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, 2005
[ ] 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, 2005
338,840,423.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
March 31,
2005 December 31,
(Unaudited) 2004
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 441.6 $ 660.5
Accounts and notes receivable, net 1,050.1 1,136.8
Inventories:
Parts and finished equipment 92.2 93.7
Work in process and materials 130.4 122.4
Deferred income taxes 292.1 291.8
Prepaid expenses and other current assets 139.5 112.4
-------- --------
Total 2,145.9 2,417.6
-------- --------
Properties 1,271.3 1,305.5
Less-Accumulated depreciation and
amortization 863.8 881.4
-------- --------
Properties, net 407.5 424.1
-------- --------
Outsourcing assets, net 433.3 431.9
Marketable software, net 340.5 336.8
Investments at equity 210.4 197.1
Prepaid pension cost 49.4 52.5
Deferred income taxes 1,394.6 1,394.6
Goodwill 188.4 189.9
Other long-term assets 164.3 176.4
-------- --------
Total $5,334.3 $5,620.9
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 2.7 $ 1.0
Current maturities of long-term debt 1.5 151.7
Accounts payable 365.6 487.4
Other accrued liabilities 1,291.5 1,316.1
Income taxes payable - 66.6
-------- --------
Total 1,661.3 2,022.8
-------- --------
Long-term debt 898.6 898.4
Accrued pension liabilities 573.3 537.9
Other long-term liabilities 708.6 655.3
Stockholders' equity
Common stock, shares issued: 2005, 340.8;
2004, 339.4 3.4 3.4
Accumulated deficit ( 421.7) ( 376.2)
Other capital 3,895.8 3,883.8
Accumulated other comprehensive loss (1,985.0) (2,004.5)
-------- --------
Stockholders' equity 1,492.5 1,506.5
-------- --------
Total $5,334.3 $5,620.9
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2005 2004
-------- --------
Revenue
Services $1,107.7 $1,165.0
Technology 258.9 297.9
-------- --------
1,366.6 1,462.9
Costs and expenses
Cost of revenue:
Services 981.4 925.7
Technology 124.9 145.7
-------- --------
1,106.3 1,071.4
Selling, general and administrative 261.6 261.2
Research and development 64.9 71.5
-------- --------
1,432.8 1,404.1
-------- --------
Operating income (loss) (66.2) 58.8
Interest expense 12.6 17.0
Other income (expense), net .5 .6
-------- --------
Income (loss) before income taxes (78.3) 42.4
Provision (benefit) for income taxes (32.8) 13.5
-------- --------
Net income (loss) $ (45.5) $ 28.9
======== ========
Earnings (loss) per share
Basic $ (.13) $ .09
======== ========
Diluted $ (.13) $ .09
======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Three Months Ended
March 31
------------------
2005 2004
-------- --------
Cash flows from operating activities
Net income (loss) $ (45.5) $ 28.9
Add (deduct) items to reconcile net income (loss)
to net cash provided by operating activities:
Equity loss (income) 4.3 ( 5.3)
Depreciation and amortization of properties 30.0 35.8
Depreciation and amortization of outsourcing assets 34.7 26.6
Amortization of marketable software 28.5 29.3
Increase in deferred income taxes, net ( .3) ( 1.4)
Decrease in receivables, net 90.5 54.2
Increase in inventories ( 6.5) (19.1)
(Decrease) increase in accounts payable and other
accrued liabilities (158.5) 8.2
Decrease in income taxes payable (66.6) (8.0)
Increase in other liabilities 97.7 -
Increase in other assets (16.4) (25.4)
Other 34.9 5.4
------- ------
Net cash provided by operating activities 26.8 129.2
------- ------
Cash flows from investing activities
Proceeds from investments 1,779.9 1,408.3
Purchases of investments (1,776.8) (1,413.7)
Investment in marketable software (33.0) ( 29.0)
Capital additions of properties (22.4) ( 36.5)
Capital additions of outsourcing assets (41.9) ( 47.6)
------- ------
Net cash used for investing activities (94.2) ( 118.5)
------- ------
Cash flows from financing activities
Net proceeds from short-term borrowings 1.7 10.6
Proceeds from employee stock plans 6.6 11.1
Payments of long-term debt ( 150.3) ( 1.0)
------- ------
Net cash (used for) provided by financing activities (142.0) 20.7
------- ------
Effect of exchange rate changes on
cash and cash equivalents (9.5) 4.1
------- ------
(Decrease) increase in cash and cash equivalents (218.9) 35.5
Cash and cash equivalents, beginning of period 660.5 635.9
------- -------
Cash and cash equivalents, end of period $ 441.6 $ 671.4
======= =======
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 except as disclosed herein. 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 (loss) per share were computed for the
three months ended March 31, 2005 and 2004 (dollars in millions, shares
in thousands):
Three Months Ended March 31,
----------------------------
2005 2004
----------- ----------
Basic Earnings (Loss) Per Share
Net income (loss) $ (45.5) $ 28.9
========= =========
Weighted average shares 338,248 332,722
========= =========
Basic earnings (Loss) per share $ (.13) $ .09
========= =========
Diluted Earnings (loss) Per Share
Net income (loss) $ (45.5) $ 28.9
========= =========
Weighted average shares 338,248 332,722
Plus incremental shares from assumed
conversions of employee stock plans - 5,326
--------- ---------
Adjusted weighted average shares 338,248 338,048
========= =========
Diluted earnings (loss) per share $ (.13) $ .09
========= =========
At March 31, 2005, no shares related to employee stock plans
were included in the computation of diluted earnings per share since
inclusion of these shares would be antidilutive because of the net loss
incurred in the three months ended March 31, 2005.
