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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding as of September 30, 2003:
330,417,158.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
September 30,
2003 December 31,
(Unaudited) 2002
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 402.7 $ 301.8
Accounts and notes receivable, net 961.8 955.6
Inventories
Parts and finished equipment 136.2 165.3
Work in process and materials 113.6 127.5
Deferred income taxes 313.8 311.3
Other current assets 86.3 84.5
-------- --------
Total 2,014.4 1,946.0
-------- --------
Properties 1,718.2 1,542.7
Less-Accumulated depreciation
and amortization 1,033.7 932.9
-------- --------
Properties, net 684.5 609.8
-------- --------
Investments at equity 124.2 111.8
Marketable software, net 329.0 311.8
Deferred income taxes 1,476.0 1,476.0
Goodwill 165.6 160.6
Other long-term assets 392.4 365.4
-------- --------
Total $5,186.1 $4,981.4
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 20.3 $ 77.3
Current maturities of long-term debt 1.8 4.4
Accounts payable 416.6 532.5
Other accrued liabilities 1,242.2 1,341.4
Income taxes payable 248.6 228.9
-------- --------
Total 1,929.5 2,184.5
-------- --------
Long-term debt 1,047.4 748.0
Accrued pension liabilities 660.9 727.7
Other long-term liabilities 472.5 465.2
Stockholders' equity
Common stock, shares issued: 2003, 332.3;
2002, 328.1 3.3 3.3
Accumulated deficit ( 526.4) ( 673.5)
Other capital 3,801.3 3,763.1
Accumulated other comprehensive loss (2,202.4) (2,236.9)
-------- --------
Stockholders' equity 1,075.8 856.0
-------- --------
Total $5,186.1 $4,981.4
======== ========
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
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue
Services $1,124.3 $1,016.3 $3,394.7 $3,104.8
Technology 325.4 316.0 878.9 949.8
-------- -------- -------- --------
1,449.7 1,332.3 4,273.6 4,054.6
Costs and expenses
Cost of revenue:
Services 886.1 766.5 2,675.4 2,362.0
Technology 138.5 162.8 393.9 495.8
-------- -------- -------- --------
1,024.6 929.3 3,069.3 2,857.8
Selling, general and
administrative expenses 251.0 241.3 737.1 732.2
Research and development expenses 68.2 65.5 198.7 192.6
-------- -------- -------- --------
1,343.8 1,236.1 4,005.1 3,782.6
-------- -------- -------- --------
Operating income 105.9 96.2 268.5 272.0
Interest expense 17.2 17.6 51.3 53.2
Other income (expense), net (4.7) 9.5 2.5 (18.9)
-------- -------- -------- --------
Income before income taxes 84.0 88.1 219.7 199.9
Provision for income taxes 27.8 29.1 72.5 66.0
-------- -------- -------- --------
Net income $ 56.2 $ 59.0 $ 147.2 $ 133.9
======== ======== ======== ========
Earnings per share
Basic $ .17 $ .18 $ .45 $ .41
======== ======== ======== ========
Diluted $ .17 $ .18 $ .44 $ .41
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
-----------------
2003 2002
-------- -------
Cash flows from operating activities
Net income $ 147.2 $ 133.9
Add(deduct) items to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of properties 131.4 111.7
Amortization:
Marketable software 92.2 90.1
Deferred outsourcing contract costs 23.5 14.1
(Increase) in deferred income taxes, net ( 2.5) ( 2.5)
(Increase) decrease in receivables, net ( 32.3) 208.0
Decrease in inventories 43.0 88.2
(Decrease) in accounts payable and
other accrued liabilities (180.0) (375.8)
Increase in income taxes payable 19.8 7.0
(Decrease) in other liabilities ( 56.8) ( 33.3)
(Increase) in other assets ( 29.9) (178.8)
Other 6.5 7.4
------- ------
Net cash provided by operating activities 162.1 70.0
------- ------
Cash flows from investing activities
Proceeds from investments 3,626.1 2,360.1
Purchases of investments (3,663.2) (2,384.0)
Investment in marketable software (109.4) (105.0)
Capital additions of properties (177.9) (151.8)
Purchases of businesses ( 2.0) ( 4.8)
------- ------
Net cash used for investing activities (326.4) (285.5)
------- ------
Cash flows from financing activities
Proceeds from issuance of long-term debt 293.3 -
Net (reduction in) proceeds from short-term
borrowings ( 57.0) 33.8
Proceeds from employee stock plans 21.0 21.9
Payments of long-term debt ( 3.8) ( 1.6)
------- ------
Net cash provided by financing activities 253.5 54.1
------- ------
Effect of exchange rate changes on
cash and cash equivalents 11.7 1.7
------- ------
Increase (decrease) in cash and cash equivalents 100.9 (159.7)
Cash and cash equivalents, beginning of period 301.8 325.9
------- -------
Cash and cash equivalents, end of period $ 402.7 $ 166.2
======= =======
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. Because of seasonal and other factors, results
for interim periods are not necessarily indicative of the results to
be expected for the full year.
