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 June 30, 2003
[ ] 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding as of June 30, 2003:
329,171,349.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
June 30,
2003 December 31,
(Unaudited) 2002
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 381.8 $ 301.8
Accounts and notes receivable, net 957.9 955.6
Inventories
Parts and finished equipment 144.7 165.3
Work in process and materials 128.6 127.5
Deferred income taxes 312.8 311.3
Other current assets 94.6 84.5
-------- --------
Total 2,020.4 1,946.0
-------- --------
Properties 1,663.9 1,542.7
Less-Accumulated depreciation
and amortization 1,004.8 932.9
-------- --------
Properties, net 659.1 609.8
-------- --------
Investments at equity 125.6 111.8
Marketable software, net 328.8 311.8
Deferred income taxes 1,476.0 1,476.0
Goodwill 165.1 160.6
Other long-term assets 379.8 365.4
-------- --------
Total $5,154.8 $4,981.4
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 17.7 $ 77.3
Current maturities of long-term debt 2.2 4.4
Accounts payable 472.9 532.5
Other accrued liabilities 1,195.1 1,341.4
Income taxes payable 246.4 228.9
-------- --------
Total 1,934.3 2,184.5
-------- --------
Long-term debt 1,046.7 748.0
Accrued pension liabilities 682.3 727.7
Other long-term liabilities 489.4 465.2
Stockholders' equity
Common stock, shares issued: 2003, 331.1;
2002, 328.1 3.3 3.3
Accumulated deficit ( 582.6) ( 673.5)
Other capital 3,788.4 3,763.1
Accumulated other comprehensive loss (2,207.0) (2,236.9)
-------- --------
Stockholders' equity 1,002.1 856.0
-------- --------
Total $5,154.8 $4,981.4
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
----------------- ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue
Services $1,163.4 $1,039.3 $2,270.4 $2,088.5
Technology 261.6 320.5 553.5 633.8
-------- -------- -------- --------
1,425.0 1,359.8 2,823.9 2,722.3
Costs and expenses
Cost of revenue:
Services 906.8 793.1 1,789.3 1,595.5
Technology 126.1 162.2 255.4 333.0
-------- -------- -------- --------
1,032.9 955.3 2,044.7 1,928.5
Selling, general and
administrative expenses 242.4 245.5 486.1 490.9
Research and development expenses 63.7 62.0 130.5 127.1
-------- -------- -------- --------
1,339.0 1,262.8 2,661.3 2,546.5
-------- -------- -------- --------
Operating income 86.0 97.0 162.6 175.8
Interest expense 18.4 18.1 34.1 35.6
Other income (expense), net 10.6 (16.0) 7.2 (28.4)
-------- -------- -------- --------
Income before income taxes 78.2 62.9 135.7 111.8
Provision for income taxes 25.7 20.7 44.7 36.9
-------- -------- -------- --------
Net income $ 52.5 $ 42.2 $ 91.0 $ 74.9
======== ======== ======== ========
Earnings per share
Basic $ .16 $ .13 $ .28 $ .23
======== ======== ======== ========
Diluted $ .16 $ .13 $ .28 $ .23
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Six Months Ended
June 30
-----------------
2003 2002
-------- -------
Cash flows from operating activities
Net income $ 91.0 $ 74.9
Add(deduct) items to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of properties 88.9 74.6
Amortization:
Marketable software 59.9 61.0
Deferred outsourcing contract costs 16.5 9.0
(Increase) in deferred income taxes, net ( 1.5) ( 2.2)
(Increase) decrease in receivables, net ( 6.6) 132.6
Decrease in inventories 19.5 72.7
(Decrease) in accounts payable and
other accrued liabilities (169.8) (302.5)
Increase (decrease) in income taxes payable 17.5 ( 2.3)
(Decrease) in other liabilities ( 22.5) ( 22.0)
(Increase) in other assets ( 39.1) (131.5)
Other ( 5.6) 48.3
------- ------
Net cash provided by operating activities 48.2 12.6
------- ------
Cash flows from investing activities
Proceeds from investments 2,387.5 1,476.7
Purchases of investments (2,421.7) (1,490.6)
Investment in marketable software ( 76.9) ( 71.2)
Capital additions of properties (112.0) (106.1)
Purchases of businesses ( 2.0) ( 3.9)
------- ------
Net cash used for investing activities (225.1) (195.1)
------- ------
Cash flows from financing activities
Proceeds from issuance of long-term debt 293.3 -
Net (reduction in) proceeds from short-term
borrowings ( 59.6) 39.0
Proceeds from employee stock plans 13.9 16.1
Payments of long-term debt ( 3.0) ( 1.2)
------- ------
Net cash provided by financing activities 244.6 53.9
------- ------
Effect of exchange rate changes on
cash and cash equivalents 12.3 3.8
------- ------
Increase (decrease) in cash and cash equivalents 80.0 (124.8)
Cash and cash equivalents, beginning of period 301.8 325.9
------- -------
Cash and cash equivalents, end of period $ 381.8 $ 201.1
======= =======
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. Because of seasonal and other factors, results
for interim periods are not necessarily indicative of the results to
be expected for the full year.
