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UIS > SEC Filings for UIS > Form 10-Q on 31-Jul-2013All Recent SEC Filings

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Form 10-Q for UNISYS CORP


31-Jul-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

The company's results in the first half of 2013 were impacted by lower revenue in its Services segment, reflecting a soft demand environment. In particular, the company's systems integration revenue declined 22% in the first half of 2013 due to lower demand for project-based services and solutions.

The company reported a first half 2013 net loss of $13.5 million, or $.31 per diluted share, compared with first half 2012 net income of $60.0 million, or $1.33 per diluted share. Included in the six months ended June 30, 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 a $10.6 million pretax gain on the sale of this subsidiary (see Note (l) of the Notes to Consolidated Financial Statements).

Revenue for the six months ended June 30, 2013 was $1,668.5 million compared with $1,849.7 million for the six months ended June 30, 2012. Revenue for the six months ended June 30, 2012 included $47.6 million (principally public sector in-period sell and bill revenue) from the company's South African subsidiary, which was sold on March 31, 2012.


Results of operations

Company results

Three months ended June 30, 2013 compared with the three months ended June 30, 2012

Revenue for the quarter ended June 30, 2013 was $858.6 million compared with $921.3 million for the second quarter of 2012, a decrease of 7% 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 9% and Technology revenue increased 13% in the current quarter compared with the year-ago period. U.S. revenue decreased 6% in the second quarter compared with the year-ago period. International revenue decreased 7% in the current quarter principally due to declines in Europe and Asia/Pacific partially offset by an increase in Latin America. Foreign currency had a 1-percentage-point negative impact on international revenue in the three months ended June 30, 2013 compared with the three months ended June 30, 2012.

Total gross profit margin was 23.4% in the three months ended June 30, 2013 compared with 26.4% in the three months ended June 30, 2012 reflecting lower year-over-year volume in the Services segment as well as the mix of Technology segment revenue.

Selling, general and administrative expense in the three months ended June 30, 2013 was $144.9 million (16.9% of revenue) compared with $142.0 million (15.4% of revenue) in the year-ago period.

Research and development (R&D) expenses in the second quarter of 2013 were $17.8 million compared with $22.2 million in the second quarter of 2012.

For the second quarter of 2013, the company reported an operating profit of $38.0 million compared with an operating profit of $79.0 million in the second quarter of 2012.

For the three months ended June 30, 2013, pension expense was $22.8 million compared with pension expense of $21.1 million for the three months ended June 30, 2012. Included in pension expense for the three months ended June 30, 2012 was a curtailment gain of $5.7 million related to amendments to a defined benefit plan in the Netherlands. For the full year 2013, the company expects to recognize pension expense of approximately $91 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 June 30, 2013 was $2.6 million compared with $7.9 million for the three months ended June 30, 2012 reflecting the company's 2012 debt reduction actions.

Other income (expense), net was income of $14.1 million in the second quarter of 2013 compared with income of $4.1 million in 2012. Included in the second quarter of 2013 and 2012 were foreign exchange gains of $15.7 million and $3.1 million, respectively.

Income before income taxes for the three months ended June 30, 2013 was $49.5 million compared with income of $75.2 million for the three months ended June 30, 2012. The provision for income taxes was $22.7 million in the current quarter compared with a $22.1 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 be


considered to be enacted for U.S. GAAP purposes in Q3 2013 since all legislative procedures required were completed and the Finance Act of 2013 received Royal Assent in July, 2013. It is expected that the rate change will increase the company's income tax provision by approximately $11.7 million due to the impact on the company's UK net deferred tax assets.

Net income for the three months ended June 30, 2013 was $20.4 million, or $.46 per diluted share, compared with net income of $46.6 million, or $.99 per diluted share, for the three months ended June 30, 2012.

Six months ended June 30, 2013 compared with the six months ended June 30, 2012

Revenue for the six months ended June 30, 2013 was $1,668.5 million compared with $1,849.7 million for the six months ended June 30, 2012. Foreign currency fluctuations had a 1-percentage point negative impact on revenue in the current period compared with the year-ago period. Revenue for the six months ended June 30, 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.

