NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions, except share and per share amounts)
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, comprehensive income and cash flows for the interim periods specified. These adjustments consist only of normal recurring accruals except as disclosed herein. Because of seasonal and other factors, results for interim periods are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and the reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, outsourcing assets, marketable software, goodwill and other long-lived assets, legal contingencies, indemnifications, and assumptions used in the calculation for systems integration projects, income taxes and retirement and other post-employment benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
The company’s accounting policies are set forth in detail in note 1 of the notes to the consolidated financial statements in the company’s Annual Report on Form 10-K for the year ended December 31,
2015
filed with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the company’s critical accounting policies. The company believes that these critical accounting policies affect its more significant estimates and judgments used in the preparation of the company’s consolidated financial statements. There have been no changes in the company’s critical accounting policies from those disclosed in the company’s Annual Report on Form 10-K for the year ended December 31,
2015
.
a. Earnings Per Share.
The following table shows how the Net income (loss) per share attributable to Unisys Corporation was computed for the
three and six
months ended
June 30, 2016
and
2015
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Unisys Corporation
|
|
$
|
21.6
|
|
|
$
|
(58.2
|
)
|
|
$
|
(18.3
|
)
|
|
$
|
(101.4
|
)
|
Weighted average shares
|
|
50,069
|
|
|
49,927
|
|
|
50,036
|
|
|
49,874
|
|
Total
|
|
$
|
0.43
|
|
|
$
|
(1.17
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(2.03
|
)
|
Diluted Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Unisys Corporation
|
|
$
|
21.6
|
|
|
$
|
(58.2
|
)
|
|
$
|
(18.3
|
)
|
|
$
|
(101.4
|
)
|
Add interest expense on convertible notes, net of tax of zero
|
|
4.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) attributable to Unisys Corporation for diluted earnings per share
|
|
$
|
26.1
|
|
|
$
|
(58.2
|
)
|
|
$
|
(18.3
|
)
|
|
$
|
(101.4
|
)
|
Weighted average shares
|
|
50,069
|
|
|
49,927
|
|
|
50,036
|
|
|
49,874
|
|
Plus incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
167
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible notes
|
|
21,550
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted weighted average shares
|
|
71,786
|
|
|
49,927
|
|
|
50,036
|
|
|
49,874
|
|
Total
|
|
$
|
0.36
|
|
|
$
|
(1.17
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(2.03
|
)
|
In the
six
months ended
June 30, 2016
and
2015
, the following weighted-average number of stock options and restricted stock units were antidilutive and therefore excluded from the computation of diluted earnings per share (in thousands):
3,684
and
3,358
, respectively. In the
six
months ended
June 30, 2016
, the following weighted-average number of common shares issuable upon conversion of the
5.50%
Convertible Senior Notes due 2021 were antidilutive and therefore excluded from the computation of diluted earnings per share (in thousands):
12,593
.
b. Cost Reduction Actions.
In April 2015, in connection with organizational initiatives to create a more competitive cost structure and rebalance the company’s global skill set, the company initiated a plan to incur pretax restructuring charges currently estimated at approximately
$300 million
through 2017.
During the twelve months ended
December 31, 2015
, the company recognized charges of
$118.5 million
in connection with this plan, principally related to a reduction in employees. The charges related to work-force reductions were
$78.8 million
and were comprised of: (a) a charge of
$27.9 million
for
700
employees in the U.S. and (b) a charge of
$50.9 million
for
782
employees outside the U.S. In addition, the company recorded charges of
$39.7 million
, related to asset impairments (
$20.2 million
) and other expenses related to the cost reduction effort (
$19.5 million
). The charges were recorded in the following statement of income classifications: cost of revenue – services,
$52.3 million
; cost of revenue – technology,
$0.3 million
; selling, general and administrative expenses,
$53.5 million
; and research and development expenses,
$12.4 million
.
During the three months ended
June 30, 2016
, the company recognized charges of
$10.2 million
in connection with this plan, principally related to a reduction in employees. The charges related to work-force reductions were
$6.5 million
, principally related to severance costs, and were comprised of: (a) a charge of
$1.2 million
for
69
employees in the U.S. and (b) a charge of
$5.3 million
for
262
employees outside the U.S. In addition, the company recorded charges of
$3.7 million
, for other expenses related to the cost reduction effort. The net charges were recorded in the following statement of income classifications: cost of revenue – services,
$5.1 million
; selling, general and administrative expenses,
$5.5 million
; and research and development expenses,
$(0.4) million
.
