UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of Common Stock outstanding as of September 30, 2008
362,267,381.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
September 30,
2008 December 31,
(Unaudited) 2007
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 493.8 $ 830.2
Accounts and notes receivable, net 853.3 1,059.2
Inventories:
Parts and finished equipment 78.5 91.9
Work in process and materials 72.8 79.2
Deferred income taxes 18.0 18.0
Prepaid expenses and other current assets 145.6 133.7
-------- --------
Total 1,662.0 2,212.2
-------- --------
Properties 1,307.8 1,336.9
Less-Accumulated depreciation and
amortization 1,013.2 1,004.7
-------- --------
Properties, net 294.6 332.2
-------- --------
Outsourcing assets, net 348.9 409.4
Marketable software, net 244.2 268.8
Prepaid postretirement assets 603.8 497.0
Deferred income taxes 93.8 93.8
Goodwill 195.9 200.6
Other long-term assets 120.2 123.1
-------- --------
Total $3,563.4 $4,137.1
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ - $ .1
Current maturities of long-term debt 2.2 204.3
Accounts payable 337.5 419.6
Other accrued liabilities 1,092.1 1,272.0
-------- --------
Total 1,431.8 1,896.0
-------- --------
Long-term debt 1,059.7 1,058.3
Long-term postretirement liabilities 370.3 420.7
Other long-term liabilities 321.5 395.5
Stockholders' equity
Common stock, shares issued: 2008; 364.5
2007, 356.1 3.6 3.6
Accumulated deficit (2,538.0) (2,465.9)
Other capital 4,045.9 4,011.8
Accumulated other comprehensive loss (1,131.4) (1,182.9)
-------- --------
Stockholders' equity 380.1 366.6
-------- --------
Total $3,563.4 $4,137.1
======== ========
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
------------------ ------------------
2008 2007 2008 2007
---- ---- ---- ----
Revenue
Services $1,152.1 $1,217.6 $3,486.2 $3,579.1
Technology 160.3 175.5 467.5 537.7
-------- -------- -------- --------
1,312.4 1,393.1 3,953.7 4,116.8
Costs and expenses
Cost of revenue:
Services 937.6 994.5 2,814.2 2,980.6
Technology 82.8 89.5 250.5 270.3
-------- -------- -------- --------
1,020.4 1,084.0 3,064.7 3,250.9
Selling, general and administrative 218.4 225.8 701.9 717.8
Research and development 35.7 39.7 98.6 131.6
-------- -------- -------- --------
1,274.5 1,349.5 3,865.2 4,100.3
-------- ------- -------- --------
Operating profit 37.9 43.6 88.5 16.5
Interest expense 21.5 18.5 64.3 56.1
Other income (expense), net (6.1) (19.3) (23.9) (2.5)
-------- -------- -------- --------
Income (loss) before income taxes 10.3 5.8 .3 (42.1)
Provision for income taxes 45.0 36.8 72.4 50.8
-------- -------- -------- --------
Net loss $ (34.7) $ (31.0) $ (72.1) $ (92.9)
======== ======== ======== ========
Loss per share
Basic $ (.10) $ (.09) $ (.20) $ (.27)
======== ======== ======== ========
Diluted $ (.10) $ (.09) $ (.20) $ (.27)
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
------------------
2008 2007
-------- --------
Cash flows from operating activities
Net loss $ (72.1) $ (92.9)
Add (deduct) items to reconcile net loss to net
cash provided by (used for) operating activities:
Employee stock compensation (.2) 8.6
Company stock issued for U.S. 401(k) plan 34.2 34.3
Depreciation and amortization of properties 80.4 83.9
Depreciation and amortization of outsourcing assets 126.0 102.4
Amortization of marketable software 90.0 90.1
Disposals of capital assets 8.6 3.8
Gain on sale of assets - (23.4)
Decrease in deferred income taxes, net - 8.9
Decrease in receivables, net 175.9 111.7
Decrease (increase) in inventories 16.7 (15.6)
Decrease in accounts payable and other
accrued liabilities (215.9) (286.8)
Decrease in other liabilities (27.9) (68.8)
Increase in other assets (108.7) (28.7)
Other 9.4 (1.7)
------- ------
Net cash provided by (used for)
operating activities 116.4 (74.2)
------- ------
Cash flows from investing activities
Proceeds from investments 4,838.1 5,785.7
Purchases of investments (4,847.9) (5,793.4)
Investment in marketable software (65.9) (73.0)
Capital additions of properties (51.8) (56.4)
Capital additions of outsourcing assets (96.6) (108.4)
Purchases of businesses (2.3) (2.0)
Proceeds from sale of businesses - 28.0
------- ------
Net cash used for investing activities (226.4) (219.5)
------- ------
Cash flows from financing activities
Net reduction in short-term borrowings (.1) (1.1)
Proceeds from exercise of stock options - 12.3
Minority shareholder dividends - (5.8)
Payment of long-term debt (200.0) -
Financing fees (.8) -
------- ------
Net cash (used for) provided by financing activities (200.9) 5.4
------- ------
Effect of exchange rate changes on
cash and cash equivalents (25.5) 17.5
------- ------
Decrease in cash and cash equivalents (336.4) (270.8)
Cash and cash equivalents, beginning of period 830.2 719.3
------- -------
Cash and cash equivalents, end of period $ 493.8 $ 448.5
======== =======
See notes to consolidated financial statements.
5
Unisys Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished herein
reflects all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
specified. These adjustments consist only of normal recurring accruals except
as disclosed herein. Because of seasonal and other factors, results for interim
periods are not necessarily indicative of the results to be expected for the
full year.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions.
The company's accounting policies are set forth in detail in note 1 of the notes
to the consolidated financial statements in the company's Annual Report on Form
10-K for the year ended December 31, 2007 filed with the Securities and Exchange
Commission. Such Annual Report also contains a discussion of the company's
critical accounting policies. The company believes that these critical
accounting policies affect its more significant estimates and judgments used in
the preparation of the company's consolidated financial statements. There have
been no changes in the company's critical accounting policies from those
disclosed in the company's Annual Report on Form 10-K for the year ended
December 31, 2007.
a. The following table shows how loss per share was computed for the three and
nine months ended September 30, 2008 and 2007 (dollars in millions, shares in
thousands):
Three Months Nine Months
Ended September 30 Ended September 30
----------------- ------------------
2008 2007 2008 2007
---- ---- ---- ----
Basic Loss Per Share
Net loss $ (34.7) $ (31.0) $ (72.1) $ (92.9)
======== ========= ======== ========
Weighted average shares 360,944 350,765 357,969 348,715
======== ========= ======== ========
Basic loss per share $ (.10) $ (.09) $ (.20) $ (.27)
======== ========= ======== ========
Diluted Loss Per Share
Net loss $ (34.7) $ (31.0) $ (72.1) $ (92.9)
======== ========= ======== ========
Weighted average shares 360,944 350,765 357,969 348,715
Plus incremental shares
from assumed conversions
of employee stock plans - - - -
-------- --------- -------- --------
Adjusted weighted average shares 360,944 350,765 357,969 348,715
======== ========= ======== ========
Diluted loss per share $ (.10) $ (.09) $ (.20) $ (.27)
======== ========= ======== ========
At September 30, 2008 and 2007, 33.7 million and 38.1 million, respectively, of
employee stock options were not included in the computation of diluted earnings
per share because either a loss was reported or the inclusion of stock options
in the computation would have been antidilutive.
b. In October 2005, the company announced a plan to reduce its cost structure.
During the three months ended September 30, 2007, the company did not record
additional cost reduction charges. During the nine months ended September 30,
2007, the company consolidated facility space and committed to an additional
reduction of 1,517 employees. This resulted in a pretax charge of $66.0
million. The charge related to work force reductions of $52.5 million was
broken down as follows: (a) 876 employees in the U.S. for a charge of $23.6
million and (b) 641 employees outside the U.S. for a charge of $28.9 million.
The facility charge of $13.5 million principally relates to leased property that
the company ceased using as of June 30, 2007. The pretax charge was recorded in
the following statement of income classifications: cost of revenue-services,
$31.8 million; cost of revenue-technology, $.5 million; selling, general and
administrative expenses, $18.6 million; research and development expenses, $15.9
million; and other income (expense), net, $.8 million.
6
There were no additional cost-reduction charges recorded during the three and
nine months ended September 30, 2008; however, a $2.0 million change in
estimates was recorded as expense in the current quarter compared with $1.7
million recorded as income in the year-ago period, and a $1.2 million change in
estimates was recorded as expense in the current nine-month period compared with
$17.4 million recorded as income in the year-ago nine-month period. In
addition, during the nine months ended September 30, 2008, the company recorded
a pretax charge of $7.5 million in selling, general and administrative expense
related to a lease guarantee.
