SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission file number 1-8729 UNISYS CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-0387840 (State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) Township Line and Union Meeting Roads Blue Bell, Pennsylvania 19424 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 986-4011 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Number of shares of Common Stock outstanding as of June 30, 1997: 175,200,754.
Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements. <TABLE> UNISYS CORPORATION CONSOLIDATED BALANCE SHEET (Millions) <CAPTION> June 30, 1997 December 31, (Unaudited) 1996 ----------- ------------ <S> <C> <C> Assets Current Assets Cash and cash equivalents $ 472.0 $1,029.2 Marketable securities 5.6 5.6 Accounts and notes receivable, net 913.7 959.0 Inventories Finished equipment and supplies 317.8 325.5 Work in process and raw materials 288.6 316.8 Deferred income taxes 365.8 365.8 Other current assets 122.6 131.2 -------- -------- Total 2,486.1 3,133.1 -------- -------- Long-term receivables, net 72.2 59.3 -------- -------- Properties and rental equipment 1,844.0 1,950.3 Less-Accumulated depreciation 1,257.3 1,328.5 -------- -------- Properties and rental equipment, net 586.7 621.8 -------- -------- Cost in excess of net assets acquired 965.6 981.3 Investments at equity 222.4 244.4 Deferred income taxes 678.7 678.7 Other assets 1,256.9 1,248.5 -------- -------- Total $6,268.6 $6,967.1 -------- -------- Liabilities and stockholders' equity Current liabilities Notes payable $ 9.6 $ 13.9 Current maturities of long-term debt 5.4 5.8 Accounts payable 730.2 871.1 Other accrued liabilities 1,184.5 1,453.4 Dividends payable 26.6 26.6 Estimated income taxes 85.1 94.3 -------- -------- Total 2,041.4 2,465.1 -------- -------- Long-term debt 2,264.6 2,271.4 Other liabilities 422.2 474.6 Redeemable preferred stock 150.0 Stockholders' equity Preferred stock 1,420.2 1,420.2 Common stock, issued: 1997, 176.1; 1996, 175.7 1.8 1.8 Accumulated deficit (768.7) (770.1) Other capital 887.1 954.1 -------- -------- Stockholders' equity 1,540.4 1,606.0 -------- -------- Total $6,268.6 $6,967.1 ======== ======== <FN> See notes to consolidated financial statements. </TABLE>
Page 3 <TABLE> UNISYS CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (Millions, except per share data) <CAPTION> Three Months Six Months Ended June 30 Ended June 30 ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenue $1,585.3 $1,505.0 $3,116.0 $2,928.1 -------- -------- -------- -------- Costs and expenses Cost of revenue 1,046.9 1,013.1 2,061.9 1,997.3 Selling, general and administrative 341.8 346.6 670.6 668.6 Research and development 67.4 81.4 147.7 177.4 -------- -------- -------- -------- 1,456.1 1,441.1 2,880.2 2,843.3 -------- -------- -------- -------- Operating income 129.2 63.9 235.8 84.8 Interest expense 59.5 68.3 119.9 118.8 Other income (loss), net ( 3.2) 12.4 (18.8) 21.7 -------- -------- -------- -------- Income (loss) before income taxes 66.5 8.0 97.1 (12.3) Estimated income taxes (benefit) 24.6 2.7 35.9 ( 4.2) -------- -------- -------- -------- Net income (loss) 41.9 5.3 61.2 ( 8.1) Dividends on preferred shares 27.8 30.2 57.9 60.4 -------- -------- -------- -------- Earnings (loss) on common shares $ 14.1 $ (24.9) $ 3.3 $ (68.5) ======== ======== ======== ========= Earnings (loss) per common share Primary $ .08 $ (.14) $ .02 $ (.40) ======== ======== ======== ========= Fully Diluted $ .08 $ (.14) $ .02 $ (.40) ======== ======== ======== ========= <FN> See notes to consolidated financial statements. </TABLE>
Page 4 <TABLE> UNISYS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Millions) <CAPTION> Six Months Ended June 30 ------------------- 1997 1996 -------- --------- <S> <C> <C> Cash flows from operating activities Net income (loss) $ 61.2 $( 8.1) Add (deduct) items to reconcile net income (loss) to net cash (used for) operating activities: Depreciation 80.2 86.1 Amortization: Marketable software 43.9 53.6 Cost in excess of net assets acquired 23.2 21.7 (Increase) in deferred income taxes ( 15.6) Decrease in receivables, net 32.5 79.0 Decrease (increase) in inventories 35.9 ( 44.5) (Decrease) in accounts payable and other accrued liabilities ( 414.3) ( 502.5) (Decrease) in estimated income taxes ( 9.2) ( 39.7) (Decrease) in other liabilities ( 52.4) ( 4.5) Decrease (increase) in other assets 14.6 ( 45.0) Other 8.1 ( 27.8) --------- -------- Net cash used for operating activities ( 176.3) ( 447.3) --------- -------- Cash flows from investing activities Proceeds from investments 754.4 1,118.9 Purchases of investments ( 734.7) (1,124.6) Proceeds from sales of properties 3.2 18.8 Investment in marketable software ( 59.1) ( 42.1) Capital additions of properties and rental equipment ( 90.5) ( 