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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, 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 June 30, 2004:
334,846,823.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
June 30,
2004 December 31,
(Unaudited) 2003
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 643.4 $ 635.9
Accounts and notes receivable, net 885.2 1,027.8
Inventories
Parts and finished equipment 112.7 121.7
Work in process and materials 120.0 116.9
Deferred income taxes 272.4 270.0
Other current assets 106.4 85.7
-------- --------
Total 2,140.1 2,258.0
-------- --------
Properties 1,347.4 1,352.7
Less-Accumulated depreciation
and amortization 924.8 928.5
-------- --------
Properties, net 422.6 424.2
-------- --------
Outsourcing assets, net 529.9 477.5
Marketable software, net 329.8 332.2
Investments at equity 183.3 153.3
Prepaid pension cost 49.6 55.5
Deferred income taxes 1,385.7 1,384.6
Goodwill 186.6 177.5
Other long-term assets 189.3 211.8
-------- --------
Total $5,416.9 $5,474.6
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 10.4 $ 17.7
Current maturities of long-term debt 150.7 2.2
Accounts payable 429.8 513.8
Other accrued liabilities 1,240.0 1,305.7
Income taxes payable 192.2 214.1
-------- --------
Total 2,023.1 2,053.5
-------- --------
Long-term debt 901.8 1,048.3
Accrued pension liabilities 460.1 433.6
Other long-term liabilities 539.1 544.0
Stockholders' equity
Common stock, shares issued: 2004, 336.8;
2003, 333.8 3.4 3.3
Accumulated deficit ( 366.4) ( 414.8)
Other capital 3,856.9 3,818.6
Accumulated other comprehensive loss (2,001.1) (2,011.9)
-------- --------
Stockholders' equity 1,492.8 1,395.2
-------- --------
Total $5,416.9 $5,474.6
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
----------------- ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue
Services $1,158.8 $1,163.4 $2,323.8 $2,270.4
Technology 229.3 261.6 527.2 553.5
-------- -------- -------- --------
1,388.1 1,425.0 2,851.0 2,823.9
Costs and expenses
Cost of revenue:
Services 930.2 906.8 1,855.9 1,789.3
Technology 90.8 126.1 236.5 255.4
-------- -------- -------- --------
1,021.0 1,032.9 2,092.4 2,044.7
Selling, general and
administrative expenses 272.9 242.4 534.1 486.1
Research and development expenses 71.3 63.7 142.8 130.5
-------- -------- -------- --------
1,365.2 1,339.0 2,769.3 2,661.3
-------- -------- -------- --------
Operating income 22.9 86.0 81.7 162.6
Interest expense 18.2 18.4 35.2 34.1
Other income (expense), net 24.0 10.6 24.6 7.2
-------- -------- -------- --------
Income before income taxes 28.7 78.2 71.1 135.7
Provision for income taxes 9.3 25.7 22.8 44.7
-------- -------- -------- --------
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======== ======== ======== ========
Earnings per share
Basic $ .06 $ .16 $ .14 $ .28
======== ======== ======== ========
Diluted $ .06 $ .16 $ .14 $ .28
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Six Months Ended
June 30
-----------------
2004 2003
-------- -------
Cash flows from operating activities
Net income $ 48.3 $ 91.0
Add(deduct) items to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of properties and
outsourcing assets 123.1 105.4
Amortization of marketable software 62.9 59.9
(Increase) in deferred income taxes, net ( 2.4) ( 1.5)
Decrease (increase) in receivables, net 185.3 ( 6.6)
Decrease in inventories 6.4 19.5
(Decrease) in accounts payable and other
accrued liabilities (172.2) (177.5)
(Decrease) increase in income taxes payable ( 21.9) 17.5
Increase (decrease) in other liabilities 3.5 ( 14.8)
(Increase) in other assets ( 27.8) ( 39.1)
Other 8.8 ( 5.6)
------- ------
Net cash provided by operating activities 214.0 48.2
------- ------
Cash flows from investing activities
Proceeds from investments 2,878.8 2,387.5
Purchases of investments (2,879.0) (2,421.7)
Investment in marketable software ( 60.5) ( 76.9)
Capital additions of properties and
outsourcing assets (143.5) (112.0)
Purchases of businesses ( 12.6) ( 2.0)
------- ------
Net cash used for investing activities (216.8) (225.1)
