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UIS > SEC Filings for UIS > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for UNISYS CORP


1-Nov-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 for the first nine months of 2013 were impacted by lower revenue for IT services and technology. Revenue for the nine months ended September 30, 2013 was $2,460.6 million compared with $2,727.1 million for the nine months ended September 30, 2012. Services revenue over the first nine months of 2013 declined 9%, primarily reflecting lower revenue for project-based services and solutions. Technology revenue, which can vary significantly from quarter to quarter based on the timing of customer purchases, declined 18% in the first nine months of 2013 due to lower sales of enterprise-class software and servers.

Reflecting lower revenue, the company reported a nine month 2013 net loss of $25.1 million, or $.57 per diluted share, compared with net income of $47.6 million, or $1.08 per diluted share, in the first nine months of 2012. Results for the nine months ended September 30, 2012 included pretax income of $7.6 million from the operations of the company's former South African subsidiary, which was sold in March 2012, and a $10.6 million pretax gain on the sale of this subsidiary (see Note (1) of the Notes to Consolidated Financial Statements). In addition, the results for the nine months ended September 30, 2012 include pretax charges of $30.6 million related to debt reduction charges (see Note (k) of the Notes to Consolidated Financial Statements).

Results of operations

Company results

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

The company's 2013 third quarter was impacted by lower technology revenue, which can vary significantly from quarter to quarter based on the timing of customer purchases. Revenue for the quarter ended September 30, 2013 was $792.1 million compared with $877.4 million for the third quarter of 2012, a decrease of 10% 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 4% and Technology revenue decreased 44% in the current quarter compared with the year-ago period. U.S. revenue decreased 2% in the third quarter compared with the year-ago period. International revenue decreased 15% in the current quarter due to declines in all regions. Foreign currency had a 2-percentage-point negative impact on international revenue in the three months ended September 30, 2013 compared with the three months ended September 30, 2012.

Total gross profit margin was 21.7% in the three months ended September 30, 2013 compared with 24.9% in the three months ended September 30, 2012 reflecting lower revenue and margin in company's technology business.

Selling, general and administrative expense in the three months ended September 30, 2013 was $131.7 million (16.6% of revenue) compared with $138.6 million (15.8% of revenue) in the year-ago period.

Research and development (R&D) expenses in the third quarter of 2013 were $15.8 million compared with $18.8 million in the third quarter of 2012.

For the third quarter of 2013, the company reported an operating profit of $24.0 million compared with an operating profit of $61.2 million in the third quarter of 2012.

For the three months ended September 30, 2013, pension expense was $23.4 million compared with pension expense of $29.9 million for the three months ended September 30, 2012. Included in pension expense for the three months ended September 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 $94 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 September 30, 2013 was $2.4 million compared with $7.8 million for the three months ended September 30, 2012 reflecting the company's 2012 debt reduction actions.

Other income (expense), net was income of $1.9 million in the third quarter of 2013 compared with an expense of $25.8 million in the third quarter of 2012. Included in the third quarter of 2012 was a $23.1 million charge related to debt redemptions.

Income before income taxes for the three months ended September 30, 2013 was $23.5 million compared with income of $27.6 million for the three months ended September 30, 2012. The provision for income taxes was $27.0 million in the current quarter compared with $32.7 million in the year-ago period. Included in the provision for income taxes for the three months ended September 30, 2013 and 2012 was $11.4 million and $9.2 million, respectively, related to UK tax rate changes, as discussed in note (j) of the Notes to Consolidated Financial Statements.

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.

For the three months ended September 30, 2013, the company reported a net loss of $11.6 million, or $.26 per diluted share, compared with a net loss of $12.4 million, or $.28 per diluted share, for the three months ended September 30, 2012.

Nine months ended September 30, 2013 compared with the nine months ended September 30, 2012

Revenue for the nine months ended September 30, 2013 was $2,460.6 million compared with $2,727.1 million for the nine months ended September 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 nine months ended September 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 9% and Technology revenue decreased 18% for the nine months ended September 30, 2013 compared with the year-ago period. U.S. revenue decreased 8% in the current period compared with the year-ago period.

International revenue decreased 11% in the current period due to declines in all regions. Foreign currency had a 2-percentage-point negative impact on international revenue in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012.

Total gross profit margin was 21.7% in the nine months ended September 30, 2013 compared with 25.2% in the nine months ended September 30, 2012 primarily reflecting a lower margin in the company's technology business.

Selling, general and administrative expense in the nine months ended September 30, 2013 was $418.8 million (17.0% of revenue) compared with $422.0 million (15.5% 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 for the nine months ended September 30, 2013 were $50.6 million compared with $61.0 million in the prior-year period.

For the nine months ended September 30, 2013, the company reported an operating profit of $63.6 million compared with an operating profit of $204.6 million in the prior-year period.


