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 March 31, 2004
[ ] 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 March 31, 2004:
333,315,970.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
March 31,
2004 December 31,
(Unaudited) 2003
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 671.4 $ 635.9
Accounts and notes receivable, net 1,002.6 1,027.8
Inventories:
Parts and finished equipment 119.1 121.7
Work in process and materials 138.7 116.9
Deferred income taxes 271.4 270.0
Other current assets 111.9 85.7
-------- --------
Total 2,315.1 2,258.0
-------- --------
Properties 1,342.9 1,352.7
Less-Accumulated depreciation and
amortization 914.6 928.5
-------- --------
Properties, net 428.3 424.2
-------- --------
Outsourcing assets, net 522.9 477.5
Marketable software, net 332.0 332.2
Investments at equity 167.6 153.3
Prepaid pension cost 50.3 55.5
Deferred income taxes 1,384.6 1,384.6
Goodwill 176.7 177.5
Other long-term assets 195.9 211.8
-------- --------
Total $5,573.4 $5,474.6
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 28.3 $ 17.7
Current maturities of long-term debt 150.8 2.2
Accounts payable 522.3 513.8
Other accrued liabilities 1,311.5 1,305.7
Income taxes payable 206.1 214.1
-------- --------
Total 2,219.0 2,053.5
-------- --------
Long-term debt 899.8 1,048.3
Accrued pension liabilities 446.9 433.6
Other long-term liabilities 543.9 544.0
Stockholders' equity
Common stock, shares issued: 2004, 335.3;
2003, 333.8 3.4 3.3
Accumulated deficit ( 385.9) ( 414.8)
Other capital 3,836.5 3,818.6
Accumulated other comprehensive loss (1,990.2) (2,011.9)
-------- --------
Stockholders' equity 1,463.8 1,395.2
-------- --------
Total $5,573.4 $5,474.6
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2004 2003
-------- --------
Revenue
Services $1,165.0 $1,107.0
Technology 297.9 291.9
-------- --------
1,462.9 1,398.9
Costs and expenses
Cost of revenue:
Services 925.7 882.5
Technology 145.7 129.3
-------- --------
1,071.4 1,011.8
Selling, general and administrative 261.2 243.7
Research and development 71.5 66.8
-------- --------
1,404.1 1,322.3
-------- --------
Operating income 58.8 76.6
Interest expense 17.0 15.7
Other income (expense), net .6 (3.4)
-------- --------
Income before income taxes 42.4 57.5
Provision for income taxes 13.5 19.0
-------- --------
Net income $ 28.9 $ 38.5
======== ========
Earnings per share
Basic $ .09 $ .12
======== ========
Diluted $ .09 $ .12
======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Three Months Ended
March 31
------------------
2004 2003
-------- --------
Cash flows from operating activities
Net income $ 28.9 $ 38.5
Add(deduct) items to reconcile net income
to net cash provided by (used for) operating
activities:
Depreciation and amortization of properties and
outsourcing assets 60.1 50.0
Amortization of marketable software 29.3 29.7
(Increase) in deferred income taxes, net ( 1.4) ( 1.0)
Decrease in receivables, net 54.2 91.9
(Increase) decrease in inventories ( 19.1) 2.6
Increase (decrease) in accounts payable and
other accrued liabilities 8.2 (270.1)
(Decrease) increase in income taxes payable ( 8.0) 6.1
Increase in other liabilities 6.8
(Increase) in other assets ( 40.3) ( 20.3)
Other 3.9 .9
------- ------
Net cash provided by (used for) operating
activities 115.8 ( 64.9)
------- ------
Cash flows from investing activities
Proceeds from investments 1,408.3 1,279.1
Purchases of investments (1,413.7) (1,292.7)
Investment in marketable software ( 29.0) ( 40.0)
Capital additions of properties and
outsourcing assets ( 70.7) ( 49.4)
Purchases of businesses ( .8)
------- ------
Net cash used for investing activities ( 105.1) ( 103.8)
------- ------
Cash flows from financing activities
Net proceeds from short-term borrowings 10.6 1.3
Proceeds from employee stock plans 11.1 6.3
Payments of long-term debt ( 1.0) ( 2.4)
Proceeds from issuance of long-term debt 293.3
------- ------
Net cash provided by financing activities 20.7 298.5
------- ------
Effect of exchange rate changes on
cash and cash equivalents 4.1 1.5
------- ------
Increase in cash and cash equivalents 35.5 131.3
Cash and cash equivalents, beginning of period 635.9 301.8
