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, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of Common Stock outstanding as of September 30, 2007:
351,525,102.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
September 30,
2007 December 31,
(Unaudited) 2006
----------- ------------
Assets
------
Current assets
Cash and cash equivalents $ 448.5 $ 719.3
Accounts and notes receivable, net 1,093.0 1,164.6
Inventories:
Parts and finished equipment 99.9 95.0
Work in process and materials 96.0 81.2
Deferred income taxes 30.0 30.0
Prepaid expenses and other current assets 155.1 148.4
-------- --------
Total 1,922.5 2,238.5
-------- --------
Properties 1,320.1 1,233.4
Less-Accumulated depreciation and
amortization 982.7 892.1
-------- --------
Properties, net 337.4 341.3
-------- --------
Outsourcing assets, net 426.1 401.1
Marketable software, net 282.7 304.3
Prepaid postretirement assets 338.2 250.1
Deferred income taxes 182.4 191.3
Goodwill 199.3 193.9
Other long-term assets 124.9 117.4
-------- --------
Total $3,813.5 $4,037.9
======== ========
Liabilities and stockholders' equity
------------------------------------
Current liabilities
Notes payable $ - $ 1.2
Current maturities of long-term debt 200.3 .5
Accounts payable 420.9 460.9
Other accrued liabilities 1,286.2 1,469.1
-------- --------
Total 1,907.4 1,931.7
-------- --------
Long-term debt 849.4 1,049.1
Long-term postretirement liabilities 629.7 667.7
Other long-term liabilities 414.0 453.6
Stockholders' equity (deficit)
Common stock, shares issued: 2007, 353.7;
2006, 347.5 3.5 3.5
Accumulated deficit (2,479.7) (2,386.8)
Other capital 3,999.7 3,945.1
Accumulated other comprehensive loss (1,510.5) (1,626.0)
-------- --------
Stockholders' equity (deficit) 13.0 (64.2)
-------- --------
Total $3,813.5 $4,037.9
======== ========
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
------------------ ------------------
2007 2006 2007 2006
---- ---- ---- ----
Revenue
Services $1,217.6 $1,217.6 $3,579.1 $3,618.5
Technology 175.5 192.5 537.7 586.7
-------- -------- -------- --------
1,393.1 1,410.1 4,116.8 4,205.2
Costs and expenses
Cost of revenue:
Services 994.5 1,058.9 2,980.6 3,271.7
Technology 89.5 92.5 270.3 310.0
-------- -------- -------- --------
1,084.0 1,151.4 3,250.9 3,581.7
Selling, general and administrative 225.8 256.1 717.8 834.2
Research and development 39.7 45.5 131.6 184.7
-------- -------- -------- --------
1,349.5 1,453.0 4,100.3 4,600.6
-------- ------- -------- --------
Operating profit (loss) 43.6 (42.9) 16.5 (395.4)
Interest expense 18.5 19.0 56.1 57.9
Other income (expense), net (19.3) .4 (2.5) 153.1
-------- -------- -------- --------
Income (loss) before income taxes 5.8 (61.5) (42.1) (300.2)
Provision (benefit) for income taxes 36.8 16.0 50.8 (.2)
-------- -------- -------- --------
Net loss $ (31.0) $ (77.5) $ (92.9) $ (300.0)
======== ======== ======== ========
Loss per share
Basic $ (.09) $ (.23) $ (.27) $ (.87)
======== ======== ======== ========
Diluted $ (.09) $ (.23) $ (.27) $ (.87)
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Nine Months Ended
September 30
------------------
2007 2006
-------- --------
Cash flows from operating activities
Net loss $ (92.9) $(300.0)
Add (deduct) items to reconcile net loss
to net cash used for operating activities:
Equity loss - 4.3
Employee stock compensation 8.6 4.8
Company stock issued for U.S. 401(k) plan 34.3 13.4
Depreciation and amortization of properties 83.9 88.1
Depreciation and amortization of outsourcing assets 102.4 100.5
Amortization of marketable software 90.1 98.7
Gain on sale of assets (23.4) (153.2)
Decrease (increase) in deferred income taxes, net 8.9 (44.0)
Decrease in receivables, net 111.7 8.0
(Increase) decrease in inventories (15.6) 5.2
(Decrease) increase in accounts payable and other
accrued liabilities (286.8) 69.8
Decrease in other liabilities (68.8) (64.8)
(Increase) decrease in other assets (28.7) 21.2
Other 2.1 9.3
------- ------
Net cash used for operating activities (74.2) (138.7)
------- ------
Cash flows from investing activities
Proceeds from investments 5,785.7 5,617.8
Purchases of investments (5,793.4) (5,620.7)
Investment in marketable software (73.0) (81.2)
Capital additions of properties (56.4) (48.2)
Capital additions of outsourcing assets (108.4) (68.9)
Purchases of businesses (2.0) -
Proceeds from sale of assets 28.0 380.6
------- ------
Net cash (used for) provided by
investing activities (219.5) 179.4
------- ------
Cash flows from financing activities
Net reduction in short-term borrowings (1.1) (17.3)
Proceeds from exercise of stock options 12.3 .9
Dividends paid to minority shareholders (5.8) -
Payments of long-term debt - (57.9)
Cost of credit agreement - (4.6)
------- ------
Net cash provided by (used for) financing activities 5.4 (78.9)
------- ------
Effect of exchange rate changes on
cash and cash equivalents 17.5 7.7
------- ------
(Decrease) increase in cash and cash equivalents (270.8) (30.5)
Cash and cash equivalents, beginning of period 719.3 642.5
------- -------
Cash and cash equivalents, end of period $ 448.5 $ 612.0
======== =======
See notes to consolidated financial statements.
5
Unisys Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished herein
reflects all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
specified. These adjustments consist only of normal recurring accruals except
as disclosed herein. Because of seasonal and other factors, results for interim
periods are not necessarily indicative of the results to be expected for the
full year.
a. The following table shows how the loss per share was computed for the
three and nine months ended September 30, 2007 and 2006 (dollars in millions,
shares in thousands):
Three Months Nine Months
Ended September 30 Ended September 30
---------------- -----------------
2007 2006 2007 2006
---- ---- ---- ----
Basic Loss Per Share:
Net loss $ (31.0) $ (77.5) $ (92.9)$ (300.0)
======== ========= ======== ========
Weighted average shares 350,765 344,182 348,715 343,351
======== ========= ======== ========
Basic loss per share $ (.09) $ (.23) $ (.27) $ (.87)
======== ========= ======== ========
Diluted Loss Per Share:
Net loss $ (31.0) $ (77.5) $ (92.9) $ (300.0)
======== ========= ======== ========
Weighted average shares 350,765 344,182 348,715 343,351
Plus incremental shares
from assumed conversions
of employee stock plans - - - -
-------- --------- -------- --------
Adjusted weighted average shares 350,765 344,182 348,715 343,351
======== ========= ======== ========
Diluted loss per share $ (.09) $ (.23) $ (.27) $ (.87)
======== ========= ======== ========
At September 30, 2007, no shares related to employee stock plans were
included in the computation of diluted earnings per share since inclusion of
these shares would be antidilutive because of the net loss incurred in the
three and nine months ended September 30, 2007.
b. In October 2005, the company announced a cost-reduction plan to right size
the company's cost structure. During 2006, the company committed to a
reduction of 5,665 employees. This resulted in pretax charges in 2006 of
$330.1 million, principally related to severance costs, and was comprised of
(a) a charge of $72.4 million for 2,250 employees in the U.S. and (b) a
charge of $257.7 million for 3,415 employees outside the U.S.
During the three months ended September 30, 2007, the company did not record
additional cost reduction charges.
During the three months ended September 30, 2006, the company committed to a
reduction of approximately 100 employees outside the U.S. that resulted in a
pretax charge in the third quarter of 2006 of $36.4 million, principally
related to severance costs. The pretax charge was recorded in the following
statement of income classifications: cost of revenue-services, $28.1 million
and selling, general and administrative expenses, $8.3 million.
During the nine months ended September 30, 2007, the company consolidated
facility space and committed to an additional reduction of 1,517 employees.
This resulted in a pretax charge of $66.0 million. The charge related to
work force reductions of $52.5 million is broken down as follows: (a) 876
employees in the U.S. for a charge of $23.6 million and (b) 641 employees
outside the U.S. for a charge of $28.9 million. The facility charge of
$13.5 million principally relates to leased property that the company ceased
using as of June 30, 2007. The pretax charge was recorded in the following
statement of income classifications: cost of revenue-services, $31.8
million; cost of revenue-technology, $.5 million; selling, general and
administrative expenses, $18.6 million; research and development expenses,
$15.9 million; and other income (expense), net, $.8 million.
