UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of Common Stock outstanding as of September 30, 2009
42,279,463 (after giving effect to the one-for-ten reverse stock split, which
became effective on October 26, 2009).
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Millions)
September 30, December 31,
2009 2008
----------- ------------
Assets
------
Current assets
Cash and cash equivalents $ 473.6 $ 544.0
Accounts and notes receivable, net 764.0 818.5
Inventories:
Parts and finished equipment 65.1 64.7
Work in process and materials 59.7 70.7
Deferred income taxes 17.7 23.8
Prepaid expenses and other current assets 112.4 116.7
-------- --------
Total 1,492.5 1,638.4
-------- --------
Properties 1,438.5 1,416.0
Less-Accumulated depreciation and
amortization 1,192.4 1,139.5
-------- --------
Properties, net 246.1 276.5
-------- --------
Outsourcing assets, net 292.0 314.9
Marketable software, net 175.3 202.0
Prepaid postretirement assets 55.6 20.7
Deferred income taxes 89.5 87.6
Goodwill 198.2 189.4
Other long-term assets 191.9 94.6
-------- --------
Total $2,741.1 $2,824.1
======== ========
Liabilities and stockholders' deficit
-------------------------------------
Current liabilities
Current maturities of long-term debt $ 66.0 $ 1.5
Accounts payable 287.3 379.2
Other accrued liabilities 952.4 1,045.7
-------- --------
Total 1,305.7 1,426.4
-------- --------
Long-term debt 845.0 1,059.1
Long-term postretirement liabilities 1,410.5 1,497.0
Other long-term liabilities 325.4 265.4
Commitments and contingencies
Stockholders' deficit
Common stock, shares issued:
2009; 42.5, 2008; 37.2 .4 .4
Accumulated deficit (2,521.2) (2,596.0)
Treasury stock, shares at cost:
2009; .2, 2008; .2 (44.9) (44.8)
Paid-in capital 4,195.6 4,102.6
Accumulated other comprehensive loss (2,803.9) (2,904.6)
Noncontrolling interests 28.5 18.6
-------- --------
Total stockholders' deficit (1,145.5) (1,423.8)
-------- --------
Total $2,741.1 $2,824.1
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2009 2008 2009 2008
---- ---- ---- ----
Revenue
Services $1,006.0 $1,152.1 $3,019.8 $3,486.2
Technology 153.6 160.3 368.4 467.5
-------- -------- -------- --------
1,159.6 1,312.4 3,388.2 3,953.7
Costs and expenses
Cost of revenue:
Services 793.1 937.6 2,402.7 2,814.2
Technology 60.7 82.8 187.0 250.5
-------- -------- -------- --------
853.8 1,020.4 2,589.7 3,064.7
Selling, general and administrative 163.5 218.4 506.3 701.9
Research and development 24.3 35.7 76.8 98.6
-------- -------- -------- --------
1,041.6 1,274.5 3,172.8 3,865.2
-------- ------- -------- --------
Operating income 118.0 37.9 215.4 88.5
Interest expense 25.4 21.5 68.4 64.3
Other income (expense), net (3.3) (.9) (7.0) (8.4)
-------- -------- -------- --------
Income before income taxes 89.3 15.5 140.0 15.8
Provision for income taxes 26.2 45.1 58.4 72.5
-------- -------- -------- --------
Consolidated net income (loss) 63.1 (29.6) 81.6 (56.7)
Net income attributable to
noncontrolling interests (2.0) (5.1) (6.8) (15.4)
-------- ------- ------- --------
Net income (loss) attributable
to Unisys Corporation $ 61.1 $ (34.7) $ 74.8 $ (72.1)
======== ======== ======= ========
Earnings (loss) per share
attributable to Unisys Corporation
Basic $ 1.51 $ (.96) $ 1.96 $ (2.01)
======== ======== ======= ========
Diluted $ 1.48 $ (.96) $ 1.93 $ (2.01)
======== ======== ======= ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
------------------
2009 2008
-------- -------
Cash flows from operating activities
Consolidated net income (loss) $ 81.6 $ (56.7)
Add (deduct) items to reconcile consolidated
net income (loss) to net cash provided by
operating activities:
Employee stock compensation (.3) (.2)
Company stock issued for U.S. 401(k) plan - 34.2
Depreciation and amortization of properties 71.7 80.4
Depreciation and amortization of outsourcing assets 113.9 126.0
Amortization of marketable software 70.3 90.0
Disposal of capital assets 5.7 8.6
Loss on sale of assets 4.7 -
Decrease in deferred income taxes, net 16.7 -
Decrease in receivables, net 96.4 175.9
Decrease in inventories 15.4 16.7
Decrease in accounts payable and other
accrued liabilities (248.8) (215.9)
Increase (decrease) in other liabilities 6.0 (43.3)
Increase in other assets (52.0) (108.7)
Other .5 9.4
------- ------
Net cash provided by operating activities 181.8 116.4
------- ------
Cash flows from investing activities
Proceeds from investments 296.8 4,838.1
Purchases of investments (294.9) (4,847.9)
Collateralized letters of credit (82.5) -
Investment in marketable software (43.7) (65.9)
Capital additions of properties (32.1) (51.8)
Capital additions of outsourcing assets (73.4) (96.6)
Purchases of businesses (1.9) (2.3)
------- ------
Net cash used for investing activities (231.7) (226.4)
------- ------
Cash flows from financing activities
Net reduction in short-term borrowings - (.1)
Payment of long-term debt (30.0) (200.0)
Financing fees (15.4) (.8)
------- ------
Net cash used for financing activities (45.4) (200.9)
------- ------
Effect of exchange rate changes on
cash and cash equivalents 24.9 (25.5)
------- ------
Decrease in cash and cash equivalents (70.4) (336.4)
Cash and cash equivalents, beginning of period 544.0 830.2
------- -------
Cash and cash equivalents, end of period $ 473.6 $ 493.8
======== =======
See notes to consolidated financial statements.
5
Unisys Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished herein
reflects all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
specified. These adjustments consist only of normal recurring accruals except
as disclosed herein. Because of seasonal and other factors, results for
interim periods are not necessarily indicative of the results to be expected
for the full year.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions about future events. These estimates and assumptions affect the
amounts of assets and liabilities reported, disclosures about contingent assets
and liabilities and the reported amounts of revenue and expenses. Such
estimates include the valuation of accounts receivable, inventories,
outsourcing assets, marketable software, goodwill and other long-lived assets,
legal contingencies, indemnifications, and assumptions used in the calculation
of income taxes and retirement and other post-employment benefits, among
others. These estimates and assumptions are based on management's best
estimates and judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the
current economic environment, which management believes to be reasonable under
the circumstances. Management adjusts such estimates and assumptions when
facts and circumstances dictate. Illiquid credit markets, volatile equity and
foreign currency markets and reductions in information technology spending have
combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates.
Changes in those estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods.
The company's accounting policies are set forth in detail in note 1 of the notes
to the consolidated financial statements in the company's Annual Report on Form
10-K for the year ended December 31, 2008 filed with the Securities and
Exchange Commission. Such Annual Report also contains a discussion of the
company's critical accounting policies. The company believes that these
critical accounting policies affect its more significant estimates and
judgments used in the preparation of the company's consolidated financial
statements. There have been no changes in the company's critical accounting
policies from those disclosed in the company's Annual Report on Form 10-K for
the year ended December 31, 2008.
a. On October 23, 2009, a one-for-ten reverse stock split of the company's
common stock became effective. As a result of the stock split, every ten shares
of issued and outstanding common stock were automatically combined into one
issued and outstanding share of common stock without any change in the par
value of the shares. Accordingly, the financial statements reflect the impact
of the reverse stock split applied on a retroactive basis. The following have
been retroactively adjusted: (1) balance sheet - the number of issued common
shares; the number of treasury shares; the amount of common stock; and the
amount of paid-in-capital, (2) earnings per share, and (3) share-based plan
information.
6
b. The following table shows how earnings (loss) per share attributable to
Unisys Corporation was computed for the three and nine months ended September
30, 2009 and 2008 (dollars in millions, shares in thousands):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2009 2008 2009 2008
---- ---- ---- ----
Basic Earnings (Loss) Per Share
Net income (loss) attributable
to Unisys Corporation $ 61.1 $ (34.7) $ 74.8 $ (72.1)
======== ========= ======== ========
Weighted average shares 40,569 36,094 38,215 35,797
======== ========= ======== ========
Basic earnings (loss) per share $ 1.51 $ (.96) $ 1.96 $ (2.01)
======== ========= ======== ========
Diluted Earnings (Loss) Per Share
Net income (loss) attributable
to Unisys Corporation $ 61.1 $ (34.7) $ 74.8 $ (72.1)
======== ========= ======== ========
Weighted average shares 40,569 36,094 38,215 35,797
Plus incremental shares
from assumed conversions
of employee stock plans 834 - 451 -
-------- --------- -------- --------
Adjusted weighted average shares 41,403 36,094 38,666 35,797
======== ========= ======== ========
Diluted earnings (loss) per share $ 1.48 $ (.96) $ 1.93 $ (2.01)
======== ========= ======== ========
At September 30, 2009 and 2008, 2.8 million and 3.4 million, respectively, of
employee stock options were antidilutive and therefore excluded from the
computation of diluted earnings per share.
c. A breakdown of the individual components of the company's cost-reduction
charges follows (in millions of dollars):
Work-Force
Reductions
-------------- Idle
Headcount Total U.S. Int'l. Lease Cost
--------- ----- ---- ------ ----------
Balance at December
31, 2008 787 $ 95.8 $ 25.1 $ 27.2 $ 43.5
Utilized (720) (57.9) (21.2) (22.4) (14.3)
Changes in estimates
and revisions (39) (4.7) (.7) (.3) (3.7)
Translation adjustments - 2.2 - (.4) 2.6
------ ------ ----- ----- ------
Balance at Sept. 30, 2009 28 $ 35.4 $ 3.2 $ 4.1 $ 28.1
====== ====== ===== ===== ======
Expected future utilization:
2009 remaining three months 28 $ 12.0 $ 3.2 $ 4.1 $ 4.7
Beyond 2009 23.4 - - 23.4
Due to changes in estimates related to cost-reduction charges, $4.7 million of
expense was recorded in the three months ended September 30, 2009 compared with
$2.0 million recorded as expense in the year-ago period, and $4.7 million was
recorded as income in the current nine-month period compared with $1.2 million
recorded as expense in the year-ago nine-month period.
