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UIS > SEC Filings for UIS > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for UNISYS CORP


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

For the nine months ended September 30, 2012, the company reported net income of $47.6 million, or $1.08 per diluted share, compared with prior period net income of $26.2 million, or $.60 per diluted share. Revenue for the nine months ended September 30, 2012 was $2,727.1 million compared with $2,868.5 million for the nine months ended September 30, 2011. Foreign currency fluctuations had a 3-percentage point negative impact on revenue in the current period compared with the year-ago period. Also impacting the company's nine month 2012 revenue was a $114 million, or 23%, decline in the company's U.S. Federal government business, reflecting continued softness in this business. For the nine months ended September 30, 2012 and September 30, 2011, the company reported income before income taxes of $144.7 million and $94.7 million, respectively. The company's pretax results for the nine months ended September 30, 2012 and 2011 included debt-reduction charges of approximately $30.6 million and $77.6 million, respectively; pension expense of $76.7 million and $26.2 million, respectively; foreign exchange losses of $7.3 million and foreign exchange gains of $21.1 million, respectively; a gain of $10.6 million related to the sale of a subsidiary in the nine months ended September 30, 2012 discussed below; and a charge of $13.5 million in the nine months ended September 30, 2011 related to a Brazil matter discussed below.

For the three months ended September 30, 2012, the company reported a net loss of $12.4 million, or a $.28 loss per diluted share, compared with prior period net income of $78.6 million, or $1.63 per diluted share. Revenue for the three months ended September 30, 2012 was $877.4 million compared with $1,020.1 million for the three months ended September 30, 2011. The company's results for the third quarter of 2012 were impacted by weak demand for systems integration services and lower revenue in its U.S. Federal Systems business. Also impacting the third-quarter 2012 results were $23.1 million of debt reduction charges and higher pension expense of $28.9 million.


Results of operations

Company results

Three months ended September 30, 2012 compared with the three months ended September 30, 2011

Revenue for the quarter ended September 30, 2012 was $877.4 million compared with $1,020.1 million for the third quarter of 2011, a decrease of 14% from the prior year. Approximately 3 percentage points of the decline were due to a $52.4 million, or 29%, decline in revenue from the company's U.S. Federal business. Foreign currency fluctuations had a 4-percentage point negative impact on revenue in the current period compared with the year-ago period.

Services revenue decreased 15% and Technology revenue decreased 10% in the current quarter compared with the year-ago period. U.S. revenue decreased 24% in the third quarter compared with the year-ago period. Approximately 3 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business. International revenue decreased 6% in the current quarter principally due to declines in Europe, Brazil and Asia/Pacific, partially offset by an increase in Latin America (excluding Brazil) and Japan. Foreign currency had a 9-percentage-point negative impact on international revenue in the three months ended September 30, 2012 compared with the three months ended September 30, 2011.

Total gross profit margin was 24.9% in the three months ended September 30, 2012 compared with 27.9% in the three months ended September 30, 2011.

Selling, general and administrative expense in the three months ended September 30, 2012 was $138.6 million (15.8% of revenue) compared with $153.3 million (15.0% of revenue) in the year-ago period.

Research and development (R&D) expenses in the third quarter of 2012 were $18.8 million compared with $18.5 million in the third quarter of 2011.

For the third quarter of 2012, the company reported an operating profit of $61.2 million compared with an operating profit of $113.0 million in the third quarter of 2011.

For the three months ended September 30, 2012, pension expense was $29.9 million compared with pension expense of $8.5 million for the three months ended September 30, 2011. For the full year 2012, the company expects to recognize pension expense of approximately $107 million compared with $34.3 million for the full year of 2011. The increase in pension expense in 2012 from 2011 is principally due to lower expected returns on plan assets in the company's U.S. qualified defined benefit pension plan and lower discount rates. 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 revenue; selling, general and administrative expenses; and research and development expenses. The amount allocated to each category is principally based on where the salaries of active employees are charged.

