See notes to consolidated financial statements.
UNISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share amounts)
Note 1 — Summary of significant accounting policies
Principles of consolidation The consolidated financial statements include the accounts of all majority-owned subsidiaries.
Liquidity and Capital Resources Management believes that cash and cash equivalents as of December 31, 2019, cash flows from operations and availability under the company’s revolving line of credit are sufficient to maintain operations through at least February 28, 2021. On February 6, 2020, the company announced that it had entered into a definitive agreement to sell its U.S. federal business for $1.2 billion. The transaction is expected to close in the first half of 2020, subject to customary closing conditions. On September 27, 2019, the company applied for waivers with the U.S. Internal Revenue Service (IRS) to defer a portion of the required contributions to its 2 U.S. pension plans, which if granted would reduce total required cash contributions by approximately $115 million in calendar 2020. The IRS may choose not to grant the application, or to grant it for an amount less than the amount requested. There is no specified time frame in which the IRS must make a decision. If the sale of the U.S. federal business does not close and if the IRS deferral is not granted, the company will be required to reduce discretionary operating expenses and/or capital expenditures as well as utilize the availability under its revolving line of credit.
Use of estimates 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, contract assets, inventories, operating lease right-of-use assets, outsourcing assets, marketable software, goodwill and other long-lived assets, legal contingencies, indemnifications, assumptions used in the measurement of progress toward completioncalculation 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.
Cash and Cash equivalents Cash and cash equivalents consistsconsist of cash on hand, short-term investments purchased with a maturity of three months or less and certificates of deposit which may be withdrawn at any time at the discretion of the company without penalty.
Cash and cash equivalents subject to contractual restrictions and not readily available are classified as restricted cash. Restricted cash primarily consists ofincludes cash the company is contractually obligated to maintain in accordance with the terms of its U.K. business process outsourcing joint venture agreement.agreement and other cash that is restricted from withdrawal.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the total of the amounts shown in the consolidated statements of cash flows.
|
| | | | | | | | |
As of December 31, | | 2019 | | 2018 |
Cash and cash equivalents | | $ | 538.8 |
| | $ | 605.0 |
|
Restricted cash | | 13.0 |
| | 19.1 |
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | | $ | 551.8 |
| | $ | 624.1 |
|
|
| | | | | | | | |
As of December 31, | | 2017 | | 2016 |
Cash and cash equivalents | | $ | 733.9 |
| | $ | 370.6 |
|
Restricted cash | | 30.2 |
| | 30.5 |
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | | $ | 764.1 |
| | $ | 401.1 |
|
Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined on the first-in, first-out method.
Properties Properties are carried at cost and are depreciated over the estimated lives of such assets using the straight-line method. The estimated lives used, in years, are as follows: buildings, 20 – 50; machinery and office equipment, 4 – 7; rental equipment, 4; and internal-use software, 3 – 10.
Advertising costs All advertising costsOutsourcing assets Costs on outsourcing contracts are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract (principally initial customer setup) are deferred and expensed over the initial contract life. Fixed assets and software used in connection with outsourcing contracts are capitalized and depreciated over the shorter of the initial contract life or in accordance with the fixed asset policy described above.
Recoverability of these costs is subject to various business risks. Quarterly, the company compares the carrying value of these assets with the undiscounted future cash flows expected to be generated by them to determine if there is impairment. If impaired, these assets are reduced to an estimated fair value on a discounted cash flow basis. The amount chargedcompany prepares its cash
flow estimates based on assumptions that it believes to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.
Marketable software The cost of development of computer software to be sold or leased, incurred subsequent to establishment of technological feasibility, is capitalized and amortized to cost of sales over the estimated revenue-producing lives of the products. In assessing the estimated revenue-producing lives and recoverability of the products, the company considers operating strategies, underlying technologies utilized, estimated economic life and external market factors, such as expected levels of competition, barriers to entry by potential competitors, stability in the market and governmental regulation. The company continually reassesses the estimated revenue-producing lives of the products and any change in the company’s estimate could result in the remaining amortization expense during 2017, 2016being accelerated or spread out over a longer period.
Previously, the estimated revenue-producing lives of the company’s proprietary enterprise software was three years. Due to the maturity of the company’s proprietary enterprise software product, the company increased the time between its major releases as its product has a longer useful life. In addition, the company modified its commitment to provide post-contract support from an average of three years to five years following each new proprietary enterprise software release. In the first quarter of 2019, the company validated that the revised extended timeline between major product releases and 2015the revised post-contract support period has achieved market acceptance. The company’s historical experience is that its significant customers typically renew the software on average every five years. As a result, the company adjusted the remaining useful life of its proprietary enterprise software product, which represents approximately 66% of the company’s marketable software, to five years. This change in estimate was $1.6applied prospectively effective January 1, 2019. The adjustment resulted in a $19.8 million $2.7decrease to cost of revenue in 2019, and accordingly increased consolidated net income by $19.8 million or $0.35 per diluted earnings per share. The useful lives of the remaining products classified as marketable software remain at three years, which is consistent with prior years. As of December 31, 2019, $67.1 million of marketable software was in process and $4.9the remaining $119.7 million respectively.has a weighted-average remaining life of 3.2 years. The company performs quarterly reviews to ensure that unamortized costs remain recoverable from future revenue. As of December 31, 2019, the company believes that all unamortized costs are fully recoverable.
ShippingInternal-use software The company capitalizes certain internal and handling Costsexternal costs incurred to acquire or create internal-use software, principally related to shippingsoftware coding, designing system interfaces, and handlinginstallation and testing of the software. These costs are includedamortized in cost of revenue.accordance with the fixed asset policy described above.
Goodwill Goodwill arising from the acquisition of an entity represents the excess of the cost of acquisition over the fair value of the acquired identifiable assets, liabilities and contingent liabilities of the entity recognized at the date of acquisition. Goodwill is initially recognized as an asset and is subsequently measured at cost less any accumulated impairment losses. Goodwill is held in the currency of the acquired entity and revalued to the closing rate at each balance sheet date.
The company tests goodwill for impairment annually in the fourth quarter using data as of September 30th30 of that year, as well as whenever there are events or changes in circumstances (triggering events) that would more likely than not reduce the fair value of one or more reporting units below its respective carrying amount. The company compares the fair value of each of its reporting units to their respective carrying value. If the carrying value exceeds fair value, an impairment charge is recognized for the difference. Impaired goodwill is written down to its fair value through a charge to the consolidated statement of income in the period the impairment is identified.
We estimateThe company estimates the fair value of each reporting unit using a combination of the income approach and market approach.
The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to present value. Cash flow projections are based on management’s
estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate in turn is based on various market factors and specific risk characteristics of each reporting unit.
The market approach estimates fair value by applying performance metric multiples to the reporting unit’s prior and expected operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit.
