UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

CA, Inc.

(Exact name of registrant as specified in its charter)

1-800-225-5224

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ü  Yes        No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.      Yes   ü  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ü  Yes        No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ü  Yes        No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes   ü  No

 

The aggregate market value of the common stock held by non-affiliates of the registrant as of September 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $8.6 billion based on the closing price of $21.99 on the NASDAQ Stock Market LLC on that date.

 

The number of shares of each of the registrant’s classes of common stock outstanding at May 7, 2010 was 513,864,140 shares of common stock, par value $0.10 per share.

 

Documents Incorporated by Reference:
Part III: Portions of the Proxy Statement to be issued in conjunction with the registrant’s 2010 Annual Meeting of Stockholders.

 

CA, Inc.

Table of Contents

 

This Annual Report on Form 10-K (Form 10-K) contains certain forward-looking information relating to CA, Inc. (the “Company,” “Registrant,” “CA,” “we,” “our,” or “us”), that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-K, the words “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify forward-looking information. Such information includes, for example, the statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7, but also appears in other parts of this Form 10-K. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties, and assumptions, some of which are described under the caption “Risk Factors” in Part I Item 1A and elsewhere in this Form 10-K. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from those described in this Form 10-K as anticipated, believed, estimated, or expected. We do not intend to update these forward-looking statements.

 

The product and services names mentioned in this Form 10-K are used for identification purposes only and may be protected by trademarks, trade names, services marks and/or other intellectual property rights of the Company and/or other parties in the United States and/or other jurisdictions. The absence of a specific attribution in connection with any such mark does not constitute a waiver of any such right. ITIL^® is a registered trademark of the Office of Government Commerce in the United Kingdom and other countries. All other trademarks, trade names, service marks and logos referenced herein, belong to their respective companies.

 

References in this Form 10-K to fiscal 2010, fiscal 2009, fiscal 2008 and fiscal 2007, etc. are to our fiscal years ended on March 31, 2010, 2009, 2008 and 2007, etc., respectively.

 

Overview

CA, Inc. is the leading independent enterprise information technology (IT) software and service company with expertise across IT environments — from mainframe and physical to virtual and cloud. We develop and deliver software and services that help organizations manage and secure their IT infrastructures and deliver more flexible IT services. This allows companies to more effectively and efficiently respond to business needs.

 

We address most of the components of the computing environment, including people, information, processes, systems, networks, applications and databases, regardless of the hardware or software customers are using. We have a broad portfolio of software products that address our customers’ needs, with a specific focus on: service management and assurance; project and portfolio management; and security (identity and access management). We deliver our products on-premise or, for certain products, via Software-as-a-Service (SaaS).

 

Fiscal 2010 Business Developments and Highlights

The following are some significant developments and highlights relating to our business since the beginning of fiscal 2010:

 

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We made the following changes to management and our Board of Directors:

 

 

Our global business consists of a single operating segment — the design, development, marketing, licensing and support of IT management software products that operate on a wide range of hardware platforms and operating systems. Refer to Note 5 “Segment and Geographic Information,” in the Notes to the Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.

 

As the leading independent enterprise IT management software and service company, we develop and deliver software and services that help organizations manage and secure their IT infrastructures and adopt new technologies and more flexible IT

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services. Our products are designed to work in a wide range of IT environments — from mainframe and physical to virtual and cloud. This allows companies to more effectively and efficiently respond to business.

 

During fiscal 2010, we supported our customers’ needs to manage and securely access technology so that high-quality IT services were delivered to our customers at a competitive cost. Increasingly, organizations need their IT to be more responsive and flexible. Organizations need better utilization of their physical environments, as well as the opportunity to take advantage of new technologies like virtualization and cloud computing to significantly increase productivity, flexibility and business responsiveness. As companies add new technologies, their IT environments become more complex and difficult to manage and secure. We believe this trend offers opportunities for us to sell new technologies and services to existing customers and acquire new customers beyond our core large enterprise customers and in new geographies.

 

Our IT management and security software and services are designed to enable organizations to effectively manage complex IT environments, regardless of their infrastructure. Our management and security solutions allow customers to manage their environments through cutting-edge monitoring technology, intelligent automation capabilities, integral security features and easy-to-use tools and dashboards. Our products help IT organizations:

 

 

Business Strategy

Our strategy is to continue to build on our portfolio of IT management and security software and services to meet current needs and next-generation opportunities by investing in areas where we have a leadership position or which we believe represent the fastest growing markets. We expect these investments to allow us to pursue new markets and geographies. We are investing in the following strategic areas to help customers manage and secure their existing IT infrastructure and adopt new technologies and more flexible IT services:

 

Manage

 

Secure

 

Enable the Adoption of New Technologies

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Because of the easy-to-use and on-demand nature of SaaS, we expect increased demand from existing and prospective customers for products delivered in this manner. As a result, we intend to offer an increasing number of our products as SaaS solutions. We have been delivering CA Clarity PPM On Demand as a SaaS offering since November 2008.

 

In addition, we believe SaaS offerings will appeal to managed service providers, who are adept at delivering IT management services through SaaS way and who extend our reach by offering these capabilities to their own customers. We expect SaaS offerings will also appeal to emerging enterprises, which we believe will be early adopters of cloud services due to their desire for easy-to-install software and limited up-front investments. This is a new and important market for us, and one to which we believe we can gain access through our Nimsoft acquisition. There are an estimated 14,000 emerging enterprises, which we define as companies with annual revenue between $300 million and $2 billion. We also are pursuing emerging geographic markets where we believe cloud computing and hosted or managed services are key to business development.

 

Sales and Marketing

We offer our solutions through our direct sales force, and indirectly through global systems integrators, managed service providers, technology partners, value-added resellers, exclusive representatives, and distributors and volume partners. We have a disciplined, structured and systematic selling process through which we concentrate on our focus areas for IT environments from mainframe and physical to virtual and cloud. Our sales and marketing process includes carefully managing the customer lifecycle by continually improving the customer experience from purchase to deployment and beyond.

 

Our growth strategy is intended to allow us to reach a broader range of customers and deepen existing relationships while opening the door for us to cross-sell and up-sell additional solutions. We rely on our marketing organization to help us identify new market opportunities, provide fact-based insight on industry and customer trends, and build awareness of our products globally to help drive sales.

 

Our sales organization operates globally. We operate through branches, subsidiaries and partners around the world. Approximately 45% of our revenue in fiscal 2010 was from operations outside of the United States. As of March 31, 2010 and March 31, 2009, we had approximately 3,400 and 3,200 sales and sales support personnel, respectively. In certain geographic locations, including in the Asia Pacific and Japan region, we use our distribution and resale partners as our primary selling vehicle. In other geographic locations, primarily in the Middle East and Africa, we have started to use exclusive representatives as our primary selling vehicle.

 

CA Customer Lifecycle Management

We have a coordinated process to guide customers through installing, deploying and leveraging IT management software. Our goal is to stay proactive and attuned to customers’ needs, ensuring customers gain business value at every stage.

 

We strive to provide a continuous and seamless customer experience by bringing a range of resources together in one place: support, education, services, networking opportunities and expert guidance from us and our partners. We support this process through an approach that makes it easy for customers to find and take advantage of our resources through one online portal. This coordinated and focused attention on driving customer value is designed to increase product adoption, improve our renewal value, increase customer partnerships and create opportunities for new sales.

 

Partners

Strategic partners are an important component of how we do business. We leverage partners to accelerate sales through new routes to market, complement our technology and services, provide more comprehensive offerings, and help build brand awareness. We continue to build strategic alliances to broaden our coverage of new market segments and increase our competitive advantage.

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We work with several types of partners:

 

 

Customers

We have a large and broad base of customers, including the majority of the Forbes Global 2000. Most of our revenue is generated from enterprise customers who have the ability to make substantial commitments to software and hardware implementations. Our growth strategy is aimed at expanding our reach into the mid-market and emerging markets, and with emerging enterprises and managed service providers. Our software products are used in a broad range of industries, businesses and applications. We currently service companies across most major industries worldwide, including banks, insurance companies, other financial services providers, governmental agencies, manufacturers, technology companies, retailers, educational institutions and health care institutions.

 

When customers enter into software license agreements with us, they often pay for the right to use our software for a specified period of time. When the terms of these agreements expire, the customers may either renew the license agreements or pay usage and maintenance fees, if applicable, for the right to continue to use our software, receive support, and/or receive future upgrades. Our customers’ satisfaction is important to us and we believe that our flexible business model allows us to maintain our customer base while allowing us to cross-sell new software products and services to them.

 

No individual customer accounted for a material portion of our revenue during any of the past three fiscal years.

 

Research and Development

We invest in product development and enhancements to bring innovative solutions to market and to ensure that our products are compatible with hardware and operating system changes and our customers’ evolving needs. We focus our development efforts for new and updated products by investing in areas where we have a leadership position or we believe represent the fastest growing segments of our markets: service management and assurance; mainframe; project and portfolio management; security; virtualization and automation; cloud computing; and Software-as-a-Service.

 

Our research and development activities also include a number of efforts to support our technical community in its pursuit of leading solutions for customers. CA Labs strengthens our relationships with research communities by enabling us to work with academia, professional associations, industry standards bodies, customers and partners to explore novel products and emerging technologies. Our CA Council for Technical Excellence leads innovative projects designed to promote communication, collaboration and synergy throughout our global technical community. We also formed the CA Architecture Board to ensure a

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strong central architecture that supports our growth strategy and the Distinguished Engineer Board to encourage and recognize excellence in engineering.

 

To keep us on top of major technological advances and to ensure our products continue to work well with those of other vendors, we are active in most major industry standards organizations and take the lead on many issues. Our professionals are certified across key standards, including ITIL^®, PMI and CISPP, and possess knowledge and expertise in key vertical markets, such as financial services, government, telecommunications, insurance, health care, manufacturing and retail. Further, we were the first major software company to earn the International Organization for Standardization’s (ISO) 9001:2000 Global Certification. In addition, our Global IT Operation has attained ISO/IEC 20000-1:2005 and ISO/IEC 27001:2005 certifications. These certifications demonstrate our leadership in IT service management and information security.

 

We have approximately 5,900 engineers globally who design and support our software. We have charged to operations $476 million, $486 million and $526 million in fiscal 2010, 2009 and 2008, respectively, for product development and enhancements. In fiscal 2010, 2009 and 2008, we capitalized costs of $188 million, $129 million and $112 million, respectively, for internally developed software.

