UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
[ ] 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 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
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 [X] 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
(sec. 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 [ ] 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 [X] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of Common Stock outstanding as of March 31, 2010
42,574,670.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Millions)
March 31, December 31,
2010 2009*
----------- ------------
Assets
------
Current assets
Cash and cash equivalents $ 468.5 $ 647.6
Accounts and notes receivable, net 736.7 779.7
Inventories:
Parts and finished equipment 62.7 57.5
Work in process and materials 40.3 43.0
Deferred income taxes 13.1 19.9
Prepaid expenses and other current assets 131.2 141.8
Assets of discontinued operations 98.0 82.1
-------- --------
Total 1,550.5 1,771.6
-------- --------
Properties 1,360.4 1,370.6
Less-Accumulated depreciation and
amortization 1,140.5 1,143.2
-------- --------
Properties, net 219.9 227.4
-------- --------
Outsourcing assets, net 204.5 213.7
Marketable software, net 149.2 151.5
Deferred income taxes 174.9 180.6
Goodwill 195.8 198.5
Other long-term assets 217.0 213.6
-------- --------
Total $2,711.8 $2,956.9
======== ========
Liabilities and stockholders' deficit
-------------------------------------
Current liabilities
Notes payable and current maturities
of long-term debt $ 2.6 $ 65.8
Accounts payable 278.6 300.4
Other accrued liabilities 904.6 1,017.7
Liabilities of discontinued operations 44.1 39.2
-------- --------
Total 1,229.9 1,423.1
-------- --------
Long-term debt 846.6 845.9
Long-term postretirement liabilities 1,562.6 1,640.6
Other long-term liabilities 294.4 319.0
Commitments and contingencies
Stockholders' deficit
Common stock, shares issued:
2010; 42.8, 2009, 42.5 .4 .4
Accumulated deficit (2,418.3) (2,406.7)
Treasury stock, shares at cost:
2010; .3, 2009; .2 (45.8) (45.0)
Paid-in capital 4,202.3 4,196.5
Accumulated other comprehensive loss (2,959.1) (3,013.5)
-------- --------
Total Unisys stockholders' deficit (1,220.5) (1,268.3)
Noncontrolling interests (1.2) (3.4)
-------- --------
Total stockholders' deficit (1,221.7) (1,271.7)
-------- --------
Total $2,711.8 $2,956.9
======== ========
* Reclassified for discontinued operations. See note (a).
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2010 2009*
-------- --------
Revenue
Services $ 871.4 $ 956.6
Technology 126.9 116.1
-------- --------
998.3 1,072.7
Costs and expenses
Cost of revenue:
Services 707.6 786.4
Technology 54.6 71.8
-------- --------
762.2 858.2
Selling, general and administrative 156.4 172.1
Research and development 20.8 27.4
-------- --------
939.4 1,057.7
-------- --------
Operating profit 58.9 15.0
Interest expense 26.5 21.8
Other income (expense), net (36.8) (6.7)
-------- --------
Loss from continuing operations
before income taxes (4.4) (13.5)
Provision for income taxes 11.3 12.8
-------- --------
Consolidated net loss from
continuing operations (15.7) (26.3)
Net income attributable to
noncontrolling interests (1.2) (2.3)
-------- --------
Net loss from continuing operations
attributable to Unisys Corporation (16.9) (28.6)
Income from discontinued operations,
net of tax 5.3 4.2
-------- --------
Net loss attributable
to Unisys Corporation $ (11.6) $ (24.4)
======== ========
Earnings (loss) per share attributable
to Unisys Corporation
Basic
Continuing operations $ (.40) $ (.77)
Discontinued operations .13 .11
-------- --------
Total $ (.27) $ (.66)
======== ========
Diluted
Continuing operations $ (.40) $ (.77)
Discontinued operations .13 .11
-------- --------
Total $ (.27) $ (.66)
======== ========
* Reclassified for discontinued operations. See note (a).
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Three Months Ended
March 31
------------------
2010 2009
-------- -------
Cash flows from operating activities
Consolidated net loss from continuing operations $ (15.7) $(26.3)
Income from discontinued operations, net of tax 5.3 4.2
Add (deduct) items to reconcile consolidated
net loss to net cash (used for)
provided by operating activities:
Foreign currency transaction losses 19.9 -
Employee stock compensation 4.9 2.1
Depreciation and amortization of properties 20.5 23.7
Depreciation and amortization of outsourcing assets 30.2 34.8
Amortization of marketable software 16.2 25.2
Disposal of capital assets 2.7 16.0
Loss on sale of capital assets 2.8 -
Decrease in deferred income taxes, net 1.2 7.3
Decrease in receivables, net 21.3 83.7
(Increase) decrease in inventories (3.6) 11.8
Decrease in accounts payable and other
accrued liabilities (85.8) (116.8)
Decrease in other liabilities (24.7) (4.5)
Increase in other assets (24.5) (21.7)
Other .9 (.2)
------- ------
Net cash (used for) provided by
operating activities (28.4) 39.3
------- ------
Cash flows from investing activities
Proceeds from investments 107.8 94.3
Purchases of investments (108.3) (94.4)
Collateralized letters of credit .5 (61.2)
Investment in marketable software (14.8) (15.5)
Capital additions of properties (14.8) (9.9)
Capital additions of outsourcing assets (39.0) (21.9)
Purchases of businesses - (.4)
Proceeds from sale of assets 4.4 -
------- ------
Net cash used for investing activities (64.2) (109.0)
------- ------
Cash flows from financing activities
Payment of long-term debt (64.9) -
Proceeds from exercise of stock options 1.1 -
Net proceeds from short-term borrowings 1.8 .1
Financing fees (.1) -
------- ------
Net cash (used for) provided by financing activities (62.1) .1
------- ------
Effect of exchange rate changes on
cash and cash equivalents (24.4) (5.7)
------- ------
Decrease in cash and cash equivalents (179.1) (75.3)
Cash and cash equivalents, beginning of period 647.6 544.0
------- -------
Cash and cash equivalents, end of period $ 468.5 $ 468.7
======== =======
See notes to consolidated financial statements.
5
Unisys Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished herein
reflects all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
specified. These adjustments consist only of normal recurring accruals except
as disclosed herein. Because of seasonal and other factors, results for interim
periods are not necessarily indicative of the results to be expected for the
full year.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions about future events. These estimates and assumptions affect the
amounts of assets and liabilities reported, disclosures about contingent assets
and liabilities and the reported amounts of revenue and expenses. Such
estimates include the valuation of accounts receivable, inventories, outsourcing
assets, marketable software, goodwill and other long-lived assets, legal
contingencies, indemnifications, and assumptions used in the calculation for
systems integration projects, income taxes and retirement and other post-
employment benefits, among others. These estimates and assumptions are based on
management's best estimates and judgment. Management evaluates its estimates
and assumptions on an ongoing basis using historical experience and other
factors, including the current economic environment, which management believes
to be reasonable under the circumstances. Management adjusts such estimates and
assumptions when facts and circumstances dictate. Illiquid credit markets,
volatile equity and foreign currency markets and reductions in information
technology spending have combined to increase the uncertainty inherent in such
estimates and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ significantly from these
estimates. Changes in those estimates resulting from continuing changes in the
economic environment will be reflected in the financial statements in future
periods.
The company's accounting policies are set forth in detail in note (1) of the
notes to the consolidated financial statements in the company's Annual Report on
Form 10-K for the year ended December 31, 2009 filed with the Securities and
Exchange Commission. Such Annual Report also contains a discussion of the
company's critical accounting policies. The company believes that these
critical accounting policies affect its more significant estimates and judgments
used in the preparation of the company's consolidated financial statements.