6
The cost reduction actions taken in the first nine months of 2007 when
combined with the 2006 actions bring the total pretax charge to $396.1
million, comprised of $382.6 million for 7,182 work force reductions and
$13.5 million for idle lease cost. The combined employee reduction actions
are expected to be substantially completed by the end of 2007. Given the
company's recent headcount reductions and its continued move to an
increasingly mobile services delivery workforce, the company is currently
looking at potential cost saving opportunities and may take additional
actions in the fourth quarter to further consolidate facility space.
For the nine months ended September 30, 2006, a pretax charge of $323.5
million was recorded in the following statement of income classifications:
cost of revenue-services, $212.9 million; cost of revenue-technology, $2.0
million; selling, general and administrative expenses, $82.0 million;
research and development expenses, $29.4 million; and other income
(expense), net, $2.8 million.
A further breakdown of the individual components of these costs follows (in
millions of dollars):
Work Force
Reductions
-------------- Idle
Headcount Total U.S. Int'l. Lease Cost
--------- ----- ---- ------ ----------
Balance at December
31, 2006 757 $142.6 $ 26.1 $116.5
Additional provisions 1,517 66.0 23.6 28.9 $ 13.5
Minority interest .8 .8
Utilized (1,220) (117.2) (33.2) (82.7) (1.3)
Changes in estimates
and revisions (126) (17.4) 6.3 (23.0) (.7)
Translation adjustments 3.6 3.3 .3
------ ------ ----- ----- ------
Balance at Sept. 30, 2007 928 $ 78.4 $22.8 $ 43.8 $ 11.8
====== ====== ===== ===== ======
Expected future utilization:
2007 remaining three months 410 $22.2 $ 8.0 $ 13.4 $ .8
Beyond 2007 518 56.2 14.8 30.4 11.0
c. In March 2006, the company adopted changes to its U.S. defined benefit
pension plans effective December 31, 2006. The changes affected most U.S.
employees including senior management and included ending the accrual of
future benefits in the company's defined benefit pension plans for employees
effective December 31, 2006. No new entrants to the plans are allowed after
that date. The changes do not affect the vested accrued pension benefits of
current and former employees, including retirees. In addition, effective
January 1, 2007, the company increased its matching contribution for its
U.S. defined contribution plan to 100 percent of the first 6 percent of
eligible pay contributed by plan participants. As a result of the
amendment to stop accruals for future benefits in its U.S. defined benefit
pension plans, the company recorded a pretax curtailment gain of $45.0
million in the first quarter of 2006.
Net periodic pension expense (income) for the three and nine months ended
September 30, 2007 and 2006 is presented below (in millions of dollars):
Three Months Three Months
Ended September 30, 2007 Ended September 30, 2006
----------------------- -----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 11.4 $ .1 $ 11.3 $ 26.0 $ 13.9 $ 12.1
Interest cost 101.0 69.5 31.5 91.7 63.0 28.7
Expected return on
plan assets (134.5) (97.4) (37.1) (114.2) (83.1) (31.1)
Amortization of prior
service (benefit) cost .1 - .1 ( .4) ( .5) .1
Recognized net actuarial
loss 33.4 24.3 9.1 40.3 27.5 12.8
----- ------ ----- ----- ----- -----
Net periodic pension
expense (income) $ 11.4 $ (3.5) $ 14.9 $ 43.4 $ 20.8 $ 22.6
====== ====== ====== ====== ======= ======
7
Nine Months Nine Months
Ended September 30, 2007 Ended September 30, 2006
----------------------- ------------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ------ ----- ----- ------
Service cost $ 33.2 $ .2 $33.0 $ 83.2 $ 47.5 $ 35.7
Interest cost 301.1 208.5 92.6 298.5 215.3 83.2
Expected return on
plan assets (401.0) (292.3) (108.7) (374.8) (284.1) (90.7)
Amortization of prior
service (benefit) cost .4 - .4 (.9) (1.5) .6
Recognized net actuarial
loss 99.7 73.0 26.7 130.8 93.9 36.9
Curtailment gain (45.0) (45.0)
------- ------- ------- ------- ------ -----
Net periodic pension
expense (income) $ 33.4 $ (10.6) $44.0 $ 91.8 $26.1 $65.7
======= ======= ======= ====== ====== =====
The company currently expects to make cash contributions of approximately
$75 million to its worldwide defined benefit pension plans in 2007 compared
with $78.0 million in 2006. For the nine months ended September 30, 2007
and 2006, $52.6 million and $53.3 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 2007.
Net periodic postretirement benefit expense for the three and nine months
ended September 30, 2007 and 2006 is presented below (in millions of
dollars):
Three Months Nine Months
Ended September 30 Ended September 30
----------------- -----------------
2007 2006 2007 2006
---- ---- ---- ----
Interest cost $3.1 $3.2 $ 9.2 $ 9.6
Expected return on assets (.1) (.2) (.4) (.3)
Amortization of prior
service benefit - (.5) - (1.5)
Recognized net actuarial
loss 1.2 1.4 3.8 4.0
---- ---- ---- -----
Net periodic postretirement
benefit expense $4.2 $3.9 $12.6 $11.8
==== ==== ==== =====
The company expects to make cash contributions of approximately $30 million
to its postretirement benefit plan in 2007 compared with $26.9 million in
2006. For the nine months ended September 30, 2007 and 2006, $27.3 million
and $19.1 million, respectively, of cash contributions have been made.
d. In March 2006, the company sold all of the shares it owned in Nihon Unisys,
Ltd. (NUL), a publicly traded Japanese company. The company received gross
proceeds of $378.1 million and recognized a pretax gain of $149.9 million in
the first quarter of 2006. NUL will remain the exclusive distributor of the
company's hardware and software in Japan.
In February 2007, the company sold its media business for gross proceeds of
$28.0 million and recognized a pretax gain of $23.4 million.
e. Under the company's stockholder approved stock-based plans, stock options,
stock appreciation rights, restricted stock and restricted stock units may
be granted to officers, directors and other key employees. As of September
30, 2007, the company has granted non-qualified stock options and restricted
stock units under these plans. At September 30, 2007, 3.9 million shares of
unissued common stock of the company were available for granting under these
plans.
For the nine months ended September 30, 2007, 54,000 stock options were
granted. The company currently expects that any future grants of stock
option awards will be principally to newly hired individuals.
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:
PAGE> 8
Nine Months Ended September 30,
-------------------------------
2007 2006
---- ----
Weighted-average fair value of grant $2.88 $2.46
Risk-free interest rate 4.63% 4.35%
Expected volatility 35.31% 45.88%
Expected life of options in years 3.67 3.67
Expected dividend yield - -
For periods after January 1, 2006, the company has granted an annual
restricted stock unit award to officers, directors and other key employees
in lieu of an annual stock option grant. The restricted stock unit awards
granted in March 2006 contained both time-based units (25% of the grant) and
performance-based units (75% of the grant). The time-based units vest in
three equal annual installments beginning with the first anniversary of the
grant, and the performance-based units vest in three equal annual
installments, beginning with the first anniversary of the grant, based upon
the achievement of pretax profit and revenue growth rate goals in 2006 (the
first installment), 2006-2007 (the second installment), and 2006-2008 (the
third installment). The restricted stock unit awards granted in March 2007
consist of only performance-based units which vest at the end of three
years, based upon the achievement of pretax profit and revenue growth rate
goals for the three-year period from 2007-2009. 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 share-based expense in
selling, general and administrative expense.
During the nine months ended September 30, 2007 and 2006, the company
recorded $8.6 million and $4.8 million of share-based compensation expense,
respectively, which is comprised of $8.4 million and $4.4 million of
restricted stock unit expense and $.2 million and $.4 million of stock
option expense, respectively.
