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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 September 30, 2005
[ ] 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding as of September 30, 2005
341,271,970.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
September 30,
2005 December 31,
(Unaudited) 2004
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 466.1 $ 660.5
Accounts and notes receivable, net 1,118.2 1,136.8
Inventories:
Parts and finished equipment 86.9 93.7
Work in process and materials 109.1 122.4
Deferred income taxes 24.9 291.8
Prepaid expenses and other current assets 142.6 112.4
-------- --------
Total 1,947.8 2,417.6
-------- --------
Properties 1,326.8 1,305.5
Less-Accumulated depreciation and
amortization 928.9 881.4
-------- --------
Properties, net 397.9 424.1
-------- --------
Outsourcing assets, net 428.3 431.9
Marketable software, net 335.3 336.8
Investments at equity 197.1 197.1
Prepaid pension cost 43.3 52.5
Deferred income taxes 187.1 1,394.6
Goodwill 193.1 189.9
Other long-term assets 158.3 176.4
-------- --------
Total $3,888.2 $5,620.9
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 4.7 $ 1.0
Current maturities of long-term debt 60.5 151.7
Accounts payable 413.0 487.4
Other accrued liabilities 1,151.7 1,382.7
-------- --------
Total 1,629.9 2,022.8
-------- --------
Long-term debt 1,052.2 898.4
Accrued pension liabilities 638.9 537.9
Other long-term liabilities 708.2 655.3
Stockholders' equity (deficit)
Common stock, shares issued: 2005, 343.3
2004, 339.4 3.4 3.4
Accumulated deficit (2,077.0) ( 376.2)
Other capital 3,911.7 3,883.8
Accumulated other comprehensive loss (1,979.1) (2,004.5)
-------- --------
Stockholders' equity (deficit) (141.0) 1,506.5
-------- --------
Total $3,888.2 $5,620.9
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenue
Services $1,174.0 $1,147.1 $3,517.7 $3,470.9
Technology 213.1 298.6 671.5 825.8
-------- -------- -------- --------
1,387.1 1,445.7 4,189.2 4,296.7
Costs and expenses
Cost of revenue:
Services 1,036.0 965.7 3,080.8 2,821.6
Technology 105.1 139.0 324.7 375.5
-------- ------- -------- -------
1,141.1 1,104.7 3,405.5 3,197.1
Selling, general
and administrative 261.0 303.7 790.0 837.8
Research and development 61.2 75.3 192.7 218.1
-------- ------- -------- -------
1,463.3 1,483.7 4,388.2 4,253.0
-------- ------- -------- -------
Operating income (loss) (76.2) (38.0) (199.0) 43.7
Interest expense 17.1 16.2 44.9 51.4
Other income (expense),
net 13.3 (3.0) 45.8 21.6
-------- ------- ------- -------
Income (loss) before
income taxes (80.0) (57.2) (198.1) 13.9
Provision (benefit)
for income taxes 1,548.2 (82.4) 1,502.7 (59.6)
-------- -------- -------- --------
Net income (loss) $(1,628.2) $ 25.2 $(1,700.8) $ 73.5
======== ======== ======== ========
Earnings (loss) per share
Basic $ (4.78) $ .08 $ (5.01) $ .22
======== ======== ======== ========
Diluted $ (4.78) $ .07 $ (5.01) $ .22
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
-----------------
2005 2004
---- ----
Cash flows from operating activities
Net income (loss) $(1,700.8) $ 73.5
Add (deduct) items to reconcile net income (loss)
to net cash provided by operating activities:
Equity income (3.8) ( 7.2)
Depreciation and amortization of properties 89.7 99.9
Depreciation and amortization of outsourcing assets 96.0 88.6
Amortization of marketable software 91.6 96.6
Gain on sale of facility (15.8) -
Loss on the tender of debt 10.7 -
Decrease (increase) in deferred income taxes, net 1,474.5 (25.3)
Decrease in receivables, net 20.7 97.2
Decrease in inventories 19.6 19.1
Decrease in accounts payable and other
accrued liabilities (245.9) (260.1)
Increase in other liabilities 199.4 19.8
Increase in other assets (48.8) ( 9.8)
Other 35.4 50.6
------ ------
Net cash provided by operating activities 22.5 242.9
------ ------
Cash flows from investing activities
Proceeds from investments 5,758.9 4,423.4
Purchases of investments (5,746.2) (4,427.4)
Investment in marketable software (93.7) ( 88.8)
Capital additions of properties (84.9) ( 95.5)
Capital additions of outsourcing assets (115.7) (126.6)
Purchases of businesses (.5) ( 18.6)
Proceeds from sales of properties 23.4 -
------ ------
Net cash used for investing activities (258.7) ( 333.5)
------ ------
Cash flows from financing activities
Net proceeds from (reduction in)
short-term borrowings 3.8 ( 1.0)
Proceeds from employee stock plans 12.8 30.9
Payments of long-term debt (500.2) ( 2.3)
Proceeds from issuance of long-term debt 541.5 -
------ ------
Net cash provided by financing
activities 57.9 27.6
------ ------
Effect of exchange rate changes on
cash and cash equivalents (16.1) .8
------ ------
Decrease in cash and cash equivalents (194.4) (62.2)
Cash and cash equivalents, beginning of period 660.5 635.9
------ -------
Cash and cash equivalents, end of period $466.1 $ 573.7
====== =======
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.
a. The following table shows how earnings (loss) per share were computed for
the three and nine months ended September 30, 2005 and 2004 (dollars in
millions, shares in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Basic Earnings (Loss)
per Share
Net income (loss) $(1,628.2) $ 25.2 $(1,700.8) $ 73.5
======= ======= ======== =======
Weighted average shares 340,914 335,576 339,736 334,236
======= ======= ======== =======
Basic earnings (loss)
per share $ (4.78) $ .08 $ (5.01) $ .22
======= ======= ======== =======
Diluted Earnings (Loss)
per Share
Net income (loss) $(1,628.2) $ 25.2 $(1,700.8) $ 73.5
======= ======= ======== =======
Weighted average shares 340,914 335,576 339,736 334,236
Plus incremental shares
from assumed conversions
of employee stock plans - 1,786 - 3,823
-------- ------- -------- --------
Adjusted weighted average
shares 340,914 337,362 339,736 338,059
======= ======= ======= =======
Diluted earnings (loss)
per share $ (4.78) $ .07 $ (5.01) $ .22
======== ======= ======== ========
At September 30, 2005, no shares related to employee stock plans
were included in the computation of diluted earnings per share since
inclusion of these shares would be antidilutive because of the net loss
incurred in the three and nine months ended September 30, 2005.
b. During the financial close for the quarter ended September 30, 2005, the
company performed its quarterly assessment of its net deferred tax assets.
Up to this point in time, as previously disclosed in the company's critical
accounting policies section of its Form 10-K, the company has principally
relied on its ability to generate future taxable income (predominately in
the U.S.) in its assessment of the realizability of its net deferred tax
6
assets. Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (SFAS No. 109), limits the ability to use
future taxable income to support the realization of deferred tax assets
when a company has experienced recent losses even if the future taxable
income is supported by detailed forecasts and projections. After
considering the company's pretax losses in 2004 and for the nine months
ended September 30, 2005, the expectation of a pre-tax loss for the full
year of 2005, and the impact over the short term of the company's
recently-announced plans to restructure its business model by divesting
non-core assets, reducing its cost structure and shifting its focus to
high growth core markets, the company concluded that it could no longer
rely on future taxable income as the basis for realization of its net
deferred tax asset.
Accordingly, the company recorded a non-cash charge in the third quarter
of 2005 of $1,573.9 million to increase the valuation allowance against
deferred tax assets. With this increase, the company has a full valuation
allowance against its deferred tax assets for all of its U.S. operations
and certain foreign subsidiaries. This non-cash charge does not affect
the company's compliance with the financial covenants under its credit
agreements. It has been recorded in provision for income taxes in the
accompanying consolidated statement of income. The company expects to
continue to record a full valuation allowance on future tax benefits in
such jurisdictions until other positive evidence is sufficient to justify
realization.
The realization of the remaining deferred tax assets of approximately
$150 million is primarily dependent on forecasted future taxable income
within certain foreign jurisdictions. Any reduction in estimated
forecasted future taxable income may require the company to record an
additional valuation allowance against the remaining deferred tax assets.
Any increase or decrease in the valuation allowance would result in
additional or lower income tax expense in such period and could have a
significant impact on that period's earnings.
c. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - consulting and
systems integration, 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
7
use in Services engagements. The amount of such profit included in
operating income of the Technology segment for the three and nine months
ended September 30, 2005 and 2004 was $3.3 million and $7.2 million and
$13.0 million and $9.8 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.