a. The following table shows how earnings per share were computed for the
three and nine months ended September 30, 2003 and 2002 (dollars in millions,
shares in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Basic Earnings Per Share
Net income $ 56.2 $ 59.0 $ 147.2 $ 133.9
======= ======= ======= =======
Weighted average shares 330,033 324,075 328,675 322,792
======= ======= ======= =======
Basic earnings per share $ .17 $ .18 $ .45 $ .41
======= ======= ======= =======
Diluted Earnings Per Share
Net income $ 56.2 $ 59.0 $ 147.2 $ 133.9
======= ======= ======= =======
Weighted average shares 330,033 324,075 328,675 322,792
Plus incremental shares
from assumed exercises
under employee stock plans 3,946 594 2,642 1,287
------- ------- ------- -------
Adjusted weighted average
shares 333,979 324,669 331,317 324,079
======= ======= ======= =======
Diluted earnings per share $ .17 $ .18 $ .44 $ .41
======= ======= ======= =======
At September 30, 2003, 21.2 million shares related to employee stock plans
were not included in the computation of diluted earnings per share because
the option prices are above the average market price of the company's common
stock.
b. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration,
outsourcing, infrastructure services, and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting
policies of each business segment are the same as those followed by the
company as a whole. Intersegment sales and transfers are priced as if the
sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware
and software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing profits on such
shipments of company hardware and software to customers. The Services
segment also includes the sale of hardware and software products sourced
from third parties that are sold to customers through the company's Services
channels. In the company's consolidated statements of income, the
manufacturing costs of products sourced from the Technology segment and sold
to Services customers are reported in cost of revenue for Services. Also
included in the Technology segment's sales and operating profit are sales of
hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating
income of the Technology segment for the three months ended September 30,
2003 and 2002 was $6.7 million and $1.2 million, respectively; and the
amount of profit for the nine months ended September 30, 2003 and 2002 was
$18.6 million and $11.8 million, respectively. The profit on these
transactions is eliminated in Corporate. The company evaluates business
segment performance on operating income exclusive of restructuring charges
and unusual and nonrecurring items, which are included in Corporate. All
other corporate and centrally incurred costs are allocated to the business
segments based principally on revenue, employees, square footage or usage.
6
A summary of the company's operations by business segment for the three and
nine month periods ended September 30, 2003 and 2002 is presented below (in
millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
September 30, 2003
------------------
Customer revenue $1,449.7 $1,124.3 $ 325.4
Intersegment $( 66.4) 7.3 59.1
-------- ------- -------- --------
Total revenue $1,449.7 $( 66.4) $1,131.6 $ 384.5
======== ======= ======== ========
Operating income (loss) $ 105.9 $( 1.3) $ 43.8 $ 63.4
======== ======= ======== ========
Three Months Ended
September 30, 2002
------------------
Customer revenue $1,332.3 $1,016.3 $ 316.0
Intersegment $( 69.4) 6.5 62.9
-------- ------- -------- --------
Total revenue $1,332.3 $( 69.4) $1,022.8 $ 378.9
======== ======= ======== ========
Operating income (loss) $ 96.2 $ - $ 57.9 $ 38.3
======== ======= ======== ========
Nine Months Ended
September 30, 2003
----------------
Customer revenue $4,273.6 $3,394.7 $ 878.9
Intersegment $(225.6) 19.2 206.4
-------- ------- -------- --------
Total revenue $4,273.6 $(225.6) $3,413.9 $1,085.3
======== ======= ======== ========
Operating income (loss) $ 268.5 $( 3.6) $ 142.3 $ 129.8
======== ======= ======== ========
Nine Months Ended
September 30, 2002
------------------
Customer revenue $4,054.6 $3,104.8 $ 949.8
Intersegment $(233.0) 32.2 200.8
-------- ------- -------- --------
Total revenue $4,054.6 $(233.0) $3,137.0 $1,150.6
======== ======= ======== ========
Operating income (loss) $ 272.0 $( 15.0) $ 171.5 $ 115.5
======== ======= ======== ========
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Total segment operating income $107.2 $ 96.2 $272.1 $287.0
Interest expense (17.2) (17.6) (51.3) (53.2)
Other income (expense), net ( 4.7) 9.5 2.5 (18.9)
Corporate and eliminations ( 1.3) - ( 3.6) (15.0)
------ ------ ------ ------
Total income before income taxes $ 84.0 $ 88.1 $219.7 $199.9
====== ====== ====== ======
7
Customer revenue by classes of similar products or services, by segment, is
presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Services
Systems integration $ 378.9 $ 307.5 $1,121.3 $1,012.3
Outsourcing 396.2 370.9 1,227.3 1,059.9
Infrastructure services 207.5 198.8 620.1 617.9
Core maintenance 141.7 139.1 426.0 414.7
-------- -------- -------- --------
1,124.3 1,016.3 3,394.7 3,104.8
Technology
Enterprise-class servers 249.7 205.7 661.3 674.7
Specialized technologies 75.7 110.3 217.6 275.1
-------- -------- -------- --------
325.4 316.0 878.9 949.8
-------- -------- -------- --------
Total $1,449.7 $1,332.3 $4,273.6 $4,054.6
======== ======== ======== ========
c. Comprehensive income for the three and nine months ended September 30, 2003
and 2002 includes the following components (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 56.2 $ 59.0 $147.2 $133.9
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of
$(2.5), $.5, $(5.1), and
$(1.9) (4.6) .8 (9.4) (3.6)
Reclassification adjustments,
net of tax of $1.1, $.2, $3.1,
and $(.4) 2.0 .4 5.8 ( .9)
Foreign currency translation
adjustments 7.2 (50.2) 38.1 (68.5)
------ ------ ------ ------
Total other comprehensive
income (loss) 4.6 (49.0) 34.5 (73.0)
------ ------ ------ ------
Comprehensive income $ 60.8 $ 10.0 $181.7 $ 60.9
====== ====== ====== ======
Accumulated other comprehensive income (loss) as of December 31, 2002 and
September 30, 2003 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2001 $ (706.8) $(711.2) $ 4.4 $ -
Change during period (1,530.1) ( 33.8) ( 5.9) (1,490.4)
--------- ------- ------ ---------
Balance at December 31, 2002 (2,236.9) (745.0) ( 1.5) (1,490.4)
Change during period 34.5 38.1 ( 3.6) -
--------- ------- ------ ---------
Balance at September 30, 2003 $(2,202.4) $(706.9) $( 5.1) $(1,490.4)
========= ======= ====== =========
d. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the nine months ended September 30,
2003 and 2002 was $3.1 million in both periods. The company expects to
realize these tax benefits on future Federal income tax returns.
