SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding as of September 30, 2003:
330,417,158.March 31, 2004:
333,315,970.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
September 30,
2003 December 31,
(Unaudited) 2002
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 402.7 $ 301.8
Accounts and notes receivable, net 961.8 955.6
Inventories
Parts and finished equipment 136.2 165.3
Work in process and materials 113.6 127.5
Deferred income taxes 313.8 311.3
Other current assets 86.3 84.5
-------- --------
Total 2,014.4 1,946.0
-------- --------
Properties 1,718.2 1,542.7
Less-Accumulated depreciation
and amortization 1,033.7 932.9
-------- --------
Properties, net 684.5 609.8
-------- --------
Investments at equity 124.2 111.8
Marketable software, net 329.0 311.8
Deferred income taxes 1,476.0 1,476.0
Goodwill 165.6 160.6
Other long-term assets 392.4 365.4
-------- --------
Total $5,186.1 $4,981.4UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
March 31,
2004 December 31,
(Unaudited) 2003
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 671.4 $ 635.9
Accounts and notes receivable, net 1,002.6 1,027.8
Inventories:
Parts and finished equipment 119.1 121.7
Work in process and materials 138.7 116.9
Deferred income taxes 271.4 270.0
Other current assets 111.9 85.7
-------- --------
Total 2,315.1 2,258.0
-------- --------
Properties 1,342.9 1,352.7
Less-Accumulated depreciation and
amortization 914.6 928.5
-------- --------
Properties, net 428.3 424.2
-------- --------
Outsourcing assets, net 522.9 477.5
Marketable software, net 332.0 332.2
Investments at equity 167.6 153.3
Prepaid pension cost 50.3 55.5
Deferred income taxes 1,384.6 1,384.6
Goodwill 176.7 177.5
Other long-term assets 195.9 211.8
-------- --------
Total $5,573.4 $5,474.6
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 28.3 $ 17.7
Current maturities of long-term debt 150.8 2.2
Accounts payable 522.3 513.8
Other accrued liabilities 1,311.5 1,305.7
Income taxes payable 206.1 214.1
-------- --------
Total 2,219.0 2,053.5
-------- --------
Long-term debt 899.8 1,048.3
Accrued pension liabilities 446.9 433.6
Other long-term liabilities 543.9 544.0
Stockholders' equity
Common stock, shares issued: 2004, 335.3;
2003, 333.8 3.4 3.3
Accumulated deficit ( 385.9) ( 414.8)
Other capital 3,836.5 3,818.6
Accumulated other comprehensive loss (1,990.2) (2,011.9)
-------- --------
Stockholders' equity 1,463.8 1,395.2
-------- --------
Total $5,573.4 $5,474.6
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 20.3 $ 77.3
Current maturities of long-term debt 1.8 4.4
Accounts payable 416.6 532.5
Other accrued liabilities 1,242.2 1,341.4
Income taxes payable 248.6 228.9
-------- --------
Total 1,929.5 2,184.5
-------- --------
Long-term debt 1,047.4 748.0
Accrued pension liabilities 660.9 727.7
Other long-term liabilities 472.5 465.2
Stockholders' equity
Common stock, shares issued: 2003, 332.3;
2002, 328.1 3.3 3.3
Accumulated deficit ( 526.4) ( 673.5)
Other capital 3,801.3 3,763.1
Accumulated other comprehensive loss (2,202.4) (2,236.9)
-------- --------
Stockholders' equity 1,075.8 856.0
-------- --------
Total $5,186.1 $4,981.4
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue
Services $1,124.3 $1,016.3 $3,394.7 $3,104.8
Technology 325.4 316.0 878.9 949.8
-------- -------- -------- --------
1,449.7 1,332.3 4,273.6 4,054.6
Costs and expenses
Cost of revenue:
Services 886.1 766.5 2,675.4 2,362.0
Technology 138.5 162.8 393.9 495.8
-------- -------- -------- --------
1,024.6 929.3 3,069.3 2,857.8
Selling, general and
administrative expenses 251.0 241.3 737.1 732.2
Research and development expenses 68.2 65.5 198.7 192.6
-------- -------- -------- --------
1,343.8 1,236.1 4,005.1 3,782.6
-------- -------- -------- --------
Operating income 105.9 96.2 268.5 272.0
Interest expense 17.2 17.6 51.3 53.2
Other income (expense), net (4.7) 9.5 2.5 (18.9)
-------- -------- -------- --------
Income before income taxes 84.0 88.1 219.7 199.9
Provision for income taxes 27.8 29.1 72.5 66.0
-------- -------- -------- --------
Net income $ 56.2 $ 59.0 $ 147.2 $ 133.9UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2004 2003
-------- --------
Revenue
Services $1,165.0 $1,107.0
Technology 297.9 291.9
-------- --------
1,462.9 1,398.9
Costs and expenses
Cost of revenue:
Services 925.7 882.5
Technology 145.7 129.3
-------- --------
1,071.4 1,011.8
Selling, general and administrative 261.2 243.7
Research and development 71.5 66.8
-------- --------
1,404.1 1,322.3
-------- --------
Operating income 58.8 76.6
Interest expense 17.0 15.7
Other income (expense), net .6 (3.4)
-------- --------
Income before income taxes 42.4 57.5
Provision for income taxes 13.5 19.0
-------- --------
Net income $ 28.9 $ 38.5
======== ========
Earnings per share
Basic $ .09 $ .12
======== ========
Diluted $ .09 $ .12
======== ======== ======== ========
Earnings per share
Basic $ .17 $ .18 $ .45 $ .41
======== ======== ======== ========
Diluted $ .17 $ .18 $ .44 $ .41
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
-----------------
2003 2002
-------- -------
Cash flows from operating activities
Net income $ 147.2 $ 133.9
Add(deduct) items to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of properties 131.4 111.7
Amortization:
Marketable software 92.2 90.1
Deferred outsourcing contract costs 23.5 14.1
(Increase) in deferred income taxes, net ( 2.5) ( 2.5)
(Increase) decrease in receivables, net ( 32.3) 208.0
Decrease in inventories 43.0 88.2
(Decrease) in accounts payable and
other accrued liabilities (180.0) (375.8)
Increase in income taxes payable 19.8 7.0
(Decrease) in other liabilities ( 56.8) ( 33.3)
(Increase) in other assets ( 29.9) (178.8)
Other 6.5 7.4
------- ------
Net cash provided by operating activities 162.1 70.0
------- ------
Cash flows from investing activities
Proceeds from investments 3,626.1 2,360.1
Purchases of investments (3,663.2) (2,384.0)
Investment in marketable software (109.4) (105.0)
Capital additions of properties (177.9) (151.8)
Purchases of businesses ( 2.0) ( 4.8)
------- ------
Net cash used for investing activities (326.4) (285.5)
