Edgar Filing: CA, INC.

Incentive Plans
for Fiscal Years

Performance Period

Shares of Common Stock
(in millions)

Weighted Average Grant Date Fair Value

CA-2015.06.30-10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

__________________________________________

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 1-9247

__________________________________________

CA, Inc.

(Exact name of registrant as specified in its charter)

__________________________________________



Delaware	13-2857434
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

520 Madison Avenue, New York, New York	10022
(Address of principal executive offices)	(Zip Code)

1-800-225-5224

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

__________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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



(Check one:)
Large accelerated filer	þ	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:



Title of Class		Shares Outstanding
Common Stock		as of July 17, 2015
par value $0.10 per share		441,304,906

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CA, INC. AND SUBSIDIARIES

INDEX



		Page
PART I.	Financial Information

	Report of Independent Registered Public Accounting Firm	1

Item 1.	Condensed Consolidated Financial Statements	2

	Condensed Consolidated Balance Sheets – June 30, 2015 and March 31, 2015	2

	Condensed Consolidated Statements of Operations – Three Months Ended June 30, 2015 and 2014	3

	Condensed Consolidated Statements of Comprehensive Income – Three Months Ended June 30, 2015 and 2014	4

	Condensed Consolidated Statements of Cash Flows – Three Months Ended June 30, 2015 and 2014	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Overview	20

	Executive Summary	21

	Quarterly Update	22

	Performance Indicators	23

	Results of Operations	26

	Liquidity and Capital Resources	31

	Critical Accounting Policies and Business Practices	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

	Signatures	47

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PART I. FINANCIAL INFORMATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

CA, Inc.:

We have reviewed the condensed consolidated balance sheet of CA, Inc. and subsidiaries as of June 30, 2015, and the related condensed consolidated statements of operations, comprehensive income, and cash flows for the three-month periods ended June 30, 2015 and 2014. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CA, Inc. and subsidiaries as of March 31, 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 8, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2015, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

New York, New York

July 24, 2015

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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)



	June 30, 2015			March 31, 2015
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,816		$	2,804
Trade accounts receivable, net	432			652
Deferred income taxes	335			318
Other current assets	162			213
Total current assets	$	3,745		$	3,987
Property and equipment, net of accumulated depreciation of $829 and $812, respectively	$	252		$	252
Goodwill	5,817			5,806
Capitalized software and other intangible assets, net	700			731
Deferred income taxes	88			92
Other noncurrent assets, net	105			111
Total assets	$	10,707		$	10,979
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	8		$	10
Accounts payable	85			105
Accrued salaries, wages and commissions	138			219
Accrued expenses and other current liabilities	373			428
Deferred revenue (billed or collected)	2,040			2,114
Taxes payable, other than income taxes payable	29			55
Federal, state and foreign income taxes payable	6			—
Deferred income taxes	7			7
Total current liabilities	$	2,686		$	2,938
Long-term debt, net of current portion	$	1,250		$	1,253
Federal, state and foreign income taxes payable	159			150
Deferred income taxes	54			45
Deferred revenue (billed or collected)	720			863
Other noncurrent liabilities	105			105
Total liabilities	$	4,974		$	5,354
Stockholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; No shares issued and outstanding	$	—		$	—
Common stock, $0.10 par value, 1,100,000,000 shares authorized; 589,695,081 and 589,695,081 shares issued; 436,571,635 and 435,502,730 shares outstanding, respectively	59			59
Additional paid-in capital	3,592			3,631
Retained earnings	6,323			6,221
Accumulated other comprehensive loss	(386		)	(418		)
Treasury stock, at cost, 153,123,446 and 154,192,351 shares, respectively	(3,855		)	(3,868		)
Total stockholders’ equity	$	5,733		$	5,625
Total liabilities and stockholders’ equity	$	10,707		$	10,979

See accompanying Notes to the Condensed Consolidated Financial Statements

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CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in millions, except per share amounts)



	For the Three Months Ended June 30,
	2015			2014
Revenue:
Subscription and maintenance	$	836		$	909
Professional services	79			87
Software fees and other	62			73
Total revenue	$	977		$	1,069
Expenses:
Costs of licensing and maintenance	$	66		$	72
Cost of professional services	71			81
Amortization of capitalized software costs	60			67
Selling and marketing	226			246
General and administrative	90			92
Product development and enhancements	136			150
Depreciation and amortization of other intangible assets	27			34
Other (gains) expenses, net	(3		)	14
Total expenses before interest and income taxes	$	673		$	756
Income from continuing operations before interest and income taxes	$	304		$	313
Interest expense, net	9			14
Income from continuing operations before income taxes	$	295		$	299
Income tax expense	88			87
Income from continuing operations	$	207		$	212
Income from discontinued operations, net of income taxes	5			5
Net income	$	212		$	217

Basic income per common share:
Income from continuing operations	$	0.47		$	0.48
Income from discontinued operations	0.01			0.01
Net income	$	0.48		$	0.49
Basic weighted average shares used in computation	436			440

Diluted income per common share:
Income from continuing operations	$	0.47		$	0.48
Income from discontinued operations	0.01			0.01
Net income	$	0.48		$	0.49
Diluted weighted average shares used in computation	438			441

See accompanying Notes to the Condensed Consolidated Financial Statements

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CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in millions)



	For the Three Months Ended June 30,
	2015		2014
Net income	$	212	$	217
Other comprehensive loss:
Foreign currency translation adjustments	32		10
Total other comprehensive loss	$	32	$	10
Comprehensive income	$	244	$	227

See accompanying Notes to the Condensed Consolidated Financial Statements

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CA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)



	For the Three Months Ended June 30,
	2015			2014
Operating activities from continuing operations:
Net income	$	212		$	217
Income from discontinued operations	(5		)	(5		)
Income from continuing operations	$	207		$	212
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	87			101
Deferred income taxes	(10		)	(20		)
Provision for bad debts	1			(1		)
Share-based compensation expense	22			20
Asset impairments and other non-cash items	—			1
Foreign currency transaction losses	3			—
Changes in other operating assets and liabilities, net of effect of acquisitions:
Decrease in trade accounts receivable	228			251
Decrease in deferred revenue	(239		)	(285		)
Increase in taxes payable, net	27			17
Decrease in accounts payable, accrued expenses and other	(33		)	(30		)
Decrease in accrued salaries, wages and commissions	(83		)	(97		)
Changes in other operating assets and liabilities	(22		)	(3		)
Net cash provided by operating activities - continuing operations	$	188		$	166
Investing activities from continuing operations:
Acquisitions of businesses, net of cash acquired, and purchased software	$	(37	)	$	(11	)
Purchases of property and equipment	(13		)	(21		)
Net cash used in investing activities - continuing operations	$	(50	)	$	(32	)
Financing activities from continuing operations:
Dividends paid	$	(110	)	$	(111	)
Purchases of common stock	(50		)	(50		)
Notional pooling borrowings	1,760			1,334
Notional pooling repayments	(1,776		)	(1,323		)
Debt repayments	(5		)	(2		)
Exercise of common stock options	4			12
Other financing activities	(23		)	—
Net cash used in financing activities - continuing operations	$	(200	)	$	(140	)
Effect of exchange rate changes on cash	$	69		$	1
Net change in cash and cash equivalents - continuing operations	$	7		$	(5	)
Cash provided by operating activities - discontinued operations	$	5		$	8
Net effect of discontinued operations on cash and cash equivalents	$	5		$	8
Increase in cash and cash equivalents	$	12		$	3
Cash and cash equivalents at beginning of period	$	2,804		$	3,252
Cash and cash equivalents at end of period	$	2,816		$	3,255

See accompanying Notes to the Condensed Consolidated Financial Statements

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited Condensed Consolidated Financial Statements of CA, Inc. (Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 270, for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (2015 Form 10-K).

In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results.

Operating results for the three months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016.

Divestitures: In the second quarter of fiscal year 2015, the Company sold its CA arcserve data protection solution assets (arcserve). In the fourth quarter of fiscal year 2014, the Company identified its CA ERwin Data Modeling solution assets (ERwin) as available for sale. The results of operations associated with these businesses have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows. The effects of the discontinued operations were immaterial to the Company’s Condensed Consolidated Balance Sheets at June 30, 2015 and March 31, 2015. See Note B, “Divestitures,” for additional information.

Cash and Cash Equivalents: The Company’s cash and cash equivalents are held in numerous locations throughout the world, with approximately 71% being held by the Company’s foreign subsidiaries outside the United States at June 30, 2015.

New Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB issued a one-year deferral of the effective date of the new revenue recognition standard. The new guidance will be effective for the Company's first quarter of fiscal year 2019 and early application for fiscal year 2018 would be permitted. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. ASU 2014-09 is expected to have a significant impact on the Company’s revenue recognition policies and disclosures. The Company has not yet selected a transition method nor has it determined when it will adopt the standard and the effect of the standard on its ongoing financial reporting.

NOTE B – DIVESTITURES

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

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The income from discontinued operations relating to both ERwin and arcserve for the three months ended June 30, 2015 and 2014 consisted of the following:



	Three Months Ended June 30,
(in millions)	2015		2014
Subscription and maintenance	$	6	$	21
Software fees and other	2		10
Total revenue	$	8	$	31
Income from discontinued operations, net of tax expense of $2 million and $4 million, respectively	$	5	$	5

NOTE C – SEVERANCE AND EXIT COSTS

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

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

Accrued severance and exit costs and changes in the accruals during the three months ended June 30, 2015 and 2014 were as follows:



(in millions)	Accrued Balance at March 31, 2015		Expense		Change in Estimate			Payments			Accretion and Other		Accrued Balance at June 30, 2015
Severance charges	$	28	$	—	$	(2	)	$	(15	)	$	—	$	11
Facility exit charges	21		—		—			(1		)	—		20
Total accrued liabilities	$	49											$	31



(in millions)	Accrued Balance at March 31, 2014		Expense		Change in Estimate		Payments			Accretion and Other			Accrued Balance at June 30, 2014
Severance charges	$	55	$	8	$	1	$	(28	)	$	(3	)	$	33
Facility exit charges	29		—		—		(2		)	(2		)	25
Total accrued liabilities	$	84											$	58

The balance at June 30, 2015 includes a severance accrual of approximately $3 million for plans and actions prior to the Fiscal 2015 Severance Actions.

The severance liabilities are included in “Accrued salaries, wages and commissions” in the Condensed Consolidated Balance Sheets. The facility exit liabilities are included in “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” in the Condensed Consolidated Balance Sheets.

Accretion and other includes accretion of the Company’s lease obligations related to facility exits as well as changes in the assumptions related to future sublease income. These costs are included in “General and administrative” expense in the Condensed Consolidated Statements of Operations.

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE D – TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable, net represents amounts due from the Company’s customers and is presented net of allowances. These balances include revenue recognized in advance of customer billings but do not include unbilled contractual commitments executed under license agreements. The components of “Trade accounts receivable, net” were as follows:



	June 30, 2015			March 31, 2015
	(in millions)
Accounts receivable – billed	$	383		$	591
Accounts receivable – unbilled	55			63
Other receivables	12			15
Less: Allowances	(18		)	(17		)
Trade accounts receivable, net	$	432		$	652

NOTE E – GOODWILL, CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS

The gross carrying amounts and accumulated amortization for capitalized software and other intangible assets at June 30, 2015 were as follows:



	At June 30, 2015
	Gross Amortizable Assets		Less: Fully Amortized Assets		Remaining Amortizable Assets		Accumulated Amortization on Remaining Amortizable Assets		Net Assets
	(in millions)
Purchased software products	$	5,758	$	4,865	$	893	$	436	$	457
Internally developed software products	1,486		862		624		419		205
Other intangible assets	837		556		281		243		38
Total capitalized software and other intangible assets	$	8,081	$	6,283	$	1,798	$	1,098	$	700

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



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

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Based on the capitalized software and other intangible assets recorded through June 30, 2015, the projected annual amortization expense for fiscal year 2016 and the next four fiscal years is expected to be as follows:



	Year Ended March 31,
	2016		2017		2018		2019		2020
	(in millions)
Purchased software products	$	118	$	118	$	114	$	73	$	53
Internally developed software products	109		79		37		10		1
Other intangible assets	37		9		2		1		—
Total	$	264	$	206	$	153	$	84	$	54

The Company evaluates the useful lives and recoverability of capitalized software and other intangible assets when events or changes in circumstances indicate that an impairment may exist. These evaluations require complex assumptions about key factors such as future customer demand, technology trends and the impact of those factors on the technology the Company acquires and develops for its products. Impairments or revisions to useful lives could result from the use of alternative assumptions that reflect reasonably possible outcomes related to future customer demand or technology trends for assets within the Enterprise Solutions segment.

Goodwill activity by segment for the three months ended June 30, 2015 was as follows:



(in millions)	Mainframe Solutions		Enterprise Solutions		Services		Total
Balance at March 31, 2015	$	4,178	$	1,547	$	81	$	5,806
Acquisitions	—		8		—		8
Foreign currency translation adjustment	—		3		—		3
Balance at June 30, 2015	$	4,178	$	1,558	$	81	$	5,817

NOTE F – DEFERRED REVENUE

The current and noncurrent components of “Deferred revenue (billed or collected)” at June 30, 2015 and March 31, 2015 were as follows:



	June 30, 2015		March 31, 2015
	(in millions)
Current:
Subscription and maintenance	$	1,894	$	1,966
Professional services	110		115
Software fees and other	36		33
Total deferred revenue (billed or collected) – current	$	2,040	$	2,114
Noncurrent:
Subscription and maintenance	$	689	$	832
Professional services	29		28
Software fees and other	2		3
Total deferred revenue (billed or collected) – noncurrent	$	720	$	863
Total deferred revenue (billed or collected)	$	2,760	$	2,977

NOTE G – DERIVATIVES

The Company is exposed to financial market risks arising from changes in interest rates and foreign exchange rates. Changes in interest rates could affect the Company’s monetary assets and liabilities, and foreign exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted transactions. The Company enters into derivative contracts with the intent of mitigating a portion of these risks.

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Swaps: At June 30, 2015 and March 31, 2015, the Company had no interest rate swap derivatives outstanding.

Foreign Currency Contracts: The Company enters into foreign currency option and forward contracts to manage foreign currency risks. The Company has not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other (gains) expenses, net” in the Company’s Condensed Consolidated Statements of Operations.

At June 30, 2015, foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $1,618 million and durations of less than nine months. The net fair value of these contracts at June 30, 2015 was a net asset of approximately $5 million, of which approximately $20 million is included in “Other current assets” and approximately $15 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.

At March 31, 2015, foreign currency contracts outstanding consisted of purchase and sale contracts with a total gross notional value of approximately $298 million and durations of less than three months. The net fair value of these contracts at March 31, 2015 was a net asset of approximately $2 million, of which approximately $5 million is included in “Other current assets” and approximately $3 million is included in “Accrued expenses and other current liabilities” in the Company’s Condensed Consolidated Balance Sheet.

A summary of the effect of the interest rate and foreign exchange derivatives on the Company’s Condensed Consolidated Statements of Operations was as follows:



	Amount of Net (Gain)/Loss Recognized in the Condensed Consolidated Statements of Operations
	Three Months Ended June 30,
(in millions)	2015		2014
Interest expense, net – interest rate swaps designated as fair value hedges	$	—	$	(3	)
Other (gains) expenses, net – foreign currency contracts	$	11	$	5

The Company is subject to collateral security arrangements with most of its major counterparties. These arrangements require the Company or the counterparty to post collateral when the derivative fair values exceed contractually established thresholds. The aggregate fair values of all derivative instruments under these collateralized arrangements were in a net asset position at June 30, 2015 and March 31, 2015. The Company posted no collateral at June 30, 2015 or March 31, 2015. Under these agreements, if the Company’s credit ratings had been downgraded one rating level, the Company would still not have been required to post collateral.

NOTE H – FAIR VALUE MEASUREMENTS

The following table presents the Company’s assets and liabilities that were measured at fair value on a recurring basis at June 30, 2015 and March 31, 2015:



	At June 30, 2015						At March 31, 2015
	Fair Value Measurement Using Input Types				Estimated Fair Value		Fair Value Measurement Using Input Types				Estimated Fair Value
(in millions)	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Money market funds ⁽¹⁾	$	468	$	—	$	468	$	749	$	—	$	749
Foreign exchange derivatives ⁽²⁾	—		20		20		—		5		5
Total assets	$	468	$	20	$	488	$	749	$	5	$	754
Liabilities:
Foreign exchange derivatives ⁽²⁾	$	—	$	15	$	15	$	—	$	3	$	3
Total liabilities	$	—	$	15	$	15	$	—	$	3	$	3


(1)	The Company’s investments in money market funds are classified as “Cash and cash equivalents” in its Condensed Consolidated Balance Sheets.


