FINANCIAL REVIEW
Management's Discussion and Analysis 20
Consolidated Statements of Income 32
Consolidated Balance Sheets 33
Consolidated Statements of Cash Flows 34
Consolidated Statements of Stockholders' Equity 35
Notes to Consolidated Financial Statements 36
Report of Management 53
Report of Independent Auditors 53
Quarterly Financial Information 54
Five-Year Summary of Selected Financial Data 55
UNISYS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In recent years, the company has been transitioning its business model to
strengthen its capabilities as a services-led, technology-based solutions
provider. As part of this transformation, the company has moved away from
low-margin, commodity-type products and services to higher-end, value-added
business opportunities, such as business process outsourcing, managed
infrastructure services, business consulting, enterprise security, and high-end
server technology. As a result of this transformation, the company has seen a
fundamental shift in its revenue composition. For 2002, 76% of the company's
revenue came from its Services segment while 24% of revenue came from its
Technology segment. By contrast, in the year 2000, 69% of the company's revenue
came from the Services segment while 31% of revenue derived from its Technology
segment.
In addition, during this time period the IT services and technology
industry has experienced a severe contraction in demand resulting from a weak
economic environment worldwide. In response to these business conditions, in the
fourth quarters of 2001 and 2000, the company took significant charges for
work-force reductions and other actions to reduce its cost base and reposition
its business model as a services-led, technology-enabled solutions provider. See
Note 4 of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
COMPANY RESULTS
In 2002, the company reported net income of $223.0 million, or $.69 per share,
compared to a net loss of $67.1 million, or $.21 per share in 2001, and net
income of $225.0 million, or $.71 per diluted share, in 2000. The results for
2001 include a fourth-quarter pretax charge of $276.3 million, or $.64 per
share, principally for a work-force reduction, as well as an extraordinary
charge of $17.2 million, or $.05 per share, for the early extinguishment of
debt. Excluding these items, earnings per share in 2001 was $.48. The results
for 2000 include a fourth-quarter pretax charge of $127.6 million, or $.29 per
diluted share, principally for a work-force reduction, as well as an
extraordinary charge of $19.8 million, or $.06 per diluted share, for the early
extinguishment of debt. Excluding these items, diluted earnings per share in
2000 was $1.06. See Note 4 of the Notes to Consolidated Financial Statements.
Revenue for 2002 was $5.61 billion compared to $6.02 billion in 2001 and
$6.89 billion in 2000. Revenue in 2002 decreased 7% from the prior year. The
decrease was due to a decline in Technology revenue of 16% as well as a 4%
decline in Services revenue. Foreign currency fluctuations had a negligible
impact on revenue in 2002. Revenue in 2001 decreased 13% from 2000. The decrease
was due to a decline in Technology revenue of 27% as well as a 6% decline in
Services revenue. Excluding the negative impact of foreign currency
fluctuations, revenue in 2001 declined 9%. Revenue from international operations
in 2002, 2001 and 2000 was $3.11 billion, $3.42 billion and $4.01 billion,
respectively. Revenue from U.S. operations was $2.50 billion in 2002, $2.60
billion in 2001 and $2.88 billion in 2000.
Total gross profit percent was 30.1% in 2002, 24.6% (27.4% exclusive of the
fourth-quarter charge of $163.8 million) in 2001 and 30.3% (31.2% exclusive of
the fourth-quarter charge of $56.1 million) in 2000. The increase in gross
profit in 2002 from 2001 was principally due to the company's focus on higher
value-added business opportunities and continued tight cost controls, including
the personnel reduction actions taken in the last two years. The decrease in the
2001 gross profit margin from 2000 primarily reflected lower sales of
high-margin enterprise servers and services, which were impacted by the general
falloff in demand industrywide for information technology products and services.
Selling, general and administrative expenses were $.99 billion in 2002
(17.7% of revenue), $1.16 billion in 2001 ($1.07 billion or 17.8% of revenue
excluding the fourth-quarter charge of $83.2 million) and $1.33 billion in 2000
($1.28 billion or 18.5% of revenue excluding the fourth-quarter charge of $51.9
million). The decreases, net of the impacts of the fourth-quarter charges in
2001 and 2000, reflect the benefits of the personnel reduction actions announced
in the fourth quarter of 2001 and 2000 and continued tight cost controls.
20
Research and development ("R&D") expenses in 2002 were $273.3 million
compared to $331.5 million in 2001 ($303.9 million before the fourth-quarter
charge of $27.6 million) and $333.6 million in 2000 ($315.4 million before the
fourth-quarter charge of $18.2 million). The lower level of R&D reflects changes
that the company has made to improve efficiencies, including the consolidation
of R&D activities in systems integration to improve synergies and the use of
lower-cost offshore resources for software support. Although the amount of R&D
is down, the company continues to invest in high-end Cellular MultiProcessing
(CMP) server technology and in key programs within its industry practices.
In 2002, the company reported operating income of $423.2 million, or 7.5%
of revenue, compared to a loss of $4.5 million in 2001 ($270.1 million income or
4.5% of revenue before the fourth-quarter charge of $274.6 million) and income
of $426.8 million in 2000 ($553.0 million or 8.0% of revenue before the fourth-
quarter charge of $126.2 million).
Interest expense was $66.5 million in 2002, $70.0 million in 2001 and $79.8
million in 2000. The decline in 2002 was due to lower average interest rates and
an increase in 2002 over 2001 in capitalized interest expense. The decline in
2001 was principally due to lower average borrowings and lower average interest
rates.
Other income (expense), net, which can vary from year to year, was an
expense of $23.9 million in 2002, income of $28.0 million in 2001 and income of
$32.0 million in 2000. The difference in 2002 from 2001 was principally due to
foreign exchange losses of $1.2 million in 2002 compared to foreign exchange
gains of $21.4 million in 2001 (principally relating to Latin America) and
equity investment losses of $12.4 million in 2002 (principally due to a charge
of $21.8 million relating to the company's share of an early retirement charge
recorded by Nihon Unisys, Ltd.) compared to gains of $10.4 million in 2001.
Pension income for 2002 was $143.5 million compared to $170.0 million in
2001 and $139.0 million in 2000. At the beginning of each year, accounting rules
require that the company establish an expected long-term rate of return on its
pension plan assets. The principal reason for the decline in pension income in
2002 was that, effective January 1, 2002, the company reduced its expected
long-term rate of return on plan assets for its U.S. pension plan to 9.5% from
10.0%. This change caused 2002 pension income in the U.S. to decline by
approximately $24 million from the 2001 amount. The company records pension
income or expense, as well as other employee-related costs such as FICA and
medical insurance costs, in operating income in the following income statement
categories: cost of sales; selling, general and administrative expenses; and
research and development expenses. The amount allocated to each line is based on
where the salaries of the active employees are charged.
Income before income taxes in 2002 was $332.8 million compared to a loss of
$46.5 million in 2001 ($229.8 million income excluding the fourth-quarter charge
of $276.3 million) and income of $379.0 million in 2000 ($506.6 million income
excluding the fourth-quarter charge of $127.6 million).
The provision for income taxes in 2002 was $109.8 million (33% effective
tax rate) compared to $3.4 million ($75.9 million excluding the fourth-quarter
charge of $72.5 million, representing a 33% effective tax rate) in 2001 and
$134.2 million ($172.3 million excluding the fourth-quarter charge of $38.1
million, representing a 34% tax rate) in 2000. It is expected that the effective
tax rate will be 33% for 2003.
At December 31, 2002, the company owned approximately 28% of the voting
common stock of Nihon Unisys, Ltd., a publicly traded Japanese company ("NUL").
The company accounts for this investment by the equity method. NUL is the
exclusive supplier of the company's hardware and software products in Japan. The
company considers its investment in NUL to be of a long-term strategic nature.
For the years ended December 31, 2002, 2001 and 2000, total direct and indirect
sales to NUL were approximately $270 million, $340 million and $530 million,
respectively.
At December 31, 2002, the market value of the company's investment in NUL
was approximately $171 million and the amount recorded on the company's books
was $110.7 million, which is net of $80.4 million relating to the company's
share of NUL's minimum pension liability adjustment. The market value is
determined by both the quoted price per share of NUL's shares on the Tokyo stock
exchange and the current exchange rate of the Japanese yen to the U.S. dollar.
At any point in time, the company's book value may be higher or lower than the
market value. The company would reflect impairment in this investment only if
the loss in value of the investment were deemed to be other than a temporary
decline.
21
SEGMENTS RESULTS
The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration,
outsourcing, infrastructure services, and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting policies
of each business segment are the same as those followed by the company as a
whole. Intersegment sales and transfers are priced as if the sales or transfers
were to third parties. Accordingly, the Technology segment recognizes
intersegment revenue and manufacturing profit on hardware and software shipments
to customers under Services contracts. The Services segment, in turn, recognizes
customer revenue and marketing profit on such shipments of company hardware and
software to customers. The Services segment also includes the sale of hardware
and software products sourced from third parties that are sold to customers
through the company's Services channels. In the company's consolidated
statements of income, the manufacturing costs of products sourced from the
Technology segment and sold to Services customers are reported in cost of
revenue for Services. Also included in the Technology segment's sales and
operating profit are sales of hardware and software sold to the Services segment
for internal use in Services engagements. The amount of such profit included in
operating income of the Technology segment for the years ended December 31,
2002, 2001 and 2000, was $19.2 million, $21.8 million and $23.6 million,
respectively. The profit on these transactions is eliminated in Corporate. The
company evaluates business segment performance on operating income exclusive of
restructuring charges and unusual and nonrecurring items, which are included in
Corporate. All other corporate and centrally incurred costs are allocated to the
business segments based principally on revenue, employees, square footage or
usage.
Information by business segment for 2002, 2001 and 2000 is presented below:
(Millions of dollars) Total Eliminations Services Technology
----------------------------------------------------------------------------------------
2002
--------------
Customer revenue $ 5,607.4 $ 4,285.1 $ 1,322.3
Intersegment $ (331.9) 38.8 293.1
---------------------------------------------------------
Total revenue $ 5,607.4 $ (331.9) $ 4,323.9 $ 1,615.4
---------------------------------------------------------
Gross profit percent 30.1% 22.2% 46.5%
Operating income percent 7.5% 5.9% 11.7%
2001
--------------
Customer revenue $ 6,018.1 $ 4,444.6 $ 1,573.5
Intersegment $ (363.4) 73.8 289.6
---------------------------------------------------------
Total revenue $ 6,018.1 $ (363.4) $ 4,518.4 $ 1,863.1
---------------------------------------------------------
Gross profit percent 27.4% 19.7% 43.0%
Operating income percent 4.5% 2.1% 11.6%
2000
--------------
Customer revenue $ 6,885.0 $ 4,741.6 $ 2,143.4
Intersegment $ (437.2) 46.6 390.6
---------------------------------------------------------
Total revenue $ 6,885.0 $ (437.2) $ 4,788.2 $ 2,534.0
---------------------------------------------------------
Gross profit percent 31.2% 21.6% 44.7%
Operating income percent 8.0% 1.7% 17.7%
----------------------------------------------------------------------------------------
Gross profit percent and operating income percent are as a percent of
total revenue.
In the Services segment, customer revenue was $4.29 billion in 2002, $4.44
billion in 2001 and $4.74 billion in 2000. Revenue in 2002 was down 4% from
2001, as an 11% increase in outsourcing ($1.44 billion in 2002 compared to $1.30
billion in 2001) was more than offset by a 24% decline in infrastructure
services ($.83 billion in 2002 compared to $1.09 billion in 2001) and a 4%
decline in core maintenance revenue ($.56 billion in 2002 compared to $.58
billion in 2001). Systems integration revenue in 2002 was $1.46 billion compared
to $1.47 billion in 2001. Services customer revenue in 2001 was down 6% from
2000, as a 9% increase in outsourcing was more than offset by a 17%
22
decline in infrastructure services, an 8% decline in systems integration and a
7% decline in core maintenance revenue. Within the Services segment, the change
in revenue in 2002 from 2001 reflects market conditions. Market demand in the
Services segment currently varies by revenue classification. Demand for services
that drive short-term cost and process efficiencies (outsourcing) remains
strong, while market demand for project-based work (systems integration and
infrastructure services) remains weak. The growth in outsourcing revenue, which
was particularly driven by growth in business process outsourcing, and the
decline in both systems integration and infrastructure services were reflective
of these market conditions. In addition, the decline in Services customer
revenue in 2002 from 2001 reflected the company's de-emphasis in 2001 of
low-margin commodity hardware sales within infrastructure services contracts.
The core maintenance decline is reflective of the long-term industry trend for
reduction in maintenance, as the underlying equipment reliability has improved
over time. Additionally, the decline in Services customer revenue in 2001 from
2000 reflected the company's de-emphasis in 2001 of low-margin commodity
hardware sales within infrastructure services contracts. Services gross profit
was 22.2% in 2002, 19.7% in 2001 and 21.6% in 2000, and Services operating
income percent was 5.9% in 2002, 2.1% in 2001 and 1.7% in 2000. The company
achieved the margin improvements in 2002 by executing its strategy of selective
pursuit of higher value-added business opportunities and resizing its work force
to meet the market demand. The decrease in 2001 margins compared to 2000 was
largely due to a lower content of higher-margin systems integration and core
maintenance revenue. In addition, margins in 2001 were negatively impacted by
the start-up of several large outsourcing contracts. Typically, in the early
phases of these contracts, gross margins may be lower than in later years when
the work force and facilities have been rationalized for efficient operations,
and an integrated systems solution has been implemented.