If the fair value of the reporting unit derived using the income approach is significantly different from the fair value estimate using the market approach, the company reevaluates its assumptions used in the two models. When considering the weighting between the market approach and income approach, wethe company gave more weighting to the income approach. The higher weighting assigned to the income approach took into consideration that the guideline companies used in the market approach generally represent larger diversified companies relative to the reporting units and may have different long termlong-term growth prospects, among other factors.
In order to assess the reasonableness of the calculated reporting unit fair values, the company also compares the sum of the reporting units’ fair values to its market capitalization (per share stock price multiplied by shares outstanding) and calculates an implied control premium (the excess of the sum of the reporting units’ fair values over the market capitalization).
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
Revenue recognition Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is probable.
Revenue from hardware sales with standard payment terms is recognized upon the passage of title and the transfer of risk of loss. Outside the United States, the company recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable the company to recover the products in the event of customer payment default and the arrangement does not prohibit the customer’s use of the product in the ordinary course of business.
Revenue from software licenses with standard payment terms is recognized at the inception of the initial license term and upon execution of an extension to the license term.
The company also enters into multiple-element arrangements, which may include any combination of software, hardware, or services. For example, a client may purchase an enterprise server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance for service of the hardware. These arrangements consist of multiple deliverables, with software and hardware delivered in one reporting period and the software support and hardware maintenance services delivered across multiple reporting periods. In another example, the company may provide desktop managed services to a client on a long term multiple year basis and periodically sell software and hardware products to the client. The services are provided on a continuous basis across multiple reporting periods and the software and hardware products are delivered in one reporting period. To the extent that a deliverable in a multiple-deliverable arrangement is subject to specific guidance, that deliverable is accounted for in accordance with such specific guidance. Examples of such arrangements may include leased hardware which is subject to specific leasing guidance or software which is subject to specific software revenue recognition guidance.
In these transactions, the company allocates the total revenue to be earned under the arrangement among the various elements based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or the best estimated selling price (“ESP”) if neither VSOE nor TPE is available. VSOE of selling price is based upon the normal pricing and discounting practices for those services and products when sold separately. TPE of selling price is based on evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. ESP is established considering factors such as margin objectives, discounts off of list prices, market conditions, competition and other factors. ESP represents the price at which the company would transact for the deliverable if it were sold by the company regularly on a standalone basis.
As mentioned above, some of the company’s multiple-element arrangements may include leased hardware which is subject to specific leasing guidance. Revenue under these arrangements is allocated considering the relative selling prices of the lease and non-lease elements. Lease deliverables include hardware, financing, maintenance and other executory costs, while non-lease deliverables generally consist of services other than maintenance. The determination of the amount of revenue allocated to the lease deliverables begins by allocating revenue to maintenance and other executory costs plus a profit thereon. These elements are generally recognized over the term of the lease. The remaining amounts are allocated to the hardware and financing elements. The amount allocated to hardware is recognized as revenue monthly over the term of the lease for those leases which are classified as operating leases and at the inception of the lease term for those leases which are classified as sales-type leases.
The amount of finance income attributable to sales-type leases is recognized on the accrual basis using the effective interest method.
For multiple-element arrangements that involve the licensing, selling or leasing of software, for software and software-related elements, the allocation of revenue is based on VSOE. There may be cases in which there is VSOE of fair value of the undelivered elements but no such evidence for the delivered elements. In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered elements equals the total arrangement consideration less the aggregate VSOE of fair value of the undelivered elements.
For multiple-element arrangements that include services or products that (a) do not include the licensing, selling or leasing of software, or (b) contain software that is incidental to the services or products as a whole or (c) contain software components that are sold, licensed or leased with tangible products when the software components and non-software components (i.e., the software and hardware) of the tangible product function together to deliver the tangible product’s essential functionality (e.g., sales of the company’s enterprise-class servers including software and hardware), or some combination of the above, the allocation of revenue is based on the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy, discussed above.
For multiple-element arrangements that include both software and non-software deliverables, the company allocates arrangement consideration to the software group and to the non-software group based on the relative selling prices of the deliverables in the arrangement based on the selling price hierarchy discussed above. For the software group, arrangement consideration is further allocated using VSOE as described above.
The company recognizes revenue on delivered elements only if: (a) any undelivered services or products are not essential to the functionality of the delivered services or products, (b) the company has an enforceable claim to receive the amount due in the event it does not deliver the undelivered services or products, (c) there is evidence of the selling price for each undelivered service or product, and (d) the revenue recognition criteria otherwise have been met for the delivered elements. Otherwise, revenue on delivered elements is recognized as the undelivered elements are delivered. The company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A delivered element constitutes a separate unit of accounting when it has standalone value and there is no customer-negotiated refund or return right for the delivered elements. If these criteria are not met, the deliverable is combined with the undelivered elements and the allocation of the arrangement consideration and revenue recognition are determined for the combined unit as a single unit.
Revenue from hardware sales and software licenses with extended payment terms is recognized as payments from customers become due (assuming that all other conditions for revenue recognition have been satisfied).
Revenue for operating leases is recognized on a monthly basis over the term of the lease and for sales-type leases at the inception of the lease term.
Revenue from equipment and software maintenance and post-contract support is recognized on a straight-line basis as earned over the terms of the respective contracts. Cost related to such contracts is recognized as incurred.
Revenue and profit under systems integration contracts are recognized either on the percentage-of-completion method of accounting using the cost-to-cost method, or when services have been performed, depending on the nature of the project. For contracts accounted for on the percentage-of-completion basis, revenue and profit recognized in any given accounting period are based on estimates of total projected contract costs. The estimates are continually reevaluated and revised, when necessary, throughout the life of a contract. Any adjustments to revenue and profit resulting from changes in estimates are accounted for in the period of the change in estimate. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident.
Revenue from time and materials service contracts and outsourcing contracts is recognized as the services are provided using either an objective measure of output or on a straight-line basis over the term of the contract.
Income taxes Income taxes are based on income before taxes for financial reporting purposes and reflect a current tax liability for the estimated taxes payable in the current-year tax returns and changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized. The company recognizes penalties and interest accrued related to income tax liabilities in provision for income taxes in its consolidated statements of income.
The Tax Cuts & Jobs Act (“TCJA”) was enacted by the U.S. on December 22, 2017 and introduced a tax on “global intangible low-taxed income” (“GILTI”) effective in 2018. The company will treat GILTI as a period cost when included in U.S. taxable income.
Marketable software The cost of development of computer software to be sold or leased, incurred subsequent to establishment of technological feasibility, is capitalized and amortized to cost of sales over the estimated revenue-producing lives of the products, which is generally not in excess of three years following product release. The company performs quarterly reviews to ensure that unamortized costs remain recoverable from future revenue.
Internal-use software The company capitalizes certain internal and external costs incurred to acquire or create internal-use software, principally related to software coding, designing system interfaces, and installation and testing of the software. These costs are amortized in accordance with the fixed asset policy described above.
Outsourcing assets Costs on outsourcing contracts are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract (principally initial customer setup) are deferred and expensed over the initial contract life. Fixed assets and software used in connection with outsourcing contracts are capitalized and depreciated over the shorter of the initial contract life or in accordance with the fixed asset policy described above.