There have been no changes in the company's critical accounting policies from
those disclosed in the company's Annual Report on Form 10-K for the year ended
December 31, 2009.
a. On February 1, 2010, the company closed on the sale of its U.S. specialized
technology check sorter equipment and related U.S. maintenance business. At
December 31, 2009, the assets and liabilities of the business sold were reported
as held for sale in the company's consolidated balance sheet as follows:
approximately $24 million in "prepaid expenses and other current assets" and
approximately $20 million in "other accrued liabilities." These amounts have
been reflected at fair value, less cost to sell, and as a result, the company
reported an impairment of $13.4 million in 2009 in the company's consolidated
statement of income. In the first quarter of 2010, the company recorded an
additional loss on the sale of approximately $2.8 million, principally as a
result of closing date working capital and other adjustments. The divested
business, which has operations in both of the company's reporting segments of
Services and Technology, generated 2009 revenue and pretax loss of approximately
$100 million and $3 million, respectively.
On April 30, 2010, the company closed on the previously disclosed sale of its
health information management (HIM) business for a purchase price of
approximately $135 million, subject to adjustment. Effective January 1, 2010,
the company's financial statements have been retroactively reclassified to
report the HIM business as discontinued operations. As a result, all items
within the consolidated statements of income have been reported as income from
discontinued operations, net of tax, and all items within the consolidated
balance sheets have been reported as either assets or liabilities of
discontinued operations. In the second quarter of 2010, the company expects to
report a gain on the sale, in discontinued operations, of approximately $70
million. The HIM business, which has operations in the company's Services
reporting segment, generated 2009 revenue, pretax income and capital
expenditures of approximately $110 million, $20 million and $50 million,
respectively. For the first quarter of 2010 and 2009, the HIM business
generated revenue of $31.6 million and $27.2 million, pretax income of $8.8
million and $7.0 million and a provision for income taxes of $3.5 million and
$2.8 million, respectively.
6
Pursuant to the indentures governing the secured notes maturing in 2014 and
2015, net proceeds from the sale of the HIM business must be placed in a
segregated account and may be used only for certain purposes, including to
purchase long-term assets that would constitute collateral; to make capital
expenditures with respect to assets that constitute collateral; or to repay
certain of the company's outstanding debt obligations. To the extent that excess
proceeds remain 360 days following the closing of the transaction, the company
may be required to offer to acquire the outstanding secured notes at 100% of
face value plus accrued and unpaid interest.
b. Due to cumulative inflation of approximately 100 percent or more over the
last 3-year period, the company's Venezuelan subsidiary has applied highly
inflationary accounting beginning January 1, 2010. For those international
subsidiaries operating in highly inflationary economies, the U.S. dollar is the
functional currency, and as such, nonmonetary assets and liabilities are
translated at historical exchange rates, and monetary assets and liabilities are
translated at current exchange rates. Exchange gains and losses arising from
translation are included in other income (expense), net. Effective January 11,
2010, the Venezuelan government devalued the Bolivar Fuerte by 50 percent by
resetting the official exchange rate from 2.15 to the U.S. dollar to 4.30 to the
U.S. dollar. As a result, the company recorded a foreign exchange loss in the
first quarter of 2010 of approximately $20 million.
c. The following table shows how earnings (loss) per share attributable to
Unisys Corporation was computed for the three months ended March 31, 2010 and
2009 (dollars in millions, shares in thousands):
Three Months Ended March 31,
----------------------------
2010 2009
--------- ----------
Net loss from continuing operations
attributable to Unisys Corporation $ (16.9) $ (28.6)
Income from discontinued operations, net of tax 5.3 4.2
-------- --------
Net loss attributable to Unisys Corporation $ (11.6) $ (24.4)
======== ========
Basic Earnings (Loss) Per Share
Weighted average shares 42,398 37,005
======== ========
Continuing operations $ (.40) $ (.77)
Discontinued operations .13 .11
-------- ---------
Total $ (.27) $ (.66)
======== =========
Diluted Earnings (Loss) Per Share
Weighted average shares 42,398 37,005
Plus incremental shares from assumed
conversions of employee stock plans - -
-------- ---------
Adjusted weighted average shares 42,398 37,005
======== =========
Continuing operations $ (.40) $ (.77)
Discontinued operations .13 .11
-------- ---------
Total $ (.27) $ (.66)
======== =========
The following number of securities was antidilutive and therefore excluded from
the computation of diluted earnings per share (in thousands): 2010, 2,751 and
2009, 4,697.
7
d. Net periodic pension expense (income) for the three months ended March 31,
2010 and 2009 is presented below (in millions of dollars):
Three Months Three Months
Ended March 31, 2010 Ended March 31, 2009
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 3.9 $ - $ 3.9 $ 2.9 $ - $ 2.9
Interest cost 99.9 69.2 30.7 98.3 72.2 26.1
Expected return on
plan assets (124.8) (91.6) (33.2) (126.3) (96.5) (29.8)
Amortization of prior
service cost .2 .2 - .2 .2 -
Recognized net actuarial
loss 20.5 13.9 6.6 22.0 20.9 1.1
----- ----- ----- ----- ---- -----
Net periodic pension
expense (income) $ (.3) $ (8.3) $8.0 $(2.9) $ (3.2) $ .3
===== ===== ==== ===== ====== ====
The company currently expects to make cash contributions of approximately $115
million to its worldwide defined benefit pension plans in 2010 compared with
$94.0 million in 2009. For the three months ended March 31, 2010 and 2009,
$20.0 million and $13.9 million, respectively, of cash contributions have been
made. In accordance with regulations governing contributions to U.S. defined
benefit pension plans, the company is not required to fund its U.S. qualified
defined benefit pension plan in 2010.
Net periodic postretirement benefit expense for the three months ended March 31,
2010 and 2009 is presented below (in millions of dollars):
Three Months Ended March 31,
----------------------------
2010 2009
---- ----
Service cost $ - $ .1
Interest cost 2.7 3.0
Expected return on assets (.1) (.1)
Amortization of prior service cost .4 .3
Recognized net actuarial loss .9 .9
---- ----
Net periodic postretirement benefit expense $3.9 $4.2
==== ====
The company expects to make cash contributions of approximately $24 million to
its postretirement benefit plan in 2010 compared with $22.7 million in 2009.
For the three months ended March 31, 2010 and 2009, $4.8 million and $5.0
million, respectively, of cash contributions have been made.
e. Due to its foreign operations, the company is exposed to the effects of
foreign currency exchange rate fluctuations on the U.S. dollar, principally
related to intercompany account balances. The company uses derivative financial
instruments to reduce its exposure to market risks from changes in foreign
currency exchange rates on such balances. The company enters into foreign
exchange forward contracts, generally having maturities of one month, which have
not been designated as hedging instruments. At March 31, 2010 and 2009, the
notional amount of these contracts was $34.0 million and $29.5 million,
respectively. At March 31, 2010 and 2009, the fair value of such contracts was
a net gain of $.1 million and a net loss of $.4 million, respectively, of which
$7.6 million and $.2 million, respectively, has been recognized in "Prepaid
expenses and other current assets" and $7.5 million and $.6 million,
respectively, has been recognized in "Other accrued liabilities" in the
company's consolidated balance sheet. For the three months ended March 31, 2010
and 2009, changes in the fair value of these instruments were a gain of $.2
million and a loss of $.6 million, respectively, which has been recognized in
earnings in "Other income (expense), net" in the company's consolidated
statement of income. The fair value of these forward contracts is based on
quoted prices for similar but not identical financial instruments; as such, the
inputs are considered Level 2 inputs.
8
Financial assets with carrying values approximating fair value include cash and
cash equivalents and accounts receivable. Financial liabilities with carrying
values approximating fair value include accounts payable and other accrued
liabilities. The carrying amounts of these financial assets and liabilities
approximate fair value due to their short maturities. At March 31, 2010 and
December 31, 2009, the carrying amount of long-term debt was less than fair
value, which is based on market prices (Level 2 inputs), of such debt by
approximately $127 million and $100 million, respectively.
f. Under stockholder approved stock-based plans, stock options, stock
appreciation rights, restricted stock and restricted stock units may be granted
to officers, directors and other key employees. At March 31, 2010, 1.3 million
shares of unissued common stock of the company were available for granting under
these plans.