a. The following table shows how earnings per share were computed for the
three and six months ended June 30, 2003 and 2002 (dollars in millions,
shares in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Basic Earnings Per Share
Net income $ 52.5 $ 42.2 $ 91.0 $ 74.9
======= ======= ======= =======
Weighted average shares 328,783 322,832 327,996 322,150
======= ======= ======= =======
Basic earnings per share $ .16 $ .13 $ .28 $ .23
======= ======= ======= =======
Diluted Earnings Per Share
Net income $ 52.5 $ 42.2 $ 91.0 $ 74.9
======= ======= ======= =======
Weighted average shares 328,783 322,832 327,996 322,150
Plus incremental shares
from assumed exercises
under employee stock plans 2,366 1,430 1,991 1,635
------- ------- ------- -------
Adjusted weighted average
shares 331,149 324,262 329,987 323,785
======= ======= ======= =======
Diluted earnings per share $ .16 $ .13 $ .28 $ .23
======= ======= ======= =======
At June 30, 2003, 33.7 million shares related to employee stock plans were
not included in the computation of diluted earnings per share because the
option prices are above the average market price of the company's common
stock.
b. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - systems integration,
outsourcing, infrastructure services, and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting
policies of each business segment are the same as those followed by the
company as a whole. Intersegment sales and transfers are priced as if the
sales or transfers were to third parties. Accordingly, the Technology
segment recognizes intersegment revenue and manufacturing profit on hardware
and software shipments to customers under Services contracts. The Services
segment, in turn, recognizes customer revenue and marketing 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 six months ended June 30,
2003 and 2002 was $11.5 million and $5.0 million and $14.6 million and $10.6
million, respectively. The profit on these transactions is eliminated in
Corporate. The company evaluates business segment performance on operating
income exclusive of restructuring charges and unusual and nonrecurring
items, which are included in Corporate. All other corporate and centrally
incurred costs are allocated to the business segments based principally on
revenue, employees, square footage or usage.
6
A summary of the company's operations by business segment for the three and
six month periods ended June 30, 2003 and 2002 is presented below (in
millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
June 30, 2003
------------------
Customer revenue $1,425.0 $1,163.4 $ 261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- --------
Total revenue $1,425.0 $( 89.2) $1,169.7 $ 344.5
======== ======= ======== ========
Operating income (loss) $ 86.0 $( 4.9) $ 64.1 $ 26.8
======== ======= ======== ========
Three Months Ended
June 30, 2002
------------------
Customer revenue $1,359.8 $1,039.3 $ 320.5
Intersegment $( 82.9) 14.2 68.7
-------- ------- -------- --------
Total revenue $1,359.8 $( 82.9) $1,053.5 $ 389.2
======== ======= ======== ========
Operating income (loss) $ 97.0 $( 11.9) $ 61.2 $ 47.7
======== ======= ======== ========
Six Months Ended
June 30, 2003
----------------
Customer revenue $2,823.9 $2,270.4 $ 553.5
Intersegment $(159.2) 11.9 147.3
-------- ------- -------- --------
Total revenue $2,823.9 $(159.2) $2,282.3 $ 700.8
======== ======= ======== ========
Operating income (loss) $ 162.6 $( 2.3) $ 98.5 $ 66.4
======== ======= ======== ========
Six Months Ended
June 30, 2002
------------------
Customer revenue $2,722.3 $2,088.5 $ 633.8
Intersegment $(163.6) 25.7 137.9
-------- ------- -------- --------
Total revenue $2,722.3 $(163.6) $2,114.2 $ 771.7
======== ======= ======== ========
Operating income (loss) $ 175.8 $( 15.0) $ 113.6 $ 77.2
======== ======= ======== ========
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Total segment operating income $ 90.9 $108.9 $164.9 $190.8
Interest expense (18.4) (18.1) (34.1) (35.6)
Other income (expense), net 10.6 (16.0) 7.2 (28.4)
Corporate and eliminations ( 4.9) (11.9) ( 2.3) (15.0)
------ ------ ------ ------
Total income before income taxes $ 78.2 $ 62.9 $135.7 $111.8
====== ====== ====== ======
7
Customer revenue by classes of similar products or services, by segment, is
presented below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Services
Systems integration $ 386.0 $ 340.9 $ 742.4 $ 704.8
Outsourcing 421.8 346.7 831.1 689.0
Infrastructure services 211.8 214.6 412.6 419.1
Core maintenance 143.8 137.1 284.3 275.6
-------- -------- -------- -------
1,163.4 1,039.3 2,270.4 2,088.5
Technology
Enterprise-class servers 193.8 240.3 411.6 469.0
Specialized technologies 67.8 80.2 141.9 164.8
-------- -------- -------- --------
261.6 320.5 553.5 633.8
-------- -------- -------- --------
Total $1,425.0 $1,359.8 $2,823.9 $2,722.3
======== ======== ======== ========
c. Comprehensive income for the three and six months ended June 30, 2003 and
2002 includes the following components (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 52.5 $ 42.2 $ 91.0 $ 74.9
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of
$(2.6), $(3.5), $(2.6), and
$(2.4) (4.7) (6.4) (4.8) (4.4)
Reclassification adjustments,
net of tax of $1.0, $1.2,$2.0,
and $(.6) 1.7 2.2 3.8 (1.3)
Foreign currency translation
adjustments 38.6 (26.4) 30.9 (18.3)
------ ------ ------ ------
Total other comprehensive
income (loss) 35.6 (30.6) 29.9 (24.0)
------ ------ ------ ------
Comprehensive income $ 88.1 $ 11.6 $120.9 $ 50.9
====== ====== ====== ======
Accumulated other comprehensive income (loss) as of December 31, 2002 and
June 30, 2003 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2001 $ (706.8) $(711.2) $ 4.4 $ -
Change during period (1,530.1) ( 33.8) ( 5.9) (1,490.4)
--------- ------- ------ ---------
Balance at December 31, 2002 (2,236.9) (745.0) ( 1.5) (1,490.4)
Change during period 29.9 30.9 ( 1.0) -
--------- ------- ------ ---------
Balance at June 30, 2003 $(2,207.0) $(714.1) $( 2.5) $(1,490.4)
========= ======= ====== =========
d. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the six months ended June 30,
2003 and 2002 was $1.8 million and $2.8 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
8
e. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for twelve months
after shipment to the customer. The company will repair or replace, at its
option and expense, items of equipment that do not meet this warranty. For
company software, the company warrants that it will conform substantially to
then-current published functional specifications for ninety days from
customer's receipt. The company will provide a workaround or correction for
material errors in its software that prevent its use in a production
environment.
