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June 12, 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
Form 10-Q for the Period Ended March 31, 2006
Form 8-K Filed April 18, 2006
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
May 26, 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview, page 12
Comment 1
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We note you recorded a $1.6 billion adjustment to your deferred tax valuation
allowance in the third quarter ended September 30, 2005. Your disclosures
previously indicated that you considered your ability to generate future
taxable income (predominantly in the U.S.) in assessing the realizability of
the net deferred tax assets. Your current disclosures indicate that you
considered your historical pretax losses recognized both in fiscal 2004 and in
the first nine months of 2005 as well as the expected short term negative
impact on operations as a result of your planned business restructurings in
2006. SFAS 109 requires that all available evidence both positive and negative
should be considered to determine whether a valuation allowance is needed.
Further, it states that the historical information should be supplemented by
all currently available information about future years. We note the following
forward looking statements which you have made and disclosed in within the Form
10-K:
* Your restructuring actions to be conducted in 2006 are expected to yield
approximately $250 million of annualized cost savings on a run-rate basis by
the end of 2007;
* In January 2006, you restructured an agreement with your equity partners in
your iPSL joint venture whereby you expect an increase in your revenues of $150
million over the 2006 to 2010 timeframe and;
* The Company believes that the actions being taken by management, including
the two listed above, will enable the Company in the coming years to accelerate
revenue growth and significantly expand its margins and profitability.
Based on the current disclosures it is unclear to us why the company recorded
the valuation allowance during the 3rd quarter ended September 30, 2005 after
considering the guidance in paragraphs 20-25 of SFAS 109. Provide us with
specific evidence which addresses the following:
* Consideration given to the planned restructuring activities to be entered
into in fiscal 2006 and the related impact these activities are expected to
have on both domestic and international operations;
* Address whether the company had a change in their interpretation of SFAS 109
when they reconsidered their previous position of focusing on domestic
operations to generate future taxable income to one where you focused on
historical operating results;
* Address the timing of the recording of the valuation allowance;
* Address how your planned restructuring of your business model and planned
divestiture of non-core assets (i.e. undefined) impacted your decision to
record the valuation allowance.
Response to Comment 1
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For the third quarter of 2005, the Company reported a pretax loss of $80
million and, based on updated estimates, disclosed that it expected to report a
full-year 2005 pretax loss of approximately $200 million. Prior to the third
quarter of 2005, the Company had forecasted pretax earnings for the full year
of 2005. As a result of the significant deterioration in the Company's 2005
results, during the accounting close for the third quarter of 2005, management
initiated a recovery plan that included future reductions in its work force,
which were to be funded by divestitures of non-core assets and businesses.
Consistent with the Company's stated accounting policy, during the normal
quarterly close process, the Company evaluated the realizability of its
deferred tax assets by considering its loss in 2004, its updated view of 2005
results and the likely loss in 2006 due to the negative impact of restructuring
charges. The Company considered all evidence that was available - both positive
and negative - to determine if it was more likely than not that the deferred
tax asset would be realized. 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." Furthermore, the Company also considered paragraph
103 of SFAS 109 which states the following:
The Board believes that the more likely than not criterion required by this
Statement is capable of appropriately dealing with all forms of negative
evidence, including cumulative losses in recent years. That criterion
requires positive evidence of sufficient quality and quantity to
counteract negative evidence in order to support a conclusion that, based
on the weight of all available evidence, a valuation allowance is not
needed. A cumulative loss in recent years is a significant piece of
negative evidence that is difficult to overcome.
The Company considered all available evidence during the evaluation of its
deferred tax assets. Due to the inherent uncertainty of the timing and results
of the restructuring activities, the continued volatility of the technology
industry, and the likelihood of continued near-term losses, the positive
evidence from the restructuring activities could not outweigh the significant
negative evidence of the recent cumulative losses. Furthermore, during the
accounting close for the third quarter of 2005, the Company initiated its
review of possible sales and divestitures of non core assets. The ultimate
outcome of these sales and divestitures were uncertain due in part to the fact
that the Company was still identifying the non core assets to be sold and the
success of the sales and divestitures was dependent on finding buyers willing
to purchase the non core assets on terms mutually satisfactory to both parties.
As a result, these actions were not given significant weight in the Company's
analysis.
The Company did consider the impact of its restructured agreement with the
equity partners of iPSL, its UK check processing joint venture, in evaluating
the realizability of the deferred tax assets, and after considering the
restructured iPSL agreement, along with all other available positive and
negative evidence, concluded that it was more likely than not that its UK
deferred tax assets would be realized and therefore no increase in the
valuation allowance for UK deferred tax assets was necessary.
Finally, the Company confirms that it did not change its interpretation of SFAS
109 during its evaluation of the valuation allowance for deferred taxes during
the third quarter of 2005.
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Revenue Recognition, page 33
Comment 2
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We note your disclosure that revenue for post-contract software support
arrangements is recorded at inception for contracts of one year or less.