A summary of the company's operations by business segment for the three
and nine month periods ended September 30, 2005 and 2004 is presented below
(in millions of dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
September 30, 2005
------------------
Customer revenue $1,387.1 $1,174.0 $ 213.1
Intersegment $(57.1) 4.5 52.6
-------- -------- -------- -------
Total revenue $1,387.1 $(57.1) $1,178.5 $ 265.7
======== ======== ======== =======
Operating loss $ (76.2) $ (.4) $ (60.2) $ (15.6)
======== ======== ======== =======
Three Months Ended
September 30, 2004
------------------
Customer revenue $1,445.7 $1,147.1 $ 298.6
Intersegment $(63.6) 5.2 58.4
------- ------- -------- -------
Total revenue $1,445.7 $(63.6) $1,152.3 $ 357.0
======== ======= ======== =======
Operating income (loss) $ (38.0) $(85.4) $ (2.3) $ 49.7
======== ======= ======== =======
Nine Months Ended
September 30, 2005
------------------
Customer revenue $4,189.2 $3,517.7 $ 671.5
Intersegment $(192.7) 14.2 178.5
-------- -------- -------- -------
Total revenue $4,189.2 $(192.7) $3,531.9 $ 850.0
======== ======== ======== =======
Operating loss $ (199.0) $ (8.1) $ (181.7) $ (9.2)
======== ======== ======== =======
8
Nine Months Ended
September 30, 2004
------------------
Customer revenue $4,296.7 $3,470.9 $ 825.8
Intersegment $(166.6) 14.5 152.1
-------- -------- -------- -------
Total revenue $4,296.7 $(166.6) $3,485.4 $ 977.9
======== ======== ======== =======
Operating income (loss) $ 43.7 $ (85.4) $ 35.1 $ 94.0
======== ======== ======== =======
Presented below is a reconciliation of total business segment operating
income (loss) to consolidated income (loss) before income taxes (in
millions of dollars):
Three Months Nine Months
Ended September 30 Ended September 30,
------------------- -----------------------
2005 2004 2005 2004
---- ---- ---- ----
Total segment operating
income (loss) $ (75.8) $ 47.4 $(190.9) $129.1
Interest expense (17.1) (16.2) ( 44.9) (51.4)
Other income (expense), net 13.3 (3.0) 45.8 21.6
Corporate and eliminations (.4) 1.3 (8.1) 1.3
Cost reduction charge (86.7) (86.7)
------- ------- ------- ------
Total income (loss) before
income taxes $ (80.0) $(57.2) $(198.1) $ 13.9
======= ====== ======== ======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Services
Consulting and systems
integration $ 392.2 $ 403.3 $1,205.5 $1,194.3
Outsourcing 455.6 411.8 1,349.2 1,274.2
Infrastructure services 204.4 193.1 582.4 572.6
Core maintenance 121.8 138.9 380.6 429.8
------- ------- ------- -------
1,174.0 1,147.1 3,517.7 3,470.9
Technology
Enterprise-class servers 170.9 249.6 534.8 636.9
Specialized technologies 42.2 49.0 136.7 188.9
------- -------- ------- -------
213.1 298.6 671.5 825.8
------- ------- ------- -------
Total $1,387.1 $1,445.7 $4,189.2 $4,296.7
======= ======== ======= =======
9
d. Outsourcing assets include fixed assets acquired in connection with
outsourcing contracts, capitalized software used in outsourcing
arrangements, and costs incurred upon initiation of an outsourcing
contract that have been deferred, which consist principally of initial
customer setup and employment obligations related to employees assumed.
Recoverability of outsourcing assets is dependent on various factors,
including the timely completion and ultimate cost of the outsourcing
solution, realization of expected profitability of existing outsourcing
contracts and obtaining additional outsourcing customers. The company
quarterly compares the carrying value of the outsourcing assets with the
undiscounted future cash flows expected to be generated by the
outsourcing assets to determine if there is an impairment. If impaired,
the outsourcing assets are reduced to an estimated fair value on a
discounted cash flow approach. The company prepares its cash flow
estimates based on assumptions that it believes to be reasonable but are
also inherently uncertain. Actual future cash flows could differ from
these estimates.
At September 30, 2005, total outsourcing assets, net were $428.3 million,
approximately $213.2 million of which relate to iPSL, a 51% owned U.K.-
based company which generates annual revenue of approximately $200 million.
As a result of incurred losses, the company began discussions during the
second quarter of 2005 with the minority shareholders to revise the iPSL
corporate structure and the services agreements. On October 7, 2005,
the company and the minority shareholders executed a memorandum of
understanding whereby the company will retain its current 51% ownership
in iPSL and the fees charged under the outsourcing services agreements
will be increased beginning January 1, 2006. The memorandum of
understanding also addresses changes in the governance of iPSL and
shareholder responsibilities for funding iPSL. The estimated increase
in iPSL revenue resulting from the amended outsourcing services
agreements, together with its existing revenue, is expected to provide
the company with sufficient cash flow to recover all of iPSL's outsourcing
assets as of September 30, 2005. The parties have undertaken to complete,
in the fourth quarter of 2005, definitive agreements relating to the
matters covered by the memorandum of understanding. While the company
believes that the iPSL outsourcing assets at September 30, 2005 will be
recovered, significant revisions in the final agreements or failure to
reach a final agreement could result in an impairment of a portion or all
of the iPSL outsourcing assets.
e. Comprehensive income (loss) for the three and nine months ended September
30, 2005 and 2004 includes the following components (in millions of
dollars):
10
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss) $(1,628.2) $ 25.2 $(1,700.8) $ 73.5
Other comprehensive income
(loss)
Cash flow hedges
Income, net of tax of $(.8),
$(.1), $1.9 and $.3 (1.6) (.2) 3.3 .7
Reclassification adjustments,
net of tax of $.6, $.6,
$ - and $2.2 1.3 1.3 .3 4.2
Foreign currency translation
adjustments 4.6 6.1 21.8 13.1
------ ------ ------ -----
Total other comprehensive
income 4.3 7.2 25.4 18.0
------- ------ ------ ------
Comprehensive income (loss) $(1,623.9) $ 32.4 $(1,675.4) $ 91.5
======= ====== ======= ======
Accumulated other comprehensive income (loss) is as follows (in millions
of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2003 $(2,011.9) $(679.7) $( 6.6) $(1,325.6)
Change during period 7.4 43.5 3.1 (39.2)
-------- ------- ------ ---------
Balance at December 31, 2004 (2,004.5) (636.2) ( 3.5) (1,364.8)
Change during period 25.4 21.8 3.6 -
-------- ------- ------ ---------
Balance at September 30, 2005 $(1,979.1) $(614.4) $ .1 $(1,364.8)
======== ======= ====== =========
f. The amount credited to stockholders' equity (deficit) for the income tax
benefit related to the company's stock plans for the nine months ended
September 30, 2005 and 2004 was $.8 million and $3.6 million, respectively.
g. For equipment manufactured by the company, the company warrants that it
will substantially conform to relevant published specifications for 12
months after shipment to the customer. The company will repair or replace,
at its option and expense, items of equipment that do not meet this
warranty. For company software, the company warrants that it will conform
substantially to then-current published functional specifications for 90
days from customer's receipt. The company will provide a workaround or
correction for material errors in its software that prevents its use in a
production environment.
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
11
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Balance at beginning
of period $ 9.4 $ 15.0 $ 11.6 $ 20.8
Accruals for warranties issued
during the period 2.1 2.0 6.4 9.1
Settlements made during the
period (2.6) (3.8) (8.1) (12.7)
Changes in liability for
pre-existing warranties
during the period,
including expirations (.5) (.4) (1.5) (4.4)
------ ------- -------- -------
Balance at September 30 $ 8.4 $ 12.8 $ 8.4 $ 12.8
====== ======= ======= =======
h. The company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based employee compensation
plans. For stock options, at date of grant no compensation expense is
reflected in net income as all stock options granted had an exercise
price equal to or greater than the market value of the underlying common
stock on the date of grant. In addition, no compensation expense was
recognized for common stock purchases under the Employee Stock Purchase
Plan. Pro forma information regarding net income and earnings per share
is required by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," and has been determined as
if the company had accounted for its stock plans under the fair value
method of SFAS No. 123. For purposes of the pro forma disclosures, the
estimated fair value of the options is amortized to expense over the
options' vesting period.
The company's stock option grants include a provision that if
termination of employment occurs after the participant has attained age
55 and completed five years of service with the company, the
participant shall continue to vest in each of his or her stock options
in accordance with the vesting schedule set forth in the applicable
stock option award agreement. For purposes of the pro forma
information required to be disclosed by SFAS No. 123, the company has
recognized compensation cost over the vesting period. Under SFAS No.
