UNITED STATES
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, 2006
[ ] 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of Common Stock outstanding as of March 31, 2006
343,012,266.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
March 31,
2006 December 31,
(Unaudited) 2005
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 980.2 $ 642.5
Accounts and notes receivable, net 1,066.4 1,111.5
Inventories:
Parts and finished equipment 100.8 103.4
Work in process and materials 88.0 90.7
Deferred income taxes 88.1 68.2
Prepaid expenses and other current assets 158.1 137.0
-------- --------
Total 2,481.6 2,153.3
-------- --------
Properties 1,339.3 1,320.8
Less-Accumulated depreciation and
amortization 963.7 934.4
-------- --------
Properties, net 375.6 386.4
-------- --------
Outsourcing assets, net 407.0 416.0
Marketable software, net 320.4 327.6
Investments at equity 1.1 207.8
Prepaid pension cost 1,333.2 66.1
Deferred income taxes 138.4 138.4
Goodwill 192.1 192.0
Other long-term assets 138.3 141.3
-------- --------
Total $5,387.7 $4,028.9
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 19.7 $ 18.1
Current maturities of long-term debt 58.7 58.8
Accounts payable 445.3 444.6
Other accrued liabilities 1,403.0 1,293.3
-------- --------
Total 1,926.7 1,814.8
-------- --------
Long-term debt 1,049.1 1,049.0
Accrued pension liabilities 351.9 506.9
Other long-term liabilities 679.1 690.8
Stockholders' equity (deficit)
Common stock, shares issued: 2006; 345.1
2005, 344.2 3.5 3.4
Accumulated deficit (2,136.0) (2,108.1)
Other capital 3,922.8 3,917.0
Accumulated other comprehensive loss (409.4) (1,844.9)
-------- --------
Stockholders' equity (deficit) 1,380.9 (32.6)
-------- --------
Total $5,387.7 $4,028.9
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Ended March 31
---------------------------
2006 2005
-------- --------
Revenue
Services $1,176.4 $1,107.7
Technology 211.4 258.9
-------- --------
1,387.8 1,366.6
Costs and expenses
Cost of revenue:
Services 1,076.5 981.4
Technology 109.4 124.9
-------- --------
1,185.9 1,106.3
Selling, general and administrative 295.4 261.6
Research and development 75.3 64.9
-------- --------
1,556.6 1,432.8
-------- --------
Operating loss (168.8) (66.2)
Interest expense 19.8 12.6
Other income (expense), net 153.4 .5
-------- --------
Loss before income taxes (35.2) (78.3)
Benefit for income taxes (7.3) (32.8)
-------- --------
Net loss $ (27.9) $ (45.5)
======== ========
Loss per share
Basic $ (.08) $ (.13)
======== ========
Diluted $ (.08) $ (.13)
======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Three Months Ended
March 31
------------------
2006 2005
-------- --------
Cash flows from operating activities
Net loss $ (27.9) $ (45.5)
Add (deduct) items to reconcile net loss
to net cash provided by operating activities:
Equity loss 4.3 4.3
Employee stock compensation (income) 1.7 (.4)
Depreciation and amortization of properties 30.3 30.0
Depreciation and amortization of outsourcing assets 35.0 34.7
Amortization of marketable software 33.1 28.5
Gain on sale of NUL shares and other assets (153.2)
Increase in deferred income taxes, net (19.8) ( .3)
Decrease in receivables, net 67.0 90.5
Decrease (increase) in inventories 4.3 (6.5)
Increase (decrease) in accounts payable and other
accrued liabilities 94.5 (225.1)
(Decrease) increase in other liabilities (14.6) 97.7
Increase in other assets (30.8) (16.4)
Other 3.0 35.3
------- ------
Net cash provided by operating activities 26.9 26.8
------- ------
Cash flows from investing activities
Proceeds from investments 1,869.3 1,779.9
Purchases of investments (1,870.6) (1,776.8)
Investment in marketable software (27.1) (33.0)
Capital additions of properties (21.6) (22.4)
Capital additions of outsourcing assets (24.6) (41.9)
Proceeds from sale of NUL shares and
other assets 380.6
------- ------
Net cash provided by (used for)
investing activities 306.0 (94.2)
------- ------
Cash flows from financing activities
Net proceeds from short-term borrowings 1.6 1.7
Proceeds from employee stock plans .6 6.6
Payments of long-term debt (150.3)
------- ------
Net cash provided by (used for) financing activities 2.2 (142.0)
------- ------
Effect of exchange rate changes on
cash and cash equivalents 2.6 (9.5)
------- ------
Increase (decrease) in cash and cash equivalents 337.7 (218.9)
Cash and cash equivalents, beginning of period 642.5 660.5
------- -------
Cash and cash equivalents, end of period $ 980.2 $ 441.6
======== =======
See notes to consolidated financial statements.
5
Unisys Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished
herein reflects all adjustments necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods specified. These adjustments consist only of normal
recurring accruals except as disclosed herein. Because of seasonal and other
factors, results for interim periods are not necessarily indicative of the
results to be expected for the full year.
a. The following table shows how earnings (loss) per share were computed for the
three months ended March 31, 2006 and 2005 (dollars in millions, shares in
thousands):
Three Months Ended March 31,
----------------------------
2006 2005
----------- ----------
Basic Loss Per Share
Net loss $ (27.9) $ (45.5)
========= =========
Weighted average shares 342,458 338,248
========= =========
Basic loss per share $ (.08) $ (.13)
========= =========
Diluted Loss Per Share
Net loss $ (27.9) $ (45.5)
========= =========
Weighted average shares 342,458 338,248
Plus incremental shares from assumed
conversions of employee stock plans - -
--------- ---------
Adjusted weighted average shares 342,458 338,248
========= =========
Diluted loss per share $ (.08) $ (.13)
========= =========
At March 31, 2006, no shares related to employee stock plans were included in
the computation of diluted earnings per share since inclusion of these shares
would be antidilutive because of the net loss incurred in the three months
ended March 31, 2006.
b. As part of the company's repositioning plan to right size its cost
structure, on March 31, 2006, the company committed to a reduction of
approximately 3,600 employees. This resulted in a pretax charge in the first
quarter of 2006 of $145.9 million, principally related to severance costs. The
charge is broken down as follows: (a) approximately 1,600 employees in the
U.S. for a charge of $50.3 million and (b) approximately 2,000 employees
outside the U.S. for a charge of $95.6 million. The employee reductions are
expected to be substantially completed by the end of 2006. The company
anticipates that these actions will yield approximately $250 million of
annualized cost savings on a run-rate basis by the end of 2006. The pretax
charge was recorded in the following statement of income classifications:
cost of revenue-services, $83.4 million; cost of revenue-technology, $2.0
million; selling, general and administrative expenses, $45.4 million; research
and development expenses, $17.6 million; and other income (expense), net, $2.5
million. The income recorded in other income (expense), net relates to
minority shareholders' portion of the charge related to majority owned
subsidiaries which are fully consolidated by the company. The company is also
in the process of identifying additional cost reduction actions, primarily
in Continental Europe, for which it expects to take a charge in the second
quarter of 2006.