Recoverability of outsourcing assets is subject to various business risks. Quarterly, the company compares the carrying value of the outsourcing assets with the undiscounted future cash flows expected to be generated by the outsourcing assets to determine if there is impairment. If impaired, the outsourcing assets are reduced to an estimated fair value on a discounted cash flow basis. The company prepares its cash flow estimates based on assumptions that it believes to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.
Translation of foreign currency The local currency is the functional currency for most of the company’s international subsidiaries, and as such, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income (loss). Exchange gains and losses on intercompany balances are reported in other income (expense), net.
For those international subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency, and as such, nonmonetary assets and liabilities are translated at historical exchange rates, and monetary assets and liabilities are translated at current exchange rates. Exchange gains and losses arising from translation are included in other income (expense), net.
Stock-based compensation plans Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. The company recognizes compensation expense for the fair value of stock options, which have graded vesting, on a straight-line basis over the requisite service period. The company estimates the fair value of stock options using a Black-Scholes valuation model. The expense is recorded in selling, general and administrative expenses.
Retirement benefits Accounting rules covering defined benefit pension plans and other postretirement benefits require that amounts recognized in financial statements be determined on an actuarial basis. A significant element in determining the company’s retirement benefits expense or income is the expected long-term rate of return on plan assets. This expected return is an assumption as to the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected pension benefit obligation. The company applies this assumed long-term rate of return to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over four years. This produces the expected return on plan assets that is included in retirement benefits expense or income. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset losses or gains affects the calculated value of plan assets and, ultimately, future retirement benefits expense or income.
At December 31 of each year, the company determines the fair value of its retirement benefits plan assets as well as the discount rate to be used to calculate the present value of plan liabilities. The discount rate is an estimate of the interest rate at which the retirement benefits could be effectively settled. In estimating the discount rate, the company looks to rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the retirement benefits. The company uses a portfolio of fixed-income securities, which receive at least the second-highest rating given by a recognized ratings agency.
Noncontrolling interest The company owns a NaN percent interest in Intelligent Processing Solutions Ltd. (iPSL), a U.K. business process outsourcing joint venture. The remaining interests, which are reflected as a noncontrolling interest in the company’s financial statements, are owned by 3 financial institutions for which iPSL performs services.
Revenue recognition Revenue is recognized at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods and services to a customer. The company determines revenue recognition using the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the company satisfies a performance obligation.
Revenue excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by the company from a customer (e.g., sales, use and value-added taxes). Revenue includes payments for shipping and handling activities.
At contract inception, the company assesses the goods and services promised in a contract with a customer and identifies as a performance obligation each promise to transfer to the customer either: (1) a good or service (or a bundle of goods or services) that is distinct or (2) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. The company recognizes revenue only when it satisfies a performance obligation by transferring a promised good or service to a customer.
The company must apply its judgment to determine the timing of the satisfaction of performance obligations as well as the transaction price and the amounts allocated to performance obligations including estimating variable consideration, adjusting the consideration for the effects of the time value of money and assessing whether an estimate of variable consideration is constrained.
Revenue from hardware sales is recognized upon the transfer of control to a customer, which is defined as an entity’s ability to direct the use of and obtain substantially all of the remaining benefits of an asset.
Revenue from software licenses is recognized at the inception of either the initial license term or the inception of an extension or renewal to the license term.
Revenue for operating leases is recognized on a monthly basis over the term of the lease and for sales-type leases at the inception of the lease term.
Revenue from equipment and software maintenance and post-contract support is recognized on a straight-line basis as earned over the terms of the respective contracts. Cost related to such contracts is recognized as incurred.
Revenue and profit under systems integration contracts are recognized over time as the company transfers control of goods or services. The company measures its progress toward satisfaction of its performance obligations using the cost-to-cost method, or when services have been performed, depending on the nature of the project. For contracts accounted for using the cost-to-cost method, revenue and profit recognized in any given accounting period are based on estimates of total projected contract
costs. The estimates are continually reevaluated and revised, when necessary, throughout the life of a contract. Any adjustments to revenue and profit resulting from changes in estimates are accounted for in the period of the change in estimate. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident.
In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time, because the client simultaneously receives and consumes the benefits provided as the company performs the services. The company’s services are provided on a time-and-materials basis, as a fixed-price contract or as a fixed-price per measure of output contract.
Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred.
In outsourcing contracts, including managed services, application management, business process outsourcing and other cloud-based services arrangements, the arrangement generally consists of a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue is generally recognized over the period the services are provided either on a straight-line basis or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether the contract has usage-based metrics). This results in revenue recognition that corresponds with the value to the client of the services transferred to date relative to the remaining services promised.
The company also enters into arrangements, which may include any combination of hardware, software or services. For example, a client may purchase an enterprise server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance for service of the hardware. These arrangements consist of multiple performance obligations, with control over hardware and software transferred in one reporting period and the software support and hardware maintenance services performed across multiple reporting periods. In another example, the company may provide desktop managed services to a client on a long-term multiple-year basis and periodically sell hardware and license software products to the client. The services are provided on a continuous basis across multiple reporting periods and control over the hardware and software products occurs in one reporting period. To the extent that a performance obligation in an arrangement is subject to specific guidance, that performance obligation is accounted for in accordance with such specific guidance. An example of such an arrangement may include leased assets which are subject to specific leasing accounting guidance.
The company allocates the total transaction price to be earned under an arrangement among the various performance obligations in proportion to their standalone selling prices (relative standalone selling price basis). The standalone selling price for a performance obligation is the price at which the company would sell a promised good or service separately to a customer.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Many of the company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. The primary methods used to estimate standalone selling price are as follows: (1) the expected cost plus margin approach, under which the company forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service and (2) the percent discount off of list price approach.
In the Services segment, substantially all of the company’s performance obligations are satisfied over time as work progresses and therefore substantially all of the revenue in this segment is recognized over time. The company generally receives payment for these contracts over time as the performance obligations are satisfied.
In the Technology segment, substantially all of the company’s goods and services are transferred to customers at a single point in time. Revenue on these contracts is recognized when control over the product is transferred to the customer or a software license term begins. The company generally receives payment for these contracts upon signature or within 30 to 60 days.
The company discloses disaggregation of its customer revenue by geographic areas and by classes of similar products and services, by segment (see Note 19).
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, contract assets and deferred revenue (contract liabilities).
Advertising costs All advertising costs are expensed as incurred. The amount charged to expense during 2019, 2018 and 2017 was $3.6 million, $2.8 million and $1.6 million, respectively.
Shipping and handling Costs related to shipping and handling are included in cost of revenue.