------- ------
Cash flows from financing activities
Net reduction in short-term borrowings (10.6) ( 59.6)
Proceeds from employee stock plans 24.0 13.9
Payments of long-term debt ( 1.7) ( 3.0)
Proceeds from issuance of long-term debt 293.3
------- ------
Net cash provided by financing activities 11.7 244.6
------- ------
Effect of exchange rate changes on
cash and cash equivalents ( 1.4) 12.3
------- ------
Increase in cash and cash equivalents 7.5 80.0
Cash and cash equivalents, beginning of period 635.9 301.8
------- -------
Cash and cash equivalents, end of period $ 643.4 $ 381.8
======= =======
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, 2004 and 2003 (dollars in millions,
shares in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Basic Earnings Per Share
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======= ======= ======= =======
Weighted average shares 334,411 328,783 333,567 327,996
======= ======= ======= =======
Basic earnings per share $ .06 $ .16 $ .14 $ .28
======= ======= ======= =======
Diluted Earnings Per Share
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======= ======= ======= =======
Weighted average shares 334,411 328,783 333,567 327,996
Plus incremental shares
from assumed exercises
under employee stock plans 4,356 2,366 4,840 1,991
------- ------- ------- -------
Adjusted weighted average
shares 338,767 331,149 338,407 329,987
======= ======= ======= =======
Diluted earnings per share $ .06 $ .16 $ .14 $ .28
======= ======= ======= =======
At June 30, 2004, 25.8 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. 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 and six months ended June 30,
2004 and 2003 was $1.3 million and $11.5 million, and $2.6 million and $14.6
million, respectively. The profit on these transactions is eliminated in
Corporate.
6
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.
A summary of the company's operations by business segment for the three and
six month periods ended June 30, 2004 and 2003 is presented below (in
millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
June 30, 2004
------------------
Customer revenue $1,388.1 $1,158.8 $ 229.3
Intersegment $( 57.3) 4.5 52.8
-------- ------- -------- --------
Total revenue $1,388.1 $( 57.3) $1,163.3 $ 282.1
======== ======= ======== ========
Operating income (loss) $ 22.9 $( .4) $ 8.2 $ 15.1
======== ======= ======== ========
Three Months Ended
June 30, 2003
------------------
Customer revenue $1,425.0 $1,163.4 $ 261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- --------
Total revenue $1,425.0 $( 89.2) $1,169.7 $ 344.5
======== ======= ======== ========
Operating income (loss) $ 86.0 $( 4.9) $ 64.1 $ 26.8
======== ======= ======== ========
Six Months Ended
June 30, 2004
----------------
Customer revenue $2,851.0 $2,323.8 $ 527.2
Intersegment $(103.0) 9.3 93.7
-------- ------- -------- --------
Total revenue $2,851.0 $(103.0) $2,333.1 $ 620.9
======== ======= ======== ========
Operating income (loss) $ 81.7 $ - $ 37.4 $ 44.3
======== ======= ======== ========
Six Months Ended
June 30, 2003
------------------
Customer revenue $2,823.9 $2,270.4 $ 553.5
Intersegment $(159.2) 11.9 147.3
-------- ------- -------- --------
Total revenue $2,823.9 $(159.2) $2,282.3 $ 700.8
======== ======= ======== ========
Operating income (loss) $ 162.6 $( 2.3) $ 98.5 $ 66.4
======== ======= ======== ========
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,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Total segment operating income $ 23.3 $ 90.9 $ 81.7 $164.9
Interest expense (18.2) (18.4) (35.2) (34.1)
Other income (expense), net 24.0 10.6 24.6 7.2
Corporate and eliminations ( .4) ( 4.9) - ( 2.3)
------ ------ ------ ------
Total income before income taxes $ 28.7 $ 78.2 $ 71.1 $135.7
====== ====== ====== ======
7
Customer revenue by classes of similar products or services, by segment, is
presented below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Services
Consulting and systems
integration $ 413.9 $ 386.0 $ 791.0 $ 742.4