 

Our development organization is dedicated to engineering market-leading solutions that meet the needs of customers around the world. We drive innovation throughout our organization by enabling developers in Canada, China, the Czech Republic, Germany, India, Israel, Japan, the United Kingdom and the United States to collaborate in both physical and virtual labs.

 

In the United States, product development is primarily performed at our facilities in Redwood City and San Francisco, California; Lisle, Illinois; Framingham, Massachusetts; Ewing, New Jersey; Islandia, New York; Pittsburgh, Pennsylvania; Plano, Texas; and Herndon, Virginia.

 

Patents and Trademarks

Certain aspects of our products and technology are proprietary. We rely on U.S. and foreign intellectual property laws, including patent, copyright, trademark and trade secret laws to protect our proprietary rights. However, the extent and duration of protection given to different types of intellectual property rights vary under different countries’ legal systems. In some countries, full-scale intellectual property protection for our products and technology may be unavailable, or the laws of other jurisdictions may not protect our proprietary technology rights to the same extent as the laws of the United States. We also maintain contractual restrictions in our agreements with customers, employees and others to protect our intellectual property rights. In addition, we occasionally license software and technology from third parties, including some competitors, and incorporate them into our own software products.

 

We expect to maintain a portfolio of U.S. and foreign patents that generally expire at various times over the next 20 years. Although the durations and geographic coverage for our patents may vary, we believe our patent portfolio adequately protects our interests. We expect to maintain a patent portfolio that includes more than 400 issued patents and 700 pending applications in the United States and the European Union.

 

The source code for our products are protected both as trade secrets and as copyrighted works. Some of our customers are beneficiaries of a source code escrow arrangement that enables them to obtain a contingent, limited right to access our source code.

 

We are not aware of any of our products or technologies infringing on the proprietary rights of third parties. Third parties, however, have asserted and may assert infringement claims against us with respect to our products, and any such assertion may require us to enter into royalty arrangements or result in costly and time-consuming litigation. Although we have a number of U.S. and foreign patents and pending applications that may have value to various aspects of our products and technology, we are not aware of any single patent that is essential to us or to any of our principal business product areas.

 

Product Licensing

Our licensing model offers customers a wide range of purchasing and payment options. Under our flexible licensing terms, customers can license our software products under multi-year licenses or on a month-to-month basis, with most customers choosing terms of one to three years, although longer terms are sometimes negotiated in order to obtain greater cost certainty. We also help customers reduce uncertainty by providing a standard pricing schedule based on simple usage tiers. Additionally, we offer our customers the ability to establish pricing models for our products based on their key business metrics. Although this practice is not widely used by our customers, we believe this metric-based approach can provide us with a competitive advantage in certain circumstances.

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With respect to licenses sold for our mainframe products, we offer our customers the right to receive unspecified future software products for no additional fee, and we include maintenance during the term of the license. With respect to licenses sold for most of our distributed products, we do not offer our customers unspecified future software products and do not always include maintenance with the license sale. For a description of our revenue recognition policies, refer to Note 1, “Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements.

 

Competition

The enterprise information technology business is highly competitive and is marked by rapid technological change, the steady emergence of new companies and products, evolving industry standards and changing customer needs. We compete with many established companies in the markets we serve. Some of these companies have substantially greater financial, marketing, and technological resources, broader distribution capabilities, earlier access to customers, and a greater opportunity to address customers’ various information technology requirements than we do. These factors may at times provide some of our competitors with an advantage in penetrating markets with their products.

 

We also compete with many smaller, less established companies that may be able to focus more effectively on specific product areas or markets. Because of the breadth of our product portfolio, we have competitors who may only compete with us in one product area and other competitors who compete across most or all of our product portfolios. Competitive differentiators include, but are not limited to: industry vision, performance, quality, breadth of product offerings, expertise, integration of products, brand name recognition, price, functionality, customer support, frequency of upgrades and updates, manageability of products and reputation. Some of our key competitors are IBM, HP, Oracle, BMC and Symantec.

 

We believe that we are well positioned and have a unique competitive advantage in the marketplace for a number of reasons:

 

 

Employees

The table below sets forth the approximate number of employees by location and functional area as of March 31, 2010:

 

 

As of March 31, 2010, and 2009, we had approximately 13,800 and 13,200 employees, respectively.

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Refer to Note 5, “Segment and Geographic Information” in the Notes to the Consolidated Financial Statements for financial data pertaining to our segment and geographic operations.

 

The Company was incorporated in Delaware in 1974, began operations in 1976 and completed an initial public offering of common stock in December 1981. Prior to April 28, 2008, our common stock was traded on the New York Stock Exchange under the symbol “CA.” On April 28, 2008, we commenced trading on The NASDAQ Global Select Market tier of The NASDAQ Stock Market LLC under the same symbol.

 

Our corporate website address is www.ca.com. All filings we make with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments thereto, are available for free in the investor relations section of our website (www.ca.com/investor) as soon as reasonably practicable after they are filed with or furnished to the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s website at www.sec.gov. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Form 10-K or other filings with the SEC, and the information contained on our website is not part of this document.

 

The investor relations section of our website (www.ca.com/investor) also contains information about our initiatives in corporate governance, including: our corporate governance principles; information concerning our Board of Directors (including specific procedures for communicating with them); information concerning our Board Committees, including the charters of the Audit Committee, the Compensation and Human Resources Committee, the Corporate Governance Committee, and the Compliance and Risk Committee; and our Code of Conduct: Information and Resource Guide (applicable to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and our directors). These documents can also be obtained in print by writing to our Corporate Secretary, CA, Inc., One CA Plaza, Islandia, NY 11749.

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Current and potential stockholders should consider carefully the risk factors described below. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow and stock price.

 

Failure to achieve success in our growth strategy could materially adversely affect our business, financial condition, operating results and cash flow.

Our current strategy emphasizes accelerating our growth. This strategy is designed to build on our portfolio of software and services to meet next-generation market opportunities. This strategy is focused on seven key areas: service management and assurance; mainframe; project and portfolio management; security; virtualization and automation; cloud computing; and Software-as-a-Service (SaaS). The success of this growth strategy could be affected by many of the risk factors discussed in this Form 10-K and also by our ability to:

 

 

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:

 

 

Any of the foregoing factors could materially adversely affect our business, financial condition, operating results and cash flow.

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General economic conditions, including concerns regarding a global recession 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 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 or recession in the global economy, or in a particular region, or 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 adversely affect our business, financial condition, operating results and cash flow.

 

Such a general slowdown or recession 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.

 

These adverse financial events could also result in further government intervention in the U.S. and world markets. Any of these results could affect the manner in which we are able to conduct business, including within a particular industry sector or market and could adversely affect our business, financial condition, operating results and cash flow.

 

Failure to expand our channel partner programs related to the sale of CA solutions may result in lost sales opportunities, increases in expenses and a weakening in our competitive position.

We sell CA solutions through global systems integrators, managed service providers and value-added resellers in channel 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 channel partner programs and penetrate these markets could materially adversely affect our success with channel partners, resulting in lost sales opportunities and an increase in expenses, as well as weaken our competitive position.

 

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.

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We may encounter difficulties in successfully integrating companies and products that we have acquired or may acquire into our existing business, and any failed integration 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 growth strategy. The risks we may encounter include:

 

 

These factors could have a material adverse effect on 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 net income per share may decrease.

 

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 growth 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

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and cash flow. Additionally, competition from any of these sources could result in price reductions or displacement of our products, which could have a material adverse effect on 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 Item 1, “Business — (c) Narrative Description of the Business — Competition,” for additional information.

 

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 growth 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 large part on the continued contribution of our senior management and other key employees. A loss of a significant number of skilled managerial 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.

 

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 have a material adverse effect on 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 growth 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. If there are delays in new product introductions or there is less-than-anticipated market acceptance of these new products, 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.

 

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, such new products from these companies could incorporate features that perform functions currently performed by our products, or could require substantial modification of

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our products to maintain compatibility with these companies’ hardware or software. 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 adapt our products in a timely manner to such changes or customer decisions to forgo the use of our products in favor of those with comparable functionality contained either in their hardware or operating system could have a material adverse effect on our business, financial condition, operating results and cash flow.

 

Certain software that we use in our products is licensed from third parties and thus may not be available to us in the future, which has the potential to delay product development and production and, therefore, 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 have a material adverse effect on 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 have a material adverse effect on our business, financial condition, operating results and cash flow.

 

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. Moreover, we could 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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Consequently, the discovery of errors in our products after delivery could have a material adverse effect on our business, financial condition, operating results and cash flow.

 

We have a significant amount of debt. 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.

As of March 31, 2010, we had $1,545 million of debt outstanding, consisting mostly of unsecured fixed-rate senior note obligations and credit facility borrowings. Refer to Note 8, “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 would 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.

 

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 “Item 1, Business — (c) Narrative Description of the Business — Patents and Trademarks,” for additional information.

 

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 bookings 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., bookings or cash flow), and, accordingly, increases the risk of unanticipated variations in our quarterly results and financial condition.

 

We may become dependent upon large transactions, and the failure to close such transactions on a satisfactory basis could materially adversely affect our business, financial condition, operating results and cash flow.

In the past, we have been dependent upon large-dollar enterprise transactions with individual customers. There can be no assurances that we will not be reliant on large-dollar enterprise transactions in the future, and the failure to close those transactions on terms that are commercially attractive to us could materially adversely affect our business, financial condition, operating results and cash flow.

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Our sales to government clients subject us to risks, including early termination, audits, investigations, sanctions and penalties.

Approximately 9% of our total revenue backlog as of March 31, 2010 is associated with multi-year contracts signed with the U.S. federal government and other U.S. state and local governmental agencies. These contracts are generally subject to annual fiscal funding approval, may be terminated at the convenience of the government, or both. Termination of a contract or funding for a contract could adversely affect our sales, revenue and reputation. Additionally, 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.

 

Our customers’ data centers and IT environments may be subject to hacking or other breaches, harming the market perception of the effectiveness of our products.

If an actual or perceived breach of our customers’ network security occurs, allowing access to our customers’ data centers or other parts of their IT environments, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. 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, 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 breaches, harming the market perception of the effectiveness of our products.

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 and misappropriate proprietary information or cause interruptions of our services. Although we believe we have sufficient controls in place to prevent significant external disruptions, if these intentionally disruptive efforts are successful, our activities could be adversely affected, our reputation and future sales could be harmed and our business, financial condition, operating results and cash flow could be materially adversely affected.