A summary of stock option activity for the nine months ended September 30,
2007 follows (shares in thousands):
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (years) ($ in millions)
------- ------ --------- ------------ ---------------
Outstanding at
December
31, 2006 43,190 $16.44
Granted 54 8.87
Exercised (1,712) 7.21
Forfeited and
expired (3,455) 15.18
-------
Outstanding at
Sept. 30, 2007 38,077 16.95 3.27 $2.0
======
Vested and
expected to
vest at
Sept. 30, 2007 38,077 16.95 3.27 2.0
======
Exercisable at
Sept. 30, 2007 37,614 17.08 3.27 1.8
======
The aggregate intrinsic value in the above table reflects the total pretax
intrinsic value (the difference between the company's closing stock price on
the last trading day of the period and the exercise price of the options,
multiplied by the number of in-the-money stock options) that would have been
received by the option holders had all option holders exercised their
options on September 30, 2007. 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, 2007 was $2.9 million; the amount for the nine months ended
September 30, 2006 was immaterial. As of September 30, 2007, $1.1 million
of total unrecognized compensation cost related to stock options is expected
to be recognized over a weighted-average period of 1.7 years.
9
A summary of restricted stock unit activity for the nine months ended
September 30, 2007 follows (shares in thousands):
Weighted-
Restricted Average
Stock Grant Date
Units Fair Value
---------- ----------
Outstanding at
December 31, 2006 1,963 $6.66
Granted 3,336 8.34
Vested (359) 6.89
Forfeited and expired (654) 7.36
----
Outstanding at
Sept. 30, 2007 4,286 7.84
=====
The fair value of restricted stock units is determined based on the average
of the high and low trading price of the company's common shares on the date
of grant. The weighted-average grant-date fair value of restricted stock
units granted during the nine months ended September 30, 2007 and 2006 was
$8.34 and $6.55, respectively. As of September 30, 2007, there was $25.8
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 2.1 years. The
total fair value of restricted share units vested during the nine months
ended September 30, 2007 and 2006 was $3.0 million and $.8 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, 2007 and 2006 was $12.3 million and $.9 million, respectively.
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 in light of its tax position. Tax benefits resulting
from tax deductions in excess of the compensation costs recognized are
classified as financing cash flows.
f. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - 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 and nine months ended
September 30, 2007 and 2006 was $14.4 million and $9.7 million, and $16.2
million and $13.0 million, respectively. The profit on these transactions
is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue,
employees, square footage or usage. Therefore, the segment comparisons
below exclude the cost reduction items mentioned above.
10
A summary of the company's operations by business segment for the three and
nine month periods ended September 30, 2007 and 2006 is presented below (in
millions of dollars):
Total Corporate Services Technology
----- --------- -------- ----------
Three Months Ended
September 30, 2007
------------------
Customer revenue $1,393.1 $1,217.6 $ 175.5
Intersegment $ (61.2) 3.4 57.8
-------- ------- -------- ------
Total revenue $1,393.1 $ (61.2) $1,221.0 $ 233.3
======== ======= ======== ======
Operating income (loss) $ 43.6 $ (9.5) $ 43.6 $ 9.5
======== ======= ======== =======
Three Months Ended
September 30, 2006
------------------
Customer revenue $1,410.1 $1,217.6 $ 192.5
Intersegment $ (76.5) 3.6 72.9
-------- -------- -------- -------
Total revenue $1,410.1 $ (76.5) $1,221.2 $ 265.4
======== ======== ======== =======
Operating income (loss) $ (42.9) $ (42.0) $ (15.6) $ 14.7
======== ======= ======== =======
Nine Months Ended
September 30, 2007
------------------
Customer revenue $4,116.8 $3,579.1 $ 537.7
Intersegment $(148.7) 10.9 137.8
-------- -------- -------- -------
Total revenue $4,116.8 $(148.7) $3,590.0 $ 675.5
======== ======== ======== =======
Operating income (loss) $ 16.5 $ (62.5) $ 62.8 $ 16.2
======== ======== ======== =======
Nine Months Ended
September 30, 2006
------------------
Customer revenue $4,205.2 $3,618.5 $ 586.7
Intersegment $(172.3) 10.8 161.5
-------- -------- -------- -------
Total revenue $4,205.2 $(172.3) $3,629.3 $ 748.2
======== ======== ======== =======
Operating loss $ (395.4) $(330.7) $ (37.7) $ (27.0)
======== ======== ======== =======
Presented below is a reconciliation of total business segment operating
income (loss) to consolidated income (loss) before income taxes (in millions
of dollars):
Three Months Nine Months
Ended September 30 Ended September 30
----------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
Total segment
operating income (loss) $ 53.1 $ (.9) $ 79.0 $ (64.7)
Interest expense (18.5) (19.0) (56.1) (57.9)
Other income (expense), net (19.3) .4 (2.5) 153.1
Cost reduction charges - (36.4) (66.0) (323.5)
Corporate and eliminations (9.5) (5.6) 3.5 (7.2)
------- ------- ------- -------
Total income (loss) before
income taxes $ 5.8 $ (61.5) $ (42.1) $(300.2)
======= ======= ======= =======
11
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2007 2006 2007 2006
---- ---- ---- ----
Services
Systems integration
and consulting $ 379.2 $ 377.6 $1,092.6 $1,162.9
Outsourcing 523.9 491.0 1,497.7 1,417.4
Infrastructure services 208.6 237.0 667.4 691.5
Core maintenance 105.9 112.0 321.4 346.7
-------- -------- -------- --------
1,217.6 1,217.6 3,579.1 3,618.5
Technology
Enterprise-class servers 133.9 146.2 411.8 459.9
Specialized technologies 41.6 46.3 125.9 126.8
-------- -------- -------- --------
175.5 192.5 537.7 586.7
-------- -------- -------- --------
Total $1,393.1 $1,410.1 $4,116.8 $4,205.2
======== ======== ======== ========
g. Comprehensive income (loss) for the three and nine months ended September
30, 2007 and 2006 includes the following components (in millions of
dollars):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2007 2006 2007 2006
---- ---- ---- ----
Net loss $(31.0) $ (77.5) $ (92.9) $ (300.0)
Other comprehensive income
(loss)
Cash flow hedges
Income (loss) .4 (.1) - (.3)
Reclassification adj. (.4) .5 - .5
Foreign currency
translation adjustments 6.4 6.0 35.8 (6.2)
Postretirement adjustments 24.3 - 79.7 1,446.0
------ -------- -------- -------
Total other comprehensive
income (loss) 30.7 6.4 115.5 1,440.0
------- ------- -------- -------
Comprehensive income (loss) $ (.3) $ (71.1) $ 22.6 $1,140.0
======= ======= ======== =======
Accumulated other comprehensive income (loss) as of December 31, 2006 and
September 30, 2007 is as follows (in millions of dollars):
Cash
Translation Flow Postretirement
Total Adjustments Hedges Plans
----- ----------- ------ -------------
Balance at December 31, 2006 $(1,626.0) $(633.1) $ - $ (992.9)
Change during period 115.5 35.8 - 79.7
-------- ------- ------ ---------
Balance at September 30, 2007 $(1,510.5) $(597.3) $ - $ (913.2)
========= ======= ====== =========
h. For equipment manufactured by the company, the company warrants that it
will substantially conform to relevant published specifications for 12 months
after shipment to the customer. The company will repair or replace, at its
option and expense, items of equipment that do not meet this warranty. For
company software, the company warrants that it will conform substantially to
then-current published functional specifications for 90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that prevents its use in a production environment.
12
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2007 2006 2007 2006
---- ---- ---- ----
Balance at beginning of
period $ 8.6 $ 8.9 $ 8.2 $ 8.0
Accruals for warranties
issued during the period 1.4 2.1 3.9 7.1
Settlements made during
the period (1.8) (2.3) (5.6) (7.1)
Changes in liability for
pre-existing warranties
during the period,
including expirations (.1) (.1) 1.6 .6
------- -------- ------- ------
Balance at September 30 $ 8.1 $ 8.6 $ 8.1 $ 8.6
======= ======== ======= ======
i. Net cash refunds received during the nine months ended September 30, 2007
for income taxes was $4.0 million compared with net cash paid for income
taxes during the nine months ended September 30, 2006 of $60.4 million.
Cash paid during the nine months ended September 30, 2007 and 2006 for
interest was $52.6 million and $60.4 million, respectively.
During the nine months ended September 30, 2007, the company financed $22.7
million of internal use software licenses.
j. Effective January 1, 2007, the company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" (FIN 48). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Adoption of FIN 48 did not have a material impact on the company's
consolidated results of operations and financial position. See note (l).
Effective January 1, 2007, the company adopted EITF 06-2, "Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No.
43." EITF 06-2 applies to compensated absences that require a minimum
service period but have no increase in the benefit even with additional
years of service and requires the benefit to be recognized as a liability
over the service period. Adoption of EITF 06-2 did not have a material
impact on the company's consolidated results of operations and financial
position.