Outsourcing 419.4 421.8 862.4 831.1
Infrastructure services 180.0 211.8 379.5 412.6
Core maintenance 145.5 143.8 290.9 284.3
-------- -------- -------- -------
1,158.8 1,163.4 2,323.8 2,270.4
Technology
Enterprise-class servers 185.5 193.8 387.3 411.6
Specialized technologies 43.8 67.8 139.9 141.9
-------- -------- -------- --------
229.3 261.6 527.2 553.5
-------- -------- -------- --------
Total $1,388.1 $1,425.0 $2,851.0 $2,823.9
======== ======== ======== ========
c. Comprehensive income for the three and six months ended June 30, 2004 and
2003 includes the following components (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of
$1.4, $(2.6), $.4, and $(2.6) 2.5 (4.7) .9 (4.8)
Reclassification adjustments,
net of tax of $(.1), $1.0 ,$1.6,
and $2.0 (.2) 1.7 2.9 3.8
Foreign currency translation
adjustments (13.2) 38.6 7.0 30.9
------ ------ ------ ------
Total other comprehensive
income (loss) (10.9) 35.6 10.8 29.9
------ ------ ------ ------
Comprehensive income $ 8.5 $ 88.1 $ 59.1 $120.9
====== ====== ====== ======
Accumulated other comprehensive income (loss) as of December 31, 2003 and
June 30, 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 10.8 7.0 3.8
--------- ------- ------ ---------
Balance at June 30, 2004 $(2,001.1) $(672.7) $ (2.8) $(1,325.6)
========= ======= ====== =========
d. 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,
2004 and 2003 was $2.9 million and $1.8 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
8
e. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for 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 Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning
of period $17.9 $19.3 $20.8 $19.2
Accruals for warranties issued
during the period 2.1 6.8 7.1 11.7
Settlements made during the
period (4.2) (4.4) (8.9) (9.1)
Changes in liability for
pre-existing warranties during
the period, including expirations (.8) (.6) (4.0) (.7)
----- ----- ----- -----
Balance at June 30 $15.0 $21.1 $15.0 $21.1
===== ===== ===== =====
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 Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 19.4 $ 52.5 $ 48.3 $ 91.0
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax ( 7.7) (10.3) (17.7) (24.8)
------ ------ ------ ------
Pro forma net income $ 11.7 $ 42.2 $ 30.6 $ 66.2
====== ====== ====== ======
Earnings per share
Basic - as reported $ .06 $ .16 $ .14 $ .28
Basic - pro forma $ .03 $ .13 $ .09 $ .20
Diluted - as reported $ .06 $ .16 $ .14 $ .28
Diluted - pro forma $ .03 $ .13 $ .09 $ .20
9
g. Net periodic pension expense (income) for the three and six months ended
June 30, 2004 and 2003 is presented below (in millions of dollars):
Three Months Three Months
Ended June 30, 2004 Ended June 30, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 28.6 $ 16.5 $ 12.1 $ 23.5 $ 13.5 $ 10.0
Interest cost 90.7 66.7 24.0 86.7 66.6 20.1
Expected return on
plan assets (123.3) (94.7) (28.6) (125.7) (101.0) (24.7)
Amortization of prior
service (benefit) cost (1.6) (1.9) .3 (2.5) (3.0) 0.5
Recognized net actuarial
loss 30.4 24.3 6.1 8.9 4.9 4.0
Settlement/curtailment
loss 1.2 1.2
----- ----- ------ ------ ------ -----
Net periodic pension
expense (income) $24.8 $ 10.9 $ 13.9 $ (7.9) $ (19.0)$ 11.1
===== ====== ====== ======= ====== =====
Six Months Six Months
Ended June 30, 2004 Ended June 30, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 57.9 $ 33.6 $ 24.3 $ 48.7 $ 29.4 $ 19.3
Interest cost 180.2 132.3 47.9 173.4 133.6 39.8
Expected return on
plan assets (246.8) (189.5) (57.3) (251.1) (201.8) (49.3)
Amortization of prior
service (benefit) cost (3.0) (3.8) .8 (5.3) (6.0) 0.7
Recognized net actuarial
loss 58.7 46.5 12.2 17.8 10.4 7.4
Settlement/curtailment
loss 2.2 2.2
----- ----- ------ ------ ------ -----
Net periodic pension
expense (income) $47.0 $19.1 $ 27.9 $(14.3) $(34.4) $ 20.1
===== ===== ====== ======= ====== =====
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 six months ended June 30, 2004 and
2003, $27.5 million and $22.7 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.
