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CA Technologies Reports Third Quarter Fiscal Year 2013 Results

CA Technologies (NASDAQ:CA) today reported financial results for its third quarter of fiscal year 2013, ended December 31, 2012.

FINANCIAL OVERVIEW

  Third Quarter FY13 vs. FY12
(in millions, except share data) FY13   FY12***   % Change   % Change CC**
Revenue $ 1,195   $ 1,263   (5 %)   (4 %)
GAAP Income from continuing operations $ 251   $ 263   (5 %)   (3 %)
Non-GAAP Income from continuing operations* $ 288   $ 319   (10 %)   (8 %)
GAAP Diluted EPS from continuing operations $ 0.55   $ 0.54   2 %   4 %
Non-GAAP Diluted EPS from continuing operations* $ 0.63   $ 0.65   (3 %)   (2 %)
Cash Flow from continuing operations   $ 566   $ 396   43 %   42 %

* Non-GAAP income and earnings per share are non-GAAP financial measures, as noted in the discussion of non-GAAP results below. A reconciliation of non-GAAP financial measures to their comparable GAAP financial measures is included in the tables following this news release.

**CC: Constant Currency

*** Third Quarter FY12 included a single license payment for $39 million in connection with a 2009 litigation settlement. In the third quarter of fiscal year 2012, the payment added $39 million in our Mainframe Solutions segment and in the software fees and other line of revenue; approximately 2 percentage points to GAAP and non-GAAP operating margin; GAAP and non-GAAP operating income of $36 million; GAAP and non-GAAP EPS of $0.05; and cash flow from continuing operations of $39 million.

EXECUTIVE COMMENTARY

“I am very pleased to be a part of the CA Technologies team,” said CA Technologies CEO Mike Gregoire. “While we are encouraged by improvements we saw in the business during our third quarter, including increased demand for our Nimsoft, Infrastructure Management and Service Virtualization offerings, we know that we need to do more to accelerate innovation, gain market share and better differentiate our solutions in the marketplace.

“We also know there is room for improvement in our cost of sales and in the speed and intensity with which we pursue our objectives,” he continued. “Over the next few months we will perform a detailed diagnostic of where we are, and lay out a plan on how to achieve our strategic and financial goals.”

REVENUE AND BOOKINGS

About 62 percent of the Company’s third quarter fiscal year 2013 revenue came from North America, while 38 percent came from International operations.

Revenue year-over-year:

  • Total revenue was $1.195 billion, down 4 percent in constant currency and 5 percent as reported. A $39 million single license payment the Company received in the third quarter of fiscal year 2012 added 3 percentage points to the decrease in the third quarter of fiscal year 2013 revenue.
  • Total revenue backlog was $7.488 billion, down 8 percent in constant currency and 7 percent as reported. The current portion of revenue backlog was $3.495 billion, down 2 percent in constant currency and as reported. The Company continues to see a drop in backlog as contracts come off the balance sheet prior to an expected increase in the fiscal year 2014 renewals.
  • North America revenue was $745 million, down 6 percent in constant currency and as reported. The single license payment contributed 5 percentage points to this decrease.
  • International revenue was $450 million, down 2 percent in constant currency and 5 percent as reported.

Bookings year-over-year:

  • Total bookings in the third quarter were $1.261 billion, down 2 percent in constant currency and as reported. The single license payment in the third quarter of fiscal year 2012 added 3 percentage points of decline to fiscal year 2013 total bookings. The Company executed a total of 18 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $477 million. During the third quarter of fiscal year 2012, the Company executed a total of 12 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $452 million.
  • The weighted average duration of subscription and maintenance bookings for the quarter was 2.97 years, compared with 3.53 years for the same period in fiscal year 2012.
  • North America bookings were $685 million, down 11 percent in constant currency and as reported. The single license payment in the third quarter of fiscal year 2012 added 5 percentage points of decline from the year ago period.
  • International bookings were $576 million, up 13 percent in constant currency and 11 percent as reported.

EXPENSES AND MARGIN

Year-over-year GAAP results:

  • Operating expenses, before interest and income taxes, were $825 million, down 2 percent in constant currency and 3 percent as reported.
  • Operating income, before interest and income taxes, was $370 million, down 10 percent in constant currency and as reported.
  • Operating margin was 31 percent, down 2 percentage points from the prior year period.

Year-over-year non-GAAP results exclude purchased software and other intangibles amortization, share-based compensation, and certain other gains and losses. The results also include gains and losses on hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter.