8
e. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for twelve 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 ninety days from
customer's receipt. The company will provide a workaround or correction for
material errors in its software that prevent 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 Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning
of period $21.1 $17.4 $19.2 $16.1
Accruals for warranties issued
during the period 5.5 4.3 17.2 11.3
Settlements made during the
period ( 4.7) ( 4.3) (13.8) (11.2)
Changes in liability for
pre-existing warranties during
the period, including expirations ( .8) .8 ( 1.5) 2.0
----- ----- ----- -----
Balance at September 30 $21.1 $18.2 $21.1 $18.2
===== ===== ===== =====
f. The company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based employee compensation
plans. For stock options, no compensation expense is reflected in net
income as all stock options granted had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant. In addition, no compensation expense is recognized for common
stock purchases under the Employee Stock Purchase Plan. Pro forma
information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," and has been determined as if the company
had accounted for its stock plans under the fair value method of SFAS No.
123. For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No.
123 (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 56.2 $ 59.0 $147.2 $133.9
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (10.4) (12.1) (35.2) (36.9)
------ ------ ------ ------
Pro forma net income $ 45.8 $ 46.9 $112.0 $ 97.0
====== ====== ====== ======
Earnings per share
Basic - as reported $ .17 $ .18 $ .45 $ .41
Basic - pro forma $ .14 $ .14 $ .34 $ .30
Diluted - as reported $ .17 $ .18 $ .44 $ .41
Diluted - pro forma $ .14 $ .14 $ .34 $ .30
9
g. Following is a breakdown of the individual components of the 2001 fourth-
quarter charge (in millions of dollars):
Work-Force
Reductions(1)
---------- Idle
Lease
Headcount Total U.S. Int'l Costs
---------------------------------------------------------------
Balance at
Dec. 31, 2002 631 $ 67.6 $ 7.4 $ 43.7 $ 16.5
Additional
provisions 4 2.2 - .8 1.4
Utilized (514) (48.7) ( 7.3) (34.5) ( 6.9)
Reversal of
excess reserves (105) ( 3.1) ( 1.7) ( 1.4) -
Other(2) - 2.0 2.2 2.0 ( 2.2)
------ ------ ------ ------ ------
Balance at
Sept. 30, 2003 16 $ 20.0 $ .6 $ 10.6 $ 8.8
====== ====== ====== ====== ======
Expected future
utilization:
2003 remaining
three months 16 $ 6.0 $ .6 $ 3.1 $ 2.3
2004 and thereafter - 14.0 - 7.5 6.5
(1) Includes severance, notice pay, medical and other benefits.
(2) Changes in estimates and translation adjustments.
Cash expenditures related to the 2001 and prior-year restructuring charges
were approximately $51 million in the nine months ended September 30, 2003
compared to $87 million for the prior-year period, and are expected to be
approximately $7 million (which includes approximately $1 million related
to restructuring charges taken prior to 2001) for the remainder of 2003 and
$20 million (which includes approximately $6 million related to
restructuring charges taken prior to 2001) in total for all subsequent
years, principally for work-force reductions and idle lease costs.
h. Cash paid during the nine months ended September 30, 2003 and 2002 for
income taxes was $63.2 million and $44.8 million, respectively.
Cash paid during the nine months ended September 30, 2003 and 2002 for
interest expense was $51.4 million and $45.5 million, respectively.
i. In June 2003, the company entered into a new lease for its facility at
Malvern, PA that replaces a former lease that was due to expire in March
2005. The new lease has a 60-month term expiring in June 2008. Under the
new lease, the company has the option to purchase the facility at any time
for approximately $34 million. In addition, if the company does not
exercise its purchase option and the lessor sells the facility at the end of
the lease term for a price that is less than approximately $34 million, the
company will be required to guarantee the lessor a residual value on the
property of up to $29 million. The lessor is a substantive independent
leasing company that does not have the characteristics of a variable
interest entity as defined by the Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN No. 46") and is therefore not consolidated by the company.
The company has accounted for the lease as an operating lease, and
therefore, neither the leased facility nor the related debt is reported in
the company's accompanying balance sheets. As stated above, under the
lease, the company is required to provide a guaranteed residual value on the
facility of up to $29 million to the lessor at the end of the 60-month lease
term. The company recognized a liability of approximately $1 million for
the related residual value guarantee. The value of the guarantee was
determined by computing the estimated present value of probability-weighted
cash flows that might be expended under the guarantee, discounted using the
company's incremental borrowing rate of approximately 6.5%. The company
has recorded a liability for the fair value of the obligation with a
corresponding asset recorded as prepaid rent which will be amortized to
rental expense over the lease term. The liability will be subsequently
assessed and adjusted to fair value as necessary.
10
j. Effective January 1, 2003, the company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required
that all gains and losses from extinguishment of debt be reported as an
extraordinary item. Previously recorded losses on the early extinguishment
of debt that were classified as an extraordinary item in prior periods have
been reclassified to other income (expense), net. The adoption of SFAS No.
145 had no effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.