During the
six
months ended
June 30, 2016
, the company recognized charges of
$37.1 million
in connection with this plan, principally related to a reduction in employees. The charges related to work-force reductions were
$28.6 million
, principally related to severance costs, and were comprised of: (a) a charge of
$5.4 million
for
244
employees in the U.S. and (b) a charge of
$23.2 million
for
599
employees outside the U.S. In addition, the company recorded charges of
$8.5 million
, for other expenses related to the cost reduction effort. The charges were recorded in the following statement of income classifications: cost of revenue – services,
$16.6 million
; selling, general and administrative expenses,
$18.8 million
; and research and development expenses,
$1.7 million
.
During the three and
six
months ended
June 30, 2015
, the company recognized charges of
$52.6 million
in connection with this plan, principally related to a reduction in employees. The charges related to work-force reductions were
$42.5 million
, principally related to severance costs, and were comprised of: (a) a charge of
$25.4 million
for
530
employees in the U.S. and (b) a charge of
$17.1 million
for
413
employees outside the U.S. In addition, the company recorded charges of
$10.1 million
related to asset impairments of
$3.5 million
and other expenses of
$6.6 million
related to the cost reduction effort. The charges were recorded in the following statement of income classifications: cost of revenue – services,
$13.3 million
; cost of revenue - technology,
$0.1 million
; selling, general and administrative expenses,
$27.5 million
; and research and development expenses,
$11.7 million
.
A breakdown of the individual components of the work-force reduction costs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
U.S.
|
|
Int’l.
|
Charges for work-force reductions
|
|
$
|
78.8
|
|
|
$
|
27.9
|
|
|
$
|
50.9
|
|
Utilized
|
|
(45.3
|
)
|
|
(23.7
|
)
|
|
(21.6
|
)
|
Translation adjustments
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
Balance at December 31, 2015
|
|
33.0
|
|
|
4.2
|
|
|
28.8
|
|
Additional provisions
|
|
32.2
|
|
|
6.0
|
|
|
26.2
|
|
Utilized
|
|
(30.2
|
)
|
|
(5.7
|
)
|
|
(24.5
|
)
|
Changes in estimates and revisions
|
|
(3.6
|
)
|
|
(0.6
|
)
|
|
(3.0
|
)
|
Translation adjustments
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
Balance at June 30, 2016
|
|
$
|
32.5
|
|
|
$
|
3.9
|
|
|
$
|
28.6
|
|
Expected future utilization:
|
|
|
|
|
|
|
2016 remaining six months
|
|
$
|
29.7
|
|
|
$
|
3.9
|
|
|
$
|
25.8
|
|
Beyond 2016
|
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
c. Pension and Postretirement Benefits.
Net periodic pension expense for the
three and six
months ended
June 30, 2016
and
2015
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
Three Months Ended
June 30, 2015
|
|
|
Total
|
|
U.S.
Plans
|
|
Int’l.
Plans
|
|
Total
|
|
U.S.
Plans
|
|
Int’l.
Plans
|
Service cost
|
|
$
|
2.1
|
|
|
$
|
—
|
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
|
$
|
—
|
|
|
$
|
2.1
|
|
Interest cost
|
|
81.4
|
|
|
58.1
|
|
|
23.3
|
|
|
79.0
|
|
|
55.9
|
|
|
23.1
|
|
Expected return on plan assets
|
|
(100.0
|
)
|
|
(63.2
|
)
|
|
(36.8
|
)
|
|
(102.2
|
)
|
|
(63.7
|
)
|
|
(38.5
|
)
|
Amortization of prior service (benefit) cost
|
|
(1.4
|
)
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
(1.1
|
)
|
|
(0.6
|
)
|
|
(0.5
|
)
|
Recognized net actuarial loss
|
|
39.4
|
|
|
29.3
|
|
|
10.1
|
|
|
48.6
|
|
|
32.7
|
|
|
15.9
|
|
Net periodic pension expense
|
|
$
|
21.5
|
|
|
$
|
23.5
|
|
|
$
|
(2.0
|
)
|
|
$
|
26.4
|
|
|
$
|
24.3
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2015
|
|
|
Total
|
|
U.S.
Plans
|
|
Int’l.
Plans
|
|
Total
|
|
U.S.
Plans
|
|
Int’l.