Effective January 1, 2007, the company adopted EITF 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4." EITF 06-5 requires
that a policyholder should consider any additional amounts included in the
contractual terms of the policy in determining the amount that could be
realized under the insurance contract on a policy-by-policy basis. Adoption
of EITF 06-5 did not have a material impact on the company's consolidated
results of operations and financial position.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" (SFAS No. 157). SFAS No. 157 defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair
value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. Accordingly,
SFAS No. 157 does not require any new fair value measurements. The
provisions of SFAS No. 157 are to be applied prospectively and are effective
for financial statements issued for fiscal years beginning after November
15, 2007. The company is currently evaluating what effect, if any, adoption
of SFAS No. 157 will have on the company's consolidated results of
operations and financial position.
13
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been elected are reportable in earnings. The provisions of SFAS No. 159
shall be effective as of the beginning of each reporting entity's first
fiscal year that begins after November 15, 2007. The company is currently
assessing the impact of SFAS No. 159 on its consolidated results of
operations and financial position.
EITF 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements," was issued
in September 2006 and is effective for fiscal years beginning after December
15, 2007. EITF 06-4 requires that, for split-dollar life insurance
arrangements that provide a benefit to an employee that extends to
postretirement periods, an employer should recognize a liability for future
benefits in accordance with SFAS No. 106. EITF 06-4 requires that
recognition of the effects of adoption should be either by (a) a change in
accounting principle through a cumulative-effect adjustment to retained
earnings as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods.
The company is reviewing EITF 06-4 and does not currently expect that its
adoption will have a material impact on the company's consolidated results
of operations and financial position.
k. In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the
establishment of secure information technology environments in airports. The
Defense Contract Audit Agency (DCAA), at the request of TSA, reviewed
contract performance and raised some government contracting issues. The
company continues to work to address certain contracts administration issues
raised by the DCAA. In addition, the Civil Division of the Department of
Justice, working with the Inspector General's Office of the Department of
Homeland Security, is reviewing issues raised by the DCAA relating to labor
categorization and overtime on the TSA contract. The company understands
that the Civil Division's review continues at a preliminary stage. The
company is working cooperatively with the Civil Division. The company does
not know whether the Civil Division will pursue the matter, or, if pursued,
what effect this might have on the company.
l. Effective January 1, 2007, the company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" (FIN 48). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Adoption of FIN 48 did not have a material impact on the company's
consolidated results of operations and financial position.
The company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The company
recently concluded a U.S. federal income tax audit of the years 2000-2003
with no material impact. Several U.S. state and foreign income tax audits
are in process. There are currently no income tax audits in process in
either Brazil or the United Kingdom, which are the most significant
jurisdictions outside the U.S. For Brazil, the audit period through 2000 is
closed and for the United Kingdom, the audit period through 2004 is closed.
All of the various ongoing income tax audits throughout the world are not
expected to have a material impact on the company's financial position.
The company recognizes penalties and interest accrued related to income tax
liabilities in the provision (benefit) for income taxes in its consolidated
statements of income. The company had an accrual of $7.7 million for the
payment of penalties and interest at September 30, 2007 and $10.3 million at
December 31, 2006.
As of December 31, 2006, the company had $38.3 million of a liability for
unrecognized tax benefits. In March 2007, the company settled an income tax
audit in the Netherlands and as a result, recorded a tax benefit of $39.4
million and received a refund, including interest, of approximately $57
million during the second quarter of 2007.
14
After the settlement discussed above, the company had $14.4 million of a
liability for unrecognized tax benefits as of September 30, 2007, all of
which, if recognized, would affect the company's effective tax rate. The
company does not currently expect that the total amount of unrecognized tax
benefits at September 30, 2007 will significantly increase or decrease
within the next 12 months.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
In October 2005, Unisys announced a comprehensive, multi-year program to
fundamentally reposition the company in the marketplace and enhance its
profitability. The program included: 1) focusing the company's resources on
higher-growth market segments such as outsourcing, enterprise security, open
source, Microsoft solutions, and real-time infrastructure while continuing to
invest in its proprietary ClearPath enterprise servers; 2) focusing sales and
marketing efforts on large client accounts and selected geographies; 3)
significantly reducing the company's cost structure in line with its more
focused business model; and 4) divesting non-core areas of the business and
using the proceeds to fund its restructuring efforts.
In the third quarter of 2007, the company continued to make progress against
this repositioning program. As a result of its cost-reduction efforts and other
actions, the company's operating profit margins improved significantly in the
quarter from year-ago levels. The company saw this progress particularly in its
services business, which represented 87% of its revenue in the quarter.
The company achieved this progress despite two issues that continue to impact
its operating profitability: 1) higher temporary contract labor costs, which
have been needed to help maintain service delivery levels during the
transitional period as it implements headcount reductions; and 2) lower volume
in its systems integration and consulting business due to disruptions in this
business related to repositioning actions. The company is focused on addressing
these issues while continuing to implement the repositioning program.
For the nine months ended September 30, 2007, the company reported a net loss of
$92.9 million, or $.27 per share, compared with a net loss of $300.0 million, or
$.87 per share, for the nine months ended September 30, 2006. The current nine-
month period includes pretax charges relating to cost reduction actions of $66.0
million compared with $323.5 million in the prior nine-month period.
During the first nine months of 2007, the company:
* recorded cost reduction charges of $66.0 million for 1,517 personnel
reductions and idle facility costs (see note (b));
* continued its program to divest non-core assets by selling its media
business for cash proceeds of approximately $28 million (see note (d));
and
* settled a Netherlands income tax audit and as a result recorded a tax
benefit of approximately $39 million and received a cash refund,
including interest, of approximately $57 million (see note (l)).
15
Results of operations
Company results
For the three months ended September 30, 2007, the company reported a net loss
of $31.0 million, or $.09 per share, compared with a net loss of $77.5 million,
or $.23 per share, for the three months ended September 30, 2006. The current
period includes no pretax charges relating to cost reduction actions compared
with $36.4 million of charges in the prior-year period.
Revenue for the quarter ended September 30, 2007 was $1.39 billion compared with
$1.41 billion for the third quarter of 2006, a decrease of 1% from the prior
year. Technology revenue declined 9% while Services revenue was flat when
compared with the prior year. Foreign currency fluctuations had a 3-percentage-
point positive impact on revenue in the current period compared with the year-
ago period. U.S. revenue declined 5% in the quarter compared with the year-ago
period, principally driven by weakness in infrastructure services. Revenue in
international markets increased 2% due to increases in Latin America, Canada and
Pacific/Asia, offset in part by a decrease in Europe. On a constant currency
basis, international revenue declined 4% in the three months ended September 30,
2007 compared with the three months ended September 30, 2006.
During the three months ended September 30, 2007, the company did not record
additional cost reduction charges.
During the three months ended September 30, 2006, the company committed to a
reduction of approximately 100 employees outside the U.S. that resulted in a
pretax charge in the third quarter of 2006 of $36.4 million, principally related
to severance costs. The pretax charge was recorded in the following statement
of income classifications: cost of revenue-services, $28.1 million and selling,
general and administrative expenses, $8.3 million.
The cost reduction actions taken in the first nine months of 2007 when combined
with the 2006 actions bring the total pretax charge to $396.1 million, comprised
of $382.6 million for 7,182 work force reductions and $13.5 million for idle
lease cost. The combined employee reduction actions are expected to be
substantially completed by the end of 2007. Net of investments in offshore
resources and outsourcing of certain internal, non-client facing functions, the
company anticipates that these combined actions will yield, on a run-rate basis,
annualized cost savings in excess of $365 million by the first half of 2008.
Given the company's recent headcount reductions and its continued move to an
increasingly mobile services delivery workforce, the company is currently
looking at potential cost saving opportunities and may take additional actions
in the fourth quarter to further consolidate facility space.
In March 2006, the company adopted changes to its U.S. defined benefit
pension plans effective December 31, 2006. The changes affected most U.S.
employees including senior management and included ending the accrual of future
benefits in the company's defined benefit pension plans for employees
effective December 31, 2006. No new entrants to the plans are allowed after
that date. The changes do not affect the vested accrued pension benefits of
current and former employees, including retirees. In addition, effective
January 1, 2007, the company increased its matching contribution for its
U.S. defined contribution plan to 100 percent of the first 6 percent of
eligible pay contributed by plan participants. As a result of the
amendment to stop accruals for future benefits in its U.S. defined benefit
pension plans, the company recorded a pretax curtailment gain of $45.0
million in the first quarter of 2006.