------- ------
Cash flows from financing activities
Proceeds from issuance of long-term debt 293.3 -
Net (reduction in) proceeds from short-term
borrowings ( 57.0) 33.8
Proceeds from employee stock plans 21.0 21.9
Payments of long-term debt ( 3.8) ( 1.6)
------- ------
Net cash provided by financing activities 253.5 54.1
------- ------
Effect of exchange rate changes on
cash and cash equivalents 11.7 1.7
------- ------
Increase (decrease) in cash and cash equivalents 100.9 (159.7)
Cash and cash equivalents, beginning of period 301.8 325.9
------- -------
Cash and cash equivalents, end of period $ 402.7 $ 166.2UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Three Months Ended
March 31
------------------
2004 2003
-------- --------
Cash flows from operating activities
Net income $ 28.9 $ 38.5
Add(deduct) items to reconcile net income
to net cash provided by (used for) operating
activities:
Depreciation and amortization of properties and
outsourcing assets 60.1 50.0
Amortization of marketable software 29.3 29.7
(Increase) in deferred income taxes, net ( 1.4) ( 1.0)
Decrease in receivables, net 54.2 91.9
(Increase) decrease in inventories ( 19.1) 2.6
Increase (decrease) in accounts payable and
other accrued liabilities 8.2 (270.1)
(Decrease) increase in income taxes payable ( 8.0) 6.1
Increase in other liabilities 6.8
(Increase) in other assets ( 40.3) ( 20.3)
Other 3.9 .9
------- ------
Net cash provided by (used for) operating
activities 115.8 ( 64.9)
------- ------
Cash flows from investing activities
Proceeds from investments 1,408.3 1,279.1
Purchases of investments (1,413.7) (1,292.7)
Investment in marketable software ( 29.0) ( 40.0)
Capital additions of properties and
outsourcing assets ( 70.7) ( 49.4)
Purchases of businesses ( .8)
------- ------
Net cash used for investing activities ( 105.1) ( 103.8)
------- ------
Cash flows from financing activities
Net proceeds from short-term borrowings 10.6 1.3
Proceeds from employee stock plans 11.1 6.3
Payments of long-term debt ( 1.0) ( 2.4)
Proceeds from issuance of long-term debt 293.3
------- ------
Net cash provided by financing activities 20.7 298.5
------- ------
Effect of exchange rate changes on
cash and cash equivalents 4.1 1.5
------- ------
Increase in cash and cash equivalents 35.5 131.3
Cash and cash equivalents, beginning of period 635.9 301.8
------- -------
Cash and cash equivalents, end of period $ 671.4 $ 433.1
======= =======
See notes to consolidated financial statements.
5
UNISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished
herein reflects all adjustments necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods specified. These adjustments consist only of normal
recurring accruals. Because of seasonal and other factors, results
for interim periods are not necessarily indicative of the results to
be expected for the full year.
a. The following table shows how earnings per share were computed for the
three and nine months ended September 30,March 31, 2004 and 2003 and 2002 (dollars in millions, shares
in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------March 31,
----------------------------
2004 2003
2002 2003 2002
------- ------- ------- ------------------ ----------
Basic Earnings Per Share
Net income $ 56.228.9 $ 59.0 $ 147.2 $ 133.9
======= ======= ======= =======38.5
========= =========
Weighted average shares 330,033 324,075 328,675 322,792
======= ======= ======= =======332,722 327,208
========= =========
Basic earnings per share $ .17.09 $ .18 $ .45 $ .41
======= ======= ======= =======.12
========= =========
Diluted Earnings Per Share
Net income $ 56.228.9 $ 59.0 $ 147.2 $ 133.9
======= ======= ======= =======38.5
========= =========
Weighted average shares 330,033 324,075 328,675 322,792332,722 327,208
Plus incremental shares from assumed
exercises
underconversions of employee stock plans 3,946 594 2,642 1,287
------- ------- ------- -------5,326 1,616
--------- ---------
Adjusted weighted average shares 333,979 324,669 331,317 324,079
======= ======= ======= =======338,048 328,824
========= =========
Diluted earnings per share $ .17.09 $ .18 $ .44 $ .41
======= ======= ======= =======
At September 30, 2003, 21.2.12
========= =========
During the three months ended March 31, 2004, 21.9 million shares related to
employee stock plans were not included in the computation of diluted
earnings per share because the option prices are above the average market
price of the company's common stock.
b. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - consulting and
systems integration, outsourcing, infrastructure services and core
maintenance; Technology - enterprise-class servers and specialized
technologies. The accounting policies of each business segment are the same
as those followed by the company as a whole. Intersegment sales and
transfers are priced as if the sales or transfers were to third parties.
Accordingly, the Technology segment recognizes intersegment revenue and
manufacturing profit on hardware and software shipments to customers under
Services contracts. The Services segment, in turn, recognizes customer
revenue and marketing profits on such shipments of company hardware and
software to customers. The Services segment also includes the sale of
hardware and software products sourced from third parties that are sold to
customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products
sourced from the Technology segment and sold to Services customers are
reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are
sales of hardware and software sold to the Services segment for internal use
in Services engagements. The amount of such profit included in operating
income of the Technology segment for the three months ended September 30,March 31, 2004
and 2003 and 2002 was $6.7$1.4 million and $1.2 million, respectively; and the
amount of profit for the nine months ended September 30, 2003 and 2002 was
$18.6 million and $11.8$3.1 million, respectively. The profit on
these transactions is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue,
employees, square footage or usage.