7
d. Net periodic pension expense (income) for the three and nine months ended
September 30, 2009 and 2008 is presented below (in millions of dollars):
Three Months Three Months
Ended Sept. 30, 2009 Ended Sept. 30, 2008
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 3.0 $ - $ 3.0 $ 4.1 $ - $ 4.1
Interest cost 101.8 71.2 30.6 105.1 71.0 34.1
Expected return on
plan assets (129.6) (96.1) (33.5) (142.0) (101.8) (40.2)
Amortization of prior
service cost .1 .2 (.1) .1 .1 -
Recognized net actuarial loss 19.5 18.6 .9 17.7 14.4 3.3
----- ------ ----- ----- ----- ----
Net periodic pension
(income) expense $ (5.2) $ (6.1) $ .9 $(15.0) $ (16.3) $ 1.3
====== ====== ===== ====== ======= =====
Nine Months Nine Months
Ended Sept. 30, 2009 Ended Sept. 30, 2008
------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ------ ----- ----- ------
Service cost $ 8.6 $ - $ 8.6 $ 20.3 $ - $ 20.3
Interest cost 298.2 213.7 84.5 316.0 212.9 103.1
Expected return on
plan assets (383.2) (288.5) (94.7) (427.3) (305.5)(121.8)
Amortization of prior
service cost .6 .6 - .6 .5 .1
Recognized net actuarial loss 58.8 55.7 3.1 53.6 43.1 10.5
Curtailment loss - - - 1.5 - 1.5
------- ------- ----- ------- ----- ----
Net periodic pension
(income) expense $ (17.0) $(18.5) $ 1.5 $ (35.3) $(49.0) $13.7
======= ======= ===== ====== ====== =====
The company currently expects to make cash contributions of approximately $100-
$105 million to its worldwide defined benefit pension plans in 2009 compared
with $78.1 million in 2008. For the nine months ended September 30, 2009 and
2008, $55.8 million and $57.7 million, respectively, of cash contributions have
been made. In accordance with regulations governing contributions to U.S.
defined benefit pension plans, the company is not required to fund its U.S.
qualified defined benefit pension plan in 2009.
The expense related to the company's match to the U.S. 401(k) plan for the
nine months ended September 30, 2009 and 2008 was zero and $38.0 million,
respectively. Effective January 1, 2009, the company match was suspended.
Net periodic postretirement benefit expense for the three and nine months ended
September 30, 2009 and 2008 is presented below (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- ---------------
2009 2008 2009 2008
---- ---- ---- ----
Service cost $ - $ .1 $ .2 $ .5
Interest cost 3.0 3.1 8.9 9.6
Expected return on assets (.1) (.2) (.3) (.4)
Amortization of prior
service cost .4 .3 1.1 1.5
Recognized net actuarial loss .9 1.2 2.6 3.4
---- ---- ---- -----
Net periodic postretirement
benefit expense $4.2 $4.5 $12.5 $14.6
==== ==== ===== =====
The company expects to make cash contributions of approximately $23 million to
its postretirement benefit plan in 2009 compared with $19.5 million in 2008.
For the nine months ended September 30, 2009 and 2008, $16.2 million and $11.9
million, respectively, of cash contributions have been made.
8
e. Due to its foreign operations, the company is exposed to the effects of
foreign currency exchange rate fluctuations on the U.S. dollar, principally
related to intercompany account balances. The company uses derivative
financial instruments to reduce its exposure to market risks from changes in
foreign currency exchange rates on such balances. The company enters into
foreign exchange forward contracts, generally having maturities of one month,
which have not been designated as hedging instruments. At September 30, 2009,
the fair value of such contracts was a net loss of $.3 million, of which $5.4
million has been recognized in "Prepaid expenses and other current assets" and
$5.7 million has been recognized in "Other accrued liabilities". Changes in
the fair value of these instruments was a loss of $.8 million and $.5 million
for the three months and nine months ended September 30, 2009, respectively,
which has been recognized in earnings in "Other income (expense), net" in the
company's consolidated statement of income.
f. Under stockholder approved stock-based plans, stock options, stock
appreciation rights, restricted stock and restricted stock units may be granted
to officers, directors and other key employees. At September 30, 2009, 1.5
million shares of unissued common stock of the company were available for
granting under these plans.
The fair value of stock option awards was estimated using the Black-Scholes
option pricing model with the following assumptions and weighted-average fair
values:
Nine Months Ended Sept. 30,
--------------------------
2009 2008
---- ----
Weighted-average fair value of grant $2.81 $16.19
Risk-free interest rate 1.57% 3.63%
Expected volatility 58.28% 45.28%
Expected life of options in years 3.77 3.67
Expected dividend yield - -
Restricted stock unit awards may contain time-based units, performance-based
units or a combination of both. Each performance-based unit will vest into
zero to 1.5 shares depending on the degree to which the performance goals are
met. Compensation expense resulting from these awards is recognized as expense
ratably for each installment from the date of grant until the date the
restrictions lapse and is based on the fair market value at the date of grant
and the probability of achievement of the specific performance-related goals.
The company records all share-based expense in selling, general and
administrative expense.
During the nine months ended September 30, 2009 and 2008, the company recorded
$.3 million of income and $.2 million of income for share-based compensation,
respectively, which is comprised of $2.0 million and $.7 million of restricted
stock unit income and $1.7 million and $.5 million of stock option expense,
respectively. During the three months ended September 30, 2009 and 2008, the
company reversed $2.4 million and $13.2 million, respectively, of previously-
accrued compensation expense related to performance-based restricted stock
units due to a change in the assessment of the achievability of the performance
goals. In addition, during the three months ended September 30, 2009, the
company reversed $2.6 million of previously-accrued share-based compensation
principally related to employees terminated in prior periods.
9
A summary of stock option activity for the nine months ended September 30, 2009
follows (shares in thousands):
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (years) ($ in millions)
------- ------ --------- ------------ ---------------
Outstanding at
December
31, 2008 3,414 $163.78
Granted 1,159 6.40
Forfeited and
expired (505) 234.63
-----
Outstanding at
Sept. 30, 2009 4,068 110.46 2.47 $23.8
=====
Expected to vest at
Sept. 30, 2009 1,198 8.18 4.33 22.5
=====
Exercisable at
Sept. 30, 2009 2,807 156.45 1.63 -
=====
The aggregate intrinsic value represents the total pretax value of the
difference between the company's closing stock price on the last trading day of
the period and the exercise price of the options, multiplied by the number of
in-the-money stock options that would have been received by the option holders
had all option holders exercised their options on September 30, 2009. The
intrinsic value of the company's stock options changes based on the closing
price of the company's stock. The total intrinsic value of options exercised
for the nine months ended September 30, 2009 and for the nine months ended
September 30, 2008 was zero since no options were exercised. As of September
30, 2009, $2.5 million of total unrecognized compensation cost related to stock
options is expected to be recognized over a weighted-average period of 2.2
years.
A summary of restricted stock unit activity for the nine months ended
September 30, 2009 follows (shares in thousands):
Weighted-
Restricted Average
Stock Grant Date
Units Fair Value
---------- ----------
Outstanding at December 31, 2008 763 $50.66
Granted 166 6.37
Vested (57) 53.25
Forfeited and expired (289) 45.34
---
Outstanding at Sept. 30, 2009 583 40.45
===
The fair value of restricted stock units is determined based on the trading
price of the company's common shares on the date of grant. The aggregate
weighted-average grant-date fair value of restricted stock units granted during
the nine months ended September 30, 2009 and 2008 was $1.1 million and $27.8
million, respectively. As of September 30, 2009, there was $3.2 million of
total unrecognized compensation cost related to outstanding restricted stock
units granted under the company's plans. That cost is expected to be
recognized over a weighted-average period of 1.5 years. The aggregate weighted-
average grant date fair value of restricted share units vested during the nine
months ended September 30, 2009 and 2008 was $3.0 million and $1.7 million,
respectively.
Common stock issued upon exercise of stock options or upon lapse of
restrictions on restricted stock units is newly issued shares. Cash received
from the exercise of stock options for the nine months ended September 30, 2009
and 2008 was zero. In light of its tax position, the company is currently not
recognizing any tax benefits from the exercise of stock options or upon
issuance of stock upon lapse of restrictions on restricted stock units. Tax
benefits resulting from tax deductions in excess of the compensation costs
recognized are classified as financing cash flows.
10
g. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies.
The accounting policies of each business segment are the same as those followed
by the company as a whole. Intersegment sales and transfers are priced as if
the sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware
and software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing profits on such
shipments of company hardware and software to customers. The Services segment
also includes the sale of hardware and software products sourced from third
parties that are sold to customers through the company's Services channels.
In the company's consolidated statements of income, the manufacturing costs of
products sourced from the Technology segment and sold to Services customers
are reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended September 30, 2009 and
2008 was $1.5 million and $21.9 million, respectively. The amount for the nine
months ended September 30, 2009 and 2008 was $12.0 million and $33.1 million,
respectively. The profit on these transactions is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue,
employees, square footage or usage.