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, 2005
and 2004 was $4.8 million and $1.4 million, respectively. The profit on
these transactions are 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-
month periods ended March 31, 2005 and 2004 is presented below (in millions
of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
March 31, 2005
------------------
Customer revenue $1,366.6 $1,107.7 $ 258.9
Intersegment $( 59.9) 4.8 55.1
-------- -------- -------- -------
Total revenue $1,366.6 $( 59.9) $1,112.5 $ 314.0
======== ======= ======== =======
Operating income (loss) $ (66.2) $ (10.4) $ (75.1) $ 19.3
========= ======= ======== =======
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
======== ======== ======== =======
Presented below is a reconciliation of total business segment operating
income (loss) to consolidated income (loss) before income taxes (in
millions of dollars):
Three Months Ended March 31
---------------------------
2005 2004
---- ----
Total segment operating income (loss) $ (55.8) $ 58.4
Interest expense (12.6) (17.0)
Other income (expense), net .5 .6
Corporate and eliminations (10.4) .4
------ ------
Total income (loss) before income taxes $ (78.3) $ 42.4
======= ======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Ended March 31
---------------------------
2005 2004
---- ----
Services
Consulting and systems integration $ 369.8 $ 377.1
Outsourcing 420.7 443.0
Infrastructure services 186.2 199.5
Core maintenance 131.0 145.4
-------- --------
1,107.7 1,165.0
Technology
Enterprise-class servers 198.2 201.8
Specialized technologies 60.7 96.1
-------- --------
258.9 297.9
-------- --------
Total $1,366.6 $1,462.9
======== ========
7
c. Recoverability of outsourcing assets is dependent on various factors,
including the timely completion and ultimate cost of the outsourcing
solution, realization of expected profitability of existing outsourcing
contracts and obtaining additional outsourcing customers. The company
quarterly compares the carrying value of the outsourcing assets with the
undiscounted future cash flows expected to be generated by the outsourcing
assets to determine if there is an impairment. If impaired, the outsourcing
assets are reduced to an estimated fair value on a discounted cash flow
approach. The company prepares its cash flow estimates based on assumptions
that it believes to be reasonable but are also inherently uncertain. Actual
future cash flows could differ from these estimates. At March 31, 2005,
total outsourcing assets, net were $433.3 million, approximately $250
million of which relate to iPSL, a 51% owned U.K.-based company.