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning
of period $19.3 $16.3 $19.2 $16.1
Accruals for warranties issued
during the period 6.8 4.1 11.7 7.0
Settlements made during the
period (4.4) (3.4) (9.1) (6.9)
Changes in liability for
pre-existing warranties during
the period, including expirations (.6) .4 (.7) 1.2
----- ----- ----- -----
Balance at June 30 $21.1 $17.4 $21.1 $17.4
===== ===== ===== =====
f. The company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based employee compensation
plans. For stock options, no compensation expense is reflected in net
income as all stock options granted had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant. In addition, no compensation expense is recognized for common
stock purchases under the Employee Stock Purchase Plan. Pro forma
information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," and has been determined as if the company
had accounted for its stock plans under the fair value method of SFAS No.
123. For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No.
123 (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 52.5 $ 42.2 $ 91.0 $ 74.9
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax (10.3) (12.1) (24.8) (24.8)
------ ------ ------ ------
Pro forma net income $ 42.2 $ 30.1 $ 66.2 $ 50.1
====== ====== ====== ======
Earnings per share
Basic - as reported $ .16 $ .13 $ .28 $ .23
Basic - pro forma $ .13 $ .09 $ .20 $ .16
Diluted - as reported $ .16 $ .13 $ .28 $ .23
Diluted - pro forma $ .13 $ .09 $ .20 $ .15
9
g. Following is a breakdown of the individual components of the 2001 fourth-
quarter charge (in millions of dollars):
Work-Force
Reductions(1)
---------- Idle
Lease
Headcount Total U.S. Int'l Costs
---------------------------------------------------------------
Balance at
Dec. 31, 2002 631 $ 67.6 $ 7.4 $ 43.7 $ 16.5
Additional
provisions 4 2.2 - .8 1.4
Utilized (501) (43.5) (6.1) (32.1) (5.3)
Reversal of
excess reserves (105) (3.1) (1.7) (1.4) -
Other(2) 4.4 2.3 2.7 (.6)
------ ------ ------ ------ ------
Balance at
June 30, 2003 29 $ 27.6 $ 1.9 $ 13.7 $ 12.0
====== ====== ====== ====== ======
Expected future
utilization:
2003 remaining
six months 29 $ 16.2 $ 1.9 $ 10.2 $ 4.1
2004 and thereafter - 11.4 - 3.5 7.9
(1)Includes severance, notice pay, medical and other benefits.
(2)Changes in estimates and translation adjustments.
Cash expenditures related to the 2001 and prior-year restructuring charges
were approximately $45 million in the six months ended June 30, 2003
compared to $63 million for the prior-year period, and are expected to be
approximately $18 million (which includes approximately $2 million related
to restructuring charges taken prior to 2001) for the remainder of 2003 and
$17 million (which includes approximately $6 million related to
restructuring charges taken prior to 2001) in total for all subsequent
years, principally for work-force reductions and idle lease costs.
h. Cash paid during the six months ended June 30, 2003 and 2002 for income
taxes was $42.2 million and $31.2 million, respectively.
Cash paid during the six months ended June 30, 2003 and 2002 for interest
expense was $33.8 million and $34.9 million, respectively.
i. In June 2003, the company entered into a new lease for its facility at
Malvern, PA that replaces a former lease that was due to expire in March
2005. The new lease has a 60-month term expiring in June 2008. Under the
new lease, the company has the option to purchase the facility at any time
for approximately $34 million. In addition, if the company does not
exercise its purchase option and the lessor sells the facility at the end of
the lease term for a price that is less than approximately $34 million, the
company will be required to guarantee the lessor a residual value on the
property of up to $29 million. The lessor is a substantive independent
leasing company that does not have the characteristics of a variable
interest entity as defined by the Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN No. 46") and is therefore not consolidated by the company.
The company has accounted for the lease as an operating lease, and
therefore, neither the leased facility nor the related debt is reported in
the company's accompanying balance sheets. As stated above, under the
lease, the company is required to provide a guaranteed residual value on the
facility of up to $29 million to the lessor at the end of the 60-month lease
term. The company recognized a liability of approximately $1 million for
the related residual value guarantee. The value of the guarantee was
determined by computing the estimated present value of probability-weighted
cash flows that might be expended under the guarantee, discounted using the
company's incremental borrowing rate of approximately 6.5%. The company
has recorded a liability for the fair value of the obligation with a
corresponding asset recorded as prepaid rent which will be amortized to
rental expense over the lease term. The liability will be subsequently
assessed and adjusted to fair value as necessary.
10
j. Effective January 1, 2003, the company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required
that all gains and losses from extinguishment of debt be reported as an
extraordinary item. Previously recorded losses on the early extinguishment
of debt that were classified as an extraordinary item in prior periods have
been reclassified to other income (expense), net. The adoption of SFAS No.