A breakdown of the individual components of these costs follows (in millions of
dollars):
Work-Force
Reductions
-------------- Idle
Headcount Total U.S. Int'l. Lease Cost
--------- ----- ---- ------ ----------
Balance at December
31, 2007 727 $ 92.0 $ 21.1 $ 31.1 $ 39.8
Utilized (486) (44.3) (15.4) (18.6) (10.3)
Changes in estimates
and revisions (135) 1.2 1.2 (2.7) 2.7
Translation adjustments (2.4) - (.2) (2.2)
------ ------ ----- ----- ------
Balance at Sept. 30, 2008 106 $ 46.5 $ 6.9 $ 9.6 $ 30.0
====== ====== ===== ===== ======
Expected future utilization:
2008 remaining three months 106 $ 6.2 $ 2.0 $ 1.6 $ 2.5
Beyond 2008 40.3 4.9 8.0 27.5
c. Net periodic pension expense (income) for the three and nine months ended
September 30, 2008 and 2007 is presented below (in millions of dollars):
Three Months Three Months
Ended Sept. 30, 2008 Ended Sept. 30, 2007
--------------------- --------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 4.1 $ - $ 4.1 $ 11.4 $ .1 $ 11.3
Interest cost 105.1 71.0 34.1 101.0 69.5 31.5
Expected return on
plan assets (142.0) (101.8) (40.2) (134.5) (97.4) (37.1)
Amortization of prior
service cost .1 .1 - .1 - .1
Recognized net actuarial
loss 17.7 14.4 3.3 33.4 24.3 9.1
----- ------ ----- ----- ----- ----
Net periodic pension
expense (income) $ (15.0) $(16.3) $ 1.3 $ 11.4 $ (3.5) $14.9
====== ====== ===== ====== ======= =====
Nine Months Nine Months
Ended Sept. 30, 2008 Ended Sept. 30, 2007
-------------------- ---------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ------ ----- ----- -----
Service cost $ 20.3 $ - $20.3 $ 33.2 $ .2 $33.0
Interest cost 316.0 212.9 103.1 301.1 208.5 92.6
Expected return on
plan assets (427.3) (305.5) (121.8) (401.0) (292.3)(108.7)
Amortization of prior
service cost .6 .5 .1 .4 - .4
Recognized net actuarial
loss 53.6 43.1 10.5 99.7 73.0 26.7
Curtailment loss 1.5 - 1.5 - - -
------- ------- ----- ------- ----- ----
Net periodic pension
expense (income) $ (35.3) $(49.0) $13.7 $ 33.4 $(10.6) $44.0
======= ======= ===== ====== ===== =====
7
In April 2008, the company adopted changes to certain of its U.K. defined
benefit pension plans whereby effective June 30, 2008 all future accruals of
benefits under the plans ceased. As a result of this change, the company
recorded a pretax curtailment loss of $1.5 million in the second quarter of
2008. In addition, the company has enhanced its contributions to certain U.K.
defined contribution plans, effective July 1, 2008. The changes to the U.K.
plans are part of a global effort by the company to provide a competitive
retirement program while controlling the level and volatility of retirement
costs.
The company currently expects to make cash contributions of approximately $80
million to its worldwide defined benefit pension plans in 2008 compared with
$78.7 million in 2007. For the nine months ended September 30, 2008 and 2007,
$57.7 million and $52.6 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 2008.
The expense related to the company's match to the U.S. 401(k) plan for the nine
months ended September 30, 2008 and 2007 was $38.0 million and $37.4 million,
respectively. During the three months ended June 30, 2008 and 2007, the company
recorded an expense for a true-up match related to the prior year in the amount
of $3.5 million and $1.0 million, respectively.
Net periodic postretirement benefit expense for the three and nine months ended
September 30, 2008 and 2007 is presented below (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------- -------------
2008 2007 2008 2007
---- ---- ---- ----
Service cost $ .1 $ - $ .5 $ -
Interest cost 3.1 3.1 9.6 9.2
Expected return on assets (.2) (.1) (.4) (.4)
Amortization of prior
service cost .3 - 1.5 -
Recognized net actuarial
loss 1.2 1.2 3.4 3.8
---- ---- ---- ----
Net periodic postretirement
benefit expense $4.5 $4.2 $14.6 $12.6
==== ==== ===== =====
The company expects to make cash contributions of approximately $28 million to
its postretirement benefit plan in 2008 compared with $24.4 million in 2007.
For the nine months ended September 30, 2008 and 2007, $11.9 million and $27.3
million, respectively, of cash contributions have been made.
d. In February 2007, the company sold its media business for gross proceeds of
$28.0 million and recognized a pretax gain of $23.4 million, which is included
in other income (expense).
In March 2007, the company settled an income tax audit in the Netherlands and as
a result, recorded a tax benefit of $39.4 million.
e. Under the company's stockholder approved stock-based plans, stock options,
stock appreciation rights, restricted stock and restricted stock units may be
granted to officers, directors and other key employees. As of September 30,
2008, the company has granted non-qualified stock options and restricted stock
units under these plans. At September 30, 2008, 23.7 million shares of unissued
common stock of the company were available for granting under these plans.
For the nine months ended September 30, 2008 and 2007, 188,000 and 54,000 stock
options were granted, respectively. The company currently expects that any
future grants of stock option awards will be principally to newly hired
individuals.
8
The fair value of stock option awards was estimated using the Black-Scholes
option pricing model with the following assumptions and weighted-average fair
values:
Nine Months Ended Sept. 30,
----------------------------
2008 2007
---- ----
Weighted-average fair value of grant $1.62 $2.88
Risk-free interest rate 3.63% 4.63%
Expected volatility 45.28% 35.31%
Expected life of options in years 3.67 3.67
Expected dividend yield - -
For periods after January 1, 2006, the company has granted an annual restricted
stock unit award to officers, directors and other key employees in lieu of an
annual stock option grant. The restricted stock unit awards granted can contain
both time-based units and performance-based units. Each performance-based unit
will vest into zero to 1.5 shares depending on the degree to which the
performance goals are met. Compensation expense resulting from these awards is
recognized as expense ratably for each installment from the date of grant until
the date the restrictions lapse and is based on the fair market value at the
date of grant and the probability of achievement of the specific performance-
related goals. The company records share-based expense in selling, general and
administrative expense.
During the nine months ended September 30, 2008 and 2007, the company recorded
$.2 million of income and $8.6 million of expense for share-based compensation,
respectively, which is comprised of $(.7) million and $8.4 million of restricted
stock unit (income) expense and $.5 million and $.2 million of stock option
expense, respectively. During the three months ended September 30, 2008, the
company reversed $13.2 million of previously-accrued compensation expense
related to performance-based restricted stock units due to a change in the
assessment of the achievability of the performance goals.
A summary of stock option activity for the nine months ended September 30, 2008
follows (shares in thousands):
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (years) ($ in millions)
------- ------ --------- ------------ ---------------
Outstanding at
December 31, 2007 37,452 $16.99
Granted 188 4.28
Forfeited and
expired (3,928) 17.99
------
Outstanding at
Sept. 30, 2008 33,712 16.79 2.43 $ -
======
Vested and
expected to vest
at Sept. 30, 2008 33,712 16.79 2.43 -
======
Exercisable at
Sept. 30, 2008 33,272 16.94 2.41 -
======
The aggregate intrinsic value represents the pretax value of the difference
between the company's closing stock price on the last trading day of the period
and the exercise price of the options, multiplied by the number of in-the-money
stock options that would have been received by the option holders had all option
holders exercised their options on September 30, 2008. The intrinsic value of
the company's stock options changes based on the closing price of the company's
stock. The total intrinsic value of options exercised for the nine months ended
September 30, 2008 was zero since no options were exercised and the amount for
the nine months ended September 30, 2007 was $2.9 million. As of September 30,
2008, $.7 million of total unrecognized compensation cost related to stock
options is expected to be recognized over a weighted-average period of 1.6
years.
9
A summary of restricted stock unit activity for the nine months ended September
30, 2008 follows (shares in thousands):
Weighted-
Restricted Average
Stock Grant Date
Units Fair Value
---------- ----------
Outstanding at
December 31, 2007 4,346 $7.65
Granted 6,770 4.11
Vested (234) 7.11
Forfeited and expired (1,565) 6.14
-----
Outstanding at
September 30, 2008 9,317 5.34
=====
The fair value of restricted stock units is determined based on the stock price
of the company's common shares on the date of grant. The weighted-average grant-
date fair value of restricted stock units granted during the nine months ended
September 30, 2008 and 2007 was $4.11 and $8.34, respectively. As of September
30, 2008, there was approximately $9.4 million of total unrecognized
compensation cost related to outstanding restricted stock units granted under
the company's plans. That cost is expected to be recognized over a weighted-
average period of 1.6 years. The total fair value of restricted share units
vested during the nine months ended September 30, 2008 and 2007 was $.9 million
and $3.0 million, respectively.
Common stock issued upon exercise of stock options or upon lapse of restrictions
on restricted stock units are newly issued shares. Cash received from the
exercise of stock options for the nine months ended September 30, 2008 and 2007
was zero and $12.3 million, respectively. The company is currently not
recognizing any tax benefits from the exercise of stock options or upon issuance
of stock upon lapse of restrictions on restricted stock units in light of its
tax position. Tax benefits resulting from tax deductions in excess of the
compensation costs recognized are classified as financing cash flows.
f. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies.
The accounting policies of each business segment are the same as those followed
by the company as a whole. Intersegment sales and transfers are priced as if
the sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services segment,
in turn, recognizes customer revenue and marketing profits on such shipments of
company hardware and software to customers. The Services segment also includes
the sale of hardware and software products sourced from third parties that are
sold to customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products sourced
from the Technology segment and sold to Services customers are reported in cost
of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income of
the Technology segment for the three months ended September 30, 2008 and 2007
was $21.9 million and $14.4 million, respectively. The amount for the nine
months ended September 30, 2008 and 2007 was $33.1 million and $16.2 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 segment comparisons below exclude the cost reduction
items mentioned in note (b).
