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, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock outstanding as of March 31, 2000:
311,775,241.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions)
March 31, December 31,
2000 1999
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 397.4 $ 464.0
Accounts and notes receivable, net 1,335.5 1,430.5
Inventories
Parts and finished equipment 241.2 236.8
Work in process and materials 136.1 136.1
Deferred income taxes 475.6 472.7
Other current assets 118.2 105.6
-------- --------
Total 2,704.0 2,845.7
-------- --------
Properties 1,747.0 1,723.0
Less-Accumulated depreciation 1,125.3 1,102.2
-------- --------
Properties, net 621.7 620.8
-------- --------
Investments at equity 221.9 225.5
Software, net of accumulated amortization 264.9 259.8
Prepaid pension cost 1,011.6 975.9
Deferred income taxes 655.6 655.6
Other assets 326.6 306.4
-------- --------
Total $5,806.3 $5,889.7
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 52.1 $ 26.9
Current maturities of long-term debt 421.4 22.9
Accounts payable 926.4 1,036.7
Other accrued liabilities 1,057.6 1,183.1
Estimated income taxes 355.3 348.9
-------- --------
Total 2,812.8 2,618.5
-------- --------
Long-term debt 553.2 950.2
Other liabilities 352.7 367.7
Stockholders' equity
Common stock, issued: 2000, 313.7;
1999,312.5 3.1 3.1
Accumulated deficit ( 947.9) (1,054.4)
Other capital 3,599.9 3,575.0
Accumulated other comprehensive
loss (567.5) (570.4)
-------- --------
Stockholders' equity 2,087.6 1,953.3
-------- --------
Total $5,806.3 $5,889.7
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2000 1999
-------- --------
Revenue $1,668.7 $1,822.8
-------- --------
Costs and expenses
Cost of revenue 1,129.4 1,154.2
Selling, general and administrative 281.5 334.9
Research and development expenses 82.1 80.5
-------- --------
1,493.0 1,569.6
-------- --------
Operating income 175.7 253.2
Interest expense 20.5 34.2
Other income (expense), net 6.2 (49.3)
-------- --------
Income before income taxes 161.4 169.7
Estimated income taxes 54.9 59.8
-------- --------
Net income 106.5 109.9
Dividends on preferred shares 22.8
-------- --------
Earnings on common shares $ 106.5 $ 87.1
======== ========
Earnings per common share
Basic $ .34 $ .33
======== ========
Diluted $ .34 $ .31
======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Millions)
Three Months Ended
March 31
------------------
2000 1999
-------- --------
Cash flows from operating activities
Net income $ 106.5 $ 109.9
Add(deduct) items to reconcile net income
to net cash (used for) provided by operating
activities:
Depreciation 37.8 35.2
Amortization:
Marketable software 29.2 25.2
Goodwill 2.4 6.8
(Increase) in deferred income taxes, net ( 2.9) ( 20.3)
Decrease in receivables, net 72.7 67.6
(Increase) decrease in inventories ( 4.4) 15.2
(Decrease) in accounts payable and
other accrued liabilities (246.1) (159.6)
Increase in estimated income taxes 6.4 15.7
(Decrease) in other liabilities ( .2) ( 4.4)
(Increase) in other assets ( 46.5) ( 38.6)
Other 2.2 ( 3.6)
------- ------
Net cash (used for) provided by operating
activities ( 42.9) 49.1
------- ------
Cash flows from investing activities
Proceeds from investments 135.7 456.4
Purchases of investments (128.5) (451.1)
Proceeds from sales of properties 7.8 6.5
Investment in marketable software ( 34.3) ( 26.8)
Capital additions of properties ( 38.2) ( 35.6)
Purchases of businesses ( 3.8) ( 2.5)
------- ------
Net cash (used for) investing activities ( 61.3) ( 53.1)
------- ------
Cash flows from financing activities
Redemption of preferred stock (168.3)
Proceeds from issuance of long-term debt .7
Payments of long-term debt ( 2.9) ( .1)
Net proceeds from short-term borrowings 25.2 6.9
Dividends paid on preferred shares ( 28.2)
Proceeds from employee stock plans 17.0 14.2
------- ------
Net cash provided by(used for) financing
activities 39.3 (174.8)
------- ------
Effect of exchange rate changes on
cash and cash equivalents ( 1.7) ( 4.7)
------- ------
Decrease in cash and cash equivalents ( 66.6) (183.5)
Cash and cash equivalents, beginning of period 464.0 616.4
------- -------
Cash and cash equivalents, end of period $ 397.4 $ 432.9
======= =======
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the financial information furnished herein
reflects all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
specified. These adjustments consist only of normal recurring accruals.