Pension expense for the three months ended September 30, 2007 was $11.4 million
compared with $43.4 million for the three months ended September 30, 2006. The
company records pension income or expense, as well as other employee-related
costs such as payroll taxes and medical insurance costs, in operating income in
the following income statement categories: cost of sales; selling, general and
administrative expenses; and research and development expenses. The amount
allocated to each category is based on where the salaries of active employees
are charged.
Total gross profit margin was 22.2% in the three months ended September 30, 2007
compared with 18.3% in the three months ended September 30, 2006. Included in
the gross profit margin in 2006 were cost reduction charges of $28.1 million.
The increase in gross profit margin excluding the 2006 charges principally
reflects the benefits derived from the cost reduction actions as well as a
decline in pension expense of $22.3 million ($8.8 million for the three months
ended September 30, 2007 compared with $31.1 million in the year-ago period).
16
Selling, general and administrative expenses were $225.8 million for the three
months ended September 30, 2007 (16.2% of revenue) compared with $256.1 million
(18.2% of revenue) in the year-ago period. During the current quarter, as a
result of unfavorable administrative tax rulings, the company recorded a charge
of approximately $6 million principally related to a sales and use tax matter.
In addition, as a result of a favorable arbitration ruling, the company reversed
approximately $6.5 million of outstanding bad debt reserves related to a former
systems integration contract. Included in selling, general and administrative
expense in the year-ago quarter were cost reduction charges of $8.3 million.
The decrease in selling, general and administrative expense excluding these
items principally reflects the benefits derived from the cost reduction actions
as well as a decline in pension expense of $6.3 million ($2.9 million for the
three months ended September 30, 2007 compared with $9.2 million in the year-ago
period).
Research and development (R&D) expenses in the third quarter of 2007 were $39.7
million compared with $45.5 million in the third quarter of 2006. The company
continues to invest in proprietary operating systems and in key programs within
its industry practices. The reduction in R&D in 2007 compared with 2006
principally reflects the benefits derived from the cost reduction actions as
well as a decline in pension expense of $3.3 million ($.2 million of income for
the three months ended September 30, 2007 compared with $3.1 million of expense
in the year-ago period).
For the third quarter of 2007, the company reported a pretax operating income of
$43.6 million compared with a pretax operating loss of $42.9 million in the
third quarter of 2006. The third quarter of 2006 included a $36.4 million
charge related to cost reduction actions. Contributing to the increase in
operating profit was a decline in pension expense of $32.0 million ($11.4
million for the three months ended September 30, 2007 compared with $43.4
million in the year-ago period), as well as the benefits derived from the cost
reduction actions.
Interest expense for the three months ended September 30, 2007 was $18.5 million
compared with $19.0 million for the three months ended September 30, 2006.
Other income (expense), net, which can vary from period to period, was expense
of $19.3 million in the third quarter of 2007, compared with income of $.4
million in 2006. The difference in 2007 from 2006 was principally due to
expense of $10.7 million in the current quarter to settle an escheat audit and
foreign exchange losses in the current period of $6.1 million compared with $.2
million gain in the prior-year period. In addition, there was an expense of
$6.2 million in the current quarter compared with expense of $2.3 million in the
last year's third quarter related to minority shareholders' portion of income of
iPSL, a 51% owned subsidiary which is fully consolidated by the company. The
change was due to increased profit from iPSL resulting from the renegotiated
contract in January 2006 and benefits derived from cost reduction actions.
Income (loss) before income taxes for the three months ended September 30, 2007
was income of $5.8 million compared with a loss of $61.5 million in 2006. The
provision for income taxes was $36.8 million in the current quarter compared
with a provision of $16.0 million in the year-ago period. Due to the
establishment of a full valuation allowance for all of the company's U.S.
deferred tax assets and certain international subsidiaries in the third quarter
of 2005, the company no longer has a meaningful effective tax rate. The company
will record a tax provision or benefit for those international subsidiaries that
do not have a full valuation allowance against their deferred tax assets. Any
profit or loss recorded for the company's U.S. operations will have no provision
or benefit associated with it. As a result, the company's provision or benefit
for taxes will vary significantly quarter to quarter depending on the geographic
distribution of income. In the current quarter, income increased in certain
international jurisdictions due in large part to profit improvement caused by
the company's cost reduction actions. In addition, the provision for income
taxes in the current period includes $8.9 million due to a reduction in the UK
income tax rate. The rate reduction from 30% to 28% was enacted in the third
quarter effective April 1, 2008. The provision of $8.9 million was caused by a
write down of the UK deferred tax assets to the 28% rate.
For the nine months ended September 30, 2007, the company reported a net loss of
$92.9 million, or $.27 per share, compared with a net loss of $300.0 million, or
$.87 per share, for the nine months ended September 30, 2006. The current nine-
month period includes pretax charges relating to cost reduction actions of $66.0
million compared with $323.5 million in the prior nine-month period.
17
Total revenue for the nine months ended September 30, 2007 and 2006 was $4.12
billion and $4.21 billion, respectively. Foreign currency translations had a 3-
percentage-point positive impact on revenue in the current nine months when
compared with the year-ago period. In the current nine-month period, Services
revenue decreased 1% and Technology revenue decreased 8%.
U.S. revenue declined 5% in the current nine-month period compared with the
year-ago period and revenue in international markets was up slightly. On a
constant currency basis, international revenue decreased 6% in the nine months
ended September 30, 2007.
Pension expense for the nine months ended September 30, 2007 was $33.4 million
compared with $91.8 million of pension expense for the nine months ended
September 30, 2006. The decrease in pension expense in 2007 from 2006 was
principally due to the change in the U.S. defined benefit pension plans,
discussed above.
Total gross profit margin was 21.0% in the nine months ended September 30, 2007
compared with 14.8% in the year-ago period. Included in the gross profit margin
in 2007 and 2006 were cost reduction charges of $32.3 million and $214.9
million, respectively. The increase in gross profit margin excluding these
charges principally reflects the benefits derived from the cost reduction
actions as well as a decline in pension expense of $42.9 million ($25.1 million
for the nine months ended September 30, 2007 compared with $68.0 million in the
year-ago period).
For the nine months ended September 30, 2007, selling, general and
administrative expenses were $717.8 million (17.4% of revenue) compared with
$834.2 million (19.8% of revenue) for the nine months ended September 30, 2006.
Included in selling, general and administrative expense in 2007 and 2006 were
cost reduction charges of $18.6 million and $82.0 million, respectively. The
decrease in selling, general and administrative expense excluding these charges
principally reflects the benefits derived from the cost reduction actions as
well as a decline in pension expense of $10.4 million ($9.1 million for the nine
months ended September 30, 2007 compared with $19.5 million in the year-ago
period).
R&D expense for the nine months ended September 30, 2007 was $131.6 million
compared with $184.7 million a year ago. Included in R&D expense in 2007 and
2006 were cost reduction charges of $15.9 million and $29.4 million,
respectively. The reduction in R&D in 2007 compared with 2006 excluding these
charges principally reflects the benefits derived from the cost reduction
actions as well as a decline in pension expense of $5.0 million ($.7 million of
income for the nine months ended September 30, 2007 compared with $4.3 million
of expense in the year-ago period).
For the nine months ended September 30, 2007, the company reported an operating
profit of $16.5 million compared with an operating loss of $395.4 million for
the nine months ended September 30, 2006. Included in operating profit was
charges of $66.8 million and $323.5 million in 2007 and 2006, respectively,
related to the cost reduction actions. Contributing to the increase in
operating profit was a decline in pension expense of $58.4 million ($33.4
million for the nine months ended September 30, 2007 compared with $91.8 million
in the year-ago period), as well as the benefits derived from the cost reduction
actions.
Interest expense for the nine months ended September 30, 2007 was $56.1 million
compared with $57.9 million for the nine months ended September 30, 2006.
Other income (expense), net was an expense of $2.5 million in the current nine-
month period compared with income of $153.1 million in the year-ago period.
Other income (expense) in 2007 principally reflects a gain of $23.4 million on
the sale of the company's media business as well as an expense of $10.7 million
to settle an escheat audit. The 2006 period principally reflects a gain of
$149.9 million from the sale of all of the company's shares in NUL (see note
(d)).