Effective January 1, 2003, the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. SFAS No. 146 replaces previous accounting guidance provided
by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and is effective for the company for exit or disposal activities initiated
after December 31, 2002. Adoption of this statement had no material impact
on the company's consolidated financial position, consolidated results of
operations, or liquidity.
Effective January 1, 2003, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34" ("FIN No. 45"). The interpretation requires that upon issuance of a
guarantee, the entity must recognize a liability for the fair value of the
obligation it assumes under that guarantee. In addition, FIN No. 45
requires disclosures about the guarantees that an entity has issued,
including a roll forward of the entity's product warranty liabilities. This
interpretation is intended to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. Adoption of this Interpretation had no material
impact on the company's consolidated financial position, consolidated
results of operations, or liquidity.
Effective July 1, 2003, the company adopted the Financial Accounting
Standards Board's ("FASB") consensus on EITF Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This issue addresses
how to account for arrangements that may involve the delivery or performance
of multiple products, services, and/or rights to use assets. The final
consensus of this issue is applicable to agreements entered into in fiscal
periods beginning after June 15, 2003. Additionally, companies will be
permitted to apply the consensus guidance in this issue to all existing
arrangements as the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, "Accounting Changes." Adoption of this
issue had no material impact on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. Fin No. 46 requires certain
variable interest entities ("VIE's") to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the
parties involved. The provisions of FIN No. 46 are effective immediately
for those variable interest entities created after January 31, 2003. The
provisions, as amended, are effective for the first interim or annual period
ending after December 15, 2003 for those variable interests held prior to
February 1, 2003. While the company believes this Interpretation will not
have a material effect on its financial position or results of operations,
it is continuing to evaluate the effect of adoption of this Interpretation.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended September 30, 2003, the company reported net income
of $56.2 million, or $.17 per share, compared to $59.0 million, or $.18 per
share, for the three months ended September 30, 2002.
Total revenue for the quarter ended September 30, 2003 was $1.45 billion, up 9%
from revenue of $1.33 billion for the quarter ended September 30, 2002.
Foreign currency translations had a 4% positive impact on revenue in the
quarter when compared to the year-ago period. In the current quarter,
Services revenue increased 11% and Technology revenue increased 3%.
U.S. revenue increased 11% in the third quarter compared to the year-ago
period, driven by strength in the U.S. Federal government business. Revenue
in international markets increased 7% in the current quarter compared to the
year-ago period, as growth in Europe more than offset a decline in Latin
America and a slight revenue decline in the Asia/Pacific region.
Total gross profit margin was 29.3% in the third quarter of 2003 compared to
30.3% in the year-ago period, principally reflecting a decline in pension
income as discussed below.
For the three months ended September 30, 2003, selling, general and
administrative expenses were $251.0 million (17.3% of revenue) compared to
$241.3 million (18.1% of revenue) for the three months ended September 30, 2002.
The increase was due to foreign currency translations and lower pension income.
Research and development expense was $68.2 million compared to $65.5 million a
year ago. The company continues to invest in high-end Cellular MultiProcessing
server technology and in key programs within its industry practices.
For the third quarter of 2003, the company reported an operating income percent
of 7.3% compared to 7.2% for the third quarter of 2002.
Pension income for the three months ended September 30, 2003 was approximately
$9 million compared to approximately $37 million for the three months ended
September 30, 2002. At the beginning of each year, accounting rules require
that the company establish an expected long-term rate of return on its pension
plan assets. One of the reasons for the decline in pension income was that,
effective January 1, 2003, the company reduced its expected long-term rate of
return on plan assets for its U.S. pension plan to 8.75% from 9.50%. In
addition, the discount rate used for the U.S. pension plan declined to 6.75% at
December 31, 2002, from 7.50% at December 31, 2001. The remaining reasons for
the decline in pension income were lower expected returns on U.S. plan assets
due to asset declines, the company's change as of January 1, 2003 to a cash
balance plan in the U.S., and for international plans, declines in discount
rates, lower expected long-term rates of return on plan assets, and currency
translation. The company records pension income or expense, as well as other
employee-related costs such as FICA and medical insurance costs, in operating
income in the following income statement categories: cost of sales; selling,
general and administrative expenses; and research and development expenses.
The amount allocated to each income statement line is based on where the
salaries of the active employees are charged.
Interest expense for the three months ended September 30, 2003 was $17.2 million
compared to $17.6 million for the three months ended September 30, 2002.
Other income (expense), net was an expense of $4.7 million in the current
quarter compared to income of $9.5 million in the year-ago quarter income. The
principal reason for the change was foreign exchange losses in the current
quarter of $3.7 million compared to gains of $9.6 million in the prior-year
quarter.
Income before income taxes was $84.0 million in the third quarter of 2003
compared to $88.1 million last year. The provision for income taxes was $27.8
million in the current period compared to $29.1 million in the year-ago period.
The effective tax rate in both periods was 33%.
12
For the nine months ended September 30, 2003, net income was $147.2 million, or
$.44 per diluted share, compared to net income of $133.9 million, or $.41 per
diluted share, last year. Revenue for the nine months ended September 30, 2003
was $4.27 billion, up 5% from $4.05 billion for the nine months ended September
30, 2002.