Net periodic postretirement benefit expense for the three and six months
ended June 30, 2004 and 2003 is presented below (in millions of dollars):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Interest cost $ 3.5 $ 3.6 $ 7.0 $ 7.2
Amortization of prior service benefit (.5) (.5) (1.0) (1.0)
Recognized net actuarial loss 1.0 .7 2.0 1.4
----- ----- ----- -----
Net periodic postretirement benefit
expense $ 4.0 $ 3.8 $ 8.0 $ 7.6
===== ===== ===== =====
The company expects to make cash contributions of approximately $25 million
to its postretirement benefit plan in 2004. For the six months ended
June 30, 2004, $14 million of cash contributions have been made.
10
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 $9.1 million and $14.4 million for the three
and six months ended June 30, 2004, respectively.
i. Cash paid during the six months ended June 30, 2004 and 2003 for income
taxes was $35.7 million and $42.2 million, respectively.
Cash paid during the six months ended June 30, 2004 and 2003 for interest
was $42.7 million and $33.8 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 its 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. The goodwill from this acquisition has been
assigned to the Services segment.
In April 2004, the company purchased the document services business unit of
Interpay Nederlands B.V. ("Interpay") for $5.2 million. This business unit
processes approximately 110 million paper-related payments a year for Dutch
banks. The purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair values, and resulted in goodwill of
$3.4 million. The acquisition provides for the company to make contingent
payments to Interpay based on the achievement of certain future revenue
levels. The contingent consideration will be recorded as additional
goodwill when the contingencies are resolved and consideration is issued or
becomes issuable. The goodwill from this acquisition has been assigned to
the Services segment.
In June 2004, the company purchased the security services and identity and
access management solutions business of ePresence, Inc., whose consultants
design and implement enterprise directory and security solutions that enable
identity management within and across organizations. The purchase price of
$10.6 million will be allocated to assets acquired and liabilities assumed
based on their estimated fair values. The preliminary allocation of the
purchase price assumes that the excess of the purchase price over the assets
acquired and liabilities assumed of $8.2 million will be allocated to
goodwill. There can be no assurance that this preliminary allocation will
represent the final purchase price allocation. The purchase price
allocation will be completed within the next few months after finalization
of appraisals. The goodwill from this acquisition has been assigned to the
Services segment.
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.
11
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.
On May 19, 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003", ("FSP No. 106-2"). The above
Act introduces a prescription drug benefit under Medicare as well as a
federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part
D. FSP No. 106-2 is effective for the first interim period beginning after
June 15, 2004 and provides that an employer shall measure the accumulated
plan benefit obligation ("APBO") and net periodic postretirement benefit
cost taking into account any subsidy received under the Act. As of June 30,
2004, the company's measurements of both the APBO and the net postretirement
benefit cost do not reflect any amounts associated with the subsidy because
the company has not yet been able to conclude whether the benefits provided
by its postretirement medical plan are actuarially equivalent to Medicare
Part D under the Act.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
The company experienced a slowdown in certain areas of its business,
particularly in infrastructure services and in enterprise servers in the second
quarter of 2004. This resulted in deferrals and delays of some technology
contracts and services projects late in the quarter, leading to lower-than-
anticipated results for the period.
For the three months ended June 30, 2004, the company reported net income of
$19.4 million, or $.06 per share, compared with $52.5 million, or $.16 per
share, for the three months ended June 30, 2003.
Total revenue for the quarter ended June 30, 2004 was $1.39 billion, down 3%
from revenue of $1.43 billion for the quarter ended June 30, 2003. Foreign
currency translations had a 4% positive impact on revenue in the quarter when
compared with the year-ago period. In the current quarter, Services revenue
was flat and Technology revenue decreased 12% from the prior year.