------- -------
Cash and cash equivalents, end of period $ 671.4 $ 433.1
======= =======
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 months ended March 31, 2004 and 2003 (dollars in millions, shares
in thousands):
Three Months Ended March 31,
----------------------------
2004 2003
----------- ----------
Basic Earnings Per Share
Net income $ 28.9 $ 38.5
========= =========
Weighted average shares 332,722 327,208
========= =========
Basic earnings per share $ .09 $ .12
========= =========
Diluted Earnings Per Share
Net income $ 28.9 $ 38.5
========= =========
Weighted average shares 332,722 327,208
Plus incremental shares from assumed
conversions of employee stock plans 5,326 1,616
--------- ---------
Adjusted weighted average shares 338,048 328,824
========= =========
Diluted earnings per share $ .09 $ .12
========= =========
During the three months ended March 31, 2004, 21.9 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 - consulting and
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 March 31, 2004
and 2003 was $1.4 million and $3.1 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-month
periods ended March 31, 2004 and 2003 is presented below
(in millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
March 31, 2004
------------------
Customer revenue $1,462.9 $1,165.0 $297.9
Intersegment $( 45.7) 4.8 40.9
-------- -------- -------- ------
Total revenue $1,462.9 $( 45.7) $1,169.8 $338.8
======== ======== ======== ======
Operating income $ 58.8 $ .4 $ 29.2 $ 29.2
======== ======== ======== ======
Three Months Ended
March 31, 2003
------------------
Customer revenue $1,398.9 $1,107.0 $291.9
Intersegment $( 70.0) 5.6 64.4
-------- -------- -------- ------
Total revenue $1,398.9 $( 70.0) $1,112.6 $356.3
======== ======== ======== ======
Operating income $ 76.6 $ 2.6 $ 34.4 $ 39.6
======== ======= ======== ======
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Total segment operating income $ 58.4 $ 74.0
Interest expense (17.0) (15.7)
Other income (expense), net .6 ( 3.4)
Corporate and eliminations .4 2.6
------ ------
Total income before income taxes $ 42.4 $ 57.5
====== ======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Services
Consulting and systems integration $ 377.1 $ 356.4
Outsourcing 443.0 409.3
Infrastructure services 199.5 200.8
Core maintenance 145.4 140.5
-------- --------
1,165.0 1,107.0
Technology
Enterprise-class servers 201.8 217.8
Specialized technologies 96.1 74.1
-------- --------
297.9 291.9
-------- --------
Total $1,462.9 $1,398.9
======== ========
7
c. Comprehensive income for the three months ended March 31, 2004 and
2003 includes the following components (in millions of dollars):
2004 2003
------ ------
Net income $ 28.9 $ 38.5
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of $(1.0) and $- (1.6) ( .1)
Reclassification adjustments, net of tax
of $1.7 and $1.0 3.1 2.1
Foreign currency translation adjustments 20.2 (7.7)
------ ------
Total other comprehensive income 21.7 (5.7)
------ ------
Comprehensive income $ 50.6 $ 32.8
====== ======
Accumulated other comprehensive income (loss) as of December 31, 2003 and
March 31, 2004 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2002 $(2,236.9) $(745.0) $( 1.5) $(1,490.4)
Change during period 225.0 65.3 ( 5.1) 164.8
-------- ------- ------ ---------
Balance at December 31, 2003 (2,011.9) (679.7) ( 6.6) (1,325.6)
Change during period 21.7 20.2 1.5
-------- ------- ------ ---------
Balance at March 31, 2004 $(1,990.2) $(659.5) $( 5.1) $(1,325.6)
======== ======= ====== =========
d. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the three months ended March 31,
2004 and 2003 was $1.6 million and $1.3 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
e. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for 12 months
after shipment to the customer. The company will repair or replace, at its
option and expense, items of equipment that do not meet this warranty. For
company software, the company warrants that it will conform substantially to
then-current published functional specifications for 90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that prevents its use in a production environment.