For the nine months ended September 30, 2013, pension expense was $69.4 million compared with pension expense of $76.7 million for the nine months ended September 30, 2012.

Interest expense for the nine months ended September 30, 2013 was $7.7 million compared with $25.0 million for the nine months ended September 30, 2012 reflecting the company's 2012 debt reduction actions.

Other income (expense), net was income of $11.1 million for the nine months ended September 30, 2013 compared with expense of $34.9 million in 2012. The current-year period includes $11.7 million of foreign exchange gains. Included in the prior-year period were debt reduction charges of $30.6 million and foreign exchange losses of $7.3 million.

Income before income taxes for the nine months ended September 30, 2013 was $67.0 million compared with income of $144.7 million for the nine months ended September 30, 2012. The provision for income taxes was $71.1 million in the current period compared with $76.8 million in the year-ago period. Included in the provision for taxes for the nine months ended September 30, 2013 and 2012 was $11.4 million and $9.2 million, respectively, related to UK tax rate changes, as discussed above.

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, 2013 and 2012 was $1.0 million and $.4 million, respectively. The amount for the nine months ended September 30, 2013 and 2012 was $3.7 million and $9.8 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 September 30, 2013 compared with the three months ended September 30, 2012

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

                                     Total       Eliminations        Services        Technology
Three Months Ended Sept. 30, 2013
Customer revenue                    $ 792.1                         $    720.0      $       72.1
Intersegment                                     $       (22.3 )            .4              21.9

Total revenue                       $ 792.1      $       (22.3 )    $    720.4      $       94.0


Gross profit percent                   21.7 %                             21.1 %            35.3 %

Operating profit (loss) percent         3.0 %                              7.7 %           (11.0 )%


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 %


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
                                                 2013        2012        Change
        Services
        Systems integration and consulting      $ 227.7     $ 230.6         (1.3 )%
        Outsourcing                               339.4       363.3         (6.6 )%
        Infrastructure services                   104.7       107.1         (2.2 )%
        Core maintenance                           48.2        47.0          2.6 %

                                                  720.0       748.0         (3.7 )%
        Technology
        Enterprise-class software and servers      54.6       123.5        (55.8 )%
        Other technology                           17.5         5.9        196.6 %

                                                   72.1       129.4        (44.3 )%

        Total                                   $ 792.1     $ 877.4         (9.7 )%

In the Services segment, customer revenue was $720.0 million for the three months ended September 30, 2013, down 3.7% from the three months ended September 30, 2012. Foreign currency translation had a 2-percentage-point negative impact on Services revenue in the current quarter compared with the year-ago period.

Revenue from systems integration and consulting decreased 1.3% to $227.7 million in the September 2013 quarter from $230.6 million in the September 2012 quarter.

Outsourcing revenue decreased 6.6% for the three months ended September 30, 2013 to $339.4 million compared with the three months ended September 30, 2012 principally due to a decrease in information technology (IT) outsourcing, primarily in public sector customers in the Asia/Pacific region.

Infrastructure services revenue decreased 2.2% for the three month period ended September 30, 2013 compared with the three month period ended September 30, 2012.

Core maintenance revenue increased 2.6% in the current quarter compared with the prior-year quarter.

Services gross profit was 21.1% in the current quarter of 2013 compared with 19.9% in the year-ago period. Services operating income percent was 7.7% in the three months ended September 30, 2013 compared with 6.0% in the three months ended September 30, 2012.

In the Technology segment, customer revenue, which can vary significantly from quarter to quarter based on the timing of customer purchases, decreased 44.3% to $72.1 million in the current quarter compared with $129.4 million in the year-ago period, as ClearPath revenue decreased. Foreign currency translation had a negligible impact on Technology revenue in the current period compared with the prior-year period.

Revenue from the company's enterprise-class software and servers decreased 55.8% for the three months ended September 30, 2013 compared with the three months ended September 30, 2012. The decrease was due to lower sales of the company's ClearPath products.


Revenue from other technology increased $11.6 million for the three months ended September 30, 2013 compared with the three months ended September 30, 2012, principally due to higher sales of third-party technology products.

Technology gross profit was 35.3% in the current quarter compared with 59.9% in the year-ago quarter. Technology operating profit (loss) percent was (11.0)% in the three months ended September 30, 2013 compared with 29.1% in the three months ended September 30, 2012. The decrease in Technology gross profit and operating profit margins reflected the lower ClearPath revenue.