On March 31, 2006, the company and its lenders entered into an amendment to
the company's $500 million credit agreement modifying the financial covenants
to provide the necessary flexibility to record the above charge.
c. On March 17, 2006, the company adopted changes to its U.S. defined benefit
pension plans effective December 31, 2006, and will increase matching
contributions to its defined contribution savings plan beginning January 1,
2007. The changes to the U.S. plans are part of a global effort by the company
to provide a competitive retirement program while controlling the level and
volatility of retirement costs.
6
The changes to the U.S. pension plans affect most U.S. employees and senior
management. They include:
* Ending the accrual of future benefits in the company's defined benefit
pension plans for employees effective December 31, 2006. There will be no new
entrants to the plans after that date.
* Increasing the company's matching contribution under the company savings
plan to 100 percent of the first 6 percent of eligible pay contributed by
participants, up from the current 50 percent of the first 4 percent of eligible
pay contributed by participants. The company match is made in stock.
The changes do not affect the vested accrued pension benefits of current and
former employees, including Unisys retirees, as of December 31, 2006.
As a result of the amendment to stop accruals for future benefits in its U.S.
defined benefit pension plans, the company recorded a pretax curtailment gain
of $45.0 million in the first quarter of 2006. U.S. GAAP pension accounting
rules require companies to re-measure both plan assets and obligations whenever
a significant event occurs, such as a plan amendment. The company has
performed such re-measurement as of March 31, 2006. As a result of the re-
measurement, the company's U.S. qualified defined benefit pension plan is no
longer in a minimum liability position and accordingly, the company has
reclassified its prepaid pension asset from other comprehensive income to a
prepaid pension asset on its balance sheet. Based on the changes to the U.S.
plans, the March 31, 2006 re-measurement and including the $45.0 million
curtailment gain, the company currently expects its 2006 worldwide pension
expense to be approximately $141 million, down from $181 million in 2005. The
expected pension expense in 2006 is based on actuarial assumptions and on
assumptions regarding interest rates and currency exchange rates, all of which
are subject to change. Accordingly the expected expense amount could change.
Net periodic pension expense (income) for the three months ended March 31,
2006 and 2005 is presented below (in millions of dollars):
Three Months Three Months
Ended March 31, 2006 Ended March 31, 2005
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 29.8 $ 18.4 $ 11.4 $ 31.7 $ 19.1 $ 12.6
Interest cost 94.9 68.1 26.8 93.1 65.3 27.8
Expected return on
plan assets (119.9) (90.7) (29.2) (121.0) ( 90.3) (30.7)
Amortization of prior
service (benefit) cost (.3) ( .5) .2 ( 1.3) ( 1.9) .6
Recognized net actuarial
loss 48.4 36.5 11.9 44.3 34.1 10.2
Curtailment gain (45.0) (45.0)
----- ------ ------ ------ ------ -----
Net periodic pension
expense (income) $ 7.9 $(13.2) $21.1 $ 46.8 $ 26.3 $20.5
===== ====== ====== ======= ====== =====
The company currently expects to make cash contributions of approximately $70
million to its worldwide defined benefit pension plans in 2006 compared with
$71.6 million in 2005. For the three months ended March 31, 2006 and 2005,
$18.4 million and $15.6 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 2006.
7
Net periodic postretirement benefit expense for the three months ended
March 31, 2006 and 2005 is presented below (in millions of dollars):
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Interest cost $3.2 $3.5
Expected return on assets (.1) (.1)
Amortization of prior service benefit (.5) (.5)
Recognized net actuarial loss 1.3 1.6
---- ----
Net periodic postretirement benefit expense $3.9 $4.5
==== ====
The company expects to make cash contributions of approximately $28 million to
its postretirement benefit plan in 2006 compared with $26.4 million in 2005.
For the three months ended March 31, 2006 and 2005, $6.1 million and $7.4
million, respectively, of cash contributions have been made.
d. In March 2006, the company sold all of the shares it owned in Nihon Unisys,
Ltd. (NUL), a publicly traded Japanese company. The company received gross
proceeds of $378.1 million and recognized a pretax gain of $149.9 million in
the first quarter of 2006. NUL will remain the exclusive distributor of the
company's hardware and software in Japan.
At December 31, 2005, the company owned approximately 29% of the voting common
stock of NUL. The company accounted for this investment by the equity method,
and, at December 31, 2005, the amount recorded in the company's books for the
investment, after the reversal of a minimum pension liability adjustment, was
$243 million. During the years ended December 31, 2005, 2004, 2003, and for
the three months ended March 31, 2006 and 2005, the company recorded equity
income (loss) related to NUL of $9.1 million, $16.2 million, $18.2 million,
$(4.2) million and $(4.3) million, respectively. These amounts were recorded
in "Other income (expense), net" in the company's consolidated statements of
income.
e. Under the company's stockholder approved stock-based plans, stock options,
stock appreciation rights, restricted stock and restricted stock units may be
granted to officers, directors and other key employees. At March 31, 2006,
13.4 million shares of unissued common stock of the company were available for
granting under these plans.
As of March 31, 2006, the company has granted non-qualified stock options and
restricted stock units under these plans. Prior to January 1, 2006, the
company applied the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for those plans, whereby for stock options, at the date of grant, no
compensation expense was reflected in 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. Pro forma information regarding net income
and earnings per share was provided in accordance with Statement of Financial
Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS No. 148), as if the fair value
method defined by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) had been applied to stock-based compensation. For purposes of the pro
forma disclosures, the estimated fair value of stock options was amortized to
expense over the options' vesting period.