In the Technology segment, customer revenue was $1.32 billion in 2002,
$1.57 billion in 2001 and $2.14 billion in 2000. Demand throughout the period in
the Technology segment remained weak industrywide as customers deferred spending
on new computer hardware and software. Revenue in 2002 was down 16% from 2001,
due to a 30% decrease in sales of specialized technology products ($.37 billion
in 2002 compared to $.52 billion in 2001) and a 9% decline in sales of
enterprise-class servers ($.96 billion in 2002 compared to $1.05 billion in
2001). In addition to weak industrywide demand for technology products and
software, the decline in customer revenue in 2002 reflected lower commodity
hardware sales as a result of the company's decision to de-emphasize sales of
these products. The 27% decline in customer revenue in 2001 from 2000 reflected
the impact of the global downturn in information technology spending on sales of
high-end server products, as well as lower commodity hardware sales as a result
of the company's decision to de-emphasize sales of these products. Technology
gross profit percent was 46.5% in 2002, 43.0% in 2001 and 44.7% in 2000, and
Technology operating income percent was 11.7% in 2002, 11.6% in 2001 and 17.7%
in 2000. The margin improvements in 2002 primarily reflected a higher proportion
of high-end, higher-margin products within ClearPath revenue, increased demand
for high-end payment systems products and continued tight cost controls. The
decrease in 2001 margins was due in large part to lower sales of high-end
ClearPath systems as compared to 2000.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
no longer permits the amortization of goodwill and indefinite-lived intangible
assets. Instead, these assets must be reviewed annually for impairment in
accordance with this statement. SFAS No. 142 required the company to perform a
transitional impairment test of its goodwill as of January 1, 2002, as well as
perform impairment tests on an annual basis and whenever events or circumstances
occur indicating that the goodwill may be impaired. During 2002, the company
performed its transitional and annual impairment tests, which indicated that the
company's goodwill was not impaired.
Effective January 1, 2002, the company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." This statement addresses financial accounting
and reporting for legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated
23
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's useful
life. Adoption of SFAS No. 143 had no effect on the company's consolidated
financial position, consolidated results of operations, or liquidity.
Effective January 1, 2002, the company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires an impairment loss to be recognized only if the
carrying amounts of long-lived assets to be held and used are not recoverable
from their expected undiscounted future cash flows. Adoption of SFAS No. 144 had
no effect on the company's consolidated financial position, consolidated results
of operations, or liquidity.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS
No. 4, which required that all gains and losses from extinguishment of debt be
reported as an extraordinary item. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15,
2002. The company will adopt this statement effective January 1, 2003.
Previously recorded losses on the early extinguishment of debt that were
classified as an extraordinary item in prior periods will be reclassified to
other income (expense), net. The adoption of SFAS No. 145 will have no effect on
the company's consolidated financial position, consolidated results of
operations, or liquidity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaces previous accounting guidance provided by Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," and will be effective for the company for
exit or disposal activities initiated after December 31, 2002. The company does
not believe that adoption of this statement will have a material impact on its
consolidated financial position, consolidated results of operations, or
liquidity.
In November 2002, the FASB issued EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
guidance in this issue to all existing arrangements as the cumulative effect of
a change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes." The company does not believe that adoption of this issue
will have a material impact on its consolidated financial position, consolidated
results of operations, or liquidity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. For the company, the initial recognition, measurement
provision and disclosure requirements of FIN No. 45 are applicable to guarantees
issued or modified after December 31, 2002. The company is currently evaluating
what impact, if any, adoption of FIN No. 45 will have on its consolidated
financial position, consolidated results of operations, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. For the company's synthetic lease, as described in Note 12 of the Notes to
Consolidated Financial Statements, FIN No. 46 is effective for the period
beginning July 1, 2003.
24
FINANCIAL CONDITION
Cash and cash equivalents at December 31, 2002, were $301.8 million compared to
$325.9 million at December 31, 2001.
During 2002, cash provided by operations was $324.5 million compared to
$202.4 million in 2001, principally reflecting strong working capital management
and an increase in profitability. Cash expenditures related to both current and
prior-year restructuring actions (which are included in operating activities) in
2002, 2001 and 2000 were $104.4 million, $71.5 million and $26.3 million,
respectively, and are expected to be approximately $66 million in 2003,
principally for international work-force reductions and facility costs.
Personnel reductions in 2002 related to both current and prior-year
restructuring actions were approximately 1,900 and are expected to be
approximately 630 in 2003.
Cash used for investing activities in 2002 was $379.2 million compared to
$325.6 million for 2001. The increase was principally due to net purchases of
investments (derivative financial instruments used to manage the company's
exposure to market risks from changes in foreign currency exchange rates) of
$38.3 million for 2002 compared to net proceeds of $19.7 million in the
prior-year period. In 2002, the investment in marketable software was $139.9
million and capital additions to properties was $196.2 million, which combined
was essentially flat compared to the prior-year period.
Cash provided by financing activities during 2002 was $25.3 million
compared to $71.6 million in 2001. In 2002, the company had a reduction in
short-term borrowings of $1.6 million compared to a reduction of $127.7 million
in 2001. In addition, the prior year included proceeds from issuance of
long-term debt of $536.5 million and payment of long-term debt of $370.8
million, as described below.
At December 31, 2002, total debt was $829.7 million, an increase of $3.6
million from December 31, 2001. See Note 9 of the Notes to Consolidated
Financial Statements for components of the company's long-term debt.
During 2001, the company issued $400 million of 8 1/8% senior notes due
2006 and $150 million of 7 1/4% senior notes due 2005. In 2001, the company also
completed a cash tender offer for $319.2 million principal amount of its 11 3/4%
senior notes due 2004 and redeemed, at a premium, the remaining $15.0 million
outstanding principal amount of such notes. As a result of these actions, the
company recorded an extraordinary after-tax charge of $17.2 million, net of $9.3
million tax benefit, or $.05 per share, for the premium paid, unamortized
debt-related expenses and transaction costs.
In 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. As a
result, the company recorded an extraordinary after-tax charge of $19.8 million,
or $.06 per diluted share, for the call premium and unamortized debt expense.
The company has a $450 million credit agreement that expires in March 2004.
As of December 31, 2002, there were no borrowings under this facility.
Borrowings under the agreement bear interest based on the then-current LIBOR or
prime rates and the company's credit rating. The credit agreement contains
financial and other covenants, including maintenance of certain financial
ratios, a minimum level of net worth and limitations on certain types of
transactions, which could reduce the amount the company is able to borrow.
Events of default under the credit agreement include failure to perform
covenants, material adverse change, change of control and default under other
debt aggregating at least $25 million. If an event of default were to occur
under the credit agreement, the lenders would be entitled to declare all amounts
borrowed under it immediately due and payable. The occurrence of an event of
default under the credit agreement could also cause the acceleration of
obligations under certain other agreements and the termination of the company's
U.S. trade accounts receivable facility, described below.
In addition, the company and certain international subsidiaries have access
to certain uncommitted lines of credit from various banks. Other sources of
short-term funding are operational cash flows, including customer prepayments,
and the company's U.S. trade accounts receivable facility. Using this facility,
the company sells, on an ongoing basis, up to $225 million of its eligible U.S.
trade accounts receivable through a wholly owned subsidiary, Unisys Funding
Corporation I. The facility expires in December 2003. See Note 5 of the Notes to
Consolidated Financial Statements.
At December 31, 2002, the company had short-term borrowings of $77.3
million. Of this amount, $34.1 million was borrowed by the company's Brazilian
subsidiaries in their local currency at a weighted average interest rate at
December 31st of 28.0%, and $43.2 million was borrowed principally by other
international subsidiaries at a weighted average interest rate at December 31st
of 5.5%.
At December 31, 2002, the company has met all covenants and conditions
under its various lending and funding agreements. Since the company believes
that it will continue to meet these covenants and conditions, the company
believes that it has adequate sources and availability of short-term funding to
meet its expected cash requirements.
25
In 2000, the company terminated its interest rate swaps and currency swaps
for euro and Japanese yen, which were established in 1999. The currency swaps
were designated as hedges of the foreign currency exposure on the company's net
investments in foreign subsidiaries and equity investments. As a result of these
terminations, the company received net cash of $18.5 million and recognized a
pretax loss of $2.7 million. The interest expense benefit related to these swaps
amounted to approximately $16 million in 2000.
As described more fully in Notes 4, 9 and 12 of the Notes to Consolidated
Financial Statements, at December 31, 2002, the company had certain cash
obligations, which are due as follows:
(Millions) Total Less than 1 year 1-3 years 4-5 years After 5 years
- ---------------------------------------------------------------------------------------------------------------
Notes payable $ 77.3 $ 77.3
Long-term debt 750.0 $ 150.0 $ 400.0 $ 200.0
Capital lease obligations 7.6 4.4 2.8 .4
Operating leases, net of sublease
income 581.0 135.7 171.9 103.3 170.1
Minimum purchase obligations 53.7 33.7 20.0
Work-force reductions 53.1 53.1
------------------------------------------------------------------------
Total $ 1,522.7 $ 304.2 $ 344.7 $ 503.7 $ 370.1
- ---------------------------------------------------------------------------------------------------------------
As more fully described in Note 12 of the Notes to Consolidated Financial
Statements, the company could have an additional obligation under an operating
lease for one of its facilities.
At December 31, 2002, the company had outstanding standby letters of credit
and surety bonds of approximately $340 million related to performance and
payment guarantees. On the basis of experience with these arrangements, the
company believes that any obligations that may arise will not be material.
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 an
effective registration statement covering $1.5 billion of debt or equity
securities, which enables the company to be prepared for future market
opportunities.
Stockholders' equity decreased $1.3 billion during 2002, principally
reflecting a minimum pension liability adjustment of $1.5 billion and currency
translation of $33.8 million, offset in part by net income of $223.0 million,
$46.9 million for issuance of stock under stock option and other plans, and $3.5
million of tax benefits related to employee stock plans.
MARKET RISK
The company has exposure to interest rate risk from its short-term and long-term
debt. In general, the company's long-term debt is fixed rate and the short-term
debt is variable rate. See Note 9 of the Notes to Consolidated Financial
Statements for components of the company's long-term debt. The company believes
that the market risk from changes in interest rates would not be material to the
fair value of these financial instruments, or the related cash flows, or future
results of operations.
The company is also exposed to foreign currency exchange rate risks. The
company uses derivative financial instruments to reduce its exposure to market
risks from changes in foreign currency exchange rates. The derivative
instruments used are foreign exchange forward contracts and foreign exchange
options. See Note 13 of the Notes to Consolidated Financial Statements for
additional information on the company's derivative financial instruments.
The company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign currency exchange rates applied to these
derivative financial instruments described above. As of December 31, 2002 and
2001, the analysis indicated that such market movements would have reduced the
estimated fair value of these derivative financial instruments by approximately
$45 million and $25 million, respectively.
Based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the company's actual exposures and hedges,
actual gains and losses in the future may differ from the above analysis.
26
CRITICAL ACCOUNTING POLICIES
OUTSOURCING
In recent years, the company's outsourcing business has increased significantly.
Typically the terms of these contracts are between three and 10 years. In a
number of these arrangements, the company hires certain of the customers'
employees and often becomes responsible for the related employee obligations,
such as pension and severance commitments. In addition, system development
activity on outsourcing contracts may require significant upfront investments by
the company. The company funds these investments, and any employee-related
obligations, from customer prepayments and operating cash flow. Also, in the
early phases of these contracts, gross margins may be lower than in later years
when the work force and facilities have been rationalized for efficient
operations, and an integrated systems solution has been implemented.
Revenue under these contracts is recognized when the company performs the
services or processes transactions in accordance with contractual performance
standards. Customer prepayments (even if nonrefundable) are deferred (classified
as a liability) and recognized systematically over future periods as services
are delivered or performed.
Costs on outsourcing contracts are generally charged to expense as
incurred. However, direct costs incurred related to the inception of an
outsourcing contract are deferred and charged to expense over the contract term.
These costs consist principally of initial customer setup and employment
obligations related to employees assumed. In addition, the costs of equipment
and software, some of which is internally developed, is capitalized and
depreciated over the shorter of their useful life or the term of the contract.
At December 31, 2002 and 2001, the net capitalized amount related to
outsourcing contracts was $321.0 million and $217.8 million, respectively,
consisting of $163.0 million and $80.8 million, respectively, reported in
properties and $158.0 million and $137.0 million, respectively, of net
contract-related costs reported in other long-term assets. The contract-related
costs are tested for recoverability quarterly.
SYSTEMS INTEGRATION
For long-term systems integration contracts, the company recognizes revenue and
profit as the contracts progress using the percentage-of-completion method of
accounting, which relies on estimates of total expected contract revenues and
costs. The company follows this method since reasonably dependable estimates of
the revenue and costs applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends on estimates, which are
assessed continually during the term of the contracts, recognized revenues and
profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revision become known. Accordingly, favorable changes in
estimates result in additional revenue and profit recognition, and unfavorable
changes in estimates result in a reduction of recognized revenue and profits.
When estimates indicate that a loss will be incurred on a contract upon
completion, a provision for the expected loss is recorded in the period in which
the loss becomes evident. As work progresses under a loss contract, revenue
continues to be recognized, and a portion of the contract costs incurred in each
period is charged to the contract loss reserve. For other systems integration
projects, the company recognizes revenue when the services have been performed.
TAXES
The company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
At December 31, 2002 and 2001, the company had deferred tax assets in
excess of deferred tax liabilities of $2,178 million and $1,376 million,
respectively. For the reasons cited below, at December 31, 2002 and 2001,
management determined that it is more likely than not that $1,726 million and
$1,034 million, respectively, of such assets will be realized, resulting in a
valuation allowance of $452 million and $342 million, respectively.
27
The company evaluates quarterly the realizability of its deferred tax
assets by assessing its valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are the company's forecast of future taxable income and available
tax planning strategies that could be implemented to realize the net deferred
tax assets. The company has used tax planning strategies to realize or renew net
deferred tax assets in order to avoid the potential loss of future tax benefits.
Approximately $5.2 billion of future taxable income (predominately U.S.)
ultimately is needed to realize the net deferred tax assets at December 31,
2002. Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. Factors that may affect the
company's ability to achieve sufficient forecasted taxable income include, but
are not limited to, the following: increased competition, a decline in sales or
margins, loss of market share, delays in product availability or technological
obsolescence.