A summary of the company's operations by business segment for the three and
nine month periods ended September 30, 2009 and 2008 is presented below (in
millions of dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
September 30, 2009
------------------
Customer revenue $1,159.6 $1,006.0 $ 153.6
Intersegment - $ (33.2) 1.7 31.5
-------- -------- -------- -------
Total revenue $1,159.6 $ (33.2) $1,007.7 $ 185.1
======== ======== ======== =======
Operating income $ 118.0 $ 1.1 $ 77.7 $ 39.2
======== ======== ======== =======
Three Months Ended
September 30, 2008
------------------
Customer revenue $1,312.4 $1,152.1 $ 160.3
Intersegment - $ (67.5) 4.0 63.5
-------- -------- -------- -------
Total revenue $1,312.4 $ (67.5) $1,156.1 $ 223.8
======== ======== ======== =======
Operating income (loss) $ 37.9 $ (22.3) $ 35.6 $ 24.6
======== ======== ======== =======
Nine Months Ended
September 30, 2009
------------------
Customer revenue $3,388.2 $3,019.8 $ 368.4
Intersegment - $ (118.4) 5.0 113.4
-------- -------- -------- -------
Total revenue $3,388.2 $ (118.4) $3,024.8 $ 481.8
======== ======== ======== =======
Operating income $ 215.4 $ 16.0 $ 185.8 $ 13.6
======== ======== ======== =======
Nine Months Ended
September 30, 2008
----------------
Customer revenue $3,953.7 $3,486.2 $ 467.5
Intersegment - $(162.2) 9.4 152.8
-------- ------- -------- -------
Total revenue $3,953.7 $(162.2) $3,495.6 $ 620.3
======== ======= ======== =======
Operating income (loss) $ 88.5 $ (32.2) $ 101.4 $ 19.3
======== ======= ======== =======
11
Presented below is a reconciliation of total business segment operating income
to consolidated income before income taxes (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2009 2008 2009 2008
---- ---- ---- ----
Total segment operating income $ 116.9 $ 60.2 $ 199.4 $ 120.7
Interest expense (25.4) (21.5) (68.4) (64.3)
Other income (expense), net (3.3) (.9) (7.0) (8.4)
Corporate and eliminations 1.1 (22.3) 16.0 (32.2)
------- ------- ------- -------
Total income before income taxes $ 89.3 $ 15.5 $ 140.0 $ 15.8
======= ======= ======= =======
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2009 2008 2009 2008
---- ---- ---- ----
Services
Systems integration
and consulting $ 327.3 $ 361.2 $1,018.5 $1,094.7
Outsourcing 464.5 515.0 1,347.8 1,529.7
Infrastructure services 133.7 182.1 419.7 575.7
Core maintenance 80.5 93.8 233.8 286.1
-------- -------- -------- --------
1,006.0 1,152.1 3,019.8 3,486.2
Technology
Enterprise-class servers 138.8 141.3 295.5 384.7
Specialized technologies 14.8 19.0 72.9 82.8
-------- -------- -------- --------
153.6 160.3 368.4 467.5
-------- -------- -------- --------
Total $1,159.6 $1,312.4 $3,388.2 $3,953.7
======== ======== ======== ========
Geographic information about the company's revenue, which is principally based
on location of the selling organization, is presented below (in millions of
dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2009 2008 2009 2008
---- ---- ---- ----
United States $ 541.4 $ 559.8 $1,622.0 $1,668.5
United Kingdom 139.5 182.9 405.9 592.5
Other international 478.7 569.7 1,360.3 1,692.7
------- -------- ------- --------
Total $1,159.6 $1,312.4 $3,388.2 $3,953.7
======== ======== ======== ========
12
h. Comprehensive income (loss) for the three and nine months ended September 30,
2009 and 2008 includes the following components (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------------- -----------------
2009 2008 2009 2008
---- ------- ------ -------
Consolidated net income (loss) $ 63.1 $ (29.6) $ 81.6 $ (56.7)
------- ------ ------ -------
Other comprehensive income (loss)
Cash flow hedges
Gain - 1.6 - 1.0
Reclassification adjustments - (.4) - .1
Foreign currency translation adjustments 22.8 (37.0) 68.5 (37.3)
Postretirement adjustments 25.1 56.6 35.3 82.0
------- ------- ----- ------
Total other comprehensive income 47.9 20.8 103.8 45.8
------- ------- ----- ------
Consolidated comprehensive income (loss) 111.0 (8.8) 185.4 (10.9)
Comprehensive income attributable to
noncontrolling interests 1.6 2.0 9.9 11.5
------ ------ ----- -------
Comprehensive income (loss) attributable
to Unisys Corporation $ 112.6 $ (6.8) $ 195.3 $ .6
======= ======= ====== =======
Accumulated other comprehensive loss as of December 31, 2008 and September 30,
2009 is as follows (in millions of dollars):
Post-
Translation retirement
Total Adjustments Plans
----- ----------- --------
Balance at December 31, 2008 $(2,904.6) $(701.5) $(2,203.1)
Change during period 100.7 64.0 36.7
-------- ------- ---------
Balance at September 30, 2009 $(2,803.9) $(637.5) $(2,166.4)
======== ======= =========
Noncontrolling interests as of December 31, 2008 and September 30, 2009 is as
follows (in millions of dollars):
Non-
Controlling
Interests
-----------
Balance at December 31, 2008 $ 18.6
Net income 6.8
Translation adjustments 4.5
Postretirement plans (1.4)
------
Balance at September 30, 2009 $ 28.5
======
i. For equipment manufactured by the company, the company warrants that it
will substantially conform to relevant published specifications for 12 months
after shipment to the customer. The company will repair or replace, at its
option and expense, items of equipment that do not meet this warranty. For
company software, the company warrants that it will conform substantially to
then-current published functional specifications for 90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that prevents its use in a production environment.
The company estimates the costs that may be incurred under its warranties and
records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include the
number of units sold, historical and anticipated rates of warranty claims and
cost per claim. The company assesses quarterly the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary.
13
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- ----------------
2009 2008 2009 2008
---- ---- ---- ----
Balance at beginning of period $ 4.6 $ 5.1 $ 5.2 $ 6.9
Accruals for warranties
issued during the period .6 .6 1.7 2.0
Settlements made during
the period (.7) (.6) (2.1) (2.0)
Changes in liability for
pre-existing warranties
during the period,
including expirations (.4) (.2) (.7) (2.0)
------- ------- ------- ------
Balance at September 30 $ 4.1 $ 4.9 $ 4.1 $ 4.9
======= ======= ======= ======
j. Cash paid during the nine months ended September 30, 2009 and 2008 for
income tax was $45.4 million and $43.6 million, respectively.
Cash paid during the nine months ended September 30, 2009 and 2008 for interest
was $83.5 million and $64.4 million, respectively.
k. Effective September 30, 2009, the company adopted Accounting Standards
Update No. 2009-01, "Statement of Financial Accounting Standards No. 168 - The
FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles," (ASU 2009-01). ASU 2009-01 is not expected to change
U.S. generally accepted accounting principles but combines all nongovernmental
authoritative standards into a comprehensive, topically organized online
database. All other accounting literature excluded from ASU 2009-01 will be
considered nonauthoritative. All references to authoritative accounting
literature have been made in accordance with ASU 2009-01.
Effective July 1, 2009, the company adopted Accounting Standards Update No.
2009-05, "Measuring Liabilities at Fair Value," (ASU 2009-05). ASU 2009-05
provides additional guidance clarifying the measurement of liabilities at fair
value that are within the scope of Accounting Standards Codification (ASC) 820
and addresses several key issues with respect to estimating the fair value of
liabilities in accordance with ASC 820. Among other things, the guidance
clarifies how the price of a traded debt security should be considered in
estimating the fair value of the issuer's liability. Adoption of ASU 2009-05
did not have an impact on the company's consolidated results of operations and
financial position.
Effective January 1, 2009, the company adopted ASC 805-10 related to business
combinations, which established principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. ASC 805-
10 applies to business combinations for which the acquisition date is on or
after January 1, 2009.
Effective January 1, 2009, the company adopted ASC 810-10, which describes a
noncontrolling interest, sometimes called a minority interest, as the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent.
ASC 810-10 establishes accounting and reporting standards that require, among
other items: (a) the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity; (b) the amount of consolidated net income (loss)
attributable to the parent and the noncontrolling interests be clearly
identified and presented on the face of the consolidated statement of income;
and (c) entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. As required by ASC 810-10, the presentation and
disclosure requirements have been applied retrospectively for all periods
presented. See note (n).
14
Effective January 1, 2009, the company adopted ASC 815-10, which requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
See note (e).
Effective June 30, 2009, the company adopted ASC 855-10, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the date the financial statements are issued
or available to be issued. ASC 855-10 requires companies to reflect in their
financial statements the effects of subsequent events that provide additional
evidence about conditions at the balance-sheet date. Subsequent events that
provide evidence about conditions that arose after the balance-sheet date
should be disclosed if the financial statements would otherwise be misleading.
Disclosures should include the nature of the event and either an estimate of
its financial effect or a statement that an estimate cannot be made. See note
(p).
Effective June 30, 2009, the company adopted ASC 825-10, which requires an
entity to provide disclosures about fair value of financial instruments in
interim financial statements. See note (q).
In December 2008, the FASB issued ASC 715-20, which provides guidance on an
employer's disclosures about plan assets of a defined benefit pension or other
postretirement plan. Specifically, employers will be required to disclose
information about how investment allocation decisions are made, the fair value
of each major category of plan assets and information about the inputs and
valuation techniques used to develop the fair value measurements of plan assets.
The disclosures about plan assets required by ASC 715-20 shall be provided for
fiscal years ending after December 15, 2009, which is December 31, 2009 for
the company.
In June 2009, the FASB issued ASC 860-10, which among other changes, eliminates
the concept of a "qualifying special-purpose entity," changes the requirements
for derecognizing financial assets, defines the term participating interest to
establish specific conditions for reporting a transfer of a portion of a
financial asset as a sale and requires additional disclosures. ASC 860-10 is
effective as of the beginning of a reporting entity's first annual reporting
period that begins after November 15, 2009 (which for the company is
January 1, 2010), for interim periods within the first annual reporting period
and for interim and annual reporting periods thereafter. Earlier application
is prohibited. The recognition and measurement provisions are effective for
transfers occurring on or after the effective date. Based on an initial
review, the company believes that its current U.S. trade accounts receivable
facility will no longer meet the requirements to be treated as a sale of
receivables, and that it will be accounted for as a secured borrowing with
pledge of collateral.
In June 2009, the FASB issued ASC 860-10, which changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is
based on, among other things, an entity's purpose and design and a company's
ability to direct the activities of the entity that most significantly impact
the entity's economic performance. ASC 860-10 is effective as of the
beginning of a reporting entity's first annual reporting period that begins
after November 15, 2009 (which for the company is January 1, 2010), for interim
periods within the first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The company
is currently assessing the impact of the adoption of ASC 860-10 on its
consolidated results of operations, financial position and cash flows.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13,
"Multiple-Deliverable Revenue Arrangements," (ASU 2009-13) and Accounting
Standards Update No. 2009-14, "Certain Revenue Arrangements That Include
Software Elements," (ASU 2009-14). ASU 2009-13 supersedes certain prior
accounting guidance and requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables
based on their relative selling prices (i.e., the relative-selling-price
method). ASU 2009-13 eliminates the use of the residual method of allocation
and requires the relative-selling-price method in all circumstances in which
an entity recognizes revenue for an arrangement with multiple deliverables
subject to this ASU. ASU 2009-14 supersedes prior software revenue recognition
accounting guidance by excluding from the scope of such prior guidance tangible
products that contain software elements and non-software elements that function
together to deliver the tangible product's essential functionality. Both of
these Accounting Standards Updates must be adopted at the same time and both
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 30, 2010, which
15
for the company is January 1, 2011. Early adoption is permitted. If an entity
elects early adoption and the period of adoption is not the beginning of the
entity's fiscal year, the entity is required to apply the amendments
retrospectively from the beginning of the entity's fiscal year. An entity may
elect, but is not required, to adopt these amendments retrospectively to prior
periods. The company is currently assessing when it will adopt and is
evaluating the impact of the adoption of these Accounting Standards Updates on
its consolidated results of operations and financial position; however, the
company expects, as indicated in ASU 2009-14, that the application of the
amended guidance will result in revenue being recognized earlier than had been
required under the superseded guidance.
l. There are various lawsuits, claims, investigations and proceedings that
have been brought or asserted against the company, which arise in the ordinary
course of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. The company records a provision for these matters when
it is both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. Any provisions are reviewed at least
quarterly and are adjusted to reflect the impact and status of settlements,
rulings, advice of counsel and other information and events pertinent to a
particular matter.