6
A summary of the company's operations by business segment for the three and
nine monththree-month
periods ended September 30,March 31, 2004 and 2003 and 2002 is presented below
(in millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
September 30,March 31, 2004
------------------
Customer revenue $1,462.9 $1,165.0 $297.9
Intersegment $( 45.7) 4.8 40.9
-------- -------- -------- ------
Total revenue $1,462.9 $( 45.7) $1,169.8 $338.8
======== ======== ======== ======
Operating income $ 58.8 $ .4 $ 29.2 $ 29.2
======== ======== ======== ======
Three Months Ended
March 31, 2003
------------------
Customer revenue $1,449.7 $1,124.3 $ 325.4$1,398.9 $1,107.0 $291.9
Intersegment $( 66.4) 7.3 59.1
-------- -------70.0) 5.6 64.4
-------- -------- -------- ------
Total revenue $1,449.7$1,398.9 $( 66.4) $1,131.670.0) $1,112.6 $356.3
======== ======== ======== ======
Operating income $ 384.576.6 $ 2.6 $ 34.4 $ 39.6
======== ======= ======== ========
Operating income (loss) $ 105.9 $( 1.3) $ 43.8 $ 63.4
======== ======= ======== ========
Three Months Ended
September 30, 2002
------------------
Customer revenue $1,332.3 $1,016.3 $ 316.0
Intersegment $( 69.4) 6.5 62.9
-------- ------- -------- --------
Total revenue $1,332.3 $( 69.4) $1,022.8 $ 378.9
======== ======= ======== ========
Operating income (loss) $ 96.2 $ - $ 57.9 $ 38.3
======== ======= ======== ========
Nine Months Ended
September 30, 2003
----------------
Customer revenue $4,273.6 $3,394.7 $ 878.9
Intersegment $(225.6) 19.2 206.4
-------- ------- -------- --------
Total revenue $4,273.6 $(225.6) $3,413.9 $1,085.3
======== ======= ======== ========
Operating income (loss) $ 268.5 $( 3.6) $ 142.3 $ 129.8
======== ======= ======== ========
Nine Months Ended
September 30, 2002
------------------
Customer revenue $4,054.6 $3,104.8 $ 949.8
Intersegment $(233.0) 32.2 200.8
-------- ------- -------- --------
Total revenue $4,054.6 $(233.0) $3,137.0 $1,150.6
======== ======= ======== ========
Operating income (loss) $ 272.0 $( 15.0) $ 171.5 $ 115.5
======== ======= ======== ==============
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------March 31
---------------------------
2004 2003 2002 2003 2002
---- ----
---- ----
Total segment operating income $107.2 $ 96.2 $272.1 $287.058.4 $ 74.0
Interest expense (17.2) (17.6) (51.3) (53.2)(17.0) (15.7)
Other income (expense), net .6 ( 4.7) 9.5 2.5 (18.9)3.4)
Corporate and eliminations ( 1.3) - ( 3.6) (15.0)
------ ------.4 2.6
------ ------
Total income before income taxes $ 84.042.4 $ 88.1 $219.7 $199.957.5
====== ====== ====== ======
7
Customer revenue by classes of similar products or services, by segment, is
presented below:below (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------March 31
---------------------------
2004 2003 2002 2003 2002
---- ----
---- ----
Services
SystemsConsulting and systems integration $ 378.9377.1 $ 307.5 $1,121.3 $1,012.3356.4
Outsourcing 396.2 370.9 1,227.3 1,059.9443.0 409.3
Infrastructure services 207.5 198.8 620.1 617.9199.5 200.8
Core maintenance 141.7 139.1 426.0 414.7145.4 140.5
-------- --------
-------- --------
1,124.3 1,016.3 3,394.7 3,104.81,165.0 1,107.0
Technology
Enterprise-class servers 249.7 205.7 661.3 674.7201.8 217.8
Specialized technologies 75.7 110.3 217.6 275.196.1 74.1
-------- --------
-------- --------
325.4 316.0 878.9 949.8
-------- --------297.9 291.9
-------- --------
Total $1,449.7 $1,332.3 $4,273.6 $4,054.6$1,462.9 $1,398.9
======== ========
======== ======== 7
c. Comprehensive income for the three and nine months ended September 30,March 31, 2004 and
2003
and 2002 includes the following components (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------2004 2003
2002 2003 2002
---- ---- ---- ---------- ------
Net income $ 56.228.9 $ 59.0 $147.2 $133.938.5
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of $(2.5), $.5, $(5.1),$(1.0) and $(1.9) (4.6) .8 (9.4) (3.6)$- (1.6) ( .1)
Reclassification adjustments, net of tax
of $1.1, $.2, $3.1,$1.7 and $(.4) 2.0 .4 5.8 ( .9)$1.0 3.1 2.1
Foreign currency translation adjustments 7.2 (50.2) 38.1 (68.5)
------ ------20.2 (7.7)
------ ------
Total other comprehensive income (loss) 4.6 (49.0) 34.5 (73.0)
------ ------21.7 (5.7)
------ ------
Comprehensive income $ 60.850.6 $ 10.0 $181.7 $ 60.9
====== ======32.8
====== ======
Accumulated other comprehensive income (loss) as of December 31, 20022003 and
September 30, 2003March 31, 2004 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2001 $ (706.8) $(711.2) $ 4.4 $ -2002 $(2,236.9) $(745.0) $( 1.5) $(1,490.4)
Change during period (1,530.1)225.0 65.3 ( 33.8) ( 5.9) (1,490.4)
---------5.1) 164.8
-------- ------- ------ ---------
Balance at December 31, 2002 (2,236.9) (745.0)2003 (2,011.9) (679.7) ( 1.5) (1,490.4)6.6) (1,325.6)
Change during period 34.5 38.1 ( 3.6) -
---------21.7 20.2 1.5
-------- ------- ------ ---------
Balance at September 30, 2003 $(2,202.4) $(706.9)March 31, 2004 $(1,990.2) $(659.5) $( 5.1) $(1,490.4)
=========$(1,325.6)
======== ======= ====== =========
d. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the ninethree months ended September 30,March 31,
2004 and 2003 was $1.6 million and 2002 was $3.1$1.3 million, in both periods.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 twelve12 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 ninety90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that preventprevents its use in a production environment.
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------March 31,
----------------------------
2004 2003 2002 2003 2002
---- ----
---- ----
Balance at beginning
of period $21.1 $17.4December 31 $20.8 $19.2 $16.1
Accruals for warranties issued
during the period 5.5 4.3 17.2 11.35.0 4.9
Settlements made during the period ( 4.7) ( 4.3) (13.8) (11.2)(4.7) (4.7)
Changes in liability for pre-existing warranties
during the period, including expirations (3.2) ( .8) .8 ( 1.5) 2.0
----- -----.1)
----- -----
Balance at September 30 $21.1 $18.2 $21.1 $18.2March 31 $17.9 $19.3
===== =====
===== ===== 8
f. The company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based employee compensation
plans. For stock options, no compensation expense is reflected in net
income as all stock options granted had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant. In addition, no compensation expense is recognized for common
stock purchases under the Employee Stock Purchase Plan. Pro forma
information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," and has been determined as if the company
had accounted for its stock plans under the fair value method of SFAS No.
123. For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No.
123 (in millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------March 31,
----------------------------
2004 2003
2002 2003 2002
---- ---- ---- ---------- ------
Net income as reported $ 56.228.9 $ 59.0 $147.2 $133.938.5
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (10.4) (12.1) (35.2) (36.9)
------ ------(10.0) (14.5)
------ ------
Pro forma net income $ 45.818.9 $ 46.9 $112.0 $ 97.0
====== ======24.0
====== ======
Earnings per share
Basic - as reported $ .17.09 $ .18 $ .45 $ .41.12
Basic - pro forma $ .14.06 $ .14 $ .34 $ .30.07
Diluted - as reported $ .17.09 $ .18 $ .44 $ .41.12
Diluted - pro forma $ .14.06 $ .14 $ .34 $ .30
9.07
g. FollowingNet periodic pension expense (income) for the three months ended March 31,
2004 and 2003 is a breakdown of the individual components of the 2001 fourth-
quarter chargepresented below (in millions of dollars):
Work-Force
Reductions(1)
---------- Idle
Lease
HeadcountThree Months Three Months
Ended March 31, 2004 Ended March 31, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total U.S. Int'l Costs
---------------------------------------------------------------
Balance at
Dec. 31, 2002 631Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 67.629.3 $ 7.417.1 $ 43.712.2 $ 16.5
Additional
provisions 4 2.2 - .8 1.4
Utilized (514) (48.7) ( 7.3) (34.5) ( 6.9)
Reversal25.2 $ 15.9 $ 9.3
Interest cost 89.5 65.6 23.9 86.7 67.0 19.7
Expected return on
plan assets (123.5) (94.8) (28.7) (125.4) (100.8) (24.6)
Amortization of excess reserves (105) ( 3.1) ( 1.7)prior
service (benefit) cost ( 1.4) -
Other(2) - 2.0 2.2 2.0 ( 2.2)1.9) .5 ( 2.8) ( 3.0) .2
Recognized net actuarial
loss (gain) 28.3 22.2 6.1 8.9 5.5 3.4
Settlement/curtailment
(gain) loss 1.0 1.0
----- ----- ------ ------ ------ ------ ------
Balance at
Sept. 30, 2003 16-----
Net periodic pension
expense (income) $22.2 $ 20.08.2 $ .614.0 $( 6.4) $( 15.4) $ 10.6 $ 8.89.0
===== ===== ====== ======= ====== ====== ====== ======
Expected future
utilization:
2003 remaining=====
The company currently expects to make cash contributions of approximately
$70 million to its worldwide defined benefit pension plans in 2004 compared
with $62.5 million in 2003. For the three months 16 $ 6.0 $ .6 $ 3.1 $ 2.3ended March 31, 2004 and
thereafter - 14.0 - 7.5 6.5
(1) Includes severance, notice pay, medical2003, $12.0 million and other benefits.