Effective January 1, 2006, the company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. The company adopted SFAS
No. 123R using the modified-prospective transition method, which requires the
company, beginning January 1, 2006 and thereafter, to expense the grant date
fair value of all share-based awards over their remaining vesting periods to
the extent the awards were not fully vested as of the date of adoption and to
expense the fair value of all share-based awards granted subsequent to December
31, 2005 over their requisite service periods. Stock-based compensation
expense for all share-based payment awards granted after January 1, 2006 is
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123R. The company recognizes compensation cost net of a forfeiture
rate and recognizes the compensation cost for only those awards expected to
vest on a straight-line basis over the requisite service period of the award,
which is generally the vesting term. The company estimated the forfeiture rate
based on its historical experience and its expectations about future
forfeitures. As required under the modified- prospective transition method,
prior periods have not been restated. In March 2005, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107)
regarding the SEC's interpretation of SFAS No. 123R and the valuation of share-
based payments for public companies. The company has applied the provisions of
SAB 107 in its adoption of SFAS No. 123R. The company records share-based
payment expense in selling, general and administrative expenses.
8
The company's stock option and time-based restricted stock unit grants include
a provision that if termination of employment occurs after the participant has
attained age 55 and completed 5 years of service with the company, or for
directors, the completion of 5 years of service as a director, the participant
shall continue to vest in each of his or her awards in accordance with the
vesting schedule set forth in the applicable award agreement. For purposes of
the pro forma information required to be disclosed by SFAS No. 123, the company
recognized compensation expense over the vesting period. Under SFAS No. 123R,
compensation expense is recognized over the period through the date that the
employee first becomes eligible to retire and is no longer required to provide
service to earn the award. For grants prior to January 1, 2006, compensation
expense continues to be recognized under the prior method; compensation expense
for awards granted after December 31, 2005 is recognized over the period to the
date the employee first becomes eligible for retirement.
Options have been granted to purchase the company's common stock at an exercise
price equal to or greater than the fair market value at the date of grant.
Options granted before January 1, 2005 generally have a maximum duration of ten
years and were exercisable in annual installments over a four-year period
following date of grant. Stock options granted after January 1, 2005 generally
have a maximum duration of five years and become exercisable in annual
installments over a three-year period following date of grant. On September
23, 2005, the company accelerated the vesting of all of its then-issued
unvested stock options. On December 19, 2005, the company granted fully vested
stock options to purchase a total of 3.4 million shares of the company's common
stock at an exercise price of $6.05, the fair market value of the company's
common stock on December 19, 2005.
Prior to January 1, 2006, restricted stock units had been granted and were
subject to forfeiture upon employment termination prior to the release of the
restrictions. Compensation expense resulting from these awards is recognized
as expense ratably from the date of grant until the date the restrictions lapse
and is based on the fair market value of the shares at the date of grant.
For stock options issued both before and after adoption of SFAS No. 123R, the
fair value is estimated at the date of grant using a Black-Scholes option
pricing model. As part of its adoption of SFAS No. 123R, for stock options
issued after December 31, 2005, the company reevaluated its assumptions in
estimating the fair value of stock options granted. Principal assumptions used
are as follows: (a) expected volatility for the company's stock price is based
on historical volatility and implied market volatility, (b) historical exercise
data is used to estimate the options' expected term, which represents the
period of time that the options granted are expected to be outstanding, and (c)
the risk-free interest rate is the rate on zero-coupon U.S. government issues
with a remaining term equal to the expected life of the options. The company
recognizes compensation expense for the fair value of stock options, which have
graded vesting, on the straight-line basis over the requisite service period of
the awards.
The fair value of stock option awards was estimated using the Black-Scholes
option pricing model with the following assumptions and expected weighted-
average fair values as follows:
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Weighted-average fair value of grant $2.59 $3.27
Risk-free interest rate 4.35% 3.43%
Expected volatility 45.88% 55.00%
Expected life of options in years 3.67 3.50
Expected dividend yield - -
9
Prior to January 1, 2006, the company would grant an annual stock option award
to officers, directors and other key employees generally in the first quarter
of a year. For 2006, this annual stock option award has been replaced with
restricted stock unit awards. The company currently expects to continue to
grant stock option awards, principally to newly hired individuals. The
restricted stock unit awards granted in March of 2006 contain both time-based
units (25% of the grant) and performance-based units (75% of the grant). The
time-based units vest in three equal annual installments beginning with the
first anniversary of the grant, and the performance-based units vest in three
equal annual installments, beginning with the first anniversary of the grant,
based upon the achievement of pretax profit and revenue growth rate goals in
2006, 2006-2007, and 2006-2008, for each installment, respectively. Each
performance-based unit will vest into zero to 1.5 shares depending on the
degree to which the performance goals are met. Compensation expense resulting
from these awards is recognized as expense ratably for each installment from
the date of grant until the date the restrictions lapse and is based on the
fair market value at the date of grant and the probability of achievement of
the specific performance-related goals.
During the three months ended March 31, 2006, the company recorded $1.7 million
of share-based compensation expense, which is comprised of $1.6 million of
restricted stock unit expense and $.1 million of stock option expense.
The adoption of SFAS No. 123R had an immaterial impact to income before income
taxes and net income for the three months ended March 31, 2006.
A summary of the status of stock option activity for the three months ended
March 31, 2006 follows (shares in thousands):
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (years) ($ in millions)
------- ------ --------- ------------ ---------------
Outstanding at
December
31, 2005 47,536 $16.54
Granted 229 6.62
Exercised (100) 6.25
Forfeited and
expired (702) 13.04
-------
Outstanding at
March 31, 2006 46,963 16.57 4.89 $3.8
======
Vested and
expected to
vest at
March 31, 2006 46,963 16.57 4.89 3.8
======
Exercisable at
March 31, 2006 46,474 16.68 4.89 3.6
======
The aggregate intrinsic value in the above table reflects the total pretax
intrinsic value (the difference between the company's closing stock price on
the last trading day of the period and the exercise price of the options,
multiplied by the number of in-the-money stock options) that would have been
received by the option holders had all option holders exercised their options
on March 31, 2006. The intrinsic value of the company's stock options changes
based on the closing price of the company's stock. The total intrinsic value
of options exercised for the three months ended March 31, 2006 and March 31,
2005 was immaterial. As of March 31, 2006, $1.2 million of total unrecognized
compensation cost related to stock options is expected to be recognized over a
weighted-average period of 1.8 years.
A summary of the status of restricted stock unit activity for the three months
ended March 31, 2006 follows (shares in thousands):
Weighted-
Restricted Average
Stock Grant Date
Units Fair Value
---------- ----------
Outstanding at
December 31, 2005 352 $8.89
Granted 1,681 6.65
Vested (128) 7.62
Forfeited and
expired (11) 11.08
----
Outstanding at
March 31, 2006 1,894 6.97
=====
10
The fair value of restricted stock units is determined based on the average of
the high and low trading price of the company's common shares on the date of
grant. The weighted-average grant-date fair value of restricted stock units
granted during the three months ended March 31, 2006 and 2005 was $6.65 and
$7.62, respectively. As of March 31, 2006, there was $10.3 million of total
unrecognized compensation cost related to outstanding restricted stock units
granted under the company's plans. That cost is expected to be recognized over
a weighted-average period of 1.9 years. The total fair value of restricted
share units vested during the three months ended March 31, 2006 was $.8 million.