123R, which the company will adopt on January 1, 2006 (see note n),
compensation cost must be recognized over the period through the date
that the employee first becomes eligible to retire and is no longer
13
i. Net periodic pension expense for the three and nine months ended
September 30, 2005 and 2004 is presented below (in millions of dollars):
Three Months Three Months
Ended September 30, 2005 Ended September 30, 2004
------------------------ ------------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ------ ----- ----- ------
Service cost $ 28.4 $17.3 $ 11.1 $ 29.2 $ 16.8 $ 12.4
Interest cost 91.9 65.8 26.1 90.3 66.0 24.3
Expected return on
plan assets (119.1) (90.3) (28.8) (123.9) (94.7) (29.2)
Amortization of prior
service (benefit)
cost (1.7) (1.9) .2 (1.6) (1.9) .3
Recognized net
actuarial loss 44.7 35.1 9.6 29.5 23.3 6.2
------ ------ ------ ------ ----- ------
Net periodic pension
expense $ 44.2 $26.0 $ 18.2 $ 23.5 $ 9.5 $ 14.0
====== ====== ====== ====== ====== ======
Nine Months Nine Months
Ended September 30, 2005 Ended September 30, 2004
------------------------ ------------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ------ ----- ----- ------
Service cost $ 88.2 $52.0 $ 36.2 $ 87.1 $ 50.4 $ 36.7
Interest cost 278.0 197.3 80.7 270.5 198.3 72.2
Expected return on
plan assets (359.9)(270.8) (89.1) (370.7) (284.2) (86.5)
Amortization of prior
service (benefit)
cost (4.7) (5.7) 1.0 (4.6) (5.7) 1.1
Recognized net
actuarial loss 135.2 105.2 30.0 88.2 69.8 18.4
------ ------ ------ ------ ----- ------
Net periodic pension
expense $136.8 $78.0 $ 58.8 $ 70.5 $ 28.6 $ 41.9
====== ====== ====== ====== ====== ======
The company currently expects to make cash contributions of approximately
$70 million to its worldwide defined benefit pension plans in 2005 compared
with $62.8 million in 2004. For the nine months ended September 30, 2005
and 2004, $49.3 million and $41.4 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 2005.
Net periodic postretirement benefit expense for the three and nine months
ended September 30, 2005 and 2004 is presented below (in millions of
dollars):
14
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Interest cost $ 3.5 $ 3.5 $10.4 $ 10.5
Expected return on plan
assets (.1) - (.3) -
Amortization of prior service
benefit (.5) (.5) (1.5) (1.5)
Recognized net actuarial loss 1.6 1.0 4.8 3.0
----- ----- ----- ------
Net periodic postretirement
benefit expense $ 4.5 $ 4.0 $13.4 $ 12.0
===== ===== ===== ======
The company expects to make cash contributions of approximately $27 million
to its postretirement benefit plan in 2005. For the nine months ended
September 30, 2005 and 2004, $18.8 million and $20.0 million, respectively
of cash contributions have been made.
j. Cash paid during the nine months ended September 30, 2005 and 2004 for
income taxes was $32.4 million and $47.0 million, respectively.
Cash paid during the nine months ended September 30, 2005 and
2004 for interest was $61.7 million and $57.7 million, respectively.
k. As part of its ongoing efforts to reduce its cost base and enhance
its administrative efficiency, on September 30, 2004, the company
consolidated facility space and committed to a reduction of approximately
1,400 employees, primarily in general and administrative areas. These
actions resulted in a pretax charge of $82.0 million, or $.18 per diluted
share.
The pretax charge was recorded in the following statement of income
classifications: cost of revenue-services, $28.1 million; selling,
general and administrative expenses, $50.2 million; research and
development expenses, $8.4 million; and other income (expense), net, $4.7
million.
15
Following is a breakdown of the individual components of the 2004 cost
reduction action charge (in millions of dollars):
Work Force
Reductions*
----------- Idle
Lease
Headcount Total U.S. Int'l. Cost
------------------------------------------------------------------------
Balance at
Dec. 31, 2004 851 $81.1 $22.5 $52.9 $5.7
Utilized (753) (43.4) (16.3) (24.6) (2.5)
Changes in
estimates and
revisions (8.1) (2.2) (8.9) 3.0
Translation
adjustments (3.3) (3.3)
------------------------------------------
Balance at
September 30, 2005 98 $26.3 $4.0 $16.1 $6.2
==========================================
Expected future
utilization:
2005 remaining
three months 84 $13.5 $3.0 $ 9.7 $ .8
2006 and thereafter 14 12.8 1.0 6.4 5.4
------------------------------------------------------------------------
* Includes severance, notice pay, medical and other benefits.
Cash expenditures related to the above actions, as well as cost
reduction actions taken in years prior to 2004, for the nine months
ended September 30, 2005 and 2004 were approximately $49.0 million
and $10.0 million, respectively.
l. During the September 2004 quarter, the U.S. Congressional Joint Committee
on Taxation approved an income tax refund to the company related to the
settlement of tax audit issues dating from the mid-1980s. The refund,
including interest, of approximately $40 million was received in the
June 2005 quarter. As a result of the resolution of these audit issues,
the company recorded favorable adjustments to its tax liability
reserves, which resulted in an after-tax benefit of $68.2 million,
or $.20 per diluted share, to net income in the third quarter of 2004.
m. The company currently owns approximately 29% of the outstanding shares
of Nihon Unisys Limited (NUL), a Japanese company that serves as the
company's exclusive distributor in Japan. On October 4, 2005, the
company and NUL amended the terms of a license and support agreement
pursuant to which NUL receives access to certain of the company's
intellectual property and support services. Prior to the revised
agreement, NUL paid annual royalties to the company based on a percentage
of NUL's revenue. In 2004 and 2003, these royalties amounted to
approximately $103 million and $101 million, respectively. Under the
revised arrangement, the company has granted NUL a perpetual license to
the intellectual property, and, in lieu of an annual royalty, NUL has
16
agreed to pay the company a fixed fee of $225 million, one-half of which
was paid on October 7, 2005 and one-half of which is payable on October 1,
2006. The company will recognize the $225 million as revenue over the
three-year period ending March 31, 2008. In addition, the parties have
agreed that NUL will pay the company a fee of $20 million per year for
three years for the support services it provides under the license and
support agreement. NUL has an option to renew the support services
arrangement for an additional two years at the same price. In prior
periods, the support services fee was included as part of the royalty
payments.
n. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2
(FSP No. 109-2), "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provisions within the American Jobs Creation Act
of 2004" (the Jobs Act). FSP No. 109-2 provides guidance with respect
to reporting the potential impact of the repatriation provisions of the
Jobs Act on an enterprise's income tax expense and deferred tax liability.
The Jobs Act was enacted on October 22, 2004, and provides for a temporary
85% dividends received deduction on certain foreign earnings repatriated
during a one-year period. The deduction would result in an approximate
5.25% federal tax rate on the repatriated earnings. To qualify for the
deduction, the earnings must be reinvested in the United States pursuant
to a domestic reinvestment plan established by a company's chief executive
officer and approved by a company's board of directors. Certain other
criteria in the Jobs Act must be satisfied as well. FSP No. 109-2 states
that an enterprise is allowed time beyond the financial reporting period
to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings. These provisions will not impact the
company's consolidated financial position, consolidated results of
operations, or liquidity. Accordingly, the company has not adjusted its
tax expense or deferred tax liability to reflect the repatriation
provisions of the Jobs Act.
Effective July 1, 2005, the company adopted SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" (SFAS No. 153). SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting
for Nonmonetary Transactions," and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies
that a nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. Adoption of SFAS No. 153 did not have a material effect on the
company's consolidated financial position, consolidated results of
operations, or liquidity.
In May 2004, the FASB issued Staff Position No. FAS 106-2 (FSP No. 106-2),
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (the Act).
The Act introduces a prescription drug benefit under Medicare, as well as
a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part
D. FSP No. 106-2 is effective for the first interim period beginning after
June 15, 2004, and provides that an employer shall measure the accumulated
plan benefit obligation (APBO) and net periodic postretirement benefit
cost, taking into account any subsidy received under the Act. As of
September 30, 2005, the company's measurements of both the APBO and the net
17
postretirement benefit cost do not reflect any amounts associated with the
subsidy. Final regulations implementing the Act were issued on January 21,
2005. The final regulations clarify how a company should determine
actuarial equivalency and the definition of a plan for purposes of
determining actuarial equivalency. Adoption of FSP No. 106-2 did not
have a material impact on the company's consolidated financial position,
consolidated results of operations, or liquidity.
In May 2005, the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standards (SFAS) No. 154, "Accounting
Changes and Error Corrections" (SFAS No. 154). SFAS No. 154 provides
guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to
the newly adopted accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The company does not expect that
adoption of SFAS No. 154 will have a material effect on its consolidated
financial position, consolidated results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial
statements based on their fair values. The pro forma disclosures
previously permitted under SFAS No. 123 will no longer be an alternative
to financial statement recognition. In accordance with a Securities
and Exchange Commission rule, companies will be allowed to implement
SFAS No. 123R as of the beginning of the first interim or annual
period that begins after June 15, 2005. The company will adopt SFAS No.
