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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] 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 [ ]
Number of shares of Common Stock outstanding as of June 30, 2002:
323,183,887.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEET
(Millions)
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 201.1 $ 325.9
Accounts and notes receivable, net 958.5 1,093.7
Inventories
Parts and finished equipment 176.2 201.6
Work in process and materials 96.8 144.2
Deferred income taxes 344.8 342.6
Other current assets 100.2 96.1
-------- --------
Total 1,877.6 2,204.1
-------- --------
Properties 1,472.2 1,460.4
Less-Accumulated depreciation 895.8 910.8
-------- --------
Properties, net 576.4 549.6
-------- --------
Investments at equity 177.3 212.3
Marketable software, net 298.1 287.9
Prepaid pension cost 1,316.8 1,221.0
Deferred income taxes 747.8 747.8
Goodwill 161.7 159.0
Other long-term assets 392.0 387.4
-------- --------
Total $5,547.7 $5,769.1
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 117.9 $ 78.9
Current maturities of long-term debt 1.1 2.2
Accounts payable 499.3 694.9
Other accrued liabilities 1,198.8 1,302.9
Income taxes payable 232.3 234.6
-------- --------
Total 2,049.4 2,313.5
-------- --------
Long-term debt 746.1 745.0
Other long-term liabilities 561.1 597.9
Stockholders' equity
Common stock, shares issued: 2002, 325.1;
2001,322.5 3.3 3.2
Accumulated deficit ( 821.7) ( 896.5)
Other capital 3,740.3 3,712.8
Accumulated other comprehensive loss ( 730.8) ( 706.8)
-------- --------
Stockholders' equity 2,191.1 2,112.7
-------- --------
Total $5,547.7 $5,769.1
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
----------------- ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $1,359.8 $1,461.4 $2,722.3 $3,085.2
-------- -------- -------- --------
Costs and expenses
Cost of revenue 955.3 1,064.0 1,928.5 2,260.2
Selling, general and
administrative expenses 245.5 276.4 490.9 521.7
Research and development expenses 62.0 75.2 127.1 151.2
-------- -------- -------- --------
1,262.8 1,415.6 2,546.5 2,933.1
-------- -------- -------- --------
Operating income 97.0 45.8 175.8 152.1
Interest expense 18.1 17.6 35.6 33.5
Other income (expense), net (16.0) 15.7 (28.4) 28.7
-------- -------- -------- --------
Income before income taxes 62.9 43.9 111.8 147.3
Provision for income taxes 20.7 14.6 36.9 48.7
-------- -------- -------- --------
Income before extraordinary item 42.2 29.3 74.9 98.6
Extraordinary item (17.2) (17.2)
-------- -------- -------- --------
Net income $ 42.2 $ 12.1 $ 74.9 $ 81.4
======== ======== ======== ========
Earnings per share
Basic
Before extraordinary item $ .13 $ .09 $ .23 $ .31
Extraordinary item (.05) (.05)
-------- -------- -------- --------
Total $ .13 $ .04 $ .23 $ .26
======== ======== ======== ========
Diluted
Before extraordinary item $ .13 $ .09 $ .23 $ .31
Extraordinary item (.05) (.05)
-------- -------- -------- --------
Total $ .13 $ .04 $ .23 $ .26
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Millions)
Six Months Ended
June 30
-----------------
2002 2001
-------- -------
Cash flows from operating activities
Income before extraordinary item $ 74.9 $ 98.6
Add(deduct) items to reconcile income before
extraordinary item to net cash provided
by operating activities:
Extraordinary item (17.2)
Depreciation 74.6 65.0
Amortization:
Marketable software 61.0 61.0
Deferred outsourcing contract costs 9.0 4.7
Goodwill 8.7
(Increase) in deferred income taxes, net ( 2.2) ( 2.8)
Decrease in receivables, net 132.6 100.2
Decrease in inventories 72.7 4.7
(Decrease) in accounts payable and
other accrued liabilities (302.5) (356.8)
(Decrease) in income taxes payable ( 2.3) ( 8.7)
(Decrease) increase in other liabilities ( 22.0) 190.3
(Increase) in other assets (131.5) (143.7)
Other 48.3 6.0
------- ------
Net cash provided by operating
activities 12.6 10.0
------- ------
Cash flows from investing activities
Proceeds from investments 1,476.7 1,056.6
Purchases of investments (1,490.6) (1,042.6)
Investment in marketable software ( 71.2) ( 67.8)
Capital additions of properties (106.1) ( 84.5)
Purchases of businesses ( 3.9) ( 2.2)
------- ------
Net cash used for investing activities (195.1) (140.5)
------- ------
Cash flows from financing activities
Net proceeds from (reduction in) short-term
borrowings 39.0 ( 22.3)
Proceeds from employee stock plans 16.1 19.0
Payments of long-term debt ( 1.2) (342.3)
Proceeds from issuance of long-term debt 341.2
------- ------
Net cash provided by (used for) financing
activities 53.9 ( 4.4)
------- ------
Effect of exchange rate changes on
cash and cash equivalents 3.8 1.6
------- ------
Decrease in cash and cash equivalents (124.8) (133.3)
Cash and cash equivalents, beginning of period 325.9 378.0
------- -------
Cash and cash equivalents, end of period $ 201.1 $ 244.7
======= =======
See notes to consolidated financial statements.