Services revenue decreased 11% and Technology revenue decreased 2% in the first half of 2013 compared with the year-ago period. U.S. revenue decreased 11% in the first half of 2013 compared with the year-ago period. International revenue decreased 9% in the current period principally due to declines in Europe and Asia/Pacific partially offset by an increase in Latin America. Foreign currency had a 1-percentage-point negative impact on international revenue in the six months ended June 30, 2013 compared with the six months ended June 30, 2012.

Total gross profit margin was 21.7% in the six months ended June 30, 2013 compared with 25.4% in the six months ended June 30, 2012 reflecting lower year-over-year volume in the Services segment as well as the mix of Technology segment revenue.

Selling, general and administrative expense in the six months ended June 30, 2013 was $287.1 million (17.2% of revenue) compared with $283.4 million (15.3% of revenue) in the year-ago period. The prior-year period includes a gain of $10.6 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 half of 2013 were $34.8 million compared with $42.2 million in the first half of 2012.

For the first half of 2013, the company reported an operating profit of $39.6 million compared with an operating profit of $143.4 million in the first half of 2012.

For the six months ended June 30, 2013, pension expense was $46.0 million compared with pension expense of $46.8 million for the six months ended June 30, 2012.

Interest expense for the six months ended June 30, 2013 was $5.3 million compared with $17.2 million for the six months ended June 30, 2012 reflecting the company's 2012 debt reduction actions.

Other income (expense), net was income of $9.2 million in the first half of 2013 compared with expense of $9.1 million in 2012. Included in the first half of 2013 were foreign exchange gains of $11.5 million. Included in the first half of 2012 were debt reduction charges of $7.5 million and foreign exchange losses of $3.9 million.

Income before income taxes for the six months ended June 30, 2013 was $43.5 million compared with income of $117.1 million for the six months ended June 30, 2012. The provision for income taxes was $44.1 million in the current period as well as the year-ago period.

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 June 30, 2013 and 2012 was $2.4 million and $8.2 million, respectively. The amount for the six months ended June 30, 2013 and 2012 was $2.7 million and $9.4 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.

Three months ended June 30, 2013 compared with the three months ended June 30, 2012

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

                                        Total            Eliminations           Services            Technology
Three Months Ended June 30, 2013
Customer revenue                   $         858.6                           $         739.7      $         118.9
Intersegment                                            $         (16.9 )                 .4                 16.5

Total revenue                      $         858.6      $         (16.9 )    $         740.1      $         135.4


Gross profit percent                          23.4 %                                    18.2 %               59.4 %

Operating profit percent                       4.4 %                                     4.0 %               23.9 %


Three Months Ended June 30, 2012
Customer revenue                   $         921.3                           $         815.7      $         105.6
Intersegment                                            $         (37.6 )                 .6                 37.0

Total revenue                      $         921.3      $         (37.6 )    $         816.3      $         142.6


Gross profit percent                          26.4 %                                    21.0 %               63.4 %

Operating profit percent                       8.6 %                                     8.0 %               28.6 %

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 June 30        Percent
                                                 2013        2012        Change
        Services
        Systems integration and consulting      $ 234.7     $ 263.8        (11.0 )%
        Outsourcing                               354.7       396.2        (10.5 )%
        Infrastructure services                   105.5       107.6         (2.0 )%
        Core maintenance                           44.8        48.1         (6.9 )%

                                                  739.7       815.7         (9.3 )%
        Technology
        Enterprise-class software and servers     112.2       100.8         11.3 %
        Other technology                            6.7         4.8         39.6 %

                                                  118.9       105.6         12.6 %

                                                $ 858.6     $ 921.3         (6.8 )%

In the Services segment, customer revenue was $739.7 million for the three months ended June 30, 2013, down 9.3% from the three months ended June 30, 2012 as demand remained soft in a challenging IT spending environment. Foreign currency translation had a 1-percentage-point negative impact on Services revenue in the current quarter compared with the year-ago period.