The company believes that it has valid defenses with respect to legal matters
pending against it. Based on its experience, the company also believes that the
damage amounts claimed in the lawsuits disclosed below are not a meaningful
indicator of the company's potential liability. Litigation is inherently
unpredictable, however, and it is possible that the company's results of
operations or cash flow could be affected in any particular period by the
resolution of one or more of the legal matters pending against it.
In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the establishment
of secure information technology environments in airports. The Civil Division
of the Department of Justice, working with the Inspector General's Office of
the Department of Homeland Security, is reviewing issues relating to labor
categorization and overtime on the TSA contract. The Civil Division is also
reviewing issues relating to cyber intrusion protection under the TSA and
follow-on contracts. The company is working cooperatively with the Civil
Division. The company does not know whether the Civil Division will pursue
these matters, or, if pursued, what effect they might have on the company.
The company has contracts with the General Services Administration (GSA), known
as Multiple Award Schedule Contracts, under which various U.S. governmental
agencies can purchase products and services from the company. Auditors from
the GSA's Office of Inspector General are reviewing the company's compliance
with the disclosure and pricing provisions under two of these contracts, and
whether the company has potentially overcharged the government under the
contracts. Separately, the company has made voluntary disclosures about these
matters to the responsible GSA contracting officers. The company is providing
pricing and other information to the GSA auditors and is working cooperatively
with them. As the audit is on-going, the company cannot predict the outcome
at this time.
In April 2007, the Ministry of Justice of Belgium sued Unisys Belgium SA-NV, a
Unisys subsidiary (Unisys Belgium), in the Court of First Instance of Brussels.
The Belgian government had engaged the company to design and develop software
for a computerized system to be used to manage the Belgian court system. The
Belgian State terminated the contract and in its lawsuit has alleged that the
termination was justified because Unisys Belgium failed to deliver satisfactory
software in a timely manner. It claims damages of approximately 28 million
euros. The company believes it has valid defenses to the claims and contends
that the Belgian State's termination of the contract was unjustified. Unisys
Belgium has filed its defense and counterclaim in the amount of approximately
18.5 million euros. The litigation is proceeding.
In December 2007, Lufthansa AG sued Unisys Deutschland GmbH, a Unisys subsidiary
(Unisys Germany), in the District Court of Frankfurt, Germany, for allegedly
failing to perform properly its obligations during the initial phase of a 2004
software design and development contract relating to a Lufthansa customer
loyalty program. Under the contract, either party was free to withdraw from
the project at the conclusion of the initial design phase. Rather than
withdraw, Lufthansa instead terminated the contract and failed to pay the
balance owed to Unisys Germany for the initial phase. Lufthansa's lawsuit
alleges that Unisys Germany breached the contract by failing to deliver a
proper design for the new system and seeks approximately 21.4 million euros in
damages. The company believes it has valid defenses and has filed its defense
and a counterclaim in the amount of approximately 1.5 million euros. The
litigation is proceeding.
16
In July 2008, Lufthansa Systems Passenger Services GmbH sued Unisys Germany in
the District Court of Frankfurt, Germany, in connection with a 2005 agreement
under which Unisys Germany was to develop passenger management software for
Lufthansa Systems. Lufthansa Systems purported to terminate the agreement for
cause in July 2007 claiming that Unisys Germany failed to deliver satisfactory
software in a timely manner. The lawsuit sought a monetary recovery of
approximately 49 million euros. The company filed its defense and a
counterclaim in the amount of approximately 8.6 million euros. In August
2009, the district court dismissed all of Lufthansa Systems's claims except a
claim for 1.9 million euros for delay of the project and entered judgment
against Unisys Germany for this amount, plus interest and a small portion of
Lufthansa Systems's attorneys' fees. Having dismissed Lufthansa Systems's
claims, the court did not rule on the Unisys Germany counterclaim. Both
parties have appealed the decision.
Notwithstanding that the ultimate results of the lawsuits, claims,
investigations and proceedings that have been brought or asserted against the
company are not currently determinable, the company believes that at September
30, 2009, it has adequate provisions for any such matters.
m. Accounting rules governing income taxes require 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.
In addition, these rules also require that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or the
entire deferred tax asset will not be realized.
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 uses tax-planning strategies to realize or renew net
deferred tax assets to avoid the potential loss of future tax benefits.
In 2005, based upon the level of historical taxable income and projections of
future taxable income over the periods during which the deferred tax assets are
deductible, management concluded that it is more likely than not that the U.S.
and certain foreign deferred tax assets in excess of deferred tax liabilities
would not be realized. A full valuation allowance was recognized in 2005 and
is currently maintained for all U.S. and certain foreign deferred tax assets in
excess of deferred tax liabilities. The company will record a tax provision or
benefit for those international subsidiaries that do not have a full valuation
allowance against their deferred tax assets. Any profit or loss recorded for
the company's U.S. operations will have no provision or benefit associated
with it. As a result, the company's provision or benefit for taxes will vary
significantly depending on the geographic distribution of income.
n. Certain prior year amounts have been reclassified due to the adoption of ASC
810-10, see note (k). As a result of the adoption, the following retroactive
adjustment was made: the December 31, 2008 noncontrolling interests' balance of
$30.5 million, previously presented in other long-term liabilities, has been
presented as part of stockholders' deficit. Also, in connection with the
adoption, the December 31, 2008 noncontrolling interests portion of the
postretirement plans of $11.9 million, which had previously been included in
Accumulated Other Comprehensive Income, has been reported as a reduction in the
noncontrolling interests included in stockholders' deficit.
o. On July 31, 2009, the company completed offers to exchange its 6 7/8% senior
notes due 2010 (the 2010 Notes), its 8% senior notes due 2012 (the 2012 Notes),
its 8 1/2% senior notes due 2015 (the 2015 Notes) and its 12 1/2% senior notes
due 2016 (the 2016 Notes) in private placements for new 12 3/4% senior secured
notes due 2014 (the First Lien Notes), new 14 1/4% senior secured notes due
2015 (the Second Lien Notes and, together with First Lien Notes, the New
Secured Notes), shares of the company's common stock and cash. On that date,
the company issued approximately $385.0 million aggregate principal amount of
First Lien Notes, approximately $246.6 million aggregate principal amount of
Second Lien Notes and approximately 5.2 million shares of common stock and
paid $30.0 million in cash in exchange for approximately $235.1 million
aggregate principal amount of 2010 Notes, approximately $331.9 million
aggregate principal amount of 2012 Notes, approximately $134.0 million
aggregate principal amount of 2015 Notes, and approximately $59.4 million
aggregate principal amount of 2016 Notes. The New Secured Notes are guaranteed
by Unisys Holding Corporation, a wholly-owned Delaware corporation that
directly or indirectly holds the shares of substantially all of the company's
foreign subsidiaries, and by certain of the company's other current and future
U.S. subsidiaries. The First Lien Notes and Second Lien Notes are secured by
first-priority liens and second priority liens, respectively, (in each case,
subject to permitted prior liens) by substantially all of the company's
assets, except (i) accounts receivable that are subject to one or more
receivables facilities, (ii) real estate located outside the U.S., (iii) cash
or cash equivalents securing reimbursement obligations under letters of credit
or surety bonds and (iv) certain other excluded assets. The company recognized
a net gain of $.5 million on the exchange in "Other income (expense), net" in
the quarter ended September 30, 2009. As a result of the exchange, annual
interest expense will increase by approximately $23 million.
17
p. The company has evaluated subsequent events (events occurring after
September 30, 2009) for recognition or disclosure in these financial statements
up to October 30, 2009.
q. Financial assets with carrying values approximating fair value include cash
and cash equivalents and accounts receivable. Financial liabilities with
carrying values approximating fair value include accounts payable and other
accrued liabilities. The carrying amounts of these financial assets and
liabilities approximate fair value due to their short maturities. At September
30, 2009, the carrying amount of long-term debt, including current maturities,
approximated fair value.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The earnings per share amounts below reflect the company's previously announced
reverse stock split applied on a retroactive basis (see note (a) of the Notes to
Consolidated Financial Statements).
The company reported significantly improved profitability and cash flow for the
first nine months of 2009 as the company's results benefited from ongoing
actions to concentrate its resources more effectively and reduce its cost base,
despite a decline in revenue.
Revenue in the first nine months of 2009 compared with the year-ago period was
impacted by weakness in global economic conditions as well as unfavorable
foreign currency translation. The company reported revenue of $3.39 billion in
the nine months ended September 30, 2009, down 14% compared with revenue of
$3.95 billion in the nine months ended September 30, 2008. Foreign currency
exchange rates had an approximately 7-percentage-point negative impact on
revenue in the first nine months of 2009. On a constant currency basis,
revenue declined 7% in the first nine months of 2009 compared to the prior-year
period.
For the nine months ended September 30, 2009, operating income increased to
$215.4 million compared with $88.5 million in the first nine months of 2008.
Operating profit percent increased to 6.4% for the first nine months of 2009
compared with 2.2% in the year-ago period. After a tax provision of $58.4
million, the company reported net income attributable to Unisys Corporation of
$74.8 million, or $1.93 per diluted share, for the first nine months of 2009.
This compared with a year-ago net loss attributable to Unisys Corporation of
$72.1 million, or a loss of $2.01 per diluted share, which included a tax
provision of $72.5 million.
Cash from operating activities increased to $181.8 million in the first nine
months of 2009 compared with $116.4 million in the same period of 2008.
Results of operations
Company results
Revenue for the quarter ended September 30, 2009 was $1.16 billion compared
with $1.31 billion for the third quarter of 2008, a decrease of 12% from the
prior year. Foreign currency fluctuations had a 5-percentage-point negative
impact on revenue in the third quarter compared with the year-ago period.
Services revenue declined 13% and Technology revenue declined 4% in the third
quarter compared with the year-ago period. U.S. revenue was down 3% in the
third quarter compared with the year-ago period, as growth in U.S. Federal
government revenue was offset by declines in commercial revenue. International
revenue decreased 18% (11% on a constant currency basis) in the three months
ended September 30, 2009 due to declines in all major regions.