In addition, the company operates within multiple taxing jurisdictions and
is subject to audit in these jurisdictions. These audits can involve complex
issues, which may require an extended period of time to resolve. In management's
opinion, adequate provisions for income taxes have been made for all years.
PENSIONS
The company accounts for its defined benefit pension plans in accordance with
SFAS No. 87, "Employers' Accounting for Pensions," which requires that amounts
recognized in financial statements be determined on an actuarial basis. A
substantial portion of the company's pension amounts relate to its defined
benefit plan in the United States. As permitted by SFAS No. 87, the company uses
a calculated value of plan assets (which is further described below). SFAS No.
87 requires that the effects of the performance of the pension plan's assets and
changes in pension liability discount rates on the company's computation of
pension income (expense) be amortized over future periods.
A significant element in determining the company's pension income (expense)
in accordance with SFAS No. 87 is the expected return on plan assets. In 2002,
the company assumed that the expected long-term rate of return on U.S. plan
assets would be 9.5%. For 2003, the company has assumed that the expected
long-term rate of return on U.S. plan assets will be 8.75%. The assumed
long-term rate of return on assets is applied to a calculated value of plan
assets, which recognizes changes in the fair value of plan assets in a
systematic manner over four years. This produces the expected return on plan
assets that is included in pension income (expense). The difference between this
expected return and the actual return on plan assets is deferred. The net
deferral of past asset gains (losses) affects the calculated value of plan
assets and, ultimately, future pension income (expense).
At the end of each year, the company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the company
looks to rates of return on high-quality, fixed-income investments that (i)
receive one of the two highest ratings given by a recognized ratings agency, and
(ii) are currently available and expected to be available during the period to
maturity of the pension benefits. At December 31, 2002, the company determined
this rate to be 6.75% for its U.S. defined benefit pension plan, a decrease of
75 basis points from the rate used at December 31, 2001. The net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, has been deferred in accordance with SFAS
No. 87.
For the year ended December 31, 2002, the company recognized consolidated
pretax pension income of $143.5 million, compared to $170.0 million in 2001. The
principal reason for the decline was the reduction in the expected long-term
rate of return on U.S. pension plan assets from 10.0% in 2001 to 9.5% in 2002.
For 2003, the company expects pension income to be approximately $30
million, approximately $114 million less than 2002. Approximately $90 million of
the decline is in the U.S. and $24 million is in international subsidiaries,
principally the United Kingdom. The most significant assumptions underlying
these estimates, namely the expected long-term rate of return on plan assets and
the discount rate, were chosen by management with consultation from and
concurrence of the company's actuaries.
28
For 2003, the company has assumed that the expected long-term rate of
return on plan assets for its U.S. defined benefit pension plan will be 8.75%,
down from 9.50% in 2002. This will cause U.S. pension income to decline by
approximately $35 million. In addition, the discount rate used for the U.S.
pension plan has declined to 6.75% at December 31, 2002, from 7.50% at December
31, 2001. This will cause U.S. pension income to decline by approximately $22
million. The remainder of the decline in the U.S. of approximately $33 million
is due to lower expected return on assets due to asset declines (about $27
million) and the recent prospective change to a cash balance plan (about $6
million). The decline of $24 million in international plans is principally due
to discount rate declines, lower expected longterm rates of return on plan
assets, and currency translation.
During 2002, the company made cash contributions to its defined benefit
pension plans of $42.2 million and expects to make cash contributions of
approximately $60 million during 2003. In accordance with regulations governing
contributions to U.S. defined benefit pension plans, the company is not required
to fund its U.S. defined benefit plan in 2003.
At December 31st of each year, accounting rules require a company to
recognize a liability on its balance sheet for each pension plan if the fair
value of the assets of that pension plan is less than the present value of the
pension obligation (the accumulated benefit obligation, or "ABO"). This
liability is called a "minimum pension liability." Concurrently, any existing
prepaid pension asset for the pension plan must be removed. These adjustments
are recorded as a charge in "accumulated other comprehensive income (loss)" in
stockholders' equity. If at any future year-end, the fair value of the pension
plan assets exceeds the ABO, the charge to stockholders' equity would be
reversed for such plan. Alternatively, if the fair market value of pension plan
assets experiences further declines or the discount rate was to be reduced,
additional charges to accumulated other comprehensive income (loss) may be
required at a future year-end.
At December 31, 2002, for all of the company's defined benefit pension
plans, as well as the defined benefit pension plan of NUL (an equity
investment), the ABO exceeded the fair value of pension plan assets. As a
result, the company was required to do the following: remove from its assets
$1.4 billion of prepaid pension plan assets; increase its accrued pension
liability by approximately $700 million; reduce its investments at equity by
approximately $80 million relating to the company's share of NUL's minimum
pension liability; and offset these changes by a charge to other comprehensive
loss in stockholders' equity of $2.2 billion, or $1.5 billion net of tax.
This accounting has no effect on the company's net income, liquidity or
cash flows. Financial ratios and net worth covenants in the company's credit
arrangements and debt securities are unaffected by the charge to stockholders'
equity caused by recording a minimum pension liability.
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," "estimates,"
"intends," "plans," "projects" and similar expressions may identify such
forward-looking statements. All forward-looking statements rely on assumptions
and are subject to risks, uncertainties and other factors that could cause the
company's actual results to differ materially from expectations. These other
factors include, but are not limited to, those discussed below. Any
forward-looking statement speaks only as of the date on which that statement is
made. The company assumes no obligation to update any forward-looking statement
to reflect events or circumstances that occur after the date on which the
statement is made.
The company's business is affected by changes in general economic and
business conditions. It also could be affected by acts of war, terrorism or
natural disasters. The company is also facing a very challenging economic
environment. In this environment, many organizations are delaying planned
purchases of information technology products and services. If the level of
demand for the company's products and services declines in the future, the
company's business could be adversely affected.
29
The information services and technology markets in which the company
operates include a large number of companies vying for customers and market
share both domestically and internationally. The company's competitors include
computer hardware manufacturers, software providers, systems integrators,
consulting and other professional services firms, outsourcing providers, and
infrastructure services 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 may also be better
able to compete for skilled professionals. Any of this could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend in
part on the company's ability to anticipate and respond to these market trends
and to design, develop, introduce, deliver or obtain new and innovative products
and services on a timely and cost-effective basis. The company may not be
successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
The company's future results will depend in part on its ability to continue
to accelerate growth in outsourcing and infrastructure services. The company's
outsourcing contracts are multiyear engagements under which the company takes
over management of a client's technology operations, business processes or
networks. The company will need to maintain a strong financial position in order
to grow its outsourcing business. In a number of these arrangements, the company
hires certain of its clients' employees and may become responsible for the
related employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may
require the company to make significant upfront investments. As long-term
relationships, these outsourcing contracts provide a base of recurring revenue.
However, in the early phases of these contracts, gross margins may be lower than
in later years when the work force and facilities have been rationalized for
efficient operations, and an integrated systems solution has been implemented.
Future results will also depend in part on the company's ability to drive
profitable growth in systems integration and consulting. The company's systems
integration and consulting business has been adversely affected by the current
economic slowdown. In this economic environment, customers have been delaying
systems integration projects. The company's ability to grow profitably in this
business will depend in part on an improvement in economic conditions and a
pick-up in demand for systems integration projects. It will also depend on the
success of the actions the company has taken to enhance the skills base and
management team in this business and to refocus the business on integrating
best-of-breed, standards-based solutions to solve client needs. In addition,
profit margins in this business are largely a function of the rates the company
is able to charge for services and the chargeability of its professionals. If
the company is unable to maintain the rates it charges, or appropriate
chargeability, for its professionals, profit margins will suffer. The rates the
company is able to charge for services are affected by a number of factors,
including clients' perception of the company's ability to add value through its
services; introduction of new services or products by the company or its
competitors; pricing policies of competitors; and general economic conditions.
Chargeability is also affected by a number of factors, including the company's
ability to transition employees from completed projects to new engagements; and
its ability to forecast demand for services and thereby maintain an appropriate
head count.
30
Future results will also depend in part on market acceptance of the
company's high-end enterprise servers. In its technology business, the company
is focusing its resources on high-end enterprise servers based on its CMP
architecture. The company's CMP servers are designed to provide mainframe-class
capabilities with compelling price-performance by making use of standards-based
technologies such as Intel chips and Microsoft operating system software. The
company has transitioned both its legacy ClearPath servers and its Intel-based
ES7000s to the CMP platform, creating a common platform for all the company's
high-end server lines. Future results will depend, in part, on customer
acceptance of the new CMP-based ClearPath Plus systems and the company's ability
to maintain its installed base for ClearPath. In addition, future results will
depend, in part, on the company's ability to generate new customers and increase
sales of the Intel-based ES7000 line. The company believes there is significant
growth potential in the developing market for high-end Intel-based servers
running Microsoft operating system software. However, competition in this new
market is likely to intensify in coming years, and the company's ability to
succeed will depend on its ability to compete effectively against enterprise
server competitors with more substantial resources and its ability to achieve
market acceptance of the ES7000 technology by clients, systems integrators, and
independent software vendors.
A number of the company's long-term contracts for infrastructure services,
outsourcing, help desk and similar services do not provide for minimum
transaction volumes. As a result, revenue levels are not guaranteed. In
addition, some of these contracts may permit termination or may impose other
penalties if the company does not meet the performance levels specified in the
contracts.
Some of the company's systems integration contracts are fixed-priced
contracts under which the company assumes the risk for delivery of the
contracted services and products at an agreed-upon fixed price. At times the
company has experienced problems in performing some of these fixed-price
contracts on a profitable basis and has provided periodically for adjustments to
the estimated cost to complete them. Future results will depend on the company's
ability to perform these services contracts profitably.
The company frequently enters into contracts with governmental entities.
Risks and uncertainties associated with these government contracts include the
availability of appropriated funds and contractual provisions that allow
governmental entities to terminate agreements at their discretion before the end
of their terms.
The success of the company's business is dependent on strong, long-term
client relationships and on its reputation for responsiveness and quality. As a
result, if a client is not satisfied with the company's services or products,
its reputation could be damaged and its business adversely affected. In
addition, if the company fails to meet its contractual obligations, it could be
subject to legal liability, which could adversely affect its business, operating
results and financial condition.
The company has commercial relationships with suppliers, channel partners
and other parties that have complementary products, services or skills. Future
results will depend in part on the performance and capabilities of these third
parties, on the ability of external suppliers to deliver components at
reasonable prices and in a timely manner, and on the financial condition of, and
the company's relationship with, distributors and other indirect channel
partners.
Approximately 55% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, import or export licensing requirements, multiple and
possibly overlapping and conflicting tax laws, and weaker intellectual property
protections in some jurisdictions.
The company cannot be certain 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.