Interest expense for the three months ended September 30, 2012 was $7.8 million compared with $12.5 million for the three months ended September 30, 2011 reflecting the company's debt reduction actions.

Other income (expense), net was an expense of $25.8 million in the third quarter of 2012 compared with income of $16.6 million in 2011. Included in the third quarter of 2012 were charges of $23.1 million related to debt redemptions and foreign exchange losses of $3.4 million. Included in the third quarter of 2011 were foreign exchange gains of $12.9 million and a charge of $7.1 million related to the Brazil matter discussed above.

Income before income taxes for the three months ended September 30, 2012 was $27.6 million compared with income of $117.1 million for the three months ended September 30, 2011. The provision for income taxes was $32.7 million in the current quarter compared with a provision of $33.4 million in the year-ago period. Included in the provision for taxes for the three months ended September 30, 2012 and 2011 was $9.2 million and $7.6 million, respectively, related to a UK tax rate change, as discussed in note (j) of the Notes to Consolidated Financial Statements.

As also discussed in note (j) of the Notes to Consolidated Financial Statements, the company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance,


if necessary. The company records a tax provision or benefit for those international subsidiaries that do not have a full valuation allowance against their net deferred tax assets. Any profit or loss recorded for the company's U.S. operations has no provision or benefit associated with it due to a full valuation allowance. As a result, the company's provision or benefit for taxes will vary significantly quarter to quarter depending on the geographic distribution of income.

Net loss for the three months ended September 30, 2012 was $12.4 million, or $.28 per diluted share, compared with net income of $78.6 million, or $1.63 per diluted share, for the three months ended September 30, 2011.

Nine months ended September 30, 2012 compared with the nine months ended September 30, 2011

Revenue for the nine months ended September 30, 2012 was $2,727.1 million compared with $2,868.5 million for the nine months ended September 30, 2011, a decrease of 5% from the prior year. Approximately 4 percentage points of the decline were due to a $114.4 million, or 23%, decline in revenue from the company's U.S. Federal business. Foreign currency fluctuations had a 3-percentage point negative impact on revenue in the current period compared with the year-ago period.

Services revenue decreased 5% and Technology revenue decreased 3% in the current period of 2012 compared with the year-ago period. U.S. revenue decreased 7% in the first nine months of 2012 compared with the year-ago period. Approximately 12 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business. International revenue decreased 3% in the current period due to declines in all regions with the exception of Pacific/Asia/Japan. Foreign currency had a 5-percentage-point negative impact on international revenue in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011.

Total gross profit margin was 25.2% in the nine months ended September 30, 2012 compared with 24.6% in the nine months ended September 30, 2011.

Selling, general and administrative expense in the nine months ended September 30, 2012 was $422.0 million (15.5% of revenue) compared with $446.5 million (15.6% of revenue) in the year-ago period. The current period includes a gain of $10.6 million related to the sale of a subsidiary which has been recorded as a reduction of selling, general and administrative expense (see note
(l) of the Notes to Consolidated Financial Statements).

Research and development (R&D) expenses in the first nine months of 2012 were $61.0 million compared with $57.2 million in the year-ago period.

For the first nine months of 2012, the company reported an operating profit of $204.6 million compared with an operating profit of $203.0 million in the year-ago period.

For the nine months ended September 30, 2012, pension expense was $76.7 million compared with pension expense of $26.2 million for the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the company recorded a charge of $13.5 million ($6.4 million in cost of revenue and $7.1 million in other income/expense) related to the loss of an old non-income tax case concerning the company's former Brazilian manufacturing operations.

Interest expense for the nine months ended September 30, 2012 was $25.0 million compared with $51.7 million for the nine months ended September 30, 2011 reflecting the company's debt reduction actions.

Other income (expense), net was an expense of $34.9 million in the first nine months of 2012 compared with expense of $56.6 million in 2011. Included in the first nine months of 2012 were debt reduction charges of $30.6 million and foreign exchange losses of $7.3 million. Included in the first nine months of 2011 were charges of $77.6 million related to debt redemptions and foreign exchange gains of $21.1 million.