5
UNISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of management, the financial information furnished
herein reflects all adjustments necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods specified. These adjustments consist only of normal
recurring accruals. 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 six months ended June 30, 2002 and 2001 (dollars in millions,
shares in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Basic Earnings Per Share
Income before
extraordinary item $ 42.2 $ 29.3 $ 74.9 $ 98.6
Extraordinary item ( 17.2) (17.2)
------- ------- ------- -------
Net income $ 42.2 $ 12.1 $ 74.9 $ 81.4
======= ======= ======= =======
Weighted average shares 322,832 317,658 322,150 316,984
======= ======= ======= =======
Basic earnings per share
Before extraordinary
item $ .13 $ .09 $ .23 $ .31
Extraordinary item (.05) (.05)
------- ------- ------- -------
Total $ .13 $ .04 $ .23 $ .26
======= ======= ======= =======
Diluted Earnings Per Share
Income before
extraordinary item $ 42.2 $ 29.3 $ 74.9 $ 98.6
Extraordinary item ( 17.2) ( 17.2)
------- ------- ------- -------
Net income $ 42.2 $ 12.1 $ 74.9 $ 81.4
======= ======= ======= =======
Weighted average shares 322,832 317,658 322,150 316,984
Plus incremental shares
from assumed exercise
of employee stock plans 1,430 1,738 1,635 2,228
------- ------- ------- -------
Adjusted weighted average
shares 324,262 319,396 323,785 319,212
======= ======= ======= =======
Diluted earnings per share
Before extraordinary
item $ .13 $ .09 $ .23 $ .31
Extraordinary item (.05) (.05)
------- ------- ------- -------
Total $ .13 $ .04 $ .23 $ .26
======= ======= ======= =======
At June 30, 2002, 34.8 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. Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets."
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-
6
lived intangible assets. Instead, these assets must be reviewed annually for
impairment in accordance with this statement. During the first quarter of
2002, the company performed the first of the required impairment tests of
goodwill, which indicated that the company's goodwill was not impaired.
During the six months ended June 30, 2002, there was an increase in goodwill
of $3.0 million related to an immaterial acquisition and all other changes
were attributed to foreign currency translation adjustments. Goodwill as of
June 30, 2002 was allocated by segment as follows: Technology - $117
million; Services - $45 million.