 

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.

In the past, we have either directly licensed from third parties, or used within the scope of our customer’s license, code and information for third-party software and hardware that enables us to develop compatible products and interfaces. Such code and information includes: “source code,” which is human-readable and makes the software understandable to programmers; “object code,” which is machine-readable and can be directly executed by a computer; beta and evaluation software; microcode and firmware that implement machine instructions on hardware; and technical documentation. Since the availability of this code and information facilitated the development of systems and applications software that interfaces with the third-party software and hardware, independent software vendors, such as us, were able to develop and market compatible software. 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. There can be no assurance that such restrictions will not have a material adverse effect on our business, financial condition, operating results and cash flow.

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Third parties could claim that our products infringe their intellectual property rights or that we owe royalty payments, 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.

 

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., foreign currency fluctuations 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. To the extent that these strategies do not manage all of the risks inherent in our foreign exchange exposures cause our earnings and expenses to fluctuate more than they would have had these strategies not been employed, fluctuations of the exchange rates of foreign currencies against the U.S. dollar could materially adversely affect our business, financial condition, operating results and cash flow.

 

Failure by us to execute our restructuring plans successfully could result in total costs that are greater than expected or revenues that are less than anticipated.

We have announced restructuring plans, which include workforce reductions as well as global facility consolidations and other cost reduction initiatives. We may have further workforce reductions or restructuring actions in the future. Risks associated with these actions and other workforce management issues include delays in implementation of anticipated workforce reductions, changes in restructuring 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 these arrangements may not be successful, thereby resulting in increased costs, or may adversely affect service levels and our public reporting.

We have outsourced various functions to third parties including certain development and other administrative functions and may outsource additional functions to third-party providers in the future. We rely on those third parties to provide services on a timely and effective basis. 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 to perform as expected or as required by contract could result in significant disruptions and costs to our operations, which could materially adversely affect our business, financial condition, operating results and cash flow and our ability to file our financial statements with the Securities and Exchange Commission timely or accurately.

 

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 financial condition, operating results and cash flow in the period or periods in which that determination is made.

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Our principal real estate properties are located in areas necessary to meet sales and operating requirements. All of the properties are considered to be both suitable and adequate to meet current and anticipated operating requirements.

 

As of March 31, 2010, we leased 68 facilities throughout the United States and 92 facilities outside the United States. Our lease obligations expire on various dates with the longest commitment extending to 2023. We believe 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, one facility in India totaling approximately 255,000 square feet and our European headquarters in the United Kingdom totaling approximately 215,000 square feet.

 

We own and lease various computer, telecommunications, electronic, and transportation equipment. We also lease mainframe and distributed computers at our facilities in Islandia, New York and Lisle, Illinois. This equipment is used for internal product development, technical support efforts, and administrative purposes. We consider our computer and other equipment to be adequate for our current and anticipated needs. Refer to “Contractual Obligations and Commitments” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 9, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements for additional information.

 

Refer to Note 9, “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.

 

* * *

 

Executive Officers of the Registrant.

The name, age, present position, and business experience for the past five years of our executive officers as of May 14, 2010 are listed below:

 

William E. McCracken, 67, 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, Mr. McCracken held several different executive offices, including serving as general manager of the IBM Printing Systems Division and general manager of Worldwide Marketing of IBM PC Company. From 1999 to 2001, he served on IBM’s Worldwide Management Counsel, a group of the top 30 executives at IBM.

 

Michael J. Christenson, 51, has been President of the Company since March 2008 and Chief Operating Officer since April 2006. On May 13, 2010, the Company announced that Mr. Christenson will be leaving the Company effective May 31, 2010. Mr. Christenson joined the Company in 2005. He served as the Company’s Executive Vice President of Strategy and Business Development from February 2005 to April 2006. He retired in 2004 from Citigroup Global Markets, Inc. after a 23-year career as an investment banker, where he was responsible for Global Private Equity Investment Banking, North American Regional Investment Banking, and Latin American Investment Banking.

 

Russell M. Artzt, 63, co-founded the Company in June 1976. He has been Vice Chairman and Founder of the Company since April 2007, playing an instrumental role in the evolution of the Company’s vision. Mr. Artzt also provides counsel in the areas of strategic partnerships, product development leadership, and corporate strategy. Mr. Artzt was the Company’s Executive Vice President of Products from January 2004 to April 2007 and was Executive Vice President, eTrust^® Solutions from April 2002 to January 2004.

 

James E. Bryant, 65, has been Executive Vice President, Risk, and Chief Administrative Officer of the Company since April 2009. He is responsible for the Company’s information technology, facilities and administration, corporate transformation, enterprise risk management, internal audit and internal controls. Mr. Bryant joined the Company in June 2006. He served as

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the Company’s Executive Vice President and Chief Administrative Officer from June 2006 to March 2009. From 2005 to June 2006, Mr. Bryant was a member of Common Angels, a Boston-based investment group that provides funding and mentoring for high technology start-ups. From 2003 to June 2006, he was a Selectman for the Town of Hamilton, Massachusetts. From 1994 to 2002, Mr. Bryant served as Vice President of Finance in IBM’s Software Group.

 

Nancy E. Cooper, 56, has been Executive Vice President and Chief Financial Officer of the Company since she joined the Company in August 2006. From December 2001 to August 2006, she served as Senior Vice President and Chief Financial Officer of IMS Health Incorporated, a provider of information solutions to the pharmaceutical and healthcare industries. Ms. Cooper began her career at IBM, where she held positions of increasing responsibility over a 22-year period, including Chief Financial Officer of the Global Industries Division, Assistant Corporate Controller, and Controller and Treasurer of IBM Credit Corporation.

 

Andrew Goodman, 51, has been Executive Vice President, Worldwide Human Resources of the Company since July 2005. Mr. Goodman joined the Company in July 2002. From July 2002 to July 2005, he served as Senior Vice President of Human Resources.

 

Ajei S. Gopal, 48, has been Executive Vice President, Products and Technology Group, since January 2009. Dr. Gopal has overall responsibility for the Company’s Products and Technology Group, which includes the Cloud, Enterprise and Mainframe Business lines, the IT Governance Business Unit and the Office of the Chief Technology Officer. He joined the Company in July 2006. He served as Senior Vice President and General Manager, Enterprise Systems Management Business Unit from July 2006 to May 2007, as Executive Vice President and General Manager of the Management Business Unit and Security Business Unit from May 2007 to January 2008 and as Executive Vice President, EITM Group from January 2008 to January 2009. Dr. Gopal was with Symantec Corporation, a provider of security and storage software, from September 2004 to July 2006, where he served most recently as Executive Vice President and Chief Technology Officer, and earlier as Senior Vice President, Global Technology and Corporate Development. From June 2001 to June 2004, Dr. Gopal was with ReefEdge Networks, a provider of wireless LAN systems, and a company he co-founded, where he served on the Board of Directors and as Chief Executive Officer.

 

Jacob Lamm, 45, has been the Company’s Executive Vice President, Strategy and Corporate Development since February 2009. He joined the Company in 1998. He is responsible for coordinating the Company’s overall business strategy, as well as the Company’s strategy for acquisitions. 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, as Senior Vice President, General Manager and Business Unit Executive from April 2005 to March 2007, and as Senior Vice President, Development from October 2003 to April 2005.

 

Amy Fliegelman Olli, 46, has been Executive Vice President and General Counsel of the Company since February 2007. She is responsible for all of the Company’s legal and compliance functions worldwide. Ms. 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. Before September 2006, Ms. Olli spent nearly 20 years in various senior-level legal positions with divisions of IBM, most recently as General Counsel — Americas and Global Coordinator for Sales and Distribution, where she was responsible for a team of more than 200 lawyers in the U.S., Europe, Latin America and Canada and for coordination of all of IBM’s sales and distribution lawyers on a global basis.

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Through April 27, 2008, our common stock was traded on the New York Stock Exchange under the symbol “CA.” On April 28, 2008, our common stock commenced trading on The NASDAQ Global Select Market tier of The NASDAQ Stock Market LLC (“NASDAQ”) under the same symbol. The following table sets forth, for the fiscal quarters indicated, the quarterly high and low closing sales prices on the NASDAQ and the New York Stock Exchange, as applicable:

 

 

On March 31, 2010, the closing price for our common stock on the NASDAQ was $23.47. As of March 31, 2010, we had approximately 8,450 stockholders of record.

 

We have paid cash dividends each year since July 1990. For fiscal 2010, 2009 and 2008, we paid annual cash dividends of $0.16 per share, which have been paid out in quarterly installments of $0.04 per share as and when declared by the Board of Directors.

 

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 2010:

 

Issuer Purchases of Equity Securities

 

On October 29, 2008, our Board of Directors approved a stock repurchase program that authorized us to acquire up to $250 million of our common stock. We funded the program with available cash on hand and repurchased shares on the open market from time to time based on market conditions and other factors.

 

During fiscal 2009, we paid approximately $4 million to repurchase approximately 0.3 million shares of our common stock at an average price of $15.84 per share.

 

During fiscal 2010, we entered into brokerage arrangements with third-party financial institutions to purchase our common stock in the open market on our behalf. We acquired approximately 10.0 million shares of our common stock for approximately $227 million under these arrangements during fiscal 2010. As of March 31, 2010, we remained authorized to purchase an aggregate amount of up to approximately $19 million of additional shares of our common stock under our 2008 stock repurchase program. The remaining authorized amount of approximately $19 million was repurchased during April 2010, which completed the stock repurchase program authorized by our Board of Directors on October 29, 2008.

 

On May 12, 2010, our Board of Directors approved a stock repurchase program that authorized us to acquire up to $500 million of our common stock. We will fund the program with available cash on hand and repurchase shares on the open market from time to time based on market conditions and other factors.

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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.”

 

Statement of Operations Data

 

Balance Sheet and Other Data

 

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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, change 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 Report and the Risk Factors included in Part I, Item 1A of this Report as well as other cautionary statements and risks described elsewhere in this Report. References in this MD&A to fiscal 2010, fiscal 2009, fiscal 2008 and fiscal 2007 are to our fiscal years ended on March 31, 2010, 2009, 2008 and 2007, respectively.

