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UIS > SEC Filings for UIS > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for UNISYS CORP


3-May-2013

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

Lower revenue in both the services and technology businesses impacted profitability and resulted in a net loss in the quarter. The company reported a first-quarter 2013 net loss of $33.9 million, or a loss of $.77 per diluted share, compared with first-quarter 2012 net income of $13.4 million, or income of $.30 per diluted share. Included in the three months ended March 31, 2013 were pretax foreign exchange losses of $4.3 million (including $6.5 million related to currency devaluation in Venezuela), discussed below. Included in the three months ended March 31, 2012 was $7.6 million of pretax income from the operations of the company's South African subsidiary which was sold in March of 2012 and an $11.3 million pretax gain on the sale of this subsidiary (see Note
(l) of the Notes to Consolidated Financial Statements). In addition, the first quarter of 2012 included pretax charges of $7.2 million related to debt redemptions (see Note (k) of the Notes to Consolidated Financial Statements) and foreign exchange losses of $7.0 million.

Revenue for the quarter ended March 31, 2013 was $809.9 million compared with $928.4 million for the first quarter of 2012, a decrease of 13% from the prior


year. Most significantly, the company's systems integration revenue declined by 31% due to lower demand for project-based services and solutions, particularly public sector in-quarter sell and bill revenue. Demand for discretionary project-based services and solutions remains soft. In addition, the company needs to improve its execution in this area. Revenue in the first quarter 2012 included $47.6 million (principally public sector in-quarter sell and bill revenue) from the company's South African subsidiary, which was sold on March 31, 2012. In the company's U.S. Federal business, revenue declined 9% in the quarter. This decline reflected delayed governmental decision making, lower funding on certain services contracts, the continued roll-off of revenue from some services contracts lost in prior quarters as well as lower technology revenue.

Effective February 13, 2013, the Venezuelan government devalued its currency (Bolivar Fuerte) by resetting the official exchange rate from 4.30 to the U.S. dollar to 6.30 to the U.S. dollar. As a result, the company recorded a pretax foreign exchange loss in the first quarter of 2013 of $6.5 million.

Results of operations

Company results

Revenue for the quarter ended March 31, 2013 was $809.9 million compared with $928.4 million for the first quarter of 2012, a decrease of 13% from the prior year. Foreign currency fluctuations had a 1 percentage-point negative impact on revenue in the current period compared with the year-ago period.

Services revenue decreased 12% and Technology revenue decreased 18% in the current quarter compared with the year-ago period. As set forth above, the company's systems integration revenue declined by 31% due to lower demand for project-based services and solutions, particularly public sector in-quarter sell and bill revenue. U.S. revenue decreased 15% in the first quarter compared with the year-ago period. International revenue decreased 11% in the current quarter principally due to declines in Latin America and Asia/Pacific partially offset by an increase in Europe. Foreign currency had a 2-percentage-point negative impact on international revenue in the three months ended March 31, 2013 compared with the three months ended March 31, 2012.

Total gross profit margin was 19.9% in the three months ended March 31, 2013 compared with 24.3% in the three months ended March 31, 2012 reflecting lower margins in both the company's services and technology businesses.

Selling, general and administrative expense in the three months ended March 31, 2013 was $142.2 million (17.6% of revenue) compared with $141.4 million (15.2% of revenue) in the year-ago period. The prior-year quarter includes a gain of $11.3 million related to the sale of the company's South African subsidiary which was 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 quarter of 2013 were $17.0 million compared with $20.0 million in the first quarter of 2012.

For the first quarter of 2013, the company reported an operating profit of $1.6 million compared with an operating profit of $64.4 million in the first quarter of 2012.

For the three months ended March 31, 2013, pension expense was $23.2 million compared with pension expense of $25.7 million for the three months ended March 31, 2012. For the full year 2013, the company expects to recognize pension expense of approximately $92 million compared with $108.2 million for the full year of 2012. 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 March 31, 2013 was $2.7 million compared with $9.3 million for the three months ended March 31, 2012 reflecting the company's 2012 debt reduction actions.

Other income (expense), net was an expense of $4.9 million in the first quarter of 2013 compared with expense of $13.2 million in 2012. Included in the first


quarter of 2013 were foreign exchange losses of $4.3 million, including $6.5 million related to the Venezuelan devaluation. Included in the first quarter of 2012 were charges of $7.2 million related to the debt redemptions, discussed above, and foreign exchange losses of $7.0 million.