The company's net income and earnings per share for the three and six months
ended June 30, 2002 and 2001 adjusted to exclude goodwill amortization was as
follows (in millions of dollars, except per share amounts):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
Reported income before
extraordinary item $ 42.2 $ 29.3 $ 74.9 $ 98.6
Add back goodwill
amortization, net of tax - 3.8 - 7.3
------ ------ ------ ------
Adjusted income before
extraordinary item $ 42.2 $ 33.1 $ 74.9 $105.9
====== ====== ====== ======
Reported net income $ 42.2 $ 12.1 $ 74.9 $ 81.4
Add back goodwill
amortization, net of tax - 3.8 - 7.3
------ ------ ------ ------
Adjusted net income $ 42.2 $ 15.9 $ 74.9 $ 88.7
====== ====== ====== ======
Earnings per share before
extraordinary item
Basic and diluted earnings
per share as reported $ .13 $ .09 $ .23 $ .31
Goodwill amortization - .01 - .02
------ ------ ------ ------
Basic and diluted earnings
per share as adjusted $ .13 $ .10 $ .23 $ .33
====== ====== ====== ======
Earnings per share
Basic and diluted earnings
per share as reported $ .13 $ .04 $ .23 $ .26
Goodwill amortization - .01 - .02
------ ------ ------ ------
Basic and diluted earnings
per share as adjusted $ .13 $ .05 $ .23 $ .28
====== ====== ====== ======
7
The company's net income and earnings per share for the three years ended
December 31, 2001 adjusted to exclude goodwill amortization was as follows (in
millions of dollars, except per share amounts):
Years Ended
December 31,
----------------------------
2001 2000 1999
---- ---- ----
Reported income (loss) available to common
stockholders before extraordinary items $(49.9) $244.8 $486.1
Add back goodwill amortization, net of tax 14.1 20.1 20.9
------ ------ ------
Adjusted income (loss) available to common
stockholders before extraordinary items $(35.8) $264.9 $507.0
====== ====== ======
Reported income (loss) on common shares $(67.1) $225.0 $474.0
Add back goodwill amortization, net of tax 14.1 20.1 20.9
------ ------ ------
Adjusted income (loss) on common shares $(53.0) $245.1 $494.9
====== ====== ======
Earnings (loss) per share before extraordinary
items
Basic
As reported $ (.16) $ .78 $ 1.69
Goodwill amortization .04 .06 .07
------ ------ ------
As adjusted $ (.12) $ .84 $ 1.76
====== ====== ======
Diluted
As reported $ (.16) $ .77 $ 1.63
Goodwill amortization .04 .06 .07
------ ------ ------
As adjusted $ (.12) $ .83 $ 1.70
====== ====== ======
Earnings (loss) per share
Basic
As reported $ (.21) $ .72 $ 1.65
Goodwill amortization .04 .06 .07
------ ------ ------
As adjusted $ (.17) $ .78 $ 1.72
====== ====== ======
Diluted
As reported $ (.21) $ .71 $ 1.59
Goodwill amortization .04 .06 .07
------ ------ ------
As adjusted $ (.17) $ .77 $ 1.66
====== ====== ======
c. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration
and consulting, outsourcing, network services and core maintenance;
Technology - enterprise-class servers and specialized technologies. The
accounting policies of each business segment are the same as for the company
as a whole. Intersegment sales and transfers are priced as if the sales or
transfers were to third parties. The company evaluates business segment
performance on operating income exclusive of restructuring charges and
unusual and nonrecurring items. All other corporate and centrally incurred
costs are allocated to the business segments based principally on assets,
revenue, employees, square footage or usage.
8
A summary of the company's operations by business segment for the three and
six month periods ended June 30, 2002 and 2001 is presented below (in
millions of dollars):
Total Corporate Services Technology
Three Months Ended
June 30, 2002
------------------
Customer revenue $1,359.8 $1,039.3 $ 320.5
Intersegment $( 82.9) 14.2 68.7
-------- ------- -------- --------
Total revenue $1,359.8 $( 82.9) $1,053.5 $ 389.2
======== ======= ======== ========
Operating income (loss) $ 97.0 $( 11.9) $ 61.2 $ 47.7
======== ======= ======== ========
Three Months Ended
June 30, 2001
------------------
Customer revenue $1,461.4 $1,084.7 $ 376.7
Intersegment $( 82.9) 18.2 64.7
-------- ------- -------- --------
Total revenue $1,461.4 $( 82.9) $1,102.9 $ 441.4
======== ======= ======== ========
Operating income(loss) $ 45.8 $( 10.2) $ 9.8 $ 46.2
======== ======= ======== ========
Six Months Ended
June 30, 2002
----------------