145 had no effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.
Effective January 1, 2003, the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. SFAS No. 146 replaces previous accounting guidance provided
by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)"
and is effective for the company for exit or disposal activities initiated
after December 31, 2002. Adoption of this statement had no material impact
on the company's consolidated financial position, consolidated results of
operations, or liquidity.
Effective January 1, 2003, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34" ("FIN No. 45"). The interpretation requires that upon issuance of a
guarantee, the entity must recognize a liability for the fair value of the
obligation it assumes under that guarantee. In addition, FIN No. 45
requires disclosures about the guarantees that an entity has issued,
including a roll forward of the entity's product warranty liabilities. This
interpretation is intended to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. Adoption of this Interpretation had no material
impact on the company's consolidated financial position, consolidated
results of operations, or liquidity.
In January 2003, the FASB issued FIN No. 46 which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). This
interpretation clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. FIN No. 46 is applicable to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. A company with a variable
interest in a variable interest entity created before February 1, 2003 shall
apply the provisions of FIN No. 46 effective July 1, 2003. Adoption of FIN
No. 46 had no material impact on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In November 2002, the Financial Accounting Standards Board("FASB") reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." This issue addresses how to account for
arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods
beginning after June 15, 2003. Additionally, companies will be permitted to
apply the consensus guidance in this issue to all existing arrangements as
the cumulative effect of a change in accounting principle in accordance with
APB Opinion No. 20, "Accounting Changes." The company does not believe that
adoption of this issue will have a material impact on its consolidated
financial position, consolidated results of operations, or liquidity.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended June 30, 2003, the company reported net income of
$52.5 million, or $.16 per share, compared to $42.2 million, or $.13 per
share, for the three months ended June 30, 2002.
Total revenue for the quarter ended June 30, 2003 was $1.43 billion, up 5%
from revenue of $1.36 billion for the quarter ended June 30, 2002. Foreign
currency translations had a 4% positive impact on revenue in the quarter when
compared to the year-ago period. In the current quarter, Services revenue
increased 12% and Technology revenue declined 18%.
U.S. revenue increased 12% in the second quarter compared to the year-ago
period, driven principally by strength in the U.S. Federal government
business. Revenue in international markets declined slightly compared to the
year-ago period.
Total gross profit margin was 27.5% in the second quarter of 2003 compared to
29.7% in the year-ago period, principally reflecting a decline in pension
income as discussed below.
For the three months ended June 30, 2003, selling, general and administrative
expenses were $242.4 million (17.0% of revenue) compared to $245.5 million
(18.1% of revenue) for the three months ended June 30, 2002.
Research and development expense was $63.7 million compared to $62.0 million a
year ago. The company continues to invest in high-end Cellular
MultiProcessing server technology and in key programs within its industry
practices.
For the second quarter of 2003, the company reported an operating income
percent of 6.0% compared to 7.1% for the second quarter of 2002, principally
reflecting lower pension income.
Pension income for the three months ended June 30, 2003 was approximately $8
million compared to approximately $34 million for the three months ended June
30, 2002. At the beginning of each year, accounting rules require that the
company establish an expected long-term rate of return on its pension plan
assets. One of the reasons for the decline in pension income was that,
effective January 1, 2003, the company reduced its expected long-term rate of
return on plan assets for its U.S. pension plan to 8.75% from 9.50%. In
addition, the discount rate used for the U.S. pension plan declined to 6.75%
at December 31, 2002, from 7.50% at December 31, 2001. The remaining reasons
for the decline in pension income were lower expected returns on U.S. plan
assets due to asset declines, the company's recent change to a cash balance
plan in the U.S., and for international plans, declines in discount rates,
lower expected long-term rates of return on plan assets, and currency
translation. The company records pension income or expense, as well as other
employee-related costs such as FICA and medical insurance costs, in operating
income in the following income statement categories: cost of sales; selling,
general and administrative expenses; and research and development expenses.
The amount allocated to each income statement line is based on where the
salaries of the active employees are charged.
Interest expense for the three months ended June 30, 2003 was $18.4 million
compared to $18.1 million for the three months ended June 30, 2002.
Other income (expense), net was income of $10.6 million in the current quarter
compared to an expense of $16.0 million in the year-ago quarter income. The
principal reason for the change was that in the prior-year quarter, other
income (expense), net included a charge of $21.8 million relating to the
company's share of an early retirement charge recorded by Nihon Unisys, Ltd.
("NUL"). The company owns approximately 28% of the common stock of NUL and
accounts for its investment by the equity method.
12
Income before income taxes was $78.2 million in the second quarter of 2003
compared to $62.9 million last year. The provision for income taxes was $25.7
million in the current period compared to $20.7 million in the year-ago period.
The effective tax rate in both periods was 33%.
For the six months ended June 30, 2003, net income was $91.0 million, or $.28
per share, compared to net income of $74.9 million, or $.23 per share, last
year. Revenue for the six months ended June 30, 2003 was $2.82 billion, up 4%
from $2.72 billion for the six months ended June 30, 2002.