18
Total gross profit margin was 26.4% in the three months ended September 30, 2009
compared with 22.2% in the three months ended September 30, 2008. The increase
in gross profit margin reflects improved cost efficiencies in services delivery,
the benefits from operating expense reductions as well as a stronger mix of
high-end enterprise server sales.
Selling, general and administrative expense in the three months ended September
30, 2009 was $163.5 million (14.1% of revenue) compared with $218.4 million
(16.6% of revenue) in the year-ago period. The decrease in selling, general
and administrative expense reflects the benefits from cost reduction actions as
well as foreign currency exchange fluctuations. During the three months ended
September 30, 2009 and 2008, the company reversed $2.4 million and $13.2
million, respectively, of previously-accrued compensation expense related to
performance-based restricted stock units due to a change in the assessment of
the achievability of the performance goals. In addition, during the three
months ended September 30, 2009, the company reversed $2.6 million of
previously-accrued share-based compensation principally related to employees
terminated in prior periods (see note (f)).
Research and development (R&D) expenses in the third quarter of 2009 were $24.3
million compared with $35.7 million in the third quarter of 2008. The decrease
in R&D expenses in 2009 compared with 2008 principally reflects changes in the
company's development model as the company has focused its investments on
software development versus hardware design.
For the third quarter of 2009, the company reported operating income of $118.0
million compared with operating income of $37.9 million in the third quarter
of 2008.
For the three months ended September 30, 2009, pension income was $5.2 million
compared with pension income of $15.0 million for the three months ended
September 30, 2008. The expense related to the company's match to the U.S.
401(k) plan for the three months ended September 30, 2009 and 2008 was zero and
$11.3 million, respectively. Effective January 1, 2009, the company match was
suspended. The company records pension income or expense, as well as other
employee-related costs such as 401(k) match, payroll taxes and medical
insurance costs, in operating income in the following income statement
categories: cost of revenue; selling, general and administrative expenses;
and research and development expenses. The amount allocated to each category
is based on where the salaries of active employees are charged.
Due to changes in estimates related to cost reduction charges, during the three
months ended September 30, 2009, $4.7 million was recorded as expense compared
with $2.0 million recorded as expense in the year-ago period.
Interest expense for the three months ended September 30, 2009 was $25.4
million compared with $21.5 million for the three months ended September 30,
2008. The increase was principally due to higher interest rates associated with
the debt issued in connection with the debt exchange discussed below.
Other income (expense), net was an expense of $3.3 million in the third quarter
of 2009, compared with expense of $.9 million in 2008, principally due to a
loss of $4.7 million on the sale of a subsidiary in the third quarter of 2009.
The company reported income before income taxes for the three months ended
September 30, 2009 of $89.3 million compared with income before taxes of $15.5
million in 2008. The provision for income taxes was $26.2 million in the third
quarter compared with a provision of $45.1 million in the year-ago period.
Included in the tax provision for the three months ended September 30, 2009 was
a benefit related to a prior period adjustment of $4.4 million. Included in
the tax provision for the three months ended September 30, 2008 was a provision
of $7.8 million for the understatement of the income tax provision for the
first and second quarters of 2008. This charge had no effect on the 2008 year
to date provision for income taxes.
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 company will record a tax provision or benefit
for those international subsidiaries that do not have a full valuation
allowance against their deferred tax assets. Any profit or loss recorded for
the company's U.S. operations will have no provision or benefit associated
with it. As a result, the company's provision or benefit for taxes will vary
significantly quarter to quarter depending on the geographic distribution of
income.
19
The net income attributable to Unisys Corporation for the three months ended
September 30, 2009 was $61.1 million, or $1.48 per diluted share, compared with
a net loss attributable to Unisys Corporation of $34.7 million, or a loss of
$.96 per diluted share, for the three months ended September 30, 2008.
Revenue for the nine months ended September 30, 2009 was $3.39 billion compared
with $3.95 billion for the nine months ended September 30, 2008, a decrease of
14% from the prior year. Foreign currency fluctuations had a 7-percentage-point
negative impact on revenue in the current period compared with the year-ago
period. Services revenue declined 13% and Technology revenue declined 21% for
the nine months ended September 30, 2009 compared with the year-ago period.
U.S. revenue was down 3% in the first nine months of 2009 compared with the
year-ago period, as growth in U.S. Federal government revenue was offset by
declines in commercial revenue. International revenue decreased 23% (10% on a
constant currency basis) in the first nine months of 2009 due to declines in
all major regions.
Total gross profit margin was 23.6% in the nine months ended September 30, 2009
compared with 22.5% in the nine months ended September 30, 2008. The increase
in gross profit margin reflects the benefits from cost reduction actions.
Selling, general and administrative expense in the nine months ended September
30, 2009 was $506.3 million (14.9% of revenue) compared with $701.9 million
(17.8% of revenue) in the year-ago period. The decrease in selling, general
and administrative expense reflects the benefits from cost reduction actions
as well as foreign currency exchange fluctuations. During the nine months
ended September 30, 2009 and 2008, the company reversed $2.4 million and $13.2
million, respectively, of previously-accrued compensation expense related to
performance-based restricted stock units due to a change in the assessment of
the achievability of the performance goals. In addition, during the nine
months ended September 30, 2009, the company reversed $2.6 million of
previously-accrued share-based compensation principally related to employees
terminated in prior periods (see note (f)).
R&D expenses in the first nine months of 2009 were $76.8 million compared with
$98.6 million in the first nine months of 2008. The decrease in R&D expenses
in 2009 compared with 2008 principally reflects changes in the company's
development model as the company has focused its investments on software
development versus hardware design.
For the nine months ended September 30, 2009, the company reported operating
income of $215.4 million compared with operating income of $88.5 million for
the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, pension income was $17.0 million
compared with pension income of $35.3 million for the nine months ended
September 30, 2008. The decrease in pension income in 2009 from 2008 was
principally due to lower returns on plan assets worldwide. The expense related
to the company's match to the U.S. 401(k) plan for the nine months ended
September 30, 2009 and 2008 was zero and $38.0 million, respectively.
Due to changes in estimates related to cost reduction charges, during the nine
months ended September 30, 2009, $4.7 million was recorded as income compared
with $1.2 million recorded as expense in the year-ago period. In addition,
during the nine months ended September 30, 2009, the company recorded a benefit
of $11.2 million (a $5.4 million benefit in other income, a $6.1 million
benefit in cost of revenue and an expense of $.3 million in selling, general
and administrative expense related to legal fees) relating to a change in
Brazilian law involving a gross receipt tax.
Interest expense for the nine months ended September 30, 2009 was $68.4 million
compared with $64.3 million for the nine months ended September 30, 2008. The
increase was principally due to higher interest rates associated with the debt
issued in connection with the debt exchange discussed below.
Other income (expense), net was an expense of $7.0 million for the nine months
ended September 30, 2009, compared with expense of $8.4 million for the nine
months ended September 30, 2008. The nine months ended September 30, 2009
includes income of $5.4 million related to the Brazilian law change discussed
above, a loss of $4.7 million on the sale of a subsidiary and foreign exchange
losses of $6.1 million. Included in the nine months ended September 30, 2008
were foreign exchange losses of $.8 million.
20
The company reported income before income taxes for the nine months ended
September 30, 2009 of $140.0 million compared with income of $15.8 million in
2008. The provision for income taxes was $58.4 million in the first nine
months of 2009 compared with a provision of $72.5 million in the year-ago
period. Included in the tax provision for the nine months ended September 30,
2009 was a U.S. refundable credit of $8.3 million, a foreign tax refund of
$2.7 million related to a 2008 refund claim and a benefit related to a prior
period adjustment of $5.0 million. Included in the tax provision for the nine
months ended September 30, 2008 was a $5.1 million benefit related to prior
years' intercompany royalties and a U.S. refundable credit of $4.1 million.
The net income attributable to Unisys Corporation for the nine months ended
September 30, 2009 was $74.8 million, or $1.93 per diluted share, compared with
a net loss attributable to Unisys Corporation of $72.1 million, or a loss of
$2.01 per diluted share, for the nine months ended September 30, 2008.
Segment results
The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration and
consulting, outsourcing, infrastructure services and core maintenance;
Technology - enterprise-class servers and specialized technologies. The
accounting policies of each business segment are the same as those followed by
the company as a whole. Intersegment sales and transfers are priced as if the
sales or transfers were to third parties. Accordingly, the Technology segment
recognizes intersegment revenue and manufacturing profit on hardware and
software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing profit on such
shipments of company hardware and software to customers. The Services segment
also includes the sale of hardware and software products sourced from third
parties that are sold to customers through the company's Services channels. In
the company's consolidated statements of income, the manufacturing costs of
products sourced from the Technology segment and sold to Services customers are
reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended September 30, 2009 and
2008 was $1.5 million and $21.9 million, respectively. The amount for the nine
months ended September 30, 2009 and 2008 was $12.0 million and $33.1 million,
respectively. The profit on these transactions is eliminated in Corporate.
The company evaluates business segment performance on operating profit
exclusive of cost reduction 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 the three months ended September 30, 2009
and 2008 is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2009
------------------
Customer revenue $1,159.6 $1,006.0 $ 153.6
Intersegment - $ (33.2) 1.7 31.5
-------- ------- ------- ------
Total revenue $1,159.6 $ (33.2) $1,007.7 $ 185.1
======== ======== ======== =======
Gross profit percent 26.4% 19.7% 55.2%
======== ======= ======
Operating income percent 10.2% 7.7% 21.2%
======== ======= ======
Three Months Ended
September 30, 2008
------------------
Customer revenue $1,312.4 $1,152.1 $ 160.3
Intersegment - $ (67.5) 4.0 63.5
-------- ------- ------- ------
Total revenue $1,312.4 $ (67.5) $1,156.1 $ 223.8
======== ======== ======= ======
Gross profit percent 22.2% 17.6% 47.5%
======== ======= ======
Operating income percent 2.9% 3.1% 11.0%
======== ======= ======
Gross profit and operating income percent are as a percent of total revenue.