Plans
|
Service cost
|
|
$
|
3.9
|
|
|
$
|
—
|
|
|
$
|
3.9
|
|
|
$
|
4.3
|
|
|
$
|
—
|
|
|
$
|
4.3
|
|
Interest cost
|
|
161.9
|
|
|
115.7
|
|
|
46.2
|
|
|
158.9
|
|
|
112.0
|
|
|
46.9
|
|
Expected return on plan assets
|
|
(199.4
|
)
|
|
(126.6
|
)
|
|
(72.8
|
)
|
|
(204.9
|
)
|
|
(127.4
|
)
|
|
(77.5
|
)
|
Amortization of prior service (benefit) cost
|
|
(2.8
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
|
(2.2
|
)
|
|
(1.2
|
)
|
|
(1.0
|
)
|
Recognized net actuarial loss
|
|
78.2
|
|
|
58.0
|
|
|
20.2
|
|
|
98.2
|
|
|
66.4
|
|
|
31.8
|
|
Net periodic pension expense
|
|
$
|
41.8
|
|
|
$
|
45.8
|
|
|
$
|
(4.0
|
)
|
|
$
|
54.3
|
|
|
$
|
49.8
|
|
|
$
|
4.5
|
|
In
2016
, the company expects that it will make cash contributions of approximately
$136.1 million
to its worldwide defined benefit pension plans, which are comprised of
$53.8 million
for the company's U.S. qualified defined benefit pension plan and
$82.3 million
primarily for the company's non-U.S. defined benefit pension plans. In
2015
, the company made cash contributions of
$148.3 million
to its worldwide defined benefit pension plans. For the
six
months ended
June 30, 2016
and
2015
,
$64.1 million
and
$75.7 million
, respectively, of cash contributions have been made.
Net periodic postretirement benefit expense for the
three and six
months ended
June 30, 2016
and
2015
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Interest cost
|
|
1.6
|
|
|
1.7
|
|
|
3.2
|
|
|
3.4
|
|
Expected return on assets
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Recognized net actuarial loss
|
|
0.3
|
|
|
0.7
|
|
|
0.6
|
|
|
1.4
|
|
Amortization of prior service cost
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.6
|
|
Net periodic postretirement benefit expense
|
|
$
|
1.9
|
|
|
$
|
2.8
|
|
|
$
|
3.8
|
|
|
$
|
5.5
|
|
The company expects to make cash contributions of approximately
$15.0 million
to its postretirement benefit plan in
2016
compared with
$15.9 million
in
2015
. For the
six
months ended
June 30, 2016
and
2015
,
$5.4 million
and
$6.9 million
, respectively, of cash contributions have been made.
d. Fair Value Measurements.
Due to its foreign operations, the company is exposed to the effects of foreign currency exchange rate fluctuations on the U.S. dollar, principally related to intercompany account balances. The company uses derivative financial instruments to reduce its exposure to market risks from changes in foreign currency exchange rates on such balances. The company enters into foreign exchange forward contracts, generally having maturities of
three
months or less, which have not been designated as hedging instruments. At
June 30, 2016
and
2015
, the notional amount of these contracts was
$473.8 million
and
$408.4 million
, respectively. At
June 30, 2016
and
2015
, the fair value of such contracts was a net loss of
$17.3 million
and a net gain of
$0.6 million
, respectively, of which
$1.9 million
and
$1.3 million
, respectively, has been recognized in “Prepaid expenses and other current assets” and
$19.2 million
and
$0.7 million
, respectively, has been recognized in “Other accrued liabilities” in the company’s consolidated balance sheet. For the
six
months ended
June 30, 2016
and
2015
, changes in the fair value of these instruments was a loss of
$14.1 million
and a gain of
$22.8 million
, respectively, which has been recognized in earnings in “Other income (expense), net” in the company’s consolidated statement of income. The fair value of these forward contracts is based on quoted prices for similar but not identical financial instruments; as such, the inputs are considered Level 2 inputs.
Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities. The carrying amounts of these financial assets and liabilities approximate fair value due to their short maturities. At
June 30, 2016
and
December 31, 2015
, the carrying amount of long-term debt was less than fair value, which is based on market prices (Level 2 inputs), of such debt by approximately
$4 million
and
$3 million
, respectively.
e. Stock Options.
Under stockholder approved stock-based plans, stock options, stock appreciation rights, restricted stock and restricted stock units may be granted to officers, directors and other key employees. At
June 30, 2016
,
3.6 million
shares of unissued common stock of the company were available for granting under these plans.