55.8) Purchases of businesses ( 13.7) ( 12.2) --------- -------- Net cash used for investing activities ( 140.4) ( 97.0) --------- -------- Cash flows from financing activities Redemption of redeemable preferred stock ( 150.0) Proceeds from issuance of debt 700.9 Principal payments of debt ( 24.7) Net (reduction in) proceeds from short-term borrowings ( 4.3) 1.7 Dividends paid on preferred shares ( 59.8) ( 60.4) Other .1 .3 --------- -------- Net cash (used for) provided by financing activities ( 214.0) 617.8 --------- -------- Effect of exchange rate changes on cash and cash equivalents ( 18.4) ( 11.4) --------- -------- Net cash (used for) provided by continuing operations ( 549.1) 62.1 Net cash used for discontinued operations ( 8.1) ( 7.4) --------- -------- (Decrease) increase in cash and cash equivalents ( 557.2) 54.7 Cash and cash equivalents, beginning of period 1,029.2 1,114.3 --------- -------- Cash and cash equivalents, end of period $ 472.0 $1,169.0 ========= ======== <FN> See notes to consolidated financial statements. </TABLE>
Page 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the financial information furnished herein reflects all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods specified. These adjustments consist only of normal recurring accruals. Because of seasonal and other factors, results for interim periods are not necessarily indicative of the results to be expected for the full year. a. For the three and six months ended June 30, 1997, the computations of earnings per share are based on the weighted average number of outstanding common shares and additional shares assuming the exercise of stock options. The computations for the three and six months ended June 30, 1996 are based solely on the weighted average number of outstanding common shares. None of the periods presented assumes conversion of the 8 1/4% Convertible Subordinated Notes due 2000 and 2006, or the Series A Preferred Stock since such conversions would have been antidilutive. The shares used in the computations are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1997 1996 1997 1996 ------- ------- ------- ------- Primary 175,906 172,702 175,761 172,070 Fully diluted 175,906 172,702 175,761 172,070
Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations For the three months ended June 30, 1997, the Company reported net income of $41.9 million, compared to net income of $5.3 million for the three months ended June 30, 1996. On a per-share basis, the second quarter net income was $.08 per primary and fully diluted common share after preferred dividends, compared to a loss of $.14 per primary and fully diluted common share a year ago. Total revenue for the quarter ended June 30, 1997 was $1.56 billion, up 5% from $1.51 billion for the year-ago period despite the negative impact of foreign currencies in the current quarter. Total gross profit percent was 34.0% in the second quarter of 1997 compared to 32.7% in the year-ago period. For the three months ended June 30, 1997, selling, general and administrative expenses were $341.8 million compared to $346.6 million for the three months ended June 30, 1996, and research and development expenses were $67.4 million compared to $81.4 million a year earlier. The decline in research and development was largely due to the Company's cost reduction actions and an increase in capitalization of software development costs compared to the prior-year period. For the second quarter of 1997, the Company reported an operating income percent (operating income as a percent of revenue) of 8.1% compared to 4.2% for the second quarter of 1996. <TABLE> Revenue, gross profit percentage and operating income percentage by business unit are presented below ($ in millions): <CAPTION> Information Global Computer Elimi- Services Customer Systems Total nations Group Services Group -------- ------- ----------- -------- -------- <S> <C> <C> <C> <C> <C> Three Months Ended June 30, 1997 - ------------------ Customer revenue $1,585.3 $484.1 $542.2 $559.0 Intercompany $(110.4) 2.0 19.0 89.4 -------- ------- ------ ------ ------ Total revenue $1,585.3 $(110.4) $486.1 $561.2 $648.4 ======== ======= ====== ====== ====== Gross profit percent 34.0% 21.3% 28.9% 43.3% ======== ====== ====== ====== Operating income percent 8.1% (3.7)% 11.2% 13.5% ======== ====== ====== ====== Three Months Ended June 30, 1996 - ------------------ Customer revenue $1,505.0 $508.6 $486.6 $509.8 Intercompany $(156.7) 2.1 32.2 122.4 -------- ------- ------ ------ ------ Total revenue $1,505.0 $(156.7) $510.7 $518.8 $632.2 ======== ======= ====== ====== ====== Gross profit percent 32.7% 17.9% 31.9% 38.4% ======== ====== ====== ======
