Fitch stated today that the following ratings and Stable Rating
Outlook for CA, Inc. (NASDAQ: CA) are unaffected by the company's
announced share repurchase program and increased cash dividend:
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured revolving credit facility (RCF) 'BBB+';
--Senior unsecured notes 'BBB+'.
The stock buyback program authorizes the repurchase up to $1.5
billion of common stock through March 31, 2013 and provides for a
$500 million accelerated share repurchase (ASR) program to be
completed during the current quarter ending March 31, 2012. The
dividend increase raises the quarterly cash dividend to $0.25 per
share (approximately $500 million annually) from $0.05 per share
(approximately $91 million for the latest 12 months ending Dec. 30,
2011).
CA's consistent free cash flow, solid liquidity and low debt
levels historically have provided the company with meaningful
financial flexibility within the 'BBB+' rating. Furthermore, the
ratings and Outlook always have incorporated CA's use of free cash
flow for share repurchases and acquisitions. These cash uses have
been smaller in size and less frequent than anticipated and
resulted in cash build over recent years and more than sufficient
capacity for the share repurchase authorization.
Nonetheless, Fitch believes the significantly higher cash
dividend reduces structural financial flexibility, resulting in a
weaker 'BBB+' rating for CA. Fitch estimates the dividend will
represent approximately 42% of expected pre-dividend free cash flow
for the fiscal year ending March 31, 2012, which is meaningfully
higher than that of software or technology peers.
Fitch estimates CA's current U.S. cash and cash equivalents
balances totaled approximately $1 billion as of Dec. 31, 2011 with
approximately half of free cash flow generated domestically. Fitch
expects total pre-dividend annual free cash flow of more than $1
billion in each of fiscal years 2012-2014.
As contingency sources of liquidity, the company has substantial
pooled foreign cash balances that could be repatriated at
relatively favorable tax rates. CA also has headroom under current
covenants related to the undrawn $1 billion revolving bank credit
facility. However, Fitch believes the increased dividend reduces
the incremental debt available at the 'BBB+' rating and Stable
Outlook, which now incorporate Fitch's expectation that total
leverage will remain under 1.5x. Fitch estimates total leverage
(total debt to operating EBITDA) was 1 times (x) for the LTM ended
Dec. 31, 2011.
Leverage tolerance also factors in significant deferred revenue
balances and Fitch's expectations that the ratio of cash balances
and accounts receivables to deferred revenue (including long-term)
and other short term liabilities will not diverge too dramatically
from historical levels. The use of a portion of existing cash
balances are accommodated at existing ratings given the company's
substantial billings backlog as well as Fitch's belief that
deferred revenue balances carry high incremental operating margins.
Importantly, Fitch does not anticipate a material reduction in
orders over time, given significant switching costs associated with
the software industry.
The rating and Outlook reflect Fitch's expectations that
CA's:
--Revenues will grow at a modestly positive rate;
--Annual free cash flow will exceed $500 million; and
--Financial policies beyond today's announcement will remain
relatively conservative; and
--Credit protection measures will remain solid.
Revenues are on track for growth in the mid-single digits for
fiscal year 2012, driven by improved enterprise spending and
increased focus on smaller customers through its indirect sales
network. Sales growth within mainframe markets should remain modest
but drive substantial recurring revenues and free cash flow, given
the company's exposure and leadership positions in these markets.
CA's longer-term sales should increasingly be dependent upon the
rate of cloud computing adoption, which could meaningfully expand
the addressable market for CA's security and compliance
products.
Fitch anticipates profitability will remain near current levels,
with operating EBIT margins in the mid-30%. Fitch believes the
potential for pricing pressures should be at least partially offset
by the company's ongoing efforts to realign the organization
(redundant costs associated with past acquisitions) and
implementation of CA's enterprise resource planning system. As a
result, Fitch believes CA's annual free cash flow will exceed $500
million within a normalized operating environment.
Fitch believes positive rating actions are unlikely without
significant revenue growth outside mainframe markets, supporting
the company's virtualization and cloud computing strategy and
ability to remain competitive despite its more limited investment
levels.
The ratings could be negatively impacted by:
--Total leverage exceeds 1.5x;
--Sustained revenue contraction, most likely from larger
customer consolidation;
--Intensified pricing pressures resulting in meaningful profit
margin contraction, or;
--A lack of success penetrating or slower adoption of
virtualization.
The ratings continue to be supported by:
--Strong share positions in and high switching costs associated
with core mainframe and security markets, which constitute the
majority of CA's revenue mix and drive significant recurring
maintenance revenue;
--Annual free cash flow of more than $500 million, largely from
the diversification of CA's customer base; and
--Conservative financial policies, supported by historical debt
reduction over last few years and nearly 1x net cash position, pro
forma for 60% of cash located outside of the U.S. as of Dec. 31,
2011.
Ratings concerns center on:
--Mature organic growth rates within mainframe market, which
continue to constitute a significant proportion (albeit highly
profitable) of total revenues;
--Challenges integrating historical acquisitions, which Fitch
believes will be critical to maintaining operating margins at
current levels over the longer term;
--Expectations for substantial acquisitions activity in order to
bolster revenue growth within cloud computing and virtualization
markets; and
--Meaningfully larger competitors with superior financial
flexibility.
Fitch believes CA's liquidity at Dec. 31, 2011 was solid and
supported by:
--$2.5 billion of cash, approximately 60% of which was located
outside the U.S. CA's deferred revenues were approximately $3.6
billion; and
--an undrawn $1 billion RCF expiring August 2016.
Fitch's expectations for more than $500 million of annual free
cash flow also support CA's liquidity, although approximately half
of this FCF is generated outside the U.S.
Total debt was approximately $1.3 billion as of Dec. 31, 2011
and consisted of:
--$750 million of 5.375% senior notes due 2019;
--$500 million of 6.125% senior notes due 2014; and
--$35 million of capital leases.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Evaluating Corporate Governance', December 12, 2007.
--'Liquidity considerations for corporate issuers', June 12,
2007.
--'Cash flow measures in corporate analysis - amended', October
12, 2005
--'Revisions to Rating Definitions', March 2009.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Cash Flow Measures in Corporate Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=243758
Fitch Revisions to Rating Definitions: Sovereign
Implications
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=432326
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