Because of seasonal and other factors, results for interim periods are not
necessarily indicative of the results to be expected for the full year.
a. The shares used in the computations of earnings per share are as follows
(in thousands):
Three Months Ended
March 31,
------------------
2000 1999
------- -------
Basic 311,161 262,704
Diluted 317,080 277,830
b. A summary of the company's operations by business segment for the three-
month periods ended March 31, 2000 and 1999 is presented below (in millions of
dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
March 31, 2000
------------------
Customer revenue $1,668.7 $1,125.0 $543.7
Intersegment $(124.1) 11.0 113.1
-------- ------- -------- ------
Total revenue $1,668.7 $(124.1) $1,136.0 $656.8
======== ======= ======== ======
Operating income(loss) $ 175.7 $ 13.4 $ 19.1 $143.2
======== ======= ======== ======
Three Months Ended
March 31, 1999
------------------
Customer revenue $1,822.8 $1,202.7 $620.1
Intersegment $(109.1) 14.6 94.5
-------- -------- -------- ------
Total revenue $1,822.8 $(109.1) $1,217.3 $714.6
======== ======== ======== ======
Operating income(loss) $ 253.2 $( 8.0) $ 69.6 $191.6
======== ======= ======== ======
6
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended March 31
---------------------------
2000 1999
---- ----
Total segment operating income $162.3 $261.2
Interest expense (20.5) (34.2)
Other income (expense), net 6.2 (49.3)
Corporate and eliminations 13.4 ( 8.0)
------ ------
Total income before income taxes $161.4 $169.7
====== ======
c. Comprehensive income for the three months ended March 31, 2000 and 1999
includes the following components (in millions of dollars):
2000 1999
---- ----
Net income $106.5 $109.9
Other comprehensive income (loss)
Foreign currency translation adjustment 5.8 (58.9)
Related tax expense(benefit) 2.9 ( .2)
------ -------
Total other comprehensive income (loss) 2.9 (58.7)
------ -------
Comprehensive income $109.4 $ 51.2
====== =======
Accumulated other comprehensive income (loss), (all of which
relates to foreign currency translation adjustments) as of
March 31, 2000 and December 31, 1999 is as follows (in millions of
dollars):
March 31, December 31,
2000 1999
----------- -----------
Balance at beginning of period $(570.4) $(531.6)
Translation adjustments 2.9 ( 38.8)
------- -------
Balance at end of period $(567.5) $(570.4)
======= =======
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended March 31, 2000, the company reported net income of
$106.5 million or $.34 per diluted share, compared to $109.9 million, or $.31
per diluted share, for the three months ended March 31, 1999.
Total revenue for the quarter ended March 31, 2000 was $1.67 billion, down 8%
from revenue of $1.82 billion for the quarter ended March 31, 1999. Excluding
the negative impact of foreign currency fluctuations, revenue in the quarter
declined 6%. The decrease in revenue was due to a slower-than-anticipated
rebound in sales following the year 2000 transition, particularly in the
company's Federal government and financial services businesses, and a slow start
in the quarter associated with the implementation of a new organizational
structure. In addition, the first half of 1999 was unusually strong as
customers accelerated purchases in preparation for the year 2000 transition,
making revenue comparisons to the first and second quarters of 2000 difficult.
Given this factor and the slow start in the first quarter, the company expects
revenue for the quarter ending June 30, 2000 to be down slightly from the year-
ago quarter. Total gross profit percent was 32.3% in the first quarter of 2000
compared to 36.7% in the year-ago period, principally due to lower revenue in
the current quarter and a lower mix of higher-margin products and services than
in the year-ago quarter.
For the three months ended March 31, 2000, selling, general and administrative
expenses were $281.5 million (16.9% of revenue) compared to $334.9 million
(18.4% of revenue) for the three months ended March 31, 1999. The decrease in
these expenses reflected continued progress in controlling costs through the
company's worldwide business process standardization program, continued
stringent controls over discretionary expenditures as well as an insurance cost
reimbursement in the quarter. Research and development expenses were $82.1
million compared to $80.5 million a year earlier.
For the first quarter of 2000, the company reported an operating income percent
of 10.5% compared to 13.9% for the first quarter of 1999.