U.S. revenue decreased 5% in the current quarter compared with the year-ago
period and revenue in international markets was flat as an increase in Europe
was offset by declines in other international regions. On a constant currency
basis, international revenue declined 8% in the quarter.
Pension expense for the three months ended June 30, 2004 was $24.8 million
compared with $7.9 million of pension income for the three months ended
June 30, 2003. The change 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 $90 - $95 million in 2004 compared with pension income of $22.6
million in 2003.
Total gross profit margin was 26.4% in the second quarter of 2004 compared with
27.5% in the year-ago period, the change principally reflected pension expense
of $17.8 million in the current quarter compared with pension income of $1.5
million in the year-ago quarter.
For the three months ended June 30, 2004, selling, general and administrative
expenses were $272.9 million (19.7% of revenue) compared with $242.4 million
(17.0% of revenue) for the three months ended June 30, 2003. The increase
principally reflected pension expense of $4.8 million in the current year
compared with $2.4 million of pension income in the year-ago period as well as
the impact of foreign currency exchange rates.
Research and development ("R&D") expense was $71.3 million compared with $63.7
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 $2.2 million of pension expense
compared with pension income of $4.0 million in the year-ago period.
For the second quarter of 2004, the company reported an operating income
percent of 1.6% compared with 6.0% for the second quarter of 2003. The change
principally reflected pension expense of $24.8 million in the current quarter
compared with pension income of $7.9 million in the year-ago period as well as
lower revenue and higher selling, general and administrative expenses.
Interest expense for the three months ended June 30, 2004 was $18.2 million
compared with $18.4 million for the three months ended June 30, 2003.
13
Other income (expense), net was income of $24.0 million in the current quarter
compared with income of $10.6 million in the year-ago quarter. The increase
in income was principally due to foreign currency exchange gains of $1.5
million in the current quarter compared with exchange losses of $6.9 million
in the year-ago quarter.
Income before income taxes was $28.7 million in the second quarter of 2004
compared with $78.2 million last year. The provision for income taxes was
$9.3 million in the current period compared with $25.7 million in the year-ago
period. The effective tax rate was 32% in 2004 and 33% in 2003.
For the six months ended June 30, 2004, the company reported net income of
$48.3 million, or $.14 per share, compared with $91.0 million, or $.28 per
share, for the six months ended June 30, 2003.
Total revenue for the six months ended June 30, 2004 was $2.85 billion, up 1%
from revenue of $2.82 billion for the six months ended June 30, 2003. Foreign
currency translations had a 5% positive impact on revenue in the six months
when compared with the year-ago period. In the current six-month period,
Services revenue increased 2% and Technology revenue decreased 5%.
U.S. revenue decreased 1% in the current six-month period compared with the
year-ago period and revenue in international markets increased 3% driven by an
increase in Europe which was partially offset by declines in other
international regions. On a constant currency basis, international revenue
declined 7% in the six months ended June 30, 2004.
Pension expense for the six months ended June 30, 2004 was $47.0 million
compared with $14.3 million of pension income for the six months ended June 30,
2003.
Total gross profit margin was 26.6% in the six months ended June 30, 2004
compared with 27.6% in the year-ago period. The change principally reflected
pension expense of $33.3 million in the current period compared with pension
income of $2.7 million in the year-ago period.
For the six months ended June 30, 2004, selling, general and administrative
expenses were $534.1 million (18.7% of revenue) compared with $486.1 million
(17.2% of revenue) for the six months ended June 30, 2003.
R&D expense for the six months ended June 30, 2004 was $142.8 million compared
with $130.5 million a year ago. R&D in the current period includes $4.0
million of pension expense compared with pension income of $7.2 million in the
year-ago period.
For the six months ended June 30, 2004, the company reported an operating
income percent of 2.9% compared with 5.8% for the six months ended June 30,
2003. The change principally reflected pension expense of $47.0 million in the
current period compared with pension income of $14.3 million in the year-ago
period.
Interest expense for the six months ended June 30, 2004 was $35.2 million
compared with $34.1 million for the six months ended June 30, 2003. The
increase in interest expense was due to higher borrowing levels in 2004.