31
UNISYS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (Millions, except per share data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenue
Services $ 4,285.1 $ 4,444.6 $ 4,741.6
Technology 1,322.3 1,573.5 2,143.4
--------------------------------------------
5,607.4 6,018.1 6,885.0
--------------------------------------------
Costs and Expenses
Cost of revenue:
Services 3,244.9 3,624.6 3,623.8
Technology 674.0 910.2 1,172.1
--------------------------------------------
3,918.9 4,534.8 4,795.9
Selling, general and administrative expenses 992.0 1,156.3 1,328.7
Research and development expenses 273.3 331.5 333.6
--------------------------------------------
5,184.2 6,022.6 6,458.2
--------------------------------------------
Operating income (loss) 423.2 (4.5) 426.8
Interest expense 66.5 70.0 79.8
Other income (expense), net (23.9) 28.0 32.0
--------------------------------------------
Income (loss) before income taxes 332.8 (46.5) 379.0
Provision for income taxes 109.8 3.4 134.2
--------------------------------------------
Income (loss) before extraordinary items 223.0 (49.9) 244.8
Extraordinary items (17.2) (19.8)
--------------------------------------------
Net income (loss) $ 223.0 $ (67.1) $ 225.0
--------------------------------------------
Earnings (loss) per share - Basic
Before extraordinary items $ .69 $ (.16) $ .78
Extraordinary items (.05) (.06)
--------------------------------------------
Total $ .69 $ (.21) $ .72
--------------------------------------------
Earnings (loss) per share - Diluted
Before extraordinary items $ .69 $ (.16) $ .77
Extraordinary items (.05) (.06)
--------------------------------------------
Total $ .69 $ (.21) $ .71
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
32
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (Millions) 2002 2001
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 301.8 $ 325.9
Accounts and notes receivable, net 955.6 1,093.7
Inventories:
Parts and finished equipment 165.3 201.6
Work in process and materials 127.5 144.2
Deferred income taxes 311.3 342.6
Other current assets 84.5 96.1
---------------------------
Total 1,946.0 2,204.1
---------------------------
Properties 1,542.7 1,460.4
Less - Accumulated depreciation and amortization 932.9 910.8
---------------------------
Properties, net 609.8 549.6
---------------------------
Investments at equity 111.8 212.3
Marketable software, net 311.8 287.9
Prepaid pension cost 1,221.0
Deferred income taxes 1,476.0 747.8
Goodwill 160.6 159.0
Other long-term assets 365.4 387.4
---------------------------
Total $ 4,981.4 $ 5,769.1
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 77.3 $ 78.9
Current maturities of long-term debt 4.4 2.2
Accounts payable 532.5 694.9
Other accrued liabilities 1,341.4 1,302.9
Income taxes payable 228.9 234.6
---------------------------
Total 2,184.5 2,313.5
---------------------------
Long-term debt 748.0 745.0
Accrued pension liability 727.7 10.1
Other long-term liabilities 465.2 587.8
STOCKHOLDERS' EQUITY
Common stock 3.3 3.2
Accumulated deficit (673.5) (896.5)
Other capital 3,763.1 3,712.8
Accumulated other comprehensive loss (2,236.9) (706.8)
---------------------------
Stockholders' equity 856.0 2,112.7
---------------------------
Total $ 4,981.4 $ 5,769.1
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
33
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (Millions) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income (loss) before extraordinary items $ 223.0 $ (49.9) $ 244.8
Add (deduct) items to reconcile income (loss) before extraordinary
items to net cash provided by operating activities:
Extraordinary items (17.2) (19.8)
Depreciation and amortization of properties 154.5 140.2 135.6
Amortization:
Marketable software 121.0 145.5 115.5
Deferred outsourcing contract cost 22.3 15.8 12.7
Goodwill 16.5 21.8
Decrease (increase) in deferred income taxes, net 39.4 (44.4) 85.6
Decrease in receivables, net 156.5 72.3 158.2
Decrease (increase) in inventories 53.0 79.7 (52.5)
(Decrease) in accounts payable and other accrued liabilities (116.5) (144.5) (140.0)
(Decrease) in income taxes payable (15.5) (58.0) (62.8)
(Decrease) increase in other liabilities (73.9) 246.5 (2.5)
(Increase) in other assets (251.2) (238.8) (81.9)
Other 11.9 38.7 5.2
--------------------------------------------
Net cash provided by operating activities 324.5 202.4 419.9
--------------------------------------------
Cash flows from investing activities
Proceeds from investments 3,447.1 3,028.7 790.4
Purchases of investments (3,485.4) (3,009.0) (716.7)
Investment in marketable software (139.9) (136.8) (152.4)
Capital additions of properties (196.2) (199.4) (198.3)
Purchases of businesses (4.8) (9.1) (13.9)
Proceeds from sales of properties 20.0
--------------------------------------------
Net cash used for investing activities (379.2) (325.6) (270.9)
--------------------------------------------
Cash flows from financing activities
Net (reduction in) proceeds from short-term borrowings (1.6) (127.7) 179.6
Proceeds from employee stock plans 29.0 33.6 51.1
Payments of long-term debt (2.1) (370.8) (448.0)
Proceeds from issuance of long-term debt 536.5
--------------------------------------------
Net cash provided by (used for) financing activities 25.3 71.6 (217.3)
--------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 5.3 (.5) (17.7)
--------------------------------------------
Decrease in cash and cash equivalents (24.1) (52.1) (86.0)
Cash and cash equivalents, beginning of year 325.9 378.0 464.0
--------------------------------------------
Cash and cash equivalents, end of year $ 301.8 $ 325.9 $ 378.0
- -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
34
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Other, Accumulated
Common Stock Treasury Stock Principally Other Comprehensive
------------------ Accumulated ------------------- Paid-In Comprehensive Income
(Millions) Shares Par Value Deficit Shares Cost Capital Loss (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 312.5 $ 3.1 $ (1,054.4) (1.9) $ (41.4) $ 3,616.4 $ (570.4)
Issuance of stock under stock
option and other plans 4.8 .1 (.7) 70.0
Net income 225.0 $ 225.0
Other comprehensive income
Translation adjustments (73.3) (73.3)
-------------
Comprehensive income $ 151.7
-------------
Unearned compensation .4
Tax benefit related to stock plans 11.3
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 317.3 3.2 (829.4) (1.9) (42.1) 3,698.1 (643.7)
Issuance of stock under stock
option and other plans 5.2 (.2) 52.2
Net loss (67.1) $ (67.1)
Other comprehensive loss (67.5)
Translation adjustments 4.4
Cash flow hedges -------------
(63.1) (63.1)
-------------
Comprehensive loss $ (130.2)
-------------
Unearned compensation .2
Tax benefit related to stock plans 4.6
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 322.5 3.2 (896.5) (1.9) (42.3) 3,755.1 (706.8)
Issuance of stock under stock
option and other plans 5.6 .1 (.1) 46.9
Net income 223.0 $ 223.0
Other comprehensive loss
Translation adjustments (33.8)
Cash flow hedges (5.9)
Minimum pension liability (1,490.4)
-------------
(1,530.1) (1,530.1)
-------------
Comprehensive loss $ (1,307.1)
-------------
Tax benefit related to stock plans 3.5
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 328.1 $ 3.3 $ (673.5) (1.9) $ (42.4) $ 3,805.5 $ (2,236.9)
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
35
UNISYS CORPORATION
Notes to Consolidated Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of all majority-owned subsidiaries. Investments in companies
representing ownership interests of 20% to 50% are accounted for by the equity
method.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and
assumptions.
Cash equivalents. All short-term investments purchased with a maturity of three
months or less are classified as cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined principally on the first-in, first-out method.
Properties. Properties are carried at cost and are depreciated over the
estimated lives of such assets using the straight-line method. Outsourcing
equipment is depreciated over the shorter of the asset life or the term of the
contract. For other classifications of properties, the principal rates used are
summarized below:
Rate per Year (%)
-----------------
Buildings 2-5
Machinery and office equipment 5-25
Rental equipment 25
Internal-use software 12-33
Advertising costs. The company expenses all advertising costs as they are
incurred. The amount charged to expense during 2002, 2001 and 2000 was $29.3
million, $35.6 million and $38.2 million, respectively.
Revenue recognition. The company recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed or determinable
and collectibility is probable.
Revenue from hardware sales is recognized upon shipment and the passage of
title. Outside of the United States, the company recognizes revenue even if it
retains a form of title to products delivered to customers, provided the sole
purpose is to enable the company to recover the products in the event of
customer payment default and the arrangement does not prohibit the customer's
use of the product in the ordinary course of business.
Revenue from software licenses is recognized at the inception of the
initial license term and upon execution of an extension to the license term.
Revenue for postcontract software support arrangements, which are marketed
separately, is recorded on a straight-line basis over the support period for
multi-year contracts and at inception for contracts of one year or less. The
company also enters into multiple-element arrangements, which may include any
combination of hardware, software or services. In these transactions, the
company allocates the total revenue to be earned under the arrangement among the
various elements based on their relative fair value. For transactions that
include software, the allocation is based on vendor-specific objective evidence
of fair value. The company recognizes revenue on multiple-element arrangements
only if: (i) any undelivered products or services are not essential to the
functionality of the delivered products or services, (ii) the company has an
enforceable claim to receive the amount due in the event it does not deliver the
undelivered products or services, (iii) there is evidence of the fair value for
each undelivered product or service, and (iv) the revenue recognition criteria
otherwise applicable have been met for the delivered elements.
Revenue from equipment and software maintenance is recognized on a
straight-line basis as earned over the lives of the respective contracts.
Revenue for operating leases is recognized on a monthly basis over the term
of the lease and for sales-type leases at the inception of the lease term.
Revenue and profit under systems integration contracts is recognized either
on the percentage-of-completion method of accounting using the cost-to-cost
method, or when services have been performed, depending on the nature of the
project. For contracts accounted for on the percentage-of-completion basis,
revenue and profit recognized in any given accounting period are based on
estimates of total projected contract costs; the estimates are continually
re-evaluated and revised, when necessary, throughout the life of a contract. Any
adjustments to revenue and profit due to changes in estimates are accounted for
in the period of the change in estimate. When estimates indicate that a loss
will be incurred on a contract upon completion, a provision for the expected
loss is recorded in the period in which the loss becomes evident.
Revenue from time and materials service contracts and outsourcing contracts
is recognized as the services are provided.
Income taxes. Income taxes are provided on taxable income at the statutory rates
applicable to such income. Deferred taxes have not been provided on the
cumulative undistributed earnings of foreign subsidiaries because such amounts
are expected to be reinvested indefinitely.
36
Marketable software. The cost of development of computer software to be sold or
leased, incurred subsequent to establishment of technological feasibility, is
capitalized and amortized to cost of sales over the estimated revenue-producing
lives of the products, but not in excess of three years following product
release.
Outsourcing contract costs. Costs on outsourcing contracts are generally charged
to expense as incurred. However, certain direct costs incurred related to the
inception of an outsourcing contract are deferred and charged to expense over
the contract term. These costs consist principally of initial customer setup and
employment obligations related to employees assumed. At December 31, 2002 and
2001, $158.0 million and $137.0 million, respectively, of these costs were
reported in other longterm assets. These costs are tested for recoverability
quarterly.
Translation of foreign currency. The local currency is the functional currency
for most of the company's international subsidiaries, and as such, assets and
liabilities are translated into U.S. dollars at year-end exchange rates. Income
and expense items are translated at average exchange rates during the year.
Translation adjustments resulting from changes in exchange rates are reported in
other comprehensive income. Exchange gains and losses on intercompany balances
of a long-term investment nature are reported in other comprehensive income. All
other exchange gains and losses on intercompany balances are reported in other
income (expense), net.
For those international subsidiaries operating in hyper-inflationary
economies, the U.S. dollar is the functional currency, and as such, nonmonetary
assets and liabilities are translated at historical exchange rates and monetary
assets and liabilities are translated at current exchange rates. Exchange gains
and losses arising from translation are included in other income (expense), net.
Stock-based compensation plans. The company has stock-based employee
compensation plans, which are described more fully in Note 16. The company
applies the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for those plans. For stock options, no compensation expense is
reflected in net income as all stock options granted had an exercise price equal
to or greater than the market value of the underlying common stock on the date
of grant. In addition, no compensation expense is recognized for common stock
purchases under the Employees Stock Purchase Plan. Pro forma information
regarding net income and earnings per share is required by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the company had accounted for its
stock plans under the fair value method of SFAS No. 123. For purposes of the pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The following table illustrates the
effect on net income and earnings per share if the company had applied the fair
value recognition provisions of SFAS No. 123.
Years ended December 31
(Millions, except per share data) 2002 2001 2000
- ----------------------------------------------------------------------
Net income (loss) as reported $ 223.0 $ (67.1) $ 225.0
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (49.0) (51.8) (42.5)
---------------------------------
Pro forma net income (loss) $ 174.0 $ (118.9) $ 182.5
=================================
Earnings (loss) per share
Basic - as reported $ .69 $ (.21) $ .72
Basic - pro forma $ .54 $ (.37) $ .58
Diluted - as reported $ .69 $ (.21) $ .71
Diluted - pro forma $ .54 $ (.37) $ .58
=================================
Retirement benefits. The company accounts for its defined benefit pension plans
in accordance with SFAS No. 87, "Employers' Accounting for Pensions," which
requires that amounts recognized in financial statements be determined on an
actuarial basis. A significant element in determining the company's pension
income (expense) is the expected return on plan assets. This expected return is
an assumption as to the rate of return on plan assets reflecting the average
rate of earnings expected on the funds invested or to be invested to provide for
the benefits included in the projected pension benefit obligation. The company
applies this assumed long-term rate of return to a calculated value of plan
assets, which recognizes changes in the fair value of plan assets in a
systematic manner over four years. This produces the expected return on plan
assets that is included in pension income (expense). The difference between this
expected return and the actual return on plan assets is deferred. The net
deferral of past asset gains (losses) affects the calculated value of plan
assets and, ultimately, future pension income (expense).
At December 31st of each year, the company determines the fair value of its
pension plan assets as well as the discount rate to be used to calculate the
present value of plan liabilities. The discount rate is an estimate of the
interest rate at which the pension benefits could be effectively settled. In
estimating the discount rate, the company looks to rates of return on
high-quality, fixed income investments currently available and expected to be
available during the period to maturity of the pension benefits. The company
specifically uses a portfolio of fixed-income securities, which receive at least
the second highest rating given by a recognized rating agency.
Reclassifications. Certain prior-year amounts have been reclassified to conform
with the 2002 presentation.
37
2 EARNINGS PER SHARE
The following table shows how earnings per share were computed for the three
years ended December 31, 2002.
Year ended December 31
(Millions, except per share data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION
Income (loss) before extraordinary items $ 223.0 $ (49.9) $ 244.8
Extraordinary items (17.2) (19.8)
------------------------------------------
Net income (loss) $ 223.0 $ (67.1) $ 225.0
------------------------------------------
Weighted average shares (thousands) 323,526 318,207 313,115
------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ .69 $ (.16) $ .78
Extraordinary items (.05) (.06)
------------------------------------------
Total $ .69 $ (.21) $ .72
------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION
Income (loss) before extraordinary items $ 223.0 $ (49.9) $ 244.8
Extraordinary items (17.2) (19.8)
------------------------------------------
Net income (loss) $ 223.0 $ (67.1) $ 225.0
------------------------------------------
Weighted average shares (thousands) 323,526 318,207 313,115
Plus incremental shares from assumed conversions of
employee stock plans 1,218 3,536
------------------------------------------
Adjusted weighted average shares 324,744 318,207 316,651
------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary items $ .69 $ (.16) $ .77
Extraordinary items (.05) (.06)
------------------------------------------
Total $ .69 $ (.21) $ .71
------------------------------------------
The following shares were not included in the computation of diluted earnings
per share because the option prices were above the average market price of the
company's common stock, or their inclusion would have been antidilutive (in
thousands): 2002, 35,415; 2001, 28,653; 2000, 16,073.
3 ACCOUNTING CHANGES
Effective January 1, 2002, the company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 no longer permits the amortization of goodwill
and indefinite-lived intangible assets. Instead, these assets must be reviewed
annually for impairment in accordance with this statement. SFAS No. 142 required
the company to perform a transitional impairment test of its goodwill as of
January 1, 2002, as well as perform impairment tests on an annual basis and
whenever events or circumstances occur indicating that the goodwill may be
impaired. During 2002, the company performed its transitional and annual
impairment tests, which indicated that the company's goodwill was not impaired.