  • Operating expenses, before interest and income taxes, were $767 million, down 1 percent in constant currency and 3 percent as reported. The decrease in operating expenses was primarily due to lower general and administrative, sales and marketing and product development costs, offset in part by higher severance costs.
  • Operating income, before interest and income taxes, was $428 million, down 9 percent in constant currency and 10 percent as reported.
  • Operating margin was 36 percent, down 2 percentage points from the prior year period.

The single license payment added $0.05 to GAAP and non-GAAP earnings per share and 2 percentage points to GAAP and non-GAAP operating margin in the third quarter of fiscal year 2012.

For the third quarter of fiscal year 2013, the Company’s effective GAAP tax rate was 29.9 percent, compared with 34.9 percent in the prior year period. The Company’s effective non-GAAP tax rate was 30.7 percent, compared with 31.5 percent in the prior year period.

SEGMENT INFORMATION

  • Mainframe Solutions revenue was $622 million, down 8 percent in constant currency and 9 percent as reported. The single license payment in the third quarter of fiscal 2012 contributed 6 percentage points to the year-over-year decline. Operating expense was $248 million and operating profit was $374 million. Operating margin was 60 percent, up 1 percentage point from a year ago.
  • Enterprise Solutions revenue was $476 million, flat in constant currency and as reported. Operating expense was $426 million and operating profit was $50 million. Operating margin was 11 percent, down 1 percentage point from a year ago.
  • Services revenue was $97 million, down 5 percent in constant currency and 6 percent as reported. Operating expense was $93 million and operating profit was $4 million. Operating margin was 4 percent, down 7 percentage points from a year ago.

CASH FLOW FROM CONTINUING OPERATIONS

Cash flow from continuing operations in the third quarter was $566 million, compared with $396 million in the prior year. The quarter included an increase of $150 million in single installment payments year-over-year, primarily attributable to one single installment payment of more than $100 million.

CAPITAL STRUCTURE

  • Cash, cash equivalents and investments at Dec. 31, 2012 were $2.548 billion.
  • With $1.301 billion in total debt outstanding and a borrowing position of $140 million on the Company’s notional pooling arrangement, the Company’s net cash, cash equivalents and investments were $1.107 billion.
  • During the quarter, the Company repurchased 3.4 million shares in the market for approximately $75 million.
  • The Company is currently authorized to repurchase an additional $579 million of common stock through fiscal year 2014.
  • The Company’s outstanding share count at Dec. 31, 2012 was 451 million.
  • During the quarter, the Company distributed $114 million in dividends.

BUSINESS HIGHLIGHTS

During the third quarter, the Company announced:

  • Michael P. Gregoire’s election as the Company’s chief executive officer and addition to the Company’s Board of Directors, and Bill McCracken’s retirement as chief executive officer and Board member, effective January 7, 2013.
  • Adoption of a Stockholder Protection Rights Agreement to replace the Company’s existing Rights Agreement, which expired on November 30, 2012.

OUTLOOK FOR FISCAL YEAR 2013 Update

The Company reaffirmed its revenue and GAAP and non-GAAP earnings per share from continuing operations and cash flow from continuing operations guidance for fiscal year 2013. The following guidance consists of "forward-looking statements" (as defined below).

The Company expects the following:

  • Total revenue growth in a range of negative 3 percent to negative 1 percent in constant currency. At Dec. 31, 2012 exchange rates, this translates to reported revenue of $4.58 billion to $4.67 billion.
  • GAAP diluted earnings per share from continuing operations growth in constant currency in a range of 8 percent to 12 percent. At Dec. 31, 2012 exchange rates, this translates to GAAP reported diluted earnings per share of $2.00 to $2.08.
  • Non-GAAP diluted earnings per share from continuing operations growth in constant currency in a range of 6 percent to 10 percent. At Dec. 31, 2012 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.36 to $2.44.
  • Cash flow from continuing operations growth in a range of negative 8 percent to negative 4 percent in constant currency. At Dec. 31, 2012 exchange rates, this translates to reported cash flow from continuing operations of $1.39 billion to $1.45 billion.

This outlook also assumes no material acquisitions and a partial currency hedge of operating income. The Company continues to expect a full-year GAAP operating margin of 30 percent and a non-GAAP operating margin of 36 percent. The Company also continues to expect an effective full-year GAAP and non-GAAP tax rate to come in closer to the high-end of the 30 to 31 percent range provided at the outset of the fiscal year.

