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August 4, 2006
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Brad Skinner, Accounting Branch Chief
Re: Unisys Corporation
Form 10-K for Fiscal Year Ended December 31, 2005
File No. 001-08729
Dear Mr. Skinner:
On behalf of Unisys Corporation (the "Company"), set forth below are the
Company's responses to the comments of the Staff of the Securities and Exchange
Commission regarding the above referenced filings set forth in the letter dated
July 21, 2006. For your convenience, we have repeated each of the comments set
forth in the Staff's letter and followed each comment with the Company's
response.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
EXHIBIT 13, PORTIONS OF ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 33
COMMENT 1
We note your response to prior comment 2 where you indicate that the Company's
principle PCS offering is select operating system software updates and in 2005,
the costs associated with providing such software updates was immaterial to the
financial statements. In order to satisfy criteria (c) under paragraph 59 of
SOP 97-2 the estimated cost of providing PCS, which would include service costs
as well as software updates, must be insignificant. Please address the
materiality of all costs associated with PCS including the costs of providing
support services in 2005 for each product where revenue related to PCS is
recognized with the initial license. Further describe how these actual costs
relate to your estimated PCS costs at inception of your arrangements.
RESPONSE TO COMMENT 1
Total PCS revenue recognized together with initial licensing fees during 2005
was approximately $2 million and the total costs associated with providing this
PCS was approximately $1 million during 2005. These costs generally include
engineering and software development labor costs. There are no other costs,
including support service costs, associated with this PCS arrangement
recognized with the initial license term. Accordingly, the total costs of
providing this PCS during 2005 of approximately $1 million include all costs of
providing PCS recognized with the initial license term. The Company has
concluded that these costs are insignificant and therefore satisfy criteria (c)
of paragraph 59 of SOP 97-2.
The Company's historical experience has been that the estimated cost of
providing this PCS during the arrangement is insignificant, and the actual
total costs incurred during 2005 of approximately $1 million, which are not
material to the Company's consolidated financial statements, are consistent
with our estimates.
SIGNIFICANT ITEM, PAGE 36
COMMENT 2
Your response to prior comment 1 indicates that, prior to the third quarter of
2005, you had forecasted pretax earnings for the full year of 2005. Explain to
us the specific factors that led you to revise your projections during the
third quarter of 2005. Also, provide us with copies or reasonably detailed
summaries of your projected results for 2005 as of March 31, June 30 and
September 30, 2005.
RESPONSE TO COMMENT 2
The specific factors that led the Company to revise its full-year 2005
projections during the third quarter of 2005 included the following:
* The Company's July 20, 2005 News Release forecasted a net loss for the
September 30, 2005 quarter of 3 to 5 cents per share. The preliminary results
reported in the October 18, 2005 News Release were a net loss of 16 cents per
share.
* Services orders declined 20% in the third quarter of 2005 compared with an
increase of 12% in the second quarter of 2005.
* Personnel utilization decreased during the quarter and was forecast to
remain weak during the remainder of 2005.
* Customer revenue in the Company's Technology segment declined 29% in the
third quarter of 2005 compared with a 13% decline in the second quarter of 2005.
This decline was significantly greater than prior quarters and resulted in a
significant reduction in forecasted 2005 Technology segment profit.
* The strategic actions announced during the accounting close for the third
quarter of 2005 were expected to have a near-term disruptive effect on the
Company's results of operations.
Also, during the accounting close for the third quarter of 2005, the Company was
preparing its initial 2006 plan and during that process the Company identified
increased competitive pressures in the marketplace, which would result in
further price and margin deterioration during the remainder of 2005.
As a result, on October 18, 2005, the Company significantly reduced its outlook
for full year 2005 earnings and announced that it expected to incur a full year
2005 pretax loss in the range of $168 million to $193 million.
Summaries of the Company's projected pretax earnings during 2005 were as
follows:
Projected Date of News Estimated Full Year 2005
Results as of Release Pretax Income (Loss)
- ----------------- ---------------- -----------------------------------
December 31, 2004 January 25, 2005 $65 million to $115 million
March 31, 2005 April 14, 2005 No change from 1/25/05 News Release
June 30, 2005 July 20, 2005 $(15) million to $10 million
September 30, 2005 October 18, 2005 $(168) million to $(193) million
The Company also decided in October 2005 and announced in its October 18, 2005
News Release that it was initiating actions to reduce costs and drive future
profitable growth. The actions were expected to be implemented through 2006
and included plans to reduce headcount by 10% of the current workforce over the
next year, resulting in cost restructuring charges of approximately $250 - $300
million through 2006. While the Company had not completed its 2006 plan during
the accounting close for the third quarter of 2005, it believed that the
combination of cost restructuring charges of $250 to $300 million and the
likelihood, at that time, of an increase in pension expense in 2006 by
approximately 25% would result in a pretax loss in 2006. Prior to the third
quarter of 2005, Company management had not decided to initiate such actions
during 2006.
The Company concluded that the following specific negative evidence, which
originated during the accounting close for the third quarter of 2005, resulted
in it being more likely than not that a significant portion of the deferred tax
asset would not be realized:
* Inability to achieve third quarter and full year forecasted income for
2005 by a significant amount.
* The actions announced in October 2005 created uncertainty about the
profitability of future periods, and the Company's ability to achieve
forecasted results in the near future. As a result, the Company concluded that
it was likely that it would be in a three-year cumulative loss position at the
end of 2006.