d. Comprehensive income (loss) for the three months ended March 31, 2005 and
2004 includes the following components (in millions of dollars):
2005 2004
------ ------
Net income (loss) $(45.5) $ 28.9
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of $1.3 and $(1.0) 2.3 (1.6)
Reclassification adjustments, net of tax
of $.7 and $1.7 1.4 3.1
Foreign currency translation adjustments 15.8 20.2
------ ------
Total other comprehensive income 19.5 21.7
------ ------
Comprehensive income (loss) $(26.0) $ 50.6
====== ======
Accumulated other comprehensive income (loss) as of December 31, 2004 and
March 31, 2005 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2003 $(2,011.9) $(679.7) $( 6.6) $(1,325.6)
Change during period 7.4 43.5 3.1 (39.2)
-------- ------- ------ ---------
Balance at December 31, 2004 (2,004.5) (636.2) ( 3.5) (1,364.8)
Change during period 19.5 15.8 3.7 -
-------- ------- ------ ---------
Balance at March 31, 2005 $(1,985.0) $(620.4) $ .2 $(1,364.8)
======== ======= ====== =========
e. 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,
2005 and 2004 was $.4 million and $1.6 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
f. 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):
PAGE> 8
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Balance at beginning of period $11.6 $20.8
Accruals for warranties issued
during the period 2.4 5.0
Settlements made during the period (2.9) (4.7)
Changes in liability for pre-existing warranties
during the period, including expirations (.1) (3.2)
----- -----
Balance at March 31 $11.0 $17.9
===== =====
g. 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 are 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,
----------------------------
2005 2004
------ ------
Net income (loss) as reported $(45.5) $ 28.9
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (5.7) (10.0)
------ ------
Pro forma net income (loss) $(51.2) $ 18.9
====== ======
Earnings (loss) per share
Basic - as reported $ (.13) $ .09
Basic - pro forma $ (.15) $ .06
Diluted - as reported $ (.13) $ .09
Diluted - pro forma $ (.15) $ .06
h. Net periodic pension expense for the three months ended March 31, 2005
and 2004 is presented below (in millions of dollars):
Three Months Three Months
Ended March 31, 2005 Ended March 31, 2004
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 31.7 $ 19.1 $ 12.6 $ 29.3 $ 17.1 $ 12.2
Interest cost 93.1 65.3 27.8 89.5 65.6 23.9
Expected return on
plan assets (121.0) (90.3) (30.7) (123.5) ( 94.8) (28.7)
Amortization of prior
service (benefit) cost ( 1.3) ( 1.9) .6 ( 1.4) ( 1.9) .5
Recognized net actuarial
loss 44.3 34.1 10.2 28.3 22.2 6.1
----- ----- ------ ------ ------ -----
Net periodic pension
expense $46.8 $26.3 $ 20.5 $ 22.2 $ 8.2 $14.0
===== ===== ====== ======= ====== =====
9
The company currently expects to make cash contributions of approximately
$70 million to its worldwide defined benefit pension plans in 2005 compared
with $62.8 million in 2004. For the three months ended March 31, 2005 and
2004, $15.6 million and $12.0 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 2005.
Net periodic postretirement benefit expense for the three months ended
March 31, 2005 and 2004 is presented below (in millions of dollars):
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Interest cost $3.5 $3.5
Expected return on assets (.1) -
Amortization of prior service benefit (.5) (.5)
Recognized net actuarial loss 1.6 1.0
---- ----
Net periodic postretirement benefit expense $4.5 $4.0
==== ====
The company expects to make cash contributions of approximately $27 million
to its postretirement benefit plan in 2005. For the three months ended
March 31, 2005 and 2004, $7.4 million and $6.0 million, respectively of cash
contributions have been made.
i. Cash paid during the three months ended March 31, 2005 and 2004 for income
taxes was $41.3 million and $18.4 million, respectively.
Cash paid during the three months ended March 31, 2005 and 2004 for interest
was $16.5 million and $16.1 million, respectively.
j. Following is a breakdown of the individual components of the 2004 cost
reduction action charge (in millions of dollars):
Work Force
Reductions*
----------- Idle
Lease
Headcount Total U.S. Int'l. Cost
------------------------------------------------------------------------
Balance at
Dec. 31, 2004 851 $81.1 $22.5 $52.9 $5.7
Utilized (401) (12.6) (6.6) (5.1) (.9)
Changes in
estimates and
revisions (3.7) .1 (3.9) .1
Translation (1.6) (1.6)
adjustments ------------------------------------------
Balance at
March 31, 2005 450 $63.2 $16.0 $42.3 $4.9
==========================================
Expected future
utilization:
2005 remaining
nine months 450 $50.1 $16.0 $32.2 $1.9
2006 and thereafter 13.1 10.1 3.0
------------------------------------------------------------------------
* Includes severance, notice pay, medical and other benefits.
Cash expenditures related to the above actions, as well as cost
reduction actions taken in years prior to 2004, for the three months
ended March 31, 2005 and 2004 were approximately $14.3 million and $4.0
million, respectively.
k. In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position No. FAS 109-2 (FSP No. 109-2), "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provisions within
the American Jobs Creation Act of 2004" (the Jobs Act). FSP No. 109-2
provides guidance with respect to reporting the potential impact of the
10
repatriation provisions of the Jobs Act on an enterprise's income tax
expense and deferred tax liability. The Jobs Act was enacted on October 22,
2004, and provides for a temporary 85% dividends received deduction on
certain foreign earnings repatriated during a one-year period. The
deduction would result in an approximate 5.25% federal tax rate on the
repatriated earnings. To qualify for the deduction, the earnings must be
reinvested in the United States pursuant to a domestic reinvestment plan
established by a company's chief executive officer and approved by a
company's board of directors. Certain other criteria in the Jobs Act must
be satisfied as well. FSP No. 109-2 states that an enterprise is allowed
time beyond the financial reporting period to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings.