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Balance at December 31 $20.8 $19.2
Accruals for warranties issued
during the period 5.0 4.9
Settlements made during the period (4.7) (4.7)
Changes in liability for pre-existing warranties
during the period, including expirations (3.2) ( .1)
----- -----
Balance at March 31 $17.9 $19.3
===== =====
8
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 March 31,
----------------------------
2004 2003
------ ------
Net income as reported $ 28.9 $ 38.5
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (10.0) (14.5)
------ ------
Pro forma net income $ 18.9 $ 24.0
====== ======
Earnings per share
Basic - as reported $ .09 $ .12
Basic - pro forma $ .06 $ .07
Diluted - as reported $ .09 $ .12
Diluted - pro forma $ .06 $ .07
g. Net periodic pension expense (income) for the three months ended March 31,
2004 and 2003 is presented below (in millions of dollars):
Three Months Three Months
Ended March 31, 2004 Ended March 31, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 29.3 $ 17.1 $ 12.2 $ 25.2 $ 15.9 $ 9.3
Interest cost 89.5 65.6 23.9 86.7 67.0 19.7
Expected return on
plan assets (123.5) (94.8) (28.7) (125.4) (100.8) (24.6)
Amortization of prior
service (benefit) cost ( 1.4) ( 1.9) .5 ( 2.8) ( 3.0) .2
Recognized net actuarial
loss (gain) 28.3 22.2 6.1 8.9 5.5 3.4
Settlement/curtailment
(gain) loss 1.0 1.0
----- ----- ------ ------ ------ -----
Net periodic pension
expense (income) $22.2 $ 8.2 $ 14.0 $( 6.4) $( 15.4) $ 9.0
===== ===== ====== ======= ====== =====
The company currently expects to make cash contributions of approximately
$70 million to its worldwide defined benefit pension plans in 2004 compared
with $62.5 million in 2003. For the three months ended March 31, 2004 and
2003, $12.0 million and $7.8 million, respectively of cash contributions
have been made. In accordance with regulations governing contributions to
U.S. defined benefit pension plans, the company is not required to fund its
U.S. qualified defined benefit pension plan in 2004.
9
Net periodic postretirement benefit expense for the three months ended
March 31, 2004 and 2003 is presented below (in millions of dollars):
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Interest cost $3.5 $3.6
Amortization of prior service benefit (.5) (.5)
Recognized net actuarial loss 1.0 .7
---- ----
Net periodic postretirement benefit expense $4.0 $3.8
==== ====
The company expects to make cash contributions of approximately $25 million
to its postretirement benefit plan in 2004. For the three months ended
March 31, 2004, $6 million of cash contributions have been made.
h. Substantially all of the company's investments at equity consist of Nihon
Unisys, Ltd., a publicly traded Japanese company ("NUL"). NUL is the
exclusive supplier of the company's hardware and software products in Japan.
The company owns approximately 28% of NUL's outstanding common stock. Prior
to January 1, 2004, the company's share of NUL's earnings or losses were
recorded semiannually in the second quarter and fourth quarter on a quarter-
lag basis since NUL's quarterly financial results were not available. Due
to recent regulatory changes in Japan, NUL is required to publish its
earnings quarterly. Accordingly, effective January 1, 2004, the company has
begun to record its equity earnings in NUL quarterly on a quarter-lag basis,
and recorded equity income of $5.2 million for the three months ended March
31, 2004.
i. Cash paid during the three months ended March 31, 2004 and 2003 for income
taxes was $18.4 million and $15.6 million, respectively.
Cash paid during the three months ended March 31, 2004 and 2003 for interest
was $16.1 million and $8.8 million, respectively.
j. In November 2003, the company purchased KPMG's Belgian consulting business
for approximately $3.3 million of cash plus assumed liabilities. The
preliminary purchase price allocation was completed in December 2003 and
assumed that the excess of the purchase price over the assets acquired and
liabilities assumed was allocated to goodwill. An outside appraisal company
completed their appraisal during the March 2004 quarter. Approximately $1.5
million of amortizable intangibles (principally customer relationships) were
identified and recorded. The intangible assets have a weighted average life
of approximately 5.5 years.
k. In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51." The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise (the "primary beneficiary") should consolidate the variable
interest entity. This new model for consolidation applies to an entity in
which either (i) the equity investors (if any) do not have a controlling
financial interest, or (ii) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that the
primary beneficiary, as well as all other enterprises with a significant
variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation
issues.
The provisions of FIN 46 were applicable for variable interests in entities
obtained after January 31, 2003. The adoption of the provisions applicable
to special purpose entities ("SPE") and all other variable interests
obtained after January 31, 2003 did not have a material impact on the
company's consolidated financial position, consolidated results of
operations, or liquidity.