* The Company's fourth quarter results of operations have historically been
its most profitable. However, actual third quarter orders were significantly
less than originally expected. As a result, during the accounting close for the
third quarter of 2005, the Company determined that its fourth quarter 2005
earnings would be insufficient to provide for full year earnings during 2005.
COMMENT 3
We note from disclosure in your MD&A overview in your Form 10-Q for the period
ended June 30, 2005, that several negative trends were expected to continue to
impact 2005 results including; development of new software and transitioning to
new processes, declining sales of large enterprise servers and higher pension
expense. Given these trends and the apparent uncertainty regarding the
realizability of your deferred tax assets, tell us why you believe disclosure
regarding your deferred tax assets, and the possible impact of any change in
your assessment of the recoverability of those assets, in your June 30, 2005
Form 10-Q was adequate. Refer to Section III.B.3 of SEC Release 33-8350.
RESPONSE TO COMMENT 3
Included in the Company's Financial Condition section of the MD&A of its June
30, 2005 Form 10-Q were the following deferred tax asset disclosures:
"The company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes,' which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or the entire
deferred tax asset will not be realized."
"At June 30, 2005, the company had deferred tax assets in excess of deferred
tax liabilities of $2,135 million. For the reasons cited below, management
determined that it is more likely than not that $1,625 million of such assets
will be realized, therefore resulting in a valuation allowance of $510 million."
"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 addition to the repatriation provisions discussed above, the Jobs Act
extends the excess foreign tax credit carry forward period from five to 10
years and limits the carry back period to one year. The company's deferred tax
asset included approximately $183 million of foreign tax credit carry forwards.
The Jobs Act should provide the company with additional opportunities to fully
utilize this portion of the deferred tax asset."
"Approximately $4.9 billion of future taxable income (predominately U.S.)
ultimately is needed to realize the net deferred tax assets at June 30, 2005.
Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. Factors that may affect the
company's ability to achieve sufficient forecasted taxable income include, but
are not limited to, the following: increased competition, a continuing decline
in sales or margins, loss of market share, delays in product availability or
technological obsolescence. See "Factors that may affect future results"
below."
As stated above, at June 30, 2005 the principal factor used by the Company to
assess the likelihood of realization of its deferred tax assets was the
Company's forecast of future taxable income which considered the several
negative trends referred to in the Overview section of the MD&A. After giving
consideration to these negative trends, the Company continued to forecast
pretax profit for the full-year 2005. It was not until the accounting close
for the third quarter of 2005 that the Company's forecast for full-year 2005
changed to a pretax loss. As stated in the Company's June 12, 2006 response to
prior comment 1, during the normal quarterly close process in the third quarter
of 2005, the Company evaluated the realizability of its deferred tax assets by
considering its losses in 2004, its updated view of 2005 and the likely loss in
2006 due to the restructuring charges announced in October 2005. As a result
the Company concluded, during the accounting close for the third quarter of
2005, that it was likely to be in a cumulative loss position for the three
years ending December 31, 2006. In addition at that time, the Company
specifically considered paragraph 23 of SFAS 109, which states that "forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years" as well as
paragraph 103 which states the following: "A cumulative loss in recent years is
a significant piece of negative evidence that is difficult to overcome."
In its preparation of the June 30, 2005 MD&A, the Company followed the guidance
within FR-72, "Commission Guidance Regarding Management's Discussion and
Analysis of Financial Condition and Results of Operations". The Company
believes that its MD&A disclosure was responsive to the requirements of FR-72
related to the identification of material trends and uncertainties. The
negative trends and uncertainties identified within the Overview section of the
Company's June 30, 2005 MD&A were considered by the Company in forecasting full-
year 2005 results, and after considering these negative trends and
uncertainties, the Company continued to estimate full-year 2005 pretax income.
The principal factors giving rise to the need for an increase in the valuation
allowance for deferred taxes during the accounting close for the September 30,
2005 quarter were, as noted in the response to comment 2 above, (i) the
shortfall in actual third quarter 2005 earnings as compared to the Company's
forecast, (ii) the decline in orders during the third quarter of 2005, and
(iii) the announcement of the restructuring actions to be completed during 2006.
The Company concluded that these factors would likely result in a pretax loss
for 2005 and 2006, in addition to the reported pretax loss in 2004.
As noted above, the Company's June 30, 2005 MD&A disclosed that the ultimate
realization of the net deferred tax assets would be significantly impacted by
the Company's inability to achieve forecasted taxable income, since significant
future taxable income was needed to realize the net deferred tax assets as of
June 30, 2005. Accordingly, the Company concluded that this disclosure, in
addition to the other factors identified within the MD&A that could affect
future results of operations, adequately described the material uncertainties
surrounding the realization of the Company's net deferred tax assets as of June
30, 2005.
Based on all known material trends and uncertainties as of June 30, 2005, the
Company believes that the June 30, 2005 MD&A identified and analyzed those
trends and uncertainties and considered them in forecasting full-year 2005
earnings. Furthermore, the Company has concluded that the disclosure of the
uncertainties surrounding the realization of its net deferred tax assets
appropriately described the significant assumptions used by the Company in
evaluating the realization of deferred tax assets, along with the impact to the
financial statements of changes in those assumptions surrounding forecasted
taxable income.
* * * *
The Company hopes that the above is responsive to the Staff's comments.
Very truly yours,
UNISYS CORPORATION
Janet Brutschea Haugen
Senior Vice President and Chief Financial Officer
cc: David Edgar
Mark Thomas