Describe how such arrangements comply with paragraph 59 of SOP 97-2. As part
of your response, provide us with objective evidence of the Company's
compliance with criteria c. and d. of paragraph 59 which indicate that in order
to recognize PCS revenue with the initial licensing fee, the estimated cost of
providing PCS during the arrangement is insignificant and unspecified
upgrades/enhancements offered during the PCS period have been and are expected
to be both minimal and infrequent. Also, tell us specifically what is included
in these post-contract software support arrangements and whether they are
renewable.
Response to Comment 2
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SOP 97-2 paragraph 59 states the following:
PCS revenue may be recognized together with the initial licensing fee on
delivery of the software if all of the following conditions are met.
(a) The PCS fee is included with the initial licensing fee.
(b) The PCS included with the initial license is for one year or less.
(c) The estimated cost of providing PCS during the arrangement is
insignificant.
(d) Unspecified upgrades/enhancements offered during PCS arrangements
historically have been and are expected to continue to be minimal and
infrequent.
If PCS revenue is recognized upon delivery of the software, the vendor must
accrue all estimated costs of providing the services, including
upgrades/enhancements. Upgrades/enhancements are not developed solely for
distribution to PCS customers; revenues are expected to be earned from
providing the enhancements to other customers as well. Therefore, costs
should be allocated between PCS arrangements and other licenses.
The Company has concluded that its revenue recognition policy for PCS fees,
included with the initial licensing fee, and for a term of one year or less,
complies with paragraph 59 of SOP 97-2.
The Company's principal software product is its operating system software used
in its ClearPath high end servers/mainframes. The operating system software has
been licensed to clients for over 30 years, principally to support clients with
high-volume, mission-critical applications. The Company's principal PCS
offering that is included with the initial operating system software licensing
fee is select operating system software updates. This PCS may be renewed
annually.
Updates that are provided to customers as part of PCS do not result in a change
of the base software style and do not include upgrades that increase the
processing speed, or user capacity of the existing operating system software.
As further described below, the updates provided under these PCS arrangements
are minor improvements to the operating system software that the Company
believes do not meet the SOP 97-2 definition of upgrades or enhancements.
The Company monitors the costs associated with these operating system software
updates and has concluded that the cost of providing the updates during the
year is insignificant and is expected to continue to be minimal. The basis for
the Company's conclusion is as follows:
* During 2005, the estimated costs associated with such software updates was
approximately $1 million and revenue associated with updates recognized
together with the initial licensing was approximately $2 million, which
represented approximately .03% of 2005 revenue. Such amounts are immaterial to
the Company's consolidated financial statements.
* During the past several years such software updates have included items such
as operating system software performance monitoring reports, system
administrator management tools and plug-ins to assist in third-party
application software management.
* Such updates have not included, nor are they expected to include in the
future, upgrades to the operating system software that result in increased
processing speed or user capacity.
* During the past several years, such software updates have generally been
provided no more frequently than on an annual basis and the Company does not
expect to offer such updates more frequently in the future.
* As noted above, the Company has licensed its operating system software for
over 30 years. Substantially all of the Company's ClearPath server/mainframe
installed base have been users of the product for many years and the customers
desire a stable operating environment to continue to support their mission
critical applications. As a result of the maturity of the operating system
software and the long-term relationships with the users, the Company has
concluded that software updates will continue to be minimal and infrequent.
The Company does develop and periodically release upgrades and enhancements to
the ClearPath operating system software. These releases are not provided to
existing licensees as part of PCS. Rather, the Company separately markets and
charges additional fees to licensees who wish to receive such upgrades to the
software.
Form 8-K Filed April 18, 2006
Exhibit 99
Comment 3
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Your non-GAAP presentation within the press release does not appear consistent
with our guidance and requirements on such presentation. We note the following
inconsistencies:
* We note your presentation of a non-GAAP statement of operations may create
the unwarranted impression that the presentation is based on a comprehensive
set of accounting rules or principles and that such presentation may not comply
with Item 100 (b) of Regulation G. Please explain to us your basis for this
presentation and explain how you believe it complies with Item 100 (b) of
Regulation G.
* Your non-GAAP statement of operations excludes pension expense and identifies
numerous non-GAAP measures including, but not limited to, non-GAAP cost of
revenue, non-GAAP operating loss, various non-GAAP operating expense items and
non-GAAP income (loss) before income taxes. It appears that your presentation
lacks any substantive disclosure that addresses the various disclosures in
Question 8 of the Frequently Asked Questions Regarding the Use of non-GAAP
Financial Measures. For example, the disclosure does not explain the economic
substance behind your decision to use the measures, why you believe the
measures provide investors with valuable insight into your operating results,
or why it is useful to an investor to segregate each of the items for which
adjustments are made. Additionally, you do not provide any discussion
regarding the material limitations associated with each measure or the manner
in which you compensate for such limitations. Note that we believe that
detailed disclosures should be provided for each adjustment to your GAAP
results and each non-GAAP measure. Further, please note that you must meet
the burden of demonstrating the usefulness of any measure that excludes
recurring items, especially if the non-GAAP measure is used to evaluate
performance. Please explain to us how your current disclosure meets these
requirements.