The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted-average fair values:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
2015
|
Weighted-average fair value of grant
|
|
$
|
4.53
|
|
|
$
|
9.07
|
|
Risk-free interest rate
|
|
1.29
|
%
|
|
1.28
|
%
|
Expected volatility
|
|
51.30
|
%
|
|
45.46
|
%
|
Expected life of options in years
|
|
4.90
|
|
|
4.92
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
Restricted stock unit awards may contain time-based units, performance-based units or a combination of both. Each performance-based unit will vest into
zero
to
2.0
shares depending on the degree to which the performance goals are met. Compensation expense resulting from these awards is recognized as expense ratably for each installment from the date of grant until the date the restrictions lapse and is based on the fair market value at the date of grant and the probability of achievement of the specific performance-related goals.
The company records all share-based expense in selling, general and administrative expense.
During the
six
months ended
June 30, 2016
and
2015
, the company recorded
$5.3 million
and
$6.2 million
of share-based compensation expense, respectively, which is comprised of
$4.3 million
and
$2.9 million
of restricted stock unit expense and
$1.0 million
and
$3.3 million
of stock option expense, respectively.
A summary of stock option activity for the
six
months ended
June 30, 2016
follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2015
|
|
2,723
|
|
|
$
|
27.88
|
|
|
|
|
|
Granted
|
|
11
|
|
|
10.85
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited and expired
|
|
(570
|
)
|
|
37.00
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
2,164
|
|
|
25.40
|
|
|
2.77
|
|
$
|
—
|
|
Expected to vest at June 30, 2016
|
|
631
|
|
|
25.89
|
|
|
4.22
|
|
—
|
|
Exercisable at June 30, 2016
|
|
1,508
|
|
|
25.23
|
|
|
2.13
|
|
—
|
|
The aggregate intrinsic value represents the total pretax value of the difference between the company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all option holders exercised their options on
June 30, 2016
. The intrinsic value of the company’s stock options changes based on the closing price of the company’s stock. The total intrinsic value of options exercised for the
six
months ended
June 30, 2016
and
2015
was
zero
and
$0.6 million
, respectively. As of
June 30, 2016
,
$2.5 million
of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of
1.5
years.
A summary of restricted stock unit activity for the
six
months ended
June 30, 2016
follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Outstanding at December 31, 2015
|
|
469
|
|
|
$
|
23.57
|
|
Granted
|
|
1,275
|
|
|
9.85
|
|
Vested
|
|
(182
|
)
|
|
18.90
|
|
Forfeited and expired
|
|
(42
|
)
|
|
19.94
|
|
Outstanding at June 30, 2016
|
|
1,520
|
|
|
$
|
12.76
|
|
The fair value of restricted stock units is determined based on the trading price of the company’s common shares on the date of grant. The aggregate weighted-average grant-date fair value of restricted stock units granted during the
six
months ended
June 30, 2016
and
2015
was
$12.5 million
and
$10.0 million
, respectively. As of
June 30, 2016
, there was
$12.4 million
of total unrecognized compensation cost related to outstanding restricted stock units granted under the company’s plans. That cost is expected to be recognized over a weighted-average period of
2.4
years. The aggregate weighted-average grant-date fair value of restricted stock units vested during the
six
months ended
June 30, 2016
and
2015
was
$3.4 million
and
$1.9 million
, respectively.
Common stock issued upon exercise of stock options or upon lapse of restrictions on restricted stock units are newly issued shares. Cash received from the exercise of stock options for the
six
months ended
June 30, 2016
and
2015
was
zero
and
$3.7 million
, respectively. In light of its tax position, the company is currently not recognizing any tax benefits from the exercise of stock options or upon issuance of stock upon lapse of restrictions on restricted stock units. Tax benefits resulting from tax deductions in excess of the compensation costs recognized are classified as financing cash flows.
f. Segment Information.
The company has
two
business segments: Services and Technology. Revenue classifications within the Services segment are as follows:
|
|
•
|
Cloud & infrastructure services. This represents revenue from work the company performs in the data center and cloud area, technology consulting and technology-based systems integration projects, as well as global service desks and global field services.
|
|
|
•
|
Application services. This represents revenue from application managed services and application development, maintenance and support work.
|
|
|
•
|
Business processing outsourcing services. This represents revenue from the management of clients’ specific business processes.
|
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, 2016
and
2015
was
$0.4 million
and
$6.0 million
, respectively. The amount for the
six
months ended
June 30, 2016
and
2015
was
$0.5 million
and
$7.5 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.
