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UIS > SEC Filings for UIS > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for UNISYS CORP

Form 10-Q for UNISYS CORP


1-Aug-2014

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 2014 were impacted by lower revenue from enterprise servers, systems integration and infrastructure services. The lower revenue as well as execution issues on a few projects impacted margins and resulted in a net loss for the first six months of 2014.

The company reported a first half 2014 net loss attributable to Unisys Corporation common shareholders of $65.6 million, or $1.35 per diluted share, compared with first half 2013 net loss attributable to Unisys Corporation common shareholders of $13.5 million, or $.31 per diluted share.

Revenue for the six months ended June 30, 2014 declined 6 percent to $1,568.1 million compared with $1,668.5 million for the six months ended June 30, 2013.

Results of operations

Company results

Three months ended June 30, 2014 compared with the three months ended June 30, 2013

Revenue for the quarter ended June 30, 2014 was $806.4 million compared with $858.6 million for the second quarter of 2013, a decrease of 6% from the prior year. Foreign currency fluctuations had a 1-percentage-point positive impact on revenue in the current period compared with the year-ago period.

Services revenue decreased 4% and Technology revenue decreased 21% in the current quarter compared with the year-ago period. U.S. revenue decreased 10% in the second quarter compared with the year-ago period, principally due to a decline in Technology revenue. International revenue decreased 3% in the current quarter principally due to declines in Asia/Pacific and Latin America,


excluding Brazil, partially offset by increases in Europe and Brazil. Foreign currency had a 1-percentage-point positive impact on international revenue in the three months ended June 30, 2014 compared with the three months ended June 30, 2013.

Total gross profit margin was 20.5% in the three months ended June 30, 2014 compared with 23.4% in the three months ended June 30, 2013, reflecting lower margins in both the Technology and Services segments.

Selling, general and administrative expense in the three months ended June 30, 2014 was $133.6 million (16.6% of revenue) compared with $144.9 million (16.9% of revenue) in the year-ago period. Continuing tight cost controls contributed to the decline.

Research and development (R&D) expenses in the second quarter of 2014 were $15.8 million compared with $17.8 million in the second quarter of 2013.

For the second quarter of 2014, the company reported an operating profit of $15.8 million compared with $38.0 million in the second quarter of 2013.

For the three months ended June 30, 2014, pension expense was $17.9 million compared with pension expense of $22.8 million for the three months ended June 30, 2013. For the full year 2014, the company expects to recognize pension expense of approximately $75 million compared with $93.5 million for the full year of 2013. 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, 2014 was $2.3 million compared with $2.6 million for the three months ended June 30, 2013.

Other income (expense), net was an expense of $2.5 million in the second quarter of 2014 compared with income of $14.1 million in 2013. Included in the second quarter of 2014 and 2013 were foreign exchange losses of $4.0 million and foreign exchange gains of $15.7 million, respectively.

Income before income taxes for the three months ended June 30, 2014 was $11.0 million compared with $49.5 million for the three months ended June 30, 2013. The provision for income taxes was $19.9 million in the current quarter compared with $22.7 million in the year-ago period. As discussed in note (i) 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.

Net income attributable to Unisys Corporation common shareholders for the three months ended June 30, 2014 was a loss of $12.1 million, or a loss of $.24 per diluted share, compared with net income attributable to Unisys Corporation common shareholders of $20.4 million, or $.46 per diluted share, for the three months ended June 30, 2013.

Six months ended June 30, 2014 compared with the six months ended June 30, 2013

Revenue for the six months ended June 30, 2014 was $1,568.1 million compared with $1,668.5 million for the six months ended June 30, 2013. Foreign currency fluctuations had a negligible impact on revenue in the current period compared with the year-ago period.

Services revenue decreased 4% and Technology revenue decreased 20% in the first half of 2014 compared with the year-ago period. U.S. revenue decreased 8% in the first half of 2014 compared with the year-ago period, principally due to a decline in Technology revenue. International revenue decreased 5% in the current period principally due to declines in Asia/Pacific and Latin America partially offset by an increase in Europe. Foreign currency had a 1-percentage-point negative impact on international revenue in the six months ended June 30, 2014 compared with the six months ended June 30, 2013.


Total gross profit margin was 19.0% in the six months ended June 30, 2014 compared with 21.7% in the six months ended June 30, 2013, reflecting lower margins in both the Technology and Services segments.

Selling, general and administrative expense in the six months ended June 30, 2014 was $272.1 million (17.4% of revenue) compared with $287.1 million (17.2% of revenue) in the year-ago period.

Research and development (R&D) expenses in the first half of 2014 were $30.2 million compared with $34.8 million in the first half of 2013.

For the first half of 2014, the company reported an operating loss of $4.1 million compared with an operating profit of $39.6 million in the first half of 2013.

For the six months ended June 30, 2014, pension expense was $37.4 million compared with pension expense of $46.0 million for the six months ended June 30, 2013.