 

Business Overview

We are the leading independent enterprise IT management software and service company with deep expertise across IT environments — from mainframe and physical to virtual and cloud. We develop and deliver software and services that help organizations manage and secure their IT infrastructures and deliver more flexible IT services. This allows companies to more effectively and efficiently respond to business needs. We address virtually all of the components of the computing environment, including people, information, processes, systems, networks, applications and databases, regardless of the hardware or software customers are using. We have a broad portfolio of software products that address our customers’ needs with a specific focus on service management and assurance; mainframe; project and portfolio management; security (identity and access management); virtualization and automation; and cloud computing. We deliver our products on-premise or, for certain products, via Software-as-a-Service (SaaS).

 

We license our products worldwide. We service companies across most major industries worldwide, including banks, insurance companies, other financial services providers, governmental agencies, manufacturers, technology companies, retailers, educational institutions and health care institutions. These customers typically maintain IT infrastructures that are both complex and central to their objectives for operational excellence.

 

We offer our software products and solutions directly to our customers through our direct sales force and indirectly through global systems integrators, managed service providers, technology partners, value-added resellers, exclusive representatives and distributors and volume partners.

 

CA’s Business Model

We generate revenue from the following sources: license fees — licensing our products on a right-to-use basis; maintenance fees — providing customer technical support and product enhancements; and service fees — providing professional services such as product implementation, consulting and education. The timing and amount of fees recognized as revenue during a reporting period are determined in accordance with generally accepted accounting principles in the United States of America (GAAP). Revenue is reported net of applicable sales taxes.

 

Under our business model, we offer customers a wide range of licensing options, including the flexibility to license software under month-to-month licenses or to fix their costs by committing to longer-term agreements. Licenses sold for most of our software products permit customers to change their software product mix as their business and technology needs change and include the right to receive software products in the future within defined product lines for no additional fee, commonly referred to as unspecified future software products, as well as maintenance included during the term of each license. In some instances, we sell certain products without the right to receive unspecified future software products.

 

Performance Indicators

Management uses several quantitative and qualitative performance indicators to assess our financial results and condition. Each provides a measurement of the performance of our business and how well we are executing our plan.

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Our predominantly subscription-based business model is less common among our competitors in the software industry and it may be difficult to compare the results for many of our performance indicators with those of our competitors. The following is a summary of the principal performance indicators that management uses to review performance:

 

 

 

 

Analyses of our performance indicators, including general trends, can be found in the “Results of Operations” and “Liquidity and Capital Resources” sections of this MD&A.

 

Total Revenue — Total revenue is the amount of revenue recognized during the reporting period from subscription and maintenance agreements, professional services arrangements and software fees and other revenue recognized during the reporting period.

 

Subscription and Maintenance Revenue — Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from: (i) subscription license agreements that were in effect during the period, generally including 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 that are separately identifiable from software usage fees or product sales, and (iii) license agreements bundled with additional products, maintenance or professional services for which Vendor Specific Objective Evidence (VSOE) has not been established. These amounts include the sale of products directly by us, as well as by distributors and volume partners, value-added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts entered into in close proximity or contemplation of such agreements.

 

Total Bookings — Total bookings includes the incremental value of all subscription, maintenance and professional service contracts and software fees and other contracts entered into during the reporting period.

 

Subscription and Maintenance Bookings — Subscription and maintenance bookings is the aggregate incremental amount we expect to collect from our customers over the terms of the underlying subscription and maintenance agreements entered into during a reporting period. These amounts include the sale of products directly by us and may include additional products, services or other fees for which we have not established VSOE. Subscription and maintenance bookings also includes indirect sales by distributors and volume partners, value added resellers and exclusive representatives to end-users, where the contracts incorporate the right for end-users to receive unspecified future software products, and other contracts without these rights entered into in close proximity or contemplation of such agreements. These amounts are expected to be recognized ratably as subscription and maintenance revenue over the applicable term of the agreements. Subscription and maintenance bookings excludes the value associated with certain perpetual licenses, license-only indirect sales, and professional services arrangements.

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The license and maintenance agreements that contribute to subscription and maintenance bookings represent binding payment commitments by customers over periods that range generally from three to five years on a weighted average basis, although individual customer commitments can be for longer or shorter periods. These current period bookings are often renewals of prior contracts that also had various durations, usually from three to five years. The amount of new subscription and maintenance bookings recorded in a period is affected by the volume, duration and value of contracts renewed during that period. Our subscription and maintenance bookings typically increase in each consecutive quarter during a fiscal year, with the first quarter having the least amount of bookings and the fourth quarter having the highest bookings. However, subscription and maintenance bookings may not always follow the pattern of increasing in consecutive quarters during a fiscal year, and the quarter-to-quarter differences in subscription and maintenance bookings may vary. Given the varying durations of the contracts being renewed, year-over-year comparisons on bookings are not always indicative of the overall bookings trend. We believe our revenue backlog is our best indicator of future revenue due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably.

 

Additionally, period-to-period changes in subscription and maintenance bookings do not necessarily correlate to changes in cash receipts. The contribution to current period revenue from subscription and maintenance bookings from any single license or maintenance agreement is relatively small, since revenue is recognized ratably over the applicable term for these agreements.

 

Weighted Average Subscription and Maintenance License Agreement Duration in Years — The weighted average subscription and maintenance license agreement duration in years reflects the duration of all subscription and maintenance agreements executed during a period, weighted by the total contract value of each individual agreement.

 

Annualized Subscription and Maintenance Bookings — Annualized subscription and maintenance bookings is an indicator that normalizes the bookings recorded in the current period to account for contract length. It is calculated by dividing the total value of all new subscription and maintenance license agreements entered into during a period by the weighted average subscription and license agreement duration in years for all such subscription and maintenance license agreements recorded during the same period.

 

Total Revenue Backlog — Total revenue backlog represents the aggregate amount we expect to recognize as revenue in the future as either subscription and maintenance revenue, professional services revenue or software fees and other revenue associated with contractually committed amounts billed or to be billed as of the balance sheet date. Total revenue backlog is composed of amounts recognized as liabilities in our Consolidated Balance Sheets as deferred revenue (billed or collected) as well as unearned amounts yet to be billed under subscription and maintenance and software fees and other agreements. Amounts are classified as current or non-current depending on when they are expected to be earned and therefore recognized as revenue. The portion of the total revenue backlog that relates to subscription and maintenance agreements is recognized as revenue evenly on a monthly basis over the duration of the underlying agreements and is reported as subscription and maintenance revenue in our Consolidated Statements of Operations.

 

“Deferred revenue (billed or collected)” is composed of: (i) amounts received from customers in advance of revenue recognition, (ii) amounts billed but not collected for which revenue has not yet been earned, and (iii) amounts received in advance of revenue recognition from financial institutions where we have transferred our interest in committed installments.

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Results of Operations

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for fiscal 2010, 2009 and 2008 and the period-over-period dollar and percentage changes for those line items.

 

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The following table sets forth, for the fiscal years indicated, the percentage that the items in the accompanying Consolidated Statements of Operations bear to total revenue.

 

 

Note — amounts may not add to their respective totals due to rounding.

 

Revenue

The $82 million increase in total revenue for fiscal 2010 as compared with fiscal 2009 was primarily due to a higher annualized value of customer contracts contributing to revenue during fiscal 2010 as compared with fiscal 2009, partially offset by an unfavorable foreign exchange effect of $32 million and a decrease in professional services revenue.

 

Total revenue for fiscal 2009 decreased $6 million compared with fiscal 2008. Fiscal 2009 revenue was unfavorably affected by foreign exchange of $35 million compared with fiscal 2008, partially offset by a higher value of customer subscription and maintenance contracts.

 

Subscription and Maintenance Revenue

The increase in subscription and maintenance revenue for fiscal 2010 as compared with fiscal 2009 was primarily due to a higher annualized value of customer contracts contributing to revenue during fiscal 2010 as compared with fiscal 2009, partially offset by a $32 million negative effect from foreign exchange.

 

Subscription and maintenance revenue increased slightly for fiscal 2009 compared with fiscal 2008 primarily due to an increase in the value of existing customer contracts, partially offset by a $32 million negative effect from foreign exchange.

 

Subscription and Maintenance Bookings

For fiscal 2010 and 2009, our subscription and maintenance bookings were $4,435 million and $4,783 million, respectively. The decrease in subscription and maintenance bookings for fiscal 2010 as compared with fiscal 2009 was primarily due to several large contract extensions with terms of approximately five years entered into during the second quarter of fiscal 2009, two of which had a combined contract value of approximately $550 million. During fiscal 2010, we renewed a total of 68 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of

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$2,146 million. During fiscal 2009, we renewed a total of 68 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $2,471 million. The decrease in the dollar value of the agreements in excess of $10 million was primarily attributable to the large contract renewals that were signed in the second quarter of fiscal 2009. For fiscal 2010, annualized subscription and maintenance bookings decreased $72 million from the prior year period to $1,253 million. The weighted average subscription and maintenance license agreement duration in years decreased slightly from fiscal 2009 to 2010, from 3.61 to 3.54. Although each contract is subject to terms negotiated by the respective parties, management does not currently expect the weighted average duration of contracts to change materially from current levels for end-user contracts.

 

For fiscal 2009 and 2008, our subscription and maintenance bookings were $4,783 million and $4,110 million, respectively. Subscription and maintenance bookings for fiscal 2009 were favorably affected by an increase in U.S. renewal bookings compared with the prior year period primarily due to the size and duration of the contracts that were renewed in fiscal 2009, partially offset by an unfavorable variance due to foreign exchange. During fiscal 2009, we renewed a total of 68 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $2,471 million. During fiscal 2008, we renewed a total of 61 license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $1,396 million. The increase in the dollar value of the agreements in excess of $10 million was primarily attributable to the execution of several large contract extensions with terms of approximately five years in the second quarter of fiscal 2009, two of which had a combined contract value of approximately $550 million. For fiscal 2009, annualized subscription and maintenance bookings decreased $54 million from the prior year period to $1,325 million. The weighted average subscription and maintenance license agreement duration in years increased to 3.61 for fiscal 2009 compared with 2.98 for fiscal 2008 due to an increase in the number and dollar values of contracts executed with contract terms longer than historical averages.

 

Professional Services

Professional services revenue primarily includes product implementation, customer training and customer education. The revenue decrease for fiscal 2010 compared with fiscal 2009 was primarily a result of our customers’ reduced discretionary spending due to the difficult economic environment.

 

The revenue decrease for fiscal 2009 compared with fiscal 2008 was primarily due to our concerted efforts to reduce the number of low margin service contracts in all regions, revenue decreases from customer delays in signing professional service contracts due to the difficult economic environment and revenue decreases in the Asia Pacific and Japan (APJ) region, which was due to our decision to stop providing professional services in certain markets in conjunction with our change in that region from a direct to an indirect sales model.