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - systems integration, outsourcing,
infrastructure services, and core maintenance; Technology - enterprise-class
servers and specialized technologies. The accounting policies of each business
segment are the same as those followed by the company as a whole. Intersegment
sales and transfers are priced as if the sales or transfers were to third
parties. Accordingly, the Technology segment recognizes intersegment revenue
and manufacturing profit on hardware and software shipments to customers under
Services contracts. The Services segment, in turn, recognizes customer revenue
and marketing profit on such shipments of company hardware and software to
customers. The Services segment also includes the sale of hardware and
software products sourced from third parties that are sold to customers through
the company's Services channels. In the company's consolidated statements of
income, the manufacturing costs of products sourced from the Technology segment
and sold to Services customers are reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three and six months ended June 30, 2003 and
2002, was $11.5 million and $5.0 million and $14.6 million and $10.6 million,
respectively. The profit on these transactions is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue, employees,
square footage or usage. See Note b to the Notes to Consolidated Financial
Statements.
Information by business segment is presented below (in millions):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
June 30, 2003
- ------------------
Customer revenue $1,425.0 $1,163.4 $261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- ------
Total revenue $1,425.0 $( 89.2) $1,169.7 $344.5
======== ======= ======== ======
Gross profit percent 27.5% 20.0% 46.6%
======== ======== ======
Operating income
percent 6.0% 5.5% 7.8%
======== ======== ======
Three Months Ended
June 30, 2002
- ------------------
Customer revenue $1,359.8 $1,039.3 $320.5
Intersegment $( 82.9) 14.2 68.7
-------- ------- -------- ------
Total revenue $1,359.8 $( 82.9) $1,053.5 $389.2
======== ======= ======== ======
Gross profit percent 29.7% 21.9% 46.8%
======== ======== ======
Operating income
percent 7.1% 5.8% 12.2%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
13
In the Services segment, customer revenue was $1.16 billion for the three
months ended June 30, 2003, up 12% compared to $1.04 billion for the three
months ended June 30, 2002. The increase in Services revenue was due to a 22%
increase in outsourcing ($422 million in 2003 compared to $347 million in 2002),
a 13% increase in systems integration ($386 million in 2003 compared to $341
million in 2002), and a 5% increase in core maintenance revenue ($143 million
in 2003 compared to $137 million in 2002), offset in part by a decline of 1% in
infrastructure services ($212 million in 2003 compared to $215 million in 2002).
Within the Services segment, the outsourcing business benefited from the
rollout of recent large contract wins from new customers, including the U.S.
Transportation Security Administration. Services gross profit percent was
20.0% for the three months ended June 30, 2003 compared to 21.9% in the
year-ago period, and Services operating income percent was 5.5% for the three
months ended June 30, 2003 compared to 5.8% last year. The reason for these
declines was principally lower pension income in the current quarter compared
to the year-ago period.
In the Technology segment, customer revenue was $262 million for the three
months ended June 30, 2003 compared to $321 million for the three months ended
June 30, 2002. Demand in the Technology segment remained weak industry-wide as
customers continue to defer spending on new large-scale computer hardware and
software. The 18% decline in revenue was due to a 19% decline in sales of
enterprise-class servers ($194 million in 2003 compared to $240 million in 2002)
and a 15% decrease in sales of specialized technology products ($68 million in
2003 compared to $80 million in 2002). Technology gross profit percent was
46.6% for the three months ended June 30, 2003 compared to 46.8% in the year-ago
period, and Technology operating income percent was 7.8% for the three months
ended June 30, 2003 compared to 12.2% last year. The operating income margin
decline primarily reflected lower volume and lower pension income.
New Accounting Pronouncements
- -----------------------------
Effective January 1, 2003, the company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required that
all gains and losses from extinguishment of debt be reported as an
extraordinary item. Previously recorded losses on the early extinguishment of
debt that were classified as an extraordinary item in prior periods have been
reclassified to other income (expense), net. The adoption of SFAS No. 145 had
no effect on the company's consolidated financial position, consolidated
results of operations, or liquidity.
Effective January 1, 2003, the company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and is effective for the company
for exit or disposal activities initiated after December 31, 2002. Adoption
of this statement had no material impact on the company's consolidated
financial position, consolidated results of operations, or liquidity.
Effective January 1, 2003, the company adopted FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
("FIN No. 45"). The interpretation requires that upon issuance of a guarantee,
the entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures
about the guarantees that an entity has issued, including a roll forward of the
entity's product warranty liabilities. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration. Adoption of
this Interpretation had no material impact on the company's consolidated
financial position, consolidated results of operations, or liquidity.
14
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46) which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). This
interpretation clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN No. 46 is applicable to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. A company with a variable interest in a variable
interest entity created before February 1, 2003 shall apply the provisions of
FIN No. 46 effective July 1, 2003. Adoption of FIN No. 46 had no material
impact on the company's consolidated financial position, consolidated results
of operations, or liquidity.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This issue
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets. The
final consensus of this issue is applicable to agreements entered into in
fiscal periods beginning after June 15, 2003. Additionally, companies will be
permitted to apply the consensus guidance in this issue to all existing
arrangements as the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, "Accounting Changes." The company does
not believe that adoption of this issue will have a material impact on its
consolidated financial position, consolidated results of operations, or
liquidity.
Financial Condition
- -------------------
Cash and cash equivalents at June 30, 2003 were $381.8 million compared to
$301.8 million at December 31, 2002.
During the six months ended June 30, 2003, cash provided by operations was
$48.2 million compared to cash provided by operations of $12.6 million for the
six months ended June 30, 2002. The change in operating cash flow primarily
reflected the company's continued focus on working capital, including higher
levels of customer prepayments in the current six-month period compared to the
prior-year period. Cash expenditures in the current period related to prior-
year restructuring charges (which are included in operating activities) were
approximately $45 million compared to $63 million for the prior-year period,
and are expected to be approximately $18 million for the remainder of 2003 and
$17 million in total for all subsequent years, principally for work-force
reductions and idle lease costs. Personnel reductions in the current period
related to these restructuring actions were approximately 500 and are expected
to be approximately 29 for the remainder of the year.