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - systems integration, outsourcing,
infrastructure services, and core maintenance; Technology - enterprise-class
servers and specialized technologies. The accounting policies of each business
segment are the same as those followed by the company as a whole. Intersegment
sales and transfers are priced as if the sales or transfers were to third
parties. Accordingly, the Technology segment recognizes intersegment revenue
and manufacturing profit on hardware and software shipments to customers under
Services contracts. The Services segment, in turn, recognizes customer revenue
and marketing profit on such shipments of company hardware and software to
customers. The Services segment also includes the sale of hardware and software
products sourced from third parties that are sold to customers through the
company's Services channels. In the company's consolidated statements of
income, the manufacturing costs of products sourced from the Technology segment
and sold to Services customers are reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended September 30, 2003 and
2002, was $6.7 million and $1.2 million, respectively; and the amount of profit
for the nine months ended September 30, 2003 and 2003 was $18.6 million and
$11.8 million, respectively. The profit on these transactions is eliminated in
Corporate. The company evaluates business segment performance on operating
income exclusive of restructuring charges and unusual and nonrecurring items,
which are included in Corporate. All other corporate and centrally incurred
costs are allocated to the business segments based principally on revenue,
employees, square footage or usage. See Note b to the Notes to Consolidated
Financial Statements.
Information by business segment is presented below (in millions):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2003
- ------------------
Customer revenue $1,449.7 $1,124.3 $325.4
Intersegment $( 66.4) 7.3 59.1
-------- ------- -------- ------
Total revenue $1,449.7 $( 66.4) $1,131.6 $384.5
======== ======= ======== ======
Gross profit percent 29.3% 19.8% 53.1%
======== ======== ======
Operating income
percent 7.3% 3.9% 16.5%
======== ======== ======
Three Months Ended
September 30, 2002
- ------------------
Customer revenue $1,332.3 $1,016.3 $316.0
Intersegment $( 69.4) 6.5 62.9
-------- ------- -------- ------
Total revenue $1,332.3 $( 69.4) $1,022.8 $378.9
======== ======= ======== ======
Gross profit percent 30.3% 22.5% 46.4%
======== ======== ======
Operating income
percent 7.2% 5.7% 10.1%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
13
In the Services segment, customer revenue was $1.12 billion for the three
months ended September 30, 2003, an increase of 11% compared to $1.02 billion
for the three months ended September 30, 2002. The increase in Services
revenue was due to a 7% increase in outsourcing ($396 million in 2003 compared
to $371 million in 2002), a 23% increase in systems integration ($379 million
in 2003 compared to $307 million in 2002), a 2% increase in core maintenance
revenue ($142 million in 2003 compared to $139 million in 2002), and a 4%
increase in infrastructure services ($207 million in 2003 compared to $199
million in 2002). The systems integration business benefited from growth in
the company's U.S. Federal government business. Services gross profit percent
was 19.8% for the three months ended September 30, 2003 compared to 22.5% in
the year-ago period, and Services operating income percent was 3.9% for the
three months ended September 30, 2003 compared to 5.7% last year. The declines
in gross profit and operating income margins were principally due to lower
pension income in the current quarter compared to the year-ago period.
In the Technology segment, customer revenue was $325 million for the three
months ended September 30, 2003, up 3% compared to $316 million for the three
months ended September 30, 2002. The 3% increase in revenue was due to a 21%
increase in sales of enterprise-class servers ($250 million in 2003 compared
to $206 million in 2002) offset in part by a 31% decrease in sales of
specialized technology products ($75 million in 2003 compared to $110 million
in 2002). The decline in specialized technology revenue primarily reflected
the company's continued de-emphasis of low-margin product sales. Technology
gross profit percent was 53.1% for the three months ended September 30, 2003
compared to 46.4% in the year-ago period, and Technology operating income
percent was 16.5% for the three months ended September 30, 2003 compared to
10.1% last year. The gross profit and operating income margin increases
primarily reflected a richer mix of ClearPath servers and software offset in
part by lower pension income.
New Accounting Pronouncements
- -----------------------------
Effective January 1, 2003, the company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required that
all gains and losses from extinguishment of debt be reported as an extraordinary
item. Previously recorded losses on the early extinguishment of debt that were
classified as an extraordinary item in prior periods have been reclassified to
other income (expense), net. The adoption of SFAS No. 145 had no effect on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
Effective January 1, 2003, the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and is effective for the company
for exit or disposal activities initiated after December 31, 2002. Adoption of
this statement had no material impact on the company's consolidated financial
position, consolidated results of operations, or liquidity.
Effective January 1, 2003, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
("FIN No. 45"). The interpretation requires that upon issuance of a guarantee,
the entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures
about the guarantees that an entity has issued, including a roll forward of the
entity's product warranty liabilities. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration. Adoption of
this Interpretation had no material impact on the company's consolidated
financial position, consolidated results of operations, or liquidity.
14
Effective July 1, 2003, the company adopted the Financial Accounting Standards
Board's ("FASB") consensus on EITF Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." This issue addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The final consensus of this
issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
consensus guidance in this issue to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." Adoption of this issue had no material impact on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. Fin No. 46 requires certain
variable interest entities ("VIE's") to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the parties
involved. The provisions of FIN No. 46 are effective immediately for those
variable interest entities created after January 31, 2003. The provisions, as
amended, are effective for the first interim or annual period ending after
December 15, 2003 for those variable interests held prior to February 1, 2003.
While the company believes this Interpretation will not have a material effect
on its financial position or results of operations, it is continuing to
evaluate the effect of adoption of this Interpretation.
Financial Condition
- -------------------
Cash and cash equivalents at September 30, 2003 were $402.7 million compared to
$301.8 million at December 31, 2002.