The changes in the carrying amount of goodwill by segment for the year ended
December 31, 2002, were as follows:
(Millions) Total Services Technology
- -----------------------------------------------------------------
Balance at
December 31, 2001 $ 159.0 $ 41.9 $ 117.1
Acquisition 3.0 3.0
Foreign currency
translation adjustments (1.4) (2.4) 1.0
------------------------------------
Balance at
December 31, 2002 $ 160.6 $ 42.5 $ 118.1
- -----------------------------------------------------------------
38
The company's net income and earnings per share adjusted to exclude
goodwill amortization was as follows:
Year ended December 31,
(Millions, except per share data) 2002 2001 2000
- -------------------------------------------------------------------------
Reported income (loss)
before extraordinary items $ 223.0 $ (49.9) $ 244.8
Add back goodwill amortization,
net of tax 14.1 20.1
------------------------------------
Adjusted income (loss)
before extraordinary items $ 223.0 $ (35.8) $ 264.9
------------------------------------
Reported net income (loss) $ 223.0 $ (67.1) $ 225.0
Add back goodwill amortization,
net of tax 14.1 20.1
------------------------------------
Adjusted net income (loss) $ 223.0 $ (53.0) $ 245.1
------------------------------------
Earnings (loss) per share
before extraordinary items
Basic
As reported $ .69 $ (.16) $ .78
Goodwill amortization .04 .06
------------------------------------
As adjusted $ .69 $ (.12) $ .84
------------------------------------
Diluted
As reported $ .69 $ (.16) $ .77
Goodwill amortization .04 .06
------------------------------------
As adjusted $ .69 $ (.12) $ .83
------------------------------------
Earnings (loss) per share
Basic
As reported $ .69 $ (.21) $ .72
Goodwill amortization .04 .06
------------------------------------
As adjusted $ .69 $ (.17) $ .78
------------------------------------
Diluted
As reported $ .69 $ (.21) $ .71
Goodwill amortization .04 .06
------------------------------------
As adjusted $ .69 $ (.17) $ .77
------------------------------------
Effective January 1, 2002, the company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." This statement addresses financial accounting
and reporting for legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
over the asset's useful life. Adoption of SFAS No. 143 had no effect on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
Effective January 1, 2002, the company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires an impairment loss to be recognized only if the
carrying amounts of long-lived assets to be held and used are not recoverable
from their expected undiscounted future cash flows. Adoption of SFAS No. 144 had
no effect on the company's consolidated financial position, consolidated results
of operations, or liquidity.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4,
which required that all gains and losses from extinguishment of debt be reported
as an extraordinary item. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15,
2002. The company will adopt this statement effective January 1, 2003.
Previously recorded losses on the early extinguishment of debts that were
classified as an extraordinary item in prior periods will be reclassified to
other income (expense), net. Adoption of SFAS No. 145 will have no effect on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaces previous accounting guidance provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and will be effective for the company for exit or disposal activities initiated
after December 31, 2002. The company does not believe that adoption of this
statement will have a material impact on its consolidated financial position,
consolidated results of operations, or liquidity.
In November 2002, the FASB issued EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
guidance in this issue to all existing arrangements as the cumulative effect of
a change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes." The company does not believe that adoption of this issue
will have a material impact on its consolidated financial position, consolidated
results of operations, or liquidity.
39
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. For the company, the initial recognition, measurement
provision and disclosure requirements of FIN No. 45 are applicable to guarantees
issued or modified after December 31, 2002. The company is currently evaluating
what impact, if any, adoption of FIN No. 45 will have on its consolidated
financial position, consolidated results of operations, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. For the company's synthetic lease, as described in Note 12, FIN No. 46 is
effective for the period beginning July 1, 2003.
4 FOURTH-QUARTER CHARGES
2001 charge. In response to the weak economic environment in 2001, the company
took actions to reduce its cost structure. In the fourth quarter of 2001, the
company recorded a pretax charge of $276.3 million, or $.64 per share, primarily
for a work-force reduction of approximately 3,750 people (1,700 in the United
States and 2,050 outside the United States). Of the total, 1,910 people left the
company in 2001, which included 764 people who accepted an early retirement
program in the United States. For those employees who accepted the early
retirement program, cash requirements were provided through the company's
pension plan. Cash expenditures in 2001 related to the involuntary reductions
were $23.3 million. These activities did not significantly affect the company's
operations while they were ongoing. A further breakdown of the individual
components of these costs follows:
Work-Force
Reductions/(1)/ Idle
----------------------- Lease
($ in Millions) Headcount Total U.S. Int'l Costs Other/(2)/
- ------------------------------------------------------------------------------------------------------
Work-force
reductions/(1)/
Early retirement 764 $ 58.8 $ 58.8
Involuntary
reductions 3,001 145.9 18.8 $ 127.1
-------------------------------------------------
Subtotal 3,765 204.7 77.6 127.1
Other 71.6 $ 29.5 $ 42.1
---------------------------------------------------------------------------
Total charge 3,765 276.3 77.6 127.1 29.5 42.1
Utilized (1,910) (127.2) (62.5) (22.6) (42.1)
---------------------------------------------------------------------------
Balance at
Dec. 31, 2001 1,855 149.1 15.1 104.5 29.5 $ -
Additional
provisions 996 31.9 8.7 21.8 1.4
Utilized (1,890) (98.0) (13.4) (75.5) (9.1)
Reversal of
excess reserves (330) (20.2) (4.6) (12.4) (3.2)
Other/(3)/ 4.8 1.6 5.3 (2.1)
---------------------------------------------------------------------------
Balance at
Dec. 31, 2002 631 $ 67.6 $ 7.4 $ 43.7 $ 16.5 $ -
---------------------------------------------------------------------------
Expected future
utilization:
2003 631 $ 59.5 $ 7.4 $ 43.7 $ 8.4
2004 and thereafter 8.1 8.1
- ------------------------------------------------------------------------------------------------------
/(1)/ Includes severance, notice pay, medical and other benefits.
/(2)/ Includes product and program discontinuances, principally representing a
provision for asset write-offs.
/(3)/ Changes in estimates and translation adjustments.
Most of the 2001 fourth-quarter charges were related to work-force
reductions ($204.7 million), principally severance costs. Other employee-related
costs are not significant. Approximately $58.8 million of this total was funded
from the company's U.S. pension plan. The remainder of the cost related to
work-force reductions as well as idle lease costs, discussed below, is being
funded from the company's operating cash flow. The charge related to idle lease
costs was $29.5 million and relates to contractual obligations (reduced by
estimated sublease income) existing under long-term leases of vacated
facilities. Estimates of the amounts and timing of sublease income were based on
discussions with real estate brokers that considered the marketability of the
individual property involved. The charge for product and program discontinuances
was $42.1 million and principally represented capitalized marketable software
and inventory related to products or programs that were discontinued at December
31, 2001. These actions have lowered the company's cost base (principally
employee-related costs), thereby making the company better able to compete in
the marketplace.
40
Cash expenditures related to the 2001 restructuring charges were approximately
$95.4 million in the year ended December 31, 2002, compared to $23.3 million in
2001. Cash expenditures are expected to be approximately $59.5 million for 2003
and $8.1 million in total for all subsequent years for idle lease costs.
During 2002, the company reduced the accrued work-force portion of the
reserve by $17.0 million. This reduction related to 330 employees who were
designated for involuntary termination but were retained as a result of job
positions that became available due to voluntary terminations or acceptance of
alternative positions within the company. In addition, given the continuing weak
economic environment, the company identified new restructuring actions and
recorded an additional provision of $30.5 million, for a work-force reduction of
996 people.
The 2001 fourth-quarter charge was recorded in the following statement of
income classifications: cost of revenue, $163.8 million; selling, general and
administrative expenses, $83.2 million; research and development expenses, $27.6
million; and other income (expense), net, $1.7 million.
2000 charge. As a result of a strategic business review of its operations in
2000, the company took actions to focus its resources on value-added business
opportunities, de-emphasize or eliminate low-return businesses and lower its
cost base. In the fourth quarter of 2000, the company recorded a pretax charge
of $127.6 million, or $.29 per diluted share, primarily for a work-force
reduction of 2,000 people (1,400 in the United States and 600 outside the United
States). Of the total, approximately 500 people left the company in 2001 and
1,300 in 2000. Of the total work-force reduction, 742 people accepted an early
retirement program in the United States. For those employees who accepted the
early retirement program, cash requirements were provided through the company's
pension plan. Cash expenditures related to the 2000 restructuring charges were
$5.5 million in 2002, $39.3 million in 2001 and $8.7 million in 2000. Cash
expenditures for 2003 are expected to be approximately $2.0 million. A further
breakdown of the individual components of these costs follows:
Work-Force Reductions/(1)/
---------------------------
(Millions) Total U. S. Int'l Other/(2)/
- ---------------------------------------------------------------------------
Work-force
reductions /(1)/
Early retirement $ 57.8 $ 57.8
Involuntary
reductions 60.9 13.3 $ 47.6
----------------------------------------
Subtotal 118.7 71.1 47.6
Other/(2)/ 8.9 $ 8.9
-----------------------------------------------------
Total charge 127.6 71.1 47.6 8.9
Utilized (71.9) (58.7) (7.8) (5.4)
-----------------------------------------------------
Balance at
Dec. 31, 2000 55.7 12.4 39.8 3.5
Utilized (40.0) (8.8) (30.5) (.7)
Other/(3)/ (7.1) (2.3) (4.0) (.8)
-----------------------------------------------------
Balance at
Dec. 31, 2001 8.6 1.3 5.3 2.0
Utilized (6.6) (1.3) (3.3) (2.0)
-----------------------------------------------------
Balance at
Dec. 31, 2002 $ 2.0 $ - $ 2.0 $ -
-----------------------------------------------------
Expected future
utilization:
2003 $ 2.0 $ 2.0
- ---------------------------------------------------------------------------
/(1)/ Includes severance, notice pay, medical and other benefits.
/(2)/ Includes facilities costs, and product and program discontinuances.
/(3)/ Includes changes in estimates, reversals of excess reserves, translation
adjustments and additional provisions.
In 2001, there was a reduction in accrued work-force provisions principally
for the reversal of unneeded reserves due to approximately 200 voluntary
terminations.
The 2000 fourth-quarter charge was recorded in the following statement of
income classifications: cost of revenue, $56.1 million; selling, general and
administrative expenses, $51.9 million; research and development expenses, $18.2
million; and other income (expense), net, $1.4 million.
Prior-year charges. As a result of prior-year actions related to a strategic
realignment of the company's business in 1997 and 1995, cash expenditures in
2002, 2001 and 2000 were $3.5 million, $8.9 million and $17.6 million,
respectively. At December 31, 2002, an $8.8 million accrued liability remains
principally for idle lease costs. Cash expenditures for 2003 are expected to be
approximately $4.3 million.
41
5 ACCOUNTS RECEIVABLE
In December 2000, the company entered into an agreement to sell, through Unisys
Funding Corporation I, a wholly owned subsidiary, interests in eligible U.S.
trade accounts receivable for up to $275 million. The agreement is renewable
annually, at the purchasers' option, for up to three years. Upon renewal of the
facility in December 2001, the amount was reduced to $225 million. Unisys
Funding Corporation I has been structured to isolate its assets from creditors
of Unisys. In 2000, the company received proceeds of $232 million from the
initial sale, and in 2002 and 2001, the company received an aggregate of $2.3
billion, each year, from ongoing sales of accounts receivable interests under
the program. At December 31, 2002 and 2001, the company retained subordinated
interests of $120 million and $135 million, respectively, in the associated
receivables; these receivables have been included in accounts and notes
receivable, net in the accompanying consolidated balance sheet. As collections
reduce previously sold interests, interests in new eligible receivables can be
sold, subject to meeting certain conditions. At December 31, 2002 and 2001,
receivables of $199 million and $176 million, respectively, were sold and
therefore removed from the accompanying consolidated balance sheet.
The selling price of the receivables interests reflects a discount based on
the A-1 rated commercial paper borrowing rates of the purchasers (1.5% at
December 31, 2002, and 2.0% at December 31, 2001). The company remains
responsible for servicing the underlying accounts receivable, for which it will
receive a fee of 0.5% of the outstanding balance, which it believes represents
adequate compensation. The company estimates the fair value of its retained
interests by considering two key assumptions: the payment rate, which is derived
from the average life of the accounts receivable, which is less than 60 days,
and the rate of expected credit losses. Based on the company's favorable
collection experience and very short-term nature of the receivables, both
assumptions are considered to be highly predictable. Therefore, the company's
estimated fair value of its retained interests in the pool of eligible
receivables is approximately equal to book value, less the associated allowance
for doubtful accounts. The discount on the sales of these accounts receivable
during the years ended December 31, 2002 and 2001, was $4.2 million and $12.2
million, respectively. The amount of discount for the year ended December 31,
2000, was not material. These discounts are recorded in other income (expense),
net in the accompanying consolidated statement of income.
Revenue recognized in excess of billings on services contracts, or unbilled
accounts receivable, was $133.3 million and $146.7 million at December 31, 2002
and 2001, respectively. Such amounts are included in accounts and notes
receivables, net. At December 31, 2002 and 2001, the company had long-term
accounts and notes receivable, net of $144.0 million and $186.3 million,
respectively. Such amounts are included in other long-term assets in the
accompanying consolidated balance sheet.