The fair value of stock option awards was estimated using the Black-Scholes
option pricing model with the following assumptions and weighted-average fair
values:
Three Months Ended March 31,
----------------------------
2010 2009
---- ----
Weighted-average fair value of grant $17.97 $2.82
Risk-free interest rate 1.74% 1.57%
Expected volatility 72.20% 58.28%
Expected life of options in years 3.63 3.77
Expected dividend yield - -
Restricted stock unit awards may contain time-based units, performance-based
units or a combination of both. Each performance-based unit will vest into zero
to 1.5 shares depending on the degree to which the performance goals are met.
Compensation expense resulting from these awards is recognized as expense
ratably for each installment from the date of grant until the date the
restrictions lapse and is based on the fair market value at the date of grant
and the probability of achievement of the specific performance-related goals.
The company records all share-based expense in selling, general and
administrative expense.
During the three months ended March 31, 2010 and 2009, the company recorded $4.9
million and $2.1 million of share-based compensation expense, respectively,
which is comprised of $2.1 million and $1.3 million of restricted stock unit
expense and $2.8 million and $.8 million of stock option expense, respectively.
A summary of stock option activity for the three months ended March 31, 2010
follows (shares in thousands):
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (years) ($ in millions)
------- ------ --------- ------------ ---------------
Outstanding at
December
31, 2009 3,981 $109.30
Granted 618 34.91
Exercised (168) 6.40
Forfeited and
expired (835) 192.15
------
Outstanding at
March 31, 2010 3,596 82.48 2.80 $27.2
======
Expected to vest at
March 31, 2010 1,155 22.01 4.35 15.0
======
Exercisable at
March 31, 2010 2,378 113.51 2.01 11.2
======
The aggregate intrinsic value represents the total pretax value of the
difference between the company's closing stock price on the last trading day of
the period and the exercise price of the options, multiplied by the number of
in-the-money stock options that would have been received by the option holders
had all option holders exercised their options on March 31, 2010. The intrinsic
value of the company's stock options changes based on the closing price of the
company's stock. The total intrinsic value of options exercised for the three
months ended March 31, 2010 and 2009 was $4.9 million and zero, respectively.
As of March 31, 2010, $10.0 million of total unrecognized compensation cost
related to stock options is expected to be recognized over a weighted-average
period of 2.7 years.
9
A summary of restricted stock unit activity for the three months ended March 31,
2010 follows (shares in thousands):
Weighted-
Restricted Average
Stock Grant Date
Units Fair Value
---------- ----------
Outstanding at December 31, 2009 561 $40.42
Granted 208 34.79
Vested (144) 24.44
Forfeited and expired (154) 74.97
----
Outstanding at March 31, 2010 471 31.13
====
The fair value of restricted stock units is determined based on the trading
price of the company's common shares on the date of grant. The aggregate
weighted-average grant-date fair value of restricted stock units granted during
the three months ended March 31, 2010 and 2009 was $6.7 million and $1.1
million, respectively. As of March 31, 2010, there was $6.9 million of total
unrecognized compensation cost related to outstanding restricted stock units
granted under the company's plans. That cost is expected to be recognized over
a weighted-average period of 2.2 years. The aggregate weighted-average grant-
date fair value of restricted share units vested during the three months ended
March 31, 2010 and 2009 was $3.5 million and $.4 million, respectively.
Common stock issued upon exercise of stock options or upon lapse of restrictions
on restricted stock units is newly issued shares. Cash received from the
exercise of stock options for the three months ended March 31, 2010 and 2009 was
$1.1 million and zero, respectively. The company is currently not recognizing
any tax benefits from the exercise of stock options or upon issuance of stock
upon lapse of restrictions on restricted stock units in light of its tax
position. Tax benefits resulting from tax deductions in excess of the
compensation costs recognized are classified as financing cash flows.
g. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies.
The accounting policies of each business segment are the same as those followed
by the company as a whole. Intersegment sales and transfers are priced as if
the sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services segment,
in turn, recognizes customer revenue and marketing profits on such shipments of
company hardware and software to customers. The Services segment also includes
the sale of hardware and software products sourced from third parties that are
sold to customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products sourced
from the Technology segment and sold to Services customers are reported in cost
of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income of
the Technology segment for the three months ended March 31, 2010 and 2009 was
$.4 million and $1.5 million, respectively. The profit on these transactions is
eliminated in Corporate.
The company evaluates business segment performance on operating income exclusive
of restructuring charges and unusual and nonrecurring items, which are included
in Corporate. All other corporate and centrally incurred costs are allocated to
the business segments based principally on revenue, employees, square footage or
usage.
10
A summary of the company's operations by business segment for the three-month
periods ended March 31, 2010 and 2009 is presented below (in millions of
dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
March 31, 2010
------------------
Customer revenue $ 998.3 $ 871.4 $ 126.9
Intersegment $ (23.0) .8 22.2
-------- -------- -------- -------
Total revenue $ 998.3 $ (23.0) $ 872.2 $ 149.1
======== ======== ======== =======
Operating income $ 58.9 $ (1.7) $ 40.2 $ 20.4
======== ======== ======== =======
Three Months Ended
March 31, 2009
------------------
Customer revenue $1,072.7 $ 956.6 $ 116.1
Intersegment $ (37.9) 1.7 36.2
-------- -------- -------- -------
Total revenue $1,072.7 $ (37.9) $ 958.3 $ 152.3
======== ======== ======== =======
Operating income (loss) $ 15.0 $ 13.5 $ 19.2 $ (17.7)
======== ======== ======== =======
Presented below is a reconciliation of total business segment operating income
to consolidated loss from continuing operations before income taxes (in millions
of dollars):
Three Months Ended March 31
---------------------------
2010 2009
---- ----
Total segment operating profit $ 60.6 $ 1.5
Interest expense (26.5) (21.8)
Other income (expense), net (36.8) (6.7)
Corporate and eliminations (1.7) 13.5
------ ------
Total loss from continuing operations
before income taxes $ (4.4) $(13.5)
====== ======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Ended March 31
---------------------------
2010 2009
---- ----
Services
Systems integration and consulting $ 295.2 $ 339.5
Outsourcing 389.7 398.2
Infrastructure services 125.6 142.2
Core maintenance 60.9 76.7
------- --------
871.4 956.6
Technology
Enterprise-class servers 102.4 79.6
Specialized technologies 24.5 36.5
------- --------
126.9 116.1
------- --------
Total $ 998.3 $1,072.7
======== ========
11
Geographic information about the company's revenue, which is principally based
on location of the selling organization, is presented below (in millions of
dollars):
Three Months Ended March 31
---------------------------
2010 2009
---- ----
United States $ 430.6 $ 511.3
United Kingdom 118.8 130.1
Other foreign 448.9 431.3
------- --------
Total $ 998.3 $1,072.7
======== ========
h. Comprehensive income (loss) for the three months ended March 31, 2010 and
2009 includes the following components (in millions of dollars):
2010 2009
------ -------
Consolidated net loss from
continuing operations $ (15.7) $ (26.3)
Income from discontinued operations, net of tax 5.3 4.2
------- -------
Total (10.4) (22.1)
------- -------
Other comprehensive income (loss)
Foreign currency translation adjustments (9.0) (13.8)
Postretirement adjustments 64.4 31.9
------- -------
Total other comprehensive income 55.4 18.1
------- -------
Consolidated comprehensive income (loss) 45.0 (4.0)
Comprehensive income attributable to
noncontrolling interests 2.2 1.7
------- ------
Comprehensive income (loss) attributable to
Unisys Corporation $ 47.2 $ (2.3)
======= ======
Accumulated other comprehensive loss as of December 31, 2009 and March 31, 2010
is as follows (in millions of dollars):
Translation Postretirement
Total Adjustments Plans
----- ----------- --------
Balance at December 31, 2009 $(3,013.5) $(629.9) $(2,383.6)
Change during period 54.4 (6.5) 60.9
-------- ------- ---------
Balance at March 31, 2010 $(2,959.1) $(636.4) $(2,322.7)
======== ======= =========
Noncontrolling interests as of December 31, 2009 and March 31, 2010 is as
follows (in millions of dollars):
Non-Controlling
Interests
-----------
Balance at December 31, 2009 $ (3.4)
Net income 1.2
Translation adjustments (2.5)
Postretirement plans 3.5
--------
Balance at March 31, 2010 $ (1.2)
========
i. Cash paid during the three months ended March 31, 2010 and 2009 for income
taxes was $10.7 million and $8.5 million, respectively.