10
A summary of the company's operations by business segment for the three and nine
month periods ended September 30, 2008 and 2007 is presented below (in millions
of dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
September 30, 2008
- ------------------
Customer revenue $1,312.4 $1,152.1 $ 160.3
Intersegment - $ (67.5) 4.0 63.5
-------- -------- -------- -------
Total revenue $1,312.4 $ (67.5) $1,156.1 $ 223.8
======== ======= ======== =======
Operating income (loss) $ 37.9 $ (22.3) $ 35.6 $ 24.6
======== ======= ======== =======
Three Months Ended
September 30, 2007
- ------------------
Customer revenue $1,393.1 $1,217.6 $ 175.5
Intersegment - $ (61.2) 3.4 57.8
-------- -------- -------- ------
Total revenue $1,393.1 $ (61.2) $1,221.0 $ 233.3
======== ======= ======== ======
Operating income (loss) $ 43.6 $ (9.5) $ 43.6 $ 9.5
======== ======= ======== =======
Nine Months Ended
September 30, 2008
- ----------------
Customer revenue $3,953.7 $3,486.2 $ 467.5
Intersegment - $(162.2) 9.4 152.8
-------- ------- -------- -------
Total revenue $3,953.7 $(162.2) $3,495.6 $ 620.3
======== ======= ======== =======
Operating income (loss) $ 88.5 $ (32.2) $ 101.4 $ 19.3
======== ======= ======== =======
Nine Months Ended
September 30, 2007
- ----------------
Customer revenue $4,116.8 $3,579.1 $ 537.7
Intersegment - $(148.7) 10.9 137.8
-------- ------- -------- -------
Total revenue $4,116.8 $(148.7) $3,590.0 $ 675.5
======== ======= ======== =======
Operating income (loss) $ 16.5 $ (62.5) $ 62.8 $ 16.2
======== ======= ======== =======
Presented below is a reconciliation of total business segment operating income
to consolidated income (loss) before income taxes (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------- --------------
2008 2007 2008 2007
---- ---- ---- ----
Total segment operating
income $ 60.2 $ 53.1 $ 120.7 $ 79.0
Interest expense (21.5) (18.5) (64.3) (56.1)
Other income (expense), net (6.1) (19.3) (23.9) (2.5)
Cost reduction charges - - - (66.0)
Corporate and eliminations (22.3) (9.5) (32.2) 3.5
------- ------- ------- -------
Total income (loss) before
income taxes $ 10.3 $ 5.8 $ .3 $ (42.1)
======= ======= ======= =======
11
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
--------------- -----------------
2008 2007 2008 2007
---- ---- ---- ----
Services
Systems integration
and consulting $ 361.2 $ 379.2 $1,094.7 $1,092.6
Outsourcing 515.0 523.9 1,529.7 1,497.7
Infrastructure services 182.1 208.6 575.7 667.4
Core maintenance 93.8 105.9 286.1 321.4
-------- -------- -------- --------
1,152.1 1,217.6 3,486.2 3,579.1
Technology
Enterprise-class servers 141.3 133.9 384.7 411.8
Specialized technologies 19.0 41.6 82.8 125.9
-------- -------- -------- --------
160.3 175.5 467.5 537.7
-------- -------- -------- --------
Total $1,312.4 $1,393.1 $3,953.7 $4,116.8
======== ======== ======== ========
Geographic information about the company's revenue, which is principally based
on location of the selling organization, is presented below (in millions of
dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
---------------- -------------------
2008 2007 2008 2007
---- ---- ---- ----
United States $ 559.8 $ 611.8 $1,668.5 $1,806.5
United Kingdom 182.9 231.6 592.5 678.8
Other international 569.7 549.7 1,692.7 1,631.5
------- -------- ------- --------
Total $1,312.4 $1,393.1 $3,953.7 $4,116.8
======== ======== ======== ========
g. Comprehensive income (loss) for the three and nine months ended September
30, 2008 and 2007 includes the following components (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
--------------- ----------------
2008 2007 2008 2007
---- ---- ---- ----
Net loss $(34.7) $ (31.0) $ (72.1) $ (92.9)
Other comprehensive income (loss)
Cash flow hedges
Loss 1.6 .4 1.0 -
Reclassification adj. (.4) (.4) .1 -
Foreign currency
translation adjustments (31.6) 6.4 (31.6) 35.8
Postretirement adjustments 56.6 24.3 82.0 79.7
------ ------- ------ -------
Total other comprehensive
income 26.2 30.7 51.5 115.5
------ ------- ------- --------
Comprehensive income (loss) $ (8.5) $ (.3) $ (20.6) $ 22.6
====== ======= ======= ========
Accumulated other comprehensive income (loss) as of December 31, 2007 and
September 30, 2008 is as follows (in millions of dollars):
Cash
Translation Flow Postretirement
Total Adjustments Hedges Plans
----- ----------- ------ ---------
Balance at December 31, 2007 $(1,182.9) $(595.3) $ - $ (587.6)
Change during period 51.5 (31.6) 1.1 82.0
-------- ------- ------ --------
Balance at Sept. 30, 2008 $(1,131.4) $(626.9) $ 1.1 $ (505.6)
======== ======= ====== ========
12
h. 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 customers 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
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 Sept. 30 Ended Sept. 30
--------------- ----------------
2008 2007 2008 2007
---- ---- ---- ----
Balance at beginning of
period $ 5.1 $ 8.6 $ 6.9 $ 8.2
Accruals for warranties
issued during the period .6 1.4 2.0 3.9
Settlements made during
the period (.6) (1.8) (2.0) (5.6)
Changes in liability for
pre-existing warranties
during the period,
including expirations (.2) (.1) (2.0) 1.6
------- ------- ------- ------
Balance at September 30 $ 4.9 $ 8.1 $ 4.9 $ 8.1
======= ======= ======= ======
i. Cash paid during the nine months ended September 30, 2008 for income taxes
was $43.6 million compared with net cash refunds received during the nine months
ended September 30, 2007 of $4.0 million, respectively.
Cash paid during the nine months ended September 30, 2008 and 2007 for interest
was $64.4 million and $52.6 million, respectively.
During the nine months ended September 30, 2007, the company financed $22.7
million of internal use software licenses.
j. Effective January 1, 2008, the company adopted Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. This statement applies under
other accounting pronouncements that require or permit fair value measurements.
Accordingly, SFAS No. 157 does not require any new fair value measurements. In
February 2008, the FASB deferred the effective date for one year for certain
nonfinancial assets and nonfinancial liabilities. Adoption of SFAS No. 157 did
not have an impact on the company's consolidated results of operations and
financial position.
Effective January 1, 2008, the company adopted Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reportable in earnings. Adoption of SFAS No. 159 did not have an impact on the
company's consolidated results of operations and financial position.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), "Business Combinations" (SFAS No. 141R). SFAS No. 141R
replaces SFAS No. 141, "Business Combinations," and establishes principles and
requirements for how the acquirer: (a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141R applies prospectively to business combinations for
13
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, which is January 1,
2009 for the company. An entity may not apply it before that date. The company
will adopt SFAS No. 141R for business combinations, if any, after January 1,
2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Noncontrolling Interest in Consolidated Financial Statements" (SFAS
No. 160). SFAS No. 160 describes a noncontrolling interest, sometimes called a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS No. 160 establishes accounting and
reporting standards that require, among other items: (a) the ownership interests
in subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent's equity; (b) the amount of
consolidated net income attributable to the parent and the noncontrolling
interests be clearly identified and presented on the face of the consolidated
statement of income; and (c) entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, which is January 1, 2009 for the company. Earlier adoption
is prohibited. SFAS No. 160 shall be applied prospectively as of the beginning
of the fiscal year in which the statement is initially applied, except for the
presentation and disclosure requirements which shall be applied retrospectively
for all periods presented. The company is currently assessing the impact of the
adoption of SFAS No. 160 on its consolidated results of operations and financial
position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" (SFAS No. 161). SFAS No. 161 requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, which is January 1, 2009 for the company.
k. There are various lawsuits, claims, investigations and proceedings that have
been brought or asserted against the company, which arise in the ordinary course
of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. In accordance with SFAS No. 5, "Accounting for
Contingencies," the company records a provision for these matters when it is
both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. Any provisions are reviewed at least quarterly and are
adjusted to reflect the impact and status of settlements, rulings, advice of
counsel and other information and events pertinent to a particular matter.
The company believes that it has valid defenses with respect to legal matters
pending against it. Based on its experience, the company also believes that the
damage amounts claimed in the lawsuits disclosed below are not a meaningful
indicator of the company's potential liability. Litigation is inherently
unpredictable, however, and it is possible that the company's results of
operations or cash flow could be affected in any particular period by the
resolution of one or more of the legal matters pending against it.
In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the establishment of
secure information technology environments in airports. The Civil Division of
the Department of Justice, working with the Inspector General's Office of the
Department of Homeland Security, is reviewing issues relating to labor
categorization and overtime on the TSA contract. The company is working
cooperatively with the Civil Division. The company does not know whether the
Civil Division will pursue the matter, or, if pursued, what effect this might
have on the company.
In April 2007, the Ministry of Justice of Belgium sued Unisys Belgium SA-NV, a
Unisys subsidiary (Unisys Belgium), in the Court of First Instance of
Brussels. The Belgian government had engaged the company to design and develop
software for a computerized system to be used to manage the Belgian court
system. The Belgian State terminated the contract and in its lawsuit has alleged
that the termination was justified because Unisys Belgium failed to deliver
satisfactory software in a timely manner. It claims damages of approximately 28
million euros. Unisys Belgium believes it has valid defenses to the claims and
contends that the Belgian State's termination of the contract was unjustified.