Nine months ended September 30, 2013 compared with the nine months ended September 30, 2012

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

                                     Total        Eliminations       Services        Technology
Nine Months Ended Sept. 30, 2013
Customer revenue                   $ 2,460.6                         $ 2,182.7      $      277.9
Intersegment                                      $       (56.5 )          1.3              55.2

Total revenue                      $ 2,460.6      $       (56.5 )    $ 2,184.0      $      333.1

Gross profit percent                    21.7 %                            18.9 %            48.4 %

Operating profit percent                 2.6 %                             4.9 %             6.7 %


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 %

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
                                                2013          2012         Change
      Services
      Systems integration and consulting      $   674.2     $   801.9        (15.9 )%
      Outsourcing                               1,055.3       1,110.9         (5.0 )%
      Infrastructure services                     315.3         330.0         (4.5 )%
      Core maintenance                            137.9         143.9         (4.2 )%

                                                2,182.7       2,386.7         (8.6 )%
      Technology
      Enterprise-class software and servers       246.9         320.0        (22.8 )%
      Other technology                             31.0          20.4         52.0 %

                                                  277.9         340.4        (18.4 )%

      Total                                   $ 2,460.6     $ 2,727.1         (9.8 )%

In the Services segment, customer revenue was $2,182.7 million for the nine months ended September 30, 2013, a decline of 8.6% when compared with the nine months ended September 30, 2012 principally due to a decline in systems integration and consulting revenue. 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 $674.2 million for the nine months ended September 30, 2013 compared with $801.9 million for the nine months ended September 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 nine months 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 5.0% for the nine months ended September 30, 2013 to $1,055.3 million compared with the nine months ended September 30, 2012.

Infrastructure services revenue decreased 4.5% for the nine month period ended September 30, 2013 compared with the nine month period ended September 30, 2012.

Core maintenance revenue declined 4.2% in the current nine-month period compared with the prior-year period.

Services gross profit was 18.9% in the first nine months of 2013 compared with 19.9% in the year-ago period. Services operating profit percent was 4.9% in the nine months ended September 30, 2013 compared with 6.3% in the nine months ended September 30, 2012.

In the Technology segment, customer revenue, which can vary significantly from quarter to quarter based on the timing of customer purchases, decreased 18.4% to $277.9 million in the first nine months of 2013 compared with $340.4 million in the year-ago period, as ClearPath revenue decreased. 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 22.8% for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012. The decrease was due to lower sales of the company's ClearPath products.

Revenue from other technology increased $10.6 million for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012, principally due to higher sales of third-party technology products.

Technology gross profit was 48.4% in the current nine-month period compared with 61.8% in the year-ago period. Technology operating profit percent was 6.7% in the nine months ended September 30, 2013 compared with 27.8% in the nine months ended September 30, 2012. The decrease in Technology gross profit and operating profit margins reflected the lower ClearPath revenue.

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, 2013 were $555.9 million compared with $655.6 million at December 31, 2012.

As of September 30, 2013, approximately $369 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, 2013, cash provided by operations was $46.2 million compared with $107.4 million for the nine months ended September 30, 2012. Cash provided by operations during the first nine months of 2013 was positively impacted by a decrease in cash contributions to the company's defined benefit pension plans. During the nine months ended September 30, 2013, the company contributed $101.6 million to such plans compared with $175.1 million during the nine months ended September 30, 2012. In the first nine months of 2013, the company made cash contributions of $20.4 million to its U.S. qualified defined benefit pension plan compared with $111.1 million in the prior-year period.


Cash used for investing activities for the nine months ended September 30, 2013 was $109.5 million compared with cash usage of $90.2 million during the nine months ended September 30, 2012. Net purchases of investments were $7.6 million for the nine months ended September 30, 2013 compared with net proceeds of $2.4 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 $47.3 million compared with $42.9 million in the year-ago period, capital additions of properties were $26.1 million in 2013 compared with $26.0 million in 2012 and capital additions of outsourcing assets were $29.6 million in 2013 compared with $27.8 million in 2012.

Cash used for financing activities during the nine months ended September 30, 2013 was $19.1 million compared with cash usage of $200.1 million during the nine months ended September 30, 2012. The current-year period includes $11.5 million for common stock repurchases and the prior-year period includes cash payment for long-term debt of $388.9 million and net proceeds from the issuance of long-term debt of $204.8 million.

On August 21, 2012, the company issued $210 million of 6.25% senior notes due 2017. During the nine months ended September 30, 2012, the company retired an aggregate principal amount of $362.3 million of its long-term debt, comprised of all of the remaining $186.2 million of its 12.75% senior secured notes due 2014, all of the remaining $25.5 million of its 14 1/4% senior secured notes due 2015 and all of the remaining $150.6 million of its 12.50% senior notes due 2016. The company used cash on hand and the net proceeds from the issuance of the 6.25% senior notes due 2017 to fund the retirement of this debt.

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 September 30, 2013, the company had no borrowings and $24.1 million of letters of credit outstanding under the facility. At September 30, 2013, availability under the facility was $75.5 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 . . .

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