Although the company has not yet completed its evaluation of the impact of
the repatriation provisions of the Jobs Act, the company does not expect
that these provisions will have a material impact on its consolidated
financial position, consolidated results of operations, or liquidity.
Accordingly, as provided for in FSP No. 109-2, the company has not adjusted
its tax expense or deferred tax liability to reflect the repatriation
provisions of the Jobs Act.
In December 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), "Share-Based Payment" (SFAS No.
123R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS No. 123
no longer will be an alternative to financial statement recognition. In
accordance with a recently-issued Securities and Exchange Commission rule,
companies will be allowed to implement SFAS No. 123R as of the beginning of
the first interim or annual period that begins after June 15, 2005. The
company currently expects that it will adopt SFAS No. 123R on January 1,
2006. Under SFAS No. 123R, the company must determine the appropriate fair
value model to be used for valuing share-based payments, the amortization
method for compensation cost and the transition method to be used at date of
adoption. The permitted transition methods include either retrospective or
prospective adoption. Under the retrospective method, prior periods may be
restated either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of the
first quarter of adoption of SFAS No. 123R, while the retrospective methods
would record compensation expense for all unvested stock options beginning
with the first period presented. The company is currently evaluating the
requirements of SFAS No. 123R and expects that adoption of SFAS No. 123R
will have a material impact on the company's consolidated financial position
and consolidated results of operations. The company has not yet determined
the method of adoption or the effect of adopting SFAS No. 123R, and it has
not determined whether the adoption will result in amounts that are similar
to the current pro forma disclosures under SFAS No. 123. See note g.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" (SFAS No. 153). SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange.
SFAS No. 153 is effective for periods beginning after June 15, 2005. The
company does not expect that adoption of SFAS No. 153 will have a material
effect on its consolidated financial position, consolidated results of
operations, or liquidity.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs and
wasted material (spoilage). Among other provisions, the new rule requires
that such items be recognized as current-period charges, regardless of
whether they meet the criterion of "so abnormal" as stated in ARB No. 43.
SFAS No. 151 is effective for fiscal years beginning after June 15, 2005.
The company does not expect that adoption of SFAS No. 151 will have a
material effect on its consolidated financial position, consolidated results
of operations, or liquidity.
11
In May 2004, the FASB issued Staff Position No. FAS 106-2 (FSP No. 106-2),
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the Act). The 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 March 31,
2005, the company's measurements of both the APBO and the net postretirement
benefit cost do not reflect any amounts associated with the subsidy. Final
regulations implementing the Act were issued on January 21, 2005. The final
regulations clarify how a company should determine actuarial equivalency and
the definition of a plan for purposes of determining actuarial equivalency.
The company is currently evaluating these regulations and has not yet
determined what effect adoption of FSP No. 106-2 will have on its
consolidated financial position, consolidated results of operations, or
liquidity.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
- --------
The company's financial results for the first quarter of 2005 were impacted
by a number of factors that resulted in lower earnings compared with the
year-ago period. First, the company continued to be impacted by operational
issues in several of its large, transformational business process
outsourcing engagements. These contracts involve transitioning from the
client's legacy environment to a new, state-of-the-art environment with new
processes and software. It has taken the company longer than anticipated to
develop the new software and transition to the new processes. This has
resulted in higher-than-expected costs on the contracts, not only in terms
of creating the new technology and processes, but also in the salary costs
involved in the legacy operation. The company is addressing these execution
issues but expects the issues to continue to impact its 2005 results.
Second, the company experienced lower demand for project-based assignments and
for its proprietary maintenance services. The maintenance services decline was
due to server and payment system consolidations and reductions in
certain client accounts. Given the high profitability of these services,
the lower demand impacted the company's margins in its services business.