Income (loss) before income taxes was a loss of $42.1 million in the nine months
ended September 30, 2007 compared with a loss of $300.2 million last year. The
provision for income taxes was $50.8 million in the current period compared with
a benefit of $.2 million in the year-ago period. The tax provision in the
current period includes $39.4 million related to the Netherlands income tax
audit settlement (see note (l)) and $8.9 million related to the U.K income tax
rate change (discussed above).
18
In 2002, the company and the Transportation Security Administration (TSA)
entered into a competitively awarded contract providing for the establishment of
secure information technology environments in airports. The Defense Contract
Audit Agency (DCAA), at the request of TSA, reviewed contract performance and
raised some government contracting issues. The company continues to work to
address certain contracts administration issues raised by the DCAA. In
addition, the Civil Division of the Department of Justice, working with the
Inspector General's Office of the Department of Homeland Security, is reviewing
issues raised by the DCAA relating to labor categorization and overtime on the
TSA contract. The company understands that the Civil Division's review continues
at a preliminary stage. The company is working cooperatively with the Civil
Division. The company does not know whether the Civil Division will pursue the
matter, or, if pursued, what effect this might have on the company.
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 agreements. The amount of such profit included in operating income of
the Technology segment for the three and nine months ended September 30, 2007
and 2006 was $14.4 million and $9.7 million, and $16.2 million and $13.0
million, respectively. The profit on these transactions is eliminated in
Corporate.
The company evaluates business segment performance on operating income exclusive
of restructuring charges and unusual and nonrecurring items, which are included
in Corporate. All other corporate and centrally incurred costs are allocated to
the business segments, based principally on revenue, employees, square footage
or usage. Therefore, the segment comparisons below exclude the cost reduction
items mentioned above.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
September 30, 2007
------------------
Customer revenue $1,393.1 $1,217.6 $175.5
Intersegment $(61.2) 3.4 57.8
-------- ------- -------- ------
Total revenue $1,393.1 $(61.2) $1,221.0 $233.3
======== ======= ======== ======
Gross profit percent 22.2 % 17.7 % 44.6 %
======== ======== ======
Operating profit percent 3.1 % 3.6 % 4.0 %
======== ======== ======
Three Months Ended
September 30, 2006
------------------
Customer revenue $1,410.1 $1,217.6 $192.5
Intersegment $(76.5) 3.6 72.9
-------- ------- -------- ------
Total revenue $1,410.1 $(76.5) $1,221.2 $265.4
======== ======= ======== ======
Gross profit percent 18.3 % 13.9 % 46.3 %
======== ======== ======
Operating profit
(loss) percent (3.0)% (1.3)% 5.5 %
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
19
Customer revenue by classes of similar products or services, by segment, is
presented below (in millions of dollars):
Three Months
Ended September 30 Percent
------------------ Increase
2007 2006 (Decrease)
---- ---- ----------
Services
Systems integration
and consulting $ 379.2 $ 377.6 -
Outsourcing 523.9 491.0 7 %
Infrastructure services 208.6 237.0 (12)%
Core maintenance 105.9 112.0 (5)%
-------- --------
1,217.6 1,217.6 -
Technology
Enterprise-class servers 133.9 146.2 (8)%
Specialized technologies 41.6 46.3 (10)%
-------- --------
175.5 192.5 (9)%
-------- --------
Total $1,393.1 $1,410.1 (1)%
======== ========
In the Services segment, customer revenue was $1.22 billion for the three months
ended September 30, 2007 unchanged from the three months ended September 30,
2006. Foreign currency translation had a 4-percentage-point positive impact on
Services revenue in current quarter compared with the year-ago period.
Revenue from systems integration and consulting remained flat with an increase
of $1.6 million from $377.6 million in the September 2006 quarter to $379.2
million in the September 2007 quarter. Although revenue was flat in the current
quarter, the company continues to work through disruptions in this business
related to changes made in the repositioning program.
Outsourcing revenue increased by $32.9 million or 7% for the three months ended
September 30, 2007 compared with the three months ended September 30, 2006, led
by increases in both information technology outsourcing (ITO) and business
processing outsourcing (BPO).
Infrastructure services revenue declined by $28.4 million or 12% for the three
month period ended September 30, 2007 compared with the three month period ended
September 30, 2006 due to weakness in network design and consulting projects, as
well as the shift of project-based infrastructure work to managed outsourcing
contracts. This trend is expected to continue.
Core maintenance revenue declined by $6.1 million or 5% in the current quarter
compared with the prior-year quarter. The company expects the secular decline
of core maintenance will continue.
Services gross profit was 17.7% in the third quarter of 2007 compared with 13.9%
in the year-ago period. Services operating income (loss) percent was 3.6% in
the three months ended September 30, 2007 compared with (1.3)% in the three
months ended September 30, 2006. The increase in Services operating profit
margin principally reflects the benefits derived from the cost reduction actions
as well as a decline in pension expense of $26.7 million ($11.2 million for the
three months ended September 30, 2007 compared with $37.9 million in the year-
ago period). During the quarter, the company continued to experience higher
temporary contract labor costs, which have been needed to help maintain service
delivery levels during the transitional period as it implements headcount
reductions; and lower volume in its systems integration and consulting business
due to disruptions in this business related to repositioning actions. The
company is focused on addressing these issues while continuing to implement the
repositioning program.
In the Technology segment, customer revenue was $176 million in the current
quarter compared with $193 million in the year-ago period for a decrease of 9%.
Foreign currency translation had a positive impact of approximately 1-percentage
points on Technology revenue in the current period compared with the prior-year
period.
20
Revenue for the company's enterprise-class servers, which includes the company's
ClearPath and ES7000 product families, decreased from $146.2 million for the
three months ended September 30, 2006 to $133.9 million for the three months
ended September 30, 2007, a decline of $12.3 million or 8%. Included in the
three months ended September 30, 2007 were systems upgrades from large financial
services customers in Latin America and Pacific/Asia. The revenue decline
reflects the continuing secular decline in enterprise servers.
Revenue from specialized technologies, which includes the company's payment
systems products, third-party technology products and royalties from the
company's agreement with NUL, decreased from $46.3 million for the three months
ended September 30, 2006 to $41.6 million for the three months ended September
30, 2007, a decrease of $4.7 million or 10%. The decline was principally due to
reduced revenue from the company's former semiconductor test equipment business
that was sold in 2006. Revenue from NUL will decline in 2008 due to expiration
of the one-time fixed royalty fee of $225 million under an agreement executed in
2005. The company currently is recognizing $18.8 million per quarter under this
royalty agreement over the three-year period ending March 31, 2008.
Technology gross profit was 44.6% in the current quarter compared with 46.3% in
the year-ago quarter. Technology operating income percent was 4.0% in the three
months ended September 30, 2007 compared with 5.5% in the three months ended
September 30, 2006. The decline in revenue and operating margins in 2007
compared with 2006 primarily reflects the continuing secular decline in
enterprise servers.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Nine Months Ended
September 30, 2007
------------------
Customer revenue $4,116.8 $3,579.1 $537.7
Intersegment $(148.7) 10.9 137.8
-------- ------- -------- ------
Total revenue $4,116.8 $(148.7) $3,590.0 $675.5
======== ======= ======== ======
Gross profit percent 21.0 % 16.7 % 43.7 %
======== ======== ======
Operating profit percent 0.4 % 1.7 % 2.4 %
======== ======== ======
Nine Months Ended
September 30, 2006
------------------
Customer revenue $4,205.2 $3,618.5 $586.7
Intersegment $(172.3) 10.8 161.5
-------- ------- -------- ------
Total revenue $4,205.2 $(172.3) $3,629.3 $748.2
======== ======= ======== ======
Gross profit percent 14.8 % 14.4 % 42.1 %
======== ======== ======
Operating profit
(loss) percent (9.4)% (1.0)% (3.6)%
======== ======== ======
Gross profit percent 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):
Nine Months
Ended September 30 Percent
------------------ Increase
2007 2006 (Decrease)
---- ---- ----------
Services
Systems integration
and consulting $1,092.6 $1,162.9 (6)%
Outsourcing 1,497.7 1,417.4 6 %
Infrastructure services 667.4 691.5 (3)%
Core maintenance 321.4 346.7 (7)%
-------- --------
3,579.1 3,618.5 (1)%
Technology
Enterprise-class servers 411.8 459.9 (10)%
Specialized technologies 125.9 126.8 (1)%
-------- --------
537.7 586.7 (8)%
-------- --------
Total $4,116.8 $4,205.2 (2)%
======== ========
In the Services segment, customer revenue was $3.58 billion for the nine months
ended September 30, 2007, down 1% from $3.62 billion for the nine months ended
September 30, 2006. Foreign currency translation had a 4-percentage-point
positive impact on Services revenue in the current period compared with the
year-ago period.