8
Information by business segment is presented below (in millions):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
March 31, 2000
- ------------------
Customer revenue $1,668.7 $1,125.0 $543.7
Intersegment $(124.1) 11.0 113.1
-------- ------- -------- ------
Total revenue $1,668.7 $(124.1) $1,136.0 $656.8
======== ======= ======== ======
Gross profit percent 32.3% 21.1% 46.3%
======== ======== ======
Operating income
percent 10.5% 1.7% 21.8%
======== ======== ======
Three Months Ended
March 31, 1999
- ------------------
Customer revenue $1,822.8 $1,202.7 $620.1
Intersegment $(109.1) 14.6 94.5
-------- ------- -------- ------
Total revenue $1,822.8 $(109.1) $1,217.3 $714.6
======== ======= ======== ======
Gross profit percent 36.7% 24.3% 53.3%
======== ======== ======
Operating income
percent 13.9% 5.7% 26.8%
======== ======== ======
In the Services segment, customer revenue decreased 6% to $1.13 billion in the
first quarter of 2000 from $1.20 billion in the first quarter of 1999 as an
increase in outsourcing revenue was more than offset by a decline in systems
integration and repeatable solutions, particularly in the government and
financial services businesses, as customers slowed the implementation of new
solutions during the year 2000 transition. Proprietary maintenance revenue,
which continues to decline industry wide, declined more than in prior periods as
customers replaced older equipment with newer year 2000-compliant systems that
require less maintenance. Gross profit percent declined to 21.1% in the current
quarter compared to 24.3% in the prior period principally reflecting reduced
utilization of resources due to lower revenue levels, as well as a lower mix of
higher-margin systems integration, solutions, and proprietary maintenance
revenue in the quarter. Operating income percent declined to 1.7% in the
current quarter from 5.7% last year principally due to the gross profit decline.
In the Technology segment, customer revenue decreased 12% to $544 million in the
first quarter of 2000 from $620 million in the prior-year period as both
ClearPath enterprise servers and software revenue declined. In addition, the
March 1999 quarter reflected strong revenue levels associated with accelerated
spending by customers in preparation for the year 2000 transition. The gross
profit percent was 46.3% in 2000, compared to 53.3% in 1999, due in large part
to a lower percentage of enterprise server and software sales in the current
quarter. Operating profit in this segment declined to 21.8% in 2000 compared to
26.8% in 1999, principally due to the gross profit decline.
9
Interest expense for the three months ended March 31, 2000 was $20.5 million
compared to $34.2 million for the three months ended March 31, 1999. The
decline was principally due to the company's debt reduction program and the
effects of interest rate swaps discussed below.
Other income (expense), net, which can vary from quarter to quarter, was income
of $6.2 million in the current quarter compared to an expense of $49.3 million
in the year-ago quarter. The change was mainly due to charges in the year-ago
quarter for litigation costs relating to a number of cases, including the Czech
Bank settlement, and losses related to affiliated companies.
Income before income taxes was $161.4 million in the first quarter of 2000
compared to $169.7 million last year. The provision for income taxes was $54.9
million in the current period (34% effective rate) compared to $59.8 million in
the year-ago period (35% effective rate). The decline in the effective tax rate
was principally due to tax planning strategies.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for the year beginning January 1, 2001, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management is evaluating the impact this
statement may have on the company's financial statements.
Financial Condition
- -------------------
Cash and cash equivalents at March 31, 2000 were $397.4 million compared to
$464.0 million at December 31, 1999. During the three months ended March 31,
2000, cash used by operations was $42.9 million compared to cash provided of
$49.1 million a year ago, primarily reflecting a higher percentage of sales late
in the current quarter and higher foreign income tax payments.
Cash used for investing activities during the first three months of 2000 was
$61.3 million compared to $53.1 million during the first quarter of 1999.
During the current quarter, both proceeds from investments and purchases of
investments, which represent primarily the aggregate notional value of foreign
exchange hedging contract activity, declined from the prior year as a result
of extending the duration of individual contracts to more closely match the
timeframe of related underlying exposures. This change in duration of foreign
currency contracts did not significantly impact net cash flows.
Cash provided by financing activities during the current quarter was $39.3
million compared to cash used of $174.8 million in the year-ago period.
Included in the prior period were payments of $168.3 million for redemptions of
preferred stock and $28.2 million for preferred stock dividends.
Total debt was $1.0 billion at both March 31, 2000 and December 31, 1999.
The company has a $400 million credit agreement which expires June 2001. As of
March 31, 2000, there were no borrowings under this agreement.
10
On April 15, 2000, the company redeemed all of its $399.5 million outstanding
12% senior notes due 2003 at the stated redemption price of 106% of principal.
The company will take an extraordinary after-tax charge of approximately $20
million in the second quarter of 2000 for the call premium and unamortized debt
expense. During the March 2000 quarter, the company entered into an additional
$150 million credit agreement expiring April 2001 for the purpose of funding
this redemption. The redemption was funded through a combination of cash and
short-term borrowings under the company's two credit agreements.
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.