Stock-based compensation plans Stock-based compensation represents the cost related to stock-based awards granted to employees and directors. Compensation expense for performance-based restricted stock unit awards is recognized as expense ratably for each installment from the date of the 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. Compensation expense for market-based awards is recognized as expense ratably over the measurement period, regardless of the actual level of achievement, provided the service requirement is met. The fair value of restricted stock units with time and performance conditions is determined based on the trading price of the company’s common shares on the date of grant. The fair value of awards with market conditions is estimated using a Monte Carlo simulation. The company recognizes compensation expense for the fair value of stock options, which have graded vesting, on a straight-line basis over the requisite service period. The company estimates the fair value of stock options using a Black-Scholes valuation model. The expense is recorded in selling, general and administrative expenses.
Income taxes Income taxes are based on income before taxes for financial reporting purposes and reflect a current tax liability for the estimated taxes payable in the current-year tax returns and changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized. The company releases the income tax effects of deferred tax balances that have a valuation allowance from accumulated other comprehensive income once the reason the tax effects were established ceases to exist (e.g. postretirement plan is liquidated). The company recognizes penalties and interest accrued related to income tax liabilities in provision for income taxes in its consolidated statements of income.
The company treats the global intangible low-taxed income tax, or GILTI, as a period cost when included in U.S. taxable income, and the base erosion and anti-abuse tax, or BEAT, as a period cost when incurred.
Translation of foreign currency The local currency is the functional currency for most of the company’s international subsidiaries, and as such, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income (loss). Exchange gains and losses on intercompany balances are reported in other income (expense), net.
For those international subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency, and as such, nonmonetary assets and liabilities are translated at historical exchange rates, and monetary assets and liabilities are translated at current exchange rates. Exchange gains and losses arising from translation are included in other income (expense), net.
Fair value measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the company assumes that the transaction is an orderly transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale). The fair value hierarchy has three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the company can access at the measurement date; Level 2 – Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – Unobservable inputs for the asset or liability. The company has applied fair value measurements to its long-term debt (see note 9)Note 14), derivatives (see note 12)Note 11) and to its postretirement plan assets (see noteNote 16).
Noncontrolling interest The company owns a fifty-one percent interest in Intelligent Processing Solutions Ltd. (“iPSL”), a U.K. business process outsourcing joint venture. The remaining interests, which are reflected as a noncontrolling interest in the company’s financial statements, are owned by three financial institutions for which iPSL performs services.
Note 2 — Earnings per common shareRecent accounting pronouncements and accounting changes
Accounting Pronouncements Adopted
Effective January 1, 2019, the company adopted ASU No. 2016-02 Leases (Topic 842) issued by the Financial Accounting Standards Board (FASB) which is intended to improve financial reporting about leasing transactions. The ASU requires 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 also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The company adopted the new standard using the effective date transition method by applying a cumulative-effect adjustment to the balance sheet through the addition of ROU assets and lease liabilities at January 1, 2019. Prior-period results were not restated.
The company applied certain practical expedients, including the package of practical expedients, permitted under the transition guidance within Topic 842 to leases that commenced before January 1, 2019. The election of the package of practical expedients resulted in the company not reassessing prior conclusions under FASB Topic 840 Leases related to lease identification, lease classification and initial direct costs for existing leases at January 1, 2019.
The following table shows howadoption had a material impact on the loss per common share attributable to Unisys Corporation was computedconsolidated financial position and did not have a material impact on the consolidated results of operations or cash flows as of and for the three yearsyear ended December 31, 2017 (shares2019. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the company’s accounting for finance leases remained substantially unchanged.
Effective January 1, 2018, the company adopted ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) issued by the FASB which establishes 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. Topic 606 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 thousands).the financial statements. Topic 606 requires the company to recognize revenue for certain transactions, including extended payment term software licenses and short-term software licenses, sooner than the prior rules would allow and requires the company to recognize software license extensions and renewals (the most significant impact upon adoption), later than the prior rules would allow. Topic 606 also requires significantly expanded disclosure requirements. The company has adopted the standard using the modified retrospective method and applied the standard to all contracts that were not completed as of January 1, 2018. The cumulative effect of the adoption was recognized as an increase in the company’s accumulated deficit of $21.4 million on January 1, 2018.
Accounting Pronouncements Not Yet Adopted |
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Basic earnings (loss) per common share computation: | | | | | | |
Net loss attributable to Unisys Corporation common shareholders | | $ | (65.3 | ) | | $ | (47.7 | ) | | $ | (109.9 | ) |
Weighted average shares | | 50,409 |
| | 50,060 |
| | 49,905 |
|
Basic loss per common share | | $ | (1.30 | ) | | $ | (0.95 | ) | | $ | (2.20 | ) |
Diluted earnings (loss) per common share computation: | | | | | | |
Net loss attributable to Unisys Corporation for diluted earnings per share | | $ | (65.3 | ) | | $ | (47.7 | ) | | $ | (109.9 | ) |
Weighted average shares | | 50,409 |
| | 50,060 |
| | 49,905 |
|
Diluted loss per common share | | $ | (1.30 | ) | | $ | (0.95 | ) | | $ | (2.20 | ) |
| | | | | | |
Anti-dilutive weighted-average stock options and restricted stock units(a) | | 2,206 |
| | 3,553 |
| | 2,915 |
|
Anti-dilutive weighted-average common shares issuable upon conversion of the 5.50% convertible senior notes(a) | | 21,868 |
| | 17,230 |
| | — |
|
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract which clarifies the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This update is effective for fiscal years beginning after December 15, 2019. The new guidance can be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The company will adopt the new guidance on January 1, 2020, on a prospective basis, and does not expect the adoption to have a material impact on its consolidated results of operations and financial position.(a)Amounts represent shares excluded fromIn June 2016, the computationFASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of dilutedCredit Losses on Financial Instruments which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected losses. This includes trade and other receivables, loans and other financial instruments. This update is effective for annual periods beginning after December 15, 2019. The company will adopt the new guidance on January 1, 2020 through a cumulative-effect adjustment to retained earnings, per share, as their effect, if included, wouldand does not expect the adoption to have been anti-dilutive for the periods presented.a material impact on its consolidated results of operations and financial position.
Note 3 — Cost reductionCost-reduction actions
In 2015,During 2019, the company initiated a restructuring plan in connection with organizational initiatives to create a more competitive cost structure and rebalance the company’s global skill set. The company recognized cost-reduction charges and other costs of $347.4$28.7 million, through 2017 in connection with this plan, principally related to a reduction in employees.
During 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 comprised of $20.2 million for asset impairments and $19.5 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, $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 2016, the company recognized charges of $82.1 million in connection with this plan, principally related to a reduction in employees. The charges related to work-force reductions were $62.6$22.1 million, principally related to severance costs, and were comprised of: (a) a charge of $8.3$4.6 million for 351509 employees and $(1.3)$(1.5) million for changes in estimates in the U.S. and (b) a charge of $58.6$21.1 million for 1,048255 employees and $(3.0)$(2.1) million for changes in estimates outside the U.S. In addition, the company recorded charges of $19.5$6.6 million comprised of $1.4$4.6 million for idle leased facilitieslease abandonment costs, $4.1$1.1 million for contract amendmentasset write-offs and termination costs, $13.3$0.9 million for professional fees and other expenses related to the cost reduction effort and $0.7 million for net asset sales and write-offs.cost-reduction effort. The charges were recorded in the following statement of income classifications: cost of revenue – services, $42.4$10.8 million; cost of revenue - technology, $0.2 million; selling, general and administrative expenses, $38.0$15.5 million; and research and development expenses, $1.7$2.2 million.