No restricted share units vested during the three months ended March 31, 2005.
For the three months ended March 31, 2005, 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, except
per share amounts):
Three Months Ended March 31,
----------------------------
2005
----
Net loss as reported $(45.5)
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (5.7)
------
Pro forma net loss $(51.2)
======
Loss per share
Basic - as reported $ (.13)
Basic - pro forma $ (.15)
Diluted - as reported $ (.13)
Diluted - pro forma $ (.15)
Common stock issued upon exercise of stock options or upon lapse of
restrictions on restricted stock units are newly-issued shares. Cash received
from the exercise of stock options for the three months ended March 31, 2006
and 2005 was $.6 million and $.3 million, respectively. The company did not
realize any tax benefits from the exercise of stock options or upon issuance of
stock upon lapse of restrictions on restricted stock units in light of its tax
asset carryforwards. Prior to the adoption of SFAS No. 123R, the company
presented such tax benefits as operating cash flows. Upon the adoption of SFAS
No. 123R, tax benefits resulting from tax deductions in excess of the
compensation cost recognized are classified as financing cash flows.
f. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - consulting and systems
integration, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies.
The accounting policies of each business segment are the same as those followed
by the company as a whole. Intersegment sales and transfers are priced as if
the sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware
and software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing profits on such
shipments of company hardware and software to customers. The Services segment
also includes the sale of hardware and software products sourced from third
parties that are sold to customers through the company's Services channels. In
the company's consolidated statements of income, the manufacturing costs of
products sourced from the Technology segment and sold to Services customers are
reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended March 31, 2006 and 2005
was $1.3 million and $4.8 million, respectively. The profit on these
transactions is eliminated in Corporate.
11
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue, employees,
square footage or usage.
A summary of the company's operations by business segment for the three-month
periods ended March 31, 2006 and 2005 is presented below (in millions of
dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
March 31, 2006
------------------
Customer revenue $1,387.8 $1,176.4 $ 211.4
Intersegment $ (42.6) 3.4 39.2
-------- -------- -------- ------
Total revenue $1,387.8 $ (42.6) $1,179.8 $ 250.6
======== ======== ======== ======
Operating loss $ (168.8) $ (144.8) $ (10.5) $ (13.5)
======== ======== ======== =======
Three Months Ended
March 31, 2005
------------------
Customer revenue $1,366.6 $1,107.7 $ 258.9
Intersegment $( 59.9) 4.8 55.1
-------- -------- -------- -------
Total revenue $1,366.6 $( 59.9) $1,112.5 $ 314.0
======== ======= ======== =======
Operating income (loss) $ (66.2) $ (10.4) $ (75.1) $ 19.3
========= ======= ======== =======
Presented below is a reconciliation of total business segment operating income
(loss) to consolidated loss before income taxes (in millions of dollars):
Three Months Ended March 31
---------------------------
2006 2005
---- ----
Total segment operating loss $ (24.0) $(55.8)
Interest expense (19.8) (12.6)
Other income (expense), net 153.4 .5
Cost reduction charge (145.9)
Corporate and eliminations 1.1 (10.4)
------ ------
Total loss before income taxes $ (35.2) $(78.3)
======= ======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Ended March 31
---------------------------
2006 2005
---- ----
Services
Consulting and systems integration $ 381.3 $ 369.8
Outsourcing 455.2 400.2
Infrastructure services 225.0 202.8
Core maintenance 114.9 134.9
-------- --------
1,176.4 1,107.7
Technology
Enterprise-class servers 168.1 198.2
Specialized technologies 43.3 60.7
-------- --------
211.4 258.9
-------- --------
Total $1,387.8 $1,366.6
======== ========
12
g. Comprehensive income (loss) for the three months ended March 31, 2006
and 2005 includes the following components (in millions of dollars):
2006 2005
------ ------
Net loss $ (27.9) $(45.5)
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of $ - and $1.3 .2 2.3
Reclassification adjustments, net of tax
of $ - and $.7 (.2) 1.4
Foreign currency translation adjustments (10.5) 15.8
Reversal of U.S. minimum pension liability 1,446.0 -
------- ------
Total other comprehensive income 1,435.5 19.5
------- ------
Comprehensive income (loss) $1,407.6 $(26.0)
======= ======
Accumulated other comprehensive income (loss) as of December 31, 2005 and
March 31, 2006 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2005 $(1,844.9) $(627.3) $ .1 $(1,217.7)
Change during period 1,435.5 (10.5) - 1,446.0
-------- ------- ------ ---------
Balance at March 31, 2006 $ (409.4) $(637.8) $ .1 $ 228.3
======== ======= ====== =========
h. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for 12 months after
shipment to the customer. The company will repair or replace, at its option
and expense, items of equipment that do not meet this warranty. For company
software, the company warrants that it will conform substantially to then-
current published functional specifications for 90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that prevents its use in a production environment.
The company estimates the costs that may be incurred under its warranties and
records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include the
number of units sold, historical and anticipated rates of warranty claims and
cost per claim. The company quarterly assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary. Presented below is
a reconciliation of the aggregate product warranty liability (in millions of
dollars):
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Balance at beginning of period $ 8.0 $11.6
Accruals for warranties issued
during the period 2.9 2.4
Settlements made during the period (2.4) (2.9)
Changes in liability for pre-existing warranties
during the period, including expirations .8 ( .1)
----- -----
Balance at March 31 $ 9.3 $11.0
===== =====
i. Cash paid during the three months ended March 31, 2006 and 2005 for income
taxes was $19.9 million and $41.3 million, respectively.
Cash paid during the three months ended March 31, 2006 and 2005 for interest
was $11.6 million and $16.5 million, respectively.
13
j. Effective January 1, 2006, the company adopted SFAS No. 151, "Inventory
Costs an amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, handling costs
and wasted material (spoilage). Among other provisions, the new rule requires
that such items be recognized as current-period charges, regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. Adoption of
SFAS No. 151 did not have a material effect on the company's consolidated
financial position, consolidated results of operations, or liquidity.
k. Certain prior year amounts have been reclassified to conform with the 2006
presentation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
For the three months ended March 31, 2006, the company reported a net loss of
$27.9 million, or $.08 per share, compared with a net loss of $45.5 million, or
$.13 per share, for the three months ended March 31, 2005.