The Company anticipates approximately 449 million shares outstanding at fiscal year 2013 year end and weighted average diluted shares outstanding of approximately 457 million for the fiscal year.

Webcast

This news release and the accompanying tables should be read in conjunction with additional content that is available on the Company’s website, including a supplemental financial package, as well as a webcast that the Company will host at 5 p.m. ET today to discuss its unaudited third quarter results. The webcast will be archived on the website. Individuals can access the webcast, as well as this press release and supplemental financial information, at http://ca.com/invest or listen to the call at 1-877-561-2748. The international participant number is 1-720-545-0044.

About CA Technologies

CA Technologies (NASDAQ: CA) provides IT management solutions that help customers manage and secure complex IT environments to support agile business services. Organizations leverage CA Technologies software and SaaS solutions to accelerate innovation, transform infrastructure and secure data and identities, from the data center to the cloud. Learn more about CA Technologies at www.ca.com.

Follow CA Technologies

Non-GAAP Financial Measures

This news release, the accompanying tables and the additional content that is available on the Company's website, including a supplemental financial package, includes certain financial measures that exclude the impact of certain items and therefore have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP). Non-GAAP metrics for operating expenses, operating income, operating margin, income from continuing operations and diluted earnings per share exclude the following items: non-cash amortization of purchased software and other intangibles, share-based compensation, fiscal year 2007 restructuring costs and certain other gains and losses, which includes the gains and losses since inception of hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter. In fiscal year 2011, non-GAAP income also excludes recoveries and certain costs associated with derivative litigation matters. The effective tax rate on GAAP and non-GAAP income from operations is the Company's provision for income taxes expressed as a percentage of pre-tax GAAP and non-GAAP income from continuing operations, respectively. These tax rates are determined based on an estimated effective full year tax rate, with the effective tax rate for GAAP generally including the impact of discrete items in the period such items arise and the effective tax rate for non-GAAP generally allocating the impact of discrete items pro rata to the fiscal year's remaining reporting periods. Adjusted cash flow from operations excludes restructuring and other payments. Free cash flow excludes purchases of property, equipment and capitalized software development costs. We present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than U.S. dollars are converted into U.S. dollars at the exchange rate in effect on March 31, 2012, which was the last day of our prior fiscal year. Constant currency excludes the impacts from the Company's hedging program. The constant currency calculation for annualized subscription and maintenance bookings is calculated by dividing the subscription and maintenance bookings in constant currency by the weighted average subscription and maintenance duration in years. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. By excluding these items, non-GAAP financial measures facilitate management's internal comparisons to the Company's historical operating results and cash flows, to competitors' operating results and cash flows, and to estimates made by securities analysts. Management uses these non-GAAP financial measures internally to evaluate its performance and they are key variables in determining management incentive compensation. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making. In addition, the Company has historically reported similar non-GAAP financial measures to its investors and believes that the inclusion of comparative numbers provides consistency in its financial reporting. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this news release to their most directly comparable GAAP financial measures, which are attached to this news release.

Cautionary Statement Regarding Forward-Looking Statements

The declaration and payment of future dividends is subject to the determination of the Company's Board of Directors, in its sole discretion, after considering various factors, including the Company's financial condition, historical and forecast operating results, and available cash flow, as well as any applicable laws and contractual covenants and any other relevant factors. The Company's practice regarding payment of dividends may be modified at any time and from time to time.

Repurchases under the Company's stock repurchase program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through solicited or unsolicited privately negotiated transactions or otherwise. The program, which is authorized through the fiscal year ending March 31, 2014, does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company's discretion.