Income before income taxes for the nine months ended September 30, 2012 was $144.7 million compared with income of $94.7 million for the nine months ended September 30, 2011. The provision for income taxes was $76.8 million in the current period compared with $52.4 million in the year-ago period. Included in the current-year period was $9.2 million due to the impact of a U.K. tax rate change. Included in the prior-year period was a benefit of $29.2 million related to the settlement of two European tax matters, as well as a provision of $7.6 million due to the impact of a U.K. tax rate change.


Net income for the nine months ended September 30, 2012 was $47.6 million, or $1.08 per diluted share, compared with net income of $26.2 million, or $.60 per diluted share, for the nine months ended September 30, 2011.

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 software and servers and other technology.

The accounting policies of each business segment are the same as those followed by the company as a whole. Intersegment sales and transfers are priced as if the sales or transfers were to third parties. Accordingly, the Technology segment recognizes intersegment revenue and manufacturing profit on hardware and software shipments to customers under Services contracts. The Services segment, in turn, recognizes customer revenue and marketing profits on such shipments of company hardware and software to customers. The Services segment also includes the sale of hardware and software products sourced from third parties that are sold to customers through the company's Services channels. In the company's consolidated statements of income, the manufacturing costs of products sourced from the Technology segment and sold to Services customers are reported in cost of revenue for Services.

Also included in the Technology segment's sales and operating profit are sales of hardware and software sold to the Services segment for internal use in Services engagements. The amount of such profit included in operating income of the Technology segment for the three months ended September 30, 2012 and 2011 was $.4 million and $.7 million, respectively. The amount for the nine months ended September 30, 2012 and 2011 was $9.8 million and $5.4 million, respectively. The profit on these transactions is eliminated in Corporate.

The company evaluates business segment performance on operating income exclusive of pension income or expense, 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.

Three months ended September 30, 2012 compared with the three months ended September 30, 2011

Information by business segment is presented below (in millions of dollars):

                                      Total        Eliminations        Services        Technology
Three Months Ended Sept. 30, 2012
Customer revenue                    $   877.4                         $    748.0      $      129.4
Intersegment                                       $       (16.2 )            .6              15.6

Total revenue                       $   877.4      $       (16.2 )    $    748.6      $      145.0


Gross profit percent                     24.9 %                             19.9 %            59.9 %

Operating profit percent                  7.0 %                              6.0 %            29.1 %


Three Months Ended Sept. 30, 2011
Customer revenue                    $ 1,020.1                         $    876.3      $      143.8
Intersegment                                       $       (26.4 )            .9              25.5

Total revenue                       $ 1,020.1      $       (26.4 )    $    877.2      $      169.3

Gross profit percent                     27.9 %                             21.6 %            57.4 %

Operating profit percent                 11.1 %                              8.7 %            25.8 %

Gross profit percent and operating income percent are as a percent of total revenue.


Customer revenue by classes of similar products or services, by segment, is presented below (in millions of dollars):

                                                   Three Months
                                                  Ended Sept. 30         Percent
                                                2012         2011         Change
       Services
       Systems integration and consulting      $ 230.6     $   305.8        (24.6 )%
       Outsourcing                               363.3         391.2         (7.1 )%
       Infrastructure services                   107.1         124.1        (13.7 )%
       Core maintenance                           47.0          55.2        (14.9 )%

                                                 748.0         876.3        (14.6 )%
       Technology
       Enterprise-class software and servers     123.5         123.4           .1 %
       Other technology                            5.9          20.4        (71.1 )%

                                                 129.4         143.8        (10.0 )%

       Total                                   $ 877.4     $ 1,020.1        (14.0 )%

In the Services segment, customer revenue was $748.0 million for the three months ended September 30, 2012, down 14.6% from the three months ended September 30, 2011. Approximately 2 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business. Foreign currency translation had a 5-percentage-point negative impact on Services revenue in the current quarter compared with the year-ago period.

Revenue from systems integration and consulting decreased 24.6% to $230.6 million in the September 2012 quarter from $305.8 million in the September 2011 quarter. Contributing to the decline was lower sales of industry solutions and lower project work.