Unisys Belgium has filed its defense and counterclaim in the amount of
approximately 18.5 million euros.
14
In December 2007, Lufthansa AG sued Unisys Deutschland GmbH, a Unisys subsidiary
(Unisys Germany), in the District Court of Frankfurt, Germany, for allegedly
failing to perform properly its obligations during the initial phase of a 2004
software design and development contract relating to a Lufthansa customer
loyalty program. Under the contract, either party was free to withdraw from
the project at the conclusion of the initial design phase. Rather than
withdraw, Lufthansa instead terminated the contract and failed to pay the
balance owed to Unisys Germany for the initial phase. Lufthansa's lawsuit
alleges that Unisys Germany breached the contract by failing to deliver a proper
design for the new system and seeks approximately 21.4 million euros in damages.
Unisys Germany believes it has valid defenses and has filed its defense and
counterclaim in the amount of 1.5 million euros.
In July 2008, Lufthansa Systems Passenger Services GmbH sued Unisys Germany in
the District Court of Frankfurt, Germany, in connection with a 2005 agreement
under which Unisys Germany was to develop passenger management software for
Lufthansa Systems. Lufthansa Systems purported to terminate the agreement for
cause in July 2007 claiming that Unisys Germany failed to deliver satisfactory
software in a timely manner. The lawsuit seeks a monetary recovery of
approximately 49 million euros. Unisys Germany believes it has valid defenses
and expects to file its initial response during the fourth quarter of 2008.
Notwithstanding that the ultimate results of the lawsuits, claims,
investigations and proceedings that have been brought or asserted against the
company are not currently determinable, the company believes that at September
30, 2008, it has adequate provisions for any such matters.
l. 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.
The company evaluates quarterly the realizability of its deferred tax assets by
assessing its valuation allowance and by adjusting the amount of such allowance,
if necessary. The factors used to assess the likelihood of realization are the
company's forecast of future taxable income and available tax-planning
strategies that could be implemented to realize the net deferred tax assets.
The company has used tax-planning strategies to realize or renew net deferred
tax assets to avoid the potential loss of future tax benefits.
In 2005, based upon the level of historical taxable income and projections of
future taxable income over the periods during which the deferred tax assets are
deductible, management concluded that it is more likely than not that the U.S.
and certain foreign deferred tax assets in excess of deferred tax liabilities
would not be realized. A full valuation allowance was recognized in 2005 and is
currently maintained for all U.S. and certain foreign deferred tax assets in
excess of deferred tax liabilities. The company will record a tax provision or
benefit for those international subsidiaries that do not have a full valuation
allowance against their deferred tax assets. Any profit or loss recorded for
the company's U.S. operations will have no provision or benefit associated with
it. As a result, the company's provision or benefit for taxes will vary
significantly quarter to quarter depending on the geographic distribution of
income.
15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The company's third-quarter 2008 financial results were impacted by economic
uncertainties in its key commercial markets, particularly in financial services.
As has been widely reported, worldwide financial markets have been experiencing
disruptions in recent months, including, among other things, an overall decline
in credit availability. The company's customers have reacted to tight credit
conditions by reducing IT spending. In addition, the company saw a slowdown in
its federal business in the quarter due to slower government spending.
Reflecting these factors, the company's revenue declined 6% from the third
quarter of 2007. Lower sales volume led to lower-than-expected operating
margins in the company's services business and overall. However, the company
reported improved operating margins in its technology business, driven by
higher shipments of ClearPath mainframes.
Through nine months of 2008, the company reported significantly improved
profitability and cash flow. Operating profit rose to $88.5 million for the
first nine months of 2008 compared to $16.5 million for the first nine months of
2007. Year to date in 2008 the company has generated $116.4 million of
operational cash flow compared with operational cash usage of $74.2 million over
the first nine months of 2007.
RESULTS OF OPERATIONS
COMPANY RESULTS
Revenue for the three months ended September 30, 2008 was $1.31 billion compared
with $1.39 billion for the three months ended September 30, 2007, a decrease of
6% from the prior year. The change was principally due to declines in revenue
from financial services and weakness in Federal government revenue. Services
revenue decreased 5% and Technology revenue decreased 9%. Foreign currency
fluctuations had a 2-percentage-point positive impact on revenue in the current
period compared with the year-ago period. U.S. revenue declined 8% in the third
quarter compared with the year-ago period. International revenue declined 4% in
the current quarter compared with the year-ago period principally due to
declines in Europe and Asia/Pacific, offset in part by increases in Latin
America. On a constant currency basis, international revenue declined 9% in the
three months ended September 30, 2008 compared with the three months ended
September 30, 2007.
During the three months ended September 30, 2008 and 2007, the company did not
record additional cost reduction charges; however, a $2.0 million change in
estimates was recorded as expense in the current quarter compared with a $1.7
million change in estimate recorded as income in the year-ago period.
For the three months ended September 30, 2008 pension income was $15.0 million
compared with pension expense of $11.4 million for the three months ended
September 30, 2007. The change in pension expense in 2008 from 2007 was
principally due to increases in worldwide discount rates and prior years' higher
returns on plan assets worldwide. The company records pension income or expense,
as well as other employee-related costs such as payroll taxes and medical
insurance costs, in operating income in the following income statement
categories: cost of revenue; selling, general and administrative expenses; and
research and development expenses. The amount allocated to each category is
based on where the salaries of active employees are charged. The disruption in
worldwide financial markets referred to above has also led to volatility in
prices of securities and declining values of investments. This has impacted the
market value of the company's defined benefit pension plan assets. If the
market value of the investments of these plan assets does not improve
significantly through the end of 2008, the company would most likely be
required to record pension expense in 2009, increase funding in its
international funds, and to fund its U.S. plan in 2010.
Total gross profit margin was 22.2% in the three months ended September 30, 2008
compared with 22.2% in the three months ended September 30, 2007. Gross profit
margin reflects a decline in pension expense of $20.4 million (income of $11.6
million in 2008 compared with expense of $8.8 million in 2007).
16
Selling, general and administrative expenses were $218.4 million for the three
months ended September 30, 2008 (16.6% of revenue) compared with $225.8 million
(16.2% of revenue) in the year-ago period. Selling, general and administrative
expense reflects a decline in pension expense of $4.5 million (income of $1.6
million in 2008 compared with expense of $2.9 million in 2007). In addition,
during the three months ended September 30, 2008, the company reversed $13.2
million of previously-accrued compensation expense related to performance-based
restricted stock units due to a change in the assessment of the achievability of
the performance goals (see note (e)).
Research and development (R&D) expenses in the third quarter of 2008 were $35.7
million compared with $39.7 million in the third quarter of 2007. The company
continues to invest in proprietary operating systems, enterprise server
operating systems, middleware and in key programs within its industry practices.
The reduction in R&D in 2008 compared with 2007 reflects the benefits derived in
2008 from the prior-years' cost reduction actions.
For the third quarter of 2008, the company reported an operating profit of $37.9
million compared with $43.6 million in the third quarter of 2007. The principal
items affecting the comparison of 2008 with 2007 are discussed above.
Interest expense for the three months ended September 30, 2008 was $21.5 million
compared with $18.5 million for the three months ended September 30, 2007. The
increase in interest expense was primarily due to increased interest rates
related to the refinancing in December 2007 of the $200 million 7 7/8% notes due
2008 with the company's $210 million 12 1/2% notes due 2016.
Other income (expense), net, which can vary from period to period, was an
expense of $6.1 million in the third quarter of 2008, compared with expense of
$19.3 million in 2007. The principal item impacting the change was that the
prior year period included an expense of $10.7 million to settle an escheat
audit.
Income before income taxes for the three months ended September 30, 2008 was
income of $10.3 million compared with income of $5.8 million in 2007. The
provision for income taxes was $45.0 million in the current quarter compared
with $36.8 million in the year-ago period. The provision for income taxes in
the current quarter includes a $4.1 million benefit related to provisions in the
Housing and Economic Recovery Act of 2008, enacted on July 30, 2008, permitting
certain research and alternative minimum tax (AMT) credit carryforwards to be
refundable. Included in the third quarter provision for income taxes is a $7.8
million charge for understatement of the income tax provision for the first and
second quarters of 2008 in the amount of $4.7 million and $3.1 million,
respectively. This charge had no effect on the year to date provision for
income taxes. In addition, the provision for income taxes in the prior-year
period includes a provision of $8.9 million due to a reduction in the UK income
tax rate. The rate reduction from 30% to 28% was enacted in the third quarter
of 2007 effective April 1, 2008. The provision of $8.9 million was caused by a
write down of the UK deferred tax assets to the 28% rate.
The net loss for the three months ended September 30, 2008 was $34.7 million, or
$.10 per share, compared with a net loss of $31.0 million, or $.09 per share,
for the three months ended September 30, 2007.
As discussed in note (l), the company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." The company evaluates
quarterly the realizability of its deferred tax assets by assessing its
valuation allowance and by adjusting the amount of such allowance, if necessary.
The company will record a tax provision or benefit for those international
subsidiaries that do not have a full valuation allowance against their deferred
tax assets. Any profit or loss recorded for the company's U.S. operations will
have no provision or benefit associated with it. As a result, the company's
provision or benefit for taxes will vary significantly quarter to quarter
depending on the geographic distribution of income.