Certain statements in this communication (such as statements containing the words "believes," "plans," "anticipates," "expects," "estimates," "targets" and similar expressions) constitute "forward-looking statements" that are based upon the beliefs of, and assumptions made by, the Company's management, as well as information currently available to management. These forward-looking statements reflect the Company's current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company's strategy by, among other things, effectively rebalancing the Company's sales force to increase penetration in growth markets and with large enterprises that have not historically been significant customers, enabling the sales force to sell new products, improving the Company's brand in the marketplace and ensuring the Company's set of cloud computing, Software-as-a-Service and other new offerings address the needs of a rapidly changing market, while not adversely affecting the demand for the Company's traditional products or its profitability; global economic factors or political events beyond the Company's control; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business sector; the failure to adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the failure to expand partner programs; the ability to retain and attract adequate qualified personnel; the ability to integrate acquired companies and products into existing businesses; the ability to adequately manage and evolve financial reporting and managerial systems and processes; the ability of the Company's products to remain compatible with ever-changing operating environments; breaches of the Company's software products and the Company's and customers' data centers and IT environments; discovery of errors in the Company's software and potential product liability claims; the failure to protect the Company's intellectual property rights and source code; risks associated with sales to government customers; access to software licensed from third parties; risks associated with the use of software from open source code sources; access to third-party code and specifications for the development of code; third-party claims of intellectual property infringement or royalty payments; fluctuations in the number, terms and duration of the Company's license agreements as well as the timing of orders from customers and channel partners; the failure to renew large license transactions on a satisfactory basis; changes in market conditions or the Company's credit ratings; fluctuations in foreign currencies; the failure to effectively execute the Company's workforce reductions; successful outsourcing of various functions to third parties; events or circumstances that would require us to record a goodwill impairment charge; potential tax liabilities; acquisition opportunities that may or may not arise; and other factors described more fully in the Company's filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described herein as believed, planned, anticipated, expected, estimated, targeted or similarly expressed in a forward-looking manner. The Company assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Copyright © 2013 CA, Inc. All Rights Reserved. One CA Plaza, Islandia, N.Y. 11749. All other trademarks, trade names, service marks, and logos referenced herein belong to their respective companies.

Table 1
CA Technologies
Consolidated Statements of Operations
(unaudited)
(in millions, except per share amounts)
       
Three Months Ended Nine Months Ended

December 31,

December 31,

Revenue

2012

2011

2012

2011

Subscription and maintenance revenue $ 966 $ 1,006 $ 2,906 $ 3,035
Professional services 97 103 283 289
Software fees and other   132   154   303     302
Total revenue $ 1,195 $ 1,263 $ 3,492   $ 3,626
Expenses
Costs of licensing and maintenance $ 72 $ 69 $ 210 $ 207
Cost of professional services 92 91 266 270
Amortization of capitalized software costs 66 59 197 164
Selling and marketing 331 342 953 1,038
General and administrative 96 113 304 331
Product development and enhancements 120 126 368 384
Depreciation and amortization of other intangible assets 39 44 120 134
Other (gains) expenses, net   9   6   (14 )   10
Total expenses before interest and income taxes $ 825 $ 850 $ 2,404   $ 2,538
Income from continuing operations before interest and income taxes $ 370 $ 413 $ 1,088 $ 1,088
Interest expense, net   12   9   33     24
Income from continuing operations before income taxes $ 358 $ 404 $ 1,055 $ 1,064
Income tax expense   107   141   342     337
Income from continuing operations $ 251 $ 263 $ 713 $ 727
Income from discontinued operations, net of income taxes   -   -   -     13
Net income $ 251 $ 263 $ 713   $ 740
 
Basic income per share
Income from continuing operations $ 0.55 $ 0.54 $ 1.54 $ 1.46
Income from discontinued operations   -   -   -     0.03
Net income $ 0.55 $ 0.54 $ 1.54   $ 1.49
Basic weighted average shares used in computation 452 483 458 492
 
Diluted income per share
Income from continuing operations $ 0.55 $ 0.54 $ 1.53 $ 1.46
Income from discontinued operations   -   -   -     0.02
Net income $ 0.55 $ 0.54 $ 1.53   $ 1.48
Diluted weighted average shares used in computation 453 484 460 493
 

Table 2
CA Technologies
Condensed Consolidated Balance Sheets
(in millions)
   
December 31, March 31,
2012 2012
(unaudited)
Cash and cash equivalents $ 2,353 $ 2,679
Short-term investments 195 -
Trade accounts receivable, net 786 902
Deferred income taxes 326 231
Other current assets   143     153  
Total current assets $ 3,803 $ 3,965
 
Property and equipment, net $ 339 $ 386
Goodwill 5,856 5,856
Capitalized software and other intangible assets, net 1,296 1,389
Deferred income taxes 21 151
Other noncurrent assets, net   243     250  
Total assets $ 11,558   $ 11,997  
 
Current portion of long-term debt $ 19 $ 14
Deferred revenue (billed or collected) 2,234 2,658
Deferred income taxes 14 14
Other current liabilities   1,074     1,065  
Total current liabilities $ 3,341 $ 3,751
 
Long-term debt, net of current portion $ 1,282 $ 1,287
Deferred income taxes 44 44
Deferred revenue (billed or collected) 957 972
Other noncurrent liabilities   521     546  
Total liabilities $ 6,145   $ 6,600  
 