Cash used for investing activities for the six months ended June 30, 2003 was
$225.1 million compared to $195.1 million during the six months ended June 30,
2002. During 2003, both proceeds from investments and purchases of investments,
which represent derivative financial instruments used to manage the company's
currency exposure to market risks from changes in foreign currency exchange
rates, increased from the prior year as a result of an increase in the
company's exposures, principally related to intercompany accounts. The
increase in cash used was principally due to net purchases of investments of
$34.2 million in the current period compared to net purchases of $13.9 million
in the prior-year period. In addition, the current six-month period investment
in marketable software was $76.9 million compared to $71.2 million in the prior-
year, and capital additions to properties was $112.0 million for the six months
ended June 30, 2003 compared to $106.1 million in the prior-year period.
Cash provided by financing activities during the current six-month period was
$244.6 million compared to $53.9 million in the prior year. The current six-
month period includes net proceeds from issuance of long-term debt of $293.3
million, as described below. In addition, during the six months ended June 30,
2003 there was a reduction of $59.6 million in short-term borrowings compared
to an increase of $39.0 million in the year-ago period.
15
In March 2003, the company issued $300 million of 6 7/8% senior notes due 2010.
At June 30, 2003, total debt was $1.1 billion, an increase of $236.9 million
from December 31, 2002.
As of June 30, 2003, there were no borrowings under the company's $450 million
credit agreement. On July 1, 2003, the company entered into a new $500 million
credit agreement, expiring in May 2006, to replace the $450 million credit
agreement that was due to expire in March 2004. Borrowings under the new
agreement bear interest based on the then-current LIBOR or prime rates and the
company's credit rating. The credit agreement contains financial and other
covenants, including maintenance of certain financial ratios, a minimum level
of net worth and limitations on certain types of transactions, which could
reduce the amount the company is able to borrow. Events of default under the
credit agreement include failure to perform covenants, material adverse change,
change of control and default under other debt aggregating at least $25 million.
If an event of default were to occur under the credit agreement, the lenders
would be entitled to declare all amounts borrowed under it immediately due and
payable. The occurrence of an event of default under the credit agreement
could also cause the acceleration of obligations under certain other
agreements and the termination of the company's U.S. trade accounts receivable
facility described below.
In addition, the company and certain international subsidiaries have access to
certain uncommitted lines of credit from various banks. Other sources of short-
term funding are operational cash flows, including customer prepayments, and
the company's U.S. trade accounts receivable facility. Using this facility,
the company sells, on an on-going basis, up to $225 million of its eligible
U.S. trade accounts receivable through a wholly owned subsidiary, Unisys
Funding Corporation I. The facility expires in December 2003.
At June 30, 2003, the company has met all covenants and conditions under its
various lending and funding agreements. Since the company believes that it
will continue to meet these covenants and conditions, the company believes
that it has adequate sources and availability of short-term funding to meet
its expected cash requirements.
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 $1.2 billion of debt or equity securities,
which enables the company to be prepared for future market opportunities.
At June 30, 2003, the company had deferred tax assets in excess of deferred tax
liabilities of $2,196 million. For the reasons cited below, management
determined that it is more likely than not that $1,727 million of such assets
will be realized, therefore resulting in a valuation allowance of $469 million.
The company evaluates quarterly the realizability of its deferred tax assets
and adjusts the amount of the related valuation allowance, if necessary. The
factors used to assess the likelihood of realization are the company's forecast
of future taxable income, and available tax planning strategies that could be
implemented to realize deferred tax assets. Approximately $5.2 billion of
future taxable income (predominantly U.S.) is needed to realize all of the net
deferred tax assets. Failure to achieve forecasted taxable income might
affect the ultimate realization of the net deferred tax assets. See "Factors
That May Affect Future Results" below.
Stockholders' equity increased $146.1 million during the six months ended June
30, 2003, principally reflecting net income of $91.0 million, $23.5 million
for issuance of stock under stock option and other plans, $1.8 million of tax
benefits related to employee stock plans and currency translation of $30.9
million.
In March 2003, the company executed a lease commitment for a new facility in
Reston, VA. The facility is to be used to consolidate the company's expanding
U.S. Federal government business. The initial lease period runs from April
2003 to July 2018 and the lease provides for two five-year extensions. The
rent over the initial lease term is approximately $110 million.
16
In June 2003, the company entered into a new lease for its facility at Malvern,
PA that replaces a former lease that was due to expire in March 2005. The new
lease has a 60-month term expiring in June 2008. Under the new lease, the
company has the option to purchase the facility at any time for approximately
$34 million. In addition, if the company does not exercise its purchase option
and the lessor sells the facility at the end of the lease term for a price that
is less than approximately $34 million, the company will be required to
guarantee the lessor a residual value on the property of up to $29 million.
The lessor is a substantive independent leasing company that does not have the
characteristics of a variable interest entity as defined by FIN No. 46 and is
therefore not consolidated by the company.