(2) Changes$7.8 million, respectively of cash contributions
have been made. In accordance with regulations governing contributions to
U.S. defined benefit pension plans, the company is not required to fund its
U.S. qualified defined benefit pension plan in estimates2004.
9
Net periodic postretirement benefit expense for the three months ended
March 31, 2004 and translation adjustments.
Cash expenditures related2003 is presented below (in millions of dollars):
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Interest cost $3.5 $3.6
Amortization of prior service benefit (.5) (.5)
Recognized net actuarial loss 1.0 .7
---- ----
Net periodic postretirement benefit expense $4.0 $3.8
==== ====
The company expects to make cash contributions of approximately $25 million
to its postretirement benefit plan in 2004. For the 2001three months ended
March 31, 2004, $6 million of cash contributions have been made.
h. Substantially all of the company's investments at equity consist of Nihon
Unisys, Ltd., a publicly traded Japanese company ("NUL"). NUL is the
exclusive supplier of the company's hardware and prior-year restructuring chargessoftware 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
approximately $51 millionrecorded semiannually in the nine months ended September 30, 2003
comparedsecond quarter and fourth quarter on a quarter-
lag basis since NUL's quarterly financial results were not available. Due
to $87recent regulatory changes in Japan, NUL is required to publish its
earnings quarterly. Accordingly, effective January 1, 2004, the company has
begun to record its equity earnings in NUL quarterly on a quarter-lag basis,
and recorded equity income of $5.2 million for the prior-year period, and are expected to be
approximately $7 million (which includes approximately $1 million related
to restructuring charges taken prior to 2001) for the remainder of 2003 and
$20 million (which includes approximately $6 million related to
restructuring charges taken prior to 2001) in total for all subsequent
years, principally for work-force reductions and idle lease costs.
h.three months ended March
31, 2004.
i. Cash paid during the ninethree months ended September 30,March 31, 2004 and 2003 and 2002 for income
taxes was $63.2$18.4 million and $44.8$15.6 million, respectively.
Cash paid during the ninethree months ended September 30,March 31, 2004 and 2003 and 2002 for interest
expense was $51.4$16.1 million and $45.5$8.8 million, respectively.
i.j. In JuneNovember 2003, the company entered into a new lease for its facility at
Malvern, PA that replaces a former lease that was due to expire in March
2005. The new lease has a 60-month term expiring in June 2008. Under the
new lease, the company has the option to purchase the facility at any timepurchased KPMG's Belgian consulting business
for approximately $34 million. In addition, if$3.3 million of cash plus assumed liabilities. The
preliminary purchase price allocation was completed in December 2003 and
assumed that the company does not
exercise its purchase option and the lessor sells the facility at the endexcess of the lease term forpurchase price over the assets acquired and
liabilities assumed was allocated to goodwill. An outside appraisal company
completed their appraisal during the March 2004 quarter. Approximately $1.5
million of amortizable intangibles (principally customer relationships) were
identified and recorded. The intangible assets have a price that is less thanweighted average life
of approximately $34 million, the
company will be required to guarantee the lessor a residual value on the
property of up to $29 million. The lessor is a substantive independent
leasing company that does not have the characteristics of a variable
interest entity as defined by5.5 years.
k. In January 2003, the Financial Accounting Standards Board Interpretation("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 No. 46"46-R") and is therefore not consolidated by the company.to address certain FIN 46 implementation
issues.
The company has accountedprovisions of FIN 46 were applicable for the lease as an operating lease, and
therefore, neither the leased facility nor the related debt is reportedvariable interests in the company's accompanying balance sheets. As stated above, under the
lease, the company is required to provide a guaranteed residual value on the
facility of up to $29 million to the lessor at the end of the 60-month lease
term. The company recognized a liability of approximately $1 million for
the related residual value guarantee. The value of the guarantee was
determined by computing the estimated present value of probability-weighted
cash flows that might be expended under the guarantee, discounted using the
company's incremental borrowing rate of approximately 6.5%. The company
has recorded a liability for the fair value of the obligation with a
corresponding asset recorded as prepaid rent which will be amortized to
rental expense over the lease term. The liability will be subsequently
assessed and adjusted to fair value as necessary.
10
j. Effectiveentities
obtained after January 1, 2003, the company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required
that all gains and losses from extinguishment of debt be reported as an
extraordinary item. Previously recorded losses on the early extinguishment
of debt that were classified as an extraordinary item in prior periods have
been reclassified to other income (expense), net.31, 2003. The adoption of SFAS No.
145 had no effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.
Effectiveprovisions applicable
to special purpose entities ("SPE") and all other variable interests
obtained after January 1,31, 2003 the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. SFAS No. 146 replaces previous accounting guidance provided
by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred indid not have a Restructuring)"
and is effective for the company for exit or disposal activities initiated
after December 31, 2002. Adoption of this statement had no material impact on the
company's consolidated financial position, consolidated results of
operations, or liquidity.
10
Effective January 1, 2003,March 31, 2004, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guaranteesthe provisions of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34" ("FIN No. 45"). The interpretation requires that upon issuance of a
guarantee, the entity must recognize a liability for the fair value of the
obligation it assumes under that guarantee. In addition, FIN No. 45
requires disclosures about the guarantees that an entity has issued,
including a roll forward of the entity's product warranty liabilities. This
interpretation is intended46-R
applicable to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration.Non-SPEs created prior to February 1, 2003. Adoption of
this InterpretationFIN 46-R had no material impact on the company's consolidated financial position,
consolidated results of operations, or liquidity.