During 2018, the company recognized cost-reduction charges and other costs of $19.7 million, principally related to a reduction in employees. The charges related to work-force reductions were $19.0 million, principally related to severance costs, and were comprised of: (a) a charge of $5.2 million for 264 employees and $0.1 million for changes in estimates in the U.S. and (b) a charge of $22.5 million for 325 employees and $(8.8) million for changes in estimates outside the U.S. In addition, the company recorded a charge of $0.7 million for changes in estimates related to idle leased facilities costs. The charges were recorded in the following statement of income classifications: cost of revenue – services, $18.1 million and selling, general and administrative expenses, $1.6 million.
During 2017, the company recognized cost-reduction charges and other costs of $146.8 million, principally related to a reduction in connection with this plan.employees. The charges related to work-force reductions were $117.9 million, principally related to severance costs, and were comprised of: (a) a charge of $9.4 million for 542 employees and $(1.3) million for changes in estimates in the U.S. and (b) a charge of $109.4 million for 2,274 employees, $8.2 million for additional benefits provided in 2017 and $(7.8) million for changes in estimates outside the U.S. In addition, the company recorded charges of $28.9 million comprised of $4.7 million for idle leased facilities costs, $5.4 million for contract amendment and termination costs, $5.2 million for professional fees and other expenses related to the cost reductioncost-reduction effort, $1.8 million for net asset sales and write-offs and $11.8 million for net foreign currency losses related to exiting foreign countries. The charges were recorded in the following statement of income classifications: cost of revenue - services, $99.6 million; cost of revenue - technology, $0.4 million; selling, general and
administrative expenses, $33.6 million; and research and development expenses, $1.4 million; and other income (expense), net, $11.8 million.
Liabilities and expected future payments related to the company’s work-force reduction actions are as follows:
|
| | | | | | | | | | | | |
| | Total | | U.S. | | International |
Balance at January 1, 2017 | | $ | 35.2 |
| | $ | 1.8 |
| | $ | 33.4 |
|
Additional provisions | | 127.0 |
| | 9.4 |
| | 117.6 |
|
Payments | | (47.3 | ) | | (6.0 | ) | | (41.3 | ) |
Changes in estimates | | (9.1 | ) | | (1.3 | ) | | (7.8 | ) |
Translation adjustments | | 7.7 |
| | — |
| | 7.7 |
|
Balance at December 31, 2017 | | 113.5 |
| | 3.9 |
| | 109.6 |
|
Additional provisions | | 27.7 |
| | 5.2 |
| | 22.5 |
|
Payments | | (42.4 | ) | | (3.1 | ) | | (39.3 | ) |
Changes in estimates | | (8.7 | ) | | 0.1 |
| | (8.8 | ) |
Translation adjustments | | (3.9 | ) | | — |
| | (3.9 | ) |
Balance at December 31, 2018 | | 86.2 |
| | 6.1 |
| | 80.1 |
|
Additional provisions | | 25.7 |
| | 4.6 |
| | 21.1 |
|
Payments | | (57.7 | ) | | (4.0 | ) | | (53.7 | ) |
Changes in estimates | | (3.6 | ) | | (1.5 | ) | | (2.1 | ) |
Translation adjustments | | (0.8 | ) | | — |
| | (0.8 | ) |
Balance at December 31, 2019 | | $ | 49.8 |
| | $ | 5.2 |
| | $ | 44.6 |
|
| | | | | | |
Expected future payments on balance at December 31, 2019: | | | | | | |
In 2020 | | $ | 47.5 |
| | $ | 4.8 |
| | $ | 42.7 |
|
Beyond 2020 | | 2.3 |
| | 0.4 |
| | 1.9 |
|
Note 4 — Leases and commitments
Leases
The company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the company if the company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The company is the lessee in lease agreements that include lease and non-lease components, which the company accounts for as a single lease component for all personal property leases. The company also has lease agreements in which it is the lessor that include lease and non-lease components. For these costsagreements, the company accounts for these components as a single lease component. Lease expense for variable leases and short-term leases is recognized when the expense is incurred.
Operating leases are included in operating lease right-of-use (ROU) assets, other accrued liabilities and long-term operating lease liabilities on the consolidated balance sheets. Operating lease ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Operating lease payments are recognized as lease expense on a straight-line basis over the lease term.
Finance leases are included in outsourcing assets, net and long-term debt on the consolidated balance sheets. Finance lease ROU assets and lease liabilities are initially measured in the same manner as operating leases. Finance lease ROU assets are amortized using the straight-line method. Finance lease liabilities are measured at amortized cost using the effective interest method.
The company has not capitalized leases with terms of twelve months or less.
As most of the company’s leases do not provide an implicit rate, the company uses its incremental borrowing rate, based on the information available at the lease commencement date, in determining the present value of lease payments. The company determines the incremental borrowing rate using the portfolio approach considering lease term and lease currency.
The lease term for all of the company’s leases includes the non-cancelable period of the lease plus any additional periods covered by either a company option to extend (or not to terminate) the lease that the company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.
Lease payments included in the measurement of the lease liability are comprised of fixed payments, variable payments that depend on index or rate, amounts expected to be payable under a residual value guarantee and the exercise of the company option to purchase the underlying asset, if reasonably certain.
Variable lease payments associated with the company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as an operating expense in the company’s consolidated results of operations in the same line item as expense arising from fixed lease payments (operating leases) or amortization of the ROU asset (finance leases).
The company uses the long-lived assets impairment guidance in ASC Subtopic 360-10 Property, Plant, and Equipment to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize. If impaired, ROU assets for operating and finance leases are reduced for any impairment losses.
The company monitors for events or changes in circumstances that require a reassessment of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in the consolidated statement of income.
The company has commitments under operating leases for certain facilities and equipment used in its operations. The company also has finance leases for equipment. The company’s leases generally have initial lease terms ranging from 1 year to 8 years, most of which include options to extend or renew the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year. Certain lease agreements contain provisions for future rent increases.