(2)	See Note G, “Derivatives” for additional information.

At June 30, 2015 and March 31, 2015, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The carrying values of financial instruments classified as current assets and current liabilities, such as cash and cash equivalents, short-term investments, accounts payable, accrued expenses, and short-term borrowings, approximate fair value due to the short-term maturity of the instruments.

The following table presents the carrying amounts and estimated fair values of the Company’s other financial instruments that were not measured at fair value on a recurring basis at June 30, 2015 and March 31, 2015:



	At June 30, 2015				At March 31, 2015
(in millions)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Liabilities:
Total debt ⁽¹⁾	$	1,258	$	1,361	$	1,263	$	1,376
Facility exit reserve ⁽²⁾	$	20	$	22	$	21	$	23


(1)	Estimated fair value of total debt is based on quoted prices for similar liabilities for which significant inputs are observable except for certain long-term lease obligations, for which fair value approximates carrying value (Level 2).

(2)

Estimated fair value for the facility exit reserve is determined using the Company’s incremental borrowing rate at June 30, 2015 and March 31, 2015. At June 30, 2015 and March 31, 2015, the facility exit reserve included approximately $4 million and $4 million, respectively, in “Accrued expenses and other current liabilities” and approximately $16 million and $17 million, respectively, in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets (Level 3).

NOTE I – COMMITMENTS AND CONTINGENCIES

The Company, various subsidiaries, and certain current and former officers have been or, from time to time, may be named as defendants in various lawsuits and claims arising in the normal course of business. The Company may also become involved with contract issues and disputes with customers, including government customers.

On March 24, 2014, the U.S. Department of Justice (DOJ) filed under seal in the United States District Court for the District of Columbia a complaint against the Company in partial intervention under the qui tam provisions of the civil False Claims Act (FCA). The underlying complaint was filed under seal by an individual plaintiff on August 24, 2009. On May 29, 2014, the case was unsealed. Both the DOJ and the individual plaintiff have filed amended complaints. The current complaints relate to government sales transactions under the Company’s General Services Administration (GSA) schedule contract, entered into in 2002 and extended until present through subsequent amendments. In sum and substance, the current complaints allege that the Company provided inaccurate commercial discounting information to the GSA during contract negotiations and that, as a result, the GSA’s contract discount was lower than it otherwise would have been. In addition, the complaints allege that the Company failed to apply the full negotiated discount in some instances and to pay sufficient rebates pursuant to the contract’s price reduction clause. In addition to FCA claims, the current complaints also assert common law causes of action. The DOJ complaint seeks an unspecified amount of damages, including treble damages and civil penalties. The complaint by the individual plaintiff alleges that the U.S. government has suffered damages in excess of $100 million and seeks an unspecified amount of damages, including treble damages and civil penalties. The Company filed motions to dismiss the current complaints. On March 31, 2015, the court issued decisions denying the Company's motion to dismiss the DOJ complaint, and granting in part and denying in part the Company's motion to dismiss the individual plaintiff's complaint. On April 22, 2015, the court set a discovery schedule for the case. On October 30, 2014, the GSA Suspension and Debarment Division issued a Show Cause Letter to the Company in response to the complaints summarized above. In sum, the letter called on the Company to demonstrate why the U.S. government should continue to contract with the Company, given the litigation allegations made in these complaints. On December 19, 2014, the Company provided a detailed response to the Show Cause Letter. The response pointed out that the allegations in this litigation are being contested and have not been adjudicated. It also included a summary of the Company’s positions with respect to the allegations and the manner in which the Company believes that it meets the criteria for being a party with which the U.S. government should continue to contract. That response is currently under consideration by the GSA Suspension and Debarment Division. The Company cannot predict the amount of damages likely to result from the litigation summarized above. Although the timing and ultimate outcome of this litigation and the Show Cause Letter cannot be determined, the Company believes that the material aspects of the liability theories set forth in the litigation complaints are unfounded and that it is a responsible party with whom the U.S. government should continue to contract. The Company also believes that it has meritorious defenses and intends to vigorously contest the lawsuit.

Based on the Company’s experience, management believes that the damages amounts claimed in a case are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of cases. The Company believes that it has meritorious defenses in connection with its current lawsuits and material claims and disputes, and intends to vigorously contest each of them.

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of the Company’s management based upon information currently available to the Company, while the outcome of these lawsuits, claims and disputes is uncertain, the likely results of these lawsuits, claims and disputes are not expected, either individually or in the aggregate, to have a material adverse effect on the Company’s financial position, results of operations or cash flows, although the effect could be material to the Company’s results of operations or cash flows for any interim reporting period. For some of these matters, the Company is unable to estimate a range of reasonably possible loss due to the stage of the matter and/or other particular circumstances of the matter. For others, a range of reasonably possible loss can be estimated. For those matters for which such a range can be estimated, the Company estimates that, in the aggregate, the range of reasonably possible loss is from zero to $40 million. This is in addition to amounts, if any, that have been accrued for those matters.

The Company is obligated to indemnify its officers and directors under certain circumstances to the fullest extent permitted by Delaware law. As a part of that obligation, the Company may, from time to time, advance certain attorneys’ fees and expenses incurred by officers and directors in various lawsuits and investigations, as permitted under Delaware law.

NOTE J – STOCKHOLDERS’ EQUITY

Stock Repurchases: On May 14, 2014, the Company’s Board of Directors approved a stock repurchase program that authorizes the Company to acquire up to $1 billion of its common stock. During the three months ended June 30, 2015, the Company repurchased approximately 1.7 million shares of its common stock for approximately $50 million. At June 30, 2015, the Company remained authorized to purchase approximately $735 million of its common stock under its current stock repurchase program. The Company entered into an agreement effective July 1, 2015 to repurchase $50 million of its common stock to be delivered in September 2015.

Accumulated Other Comprehensive Loss: Foreign currency translation losses included in “Accumulated other comprehensive loss” in the Company’s Condensed Consolidated Balance Sheets at June 30, 2015 and March 31, 2015 were approximately $386 million and $418 million, respectively.

Cash Dividends: The Company’s Board of Directors declared the following dividends during the three months ended June 30, 2015 and 2014:

Three Months Ended June 30, 2015:

(in millions, except per share amounts)



Declaration Date	Dividend Per Share	Record Date	Total Amount	Payment Date
May 5, 2015	$0.25	May 28, 2015	$110	June 16, 2015

Three Months Ended June 30, 2014:

(in millions, except per share amounts)



Declaration Date	Dividend Per Share	Record Date	Total Amount	Payment Date
May 15, 2014	$0.25	May 29, 2014	$111	June 17, 2014

NOTE K – INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE

Basic net income per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted net income per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares, as adjusted for the potential dilutive effect of non-participating share-based awards.

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents basic and diluted income from continuing operations per common share information for the three months ended June 30, 2015 and 2014:



	Three Months Ended June 30,
	2015			2014
	(in millions, except per share amounts)
Basic income from continuing operations per common share:
Income from continuing operations	$	207		$	212
Less: Income from continuing operations allocable to participating securities	(2		)	(2		)
Income from continuing operations allocable to common shares	$	205		$	210
Weighted average common shares outstanding	436			440
Basic income from continuing operations per common share	$	0.47		$	0.48

Diluted income from continuing operations per common share:
Income from continuing operations	$	207		$	212
Less: Income from continuing operations allocable to participating securities	(2		)	(2		)
Income from continuing operations allocable to common shares	$	205		$	210
Weighted average shares outstanding and common share equivalents:
Weighted average common shares outstanding	436			440
Weighted average effect of share-based payment awards	2			1
Denominator in calculation of diluted income per share	438			441
Diluted income from continuing operations per common share	$	0.47		$	0.48

For the three months ended June 30, 2015 and 2014, respectively, approximately 1 million and 1 million shares of Company common stock underlying restricted stock awards and options to purchase common stock were excluded from the calculation because their effect on income per share was anti-dilutive during the respective periods. Weighted average restricted stock awards of approximately 4 million and 4 million for the three months ended June 30, 2015 and 2014, respectively, were considered participating securities in the calculation of net income allocable to common stockholders.