10
Effective March 31, 2004, the company adopted the provisions of FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003. Adoption of
FIN 46-R had no impact on the company's consolidated financial position,
consolidated results of operations, or liquidity.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended March 31, 2004, the company reported net income of
$28.9 million, or $.09 per share, compared with $38.5 million, or $.12 per
share, for the three months ended March 31, 2003.
Total revenue for the quarter ended March 31, 2004 was $1.46 billion, up 5%
from revenue of $1.40 billion for the quarter ended March 31, 2003. Foreign
currency translations had a 7% positive impact on revenue in the quarter when
compared with the year-ago period. In the current quarter, Services revenue
increased 5% and Technology revenue increased 2%.
U.S. revenue increased 3% in the first quarter compared with the year-ago
period and revenue in international markets increased 6% driven by increases
in Europe and South Pacific which were partially offset by declines in other
international regions. On a constant currency basis, international revenue
declined 7% in the quarter.
Pension expense for the three months ended March 31, 2004 was $22.2 million
compared with $6.4 million of pension income for the three months ended March
31, 2003. The change from pension income to pension expense was due to the
following: (1) a decline in the discount rate used for the U.S. pension plan
to 6.25% at December 31, 2003 from 6.75% at December 31, 2002, (2) an increase
in amortization of net unrecognized losses, (3) lower expected returns on plan
assets due to amortization of the difference between the calculated value of
plan assets and the fair value of plan assets, and (4) for international plans,
declines in discount rates 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. The company currently expects to report pension expense of
approximately $85 - $90 million in 2004 compared with pension income of $22.6
million in 2003.
Total gross profit margin was 26.8% in the first quarter of 2004 compared with
27.7% in the year-ago period, the change principally reflected pension expense
of $15.5 million in the current quarter compared with pension income of $1.2
million in the year-ago quarter.
For the three months ended March 31, 2004, selling, general and administrative
expenses were $261.2 million (17.9% of revenue) compared with $243.7 million
(17.4% of revenue) for the three months ended March 31, 2003.
Research and development ("R&D") expense was $71.5 million compared with $66.8
million a year ago. The company continues to invest in high-end Cellular
MultiProcessing server technology and in key programs within its industry
practices. R&D in the current period includes $1.8 million of pension expense
compared with pension income of $3.2 million in the year-ago period.
For the first quarter of 2004, the company reported an operating income percent
of 4.0% compared with 5.5% for the first quarter of 2003, the change
principally reflected pension expense of $22.2 million in the current quarter
compared with pension income of $6.4 million in the year-ago period.
Interest expense for the three months ended March 31, 2004 was $17.0 million
compared with $15.7 million for the three months ended March 31, 2003. The
increase in interest expense was due to higher borrowing levels in 2004,
principally due to the issuance of $300 million of 6 7/8% senior notes in March
2003.
Other income (expense), net was income of $.6 million in the current quarter
compared with an expense of $3.4 million in the year-ago quarter. The increase
to income was principally due to equity income of $5.2 million in the current
quarter compared with none in the prior-year quarter. As discussed in note h,
effective January 1, 2004, the company began recording its equity investment in
NUL quarterly on a quarter-lag basis. In prior years the company recorded its
equity income from NUL semiannually in the June and December quarters on a
quarter-lag basis.
12
Income before income taxes was $42.4 million in the first quarter of 2004
compared with $57.5 million last year. The provision for income taxes was
$13.5 million in the current period compared with $19.0 million in the year-ago
period. The effective tax rate was 32% in 2004 and 33% in 2003.