6 INCOME TAXES
Year ended December 31 (Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Income (loss) before income taxes
United States $ 125.7 $ 95.9 $ 389.0
Foreign 207.1 (142.4) (10.0)
------------------------------------
Total income (loss) before
income taxes $ 332.8 $ (46.5) $ 379.0
- ---------------------------------------------------------------------------
Provision for income taxes
Current
United States $ (6.5) $ 7.7 $ 10.1
Foreign 62.4 24.0 63.6
State and local 7.7 3.5 4.9
------------------------------------
Total 63.6 35.2 78.6
------------------------------------
Deferred
United States 19.2 (16.2) 72.8
Foreign 27.0 (15.6) (17.2)
------------------------------------
Total 46.2 (31.8) 55.6
------------------------------------
Total provision for income taxes $ 109.8 $ 3.4 $ 134.2
- ---------------------------------------------------------------------------
Following is a reconciliation of the provision for income taxes at the
United States statutory tax rate to the provision for income taxes as reported:
Year ended December 31 (Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
United States statutory income
tax (benefit) $ 116.5 $ (16.3) $ 132.7
Difference in estimated income
taxes on foreign earnings, losses
and remittances (4.1) 44.6 36.2
State taxes 5.0 2.3 3.2
Tax refund claims, audit issues
and other matters (16.0) (26.1) (39.6)
Other 8.4 (1.1) 1.7
------------------------------------
Provision for income taxes $ 109.8 $ 3.4 $ 134.2
- ---------------------------------------------------------------------------
42
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and liabilities at December 31,
2002 and 2001, were as follows:
December 31 (Millions) 2002 2001
- --------------------------------------------------------------
Deferred tax assets
Capitalized research and
development $ 566.2 $ 561.1
Tax loss carryforwards 384.4 325.2
Foreign tax credit carryforwards 98.3 34.1
Other tax credit carryforwards 238.1 239.4
Capitalized intellectual
property rights 302.4 303.4
Pensions 259.8
Postretirement benefits 70.5 71.8
Depreciation 52.6 48.4
Employee benefits 44.4 77.5
Restructuring 29.7 92.8
Other 277.1 278.0
-----------------------
2,323.5 2,031.7
Valuation allowance (451.5) (342.2)
-----------------------
Total deferred tax assets $ 1,872.0 $ 1,689.5
-----------------------
Deferred tax liabilities
Pensions $ - $ 501.2
Sales-type leases 78.5 102.9
Other 67.5 51.2
-----------------------
Total deferred tax liabilities $ 146.0 $ 655.3
-----------------------
Net deferred tax assets $ 1,726.0 $ 1,034.2
- --------------------------------------------------------------
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The valuation allowance at December 31, 2002,
applies to tax loss carryforwards and temporary differences relating to state
and local and certain foreign taxing jurisdictions that, in management's
opinion, are more likely than not to expire unused. During 2002, the net
increase in the valuation allowance of $109.3 million was principally related to
an increase in state and local deferred tax assets resulting from the
recognition of minimum pension liabilities.
Cumulative undistributed earnings of foreign subsidiaries, for which no
U.S. income or foreign withholding taxes have been recorded, approximated $830
million at December 31, 2002. Such earnings are expected to be reinvested
indefinitely. Determination of the amount of unrecognized deferred tax liability
with respect to such earnings is not practicable. The additional taxes payable
on the earnings of foreign subsidiaries, if remitted, would be substantially
offset by U.S. tax credits for foreign taxes already paid. While there are no
specific plans to distribute the undistributed earnings in the immediate future,
where economically appropriate to do so, such earnings may be remitted.
Cash paid during 2002, 2001 and 2000 for income taxes was $72.3 million,
$97.0 million and $110.0 million, respectively.
At December 31, 2002, the company has U.S. federal and state and local tax
loss carryforwards and foreign tax loss carryforwards for certain foreign
subsidiaries, the tax effect of which is approximately $384.4 million. These
carryforwards will expire as follows (in millions): 2003, $14.6; 2004, $26.7;
2005, $20.9; 2006, $34.3; 2007, $25.5; and $262.4 thereafter. The company also
has available tax credit carryforwards of approximately $336.4 million, which
will expire as follows (in millions): 2003, $8.4; 2004, $7.5; 2005, $26.1; 2006,
$-; 2007, $78.2; and $216.2 thereafter.
The company has substantial amounts of net deferred tax assets. Failure to
achieve forecasted taxable income might affect the ultimate realization of such
assets. Factors that may affect the company's ability to achieve sufficient
forecasted taxable income include, but are not limited to, the following:
increased competition, a decline in sales or margins, loss of market share,
delays in product availability or technological obsolescence.
7 PROPERTIES
Properties comprise the following:
December 31 (Millions) 2002 2001
- --------------------------------------------------------------
Land $ 5.3 $ 5.2
Buildings 140.5 143.7
Machinery and office equipment 897.2 897.4
Internal-use software 167.0 139.9
Rental and outsourcing
equipment 332.7 274.2
-----------------------
Total properties $ 1,542.7 $ 1,460.4
- --------------------------------------------------------------
8 INVESTMENTS AT EQUITY AND MINORITY INTERESTS
Substantially all of the company's investments at equity consist of Nihon
Unisys, Ltd., a publicly traded Japanese company ("NUL"). NUL is the exclusive
supplier of the company's hardware and software products in Japan. The company
considers its investment in NUL to be of a long-term strategic nature. For the
years ended December 31, 2002, 2001 and 2000, total direct and indirect sales to
NUL were approximately $270 million, $340 million and $530 million,
respectively. At December 31, 2002, the company owned approximately 28% of NUL's
common stock that had a market value of approximately $171 million. The
company's share of NUL's earnings or
43
losses are recorded semiannually on a quarter-lag basis in other income
(expense), net in the company's statements of income. During the years ended
December 31, 2002, 2001 and 2000, the company recorded equity income or (loss)
related to NUL of $(11.8) million, $10.4 million and $18.2 million,
respectively. The year ended December 31, 2002, included $21.8 million related
to the company's share of an early retirement charge recorded by NUL. The
company has approximately $176 million of retained earnings that represents
undistributed earnings of NUL.
Summarized financial information for NUL as of and for its fiscal years
ended March 31 is as follows:
(Millions) (Unaudited) 2002 2001 2000
- ---------------------------------------------------------------------------
Year ended March 31
Revenue $ 2,451.8 $ 2,819.2 $ 2,835.2
Gross profit 646.0 815.5 903.2
Pretax income (loss) (101.2) 85.7 68.3
Net income (loss) (62.4) 44.0 32.8
At March 31
Current assets 1,257.6 1,304.9 1,564.1
Noncurrent assets 892.3 709.6 826.9
Current liabilities 936.3 913.7 1,015.6
Noncurrent liabilities 851.2 357.0 504.6
Minority interests 10.7 11.0 11.4
- ---------------------------------------------------------------------------
The company owns 51% of Intelligent Processing Solutions Limited ("iPSL"),
a UK-based company, which provides high-volume payment processing. iPSL is fully
consolidated in the company's financial statements. The minority owners'
interests are reported in other long-term liabilities ($52.8 million and $48.6
million at December 31, 2002 and 2001, respectively) and in other income
(expense), net in the company's financial statements.
9 DEBT
Long-term debt comprises the following:
December 31 (Millions) 2002 2001
- --------------------------------------------------------------
8 1/8% senior notes due 2006 $ 400.0 $ 400.0
7 7/8% senior notes due 2008 200.0 200.0
7 1/4% senior notes due 2005 150.0 150.0
Other, net of unamortized
discounts 2.4 (2.8)
-----------------------
Total 752.4 747.2
Less - current maturities 4.4 2.2
-----------------------
Total long-term debt $ 748.0 $ 745.0
- --------------------------------------------------------------
Total long-term debt maturities in 2003, 2004, 2005, 2006 and 2007 are
$4.4, $2.6, $150.2, $400.3 and $.1 million, respectively.
Cash paid during 2002, 2001 and 2000 for interest was $73.6, $92.9 and
$90.5 million, respectively. Capitalized interest expense during 2002, 2001 and
2000 was $13.9, $11.8 and $11.4 million, respectively.
At December 31, 2002, the company had short-term borrowings of $77.3
million. Of this amount $34.1 million was borrowed by the company's Brazilian
subsidiaries in their local currency at a weighted average interest rate at
December 31st of 28%, and $43.2 million was borrowed principally by other
international subsidiaries at a weighted average interest rate at December 31st
of 5.5%.
During 2001, the company issued $400 million of 8 1/8% senior notes due
2006 and $150 million of 7 1/4% senior notes due 2005. In 2001, the company also
completed a cash tender offer for $319.2 million principal amount of its 11 3/4%
senior notes due 2004 and redeemed, at a premium, the remaining $15.0 million
outstanding principal amount of such notes. As a result of these actions, the
company recorded an extraordinary after-tax charge of $17.2 million, net of $9.3
million tax benefit, or $.05 per share, for the premium paid, unamortized
debt-related expenses and transaction costs.
In 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. As a
result, the company recorded an extraordinary charge of $19.8 million, net of
$10.7 million of income tax benefits, or $.06 per diluted share, for the call
premium and unamortized debt expense.
The company has a $450 million credit agreement that expires in March 2004.
As of December 31, 2002, there were no borrowings under this facility.
Borrowings under the agreement bear interest based on the then-current LIBOR or
prime rates and the company's credit rating. The credit agreement contains
financial and other covenants, including maintenance of certain financial
ratios, a minimum level of net worth and limitations on certain types of
transactions, which could reduce the amount the company is able to borrow.
Events of default under the credit agreement include failure to perform
covenants, material adverse change, change of control and default under other
debt aggregating at least $25 million. If an event of default were to occur
under the credit agreement, the lenders would be entitled to declare all amounts
borrowed under it immediately due and payable. The occurrence of an event of
default under the credit agreement could also cause the acceleration of
obligations under certain other agreements and the termination of the company's
U.S. trade accounts receivable facility. In addition, the company and certain
international subsidiaries have access to certain uncommitted lines of credit
from various banks. At December 31, 2002, the company has met all covenants and
conditions under its various lending and funding agreements.
44
10 OTHER ACCRUED LIABILITIES
Other accrued liabilities (current) comprise the following:
December 31 (Millions) 2002 2001
- --------------------------------------------------------------
Customers' deposits and
prepayments $ 347.8 $ 333.8
Deferred revenue 246.6 227.8
Payrolls and commissions 240.5 176.9
Accrued vacations 113.1 109.3
Taxes other than income taxes 74.5 75.5
Restructuring* 65.8 134.8
Other 253.1 244.8
-----------------------
Total other accrued liabilities $ 1,341.4 $ 1,302.9
- --------------------------------------------------------------
*At December 31, 2002 and 2001, an additional $12.6 million and $35.2
million, respectively, was reported in other long-term liabilities on the
consolidated balance sheet.
11 PRODUCT WARRANTY
For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for twelve 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 ninety 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:
Year ended December 31 (Millions) 2002
- --------------------------------------------------------------
Balance at December 31, 2001 $ 16.1
Accruals for warranties issued
during the period 16.4
Settlements made during the period (15.2)
Changes in liability for pre-existing warranties
during the period, including expirations 1.9
----------
Balance at December 31, 2002 $ 19.2
- --------------------------------------------------------------
12 RENTAL EXPENSE AND COMMITMENTS
Rental expense, less income from subleases, for 2002, 2001 and 2000 was $159.0
million, $161.6 million and $146.0 million, respectively.
Minimum net rental commitments under noncancelable operating leases
outstanding at December 31, 2002, substantially all of which relate to real
properties, were as follows: 2003, $135.7; 2004, $99.1; 2005, $72.8; 2006,
$56.8; 2007, $46.5; and $170.1 million thereafter. Such rental commitments have
been reduced by minimum sublease rentals of $124.5 million, due in the future
under noncancelable subleases.
Rental expense for 2002, 2001 and 2000 includes approximately $1.0 million,
$2.0 million and $2.2 million, respectively, under a facility lease that expires
in March 2005. The owner of the property is a special-purpose entity in which
unrelated third parties made and have maintained an equity capital investment.
The company has no debt or equity interest in this entity. At December 31, 2002
and 2001, the company did not consolidate this entity. Effective July 1, 2003,
in accordance with FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," the company will be required to consolidate this entity.
Assets and debt are expected to increase by approximately $33 million; however,
the change in the company's results of operations is expected to be immaterial.
The company has the option to purchase the facility at any time during the lease
term for approximately $33 million. At the end of the lease term, the company
has agreed to either purchase the facility or remarket it to a third party on
behalf of the owner. If the sales price is less than $33 million, the company is
obligated to make up the lesser of the shortfall or $28 million. At December 31,
2002, the fair value of the property exceeded $33 million. The lease contains a
number of financial covenants and other provisions.
At December 31, 2002, the company was in compliance with all of these
covenants and provisions. At December 31, 2002, the company had outstanding
standby letters of credit and surety bonds of approximately $340 million related
to performance and payment guarantees. On the basis of experience with these
arrangements, the company believes that any obligations that may arise will not
be material.
45
13 FINANCIAL INSTRUMENTS
Due to its foreign operations, the company is exposed to the effects of foreign
currency exchange rate fluctuations on the U.S. dollar. The company uses
derivative financial instruments to manage its exposure to market risks from
changes in foreign currency exchange rates. The derivative instruments used are
foreign exchange forward contracts and foreign exchange options.
Certain of the company's qualifying derivative financial instruments have
been designated as cash flow hedging instruments. Such instruments are used to
manage the company's currency exchange rate risks for forecasted transactions
involving intercompany sales and royalties and third-party royalty receipts. For
the forecasted intercompany transactions, the company generally enters into
derivative financial instruments for a six-month period by initially purchasing
a three-month foreign exchange option, which, at expiration, is replaced with a
three-month foreign exchange forward contract. For forecasted third-party
royalty receipts, which are principally denominated in Japanese yen, the company
generally purchases twelve-month foreign exchange forward contracts.
The company recognizes the fair value of its cash flow hedge derivatives as
either assets or liabilities in its balance sheet. Changes in the fair value
related to the effective portion of such derivatives are recognized in other
comprehensive income until the hedged item is recognized in earnings, at which
point the accumulated gain or loss is reclassified out of other comprehensive
income and into earnings. The ineffective portion of such derivative's change in
fair value is immediately recognized in earnings. The amount of ineffectiveness
recognized in earnings during the years ended December 31, 2002 and 2001,
related to cash flow hedge derivatives for third-party royalties was a gain of
approximately $1.7 million and $4.2 million, respectively. The ineffective
amount related to cash flow hedge derivatives for intercompany transactions was
immaterial. Both the amounts reclassified out of other comprehensive income and
into earnings and the ineffectiveness recognized in earnings related to cash
flow hedge derivatives for forecasted intercompany transactions are recognized
in cost of revenue, and in revenue for forecasted third-party royalties.
Substantially all of the accumulated income and loss in other comprehensive
income related to cash flow hedges at December 31, 2002, is expected to be
reclassified into earnings within the next twelve months.
When a cash flow hedge is discontinued because it is probable that the
original forcasted transaction will not occur by the end of the original
specified time period, the company is required to reclassify any gains or losses
out of other comprehensive income and into earnings. The amount of such
reclassifications during the years ended December 31, 2002 and 2001, was
immaterial.