21
Customer revenue by classes of similar products or services, by segment,
is presented below (in millions of dollars):
Three Months
Ended September 30
------------------- Percent
2009 2008 Change
---- ---- --------
Services
Systems integration
and consulting $ 327.3 $ 361.2 (9.4)%
Outsourcing 464.5 515.0 (9.8)%
Infrastructure services 133.7 182.1 (26.6)%
Core maintenance 80.5 93.8 (14.2)%
-------- --------
1,006.0 1,152.1 (12.7)%
Technology
Enterprise-class servers 138.8 141.3 (1.8)%
Specialized technologies 14.8 19.0 (22.1)%
-------- --------
153.6 160.3 (4.2)%
-------- --------
Total $1,159.6 $1,312.4 (11.6)%
======== ========
In the Services segment, customer revenue was $1,006.0 million for the three
months ended September 30, 2009 down 12.7% from the three months ended
September 30, 2008. Services revenue in the third quarter of 2009 when
compared with the year-ago period was impacted by continued world wide weak
demand and foreign currency exchange rates. Foreign currency translation had
a 5-percentage-point negative impact on Services revenue in the current quarter
compared with the year-ago period.
Revenue from systems integration and consulting decreased 9.4% in the three
months ended September 30, 2009 compared with the year-ago period, reflecting
lower demand for project-based services.
Outsourcing revenue decreased 9.8% in the three months September 30, 2009
compared with the year-ago period, primarily reflecting a decline in business
processing outsourcing (BPO) revenue.
Infrastructure services revenue declined 26.6% in the three months ended
September 30, 2009 compared with the year-ago period. The decline was due to
weakness in demand for network design and consulting projects, as well as the
shift of project-based infrastructure work to managed outsourcing contracts.
Core maintenance revenue declined 14.2% in the third quarter compared with the
prior-year quarter. The company expects the secular decline of core
maintenance to continue.
Services gross profit was 19.7% in the third quarter of 2009 compared with
17.6% in the year-ago period. Services operating income percent was 7.7% in
the three months ended September 30, 2009 compared with 3.1% in the three
months ended September 30, 2008. Contributing to the increase in Services
margins were the benefits from operating expense reductions as well as cost
efficiencies in services delivery.
In the Technology segment, customer revenue was $153.6 million in the September
2009 quarter compared with $160.3 million in the year-ago period for a decrease
of 4.2%. Foreign currency translation had a negative impact of approximately 1-
percentage point on Technology revenue in the September 2009 quarter compared
with the prior-year period.
Revenue from the company's enterprise-class servers, which includes the
company's ClearPath and ES7000 product families, decreased 1.8% for the three
months ended September 30, 2009 compared with the three months ended September
30, 2008. Revenue in the current quarter benefited from a number of high-end
enterprise server deals that were closed; however, the company expects the
secular decline in the enterprise-class server market to continue.
Revenue from specialized technologies, which includes third-party technology
products and the company's payment systems products, decreased $4.2 million for
the three months ended September 30, 2009 compared with the prior year period,
principally due to a decline in the company's payment systems products.
Technology gross profit was 55.2% in the current quarter compared with 47.5% in
the year-ago quarter. Technology operating income percent was 21.2% in the
three months ended September 30, 2009 compared with 11.0% in the three months
ended September 30, 2008. Contributing to the increase in Technology margins
was a stronger mix of high-end enterprise server sales as well as the benefits
from cost reduction actions.
22
Information by business segment for the nine months ended September 30, 2009
and 2008 is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Nine Months Ended
September 30, 2009
------------------
Customer revenue $3,388.2 $3,019.8 $ 368.4
Intersegment - $(118.4) 5.0 113.4
-------- ------- ------- ------
Total revenue $3,388.2 $(118.4) $3,024.8 $ 481.8
======== ======= ======== =======
Gross profit percent 23.6% 19.0% 43.8%
======== ======= ======
Operating income percent 6.4% 6.1% 2.8%
======== ======= ======
Nine Months Ended
September 30, 2008
------------------
Customer revenue $3,953.7 $3,486.2 $ 467.5
Intersegment - $(162.2) 9.4 152.8
-------- ------- ------- ------
Total revenue $3,953.7 $(162.2) $3,495.6 $ 620.3
======== ======== ======== ======
Gross profit percent 22.5% 18.4% 43.4%
======== ======= ======
Operating income percent 2.2% 2.9% 3.1%
======== ======= ======
Gross profit and operating income percent are as a percent of total revenue.
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Nine Months
Ended September 30
------------------- Percent
2009 2008 Change
---- ---- --------
Services
Systems integration
and consulting $1,018.5 $1,094.7 (7.0)%
Outsourcing 1,347.8 1,529.7 (11.9)%
Infrastructure services 419.7 575.7 (27.1)%
Core maintenance 233.8 286.1 (18.3)%
-------- --------
3,019.8 3,486.2 (13.4)%
Technology
Enterprise-class servers 295.5 384.7 (23.2)%
Specialized technologies 72.9 82.8 (12.0)%
-------- --------
368.4 467.5 (21.2)%
-------- --------
Total $3,388.2 $3,953.7 (14.3)%
======== ========
In the Services segment, customer revenue was $3,019.8 million for the nine
months ended September 30, 2009 down 13.4% from the nine months ended September
30, 2008. Services revenue in the first nine months of 2009 when compared with
the year-ago period was impacted by continued world wide weak demand and
foreign currency exchange rates. Foreign currency translation had an 8-
percentage-point negative impact on Services revenue in the first nine months
of 2009 compared with the year-ago period.
Revenue from systems integration and consulting decreased 7.0% from $1,094.7
million for the nine months ended September 30, 2008 to $1,018.5 million for
the nine months ended September 30, 2009.
23
Outsourcing revenue decreased 11.9% for the nine months September 30, 2009
compared with the year-ago period, primarily reflecting a decline in BPO
revenue.
Infrastructure services revenue declined 27.1% for the nine months ended
September 30, 2009 compared with the year-ago period. The decline was due to
weakness in demand for network design and consulting projects, as well as the
shift of project-based infrastructure work to managed outsourcing contracts.
Core maintenance revenue declined 18.3% in the nine months ended September 30,
2009 compared with the prior-year period. The company expects the secular
decline of core maintenance to continue.
Services gross profit was 19.0% for the nine months ended September 30, 2009
compared with 18.4% in the year-ago period. Services operating income percent
was 6.1% for the nine months ended September 30, 2009 compared with 2.9% for
the nine months ended September 30, 2008. Contributing to the increase in
Services operating profit margin were benefits from cost reduction actions.
In the Technology segment, customer revenue was $368.4 million in the nine
months ended September 30, 2009 compared with $467.5 million in the year-ago
period for a decrease of 21.2%. Foreign currency translation had a negative
impact of approximately 4-percentage points on Technology revenue in the first
nine months of 2009 compared with the prior-year period. The decline in
Technology revenue in 2009 reflects lower sales of high-end mainframe systems,
primarily in Europe and Japan, as clients deferred planned purchases in a weak
economic environment, as well as the expiration of a royalty from Nihon Unisys
Limited (NUL). The company had recognized revenue of $18.8 million per quarter
($8.5 million in enterprise-class servers and $10.3 million in specialized
technologies) under this royalty agreement over the three-year period ended
March 31, 2008. The expiration of this royalty from NUL contributed about 4
percentage points of the technology segment's 21% decline in revenue.
Revenue from the company's enterprise-class servers, which includes the
company's ClearPath and ES7000 product families, decreased 23.2% for the nine
months ended September 30, 2009 compared with the nine months ended September
30, 2008. Technology sales during the period slowed as clients tightened
spending on information technology projects due to economic concerns. Also
contributing to the decrease in revenue was the secular decline in the
enterprise-class server market, which the company expects to continue.
Revenue from specialized technologies, which includes third-party technology
products and the company's payment systems products, decreased 12.0% for the
nine months ended September 30, 2009 compared with the nine months ended
September 30, 2008.
Technology gross profit was 43.8% in the first nine months of 2009 compared
with 43.4% in the year-ago period. Technology operating income percent was
2.8% for the nine months ended September 30, 2009 compared with 3.1% for the
nine months ended September 30, 2008.
New accounting pronouncements
See note (k) of the Notes to Consolidated Financial Statements for a full
description of recent accounting pronouncements, including the expected dates
of adoption and estimated effects on results of operations and financial
condition.
Financial condition
Cash and cash equivalents at September 30, 2009 were $473.6 million compared
with $544.0 million at December 31, 2008.
The company's principal sources of liquidity are cash on hand, cash from
operations and its U.S. trade accounts receivable facility, which is discussed
below. The company's revolving credit facility, which provided for loans and
letters of credit up to an aggregate of $275 million, expired on May 31, 2009.
As discussed below, on July 31, 2009 the company closed private offers to
exchange its outstanding senior notes, for new senior secured notes due in
2014, new senior secured notes due in 2015, common stock and $30 million of
cash. The company also utilizes surety bonds, letters of credit, foreign
exchange derivatives and other financial instruments to conduct its business.
The company's anticipated future cash expenditures include contributions to its
defined benefit pension plans and payments in respect of cost-reduction actions.
In addition to actions to reduce its cost structure, the company will continue
to focus on working capital management and to tightly manage capital
expenditures. Given these actions and its cash on hand at September 30, 2009,
the company believes that it will have adequate sources of liquidity to meet
its expected near-term cash requirements.
24
During the nine months ended September 30, 2009, cash provided by operations
was $181.8 million compared with cash provided of $116.4 million for the nine
months ended September 30, 2008. Cash expenditures for the nine months ended
September 30, 2009 related to cost-reduction actions (which are included in
operating activities) were approximately $56.2 million compared with $49.0
million for the prior-year period. Cash expenditures for prior year cost-
reduction actions are expected to be approximately $12.0 million for the
remainder of 2009, resulting in an expected cash expenditure of approximately
$68.2 million in 2009 compared with $60.4 million in 2008.
Cash used for investing activities for the nine months ended September 30, 2009
was $231.7 million compared with cash usage of $226.4 million during the nine
months ended September 30, 2008. Items affecting cash used for investing
activities were the following: Net proceeds from investments were $1.9 million
for the nine months ended September 30, 2009 compared with net purchases of
$9.8 million in the prior-year period. Proceeds from investments and purchases
of investments represent derivative financial instruments used to manage the
company's currency exposure to market risks from changes in foreign currency
exchange rates. The amount of proceeds and purchases of investments has
declined significantly from last year, principally reflecting the fact that in
the fourth quarter of 2008, the company capitalized certain intercompany
balances for foreign subsidiaries which reduced the need for these derivatives.
During the nine months ended September 30, 2009, the company used $82.5
million of cash to collateralize letters of credit. In addition, in the
current nine month period, the investment in marketable software was $43.7
million compared with $65.9 million in the year-ago period, capital additions
of properties were $32.1 million in 2009 compared with $51.8 million in 2008
and capital additions of outsourcing assets were $73.4 million in 2009
compared with $96.6 million in 2008.