Customer revenue $2,722.3 $2,088.5 $ 633.8
Intersegment $(163.6) 25.7 137.9
-------- ------- -------- --------
Total revenue $2,722.3 $(163.6) $2,114.2 $ 771.7
======== ======= ======== ========
Operating income (loss) $ 175.8 $( 15.0) $ 113.6 $ 77.2
======== ======= ======== ========
Six Months Ended
June 30, 2001
------------------
Customer revenue $3,085.2 $2,260.4 $ 824.8
Intersegment $(165.0) 31.5 133.5
-------- ------- -------- --------
Total revenue $3,085.2 $(165.0) $2,291.9 $ 958.3
======== ======= ======== ========
Operating income (loss) $ 152.1 $( 19.5) $ 36.9 $ 134.7
======== ======= ======== ========
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Total segment operating income $108.9 $ 56.0 $190.8 $171.6
Interest expense (18.1) (17.6) (35.6) (33.5)
Other income (expense), net (16.0) 15.7 (28.4) 28.7
Corporate and eliminations (11.9) (10.2) (15.0) (19.5)
------ ------ ------ ------
Total income before income taxes $ 62.9 $ 43.9 $111.8 $147.3
====== ====== ====== ======
9
d. Comprehensive income for the three and six months ended June 30, 2002 and
2001 includes the following components (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 42.2 $ 12.1 $ 74.9 $ 81.4
Other comprehensive income (loss)
Cumulative effect of change in
accounting principle (SFAS
No. 133), net of tax of $1.8 3.3
Cash flow hedges
Income (loss), net of tax of
$(3.5), $.7, $(2.4) and $4.4 (6.4) 1.2 (4.4) 8.1
Reclassification adjustments,
net of tax of $1.2, $(1.3),
$(.6)and $(2.6) 2.2 (2.3) (1.3) (4.9)
Foreign currency translation
adjustments, net of tax of
$0, $1.7, $0 and $0 (26.4) (59.3) (18.3) (60.8)
------ ------ ------ ------
Total other comprehensive
income (loss) (30.6) (60.4) (24.0) (54.3)
------ ------ ------ ------
Comprehensive income (loss) $ 11.6 $(48.3) $ 50.9 $ 27.1
====== ====== ====== ======
Accumulated other comprehensive income (loss) as of December 31, 2001 and
June 30, 2002 is as follows (in millions of dollars):
Cash
Translation Flow
Total Adjustments Hedges
----- ----------- ------
Balance at December 31, 2000 $(643.7) $(643.7)
Change during period ( 63.1) ( 67.5) $ 4.4
------- ------- ------
Balance at December 31, 2001 (706.8) (711.2) 4.4
Change during period ( 24.0) ( 18.3) ( 5.7)
------- ------- ------
Balance at June 30, 2002 $(730.8) $(729.5) $( 1.3)
======= ======= ======
e. In response to the weak economic environment in 2001, the company took
actions to reduce its cost structure. In the fourth quarter of 2001, the
company recorded a pretax charge of $276.3 million, or $.64 per share,
primarily for a work-force reduction of approximately 3,750 people (1,700
in the United States and 2,050 outside the United States). Of the total,
1,910 people left the company in 2001 with the remainder to leave in 2002.
Of the total work-force reduction, 764 people accepted an early retirement
program in the United States. For those employees who accepted the early
retirement program, cash requirements were provided through the company's
pension plan. Cash expenditures in 2001 related to the involuntary
reductions were $23.3 million. These activities did not significantly
affect the company's operations while they were ongoing. A further
breakdown of the individual components of these costs follows:
10
Work-Force
Reductions(1)
----------
Idle Lease
($ in Millions) Headcount Total U.S. Int'l Costs Other(2)
------------------------------------------------------------------------
Work-force
reductions(1)
Early retirement 764 $ 58.8 $ 58.8
Involuntary
reductions 3,001 145.9 18.8 $127.1
----- ------ ------ ------
Subtotal 3,765 204.7 77.6 127.1
Other 71.6 $ 29.5 $ 42.1
------ ------ ------ ------ ------ ------
Total charge 3,765 276.3 77.6 127.1 29.5 42.1
Utilized (1,910) (127.2) ( 62.5) ( 22.6) ( 42.1)
------ ------ ------ ------ ------ ------
Balance at
Dec. 31, 2001 1,855 149.1 15.1 104.5 29.5 -
Utilized (1,340) ( 56.2) ( 8.7) ( 44.9) ( 2.6)
Additional
provisions 568 20.2 1.7 17.1 1.4
Reversal of
excess reserves ( 264) ( 12.8) ( 4.2) ( 8.3) ( .3)
Other(3) 3.4 4.3 ( .9)
------ ------ ------ ------ ------ ------
Balance at
June 30, 2002 819 $103.7 $ 3.9 $ 72.7 $ 27.1 $ -
====== ====== ====== ====== ====== ======
Expected future
cash utilization:
2002 second half $ 66.9 $ 2.9 $ 54.4 $ 9.6
2003 and thereafter 36.8 1.0 18.3 17.5
------ ------ ------ ------
(1)Includes severance, notice pay, medical and other benefits.