Common stock $ 59 $ 59
Additional paid-in capital 3,582 3,491
Retained earnings 5,229 4,865
Accumulated other comprehensive loss (119 ) (108 )
Treasury stock   (3,338 )   (2,910 )
Total stockholders’ equity $ 5,413   $ 5,397  
Total liabilities and stockholders’ equity $ 11,558   $ 11,997  
 

Table 3
CA Technologies
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in millions)
 
Three Months Ended

December 31,

2012

 

2011

Operating activities from continuing operations:
Income from continuing operations $ 251 $ 263
 

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

Depreciation and amortization 105 103
Provision for deferred income taxes 48 (45 )
Provision for bad debts 1 (3 )
Share-based compensation expense 18 20
Asset impairments and other non-cash items 3 6
Foreign currency transaction gains - (3 )
Changes in other operating assets and liabilities, net of effect of acquisitions:
Increase in trade accounts receivable (201 ) (243 )
Increase in deferred revenue 257 94
Increase in taxes payable, net 57 182
Decrease in accounts payable, accrued expenses and other (48 ) (44 )
Increase in accrued salaries, wages and commissions 47 26
Changes in other operating assets and liabilities   28     40  
Net cash provided by operating activities - continuing operations $ 566   $ 396  
Investing activities from continuing operations:
Acquisitions of businesses, net of cash acquired, and purchased software $ (6 ) $ (4 )
Purchases of property and equipment (9 ) (13 )
Capitalized software development costs (44 ) (41 )
Purchases of investments, net   (29 )   (2 )
Net cash used in investing activities - continuing operations $ (88 ) $ (60 )
Financing activities from continuing operations:
Dividends paid $ (114 ) $ (25 )
Purchases of common stock (77 ) (200 )
Debt (repayments) borrowings, net (31 ) 58
Exercise of common stock options and other   -     1  
Net cash used in financing activities - continuing operations $ (222 ) $ (166 )
Net change in cash and cash equivalents before effect of exchange rate

changes on cash - continuing operations

$ 256   $ 170  
Effect of exchange rate changes on cash $ 11 $ (11 )
Cash provided by (used in) operating activities - discontinued operations   -     (4 )
Increase in cash and cash equivalents $ 267 $ 155
Cash and cash equivalents at beginning of period $ 2,086   $ 2,203  
Cash and cash equivalents at end of period $ 2,353   $ 2,358  
 

Table 4
CA Technologies
Operating Segments
(unaudited)
(dollars in millions)
                 
Three Months Ended December 31, 2012 Nine Months Ended December 31, 2012
Mainframe Solutions (1) Enterprise Solutions (1)

Services(1)

Total Mainframe Solutions (1) Enterprise Solutions (1)

Services(1)

Total
 
Revenue (2) $ 622 $ 476 $ 97 $ 1,195 $ 1,869 $ 1,340 $ 283 $ 3,492
Expenses (3)   248     426     93     767     755     1,195     269     2,219  
Segment profit $ 374   $ 50   $ 4   $ 428   $ 1,114   $ 145   $ 14   $ 1,273  
Segment operating margin 60 % 11 % 4 % 36 % 60 % 11 % 5 % 36 %
 
Segment profit $ 428 $ 1,273
Less:
Purchased software amortization 26 80
Other intangibles amortization 14 41
Share-based compensation expense 18 62
Other (gains) expenses, net (4) - 2
Interest expense, net   12     33  
Income from continuing operations before income taxes $ 358   $ 1,055  
 
Three Months Ended December 31, 2011 Nine Months Ended December 31, 2011
Mainframe Solutions (1) Enterprise Solutions (1)

Services(1)

Total Mainframe Solutions (1) Enterprise Solutions (1)

Services(1)

Total
 
Revenue (2) $ 682 $ 478 $ 103 $ 1,263 $ 1,983 $ 1,354 $ 289 $ 3,626
Expenses (3)   277     419     92     788     861     1,223     272     2,356  
Segment profit $ 405   $ 59   $ 11   $ 475   $ 1,122   $ 131   $ 17   $ 1,270  
Segment operating margin 59 % 12 % 11 % 38 % 57 % 10 % 6 % 35 %
 
Segment profit $ 475 $ 1,270
Less:
Purchased software amortization 27 76
Other intangibles amortization 16 50
Share-based compensation expense 20 61
Other (gains) expenses, net (4) (1 ) (5 )
Interest expense, net   9     24  
Income from continuing operations before income taxes $ 404   $ 1,064  
 
 
(1) • Mainframe Solutions – Our Mainframe Solutions segment addresses the mainframe market and is focused on making significant investments in order to be innovative in key management disciplines across our broad portfolio of products. Ongoing development is guided by customer needs, our cross-enterprise management philosophy and our Mainframe 2.0 strategy, which offers management capabilities designed to appeal to the next generation of mainframe staff while also offering productivity improvements to today’s mainframe experts. Our mainframe business assists customers by addressing three major challenges: lowering costs, providing high service levels by sustaining critical workforce skills and increasing agility to help deliver on business goals.