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - consulting and 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 March 31, 2004 and 2003,
was $1.4 million and $3.1 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.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
March 31, 2004
- ------------------
Customer revenue $1,462.9 $1,165.0 $297.9
Intersegment $( 45.7) 4.8 40.9
-------- ------- -------- ------
Total revenue $1,462.9 $( 45.7) $1,169.8 $338.8
======== ======= ======== ======
Gross profit percent 26.8% 19.1% 48.3%
======== ======== ======
Operating income
percent 4.0% 2.5% 8.6%
======== ======== ======
Three Months Ended
March 31, 2003
- ------------------
Customer revenue $1,398.9 $1,107.0 $291.9
Intersegment $( 70.0) 5.6 64.4
-------- ------- -------- ------
Total revenue $1,398.9 $( 70.0) $1,112.6 $356.3
======== ======= ======== ======
Gross profit percent 27.7% 18.7% 50.0%
======== ======== ======
Operating income
percent 5.5% 3.1% 11.1%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
13
In the Services segment, customer revenue was $1.17 billion for the three
months ended March 31, 2004, up 5% compared with $1.11 billion for the three
months ended March 31, 2003. Foreign currency translations had about a 7%
positive impact on Services revenue in the quarter when compared with the year-
ago period. The increase in Services revenue was due to an 8% increase in
outsourcing ($443 million in 2004 compared with $409 million in 2003), a 6%
increase in consulting and systems integration ($377 million in 2004 compared
with $356 million in 2003) and a 3% increase in core maintenance revenue ($145
million in 2004 compared with $141 million in 2003). Infrastructure services
revenue was flat during the quarter ($200 million in 2004 compared with $201
million in 2003). Market demand in the Services segment varies by revenue
classification. Demand for outsourcing services remains good, and consulting
and systems integration services has been showing signs of gradual recovery.
The increase in outsourcing revenue reflects the emphasis that the company has
placed on growing its base of long-term outsourcing contracts that provide a
reliable base of annuity revenue over multiple years. Services gross profit
was 19.1% for the three months ended March 31, 2004 compared with 18.7% in the
year-ago period. Services operating income percent was 2.5% for the three
months ended March 31, 2004 compared with 3.1% last year, this change was
principally due to the impact of pension expense of $19.3 million in the
current quarter compared with pension income of $1.9 million in the year-ago
period.
In the Technology segment, customer revenue was $298 million for the three
months ended March 31, 2004, up 2% compared with $292 million for the three
months ended March 31, 2003. Foreign currency translations had about a 5%
positive impact on Technology revenue in the quarter when compared with the
year-ago period. The increase in revenue was due to a 30% increase in sales of
specialized technology products ($96 million in 2004 compared with $74 million
in 2003) and a 7% decline in sales of enterprise-class servers ($202 million in
2004 compared with $218 million in 2003). The increase in specialized
technology revenue was driven by higher sales of semiconductor test systems.
Sales of these systems can vary significantly from quarter to quarter depending
on customer needs. The company does not expect similar increases in
specialized technology revenue to continue through 2004. Technology gross
profit was 48.3% for the three months ended March 31, 2004 compared with 50.0%
in the year-ago period, and Technology operating income percent was 8.6% for
the three months ended March 31, 2004 compared with 11.1% last year. The
margin declines primarily reflected a lower proportion of high-end, higher-
margin products within the ClearPath product line as well as pension expense of
$2.9 million in the current period compared with pension income of $4.5 million
in the prior-year period.
New Accounting Pronouncements
- -----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an interpretation of ARB 51." The primary objectives of this interpretation
are to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities") and how to determine when and which business enterprise (the "primary
beneficiary") should consolidate the variable interest entity. This new model
for consolidation applies to an entity in which either (i) the equity investors
(if any) do not have a controlling financial interest, or (ii) the equity
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest in a variable interest entity,
make additional disclosures. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31, 2003. In December
2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues.
The provisions of FIN 46 were applicable for variable interests in entities
obtained after January 31, 2003. The adoption of the provisions applicable to
special purpose entities ("SPE") and all other variable interests obtained
after January 31, 2003 did not have a material impact on the company's
consolidated financial position, consolidated results of operations, or
liquidity.
Effective March 31, 2004, the company adopted the provisions of FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003. Adoption of FIN 46-R
had no impact on the company's consolidated financial position, consolidated
results of operations, or liquidity.
14
Financial Condition
- -------------------
Cash and cash equivalents at March 31, 2004 were $671.4 million compared with
$635.9 million at December 31, 2003.
During the three months ended March 31, 2004, cash provided by operations was
$115.8 million compared with cash used for operations of $64.9 million for the
three months ended March 31, 2003. Operating cash flow increased due to higher
earnings (excluding the non cash impact of the change from pension income to
pension expense), higher levels of advance payments for outsourcing projects,
which are generally timed to offset capital expenditures on those projects, and
lower restructuring expenditures. Cash expenditures in the current quarter
related to prior-year restructuring charges (which are included in operating
activities) were approximately $4 million compared with $31 million for the
prior-year quarter, and are expected to be approximately $9 million for the
remainder of 2004 and $6 million in total for all subsequent years, principally
for work-force reductions and idle lease costs.