 

Software Fees and Other

Software fees and other revenue primarily consists of revenue that is recognized on an up-front basis. This includes revenue generated through transactions with distributors and volume partners, value-added resellers and exclusive representatives (sometimes referred to as our “indirect” or “channel” revenue) and certain revenue associated with products sold on an up-front basis. In fiscal 2009 we recorded $5 million under the license agreement we entered into in connection with a litigation settlement entered into with Rocket Software, Inc. (Rocket) that expires in fiscal 2014. In fiscal 2010 we recorded $6 million from a renegotiated payment schedule under this agreement.

 

Software fees and other revenue increased for fiscal 2010 as compared with fiscal 2009 primarily due to a $39 million increase in revenue associated with acquired new products and existing application management products sold on an up-front basis. Approximately $18 million of these revenues were from products of NetQoS, which was acquired during the third quarter of fiscal 2010.

 

For fiscal 2009, software fees and other revenue increased from fiscal 2008 primarily due to an $11 million increase in our indirect business revenue and $5 million from the aforementioned settlement agreement we entered into with Rocket partially offset by lower financing fees and other revenue.

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Total Revenue by Geography

The following table presents the amount of revenue earned from sales to unaffiliated customers in the United States and international regions and corresponding percentage changes for fiscal 2010, 2009 and 2008.

 

 

Revenue in the U.S. increased by 5% for fiscal 2010 as compared with fiscal 2009 primarily due to a higher annual value of customer subscription and maintenance contracts. For fiscal 2010, international revenue decreased by approximately 2% as compared with the prior period primarily due to the unfavorable effect from foreign exchange of $32 million.

 

U.S. revenue increased in fiscal 2009 compared with fiscal 2008 primarily due to growth from higher subscription revenue resulting from subscription agreements executed in prior periods. International revenue decreased in fiscal 2009 compared with fiscal 2008 partially due to the unfavorable effect from foreign exchange of $35 million as well as a $37 million revenue decrease in the APJ region, which was mostly due to our decision to stop providing professional services in certain markets in conjunction with our change in that region from a direct to indirect sales model.

 

Price changes do not have a material effect on revenue in a given period as a result of our ratable subscription model.

 

Expenses

The overall decrease in operating expenses for fiscal 2010 compared with fiscal 2009 was primarily due to lower restructuring costs partially offset by increased selling and marketing, general and administrative and other costs.

 

The overall decrease in operating expenses for fiscal 2009 compared with fiscal 2008 was primarily due to improved cost management and increased operating efficiencies, including personnel and other savings realized from the fiscal 2007 cost reduction and restructuring plan (fiscal 2007 restructuring plan). In addition, there was a favorable effect from foreign exchange of $35 million for fiscal 2009 compared with fiscal 2008.

 

Costs of Licensing and Maintenance

Costs of licensing and maintenance include technical support, royalties, and other manufacturing and distribution costs. Costs of licensing and maintenance for fiscal 2010 as compared with fiscal 2009 decreased $8 million due to lower royalty fees offset by increases in product support expenses and other costs.

 

The increase in costs of licensing and maintenance for fiscal 2009 compared with fiscal 2008 was primarily due to the strategic partnership agreement that we signed with an outside third party relating to our Internet Security business during the fourth quarter of fiscal 2008, under which fees are paid based on sales volumes. Prior to this strategic partnership, the development costs relating to this business were included in product development and enhancements. These increases in costs of licensing and maintenance were partially offset by decreases in product support expenses.

 

Cost of Professional Services

Cost of professional services consists primarily of our personnel-related costs associated with providing professional services and training to customers. For fiscal 2010, cost of professional services decreased as compared with fiscal 2009 primarily due to a $36 million decrease in consulting and personnel costs, mostly related to lower sales volumes, and a $4 million favorable foreign exchange variance. Professional services gross margin for fiscal 2010 was 11% as compared with 14% for fiscal 2009 mostly due to lower utilization rates resulting from the decrease in sales.

 

The decrease in cost of professional services for fiscal 2009 compared with fiscal 2008 was primarily due to a reduced use of external consultants, reduced personnel costs and our effort to reduce the number of low margin service contracts which resulted in cost reductions due to lower sales volume and margin improvements. As a result of the decreased cost of professional services, the margins on professional services revenue improved to 14% for fiscal 2009 compared with 4% for fiscal 2008.

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Amortization of Capitalized Software Costs

Amortization of capitalized software costs consists of the amortization of both purchased software and internally generated capitalized software development costs. Internally generated capitalized software development costs relate to new products and significant enhancements to existing software products that have reached the technological feasibility stage.

 

The increases in amortization of capitalized software costs for fiscal 2010 as compared with fiscal 2009 and in fiscal 2009 as compared with fiscal 2008 were principally due to the capitalizable value of projects that have reached technological feasibility in recent periods.

 

Selling and Marketing

Selling and marketing expenses include costs relating to our sales force, channel partners, corporate and business marketing and customer training programs. The increase in selling and marketing expenses for fiscal 2010 as compared with fiscal 2009 was primarily due to increased personnel costs of $20 million partially from acquired companies and higher commission costs of $30 million resulting from new product sales partially offset by reduced promotion expenses of $21 million, principally attributable to the timing of CA World in fiscal 2009. CA World is our largest periodic promotional and marketing event that takes place approximately every 18 months, which did not occur during fiscal 2010.

 

Including a $15 million decrease due to foreign exchange, the decline in selling and marketing expenses for fiscal 2009 compared with fiscal 2008 was primarily due to decreases in personnel costs of $48 million, promotion expenses of $26 million, office and IT costs of $14 million and external consulting costs of $11 million in connection with our cost reduction efforts.

 

General and Administrative

General and administrative expenses include the costs of corporate and support functions, including our executive leadership and administration groups, finance, legal, human resources and corporate communications and other costs, such as provisions for doubtful accounts. For fiscal 2010, general and administrative costs increased $15 million as compared with fiscal 2009 primarily due to $17 million in costs related to the departure of our Chief Executive Officer and the transition to his successor. We also incurred a $12 million increase in costs attributable to acquisitions and other strategic initiatives partially offset by a $7 million reduction in bad debt expenses and other cost reductions.

 

Including a $4 million decrease due to foreign exchange, general and administrative expenses decreased in fiscal 2009 compared with fiscal 2008 primarily due to lower office and IT costs of $28 million, lower personnel-related expenses of $16 million, lower external consulting costs of $18 million and a reduction in bad debt expenses of $9 million. These decreases were partially offset by a $12 million reduction in general and administrative expenses we recorded in fiscal 2008 due to obligations from prior period acquisitions that were settled for amounts less than originally estimated (refer to Note 2, “Acquisitions,” in the Notes to the Consolidated Financial Statements for additional information).

 

Product Development and Enhancements

Product development and enhancements expenses for fiscal 2010 decreased from fiscal 2009 primarily due to an increase in resources dedicated to internally developed software for strategic investments in our security, mainframe and infrastructure management products, which are capitalized and reflected in the Capitalized development costs and other intangible assets, net line on the Consolidated Balance Sheets. Mostly offsetting this decrease in expenses were increased personnel costs, an increase in our investment in product development and enhancements for emerging technologies, and a broadening of our enterprise product offerings to build on our portfolio of software and services to meet next-generation market opportunities.

 

Expenses declined during fiscal 2009 as compared with fiscal 2008 primarily due to the strategic partnership agreement relating to the development of products associated with our Internet Security business and increased capitalization of internally developed software, partially offset by higher personnel costs.

 

For fiscal 2010, 2009 and 2008, product development and enhancements expenses represented approximately 11%, 11% and 12% of total revenue, respectively.

 

Depreciation and Amortization of Other Intangible Assets

The increase in depreciation and amortization of other intangible assets for fiscal 2010 as compared with fiscal 2009 was primarily due to the increased value of fixed assets placed into service during fiscal 2010.

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The decrease in depreciation and amortization of other intangible assets for fiscal 2009 compared with fiscal 2008 was primarily due to decreased amortization costs of intangible assets relating to prior period acquisitions.

 

Other Expenses (Gains), net

Other expenses (gains), net includes gains and losses attributable to divested assets, foreign currency exchange rate fluctuations and certain other items.

 

 

In fiscal 2010, we recorded net foreign exchange losses of $10 million. The foreign exchange amounts recorded in fiscal 2010 included net losses of $20 million associated with derivative contracts, which we use to mitigate our operating risks and exposure to foreign currency exchange rates. These losses were offset by foreign currency transaction gains due to the weakening of the U.S. dollar against the currencies of other countries in which we conduct our operations.

 

In fiscal 2009, we recorded net foreign exchange gains of $11 million. The foreign exchange amounts recorded in fiscal 2009 included net gains of $77 million associated with derivative foreign exchange contracts, which we use to mitigate our operating risks and exposure to foreign currency exchange rates. These gains were mostly offset by foreign exchange losses from other operating activities due to the strengthening of the U.S. dollar against the currencies of other countries in which we conduct our operations. During the third quarter of fiscal 2009, we recognized a gain of $5 million associated with our repurchase of $148 million principal amount of our 4.750% Senior Notes.

 

Restructuring and Other

The Fiscal 2010 Restructuring Plan (Fiscal 2010 Plan) was approved in March 2010. The Fiscal 2007 Restructuring Plan (Fiscal 2007 Plan) was approved in August 2006. For fiscal 2010 and 2009, we incurred expenses of $46 million and $96 million, respectively, primarily related to severance and lease abandonment and termination costs under the Fiscal 2010 and Fiscal 2007 Plans, of which $116 million remained unpaid as of March 31, 2010. The severance portion of the remaining liability balance is included in the “Accrued salaries, wages and commissions” line item on the Consolidated Balance Sheets. The facilities abandonment portion of the remaining liability balance is included in the “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” line items on the Consolidated Balance Sheets. Final payment of these amounts is dependent upon settlement with the works councils in certain international locations and our ability to negotiate lease terminations. (Refer to Note 3, “Restructuring and Other,” in the Notes to the Consolidated Financial Statements for additional information).

 

During fiscal 2010 and fiscal 2009, we recorded impairment charges of $3 million and $5 million, respectively, for software that was capitalized for internal use but was determined to be impaired. During fiscal 2010, we incurred $3 million in legal fees in connection with matters under review by the Special Litigation Committee (refer to Note 9, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements for additional information).