 

• Enterprise Solutions – Our Enterprise Solutions segment includes products that operate on non-mainframe platforms, such as service assurance, security (identity and access management), service and portfolio management, virtualization and service automation, SaaS, and cloud offerings. Our offerings help customers address their regulatory compliance demands, privacy needs, and internal security policies. Enterprise Solutions also focuses on delivering growth to the Company in the form of new customer acquisitions and revenue, while leveraging non-traditional routes-to-market and delivery models.

 

• Services – Our Services segment offers implementation, consulting, education and training services to customers, which is intended to promote a seamless customer experience and to increase the value that customers realize from our solutions.

 
(2) We regularly enter into a single arrangement with a customer that includes Mainframe Solutions segment software products, Enterprise Solutions segment software products 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 product); (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 we apply to the customer contract for purposes of preparing the Condensed Consolidated Financial Statements.
 
(3) 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.
 
(4) Other (gains) expenses, net consists of other unallocated costs including foreign exchange derivative (gains) losses, and other miscellaneous costs.
 

Table 5
CA Technologies
Constant Currency Summary
(unaudited)
(dollars in millions)
                 
Three Months Ended December 31, Nine Months Ended December 31,
2012 2011

% Increase
(Decrease)
in $ US

% Increase
(Decrease)
in Constant
Currency (1)

2012 2011

% Increase
(Decrease)
in $ US

% Increase
(Decrease)
in Constant
Currency (1)

 
Bookings $ 1,261 $ 1,284 (2 %) (2 %) $ 2,651 $ 3,121 (15 %) (14 %)
 
Revenue:
North America $ 745 $ 791 (6 %) (6 %) $ 2,201 $ 2,242 (2 %) (1 %)
International   450   472 (5 %) (2 %)   1,291   1,384 (7 %) (1 %)
Total revenue $ 1,195 $ 1,263 (5 %) (4 %) $ 3,492 $ 3,626 (4 %) (1 %)
 
Revenue:
Subscription and maintenance $ 966 $ 1,006 (4 %) (3 %) $ 2,906 $ 3,035 (4 %) (2 %)
Professional services 97 103 (6 %) (5 %) 283 289 (2 %) 1 %
Software fees and other   132   154 (14 %) (14 %)   303   302 0 % 1 %
Total revenue $ 1,195 $ 1,263 (5 %) (4 %) $ 3,492 $ 3,626 (4 %) (1 %)
 
Segment Revenue:
Mainframe solutions $ 622 $ 682 (9 %) (8 %) $ 1,869 $ 1,983 (6 %) (3 %)
Enterprise solutions 476 478 0 % 0 % 1,340 1,354 (1 %) 1 %
Services 97 103 (6 %) (5 %) 283 289 (2 %) 1 %
 
Total expenses before interest and income taxes:
Total non-GAAP (2) $ 767 $ 788 (3 %) (1 %) $ 2,219 $ 2,356 (6 %) (3 %)
Total GAAP 825 850 (3 %) (2 %) 2,404 2,538 (5 %) (3 %)
 
 
(1) Constant currency information is presented to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than US dollars are converted into US dollars at the exchange rate in effect on March 31, 2012, which was the last day of our prior fiscal year. Constant currency excludes the impacts from the Company's hedging program.
 
(2) Refer to Table 7 for a reconciliation of total expenses before interest and income taxes to total non-GAAP operating expenses.
 
Certain non-material differences may arise versus actual from impact of rounding.
 

