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08 Jun
2006 5:36 PM (EDT) |
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Fitch Ratings-New York-08 June
2006: Fitch Ratings has revised the Rating Outlook on CA, Inc.
('CA') to Negative from Stable. In addition, the following
ratings for CA are affirmed:
--Issuer default rating (IDR)
at 'BBB-';
--Senior bank credit facility
due December 2008 at 'BBB-';
--Senior unsecured debt at
'BBB-';
--Commercial paper (CP) program
at 'F3'.
Fitch's action affects
approximately $1.8 billion of debt securities.
The Negative Outlook and
ratings concerns primarily center on CA's delayed earnings
release for the fourth quarter and fiscal year ending March 31,
2006, due to additional accounting work necessary to accurately
determine sales commission expense and income taxes. These
accounting issues resulted in the company restating financial
results for its fiscal third quarter. In order to meet the 10-K
filing deadline, the aforementioned work must be completed by
June 14, 2006, and the negative outlook incorporates a potential
filing delay of up to 15 days, as Fitch believes there is a
potential for this to occur. CA is also required to file the
10-K by June 29, 2006, in order to be compliant with its undrawn
$1 billion bank agreement. Fitch is concerned the material
weaknesses in internal accounting controls identified by CA
management and its auditor, KPMG, could lead to identification
of further inaccuracies in the company's financial statements
and additional restatements. Previous misstatements of CA's
earnings in fiscal years 1999 and 2000 resulting from weaknesses
in accounting controls were the subject of shareholder lawsuits,
which have required significant litigation and settlement costs,
and resulted in a Securities and Exchange Commission (SEC)
investigation.
The negative outlook also
considers what Fitch believes are on-going risks for meeting
corporate governance and internal controls initiatives to
satisfy any additional recommendations by the
government-appointed independent examiner as required under the
company's September 2004 agreement with the Department of
Justice (DOJ) and SEC. Although previously anticipated to
conclude in September 2006, Fitch believes the independent
examiner's report and presence at the company could be extended
due to the aforementioned earnings delay and additional
accounting challenges. A satisfactory and timely conclusion to
the independent examiner's reports could stabilize the ratings.
Also considered for the ratings
are continued senior management changes and potential uses of
the company's free cash flow, (defined as cash flow from
operations minus capital spending, capitalized development
costs, and dividends). Fitch's ratings incorporate the company's
current policy of utilizing approximately 50% of annual free
cash flow ($500 million-$600 million) for acquisitions of add-on
software capabilities and $600 million for stock repurchases.
However, Fitch believes the potential exists for CA to become
more aggressive in share buybacks plans, dividend policy, or
participation in the consolidating software industry by pursuing
a debt-financed acquisition. Fitch is also concerned about signs
of a slowing and more challenging mainframe market, integration
that has to occur for various acquisitions the last few
quarters, and strong competition from larger, more diversified
rivals.
Positively, the ratings reflect
the company's consistent free cash flow and high barriers to
entry due to significant 'switching' costs for its various
software products. Also considered are the size, diversity, and
quality of the company's installed base (approximately 99% of
Fortune 500) and depth of product line, resulting in recurring
revenue and solid customer retention. CA's annual free cash flow
has exceeded $1 billion the last seven years and Fitch believes
this trend will continue for the intermediate term.
Total debt as of December 31,
2005, was approximately $1.8 billion, down from $2.3 billion in
fiscal year 2004 and $3.1 billion in fiscal year 2003. At the
end of the third quarter ending December 31, 2005, debt
consisted of four tranches of senior notes and senior
convertible notes (all pari-passu), with no commercial paper or
bank revolver borrowings outstanding. CA's maturity schedule
includes $350 million due April 2008, $500 million due December
2009, $460 million of 1.625% convertible senior notes due
December 2009 (non callable), and $500 million due 2014. As part
of the aforementioned agreement with the SEC and DOJ, CA agreed
to establish a $225 million restitution fund to compensate CA
shareholders, which Fitch believes has been fully funded.
Contact: Nick P. Nilarp, CFA
+1-212-908-0649, Jason Pompeii +1-212-908-0668, or John M. Witt,
CFA +1-212-908-0673, New York.
Media Relations: Brian Bertsch,
New York, Tel: +1 212-908-0549.
Fitch's rating definitions and
the terms of use of such ratings are available on the agency's
public site, 'www.fitchratings.com'. Published ratings, criteria
and methodologies are available from this site, at all times.
Fitch's code of conduct, confidentiality, conflicts of interest,
affiliate firewall, compliance and other relevant policies and
procedures are also available from the 'Code of Conduct' section
of this site.
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