Revenue from systems integration and consulting decreased $70.3 million or 6%
from $1.16 billion in the nine months ended September 30, 2006 to $1.09 billion
in the nine months ended September 30, 2007. The company continues to work
through disruptions in this business related to changes made in the
repositioning program.
Outsourcing revenue increased by $80.3 million or 6% for the nine months ended
September 30, 2007 compared with the nine months ended September 30, 2006, led
by increases in both information technology outsourcing (ITO) and business
processing outsourcing (BPO).
Infrastructure services revenue declined by $24.1 million or 3% for the nine
month period ended September 30, 2007 compared with the nine month period ended
September 30, 2006 due to weakness in network design and consulting projects, as
well as the shift of project-based infrastructure work to managed outsourcing
contracts. This trend is expected to continue.
Core maintenance revenue declined by $25.3 million or 7% in the current period
compared with the prior-year period. The company expects the secular decline of
core maintenance will continue.
Services gross profit was 16.7% in the nine months ended September 30, 2007
compared with 14.4% in the year-ago period. Services operating income (loss)
percent was 1.7% in the nine months ended September 30, 2007 compared with
(1.0)% in the nine months ended September 30, 2006. The increase in Services
operating profit margin principally reflects the benefits derived from the cost
reduction actions as well as a decline in pension expense of $50.0 million
($33.0 million for the nine months ended September 30, 2007 compared with $83.0
million in the year-ago period). During the period, the company continued to
experience higher temporary contract labor costs, which have been needed to help
maintain service delivery levels during the transitional period as it implements
headcount reductions; and lower volume in its systems integration and consulting
business due to disruptions in this business related to repositioning actions.
The company is focused on addressing these issues while continuing to implement
the repositioning program.
In the Technology segment, customer revenue was $538 million in the current
quarter compared with $587 million in the year-ago period for a decrease of 8%.
Foreign currency translation had a positive impact of approximately 2-percentage
points on Technology revenue in the current period compared with the prior-year
period.
22
Revenue for the company's enterprise-class servers decreased from $459.9 million
for the nine months ended September 30, 2006 to $411.8 million for the nine
months ended September 30, 2007, a decline of $48.1 million or 10%. The revenue
decline reflects the continuing secular decline in enterprise servers.
Revenue from specialized technologies decreased from $126.8 million for the nine
months ended September 30, 2006 to $125.9 million for the nine months ended
September 30, 2007, a decrease of $.9 million or 1%.
Technology gross profit was 43.7% in the current period compared with 42.1% in
the year-ago period. Technology operating income percent was 2.4% in the nine
months ended September 30, 2007 compared with (3.6)% in the nine months ended
September 30, 2006. The increase in Technology operating profit margin
principally reflects the benefits derived from the cost reduction actions as
well as a decline in pension expense of $8.5 million ($.3 million for the nine
months ended September 30, 2007 compared with $8.8 million in the year-ago
period).
New accounting pronouncements
See note (j) 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, 2007 were $448.5 million compared
with $719.3 million at December 31, 2006.
During the nine months ended September 30, 2007, cash used for operations was
$74.2 million compared with cash used of $138.7 million for the nine months
ended September 30, 2006. The current-year period included a tax refund of
approximately $57 million. Cash expenditures in the current period related to
the current year and prior-year restructuring actions (which are included in
operating activities) were approximately $123.9 million compared with $110.2
million for the prior-year period. Cash expenditures for the current-year and
the prior-year restructuring actions are expected to be approximately $24
million for the remainder of 2007, resulting in an expected cash expenditure of
approximately $148 million in 2007 compared with $198 million in 2006. At
September 30, 2007 and December 31, 2006, receivables of $100 million and $170
million, respectively, were sold under the company's U.S. trade accounts
receivable program discussed below.
Cash used for investing activities for the nine months ended September 30, 2007
was $219.5 million compared with $179.4 million of cash provided during the nine
months ended September 30, 2006. The principal reason for the decrease was that
in 2006, the company received net proceeds of $380.6 million from the sale of
the NUL shares and other assets. Net purchases of investments were $7.7 million
for the nine months ended September 30, 2007 compared with net purchases of $2.9
million in the prior-year period. Proceeds from investments and purchases of
investments represent derivative financial instruments used to manage the
company's currency exposure to market risks from changes in foreign currency
exchange rates. In addition, in the current period, the investment in
marketable software was $73.0 million compared with $81.2 million in the year-
ago period, capital additions of properties were $56.4 million in 2007 compared
with $48.2 million in 2006 and capital additions of outsourcing assets were
$108.4 million in 2007 compared with $68.9 million in 2006. The increase in
capital expenditures for outsourcing assets reflects higher expenditures on
outsourcing projects as the company began new client projects. During the nine
months ended September 30, 2007, the company financed $22.7 million of internal
use software licenses.
Cash provided by financing activities during the nine months ended September 30,
2007 was $5.4 million compared with $78.9 million of cash used during the nine
months ended September 30, 2006. The prior-year period includes a cash
expenditure of $57.9 million to retire at maturity all of the company's
remaining 8 1/8% senior notes. The current-year period includes $12.3 million
of cash received due to employee exercise of stock options during the nine
months ended September 30, 2007 compared with $.9 million in the prior-year
period. The current period also includes $5.8 million of cash expenditure for
dividends paid to minority shareholders.
At September 30, 2007 and December 31, 2006, total debt was $1.05 billion.
23
The company has a three-year, secured revolving credit facility which expires in
2009 that provides for loans and letters of credit up to an aggregate of $275
million. Borrowings under the facility bear interest based on short-term rates
and the company's credit rating. The credit agreement contains customary
representations and warranties, including no material adverse change in the
company's business, results of operations or financial condition. It also
contains financial covenants requiring the company to maintain certain interest
coverage, leverage and asset coverage ratios and a minimum amount of liquidity,
which could reduce the amount the company is able to borrow. The credit
facility also includes covenants limiting liens, mergers, asset sales, dividends
and the incurrence of debt. Events of default include non-payment, failure to
perform covenants, materially incorrect representations and warranties, change
of control and default under other debt aggregating at least $25 million. If an
event of default were to occur under the credit agreement, the lenders would be
entitled to declare all amounts borrowed under it immediately due and payable.
The occurrence of an event of default under the credit agreement could also
cause the acceleration of obligations under certain other agreements and the
termination of the company's U.S. trade accounts receivable facility, discussed
below. Also, the credit facility may be terminated if the 7 7/8% senior notes
due 2008 have not been repaid, refinanced or defeased by payment of amounts due
to an escrow agent on or prior to January 1, 2008. The credit facility is
secured by the company's assets, except that the collateral does not include
accounts receivable that are subject to the receivable facility, U.S. real
estate or the stock or indebtedness of the company's U.S. operating
subsidiaries. As of September 30, 2007, there were letters of credit of $43.7
million issued under the facility and there were no cash borrowings.
In addition, the company and certain international subsidiaries have access to
uncommitted lines of credit from various banks. Other sources of short-term
funding are operational cash flows, including customer prepayments, and the
company's U.S. trade accounts receivable facility.
At September 30, 2007, the company had an agreement to sell, on an on-going
basis, through Unisys Funding Corporation I, a wholly owned subsidiary,
interests in up to $300 million of eligible U.S. trade accounts receivable. The
receivables are sold at a discount that reflects a margin based on, among other
things, the company's then-current S&P and Moody's credit rating. The facility
is terminable by the purchasers if the company's corporate rating is below B by
S&P or B2 by Moody's and requires the maintenance of certain ratios related to
the sold receivables. At September 30, 2007, the company's corporate rating was
B+ and B2 by S&P and Moody's, respectively. The facility is renewable annually
in November at the purchasers' option until November 2008. At September 30,
2007 and December 31, 2006, the company had sold $100 million and $170 million,
respectively, of eligible receivables.
At September 30, 2007, the company has met all covenants and conditions under
its various lending and funding agreements. The company expects to continue to
meet these covenants and conditions. The company believes that it will have
adequate sources and availability of short-term funding to meet its expected
cash requirements.
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors.
The company has on file with the Securities and Exchange Commission a
registration statement covering $650 million of debt or equity securities, which
enables the company to be prepared for future market opportunities.