Income (loss) before income taxes for the three months ended March 31, 2013 was a loss of $6.0 million compared with income of $41.9 million for the three months ended March 31, 2012. The provision for income taxes was $21.4 million in the current quarter compared with $22.0 million in the year-ago period. As 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 may vary significantly quarter to quarter depending on the geographic distribution of income.

In March of 2013, the UK government announced its intention to reduce the UK corporate tax rate to 21% effective April 1, 2014 and to 20% effective April 1, 2015. This change, which is included in the UK Finance Act of 2013, will not be considered to be enacted for U.S. GAAP purposes until all legislative procedures are completed and the Finance Act of 2013 receives Royal Assent. This is expected to occur in the second half of 2013. When enacted, it is expected that the rate change will increase the company's income tax provision by approximately $12.2 million due to the impact on the UK net deferred tax assets.

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 March 31, 2013 and 2012 was $.3 million and $1.2 million, respectively. The profit on these transactions is eliminated in Corporate.

The company evaluates business segment performance based 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.

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

                               Total       Eliminations        Services        Technology
   Three Months Ended
   March 31, 2013
   Customer revenue           $ 809.9                         $    723.0      $       86.9
   Intersegment                            $       (17.3 )            .5              16.8

   Total revenue              $ 809.9      $       (17.3 )    $    723.5      $      103.7

   Gross profit percent          19.9 %                             17.4 %            45.8 %

   Operating profit percent        .2 %                              3.1 %              .2 %

--------------------------------------------------------------------------------
                               Total       Eliminations        Services        Technology
   Three Months Ended
   March 31, 2012
   Customer revenue           $ 928.4                         $    823.0      $      105.4
   Intersegment                            $       (32.0 )            .8              31.2

   Total revenue              $ 928.4      $       (32.0 )    $    823.8      $      136.6

   Gross profit percent          24.3 %                             18.9 %            62.2 %

   Operating profit percent       6.9 %                              5.0 %            25.6 %

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):

                                                Three Months Ended
                                                     March 31             Percent
                                                 2013          2012        Change
      Services
      Systems integration and consulting      $    211.7      $ 307.6        (31.2 )%
      Outsourcing                                  361.3        351.4          2.8 %
      Infrastructure services                      105.1        115.3         (8.8 )%
      Core maintenance                              44.9         48.7         (7.8 )%

                                                   723.0        823.0        (12.2 )%
      Technology
      Enterprise-class software and servers         80.0         95.7        (16.4 )%
      Other technology                               6.9          9.7        (28.9 )%

                                                    86.9        105.4        (17.6 )%

      Total                                   $    809.9      $ 928.4        (12.8 )%

In the Services segment, customer revenue was $723.0 million for the three months ended March 31, 2013, down 12.2% from the three months ended March 31, 2012. Foreign currency translation had a negligible impact on Services revenue in the current quarter compared with the year-ago period.

Revenue from systems integration and consulting decreased 31.2% to $211.7 million in the March 2013 quarter from $307.6 million in the March 2012 quarter. The decline was due to lower demand for project-based services and solutions, particularly public sector in-quarter sell and bill revenue. Revenue in the first quarter 2012 included $47.6 million (principally public sector in-quarter sell and bill revenue) from the company's South African subsidiary, which was sold on March 31, 2012. Demand for discretionary project-based services and solutions remains soft. In addition, the company needs to improve its execution in this area.

Outsourcing revenue for the three months ended March 31, 2013 increased 2.8% when compared with the three months ended March 31, 2012. The increase was driven by in-quarter hardware and software sales to outsourcing customers in the current period.

Infrastructure services revenue decreased 8.8% for the three month period ended March 31, 2013 compared with the three month period ended March 31, 2012.

Core maintenance revenue declined 7.8% in the current quarter compared with the prior-year quarter.

Services gross profit was 17.4% in the first quarter of 2013 compared with 18.9% in the year-ago period. Services operating income percent was 3.1% in the three months ended March 31, 2013 compared with 5.0% in the three months ended March 31, 2012. The declines in both gross profit and operating profit margins was due to lower services revenue, particularly in the systems integration and consulting business.