During the first quarter of 2006, the company executed against its previously-
announced plan to fundamentally reposition the company for profitable growth
over the 2006-2008 timeframe. During the quarter, the company:
* began implementing personnel reductions by committing to a reduction of
approximately 3,600 employees, which resulted in a pretax charge of $145.9
million. See note (b).
* adopted changes to its U.S. defined benefit pension plans effective December
31, 2006, and will increase matching contributions to its defined contribution
savings plan beginning January 1, 2007. As a result of the amendment to stop
accruals for future benefits, the company recorded a pretax curtailment gain of
$45.0 million. See note (c).
* took initial steps in its program to divest non-core assets. In March the
company divested its stake in Nihon Unisys, Ltd. (NUL), an IT solutions
provider in Japan. The company sold all of its 30.5 million shares in NUL,
generating cash proceeds of approximately $378 million. Proceeds from the sale
will be used to fund the company's cost reduction program. A pretax gain of
$149.9 million was recorded on the sale. The company also sold certain assets
of its Unigen semiconductor test equipment business for cash proceeds of $8
million. See note (d).
* reached a definitive agreement with its partner banks on renegotiated terms
for its iPSL check and payment processing joint venture in the United Kingdom.
The terms of the new agreement, which went into effect on January 1, 2006,
include new tariff arrangements that are expected to yield an additional
approximately $150 million in revenue to the company over the 2006-2010
timeframe.
* signed a series of alliance agreements with NEC Corporation (NEC) to
collaborate in server technology, research and development, manufacturing, and
solutions delivery. Among the areas included in the agreements, the two
companies will co-design and develop a common high-end, Intel-based server
platform for customers of both companies, and NEC is recognizing the company as
a preferred provider of technology support and maintenance services and managed
security services in markets outside of Japan.
14
Results of operations
Company results
Revenue for the quarter ended March 31, 2006 was $1.39 billion compared with
$1.37 billion for the first quarter of 2005. Revenue in the current period
increased 2% from the prior year. This increase was due to a 6% increase in
Services revenue offset in part by a decrease of 18% in Technology revenue.
Foreign currency fluctuations had a 3 percentage point negative impact on
revenue in the current period compared with the year-ago period. U.S. revenue
was flat in the first quarter compared with the year-ago period while revenue
in international markets increased 3% due to increases in Latin America and
Europe offset in part by a decline in Pacific/Asia/Japan. On a constant
currency basis, international revenue increased 9% in the three months ended
March 31, 2006 compared with the three months ended March 31, 2005.
Pension expense for the three months ended March 31, 2006 was $7.9 million
compared with $46.8 million for the three months ended March 31, 2005. The
decrease in pension expense in 2006 from 2005 was due to the following: the
U.S. curtailment gain of $45.0 million recognized in 2006, offset in part by an
increase in expense due to the use of an updated mortality table to reflect
longer life expectancy for the U.S. plan, and for international plans, declines
in discount rates and currency translation. The company records pension income
or expense, as well as other employee-related costs such as payroll taxes and
medical insurance costs, in operating income in the following income statement
categories: cost of sales; selling, general and administrative expenses; and
research and development expenses. The amount allocated to each category is
based on where the salaries of active employees are charged.
Total gross profit margin was 14.5% in the three months ended March 31, 2006
compared with 19.0% in the three months ended March 31, 2005. The decline in
gross profit margin in 2006 compared with 2005 principally reflected the $85.4
million cost reduction charge in 2006, offset in part by a decline in pension
expense to $7.7 million in the three months ended March 31, 2006 compared with
$32.8 million in the year ago period.
Selling, general and administrative expenses were $295.4 million for the three
months ended March 31, 2006 (21.3% of revenue) compared with $261.6 million
(19.1% of revenue) in the year-ago period. The change in selling, general and
administrative expenses in 2006 compared with 2005 was principally due to (a) a
$45.4 million charge in 2006 relating to the cost reduction actions, offset in
part by (b) $1.8 million of pension expense in 2006 compared with pension
expense of $9.1 million in 2005.
Research and development (R&D) expenses in first quarter of 2006 were $75.3
million compared with $64.9 million in the first quarter of 2005. The company
continues to invest in proprietary operating systems and in key programs within
its industry practices. R&D expense in 2006 included a $17.6 million charge
relating to the 2006 cost reduction actions. R&D in 2006 includes $1.6 million
of pension income compared with $4.9 million of pension expense in 2005.
For the first quarter of 2006, the company reported a pretax operating loss of
$168.8 million compared with a pretax operating loss of $66.2 million in the
first quarter of 2005. The principal items affecting the comparison of 2006
with 2005 were (a) a $148.4 million charge in 2006 relating to the cost
reduction actions, and (b) pension expense of $7.9 million in 2006 compared
with $46.8 million in 2005.
Interest expense for the three months ended March 31, 2006 was $19.8 million
compared with $12.6 million for the three months ended March 31, 2005,
principally due to higher average debt.
Other income (expense), net, which can vary from period to period, was income
of $153.4 million in the first quarter of 2006, compared with income of $.5
million in 2005. The difference in 2006 from 2005 was principally due to the
$149.9 million gain from the sale of all of the company's shares in NUL (see
note (d)).
Income (loss) before income taxes for the three months ended March 31, 2006 was
a loss of $35.2 million compared with a loss of $78.3 million in 2005. The
benefit for income taxes was $7.3 million in the current quarter compared with
a benefit of $32.8 million in the year-ago period. Due to the increase to a
full valuation allowance for all of the company's U.S. tax assets and certain
international subsidiaries in the third quarter of 2005, the company no longer
has a meaningful effective tax rate. The company will record a tax provision
or benefit for those international subsidiaries that do not have a full
valuation allowance against their deferred tax assets. Any profit or loss
recorded for the company's U.S. operations will have no provision or benefit
associated with it. As a result, the company's provision or benefit for taxes
will vary significantly quarter to quarter depending on the geographic
distribution of income.
15
In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the establishment
of secure information technology environments in airports. The Defense Contract
Audit Agency (DCAA), at the request of TSA, reviewed contract performance and
raised some government contracting issues. It is not unusual in complex
government contracts for the government and the contractor to have issues arise
regarding contract obligations. The company continues to work collaboratively
with the DCAA and TSA to try to resolve these issues. While the company
believes that it and the government will resolve the issues raised, there can
be no assurance that these issues will be successfully resolved or that new
issues will not be raised. It has been publicly reported that certain of these
matters have been referred to the Inspector General's office of the Department
of Homeland Security for investigation. The company has received no
investigative requests from the Inspector General's office or any other
government agency with respect to any such referral. The company does not know
whether any such referral will be pursued or, if pursued, what effect it may
have on the company or on the resolution of the issues with TSA.