Third, in its Technology segment, revenues declined 13% primarily driven by
a 37% decline in sales of specialized equipment. In addition, the company
experienced a decline in sales of large enterprise servers. Lower sales of
these systems, which are highly profitable, contributed to the lower
earnings in 2005. Finally, the company continues to be impacted by
significantly higher pension expense. Pretax pension expense in the first
quarter of 2005 increased to $47 million compared to $22 million in the
year-ago quarter. The company expects the challenges in the outsourcing
engagements, the lower proprietary maintenance revenue, the weakness in
high-end enterprise server sales, and the higher pension expense to continue
to impact its financial results in 2005.
Results of Operations
- ---------------------
For the three months ended March 31, 2005, the company reported a net loss of
$45.5 million, or $.13 per share, compared with net income of $28.9 million, or
$.09 per share, for the three months ended March 31, 2004.
Total revenue for the quarter ended March 31, 2005 was $1.37 billion, down 7%
from revenue of $1.46 billion for the quarter ended March 31, 2004. Foreign
currency translations had a 2% positive impact on revenue in the quarter when
compared with the year-ago period. In the current quarter, Services revenue
decreased 5% and Technology revenue decreased 13%.
U.S. revenue decreased 9% in the first quarter compared with the year-ago period
and revenue in international markets decreased 4% due to decreases in Europe and
Latin America which were partially offset by an increase in Pacific/Asia.
Pension expense for the three months ended March 31, 2005 was $46.8 million
compared with $22.2 million of pension expense for the three months ended March
31, 2004. The increase in pension expense was due to the following: (1) a
decline in the discount rate used for the U.S. pension plan to 5.88% at December
31, 2004 from 6.25% at December 31, 2003, (2) an increase in amortization of net
unrecognized losses for the U.S. plan, and (3) for international plans, declines
in discount rates and currency translation. The company records pension
expense, as well as other employee-related costs such as payroll taxes 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 category is
based on where the salaries of the active employees are charged. The company
currently expects to report pension expense of approximately $186.0 million in
2005 compared with pension expense of $93.6 million in 2004.
13
Total gross profit margin was 19.0% in the first quarter of 2005 compared with
26.8% in the year-ago period. The change principally reflects higher pension
expense of $32.8 million in the current quarter compared with pension expense of
$15.5 million in the year-ago quarter, as well as operational issues in several
outsourcing contracts.
For the three months ended March 31, 2005, selling, general and administrative
expenses were $261.6 million (19.1% of revenue) compared with $261.2 million
(17.9% of revenue) for the three months ended March 31, 2004. The three months
ended March 31, 2005 includes $9.1 million of pension expense compared with $4.9
million in the year-ago period.
Research and development (R&D) expense was $64.9 million compared with $71.5
million a year ago. The company continues to invest in high-end Cellular
MultiProcessing server technology and in key programs within its industry
practices. R&D in the current period includes $4.9 million of pension expense
compared with pension expense of $1.8 million in the year-ago period.
For the first quarter of 2005, the company reported a pretax operating loss of
$66.2 million compared with pretax income of $58.8 million a year ago. The
change resulted principally (a) from increased pension expense of $46.8 million
in the current quarter compared with pension expense of $22.2 million in the
year-ago period, (b) execution issues in several outsourcing contracts, and (c)
lower revenue levels.
Interest expense for the three months ended March 31, 2005 was $12.6 million
compared with $17.0 million for the three months ended March 31, 2004. The
decrease was principally due to the January 2005 retirement at maturity of all
of the company's $150 million 7 1/4% senior notes.
Other income (expense), net was income of $.5 million in the current quarter
compared with income of $.6 million in the year-ago quarter.
Income (loss) before income taxes was a loss of $78.3 million in the first
quarter of 2005 compared with income of $42.4 million last year. The provision
for income taxes was a benefit of $32.8 million in the current period compared
with a provision of $13.5 million in the year-ago period. In the current period
tax benefit, the company recorded a tax benefit of $7.8 million related to a
favorable decision in foreign tax litigation. The company expects to receive a
cash refund of such taxes in the second quarter of 2005.
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, 2005 and 2004, was
$4.8 million and $1.4 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.