A summary of the company’s operations by business segment for the three and
six
month periods ended
June 30, 2016
and
2015
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Corporate
|
|
Services
|
|
Technology
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
Customer revenue
|
|
$
|
748.9
|
|
|
|
|
$
|
613.8
|
|
|
$
|
135.1
|
|
Intersegment
|
|
|
|
$
|
(5.9
|
)
|
|
—
|
|
|
5.9
|
|
Total revenue
|
|
$
|
748.9
|
|
|
$
|
(5.9
|
)
|
|
$
|
613.8
|
|
|
$
|
141.0
|
|
Operating income (loss)
|
|
$
|
49.5
|
|
|
$
|
(30.8
|
)
|
|
$
|
12.7
|
|
|
$
|
67.6
|
|
Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
Customer revenue
|
|
$
|
764.8
|
|
|
|
|
$
|
661.5
|
|
|
$
|
103.3
|
|
Intersegment
|
|
|
|
$
|
(22.0
|
)
|
|
0.1
|
|
|
21.9
|
|
Total revenue
|
|
$
|
764.8
|
|
|
$
|
(22.0
|
)
|
|
$
|
661.6
|
|
|
$
|
125.2
|
|
Operating income (loss)
|
|
$
|
(49.5
|
)
|
|
$
|
(83.3
|
)
|
|
$
|
14.3
|
|
|
$
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Corporate
|
|
Services
|
|
Technology
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
Customer revenue
|
|
$
|
1,415.7
|
|
|
|
|
$
|
1,208.9
|
|
|
$
|
206.8
|
|
Intersegment
|
|
|
|
$
|
(11.5
|
)
|
|
—
|
|
|
11.5
|
|
Total revenue
|
|
$
|
1,415.7
|
|
|
$
|
(11.5
|
)
|
|
$
|
1,208.9
|
|
|
$
|
218.3
|
|
Operating income (loss)
|
|
$
|
21.9
|
|
|
$
|
(76.5
|
)
|
|
$
|
16.7
|
|
|
$
|
81.7
|
|
Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
Customer revenue
|
|
$
|
1,486.0
|
|
|
|
|
$
|
1,300.5
|
|
|
$
|
185.5
|
|
Intersegment
|
|
|
|
$
|
(28.7
|
)
|
|
0.1
|
|
|
28.6
|
|
Total revenue
|
|
$
|
1,486.0
|
|
|
$
|
(28.7
|
)
|
|
$
|
1,300.6
|
|
|
$
|
214.1
|
|
Operating income (loss)
|
|
$
|
(79.5
|
)
|
|
$
|
(109.4
|
)
|
|
$
|
5.8
|
|
|
$
|
24.1
|
|
Presented below is a reconciliation of total business segment operating income to consolidated income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total segment operating income
|
|
$
|
80.3
|
|
|
$
|
33.8
|
|
|
$
|
98.4
|
|
|
$
|
29.9
|
|
Interest expense
|
|
(7.8
|
)
|
|
(2.7
|
)
|
|
(12.2
|
)
|
|
(5.3
|
)
|
Other income (expense), net
|
|
2.6
|
|
|
1.4
|
|
|
1.4
|
|
|
6.3
|
|
Cost reduction charges
|
|
(10.2
|
)
|
|
(52.6
|
)
|
|
(37.1
|
)
|
|
(52.6
|
)
|
Corporate and eliminations
|
|
(20.6
|
)
|
|
(30.7
|
)
|
|
(39.4
|
)
|
|
(56.8
|
)
|
Total income (loss) before income taxes
|
|
$
|
44.3
|
|
|
$
|
(50.8
|
)
|
|
$
|
11.1
|
|
|
$
|
(78.5
|
)
|
Customer revenue by classes of similar products or services, by segment, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Services
|
|
|
|
|
|
|
|
|
Cloud & infrastructure services
|
|
$
|
340.0
|
|
|
$
|
387.7
|
|
|
$
|
675.9
|
|
|
$
|
766.1
|
|
Application services
|
|
220.4
|
|
|
217.5
|
|
|
431.0
|
|
|
419.9
|
|
Business processing outsourcing services
|
|
53.4
|
|
|
56.3
|
|
|
102.0
|
|
|
114.5
|
|
|
|
613.8
|
|
|
661.5
|
|
|
1,208.9
|
|
|
1,300.5
|
|
Technology
|
|
135.1
|
|
|
103.3
|
|
|
206.8
|
|
|
185.5
|
|
Total
|
|
$
|
748.9
|
|
|
$
|
764.8
|
|
|
$
|
1,415.7
|
|
|
$
|
1,486.0
|
|
Geographic information about the company’s revenue, which is principally based on location of the selling organization, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
United States
|
|
$
|
348.4
|
|
|
$
|
383.9
|
|
|
$
|
679.3
|
|
|
$
|
725.9
|
|
United Kingdom
|
|
109.3
|
|
|
83.6
|
|
|
191.3
|
|
|
171.5
|
|
Other foreign
|
|
291.2
|
|
|
297.3
|
|
|
545.1
|
|
|
588.6
|
|
Total
|
|
$
|
748.9
|
|
|
$
|
764.8
|
|
|
$
|
1,415.7
|
|
|
$
|
1,486.0
|
|
g. Accumulated Other Comprehensive Income.