(2)Includes product and program discontinuances, principally
representing a provision for asset write-offs.
(3)Changes in estimates and translation adjustments.
Most of the 2001 fourth-quarter charges were related to work-force
Reductions ($204.7 million), principally severance costs. Other employee-
related costs are not significant. Approximately $58.8 million of this
total was funded from the company's U.S. pension plan. The remainder of
the cost related to work-force reductions as well as idle lease costs,
discussed below, is being funded from the company's operating cash flow.
The charge related to idle lease costs was $29.5 million and relates to
contractual obligations (reduced by estimated sublease income) existing
under long-term leases of vacated facilities. Estimates of the amounts
and timing of sublease income were based on discussions with real estate
brokers that considered the marketability of the individual property
involved. The charge for product and program discontinuances was $42.1
million and principally represented capitalized marketable software and
inventory related to products or programs that were discontinued at
December 31, 2001. These actions have lowered the company's cost base
(principally employee-related costs), thereby making the company better
able to compete in the market place.
Cash expenditures related to the 2001 and prior-year restructuring charges
were approximately $63 million in the six months ended June 30, 2002
compared to $30 million for the prior-year period, and are expected to be
approximately $72 million (which includes approximately $5 million related
to restructuring charges taken prior to 2001) for the remainder of 2002
and $42 million (which includes approximately $5 million related to
restructuring charges taken prior to 2001) in total for all subsequent
years, principally for work-force reductions and idle lease costs.
Personnel reductions in the first half of 2002 related to these
restructuring actions were 1,340 and are expected to be 819 for the
remainder of the year.
11
As summarized above, during the six months ended June 30, 2002, the
company reduced its accrued workforce reserve by $12.5 million. This
reduction related to 264 employees who were designated for involuntary
termination but were retained as a result of job positions that became
available due to voluntary terminations or acceptance of alternative
positions within the company. In addition, given the continuing weak
economic environment, the company identified new restructuring actions
and recorded an additional provision of $20.2 million, principally for a
workforce reduction of 568 people.
f. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the six months ended June 30,
2002 and 2001 was $2.8 million and $3.2 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
g. In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. SFAS No. 145 also amends SFAS No. 13, Accounting for
Leases," in respect to sale-leaseback transactions.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 must
be applied in fiscal years beginning after May 15, 2002. The company will
adopt this statement effective January 1, 2003. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in
prior periods that does not meet the criteria of Opinion 30 for
classification as an extraordinary item will be reclassified from
extraordinary item to other income (expense), net. Adoption of SFAS No.
145 will have no effect on the company's consolidated financial position,
consolidated net income or liquidity.
h. Certain prior-year amounts have been reclassified to conform with the 2002
presentation.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended June 30, 2002, the company reported net income of
$42.2 million, or $.13 per share, compared to $12.1 million, or $.04 per share,
for the three months ended June 30, 2001. The prior-year period included an
extraordinary item for the early extinguishment of debt of $17.2 million, or
$.05 per share. Excluding this item, income in the prior-year period was $29.3
million, or $.09 per share.
Total revenue for the quarter ended June 30, 2002 was $1.36 billion, down 7%
from revenue of $1.46 billion for the quarter ended June 30, 2001. Services
revenue of $1.04 billion declined 4% from the prior year while Technology
revenue of $321 million declined 15% from the prior-year period.
U.S. revenue declined 8% in the second quarter to $595 million from $646 million
in the year-ago period, and revenue in international markets decreased 6% to
$765 million from $816 million in the year-ago period. Currency changes had a
negligible impact on revenue in the quarter.
Total gross profit was 29.7% in the second quarter of 2002 compared to 27.2% in
the year-ago period, principally reflecting improvements in the Services
business and a higher mix of ClearPath server sales.