14
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
March 31, 2005
- ------------------
Customer revenue $1,366.6 $1,107.7 $258.9
Intersegment $( 59.9) 4.8 55.1
-------- ------- -------- -------
Total revenue $1,366.6 $( 59.9) $1,112.5 $314.0
======== ======= ======== ======
Gross profit percent 19.0% 11.0% 47.7%
======== ======== ======
Operating income
(loss) percent (4.8)% (6.8)% 6.1%
======== ======== =======
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%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
In the Services segment, customer revenue was $1.11 billion for the three months
ended March 31, 2005, down 5% compared with $1.17 billion for the three months
ended March 31, 2004. Foreign currency translations had about a 3% positive
impact on Services revenue in the quarter when compared with the year-ago
period. The decrease in Services revenue was due to an 5% decrease in
outsourcing ($421 million in 2005 compared with $443 million in 2004), a 2%
decrease in consulting and systems integration ($370 compared with $377 million
in 2004), a 10% decrease in core maintenance revenue ($131 million in 2005
compared with $145 million in 2004) and a 7% decrease in infrastructure services
revenue ($186 million in 2005 compared with $200 million in 2004). Services
gross profit was 11.0% for the three months ended March 31, 2005 compared with
19.1% in the year-ago period. Included in gross profit was the impact of
pension expense of $31.8 million in the current period compared with pension
expense of $15.2 million in the year-ago period. Services operating income
(loss) percent was (6.8)% for the three months ended March 31, 2005 compared
with 2.5% last year. Included in operating income (loss) was the impact of
pension expense of $39.4 million in the current quarter compared with pension
expense of $19.3 million in the year-ago period. In addition, the current year
gross profit and operating profit margins were negatively impacted by
operational issues in several outsourcing contracts, weakness in project-based
assignments and the decline in core maintenance.
In the Technology segment, customer revenue was $259 million for the three
months ended March 31, 2005, down 13% compared with $298 million for the three
months ended March 31, 2004. 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 37% decrease in sales of
specialized technology products ($61 million in 2005 compared with $96 million
in 2004) and a 2% decline in sales of enterprise-class servers ($198 million in
2005 compared with $202 million in 2004). Technology gross profit was 47.7% for
the three months ended March 31, 2005 compared with 48.3% in the year-ago
period, and Technology operating income percent was 6.1% for the three months
ended March 31, 2005 compared with 8.6% last year. The margin declines
primarily reflected a lower proportion of high-end, higher-margin ClearPath
products as well as pension expense of $7.4 million in the current period
compared with pension expense of $2.9 million in the prior-year period.
15
New Accounting Pronouncements
- -----------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. FAS 109-2 (FSP No. 109-2), "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provisions within the American
Jobs Creation Act of 2004" (the Jobs Act). FSP No. 109-2 provides guidance with
respect to reporting the potential impact of the repatriation provisions of the
Jobs Act on an enterprise's income tax expense and deferred tax liability. The
Jobs Act was enacted on October 22, 2004, and provides for a temporary 85%
dividends received deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in an approximate 5.25% federal tax
rate on the repatriated earnings. To qualify for the deduction, the earnings
must be reinvested in the United States pursuant to a domestic reinvestment plan
established by a company's chief executive officer and approved by a company's
board of directors. Certain other criteria in the Jobs Act must be satisfied as
well. FSP No. 109-2 states that an enterprise is allowed time beyond the
financial reporting period to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings. Although the company has
not yet completed its evaluation of the impact of the repatriation provisions of
the Jobs Act, the company does not expect that these provisions will have a
material impact on its consolidated financial position, consolidated results of
operations, or liquidity. Accordingly, as provided for in FSP No. 109-2, the
company has not adjusted its tax expense or deferred tax liability to reflect
the repatriation provisions of the Jobs Act.
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which
replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to
financial statement recognition. In accordance with a recently-issued
Securities and Exchange Commission rule, companies will be allowed to implement
SFAS No. 123R as of the beginning of the first interim or annual period that
begins after June 15, 2005. The company currently expects that it will adopt
SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The permitted transition methods include
either retrospective or prospective adoption. Under the retrospective method,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retrospective methods would
record compensation expense for all unvested stock options beginning with the
first period presented. The company is currently evaluating the requirements of
SFAS No. 123R and expects that adoption of SFAS No. 123R will have a material
impact on the company's consolidated financial position and consolidated results
of operations. The company has not yet determined the method of adoption or the
effect of adopting SFAS No. 123R, and it has not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under SFAS No. 123. See note g.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" (SFAS No. 153). SFAS No. 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21 (b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The company does not expect that
adoption of SFAS No. 153 will have a material effect on its consolidated
financial position, consolidated results of operations, or liquidity.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, handling costs and wasted material (spoilage).
Among other provisions, the new rule requires that such items be recognized as
current-period charges, regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years
16
beginning after June 15, 2005. The company does not expect that adoption of
SFAS No. 151 will have a material effect on its consolidated financial position,
consolidated results of operations, or liquidity.