Segment results
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 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 agreements. The amount of such profit included in operating income of
the Technology segment for the three months ended March 31, 2006 and 2005 was
$1.3 million and $4.8 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. Therefore, the segment comparisons below
exclude the cost reduction items mentioned above.
16
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
March 31, 2006
- ------------------
Customer revenue $1,387.8 $1,176.4 $211.4
Intersegment $( 42.6) 3.4 39.2
-------- ------- -------- ------
Total revenue $1,387.8 $( 42.6) $1,179.8 $250.6
======== ======= ======== ======
Gross profit percent 14.5 % 15.2 % 41.9 %
======== ======== ======
Operating loss percent (12.2)% (0.9)% (5.4)%
======== ======== ======
Three Months Ended
March 31, 2005
- ------------------
Customer revenue $1,366.6 $1,107.7 $258.9
Intersegment $( 59.9) 4.8 55.1
-------- ------- -------- ------
Total revenue $1,366.6 $( 59.9) $1,112.5 $314.0
======== ======= ======== ======
Gross profit percent 19.0% 11.0% 47.7%
======== ======== ======
Operating profit
(loss) percent (4.8)% (6.8)% 6.1%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
In the Services segment, customer revenue was $1.18 billion for the three
months ended March 31, 2006 compared with $1.11 billion for the three months
ended March 31, 2005. Foreign currency translation had about a 3 percentage
point negative impact on Services revenue in current quarter compared with the
year-ago period. Revenue in the first quarter of 2006 was up 6% from 2005,
principally due to a 14% increase in outsourcing ($455.2 million in 2006
compared with $400.2 million in 2005), an 11% increase in infrastructure
services ($225.0 million in 2006 compared with $202.8 million in 2005) and a 3%
increase in consulting and systems integration revenue ($381.3 million in 2006
compared with $369.8 million in 2005), offset, in part, by a 15% decrease in
core maintenance revenue ($114.9 million in 2006 compared with $134.9 million
in 2005). Services gross profit was 15.2% in the first quarter of 2006
compared with 11.0% in the year-ago period. The Services gross profit margin
in the current quarter includes pension expense of $8.1 million compared with
$31.8 million in 2005. Services operating income (loss) percent was (0.9)% in
the three months ended March 31, 2006 compared with (6.8)% in the three months
ended March 31, 2005. Included in the operating income (loss) was the impact
of pension expense of $9.6 million in the current-year quarter compared with
$39.4 million in the year-ago quarter.
In the Technology segment, customer revenue was $211 million in the current
quarter compared with $259 million in the year-ago period. Foreign currency
translation had a negative impact of approximately 2 percentage points on
Technology revenue in the current period compared with the prior-year period.
Revenue in the three months ended March 31, 2006 was down 18% from the three
months ended March 31, 2005, due to a 15% decrease in sales of enterprise-class
servers ($168.1 million in 2006 compared with $198.2 million in 2005) and a 29%
decline in sales of specialized technology products ($43.3 million in 2006
compared with $60.7 million in 2005). Technology gross profit was 41.9% in the
current quarter compared with 47.7% in the year-ago quarter. Gross profit
included pension income of $.4 million in 2006 compared with pension expense of
$1.0 million in 2005. Technology operating income percent was (5.4)% in the
three months ended March 31, 2006 compared with 6.1% in the three months ended
March 31, 2005. The decline in revenue and margins in 2006 compared with 2005
primarily reflected weak demand for enterprise servers based on customer
technology lifecycles and buying patterns. The company expects the technology
segment to remain weak in the second quarter and to strengthen in the second
half of the year over the first half of the year as the company introduces new
enterprise server models.
New accounting pronouncements
Effective January 1, 2006, the company adopted SFAS No. 151, "Inventory Costs
an amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs and
wasted material (spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless of whether they
meet the criterion of "so abnormal" as stated in ARB No. 43. Adoption of SFAS
No. 151 did not have a material effect on the company's consolidated financial
position, consolidated results of operations, or liquidity.
Effective January 1, 2006, the company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based
on their fair values. The company adopted SFAS No. 123R using the modified-
prospective transition method, which requires the company, beginning January 1,
2006 and thereafter, to expense the grant date fair value of all share-based
awards over their remaining vesting periods to the extent the awards were not
fully vested as of the date of adoption and to expense the fair value of all
share-based awards granted subsequent to December 31, 2005 over their requisite
service periods. During the three months ended March 31, 2006, the company
recorded $1.7 million of share-based compensation expense. Previous periods
have not been restated. See note (e) for further details.
17
Financial condition
Cash and cash equivalents at March 31, 2006 were $980.2 million compared with
$642.5 at December 31, 2005.
During the three months ended March 31, 2006, cash provided by operations was
$26.9 million compared with $26.8 million for the three months ended March 31,
2005. Cash expenditures in the current quarter related to prior-year
restructuring actions (which are included in operating activities) were
approximately $6 million compared with $14 million for the prior-year quarter.
Cash expenditures for the first quarter of 2006 and the prior-year
restructuring actions are expected to be approximately $152 million for the
remainder of 2006, resulting in an expected cash expenditure of approximately
$158 million in 2006 compared with $57.8 million in 2005.
Cash provided by investing activities for the three months ended March 31, 2006
was $306.0 million compared with $94.2 million of cash used during the three
months ended March 31, 2005. The principal reason for the increase was that
the company received net proceeds of $380.6 million from the sale of the NUL
shares and other assets. Net purchases of investments was $1.3 million for the
three months ended March 31, 2006 compared with net proceeds of $3.1 million in
the prior-year period. Proceeds from investments and purchases of investments
represent derivative financial instruments used to manage the company's
currency exposure to market risks from changes in foreign currency exchange
rates. In addition, in the current quarter, the investment in marketable
software was $27.1 million compared with $33.0 million in the year-ago period,
capital additions of properties were $21.6 million in 2006 compared with $22.4
million in 2006 and capital additions of outsourcing assets were $24.6 million
in 2006 compared with $41.9 million in 2005.
Cash provided by financing activities during the three months ended March 31,
2006 was $2.2 million compared with $142.0 million of cash used during the
three months ended March 31, 2005. The prior-year period includes a cash
expenditure of $150.0 million to retire at maturity all of the company's 7 1/4%
senior notes.
At March 31, 2006, total debt was $1.1 billion, an increase of $1.6 million
from December 31, 2005.