In addition to the cash flow hedge derivatives mentioned above, the company
enters into foreign exchange forward contracts that have not been designated as
hedging instruments. Such contracts generally have maturities of one month and
are used by the company to manage its exposure to changes in foreign currency
exchange rates principally on intercompany accounts. The fair value of such
instruments is recognized as either assets or liabilities in the company's
balance sheet, and changes in the fair value are recognized immediately in
earnings in other income (expense), net in the company's statement of income.
During the years ended December 31, 2002, 2001 and 2000, the company
recognized foreign exchange transaction gains or (losses) in other income
(expense), net in its statement of income of $(1.2) million, $21.4 million and
$(2.3) million, respectively.
In 1999, the company entered into interest rate swaps and currency swaps
for euros and Japanese yen. The currency swaps were designated as hedges of the
foreign currency exposure on the company's net investments in foreign
subsidiaries and equity investments. The currency effects of these hedges were
reported in accumulated other comprehensive income (loss), thereby offsetting a
portion of the foreign currency translation of net assets. The difference
between receipts of a U.S. fixed rate of interest and payments of a foreign
currency denominated floating rate was reported in interest expense. In 2000,
the company terminated these swaps, and as a result received net cash of $18.5
million and recognized a pretax loss of $2.7 million. Under the swaps, the
company recognized an interest expense benefit of approximately $16 million in
2000.
Financial instruments also include temporary cash investments and customer
accounts receivable. Temporary investments are placed with creditworthy
financial institutions, primarily in oversecuritized treasury repurchase
agreements, Eurotime deposits, or commercial paper of major corporations. At
December 31, 2002, the company's cash equivalents principally have maturities of
less than one month. Due to the short maturities of these instruments, they are
carried on the balance sheet at cost plus accrued interest, which approximates
market value. Realized gains or losses during 2002 and 2001, as well as
unrealized gains or losses at December 31, 2002, were immaterial. Receivables
are due from a large number of customers that are dispersed worldwide across
many industries. At December 31, 2002 and 2001, the company had no significant
concentrations of credit risk. The carrying amount of cash and cash equivalents,
notes payable and long-term debt approximates fair value.
46
14 LITIGATION
There are various lawsuits, claims and proceedings that have been brought or
asserted against the company. Although the ultimate results of these lawsuits,
claims and proceedings are not currently determinable, management does not
expect that these matters will have a material adverse effect on the company's
consolidated financial position, consolidated results of operations, or
liquidity.
15 SEGMENT INFORMATION
The company has two business segments: Services and Technology. The products and
services of each segment are marketed throughout the world to commercial
businesses and governments. Revenue classifications by segment are as follows:
Services - 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
described in the summary of significant accounting policies. Intersegment sales
and transfers are priced as if the sales or transfers were to third parties.
Accordingly, the Technology segment recognizes intersegment revenue and
manufacturing profit on hardware and software shipments to customers under
Services contracts. The Services segment, in turn, recognizes customer revenue
and marketing profit on such shipments of company hardware and software to
customers. The Services segment also includes the sale of hardware and software
products sourced from third parties that are sold to customers through the
company's Services channels. In the company's consolidated statements of income,
the manufacturing costs of products sourced from the Technology segment and sold
to Services customers are reported in cost of revenue for Services. Also
included in the Technology segment's sales and operating profit are sales of
hardware and software sold to the Services segment for internal use in Services
engagements. The amount of such profit included in operating income of the
Technology segment for the years ended December 31, 2002, 2001 and 2000, was
$19.2 million, $21.8 million and $23.6 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 corporate
and centrally incurred costs are allocated to the business segments based
principally on revenue, employees, square footage or usage.
Corporate assets are principally cash and cash equivalents, prepaid pension
assets and deferred income taxes. The expense or income related to corporate
assets is allocated to the business segments. In addition, corporate assets
include an offset for interests in accounts receivable that have been recorded
as sales in accordance with SFAS No. 140 because such receivables are included
in the assets of the business segments.
No single customer accounts for more than 10% of revenue. Revenue from
various agencies of the U.S. Government, which is reported in both business
segments, approximated $579 million, $623 million and $689 million in 2002, 2001
and 2000, respectively.
A summary of the company's operations by business segment for 2002, 2001
and 2000 is presented below:
(Millions) Total Corporate Services Technology
- ---------------------------------------------------------------------------
2002
- -------
Customer revenue $ 5,607.4 $ 4,285.1 $ 1,322.3
Intersegment $ (331.9) 38.8 293.1
-------------------------------------------------
Total revenue $ 5,607.4 $ (331.9) $ 4,323.9 $ 1,615.4
-------------------------------------------------
Operating income
(loss) $ 423.2 $ (21.4) $ 256.0 $ 188.6
Depreciation and
amortization 297.8 167.2 130.6
Total assets 4,981.4 1,995.3 2,002.0 984.1
Investments at
equity 111.8 1.1 110.7
Capital expenditures
for properties 196.2 15.3 142.4 38.5
2001
- -------
Customer revenue $ 6,018.1 $ 4,444.6 $ 1,573.5
Intersegment $ (363.4) 73.8 289.6
-------------------------------------------------
Total revenue $ 6,018.1 $ (363.4) $ 4,518.4 $ 1,863.1
-------------------------------------------------
Operating income
(loss) $ (4.5) $ (315.7) $ 94.7 $ 216.5
Depreciation and
amortization 318.0 155.1 162.9
Total assets 5,769.1 2,617.6 2,009.3 1,142.2
Investments at
equity 212.3 1.8 210.5
Capital expenditures
for properties 199.4 28.9 113.8 56.7
2000
- -------
Customer revenue $ 6,885.0 $ 4,741.6 $ 2,143.4
Intersegment $ (437.2) 46.6 390.6
-------------------------------------------------
Total revenue $ 6,885.0 $ (437.2) $ 4,788.2 $ 2,534.0
-------------------------------------------------
Operating income
(loss) $ 426.8 $ (103.3) $ 81.4 $ 448.7
Depreciation and
amortization 285.6 129.4 156.2
Total assets 5,713.3 2,434.4 1,989.0 1,289.9
Investments at
equity 225.8 1.7 224.1
Capital expenditures
for properties 198.3 21.4 111.9 65.0
- ---------------------------------------------------------------------------
47
Presented below is a reconciliation of total business segment operating
income to consolidated income (loss) before income taxes:
Year ended December 31
(Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Total segment operating
income $ 444.6 $ 311.2 $ 530.1
Interest expense (66.5) (70.0) (79.8)
Other income (expense), net (23.9) 28.0 32.0
Corporate and eliminations (21.4) (39.4) 24.3
Fourth-quarter charges (276.3) (127.6)
------------------------------------
Total income (loss) before
income taxes $ 332.8 $ (46.5) $ 379.0
- ---------------------------------------------------------------------------
Presented below is a reconciliation of total business segment assets to
consolidated assets:
December 31 (Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Total segment assets $ 2,986.1 $ 3,151.5 $ 3,278.9
Cash and cash equivalents 301.8 325.9 378.0
Prepaid pension assets 1,221.0 1,063.0
Deferred income taxes 1,787.3 1,090.4 1,044.2
Elimination for sale of
receivables (273.5) (191.8) (279.1)
Other corporate assets 179.7 172.1 228.3
------------------------------------
Total assets $ 4,981.4 $ 5,769.1 $ 5,713.3
- ---------------------------------------------------------------------------
Customer revenue by classes of similar products or services, by segment, is
presented below:
Year ended December 31
(Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Services
Systems integration $ 1,455.6 $ 1,465.3 $ 1,599.0
Outsourcing 1,441.2 1,302.3 1,193.1
Infrastructure services 831.7 1,094.9 1,326.3
Core maintenance 556.6 582.1 623.2
------------------------------------
4,285.1 4,444.6 4,741.6
Technology
Enterprise-class servers 955.9 1,048.5 1,424.4
Specialized technologies 366.4 525.0 719.0
------------------------------------
1,322.3 1,573.5 2,143.4
------------------------------------
Total $ 5,607.4 $ 6,108.1 $ 6,885.0
- ---------------------------------------------------------------------------
Geographic information about the company's revenue, which is principally
based on location of the selling organization, and properties, is presented
below:
(Millions) 2002 2001 2000
- ---------------------------------------------------------------------------
Revenue
United States $ 2,500.7 $ 2,595.3 $ 2,875.5
United Kingdom 749.3 823.9 762.9
Other foreign 2,357.4 2,598.9 3,246.6
------------------------------------
Total $ 5,607.4 $ 6,018.1 $ 6,885.0
------------------------------------
Properties, net
United States $ 315.4 $ 345.9 $ 334.0
United Kingdom 164.6 75.5 52.6
Other foreign 129.8 128.2 123.3
------------------------------------
Total $ 609.8 $ 549.6 $ 509.9
- ---------------------------------------------------------------------------
16 EMPLOYEE PLANS
Stock plans. Under the company's plans, stock options, stock appreciation
rights, restricted stock, and restricted stock units may be granted to officers,
directors and other key employees.
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 generally have a maximum duration of ten years and become
exercisable in annual installments over a four-year period following date of
grant.
Restricted stock and restricted stock units have been granted and are
subject to forfeiture until the expiration of a specified period of service
commencing on the date of grant. Compensation expense resulting from the awards
is charged to income ratably from the date of grant until the date the
restrictions lapse and is based on fair market value at the date of grant.
During the years ended December 31, 2002, 2001 and 2000, $.2 million, $.6
million and $1.0 million was charged to income, respectively.
The company has a worldwide Employee Stock Purchase Plan ("ESPP"), which
enables substantially all regular employees to purchase shares of the company's
common stock through payroll deductions of up to 10% of eligible pay. The price
the employee pays is 85% of the market price at the beginning or end of a
calendar quarter, whichever is lower. During the years ended December 31, 2002,
2001 and 2000, employees purchased newly issued shares from the company for
$24.1 million, $28.8 million and $37.3 million, respectively.
48
U.S. employees are eligible to participate in an employee savings plan.
Under this plan, employees may contribute a percentage of their pay for
investment in various investment alternatives. Company matching contributions of
2% of pay are made in the form of newly issued shares of company common stock.
The charge to income related to the company match for the years ended December
31, 2002, 2001 and 2000, was $17.9 million, $18.0 million and $19.1 million,
respectively.
The company applies APB Opinion 25 for its stock plans and the
disclosure-only option under SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense is recognized for stock
options granted and for common stock purchases under the ESPP.
The fair value of stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of
4.44%, 5.08% and 6.84%, volatility factors of the expected market price of the
company's common stock of 55%, a weighted average expected life of the options
of five years and no dividends.
A summary of the status of stock option activity follows:
Year ended December 31
(Shares in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------
Outstanding at
beginning of year 28,653 $ 22.56 22,085 $ 24.44 19,158 $ 19.74
Granted 13,873 14.39 9,122 17.75 7,667 33.36
Exercised (647) 7.68 (697) 6.91 (1,455) 9.58
Forfeited and expired (2,989) 29.18 (1,857) 27.07 (3,285) 24.41
---------------------------------------------------------------------------------------
Outstanding at end of year 38,890 19.73 28,653 22.56 22,085 24.44
---------------------------------------------------------------------------------------
Exercisable at end of year 15,570 21.94 11,709 19.90 7,946 15.72
---------------------------------------------------------------------------------------
Shares available for granting
options at end of year 12,449 2,477 4,008
---------------------------------------------------------------------------------------
Weighted average fair value
of options granted during
the year $ 5.95 $ 9.80 $ 18.76
- --------------------------------------------------------------------------------------------------------------------------
December 31, 2002
(Shares in thousands) Outstanding Exercisable
- ---------------------------------------------------------------------------------------------------------
Exercise Average Average Average
Price Range Shares Life * Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------
$ 5.75-11.79 5,883 5.35 $ 8.68 4,277 $ 8.65
$11.79-12.11 9,631 8.88 12.10 282 12.00
$12.11-18.57 7,781 8.20 18.03 1,843 18.25
$18.57-30.19 9,801 6.68 26.66 6,265 26.83
$30.19-51.73 5,794 6.89 34.21 2,903 34.27
----------------------------------------------------------------------
Total 38,890 7.36 19.73 15,570 21.94
- ---------------------------------------------------------------------------------------------------------
* Average contractual remaining life in years.
49
RETIREMENT BENEFITS
Retirement plans funded status and amounts recognized
in the company's consolidated balance sheet at
December 31, 2002 and 2001, follow:
U.S. Plans International Plans
----------------------- -----------------------
December 31 (Millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,869.0 $ 3,559.0 $ 947.0 $ 757.1
Service cost 36.0 35.2 27.6 22.3
Interest cost 278.9 273.7 64.3 55.1
Plan participants' contributions 7.2 8.2
Plan amendments (74.0) 59.6 1.2 4.0
Actuarial loss 319.1 217.8 117.3 45.9
Benefits paid (305.1) (276.3) (49.7) (38.4)
Effect of settlements/curtailments 2.6 1.8
Foreign currency translation adjustments 152.1 10.1
Other* 48.2 80.9
-------------------------------------------------
Benefit obligation at end of year $ 4,123.9 $ 3,869.0 $ 1,317.8 $ 947.0
- ---------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 4,300.1 $ 4,951.3 $ 914.9 $ 847.9
Actual return on plan assets (428.2) (381.4) (111.6) (46.2)
Employer contribution 7.6 6.5 34.6 26.0
Plan participants' contributions 7.2 8.2
Benefits paid (305.1) (276.3) (49.7) (38.4)
Foreign currency translation adjustments 126.2 15.0
Other* 53.0 102.4
-------------------------------------------------
Fair value of plan assets at end of year $ 3,574.4 $ 4,300.1 $ 974.6 $ 914.9
- ---------------------------------------------------------------------------------------------------
Funded status $ (549.5) $ 431.1 $ (343.2) $ (32.1)
Unrecognized net actuarial loss 1,865.9 660.4 514.6 152.0
Unrecognized prior service (benefit) cost (74.4) (6.3) 6.8 5.8
-------------------------------------------------
Net amount recognized $ 1,242.0 $ 1,085.2 $ 178.2 $ 125.7
- ---------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated balance
sheet consist of:
Prepaid pension cost $ - $ 1,085.2 $ - $ 135.8
Intangible asset 6.8
Accrued pension liability (547.1) (180.6) (10.1)
Accumulated other comprehensive loss** 1,789.1 352.0
-------------------------------------------------
$ 1,242.0 $ 1,085.2 $ 178.2 $ 125.7
- ---------------------------------------------------------------------------------------------------
* Represents amounts of pension assets and liabilities assumed by the company
at the inception of certain outsourcing contracts related to the customers'
employees hired by the company.