Effective July 1, 2003, the company adopted the Financial Accounting
Standards Board's ("FASB") consensus on EITF Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This issue addresses
how to account for arrangements that may involve the delivery or performance
of multiple products, services, and/or rights to use assets. The final
consensus of this issue is applicable to agreements entered into in fiscal
periods beginning after June 15, 2003. Additionally, companies will be
permitted to apply the consensus guidance in this issue to all existing
arrangements as the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, "Accounting Changes." Adoption of this
issue had no material impact on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. Fin No. 46 requires certain
variable interest entities ("VIE's") to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the
parties involved. The provisions of FIN No. 46 are effective immediately
for those variable interest entities created after January 31, 2003. The
provisions, as amended, are effective for the first interim or annual period
ending after December 15, 2003 for those variable interests held prior to
February 1, 2003. While the company believes this Interpretation will not
have a material effect on its financial position or results of operations,
it is continuing to evaluate the effect of adoption of this Interpretation.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended September 30, 2003,March 31, 2004, the company reported net income of
$56.2$28.9 million, or $.17$.09 per share, compared to $59.0with $38.5 million, or $.18$.12 per
share, for the three months ended September 30, 2002.March 31, 2003.
Total revenue for the quarter ended September 30, 2003March 31, 2004 was $1.45$1.46 billion, up 9%5%
from revenue of $1.33$1.40 billion for the quarter ended September 30, 2002.March 31, 2003. Foreign
currency translations had a 4%7% positive impact on revenue in the quarter when
compared towith the year-ago period. In the current quarter, Services revenue
increased 11%5% and Technology revenue increased 3%2%.
U.S. revenue increased 11%3% in the thirdfirst quarter compared towith the year-ago
period driven by strength in the U.S. Federal government business. Revenueand revenue in international markets increased 6% driven by increases
in Europe and South Pacific which were partially offset by declines in other
international regions. On a constant currency basis, international revenue
declined 7% in the current quarter compared to the
year-ago period, as growth in Europe more than offset a decline in Latin
America and a slight revenue decline in the Asia/Pacific region.
Total gross profit margin was 29.3% in the third quarter of 2003 compared to
30.3% in the year-ago period, principally reflecting a decline in pension
income as discussed below.
For the three months ended September 30, 2003, selling, general and
administrative expenses were $251.0 million (17.3% of revenue) compared to
$241.3 million (18.1% of revenue)quarter.
Pension expense for the three months ended September 30, 2002.
The increaseMarch 31, 2004 was due to foreign currency translations and lower pension income.
Research and development expense was $68.2$22.2 million
compared to $65.5with $6.4 million a
year ago. The company continues to invest in high-end Cellular MultiProcessing
server technology and in key programs within its industry practices.
For the third quarter of 2003, the company reported an operating income percent
of 7.3% compared to 7.2% for the third quarter of 2002.
Pensionpension income for the three months ended September 30, 2003 was approximately
$9 million compared to approximately $37 million for the three months ended
September 30, 2002. At the beginning of each year, accounting rules require
that the company establish an expected long-term rate of return on its pension
plan assets. One of the reasons for the decline inMarch
31, 2003. The change from pension income to pension expense was that,
effective January 1, 2003,due to the
company reduced its expected long-term rate of
return on plan assets for its U.S. pension plan to 8.75% from 9.50%. In
addition,following: (1) a decline in the discount rate used for the U.S. pension plan
declined to 6.25% at December 31, 2003 from 6.75% at December 31, 2002, from 7.50% at December 31, 2001. The remaining reasons for
the decline(2) an increase
in pension income wereamortization of net unrecognized losses, (3) lower expected returns on U.S. plan
assets due to asset declines,amortization of the company's change asdifference between the calculated value of
January 1, 2003 to a cash
balance plan inassets and the U.S.,fair value of plan assets, and (4) for international plans,
declines in discount rates lower expected long-term rates of return on plan assets, and currency translation. The company records
pension income or expense, as well as other employee-related costs such as FICA
and medical insurance costs, in operating income in the following income
statement categories: cost of sales; selling, general and administrative
expenses; and research and development expenses. The amount allocated to each
income statement line is based on where the salaries of the active employees
are charged. The company currently expects to report pension expense of
approximately $85 - $90 million in 2004 compared with pension income of $22.6
million in 2003.
Total gross profit margin was 26.8% in the first quarter of 2004 compared with
27.7% in the year-ago period, the change principally reflected pension expense
of $15.5 million in the current quarter compared with pension income of $1.2
million in the year-ago quarter.
For the three months ended March 31, 2004, selling, general and administrative
expenses were $261.2 million (17.9% of revenue) compared with $243.7 million
(17.4% of revenue) for the three months ended March 31, 2003.
Research and development ("R&D") expense was $71.5 million compared with $66.8
million a year ago. The company continues to invest in high-end Cellular
MultiProcessing server technology and in key programs within its industry
practices. R&D in the current period includes $1.8 million of pension expense
compared with pension income of $3.2 million in the year-ago period.
For the first quarter of 2004, the company reported an operating income percent
of 4.0% compared with 5.5% for the first quarter of 2003, the change
principally reflected pension expense of $22.2 million in the current quarter
compared with pension income of $6.4 million in the year-ago period.
Interest expense for the three months ended September 30, 2003March 31, 2004 was $17.2$17.0 million
compared to $17.6with $15.7 million for the three months ended September 30, 2002.March 31, 2003. The
increase in interest expense was due to higher borrowing levels in 2004,
principally due to the issuance of $300 million of 6 7/8% senior notes in March
2003.
Other income (expense), net was an expenseincome of $4.7$.6 million in the current quarter
compared to incomewith an expense of $9.5$3.4 million in the year-ago quarter income.quarter. The principal reason for the changeincrease
to income was foreign exchange lossesprincipally due to equity income of $5.2 million in the current
quarter of $3.7 million compared to gains of $9.6 millionwith none in the prior-year quarter. As discussed in note h,
effective January 1, 2004, the company began recording its equity investment in
NUL quarterly on a quarter-lag basis. In prior years the company recorded its
equity income from NUL semiannually in the June and December quarters on a
quarter-lag basis.
12
Income before income taxes was $84.0$42.4 million in the thirdfirst quarter of 20032004
compared to $88.1with $57.5 million last year. The provision for income taxes was
$27.8$13.5 million in the current period compared to $29.1with $19.0 million in the year-ago
period. The effective tax rate was 32% in both periods was2004 and 33%.
12
For the nine months ended September 30, 2003, net income was $147.2 million, or
$.44 per diluted share, compared to net income of $133.9 million, or $.41 per
diluted share, last year. Revenue for the nine months ended September 30, 2003
was $4.27 billion, up 5% from $4.05 billion for the nine months ended September
30, 2002. in 2003.
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - consulting and systems integration,
outsourcing, infrastructure services, and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting policies
of each business segment are the same as those followed by the company as a
whole. Intersegment sales and transfers are priced as if the sales or
transfers were to third parties. Accordingly, the Technology segment
recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing profit on such
shipments of company hardware and software to customers. The Services segment
also includes the sale of hardware and software products sourced from third
parties that are sold to customers through the company's Services channels. In
the company's consolidated statements of income, the manufacturing costs of
products sourced from the Technology segment and sold to Services customers are
reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended September 30, 2003 and
2002, was $6.7 million and $1.2 million, respectively; and the amount of profit
for the nine months ended September 30, 2003March 31, 2004 and 2003,
was $18.6$1.4 million and $11.8$3.1 million, respectively. The profit on these
transactions is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue, employees,
square footage or usage.