The company has various lending and funding agreements as follows:
The company has a $500 million credit agreement that expires on May 31, 2006.
Borrowings under the agreement bear interest based on the then-current LIBOR or
prime rates and the company's credit rating. As of March 31, 2006, there were
no borrowings under this facility, and the entire $500 million was available
for borrowings. The credit agreement contains standard representations and
warranties, including no material adverse change. It also 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 and could also
limit the company's ability to take cost reduction and other charges. Events
of default under the credit agreement include failure to perform covenants,
materially incorrect representations and warranties, 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. On March 31, 2006, the company and its lenders entered into an
amendment to the company's $500 million credit agreement modifying the
financial covenants to provide the necessary flexibility to record the cost
reduction charge, discussed above. The company is in discussions with several
financial institutions regarding the terms of a new credit facility. The
company currently expects that a new facility will be in place before the end
of the second quarter of 2006. The company anticipates that the new facility
will be smaller than the current facility and will be secured.
18
In addition, the company and certain international subsidiaries have access to
uncommitted lines of credit from various banks. Other sources of short-term
funding are operational cash flows, including customer prepayments, and the
company's U.S. trade accounts receivable facility discussed below.
The company also has an agreement to sell, on an on-going basis, through Unisys
Funding Corporation I, a wholly owned subsidiary, interests in eligible U.S.
trade accounts receivable. As of January 6, 2006, the company executed an
amendment to the facility which, among other things: increases the amount of
receivables which the company may sell under the facility to $300 million;
increases the selling price of the receivables to reflect a margin based on,
among other things, the company's then-current S&P and Moody's credit rating;
relaxes the termination provision related to the rating of the company's public
debt securities such that the facility is now terminable by the purchasers if
the company's public debt securities are rated below B by S&P or B2 by Moody's;
and modifies certain definitions related to the maintenance of certain ratios
related to the sold receivables. At March 31, 2006, the company's public debt
was rated BB- and Ba3 by S&P and Moody's, respectively. The amended facility
is renewable annually at the purchasers' option until November 2008.
At March 31, 2006, the company has met all covenants and conditions under its
various lending and funding agreements. The company expects to continue to
meet these covenants and conditions. The company believes that it will have
adequate sources and availability of short-term funding to meet its expected
cash requirements.
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors.
The company has on file with the Securities and Exchange Commission a
registration statement covering $650 million of debt or equity securities,
which enables the company to be prepared for future market opportunities.
Stockholders' equity increased $1,413.5 million during the three months ended
March 31, 2006, principally reflecting the reversal of the minimum pension
liability adjustment of $1,446.0 million for the U.S. qualified defined benefit
pension plan, offset in part by the net loss of $27.9 million.
Factors that may affect future results
From time to time, the company provides information containing "forward-
looking" statements, as defined in the Private Securities Litigation Reform Act
of 1995. Forward-looking statements provide current expectations of future
events and include any statement that does not directly relate to any
historical or current fact. Words such as "anticipates," "believes," "expects,"
"intends," "plans," "projects" and similar expressions may identify such
forward-looking statements. All forward-looking statements rely on assumptions
and are subject to risks, uncertainties and other factors that could cause the
company's actual results to differ materially from expectations. Factors that
could affect future results include, but are not limited to, those discussed
below. Any forward-looking statement speaks only as of the date on which that
statement is made. The company assumes no obligation to update any forward-
looking statement to reflect events or circumstances that occur after the date
on which the statement is made.
Statements in this report regarding the company's cost reduction plan are
subject to the risk that the company may not implement the planned headcount
reductions as quickly as currently planned, which could affect the timing of
anticipated cost savings. The amount of anticipated cost savings is also
subject to currency exchange rate fluctuations with regard to actions taken
outside the U.S. Statements in this report regarding the revenue increases
anticipated from the new iPSL tariff arrangements are based on assumptions
regarding iPSL processing volumes and costs over the 2006-2010 time-frame.
Because these volumes and costs are subject to change, the amount of
anticipated revenue is not guaranteed. In addition, because iPSL is paid by its
customers in British pounds, the U.S. dollar amount of revenue recognized by the
company is subject to currency exchange rate fluctuations.
Other factors that could affect future results include the following:
19
The company's business is affected by changes in general economic and business
conditions. The company continues to face a highly competitive business
environment. If the level of demand for the company's products and services
declines in the future, the company's business could be adversely affected. The
company's business could also be affected by acts of war, terrorism or natural
disasters. Current world tensions could escalate, and this could have
unpredictable consequences on the world economy and on the company's business.
The information services and technology markets in which the company operates
include a large number of companies vying for customers and market share both
domestically and internationally. The company's competitors include consulting
and other professional services firms, systems integrators, outsourcing
providers, infrastructure services providers, computer hardware manufacturers
and software providers. Some of the company's competitors may develop competing
products and services that offer better price-performance or that reach the
market in advance of the company's offerings. Some competitors also have or may
develop greater financial and other resources than the company, with enhanced
ability to compete for market share, in some instances through significant
economic incentives to secure contracts. Some also may be better able to
compete for skilled professionals. Any of these factors could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend
in part on the company's ability to anticipate and respond to these market
trends and to design, develop, introduce, deliver or obtain new and innovative
products and services on a timely and cost-effective basis. The company may not
be successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
Future results will also depend in part on the success of the company's focused
investment and sales and marketing strategies. These strategies are based on
various assumptions, including assumptions regarding market segment growth,
client demand, and the proper skill set of and training for sales and marketing
management and personnel, all of which are subject to change.
The company's future results will depend in part on its ability to grow
outsourcing and infrastructure services. The company's outsourcing contracts
are multiyear engagements under which the company takes over management of a
client's technology operations, business processes or networks. In a number of
these arrangements, the company hires certain of its clients' employees and may
become responsible for the related employee obligations, such as pension and
severance commitments. In addition, system development activity on outsourcing
contracts may require the company to make significant upfront investments. The
company will need to have available sufficient financial resources in order to
take on these obligations and make these investments.
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, and
realization of expected profitability of existing outsourcing contracts. These
risks could result in an impairment of a portion of the associated assets,
which are tested for recoverability quarterly.
As long-term relationships, outsourcing contracts provide a base of recurring
revenue. However, outsourcing contracts are highly complex and can involve the
design, development, implementation and operation of new solutions and the
transitioning of clients from their existing business processes to the new
environment. In the early phases of these contracts, gross margins may be lower
than in later years when an integrated solution has been implemented, the
duplicate costs of transitioning from the old to the new system have been
eliminated and the work force and facilities have been rationalized for
efficient operations. Future results will depend on the company's ability to
effectively and timely complete these implementations, transitions and
rationalizations. Future results will also depend on the company's ability to
effectively address its challenging outsourcing operations through negotiations
or operationally and to fully recover the associated outsourcing assets.