In May 2004, the FASB issued Staff Position No. FAS 106-2 (FSP No. 106-2),
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the Act). The 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 March 31, 2005, the company's measurements of both the
APBO and the net postretirement benefit cost do not reflect any amounts
associated with the subsidy. Final regulations implementing the Act were issued
on January 21, 2005. The final regulations clarify how a company should
determine actuarial equivalency and the definition of a plan for purposes of
determining actuarial equivalency. The company is currently evaluating these
regulations and has not yet determined what effect adoption of FSP No. 106-2
will have on its consolidated financial position, consolidated results of
operations, or liquidity.
Financial Condition
- -------------------
Cash and cash equivalents at March 31, 2005 were $441.6 million compared with
$660.5 million at December 31, 2004.
During the three months ended March 31, 2005, cash provided by operations was
$26.8 million compared with cash provided by operations of $129.2 million for
the three months ended March 31, 2004. Operating cash flow decreased
principally due to lower earnings. Cash expenditures in the current quarter
related to prior-year restructuring charges (which are included in operating
activities) were approximately $14 million compared with $4 million for the
prior-year quarter, and are expected to be approximately $57 million for the
remainder of 2005 and $22 million in total for all subsequent years, principally
for work-force reductions and idle lease costs. In the second quarter of 2005,
the company expects to receive approximately $48 million of income tax refunds
of which $40 million represents the U.S. Internal Revenue Service (IRS) tax
audit settlement in 2004 and $8 million represents the foreign refund discussed
above.
Cash used for investing activities for the three months ended March 31, 2005 was
$94.2 million compared with $118.5 million during the three months ended March
31, 2004. The decrease in cash used was principally due to net proceeds of
investments of $3.1 million in the current quarter compared with net purchases
of $5.4 million in the prior-year period. In addition, the current period
investment in marketable software was $33.0 million compared with $29.0 million
in the prior-year. Capital additions of properties were $22.4 million for the
three months ended March 31, 2005 compared with $36.5 million in the prior-year
period. Capital additions of outsourcing assets were $41.9 million for the
three months ended March 31, 2005 compared with $47.6 million in the prior-year
period.
Cash used for financing activities during the current quarter was $142.0 million
compared with cash provided of $20.7 million in the prior year. The current
period includes cash expenditures of $150.0 million to retire at maturity all of
the company's 7 1/4% senior notes.
At March 31, 2005, total debt was $.9 billion, a decrease of $148.3 million from
December 31, 2004.
The company has a $500 million credit agreement that expires in May 2006. As of
March 31, 2005, 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
17
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
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 both March 31, 2005 and at December 31, 2004, the
company had sold $225 million of eligible receivables.
At March 31, 2005, the company has met all covenants and conditions under its
various lending and funding agreements. Since the company expects to 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.
The company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or the entire deferred
tax asset will not be realized.
At March 31, 2005, the company had deferred tax assets in excess of deferred tax
liabilities of $2,147 million. For the reasons cited below, management
determined that it is more likely than not that $1,625 million of such assets
will be realized, therefore resulting in a valuation allowance of $522 million.
The company evaluates quarterly the realizability of its deferred tax assets by
assessing its valuation allowance and by adjusting the amount of such 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 the net deferred tax assets.
The company has used tax-planning strategies to realize or renew net deferred
tax assets to avoid the potential loss of future tax benefits.
In addition to the repatriation provisions discussed above, the Jobs Act extends
the excess foreign tax credit carry forward period from five to 10 years and
limits the carry back period to one year. The company's deferred tax asset
included approximately $183 million of foreign tax credit carry forwards. The
Jobs Act should provide the company with additional opportunities to fully
utilize this portion of the deferred tax asset.
Approximately $4.9 billion of future taxable income (predominately U.S.)
ultimately is needed to realize the net deferred tax assets at March 31, 2005.
Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. Factors that may affect the
company's ability to achieve sufficient forecasted taxable income include, but
are not limited to, the following: increased competition, a continuing decline
in sales or margins, loss of market share, delays in product availability or
technological obsolescence. See "Factors that may affect future results" below.
The company's annual provision for income taxes and the determination of the
resulting deferred tax assets and liabilities involve a significant amount of
management judgment and are based on the best information available at the time.
The company operates within federal, state and international taxing
jurisdictions and is subject to audit in these jurisdictions. These audits can
involve complex issues, which may require an extended period of time to resolve.
18
As a result, the actual income tax liabilities to the jurisdictions with respect
to any fiscal year are ultimately determined long after the financial statements
have been published. The company maintains reserves for estimated tax exposures.