In the Technology segment, customer revenue declined 17.6% to $86.9 million in the current quarter compared with $105.4 million in the year-ago period, as both enterprise-class software and servers revenue and other technology revenue declined.

Revenue from the company's enterprise-class software and servers, which includes the company's ClearPath and ES7000 product families, decreased 16.4% for the three months ended March 31, 2013 compared with the three months ended March 31, 2012. The decrease was due to lower sales of the company's ClearPath products. The current quarter was impacted by the strong performance in the fourth quarter of 2012 which benefited from some earlier-than-expected ClearPath sales.

Revenue from other technology decreased $2.8 million for the three months ended March 31, 2013 compared with the three months ended March 31, 2012, principally due to lower sales of third-party technology products.

Technology gross profit was 45.8% in the current quarter compared with 62.2% in the year-ago quarter. Technology operating income percent was .2% in the three months ended March 31, 2013 compared with 25.6% in the three months ended March 31, 2012. The decreases reflected lower sales of enterprise-class software and servers in the current quarter.

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 March 31, 2013 were $628.6 million compared with $655.6 million at December 31, 2012.

As of March 31, 2013, $393.4 million of cash and cash equivalents were held by the company's foreign subsidiaries and branches operating outside of the U.S. 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 three months ended March 31, 2013, cash provided by operations was $14.1 million compared with $33.4 million for the three months ended March 31, 2012. Cash provided by operations during the first quarter of 2013 was positively impacted by a decrease in cash contributions to the company's defined benefit pension plans. During the first quarter of 2013, the company contributed cash of $26.6 million to such plans compared with $68.2 million during the first quarter of 2012. The principal reason for the decrease was that in the current quarter, the company did not contribute to its U.S. qualified defined benefit pension plan compared with $47.3 million in the prior-year quarter.

Cash used for investing activities for the three months ended March 31, 2013 was $24.6 million compared with cash usage of $26.3 million during the three months ended March 31, 2012. Net proceeds of investments were $1.1 million for the three months ended March 31, 2013 compared with zero in the prior-year period. 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. In addition, in the current quarter, the investment in marketable software was $14.8 million compared with $13.9 million in the year-ago period, capital additions of properties were $3.6 million in 2013 compared with $7.9 million in 2012 and capital additions of outsourcing assets were $7.5 million in 2013 compared with $8.6 million in 2012.

Cash used for financing activities during the three months ended March 31, 2013 was $3.1 million compared with cash used of $80.1 million during the three months ended March 31, 2012. The prior-year quarter included cash payments for long-term debt of $71.7 million as well as dividends of $4.5 million paid to noncontrolling interests.


In June 2011, the company entered into a five-year secured revolving credit facility which provides for loans and letters of credit up to an aggregate amount of $150 million (with a limit on letters of credit of $100 million). Borrowing limits under the credit agreement are based upon the amount of eligible U.S. accounts receivable. At March 31, 2013, the company had no borrowings and $26.3 million of letters of credit outstanding under the facility. At March 31, 2013, availability under the facility was $90.7 million net of letters of credit issued. Borrowings under the facility will bear interest based on short-term rates. The credit agreement contains customary representations and warranties, including that there has been no material adverse change in the company's business, properties, operations or financial condition. It also contains financial covenants requiring the company to maintain a minimum fixed charge coverage ratio and, if the company's consolidated cash plus availability under the credit facility falls below $130 million, a maximum secured leverage ratio. The credit agreement allows the company to pay dividends on its preferred stock unless the company is in default and to, among other things, repurchase its equity, prepay other debt, incur other debt or liens, dispose of assets and make acquisitions, loans and investments, provided the company complies with certain requirements and limitations set forth in the agreement. Events of default include non-payment, failure to comply with covenants, materially incorrect representations and warranties, change of control and default under other debt aggregating at least $50 million. The credit facility is guaranteed by Unisys Holding Corporation, Unisys NPL, Inc. and any future material domestic subsidiaries. The facility is secured by the assets of Unisys Corporation and the subsidiary guarantors, other than certain excluded assets. The company may elect to prepay or terminate the credit facility without penalty.

At March 31, 2013, the company has met all covenants and conditions under its various lending and funding agreements. The company expects to continue to meet these covenants and conditions.

In 2013, the company expects to make cash contributions of approximately $142 million to its worldwide defined benefit pension plans, which is comprised of $108 million primarily for non-U.S. defined benefit pension plans and $34 million for the company's U.S. qualified defined benefit pension plan.