As part of the company's ongoing program to reduce interest expense, in the
third quarter of 1999, the company entered into interest rate and currency swaps
for euros and Japanese yen. In these arrangements, the company receives
payments based on a U.S. fixed rate of interest and pays interest based on a
foreign currency denominated floating rate. The company is obligated to
deliver, on April 1, 2008, 23.2 billion yen in exchange for $200 million and is
obligated to deliver on October 15, 2004, 194.4 million euros in exchange for
$200 million. These currency swaps have been designated as hedges of the
company's net investments in entities measured in these currencies. At March
31, 2000, the company has a payable of $10.7 million included in other
liabilities (long term) related to the currency swaps.
The company has on file with the Securities and Exchange Commission an effective
registration statement covering $700 million of debt or equity securities, which
enables the company to be prepared for future market opportunities.
At March 31, 2000, the company had deferred tax assets in excess of deferred tax
liabilities of $1,384 million. For the reasons cited below, management
determined that it is more likely than not that $1,078 million of such assets
will be realized, therefore resulting in a valuation allowance of $306 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 $3.2 billion of future
taxable income (predominantly U.S.) is needed to realize all of the net deferred
tax assets. Failure to achieve forecasted taxable income might affect the
ultimate realization of the net deferred tax assets. See "Factors that may
affect future results" below.
Stockholders' equity increased $134.3 million during the three months ended
March 31, 2000, principally reflecting net income of $106.5 million and $21.7
million for issuance of stock under stock option and other plans.
11
Conversion to the Euro Currency
- -------------------------------
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (the "euro"). The transition period for the
introduction of the euro began on January 1, 1999. Beginning January 1, 2002,
the participating countries will issue new euro-denominated bills and coins for
use in cash transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions, making the conversion to the euro complete.
The company is addressing the issues involved with the introduction of the euro.
The more important issues facing the company include converting information
technology systems, reassessing currency risk, and negotiating and amending
agreements.
Based on progress to date, the company believes that the use of the euro will
not have a significant impact on the manner in which it conducts its business.
Accordingly, conversion to the euro is not expected to have a material effect on
the company's consolidated financial position, consolidated results of
operations, or liquidity.
Factors That May Affect Future Results
- --------------------------------------
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties, and other factors that could cause the company's actual results
to differ materially from expectations. In addition to changes in general
economic and business conditions and natural disasters, these include, but are
not limited to, the factors discussed below.
The company operates in an industry characterized by aggressive competition,
rapid technological change, evolving technology standards, and short product
life-cycles.
Future operating results will depend on the company's ability to design,
develop, introduce, deliver, or obtain new products and services on a timely and
cost-effective basis; on its ability to effectively execute its sales efforts
under its new organizational model; on its ability to mitigate the effects of
competitive pressures and volatility in the information services and technology
industry on revenues, pricing and margins; on its ability to effectively manage
the shift of its business mix away from traditional high-margin product and
services offerings; and on its ability to successfully attract and retain highly
skilled people. In addition, future operating results could be impacted by
market demand for and acceptance of the company's service and product offerings.
Certain of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted services
at an agreed-upon price. Future results will depend on the company's ability to
profitably perform these services contracts and bid and obtain new contracts.
12
The company frequently forms alliances with third parties that have
complementary products, services, or skills. Future results will depend in part
on the performance and capabilities of these third parties. Future results will
also depend upon 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 61% of the company's total revenue derives from international
operations. The risk of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, and import or export licensing requirements.
13
Part II - OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings
- ------- -----------------
As previously reported, most recently in the company's Annual Report on Form 10-
K for the year ended December 31, 1999, a number of purported class action
lawsuits seeking unspecified compensatory damages have been filed against Unisys
and various current and former officers in the U.S. District Court for the
Eastern District of Pennsylvania by persons who acquired Unisys common stock
during the period May 4, 1999 through October 14, 1999. On February 16, 2000,
these actions, which are in the early stages, were consolidated under the
caption In re: Unisys Corporation Securities Litigation. The plaintiffs allege
violations of the Federal securities laws in connection with statements made by
the company concerning certain of its services contracts. The company believes
it has meritorious defenses and intends to defend this action vigorously.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, the company filed no Current
Reports on Form 8-K.
14
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 19, 2000 By: /s/ Janet M. Brutschea Haugen
-----------------------------
Janet M. Brutschea Haugen
Vice President, Acting Chief
Financial Officer and Controller
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10 1990 Unisys Long-Term Incentive Plan, as amended through February 17,
2000
11 Statement of Computation of Earnings Per Share for the three
months ended March 31, 2000 and 1999
12 Statement of Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule for the period ended March 31, 2000