During the nine months ended September 30, 2003, cash provided by operations
was $162.1 million compared to cash provided by operations of $70.0 million for
the nine months ended September 30, 2002. The change in operating cash flow
primarily reflected the company's continued focus on working capital, including
higher levels of customer prepayments in the current nine-month period compared
to the prior-year period. Cash expenditures in the current period related to
prior-year restructuring charges (which are included in operating activities
were approximately $51 million compared to $87 million for the prior-year
period, and are expected to be approximately $7 million for the remainder of
2003 and $20 million in total for all subsequent years, principally for work-
force reductions and idle lease costs. Personnel reductions in the current
nine-month period related to these restructuring actions were approximately 500.
Cash used for investing activities for the nine months ended September 30, 2003
was $326.4 million compared to $285.5 million during the nine months ended
September 30, 2002. During 2003, both proceeds from investments and purchases
of investments, which represent derivative financial instruments used to manage
the company's currency exposure to market risks from changes in foreign
currency exchange rates, increased from the prior year as a result of an
increase in the company's exposures, principally related to intercompany
accounts. The increase in cash used was principally due to net purchases of
investments of $37.1 million in the current period compared to net purchases of
$23.9 million in the prior-year period. In addition, the current nine-month
period investment in marketable software was $109.4 million compared to $105.0
million in the prior-year, and capital additions to properties was $177.9
million for the nine months ended September 30, 2003 compared to $151.8 million
in the prior-year period.
Cash provided by financing activities during the current nine-month period was
$253.5 million compared to $54.1 million in the prior year. The current nine-
month period includes net proceeds from issuance of long-term debt of $293.3
million, as described below. In addition, during the nine months ended
September 30, 2003 there was a reduction of $57.0 million in short-term
borrowings compared to an increase of $33.8 million in the year-ago period.
15
In March 2003, the company issued $300 million of 6 7/8% senior notes due 2010.
At September 30, 2003, total debt was $1.1 billion, an increase of $239.8
million from December 31, 2002.
On July 1, 2003, the company entered into a new $500 million credit agreement,
expiring in May 2006, to replace the $450 million credit agreement that was due
to expire in March 2004. Borrowings under the new agreement bear interest based
on the then-current LIBOR or prime rates and the company's credit rating. The
credit agreement contains financial and other covenants, including maintenance
of certain financial ratios, a minimum level of net worth and limitations on
certain types of transactions, which could reduce the amount the company is
able to borrow. Events of default under the credit agreement include failure
to perform covenants, material adverse change, change of control and default
under other debt aggregating at least $25 million. If an event of default were
to occur under the credit agreement, the lenders would be entitled to declare
all amounts borrowed under it immediately due and payable. The occurrence of
an event of default under the credit agreement could also cause the
acceleration of obligations under certain other agreements and the termination
of the company's U.S. trade accounts receivable facility described below. As
of September 30, 2003, there were no borrowings under this credit agreement.
In addition, the company and certain international subsidiaries have access to
certain uncommitted lines of credit from various banks. Other sources of short-
term funding are operational cash flows, including customer prepayments, and
the company's U.S. trade accounts receivable facility. Using this facility,
the company sells, on an on-going basis, up to $225 million of its eligible
U.S. trade accounts receivable through a wholly owned subsidiary, Unisys
Funding Corporation I. The facility expires in December 2003. The company
expects to have a similar arrangement in place at the expiration of the current
facility. If the company were unable to have a similar arrangement in place
upon the expiration of the current facility, cash flow would be negatively
affected; however, liquidity would be unaffected since the company believes
that it has adequate sources and availability of short-term funding to meet
its expected cash requirements.
At September 30, 2003, the company has met all covenants and conditions under
its various lending and funding agreements. Since the company believes that it
will continue to meet these covenants and conditions, the company believes that
it has adequate sources and availability of short-term funding to meet its
expected cash requirements.
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors.
The company has on file with the Securities and Exchange Commission a
registration statement covering $1.2 billion of debt or equity securities,
which enables the company to be prepared for future market opportunities.
At September 30, 2003, the company had deferred tax assets in excess of
deferred tax liabilities of $2,194 million. For the reasons cited below,
management determined that it is more likely than not that $1,728 million of
such assets will be realized, therefore resulting in a valuation allowance of
$466 million.
The company evaluates quarterly the realizability of its deferred tax assets
and adjusts the amount of the related valuation 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 deferred tax assets. Approximately $5.2 billion of
future taxable income (predominantly U.S.) is needed to realize all of the net
deferred tax assets. Failure to achieve forecasted taxable income might affect
the ultimate realization of the net deferred tax assets. See "Factors That May
Affect Future Results" below.
Stockholders' equity increased $219.8 million during the nine months ended
September 30, 2003, principally reflecting net income of $147.2 million, $35.0
million for issuance of stock under stock option and other plans, $3.1 million
of tax benefits related to employee stock plans and currency translation of
$38.1 million.
16
In March 2003, the company executed a lease commitment for a new facility in
Reston, VA. The facility is to be used to consolidate the company's expanding
U.S. Federal government business. The initial lease period runs from April
2003 to July 2018 and the lease provides for two five-year extensions. The
rent over the initial lease term is approximately $110 million.
In June 2003, the company entered into a new lease for its facility at
Malvern, PA that replaces a former lease that was due to expire in March 2005.
The new lease has a 60-month term expiring in June 2008. Under the new lease,
the company has the option to purchase the facility at any time for
approximately $34 million. In addition, if the company does not exercise its
purchase option and the lessor sells the facility at the end of the lease term
for a price that is less than approximately $34 million, the company will be
required to guarantee the lessor a residual value on the property of up to $29
million. The lessor is a substantive independent leasing company that does not
have the characteristics of a variable interest entity as defined by FIN No. 46
and is therefore not consolidated by the company.