For the three months ended June 30, 2002, selling, general and administrative
expenses were $245.5 million (18.1% of revenue) compared to $276.4 million
(18.9% of revenue) for the three months ended June 30, 2001. The decline in
selling, general and administrative expenses was principally due to the effects
of the company's cost reduction actions.
Research and development ("R&D") expense was $62.0 million compared to $75.2
million a year earlier. The lower level of R&D reflects changes that the
company has made to improve efficiencies, consolidate R&D activities in systems
integration to improve synergies, and to make use of lower-cost offshore
resources for software support. Although the amount of R&D is down, the company
continues to invest in high-end CMP server technology and in key programs within
its industry practices.
For the second quarter of 2002, the company reported an operating income percent
of 7.1% compared to 3.1% for the second quarter of 2001.
The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, network services and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting policies
of each business segment are the same as for the company as a whole.
Intersegment sales and transfers are priced as if the sales or transfers were to
third parties. The company evaluates business segment performance on operating
income exclusive of restructuring charges and unusual and nonrecurring items.
All other corporate and centrally incurred costs are allocated to the business
segments based principally on assets, revenue, employees, square footage or
usage.
13
Information by business segment is presented below (in millions):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
June 30, 2002
- ------------------
Customer revenue $1,359.8 $1,039.3 $320.5
Intersegment $( 82.9) 14.2 68.7
-------- ------- -------- ------
Total revenue $1,359.8 $( 82.9) $1,053.5 $389.2
======== ======= ======== ======
Gross profit percent 29.7% 21.9% 46.8%
======== ======== ======
Operating income
percent 7.1% 5.8% 12.2%
======== ======== ======
Three Months Ended
June 30, 2001
- ------------------
Customer revenue $1,461.4 $1,084.7 $376.7
Intersegment $( 82.9) 18.2 64.7
-------- ------- -------- ------
Total revenue $1,461.4 $( 82.9) $1,102.9 $441.4
======== ======= ======== ======
Gross profit percent 27.2% 19.2% 43.5%
======== ======== ======
Operating income
percent 3.1% 0.9% 10.5%
======== ======== ======
In the Services segment, customer revenue was $1.04 billion, down 4% from $1.08
billion in the year-ago period, as an 8% increase in outsourcing ($347 million
in the second quarter of 2002 compared to $322 million in the prior period) was
more than offset by a 14% decline in network services ($215 million in the
current period compared to $250 million in the prior-year period), a 7% decline
in systems integration ($341 million in the current period compared to $368
million in the prior period), and a 5% decline in core maintenance revenue
($137 million in the current period compared to $145 million in the prior
period). The decline in network services revenue was principally due to
reduced low-margin commodity hardware sales as part of network services
projects compared to the year-ago period. The Services segment gross profit
percent increased to 21.9% in the current quarter from 19.2% in the prior
period, and its operating profit percent increased to 5.8% in the current
quarter compared to 0.9% in the year-ago period. The company achieved these
margin improvements by being selective in pursuing higher value-added business
opportunities, de-emphasizing low-margin commoditized areas of the market,
growing its annuity-based outsourcing business, and resizing its workforce to
meet business demand.
In the Technology segment, customer revenue declined 15% to $321 million in the
second quarter of 2002 from $377 million in the prior-year period. Demand in
the Technology segment remained weak industry-wide as customers deferred
spending on new computer hardware and software. Sales of specialized
technology products declined 36% to $80 million in the second quarter of 2002
from $125 million in the second quarter of 2001. Sales of enterprise servers
declined 4% to $240 million from $252 million in the year-ago quarter,
primarily reflecting lower sales of the company's Intel based ES Server line.
The gross profit percent in the Technology segment was 46.8% in the current
quarter compared to 43.5% in the prior period. Operating profit in this
segment increased to 12.2% in the current quarter from 10.5% in 2001,
primarily reflecting an increase in the percentage of ClearPath server sales,
which have a higher gross profit margin, as well as the effects of the
company's cost reduction actions.
14
Interest expense for the three months ended June 30, 2002 was $18.1 million
compared to $17.6 million for the three months ended June 30, 2001.