Accumulated other comprehensive loss as of
December 31, 2015
and
June 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Translation
Adjustments
|
|
Postretirement
Plans
|
Balance at December 31, 2015
|
|
$
|
(3,945.3
|
)
|
|
$
|
(833.8
|
)
|
|
$
|
(3,111.5
|
)
|
Other comprehensive income before reclassifications
|
|
37.0
|
|
|
(29.5
|
)
|
|
66.5
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
72.3
|
|
|
—
|
|
|
72.3
|
|
Current period other comprehensive income
|
|
109.3
|
|
|
(29.5
|
)
|
|
138.8
|
|
Balance at June 30, 2016
|
|
$
|
(3,836.0
|
)
|
|
$
|
(863.3
|
)
|
|
$
|
(2,972.7
|
)
|
Amounts related to postretirement plans not reclassified in their entirety out of accumulated other comprehensive income for the
three and six
months ended
June 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Amortization of prior service cost*
|
|
$
|
(1.4
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(1.5
|
)
|
Amortization of actuarial losses*
|
|
39.4
|
|
|
47.0
|
|
|
78.0
|
|
|
95.3
|
|
Total before tax
|
|
38.0
|
|
|
46.3
|
|
|
75.2
|
|
|
93.8
|
|
Income tax benefit
|
|
(1.5
|
)
|
|
(0.7
|
)
|
|
(2.9
|
)
|
|
(3.0
|
)
|
Net of tax
|
|
$
|
36.5
|
|
|
$
|
45.6
|
|
|
$
|
72.3
|
|
|
$
|
90.8
|
|
|
|
|
*
|
These items are included in net periodic postretirement cost (see note (c)).
|
Noncontrolling interests as of
December 31, 2015
and
June 30, 2016
are as follows:
|
|
|
|
|
|
Noncontrolling
Interests
|
Balance at December 31, 2015
|
$
|
11.1
|
|
Net income
|
5.1
|
|
Translation adjustments
|
(8.9
|
)
|
Postretirement plans
|
8.1
|
|
|
|
Balance at June 30, 2016
|
$
|
15.4
|
|
h. Supplemental Cash Flow Information.
Cash paid, net of refunds, during the
six
months ended
June 30, 2016
and
2015
for income taxes was
$24.5 million
and
$43.6 million
, respectively.
Cash paid during the
six
months ended
June 30, 2016
and
2015
for interest was
$7.2 million
and
$6.9 million
, respectively.
i. Commitments and Contingencies.
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against the company, which arise in the ordinary course of business, including actions with respect to commercial and government contracts, labor and employment, employee benefits, environmental matters, intellectual property, and non-income tax and employment compensation in Brazil. The company records a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.
The company believes that it has valid defenses with respect to legal matters pending against it. Based on its experience, the company also believes that the damage amounts claimed in the lawsuits disclosed below are not a meaningful indicator of the company’s potential liability. Litigation is inherently unpredictable, however, and it is possible that the company’s results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against it.
In April 2007, the Ministry of Justice of Belgium sued Unisys Belgium SA-NV, a Unisys subsidiary (Unisys Belgium), in the Court of First Instance of Brussels. The Belgian government had engaged the company to design and develop software for a computerized system to be used to manage the Belgian court system. The Belgian State terminated the contract and in its lawsuit has alleged that the termination was justified because Unisys Belgium failed to deliver satisfactory software in a timely manner. It claims damages of approximately
€28 million
. Unisys Belgium filed its defense and counterclaim in April 2008, in the amount of approximately
€18.5 million
. The company believes it has valid defenses to the claims and contends that the Belgian State’s termination of the contract was unjustified.