Cash paid during the three months ended March 31, 2010 and 2009 for interest
was $29.4 million and $24.0 million, respectively.
12
j. Effective January 1, 2010, the company adopted a Financial Accounting
Standards Board (FASB) accounting standard which among other changes, eliminates
the concept of a "qualifying special-purpose entity," changes the requirements
for derecognizing financial assets, defines the term participating interest to
establish specific conditions for reporting a transfer of a portion of a
financial asset as a sale and requires additional disclosures. The recognition
and measurement provisions are effective for transfers occurring on or after
January 1, 2010. The company's U.S. trade accounts receivable facility no
longer meets the requirements to be treated as a sale of receivables, and
therefore will be accounted for as a secured borrowing. See note (m).
In October 2009, the FASB issued two accounting standards. The first standard
supersedes certain prior accounting guidance and requires an entity to allocate
arrangement consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices (i.e., the relative-selling-
price method). The standard eliminates the use of the residual method of
allocation and requires the relative-selling-price method in all circumstances
in which an entity recognizes revenue for an arrangement with multiple
deliverables subject to this standard. The second standard amends prior
software revenue recognition accounting guidance by excluding from the scope of
such prior guidance tangible products that contain both software elements and
non-software elements that function together to deliver the tangible product's
essential functionality. Both of these standards must be adopted at the same
time and both will be effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010,
which for the company is January 1, 2011. Early adoption is permitted. If an
entity elects early adoption and the period of adoption is not the beginning of
the entity's fiscal year, the entity is required to apply the amendments
retrospectively from the beginning of the entity's fiscal year. An entity may
elect, but is not required, to adopt these amendments retrospectively to prior
periods. The company is currently assessing when it will adopt these standards
and is evaluating the impact of the adoption on its consolidated results of
operations and financial position; however, the company expects, as indicated in
the standards, that the application of the amended guidance will result in
revenue being recognized earlier than had been required under the prior
guidance.
k. There are various lawsuits, claims, investigations and proceedings that have
been brought or asserted against the company, which arise in the ordinary course
of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. The company records a provision for these matters when it
is both probable that a liability has been incurred and the amount of the loss
can be reasonably estimated. Any provisions are reviewed at least quarterly and
are adjusted to reflect the impact and status of settlements, rulings, advice of
counsel and other information and events pertinent to a particular matter.
The company believes that it has valid defenses with respect to legal matters
pending against it. Based on its experience, the company also believes that the
damage amounts claimed in the lawsuits disclosed below are not a meaningful
indicator of the company's potential liability. Litigation is inherently
unpredictable, however, and it is possible that the company's results of
operations or cash flow could be affected in any particular period by the
resolution of one or more of the legal matters pending against it.
In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the establishment of
secure information technology environments in airports. The Civil Division of
the Department of Justice, working with the Inspector General's Office of the
Department of Homeland Security, is reviewing issues relating to labor
categorization and overtime on the TSA contract. The Civil Division is also
reviewing issues relating to cyber intrusion protection under the TSA and
follow-on contracts. The company is working cooperatively with the Civil
Division. The company does not know whether the Civil Division will pursue
these matters, or, if pursued, what effect they might have on the company.
The company has contracts with the General Services Administration (GSA), known
as Multiple Award Schedule Contracts, under which various U.S. governmental
agencies can purchase products and services from the company. Auditors from the
GSA's Office of Inspector General are reviewing the company's compliance with
the disclosure and pricing provisions under two of these contracts, and whether
the company has potentially overcharged the government under the contracts.
Separately, the company has made voluntary disclosures about these matters to
the responsible GSA contracting officers. The company is providing pricing and
other information to the GSA auditors and is working cooperatively with them.
The Inspector General is nearing completion of its audit on one of these
contracts, and the company does not expect this matter to have a material
adverse effect. The audit on the other contract is in its preliminary stages,
and the company cannot predict the outcome at this time.
13
In April 2007, the Ministry of Justice of Belgium sued Unisys Belgium SA-NV, a
Unisys subsidiary (Unisys Belgium), in the Court of First Instance of
Brussels. The Belgian government had engaged the company to design and develop
software for a computerized system to be used to manage the Belgian court
system. The Belgian State terminated the contract and in its lawsuit has alleged
that the termination was justified because Unisys Belgium failed to deliver
satisfactory software in a timely manner. It claims damages of approximately 28
million Euros. Unisys Belgium has filed its defense and counterclaim in the
amount of approximately 18.5 million Euros. The company believes it has valid
defenses to the claims and contends that the Belgian State's termination of the
contract was unjustified.
In December 2007, Lufthansa AG sued Unisys Deutschland GmbH, a Unisys subsidiary
(Unisys Germany), in the District Court of Frankfurt, Germany, for allegedly
failing to perform properly its obligations during the initial phase of a 2004
software design and development contract relating to a Lufthansa customer
loyalty program. Under the contract, either party was free to withdraw from the
project at the conclusion of the initial design phase. Rather than withdraw,
Lufthansa instead terminated the contract and failed to pay the balance owed to
Unisys Germany for the initial phase. Lufthansa's lawsuit alleges that Unisys
Germany breached the contract by failing to deliver a proper design for the new
system and seeks approximately 21.4 million Euros in damages. The company
believes it has valid defenses and has filed its defense and a counterclaim in
the amount of approximately 1.5 million Euros. The litigation is proceeding.
Notwithstanding that the ultimate results of the lawsuits, claims,
investigations and proceedings that have been brought or asserted against the
company are not currently determinable, the company believes that at March 31,
2010, it has adequate provisions for any such matters.
l. Accounting rules governing income taxes require that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
In addition, the rules require that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or the
entire deferred tax asset will not be realized.
The company evaluates quarterly the realizability of its deferred tax assets by
assessing its valuation allowance and by adjusting the amount of such allowance,
if necessary. The factors used to assess the likelihood of realization are the
company's forecast of future taxable income and available tax-planning
strategies that could be implemented to realize the net deferred tax assets. The
company uses tax-planning strategies to realize or renew net deferred tax assets
to avoid the potential loss of future tax benefits.
A full valuation allowance was recognized in 2005 and is currently maintained
for all U.S. and certain foreign deferred tax assets in excess of deferred tax
liabilities. The company will record a tax provision or benefit for those
international subsidiaries that do not have a full valuation allowance against
their deferred tax assets. Any profit or loss recorded for the company's U.S.
continuing operations will have no provision or benefit associated with it due
to full valuation allowance, except with respect to benefits related to income
from discontinued operations. As a result, the company's provision or benefit
for taxes will vary significantly depending on the geographic distribution of
income. Due to its full valuation allowance in the U.S., the recently enacted
health care legislation will have no impact on the company's U.S. deferred tax
assets.
m. In May 2008, the company entered into a three-year, U.S. trade accounts
receivable facility. Under this facility, the company has agreed to sell, on an
ongoing basis, through Unisys Funding Corporation I, a wholly owned subsidiary,
up to $150 million of interests in eligible U.S. trade accounts receivable.
Under the facility, receivables are sold at a discount that reflects, among
other things, a yield based on LIBOR subject to a minimum rate. The facility
includes customary representations and warranties, including no material adverse
change in the company's business, assets, liabilities, operations or financial
condition. It also requires the company to maintain a minimum fixed charge
coverage ratio and requires the maintenance of certain ratios related to the
sold receivables. Other termination events include failure to perform
covenants, materially incorrect representations and warranties, change of
control and default under debt aggregating at least $25 million.