The company has accounted for the lease as an operating lease, and therefore,
neither the leased facility nor the related debt is reported in the company's
accompanying balance sheets. As stated above, under the lease, the company is
required to provide a guaranteed residual value on the facility of up to $29
million to the lessor at the end of the 60-month lease term. Under the
provisions of FIN No. 45, the company recognized a liability of approximately
$1 million for the related residual value guarantee. The value of the
guarantee was determined by computing the estimated present value of
probability-weighted cash flows that might be expended under the guarantee,
discounted using the company's incremental borrowing rate of approximately 6.5%.
The company has recorded a liability for the fair value of the obligation with
a corresponding asset recorded as prepaid rent which will be amortized to
rental expense over the lease term. The liability will be subsequently
assessed and adjusted to fair value as necessary.
At December 31st of each year, accounting rules require a company to recognize
a liability on its balance sheet for each pension plan if the fair value of the
assets of that pension plan is less than the present value of the pension
obligation (the accumulated benefit obligation, or "ABO"). This liability is
called a "minimum pension liability." Concurrently, any existing prepaid
pension asset for the pension plan must be removed. These adjustments are
recorded as a charge in "accumulated other comprehensive income (loss)" in
stockholders' equity. If at any future year-end, the fair value of the pension
plan assets exceeds the ABO, the charge to stockholders' equity would be
reversed for such plan. Alternatively, if the fair market value of pension
plan assets experiences further declines or the discount rate is reduced,
additional charges to accumulated other comprehensive income (loss) may be
required at a future year-end.
At December 31, 2002, for all of the company's defined benefit pension plans,
as well as the defined benefit pension plan of Nihon Unisys Ltd. ("NUL") (an
equity investment), the ABO exceeded the fair value of pension plan assets.
As a result, the company was required to do the following: remove from its
assets $1.4 billion of prepaid pension plan assets; increase its accrued
pension liabilities by approximately $700 million; reduce its investments at
equity by approximately $80 million relating to the company's share of NUL's
minimum pension liability; and offset these changes by a charge to other
comprehensive loss in stockholders' equity of $2.2 billion, or $1.5 billion
net of tax.
This accounting had no effect on the company's net income, liquidity or cash
flows. Financial ratios and net worth covenants in the company's credit
agreements and debt securities are unaffected by the charge to stockholders'
equity caused by recording a minimum pension liability.
In accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. defined benefit
plan in 2003. The company expects to make cash contributions of approximately
$60 million to its other defined benefit pension plans during 2003.
17
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. These other factors 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.
The company's business is affected by changes in general economic and business
conditions. The company continues to face a challenging economic environment.
In this environment, many organizations are delaying planned purchases of
information technology products and services. If the level of demand for the
company's products and services declines in the future, the company's business
could be adversely affected. The company's business could also be affected by
acts of war, terrorism or natural disasters. Current world tensions could
escalate and this could have unpredictable consequences on the world economy
and on our business.
The information services and technology markets in which the company operates
include a large number of companies vying for customers and market share both
domestically and internationally. The company's competitors include computer
hardware manufacturers, software providers, systems integrators, consulting
and other professional services firms, outsourcing providers, and
infrastructure services 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 may also be
better able to compete for skilled professionals. Any of this could have an
adverse effect on the company's business. Future results will depend on the
company's ability to mitigate the effects of aggressive competition on
revenues, pricing and margins and on the company's ability to attract and
retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend
in part on the company's ability to anticipate and respond to these market
trends and to design, develop, introduce, deliver or obtain new and innovative
products and services on a timely and cost-effective basis. The company may
not be successful in anticipating or responding to changes in technology,
industry standards or customer preferences, and the market may not demand or
accept its services and product offerings. In addition, products and services
developed by competitors may make the company's offerings less competitive.
The company's future results will depend in part on its ability to continue to
accelerate growth in outsourcing and infrastructure services. The company's
outsourcing contracts are multiyear engagements under which the company takes
over management of a client's technology operations, business processes or
networks. The company will need to maintain a strong financial position in
order to grow its outsourcing business. 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. As long-term
relationships, these outsourcing contracts provide a base of recurring revenue.
However, in the early phases of these contracts, gross margins may be lower
than in later years when the work force and facilities have been rationalized
for efficient operations, and an integrated systems solution has been
implemented. Future results will depend on the company's ability to
effectively complete the rationalizations and solution implementations.
18
Future results will also depend in part on the company's ability to drive
profitable growth in systems integration and consulting. The company's systems
integration and consulting business has been adversely affected by the current
economic slowdown. In this economic environment, customers have been delaying
systems integration projects. The company's ability to grow profitably in this
business will depend in part on an improvement in economic conditions and a
pick-up in demand for systems integration projects. It will also depend on the
success of the actions the company has taken to enhance the skills base and
management team in this business and to refocus the business on integrating
best-of-breed, standards-based solutions to solve client needs. 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 maintain the rates it charges, or appropriate
chargeability, for its professionals, profit margins will suffer. The rates
the company is able to charge for services are affected by a number of factors,
including clients' perception of the company's ability to add value through
its services; introduction of new services or products by the company or its
competitors; pricing policies of competitors; and general economic conditions.
Chargeability is also affected by a number of factors, including the company's
ability to transition employees from completed projects to new engagements; and
its ability to forecast demand for services and thereby maintain an appropriate
head count.