Other income (expense), net was income of $24.6 million in the current six-
month period compared with income of $7.2 million in the year-ago period. The
increase in income was principally due to foreign exchange losses of
$.7 million in the current year compared with losses of $11.3 million in the
prior-year period as well as Nihon Unisys Ltd. ("NUL") equity income of $14.4
million in the current period compared with $10.2 million in the prior-year
period.
Income before income taxes was $71.1 million in the six months ended June 30,
2004 compared with $135.7 million last year. The provision for income taxes
was $22.8 million in the current period compared with $44.7 million in the year-
ago period. The effective tax rate was 32% in 2004 and 33% in 2003.
14
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 June 30, 2004 and 2003,
was $1.3 million and $11.5 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
June 30, 2004
- ------------------
Customer revenue $1,388.1 $1,158.8 $229.3
Intersegment $( 57.3) 4.5 52.8
-------- ------- -------- ------
Total revenue $1,388.1 $( 57.3) $1,163.3 $282.1
======== ======= ======== ======
Gross profit percent 26.4% 18.5% 53.3%
======== ======== ======
Operating income
percent 1.6% .7% 5.4%
======== ======== ======
Three Months Ended
June 30, 2003
- ------------------
Customer revenue $1,425.0 $1,163.4 $261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- ------
Total revenue $1,425.0 $( 89.2) $1,169.7 $344.5
======== ======= ======== ======
Gross profit percent 27.5% 20.0% 46.6%
======== ======== ======
Operating income
percent 6.0% 5.5% 7.8%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
15
In the Services segment, customer revenue was $1.16 billion for the three
months ended June 30, 2004, compared with $1.16 billion for the three months
ended June 30, 2003. Foreign currency translations had about a 4% positive
impact on Services revenue in the quarter when compared with the year-ago
period. In Services revenue there was a 7% increase in consulting and systems
integration ($414 million in 2004 compared with $386 million in 2003) and a 1%
increase in core maintenance revenue ($146 million in 2004 compared with $143
million in 2003). Offsetting these increases was a decline of 15% in
infrastructure services revenue ($180 million in 2004 compared with $212
million in 2003). Outsourcing revenue was flat ($419 million in 2004 compared
with $422 million in 2003). The decline in infrastructure services revenue was
principally due to less project-based work in the current quarter compared with
the year-ago quarter. Services gross profit was 18.5% for the three months
ended June 30, 2004 compared with 20.0% in the year-ago period. This change
was principally due to the impact of pension expense of $17.4 million in the
current quarter compared with pension income of $.7 million in the year-ago
period. Services operating income percent was .7% for the three months ended
June 30, 2004 compared with 5.5% last year. This change was principally due
to the impact of pension expense of $21.1 million in the current quarter
compared with pension income of $3.2 million in the prior year as well as
higher selling, and general and administrative expenses in the current quarter.
In the Technology segment, customer revenue was $229 million for the three
months ended June 30, 2004, down 12% compared with $262 million for the three
months ended June 30, 2003. Foreign currency translations had about a 2%
positive impact on Technology revenue in the quarter when compared with the
year-ago period. The decrease in revenue was due to a 35% decrease in sales of
specialized technology products ($44 million in 2004 compared with $68 million
in 2003) and a 4% decline in sales of enterprise-class servers ($185 million in
2004 compared with $194 million in 2003). The decrease in specialized
technology revenue was caused by lower sales of semiconductor test systems and
payment systems. Sales of these systems can vary significantly from quarter to
quarter depending on customer needs. Technology gross profit was 53.3% for the
three months ended June 30, 2004 compared with 46.6% in the year-ago period,
and Technology operating income percent was 5.4% for the three months ended
June 30, 2004 compared with 7.8% last year. The gross profit increase
primarily reflected a higher proportion of high-end, higher-margin products
within the ClearPath product line. The decline in operating income percent was
principally due to pension expense of $3.7 million in the current period
compared with pension income of $4.7 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.
16
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.
Financial Condition
- -------------------
Cash and cash equivalents at June 30, 2004 were $643.4 million compared with
$635.9 million at December 31, 2003.