123R on January 1, 2006. Under SFAS No. 123R, the company must determine
the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The permitted transition methods
include either retrospective or prospective adoption. Under the
retrospective method, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded for
all unvested stock options at the beginning of the first quarter of
adoption of SFAS No. 123R, while the retrospective method would record
compensation expense for all unvested stock options beginning with the
first period presented. The company expects to adopt the prospective
method. The company is evaluating the requirements of SFAS No. 123R and
currently expects that adoption of SFAS No. 123R will not have a material
impact on the company's consolidated financial position and consolidated
results of operations due to the acceleration of stock options on
September 23, 2005 as disclosed in note h. However, uncertainties,
including the company's future stock-based compensation strategy, stock
price volatility, estimated forfeitures and employee stock option
exercise behavior, make it difficult to determine whether the stock-based
compensation expense recognized in future periods will be similar to the
SFAS 123 pro forma expense disclosed in note h.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends
18
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs
and wasted material (spoilage). Among other provisions, the new rule
requires that such items be recognized as current-period charges,
regardless of whether they meet the criterion of "so abnormal" as stated in
ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after
June 15, 2005. The company does not expect that adoption of SFAS No. 151
will have a material effect on its consolidated financial position,
consolidated results of operations, or liquidity.
o. During the nine months ended September 30, 2005, the company (a) issued
$400 million 8% senior notes due 2012 and $150 million 8-1/2% senior notes
due 2015, (b) repaid $339.8 million of the company's $400 million 8-1/8%
senior notes due 2006 pursuant to a September 2005 tender offer by the
company and recorded a charge of $10.7 million related to the tender premium
and amortization of deferred costs related to the notes, and (c) in January
2005 retired at maturity all of the company's $150.0 million 7-1/4% senior
notes.
p. 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 Defense Contract Audit Agency (DCAA), at the request of TSA, reviewed
contract performance and raised some government contracting issues. It is
not unusual in complex government contracts for the government and the
contractor to have issues arise regarding contract obligations. Working
collaboratively over the past few months, the company believes most of the
issues are being addressed - to the initial satisfaction of TSA -- and with
the DCAA's review of the action plans. While the company believes that it
and the government will resolve all issues raised, it cannot be certain that
negotiations will be successfully completed. Furthermore, the company has
not been provided with a copy of the full DCAA audit report and there can be
no assurance that the full report does not raise additional issues. It has
also been reported recently in the news that the DCAA has referred this
report to the Inspector General's office of the Department of Homeland
Security for investigation. The government has not formally informed the
company of any such referral. The company cannot determine whether any
claims will be brought or what effect, if any, this will have on the
contract or any extension or renewal of it.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
- --------
The company's financial results for the third quarter of 2005 were negatively
impacted by a number of factors that resulted in lower earnings compared with
the year-ago period. In its Technology segment, the company experienced
continued weakness in its high-end server business. Revenue in the Technology
segment declined 29% in the quarter primarily driven by a 32% decline in sales
of large enterprise servers. In its Services segment, the company's results
were impacted by lower than expected revenue, underutilization of resources in
project-based businesses, and continuing issues in two challenging outsourcing
operations. In addition, the company continues to be negatively impacted by
higher pension expense. Pretax pension expense in the third quarter of 2005
19
increased to $44.2 million compared with $23.5 million in the year-ago quarter.
The company expects the challenges in the outsourcing engagements, the
underutilization of resources in project-based businesses, and the higher
pension expense to continue to negatively impact its financial results in the
fourth quarter of 2005.
Given the company's recent operating losses, and the impact over the short term
of its recently announced plans (described below) to restructure its business
model to focus on high-growth core markets, reduce its cost structure, and
drive profitable growth, the company has recorded a full valuation allowance
against all of its deferred tax assets in the U.S. and certain foreign
subsidiaries. This resulted in the company taking a third-quarter 2005
non-cash charge of $1,573.9 million, or $4.62 per share.
To address its performance issues and reposition it for profitable growth, the
company is taking actions in the following areas:
* Focused investments. The company will focus its resources on high-growth
market areas - outsourcing, open source/Linux, Microsoft solutions, and
security - delivered through a vertical industry focus. Within its
technology business, the company remains committed to its ClearPath and
ES7000 systems and will continue to invest in operating systems and
software to drive continuous improvements in new features and
capabilities.
* Divestitures. As it concentrates its resources on the areas discussed
above, the company plans to divest non-strategic areas of the business and
use the proceeds from such asset sales or divestitures to implement cost
reduction actions, fund its growth core businesses, and pursue
complementary tuck-in acquisitions.
* Cost reduction. The company plans to rightsize its cost structure to
support its more focused business model and to improve margins. As a
result of a series of actions in services delivery, research and
development, and selling, general, and administrative areas, the company
plans to reduce its headcount by 10% of its current workforce over the
next year. The company expects to take cost restructuring charges of
approximately $250 - $300 million through 2006 for these actions. These
actions are expected to yield approximately $250 million of annualized
cost savings on a run-rate basis by the end of 2007.
* Sales and marketing. The company continues to make significant changes to
its sales and marketing programs to support its more focused model and
drive profitable order and revenue growth. In the sales area, the company
has recently strengthened its business development skills by recruiting
first-class sales management and personnel and by implementing high-impact
training to more effectively manage relationships with large accounts and
drive new business.
* Focused Alliances. The company is focused on driving profitable growth by
expanding its activities with a select group of world-class information
technology firms. The company recently signed a memorandum of
understanding with NEC Corporation to negotiate a partnership to
collaborate in technology research and development, manufacturing, and
solutions delivery. The alliance would cover a number of areas of joint
development and solutions delivery activities focusing on server
20
technology, software, integrated solutions, and support services. Other
focused alliance partners include Microsoft, Oracle, IBM, EMC, Dell,
Intel, Cisco, and SAP.
The company believes these actions will position it in large, fast-growing
markets and will enable the company in the coming years to accelerate its
revenue growth and significantly expand its margins and profitability.
In addition, the company continues to address issues in two large business
process outsourcing (BPO) operations that have been impacting its financial
results. One of these challenging BPO operations is the company's iPSL check
processing joint venture in the United Kingdom. The company recently signed a
memorandum of understanding with its iPSL joint venture bank partners that
would increase its billing rates in this operation. The definitive agreements,
which are expected to be signed by the end of 2005, are expected to improve the
economics of the iPSL operation in 2006 and beyond.
Results of Operations
- ---------------------
For the three months ended September 30, 2005, the company reported a net loss
of $1,628.2 million, or $4.78 per share, compared with net income of $25.2
million, or $.07 per diluted share, for the three months ended September 30,
2004. The change was principally due to the increase in the deferred tax asset
valuation allowance discussed below.
The third quarter of 2004 included a net benefit of $8.2 million, or $.02 per
diluted share, from (a) a tax benefit of $68.2 million, or $.20 per diluted
share, from the resolution of a U.S. tax audit and (b) a charge of $82.0
million, or $.18 per diluted share, related to cost reduction actions.
Total revenue for the quarter ended September 30, 2005 was $1.39 billion,
down 4% from revenue of $1.45 billion for the quarter ended September 30, 2004.
Foreign currency translations had a 1% positive impact on revenue in the
quarter when compared with the year-ago period. In the current quarter,
Services revenue increased 2% and Technology revenue decreased 29%.
U.S. revenue increased 3% in the third quarter compared with the year-ago
period driven by growth in the Federal business, while revenue in international
markets declined 10% due to declines in Pacific/Asia/Japan, Latin America
and Europe. On a constant currency basis, international revenue declined 12%
in the three months ended September 30, 2005.
Pension expense for the three months ended September 30, 2005 was $44.2
million compared with $23.5 million of pension expense for the three months
ended September 30, 2004. The increase in pension expense was due to the
following: (a) a decline in the discount rate used for the U.S. pension plan
to 5.88% at December 31, 2004 from 6.25% at December 31, 2003, (b) an increase
in amortization of net unrecognized losses for the U.S. plan, and (c) for
international plans, declines in discount rates and currency translation. The
company records pension 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 sales; selling, general and
administrative expenses; and research and development expenses. The amount
allocated to each category is based on where the salaries of the active
employees are charged. The company currently expects to report pension expense
of approximately $182.0 million in 2005 compared with pension expense of $93.6
million in 2004.
21
Total gross profit margin was 17.7% in the third quarter of 2005 compared with
23.6% in the year-ago period. The change principally reflects higher pension
expense of $30.2 million in the current quarter compared with pension expense
of $17.1 million in the year-ago quarter, operational issues in two outsourcing
operations, underutilization of personnel in project-based services and lower
sales of high-margin enterprise servers. The year-ago period included a $28.1
million charge related to 2004 cost reduction actions.
For the three months ended September 30, 2005, selling, general and
administrative expenses were $261.0 million (18.8% of revenue) compared with
$303.7 million (21.0% of revenue) for the three months ended September 30,
2004. The three months ended September 30, 2005 includes $9.1 million of
pension expense compared with $4.4 million in the year-ago period. The three
months ended September 30, 2004 included a $50.2 million charge related to the
2004 cost reduction actions.
Research and development (R&D) expense was $61.2 million compared with $75.3
million a year ago. The company continues to invest in proprietary operating
systems and in key programs within its industry practices. R&D in the current
period includes $4.9 million of pension expense compared with pension expense
of $2.0 million in the year-ago period. R&D in 2004 included $8.4 million
related to the 2004 cost reduction actions which contributed to the R&D decline
in 2005 compared with 2004.
For the third quarter of 2005, the company reported a pretax operating loss of
$76.2 million compared with a pretax loss of $38.0 million a year ago. The
change resulted principally from (a) pension expense of $44.2 million in the
current quarter compared with pension expense of $23.5 million in the year-ago
period, (b) execution issues in two outsourcing contracts, (c) a decline in
sales of large, high margin enterprise servers, and (d) underutilization of
personnel in project-based services. The year-ago period included a cost
reduction charge of $86.7 million.