 

In the first quarter of fiscal 2008, we incurred a $4 million expense related to a loss on the sale of an investment in marketable securities associated with the closure of an international location. During fiscal 2008, we incurred $12 million in legal fees in connection with matters under review by the Special Litigation Committee.

 

Interest Expense, net

The increase in interest expense, net for fiscal 2010 as compared with fiscal 2009 was primarily due to a decline in short-term interest rates which reduced interest income earned on cash balances.

 

The decrease in interest expense, net for fiscal 2009 compared with fiscal 2008 was primarily due to decreased interest expenses as a result of the repayment of our $350 million 6.500% Senior Notes due April 2008 (the fiscal 1999 Senior Notes) and partial repurchase of our 4.750% Senior Notes due December 2009.

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Refer to the “Liquidity and Capital Resources” section of this MD&A and Note 8, “Debt,” in the Notes to the Consolidated Financial Statements for additional information.

 

Income Taxes

Our effective tax rate was approximately 34%, 37% and 38%, for fiscal 2010, 2009 and 2008, respectively.

 

The reduction in the effective tax rate for fiscal 2010, as compared with fiscal 2009, resulted primarily from the net charge incurred in fiscal 2009 that did not reoccur in fiscal 2010, which when taken together with fiscal 2010 reconciliations of tax returns to tax provisions, resolutions of uncertain tax positions relating to non-U.S. jurisdictions and refinements of estimates ascribed to tax positions taken in prior periods relating to our international tax profile, resulted in a net benefit of $10 million for fiscal 2010 and, in our view, continues our efforts to improve our long term tax profile.

 

The income tax provision recorded for fiscal 2009 includes a net charge of $22 million, which is primarily attributable to adjustments to uncertain tax positions (including certain refinements of amounts ascribed to tax positions taken in prior periods), partially offset by the reinstatement of the U.S. Research and Development Tax Credit and the settlement of a U.S. federal income tax audit for the fiscal years 2001 through 2004. As a result of this settlement, during the first quarter of fiscal year 2009, we recognized a tax benefit of $11 million and a reduction of goodwill by $10 million.

 

The income tax provision recorded for fiscal 2008 included charges of $26 million associated with certain corporate income tax rate reductions enacted in various non-U.S. tax jurisdictions (with corresponding impacts on our net deferred tax assets). As enacted income tax rates decline, the future value of the deferred tax assets declines, giving rise to a charge through the corporate income tax provision in the current period. Accordingly, deferred tax assets were adjusted to reflect the enacted rates in effect when the temporary items are expected to reverse.

 

No provision has been made for U.S. federal income taxes on $1,067 million and $958 million as of March 31, 2010 and 2009, respectively, of unremitted earnings of our foreign subsidiaries since we plan to permanently reinvest all such earnings outside the U.S. It is not practicable to determine the amount of tax associated with such unremitted earnings.

 

Refer to Note 10, “Income Taxes,” in the Notes to the Consolidated Financial Statements for additional information.

 

Selected Quarterly Information.

 

 

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Liquidity and Capital Resources

Our cash balances, including cash equivalents, are held by numerous subsidiaries throughout the world, with 46% residing outside the United States at March 31, 2010. Cash and cash equivalents totaled $2,583 million as of March 31, 2010, representing a decrease of $129 million from the March 31, 2009 balance of $2,712 million.

 

We expect that existing cash and cash equivalents, the availability of borrowings under existing and renewable credit lines, and cash expected to be provided from operations will be sufficient to meet ongoing cash requirements.

 

We expect to use existing cash balances and future cash generated from operations to fund capital spending, financing activities such as the repayment of our debt balances as they mature, the payment of dividends, and the potential repurchase of shares of common stock in accordance with any plans approved by our Board of Directors, as well as our continued investment in our enterprise resource planning implementation and future acquisitions.

 

Sources and Uses of Cash

Cash generated by operating activities, which represents our primary source of liquidity, increased $148 million in fiscal 2010 to $1,360 million from $1,212 million in fiscal 2009. For fiscal 2010, accounts receivable decreased by $9 million, excluding the effect of foreign exchange, compared with a decline in the comparable prior year period of $199 million. For fiscal 2010, accounts payable, accrued expenses and other liabilities decreased $21 million, excluding the effect of foreign exchange, compared with a decrease in the comparable prior year period of $75 million.

 

Under our subscription and maintenance agreements, customers generally make installment payments over the term of the agreement, often with one payment due at contract execution, for the right to use our software products and receive product support, software fixes and new products when available. The timing and actual amounts of cash received from committed customer installment payments under any specific agreement can be affected by several factors, including the time value of money and the customer’s credit rating. Often, the amount received is the result of direct negotiations with the customer when establishing pricing and payment terms. In certain instances, the customer negotiates a price for a single installment payment and seeks its own internal or external financing sources. In other instances, we may assist the customer by arranging financing on the customer’s behalf through a third party financial institution. Alternatively, we may decide to transfer our rights to the future committed installment payments due under the license agreement to a third party financial institution in exchange for a cash payment. Once transferred, the future committed installments are payable by the customer to the third party financial institution. Whether the future committed installments have been financed directly by the customer with our assistance or by the transfer of our rights to future committed installments to a third party, such financing agreements may contain limited recourse provisions with respect to our continued performance under the license agreements. Based on our historical experience, we believe that any liability that we may incur as a result of these limited recourse provisions will be immaterial.

 

Amounts billed or collected as a result of a single installment for the entire contract value, or a substantial portion of the contract value, rather than being invoiced and collected over the life of the license agreement are reflected in the liability section of the Consolidated Balance Sheets as “Deferred revenue (billed or collected).” Amounts received from either the customer or a third-party financial institution in the current period that are attributable to later years of a license agreement have a positive effect on billings and cash provided by operating activities. Accordingly, to the extent such collections are attributable to the later years of a license agreement, billings and cash provided by operating activities during the license’s later years will be lower than if the payments were received over the license term. We are unable to predict with certainty the amount of cash to be collected from single installments for the entire contract value, or a substantial portion of the contract value, under new or renewed license agreements to be executed in future periods.

 

For fiscal 2010, gross receipts related to single installments for the entire contract value, or a substantial portion of the contract value, were $484 million, compared with $526 million in fiscal 2009.

 

Cash provided by operating activities typically increases in each consecutive quarter throughout the fiscal year in accordance with our bookings cycle, with the fourth quarter being the highest and the first quarter being the lowest. The timing of net cash provided by operating activities during the fiscal year is also affected by many other factors, including the timing of any customer financing or transfer of our interest in contractual installments and the level and timing of expenditures.

 

In any quarter, we may receive payments in advance of the contractually committed date on which the payments were otherwise due. In limited circumstances, we may offer discounts to customers to ensure payment in the current period of

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invoices that have been billed, but might not otherwise be paid until a subsequent period because of payment terms or other factors. Historically, any such discounts have not been material.

 

Our estimate of the fair value of net installment accounts receivable recorded for license agreements signed prior to October 2000 (the prior business model) approximates carrying value. See “Critical Accounting Policies and Estimates” for additional information regarding the prior business model.

 

Amounts due from customers under our subscription license model are offset by deferred revenue related to these license agreements, leaving no or minimal net carrying value for such amounts. The fair value of such amounts may exceed, equal, or be less than this carrying value but cannot be practically assessed since there is no existing market for a pool of customer receivables with contractual commitments similar to those owned by us. The actual fair value may not be known until these amounts are sold, securitized or collected. Although these customer license agreements commit the customer to payments under a fixed schedule, to the extent amounts are not yet due and payable by the customer, the agreements are considered executory in nature due to our ongoing commitment to provide maintenance and unspecified future software products as part of the agreement terms. For further information on our installment accounts receivable, refer to Note 6, “Trade and Installment Accounts Receivable” in the Notes to the Consolidated Financial Statements.

 

We can estimate the total amounts to be billed from committed contracts, referred to as our billings backlog, and the total amount to be recognized as revenue from committed contracts, referred to as our revenue backlog.

 

 

Note: Revenue Backlog includes deferred subscription, maintenance and professional services revenue

 

We can also estimate the total cash to be collected in the future from committed contracts, referred to as our “Expected future cash collections,” by adding the total billings backlog to the current and noncurrent Trade and Installment Accounts Receivable, which represent amounts already billed but not collected, from our Consolidated Balance Sheets.

 

 

The increases in our current and non-current revenue and billings backlogs as well as our expected future cash collections were driven by the increased committed value associated with customer contracts. Revenue to be recognized in the next 12 months increased 7% at March 31, 2010 as compared with March 31, 2009. Excluding the effect of foreign exchange, revenue to be recognized in the next 12 months increased by 4% at March 31, 2010 as compared with March 31, 2009.

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Unbilled amounts relating to subscription licenses are mostly collectible over a period of one to five years. As of March 31, 2010, on a cumulative basis, 41%, 71%, 88%, 98%, and 100% of amounts due from customers recorded under our business model come due within fiscal 2011 through 2015, respectively.

 

Cash Generated by Operating Activities

 

 

Fiscal Year 2010 versus Fiscal Year 2009

Operating Activities:

Cash generated by operating activities for fiscal 2010 was $1,360 million, representing an increase of $148 million compared with fiscal 2009. The increase was driven primarily by lower vendor disbursements and payroll of $116 million which was mostly due to decreased operating costs.

 

Investing Activities:

Cash used in investing activities for fiscal 2010 was $888 million compared with $284 million for fiscal 2009. The increase in cash used in investing activities was primarily due to the increase in acquisition related costs of $541 million and an increase in capitalized software development costs of $59 million from the reallocation of resources previously spent on maintenance to new development projects and incremental development expenditures on acquired products and other strategic investments.

 

Financing Activities:

Cash used in financing activities for fiscal 2010 was $705 million compared with $759 million in fiscal 2009. The primary changes in cash used in financing activities were an increase in debt repayments of $525 million and an increase in repurchases of our common stock of $223 million, offset by $744 million of debt borrowings, net of debt issuance costs of $6 million and proceeds of $61 million received from the exercise of a call spread option associated with our 1.625% Convertible Senior Notes due December 2009.

 

During fiscal 2009, we repaid the remaining $350 million principal amount of our 6.500% Senior Notes that was due and we also repurchased $148 million principal amount of our 4.750% Senior Notes due 2009 at a price of $143 million in cash. Refer to the “Debt Arrangements” table below for additional information about our debt balances at March 31, 2010.