Revenue for the nine months ended September 30, 2008 was $3.95 billion compared
with $4.12 billion for the nine months ended September 30, 2007, a decrease of
4% from the prior year. This decrease was due to a 3% decrease in Services
revenue and a 13% decrease in Technology revenue. Foreign currency fluctuations
had a 4-percentage-point positive impact on revenue in the current period
compared with the year-ago period. On a constant currency basis, international
revenue declined 8% in the nine months ended September 30, 2008 compared with
the nine months ended September 30, 2007.
For the nine months ended September 30, 2008 pension income was $35.3 million
compared with pension expense of $33.4 million for the nine months ended
September 30, 2007.
17
Total gross profit margin was 22.5% in the nine months ended September 30, 2008
compared with 21.0% in the nine months ended September 30, 2007. Included in
the gross profit margin in 2007 were cost reduction charges of $32.3 million.
Gross profit margin in 2008 reflects a decline in pension expense of $52.4
million (income of $27.3 million in 2008 compared with expense of $25.1 million
in 2007).
Selling, general and administrative expenses were $701.9 million for the nine
months ended September 30, 2008 (17.8% of revenue) compared with $717.8 million
(17.4% of revenue) in the year-ago period. Included in selling, general and
administrative expense in 2008 was $7.5 million of expense related to a lease
guarantee (see note (b)). In addition, during the three months ended September
30, 2008, the company reversed $13.2 million of previously-accrued compensation
expense related to performance-based restricted stock units due to a change in
the assessment of the achievability of the performance goals (see note (e)).
Included in 2007 were cost reduction charges of $18.6 million. Selling, general
and administrative expense in 2008 also reflects a decline in pension expense of
$11.9 million (income of $2.8 million in 2008 compared with expense of $9.1
million in 2007).
Research and development (R&D) expenses in the first nine months of 2008 were
$98.6 million compared with $131.6 million in the first nine months of 2007.
Included in R&D expense in 2007 were cost reduction charges of $15.9 million.
The reduction in R&D in 2008 compared with 2007 excluding these charges
principally reflects the benefits derived in 2008 from the prior-years' cost
reduction actions.
For the first nine months of 2008, the company reported an operating profit of
$88.5 million compared with an operating profit of $16.5 million in the first
nine months of 2007. The principal items affecting the comparison of 2008 with
2007 are discussed above.
Interest expense for the nine months ended September 30, 2008 was $64.3 million
compared with $56.1 million for the nine months ended September 30, 2007. The
increase in interest expense was primarily due to increased interest rates
related to the refinancing discussed above.
Other income (expense), net was an expense of $23.9 million for the nine months
ended September 30, 2008, compared with an expense of $2.5 million in 2007.
Other income (expense) for the nine months ended September 30, 2007 principally
reflects a gain of $23.4 million on the sale of the company's media business
(see note (d)), as well as an expense of $10.7 million to settle an escheat
audit.
Income (loss) before income taxes for the nine months ended September 30, 2008
was income of $.3 million compared with a loss of $42.1 million in 2007. The
provision for income taxes was $72.4 million in the current period compared with
$50.8 million in the year-ago period. Included in the current period tax
provision is a benefit of $5.1 million related to prior years' intercompany
royalties. The provision for income taxes in the current period also includes a
$4.1 million benefit related to provisions in the Housing and Economic Recovery
Act of 2008 permitting certain research and AMT credit carryforwards to be
refundable. The tax provision in the prior year nine-month period included a
$39.4 million benefit related to the Netherlands income tax audit settlement
(see note (d)) and $8.9 million related to the U.K. income tax rate change
(discussed above).
For the nine months ended September 30, 2008, the company reported a net loss of
$72.1 million, or $.20 per share, compared with a net loss of $92.9 million, or
$.27 per share, for the nine months ended September 30, 2007. The prior year
nine-month period includes pretax charges relating to cost reduction actions of
$66.0 million.
SEGMENT RESULTS
The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies.
The accounting policies of each business segment are the same as those followed
by the company as a whole. Intersegment sales and transfers are priced as if
the sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services segment,
in turn, recognizes customer revenue and marketing profit on such shipments of
company hardware and software to customers. The Services segment also includes
the sale of hardware and software products sourced from third parties that are
sold to customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products sourced
from the Technology segment and sold to Services customers are reported in cost
of revenue for Services.
18
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 agreements. The amount of such profit included in operating income of
the Technology segment for the three months ended September 30, 2008 and 2007
was $21.9 million and $14.4 million, respectively. The amount for the nine
months ended September 30, 2008 and 2007 was $33.1 million and $16.2 million,
respectively. The profit on these transactions is eliminated in Corporate.
The company evaluates business segment performance on operating profit exclusive
of cost reduction charges and unusual and nonrecurring items, which are included
in Corporate. All other corporate and centrally incurred costs are allocated to
the business segments, based principally on revenue, employees, square footage
or usage. Therefore, the segment comparisons below exclude the cost reduction
items mentioned above.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2008
- ------------------
Customer revenue $1,312.4 $1,152.1 $ 160.3
Intersegment - $ (67.5) 4.0 63.5
-------- ------- ------- ------
Total revenue $1,312.4 $ (67.5) $1,156.1 $ 223.8
======== ======= ======== =======
Gross profit percent 22.2% 17.6% 47.5%
======== ======= ======
Operating profit percent 2.9% 3.1% 11.0%
======== ======= ======
Three Months Ended
September 30, 2007
- ------------------
Customer revenue $1,393.1 $1,217.6 $175.5
Intersegment - $(61.2) 3.4 57.8
-------- ------- -------- ------
Total revenue $1,393.1 $(61.2) $1,221.0 $233.3
======== ======= ======== ======
Gross profit percent 22.2 % 17.7 % 44.6 %
======== ======== ======
Operating profit percent 3.1 % 3.6 % 4.0 %
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months
Ended Sept. 30 Percent
------------------ Increase
2008 2007 (Decrease)
---- ---- ----------
Services
Systems integration
and consulting $ 361.2 $ 379.2 (4.7)%
Outsourcing 515.0 523.9 (1.7)%
Infrastructure services 182.1 208.6 (12.7)%
Core maintenance 93.8 105.9 (11.4)%
-------- --------
1,152.1 1,217.6 (5.4)%
Technology
Enterprise-class servers 141.3 133.9 5.5 %
Specialized technologies 19.0 41.6 (54.3)%
-------- --------
160.3 175.5 (8.7)%
-------- --------
Total $1,312.4 $1,393.1 (5.8)%
======== ========
In the Services segment, customer revenue was $1.15 billion for the three months
ended September 30, 2008 down 5.4% from the three months ended September 30,
2007. Foreign currency translation had a 3-percentage-point positive impact on
Services revenue in the current quarter compared with the year-ago period.
19
Revenue from systems integration and consulting decreased 4.7% from $379.2
million in the September 2007 quarter to $361.2 million in the September 2008
quarter.
Outsourcing revenue decreased 1.7% for the three months ended September 30, 2008
to $515.0 million compared with the three months ended September 30, 2007
principally due to a decline in business process outsourcing revenue.
Infrastructure services revenue declined 12.7% for the three month period ended
September 30, 2008 compared with the three month period ended September 30, 2007
due to weakness in demand for network design and consulting projects and the
shift of project-based infrastructure work to managed outsourcing contracts, all
of which is expected to continue.
Core maintenance revenue declined 11.4% in the current quarter compared with the
prior-year quarter. The decline in core maintenance was due to the secular
decline in core maintenance as well as lower maintenance on high-volume, high-
margin check sorting equipment. The company expects the secular decline of core
maintenance to continue.
Services gross profit was 17.6% in the third quarter of 2008 compared with 17.7%
in the year-ago period. Services operating profit percent was 3.1% in the three
months ended September 30, 2008 compared with 3.6% in the three months ended
September 30, 2007. Services margins in 2008 reflect a decline in pension
expense in gross profit of $20.0 million (income of $11.1 million for the three
months ended September 30, 2008 compared with expense of $8.9 million in the
year-ago period) and a decline in pension expense in operating income of $23.6
million (income of $12.4 million for the three months ended September 30, 2008
compared with expense of $11.2 million in the year-ago period).
In the Technology segment, customer revenue was $160 million in the current
quarter compared with $176 million in the year-ago period for a decrease of
8.7%. The decline in Technology revenue reflects the ending of certain NUL
revenue beginning in the June 2008 quarter due to expiration of the one-time
fixed royalty fee of $225 million under an agreement executed in 2005. The
company had recognized revenue of $18.8 million per quarter ($8.5 million in
enterprise-class servers and $10.3 million in specialized technologies) under
this royalty agreement over the three-year period ended March 31, 2008.
Excluding the expiration of this royalty from NUL, the technology segment's
revenue would have increased 2%. Foreign currency translation had a positive
impact of approximately 4-percentage points on Technology revenue in the
current period compared with the prior-year period.
Revenue for the company's enterprise-class servers, which includes the company's
ClearPath and ES7000 product families, increased 5.5% for the three months ended
September 30, 2008 compared with the three months ended September 30, 2007. The
increase was principally due to growth in ClearPath revenue as the company
closed several significant second-half deals in the current quarter.
Notwithstanding this increase, the company still expects the secular decline of
enterprise-class servers to continue for the full year of 2008 and beyond, with
ClearPath revenue expected to be down significantly in the fourth quarter of
2008 against the fourth quarter of 2007, which had strong mainframe sales.