Other income (expense), net was an expense of $16.0 million in the current
quarter compared to income of $15.7 million in the year-ago quarter. In the
current quarter, other income (expense), net includes a charge of $21.8
million relating to the company's share of an early retirement charge recorded
by Nihon Unisys, Ltd. ("NUL"). The company owns approximately 28% of the
common stock of NUL and accounts for its investment by the equity method.
Other income (expense), net also included foreign exchange losses, principally
in Latin America, of $1.3 million in the current period compared to foreign
exchange gains of $12.5 million in the year-ago period.
Income before income taxes was $62.9 million in the second quarter of 2002
compared to $43.9 million last year. The provision for income taxes was $20.7
million in the current period compared to $14.6 million in the year-ago period.
The effective tax rate in both periods was 33%.
During the three months ended June 30, 2002, the company reduced its accrued
workforce reserve by $12.5 million. This reduction related to 264 employees
who were designated for involuntary termination but were retained as a result
of acceptance of job positions that became available due to voluntary
terminations or acceptance of alternative positions within the company. In
addition, given the continuing weak economic environment, the company
identified new restructuring actions and recorded an additional provision
of $20.2 million, principally for a workforce reduction of 568 people.
Pension income for the three months ended June 30, 2002 was approximately $34
million compared to approximately $42 million for the three months ended June
30, 2001. The principal reason for the decline was that effective January 1,
2002, the company reduced its expected long-term rate of return on plan assets
for its U.S. pension plan to 9.5% from 10.0%. This change will cause 2002
pension income in the U.S. to decline by approximately $24 million from the
2001 amount. 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 line is based on where the salaries of the active
employees are charged.
For the six months ended June 30, 2002, net income was $74.9 million, or $.23
per share, compared to net income of $81.4 million, or $.26 per share, last
year. The prior-year period included an extraordinary item for the early
extinguishment of debt of $17.2 million, or $.05 per share. Excluding this
item, income in the prior-year period was $98.6 million, or $.31 per diluted
share. Revenue for the six months ended June 30, 2002 was $2.72 billion, down
12% from $3.09 billion for the six months ended June 30, 2001.
Financial Condition
- -------------------
Cash and cash equivalents at June 30, 2002 were $201.1 million compared to
$325.9 million at December 31, 2001.
For the six months ended June 30, 2002, cash provided by operations was $12.6
million compared to cash provided of $10.0 million for the six months ended
June 30, 2001. Cash expenditures in the six months ended June 30, 2002
related to prior-year restructuring charges (which are included in operating
activities) were approximately $63 million compared to $30 million in the
prior-year period. These expenditures are expected to be approximately $72
million for the remainder of 2002 and $42 million in total for all subsequent
years, principally for work-force reductions and idle lease costs. Personnel
reductions in the first half of 2002 related to these restructuring actions
were 1,340 and are expected to be 819 for the remainder of the year. See
Note e of the Notes to Consolidated Financial Statements.
15
Cash used for investing activities for the six months ended June 30, 2002 was
$195.1 million compared to $140.5 million during the six months ended June 30,
2001. The increase was principally due to net purchases of investments of
$13.9 million for the six months ended June 30, 2002 compared to net proceeds
from investments of $14.0 million in the prior-year period, as well as higher
current period additions to properties, principally related to the outsourcing
business.
Cash provided by financing activities during the six months ended June 30, 2002
was $53.9 million compared to cash used of $4.4 million in the prior year,
principally due to net proceeds from short-term borrowings of $39.0 million
for the six months ended June 30, 2002 compared to a net reduction in short-
term borrowings of $22.3 million in the prior-year period.
At June 30, 2002, total debt was $865.1 million, an increase of $39.0 million
from December 31, 2001. The debt to capital ratio was 28% at June 30, 2002
and December 31, 2001.
The company has a three-year $450 million credit agreement. As of June 30,
2002, there were no borrowings under this facility. Borrowings under the
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.
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. At June 30, 2002, receivables of $157 million were sold and
therefore removed from the accompanying consolidated balance sheet. The
facility is renewable annually at the purchasers' option and expires in
December 2003.
At June 30, 2002, the company has met all of the 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 an
effective registration statement covering $1.5 billion of debt or equity
securities, which enables the company to be prepared for future market
opportunities.