NOTE L – ACCOUNTING FOR SHARE-BASED COMPENSATION

The Company recognized share-based compensation in the following line items in the Condensed Consolidated Statements of Operations for the periods indicated:



	Three Months Ended June 30,
	2015			2014
	(in millions)
Costs of licensing and maintenance	$	2		$	1
Cost of professional services	1			1
Selling and marketing	8			7
General and administrative	7			6
Product development and enhancements	4			5
Share-based compensation expense before tax	$	22		$	20
Income tax benefit	(7		)	(6		)
Net share-based compensation expense	$	15		$	14

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about unrecognized share-based compensation costs at June 30, 2015:



	Unrecognized Share-Based Compensation Costs		Weighted Average Period Expected to be Recognized
	(in millions)		(in years)
Stock option awards	$	8	2.2
Restricted stock units	25		2.3
Restricted stock awards	96		2.3
Performance share units	32		2.9
Total unrecognized share-based compensation costs	$	161	2.4

There were no capitalized share-based compensation costs for the three months ended June 30, 2015 and 2014.

The value of performance share units (PSUs) is determined using the closing price of the Company’s common stock on the last trading day of the quarter until the PSUs are granted. Compensation costs for the PSUs are amortized over the requisite service periods based on the expected level of achievement of the performance targets. At the conclusion of the performance periods for the PSUs, the applicable number of shares of Common Stock, restricted stock awards (RSAs) or restricted stock units (RSUs) granted may vary based upon the level of achievement of the performance targets and the approval of the Company’s Compensation and Human Resources Committee (which may reduce any award for any reason in its discretion).

For the three months ended June 30, 2015 and 2014, the Company issued stock options for approximately 0.8 million shares and 0.6 million shares, respectively. The weighted average fair values and assumptions used for the options granted were as follows:



	Three Months Ended June 30,
	2015			2014
Weighted average fair value	$	4.69		$	5.87
Dividend yield	3.37		%	3.29		%
Expected volatility factor ⁽¹⁾	23		%	29		%
Risk-free interest rate ⁽²⁾	1.9		%	2.1		%
Expected life (in years) ⁽³⁾	6.0			6.0


(1)	Expected volatility is measured using historical daily price changes of the Company’s stock over the respective expected term of the options and the implied volatility derived from the market prices of the Company’s traded options.


(2)	The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.


(3)	The expected life is the number of years the Company estimates that options will be outstanding prior to exercise. The Company’s computation of expected life was determined based on the simplified method (the average of the vesting period and option term).

The table below summarizes the RSAs and RSUs granted under the 1-year PSUs for the Company’s fiscal year 2015 and 2014 incentive plan years. The RSAs and RSUs were granted in the first quarter of fiscal years 2016 and 2015, respectively. The RSAs and RSUs vest 34% on the date of grant and 33% on the first and second anniversaries of the grant date.



		RSAs		RSUs
Incentive Plans for Fiscal Years	Performance Period	Shares (in millions)	Weighted Average Grant Date Fair Value	Shares (in millions)	Weighted Average Grant Date Fair Value
2015	1 year	0.5	$31.41	0.1	$30.42
2014	1 year	0.7	$29.91	0.1	$28.92

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

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes the RSAs and RSUs granted under the 1-year PSUs for the Company’s fiscal year 2015 and 2014 sales retention equity programs. The RSAs and RSUs were granted in the first quarter of fiscal years 2016 and 2015, respectively. The RSAs and RSUs vest on the third anniversary of the grant date.



		RSAs		RSUs
Incentive Plans for Fiscal Years	Performance Period	Shares (in millions)	Weighted Average Grant Date Fair Value	Shares (in millions)	Weighted Average Grant Date Fair Value
2015	1 year	0.2	$30.45	0.1	$27.50
2014	1 year	0.2	$28.69	0.1	$25.73

The table below summarizes all of the RSAs and RSUs, including grants made pursuant to the long-term incentive plans discussed above, granted during the three months ended June 30, 2015 and 2014:



	Three Months Ended June 30,
	2015		2014
	(shares in millions)
RSAs:
Shares	2.7		2.9
Weighted average grant date fair value ⁽¹⁾	$	30.65	$	28.96
RSUs:
Shares	0.8		0.8
Weighted average grant date fair value ⁽²⁾	$	28.90	$	26.92


(1)	The fair value is based on the quoted market value of the Company’s common stock on the grant date.


(2)	The fair value is based on the quoted market value of the Company’s common stock on the grant date reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting of the RSUs, which is calculated using a risk-free interest rate.

Employee Stock Purchase Plan: The Company maintains the 2012 Employee Stock Purchase Plan (ESPP) for all eligible employees. The ESPP offer period is semi-annual and allows participants to purchase the Company’s common stock at 95% of the closing price of the stock on the last day of the offer period. The ESPP is non-compensatory. For the six-month offer period ended June 30, 2015, the Company issued approximately 0.1 million shares under the ESPP at $27.83 per share. As of June 30, 2015, approximately 29.3 million shares are available for future issuances under the ESPP.

NOTE M – INCOME TAXES

Income tax expense for the three months ended June 30, 2015 and 2014 was approximately $88 million and $87 million, respectively.

The Company’s estimated annual effective tax rate, which excludes the impact of discrete items, for the three months ended June 30, 2015 and 2014 was 29.8% and 29.0%, respectively. Changes in tax laws, the outcome of tax audits and any other changes in potential tax liabilities may result in additional tax expense or benefit in fiscal year 2016, which are not considered in the Company’s estimated annual effective tax rate. While the Company does not currently view any such items as individually material to the results of the Company’s consolidated financial position or results of operations, the impact of certain items may yield additional tax expense or benefit in the remaining quarters of fiscal year 2016 and the Company is anticipating a fiscal year 2016 effective tax rate between 28% and 29%.

NOTE N – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

For the three months ended June 30, 2015 and 2014, interest payments, net were approximately $21 million and $25 million, respectively, and income taxes paid, net from continuing operations were approximately $17 million and $30 million, respectively. For the three months ended June 30, 2015 and 2014, the excess tax benefits from share-based incentive awards included in financing activities from continuing operations were approximately $3 million and $3 million, respectively.

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-cash financing activities for the three months ended June 30, 2015 and 2014 consisted of treasury common shares issued in connection with the following: share-based incentive awards issued under the Company’s equity compensation plans of approximately $41 million (net of approximately $27 million of income taxes withheld) and $42 million (net of approximately $27 million of income taxes withheld), respectively; and discretionary stock contributions to the CA, Inc. Savings Harvest Plan of approximately $24 million and $26 million, respectively. Non-cash financing activities for the three months ended June 30, 2015 and 2014 included approximately $2 million and $3 million, respectively, in treasury common shares issued in connection with the Company’s Employee Stock Purchase Plan.

The Company uses a notional pooling arrangement with an international bank to help manage global liquidity. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either cash deposit or borrowing positions through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both. The activity under this notional pooling arrangement for the three months ended June 30, 2015 and 2014 was as follows:



	Three Months Ended June 30,
	2015			2014
	(in millions)
Total borrowings outstanding at beginning of period ⁽¹⁾	$	138		$	139
Borrowings	1,760			1,334
Repayments	(1,776		)	(1,323		)
Foreign exchange effect	17			(10		)
Total borrowings outstanding at end of period ⁽¹⁾	$	139		$	140


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

NOTE O – SEGMENT INFORMATION

The Company’s Mainframe Solutions and Enterprise Solutions segments comprise its software business organized by the nature of the Company’s software offerings and the platform on which the products operate. The Services segment comprises product implementation, consulting, customer education and customer training, including those directly related to the Mainframe Solutions and Enterprise Solutions software that the Company sells to its customers.

Segment expenses do not include share-based compensation expense; amortization of purchased software; amortization of other intangible assets; certain foreign exchange derivative hedging gains and losses; charges relating to rebalancing initiatives that are large enough to require approval from the Company’s Board of Directors (i.e., costs associated with the Company’s Fiscal 2014 Plan); and other miscellaneous costs. The Company considers all costs of internally developed software as segment expense in the period the costs are incurred and as a result, the Company will add back capitalized internal software costs and exclude amortization of internally developed software costs previously capitalized from segment expenses. A measure of segment assets is not currently provided to the Company’s Chief Executive Officer and has therefore not been disclosed.