Table 6
CA Technologies
Reconciliation of Select GAAP Measures to Non-GAAP Measures
(unaudited)
(dollars in millions)
         
Three Months Ended Nine Months Ended

December 31,

December 31,

2012

2011

2012

2011

GAAP net income $ 251 $ 263 $ 713 $ 740
GAAP income from discontinued operations, net of income taxes   -     -     -     (13 )
GAAP income from continuing operations $ 251 $ 263 $ 713 $ 727
GAAP income tax expense 107 141 342 337
Interest expense, net   12     9     33     24  
GAAP income from continuing operations before interest and income taxes $ 370   $ 413   $ 1,088   $ 1,088  
GAAP operating margin (% of revenue) (1) 31 % 33 % 31 % 30 %
 
Non-GAAP adjustments to expenses:
Costs of licensing and maintenance(2) $ 1 $ - $ 2 $ 2
Cost of professional services(2) 1 1 3 3
Amortization of capitalized software costs(3) 26 27 80 76
Selling and marketing(2) 6 9 24 25
General and administrative(2) 6 5 21 17
Product development and enhancements(2) 4 5 12 14
Depreciation and amortization of other intangible assets(4) 14 16 41 50
Other (gains) expenses, net (5)   -     (1 )   2     (5 )
Total Non-GAAP adjustment to operating expenses $ 58   $ 62   $ 185   $ 182  
Non-GAAP income from continuing operations before interest and income taxes $ 428 $ 475 $ 1,273 $ 1,270
Non-GAAP operating margin (% of revenue) (6) 36 % 38 % 36 % 35 %
 
Interest expense, net 12 9 33 24
GAAP income tax expense 107 141 342 337
Non-GAAP adjustment to income tax expense(7)   21     6     39     56  
Non-GAAP income tax expense $ 128   $ 147   $ 381   $ 393  
Non-GAAP income from continuing operations $ 288   $ 319   $ 859   $ 853  
 
 
(1) GAAP operating margin is calculated by dividing GAAP income from continuing operations before interest and income taxes by total revenue (refer to Table 1 for total revenue).
 
(2) Non-GAAP adjustment consists of share-based compensation.
 
(3) Non-GAAP adjustment consists of purchased software amortization.
 
(4) Non-GAAP adjustment consists of other intangibles amortization.
 
(5) Non-GAAP adjustment consists of other miscellaneous costs including gains and losses since inception of hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter.
 
(6) Non-GAAP operating margin is calculated by dividing non-GAAP income from continuing operations before interest and income taxes by total revenue (refer to Table 1 for total revenue).
 
(7) The full year non-GAAP income tax expense is different from GAAP income tax expense because of the difference in non-GAAP income from continuing operations before income taxes. On an interim basis, this difference would also include a difference in the impact of discrete and permanent items where for GAAP purposes the effect is recorded in the period such items arise, but for non-GAAP such items are recorded pro rata to the fiscal year's remaining reporting periods.
 
Refer to the discussion of non-GAAP financial measures included in the accompanying press release for additional information.
 
Certain non-material differences may arise versus actual from impact of rounding.
 

Table 7
CA Technologies
Reconciliation of GAAP to Non-GAAP
Operating Expenses and Diluted Earnings per Share
(unaudited)
(in millions, except per share amounts)
         
Three Months Ended Nine Months Ended

December 31,

December 31,

Operating Expenses

2012

2011

2012

2011

 
Total expenses before interest and income taxes $ 825 $ 850 $ 2,404 $ 2,538
 
Non-GAAP operating adjustments:
Purchased software amortization 26 27 80 76
Other intangibles amortization 14 16 41 50
Share-based compensation 18 20 62 61
Other (gains) expenses, net (1)   -     (1 )   2   (5 )
Total non-GAAP operating adjustment $ 58   $ 62   $ 185 $ 182  
 
Total non-GAAP operating expenses $ 767   $ 788   $ 2,219 $ 2,356  
 
 
Three Months Ended Nine Months Ended

December 31,

December 31,

Diluted EPS from Continuing Operations

2012

2011

2012

2011

 
GAAP diluted EPS from continuing operations $ 0.55 $ 0.54 $ 1.53 $ 1.46
 
Non-GAAP adjustments, net of taxes:
Purchased software and other intangibles amortization 0.06 0.06 0.18 0.18
Share-based compensation 0.03 0.03 0.09 0.08
Other (gains) expenses, net (1) - - - -
Non-GAAP effective tax rate adjustments (2)   (0.01 )   0.02     0.05   (0.01 )
 
Non-GAAP diluted EPS from continuing operations $ 0.63   $ 0.65   $ 1.85 $ 1.71  
 
(1) Non-GAAP adjustment consists of other miscellaneous costs including gains and losses since inception of hedges that mature within the quarter, but exclude gains and losses of hedges that do not mature within the quarter.
 