The company has on file with the Securities and Exchange Commission an effective registration statement, expiring in June of 2015, covering debt or equity securities, which enables the company to be prepared for future market opportunities.

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.

In December 2012, the company's Board of Directors authorized the company to purchase up to an aggregate of $50 million of the company's common stock and mandatory convertible preferred stock through December 31, 2014. Under the authorization, the company can repurchase shares in the open market, which may include the use of 10b5-1 plans, or through privately negotiated transactions. The timing of repurchases will depend upon several factors, including market and business conditions. Share repurchases may be suspended or discontinued at any time. As of March 31, 2013, no shares had been purchased. Since then through May 2, 2013, the company has purchased 612,332 shares of common stock for an aggregate purchase price of approximately $11.5 million.

Factors that may affect future results

From time to time, the company provides information containing "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "intends," "plans," "projects" and similar expressions may identify such forward-looking statements. All forward-looking statements rely on assumptions and are subject to risks, uncertainties and other factors that could cause the company's actual results to differ materially from expectations. Factors that could affect future results include, but are not limited to, those discussed below. Any forward-looking statement speaks only as of the date on which that statement is made. The company assumes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

Factors that could affect future results include the following:

Future results will depend in part on the company's ability to drive profitable growth in consulting and systems integration. The company's ability to grow profitably in this business will depend on the level of demand for systems integration projects and the portfolio of solutions the company offers for specific industries. It will also depend on an efficient utilization of services delivery personnel. In addition, profit margins in this business are a function of both the portfolio of solutions sold in a given period and the rates the company is able to charge for services and the chargeability of its professionals. If the company is unable to attain sufficient rates and


chargeability for its professionals, profit margins will be adversely affected. The rates the company is able to charge for services are affected by a number of factors, including clients' perception of the company's ability to add value through its services; introduction of new services or products by the company or its competitors; pricing policies of competitors; and general economic conditions. Chargeability is also affected by a number of factors, including the company's ability to transition employees from completed projects to new engagements, and its ability to forecast demand for services and thereby maintain an appropriate headcount.

The company's future results will depend in part on its ability to take on, successfully implement and grow outsourcing operations. The company's outsourcing contracts are multiyear engagements under which the company takes over management of a client's technology operations, business processes or networks. In a number of these arrangements, the company hires certain of its clients' employees and may become responsible for the related employee obligations, such as pension and severance commitments. In addition, system development activity on outsourcing contracts may require the company to make significant upfront investments. The company will need to have available sufficient financial resources in order to take on these obligations and make these investments.

Recoverability of outsourcing assets is dependent on various factors, including the timely completion and ultimate cost of the outsourcing solution, and realization of expected profitability of existing outsourcing contracts. These risks could result in an impairment of a portion of the associated assets, which are tested for recoverability quarterly.

As long-term relationships, outsourcing contracts provide a base of recurring revenue. However, outsourcing contracts are highly complex and can involve the design, development, implementation and operation of new solutions and the transitioning of clients from their existing business processes to the new environment. In the early phases of these contracts, gross margins may be lower than in later years when an integrated solution has been implemented, the duplicate costs of transitioning from the old to the new system have been eliminated and the work force and facilities have been rationalized for efficient operations. Future results will depend on the company's ability to effectively and timely complete these implementations, transitions and rationalizations.

Future results will also depend, in part, on market demand for the company's high-end enterprise servers and maintenance on these servers. The company continues to apply its resources to develop value-added software capabilities and optimized solutions for these server platforms which provide competitive differentiation. Future results will depend on the company's ability to maintain its installed base for ClearPath and to develop next-generation ClearPath products to expand the market.

The company faces aggressive competition in the information services and technology marketplace, which could lead to reduced demand for the company's products and services and could have an adverse effect on the company's business. The information services and technology markets in which the company operates include a large number of companies vying for customers and market share both domestically and internationally. The company's competitors include consulting and other professional services firms, systems integrators, outsourcing providers, infrastructure services providers, computer hardware manufacturers and software providers. Some of the company's competitors may develop competing products and services that offer better price-performance or that reach the market in advance of the company's offerings. Some competitors also have or may develop greater financial and other resources than the company, with enhanced ability to compete for market share, in some instances through significant economic incentives to secure contracts. Some also may be better . . .

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