The Company’s segment information for the three months ended June 30, 2015 and 2014 was as follows:



Three Months Ended June 30, 2015	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	560		$	338		$	79		$	977
Expenses	211			290			71			572
Segment profit	$	349		$	48		$	8		$	405
Segment operating margin	62		%	14		%	10		%	41		%
Depreciation	$	9		$	7		$	—		$	16

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended June 30, 2015:



(in millions)
Segment profit	$	405
Less:
Purchased software amortization	28
Other intangibles amortization	11
Internally developed software products amortization	32
Share-based compensation expense	22
Other expenses, net ⁽¹⁾	8
Interest expense, net	9
Income from continuing operations before income taxes	$	295


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



Three Months Ended June 30, 2014	Mainframe Solutions			Enterprise Solutions			Services			Total
(dollars in millions)	Mainframe Solutions			Enterprise Solutions			Services			Total
Revenue	$	614		$	368		$	87		$	1,069
Expenses	235			325			82			642
Segment profit	$	379		$	43		$	5		$	427
Segment operating margin	62		%	12		%	6		%	40		%
Depreciation	$	12		$	7		$	—		$	19

Reconciliation of segment profit to income from continuing operations before income taxes for the three months ended June 30, 2014:



(in millions)
Segment profit	$	427
Less:
Purchased software amortization	28
Other intangibles amortization	15
Internally developed software products amortization	39
Share-based compensation expense	20
Other expenses, net ⁽¹⁾	12
Interest expense, net	14
Income from continuing operations before income taxes	$	299


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

The table below summarizes the Company’s revenue from the United States and from international (i.e., non-U.S.) locations:



	Three Months Ended June 30,
	2015		2014
	(in millions)
United States	$	619	$	643
EMEA ⁽¹⁾	221		259
Other	137		167
Total revenue	$	977	$	1,069


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

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CA, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE P – SUBSEQUENT EVENTS

On July 8, 2015, the Company completed its acquisition of Rally Software Development Corp. (Rally), a provider of Agile development software and services. Pursuant to the terms of the acquisition agreement and related tender offer, the Company acquired 100% of the outstanding shares of Rally common stock for approximately $480 million, net of cash acquired. In connection with the acquisition, the Company borrowed approximately $400 million under its revolving credit facility and funded the remaining amount from the Company’s available cash on hand. The interest rate applicable to the Company at the time of borrowing under the revolving credit facility was approximately 1.19%. The initial allocation of the purchase price for the acquisition of Rally is pending the completion of the Company’s analysis and finalization of estimates. Accordingly, such disclosures related to this business combination could not be made at the time these condensed consolidated financial statements were issued. The results of operations of Rally will be reported predominately in the Company’s Enterprise Solutions segment and will be included in the consolidated results of operations of the Company from the date of acquisition.

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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (Form 10-Q) contains certain forward-looking information relating to CA, Inc. (which we refer to as the “Company,” “Registrant,” “CA Technologies,” “CA,” “we,” “our” or “us”), that is based on the beliefs of, and assumptions made by, our management as well as information currently available to management. When used in this Form 10-Q, the words “believes,” “plans,” “anticipates,” “expects,” “estimates,” “targets” and similar expressions relating to the future are intended to identify forward-looking information. Forward-looking information includes, for example, not only the statements relating to the future made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), but also statements relating to the future that appear in other parts of this Form 10-Q. This forward-looking information reflects our current views with respect to future events and is subject to certain risks, uncertainties and assumptions.

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

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

A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to achieve success in the Company’s strategy by, among other things, enabling the Company’s sales force to accelerate growth of new product sales (at levels sufficient to offset any decline in revenue in the Company’s Mainframe Solutions segment), improving the Company’s brand, technology and innovation awareness in the marketplace, ensuring the Company’s offerings for cloud computing, application development and IT operations (DevOps), Software-as-a-Service (SaaS), and mobile device management, as well as other new offerings, address the needs of a rapidly changing market, while not adversely affecting the demand for the Company’s traditional products or its profitability to an extent greater than anticipated, and effectively managing the strategic shift in the Company’s business model to develop more easily installed software, provide additional SaaS offerings and refocus the Company’s professional services and education engagements on those engagements that are connected to new product sales, without affecting the Company’s performance to an extent greater than anticipated; the failure to innovate or adapt to technological changes and introduce new software products and services in a timely manner; competition in product and service offerings and pricing; the ability of the Company’s products to remain compatible with ever-changing operating environments, platforms or third party products; global economic factors or political events beyond the Company’s control and other business and legal risks associated with non-U.S. operations; the failure to expand partner programs; the ability to retain and attract qualified professionals; general economic conditions and credit constraints, or unfavorable economic conditions in a particular region, industry or business sector; the ability to successfully integrate acquired companies and products into the Company’s existing business; risks associated with sales to government customers; breaches of the Company’s data center, network, as well as the Company’s software products, and the IT environments of the Company’s vendors and customers; the ability to adequately manage, evolve and protect the Company’s information systems, infrastructure and processes; fluctuations in foreign exchange rates; discovery of errors or omissions in the Company’s software products or documentation and potential product liability claims; the failure to protect the Company’s intellectual property rights and source code; the failure to renew large license transactions on a satisfactory basis; access to software licensed from third parties; risks associated with the use of software from open source code sources; third-party claims of intellectual property infringement or royalty payments; fluctuations in the number, terms and duration of the Company’s license agreements, as well as the timing of orders from customers and channel partners; events or circumstances that would require the Company to record an impairment charge relating to the Company’s goodwill or capitalized software and other intangible assets balances; potential tax liabilities; changes in market conditions or the Company’s credit ratings; the failure to effectively execute the Company’s workforce reductions, workforce rebalancing and facilities consolidations; successful and secure outsourcing of various functions to third parties; changes in generally accepted accounting principles; and other factors described more fully in this Form 10-Q and the Company’s other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties occur, or should our assumptions prove incorrect, actual results may vary materially from the forward-looking information described in this Form 10-Q as believed, planned, anticipated, expected, estimated, targeted or similarly identified. We do not intend to update these forward-looking statements, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements. References in this Form 10-Q to fiscal 2016 and fiscal 2015 are to our fiscal years ending on March 31, 2016 and 2015, respectively.

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OVERVIEW

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

Our goal is to be the world’s leading independent software provider for IT management and security solutions that help organizations and enterprises plan, develop, manage, and secure modern IT architectures, across mainframe, distributed, cloud and mobile environments. To accomplish this, key elements of our strategy include:


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

•

Addressing shifts in market dynamics and technology. We will innovate to deliver new differentiated solutions that enable our customers to manage the challenges and capture the opportunities of disruptive technologies, such as ambient data (the massive amounts of data being generated and stored within and outside the enterprise), unwired enterprise (the ubiquitously connected network of devices that are changing how we view computing), and Application Programming Interface (API) assembled apps (opening up and connecting data and business logic from multiple internal and external parties to create user apps that drive business value).

•

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


•	Pursuing new business models and expanded routes to market. While our traditional on-premise software delivery remains core to many enterprise customers, we see cloud-based and lightweight try-and-buy models as increasingly attractive for our customers. This simplifies their decision-making and accelerates the value they can derive from new solution investments.

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


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

•

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


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

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

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

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At the same time, we continue to dedicate sales resources and deploy additional solutions to address opportunities to sell to new enterprises and to expand our relationship with existing non-Platinum customers–which we refer to as our “Named” and “Growth” customers. Named customers are large potential customers with whom we currently do not have a strong presence and where a competitor often has an established relationship, while Growth customers are mid-size potential customers with whom we currently do not have a strong presence. In addition to this dedication of additional sales resources, we will service some of these customers through partners. We believe we can grow our business and increase market share by delivering differentiated technology and collaborating with partners to leverage their relationships, market reach and implementation capacity. We are deploying new routes to market, and simplifying the buying and deployment process for our customers.

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

In the past, CA Technologies marketing has onboarded and integrated new talent, tools and processes to create a contemporary demand capability to support sales. Going forward, we will focus on further enhancing our connection with new and existing customers, contributing directly to business growth and expanding our customer base globally.

EXECUTIVE SUMMARY

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

Revenue


•	Total revenue declined $92 million primarily as a result of an unfavorable foreign exchange effect of $65 million and, to a lesser extent, a decrease in subscription and maintenance revenue.

•

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

Bookings


•	Total bookings decreased 9% primarily due to an unfavorable foreign exchange effect and, to a lesser extent, a year-over-year decrease in renewals within subscription and maintenance bookings, which was primarily attributable to a decrease in our Mainframe Solutions renewals.


•	Total renewals decreased by a percentage in the low teens primarily due to the timing of our renewal portfolio.