14
As discussed in note (j), effective January 1, 2010, the company adopted a new
accounting standard whereby the company's U.S. trade accounts receivable
facility no longer meets the requirements to be treated as a sale, and therefore
will be accounted for as a secured borrowing. At March 31, 2010 and December 31,
2009, receivables of zero and $100 million, respectively, were sold. At
December 31, 2009, the receivables sold under the facility of $100 million were
treated as a sale and therefore removed from the accompanying consolidated
balance sheet.
n. At March 31, 2010, the company's cost-reduction liability, substantially all
of which relates to idle lease cost, was approximately $27 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The company reported significantly improved operating profitability in the first
quarter of 2010, despite lower revenue, as it continues to streamline its
operations and reduce costs as part of its ongoing turnaround program.
First-quarter 2010 operating profit nearly quadrupled to $58.9 million, or 5.9%
of revenue, compared with operating profit of $15.0 million, or 1.4% of revenue,
in the first quarter of 2009. The company reported significant profit
improvement in both its services and technology segments in the quarter.
The company's net results in the quarter were impacted by approximately $35
million of foreign exchange losses in Other Income/Expense, including $20
million relating to the January 2010 currency devaluation in Venezuela (see note
(b) of the Notes to Consolidated Financial Statements). Including this impact,
the company reported a first-quarter 2010 net loss of $11.6 million compared
with a first-quarter 2009 net loss of $24.4 million, which included
approximately $7 million of foreign exchange losses in Other Income/Expense.
Revenue in the first quarter of 2010 declined 7 percent to $998 million compared
with $1.07 billion in the year-ago quarter, as the company continues to focus on
profitable businesses that build on its core areas of strength. Approximately
two percentage points of the revenue decline in the quarter was due to divested
businesses. Foreign exchange rates had an approximately 5 percentage-point
positive impact on revenue in the quarter.
On April 30, 2010, the company closed on the previously disclosed sale of its
health information management (HIM) business for a purchase price of
approximately $135 million, subject to adjustment. Effective January 1, 2010,
the company's financial statements have been retroactively reclassified to
report the HIM business as discontinued operations. As a result, all items
within the consolidated statements of income have been reported as income from
discontinued operations, net of tax, and all items within the consolidated
balance sheets have been reported as either assets or liabilities of
discontinued operations.
RESULTS OF OPERATIONS
COMPANY RESULTS
Revenue for the quarter ended March 31, 2010 was $998.3 million compared with
$1,072.7 million for the first quarter of 2009, a decrease of 7% from the prior
year. Approximately two percentage points of the decline was due to divestiture
of businesses. Foreign currency fluctuations had a 5-percentage-point positive
impact on revenue in the current period compared with the year-ago period.
Services revenue declined 9% and Technology revenue increased 9% in the current
quarter compared with the year-ago period. U.S. revenue was down 16% in the
first quarter compared with the year-ago period, driven by decreases in both
Federal government and commercial revenue. International revenue increased 1%
in the current quarter principally due to an increase in Brazil and the South
Pacific, offset in part by declines in Europe and Asia. Foreign currency had a
10-percentage-point positive impact on international revenue in the three months
ended March 31, 2010 compared with the three months ended March 31, 2009.
15
Total gross profit margin was 23.7% in the three months ended March 31, 2010
compared with 20.0% in the three months ended March 31, 2009. The increase in
gross profit margin principally reflects higher ClearPath sales as well as the
benefits derived from cost reduction actions.
Selling, general and administrative expense in the three months ended March 31,
2010 was $156.4 million (15.7% of revenue) compared with $172.1 million (16.0%
of revenue) in the year-ago period. The decrease in selling, general and
administrative expense reflects the benefits derived in 2010 from cost reduction
actions as well as foreign currency exchange fluctuations.
Research and development (R&D) expenses in the first quarter of 2010 were $20.8
million compared with $27.4 million in the first quarter of 2009. The decrease
in R&D expenses in 2010 compared with 2009 principally reflects changes in the
company's development model as the company has focused its investments on
software development versus hardware design.
For the first quarter of 2010, the company reported an operating profit of $58.9
million compared with an operating profit of $15.0 million in the first quarter
of 2009.
For the three months ended March 31, 2010 pension income was $.3 million
compared with pension income of $2.9 million for the three months ended March
31, 2009. The company records pension income or expense, as well as other
employee-related costs such as payroll taxes and medical insurance costs, in
operating income in the following income statement categories: cost of revenue;
selling, general and administrative expenses; and research and development
expenses. The amount allocated to each category is based on where the salaries
of active employees are charged.
Interest expense for the three months ended March 31, 2010 was $26.5 million
compared with $21.8 million for the three months ended March 31, 2009. The
increase in interest expense in 2010 was primarily due to higher interest rates
associated with the debt issued with the 2009 debt exchange.
Other income (expense), net was an expense of $36.8 million in the first quarter
of 2010, compared with expense of $6.7 million in 2009. The increase in expense
was principally due to foreign exchange losses of $35.4 million in the three
months ended March 31, 2010 compared with losses of $7.0 million in the three
months ended March 31, 2009. Included in the foreign exchange losses for the
first quarter of 2010 was $19.9 million related to the recent Venezuelan
devaluation, see note (b) of the Notes to Consolidated Financial Statements.
The loss from continuing operations before income taxes for the three months
ended March 31, 2010 was $4.4 million compared with a loss of $13.5 million in
2009. The provision for income taxes was $11.3 million in the current quarter
compared with a provision of $12.8 million in the year-ago period. As discussed
in note (l) of the Notes to Consolidated Financial Statements, the company
evaluates quarterly the realizability of its deferred tax assets by assessing
its valuation allowance and by adjusting the amount of such allowance, if
necessary. The company will record a tax provision or benefit for those
international subsidiaries that do not have a full valuation allowance against
their deferred tax assets. Any profit or loss recorded for the company's U.S.
continuing operations will have no provision or benefit associated with it due
to full valuation allowance, except with respect to benefits related to income
from discontinued operations. As a result, the company's provision or benefit
for taxes will vary significantly quarter to quarter depending on the geographic
distribution of income. Due to its full valuation allowance in the U.S., the
recently enacted health care legislation will have no impact on the company's
U.S. deferred tax assets.
SEGMENT RESULTS
The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies. The
accounting policies of each business segment are the same as those followed by
the company as a whole. Intersegment sales and transfers are priced as if the
sales or transfers were to third parties. Accordingly, the Technology segment
recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services segment,
in turn, recognizes customer revenue and marketing profit on such shipments of
company hardware and software to customers. The Services segment also includes
the sale of hardware and software products sourced from third parties that are
sold to customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products sourced
from the Technology segment and sold to Services customers are reported in cost
of revenue for Services.
16
Also included in the Technology segment's sales and operating income are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income of
the Technology segment for the three months ended March 31, 2010 and 2009 was
$.4 million and $1.5 million, respectively. The profit on these transactions is
eliminated in Corporate.
The company evaluates business segment performance on operating profit exclusive
of cost reduction charges and unusual and nonrecurring items, which are included
in Corporate. All other corporate and centrally incurred costs are allocated to
the business segments, based principally on revenue, employees, square footage
or usage.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
March 31, 2010
------------------
Customer revenue $ 998.3 $ 871.4 $ 126.9
Intersegment $ (23.0) .8 22.2
-------- ------- ------- ------
Total revenue $ 998.3 $ (23.0) $ 872.2 $ 149.1
======== ======== ======== =======
Gross profit percent 23.7% 18.2% 52.2%
======== ======= ======
Operating profit percent 5.9% 4.6% 13.7%
======== ======= ======
Three Months Ended
March 31, 2009
------------------
Customer revenue $1,072.7 $ 956.6 $ 116.1
Intersegment $ (37.9) 1.7 36.2
-------- ------- ------- ------
Total revenue $1,072.7 $ (37.9) $ 958.3 $ 152.3
======== ======== ======== =======
Gross profit percent 20.0% 15.8% 33.3%
======== ======= ======
Operating profit
(loss) percent 1.4% 2.0% (11.6)%
======== ======= ======
Gross profit percent and operating income percent are as a percent of total
revenue.