 

Fiscal Year 2009 versus Fiscal Year 2008

Operating Activities:

Cash generated by operating activities for fiscal 2009 was $1,212 million, representing an increase of $109 million compared with fiscal 2008. The increase was primarily due to a reduction of $212 million in vendor disbursements and payroll due to increased operating efficiencies and $78 million received from settlements of derivative contracts primarily resulting from the strengthening of the U.S. dollar against the euro. The amounts received from the settlements of derivative contracts were mostly offset by the reduced value in dollars of net cash received due to foreign exchange movements. These increases were partially offset by a $225 million decrease in cash collections from billings, mostly due to a $115 million decrease in single installment payments.

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Investing Activities:

Cash used in investing activities for fiscal 2009 was $284 million compared with $219 million for fiscal 2008. Increases in cash paid for acquisitions, net of cash acquired, and capitalized software development costs of $49 million and $17 million, respectively, and a $27 million reduction due to proceeds from a sale-leaseback transaction that were realized in fiscal 2008 that did not recur in fiscal 2009. These increases were partially offset by reduced purchases of property and equipment of $34 million.

 

Financing Activities:

Cash used in financing activities for fiscal 2009 was $759 million compared with $572 million in fiscal 2008. The increase in cash used in financing activities was primarily due to the partial repayment of $324 million principal amount of our 4.750% Senior Notes due 2009 during the second half of fiscal 2009. In addition, during the first quarter of fiscal 2009, we repaid the remaining $350 million principal amount of our 6.500% Senior Notes that was due and payable at that time. Refer to the “Debt Arrangements” table below for additional information concerning our outstanding debt balances at March 31, 2009. Partially offsetting the debt repayments in fiscal 2009 was a decrease in common stock repurchases. During fiscal 2009, we repurchased $4 million of our own common stock, compared with $500 million in fiscal 2008.

 

As of March 31, 2010 and 2009, our debt arrangements consisted of the following:

 

 

During fiscal 2010, we repaid $500 million of borrowing under our 2008 Revolving Credit Facility, which expires in August 2012, $176 million of our 4.750% Senior Notes due December 2009, and $520 million of our 1.625% Convertible Senior Notes (1.625% Notes), of which approximately $460 million was for the outstanding principal of the debt and approximately $60 million was for the in-the-money conversion feature. The $60 million was recorded in “Additional paid-in capital” in the Consolidated Balance Sheet. These repayments are included in “Net cash used in financing activities” in the Consolidated Statement of Cash Flows for fiscal 2010.

 

Concurrent with the original issuance of the 1.625% Notes in 2002, we entered into call spread repurchase option transactions (1.625% Notes Call Spread) to partially mitigate potential dilution from the conversion of the 1.625% Notes. We exercised the 1.625% Notes Call Spread in December 2009, resulting in option proceeds of approximately $61 million, which was recorded in “Additional paid-in capital” in the Consolidated Balance Sheet at March 31, 2010 and is included in “Net cash used in financing activities” in the Consolidated Statement of Cash Flows for fiscal 2010.

 

During fiscal 2010, we issued approximately $750 million principal amount of 5.375% Senior Notes due 2019 (the 5.375% Senior Notes). The net proceeds of the offering were approximately $738 million, after being issued at a discount of $6 million and deducting expenses, underwriting discounts and commissions of $6 million, all of which will be amortized over the term of the 5.375% Senior Notes. As of March 31, 2010, the principal amount of the 5.375% Senior Notes of $744 million, net of unamortized debt discount of $6 million, is included in the “Long-term debt, net of current portion” line item in the Consolidated Balance Sheet.

 

During fiscal 2010, we entered into three $100 million notional amount interest rate swap transactions to swap a portion of our fixed interest rate payments from our 6.125% Senior Notes due December 2014 into floating interest rate payments

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through December 1, 2014. Under the terms of the swaps, we will pay quarterly interest at rates of 2.915%, 2.779% and 2.999% on the first, second and third swap, respectively, plus the three-month LIBOR rate, and will receive interest payments at 5.625%, which is consistent with the original stated coupon at issuance. The LIBOR based rate is set quarterly three months prior to the date of the interest payment. The change in the fair value of the interest rate swaps from inception to March 31, 2010 was approximately $1 million and is reflected in “Other current assets” in the Consolidated Balance Sheet. The carrying value of the debt was adjusted by an equal and offsetting amount.

 

As of March 31, 2010, the Company’s senior unsecured notes were rated Baa3, BBB, and BBB by Moody’s Investors Service (Moody’s), Standard and Poor’s (S&P) and Fitch Ratings (Fitch), respectively.

 

As of March 31, 2010 the outlook on these unsecured notes is rated stable by all three rating agencies.

 

For further information on our debt balances, refer to Note 8, “Debt,” in the Notes to the Consolidated Financial Statements.

 

Stock Repurchases

During fiscal 2010, we entered into brokerage arrangements with third-party financial institutions to purchase our common stock in the open market on our behalf. We acquired approximately 10.0 million shares of our common stock for approximately $227 million under these arrangements during fiscal 2010. As of March 31, 2010, we were authorized to purchase an aggregate amount of up to approximately $19 million of additional shares of common stock under our current stock repurchase program. The remaining authorized amount of approximately $19 million was repurchased during April 2010, which completed the stock repurchase program authorized by our Board of Directors on October 29, 2008.

 

On May 12, 2010, our Board of Directors approved a stock repurchase program that authorized us to acquire up to $500 million of our common stock. We will fund the program with available cash on hand and repurchase shares on the open market from time to time based on market conditions and other factors.

 

Dividends

We have paid cash dividends each year since July 1990. For fiscal 2010, 2009 and 2008, we paid annual cash dividends of $0.16 per share, which have been paid out in quarterly installments of $0.04 per share as and when declared by our Board of Directors. Total cash dividends paid was $83 million, $83 million and $82 million for fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

 

Effect of Exchange Rate Changes

There was a $104 million favorable effect to our cash balances in fiscal 2010 predominantly due to the weakening of the U.S. dollar against the Australian dollar, Brazilian real and Canadian dollar of 32%, 29% and 24%, respectively. There was a $252 million unfavorable effect to our cash balances in fiscal 2009 predominantly due to the strengthening of the U.S. dollar against the euro, British pound, Australian dollar, Brazilian real and Canadian dollar of 16%, 28%, 24%, 24% and 19%, respectively.

 

Off-Balance Sheet Arrangements

Prior to fiscal 2001, we sold individual accounts receivable to a third party subject to certain recourse provisions. The outstanding principal balance subject to recourse of these receivables approximated $21 million and $38 million as of March 31, 2010 and 2009, respectively.

 

Other than the commitments and recourse provisions described above, we do not have any other off-balance sheet arrangements with unconsolidated entities or related parties and, accordingly, off-balance sheet risks to our liquidity and capital resources from unconsolidated entities are limited.

 

Contractual Obligations and Commitments

We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with current accounting rules, the future rights and related obligations pertaining to such contractual arrangements are not reported as assets or liabilities on our Consolidated Balance Sheets. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business.

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The following table summarizes our contractual arrangements as of March 31, 2010 and the timing and effect that such commitments are expected to have on our liquidity and cash flow in future periods. In addition, the table summarizes the timing of payments on our debt obligations as reported on our Consolidated Balance Sheets as of March 31, 2010.

 

 

 

As of March 31, 2010, we have no material capital lease obligations, either individually or in the aggregate.

 

Critical Accounting Policies and Estimates

We review our financial reporting and disclosure practices and accounting policies quarterly to help ensure that they provide accurate and transparent information relative to the current economic and business environment. Note 1, “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements contains a summary of the significant accounting policies that we use. Many of these accounting policies involve complex situations and require a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that effect our financial statements. On an ongoing basis, we evaluate our estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates may change in the future if underlying assumptions or factors change.

 

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in implementing them.

 

Revenue Recognition

We generate revenue from the following primary sources: (1) licensing software products; (2) providing customer technical support (referred to as maintenance); and (3) providing professional services, such as product implementation, consulting and education. Revenue is recorded net of applicable sales taxes.

 

Under our subscription model, implemented in October 2000, software license agreements typically combine the right to use specified software products, the right to maintenance, and the right to receive and use unspecified future software products for no additional fee during the term of the agreement. For these subscription licenses we are required under GAAP to recognize revenue ratably over the term of the license agreement once all four of the following revenue recognition criteria are met: (1) we have evidence of an arrangement with a customer; (2) we deliver 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.

 

Our subscription customers generally make installment payments for the right to use our software products over the term of the associated software license agreement. While the timing of revenue recognition is affected by the offering of unspecified future software products, it generally has not changed the timing of how we bill and collect cash from customers and as a result, our cash generated from operations has generally not been affected by the offering of unspecified future software products. For license agreements signed under the prior business model, once all four of the above noted revenue recognition criteria were met, software license fees were recognized as revenue generally when the software was delivered to the customer, or “up-front” (as the contracts did not include a right to unspecified future software products), and the maintenance fees were deferred and subsequently recognized as revenue over the term of the license.

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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 software license agreement are deferred and recognized on a ratable basis over the life of the related software transaction. Vendor-specific objective evidence (VSOE) of the fair value 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 is deferred until the uncertainty is removed.

 

Software fees and other revenue primarily consist 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. This includes revenue generated through transactions with distributors and volume partners, value added resellers and exclusive representatives (sometimes referred to as the Company’s “indirect” or “channel” revenue) and certain revenue associated with new or acquired products sold on an up-front basis. For bundle arrangements that include either maintenance or both maintenance and professional services, we use 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 the fair value of those elements, with the residual of the arrangement fee allocated to and recognized as license revenue. We have established VSOE of the fair value of maintenance from either contractually stated renewal rates or using the bell-shaped curve method.

 

In the event that agreements with our customers are executed in close proximity of the other license agreements with the same customer, we evaluate whether the separate arrangements are linked, and, if so, are considered a single multi-element arrangement for which revenue is recognized ratably as “Subscription and maintenance revenue” in the Consolidated Statements of Operations.

 

Some of our revenue from software licenses, including some newly developed and recently acquired products, is recognized on an up-front basis, subject to meeting the same revenue recognition criteria as described above. Software fees from such licenses are recognized up-front and are reported in the “Software fees and other” line item in the Consolidated Statements of Operations. Maintenance fees from such licenses are recognized ratably over the term of the license and are reported in the “Subscription and maintenance revenue” line item in the Consolidated Statements of Operations. License agreements under which software fees are recognized up-front do not include the right to receive unspecified future software products.