See Note b to the Notes to Consolidated
Financial Statements.
Information by business segment is presented below (in millions)millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2003March 31, 2004
- ------------------
Customer revenue $1,449.7 $1,124.3 $325.4$1,462.9 $1,165.0 $297.9
Intersegment $( 66.4) 7.3 59.145.7) 4.8 40.9
-------- ------- -------- ------
Total revenue $1,449.7$1,462.9 $( 66.4) $1,131.6 $384.545.7) $1,169.8 $338.8
======== ======= ======== ======
Gross profit percent 29.3% 19.8% 53.1%26.8% 19.1% 48.3%
======== ======== ======
Operating income
percent 7.3% 3.9% 16.5%4.0% 2.5% 8.6%
======== ======== ======
Three Months Ended
September 30, 2002March 31, 2003
- ------------------
Customer revenue $1,332.3 $1,016.3 $316.0$1,398.9 $1,107.0 $291.9
Intersegment $( 69.4) 6.5 62.970.0) 5.6 64.4
-------- ------- -------- ------
Total revenue $1,332.3$1,398.9 $( 69.4) $1,022.8 $378.970.0) $1,112.6 $356.3
======== ======= ======== ======
Gross profit percent 30.3% 22.5% 46.4%27.7% 18.7% 50.0%
======== ======== ======
Operating income
percent 7.2% 5.7% 10.1%5.5% 3.1% 11.1%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
13
In the Services segment, customer revenue was $1.12$1.17 billion for the three
months ended September 30, 2003, an increase of 11%March 31, 2004, up 5% compared to $1.02with $1.11 billion for the three
months ended September 30, 2002.March 31, 2003. Foreign currency translations had about a 7%
positive impact on Services revenue in the quarter when compared with the year-
ago period. The increase in Services revenue was due to a 7%an 8% increase in
outsourcing ($396443 million in 20032004 compared to $371with $409 million in 2002)2003), a 23%6%
increase in consulting and systems integration ($379377 million in 20032004 compared
to $307with $356 million in 2002),2003) and a 2%3% increase in core maintenance revenue ($142145
million in 20032004 compared to $139with $141 million in 2002),2003). Infrastructure services
revenue was flat during the quarter ($200 million in 2004 compared with $201
million in 2003). Market demand in the Services segment varies by revenue
classification. Demand for outsourcing services remains good, and a 4%consulting
and systems integration services has been showing signs of gradual recovery.
The increase in infrastructure services ($207 million in 2003 compared to $199
million in 2002). The systems integration business benefited from growth inoutsourcing revenue reflects the company's U.S. Federal government business.emphasis that the company has
placed on growing its base of long-term outsourcing contracts that provide a
reliable base of annuity revenue over multiple years. Services gross profit
percent
was 19.8%19.1% for the three months ended September 30, 2003March 31, 2004 compared to 22.5%with 18.7% in the
year-ago period, andperiod. Services operating income percent was 3.9%2.5% for the three
months ended September 30, 2003March 31, 2004 compared to 5.7%with 3.1% last year. The declines
in gross profit and operating income margins wereyear, this change was
principally due to lowerthe impact of pension incomeexpense of $19.3 million in the
current quarter compared towith pension income of $1.9 million in the year-ago
period.
In the Technology segment, customer revenue was $325$298 million for the three
months ended September 30, 2003,March 31, 2004, up 3%2% compared to $316with $292 million for the three
months ended September 30, 2002.March 31, 2003. Foreign currency translations had about a 5%
positive impact on Technology revenue in the quarter when compared with the
year-ago period. The 3% increase in revenue was due to a 21%30% increase in sales of enterprise-class servers ($250 million in 2003 compared
to $206 million in 2002) offset in part by a 31% decrease in sales of
specialized technology products ($7596 million in 20032004 compared to $110with $74 million
in 2002)2003) and a 7% decline in sales of enterprise-class servers ($202 million in
2004 compared with $218 million in 2003). The declineincrease in specialized
technology revenue primarily reflected
the company's continued de-emphasiswas driven by higher sales of low-margin product sales.semiconductor test systems.
Sales of these systems can vary significantly from quarter to quarter depending
on customer needs. The company does not expect similar increases in
specialized technology revenue to continue through 2004. Technology gross
profit percent was 53.1%48.3% for the three months ended September 30, 2003March 31, 2004 compared to 46.4%with 50.0%
in the year-ago period, and Technology operating income percent was 16.5%8.6% for
the three months ended September 30, 2003March 31, 2004 compared to
10.1%with 11.1% last year. The
gross profit and operating income margin increasesdeclines primarily reflected a richer mixlower proportion of high-end, higher-
margin products within the ClearPath servers and software offsetproduct line as well as pension expense of
$2.9 million in part by lowerthe current period compared with pension income.income of $4.5 million
in the prior-year period.
New Accounting Pronouncements
- -----------------------------
EffectiveIn January 1, 2003, the company adopted SFASFinancial Accounting Standards Board ("FASB") issued
interpretation No. 145, "Rescission46 ("FIN 46"), "Consolidation of FASB Statements No. 4, 44 and 64, AmendmentVariable Interest Entities,
an interpretation of FASB Statement No. 13, and
Technical Corrections.ARB 51." SFAS No. 145 rescinds SFAS No. 4, which required that
all gains and losses from extinguishmentThe primary objectives of debt be reported as an extraordinary
item. Previously recorded lossesthis interpretation
are to provide guidance on the early extinguishmentidentification of debtentities 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
classified as an extraordinary itemeffective 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 prior periods have been reclassified to
other income (expense), net.entities
obtained after January 31, 2003. The adoption of SFAS No. 145 had no effect on the company's consolidated financial position, consolidated results of operations,
or liquidity.
Effectiveprovisions applicable to
special purpose entities ("SPE") and all other variable interests obtained
after January 1,31, 2003 the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred indid not have a Restructuring)" and is effective for the company
for exit or disposal activities initiated after December 31, 2002. Adoption of
this statement had no material impact on the company's
consolidated financial position, consolidated results of operations, or
liquidity.
Effective January 1, 2003,March 31, 2004, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guaranteesthe provisions of Indebtedness of Others, and Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
("FIN No. 45"). The interpretation requires that upon issuance of a guarantee,
the entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures
about the guarantees that an entity has issued, including a roll forward of the
entity's product warranty liabilities. This interpretation is intended46-R
applicable to improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration.Non-SPEs created prior to February 1, 2003. Adoption of this InterpretationFIN 46-R
had no material impact on the company's consolidated financial position, consolidated
results of operations, or liquidity.
14
Effective July 1, 2003, the company adopted the Financial Accounting Standards
Board's ("FASB") consensus on EITF Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." This issue addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The final consensus of this
issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
consensus guidance in this issue to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." Adoption of this issue had no material impact on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. Fin No. 46 requires certain
variable interest entities ("VIE's") to be consolidated by the primary
beneficiary if the entity does not effectively disperse risks among the parties
involved. The provisions of FIN No. 46 are effective immediately for those
variable interest entities created after January 31, 2003. The provisions, as
amended, are effective for the first interim or annual period ending after
December 15, 2003 for those variable interests held prior to February 1, 2003.