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months
Ended March 31
------------------ Percent
2010 2009 Change
---- ---- --------
Services
Systems integration
and consulting $ 295.2 $ 339.5 (13.0)%
Outsourcing 389.7 398.2 (2.1)%
Infrastructure services 125.6 142.2 (11.7)%
Core maintenance 60.9 76.7 (20.6)%
-------- --------
871.4 956.6 (8.9)%
Technology
Enterprise-class servers 102.4 79.6 28.6%
Specialized technologies 24.5 36.5 (32.9)%
-------- --------
126.9 116.1 9.3%
-------- --------
Total $ 998.3 $1,072.7 (6.9)%
======== ========
17
In the Services segment, customer revenue was $871.4 million for the three
months ended March 31, 2010 down 8.9% from the three months ended March 31,
2009. Foreign currency translation had a 5-percentage-point positive impact on
Services revenue in the current quarter compared with the year-ago period.
Revenue from systems integration and consulting decreased 13.0% from $339.5
million in the March 2009 quarter to $295.2 million in the March 2010 quarter,
reflecting lower demand for project-based services.
Outsourcing revenue decreased 2.1% for the three months ended March 31, 2010 to
$389.7 million compared with the three months ended March 31, 2009, as an
increase in information technology outsourcing (ITO) revenue was more than
offset by a decline in business processing outsourcing (BPO) revenue.
Infrastructure services revenue declined 11.7% for the three month period ended
March 31, 2010 compared with the three month period ended March 31, 2009,
reflecting the company's de-emphasis of lower-margin business, as well as the
shift from project work to managed outsourcing contracts.
Core maintenance revenue declined 20.6% in the current quarter compared with the
prior-year quarter. Approximately half of the decline was due to the
divestiture of a business. The company expects the secular decline of core
maintenance to continue.
Services gross profit was 18.2% in the first quarter of 2010 compared with 15.8%
in the year-ago period. Services operating income percent was 4.6% in the three
months ended March 31, 2010 compared with 2.0% in the three months ended March
31, 2009. The increase in Services gross profit and operating profit margins
was principally due to the benefits derived from the cost reduction actions.
In the Technology segment, customer revenue was $126.9 million in the current
quarter compared with $116.1 million in the year-ago period for an increase of
9.3%. Foreign currency translation had a positive impact of approximately 7-
percentage points on Technology revenue in the current period compared with the
prior-year period. The increase in Technology revenue in 2010 was principally
due to higher sales in the United States and Brazil.
Revenue from the company's enterprise-class servers, which includes the
company's ClearPath and ES7000 product families, increased 28.6% for the three
months ended March 31, 2010 compared with the three months ended March 31, 2009.
The increase was principally due to higher sales of the company's ClearPath
products.
Revenue from specialized technologies decreased 32.9% for the three months ended
March 31, 2010 compared with the three months ended March 31, 2009, principally
due to lower sales of third-party technology products as well as the divestiture
of a business.
Technology gross profit was 52.2% in the current quarter compared with 33.3% in
the year-ago quarter. Technology operating income (loss) percent was 13.7% in
the three months ended March 31, 2010 compared with (11.6)% in the three months
ended March 31, 2009. The increases in gross profit and operating profit
margins in 2010 compared with 2009 reflects a richer mix of high margin
enterprise servers.
NEW ACCOUNTING PRONOUNCEMENTS
See note (j) of the Notes to Consolidated Financial Statements for a full
description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and financial condition.
FINANCIAL CONDITION
The company's principal sources of liquidity are cash on hand, cash from
operations and its U.S. trade accounts receivable facility, which is discussed
below. The company believes that it will have adequate sources of liquidity to
meet its expected near-term cash requirements.
Cash and cash equivalents at March 31, 2010 were $468.5 million compared with
$647.6 million at December 31, 2009. The decline was primarily due to the
payment at maturity of approximately $65 million of long-term debt and the
reduction of utilization of the company's $150 million U.S. accounts receivable
securitization facility. At December 31, 2009, the company had sold $100
million of receivables under the facility compared with zero as of March 31,
2010.
18
During the three months ended March 31, 2010, cash used for operations was $28.4
million compared with cash provided of $39.3 million for the three months ended
March 31, 2009. As discussed above, during the first quarter of 2010 the
company reduced the utilization of its U.S. accounts receivable securitization
facility. At December 31, 2009, the company had sold $100 million of
receivables under the facility compared with zero as of March 31, 2010. This
decreased cash provided by operations by $100 million in the first quarter of
2010. Cash expenditures in the current quarter related to cost-reduction
actions (which are included in operating activities) were approximately $6.2
million compared with $26.7 million for the prior-year quarter. Cash
expenditures for prior year cost-reduction actions are expected to be
approximately $9.4 million for the remainder of 2010, resulting in an expected
cash expenditure of approximately $15.6 million in 2010 compared with $61.3
million in 2009.
Cash used for investing activities for the three months ended March 31, 2010 was
$64.2 million compared with cash usage of $109.0 million during the three months
ended March 31, 2009. Items affecting cash used for investing activities were
the following: Net purchases of investments were $.5 million for the three
months ended March 31, 2010 compared with net purchases of $.1 million in the
prior-year period. Proceeds from investments and purchases of investments
represent derivative financial instruments used to reduce the company's currency
exposure to market risks from changes in foreign currency exchange rates. During
the three months ended March 31, 2010, the company generated $.5 million of cash
from the net change in cash collateralization required compared with a cash
usage of $61.2 million used in the prior year. In addition, in the current
quarter, the investment in marketable software was $14.8 million compared with
$15.5 million in the year-ago period, capital additions of properties were $14.8
million in 2010 compared with $9.9 million in 2009 and capital additions of
outsourcing assets were $39.0 million in 2010 compared with $21.9 million in
2009.
Cash used for financing activities during the three months ended March 31, 2010
was $62.1 million compared with cash provided of $.1 million during the three
months ended March 31, 2009. The current quarter includes $64.9 million used to
pay at maturity the remainder of the company's 6 7/8% senior notes due March
2010.
At March 31, 2010, total debt was $849.2 million, a decrease of $62.5 million
from December 31, 2009, principally due to the payment of the company's
6 7/8% senior notes, discussed above.
The company and certain international subsidiaries have access to uncommitted
lines of credit from various banks.
On May 16, 2008, the company entered into a three-year, U.S. trade accounts
receivable facility. Under this facility, the company has agreed to sell, on an
ongoing basis, through Unisys Funding Corporation I, a wholly owned subsidiary,
up to $150 million of interests in eligible U.S. trade accounts receivable.
Under the facility, receivables are sold at a discount that reflects, among
other things, a yield based on LIBOR subject to a minimum rate. The facility
includes customary representations and warranties, including no material adverse
change in the company's business, assets, liabilities, operations or financial
condition. It also requires the company to maintain a minimum fixed charge
coverage ratio and requires the maintenance of certain ratios related to the
sold receivables. Termination events include failure to perform covenants,
materially incorrect representations and warranties, change of control and
default under debt aggregating at least $25 million. At March 31, 2010 and
December 31, 2009, the company had sold zero and $100 million, respectively, of
eligible receivables. As discussed in note (j) of the Notes to Consolidated
Financial Statements, effective January 1, 2010, the company adopted an
accounting standard whereby its U.S. trade accounts receivable facility no
longer meets the requirements to be treated as a sale of receivables, and
therefore will be accounted for as a secured borrowing. See note (m) of the
Notes to Consolidated Financial Statements.
At March 31, 2010, the company has met all covenants and conditions under its
various lending and funding agreements. The company expects to continue to meet
these covenants and conditions.
The company currently expects to make cash contributions of approximately $115
million to its worldwide, primarily non-U.S., defined benefit pension plans in
2010. In accordance with regulations governing contributions to U.S. defined
benefit pension plans, the company is not required to make cash contributions to
its U.S. qualified defined benefit pension plan in 2010. Under current U.S.