Revenue from specialized technologies, which includes the company's payment
systems products, third-party technology products and royalties from the
company's agreement with NUL, decreased 54.3% for the three months ended
September 30, 2008 compared with the three months ended September 30, 2007. The
decline was principally due to the ending of the NUL royalties, discussed above,
as well as lower payment systems and third-party revenue.
Technology gross profit was 47.5% in the current quarter compared with 44.6% in
the year-ago quarter. Technology operating profit percent was 11.0% in the
three months ended September 30, 2008 compared with an operating profit percent
of 4.0% in the three months ended September 30, 2007. These margin improvements
reflected the stronger ClearPath sales and revenue mix in the current quarter.
20
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Nine Months Ended
September 30, 2008
- ------------------
Customer revenue $3,953.7 $3,486.2 $ 467.5
Intersegment - $(162.2) 9.4 152.8
-------- ------- ------- ------
Total revenue $3,953.7 $(162.2) $3,495.6 $ 620.3
======== ======= ======= =======
Gross profit percent 22.5% 18.4% 43.4%
======== ======= ======
Operating profit
percent 2.2% 2.9% 3.1%
======== ======= ======
Nine Months Ended
September 30, 2007
- ------------------
Customer revenue $4,116.8 $3,579.1 $537.7
Intersegment - $(148.7) 10.9 137.8
-------- ------- -------- ------
Total revenue $4,116.8 $(148.7) $3,590.0 $675.5
======== ======= ======== ======
Gross profit percent 21.0% 16.7% 43.7%
======== ======== ======
Operating profit
percent 0.4% 1.7% 2.4%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Nine Months
Ended Sept. 30 Percent
------------------ Increase
2008 2007 (Decrease)
---- ---- ----------
Services
Systems integration
and consulting $1,094.7 $1,092.6 .2 %
Outsourcing 1,529.7 1,497.7 2.1 %
Infrastructure services 575.7 667.4 (13.7)%
Core maintenance 286.1 321.4 (11.0)%
-------- --------
3,486.2 3,579.1 (2.6)%
Technology
Enterprise-class servers 384.7 411.8 (6.6)%
Specialized technologies 82.8 125.9 (34.2)%
-------- --------
467.5 537.7 (13.1)%
-------- --------
Total $3,953.7 $4,116.8 (4.0)%
======== ========
In the Services segment, customer revenue was $3.49 billion for the nine months
ended September 30, 2008, down 2.6% from the nine months ended September 30,
2007. Foreign currency translation had a 3-percentage-point positive impact on
Services revenue in current period compared with the year-ago period.
Revenue from systems integration and consulting of $1,094.7 million for the nine
months ended September 30, 2008 was flat when compared with $1,092.6 million for
the nine months ended September 30, 2007.
Outsourcing revenue of $1,529.7 million for the nine months ended September 30,
2008 increased 2.1% when compared with $1,497.7 million for the nine months
ended September 30, 2007.
Infrastructure services revenue decreased 13.7% for the nine month period ended
September 30, 2008 compared with the nine month period ended September 30, 2007
due to weakness in demand for network design and consulting projects and the
shift of project-based infrastructure work to managed outsourcing contracts, all
of which is expected to continue.
21
Core maintenance revenue declined 11.0% in the current period compared with the
prior-year period. The company expects the secular decline of core maintenance
to continue.
Services gross profit was 18.4% in the first nine months of 2008 compared with
16.7% in the year-ago period. Services operating profit percent was 2.9% in the
nine months ended September 30, 2008 compared with 1.7% in the nine months ended
September 30, 2007. Services margins in 2008 reflect a decline in pension
expense in gross profit of $51.1 million (income of $25.7 million for the nine
months ended September 30, 2008 compared with expense of $25.4 million in the
year-ago period) and a decline in pension expense in operating income of $60.8
million (income of $27.8 million for the nine months ended September 30, 2008
compared with expense of $33.0 million in the year-ago period).
In the Technology segment, customer revenue was $468 million in the current
period compared with $538 million in the year-ago period for a decrease of
13.1%. The decline in Technology revenue reflects the NUL revenue decline of
$18.8 million per quarter beginning in the June 2008 quarter, as discussed
above. Foreign currency translation had a positive impact of approximately 4-
percentage points on Technology revenue in the current period compared with the
prior-year period.
Revenue for the company's enterprise-class servers, which includes the company's
ClearPath and ES7000 product families, decreased 6.6% for the nine months ended
September 30, 2008 compared with the nine months ended September 30, 2007. The
company expects the secular decline of enterprise-class servers to continue.
Revenue from specialized technologies, which includes the company's payment
systems products, third-party technology products and royalties from the
company's agreement with NUL, decreased 34.2% for the nine months ended
September 30, 2008 compared with the nine months ended September 30, 2007. The
decline was principally due to the ending of the NUL royalties, discussed above.
Technology gross profit was 43.4% in the nine months ended September 30, 2008
compared with 43.7% in the nine months ended September 30, 2007. Technology
operating profit percent was 3.1% in the current period compared with 2.4% in
the year-ago period.
NEW ACCOUNTING PRONOUNCEMENTS
See note (j) of the Notes to Consolidated Financial Statements for a full
description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and financial condition.
FINANCIAL CONDITION
Cash and cash equivalents at September 30, 2008 were $493.8 million compared
with $830.2 million at December 31, 2007.
During the nine months ended September 30, 2008, cash provided by operations was
$116.4 million compared with cash usage of $74.2 million for the nine months
ended September 30, 2007. The increase in operating cash flow was primarily
driven by working capital improvements and a lower net loss. Cash expenditures
in the current-year period related to cost-reduction actions (which are included
in operating activities) were approximately $49 million compared with $124
million for the prior-year period. Cash expenditures for prior year cost-
reduction actions are expected to be approximately $6 million for the remainder
of 2008, resulting in an expected cash expenditure of approximately $55 million
in 2008 compared with $151.7 million in 2007. The prior-year period included a
tax refund of approximately $58 million.
Cash used for investing activities for the nine months ended September 30, 2008
was $226.4 million compared with cash usage of $219.5 million during the nine
months ended September 30, 2007. Items affecting cash used for investing
activities were the following: Net purchases of investments were $9.8 million
for the nine months ended September 30, 2008 compared with net purchases of $7.7
million in the prior-year period. Proceeds from investments and purchases of
investments represent derivative financial instruments used to manage the
company's currency exposure to market risks from changes in foreign currency
exchange rates. In addition, in the current period, the investment in
marketable software was $65.9 million compared with $73.0 million in the year-
ago period, capital additions of properties were $51.8 million in 2008 compared
with $56.4 million in 2007 and capital additions of outsourcing assets were
$96.6 million in 2008 compared with $108.4 million in 2007. Cash used for
investing activities in the nine months ended September 30, 2007 included $28.0
million of proceeds from the sale of the company's media business. During the
nine months ended September 30, 2007, the company financed $22.7 million of
internal use software licenses.
22
Cash used for financing activities during the nine months ended September 30,
2008 was $200.9 million compared with $5.4 million of cash provided during the
nine months ended September 30, 2007. The change was principally due to the
January 2008 redemption, at par, of all $200 million of the company's 7 7/8%
senior notes due April 1, 2008.
At September 30, 2008, total debt was $1.06 billion, a decrease of $200.8
million from December 31, 2007.
The company has a three-year, secured revolving credit facility which expires in
May 2009 that provides for loans and letters of credit up to an aggregate of
$275 million. Borrowings under the facility bear interest based on short-term
rates and the company's credit rating. The credit agreement contains customary
representations and warranties, including no material adverse change in the
company's business, results of operations or financial condition. It also
contains financial covenants requiring the company to maintain certain interest
coverage, leverage and asset coverage ratios and a minimum amount of liquidity,
which could reduce the amount the company is able to borrow. The credit
facility also includes covenants limiting liens, mergers, asset sales, dividends
and the incurrence of debt. Events of default include nonpayment, 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, discussed
below. The credit facility is secured by the company's assets, except that the
collateral does not include accounts receivable that are subject to the
receivable facility, U.S. real estate or the stock or indebtedness of the
company's U.S. operating subsidiaries. As of September 30, 2008, there were
letters of credit of $62.6 million issued under the facility and there were no
cash borrowings.
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.
On May 16, 2008, the company entered into a new three-year, U.S. trade
accounts receivable facility. Under this facility, the company has agreed to
sell, on an ongoing basis, through Unisys Funding Corporation I, a wholly owned
subsidiary, up to $150 million of interests in eligible U.S. trade accounts
receivable. The facility replaced the company's U.S. trade accounts receivable
facility that was scheduled to terminate on May 28, 2008. Under the new
facility, receivables are sold at a discount that reflects, among other things,
a yield based on LIBOR. The new facility includes customary representations and
warranties, including no material adverse change in the company's business,
assets, liabilities, operations or financial condition. It also requires the
company to maintain a minimum fixed charge coverage ratio and requires the
maintenance of certain ratios related to the sold receivables. The facility will
be subject to early termination if, as of February 28, 2010, the company's
6.875% Senior Notes due 2010 have not been refinanced or extended to a date
later than May 16, 2011. Other termination events include failure to perform
covenants, materially incorrect representations and warranties, change of
control and default under debt aggregating at least $25 million. At September
30, 2008 and December 31, 2007, the company had sold $144.5 million and $140
million, respectively, of eligible receivables.
At September 30, 2008, the company has met all covenants and conditions under
its various lending and funding agreements. The company expects to continue to
meet these covenants and conditions. The company believes that it will have
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, which
expires on December 1, 2008, covering $440 million of debt or equity securities.