Interest expense for the three months ended September 30, 2005 was $17.1 million
compared with $16.2 million for the three months ended September 30, 2004. The
increase was principally due to the September 2005 issuance of $550 million of
senior notes offset in part by the January 2005 retirement at maturity of all
of the company's $150 million 7 1/4% senior notes. These items are discussed
below in "Financial Condition".
Other income (expense), net was income of $13.3 million in the current quarter
compared with an expense of $3.0 million in the year-ago quarter. The increase
in income was principally due to (a) a gain on the sale of property of $15.8
million in the current period, (b) foreign exchange gains of $3.2 million in
the current period compared with losses of $2.7 million in the prior-year
period, (c) income of $11.1 million in the current period compared with income
of $2.7 million in the prior-year period related to minority shareholders'
portion of losses of iPSL, a 51% owned subsidiary which is fully consolidated
by the company, offset in part by (d) a charge of $10.7 million in the current
period related to the debt tender offer discussed below.
During the financial close for the quarter ended September 30, 2005, the
company performed its quarterly assessment of its net deferred tax assets. Up
to this point in time, as previously disclosed in the company's critical
accounting policies section of its Form 10-K, the company has principally
relied on its ability to generate future taxable income (predominately in the
U.S.) in its assessment of the realizability of its net deferred tax assets.
22
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" (SFAS No. 109), limits the ability to use future taxable income
to support the realization of deferred tax assets when a company has
experienced recent losses even if the future taxable income is supported by
detailed forecasts and projections. After considering the company's pretax
losses in 2004 and for the nine months ended September 30, 2005, the
expectation of a pre-tax loss for the full year of 2005, and the impact over
the short term of the company's recently-announced plans to restructure its
business model by divesting non-core assets, reducing its cost structure and
shifting its focus to high growth core markets, the company concluded that it
could no longer rely on future taxable income as the basis for realization of
its net deferred tax asset.
Accordingly, the company recorded a non-cash charge in the third quarter of
2005 of $1,573.9 million to increase the valuation allowance against deferred
tax assets. With this increase, the company has a full valuation allowance
against its deferred tax assets for all of its U.S. operations and certain
foreign subsidiaries. This non-cash charge does not affect the company's
compliance with the financial covenants under its credit agreements. It has
been recorded in provision for income taxes in the accompanying consolidated
statement of income. The company expects to continue to record a full
valuation allowance on future tax benefits in such jurisdictions until other
positive evidence is sufficient to justify realization.
The realization of the remaining deferred tax assets of approximately
$150 million is primarily dependent on forecasted future taxable income within
certain foreign jurisdictions. Any reduction in estimated forecasted future
taxable income may require the company to record an additional valuation
allowance against the remaining deferred tax assets. Any increase or decrease
in the valuation allowance would result in additional or lower income tax
expense in such period and could have a significant impact on that period's
earnings.
Income (loss) before income taxes was a loss of $80.0 million in the third
quarter of 2005 compared with a loss of $57.2 million last year. The provision
for income taxes was $1,548.2 million in the current period compared with a
benefit of $82.4 million in the year-ago period. The current year tax
provision includes the increase in the deferred tax asset valuation allowance
discussed above. The prior year tax benefit includes $68.2 million related to
a tax refund as well as a $22.0 million benefit related to the cost reduction
charge.
For the nine months ended September 30, 2005, the company reported a net loss of
$1,700.8 million, or $5.01 per share, compared with net income of $73.5 million,
or $.22 per share, for the nine months ended September 30, 2004. The current
period includes the increase in the deferred tax asset valuation allowance
discussed above.
Total revenue for the nine months ended September 30, 2005 was $4.19 billion,
down 3% from revenue of $4.30 billion for the nine months ended September 30,
2004. Foreign currency translations had a 2% positive impact on revenue in the
nine months when compared with the year-ago period. In the current nine-month
period, Services revenue increased 1% and Technology revenue decreased 19%.
23
U.S. revenue was flat in the current nine-month period compared with the
year-ago period and revenue in international markets decreased 4% driven by a
decrease in Europe and Latin America which was partially offset by increases in
Pacific/Asia/Japan. On a constant currency basis, international revenue
declined 8% in the nine months ended September 30, 2005.
Pension expense for the nine months ended September 30, 2005 was $136.8 million
compared with $70.5 million of pension expense for the nine months ended
September 30, 2004.
Total gross profit margin was 18.7% in the nine months ended September 30,
2005 compared with 25.6% in the year-ago period. The change principally
reflected higher pension expense ($95.0 million in the current period
compared with pension expense of $50.4 million in the year-ago period),
operational issues in two outsourcing operations, underutilization of personnel
in project-based services and lower sales of high-margin enterprise servers.
The year-ago period included a $28.1 million charge related to the cost
reduction actions.
For the nine months ended September 30, 2005, selling, general and
administrative expenses were $790.0 million (18.9% of revenue) compared with
$837.8 million (19.5% of revenue) for the nine months ended September 30, 2004.
Selling, general and administrative expense in the current nine-month period
includes $27.1 million of pension expense compared with pension expense of
$14.1 million in the year-ago period. Selling general and administrative
expenses for the nine months ended September 30, 2004 included $50.2 million
related to the cost reduction actions.
R&D expense for the nine months ended September 30, 2005 was $192.7 million
compared with $218.1 million a year ago. R&D in the current period includes
$14.7 million of pension expense compared with pension expense of $6.0 million
in the year-ago period. R&D expense in the year-ago period included $8.4
million related to the cost reduction actions.
For the nine months ended September 30, 2005, the company reported an operating
loss of $199.0 million compared with operating income of $43.7 million for
the nine months ended September 30, 2004. The change principally reflected
pension expense of $136.8 million in the current period compared with pension
expense of $70.5 million in the year-ago period, operational issues in two
outsourcing operations, underutilization of personnel in project-based services,
and lower technology revenue. The year-ago period included an $86.7 million
charge related to the cost reduction actions.
Interest expense for the nine months ended September 30, 2005 was $44.9
million compared with $51.4 million for the nine months ended September 30,
2004. The decrease was principally due to the $150.0 million debt repayment
discussed above.
Other income (expense), net was income of $45.8 million in the current nine-
month period compared with income of $21.6 million in the year-ago period.
The increase in income was principally due to (a) a gain on the sale of property
of $15.8 million in the current period, (b) foreign exchange gains of $7.4
million in the current period compared with losses of $3.4 million in the
prior-year period, (c) income of $28.0 million in the current period compared
with income of $6.3 million in the prior-year period related to minority
shareholders' portion of losses of iPSL, a 51% owned subsidiary which is fully
consolidated by the company, offset in part by (d) discounts on sales of
24
accounts receivable of $6.8 million in the current period compared with
discounts of $1.8 million in the year-ago period, and (e) a charge of $10.7
million in the current period related to the debt tender offer discussed below.
Income (loss) before income taxes was a loss of $198.1 million in the nine
months ended September 30, 2005 compared with income of $13.9 million last year.
The provision for income taxes was $1,502.7 million in the current period
compared with a benefit of $59.6 million in the year-ago period. The current
period includes the increase in the deferred tax asset valuation allowance
discussed above, as well as a tax benefit of $7.8 million related to a
favorable decision in a foreign tax litigation matter. The prior-year period
included a benefit of $68.2 million related to the tax refund as well as a
$22.0 million benefit related to the cost reduction charge.
Outsourcing assets include fixed assets acquired in connection with
outsourcing contracts, capitalized software used in outsourcing arrangements,
and costs incurred upon initiation of an outsourcing contract that have been
deferred, which consist principally of initial customer setup and employment
obligations related to employees assumed. Recoverability of outsourcing
assets is dependent on various factors, including the timely completion and
ultimate cost of the outsourcing solution, realization of expected
profitability of existing outsourcing contracts and obtaining additional
outsourcing customers. The company quarterly compares the carrying value of
the outsourcing assets with the undiscounted future cash flows expected to be
generated by the outsourcing assets to determine if there is an impairment.
If impaired, the outsourcing assets are reduced to an estimated fair value on
a discounted cash flow approach. The company prepares its cash flow estimates
based on assumptions that it believes to be reasonable but are also
inherently uncertain. Actual future cash flows could differ from these
estimates.
At September 30, 2005, total outsourcing assets, net were $428.3 million,
approximately $213.2 million of which relate to iPSL, a 51% owned U.K.-
based company which generates annual revenue of approximately $200 million.
As a result of incurred losses, the company began discussions during the
second quarter of 2005 with the minority shareholders to revise the iPSL
corporate structure and the services agreements. On October 7, 2005, the
company and the minority shareholders executed a memorandum of understanding
whereby the company will retain its current 51% ownership in iPSL and the
fees charged under the outsourcing services agreements will be increased
beginning January 1, 2006. The memorandum of understanding also addresses
changes in the governance of iPSL and shareholder responsibilities for
funding iPSL. The estimated increase in iPSL revenue resulting from the
amended outsourcing services agreements, together with its existing revenue,
is expected to provide the company with sufficient cash flow to recover all
of iPSL's outsourcing assets as of September 30, 2005. The parties have
undertaken to complete, in the fourth quarter of 2005, definitive agreements
relating to the matters covered by the memorandum of understanding. While the
company believes that the iPSL outsourcing assets at September 30, 2005 will be
recovered, significant revisions in the final agreements or failure to reach a
final agreement could result in an impairment of a portion or all of the iPSL
outsourcing assets.