The components of lease expense for the year ended December 31, 2019 are as follows: |
| | | | |
Year ended December 31, | | 2019 |
|
Operating lease cost | | $ | 69.8 |
|
Finance lease cost | | |
Amortization of right-of-use assets | | 1.6 |
|
Interest on lease liabilities | | 0.3 |
|
Total finance lease cost | | 1.9 |
|
Short-term lease costs | | 0.6 |
|
Variable lease cost | | 16.6 |
|
Sublease income | | (0.7 | ) |
Total lease cost | | $ | 88.2 |
|
Rental expense and income from subleases for the years ended December 31, 2018 and 2017, prior to the adoption of ASU 2016-02 as described in Note 2 of this Form 10-K were as follows: |
| | | | | | | |
Year ended December 31, | 2018 |
| | 2017 |
|
Rental expense, less income from subleases | $ | 67.4 |
| | $ | 71.7 |
|
Income from subleases | $ | 3.1 |
| | $ | 4.4 |
|
Supplemental balance sheet information related to leases is as follows: |
| | | | | | |
As of December 31, | | 2019 |
| |
Operating Leases | | | |
Operating lease right-of-use assets | | $ | 127.1 | |
Other accrued liabilities | | 70.0 | |
Long-term operating lease liabilities | | 83.6 | |
Total operating lease liabilities | | $ | 153.6 | |
| | | |
Finance Leases | | | |
Outsourcing assets, net | | $ | 4.6 | |
Current maturities of long-term debt | | 1.8 | |
Long-term debt | | 3.5 | |
Total finance lease liabilities | | $ | 5.3 | |
| | | |
Weighted-Average Remaining Lease Term (in years) | | | |
Operating leases | | 3.1 | |
Finance leases | | 3.0 | |
| | | |
Weighted-Average Discount Rate | | | |
Operating leases | | 6.3 |
| % |
|
Finance leases | | 5.0 |
| % |
|
Supplemental cash flow information related to leases is as follows:
|
| | | | |
Year ended December 31, | | 2019 |
|
Cash paid for amounts included in the measurement of lease liabilities: | | |
Cash payments for operating leases included in operating activities | | $ | 73.2 |
|
Cash payments for finance leases included in financing activities | | 1.7 |
|
Cash payments for finance lease included in operating activities | | 0.3 |
|
ROU assets obtained in exchange for lease obligations are as follows:
|
| | | | |
Year ended December 31, | | 2019 |
|
Operating leases | | $ | 69.6 |
|
Finance leases | | 1.5 |
|
Maturities of lease liabilities as of December 31, 2019 are as follows:
|
| | | | | | | | |
Year | | Finance Leases | | Operating Leases |
2020 | | $ | 2.0 |
| | $ | 77.2 |
|
2021 | | 2.0 |
| | 38.7 |
|
2022 | | 1.4 |
| | 23.8 |
|
2023 | | 0.3 |
| | 12.7 |
|
2024 | | 0.1 |
| | 10.3 |
|
Thereafter | | — |
| | 6.3 |
|
Total lease payments | | 5.8 |
| | 169.0 |
|
Less imputed interest | | 0.5 |
| | 15.4 |
|
Total | | $ | 5.3 |
| | $ | 153.6 |
|
Maturities of lease liabilities as of December 31, 2018, prior to the adoption of ASU No. 2016-02 as described in Note 2 of this Form 10-K are as follows:
|
| | | | | | | | | | | | | | | | |
| | | | Work-Force Reductions | | Idle Leased |
| | Total | | U.S. | | International | | Facilities Costs |
Charges for work-force reductions | | $ | 78.8 |
| | $ | 27.9 |
| | $ | 50.9 |
| | $ | — |
|
Payments | | (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 | | 68.3 |
| | 8.3 |
| | 58.6 |
| | 1.4 |
|
Payments | | (59.3 | ) | | (9.4 | ) | | (49.9 | ) | | — |
|
Changes in estimates | | (4.3 | ) | | (1.3 | ) | | (3.0 | ) | | — |
|
Translation adjustments | | (1.1 | ) | | — |
| | (1.1 | ) | | — |
|
Balance at December 31, 2016 | | 36.6 |
| | 1.8 |
| | 33.4 |
| | 1.4 |
|
Additional Provisions | | 131.2 |
| | 9.4 |
| | 117.6 |
| | 4.2 |
|
Payments | | (49.3 | ) | | (6.0 | ) | | (41.3 | ) | | (2.0 | ) |
Changes in estimates | | (8.6 | ) | | (1.3 | ) | | (7.8 | ) | | 0.5 |
|
Translation adjustments | | 7.9 |
| | — |
| | 7.7 |
| | 0.2 |
|
Balance at December 31, 2017 | | $ | 117.8 |
| | $ | 3.9 |
| | $ | 109.6 |
| | $ | 4.3 |
|
| | | | | | | | |
Expected future payments on balance at December 31, 2017 | | | | | | | | |
In 2018 | | $ | 87.7 |
| | $ | 3.9 |
| | $ | 82.0 |
| | $ | 1.8 |
|
Beyond 2018 | | 30.1 |
| | — |
| | 27.6 |
| | 2.5 |
|
|
| | | | | | | | |
Year | | Finance Leases | | Operating Leases(i) |
2019 | | $ | 1.6 |
| | $ | 48.5 |
|
2020 | | 1.6 |
| | 42.1 |
|
2021 | | 1.6 |
| | 30.0 |
|
2022 | | 1.0 |
| | 20.8 |
|
2023 | | — |
| | 14.3 |
|
Thereafter | | — |
| | 24.4 |
|
Total | | $ | 5.8 |
| | $ | 180.1 |
|
(i)Such rental commitments have been reduced by minimum sublease rentals of $2.7 million, due in the future under noncancelable leases. Note 4 — Goodwill
During the fourth quarter of 2017,For transactions where the company performed its annual impairment test of goodwillis considered the lessor, revenue for all of our reporting units. The fair values of eachoperating leases is recognized on a monthly basis over the term of the reporting units exceeded their carrying values; therefore, no goodwill impairment was required.
At December 31, 2017,lease and for sales-type leases at the amountinception of goodwill allocated to reporting units with negative net assets was as follows: Business Process Outsourcing Services, $10.8.
Changes in the carrying amount of goodwill by segmentlease term. These amounts were immaterial for the yearsyear ended December 31, 2017 and 2016 were as follows:2019.
|
| | | | | | | | | | | | |
| | Total |
| | Services |
| | Technology |
|
Balance at December 31, 2015 | | $ | 177.4 |
| | $ | 68.7 |
| | $ | 108.7 |
|
Translation adjustments | | 1.2 |
| | 1.2 |
| | — |
|
Balance at December 31, 2016 | | 178.6 |
| | 69.9 |
| | 108.7 |
|
Translation adjustments | | 2.2 |
| | 2.2 |
| | — |
|
Balance at December 31, 2017 | | $ | 180.8 |
| | $ | 72.1 |
| | $ | 108.7 |
|
Note 5 — Recent accounting pronouncements and accounting changes
Accounting Pronouncements Adopted
Effective January 1, 2017, the company adopted Accounting Standards Update (“ASU”) No. 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment issued by the Financial Accounting Standards Board (“FASB”) which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amended guidance, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Adoption of this new guidance had no impact on the company’s consolidated results of operations and financial position.