Page 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd). Note: Certain prior year business unit amounts have been reclassified to conform with the current year presentation. Customer revenue from the Information Services Group ("ISG") decreased 5% in the quarter reflecting the continued focus and refinement of the group's business model. ISG gross profit percent was 21.3% in 1997 compared to 17.9% last year due to the benefits of restructuring and an improved bid quality and control process. Global Customer Services ("GCS") customer revenue increased 11% from year-ago levels led by growth in distributed computing support services which more than offset a decline in core maintenance revenue. The gross profit percent in GCS was 28.9% in 1997 compared to 31.9% last year due in large part to the impact, in the current period, of a large lower-margin federal contract for distributed computing support services. Customer revenue in the Computer Systems Group ("CSG") increased 10% principally due to increases in sales of large-scale enterprise servers and software. CSG gross profit percent rose to 43.3% in 1997 from 38.4% last year, due in large part to a higher proportion of sales of large-scale enterprise servers. Interest expense in the second quarter of 1997 was $59.5 million compared to $68.3 million in the second quarter of 1996, principally due to lower average debt levels. Other income (loss), net, which can vary from quarter to quarter, was a loss of $3.2 million in the current quarter compared to income of $12.4 million in the year-ago period. The change was mainly due to lower equity and interest income. Income before income taxes was $66.5 million in 1997 compared to $8.0 million last year. The provision for income taxes was $24.6 million in the current period compared to $2.7 million in the year-ago period. Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement requires that if a transfer of financial assets does not meet certain criteria for recording the transaction as a sale, the transfer must be accounted for as a secured borrowing. The adoption of SFAS No. 125 did not have a material effect on the Company's consolidated financial position, consolidated statement of income, or liquidity.
Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd). In February of 1997, SFAS No. 128, "Earnings per Share," was issued. This statement establishes new standards for computing and presenting earnings per share. Adoption of SFAS No. 128 and restatement of prior periods' earnings per share is required in the fourth quarter of 1997. For the Company, earnings per share under SFAS No. 128 for the current quarter would be the same as reported. The effect of adoption of SFAS No. 128 on earlier periods is immaterial. Financial Condition Cash, cash equivalents and marketable securities at June 30, 1997 were $477.6 million compared to $1.0 billion at December 31, 1996. Cash was used during the first six months of 1997 for operating, investing and financing activities as described below. Cash used for operating activities during the six months ended June 30, 1997 was $176.3 million compared to $447.3 million used during the prior-year period. The decline in cash usage from operations in the current period compared to the year-ago period was due to current period income, and improved working capital management, including improvements in inventory turns and accounts receivable days outstanding. Cash used for investing activities during the first half of 1997 was $140.4 million compared to $97.0 million used in the year-ago period. The increase in cash usage was principally due to increased capital expenditures as a number of large-scale Clearpath enterprise servers were added to the Company's rental machine base. Cash used for financing activities during the first half of 1997 was $214.0 million compared to cash provided of $617.8 million in 1996. In the current period, the Company redeemed all $150.0 million of its Series B and C Cumulative Convertible Preferred Stock. The year-ago period includes proceeds of $700.9 million for issuances of debt. Dividends paid on preferred stock were $59.8 million in the first half of 1997 compared to $60.4 million in the first half of 1996. At June 30, 1997, total debt was $2.3 billion, a slight decrease from December 31, 1996. In June 1997, the Company entered into a two-year $200 million revolving credit facility replacing the prior one-year facility. The facility includes certain financial tests that must be met as conditions to a borrowing and provides that no loans may be outstanding for twenty consecutive days in each quarter. The facility may not be used to refinance other debt. The amount the Company may borrow at any given time is dependent upon the amount of certain of its accounts receivable and inventory. As of June 30, 1997, there were no borrowings outstanding under the facility and the entire $200 million was available for borrowings.