Cash used for investing activities for the three months ended March 31, 2004 was
$105.1 million compared with $103.8 million during the three months ended March
31, 2003. The increase in cash used was principally due to net purchases of
investments of $5.4 million in the current quarter compared with net purchases
of $13.6 million in the prior-year period. In addition, the current period
investment in marketable software was $29.0 million compared with $40.0 million
in the prior-year. Capital additions were $70.7 million for the three months
ended March 31, 2004 compared with $49.4 million in the prior-year period. The
increase in current year capital expenditures was principally due to additions
of revenue-generating assets, particularly in the company's outsourcing
business.
Cash provided by financing activities during the current quarter was $20.7
million compared with $298.5 million in the prior year. The prior period
includes net proceeds from issuance of long-term debt of $293.3 million in
connection with the company's issuance in March 2003 of $300 million of 6 7/8%
senior notes due 2010.
At March 31, 2004, total debt was $1.1 billion, an increase of $10.7 million
from December 31, 2003.
The company has a $500 million credit agreement that expires in May 2006. As
of March 31, 2004, there were no borrowings under this facility, and the entire
$500 million was available for borrowings. 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.
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 is renewable annually at the purchasers'
option and expires in December 2006. At March 31, 2004, the company had sold
$150 million of eligible receivables compared with $225 million at December 31,
2003.
At March 31, 2004, 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.
15
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 March 31, 2004, the company had deferred tax assets in excess of deferred
tax liabilities of $2,033 million. For the reasons cited below, management
determined that it is more likely than not that $1,584 million of such assets
will be realized, therefore resulting in a valuation allowance of $449 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 $4.8 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 $68.6 million during the three months ended
March 31, 2004, principally reflecting net income of $28.9 million, $16.3
million for issuance of stock under stock option and other plans, $1.6 million
of tax benefits related to employee stock plans and currency translation of
$20.2 million.
At December 31 of each year, accounting rules require a company to recognize a
liability on its balance sheet for each defined benefit 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,
the ABO exceeded the fair value of pension plan assets. At December 31, 2003,
the difference between the ABO and the fair value of pension plan assets
decreased. As a result, at December 31, 2003, the company adjusted its minimum
pension liability as follows: decreased its pension plan liabilities by
approximately $300 million, increased its investments at equity by approximately
$6 million relating to the company's share of the change in NUL's minimum
pension liability, decreased prepaid pension asset by $56 million, and offset
these changes by a credit to other comprehensive income of approximately $250
million, or $165 million net of tax.
This accounting has 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 charges or credits to
stockholders' equity caused by adjusting 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 2004. The company expects to make cash contributions of approximately
$70 million to its other defined benefit pension plans during 2004.
16
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 highly competitive business
environment and economic weakness in certain geographic regions. 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 consulting
and other professional services firms, systems integrators, outsourcing
providers, infrastructure services providers, computer hardware manufacturers
and software providers. Some of the company's competitors may develop competing
products and services that offer better price performance or that reach the
market in advance of the company's offerings. Some competitors also have or may
develop greater financial and other resources than the company, with enhanced
ability to compete for market share, in some instances through significant
economic incentives to secure contracts. Some also may be better able to
compete for skilled professionals. Any of these factors could 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.
17
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.
Future results will also depend in part on the company's ability to drive
profitable growth in consulting and systems integration. The company's ability
to grow profitably in this business will depend 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.
18
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 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.
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
March 31, 2004. 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 March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
19
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 January 20, 2004, the company furnished a Current Report on
Form 8-K to provide, under Items 7 and 12, the company's earnings release
reporting its financial results for the quarter and year ended December 31,
2003. Such information shall not be deemed "filed" for purposes of Section 18
of the Securities Exchange Act of 1934.
On April 6, 2004, the company filed a Current Report on Form 8-K,
dated April 6, 2004, to report under Items 5 and 7 of that form.
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: April 22, 2004 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)
21
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3 Bylaws of Unisys Corporation, as amended through April 22, 2004
10 Agreement, dated April 6, 2004, between Lawrence A. Weinbach and
Unisys Corporation (incorporated by reference to Exhibit 10 to the
registrant's current report on Form 8-K dated April 6, 2004)
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