The company currently owns approximately 29% of the outstanding shares of
Nihon Unisys Limited (NUL), a Japanese company that serves as the company's
exclusive distributor in Japan. On October 4, 2005, the company and NUL
amended the terms of a license and support agreement pursuant to which NUL
receives access to certain of the company's intellectual property and support
25
services. Prior to the revised agreement, NUL paid annual royalties to the
company based on a percentage of NUL's revenue. In 2004 and 2003, these
royalties amounted to approximately $103 million and $101 million,
respectively. Under the revised arrangement, the company has granted NUL a
perpetual license to the intellectual property, and, in lieu of an annual
royalty, NUL has agreed to pay the company a fixed fee of $225 million,
one-half of which was paid on October 7, 2005 and one-half of which is
payable on October 1, 2006. The company will recognize the $225 million as
revenue over the three-year period ending March 31, 2008. In addition, the
parties have agreed that NUL will pay the company a fee of $20 million per
year for three years for the support services it provides under the license
and support agreement. NUL has an option to renew the support services
arrangement for an additional two years at the same price. In prior periods,
the support services fee was included as part of the royalty payments.
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 Defense
Contract Audit Agency (DCAA), at the request of TSA, reviewed contract
performance and raised some government contracting issues. It is not unusual
in complex government contracts for the government and the contractor to have
issues arise regarding contract obligations. Working collaboratively over the
past few months, the company believes most of the issues are being addressed -
to the initial satisfaction of TSA -- and with the DCAA's review of the action
plans. While the company believes that it and the government will resolve all
issues raised, it cannot be certain that negotiations will be successfully
completed. Furthermore, the company has not been provided with a copy of the
full DCAA audit report and there can be no assurance that the full report does
not raise additional issues. It has also been reported recently in the news
that the DCAA has referred this report to the Inspector General's office of the
Department of Homeland Security for investigation. The government has not
formally informed the company of any such referral. The company cannot
determine whether any claims will be brought or what effect, if any, this will
have on the contract or any extension or renewal of it.
On October 25, 2005, the company and NEC Corporation signed a memorandum of
understanding to negotiate a partnership to collaborate in technology research
and development, manufacturing and solutions delivery. This alliance would
cover a number of areas of joint development and solutions delivery activities
focusing on server technology, software, integrated solutions and support
services. NEC and the company plan to collaborate and develop a common
high-end Intel-based server platform to provide customers of each company with
increasingly powerful, scalable and cost-effective servers. The first of these
next-generation common platforms is planned for release in 2007. The new
servers are to be manufactured by NEC on behalf of both companies. The company
will continue to supply its customers with ClearPath mainframes with the
benefit, over time, of joint research and development by both companies and
manufacturing provided by NEC. While non-binding, the memorandum of
understanding contemplates the negotiation of binding agreements that would
give effect to the areas of collaboration mentioned above. However, there can
be no assurances that a final agreement will be reached.
For 2006, pension expense cannot be reliably estimated until after December 31,
2005 when the actual amount of pension plan assets is known and the discount
rate can be determined. In addition, as previously announced, the company is
planning to divest non-strategic businesses, reduce its workforce by 10% over
the next year and is currently evaluating its defined benefit pension plans.
26
These actions could have a significant impact on the company's pension expense
going forward.
Despite these items, in accordance with regulations governing contributions to
U.S. defined benefit pension plans, the company currently expects that it will
not be required to fund its U.S. qualified defined benefit pension plan in 2006.
The 2006 pension expense will be determined in January 2006 when the December
31, 2005 employee levels, pension plan assets and discount rates are known.
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - consulting and systems integration,
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.
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 and nine months ended September 30, 2005
and 2004, was $3.3 million and $7.2 million and $13.0 million and $9.8 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. Therefore, the comparisons below exclude the 2004
cost reduction charges discussed above.
27
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2005
- ------------------
Customer revenue $1,387.1 $1,174.0 $213.1
Intersegment $ (57.1) 4.5 52.6
------- ------- -------- -------
Total revenue $1,387.1 $(57.1) $1,178.5 $265.7
======== ======= ======== ======
Gross profit percent 17.7% 11.3% 42.4%
======== ======== ======
Operating loss percent (5.5)% (5.1)% (5.9)%
======== ======== =======
Three Months Ended
September 30, 2004
- ------------------
Customer revenue $1,445.7 $1,147.1 $298.6
Intersegment $(63.6) 5.2 58.4
-------- ------- -------- ------
Total revenue $1,445.7 $(63.6) $1,152.3 $357.0
======== ======= ======== ======
Gross profit percent 23.6% 16.2% 51.0%
======== ======== ======
Operating income (loss)
percent (2.6)% (0.2)% 13.9%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
In the Services segment, customer revenue was $1.17 billion for the three
months ended September 30, 2005, up 2% compared with $1.15 billion for the three
months ended September 30, 2004. Foreign currency translations had about a 1%
positive impact on Services revenue in the quarter when compared with the year-
ago period. The increase in Services revenue was due to an 11% increase in
outsourcing ($456 million in 2005 compared with $412 million in 2004) and a 6%
increase in infrastructure services revenue ($204 million in 2005 compared with
$193 million in 2004) partially offset by a 3% decrease in consulting and
systems integration ($392 million in 2005 compared with $403 million in 2004)
and a 12% decrease in core maintenance revenue ($122 million in 2005 compared
with $139 million in 2004). Services gross profit was 11.3% for the three
months ended September 30, 2005 compared with 16.2% in the year-ago period.
Included in gross profit was the impact of pension expense of $29.2 million
in the current period compared with pension expense of $16.7 million in the
year-ago period. Services operating income (loss) percent was (5.1)% for the
three months ended September 30, 2005 compared with a loss of (.2)% last year.
Included in operating income (loss) was the impact of pension expense of $36.7
million in the current quarter compared with pension expense of $20.6 million
in the year-ago period. In addition, the current year gross profit and
operating profit margins were negatively impacted by operational issues in
two outsourcing contracts and underutilization of personnel in project-based
businesses.
28
In the Technology segment, customer revenue was $213 million for the three
months ended September 30, 2005, down 29% compared with $299 million for the
three months ended September 30, 2004. Foreign currency translations had about
a 1% positive impact on Technology revenue in the quarter when compared with the
year-ago period. The decrease in revenue was due to a 32% decline in sales of
enterprise-class servers ($171 million in 2005 compared with $250 million in
2004) and a 14% decrease in sales of specialized technology products ($42
million in 2005 compared with $49 million in 2004). Technology gross profit
was 42.4% for the three months ended September 30, 2005 compared with 51.0% in
the year-ago period, and Technology operating income (loss) percent was (5.9)%
for the three months ended September 30, 2005 compared with 13.9% last year.
The margin declines primarily reflected lower sales of ClearPath products as
well as pension expense of $7.5 million in the current period compared with
pension expense of $2.9 million in the prior-year period.
New Accounting Pronouncements
- -----------------------------
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (FSP No.
109-2), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provisions within the American Jobs Creation Act of 2004" (the
Jobs Act). FSP No. 109-2 provides guidance with respect to reporting the
potential impact of the repatriation provisions of the Jobs Act on an
enterprise's income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004, and provides for a temporary 85% dividends
received deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in an approximate 5.25% federal
tax rate on the repatriated earnings. To qualify for the deduction, the
earnings must be reinvested in the United States pursuant to a domestic
reinvestment plan established by a company's chief executive officer and
approved by a company's board of directors. Certain other criteria in the Jobs
Act must be satisfied as well. FSP No. 109-2 states that an enterprise is
allowed time beyond the financial reporting period to evaluate the effect of
the Jobs Act on its plan for reinvestment or repatriation of foreign earnings.
These provisions will not impact the company's consolidated financial position,
consolidated results of operations, or liquidity. Accordingly, the company has
not adjusted its tax expense or deferred tax liability to reflect the
repatriation provisions of the Jobs Act.