•	Total new product sales decreased by approximately 10% primarily due to a lower level of mainframe solutions new sales.


•	Mainframe solutions new sales, including capacity, declined by a percentage in the mid-twenties primarily due to lower mainframe capacity sales.


•	Enterprise solutions new product sales decreased by a percentage in the mid-single digits primarily as a result of the unfavorable effect of foreign exchange. Excluding the unfavorable effect of foreign exchange, enterprise solutions new product sales increased by a percentage in the low single digits primarily as a result of an increase in sales outside of our renewal process.


•	We currently expect our fiscal 2016 renewal portfolio to increase by approximately 10% compared with fiscal 2015. Excluding a large system integrator renewal expected in fiscal 2016, we expect our fiscal 2016 renewal portfolio to decrease by a percentage in the low single digits.

Expenses


•	Operating expenses decreased primarily as a result of a favorable foreign exchange effect of $28 million and a decrease in personnel-related costs.

Income taxes


•	Income tax expense was generally consistent with the year-ago period and we anticipate a fiscal 2016 effective tax rate between 28% and 29%.

Diluted income per common share from continuing operations


•	Diluted income per common share from continuing operations decreased to $0.47 from $0.48.

Segment results


•	Mainframe Solutions revenue decreased primarily due to an unfavorable foreign exchange effect of $38 million and, to a lesser extent, insufficient revenue from prior period new sales to offset the decline in revenue contribution from renewals. Mainframe Solutions operating margin was generally consistent compared with the year-ago period.

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•	Enterprise Solutions revenue decreased due to an unfavorable foreign exchange effect of $22 million and a decrease in the percentage of enterprise solutions product sales recognized on an up-front basis. Enterprise Solutions operating margin increased primarily as a result of lower personnel-related costs and other expenses.


•	Services revenue decreased primarily due to an unfavorable foreign exchange effect of $5 million and, to a lesser extent, a decline in fiscal 2015 professional services engagements. Operating margin for professional services increased primarily due to a decrease in personnel-related costs as a result of our prior period severance actions.

Cash flows from continuing operations

•

Net cash provided by operating activities from continuing operations was $188 million, representing an increase of $22 million. Net cash provided by operating activities increased primarily due to a decrease in vendor disbursements and payroll of $56 million, a decrease of other disbursements, net of $29 million and a decrease in income tax payments, net of $13 million, offset by a decrease in cash collections of $76 million. Net cash provided by operating activities was unfavorably affected by foreign exchange during the first quarter of fiscal 2016. Excluding this unfavorable effect, collections increased during the period.

QUARTERLY UPDATE


•	In May 2015, the Company entered into a definitive agreement to acquire Rally Software Development Corp. (Rally) a leading provider of Agile development software and services. The Company completed the acquisition of Rally in July 2015.


•	In June 2015, the Company appointed Otto Berkes as its Chief Technology Officer. Mr. Berkes will be responsible for technical leadership and innovation, further developing the Company’s technical community, and aligning its software strategy, architecture and partner relationships to deliver customer value.


•	In July 2015, the Company announced the hiring of Ayman Sayed as its Chief Product Officer. Working in partnership with Otto Berkes, the Company’s Chief Technology Officer, Mr. Sayed will be responsible for building a differentiated product portfolio targeted at customers’ most difficult business problems.

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PERFORMANCE INDICATORS

Management uses several quantitative performance indicators to assess our financial results and condition. Following is a summary of the principal quantitative performance indicators that management uses to review performance:



	First Quarter Comparison Fiscal
	2016 ⁽¹⁾		2015 ⁽¹⁾		Dollar Change			Percentage Change
	(dollars in millions)
Total revenue	$	977	$	1,069	$	(92	)	(9	)%
Income from continuing operations	$	207	$	212	$	(5	)	(2	)%
Net cash provided by operating activities - continuing operations	$	188	$	166	$	22		13	%
Total bookings	$	662	$	724	$	(62	)	(9	)%
Subscription and maintenance bookings	$	525	$	603	$	(78	)	(13	)%
Weighted average subscription and maintenance license agreement duration in years	3.45		3.60		(0.15		)	(4	)%



	June 30, 2015		March 31, 2015		Change From Year End			June 30, 2014		Change From Prior Year Quarter
	(in millions)
Cash and cash equivalents	$	2,816	$	2,804	$	12		$	3,255	$	(439	)
Total debt	$	1,258	$	1,263	$	(5	)	$	1,769	$	(511	)
Total expected future cash collections from committed contracts ^{(1) (2)}	$	3,950	$	4,205	$	(255	)	$	4,873	$	(923	)
Total revenue backlog ^{(1) (2)}	$	6,278	$	6,530	$	(252	)	$	7,330	$	(1,052	)
Total current revenue backlog ^{(1) (2)}	$	3,042	$	3,141	$	(99	)	$	3,402	$	(360	)


(1)	Information presented excludes the results of our discontinued operations.


(2)	Refer to the discussion in the “Liquidity and Capital Resources” section of this MD&A for additional information on expected future cash collections from committed contracts, billing backlog and revenue backlog.

Analyses of our performance indicators shown above and our segment performance 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 the sale of license, maintenance and professional services agreements. Amounts recognized as subscription and maintenance revenue are recognized ratably over the term of the agreement. Professional services revenue is generally recognized as the services are performed or recognized on a ratable basis over the term of the related software license. Software fees and other revenue generally represents license fee revenue recognized at the inception of a license agreement (up-front basis) and also includes our Software-as-a-Service (SaaS) revenue, which is recognized as services are provided.

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, or sales, includes the incremental value of all subscription, maintenance and professional services contracts and software fees and other contracts entered into during the reporting period and is generally reflective of the amount of products and services during the period that our customers have agreed to purchase from us. License fees for bookings attributed to sales of software products for which revenue is recognized on an up-front basis is reflected in “Software fees and other” in our Condensed Consolidated Statements of Operations, while the maintenance portion is reflected in “Subscription and maintenance” in our Condensed Consolidated Statements of Operations.

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Our management looks within total bookings at renewal bookings, which we define as bookings attributable to the renewable value of a prior contract (i.e., the maintenance value and, in the case of non-perpetual licenses, the license value), and at total new product sales, which we define as sales of mainframe and enterprise solutions products and mainframe solutions capacity that are new or in addition to products or mainframe solutions capacity previously contracted for by a customer. Renewal bookings, as we report them, do not include new product and capacity sales and professional services arrangements and are reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract). Renewals can close before their scheduled renewal date for a number of reasons, including customer preference, customer needs for additional products or capacity, or our preference. The level of contracts closed prior to scheduled expiration dates and the reasons for such closings can vary from quarter to quarter. Generally, quarters with smaller renewal inventories result in a lower level of bookings because renewal bookings will be lower and, to a lesser extent, because renewals remain an important opportunity for new product sales.

Mainframe solutions new product sales and capacity growth can be inconsistent on both a quarterly and annual basis. We believe the period-over-period change in mainframe solutions new product sales and capacity combined is a more appropriate measure of performance and, therefore, we provide only total mainframe solutions new sales information, which includes mainframe solutions capacity. The amount of new product sales for a period, as currently tracked by us, requires estimation by management and has been historically reported by providing only growth rate comparisons. Within a given period, the amount of new product sales may not be material to the change in our total bookings or revenue compared with prior periods. New product sales can be reflected as subscription and maintenance bookings in the period (for which revenue would be recognized ratably over the term of the contract) or in software fees and other bookings (which are recognized as software fees and other revenue in the current 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 either directly by us or through distributors and volume partners, value-added resellers and exclusive representatives to end-users and may include the right for the customer to receive unspecified future software products and/or additional products, services or other fees for which we have not established VSOE for all undelivered elements. 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 perpetual licenses for which revenue is recognized on an up-front basis, SaaS offerings and professional services arrangements.

Within bookings, we also consider the yield on our renewals. We define “renewal yield” as the percentage of the renewable value of a prior contract (i.e., the maintenance value and, in the case of non-perpetual licenses, the license value) realized in current period bookings. The renewable value of a prior contract is an estimate affected by various factors including contractual renewal terms, price increases and other conditions. Price increases are not considered as part of the renewable value of the prior period contract. We estimate the aggregate renewal yield for a quarter based on a review of material transactions representing a majority of the dollar value of renewals during the current period. There may be no correlation between year-over-year changes in bookings and year-over-year changes in renewal yield, since renewal yield is based on the renewable value of contracts of various durations, most of which are longer than one year.