Cash used for financing activities during the nine months ended September 30,
2009 was $45.4 million compared with $200.9 million of cash used during the
nine months ended September 30, 2008. The cash usage in the current nine month
period of $45.4 million relates to the debt exchange discussed below. The
prior-year period cash usage was principally due to the January 2008
redemption, at par, of all $200 million of the company's 7 7/8% senior notes
due April 1, 2008.
At September 30, 2009, total debt was $911.0 million, a decrease of $149.6
million from December 31, 2008, principally due to the debt exchange discussed
below.
On July 31, 2009, the company completed offers to exchange its 6 7/8% senior
notes due 2010 (the 2010 Notes), its 8% senior notes due 2012 (the 2012 Notes),
its 8 1/2% senior notes due 2015 (the 2015 Notes) and its 12 1/2% senior notes
due 2016 (the 2016 Notes) in private placements for new 12 3/4% senior secured
notes due 2014 (the First Lien Notes), new 14 1/4% senior secured notes due 2015
(the Second Lien Notes and, together with First Lien Notes, the New Secured
Notes), shares of the company's common stock and cash. On that date, the
company issued approximately $385.0 million aggregate principal amount of First
Lien Notes, approximately $246.6 million aggregate principal amount of Second
Lien Notes and approximately 5.2 million shares of common stock and paid $30.0
million in cash in exchange for approximately $235.1 million aggregate
principal amount of 2010 Notes, approximately $331.9 million aggregate
principal amount of 2012 Notes, approximately $134.0 million aggregate
principal amount of 2015 Notes, and approximately $59.4 million aggregate
principal amount of 2016 Notes. The New Secured Notes are guaranteed by Unisys
Holding Corporation, a wholly-owned Delaware corporation that directly or
indirectly holds the shares of substantially all of the company's foreign
subsidiaries, and by certain of the company's other current and future U.S.
subsidiaries. The First Lien Notes and Second Lien Notes are secured by first-
priority liens and second priority liens, respectively, (in each case, subject
to permitted prior liens) by substantially all of the company's assets, except
(i) accounts receivable that are subject to one or more receivables facilities,
(ii) real estate located outside the U.S., (iii) cash or cash equivalents
securing reimbursement obligations under letters of credit or surety bonds and
(iv) certain other excluded assets. The company recognized a net gain of $.5
million on the exchange in "Other income (expense), net" in the quarter ended
September 30, 2009. As a result of the exchange, annual interest expense will
increase by approximately $23 million.
25
On May 16, 2008, the company entered into a three-year, U.S. trade accounts
receivable facility. Under this facility, the company has agreed to sell, on
an ongoing basis, through Unisys Funding Corporation I, a wholly owned
subsidiary, up to $150 million of interests in eligible U.S. trade accounts
receivable. Under the facility, receivables are sold at a discount that
reflects, among other things, a yield based on LIBOR subject to a minimum rate.
The facility includes customary representations and warranties, including no
material adverse change in the company's business, assets, liabilities,
operations or financial condition. It also requires the company to maintain a
minimum fixed charge coverage ratio and requires the maintenance of certain
ratios related to the sold receivables. The facility will be subject to early
termination if, as of February 28, 2010, the 2010 Notes have not been
refinanced or extended to a date later than May 16, 2011. Other termination
events include failure to perform covenants, materially incorrect
representations and warranties, change of control and default under debt
aggregating at least $25 million. At September 30, 2009 and December 31, 2008,
the company had sold $118 million and $141 million, respectively, of eligible
receivables.
In addition, the company and certain international subsidiaries have access to
uncommitted lines of credit from various banks.
At September 30, 2009, the company has met all covenants and conditions under
its various lending and funding agreements. The company expects to continue to
meet these covenants and conditions.
The company currently expects to make cash contributions of approximately $100-
$105 million to its worldwide, primarily non-U.S., defined benefit pension plans
in 2009, of which $55.8 million has been made as of September 30, 2009. In
accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. qualified defined
benefit pension plan in 2009.
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 $1.1 billion of debt or equity securities, which enables the
company to be prepared for future market opportunities.
Factors that may affect future results
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events and
include any statement that does not directly relate to any historical or
current fact. Words such as "anticipates," "believes," "expects," "intends,"
"plans," "projects" and similar expressions may identify such forward-looking
statements. All forward-looking statements rely on assumptions and are subject
to risks, uncertainties and other factors that could cause the company's actual
results to differ materially from expectations. Factors that could affect
future results include, but are not limited to, those discussed below. Any
forward-looking statement speaks only as of the date on which that statement is
made. The company assumes no obligation to update any forward-looking statement
to reflect events or circumstances that occur after the date on which the
statement is made.
Factors that could affect future results include the following:
THE COMPANY'S BUSINESS IS AFFECTED BY THE ECONOMIC AND BUSINESS ENVIRONMENT.
The company's recent financial results have been impacted by the global
economic slowdown. The company has seen this slowdown particularly in its
financial services business but also in other key commercial industries, as
clients reacted to economic uncertainties by reducing information technology
spending. Decreased demand for the company's services and products has
impacted its revenue and profit margins. If current economic conditions
continue or worsen, including if the company's customers are unable to obtain
financing to purchase the company's services and products due to tight credit
conditions, the company could see further reductions in demand and increased
pressure on revenue and profit margins. The company could also see a further
consolidation of firms in the financial services industry, which could also
result in a decrease in demand. In addition, during the recent period of
disruption in the financial markets, the market price for the company's common
shares has been volatile. The company's business could also be affected by
acts of war, terrorism or natural disasters. Current world tensions could
escalate, and this could have unpredictable consequences on the world economy
and on the company's business.
26
THE COMPANY'S FUTURE RESULTS MAY DEPEND ON ITS ABILITY TO ACCESS EXTERNAL
CREDIT MARKETS. The capital and credit markets have been experiencing extreme
volatility and disruption. In addition, the commercial lending market has
contracted, with limited new loan originations or refinancings taking place.
Based on the current lending environment, the company expects to have
difficulty accessing significant additional capital in the credit markets on
acceptable terms. Given tight credit markets, along with the company's credit
rating, the company did not replace its revolving credit facility that expired
on May 31, 2009. Also, the company's ability to redeem or refinance the
senior notes that remain outstanding after the closing of the exchange offers
could be affected by credit market conditions. The turmoil and volatility in
financial markets may also impact the company's ability to utilize surety
bonds, letters of credit, foreign exchange derivatives and other financial
instruments the company uses to conduct its business. Although the company
intends to use cash on hand to address its liquidity needs, its ability to do
so assumes that its operations will continue to generate sufficient cash and
that its cash requirements will not materially exceed current estimates.
THE COMPANY HAS SIGNIFICANT PENSION OBLIGATIONS. The company has unfunded
obligations under its U.S. and non-U.S. defined benefit pension plans. The
company expects to make cash contributions of approximately $100-$105 million
to its worldwide, primarily non-U.S., defined benefit pension plans in 2009.
In accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. qualified defined
benefit pension plan in 2009. In addition, under IRS regulations issued in
March 2009, the company currently believes that it will not be required to
fund its U.S. qualified defined benefit pension plan in 2010. A further
deterioration in the value of the company's worldwide defined benefit pension
plan assets could require the company to make larger cash contributions to its
defined benefit pension plans in the future. In addition, the funding of plan
deficits over a shorter period of time than currently anticipated could result
in making cash contributions to these plans on a more accelerated basis.
Either of these events would reduce the cash available for working capital and
other corporate uses and may have an adverse impact on the company's
operations, financial condition and liquidity.
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON THE SUCCESS OF ITS TURNAROUND
PROGRAM. Over the past several years, the company has implemented and is
continuing to implement, significant cost-reduction measures intended to
achieve profitability. The company has incurred significant cost reduction
charges in connection with these efforts. Future results will depend on the
success of these efforts as well as on the success of the company's program to
focus its global resources and simplify its business structure. This program
is based on various assumptions, including assumptions regarding market segment
growth, client demand, and the proper skill set of and training for sales and
marketing management and personnel, all of which are subject to change.
Furthermore, the company's institutional stockholders may attempt to influence
these strategies.
THE COMPANY FACES AGGRESSIVE COMPETITION IN THE INFORMATION SERVICES AND
TECHNOLOGY MARKETPLACE. The information services and technology markets in
which the company operates include a large number of companies vying for
customers and market share both domestically and internationally. The company's
competitors include consulting and other professional services firms, systems
integrators, outsourcing providers, infrastructure services providers, computer
hardware manufacturers and software providers. Some of the company's
competitors may develop competing products and services that offer better price-
performance or that reach the market in advance of the company's offerings.
Some competitors also have or may develop greater financial and other resources
than the company, with enhanced ability to compete for market share, in some
instances through significant economic incentives to secure contracts. Some
also may be better able to compete for skilled professionals. Any of these
factors could lead to reduced demand for the company's products and services
and 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 FACES VOLATILITY AND RAPID TECHNOLOGICAL CHANGE IN ITS INDUSTRY.
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.
27
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON ITS ABILITY TO RETAIN SIGNIFICANT
CLIENTS. The company has a number of significant long-term contracts with
clients, including governmental entities, and its future success will depend,
in part, on retaining its relationships with these clients. The company could
lose clients for such reasons as contract expiration, conversion to a competing
service provider, disputes with clients or a decision to in-source services,
including for contracts with governmental entities as part of the rebid
process. The company could also lose clients as a result of their merger,
acquisition or business failure. The company may not be able to replace the
revenue and earnings from any such lost client.
THE COMPANY'S FUTURE RESULTS WILL DEPEND IN PART ON ITS ABILITY TO GROW
OUTSOURCING. The company's outsourcing contracts are multiyear engagements
under which the company takes over management of a client's technology
operations, business processes or networks. In a number of these arrangements,
the company hires certain of its clients' employees and may become responsible
for the related employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. The company will need to
have available sufficient financial resources in order to take on these
obligations and make these investments.
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, and
realization of expected profitability of existing outsourcing contracts. These
risks could result in an impairment of a portion of the associated assets,
which are tested for recoverability quarterly.
As long-term relationships, outsourcing contracts provide a base of recurring
revenue. However, outsourcing contracts are highly complex and can involve the
design, development, implementation and operation of new solutions and the
transitioning of clients from their existing business processes to the new
environment. In the early phases of these contracts, gross margins may be
lower than in later years when an integrated solution has been implemented,
the duplicate costs of transitioning from the old to the new system have been
eliminated and the work force and facilities have been rationalized for
efficient operations. Future results will depend on the company's ability to
effectively and timely complete these implementations, transitions and
rationalizations.