Interest expense for the six months ended June 30, 2014 was $4.3 million compared with $5.3 million for the six months ended June 30, 2013.

Other income (expense), net was an expense of $12.3 million in the first half of 2014 compared with income of $9.2 million in 2013. Included in the first half of 2014 and 2013 were foreign exchange losses of $13.1 million and foreign exchange gains of $11.5 million, respectively.

Income before income taxes for the six months ended June 30, 2014 was a loss of $20.7 million compared with income of $43.5 million for the six months ended June 30, 2013. The provision for income taxes was $35.9 million in the current period compared with $44.1 million in 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, 2014 and 2013 was zero and $2.4 million, respectively. The amount for the six months ended June 30, 2014 and 2013 was $.4 million and $2.7 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, 2014 compared with the three months ended June 30, 2013

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

                                    Total       Eliminations        Services        Technology
Three Months Ended June 30, 2014
Customer revenue                   $ 806.4                         $    712.9      $       93.5
Intersegment                                    $       (13.8 )            .1              13.7

Total revenue                      $ 806.4      $       (13.8 )    $    713.0      $      107.2


Gross profit percent                  20.5 %                             16.8 %            50.2 %

Operating profit percent               2.0 %                              4.0 %             1.9 %


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 %

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
                                                 2014        2013        Change
        Services
        Systems integration and consulting      $ 216.4     $ 234.7         (7.8 )%
        Outsourcing                               362.0       354.7          2.1 %
        Infrastructure services                    89.0       105.5        (15.6 )%
        Core maintenance                           45.5        44.8          1.6 %

                                                  712.9       739.7         (3.6 )%
        Technology
        Enterprise-class software and servers      90.8       112.2        (19.1 )%
        Other technology                            2.7         6.7        (59.7 )%

                                                   93.5       118.9        (21.4 )%

                                                $ 806.4     $ 858.6         (6.1 )%

In the Services segment, customer revenue was $712.9 million for the three months ended June 30, 2014, down 3.6% from the three months ended June 30, 2013. 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, which was impacted by execution issues on a few projects as well as lower in-quarter project work when compared with the prior-year period, decreased 7.8% to $216.4 million in the June 2014 quarter from $234.7 million in the June 2013 quarter.


Outsourcing revenue increased 2.1% for the three months ended June 30, 2014 to $362.0 million compared with the three months ended June 30, 2013.
Infrastructure services revenue decreased 15.6% for the three month period ended June 30, 2014 compared with the three month period ended June 30, 2013. The decline reflects lower volume on some existing contracts and the conclusion of other contracts.

Core maintenance revenue increased 1.6% in the current quarter compared with the prior-year quarter.

Services gross profit was 16.8% in the second quarter of 2014 compared with 18.2% in the year-ago period. The current period gross profit margin was impacted by lower volume in the systems integration and infrastructure services businesses as well as execution issues on a few IT services projects. Services operating income percent was 4.0% in the three months ended June 30, 2014 compared with 4.0% in the three months ended June 30, 2013, as lower operating expenses offset the decline in gross profit margin.

In the Technology segment, customer revenue decreased 21.4% to $93.5 million in the current quarter compared with $118.9 million in the year-ago period, driven by lower sales of ClearPath products. Foreign currency translation had a positive 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 19.1% for the three months ended June 30, 2014 compared with the three months ended June 30, 2013. The decrease was due to lower sales of the company's ClearPath products.

Revenue from other technology decreased $4.0 million for the three months ended June 30, 2014 compared with the three months ended June 30, 2013, principally due to lower sales of third-party technology products.

Technology gross profit was 50.2% in the current quarter compared with 59.4% in the year-ago quarter. Technology operating profit percent was 1.9% in the three months ended June 30, 2014 compared with 23.9% in the three months ended June 30, 2013. The Technology segment's margins were down due to lower sales of ClearPath products.

Six months ended June 30, 2014 compared with the six months ended June 30, 2013

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

                                           Total           Eliminations         Services          Technology
Six Months Ended June 30, 2014
Customer revenue                         $ 1,568.1                              $ 1,403.8        $      164.3
Intersegment                                               $       (23.4 )             .3                23.1

Total revenue                            $ 1,568.1         $       (23.4 )      $ 1,404.1        $      187.4

Gross profit percent                          19.0 %                                 16.3 %              46.9 %

Operating profit (loss) percent                (.3 )%                                 3.0 %              (8.0 )%


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 %

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
                                                2014          2013         Change
      Services
      Systems integration and consulting      $   427.4     $   446.5         (4.3 )%
      Outsourcing                                 703.5         716.0         (1.7 )%
      Infrastructure services                     181.8         210.6        (13.7 )%
      Core maintenance                             91.1          89.6          1.7 %

                                                1,403.8       1,462.7         (4.0 )%
      Technology
      Enterprise-class software and servers       153.4         192.2        (20.2 )%
      Other technology                             10.9          13.6        (19.9 )%

                                                  164.3         205.8        (20.2 )%

      Total                                   $ 1,568.1     $ 1,668.5         (6.0 )%

In the Services segment, customer revenue was $1,403.8 million for the six months ended June 30, 2014, a decline of 4.0% when compared with the six months ended June 30, 2013. Foreign currency translation had a negligible impact on Services revenue in the current period compared with the year-ago period.