The company’s Brazilian operations, along with those of many other companies doing business in Brazil, are involved in various litigation matters, including numerous governmental assessments related to indirect and other taxes, as well
as disputes associated with former employees and contract labor. The tax-related matters pertain to value added taxes, customs, duties, sales and other non-income related tax exposures. The labor-related matters include claims related to compensation matters. The company believes that appropriate accruals have been established for such matters based on information currently available. At
June 30, 2016
, excluding those matters that have been assessed by management as being remote as to the likelihood of ultimately resulting in a loss, the amount related to unreserved tax-related matters, inclusive of any related interest, is estimated to be up to approximately
$122 million
.
The company has been involved in a matter arising from the sale of its Health Information Management (HIM) business to Molina Information Systems, LLC (Molina) under a 2010 Asset Purchase Agreement (APA). The HIM business provided system solutions and services to state governments, including the state of Idaho, for administering Medicaid programs. In August 2012, Molina sued the company in Federal District Court in Delaware alleging breaches of contract, negligent misrepresentation and intentional misrepresentation with respect to the APA and the Medicaid contract with Idaho. Molina sought compensatory damages, punitive damages, lost profits, indemnification, and declaratory relief. Molina alleged losses of approximately
$35 million
in the complaint. In June 2013, the District Court granted the company’s motion to dismiss the complaint and allowed Molina to replead certain claims and file an amended complaint. In August 2013, Molina filed an amended complaint. The company filed a motion to dismiss the amended complaint. On September
2
, 2014, the District Court granted the company’s motion to dismiss the negligent misrepresentation claim, but denied the company’s motion with respect to Molina’s intentional misrepresentation and breach of contract claims. The litigation continues on the remaining claims.
On June 26, 2014, the State of Louisiana filed a Petition for Damages against, among other defendants, the company and Molina Information Systems, LLC, in the Parish of East Baton Rouge, 19th Judicial District. The State alleges that between 1989 and 2012 the defendants, each acting successively as the State’s Medicaid fiscal intermediary, utilized an incorrect reimbursement formula for the payment of pharmaceutical claims causing the State to pay excessive amounts for prescription drugs. The company believes that it has valid defenses to Louisiana’s claims and is asserting them in the pending litigation.
With respect to the specific legal proceedings and claims described above, except as otherwise noted, either (i) the amount or range of possible losses in excess of amounts accrued, if any, is not reasonably estimable or (ii) the company believes that the amount or range of possible losses in excess of amounts accrued that are estimable would not be material.
Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such matters could exceed the amounts accrued in an amount that could be material to the company’s financial condition, results of operations and cash flows in any particular reporting period.
Notwithstanding that the ultimate results of the lawsuits, claims, investigations and proceedings that have been brought or asserted against the company are not currently determinable, the company believes that at
June 30, 2016
, it has adequate provisions for any such matters.
j. Income Taxes.
Accounting rules governing income taxes require that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. These rules also require that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or the entire deferred tax asset will not be realized.
The company evaluates the realizability of its 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 historical profitability, forecast of future taxable income and available tax-planning strategies that could be implemented to realize the net deferred tax assets. The company uses tax-planning strategies to realize or renew net deferred tax assets to avoid the potential loss of future tax benefits.
A full valuation allowance is currently maintained for all U.S. and certain foreign deferred tax assets in excess of deferred tax liabilities. The company will record 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. continuing operations will have no provision or benefit associated with it due to full valuation allowance, except with respect to refundable tax credits and withholding taxes not creditable against future taxable income. As a result, the company’s provision or benefit for taxes may vary significantly depending on the geographic distribution of income.
k. Accounting Standards.
Effective January 1, 2016, the company adopted new guidance issued by the Financial Accounting Standards Board (FASB) on the presentation of debt issuance costs. The new guidance requires that debt issuance costs shall be reported in the balance sheet as a direct deduction from the face amount of that debt. Previously the company reported these costs in “Other long-term assets” in the company’s balance sheet. At
December 31, 2015
, the amount reclassified was
$1.8 million
. The new guidance has been applied on a retrospective basis whereby prior-period financial statements have been adjusted to reflect the application of the new guidance, as required by the FASB.