Effective July 1, 2005, the company adopted SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" (SFAS No. 153). SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with an exception for exchanges that
do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. Adoption of SFAS
No. 153 did not have a material effect on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In May 2004, the FASB issued Staff Position No. FAS 106-2 (FSP No. 106-2),
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the Act). The Act introduces
a prescription drug benefit under Medicare, as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
29
least actuarially equivalent to Medicare Part D. FSP No. 106-2 is effective
for the first interim period beginning after June 15, 2004, and provides that
an employer shall measure the accumulated plan benefit obligation (APBO) and
net periodic postretirement benefit cost, taking into account any subsidy
received under the Act. As of September 30, 2005, the company's measurements of
both the APBO and the net postretirement benefit cost do not reflect any
amounts associated with the subsidy. Final regulations implementing the Act
were issued on January 21, 2005. The final regulations clarify how a company
should determine actuarial equivalency and the definition of a plan for
purposes of determining actuarial equivalency. Adoption of FSP No. 106-2
did not have a material impact on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error
Corrections" (SFAS No. 154). SFAS No. 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes,
unless impracticable, retrospective application as the required method for
reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The company does not expect
that adoption of SFAS No. 154 will have a material effect on its consolidated
financial position, consolidated results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. In
accordance with a Securities and Exchange Commission rule, companies will be
allowed to implement SFAS No. 123R as of the beginning of the first interim
or annual period that begins after June 15, 2005. The company will adopt
SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The permitted transition methods
include either retrospective or prospective adoption. Under the retrospective
method, prior periods may be restated either as of the beginning of the year
of adoption or for all periods presented. The prospective method requires
that compensation expense be recorded for all unvested stock options at the
beginning of the first quarter of adoption of SFAS No. 123R, while the
retrospective method would record compensation expense for all unvested stock
options beginning with the first period presented. The company expects to
adopt the prospective method. The company is evaluating the requirements of
SFAS No. 123R and currently expects that adoption of SFAS No. 123R will not
have a material impact on the company's consolidated financial position and
consolidated results of operations due to the acceleration of stock options
on September 23, 2005 as disclosed in note h. However, uncertainties,
including the company's future stock-based compensation strategy, stock price
volatility, estimated forfeitures and employee stock option exercise behavior,
make it difficult to determine whether the stock-based compensation expense
recognized in future periods will be similar to the SFAS No. 123 pro forma
expense disclosed in note h.
30
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment
of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, handling costs and wasted material
(spoilage). Among other provisions, the new rule requires that such items be
recognized as current-period charges, regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005. The company does not expect
that adoption of SFAS No. 151 will have a material effect on its consolidated
financial position, consolidated results of operations, or liquidity.
Financial Condition
- -------------------
Cash and cash equivalents at September 30, 2005 were $466.1 million compared
with $660.5 million at December 31, 2004.
During the nine months ended September 30, 2005, cash provided by operations
was $22.5 million compared with cash provided by operations of $242.9 million
for the nine months ended September 30, 2004. Operating cash flow decreased
principally due to lower earnings. Cash expenditures in the current period
related to prior-year restructuring charges (which are included in operating
activities) were approximately $49.0 million compared with $10.0 million for
the prior-year, and are expected to be approximately $13.5 million for the
remainder of 2005 and $13 million in total for all subsequent years,
principally for work-force reductions and idle lease costs. In the second
quarter of 2005, the company received an income tax refund of approximately
$39 million from the U.S. Internal Revenue Service (IRS) tax audit settlement
in 2004.
Cash used for investing activities for the nine months ended September 30, 2005
was $258.7 million compared with $333.5 million during the nine months ended
September 30, 2004. Net proceeds of investments of $12.7 million in the
current period compared with net purchases of $4.0 million in the prior-year
period. In addition, the current period investment in marketable software was
$93.7 million compared with $88.8 million in the prior-year. Capital additions
of properties were $84.9 million for the nine months ended September 30, 2005
compared with $95.5 million in the prior-year period. Capital additions of
outsourcing assets were $115.7 million for the nine months ended September 30,
2005 compared with $126.6 million in the prior-year period. In addition, the
current year nine month period included $23.4 million proceeds from the sale of
properties.
Cash provided by financing activities during the current period was $57.9
million compared with $27.6 million of net cash provided in the prior year.
The current period includes the following: (a) $541.5 million net proceeds from
the September 2005 issuances of $400 million 8% senior notes due 2012 and $150
million 8-1/2% senior notes due 2015, (b) the cash expenditure of $349.2 million
(including tender premium and expenses of $9.4 million) for the repayment of
$339.8 million of the company's $400 million 8-1/8% senior notes due 2006
pursuant to a September 2005 tender offer by the company, and (c) the cash
expenditure of $150.0 million to retire at maturity all of the company's
7-1/4% senior notes.
At September 30, 2005, total debt was $1.1 billion, an increase of $66.3
million from December 31, 2004.
31
The company has a $500 million credit agreement that expires in May 2006.
Borrowings under the agreement bear interest based on the then-current LIBOR
or prime rates and the company's credit rating. As of September 30,
2005, there were no borrowings under this facility, and the entire $500 million
was available for borrowings. The credit agreement contains standard
representations and warranties, including no material adverse change.
It also contains financial and other covenants, including maintenance of
certain financial ratios, a minimum level of net worth and limitations on
certain types of transactions, which could reduce the amount the company is
able to borrow and could also limit the company's ability to take cost
reduction and other charges. Events of default under the credit agreement
include failure to perform covenants, materially incorrect representations and
warranties, change of control and default under other debt aggregating at least
$25 million. If an event of default were to occur under the credit agreement,
the lenders would be entitled to declare all amounts borrowed under it
immediately due and payable. The occurrence of an event of default under the
credit agreement could also cause the acceleration of obligations under certain
other agreements and the termination of the company's U.S. trade accounts
receivable facility, described below. On September 7, 2005, the company and
its lenders entered into an amendment to the company's $500 million credit
agreement modifying the financial covenants primarily to provide the necessary
flexibility to issue the $550 million of notes and tender for or otherwise
acquire the $400 million of 8 1/8% notes, discussed above.
In addition, the company and certain international subsidiaries have access to
uncommitted lines of credit from various banks. Other sources of short-term
funding are operational cash flows, including customer prepayments, and the
company's U.S. trade accounts receivable facility. Using this facility, the
company sells, on an on-going basis, up to $225 million of its eligible U.S.
trade accounts receivable through a wholly owned subsidiary, Unisys Funding
Corporation I. This facility requires maintenance of certain ratios related
to the sold receivables. The company requested and obtained a waiver and
amendment of certain of these requirements in the second quarter of 2005. The
facility is renewable annually at the purchasers' option and expires in
December 2006. It is also terminable by the purchasers if the company's public
debt securities are rated below BB- by Standard and Poor's Rating Services (S&P)
or Ba3 by Moody's Investors Service, Inc. (Moody's). During the third quarter
of 2005, both S&P and Moody's lowered their ratings on the company's public
debt securities to BB- and Ba3, respectively. If the facility were to be
terminated, collections of the sold receivables would be remitted to the
purchasers. The average life of the receivables sold is less than 60 days. At
both September 30, 2005 and at December 31, 2004, the company had sold $225
million of eligible receivables.
At September 30, 2005, the company has met all covenants and conditions under
its various lending and funding agreements. Since the company expects to
continue to meet these covenants and conditions, the company believes that it
has adequate sources and availability of short-term funding to meet its expected
cash requirements.
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 a
registration statement covering $650 million of debt or equity securities,
which enables the company to be prepared for future market opportunities.
32
The company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires 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.
SFAS No. 109 also requires 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.
At September 30, 2005, the company had deferred tax assets in excess of
deferred tax liabilities of $2,086 million and a valuation allowance of
$1,936 million, resulting in $150 million of net deferred tax assets. 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 of the
$150 million net deferred tax asset at September 30, 2005 were 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 has
used tax-planning strategies to realize or renew net deferred tax assets to
avoid the potential loss of future tax benefits.
Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. Factors that may affect the
company's ability to achieve sufficient forecasted taxable income include, but
are not limited to, the following: increased competition, a continuing decline
in sales or margins, loss of market share, delays in product availability or
technological obsolescence. See "Factors that may affect future results"
below.
The company's provision for income taxes and the determination of the
resulting deferred tax assets and liabilities involve a significant amount of
management judgment and are based on the best information available at the
time. The company operates within federal, state and international taxing
jurisdictions and is subject to audit in these jurisdictions. These audits can
involve complex issues, which may require an extended period of time to
resolve.
As a result, the actual income tax liabilities to the jurisdictions with
respect to any fiscal year are ultimately determined long after the financial
statements have been published. The company maintains reserves for estimated
tax exposures. Income tax exposures include potential challenges of research
and development credits and intercompany pricing. Exposures are settled
primarily through the settlement of audits within these tax jurisdictions, but
can also be affected by changes in applicable tax law or other factors, which
could cause management of the company to believe a revision of past estimates
is appropriate. Management believes that an appropriate liability has been
established for estimated exposures; however, actual results may differ
materially from these estimates. The liabilities are reviewed quarterly for
their adequacy and appropriateness. In the third quarter of 2005, the IRS
closed its examination of Unisys U.S. Federal Income tax returns for all
fiscal years through 1999 with no further consequences to the company other
than for the refund mentioned above. The company expects that the audit of
2000 through 2003 will commence in 2006. The liabilities, if any, associated
with these years will ultimately be resolved when events such as the
completion of audits by the taxing jurisdictions occur. To the extent the
audits or other events result in a material adjustment to the accrued
estimates, the effect would be recognized in the provision for income taxes
line in the company's consolidated statement of income in the period of the
event.
33
Stockholders' equity decreased $1,647.5 million during the nine months ended
September 30, 2005, to a deficit of $141.0 million principally reflecting the
net loss of $1,700.8 million, offset in part by $27.1 million for issuance of
stock under stock option and other plans, $.8 million of tax benefits related
to employee stock plans and currency translation of $21.8 million.
Effective April 1, 2005, the company discontinued its Employee Stock Purchase
Plan, which enabled employees to purchase shares of the company's common stock
through payroll deductions at 85% of the market price at the beginning or end
of a calendar quarter, whichever was lower. For the period from January 1,
2005 to April 1, 2005, employees had purchased 1.8 million shares for $12.5
million.