Revenue from systems integration and consulting was $427.4 million for the six months ended June 30, 2014 compared with $446.5 million for the six months ended June 30, 2013. The current-year period was impacted by execution issues on a few projects as well as lower in-period project work when compared with the prior-year period.

Outsourcing revenue decreased 1.7% for the six months ended June 30, 2014 to $703.5 million compared with the six months ended June 30, 2013.

Infrastructure services revenue decreased 13.7% for the six month period ended June 30, 2014 compared with the six month period ended June 30, 2013. The decline reflects lower volume on some existing contracts and the conclusion of other contracts.

Core maintenance revenue increased 1.7% in the current six-month period compared with the prior-year period.

Services gross profit was 16.3% in the first half of 2014 compared with 17.8% in the year-ago period. Services operating profit percent was 3.0% in the six months ended June 30, 2014 compared with 3.5% in the six months ended June 30, 2013. The current period was impacted by lower volume in the systems integration and infrastructure services businesses as well as execution issues on a few IT services projects.

In the Technology segment, customer revenue decreased 20.2% to $164.3 million in the first half of 2014 compared with $205.8 million in the year-ago period. 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 20.2% for the six months ended June 30, 2014 compared with the six months ended June 30, 2013. The decrease was due to lower sales of the company's ClearPath products.

Revenue from other technology decreased $2.7 million for the six months ended June 30, 2014 compared with the six months ended June 30, 2013.

Technology gross profit was 46.9% in the current six-month period compared with 53.5% in the year-ago period. Technology operating profit (loss) percent was
(8.0)% in the six months ended June 30, 2014 compared with 13.6% in the six months ended June 30, 2013. The Technology segment's margins were down due to lower sales of ClearPath products.


New accounting pronouncements

See note (m) 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, 2014 were $574.2 million compared with $639.8 million at December 31, 2013.

As of June 30, 2014, $378.8 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, 2014, cash provided by operations was $23.4 million compared with $30.2 million for the six months ended June 30, 2013. Cash provided by operations during the first half of 2014 was negatively impacted by an increase in cash contributions to the company's defined benefit pension plans. During the first half of 2014, the company contributed cash of $103.1 million to such plans compared with $61.3 million during the first half of 2013. The principal reason for the increase was that in the current period, the company contributed $44.0 million to its U.S. qualified defined benefit pension plan compared with $6.9 million in the prior-year period.

Cash used for investing activities during the six months ended June 30, 2014 was $77.7 million compared with cash usage of $67.4 million during the six months ended June 30, 2013. Net proceeds of investments were $10.1 million for the six months ended June 30, 2014 compared with net purchases of $2.7 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 $40.3 million compared with $29.6 million in the year-ago period, capital additions of properties were $29.0 million in 2014 compared with $16.2 million in 2013 and capital additions of outsourcing assets were $20.1 million in 2014 compared with $18.3 million in 2013. The higher capital expenditures largely reflected increased investments in new products, as well as expenditures on automation tools and leasehold improvements that support further consolidation of the company's real estate.

Cash used for financing activities during the six months ended June 30, 2014 was $15.1 million compared with cash usage of $18.2 million during the six months ended June 30, 2013.

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, 2014, the company had no borrowings and $22.8 million of letters of credit outstanding under the facility. At June 30, 2014, availability under the facility was $78.9 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., Unisys AP Investment Company I 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 June 30, 2014, 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 2014, the company expects to make cash contributions to its worldwide defined benefit pension plans of approximately $235 million, which is comprised of $109 million primarily for non-U.S. defined benefit pension plans and $126 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.

On December 10, 2012, the company announced that its Board of Directors had 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. During the six months ended June 30, 2014, the company repurchased an aggregate of 552,806 shares of common stock for approximately $14.0 million. Actual cash disbursements for repurchased shares may differ if the settlement dates for shares repurchased occurs after the end of the quarter. At June 30, 2014, there remained approximately $24.3 million available for future repurchases under the Board authorization.

On March 1, 2014, all of the outstanding shares of 6.25% mandatory convertible preferred stock (2,587,400 shares) were automatically converted (in accordance with its terms) into 6,912,756 shares of the company's common stock. Because March 1, 2014 was not a business day, the mandatory conversion was effected on Monday, March 3, 2014. Annualized cash dividends on such preferred stock were approximately $16.2 million.

Factors that may affect future results

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