Income tax exposures include potential challenges of research and development
credits and intercompany pricing. Exposures are settled primarily through the
settlement of audits within these tax jurisdictions, but can also be affected by
changes in applicable tax law or other factors, which could cause management of
the company to believe a revision of past estimates is appropriate. Management
believes that an appropriate liability has been established for estimated
exposures; however, actual results may differ materially from these estimates.
The liabilities are reviewed quarterly for their adequacy and appropriateness.
As of March 31, 2005, the IRS was in the process of examining Unisys U.S.
Federal Income tax returns for the fiscal years 1997 through 1999. The company
anticipates the examination of these years will be completed in 2005. The
company expects that the audit of 2000 through 2003 will commence in 2005. The
liabilities, if any, associated with these years will ultimately be resolved
when events such as the completion of audits by the taxing jurisdictions occur.
To the extent the audits or other events result in a material adjustment to the
accrued estimates, the effect would be recognized in the provision for income
taxes line in the company's Consolidated Statement of Income in the period of
the event.
Stockholders' equity decreased $14.0 million during the three months ended March
31, 2005, principally reflecting the net loss of $45.5 million, offset in part
by $11.5 million for issuance of stock under stock option and other plans, $.4
million of tax benefits related to employee stock plans and currency translation
of $15.8 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 values of pension
plan assets experience 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, 2004, the difference between the ABO and the fair value of
pension plan assets increased from the amount at December 31, 2003. As a result
at December 31, 2004, the company adjusted its minimum pension liability
adjustment as follows: increased its pension plan liabilities by approximately
$95 million, increased its investments at equity by approximately $27 million
relating to the company's share of the change in NUL's minimum pension
liability, increased prepaid pension asset by $13 million, and offset these
changes by an increase in other comprehensive loss of approximately $55 million,
or $39 million net of tax.
This accounting treatment 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 2005. The company expects to make cash contributions of
approximately $70 million to its other defined benefit pension plans during
2005.
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. Other factors that could affect future
19
results 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 continue to delay 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 the company's 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 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.
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, realization
of expected profitability of existing outsourcing contracts and obtaining
additional outsourcing customers. These risks could result in an impairment of
a portion of the associated assets, which are tested for recoverability
quarterly.
As long-term relationships, outsourcing contracts provide a base of recurring
revenue. However, outsourcing contracts are highly complex and can involve the
design, development, implementation and operation of new solutions and the
transitioning of clients from their existing business processes to the new
environment. In the early phases of these contracts, gross margins may be lower
than in later years when an integrated solution has been implemented, the
duplicate costs of transitioning from the old to the new system have been
eliminated and the work force and facilities have been rationalized for
efficient operations. Future results will depend on the company's ability to
effectively and timely complete these implementations, transitions and
rationalizations.
20
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 parts of 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 creating and enhancing a common high-performance platform for
both its proprietary operating environments and open standards-based operating
environments such as Microsoft Windows and Linux. In addition, the company is
applying its resources to develop value-added software capabilities and
optimized solutions for these server platforms which provide competitive
differentiation. The high-end enterprise server platforms are 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 supporting industry standard software. The company has transitioned both its
legacy ClearPath servers and its Intel-based ES7000s to the CMP platform. 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 and Linux operating system software. However, competition in these new
markets 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 customer 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-price 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
21
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.
More than half 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, new tax legislation, 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, 2005. 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 controls over
financial reporting that occurred during the quarter ended March 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II - OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits
- ------- --------
(a) Exhibits
See Exhibit Index
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: April 21, 2005 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet 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 Unisys Corporation Supplemental Executive Retirement Income Plan, as
amended and restated effective January 1, 2005 (incorporated by
reference to Exhibit 10.17 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2004)
10.2 Unisys Corporation Elected Officer Pension Plan, as amended and
restated effective January 1, 2005 (incorporated by
reference to Exhibit 10.18 to the registrant's Annual Report on Form
10-K for the year ended December 31, 2004)
10.3 2005 Deferred Compensation Plan for Directors of Unisys Corporation
(incorporated by reference to Exhibit 10.19 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2004)
10.4 Unisys Corporation 2005 Deferred Compensation Plan (incorporated by
reference to Exhibit 10.20 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2004)
10.5 Consulting Agreement, dated as of March 31, 2005, between Unisys
Corporation and George R. Gazerwitz (incorporated by reference to
Exhibit 10 to the registrant's Current Report on Form 8-K dated March
31, 2005)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Joseph W. McGrath 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 Joseph W. McGrath 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