While the company believes this Interpretation will not have a material effect
on its financial position or results of operations, it is continuing to
evaluate the effect of adoption of this Interpretation.
Financial Condition
- -------------------
Cash and cash equivalents at September 30, 2003March 31, 2004 were $402.7$671.4 million compared to
$301.8with
$635.9 million at December 31, 2002.2003.
During the ninethree months ended September 30, 2003,March 31, 2004, cash provided by operations was
$162.1$115.8 million compared towith cash provided byused for operations of $70.0$64.9 million for the
ninethree months ended September 30, 2002. The change in operatingMarch 31, 2003. Operating cash flow primarily reflectedincreased due to higher
earnings (excluding the company's continued focus on working capital, includingnon cash impact of the change from pension income to
pension expense), higher levels of customer prepayments in the current nine-month period comparedadvance payments for outsourcing projects,
which are generally timed to the prior-year period.offset capital expenditures on those projects, and
lower restructuring expenditures. Cash expenditures in the current periodquarter
related to prior-year restructuring charges (which are included in operating
activitiesactivities) were approximately $51$4 million compared to $87with $31 million for the
prior-year period,quarter, and are expected to be approximately $7$9 million for the
remainder of 20032004 and $20$6 million in total for all subsequent years, principally
for work-
forcework-force reductions and idle lease costs. Personnel reductions in the current
nine-month period related to these restructuring actions were approximately 500.
Cash used for investing activities for the ninethree months ended September 30, 2003March 31, 2004 was
$326.4$105.1 million compared to $285.5with $103.8 million during the ninethree months ended September 30, 2002. During 2003, both proceeds from investments and purchases
of investments, which represent derivative financial instruments used to manage
the company's currency exposure to market risks from changes in foreign
currency exchange rates, increased from the prior year as a result of an
increase in the company's exposures, principally related to intercompany
accounts.March
31, 2003. The increase in cash used was principally due to net purchases of
investments of $37.1$5.4 million in the current periodquarter compared towith net purchases
of $23.9$13.6 million in the prior-year period. In addition, the current nine-month
period
investment in marketable software was $109.4$29.0 million compared to $105.0with $40.0 million
in the prior-year. Capital additions were $70.7 million for the three months
ended March 31, 2004 compared with $49.4 million in the prior-year andperiod. The
increase in current year capital expenditures was principally due to additions
to properties was $177.9
million for the nine months ended September 30, 2003 compared to $151.8 millionof revenue-generating assets, particularly in the prior-year period.company's outsourcing
business.
Cash provided by financing activities during the current nine-month periodquarter was $253.5$20.7
million compared to $54.1with $298.5 million in the prior year. The current nine-
monthprior period
includes net proceeds from issuance of long-term debt of $293.3 million as described below. In addition, duringin
connection with the nine months ended
September 30, 2003 there was a reduction of $57.0 millioncompany's issuance in short-term
borrowings compared to an increase of $33.8 million in the year-ago period.
15
In March 2003 the company issuedof $300 million of 6 7/8%
senior notes due 2010.
At September 30, 2003,March 31, 2004, total debt was $1.1 billion, an increase of $239.8$10.7 million
from December 31, 2002.
On July 1, 2003, the2003.
The company entered intohas a new $500 million credit agreement expiringthat expires in May 2006, to replace2006. As
of March 31, 2004, there were no borrowings under this facility, and the $450entire
$500 million credit agreement that was due
to expire in March 2004.available for borrowings. Borrowings under the new agreement
bear interest based on the then-current LIBOR or prime rates and the company's
credit rating. The credit agreement contains financial and other covenants,
including maintenance of certain financial ratios, a minimum level of net worth
and limitations on certain types of transactions, which could reduce the amount
the company is able to borrow. Events of default under the credit agreement
include failure to perform covenants, material adverse change, change of
control and default under other debt aggregating at least $25 million. If an
event of default were to occur under the credit agreement, the lenders would be
entitled to declare all amounts borrowed under it immediately due and payable.
The occurrence of an event of default under the credit agreement could also
cause the acceleration of obligations under certain other agreements and the
termination of the company's U.S. trade accounts receivable facility, described
below.
As
of September 30, 2003, there were no borrowings under this credit agreement.
In addition, the company and certain international subsidiaries have access to
certain uncommitted lines of credit from various banks. Other sources of short-
term funding are operational cash flows, including customer prepayments, and
the company's U.S. trade accounts receivable facility. Using this facility,
the company sells, on an on-going basis, up to $225 million of its eligible
U.S. trade accounts receivable through a wholly owned subsidiary, Unisys
Funding Corporation I. The facility is renewable annually at the purchasers'
option and expires in December 2003. The company
expects to have a similar arrangement in place at the expiration of the current
facility. If2006. At March 31, 2004, the company were unable to have a similar arrangement in place
upon the expirationhad sold
$150 million of the current facility, cash flow would be negatively
affected; however, liquidity would be unaffected since the company believes
that it has adequate sources and availability of short-term funding to meet
its expected cash requirements.eligible receivables compared with $225 million at December 31,
2003.
At September 30, 2003,March 31, 2004, the company has met all covenants and conditions under its
various lending and funding agreements. Since the company believes that it
will continue to meet these covenants and conditions, the company believes that
it has adequate sources and availability of short-term funding to meet its
expected cash requirements. 15
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors.
The company has on file with the Securities and Exchange Commission a
registration statement covering $1.2 billion of debt or equity securities,
which enables the company to be prepared for future market opportunities.
At September 30, 2003,March 31, 2004, the company had deferred tax assets in excess of deferred
tax liabilities of $2,194$2,033 million. For the reasons cited below, management
determined that it is more likely than not that $1,728$1,584 million of such assets
will be realized, therefore resulting in a valuation allowance of $466$449 million.
The company evaluates quarterly the realizability of its deferred tax assets
and adjusts the amount of the related valuation allowance, if necessary. The
factors used to assess the likelihood of realization are the company's forecast
of future taxable income, and available tax planning strategies that could be
implemented to realize deferred tax assets. Approximately $5.2$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 $219.8$68.6 million during the ninethree months ended
September 30, 2003,March 31, 2004, principally reflecting net income of $147.2$28.9 million, $35.0$16.3
million for issuance of stock under stock option and other plans, $3.1$1.6 million
of tax benefits related to employee stock plans and currency translation of
$38.1$20.2 million. 16
In March 2003, the company executed a lease commitment for a new facility in
Reston, VA. The facility is to be used to consolidate the company's expanding
U.S. Federal government business. The initial lease period runs from April
2003 to July 2018 and the lease provides for two five-year extensions. The
rent over the initial lease term is approximately $110 million.
In June 2003, the company entered into a new lease for its facility at
Malvern, PA that replaces a former lease that was due to expire in March 2005.