Revenue from systems integration and consulting decreased 11.0% to $234.7 million in the June 2013 quarter from $263.8 million in the June 2012 quarter. The decline was due to lower demand for project-based services and solutions, particularly public sector in-quarter sell and bill revenue.

Outsourcing revenue decreased 10.5% for the three months ended June 30, 2013 to $354.7 million compared with the three months ended June 30, 2012 principally due to a decrease in information technology (IT) outsourcing. In addition, hardware and software sales to outsourcing customers were lower in the current period compared with the year-ago period.

Infrastructure services revenue decreased 2.0% for the three month period ended June 30, 2013 compared with the three month period ended June 30, 2012.

Core maintenance revenue declined 6.9% in the current quarter compared with the prior-year quarter.

Services gross profit was 18.2% in the second quarter of 2013 compared with 21.0% in the year-ago period. Services operating income percent was 4.0% in the three months ended June 30, 2013 compared with 8.0% in the three months ended June 30, 2012. The declines in both gross profit and operating profit margins were due to lower services revenue, particularly in the systems integration and consulting business.

In the Technology segment, customer revenue increased 12.6% to $118.9 million in the current quarter compared with $105.6 million in the year-ago period, driven by higher sales of ClearPath products. Foreign currency translation had a positive impact of approximately 5-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 increased 11.3% for the three months ended June 30, 2013 compared with the three months ended June 30, 2012. The increase was due to higher sales of the company's ClearPath products.

Revenue from other technology increased $1.9 million for the three months ended June 30, 2013 compared with the three months ended June 30, 2012, principally due to higher sales of third-party technology products.

Technology gross profit was 59.4% in the current quarter compared with 63.4% in the year-ago quarter. Technology operating profit percent was 23.9% in the three months ended June 30, 2013 compared with 28.6% in the three months ended June 30, 2012. Despite the increase in ClearPath revenue, the Technology segment's margins were down due to the mix of Technology revenue in the current period compared with the prior-year period.


Six months ended June 30, 2013 compared with the six months ended June 30, 2012

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

                                      Total            Eliminations           Services            Technology
Six Months Ended June 30, 2013
Customer revenue                 $       1,668.5                           $       1,462.7      $         205.8
Intersegment                                          $         (34.2 )                 .9                 33.3

Total revenue                    $       1,668.5      $         (34.2 )    $       1,463.6      $         239.1

Gross profit percent                        21.7 %                                    17.8 %               53.5 %

Operating profit percent                     2.4 %                                     3.5 %               13.6 %


Six Months Ended June 30, 2012
Customer revenue                 $       1,849.7                           $       1,638.7      $         211.0
Intersegment                                          $         (69.6 )                1.4                 68.2

Total revenue                    $       1,849.7      $         (69.6 )    $       1,640.1      $         279.2

Gross profit percent                        25.4 %                                    19.9 %               62.8 %

Operating profit percent                     7.8 %                                     6.5 %               27.1 %

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):

                                                    Six Months
                                                   Ended June 30          Percent
                                                2013          2012         Change
      Services
      Systems integration and consulting      $   446.5     $   571.3        (21.8 )%
      Outsourcing                                 716.0         747.6         (4.2 )%
      Infrastructure services                     210.6         222.9         (5.5 )%
      Core maintenance                             89.6          96.9         (7.5 )%

                                                1,462.7       1,638.7        (10.7 )%
      Technology
      Enterprise-class software and servers       192.2         196.5         (2.2 )%
      Other technology                             13.6          14.5         (6.2 )%

                                                  205.8         211.0         (2.5 )%

      Total                                   $ 1,668.5     $ 1,849.7         (9.8 )%

In the Services segment, customer revenue was $1,462.7 million for the six months ended June 30, 2013, a decline of 10.7% when compared with the six months ended June 30, 2012 as demand remained soft in a challenging IT spending environment. Foreign currency translation had a 1-percentage-point negative impact on Services revenue in the current period compared with the year-ago period.

