NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for CA, Inc. (NASDAQ: CA):
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable. Fitch's actions affect approximately $2.3 billion of total debt, including the RCF.
The rating and Outlook reflect Fitch's expectations for modest revenue growth and operating profit margin expansion, solid annual free cash flow, and relatively conservative financial policies and solid credit protection measures. Fitch expects low- to mid-single-digit revenue growth through the intermediate term, driven by solid demand in enterprise end markets and measured success penetrating target markets, including small-to-medium-size businesses and development markets. Revenue growth will be constrained by low revenue growth in the mainframe market, which still represents more than half of consolidated revenues. Longer-term sales growth will in part be dependent upon the rate of cloud computing adoption, which could meaningfully expand the addressable market for CA's security and compliance products.
Higher revenues and increased salesforce efficiencies from CA's salesforce reorganization and ongoing integration of past acquisition should drive operating profit expansion. Fitch expects adjusted operating profit margin could exceed 35% over the intermediate term. As a result, Fitch anticipates free cash flow (FCF) will exceed $500 million, despite the company's meaningfully higher annual dividend. Strengthening operating profitability and lower capital spending following the completion of the company's ERP systems investments have driven CA's pre-dividend FCF conversion higher. Approximately half of FCF is generated overseas but CA's receipt of approximately $300 million in annual royalty payments from foreign subsidiaries tempers cash location concerns.
Fitch also believes the higher dividend and share repurchase program reduces the company's attractiveness as a leveraged buyback or buyout candidate. Fitch anticipates CA will use FCF to fund small technology focused acquisitions to accelerate growth in key markets and share repurchases under the company's $1.5 billion authorization, of which $1 billion was still available at March 31, 2012.
Fitch expects CA's credit metrics will remain solid for the rating. Fitch expects FCF-to-total debt higher than 50%, total leverage (total debt-to-operating EBITDA) below 1.5x, and operating EBITDA-to-gross interest expense above 20x. Leverage tolerance factors in significant deferred revenue balances and Fitch's expectations are that the ratio of cash balances and accounts receivables to deferred revenue (including long-term) and other short-term liabilities will not diverge dramatically from historical levels. The use of a portion of existing cash balances is 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 bookings over time, given significant switching costs associated with the software industry.
Negative rating actions could occur if: i) revenues contract over a sustained period, signaling less competitive technology; ii) operating profit margin declines, likely from a failure to take share in enterprise markets; or iii) total leverage exceeds 1.5x, unlikely given consistent profitability and the company's cash balances, FCF profile, and history of small acquisitions. Positive rating actions are less likely over the intermediate term, in the absence of meaningfully stronger contribution from the Enterprise Solutions business resulting in a more balanced sales mix.
Fitch believes CA's liquidity at March 31, 2012 was solid and supported by $2.7 billion of cash, approximately 60% of which was located outside the U.S, and an undrawn $1 billion RCF expiring August 2016. As contingency sources of liquidity, the company has substantial pooled foreign cash balances that could be repatriated at relatively favorable tax rates. The ratings continue to incorporate expectations that FCF will be used for a combination of share repurchases and acquisitions.
Total debt at March 31, 2012 was $1.3 billion and consisted of: i) $500 million of 6.125% senior notes due 2014, ii) $750 million of 5.375% senior notes due 2019, and iii) $29 million of capital leases.
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 in excess of $500 million, largely from the diversification of CA's customer base;
--Conservative financial policies and solid credit protection measures, despite the company's significantly higher dividend and share repurchase program announced in January 2012.
Ratings concerns center on:
--Lower than industry-wide revenue growth from very low revenue growth in mainframe software, which continue to constitute a significant proportion (albeit highly profitable) of total revenues;
--Operating profit margins for the faster-growth Enterprise Solutions businesses that are significantly below that of the Mainframe segment;
--Meaningfully larger competitors with superior financial flexibility.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.