Effective January 1, 2017, the company adopted ASU No. 2016-18 Statement of Cash Flows (Topic 230) - Restricted Cash issued by the FASB which requires companies to include amounts generally described as restricted cash or restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance has been applied on retrospective basis whereby prior-period financial
statements have been adjusted to reflect the application of the new guidance, as required by the FASB. Amounts reclassified in the consolidated statements of cash flows for the years ended December 31, 2016 and 2015 are as follows:
|
| | | | | | | | |
Year ended December 31, | 2016 |
| | 2015 |
|
Cash flows from operating activities | | | |
Other assets | $ | (1.9 | ) | 2.60 |
| $ | 2.6 |
|
Cash flows from investing activities | | | |
Other | 1.6 |
| | (2.3 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (0.8 | ) | | (4.6 | ) |
Cash, cash equivalents and restricted cash, beginning of year | 31.6 |
| | 35.9 |
|
Cash, cash equivalents and restricted cash, end of year | 30.5 |
| | 31.6 |
|
Effective January 1, 2017, the company adopted ASU No. 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory issued by the FASB which allows the recognition of deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. The new guidance has been applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated deficit. At January 1, 2017, the adjustment to accumulated deficit was an increase of $4.4 million.
Effective January 1, 2017, the company adopted ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), issued by the FASB which clarifies the treatment of several cash flow categories. In addition, the guidance also clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The company previously reported premium payments on and proceeds from the settlement of corporate-owned life insurance policies as cash flows from operating activities in the company’s consolidated statement of cash flows. Under the new guidance, these amounts were reclassified to investing activities. 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. For the years ended December 31, 2016 and 2015, $1.5 million and $1.1 million, respectively, were reclassified from “other assets” in operating activities to “other” in investing activities in the company’s consolidated statements of cash flows.
Effective January 1, 2017, the company adopted ASU No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, issued by the FASB, which changes certain aspects of accounting for share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows 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. Additionally, the standard requires all tax-related cash flows resulting from share-based payments to be reported as operating activities on the consolidated statement of cash flows, and any cash payments made to taxing authorities on an employee’s behalf as financing activities, which the company previously reported as operating activities. 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. For the years ended December 31, 2016 and 2015, $0.4 million and $0.8 million, respectively, were reclassified from “accounts payable and other accrued liabilities” in operating activities to “other” in financing activities in the company’s consolidated statements of cash flows.
Accounting Pronouncements Not Yet Adopted
In March 2017, the FASB issued ASU No. 2017-07 Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. The other components of net periodic benefit cost will be presented separately from the line items that include service cost and outside the subtotal of operating income. This update is effective for annual periods beginning after December 15, 2017, which for the company is January 1, 2018. Adoption of this new guidance will result in the reclassification of net periodic benefit cost, other than service costs ($92.5 million and $81.6 million for the years ended December 31, 2017 and 2016, respectively), from operating income to non-operating income. There will be no overall impact on the company’s consolidated financial position.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected losses. This includes trade and other receivables, loans and other financial instruments. This
update is effective for annual periods beginning after December 15, 2019, with earlier adoption permitted. The company is currently assessing when it will choose to adopt, and is currently evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. The ASU requires 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, with earlier adoption permitted. The company will adopt the new guidance on January 1, 2019, and is currently evaluating the impact of the adoption on its consolidated results of operations and financial position.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606), which establishes 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. 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 new standard would require the company to recognize revenue for certain transactions, including extended payment term software licenses and short-term software licenses, sooner than the current rules would allow and require the company to recognize software license extensions and renewals (the most significant impact upon adoption), later than the current rules would allow. The standard also requires significantly expanded disclosure requirements. The company will adopt the standard on January 1, 2018 using the modified retrospective method. The company does not believe there will be a material impact to its consolidated financial position upon adoption.
Note 6 — Accounts receivable
Accounts receivable consist principally of trade accounts receivable from customers and are generally unsecured and due within 30 to 90 days. Credit losses relating to these receivables consistently have been within management’s expectations. Expected credit losses are recorded as an allowance for doubtful accounts in the consolidated balance sheets. Estimates of expected credit losses are based primarily on the aging of the accounts receivable balances. The company records a specific reserve for individual accounts when it becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. The collection policies and procedures of the company vary by credit class and prior payment history of customers.
Revenue recognized in excess of billings on services contracts, or unbilled accounts receivable, was $109.4 million and $98.0 million at December 31, 2017 and 2016, respectively.
As of December 31, 2017,2019, receivables under sales-type leases before the allowance for unearned income were collectible as follows:
|
| | | |
Year | |
2020 | $ | 19.7 |
|
2021 | 13.7 |
|
2022 | 12.6 |
|
2023 | 12.5 |
|
2024 | 12.0 |
|
Thereafter | 5.4 |
|
Total | $ | 75.9 |
|
|
| | | |
Year | |
2018 | $ | 45.5 |
|
2019 | 25.8 |
|
2020 | 16.3 |
|
2021 | 10.8 |
|
2022 | 9.7 |
|
Thereafter | 19.1 |
|
Total | $ | 127.2 |
|
Unearned income, which is deducted from accounts receivable, was $12.5Other Commitments
At December 31, 2019, the company had outstanding standby letters of credit and surety bonds totaling approximately $258 million related to performance and $7.0 millionpayment guarantees. On the basis of experience with these arrangements, the company believes that any obligations that may arise will not be material. In addition, at December 31, 20172019, the company had deposits and 2016, respectively. The allowance for doubtful accounts, whichcollateral of approximately $12 million in other long-term assets, principally related to tax contingencies in Brazil.
Note 5 — Foreign currency
Effective July 1, 2018, the company’s Argentinian subsidiary began to apply highly inflationary accounting due to cumulative inflation of approximately 100 percent or more over the last 3-year period. For those international subsidiaries operating in highly inflationary economies, the U.S. dollar is reportedthe functional currency, and as a deductionsuch, nonmonetary assets and liabilities are translated at historical exchange rates, and monetary assets and liabilities are translated at current exchange rates. Exchange gains and losses arising from accounts receivable, was $22.0 million and $22.8 million attranslation are included in other income (expense), net. At December 31, 2019, the company’s operations in Argentina had net monetary assets denominated in local currency of approximately $6.2 million.
During the years ended December 31, 2019, 2018 and 2017, and 2016, respectively. The provision for doubtful accounts, which is reportedthe company recognized foreign exchange gains (losses) in selling, general and administrative expenses“Other income (expense), net” in theits consolidated statements of income was expense of $3.1$(10.4) million, $2.2$(5.9) million and $3.0$(9.9) million, respectively. The year ended December 31, 2017 also includes $11.8 million of net foreign currency losses related to exiting foreign countries in 2017, 2016 and 2015, respectively.connection with the company’s restructuring plan.
Note 76 — Income taxes
Following is the total income (loss) before income taxes and the provision (benefit) for income taxes for the three years ended December 31, 2017.2019.