The new lease has a 60-month term expiring in June 2008. Under the new lease,
the company has the option to purchase the facility at any time for
approximately $34 million. In addition, if the company does not exercise its
purchase option and the lessor sells the facility at the end of the lease term
for a price that is less than approximately $34 million, the company will be
required to guarantee the lessor a residual value on the property of up to $29
million. The lessor is a substantive independent leasing company that does not
have the characteristics of a variable interest entity as defined by FIN No. 46
and is therefore not consolidated by the company.
The company has accounted for the lease as an operating lease, and therefore,
neither the leased facility nor the related debt is reported in the company's
accompanying balance sheets. As stated above, under the lease, the company is
required to provide a guaranteed residual value on the facility of up to $29
million to the lessor at the end of the 60-month lease term. Under the
provisions of FIN No. 45, the company recognized a liability of approximately
$1 million for the related residual value guarantee. The value of the
guarantee was determined by computing the estimated present value of
probability-weighted cash flows that might be expended under the guarantee,
discounted using the company's incremental borrowing rate of approximately 6.5%.
The company has recorded a liability for the fair value of the obligation with
a corresponding asset recorded as prepaid rent which will be amortized to
rental expense over the lease term. The liability will be subsequently
assessed and adjusted to fair value as necessary.
At December 31st31 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,
as well as the defined benefit pension plan of Nihon Unisys Ltd. ("NUL") (an
equity investment), the ABO exceeded the fair value of pension plan assets. 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 was required to do the following: remove fromadjusted its assets $1.4 billion of prepaidminimum
pension plan assets; increaseliability as follows: decreased its accrued
pension plan liabilities by
approximately $700 million; reduce$300 million, increased its investments at equity by approximately
$80$6 million relating to the company's share of the change in NUL's minimum
pension liability;liability, decreased prepaid pension asset by $56 million, and offset
these changes by a chargecredit to other comprehensive loss in stockholders' equityincome of $2.2 billion,approximately $250
million, or $1.5 billion$165 million net of tax.
This accounting hadhas no effect on the company's net income, liquidity or cash
flows. Financial ratios and net worth covenants in the company's credit
agreements and debt securities are unaffected by the chargecharges or credits to
stockholders' equity caused by recordingadjusting a minimum pension liability.
In accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. defined benefit
plan in 2003.2004. The company expects to make cash contributions of approximately
$60$70 million to its other defined benefit pension plans during 2003.2004.
1716
Factors That May Affect Future Results
- --------------------------------------
From time to time, the company provides information containing "forward-
looking""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 challenginghighly competitive business
environment and economic environment.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 computer
hardware manufacturers, software providers, systems integrators, consulting
and other professional services firms, systems integrators, outsourcing
providers, and
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-performanceprice 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 also be better able to
compete for skilled professionals. Any of thisthese factors could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend
in part on the company's ability to anticipate and respond to these market
trends and to design, develop, introduce, deliver or obtain new and innovative
products and services on a timely and cost-effective basis. The company may not
be successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
The company's future results will depend in part on its ability to continue to
accelerate growth in outsourcing and infrastructure services. The company's
outsourcing contracts are multiyear engagements under which the company takes
over management of a client's technology operations, business processes or
networks. The company will need to maintain a strong financial position in
order to grow its outsourcing business. In a number of these arrangements, the
company hires certain of its clients' employees and may become responsible for
the related employee obligations, such as pension and severance commitments.
17
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. As long-term relationships,
these outsourcing contracts provide a base of recurring revenue. However, in
the early phases of these contracts, gross margins may be lower than in later
years when the work force and facilities have been rationalized for efficient
operations, and an integrated systems solution has been implemented. Future
results will depend on the company's ability to effectively complete the
rationalizations and solution implementations.
18
Future results will also depend in part on the company's ability to drive
profitable growth in consulting and systems integration and consulting. The company's systems
integration and consulting business has been adversely affected by the current
economic slowdown. In this economic environment, customers have been delaying
systems integration projects.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;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-basedIntel-
based ES7000 line. The company believes there is significant growth potential
in the developing market for high-end, Intel-based servers running Microsoft
operating system software. However, competition in this new market is likely to
intensify in coming years, and the company's ability to succeed will depend on
its ability to compete effectively against enterprise server competitors with
more substantial resources and its ability to achieve market acceptance of the
ES7000 technology by clients, systems integrators, and independent software
vendors.
A number of the company's long-term contracts for infrastructure services,
outsourcing, help desk and similar services do not provide for minimum
transaction volumes. As a result, revenue levels are not guaranteed. In
addition, some of these contracts may permit termination or may impose other
penalties if the company does not meet the performance levels specified in the
contracts.
18
Some of the company's systems integration contracts are fixed-priced contracts
under which the company assumes the risk for delivery of the contracted
services and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
The company frequently enters into contracts with governmental entities. Risks
and uncertainties associated with these government contracts include the
availability of appropriated funds and contractual provisions that allow
governmental entities to terminate agreements at their discretion before the
end of their terms. 19
The success of the company's business is dependent on strong, long-term client
relationships and on its reputation for responsiveness and quality. As a
result, if a client is not satisfied with the company's services or products,
its reputation could be damaged and its business adversely affected. In
addition, if the company fails to meet its contractual obligations, it could be
subject to legal liability, which could adversely affect its business,
operating results and financial condition.
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. Future
results will depend, in part, on the performance and capabilities of these
third parties, on the ability of external suppliers to deliver components at
reasonable prices and in a timely manner, and on the financial condition of,
and the company's relationship with, distributors and other indirect channel
partners.
Approximately 53% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, changes in political or economic
conditions, trade protection measures, import or export licensing requirements,
multiple and possibly overlapping and conflicting tax laws, and weaker
intellectual property protections in some jurisdictions.
The company cannot be sure that its services and products do not infringe on
the intellectual property rights of third parties, and it may have infringement
claims asserted against it or against its clients. These claims could cost the
company money, prevent it from offering some services or products, or damage
its reputation.
20
Item 4. Controls and Procedures
- ------- -----------------------
The company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the company's disclosure controls and procedures as of
September 30, 2003.March 31, 2004. Based on this evaluation, the company's Chief Executive
Officer and Chief Financial Officer concluded that the company's disclosure
controls and procedures are effective for gathering, analyzing and
disclosing the information the company is required to disclose in the
reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. Such evaluation did not
identify any change in the company's internal control over financial
reporting that occurred during the quarter ended September 30, 2003March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
2119
Part II - OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On July 17, 2003January 20, 2004, the company furnished a Current Report on
Form 8-K to provide, under Items 7 9 and 12, the company's earnings release
reporting its financial results for the quarter and year ended June 30,December 31,
2003. Such information shall not be deemed "filed" for purposes of Section 18
of the Securities Exchange Act of 1934.
On April 6, 2004, the company filed a Current Report on Form 8-K,
dated April 6, 2004, to report under Items 5 and 7 of that form.
2220
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: October 23, 2003April 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)
2321
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3 Bylaws of Unisys Corporation, as amended through April 22, 2004
10 Agreement, dated April 6, 2004, between Lawrence A. Weinbach and
Unisys Corporation (incorporated by reference to Exhibit 10 to the
registrant's current report on Form 8-K dated April 6, 2004)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Lawrence A. Weinbach required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of Lawrence A. Weinbach required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350