Stockholders' equity increased $77.2 million during the nine months ended
September 30, 2007, principally reflecting a decrease of $79.7 million in other
comprehensive loss due to amortization of postretirement losses recognized in
accumulated other comprehensive income as well as positive currency exchange
rate changes of $35.8 million and an increase of $54.5 million relating to
issuance of stock under various share-based plans, offset in part by a net loss
of $92.9 million.
24
Factors that may affect future results
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events and
include any statement that does not directly relate to any historical or current
fact. Words such as "anticipates," "believes," "expects," "intends," "plans,"
"projects" and similar expressions may identify such forward-looking statements.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties and other factors that could cause the company's actual results to
differ materially from expectations. Factors that could affect future results
include, but are not limited to, those discussed below. Any forward-looking
statement speaks only as of the date on which that statement is made. The
company assumes no obligation to update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made.
Statements in this report regarding the company's cost reduction plan are
subject to the risk that the company may not implement the planned headcount
reductions, increase its offshore resources, or reduce its use of third-party
contract labor as quickly as currently planned. All of these factors could
affect the timing of anticipated cost savings. The amount of anticipated cost
savings is also subject to currency exchange rate fluctuations with regard to
actions taken outside the U.S.
Other factors that could affect future results include the following:
The company's business is affected by changes in general economic and business
conditions. The company continues to face a highly competitive business
environment. If the level of demand for the company's products and services
declines in the future, the company's business could be adversely affected. The
company's business could also be affected by acts of war, terrorism or natural
disasters. Current world tensions could escalate, and this could have
unpredictable consequences on the world economy and on the company's business.
The information services and technology markets in which the company operates
include a large number of companies vying for customers and market share both
domestically and internationally. The company's competitors include consulting
and other professional services firms, systems integrators, outsourcing
providers, infrastructure services providers, computer hardware manufacturers
and software providers. Some of the company's competitors may develop competing
products and services that offer better price-performance or that reach the
market in advance of the company's offerings. Some competitors also have or may
develop greater financial and other resources than the company, with enhanced
ability to compete for market share, in some instances through significant
economic incentives to secure contracts. Some also may be better able to compete
for skilled professionals. Any of these factors could have an adverse effect on
the company's business. Future results will depend on the company's ability to
mitigate the effects of aggressive competition on revenues, pricing and margins
and on the company's ability to attract and retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend in
part on the company's ability to anticipate and respond to these market trends
and to design, develop, introduce, deliver or obtain new and innovative products
and services on a timely and cost-effective basis. The company may not be
successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
The company's future results will depend in part on the success of its efforts
to control and reduce costs through the development and use of low-cost
subsidiaries and low-cost offshore and global sourcing models. Future results
will also depend in part on the success of the company's focused investment and
sales and marketing strategies. These strategies are based on various
assumptions, including assumptions regarding market segment growth, client
demand, and the proper skill set of and training for sales and marketing
management and personnel, all of which are subject to change.
The company's future results will depend in part on its ability to grow
outsourcing and infrastructure services. The company's outsourcing contracts
are multiyear engagements under which the company takes over management of a
client's technology operations, business processes or networks. In a number of
these arrangements, the company hires certain of its clients' employees and may
become responsible for the related employee obligations, such as pension and
severance commitments. In addition, system development activity on outsourcing
contracts may require the company to make significant upfront investments. The
company will need to have available sufficient financial resources in order to
take on these obligations and make these investments.
25
Recoverability of outsourcing assets is dependent on various factors, including
the timely completion and ultimate cost of the outsourcing solution, and
realization of expected profitability of existing outsourcing contracts. These
risks could result in an impairment of a portion of the associated assets, which
are tested for recoverability quarterly.
As long-term relationships, outsourcing contracts provide a base of recurring
revenue. However, outsourcing contracts are highly complex and can involve the
design, development, implementation and operation of new solutions and the
transitioning of clients from their existing business processes to the new
environment. In the early phases of these contracts, gross margins may be lower
than in later years when an integrated solution has been implemented, the
duplicate costs of transitioning from the old to the new system have been
eliminated and the work force and facilities have been rationalized for
efficient operations. Future results will depend on the company's ability to
effectively and timely complete these implementations, transitions and
rationalizations. Future results will also depend on the company's ability to
continue to effectively address its challenging outsourcing operations through
negotiations or operationally and to fully recover the associated outsourcing
assets.
Future results will also depend in part on the company's ability to drive
profitable growth in systems integration and consulting. 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 offered by the
company for specific industries. It will also depend on an improvement in the
utilization of services delivery personnel. In addition, profit margins in this
business are largely a function of the rates the company is able to charge for
services and the chargeability of its professionals. If the company is unable to
attain sufficient rates and chargeability for its professionals, profit margins
will suffer. The rates the company is able to charge for services are affected
by a number of factors, including clients' perception of the company's ability
to add value through its services; introduction of new services or products by
the company or its competitors; pricing policies of competitors; and general
economic conditions. Chargeability is also affected by a number of factors,
including the company's ability to transition employees from completed projects
to new engagements, and its ability to forecast demand for services and thereby
maintain an appropriate head count.
Future results will also depend, in part, on market demand for the company's
high-end enterprise servers and maintenance on these servers, both of which
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 new 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. In addition, future results will depend, in part, on the
company's ability to generate new customers and increase sales of the Intel-
based ES7000 line. The company believes there is growth potential in the market
for high-end, Intel-based servers running Microsoft and Linux operating system
software. However, the company's ability to succeed will depend on its ability
to compete effectively against enterprise server competitors with more
substantial resources and its ability to achieve market acceptance of the ES7000
technology by clients, systems integrators and independent software vendors.
Future results of the technology business will also depend, in part, on the
successful implementation of the company's arrangements with NEC.
The company frequently enters into contracts with governmental entities. U.S.
government agencies, including the Defense Contract Audit Agency and the
Department of Labor, routinely audit government contractors. These agencies
review a contractor's performance under its contracts, cost structure and
compliance with applicable laws, regulations and standards. The U.S. government
also may review the adequacy of, and a contractor's compliance with, its systems
and policies, including the contractor's purchasing, property, estimating,
accounting, compensation and management information systems. Any costs found to
be overcharged or improperly allocated to a specific contract will be subject to
reimbursement to the government. If an audit uncovers improper or illegal
activities, the company may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or prohibition from doing
business with the U.S. government. Other risks and uncertainties associated with
government contracts include the availability of appropriated funds and
contractual provisions that allow governmental entities to terminate agreements
at their discretion before the end of their terms. In addition, if the company's
performance is unacceptable to the customer under a government contract, the
government retains the right to pursue remedies under the affected contract,
which remedies could include termination.
26
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.
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 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. For example, in September 2007,
an article in the Washington Post alleged that the FBI is investigating the
company in connection with its alleged failure to detect cyber intrusions at
the Department of Homeland Security, a client of the company, and its alleged
failure to disclose these security breaches once detected. The company
disputed the allegations made in the article. 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.
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. The company
has announced that alliance partnerships with select IT companies are a key
factor in the development and delivery of the company's refocused portfolio.
Future results will depend, in part, on the performance and capabilities of
these third parties, on the ability of external suppliers to deliver components
at reasonable prices and in a timely manner, and on the financial condition of,
and the company's relationship with, distributors and other indirect channel
partners.
More than half of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, import or export licensing requirements, multiple and
possibly overlapping and conflicting tax laws, new tax legislation, and weaker
intellectual property protections in some jurisdictions.
The company cannot be sure that its services and products do not infringe on the
intellectual property rights of third parties, and it may have infringement
claims asserted against it or against its clients. These claims could cost the
company money, prevent it from offering some services or products, or damage its
reputation.
27
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, 2007.
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. Such evaluation did not identify any change in the
Company's internal controls over financial reporting that occurred during the
quarter ended September 30, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
------- -----------------
Item 1A. Risk Factors
------- ------------
See "Factors that may affect future results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of
risk factors.
Item 6. Exhibits
------- --------
(a) Exhibits
See Exhibit Index
28
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
November 9, 2007 By: /s/ Janet Brutschea Haugen
-----------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ William M. Reinheimer
-------------------------
William M. Reinheimer
Principal Accounting Officer
29
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999)
3.2 Bylaws of Unisys Corporation, as amended through February 8, 2007
(incorporated by reference to Exhibit 3 to the registrant's Current
Report on Form 8-K dated February 8, 2007)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Joseph W. McGrath required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of Joseph W. McGrath required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350