Outsourcing revenue decreased 7.1% for the three months ended September 30, 2012 to $363.3 million compared with the three months ended September 30, 2011, principally due to lower Information Technology Outsourcing (ITO) revenue. Approximately 2 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business.

Infrastructure services revenue decreased 13.7% for the three month period ended September 30, 2012 compared with the three month period ended September 30, 2011.

Core maintenance revenue declined 14.9% in the current quarter compared with the prior-year quarter.

Services gross profit was 19.9% in the third quarter of 2012 compared with 21.6% in the year-ago period. Services operating income percent was 6.0% in the three months ended September 30, 2012 compared with 8.7% in the three months ended September 30, 2011. The decrease in Services gross profit and operating profit margins reflected lower revenue levels as well as a different mix of Services revenue.

In the Technology segment, customer revenue declined 10.0% to $129.4 million in the current quarter compared with $143.8 million in the year-ago period, due to declines in other technology revenue. Foreign currency translation had a negative impact of approximately 4-percentage points on Technology revenue in the current period compared with the prior-year period.

Revenue from the company's enterprise-class software and servers, which includes the company's ClearPath and ES7000 product families, was flat for the three months ended September 30, 2012 compared with the three months ended September 30, 2011.

Revenue from other technology decreased 71.1% for the three months ended September 30, 2012 compared with the three months ended September 30, 2011, principally due to lower sales of third-party technology products.

Technology gross profit was 59.9% in the current quarter compared with 57.4% in the year-ago quarter. Technology operating income percent was 29.1% in the three months ended September 30, 2012 compared with 25.8% in the three months ended September 30, 2011. The increase in Technology gross profit and operating profit margins reflected a richer mix of high margin ClearPath revenue.


Nine months ended September 30, 2012 compared with the nine months ended September 30, 2011

Information by business segment is presented below (in millions of dollars):

                                     Total        Eliminations       Services        Technology
Nine Months Ended Sept. 30, 2012
Customer revenue                   $ 2,727.1                         $ 2,386.7      $      340.4
Intersegment                                      $       (85.8 )          2.0              83.8

Total revenue                      $ 2,727.1      $       (85.8 )    $ 2,388.7      $      424.2

Gross profit percent                    25.2 %                            19.9 %            61.8 %

Operating profit percent                 7.5 %                             6.3 %            27.8 %


Nine Months Ended Sept. 30, 2011
Customer revenue                   $ 2,868.5                         $ 2,519.3      $      349.2
Intersegment                                      $       (70.2 )          2.7              67.5

Total revenue                      $ 2,868.5      $       (70.2 )    $ 2,522.0      $      416.7

Gross profit percent                    24.6 %                            19.9 %            53.1 %

Operating profit percent                 7.1 %                             6.7 %            14.6 %

Gross profit percent and operating income percent are as a percent of total revenue.

Customer revenue by classes of similar products or services, by segment, is presented below (in millions of dollars):

                                                    Nine Months
                                                  Ended Sept. 30          Percent
                                                2012          2011         Change
      Services
      Systems integration and consulting      $   801.9     $   876.7         (8.5 )%
      Outsourcing                               1,110.9       1,112.6          (.2 )%
      Infrastructure services                     330.0         364.1         (9.4 )%
      Core maintenance                            143.9         165.9        (13.3 )%

                                                2,386.7       2,519.3         (5.3 )%
      Technology
      Enterprise-class software and servers       320.0         302.6          5.8 %
      Other technology                             20.4          46.6        (56.2 )%

                                                  340.4         349.2         (2.5 )%

      Total                                   $ 2,727.1     $ 2,868.5         (4.9 )%

In the Services segment, customer revenue was $2,386.7 million for the nine months ended September 30, 2012, down 5.3% from the nine months ended September 30, 2011. Approximately 2 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business. Foreign currency translation had a 3-percentage-point negative impact on Services revenue in the current period compared with the year-ago period.