Revenue from systems integration and consulting was $446.5 million for the six months ended June 30, 2013 compared with $571.3 million for the six months ended June 30, 2012. 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 half of 2012 included $43.4 million (principally public sector in-quarter sell and bill revenue) from the company's South African subsidiary, which was sold on March 31, 2012.

Outsourcing revenue decreased 4.2% for the six months ended June 30, 2013 to $716.0 million compared with the six months ended June 30, 2012.


Infrastructure services revenue decreased 5.5% for the six month period ended June 30, 2013 compared with the six month period ended June 30, 2012.

Core maintenance revenue declined 7.5% in the current six-month period compared with the prior-year period.

Services gross profit was 17.8% in the first half of 2013 compared with 19.9% in the year-ago period. Services operating profit percent was 3.5% in the six months ended June 30, 2013 compared with 6.5% in the six months ended June 30, 2012. The declines in both gross profit and operating profit margins were due to lower services revenue, particularly in the systems integration and consulting business.

In the Technology segment, customer revenue decreased 2.5% to $205.8 million in the first half of 2013 compared with $211.0 million in the year-ago period. Foreign currency translation had a negative impact of approximately 1-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 decreased 2.2% for the six months ended June 30, 2013 compared with the six months ended June 30, 2012. An increase in sales of the company's ClearPath products was more than offset by lower sales of other enterprise-class software and servers.

Revenue from other technology decreased $.9 million for the six months ended June 30, 2013 compared with the six months ended June 30, 2012.

Technology gross profit was 53.5% in the current six-month period compared with 62.8% in the year-ago period. Technology operating profit percent was 13.6% in the six months ended June 30, 2013 compared with 27.1% in the six months ended June 30, 2012. Despite the increase in ClearPath revenue, the Technology segment's margins are down due to the mix of Technology revenue in the current period compared with the prior-year 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 June 30, 2013 were $575.6 million compared with $655.6 million at December 31, 2012.

As of June 30, 2013, approximately $358 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 six months ended June 30, 2013, cash provided by operations was $30.2 million compared with $90.5 million for the six months ended June 30, 2012. The decline was due in part to a net loss for the current period of $.6 million compared with net income in the prior-year period of $73.0 million. Partially offsetting the reduction in cash flow from operations was a decrease in cash contributions to the company's defined benefit pension plans. During the first half of 2013, the company contributed $61.3 million to such plans compared with $118.8 million during the first half of 2012. The principal reason for the decline in cash contributions was lower cash contributions to the company's U.S. qualified defined benefit pension plan from $79.2 million in the prior-year period to $6.9 million in the current-year period.

Cash used for investing activities for the six months ended June 30, 2013 was $67.4 million compared with cash usage of $59.6 million during the six months ended June 30, 2012. Net purchases of investments were $2.7 million for the six months ended June 30, 2013 compared with net proceeds of $1.3 million 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 period, the investment in marketable software was $29.6


million compared with $28.6 million in the year-ago period, capital additions of properties were $16.2 million in 2013 compared with $17.9 million in 2012 and capital additions of outsourcing assets were $18.3 million in 2013 compared with $18.7 million in 2012.

Cash used for financing activities during the six months ended June 30, 2013 was $18.2 million compared with cash usage of $87.3 million during the six months ended June 30, 2012. The current-year period includes $11.5 million for common stock repurchases and the prior-year period includes cash payments for long-term debt of $75.0 million.

During the six months ended June 30, 2012, the company retired a total of $68.5 million of long-term debt which was comprised of all of the remaining $25.5 million of 14 1/4% senior secured notes due 2015, $40.0 million of 12.5% senior notes due 2016 and $3.0 million of 12.75% senior secured notes due 2014.

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 June 30, 2013, the company had no borrowings and $24.1 million of letters of credit outstanding under the facility. At June 30, 2013, availability under the facility was $72.1 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 . . .

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