* Similar considerations should be given to your reconciliation of GAAP to non-
GAAP segment results of operations as this reconciliation includes numerous non-
GAAP measures as well including, non-GAAP gross profit in both dollar terms and
as a percentage of revenues.
Response to Comment 3
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In Exhibit 99 of the Company's Form 8-K filed on April 18, 2006, in addition to
providing a numerical reconciliation to the most directly comparable
measurement calculated using GAAP to non-GAAP financial information, the
Company makes the following statement concerning non-GAAP information:
The preceding release presents information with and without pension
expense. Unisys believes that this information will enhance an overall
understanding of its financial performance due to the significant change
in pension expense from period to period and the non-operational nature of
pension expense. The presentation of non-GAAP information is not meant to
be considered in isolation or as a substitute for results prepared in
accordance with accounting principles generally accepted in the United
States.
In recent years, the Company's worldwide defined benefit pension expense has
varied significantly from year to year as follows: 2003, income of $22.6
million; 2004, expense of $93.6 million; and 2005, expense of $181.1 million.
These changes had little to do with the Company's performance since, for the
most part, the changes were due to forces outside the Company's control such as
worldwide equity and bond market performance and the worldwide long-term
interest rate environment. As a result, it became more and more difficult for
analysts and investors to determine the operational performance of the Company
as a whole and the operational performance of the Company's segments. In order
to facilitate this analysis, the Company provided this information in its
earnings releases.
The Company does not believe that its presentation of this non-GAAP information
creates the unwarranted impression that the presentation is based on a
comprehensive set of accounting rules or principles that contain an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the presentation of the non-GAAP financial information, in light
of the circumstances under which it is presented, not misleading. In addition,
the Company did not think it was meaningful to describe the adjustment to each
line item in the financial data presented since the adjustment was the same for
all line items, namely the removal of defined benefit pension expense or income.
In the Company's Form 10-Q for the period ended March 31, 2006, it was reported
that on March 17, 2006 the Company adopted changes to its U.S. defined benefit
pension plans whereby effective December 31, 2006 the accrual of future
benefits under these plans will cease. Accordingly, the Company does not
expect that its future pension expense will be as volatile as it has been in
recent years. Therefore in light of this and the questions raised by the
Staff, the Company will no longer report non-GAAP financial information
excluding pension expense effective with the period ending June 30, 2006. The
Company felt it was necessary to report such information for the period ended
March 31, 2006 due to the curtailment gain of $45.0 million that was recorded
in March 2006 and that had the effect of distorting the period-to-period change
in pension expense.
Form 10-Q for the Period Ended March 31, 2006
Notes to Consolidated Financial Statements
Note b, page 6
Comment 4
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We note that the Company recorded a charge of $145.9 million on March 31, 2006
in connection with a commitment to reduce your workforce by 3,600 employees.
Tell us what consideration you have given to the disclosures required by
paragraphs 20 b and d of SFAS 146.
Response to Comment 4
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In note b of its Form 10-Q for the period ended March 31, 2006, the Company
disclosed the following:
As part of the company's repositioning plan to right size its cost
structure, on March 31, 2006, the company committed to a reduction of
approximately 3,600 employees. This resulted in a pretax charge in the
first quarter of 2006 of $145.9 million, principally related to
severance costs. The charge is broken down as follows:
(a) approximately 1,600 employees in the U.S. for a charge of $50.3
million and (b) approximately 2,000 employees outside the U.S. for a
charge of $95.6 million.
Paragraph 20 b. (1) of SFAS 146 requires disclosure for each major type of cost
associated with the activity, for example, one-time termination benefits,
contract termination costs, and other associated costs. The charge for $145.9
million recorded in March 2006 was for employee severance and related fringe
benefits. The charge did not include contract termination or other associated
costs.
In addition, paragraph 20 b. (2) of SFAS 146 requires a reconciliation of the
beginning and ending liability balances showing separately the changes during
the period attributable to costs incurred and charged to expense, costs paid or
otherwise settled, and any adjustments to the liability with an explanation of
the reasons therefor. During the first quarter of 2006, there was no usage or
other activity to report since the charge was recorded on March 31, 2006. In
future filings, the Company intends to disclose, as it has done for prior
restructuring charges, the information required by paragraph 20 b. (2).
Paragraph 20 d. of SFAS 146 requires certain information about the cost and
usage to be disclosed by reportable segment. It has been the Company's long-
standing policy to exclude restructuring charges from segment performance.
This policy is stated in the Company's Form 10-Q for the period ended March 31,
2006 in both note f and in Management's Discussion and Analysis of Financial
Condition and Results of Operations as follows:
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 above.
* * * *
In addition, the Company acknowledges that:
* the Company is responsible for the adequacy and accuracy of the disclosure in
the filings;
* staff comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the filings; and
* the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
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