Revenue from systems integration and consulting decreased 8.5% to $801.9 million for the nine months ended September 30, 2012 from $876.7 million for the nine months ended September 30, 2011. Approximately 8 percentage points of the decline were due to the decline in revenue from the company's U.S. Federal business.

Outsourcing revenue of $1,110.9 million was flat for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011.


Infrastructure services revenue decreased 9.4% for the nine month period ended September 30, 2012 compared with the nine month period ended September 30, 2011.

Core maintenance revenue declined 13.3% in the current nine-month period compared with the prior-year period.

Services gross profit was 19.9% in the first nine months of 2012 compared with 19.9% in the year-ago period. Services operating income percent was 6.3% in the nine months ended September 30, 2012 compared with 6.7% in the nine months ended September 30, 2011.

In the Technology segment, customer revenue declined 2.5% to $340.4 million in the first nine months of 2012 compared with $349.2 million in the year-ago period, as ClearPath revenue increased. Foreign currency translation had a negative impact of approximately 4-percentage point on Technology revenue in the current period compared with the prior-year period.

Revenue from the company's enterprise-class software and servers, which includes the company's ClearPath and ES7000 product families, increased 5.8% for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. The increase was due to higher sales of the company's ClearPath products.

Revenue from other technology decreased 56.2% for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011, principally due to lower sales of third-party technology products.

Technology gross profit was 61.8% in the current nine-month period compared with 53.1% in the year-ago period. Technology operating income percent was 27.8% in the nine months ended September 30, 2012 compared with 14.6% in the nine months ended September 30, 2011. The increases reflected a richer mix of enterprise software in the current period.

New accounting pronouncements

See note (h) 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 the company's consolidated financial statements.

Financial condition

The company's principal sources of liquidity are cash on hand, cash from operations and its revolving credit facility, discussed below. The company and certain international subsidiaries have access to uncommitted lines of credit from various banks. The company believes that it will have adequate sources of liquidity to meet its expected near-term cash requirements.

Cash and cash equivalents at September 30, 2012 were $541.6 million compared with $714.9 million at December 31, 2011.

As of September 30, 2012, approximately $351 million of cash and cash equivalents were held by the company's foreign subsidiaries. In the future, if these funds are needed for the company's operations in the U.S., the company may be required to accrue and pay taxes to repatriate these funds.

During the nine months ended September 30, 2012, cash provided by operations was $107.4 million compared with $157.7 million for the nine months ended September 30, 2011. Cash provided by operations during the nine months ended September 30, 2012 was negatively impacted by an increase in cash contributions to the company's defined benefit pension plans. During the nine months ended September 30, 2012, the company contributed cash of $175.1 million to such plans compared with $63.6 million during the nine months ended September 30, 2011. The principal reason for the increase was that in the current period, the company contributed $111.1 million to its U.S. qualified defined benefit pension plan compared with no contributions to that plan in the prior-year period.

Cash used for investing activities for the nine months ended September 30, 2012 was $90.2 million compared with cash usage of $83.6 million during the nine months ended September 30, 2011. Net proceeds of investments were $2.4 million in each of the nine months ended September 30, 2012 and September 30, 2011. Proceeds from investments and purchases of investments represent derivative financial instruments used to reduce the company's currency exposure to market risks from changes in foreign currency exchange rates. During the nine months ended September 30, 2012, the net change in restricted deposits resulted in cash usage of $1.1 million compared with cash provided of $30.1 million during the nine months ended September 30, 2011. In addition, in the current period, the


investment in marketable software was $42.9 million compared with $36.9 million in the year-ago period, capital additions of properties were $26.0 million in 2012 compared with $32.9 million in 2011 and capital additions of outsourcing assets were $27.8 million in 2012 compared with $31.3 million in 2011. During the nine months ended September 30, 2012, net proceeds from the sales of businesses and assets was $5.2 million compared with a net usage of $15.0 million in the year-ago period.

Cash used for financing activities during the nine months ended September 30, 2012 was $200.1 million compared with cash usage of $222.1 million during the . . .

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