The company has accounted for the lease as an operating lease, and therefore,
neither the leased facility nor the related debt is reported in the company's
accompanying balance sheets. As stated above, under the lease, the company is
required to provide a guaranteed residual value on the facility of up to $29
million to the lessor at the end of the 60-month lease term. Under the
provisions of FIN No. 45, the company recognized a liability of approximately
$1 million for the related residual value guarantee. The value of the
guarantee was determined by computing the estimated present value of
probability-weighted cash flows that might be expended under the guarantee,
discounted using the company's risk adjusted borrowing rate of approximately
6.5%. The value of the guarantee was determined by computing the estimated
present value of probability -weighted cash flows that might be expended under
the guarantee, discounted using the company's incremental borrowing rate of
approximately 6.5%. The company has recorded a liability for the fair value
of the obligation with a corresponding asset recorded as prepaid rent which
will be amortized to rental expense over the lease term. The liability
will be subsequently assessed and adjusted to fair value as necessary.
At December 31st of each year, accounting rules require a company to recognize
a liability on its balance sheet for each pension plan if the fair value of
the assets of that pension plan is less than the present value of the pension
obligation (the accumulated benefit obligation, or "ABO"). This liability is
called a "minimum pension liability." Concurrently, any existing prepaid
pension asset for the pension plan must be removed. These adjustments are
recorded as a charge in "accumulated other comprehensive income (loss)" in
stockholders' equity. If at any future year-end, the fair value of the
pension plan assets exceeds the ABO, the charge to stockholders' equity would
be reversed for such plan. Alternatively, if the fair market value of pension
plan assets experiences further declines or the discount rate was to be
reduced, additional charges to accumulated other comprehensive income (loss)
may be required at a future year-end.
At December 31, 2002, for all of the company's defined benefit pension plans,
as well as the defined benefit pension plan of NUL (an equity investment), the
ABO exceeded the fair value of pension plan assets. As a result, the company
was required to do the following: remove from its assets $1.4 billion of
prepaid pension plan assets; increase its accrued pension liabilities by
approximately $700 million; reduce its investments at equity by approximately
$80 million relating to the company's share of NUL's minimum pension liability;
and offset these changes by a charge to other comprehensive loss in
stockholders' equity of $2.2 billion, or $1.5 billion net of tax.
This accounting had no effect on the company's net income, liquidity or cash
flows. Financial ratios and net worth covenants in the company's credit
agreements and debt securities are unaffected by the charge to stockholders'
equity caused by recording a minimum pension liability.
In accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. defined benefit
plan in 2003. The company expects to make cash contributions of approximately
$60 million to its other defined benefit pension plans during 2003.
17
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.
These other factors include, but are not limited to, those discussed below.
Any forward-looking statement speaks only as of the date on which that
statement is made. The company assumes no obligation to update any forward-
looking statement to reflect events or circumstances that occur after the date
on which the statement is made.
The company's business is affected by changes in general economic and business
conditions. The company is facing a very challenging economic environment.
In this environment, many organizations are delaying planned purchases of
information technology products and services. If the level of demand for the
company's products and services declines in the future, the company's business
could be adversely affected. 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 our 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 computer
hardware manufacturers, software providers, systems integrators, consulting
and other professional services firms, outsourcing providers, and
infrastructure services providers. Some of the company's competitors may
develop competing products and services that offer better price-performance or
that reach the market in advance of the company's offerings. Some competitors
also have or may develop greater financial and other resources than the
company, with enhanced ability to compete for market share, in some instances
through significant economic incentives to secure contracts. Some may also be
better able to compete for skilled professionals. Any of this could have an
adverse effect on the company's business. Future results will depend on the
company's ability to mitigate the effects of aggressive competition on
revenues, pricing and margins and on the company's ability to attract and
retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend
in part on the company's ability to anticipate and respond to these market
trends and to design, develop, introduce, deliver or obtain new and innovative
products and services on a timely and cost-effective basis. The company may
not be successful in anticipating or responding to changes in technology,
industry standards or customer preferences, and the market may not demand or
accept its services and product offerings. In addition, products and services
developed by competitors may make the company's offerings less competitive.
The company's future results will depend in part on its ability to continue to
accelerate growth in outsourcing and infrastructure services. The company's
outsourcing contracts are multiyear engagements under which the company takes
over management of a client's technology operations, business processes or
networks. The company will need to maintain a strong financial position in
order to grow its outsourcing business. In a number of these arrangements,
the company hires certain of its clients' employees and may become responsible
for the related employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. As long-term
relationships, these outsourcing contracts provide a base of recurring
revenue. However, in the early phases of these contracts, gross margins may
be lower than in later years when the work force and facilities have been
rationalized for efficient operations, and an integrated systems solution has
been implemented. Future results will depend on the company's ability to
effectively complete the rationalizations and solution implementations.
18
Future results will also depend in part on the company's ability to drive
profitable growth in systems integration and consulting. The company's
systems integration and consulting business has been adversely affected by the
current economic slowdown. In this economic environment, customers have been
delaying systems integration projects. The company's ability to grow
profitably in this business will depend in part on an improvement in economic
conditions and a pick-up in demand for systems integration projects. It will
also depend on the success of the actions the company has taken to enhance the
skills base and management team in this business and to refocus the business
on integrating best-of-breed, standards-based solutions to solve client needs.
In addition, profit margins in this business are largely a function of the
rates the company is able to charge for services and the chargeability of its
professionals. If the company is unable to maintain the rates it charges, or
appropriate chargeability, for its professionals, profit margins will suffer.
The rates the company is able to charge for services are affected by a number
of factors, including clients' perception of the company's ability to add
value through its services; introduction of new services or products by the
company or its competitors; pricing policies of competitors; and general
economic conditions. Chargeability is also affected by a number of factors,
including the company's ability to transition employees from completed
projects to new engagements; and its ability to forecast demand for services
and thereby maintain an appropriate head count.