Effective January 1, 2016, the company adopted new guidance issued by the FASB that simplifies the measurement of inventory. The new guidance states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimate of estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. Adoption of this new guidance had no impact on the company’s consolidated results of operations and financial position.
Effective January 1, 2016, the company adopted new guidance issued by the FASB that simplifies the balance sheet classification of deferred income taxes. The new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The new guidance also requires companies to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount. Previous guidance required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The new guidance has been applied on a retrospective basis whereby prior-period financial statements have been adjusted to reflect the application of the new guidance. At
December 31, 2015
, the reclassification resulted in a reduction of current deferred income tax assets of
$24.1 million
, a decrease in other current assets of
$0.1 million
, an increase in noncurrent deferred income tax assets of
$12.9 million
, a decrease in other long-term assets of
$0.1 million
, a decrease in current other accrued liabilities of
$9.4 million
and a decrease in other long-term liabilities of
$2.0 million
.
On March 30, 2016, the FASB issued new guidance that will change certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is effective for annual reporting periods beginning after December 15, 2016, which for the company is January 1, 2017. Earlier adoption is permitted. The company is currently assessing when it will choose to adopt, and is currently evaluating the impact of the adoption on its consolidated results of operations and financial position.
In February 2016, the FASB issued a new lease accounting standard entitled “Leases.” The new standard is intended to improve financial reporting about leasing transactions. The new rule will require organizations that lease assets, referred to as lessees, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The standard is effective for annual reporting periods beginning after December 15, 2018, which for the company is January 1, 2019. Earlier adoption is permitted. The company is currently assessing when it will choose to adopt, and is currently evaluating the impact of the adoption on its consolidated results of operations and financial position.
In 2014, the FASB issued a new revenue recognition standard entitled “Revenue from Contracts with Customers.” The objective of the standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows from a contract with a customer. The standard, and its various amendments, is effective for annual reporting periods beginning after December 15, 2017, which for the company is January 1, 2018. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, which for the company in January 1, 2017. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The company is currently assessing when and which method it will choose for adoption, and is evaluating the impact of the adoption on its consolidated results of operations and financial position.
l. Debt.
On March 15, 2016, the company issued
$190 million
aggregate principal amount of Convertible Senior Notes due 2021 (the notes). On April 13, 2016, the company issued an additional
$23.5 million
of the notes pursuant to an over-allotment option exercised by the initial purchasers to buy additional notes, for a total of
$213.5 million
of notes issued. The notes, which are senior unsecured obligations, bear interest at a coupon rate of
5.50%
(or
9.5%
effective interest rate) per year until maturity, payable semiannually in arrears on March 1 and September 1 of each year, beginning on September 1, 2016. The notes are not redeemable prior to maturity and are convertible into shares of the company’s common stock. The conversion rate for the notes is
102.4249
shares of the company’s common stock per
$1,000
principal amount of the notes (or a total amount of
21,867,716
shares), which is equivalent to an initial conversion price of approximately
$9.76
per share of the company’s common stock. Upon any conversion, the company will settle its conversion obligation in cash, shares of its common stock, or a combination of cash and shares of its common stock, at its election.
In connection with the issuances of the notes, the company also paid
$27.3 million
to enter into privately negotiated capped call transactions with the initial purchasers and/or affiliates of the initial purchasers. The capped call transactions will cover, subject to customary anti-dilution adjustments, the number of shares of the company’s common stock that will initially underlie the notes. The capped call transactions are expected to reduce potential dilution to the company’s common stock and/or offset potential cash payments the company is required to make in excess of the principal amount upon any conversion of the notes.
In accordance with Accounting Standards Codification 470-20, a convertible debt instrument that may be settled entirely or partially in cash is required to be separated into a liability and equity component, such that interest expense reflects the issuer’s non-convertible debt interest rate. Upon issuance, (i) a debt discount of
$33.6 million
was recognized as a decrease in debt and an increase in additional-paid in capital and (ii) the cost of the capped call transactions of
$27.3 million
was recognized as a decrease in cash and a decrease in additional paid-in capital. The debt component will accrete up to the principal amount and will be recognized as non-cash interest expense over the expected term of the notes. For the three and six months ended June 30, 2016,
$4.5 million
and
$5.2 million
was recorded as interest expense which includes the contractual interest coupon, amortization of the debt discount, and amortization of the debt issuance costs.