Future results will also depend in part on market acceptance of the company's
high-end enterprise servers. In its technology business, the company is
focusing its resources on high-end enterprise servers based on its Cellular
MultiProcessing (CMP) architecture. The company's CMP servers are designed to
provide mainframe-class capabilities with compelling price-performance by
making use of standards-based technologies such as Intel chips and Microsoft
operating system software. The company has transitioned both its legacy
ClearPath servers and its Intel-based ES7000s to the CMP platform, creating a
common platform for all the company's high-end server lines. Future results
will depend, in part, on customer acceptance of the new CMP-based ClearPath
Plus systems and the company's ability to maintain its installed base for
ClearPath and to develop next-generation ClearPath products that are purchased
by the installed base. In addition, future results will depend, in part, on
the company's ability to generate new customers and increase sales of the
Intel-based ES7000 line. The company believes there is significant growth
potential in the developing market for high-end, Intel-based servers running
Microsoft operating system software. However, competition in this new market
is likely to intensify in coming years, and the company's ability to succeed
will depend on its ability to compete effectively against enterprise server
competitors with more substantial resources and its ability to achieve market
acceptance of the ES7000 technology by clients, systems integrators, and
independent software vendors.
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 termination or may impose other
penalties if the company does not meet the performance levels specified in the
contracts.
Some of the company's systems integration contracts are fixed-priced contracts
under which the company assumes the risk for delivery of the contracted
services and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
The company frequently enters into contracts with governmental entities. Risks
and uncertainties associated with these government contracts include the
availability of appropriated funds and contractual provisions that allow
governmental entities to terminate agreements at their discretion before the
end of their terms.
19
The success of the company's business is dependent on strong, long-term client
relationships and on its reputation for responsiveness and quality. As a
result, if a client is not satisfied with the company's services or products,
its reputation could be damaged and its business adversely affected. In
addition, if the company fails to meet its contractual obligations, it could be
subject to legal liability, which could adversely affect its business,
operating results and financial condition.
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. 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.
Approximately 53% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, changes in political or economic
conditions, trade protection measures, import or export licensing
requirements, multiple and possibly overlapping and conflicting tax laws,
and weaker intellectual property protections in some jurisdictions.
The company cannot be sure that its services and products do not infringe on
the intellectual property rights of third parties, and it may have
infringement claims asserted against it or against its clients. These claims
could cost the company money, prevent it from offering some services or
products, or damage its reputation.
20
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, 2003.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing the
information the company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. Such evaluation did not identify any change in the
company's internal control over financial reporting that occurred during the
quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the company's internal control over
financial reporting.
21
Part II - OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On July 17, 2003 the company furnished a Current Report on Form 8-K
to provide, under Items 7, 9 and 12, the company's earnings release reporting
its financial results for the quarter ended June 30, 2003. Such information
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934.
22
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: October 23, 2003 By: /s/ Janet M. Brutschea Haugen
-----------------------------
Janet M. Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Carol S. Sabochick
----------------------
Carol S. Sabochick
Vice President and
Corporate Controller
(Chief Accounting Officer)
23
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Lawrence A. Weinbach 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 Lawrence A. Weinbach 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, --------------------------------
2003 2002 2001 2000 1999 1998
-------- ---- ---- ---- ---- ----
Fixed charges
Interest expense $ 51.3 $ 66.5 $ 70.0 $ 79.8 $127.8 $171.7
Interest capitalized during
the period 11.0 13.9 11.8 11.4 3.6 -
Amortization of debt issuance
expenses 2.9 2.6 2.7 3.2 4.1 4.6
Portion of rental expense
representative of interest 39.8 53.0 53.9 42.2 46.3 49.1
------ ------ ------ ------ ------ ------
Total Fixed Charges 105.0 136.0 138.4 136.6 181.8 225.4
------ ------ ------ ------ ------ ------
Earnings
Income (loss) from continuing
operations before income taxes 219.7 332.8 (73.0) 348.5 751.7 594.2
Add (deduct) the following:
Share of loss (income) of
associated companies (7.7) 14.2 (8.6) (20.5) 8.9 (.3)
Amortization of capitalized
interest 7.6 8.8 5.4 2.2 - -
------ ------ ------ ------ ------ ------
Subtotal 219.6 355.8 (76.2) 330.2 760.6 593.9
------ ------ ------ ------ ------ ------
Fixed charges per above 105.0 136.0 138.4 136.6 181.8 225.4
Less interest capitalized during
the period (11.0) (13.9) (11.8) (11.4) (3.6) -
------ ------ ------ ------ ------ ------
Total earnings $313.6 $477.9 $ 50.4 $455.4 $938.8 $819.3
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges 2.99 3.51 * 3.33 5.16 3.63
====== ====== ====== ====== ====== ======
* Earnings for the year ended December 31, 2001 were inadequate to cover fixed
charges by approximately $88.0 million.
Exhibit 31.1
CERTIFICATION
I, Lawrence A. Weinbach, 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)) 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. 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;
c. 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 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: October 23, 2003 /s/ Lawrence A. Weinbach
-------------------------
Name: Lawrence A. Weinbach
Title: Chairman, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Janet Brutschea Haugen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unisys Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) 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. 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;
c. 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 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: October 23, 2003 /s/ Janet Brutschea Haugen
-------------------------
Name: Janet Brutschea Haugen
Title: Senior Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
I, Lawrence A. Weinbach, Chairman, President and Chief Executive
Officer of Unisys Corporation (the "Company"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350,
that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 2003 (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: October 23, 2003
/s/ Lawrence A. Weinbach
- ------------------------
Lawrence A. Weinbach
Chairman, President and
Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
I, Janet Brutschea Haugen, Senior Vice President and Chief Financial
Officer of Unisys Corporation (the "Company"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350,
that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 2003 (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: October 23, 2003
/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.