Future results will also depend in part on market acceptance of the company's
high-end enterprise servers. In its technology business, the company is
focusing its resources on high-end enterprise servers based on its Cellular
MultiProcessing (CMP) architecture. The company's CMP servers are designed to
provide mainframe-class capabilities with compelling price-performance by
making use of standards-based technologies such as Intel chips and Microsoft
operating system software. The company has transitioned both its legacy
ClearPath servers and its Intel-based ES7000s to the CMP platform, creating a
common platform for all the company's high-end server lines. Future results
will depend, in part, on customer acceptance of the new CMP-based ClearPath
Plus systems and the company's ability to maintain its installed base for
ClearPath and to develop next-generation ClearPath products that are purchased
by the installed base. In addition, future results will depend, in part, on
the company's ability to generate new customers and increase sales of the Intel-
based ES7000 line. The company believes there is significant growth potential
in the developing market for high-end, Intel-based servers running Microsoft
operating system software. However, competition in this new market is likely
to intensify in coming years, and the company's ability to succeed will depend
on its ability to compete effectively against enterprise server competitors
with more substantial resources and its ability to achieve market acceptance
of the ES7000 technology by clients, systems integrators, and independent
software vendors.
A number of the company's long-term contracts for infrastructure services,
outsourcing, help desk and similar services do not provide for minimum
transaction volumes. As a result, revenue levels are not guaranteed. In
addition, some of these contracts may permit termination or may impose other
penalties if the company does not meet the performance levels specified in the
contracts.
Some of the company's systems integration contracts are fixed-priced contracts
under which the company assumes the risk for delivery of the contracted
services and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
The company frequently enters into contracts with governmental entities.
Risks and uncertainties associated with these government contracts include the
availability of appropriated funds and contractual provisions that allow
governmental entities to terminate agreements at their discretion before the
end of their terms.
19
The success of the company's business is dependent on strong, long-term client
relationships and on its reputation for responsiveness and quality. As a
result, if a client is not satisfied with the company's services or products,
its reputation could be damaged and its business adversely affected. In
addition, if the company fails to meet its contractual obligations, it could
be subject to legal liability, which could adversely affect its business,
operating results and financial condition.
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. Future
results will depend in part on the performance and capabilities of these third
parties, on the ability of external suppliers to deliver components at
reasonable prices and in a timely manner, and on the financial condition of,
and the company's relationship with, distributors and other indirect channel
partners.
Approximately 53% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign
currency exchange rate fluctuations, changes in political or economic
conditions, trade protection measures, import or export licensing requirements,
multiple and possibly overlapping and conflicting tax laws, and weaker
intellectual property protections in some jurisdictions.
The company cannot be 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.
20
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 June 30, 2003.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing the
information the company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. Such evaluation did not identify any change in the
company's internal control over financial reporting that occurred during the
quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, the company's internal control over financial
reporting.
21
Part II - OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The company's 2003 Annual Meeting of Stockholders (the "Annual Meeting")
was held on April 24, 2003 in Philadelphia, Pennsylvania.
(b) The following matters were voted upon at the Annual Meeting and received
the following votes:
1. Election of Directors as follows:
Gail D. Fosler - 285,538,146 votes for; 8,771,017 votes withheld
Melvin R. Goodes - 276,919,901 votes for; 17,389,262 votes withheld
Edwin A. Huston - 284,216,669 votes for; 10,092,494 votes withheld
2. A proposal to ratify the selection of the company's independent
auditors - 272,054,772 votes for; 19,541,515 votes against;
2,712,876 abstentions
3. A proposal to approve the Unisys Corporation 2003 Long-Term Incentive
and Equity Compensation Plan - 170,711,029 votes for; 55,412,346 votes
against; 4,357,177 abstentions; 63,828,611 broker non-votes
4. A proposal to approve the amended and restated Unisys Corporation
Employee Stock Purchase Plan - 213,447,866 votes for; 13,350,372 votes
against; 3,683,124 abstentions; 63,827,801 broker non-votes
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On April 14, 2003 the company furnished a Current Report on Form 8-K
to provide, under Items 7, 9 and 12, the company's earnings release reporting
its financial results for the quarter ended March 31, 2003. Such information
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: July 24, 2003 By: /s/ Janet M. Brutschea Haugen
-----------------------------
Janet M. Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Carol S. Sabochick
----------------------
Carol S. Sabochick
Vice President and
Corporate Controller
(Chief Accounting Officer)
23
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Unisys Corporation 2003 Long-Term Incentive and Equity Compensation
Plan (incorporated by reference to Appendix B to the registrant's
Proxy Statement, dated March 14, 2003, for its 2003 Annual Meeting of
Stockholders)
10.2 Unisys Corporation Employee Stock Purchase Plan, as amended and
restated February 13, 2003, (incorporated by reference to Appendix C
to the registrant's Proxy Statement, dated March 14, 2003, for its
2003 Annual Meeting of Stockholders)
12 Statement of Computation of Ratio of Earnings to Fixed Charges
99.1 Exhibit 31.1 - Certification of Lawrence A. Weinbach required by Rule
13a-14(a) or Rule 15d-14(a)
99.2 Exhibit 31.2 - Certification of Janet Brutschea Haugen required by
Rule 13a-14(a) or Rule 15d-14(a)
99.3 Exhibit 32.1 -- Certification of Lawrence A. Weinbach 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
99.4 Exhibit 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