At June 30, 2002, the company had deferred tax assets in excess of deferred
tax liabilities of $1,379 million. For the reasons cited below, management
determined that it is more likely than not that $1,037 million of such assets
will be realized, therefore resulting in a valuation allowance of $342 million.
16
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 $3.2 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.
At the end of each year, the company determines the fair value of its pension
plan assets as well as the discount rate to be used to calculate the present
value of plan liabilities. The discount rate is an estimate of the interest
rate at which the pension benefits could be effectively settled. In estimating
the discount rate, the company looks to rates of return on high quality, fixed
income investments currently available and expected to be available during the
period to maturity of the pension benefits. The company specifically uses a
portfolio of fixed-income securities, which on average receive at least the
second highest rating given by a recognized rating agency. The discount rate
is used to calculate the present value of the pension obligation at a point in
time (the accumulated benefit obligation, or "ABO").
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 ABO. This liability is called a "minimum pension
liability" and is recorded as a charge in "accumulated other comprehensive
income (loss)" in stockholders' equity.
At June 30, 2002, for the company's U.S. pension plan, the fair value of
pension plan assets exceeded the ABO by approximately $200 million. However,
if the fair value of the U.S. pension plan assets were to decline or long-term
interest rates were to fall to the extent that the ABO for the U.S. pension
plan exceeded the fair value of its assets at December 31, 2002, the company
would be in a minimum pension liability position.
In this case, accounting rules would require that a liability be recorded for
the excess of the ABO over the fair value of pension plan assets, as described
above. Accordingly, the company would record a charge to stockholders' equity
in an amount equal to the minimum pension liability plus the company's U.S.
pension asset of approximately $1.2 billion, net of tax. This accounting would
have no effect on the company's net income, liquidity or cash flows. Financial
ratios and net worth covenants in the company's credit agreement specifically
exclude the effects of the charge to stockholders' equity caused by recording
a minimum pension liability. If at the following year-end (December 31, 2003),
the fair value of the pension plan assets exceeds the ABO,
the charge to stockholders' equity would be reversed.
Stockholders' equity increased $78.4 million during the six months ended June
30, 2002, principally reflecting net income of $74.9 million, $24.7 million
for issuance of stock under stock option and other plans, and $2.8 million of
tax benefits related to employee stock plans, partially offset by currency
translation of $24.0 million.
Factors That May Affect Future Results
- --------------------------------------
From time to time, the company provides information containing "forward-
looking" statements, as defined in the Private Securities Litigation Reform
Act of 1995. 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.
The company's business is affected by changes in general economic and business
conditions. It also could be affected by acts of war, terrorism or natural
disasters. During 2002, the company is facing a very 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 does not increase or if it
declines in the future, the company's business could be adversely affected.
17
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 network
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 generally, 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 accelerate
growth in outsourcing and managed services. The company's outsourcing
contracts are multi-year 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 up-front 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 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 recent
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 not able 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.
18
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. Recently 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, which continues to provide the majority of operating profit in
the company's technology business. In addition, future results will depend, in
part, on the company's ability to generate new customers and accelerate sales
of the lower-margin 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 network 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.
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 57% 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.
19
Part II - OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The company's 2002 Annual Meeting of Stockholders (the "Annual
Meeting") was held on April 25, 2002 in Philadelphia, Pennsylvania.
(b) The following matters were voted upon at the Annual Meeting and
received the following votes:
1. Election of Directors as follows:
J.P. Bolduc - 277,684,581 votes for; 5,233,024 votes withheld
James J. Duderstadt - 277,715,175 votes for; 5,202,430 votes
withheld
Denise K. Fletcher - 277,961,528 votes for; 4,956,077 votes
withheld
Kenneth A. Macke - 277,693,189 votes for; 5,224,416 votes
withheld
2. A proposal to ratify the selection of the company's independent
auditors - 271,207,440 votes for; 9,788,573 votes against;
1,921,592 abstentions
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the company
filed no Current Reports on Form 8-K.
20
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: August 13, 2002 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
----------------------
Vice President and
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Letter Agreement dated June 3, 2002 between Unisys
Corporation and Joseph W. McGrath
10.2 Amendment dated July 25, 2002 to Employment Agreement between
Unisys Corporation and Lawrence A. Weinbach
12 Statement of Computation of Ratio of Earnings to Fixed
Charges