The company expects to file a replacement registration statement with the
Securities and Exchange Commission.
23
Stockholders' equity increased $13.5 million during the nine months ended
September 30, 2008, principally reflecting an improvement of $82.0 million in
the funded status of the company's defined benefit plans and $34.0 million from
share-based plans. Partially offsetting these increases was a net loss of $72.1
million and foreign currency translation losses of $31.6 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events and
include any statement that does not directly relate to any historical or current
fact. Words such as "anticipates," "believes," "expects," "intends," "plans,"
"projects" and similar expressions may identify such forward-looking statements.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties and other factors that could cause the company's actual results to
differ materially from expectations. Factors that could affect future results
include, but are not limited to, those discussed below. Any forward-looking
statement speaks only as of the date on which that statement is made. The
company assumes no obligation to update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made.
Factors that could affect future results include the following:
THE COMPANY'S BUSINESS IS AFFECTED BY CHANGES IN GENERAL ECONOMIC AND BUSINESS
CONDITIONS. The company is currently facing a difficult economic environment
that has affected its business. In particular, weakness in the financial
services industry contributed to the decline in the company's revenue in the
third quarter of 2008. In addition, during the recent period of disruption in
the financial markets, the market price for the company's common shares has
declined substantially. If current economic conditions continue or worsen, the
company's ability to access credit or other capital markets could be affected.
Adverse economic conditions, among other things, could also result in a decline
in the IT budgets of the company's commercial and public sector customers, and
the tightening of credit in financial markets could adversely affect the
ability of the company's customers to obtain financing for operations, all of
which could result in a decrease in demand for the company's products and
services. The company could also face a consolidation of firms in the
financial services industry, which could also result in a decrease in demand.
The company's business could also be affected by acts of war, terrorism or
natural disasters. Current world tensions could escalate, and this could have
unpredictable consequences on the world economy and on the company's business.
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON THE SUCCESS OF ITS REPOSITIONING
STRATEGY. The company's future results will depend in part on the success of
its efforts to control and reduce costs. Future results will also depend in
part on the success of the company's focused investment and sales and marketing
strategies. These 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. Furthermore, the company's institutional
stockholders may attempt to influence these strategies.
THE COMPANY FACES AGGRESSIVE COMPETITION IN THE INFORMATION SERVICES AND
TECHNOLOGY MARKETPLACE. The information services and technology markets in
which the company operates include a large number of companies vying for
customers and market share both domestically and internationally. The company's
competitors include consulting and other professional services firms, systems
integrators, outsourcing providers, infrastructure services providers, computer
hardware manufacturers and software providers. Some of the company's competitors
may develop competing products and services that offer better price-performance
or that reach the market in advance of the company's offerings. Some competitors
also have or may develop greater financial and other resources than the company,
with enhanced ability to compete for market share, in some instances through
significant economic incentives to secure contracts. Some also may be better
able to compete for skilled professionals. Any of these factors could lead to
reduced demand for the company's products and services and could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
24
THE COMPANY FACES VOLATILITY AND RAPID TECHNOLOGICAL CHANGE IN ITS INDUSTRY.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend in
part on the company's ability to anticipate and respond to these market trends
and to design, develop, introduce, deliver or obtain new and innovative products
and services on a timely and cost-effective basis. The company may not be
successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON ITS ABILITY TO RETAIN SIGNIFICANT
CLIENTS. The company has a number of significant long-term contracts with
clients, including governmental entities, and its future success will depend, in
part, on retaining its relationships with these clients. The company could lose
clients due to contract expiration, conversion to a competing service provider,
disputes with clients or a decision to in-source services, including for
contracts with governmental entities as part of the rebid process. The company
could also lose clients as a result of their merger, acquisition or business
failure. The company may not be able to replace the revenue and earnings from
any such lost client.
THE COMPANY'S FUTURE RESULTS WILL DEPEND IN PART ON ITS ABILITY TO GROW
OUTSOURCING. The company's outsourcing contracts are multiyear engagements
under which the company takes over management of a client's technology
operations, business processes or networks. In a number of these arrangements,
the company hires certain of its clients' employees and may become responsible
for the related employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. The company will need to
have available sufficient financial resources in order to take on these
obligations and make these investments.
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, and
realization of expected profitability of existing outsourcing contracts. These
risks could result in an impairment of a portion of the associated assets, which
are tested for recoverability quarterly.
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
continue 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 and the portfolio of solutions the company offers
for specific industries. It will also depend on an improvement in the
utilization of services delivery personnel and on the company's ability to work
through disruptions in this business related to the repositioning actions. In
addition, profit margins in this business are largely a function of the rates
the company is able to charge for services and the chargeability of its
professionals. If the company is unable to attain sufficient rates and
chargeability for its professionals, profit margins will suffer. The rates the
company is able to charge for services are affected by a number of factors,
including clients' perception of the company's ability to add value through its
services; introduction of new services or products by the company or its
competitors; pricing policies of competitors; and general economic conditions.
Chargeability is also affected by a number of factors, including the company's
ability to transition employees from completed projects to new engagements, and
its ability to forecast demand for services and thereby maintain an appropriate
headcount.
25
FUTURE RESULTS WILL ALSO DEPEND, IN PART, ON MARKET DEMAND FOR THE COMPANY'S
HIGH-END ENTERPRISE SERVERS AND MAINTENANCE ON THESE SERVERS. In the company's
technology business, high-end enterprise servers and maintenance on these
servers continue to experience secular revenue declines. The company continues
to apply its resources to develop value-added software capabilities and
optimized solutions for these server platforms which provide competitive
differentiation. Future results will depend, in part, on customer acceptance of
new ClearPath systems and the company's ability to maintain its installed base
for ClearPath and to develop next-generation ClearPath products that are
purchased by the installed base. 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 growth potential in
the market for high-end, Intel-based servers running Microsoft and Linux
operating system software. However, 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. Future results of the technology business will also depend, in part,
on the successful execution of the company's arrangements with NEC.
THE COMPANY'S CONTRACTS WITH U.S. GOVERNMENTAL AGENCIES MAY BE SUBJECT TO
AUDITS, CRIMINAL PENALTIES, SANCTIONS AND OTHER EXPENSES AND FINES. The company
frequently enters into contracts with governmental entities. U.S. government
agencies, including the Defense Contract Audit Agency and the Department of
Labor, routinely audit government contractors. These agencies review a
contractor's performance under its contracts, cost structure and compliance with
applicable laws, regulations and standards. The U.S. government also may review
the adequacy of, and a contractor's compliance with contract terms and
conditions, its systems and policies, including the contractor's purchasing,
property, estimating, billing, accounting, compensation and management
information systems. Any costs found to be overcharged or improperly allocated
to a specific contract or any amounts improperly billed for products or services
will be subject to reimbursement to the government. If an audit uncovers
improper or illegal activities, the company may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or
prohibition from doing business with the U.S. government.
THE COMPANY'S CONTRACTS MAY NOT BE AS PROFITABLE AS EXPECTED OR PROVIDE THE
EXPECTED LEVEL OF REVENUES. A number of the company's long-term contracts for
infrastructure services, outsourcing, help desk and similar services do not
provide for minimum transaction volumes. As a result, revenue levels are not
guaranteed. In addition, some of these contracts may permit customer termination
or may impose other penalties if the company does not meet the performance
levels specified in the contracts.
The company's contracts with governmental entities are subject to the
availability of appropriated funds. These contracts also contain provisions
allowing the governmental entity to terminate the contract at the governmental
entity's discretion before the end of the contract's term. In addition, if the
company's performance is unacceptable to the customer under a government
contract, the government retains the right to pursue remedies under the affected
contract, which remedies could include termination.
Certain of the company's outsourcing agreements require that the company's
prices be benchmarked and provide for a downward adjustment to those prices if
the pricing for similar services in the market has changed. As a result,
anticipated revenues from these contracts may decline.
Some of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted services
and products at an agreed-upon fixed price. At times the company has experienced
problems in performing some of these fixed-price contracts on a profitable basis
and has provided periodically for adjustments to the estimated cost to complete
them. Future results will depend on the company's ability to perform these
services contracts profitably.
26
THE COMPANY MAY FACE DAMAGE TO ITS REPUTATION OR LEGAL LIABILITY IF ITS CLIENTS
ARE NOT SATISFIED WITH ITS SERVICES OR PRODUCTS. The success of the company's
business is dependent on strong, long-term client relationships and on its
reputation for responsiveness and quality. As a result, if a client is not
satisfied with the company's services or products, its reputation could be
damaged and its business adversely affected. Allegations by private litigants or
regulators of improper conduct, as well as negative publicity and press
speculation about the company, whatever the outcome and whether or not valid,
may harm its reputation. For example, in September 2007, an article in the
Washington Post alleged that the FBI is investigating the company in connection
with its alleged failure to detect cyber intrusions at the Department of
Homeland Security, a client of the company, and its alleged failure to disclose
these security breaches once detected. The company disputed the allegations
made in the article. In addition to harm to reputation, if the company fails to
meet its contractual obligations, it could be subject to legal liability, which
could adversely affect its business, operating results and financial condition.
FUTURE RESULTS WILL DEPEND IN PART ON THE PERFORMANCE AND CAPABILITIES OF THIRD
PARTIES. The company has commercial relationships with suppliers, channel
partners and other parties that have complementary products, services or skills.
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.