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, although in certain cases 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. Subscription and maintenance bookings typically increases in each consecutive quarter during a fiscal year, with the first quarter having the least bookings and the fourth quarter having the most 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 of bookings are not always indicative of the overall bookings trend.

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. Weighted average subscription and maintenance license agreement duration in years can fluctuate from period to period depending on the mix of license agreements entered into during a period. Weighted average duration information is disclosed in order to provide additional understanding of the volume of our bookings.

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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 Condensed 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. Classification of amounts as current and noncurrent depends on when such amounts are expected to be earned and, therefore, recognized as revenue. Amounts that are expected to be earned and, therefore, recognized as revenue in 12 months or less are classified as current, while amounts expected to be earned in greater than 12 months are classified as noncurrent. 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 Condensed Consolidated Statements of Operations. Generally, we believe that an increase or decrease in the current portion of revenue backlog on a year-over-year basis is a favorable or unfavorable indicator of future subscription and maintenance revenue performance, respectively, due to the high percentage of our revenue that is recognized from license agreements that are already committed and being recognized ratably. The value of backlog can fluctuate based upon the timing of contract expirations.

“Deferred revenue (billed or collected)” is composed of: (i) amounts received from customers in advance of revenue recognition and (ii) amounts billed but not collected for which revenue has not yet been earned.

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RESULTS OF OPERATIONS

The following table presents revenue and expense line items reported in our Condensed Consolidated Statements of Operations for the first quarter of fiscal 2016 and fiscal 2015 and the period-over-period dollar and percentage changes for those line items. These comparisons of past results are not necessarily indicative of future results.



	First Quarter Comparison Fiscal 2016 Versus Fiscal 2015
						Dollar Change			Percentage Change		Percentage of Total Revenue
	2016 ⁽¹⁾			2015 ⁽¹⁾		2016 / 2015			2016 / 2015		2016		2015
	(dollars in millions)
Revenue:
Subscription and maintenance	$	836		$	909	$	(73	)	(8	)%	86	%	85	%
Professional services	79			87		(8		)	(9	)	8		8
Software fees and other	62			73		(11		)	(15	)	6		7
Total revenue	$	977		$	1,069	$	(92	)	(9	)%	100	%	100	%
Expenses:
Costs of licensing and maintenance	$	66		$	72	$	(6	)	(8	)%	7	%	7	%
Cost of professional services	71			81		(10		)	(12	)	7		8
Amortization of capitalized software costs	60			67		(7		)	(10	)	6		6
Selling and marketing	226			246		(20		)	(8	)	23		23
General and administrative	90			92		(2		)	(2	)	9		9
Product development and enhancements	136			150		(14		)	(9	)	14		14
Depreciation and amortization of other intangible assets	27			34		(7		)	(21	)	3		3
Other (gains) expenses, net	(3		)	14		(17		)	(121	)	—		1
Total expenses before interest and income taxes	$	673		$	756	$	(83	)	(11	)%	69	%	71	%
Income from continuing operations before interest and income taxes	$	304		$	313	$	(9	)	(3	)%	31	%	29	%
Interest expense, net	9			14		(5		)	(36	)	1		1
Income from continuing operations before income taxes	$	295		$	299	$	(4	)	(1	)%	30	%	28	%
Income tax expense	88			87		1			1		9		8
Income from continuing operations	$	207		$	212	$	(5	)	(2	)%	21	%	20	%


(1)	Information presented excludes the results of our discontinued operations.

Note: Amounts may not add to their respective totals due to rounding.

Revenue

Total Revenue

The decrease in total revenue in the first quarter of fiscal 2016 compared with the first quarter of fiscal 2015 was primarily a result of an unfavorable foreign exchange effect of $65 million during the first quarter of fiscal 2016 and a decrease in subscription and maintenance revenue as described below.

Subscription and Maintenance

The decrease in subscription and maintenance revenue for the first quarter of fiscal 2016 compared with the first quarter of fiscal 2015 was primarily due to an unfavorable foreign exchange effect of $57 million for the first quarter of fiscal 2016 and, to a lesser extent, a decrease in Mainframe Solutions revenue (see “Performance of Segments” below).

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Professional Services

Professional services revenue primarily includes product implementation, consulting, customer education and customer training. Professional services revenue for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to an unfavorable foreign exchange effect of $5 million for the first quarter of fiscal 2016 and, to a lesser extent, a decline in fiscal 2015 professional services engagements. For the long term, we expect new versions of our on-premise software to be easier to implement and a higher percentage of our business to shift to a SaaS-based model, which could potentially reduce the demand for our professional services engagements.

Software Fees and Other

Software fees and other revenue consists primarily of revenue that is recognized on an up-front basis. This includes revenue associated with enterprise solutions products sold on an up-front basis directly by our sales force or through transactions with distributors and volume partners, value-added resellers and exclusive representatives (sometimes referred to as our “indirect” or “channel” revenue). It also includes our SaaS revenue, which is recognized as the services are provided, generally ratably over the term of the SaaS arrangement, rather than up-front.

Software fees and other revenue for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 as a result of the decrease in the percentage of enterprise solutions product sales recognized on an up-front basis.

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 the first quarter of fiscal 2016 and the first quarter of fiscal 2015.



	First Quarter Comparison Fiscal 2016 Versus Fiscal 2015
	2016 ⁽¹⁾		Percentage of Total Revenue		2015 ⁽¹⁾		Percentage of Total Revenue		Dollar Change			Percentage Change
	(dollars in millions)
United States	$	619	63	%	$	643	60	%	$	(24	)	(4	)%
International	358		37		426		40		(68		)	(16	)
Total Revenue	$	977	100	%	$	1,069	100	%	$	(92	)	(9	)%


(1)	Information presented excludes the results of our discontinued operations.

Revenue in the United States for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to a decrease in subscription and maintenance revenue. International revenue decreased for the first quarter of fiscal 2016 compared with the first quarter of fiscal 2015 primarily due to an unfavorable foreign exchange effect of $65 million during the first quarter of fiscal 2016.

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

Expenses

Operating Expenses

Operating expenses for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily as a result of a favorable foreign exchange effect of $28 million, decrease in personnel-related costs and changes within “Other (gains) expenses, net” as described below.

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 in the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to a decrease in personnel-related costs as a result of our prior period severance actions.

Cost of Professional Services

Cost of professional services consists primarily of our personnel-related costs associated with providing professional services and training to customers. Cost of professional services for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to a decrease in personnel-related costs as a result of our prior period severance actions.

Operating margin for professional services increased to 10% for the first quarter of fiscal 2016 compared with 7% for the first quarter of fiscal 2015. The increase in operating margin for professional services was primarily attributable to the decrease in personnel-related costs as mentioned above.

Operating margin for professional services does not include certain additional direct costs that are included within the Services segment (see “Performance of Segments” below). Expenses for the Services segment consist of cost of professional services and other direct costs included within selling and marketing and general and administrative expenses.

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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.

We evaluate the useful lives and recoverability of capitalized software and other intangible assets when events or changes in circumstances indicate that an impairment may exist. These evaluations require complex assumptions about key factors such as future customer demand, technology trends and the impact of those factors on the technology we acquire and develop for our products. Impairments or revisions to useful lives could result from the use of alternative assumptions that reflect reasonably possible outcomes related to future customer demand or technology trends for assets within the Enterprise Solutions segment.

Amortization of capitalized software costs for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 as a result of a decrease in amortization expense from capitalized software costs that became fully amortized in recent periods. As disclosed in our 2015 Form 10-K under Management’s Discussion and Analysis of Financial Condition and Results of Operations, due to our Agile development methodologies, we no longer capitalize any significant amounts of internally developed software costs.

Selling and Marketing

Selling and marketing expenses include the costs relating to our sales force, channel partners, corporate and business marketing and customer training programs. For the first quarter of fiscal 2016, the decrease in selling and marketing expenses compared with the first quarter of fiscal 2015 was primarily attributable to a favorable foreign exchange effect of $13 million and a decrease in personnel-related costs as a result of our prior period severance actions.

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, corporate communications and other costs such as provisions for doubtful accounts. General and administrative expenses for the first quarter of fiscal 2016 were generally consistent compared with the first quarter of fiscal 2015.

Product Development and Enhancements

For the first quarters of fiscal 2016 and fiscal 2015, product development and enhancements expenses represented 14% of total revenue. The decrease in product development and enhancements expenses was primarily attributable to the decrease in personnel-related costs as a result of our prior period severance actions.