FUTURE RESULTS WILL ALSO DEPEND IN PART ON THE COMPANY'S ABILITY TO DRIVE
PROFITABLE GROWTH IN CONSULTING AND SYSTEMS INTEGRATION. The company's ability
to grow profitably in this business will depend on the level of demand for
systems integration projects and the portfolio of solutions the company offers
for specific industries. It will also depend on an improvement in the
utilization of services delivery personnel and on the company's ability to work
through disruptions in this business related to the turnaround program. In
addition, profit margins in this business are largely a function of the rates
the company is able to charge for services and the chargeability of its
professionals. If the company is unable to attain sufficient rates and
chargeability for its professionals, profit margins will suffer. The rates the
company is able to charge for services are affected by a number of factors,
including clients' perception of the company's ability to add value through
its services; introduction of new services or products by the company or its
competitors; pricing policies of competitors; and general economic conditions.
Chargeability is also affected by a number of factors, including the company's
ability to transition employees from completed projects to new engagements, and
its ability to forecast demand for services and thereby maintain an appropriate
headcount.
FUTURE RESULTS WILL ALSO DEPEND, IN PART, ON MARKET DEMAND FOR THE COMPANY'S
HIGH-END ENTERPRISE SERVERS AND MAINTENANCE ON THESE SERVERS. In the company's
technology business, high-end enterprise servers and maintenance on these
servers continue to experience secular revenue declines. The company continues
to apply its resources to develop value-added software capabilities and
optimized solutions for these server platforms which provide competitive
differentiation. Future results will depend, in part, on customer acceptance
of ClearPath systems and the company's ability to maintain its installed base
for ClearPath and to develop next-generation ClearPath products that are
purchased by the installed base. Future results of the technology business
will also depend, in part, on the successful execution of the company's
arrangements with NEC.
28
THE COMPANY'S CONTRACTS WITH U.S. GOVERNMENTAL AGENCIES MAY BE SUBJECT TO
AUDITS, CRIMINAL PENALTIES, SANCTIONS AND OTHER EXPENSES AND FINES. The company
frequently enters into contracts with governmental entities. U.S. government
agencies, including the Defense Contract Audit Agency and the Department of
Labor, routinely audit government contractors. These agencies review a
contractor's performance under its contracts, cost structure and compliance
with applicable laws, regulations and standards. The U.S. government also may
review the adequacy of, and a contractor's compliance with contract terms and
conditions, its systems and policies, including the contractor's purchasing,
property, estimating, billing, accounting, compensation and management
information systems. Any costs found to be overcharged or improperly allocated
to a specific contract or any amounts improperly billed for products or
services will be subject to reimbursement to the government. If an audit
uncovers improper or illegal activities, the company may be subject to civil
and criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from doing business with the U.S. government.
THE COMPANY'S CONTRACTS MAY NOT BE AS PROFITABLE AS EXPECTED OR PROVIDE THE
EXPECTED LEVEL OF REVENUES. A number of the company's long-term contracts for
infrastructure services, outsourcing, help desk and similar services do not
provide for minimum transaction volumes. As a result, revenue levels are not
guaranteed. In addition, some of these contracts may permit customer
termination or may impose other penalties if the company does not meet the
performance levels specified in the contracts.
The company's contracts with governmental entities are subject to the
availability of appropriated funds. These contracts also contain provisions
allowing the governmental entity to terminate the contract at the governmental
entity's discretion before the end of the contract's term. In addition, if the
company's performance is unacceptable to the customer under a government
contract, the government retains the right to pursue remedies under the
affected contract, which remedies could include termination.
Certain of the company's outsourcing agreements require that the company's
prices be benchmarked and provide for a downward adjustment to those prices if
the pricing for similar services in the market has changed. As a result,
anticipated revenues from these contracts may decline.
Some of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted services
and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
THE COMPANY MAY FACE DAMAGE TO ITS REPUTATION OR LEGAL LIABILITY IF ITS CLIENTS
ARE NOT SATISFIED WITH ITS SERVICES OR PRODUCTS. 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. Allegations by private litigants
or regulators of improper conduct, as well as negative publicity and press
speculation about the company, whatever the outcome and whether or not valid,
may harm its reputation. In addition to harm to reputation, 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.
FUTURE RESULTS WILL DEPEND IN PART ON THE PERFORMANCE AND CAPABILITIES OF THIRD
PARTIES. 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.
29
THE COMPANY IS SUBJECT TO THE RISKS OF DOING BUSINESS INTERNATIONALLY. More
than half of the company's total revenue is derived from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, changes in political or economic
conditions, trade protection measures, import or export licensing requirements,
multiple and possibly overlapping and conflicting tax laws, new tax
legislation, weaker intellectual property protections in some jurisdictions
and additional legal and regulatory compliance requirements applicable to
businesses that operate internationally, including the Foreign Corrupt
Practices Act and non-U.S. laws and regulations.
THE COMPANY COULD FACE BUSINESS AND FINANCIAL RISK IN IMPLEMENTING FUTURE
DISPOSITIONS OR ACQUISITIONS. As part of the company's business strategy, it
may from time to time consider disposing of existing technologies, products and
businesses that may no longer be in alignment with its strategic direction,
including transactions of a material size or acquiring complementary
technologies, products and businesses. Potential risks with respect to
dispositions include difficulty finding buyers or alternative exit strategies
on acceptable terms in a timely manner; potential loss of employees; and
dispositions at unfavorable prices or on unfavorable terms, including relating
to retained liabilities. Any acquisitions may result in the incurrence of
substantial additional indebtedness or contingent liabilities. Acquisitions
could also result in potentially dilutive issuances of equity securities and an
increase in amortization expenses related to intangible assets. Additional
potential risks associated with acquisitions include integration difficulties;
difficulties in maintaining or enhancing the profitability of any acquired
business; risks of entering markets in which the company has no or limited
prior experience; potential loss of employees or failure to maintain or renew
any contracts of any acquired business; and expenses of any undiscovered or
potential liabilities of the acquired product or business, including relating
to employee benefits contribution obligations or environmental requirements.
Further, with respect to both dispositions and acquisitions, management's
attention could be diverted from other business concerns. Current adverse
credit conditions could also affect the company's ability to consummate
divestments or acquisitions. The risks associated with dispositions and
acquisitions could have a material adverse effect upon the company's business,
financial condition and results of operations. There can be no assurance that
the company will be successful in consummating future dispositions or
acquisitions on favorable terms or at all.
THE COMPANY'S SERVICES OR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS. The company cannot be sure that its services and products do
not infringe on the intellectual property rights of third parties, and it may
have infringement claims asserted against it or against its clients. These
claims could cost the company money, prevent it from offering some services or
products, or damage its reputation.
PENDING LITIGATION COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS OR CASH
FLOW. There are various lawsuits, claims, investigations and proceedings that
have been brought or asserted against the company, which arise in the ordinary
course of business, including actions with respect to commercial and government
contracts, labor and employment, employee benefits, environmental matters and
intellectual property. See note (k) of the Notes to Consolidated Financial
Statements for more information on litigation. The company believes that it has
valid defenses with respect to legal matters pending against it. Litigation is
inherently unpredictable, however, and it is possible that the company's
results of operations or cash flow could be affected in any particular period
by the resolution of one or more of the legal matters pending against it.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
There has been no material change in the company's assessment of its
sensitivity to market risk since its disclosure in its Annual Report on Form 10-
K for the fiscal year ended December 31, 2008.
Item 4. Controls and Procedures
--------------------------------
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of September 30, 2009.
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. Such evaluation did not identify any change in the
Company's internal control over financial reporting that occurred during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
------- -----------------
Item 1 Legal Proceedings
------- -----------------
Information with respect to litigation is set forth in note (l) of the Notes to
Consolidated Financial statements, and such information is incorporated herein
by reference.
Item 1A. Risk Factors
------- ------------
See "Factors that may affect future results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
risk factors.
Item 6. Exhibits
------- --------
(a) Exhibits
See Exhibit Index
31
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: October 30, 2009 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Scott Hurley
----------------------
Scott Hurley
Vice President and
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of
Unisys Corporation (incorporated by reference to Exhibit 3.1 to the
registrant's Current Report on Form 8-K dated October 23, 2009).
3.2 Bylaws of Unisys Corporation, as amended through December 6, 2007
(incorporated by reference to Exhibit 3 to the registrant's Current
Report on Form 8-K dated December 6, 2007)
4.1 Indenture, dated as of July 31, 2009, among Unisys Corporation, the
Subsidiary Guarantors named therein and Deutsche Bank Trust Company
Americas, as trustee, including the form of 12 3/4% Senior Secured
Notes due 2014 (incorporated by reference to Exhibit 4.1 to the
registrant's Current Report on Form 8-K dated July 31, 2009).
4.2 Indenture, dated as of July 31, 2009, among Unisys Corporation, the
Subsidiary Guarantors named therein and Deutsche Bank Trust Company
Americas, as trustee, including the form of 14 1/4% Senior Secured
Notes due 2015.
4.3 Second Supplemental Indenture, dated as of July 30, 2009, between
Unisys Corporation and HSBC Bank USA, National Association, as trustee
(incorporated by reference to Exhibit 4.3 to the registrant's Current
Report on Form 8-K dated July 31, 2009).
10.1 Collateral Trust Agreement, dated as of July 31, 2009, among Unisys
Corporation, the Subsidiary Guarantors named therein and Deutsche Bank
Trust Company Americas, as collateral trustee (incorporated by
reference to Exhibit 10.1 to the registrant's Current Report on Form
8-K dated July 31, 2009).
10.2 Priority Lien Pledge and Security Agreement, dated as of July 31, 2009,
among Unisys Corporation, the Subsidiary Guarantors named therein and
Deutsche Bank Trust Company Americas, as collateral trustee, including
forms of trademark, copyright and patent security agreements
(incorporated by reference to Exhibit 10.2 to the registrant's Current
Report on Form 8-K dated July 31, 2009).
10.3 Junior Lien Pledge and Security Agreement, dated as of July 31, 2009,
among Unisys Corporation, the Subsidiary Guarantors named therein and
Deutsche Bank Trust Company Americas, as collateral trustee, including
forms of trademark, copyright and patent security agreements
(incorporated by reference to Exhibit 10.3 to the registrant's Current
Report on Form 8-K dated July 31, 2009).
10.4 Registration Rights Agreement, dated as of July 31, 2009, among Unisys
Corporation, Goldman, Sachs & Co., Banc of America Securities LLC, and
Deutsche Bank Securities Inc.12 (incorporated by reference to Exhibit
10.4 to the registrant's Current Report on Form 8-K dated July 31,
2009).
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of J. Edward Coleman required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of J. Edward Coleman required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350