THE COMPANY IS SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY. More
than half of the company's total revenue is derived from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, import or export licensing requirements, multiple and
possibly overlapping and conflicting tax laws, new tax legislation, weaker
intellectual property protections in some jurisdictions and additional legal and
regulatory compliance requirements applicable to businesses that operate
internationally, including the Foreign Corrupt Practices Act and non-U.S. laws
and regulations.
THE COMPANY COULD FACE BUSINESS AND FINANCIAL RISK IN IMPLEMENTING FUTURE
ACQUISITIONS OR DISPOSITIONS. As part of the company's business strategy, it
may from time to time consider acquiring complementary technologies, products
and businesses and disposing of existing technologies, products and businesses
that may no longer be in alignment with its strategic direction, including
transactions of a material size. Any acquisitions may result in the incurrence
of substantial additional indebtedness or contingent liabilities. Acquisitions
could also result in potentially dilutive issuances of equity securities and an
increase in amortization expenses related to intangible assets. Additional
potential risks associated with acquisitions include integration difficulties;
difficulties in maintaining or enhancing the profitability of any acquired
business; risks of entering markets in which the company has no or limited prior
experience; potential loss of employees or failure to maintain or renew any
contracts of any acquired business; and expenses of any undiscovered or
potential liabilities of the acquired product or business, including relating to
employee benefits contribution obligations or environmental requirements.
Potential risks with respect to dispositions include difficulty finding buyers
or alternative exit strategies on acceptable terms in a timely manner; potential
loss of employees; and dispositions at unfavorable prices or on unfavorable
terms, including relating to retained liabilities. Further, with respect to
both acquisitions and dispositions, management's attention could be diverted
from other business concerns. Current adverse credit conditions could also
affect the company's ability to consummate acquisitions or divestments. The
risks associated with acquisitions and dispositions could have a material
adverse effect upon the company's business, financial condition and results of
operations. There can be no assurance that the company will be successful in
consummating future acquisitions or dispositions on favorable terms or at all.
THE COMPANY'S SERVICES OR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS. The company cannot be sure that its services and products do
not infringe on the intellectual property rights of third parties, and it may
have infringement claims asserted against it or against its clients. These
claims could cost the company money, prevent it from offering some services or
products, or damage its reputation.
PENDING LITIGATION COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS OR CASH
FLOW. There are various lawsuits, claims, investigations and proceedings that
have been brought or asserted against the company, which arise in the ordinary
course of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. See note (k) of the notes to financial statements for
more information on litigation. The company believes that it has valid defenses
with respect to legal matters pending against it. Litigation is inherently
unpredictable, however, and it is possible that the company's results of
operations or cash flow could be affected in any particular period by the
resolution of one or more of the legal matters pending against it.
27
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, 2008.
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were not effective as of September 30, 2008 due to the material
weakness at December 31, 2007, described below. To address the material
weakness referenced below, the Company performed additional analysis and
performed other procedures in order to prepare the unaudited quarterly
consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America (U.S. GAAP). Accordingly,
management believes that the consolidated financial statements included in this
Quarterly Report on Form 10-Q fairly present, in all material respects, our
financial condition, results of operations and cash flows for the periods
presented.
As previously reported in the Company's Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission on February 29, 2008, in connection
with Company's assessment of the effectiveness of its internal control over
financial reporting at the end of its last fiscal year, management identified
the following material weakness in the Company's internal control over financial
reporting as of December 31, 2007 that is in the process of being remediated as
of September 30, 2008: it did not have a sufficient number of personnel with an
appropriate level of U.S. GAAP knowledge and experience commensurate with its
financial reporting requirements. This section of Item 4, "Controls and
Procedures," should be read in conjunction with Item 9A, "Controls and
Procedures," included in the Company's Form 10-K for the year ended December 31,
2007, for additional information on Management's Report on Internal Controls
Over Financial Reporting.
Management is working to address the material weakness and is committed to
remediate the material weakness as timely as possible. The Company has taken
and plans to take the following actions to remediate its material weakness:
* the Company has hired a new corporate controller and reassigned
responsibilities among key accounting personnel,
* The Company has added and will add additional personnel with an
appropriate level of U.S. GAAP tax knowledge and experience to its
income tax accounting function and provide additional income tax
accounting training to personnel responsible for its foreign
subsidiaries,
* The Company has added personnel with an appropriate level of U.S. GAAP
accounting knowledge and experience in two locations, and
* The Company will continue to supplement existing resources with
consultants where needed.
Management believes that the above actions, when fully implemented, will be
effective in remediating this material weakness. However, the Company's
material weakness will not be considered remediated until the above personnel
are in place for a period of time and the controls are tested and management
concludes that these controls are properly designed and operating effectively.
The evaluation discussed above identified a change in the Company's internal
control over financial reporting regarding the implementation, as of January 1,
2008, of a financial management and project accounting system, in the Company's
Federal government group. This system is expected to increase the efficiency of
processing transactions and produce more accurate and timely information to
address the various operational and compliance needs of the Company's Federal
government group. The Company conducted and will continue to conduct post-
implementation monitoring to ensure internal control over financial reporting is
properly designed and operating effectively. To date, the Company has not
experienced any significant difficulties in connection with the implementation
or operation of this system.
28
Part II - OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings
- ------- -----------------
Information with respect to litigation is set forth in note (k) of the notes to
financial statements, and such information is incorporated herein by reference.
Item 1A. Risk Factors
- ------- ------------
See "Factors that may affect future results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
risk factors.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The company's 2008 Annual Meeting of Stockholders (Annual
Meeting) was held on July 24, 2008 in Philadelphia, Pennsylvania.
(b) The following matters were voted upon at the Annual Meeting and received
the following votes:
(1) Election of Directors as follows:
J.P. Bolduc - 257,202,172 votes for; 77,436,402 votes withheld
James J. Duderstadt - 256,814,554 votes for; 77,824,020 votes withheld
Matthew J. Espe - 265,045,369 votes for; 69,593,205 votes withheld
Denise K. Fletcher - 265,100,626 votes for; 69,537,948 votes withheld
Clay B. Lifflander - 291,685,167 votes for; 42,953,407 votes withheld
(2) Ratification of the selection of the company's independent registered
public accounting firm for 2008 - 327,201,566 votes for; 3,186,001 votes
against; 4,251,007 abstentions.
Item 6. Exhibits
- ------- --------
(a) Exhibits
See Exhibit Index
29
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 6, 2008 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Scott Hurley
----------------------
Scott Hurley
Vice President and
Corporate Controller
(Chief Accounting Officer)
30
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 December 6, 2007
(incorporated by reference to Exhibit 3 to the registrant's Current
Report on Form 8-K dated December 6, 2007)
10.1 Agreement, dated October 6, 2008, between Unisys Corporation and
J. Edward Coleman (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated October 7, 2008)
10.2 Executive Employment Agreement, dated October 7, 2008, between Unisys
Corporation and J. Edward Coleman (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
October 7, 2008)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of J. Edward Coleman required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of J. Edward Coleman required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Exhibit 12
UNISYS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
($ in millions)
Nine
Months
Ended Years Ended December 31
Sept. 30 -----------------------------------
2008 2007 2006 2005 2004 2003
-------- ---- ---- ---- ---- ----
Fixed charges
Interest expense $ 64.3 $ 76.3 $ 77.2 $ 64.7 $ 69.0 $ 69.6
Interest capitalized during
the period 6.8 9.1 9.9 15.0 16.3 14.5
Amortization of debt issuance
expenses 3.0 3.8 3.8 3.4 3.5 3.8
Portion of rental expense
representative of interest 41.9 55.9 56.7 60.9 61.6 55.2
----- ------ ------ ------ ------ -----
Total Fixed Charges 116.0 145.1 147.6 144.0 150.4 143.1
===== ====== ====== ====== ====== =====
Earnings
Income (loss) from continuing
operations before income taxes .3 3.5 (250.9)(170.9) (76.0) 380.5
Add (deduct) the following:
Share of loss (income) of
associated companies - - 4.5 (7.2) (14.0) (16.2)
Amortization of capitalized
interest** 9.7 17.8 13.7 12.9 11.7 10.2
----- ------ ------ ------ ------ -----
Subtotal 10.0 21.3 (232.7)(165.2) (78.3) 374.5
Add fixed charges per above 116.0 145.1 147.6 144.0 150.4 143.1
Less interest capitalized during
the period (6.8) (9.1) (9.9) (15.0) (16.3) (14.5)
----- ------ ------ ------ ------ ------
Total earnings (loss) $119.2 $157.3 $(95.0)$(36.2)$ 55.8 $503.1
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges 1.03 1.08 * * * 3.52
===== ====== ====== ====== ====== =====
* Earnings for the years ended December 31, 2006, 2005 and 2004 were inadequate
to cover fixed charges by $242.6 million, $180.2 million and $94.6 million,
respectively.
** The amount of amortization of capitalized interest as well as the resulting
ratio of earnings to fixed charges for 2007 have been restated to increase the
amortization by $3.3 million and the ratio by .02, respectively.
Exhibit 31.1
CERTIFICATION
I, J. Edward Coleman, 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 6, 2008
/s/ J. Edward Coleman
-------------------------
Name: J. Edward Coleman
Title: Chairman of the Board 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 6, 2008
/s/ Janet Brutschea Haugen
-------------------------
Name: Janet Brutschea Haugen
Title: Senior Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
I, J. Edward Coleman, Chairman of the Board 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, 2008 (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 6, 2008
/s/ J. Edward Coleman
- ------------------------
J. Edward Coleman
Chairman of the Board 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, 2008 (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 6, 2008
/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.