Page 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd). The Company has on file with the Securities and Exchange Commission an effective registration statement covering $500 million of debt or equity securities which enables the Company to be prepared for future market opportunities. In addition, the Company may, from time to time, redeem or repurchase its securities in the open market or in privately negotiated transactions depending upon availability, market conditions, and other factors. At June 30, 1997, the Company had deferred tax assets in excess of deferred tax liabilities of $1,425 million. For the reasons cited below, management determined that it is more likely than not that $1,009 million of such assets will be realized, therefore resulting in a valuation allowance of $416 million. The Company evaluates quarterly the realizability of its net deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company's forecast of future taxable income, which is adjusted by applying probability factors, and available tax planning strategies that could be implemented to realize deferred tax assets. The combination of these factors is expected to be sufficient to realize the entire amount of net deferred tax assets. Approximately $2.9 billion of future taxable income (predominantly U.S.) is needed to realize all of the net deferred tax assets. The Company's net deferred tax assets include substantial amounts of net operating loss and tax credit carryforwards. Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets. See "Factors That May Affect Future Results" below. Stockholders' equity decreased $65.6 million during the six months ended June 30, 1997 principally reflecting translation adjustments of $71.5 million and preferred dividends declared of $59.8 million, offset in part by net income of $61.2 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. 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. These include, but are not limited to, the following: the impact of continued competitive pressures and volatility in the information technology and services industry on revenues, pricing and margins; rapid changes in technology, technology standards and product life cycles; the Company's ability to design, develop, introduce, deliver or obtain new products and services on a timely and cost-effective basis; the Company's ability to effectively manage the business mix shift away
Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont'd). from traditional high-margin product and services offerings; the Company's ability to profitably bid and perform services contracts, particularly large, fixed-price, multi-year systems integration contracts; the Company's reliance on third-party alliances, subcontractors, suppliers and distribution channels; the risks of doing business internationally, including foreign currency exchange rate fluctuations, changes in political or economic conditions, trade protection measures and import or export licensing requirements; the Company's cost of and success in attracting and retaining highly skilled people; and natural disasters or changes in general economic and business conditions.
Page 11 Part II - OTHER INFORMATION - ------- ----------------- Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's 1997 Annual Meeting of Stockholders (the "Annual Meeting") was held on April 24, 1997 in Philadelphia, Pennsylvania. (c) The following matters were voted upon at the Annual Meeting and received the following votes: 1. Election of Directors as follows: Gail D. Fosler -- 121,503,768 votes for; 32,470,993 votes withheld Melvin R. Goodes -- 121,338,295 votes for; 32,636,466 votes withheld Edwin A. Huston -- 121,474,372 votes for; 32,500,389 votes withheld Robert McClements, Jr. -- 121,353,373 votes for; 32,621,388 votes withheld 2. A proposal to ratify the selection of the Company's independent auditors for 1997 -- 139,158,378 votes for; 5,603,483 votes against; 9,212,900 abstentions 3. A stockholder proposal concerning declassification of the Board of Directors -- 63,489,166 votes for; 36,484,130 votes against; 3,897,786 abstentions; 50,103,679 broker non-votes 4. A stockholder proposal concerning a split-up of the Company -- 38,115,355 votes for; 61,648,988 votes against; 3,725,592 abstentions; 50,484,826 broker non-votes Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits See Exhibit Index (b) Reports on Form 8-K During the quarter ended June 30, 1997, the Company filed no Current Reports on Form 8-K.
SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNISYS CORPORATION Date: August 14, 1997 By: /s/ Robert H. Brust --------------- ---------------------------- Robert H. Brust Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/Janet M. Brutschea Haugen ---------------------------- Janet M. Brutschea Haugen Vice President and Controller (Chief Accounting Officer)
EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10.1 Unisys Corporation Director Stock Unit Plan, as amended and restated effective May 22, 1997 10.2 Unisys Corporation Elected Officer Pension Plan, as amended through May 22, 1997 10.3 Unisys Corporation Supplemental Executive Retirement Income Plan, as amended through May 22, 1997 10.4 Deferred Compensation Plan for Executives of Unisys Corporation, as amended and restated effective May 22, 1997 10.5 Deferred Compensation Plan for Directors of Unisys Corporation, as amended and restated effective May 22, 1997 11.1 Statement of Computation of Earnings Per Share for the six months ended June 30, 1997 and 1996 11.2 Statement of Computation of Earnings Per Share for the three months ended June 30, 1997 and 1996 12 Statement of Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule </TABLE>