Pension Protection Act (PPA) rules, the company believes that it will be
required to make a cash contribution of up to approximately $30 million in 2011
to fund its U.S. qualified defined benefit pension plan.
19
Pursuant to the indentures governing the secured notes maturing in 2014 and
2015, net proceeds from the sale of the HIM business must be placed in a
segregated account and may be used only for certain purposes, including to
purchase long-term assets that would constitute collateral; to make capital
expenditures with respect to assets that constitute collateral; or to repay
certain of the company's outstanding debt obligations. To the extent that excess
proceeds remain 360 days following the closing of the transaction, the company
may be required to offer to acquire the outstanding secured notes at 100% of
face value plus accrued and unpaid interest. See note (a) of the Notes to
Consolidated Financial Statements.
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors. The company has on file
with the Securities and Exchange Commission an effective registration statement
covering $1.1 billion of debt or equity securities, which enables the company to
be prepared for future market opportunities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events and
include any statement that does not directly relate to any historical or current
fact. Words such as "anticipates," "believes," "expects," "intends," "plans,"
"projects" and similar expressions may identify such forward-looking statements.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties and other factors that could cause the company's actual results to
differ materially from expectations. Factors that could affect future results
include, but are not limited to, those discussed below. Any forward-looking
statement speaks only as of the date on which that statement is made. The
company assumes no obligation to update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made.
Factors that could affect future results include the following:
THE COMPANY'S BUSINESS IS AFFECTED BY THE ECONOMIC AND BUSINESS ENVIRONMENT. The
company's recent financial results have been impacted by the global economic
slowdown. The company has seen this slowdown particularly in its financial
services business but also in other key commercial industries, as clients
reacted to economic uncertainties by reducing information technology spending.
Decreased demand for the company's services and products has impacted its
revenue and profit margins. If economic conditions worsen, the company could
see reductions in demand and increased pressure on revenue and profit margins.
The company could also see a further consolidation of clients, which could also
result in a decrease in demand. The company's business could also be affected
by acts of war, terrorism or natural disasters. Current world tensions could
escalate, and this could have unpredictable consequences on the world economy
and on the company's business.
THE COMPANY'S FUTURE RESULTS MAY DEPEND ON ITS ABILITY TO ACCESS EXTERNAL CREDIT
MARKETS. The capital and credit markets have experienced volatility and
disruption. Financial market conditions may impact the company's ability to
borrow, to refinance its outstanding debt, or to utilize surety bonds, letters
of credit, foreign exchange derivatives and other financial instruments the
company uses to conduct its business. Although the company intends to use cash
on hand to address its liquidity needs, its ability to do so assumes that its
operations will continue to generate sufficient cash.
THE COMPANY HAS SIGNIFICANT PENSION OBLIGATIONS. The company has unfunded
obligations under its U.S. and non-U.S. defined benefit pension plans. The
company expects to make cash contributions of approximately $115 million to its
worldwide, primarily non-U.S., defined benefit pension plans in 2010. In
accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. qualified defined
benefit pension plan in 2010. Under current U.S. Pension Protection Act (PPA)
rules, the company believes that it will be required to make a cash contribution
of up to approximately $30 million in 2011 to its U.S. qualified defined benefit
pension plan.
Deterioration in the value of the company's worldwide defined benefit pension
plan assets could require the company to make larger cash contributions to its
defined benefit pension plans in the future. In addition, the funding of plan
deficits over a shorter period of time than currently anticipated could result
in making cash contributions to these plans on a more accelerated basis. Either
of these events would reduce the cash available for working capital and other
corporate uses and may have an adverse impact on the company's operations,
financial condition and liquidity.
20
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON THE SUCCESS OF ITS TURNAROUND
PROGRAM. Over the past several years, the company has implemented and is
continuing to implement, significant cost-reduction measures intended to improve
profitability. In prior years, the company has incurred significant cost
reduction charges in connection with these efforts. Future results will depend
on the success of these efforts as well as on the success of the company's
program to focus its global resources and simplify its business structure. This
program is based on various assumptions, including assumptions regarding market
segment growth, client demand, and the proper skill set of and training for
sales and marketing management and personnel, all of which are subject to
change. Furthermore, the company's institutional stockholders may attempt to
influence these strategies.
THE COMPANY FACES AGGRESSIVE COMPETITION IN THE INFORMATION SERVICES AND
TECHNOLOGY MARKETPLACE. The information services and technology markets in
which the company operates include a large number of companies vying for
customers and market share both domestically and internationally. The company's
competitors include consulting and other professional services firms, systems
integrators, outsourcing providers, infrastructure services providers, computer
hardware manufacturers and software providers. Some of the company's competitors
may develop competing products and services that offer better price-performance
or that reach the market in advance of the company's offerings. Some competitors
also have or may develop greater financial and other resources than the company,
with enhanced ability to compete for market share, in some instances through
significant economic incentives to secure contracts. Some also may be better
able to compete for skilled professionals. Any of these factors could lead to
reduced demand for the company's products and services and could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
THE COMPANY FACES VOLATILITY AND RAPID TECHNOLOGICAL CHANGE IN ITS INDUSTRY.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend in
part on the company's ability to anticipate and respond to these market trends
and to design, develop, introduce, deliver or obtain new and innovative products
and services on a timely and cost-effective basis. The company may not be
successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON ITS ABILITY TO RETAIN SIGNIFICANT
CLIENTS. The company has a number of significant long-term contracts with
clients, including governmental entities, and its future success will depend, in
part, on retaining its relationships with these clients. The company could lose
clients for such reasons as contract expiration, conversion to a competing
service provider, disputes with clients or a decision to in-source services,
including for contracts with governmental entities as part of the rebid process.
The company could also lose clients as a result of their merger, acquisition or
business failure. The company may not be able to replace the revenue and
earnings from any such lost client.
THE COMPANY'S FUTURE RESULTS WILL DEPEND IN PART ON ITS ABILITY TO GROW
OUTSOURCING. The company's outsourcing contracts are multiyear engagements
under which the company takes over management of a client's technology
operations, business processes or networks. In a number of these arrangements,
the company hires certain of its clients' employees and may become responsible
for the related employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. The company will need to
have available sufficient financial resources in order to take on these
obligations and make these investments.
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, and
realization of expected profitability of existing outsourcing contracts. These
risks could result in an impairment of a portion of the associated assets, which
are tested for recoverability quarterly.
21
As long-term relationships, outsourcing contracts provide a base of recurring
revenue. However, outsourcing contracts are highly complex and can involve the
design, development, implementation and operation of new solutions and the
transitioning of clients from their existing business processes to the new
environment. In the early phases of these contracts, gross margins may be lower
than in later years when an integrated solution has been implemented, the
duplicate costs of transitioning from the old to the new system have been
eliminated and the work force and facilities have been rationalized for
efficient operations. Future results will depend on the company's ability to
effectively and timely complete these implementations, transitions and
rationalizations.
FUTURE RESULTS WILL ALSO DEPEND IN PART ON THE COMPANY'S ABILITY TO DRIVE
PROFITABLE GROWTH IN CONSULTING AND SYSTEMS INTEGRATION. The company's ability
to grow profitably in this business will depend on the level of demand for
systems integration projects and the portfolio of solutions the company offers
for specific industries. It will also depend on an improvement in the
utilization of services delivery personnel. In addition, profit margins in this
business are largely a function of the rates the company is able to charge for
services and the chargeability of its professionals. If the company is unable to
attain sufficient rates and chargeability for its professionals, profit margins
will suffer. The rates the company is able to charge for services are affected
by a number of factors, including clients' perception of the company's ability
to add value through its services; introduction of new services or products by
the company or its competitors; pricing policies of competitors; and general
economic conditions. Chargeability is also affected by a number of factors,
including the company's ability to transition employees from completed projects
to new engagements, and its ability to forecast demand for services and thereby
maintain an appropriate headcount.