** In addition to amounts recognized in other comprehensive loss relating to
company pension plans, the company recorded $80.4 million in other
comprehensive loss related to its share of NUL's minimum pension liability
adjustment.
The projected benefit obligations,
accumulated benefit obligations and fair
value of plan assets for plans with
accumulated benefit obligations in
excess of plan assets was as follows (in
millions of dollars): $5,441.7 million,
$5,270.6 million and $4,549.0 million at
December 31, 2002, and $181.0 million,
$171.3 million and $93.3 million at
December 31, 2001.
50
Net periodic pension cost for 2002, 2001 and 2000 includes the following
components:
U.S. Plans International Plans
------------------------------------ ------------------------------------
Year ended December 31 (Millions) 2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Service cost $ 36.0 $ 35.2 $ 37.4 $ 27.6 $ 22.3 $ 18.7
Interest cost 278.9 273.7 263.5 64.3 55.1 49.9
Expected return on plan assets (459.8) (476.2) (440.3) (91.4) (79.4) (67.3)
Amortization of prior service (benefit) cost (5.6) (5.5) (5.9) .8 .9 .9
Amortization of asset or liability at adoption .8 .3 .3
Recognized net actuarial loss (gain) 1.7 1.2 1.1 2.6 (1.0) .5
Settlement/curtailment (gain) loss (.4) 1.8 3.4 1.4
---------------------------------------------------------------------------
Net periodic pension (income) cost $ (149.2) $ (171.6) $ (143.4) $ 5.7 $ 1.6 $ 4.4
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31
were as follows:
Discount rate 6.75% 7.50% 8.00% 5.86% 6.25% 6.57%
Rate of compensation increase 5.40% 5.40% 5.40% 3.80% 3.80% 3.77%
Expected long-term rate of return on assets 9.50% 10.00% 10.00% 8.20% 8.54% 8.51%
- -----------------------------------------------------------------------------------------------------------------------------
* For 2003, the company has assumed that the expected long-term rate of return
on plan assets for its U.S. defined benefit pension plan will be 8.75%.
OTHER POSTRETIREMENT BENEFITS
A reconciliation of the benefit obligation, fair value of the plan assets and
the funded status of the postretirement medical plan at December 31, 2002 and
2001, follow:
December 31 (Millions) 2002 2001
- -------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 220.1 $ 219.1
Interest cost 14.7 15.2
Plan participants' contributions 30.7 27.8
Actuarial loss 17.5 10.9
Benefits paid (55.6) (52.9)
-----------------------
Benefit obligation at end of year $ 227.4 $ 220.1
-----------------------
Change in plan assets
Fair value of plan assets at beginning
of year $ 13.4 $ 13.3
Actual return on plan assets 1.1 1.0
Employer contributions 22.3 24.2
Plan participants' contributions 30.7 27.8
Benefits paid (55.6) (52.9)
-----------------------
Fair value of plan assets at end of year $ 11.9 $ 13.4
-----------------------
Funded status $ (215.5) $ (206.7)
Unrecognized net actuarial loss 40.7 26.2
Unrecognized prior service benefit (7.9) (9.9)
-----------------------
Accrued benefit cost $ (182.7) $ (190.4)
- -------------------------------------------------------------------------
Net periodic postretirement benefit cost for 2002, 2001 and 2000, follows:
Year ended December 31 (Millions) 2002 2001 2000
- -------------------------------------------------------------------------
Interest cost $ 14.7 $ 15.2 $ 14.9
Amortization of prior
service benefit (2.0) (2.0) (2.0)
Recognized net actuarial loss 1.9 1.3 .4
------------------------------------
Net periodic benefit cost $ 14.6 $ 14.5 $ 13.3
- -------------------------------------------------------------------------
Weighted-average assumptions
as of December 31 were as
follows:
Discount rate 7.00% 7.40% 7.70%
Expected return on plan assets 8.00% 8.00% 8.00%
- -------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the expected cost
of benefits covered by the plan is 10.5% for 2003, gradually declining to 5.5%
in 2008 and thereafter. A one-percentage-point increase (decrease) in the
assumed health care cost trend rate would increase (decrease) the accumulated
postretirement benefit obligation at December 31, 2002, by $10.4 million and
$(10.6) million, respectively, and increase (decrease) the interest cost
component of net periodic postretirement benefit cost for 2002 by $.7 million
and $(.7) million, respectively.
51
17 STOCKHOLDERS' EQUITY
The company has 720.0 million authorized shares of common stock, par value $.01
per share, and 40.0 million shares of authorized preferred stock, par value $1
per share, issuable in series.
Each outstanding share of common stock has attached to it one preferred
share purchase right. The rights become exercisable only if a person or group
acquires 20% or more of the company's common stock, or announces a tender or
exchange offer for 30% or more of the common stock. Until the rights become
exercisable, they have no dilutive effect on net income per common share.
At December 31, 2002, 67.4 million shares of unissued common stock of the
company were reserved principally for stock options and for stock purchase and
savings plans.
Comprehensive income (loss) for the three years ended December 31, 2002,
includes the following components:
Year ended
December 31 (Millions) 2002 2001 2000
- -------------------------------------------------------------------------
Net income (loss) $ 223.0 $ (67.1) $ 225.0
------------------------------------
Other comprehensive
income (loss)
Cumulative effect of change
in accounting principle
(SFAS No. 133), net of tax
of $1.8 3.3
Cash flow hedges
Income (loss), net of tax of
$(4.3) and $5.1 (7.9) 9.7
Reclassification adjustments,
net of tax of $1.2 and $(4.6) 2.0 (8.6)
Foreign currency translation
adjustments, net of tax of $-,
$- and $19.0 (33.8) (67.5) (73.3)
Minimum pension liability,
net of tax of $731.2 (1,490.4)
------------------------------------
Total other comprehensive
income (loss) (1,530.1) (63.1) (73.3)
------------------------------------
Comprehensive income (loss) $ (1,307.1) $ (130.2) $ 151.7
- -------------------------------------------------------------------------
Accumulated other comprehensive income (loss) as of December 31, 2002, 2001
and 2000, is as follows (in millions of dollars):
Minimum
Translation Cash Flow Pension
Total Adjustments Hedges Liability
- ------------------------------------------------------------------------------
Balance at
December 31, 1999 $ (570.4) $ (570.4) $ - $ -
Change during period (73.3) (73.3)
---------------------------------------------------
Balance at
December 31, 2000 (643.7) (643.7) - -
Change during period (63.1) (67.5) 4.4
---------------------------------------------------
Balance at
December 31, 2001 (706.8) (711.2) 4.4 -
Change during period (1,530.1) (33.8) (5.9) (1,490.4)
---------------------------------------------------
Balance at
December 31, 2002 $ (2,236.9) $ (745.0) $ (1.5) $ (1,490.4)
- ------------------------------------------------------------------------------
52
REPORT OF MANAGEMENT
The management of the company is responsible for the integrity of its financial
statements. These statements have been prepared in conformity with accounting
principles generally accepted in the United States and include amounts based on
the best estimates and judgments of management. Financial information included
elsewhere in this report is consistent with that in the financial statements.
The company maintains a system of internal accounting controls designed to
provide reasonable assurance at a reasonable cost that assets are safeguarded
against loss or unauthorized use, and that transactions are executed in
accordance with management's authorization and recorded and summarized properly.
This system is augmented by written policies and procedures, an internal audit
program, and the selection and training of qualified personnel.
Ernst & Young LLP, independent auditors, have audited the company's
financial statements. Their accompanying report is based on audits conducted in
accordance with auditing standards generally accepted in the United States,
which require a review of the system of internal accounting controls and tests
of accounting procedures and records to the extent necessary for the purpose of
their audits.
The Board of Directors, through its Audit Committee, which is composed
entirely of outside directors, oversees management's responsibilities in the
preparation of the financial statements and selects the independent auditors,
subject to stockholder ratification. The Audit Committee meets regularly with
the independent auditors, representatives of management, and the internal
auditors to review the activities of each and to assure that each is properly
discharging its responsibilities. To ensure complete independence, the internal
auditors and representatives of Ernst & Young LLP have full access to meet with
the Audit Committee, with or without management representatives present, to
discuss the results of their audits and their observations on the adequacy of
internal controls and the quality of financial reporting.
/s/ Lawrence A. Weinbach /s/ Janet Brutschea Haugen
Lawrence A. Weinbach Janet Brutschea Haugen
Chairman, President, Senior Vice President
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Unisys Corporation
We have audited the accompanying consolidated balance sheets of Unisys
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of Unisys Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Unisys
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 3 to the consolidated financial statements, in 2002
Unisys Corporation adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which resulted in Unisys Corporation
changing the method of accounting for goodwill.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 21, 2003
53
UNISYS CORPORATION
Supplemental Financial Data (Unaudited)
QUARTERLY FINANCIAL INFORMATION
First Second Third Fourth
(Millions, except per share data) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
2002
Revenue $ 1,362.5 $ 1,359.8 $ 1,332.3 $ 1,552.8 $ 5,607.4
Gross profit 389.3 404.5 403.0 491.7 1,688.5
Income before income taxes 48.9 62.9 88.1 132.9 332.8
Net income 32.7 42.2 59.0 89.1 223.0
Earnings per share - basic .10 .13 .18 .27 .69
- diluted .10 .13 .18 .27 .69
Market price per share - high 13.74 13.84 9.67 11.49 13.84
- low 10.78 8.30 6.39 5.92 5.92
- -----------------------------------------------------------------------------------------------------------
2001
Revenue $ 1,623.8 $ 1,461.4 $ 1,376.0 $ 1,556.9 $ 6,018.1
Gross profit 427.6 397.4 379.9 278.4 1,483.3
Income (loss) before income taxes 103.4 43.9 31.2 (225.0) (46.5)
Income (loss) before extraordinary item 69.3 29.3 20.9 (169.4) (49.9)
Net income (loss) 69.3 12.1 20.9 (169.4) (67.1)
Earnings (loss) per share - basic
Before extraordinary item .22 .09 .07 (.53) (.16)
Extraordinary item (.05) (.05)
----------------------------------------------------------------------
Total .22 .04 .07 (.53) (.21)
----------------------------------------------------------------------
Earnings (loss) per share - diluted
Before extraordinary item .22 .09 .07 (.53) (.16)
Extraordinary item (.05) (.05)
----------------------------------------------------------------------
Total .22 .04 .07 (.53) (.21)
----------------------------------------------------------------------
Market price per share - high 19.70 15.00 14.47 13.45 19.70
- low 12.69 11.15 7.70 7.95 7.70
- -----------------------------------------------------------------------------------------------------------
In the fourth quarter of 2001, the company recognized pretax restructuring and
related charges of $276.3 million, or $.64 per share. Excluding these items,
earnings per share before extraordinary items for 2001 was $.48. See Note 4 of
the Notes to Consolidated Financial Statements.
The individual quarterly per-share amounts may not total to the per-share amount
for the full year because of accounting rules governing the computation of
earnings per share.
Market prices per share are as quoted on the New York Stock Exchange composite
listing.
54
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Millions, except per share data) 2002 2001/(1)/ 2000/(1)/ 1999 1998
- ---------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenue $ 5,607.4 $ 6,018.1 $ 6,885.0 $ 7,544.6 $ 7,243.9
Operating income (loss) 423.2 (4.5) 426.8 960.7 799.0
Income (loss) before income taxes 332.8 (46.5) 379.0 770.3 594.2
Income (loss) before extraordinary items 223.0 (49.9) 244.8 522.8 376.4
Net income (loss) 223.0 (67.1) 225.0 510.7 376.4
Dividends on preferred shares 36.7 106.5
Earnings (loss) on common shares 223.0 (67.1) 225.0 474.0 269.9
Earnings (loss) per common share before
extraordinary items
Basic .69 (.16) .78 1.69 1.07
Diluted .69 (.16) .77 1.63 1.01
FINANCIAL POSITION
Working capital (deficit) $ (238.5) $ (109.4) $ (54.1) $ 268.3 $ 288.9
Total assets 4,981.4 5,769.1 5,713.3 5,885.0 5,608.2
Long-term debt 748.0 745.0 536.3 950.2 1,106.7
Common stockholders' equity 856.0 2,112.7 2,186.1 1,953.3 90.9
Common stockholders' equity per share 2.62 6.59 6.93 6.29 .35
OTHER DATA
Research and development $ 273.3 $ 331.5 $ 333.6 $ 339.4 $ 308.3
Capital additions of properties 196.2 199.4 198.3 219.6 209.1
Investment in marketable software 139.9 136.8 152.4 122.8 100.3
Depreciation and amortization of properties 154.5 140.2 135.6 134.5 141.8
Amortization
Marketable software 121.0 145.5 115.5 110.9 112.3
Deferred outsourcing contract costs 22.3 15.8 12.7 13.9 9.1
Goodwill 16.5 21.8 21.7 18.2
Common shares outstanding (millions) 326.2 320.6 315.4 310.6 258.2
Stockholders of record (thousands) 27.3 28.4 29.7 32.8 28.6
Employees (thousands) 36.4 38.9 36.9 35.8 33.5
- ---------------------------------------------------------------------------------------------------------
/(1)/ Includes special pretax charges of $276.3 million and $127.6 million for
the years ended December 31, 2001 and 2000, respectively.
55