 

Our historical practice with respect to newly acquired products with established VSOE of fair value has been to record revenue initially on the acquired company’s systems, generally under an up-front model; and, starting within the first fiscal year after the acquisition, to enter new licenses for such products under our subscription model, following which revenue is recognized ratably and recorded as “Subscription and maintenance revenue.” More recently, we have been selling some of our products without the right to receive unspecified future software products in certain instances. The software license fees from these contracts are recorded on an up-front basis as “Software fees and other” as described above. Selling such licenses under an up-front model will result in higher total revenue in a reporting period than if such licenses were based on our subscription model and the associated revenue recognized ratably.

 

We are unable to establish VSOE of fair value for all undelivered elements in license agreements that include software products for which maintenance pricing is based on both discounted and undiscounted license list prices and arrangements that contain rights to unspecified future software products. If VSOE of fair value of one or more undelivered elements does not exist, license revenue is deferred and recognized upon delivery of those elements or when VSOE of fair value can be established. When the license includes the right to receive unspecified future software products, license revenue is recognized ratably over the term of the arrangement as VSOE does not exist for the future unspecified software products.

 

Revenue from sales to distributors and volume partners, value added resellers and exclusive representatives commences when all four of the revenue recognition criteria noted above are met and when these entities sell the software product to their customers. This is commonly referred to as the sell-through method.

 

We have an established business practice of offering installment payment options to customers and a history of successfully collecting substantially all amounts due under such agreements. We assess collectability based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If, in our judgment, collection of a fee is not probable, we will not recognize revenue until the uncertainty is removed through the receipt of cash payment.

 

Our standard licensing agreements include a product warranty provision for all products. The likelihood that we will be required to make refunds to customers under such provisions is considered remote.

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Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and damages arising from claims against such customers based on, among other things, allegations that our software products infringe the intellectual property rights of a third-party. In most cases and where legally enforceable, the indemnification is limited to the amount paid by the customer. In most cases, in the event of an infringement claim, we retain the right to (i) procure for the customer the right to continue using the software product; (ii) replace or modify the software product to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement and refund to the customer a pro-rata portion of the fees paid. We consider the likelihood that we will be required to make refunds to customers under such provisions to be remote.

 

Accounts Receivable

The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts receivable on the Consolidated Balance Sheets. In developing the estimate for the allowance for doubtful accounts, we rely on several factors, including:

 

 

The allowance includes two components: (a) specifically identified receivables that are reviewed for impairment when, based on current information, we do not expect to collect the full amount due from the customer; and (b) an allowance for losses inherent in the remaining receivable portfolio based on historical activity.

 

Income Taxes

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, along with net operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities 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. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.

 

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We utilize a “more likely than not” threshold for the recognition and derecognition of tax positions and measure positions accordingly. We reflect changes in recognition or measurement in a period in which the change in judgment occurs. We record interest and penalties related to uncertain tax positions in income tax expense.

 

Goodwill, Capitalized Software Products, and Other Intangible Assets

GAAP requires an impairment-only approach to accounting for goodwill and other intangibles with an indefinite life. Absent any prior indicators of impairment, we perform an annual impairment analysis during the fourth quarter of our fiscal year. We evaluate goodwill impairment based on a single reporting unit.

 

The goodwill impairment model is a two-step process. The first step is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination; that is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

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The fair value of a reporting unit under the first step of the goodwill impairment test is measured using the quoted market price method. Determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether an impairment charge is recognized and the magnitude of any such charge. These estimates are subject to review and approval by senior management. This approach uses significant assumptions, including projected future cash flow, the discount rate reflecting the risk inherent in future cash flow, and a terminal growth rate. We performed our annual assessment of goodwill during the fourth quarter of fiscal 2010 and concluded that no impairment charge was required.

 

The carrying values of capitalized software products, for purchased software, internally developed software and other intangible assets are reviewed on a regular basis to ensure that any excess of the carrying value over the net realizable value is written off. The facts and circumstances considered include an assessment of the net realizable value for capitalized software products and the future recoverability of the cost of other intangible assets as of the balance sheet date. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude thereof.

 

Intangible assets with finite useful lives are subject to amortization over the expected period of economic benefit to us. We evaluate the remaining useful lives of intangible assets to determine whether events or circumstances have occurred that warrant a revision to the remaining amortization period. In cases where a revision to the remaining amortization period is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life.

 

Accounting for Business Combinations

The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed based on their respective fair values.

 

Product Development and Enhancements

GAAP specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that reflect our best estimates. If other assumptions had been used in the current period to estimate technological feasibility, the reported product development and enhancement expense could have been affected. 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 five years from the date the product became available for general release to customers. We amortize capitalized software costs using the straight-line method.

 

Accounting for Stock-Based Compensation

We currently maintain several stock-based compensation plans. We use the Black-Scholes option-pricing model to compute the estimated fair value of certain stock-based awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially affected. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially affected in future years.

 

As described in Note 11, “Stock Plans,” in the Notes to the Consolidated Financial Statements, performance share units (PSUs) are awards under the long-term incentive programs for senior executives where the number of shares or restricted shares, as applicable, ultimately received by the employee depends on Company performance measured against specified targets and will be determined after a three-year or one-year period, as applicable. The fair value of each award is estimated on the date that the performance targets are established based on the fair value of our stock and our estimate of the level of achievement of our performance targets. We are required to recalculate the fair value of issued PSUs each reporting period

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until the underlying shares are granted. The adjustment is based on the quoted market price of our stock on the reporting period date. Each quarter, we compare the actual performance we expect to achieve with the performance targets.

 

Legal Contingencies

We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether the amount of loss is reasonably estimable. Due to the uncertainties related to these matters, the decision to record an accrual and the amount of accruals recorded are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending litigation and claims, and may revise our estimates. Such revisions could have a material effect on our results of operations. Refer to Note 9, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements for a description of our material legal proceedings.

 

New Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified Accounting Standards Codification (ASC) Accounting Standards Update (ASU) 2009-13 (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 superseded EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and addresses criteria for separating the consideration in certain multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of VSOE or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The adoption of ASU 2009-13 will not have a material effect on our consolidated results of operations or financial condition.

 

In September 2009, the FASB ratified ASC ASU 2009-14 (previously EITF No. 09-3, Certain Revenue Arrangements That Include Software Elements). ASU 2009-14 modifies the scope of software revenue recognition to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 has an effective date that is consistent with ASU 2009-13. The adoption of ASU 2009-14 will not have a material effect on our consolidated results of operations or financial condition.

 

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, debt, and installment accounts receivable. We have a prescribed methodology whereby we invest our excess cash in liquid investments that are composed of money market funds and debt instruments of government agencies and high-quality corporate issuers (S&P single “A” rating and higher). To mitigate risk, all of the securities have a maturity date within one year, and holdings of any one issuer do not exceed 10% of the portfolio.

 

As of March 31, 2010, our outstanding debt was $1,545 million, all of which was in fixed rate obligations except for our 2008 Revolving Credit Facility which had a $250 million balance as of March 31, 2010 (Refer to Note 8, “Debt,” in the Notes to the Consolidated Financial Statements for additional information).

 

During fiscal year 2009, we entered into interest rate swaps with a total notional value of $250 million to hedge the variable interest rate payments relating to the 2008 Revolving Credit Facility. These derivatives are designated as cash flow hedges. Under the terms of the interest rate swaps, we will pay interest at an annualized rate of 2.70% and 2.95% and receive interest payment at the one month LIBOR rate.

 

During fiscal 2010, we entered into three interest rate swap transactions to swap a total of $300 million of our 6.125% Senior Notes (the 6.125% Notes) due December 2014 into floating interest rate debt through December 1, 2014. Under the terms of the swaps, we will pay quarterly interest at a rate of 2.915%, 2.779% and 2.999% on the first, second and third swap, respectively, plus the three month LIBOR rate, and will receive payment at 5.625%. The LIBOR base rate is set quarterly three months prior to date of the interest payment. The change in the fair value of the interest rate swaps from

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inception to March 31, 2010 was approximately $1 million and is reflected in “Other current assets” in the Consolidated Balance Sheets. The carrying value of the debt was adjusted by an equal and offsetting amount. 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 less than $1 million as of March 31, 2010.

 

Foreign Currency Exchange Risk

We conduct business on a worldwide basis through subsidiaries in 46 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 2010 and 2009, we did not designate our foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives are recognized on the Consolidated Balance Sheets at fair value and unrealized or realized changes in fair value from these contracts are recorded as “Other expenses (gains), net” in our Consolidated Statements of Operations. Refer to Note 4, “Derivatives and Fair Value Measurement,” 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 $119 million.

 

Our Consolidated Financial Statements are included in Part IV, Item 15 of this Annual Report on 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.

 

Not applicable.

 

(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 as of the end of the period covered by this report.

 

(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

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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 as of March 31, 2010 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 report.

 

The Company’s independent registered public accounting firm, KPMG LLP, have audited the effectiveness of the Company’s internal control over financial reporting as stated in their report which appears on page 52 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 such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

In the second quarter of fiscal year 2010, the Company began the migration of certain financial and sales processing systems to an enterprise resource planning (ERP) system in its Europe, Middle East and Africa region. The changes in the Company’s internal control over financial reporting associated with this ERP implementation continued during the fourth quarter of fiscal year 2010.

 

Not applicable

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Information required by this Item that will appear under the headings “Election of Directors,” “Litigation Involving Directors and Executive Officers,” “Nominating Procedures,” “Board Committees and Meetings,” “Communications with Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive proxy statement to be filed with the SEC relating to our 2010 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/investor. 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.

 

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,” and “Compensation and Human Resources Committee Report on Executive Compensation” in the definitive proxy statement to be filed with the SEC relating to our 2010 Annual Meeting of Stockholders is incorporated herein by reference.

 

Information required by this Item that will appear under the headings “Compensation and Other Information Concerning Executive Officers,” “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 2010 Annual Meeting of Stockholders is incorporated herein by reference.

 

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 2010 Annual Meeting of Stockholders is incorporated herein by reference.

 

Information required by this Item that will appear under the headings “Ratification of Appointment of Independent Registered Public Accountants” and “Audit Committee Report” in the definitive proxy statement to be filed with the SEC relating to our 2010 Annual Meeting of Stockholders is incorporated herein by reference.

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