Future results will also depend in part on the company's ability to drive
profitable growth in consulting and systems integration. The company's ability
to grow profitably in this business will depend on the level of demand for
systems integration projects. It will also depend on an improvement in the
utilization of services delivery personnel. 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 attain sufficient rates and chargeability for its professionals, profit
margins will suffer. The rates the company is able to charge for services are
affected by a number of factors, including clients' perception of the company's
ability to add value through its services; introduction of new services or
products by the company or its competitors; pricing policies of competitors;
and general economic conditions. Chargeability is also affected by a number of
factors, including the company's ability to transition employees from completed
projects to new engagements, and its ability to forecast demand for services
and thereby maintain an appropriate head count.
20
Future results will also depend, in part, on an improvement in the
company's technology business. This will require, in part, an increase in
market demand for the company's high-end enterprise servers. In its technology
business, the company continues to focus its resources on enhancing a common
high-performance platform for both its proprietary operating environments and
open standards-based operating environments such as Microsoft Windows and
Linux. In addition, the company continues to apply its resources to develop
value-added software capabilities and optimized solutions for these server
platforms which provide competitive differentiation. The high-end enterprise
server platforms are based on its Cellular MultiProcessing (CMP) architecture.
The company's CMP servers are designed to provide mainframe-class capabilities
with compelling price performance by making use of standards-based technologies
such as Intel chips and supporting industry standard software. The company has
transitioned both its legacy ClearPath servers and its Intel-based ES7000s to
the CMP platform. Future results will depend, in part, on customer acceptance
of the CMP-based ClearPath Plus systems and the company's ability to maintain
its installed base for ClearPath and to develop next-generation ClearPath
products that are purchased by the installed base. In addition, future results
will depend, in part, on the company's ability to generate new customers and
increase sales of the Intel-based ES7000 line. The company believes there is
significant growth potential in the developing market for high-end, Intel-based
servers running Microsoft and Linux operating system software. However,
competition in these new markets is likely to intensify in coming years, and
the company's ability to succeed will depend on its ability to compete
effectively against enterprise server competitors with more substantial
resources and its ability to achieve market acceptance of the ES7000 technology
by clients, systems integrators and independent software vendors. Future
results of the technology business will also depend, in part, on the successful
implementation of the company's new arrangements with NEC.
The company frequently enters into contracts with governmental entities. U.S.
government agencies, including the Defense Contract Audit Agency and the
Department of Labor, routinely audit government contractors. These agencies
review a contractor's performance under its contracts, cost structure and
compliance with applicable laws, regulations and standards. The U.S. government
also may review the adequacy of, and a contractor's compliance with, its
systems and policies, including the contractor's purchasing, property,
estimating, accounting, compensation and management information systems. Any
costs found to be overcharged or improperly allocated to a specific contract
will be subject to reimbursement to the government. If an audit uncovers
improper or illegal activities, the company may be subject to civil and
criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from doing business with the U.S. government. Other risks and
uncertainties associated with 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. In
addition, if the company's performance is unacceptable to the customer under a
government contract, the government retains the right to pursue remedies under
the affected contract, which remedies could include termination.
A number of the company's long-term contracts for infrastructure services,
outsourcing, help desk and similar services do not provide for minimum
transaction volumes. As a result, revenue levels are not guaranteed. In
addition, some of these contracts may permit customer termination or may impose
other penalties if the company does not meet the performance levels specified in
the contracts.
Some of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted
services and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
21
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. The company
has announced that alliance partnerships with select IT companies are a key
factor in the development and delivery of the company's refocused portfolio.
Future results will depend, in part, on the performance and capabilities of
these third parties, on the ability of external suppliers to deliver components
at reasonable prices and in a timely manner, and on the financial condition of,
and the company's relationship with, distributors and other indirect channel
partners.
More than half of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, changes in political or economic
conditions, trade protection measures, import or export licensing requirements,
multiple and possibly overlapping and conflicting tax laws, new tax
legislation, and weaker intellectual property protections in some jurisdictions.
The company cannot be sure that its services and products do not infringe on
the intellectual property rights of third parties, and it may have infringement
claims asserted against it or against its clients. These claims could cost the
company money, prevent it from offering some services or products, or damage
its reputation.
Item 4. Controls and Procedures
- --------------------------------
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of March 31, 2006.
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. Such evaluation did not identify any change in the
Company's internal controls over financial reporting that occurred during the
quarter ended March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
22
Part II - OTHER INFORMATION
- ------- -----------------
Item 1A. Risk Factors
- ------- ------------
See "Factors that may affect future results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
risk factors.
Item 5. Other Information
- ------ -----------------
For a description of restricted stock units granted in March 2006 to certain
key employees, including officers, see note (e) of the notes to consolidated
financial statements. The form of restricted stock unit agreement and
information on the restricted stock unit grants made to certain officers of the
company in March 2006 are filed as exhibits hereto.
See note (b) of the notes to consolidated financial statements for information
on the restructuring charge taken in the first quarter of 2006.
Item 6. Exhibits
- ------- --------
(a) Exhibits
See Exhibit Index
23
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 28, 2006 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Joseph M. Munnelly
----------------------
Joseph M. Munnelly
Vice President and
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999)
3.2 Bylaws of Unisys Corporation, as amended through December 1, 2005
(incorporated by reference to Exhibit 3 to the registrant's Current
Report on Form 8-K dated December 1, 2005)
10.1 Form of Restricted Stock Unit Agreement
10.2 Information on Restricted Stock Units granted to certain executive
officers
10.3 Description of Turnaround Cash Incentive Program (incorporated
by reference to Item 1.01(c) of the registrant's Current Report on
Form 8-K dated February 9, 2006)
10.4 Description of 2006 Compensation of Directors (incorporated by
reference to Item 1.01(d) of the registrant's Current Report on
Form 8-K dated February 9, 2006)
10.5 Consulting Agreement dated as of February 1, 2006 between Unisys
Corporation and Lawrence A. Weinbach (incorporated by reference to
Exhibit 10.1 to the registrant's Current Report on Form 8-K dated
February 9, 2006)
10.6 Summary of 2006 Salary and Bonus Arrangements with certain
executive officers (incorporated by reference to Exhibit 10.2 to
the registrant's Current Report on Form 8-K dated February 9, 2006)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Joseph W. McGrath required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of Joseph W. McGrath required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350