Depreciation and Amortization of Other Intangible Assets

For the first quarter of fiscal 2016, depreciation and amortization expense decreased compared with the first quarter of fiscal 2015 primarily due to a decrease in property and equipment depreciation expense and, to a lesser extent, a decrease in amortization expense associated with other intangible assets that became fully amortized in recent periods.

Other (Gains) Expenses, Net

The summary of other (gains) expenses, net was as follows:



	First Quarter Fiscal 2016			First Quarter Fiscal 2015
	(dollars in millions)
Fiscal 2014 Plan	$	—		$	9
Legal settlements	(17		)	—
Losses from foreign exchange derivative contracts	11			5
Losses from foreign exchange rate fluctuations	4			—
Other miscellaneous items	(1		)	—
Total	$	(3	)	$	14

In the first quarter of fiscal 2016, we recognized a gain from various favorable adjustments associated with our legal accruals and a legal settlement.

Interest Expense, Net

Interest expense, net for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to the repayment of our 6.125% Senior Notes Due December 2014 during the third quarter of fiscal 2015.

Income Taxes

Income tax expense for the first quarter of fiscal 2016 was $88 million compared with $87 million for the first quarter of fiscal 2015.

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Our estimated annual effective tax rate, which excludes the impact of discrete items, for the first quarter of fiscal 2016 and fiscal 2015 was 29.8% and 29.0%, respectively. Changes in tax laws, the outcome of tax audits and any other changes in potential tax liabilities may result in additional tax expense or benefit in fiscal 2016, which are not considered in our estimated annual effective tax rate. While we do not currently view any such items as individually material to the results of our consolidated financial position or results of operations, the impact of certain items may yield additional tax expense or benefit in the remaining quarters of fiscal 2016 and we are anticipating a fiscal 2016 effective tax rate between 28% and 29%.

Discontinued Operations

In the second quarter of fiscal 2015, we sold CA arcserve data protection solution assets (arcserve) for $170 million and recognized a gain on disposal of $20 million, including tax expense of $77 million. The effective tax rate on the disposal of arcserve was unfavorably affected by non-deductible goodwill of $109 million. In the fourth quarter of fiscal 2014, we identified our CA ERwin Data Modeling solution assets (ERwin) as available for sale. The divestiture of arcserve and the planned divestiture of ERwin result from an effort to rationalize our product portfolio within the Enterprise Solutions segment.

The results of discontinued operations for the first quarter of fiscal 2016 included revenue of $8 million and income from operations, net of taxes, of $5 million. The results of discontinued operations for the first quarter of fiscal 2015 included revenue of $31 million and income from operations, net of taxes, of $5 million.

Refer to Note B, “Divestitures,” in the Notes to the Condensed Consolidated Financial Statements for additional information.

Performance of Segments

Our Mainframe Solutions and Enterprise Solutions segments comprise our software business organized by the nature of our software offerings and the platform on which the products operate. The Services segment comprises product implementation, consulting, customer education and customer training, including those directly related to the Mainframe Solutions and Enterprise Solutions software that we sell to our customers.

Segment expenses do not include share-based compensation expense; amortization of purchased software; amortization of other intangible assets; certain foreign exchange derivative hedging gains and losses; charges relating to rebalancing initiatives that are large enough to require approval from our Board of Directors (i.e., costs associated with our Fiscal 2014 Plan); and other miscellaneous costs. We consider all costs of internally developed software as segment expenses in the period the costs are incurred, and as a result, we will add back capitalized internal software costs and exclude amortization of internally developed software costs previously capitalized from segment expenses.

Segment financial information for the first quarter of fiscal 2016 and fiscal 2015 was as follows:



Mainframe Solutions	First Quarter Fiscal 2016 ⁽¹⁾			First Quarter Fiscal 2015 ⁽¹⁾
	(dollars in millions)
Revenue	$	560		$	614
Expenses	211			235
Segment profit	$	349		$	379
Segment operating margin	62		%	62		%


(1)	Information presented excludes the results of our discontinued operations.

Mainframe Solutions revenue for the first quarter of fiscal 2016 decreased compared with the year-ago period primarily due to an unfavorable foreign exchange effect of $38 million and, to a lesser extent, insufficient revenue from prior period new sales to offset the decline in revenue contribution from renewals. Mainframe Solutions operating margin for the first quarter of fiscal 2016 was generally consistent compared with the year-ago period.



Enterprise Solutions	First Quarter Fiscal 2016 ⁽¹⁾			First Quarter Fiscal 2015 ⁽¹⁾
	(dollars in millions)
Revenue	$	338		$	368
Expenses	290			325
Segment profit	$	48		$	43
Segment operating margin	14		%	12		%


(1)	Information presented excludes the results of our discontinued operations.

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Enterprise Solutions revenue for the first quarter of fiscal 2016 decreased compared with the year-ago period due to an unfavorable foreign exchange effect of $22 million for the first quarter of fiscal 2016 and a decrease in the percentage of enterprise solutions product sales recognized on an up-front basis. Enterprise Solutions operating margin for the first quarter of fiscal 2016 increased compared with the year-ago period primarily as a result of lower personnel-related costs and other expenses, as described above.



Services	First Quarter Fiscal 2016			First Quarter Fiscal 2015
	(dollars in millions)
Revenue	$	79		$	87
Expenses	71			82
Segment profit	$	8		$	5
Segment operating margin	10		%	6		%

Services revenue for the first quarter of fiscal 2016 decreased compared with the first quarter of fiscal 2015 primarily due to an unfavorable foreign exchange effect of $5 million and, to a lesser extent, a decline in fiscal 2015 professional services engagements. Operating margin for professional services increased to 10% for the first quarter of fiscal 2016 compared with 6% for the first quarter of fiscal 2015 primarily due to a decrease in personnel-related costs as a result of our prior period severance actions.

Refer to Note O, “Segment Information,” in the Notes to the Condensed Consolidated Financial Statements for additional information.

Bookings - First Quarter Fiscal 2016 Compared with the First Quarter of Fiscal 2015

Total Bookings: For the first quarter of fiscal 2016 and fiscal 2015, total bookings were $662 million and $724 million, respectively. The decrease in bookings was primarily due to an unfavorable foreign exchange effect and, to a lesser extent, a year-over-year decrease in renewals within subscription and maintenance bookings.

Subscription and Maintenance Bookings: For the first quarter fiscal 2016 and fiscal 2015, subscription and maintenance bookings were $525 million and $603 million, respectively. The decrease in subscription and maintenance bookings was primarily attributable to an unfavorable foreign exchange effect and, to a lesser extent, a decrease in our Mainframe Solutions renewals.

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Renewal Bookings: For the first quarter of fiscal 2016, renewal bookings decreased by a percentage in the low teens compared with the first quarter of fiscal 2015. Excluding the unfavorable effect of foreign exchange, renewal bookings for the first quarter of fiscal 2016 decreased by a percentage in the mid-single digits compared with the first quarter of fiscal 2015. This decrease was primarily due to the timing of our renewal portfolio. We currently expect our fiscal 2016 renewal portfolio to increase by approximately 10% compared with fiscal 2015. Excluding a large system integrator renewal expected in fiscal 2016, we expect our fiscal 2016 renewal portfolio to decrease by a percentage in the low single digits. Excluding the unfavorable effect of foreign exchange only, we currently expect our fiscal 2016 renewal portfolio to increase by a percentage in the mid-teens. Excluding both the large system integrator renewal expected in fiscal 2016 and the unfavorable effect of foreign exchange, we currently expect our fiscal 2016 renewal portfolio to increase by a percentage in the low single digits. For the first quarter of fiscal 2016, our percentage renewal yield was in the mid-80 percent range. The lower than historical average renewal yield was a result of a large renewal with a financial institution that required less capacity following a merger that occurred multiple years ago. Excluding this renewal, our renewal yield for the first quarter of fiscal 2016 was in the mid-90 percent range.

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License Agreements over $10 million: During the first quarter of fiscal 2016, we executed a total of six license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $214 million. During the first quarter of fiscal 2015, we executed a total of eight license agreements with incremental contract values in excess of $10 million each, for an aggregate contract value of $330 million.

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Annualized Subscription and Maintenance Bookings and Weighted Average Subscription and Maintenance License Agreement Duration in Years: 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. Annualized subscription and maintenance bookings decreased from $168 million in the first quarter of fiscal 2015 to $152 million<