At December 31 of each year, accounting rules require a company to recognize a
liability on its balance sheet for each defined benefit pension plan if the
fair value of the assets of that pension plan is less than the present value of
the pension obligation (the accumulated benefit obligation, or ABO). This
liability is called a "minimum pension liability." Concurrently, any existing
prepaid pension asset for the pension plan must be removed. These adjustments
are recorded as a charge in "accumulated other comprehensive income (loss)" in
stockholders' equity. If at any future year-end, the fair value of the pension
plan assets exceeds the ABO, the charge to stockholders' equity would be
reversed for such plan. Alternatively, if the fair market values of pension
plan assets experience further declines or the discount rate is reduced,
additional charges to accumulated other comprehensive income (loss) may be
required at a future year-end.
At December 31, 2004, the difference between the ABO and the fair value of
pension plan assets increased from the amount at December 31, 2003. As a
result at December 31, 2004, the company adjusted its minimum pension liability
adjustment as follows: increased its pension plan liabilities by approximately
$95 million, increased its investments at equity by approximately $27 million
relating to the company's share of the change in NUL's minimum pension
liability, increased prepaid pension asset by $13 million, and offset these
changes by an increase in other comprehensive loss of approximately $55
million, or $39 million net of tax.
This accounting treatment has no effect on the company's net income, liquidity
or cash flows. Financial ratios and net worth covenants in the company's
credit agreements and debt securities are unaffected by charges or credits to
stockholders' equity caused by adjusting a minimum pension liability.
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 plan in 2005. The company expects to make cash contributions of
approximately $70 million to its other defined benefit pension plans during
2005.
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
34
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.
Statements in this report regarding the actions the company plans to take to
address its performance issues and to reposition itself are based on a number
of assumptions and are subject to various risks and uncertainties that could
affect actual results. The company's ability to divest non-strategic areas of
the business and to use the proceeds as planned is dependent upon the market
for these businesses and on the company's ability to sell them for an
acceptable price. In addition, the estimated charges associated with planned
cost-reduction actions are subject to change based upon the degree to which the
company generates cash from the divestitures, the degree to which the company's
financial covenants allow such charges, the location and length of service
of the affected employees, the number of employees who leave the company
voluntarily, and other factors. The anticipated cost savings associated with
the planned headcount reductions are subject to the risk that the company may
not implement the reductions as quickly or as fully as currently anticipated.
Statements in this report regarding the expected effects of the company's
focused investment and sales and marketing strategies are 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. There can be
no assurance that final agreements reflecting the matters addressed in the
memoranda of understanding with NEC Corporation and with the minority
shareholders of iPSL will be reached. Statements in this report regarding
the expected future results of these arrangements are therefore subject to
change.
Other factors that could affect future results include the following:
The company's business is affected by changes in general economic and business
conditions. The company continues to face a highly competitive business
environment. If the level of demand for the company's products and services
declines in the future, the company's business could be adversely affected.
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 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
35
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 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 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 in part on its ability to grow
outsourcing and infrastructure services. 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,
realization of expected profitability of existing outsourcing contracts and
obtaining additional outsourcing customers. These risks could result in an
impairment of a portion of the associated assets, which are tested for
recoverability quarterly.
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 on the company's ability to
effectively address its challenging outsourcing operations through negotiations
or operationally and to fully recover the associated outsourcing assets.
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. 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
36
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 head count.
Future results will also depend, in part, on market demand for the company's
high-end enterprise servers. In its technology business, the company
continues to focus its resources on enhancing a common high-performance
platform for both its proprietary operating environments and open standards-
based operating environments such as Microsoft Windows and Linux. In addition,
the company continues to apply its resources to develop value-added software
capabilities and optimized solutions for these server platforms which provide
competitive differentiation. The high-end enterprise server platforms are
based on its Cellular MultiProcessing (CMP) architecture. The company's CMP
servers are designed to provide mainframe-class capabilities with compelling
price performance by making use of standards-based technologies such as Intel
chips and supporting industry standard software. The company has transitioned
both its legacy ClearPath servers and its Intel-based ES7000s to the CMP
platform. Future results will depend, in part, on customer acceptance of the
CMP-based ClearPath Plus 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. In addition, future results will
depend, in part, on the company's ability to generate new customers and
increase sales of the Intel-based ES7000 line. The company believes there is
significant growth potential in the developing market for high-end, Intel-based
servers running Microsoft and Linux operating system software. However,
competition in these new markets is likely to intensify in coming years, and
the company's ability to succeed will depend on its ability to compete
effectively against enterprise server competitors with more substantial
resources and its ability to achieve market acceptance of the ES7000 technology
by clients, systems integrators and independent software vendors.
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, its systems
and policies, including the contractor's purchasing, property, estimating,
accounting, compensation and management information systems. Any costs found to
be overcharged or improperly allocated to a specific contract 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. Other risks and uncertainties associated
with government contracts include the availability of appropriated funds and
contractual provisions that allow governmental entities to terminate agreements
at their discretion before the end of their terms. In addition, if the
37
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.
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.
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 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. In
addition, 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.
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. The
company has announced that alliance partnerships with select IT companies are
a key factor in the development and delivery of the company's refocused
portfolio. 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.
More than half of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, 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, and weaker intellectual property protections in some
jurisdictions.
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.
38
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 September 30, 2005.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are 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 controls over financial reporting that occurred during the
quarter ended September 30, 2005 that has materially affected, or is reasonably
likely to materially affect, the company's internal control over financial
reporting.
Part II - OTHER INFORMATION
- ------- -----------------
Item 5. Other Information
- ------ -----------------
See "Overview" in Management's Discussion and Analysis of Financial Condition
and Results of Operations for information on the company's planned cost
reduction actions and on its plan to divest non-strategic areas of the
business.
Item 6. Exhibits
- ------- --------
(a) Exhibits
See Exhibit Index
39
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: November 9, 2005 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Carol S. Sabochick
----------------------
Carol S. Sabochick
Vice President and
Corporate Controller
(Chief Accounting Officer)
40
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
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999
3.2 Bylaws of Unisys Corporation, as amended through April 22, 2004
(incorporated by reference to Exhibit 3 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Joseph W. McGrath 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 Joseph W. McGrath 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
Exhibit 12
UNISYS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
($ in millions)
Nine
Months
Ended Years Ended December 31
Sept. 30, -----------------------------------
2005 2004 2003 2002 2001 2000
-------- ---- ---- ---- ---- ----
Fixed charges
Interest expense $ 44.9 $ 69.0 $ 69.6 $ 66.5 $ 70.0 $ 79.8
Interest capitalized during
the period 12.0 16.3 14.5 13.9 11.8 11.4
Amortization of debt issuance
expenses 2.5 3.5 3.8 2.6 2.7 3.2
Portion of rental expense
representative of interest 46.2 61.6 55.2 53.0 53.9 42.2
------ ------ ------ ------ ------ -----
Total Fixed Charges 105.6 150.4 143.1 136.0 138.4 136.6
------ ------ ------ ------ ------ -----
Earnings
Income (loss) from continuing
operations before income taxes (198.1) (76.0) 380.5 332.8 (73.0) 348.5
Add (deduct) the following:
Share of loss (income) of
associated companies ( 2.7) (14.0) (16.2) 14.2 ( 8.6) (20.5)
Amortization of capitalized
interest 9.6 11.7 10.2 8.8 5.4 2.2
------ ------ ------ ------ ------ -----
Subtotal (191.2) (78.3) 374.5 355.8 (76.2) 330.2
------ ------ ------ ------ ------ -----
Fixed charges per above 105.6 150.4 143.1 136.0 138.4 136.6
Less interest capitalized during
the period (12.0) (16.3) (14.5) (13.9) (11.8) (11.4)
------ ------ ------ ------ ------ ------
Total earnings (loss) $ (97.6) $ 55.8 $503.1 $477.9 $ 50.4 $455.4
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges * * 3.52 3.51 * 3.33
====== ====== ====== ====== ====== =====
* Earnings for the nine months ended September 30, 2005 and for the years ended
December 31, 2004 and 2001 were inadequate to cover fixed charges by $203.2
million, $94.6 million and $88.0 million, respectively.
Exhibit 31.1
CERTIFICATION
I, Joseph W. McGrath, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unisys Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 9, 2005
/s/ Joseph W. McGrath
-------------------------
Name: Joseph W. McGrath
Title: President and Chief
Executive Officer
Exhibit 31.2
CERTIFICATION
I, Janet Brutschea Haugen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unisys Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 9, 2005
/s/ Janet Brutschea Haugen
-------------------------
Name: Janet Brutschea Haugen
Title: Senior Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
I, Joseph W. McGrath, President and Chief Executive Officer of Unisys
Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended September 30, 2005 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 9, 2005
/s/ Joseph W. McGrath
- ------------------------
Joseph W. McGrath
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
I, Janet Brutschea Haugen, Senior Vice President and Chief Financial Officer of
Unisys Corporation (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended September 30, 2005 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 9, 2005
/s/ Janet Brutschea Haugen
- ------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.