During the six months ended June 30, 2004, cash provided by operations was
$214.0 million compared with $48.2 million for the six months ended June 30,
2003. Operating cash flow increased principally due to higher receivable
collections and lower restructuring expenditures. Cash expenditures in the six
months ended June 30, 2004 related to prior-year restructuring charges (which
are included in operating activities) were approximately $7 million compared
with $45 million for the prior-year period, and are expected to be approximately
$6 million for the remainder of 2004 and $10 million in total for all subsequent
years, principally for work-force reductions and idle lease costs.
Cash used for investing activities for the six months ended June 30, 2004 was
$216.8 million compared with $225.1 million during the six months ended June 30,
2003. The decrease in cash used was principally due to net purchases of
investments of $.2 million in the current period compared with net purchases of
$34.2 million in the prior-year period. In addition, the current period
investment in marketable software was $60.5 million compared with $76.9 million
in the prior-year. Capital additions were $143.5 million for the six months
ended June 30, 2004 compared with $112.0 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, as well as expenditures related to the move of the company's Federal
headquarters into a new facility. Cash expenditures for purchases of
businesses was $12.6 million for the six months ended June 30, 2004 compared
with $2.0 million in the prior year.
Cash provided by financing activities during the six months ended June 30, 2004
was $11.7 million compared with $244.6 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 June 30, 2004 and December 31, 2003, total debt was $1.1 billion.
The company has a $500 million credit agreement that expires in May 2006. As
of June 30, 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 June 30, 2004, the company had sold
$217 million of eligible receivables compared with $225 million at December 31,
2003.
17
At June 30, 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.
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 June 30, 2004, the company had deferred tax assets in excess of deferred tax
liabilities of $2,032 million. For the reasons cited below, management
determined that it is more likely than not that $1,586 million of such assets
will be realized, therefore resulting in a valuation allowance of $446 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 $97.6 million during the six months ended June
30, 2004, principally reflecting net income of $48.3 million, $35.4 million for
issuance of stock under stock option and other plans, $2.9 million of tax
benefits related to employee stock plans and currency translation of $7.0
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. qualified 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.
18
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 grow
outsourcing and infrastructure services. The company's outsourcing contracts
are multiyear engagements under which the company takes over management of a
client's technology operations, business processes or networks. The company
will need to maintain a strong financial position in order to grow its
outsourcing business. In a number of these arrangements, the company hires
certain of its clients' employees and may become responsible for the related
employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. As long-term relationships,
these outsourcing contracts provide a base of recurring revenue. However, in
the early phases of these contracts, gross margins may be lower than in later
years when the work force and facilities have been rationalized for efficient
operations, and an integrated systems solution has been implemented. Future
results will depend on the company's ability to effectively complete the
rationalizations and solution implementations.
19
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.
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.
20
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 54% 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 June 30, 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 June 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
21
Part II - OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The company's 2004 Annual Meeting of Stockholders (the "Annual Meeting")
was held on April 22, 2004 in Philadelphia, Pennsylvania.
(c) The following matter was voted upon at the Annual Meeting and received
the following votes:
Election of Directors as follows:
Henry C. Duques - 293,986,489 votes for; 10,001,384 votes withheld
Clayton M. Jones - 293,943,825 votes for; 10,044,048 votes withheld
Theodore E. Martin - 290,945,808 votes for; 13,042,065 votes withheld
Lawrence A. Weinbach - 295,253,437 votes for; 8,734,436 votes withheld
Item 5 Other Information
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On July 22, 2004, the company's Board of Directors elected Matthew J. Espe,
chairman and chief executive officer of IKON Office Solutions, Inc., as a
director of Unisys. Mr. Espe has been named to the Finance Committee of the
Board.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
As previously disclosed in the company's Quarterly Report on From
10-Q for the quarterly period ended March 31, 2004, 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.
On April 15, 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 ended March 31, 2004. Such information shall
not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: July 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)
23
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999)
3.2 Bylaws of Unisys Corporation, as amended through April 22, 2004
(incorporated by reference to Exhibit 3 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004)
10.1 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)
10.2 Deferred Compensation Plan for Directors of Unisys Corporation,
as amended and restated effective April 22, 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