FUTURE RESULTS WILL ALSO DEPEND, IN PART, ON MARKET DEMAND FOR THE COMPANY'S
HIGH-END ENTERPRISE SERVERS AND MAINTENANCE ON THESE SERVERS. In recent years,
the company's high-end enterprise servers and maintenance on these servers have
experienced secular revenue declines. The company continues to apply its
resources to develop value-added software capabilities and optimized solutions
for these server platforms which provide competitive differentiation. Future
results will depend, in part, on customer acceptance of ClearPath systems and
the company's ability to maintain its installed base for ClearPath and to
develop next-generation ClearPath products that are purchased by the installed
base.
THE COMPANY'S CONTRACTS WITH U.S. GOVERNMENTAL AGENCIES MAY BE SUBJECT TO
AUDITS, CRIMINAL PENALTIES, SANCTIONS AND OTHER EXPENSES AND FINES. The company
frequently enters into contracts with governmental entities. U.S. government
agencies, including the Defense Contract Audit Agency and the Department of
Labor, routinely audit government contractors. These agencies review a
contractor's performance under its contracts, cost structure and compliance with
applicable laws, regulations and standards. The U.S. government also may review
the adequacy of, and a contractor's compliance with contract terms and
conditions, its systems and policies, including the contractor's purchasing,
property, estimating, billing, accounting, compensation and management
information systems. Any costs found to be overcharged or improperly allocated
to a specific contract or any amounts improperly billed for products or services
will be subject to reimbursement to the government. If an audit uncovers
improper or illegal activities, the company may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or
prohibition from doing business with the U.S. government.
THE COMPANY'S CONTRACTS MAY NOT BE AS PROFITABLE AS EXPECTED OR PROVIDE THE
EXPECTED LEVEL OF REVENUES. A number of the company's long-term contracts for
infrastructure services, outsourcing, help desk and similar services do not
provide for minimum transaction volumes. As a result, revenue levels are not
guaranteed. In addition, some of these contracts may permit customer termination
or may impose other penalties if the company does not meet the performance
levels specified in the contracts.
The company's contracts with governmental entities are subject to the
availability of appropriated funds. These contracts also contain provisions
allowing the governmental entity to terminate the contract at the governmental
entity's discretion before the end of the contract's term. In addition, if the
company's performance is unacceptable to the customer under a government
contract, the government retains the right to pursue remedies under the affected
contract, which remedies could include termination.
22
Certain of the company's outsourcing agreements require that the company's
prices be benchmarked and provide for a downward adjustment to those prices if
the pricing for similar services in the market has changed. As a result,
anticipated revenues from these contracts may decline.
Some of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted services
and products at an agreed-upon fixed price. At times the company has experienced
problems in performing some of these fixed-price contracts on a profitable basis
and has provided periodically for adjustments to the estimated cost to complete
them. Future results will depend on the company's ability to perform these
services contracts profitably.
THE COMPANY MAY FACE DAMAGE TO ITS REPUTATION OR LEGAL LIABILITY IF ITS CLIENTS
ARE NOT SATISFIED WITH ITS SERVICES OR PRODUCTS. The success of the company's
business is dependent on strong, long-term client relationships and on its
reputation for responsiveness and quality. As a result, if a client is not
satisfied with the company's services or products, its reputation could be
damaged and its business adversely affected. Allegations by private litigants or
regulators of improper conduct, as well as negative publicity and press
speculation about the company, whatever the outcome and whether or not valid,
may harm its reputation. In addition to harm to reputation, if the company
fails to meet its contractual obligations, it could be subject to legal
liability, which could adversely affect its business, operating results and
financial condition.
FUTURE RESULTS WILL DEPEND IN PART ON THE PERFORMANCE AND CAPABILITIES OF THIRD
PARTIES. The company has commercial relationships with suppliers, channel
partners and other parties that have complementary products, services or skills.
Future results will depend, in part, on the performance and capabilities of
these third parties, on the ability of external suppliers to deliver components
at reasonable prices and in a timely manner, and on the financial condition of,
and the company's relationship with, distributors and other indirect channel
partners.
THE COMPANY IS SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY. More
than half of the company's total revenue is derived from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, currency restrictions and devaluations, changes in
political or economic conditions, trade protection measures, import or export
licensing requirements, multiple and possibly overlapping and conflicting tax
laws, new tax legislation, weaker intellectual property protections in some
jurisdictions and additional legal and regulatory compliance requirements
applicable to businesses that operate internationally, including the Foreign
Corrupt Practices Act and non-U.S. laws and regulations.
THE COMPANY COULD FACE BUSINESS AND FINANCIAL RISK IN IMPLEMENTING FUTURE
DISPOSITIONS OR ACQUISITIONS. As part of the company's business strategy, it
may from time to time consider disposing of existing technologies, products and
businesses that may no longer be in alignment with its strategic direction,
including transactions of a material size or acquiring complementary
technologies, products and businesses. Potential risks with respect to
dispositions include difficulty finding buyers or alternative exit strategies on
acceptable terms in a timely manner; potential loss of employees; and
dispositions at unfavorable prices or on unfavorable terms, including relating
to retained liabilities. Any acquisitions may result in the incurrence of
substantial additional indebtedness or contingent liabilities. Acquisitions
could also result in potentially dilutive issuances of equity securities and an
increase in amortization expenses related to intangible assets. Additional
potential risks associated with acquisitions include integration difficulties;
difficulties in maintaining or enhancing the profitability of any acquired
business; risks of entering markets in which the company has no or limited prior
experience; potential loss of employees or failure to maintain or renew any
contracts of any acquired business; and expenses of any undiscovered or
potential liabilities of the acquired product or business, including relating to
employee benefits contribution obligations or environmental requirements.
Further, with respect to both dispositions and acquisitions, management's
attention could be diverted from other business concerns. Current adverse
credit conditions could also affect the company's ability to consummate
divestments or acquisitions. The risks associated with dispositions and
acquisitions could have a material adverse effect upon the company's business,
financial condition and results of operations. There can be no assurance that
the company will be successful in consummating future dispositions or
acquisitions on favorable terms or at all.
23
THE COMPANY'S SERVICES OR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS. The company cannot be sure that its services and products do
not infringe on the intellectual property rights of third parties, and it may
have infringement claims asserted against it or against its clients. These
claims could cost the company money, prevent it from offering some services or
products, or damage its reputation.
PENDING LITIGATION COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS OR CASH
FLOW. There are various lawsuits, claims, investigations and proceedings that
have been brought or asserted against the company, which arise in the ordinary
course of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. See note (j) of the Notes to Consolidated Financial
Statements for more information on litigation. The company believes that it has
valid defenses with respect to legal matters pending against it. Litigation is
inherently unpredictable, however, and it is possible that the company's results
of operations or cash flow could be affected in any particular period by the
resolution of one or more of the legal matters pending against it.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
There has been no material change in the company's assessment of its sensitivity
to market risk since its disclosure in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.
Item 4. Controls and Procedures
--------------------------------
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of March 31, 2010. Based
on this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. Such
evaluation did not identify any change in the Company's internal control over
financial reporting that occurred during the quarter ended March 31, 2010 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II - OTHER INFORMATION
------- -----------------
Item 1 Legal Proceedings
------- -----------------
Information with respect to litigation is set forth in note (k) of the Notes to
Consolidated Financial Statements, and such information is incorporated herein
by reference.
Item 1A. Risk Factors
------- ------------
See "Factors that may affect future results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
risk factors.
Item 6. Exhibits
------- --------
(a) Exhibits
See Exhibit Index
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: April 30, 2010 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Scott Hurley
----------------------
Scott Hurley
Vice President and
Corporate Controller
(Chief Accounting Officer)
25
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's Current
Report on Form 8-K dated April 29, 2010)
3.2 Bylaws of Unisys Corporation, as amended through April 29, 2010
(incorporated by reference to Exhibit 3.2 to the registrant's Current
Report on Form 8-K dated April 29, 2010)
10 Agreement dated February 9, 2010 between Unisys Corporation and
Richard C. Marcello (incorporated by reference to Exhibit 10 to the
registrant's Current Report on Form 8-K dated February 9, 2010)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of J. Edward Coleman required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of J. Edward Coleman required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350