
The Company recognized costs associated with this plan of $44 million, $28 million and $39 million for fiscal years 2012, 2011 and 2010, respectively. Included in these amounts were discretionary contributions of stock of $29 million, $13 million and $25 million for fiscal years 2012, 2011 and 2010, respectively.
SCHEDULE valuation and qualifying accounts SCHEDULE II
CA, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(1) Write-offs of amounts against allowance provided