(2) The non-GAAP effective tax rate is equal to the full year GAAP effective tax rate, therefore no adjustment is required on an annual basis. On an interim basis, the difference in non-GAAP income tax expense and GAAP income tax expense relates to the difference in non-GAAP income from continuing operations before income taxes, and includes a difference in the impact of discrete and permanent items where for GAAP purposes, the effect is recorded in the period such items arise but for non-GAAP purposes, such items are recorded pro rata to the fiscal year's remaining reporting periods.
 
Refer to the discussion of non-GAAP financial measures included in the accompanying press release for additional information.
 
Certain non-material differences may arise versus actual from impact of rounding.
 

Table 8
CA Technologies
Effective Tax Rate Reconciliation
GAAP and Non-GAAP
(unaudited)
(dollars in millions)
         
Three Months Ended Nine Months Ended

December 31, 2012

December 31, 2012

GAAP

Non-GAAP

GAAP

Non-GAAP

 
Income from continuing operations before interest and income taxes (1) $ 370 $ 428 $ 1,088 $ 1,273
Interest expense, net 12 12 33 33
Income from continuing operations before income taxes $ 358 $ 416 $ 1,055 $ 1,240
 
Statutory tax rate 35% 35% 35% 35%
 
Tax at statutory rate $ 125 $ 146 $ 369 $ 434
Adjustments for discrete and permanent items (2) (18) (18) (27) (53)
Total tax expense $ 107 $ 128 $ 342 $ 381
 
Effective tax rate (3) 29.9% 30.7% 32.4% 30.7%
 
Three Months Ended Nine Months Ended

December 31, 2011

December 31, 2011

GAAP

Non-GAAP

GAAP

Non-GAAP

 
Income from continuing operations before interest and income taxes (1) $ 413 $ 475 $ 1,088 $ 1,270
Interest expense, net 9 9 24 24
Income from continuing operations before income taxes $ 404 $ 466 $ 1,064 $ 1,246
 
Statutory tax rate 35% 35% 35% 35%
 
Tax at statutory rate $ 141 $ 163 $ 372 $ 436
Adjustments for discrete and permanent items (2) - (16) (35) (43)
Total tax expense $ 141 $ 147 $ 337 $ 393
 
Effective tax rate (3) 34.9% 31.5% 31.7% 31.5%
 
 
(1) Refer to Table 6 for a reconciliation of income from continuing operations before interest and income taxes on a GAAP basis to income from continuing operations before interest and income taxes on a non-GAAP basis.
 
(2) The effective tax rate for GAAP generally includes the impact of discrete and permanent items in the period such items arise, whereas the effective tax rate for non-GAAP generally allocates the impact of such items pro rata to the fiscal year's remaining reporting periods.
 
(3) The effective tax rate on GAAP and non-GAAP income from continuing operations is the Company's provision for income taxes expressed as a percentage of GAAP and non-GAAP income from continuing operations before income taxes, respectively. The non-GAAP effective tax rate is equal to the full year GAAP effective tax rate. On an interim basis, the effective tax rates are determined based on an estimated effective full year tax rate after the adjustments for the impacts of certain discrete items (such as changes in tax rates, reconciliations of tax returns to tax provisions and resolutions of tax contingencies).
 
Refer to the discussion of non-GAAP financial measures included in the accompanying press release for additional information.
 
Certain non-material differences may arise versus actual from impact of rounding.
 

Table 9
CA Technologies
Reconciliation of Projected GAAP Earnings per Share to
Projected Non-GAAP Earnings per Share
(unaudited)
     
Fiscal Year Ending

Projected Diluted EPS from Continuing Operations

March 31, 2013

 
Projected GAAP diluted EPS from continuing operations range $ 2.00 to $ 2.08
 
Non-GAAP adjustments, net of taxes:
Purchased software and other intangibles amortization 0.24 0.24
Share-based compensation   0.12   0.12
 
Projected non-GAAP diluted EPS from continuing operations range $ 2.36 to $ 2.44
 

Refer to the discussion of non-GAAP financial measures included in the accompanying press release for additional information.

Table 10
CA Technologies
Reconciliation of Projected GAAP Operating Margin to
Projected Non-GAAP Operating Margin
(unaudited)
 
Fiscal Year Ending

Projected Operating Margin

March 31, 2013

 
Projected GAAP operating margin 30%
 
Non-GAAP adjustments, net of taxes:
Purchased software and other intangibles amortization 4%
Share-based compensation 2%
 
Projected non-GAAP operating margin 36%
 

Refer to the discussion of non-GAAP financial measures included in the accompanying press release for additional information.

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