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Income (loss) before income taxes | | | | | | |
United States | | $ | (48.1 | ) | | $ | (53.6 | ) | | $ | (152.7 | ) |
Foreign | | 87.8 |
| | 196.8 |
| | 80.6 |
|
Total income (loss) before income taxes | | $ | 39.7 |
| | $ | 143.2 |
| | $ | (72.1 | ) |
Provision for income taxes | | | | | | |
Current | | | | | | |
United States | | $ | 7.6 |
| | $ | 4.7 |
| | $ | (42.8 | ) |
Foreign | | 41.0 |
| | 51.4 |
| | 33.9 |
|
Total | | 48.6 |
| | 56.1 |
| | (8.9 | ) |
Deferred | | | | | | |
Foreign | | 4.4 |
| | 8.2 |
| | 3.4 |
|
Total provision (benefit) for income taxes | | $ | 53.0 |
| | $ | 64.3 |
| | $ | (5.5 | ) |
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Income (loss) before income taxes | | | | | | |
United States | | $ | (152.7 | ) | | $ | (88.3 | ) | | $ | (130.6 | ) |
Foreign | | 80.6 |
| | 108.8 |
| | 71.8 |
|
Total income (loss) before income taxes | | $ | (72.1 | ) | | $ | 20.5 |
| | $ | (58.8 | ) |
Provision for income taxes | | | | | | |
Current | | | | | | |
United States | | $ | (42.8 | ) | | $ | 6.7 |
| | $ | 1.0 |
|
Foreign | | 33.9 |
| | 47.7 |
| | 42.2 |
|
State and local | | — |
| | — |
| | 0.3 |
|
Total | | (8.9 | ) | | 54.4 |
| | 43.5 |
|
Deferred | | | | | | |
Foreign | | 3.4 |
| | 2.8 |
| | 0.9 |
|
Total (benefit) provision for income taxes | | $ | (5.5 | ) | | $ | 57.2 |
| | $ | 44.4 |
|
Following is a reconciliation of the provision (benefit) provision for income taxes at the United States statutory tax rate to the provision for income taxes as reported: |
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
United States statutory income tax provision (benefit) | | $ | 8.3 |
| | $ | 30.1 |
| | $ | (25.2 | ) |
Income and losses for which no provision or benefit has been recognized | | 28.2 |
| | 22.2 |
| | 70.3 |
|
Foreign rate differential and other foreign tax expense | | 3.2 |
| | 9.5 |
| | (11.3 | ) |
Income tax withholdings | | 17.6 |
| | 19.3 |
| | 16.8 |
|
Permanent items | | (2.5 | ) | | (5.0 | ) | | (3.0 | ) |
Enacted rate changes | | 0.5 |
| | (2.3 | ) | | (0.4 | ) |
Change in uncertain tax positions | | 0.2 |
| | (1.2 | ) | | 2.3 |
|
Change in valuation allowances due to changes in judgment | | (2.3 | ) | | (5.9 | ) | | (4.6 | ) |
Income tax credits, U.S. | | (0.2 | ) | | (2.4 | ) | | (50.4 | ) |
Provision (benefit) for income taxes | | $ | 53.0 |
| | $ | 64.3 |
| | $ | (5.5 | ) |
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
United States statutory income tax provision (benefit) | | $ | (25.2 | ) | | $ | 7.2 |
| | $ | (20.6 | ) |
Income and losses for which no provision or benefit has been recognized | | 70.3 |
| | 65.5 |
| | 69.1 |
|
Foreign rate differential and other foreign tax expense | | (11.3 | ) | | (21.1 | ) | | (15.9 | ) |
Income tax withholdings | | 16.8 |
| | 22.8 |
| | 12.5 |
|
Permanent items | | (3.0 | ) | | (4.7 | ) | | (1.9 | ) |
Enacted rate changes | | (0.4 | ) | | 3.5 |
| | 9.1 |
|
Change in uncertain tax positions | | 2.3 |
| | 0.4 |
| | 1.5 |
|
Change in valuation allowances due to changes in judgment | | (4.6 | ) | | (16.4 | ) | | (5.4 | ) |
Income tax credits, U.S. | | (50.4 | ) | | — |
| | (4.0 | ) |
(Benefit) provision for income taxes | | $ | (5.5 | ) | | $ | 57.2 |
| | $ | 44.4 |
|
The TCJA was enacted byTax Cuts & Jobs Act (TCJA) reduced the U.S. on December 22, 2017. The TCJA eliminatesfederal income tax rate from 35% to 21% effective January 1, 2018, with no net financial statement impact due to the valuation allowance recorded against all U.S. deferred tax assets.
Included in 2017 was a benefit of $50.4 million principally related to the TCJA’s elimination of the corporate Alternative Minimum Tax (“AMT”) beginning in 2018,(AMT) and also provides for refundsrefund of all remaining AMT credits. Consequently, the company recorded a benefit of $50.4 million in 2017. Of this total, $9.1 million was received in 2017, and approximately $7.2 million will be received in 2018 under Internal Revenue Code section 168(k)(4) of the prior tax law. The remainder, $34.1 million, will be refundable under the TCJA between 2019 and 2022.
The 2016 and 20152018 provision for income taxes included $3.5 million and $9.1$(2.2) million due to a reduction in the UKNetherlands income tax rate. The rate, reductions werewhich was enacted in the third quarter of 2016 and the fourth quarter of 20152018 and reduced the rate from 18%25% to 17% and from 20% to 18%20.5% effective AprilJanuary 1, 2020 and 2017, respectively.2021.
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 20172019 and 20162018 were as follows:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Deferred tax assets | | | | |
Tax loss carryforwards | | $ | 841.1 |
| | $ | 860.0 |
|
Postretirement benefits | | 434.4 |
| | 440.3 |
|
Foreign tax credit carryforwards | | 211.5 |
| | 221.6 |
|
Other tax credit carryforwards | | 30.3 |
| | 29.8 |
|
Deferred revenue | | 42.8 |
| | 37.1 |
|
Employee benefits and compensation | | 31.2 |
| | 31.1 |
|
Purchased capitalized software | | 31.2 |
| | 22.9 |
|
Depreciation | | 28.1 |
| | 20.1 |
|
Warranty, bad debts and other reserves | | 5.9 |
| | 4.8 |
|
Capitalized costs | | 7.1 |
| | 5.1 |
|
Other | | 27.9 |
| | 30.4 |
|
| | 1,691.5 |
| | 1,703.2 |
|
Valuation allowance | | (1,524.7 | ) | | (1,547.5 | ) |
Total deferred tax assets | | $ | 166.8 |
| | $ | 155.7 |
|
Deferred tax liabilities | | | | |
Capitalized research and development | | $ | 44.7 |
| | $ | 36.1 |
|
Other | | 29.0 |
| | 30.2 |
|
Total deferred tax liabilities | | $ | 73.7 |
| | $ | 66.3 |
|
Net deferred tax assets | | $ | 93.1 |
| | $ | 89.4 |
|
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Deferred tax assets | | | | |
Tax loss carryforwards | | $ | 837.6 |
| | $ | 889.6 |
|
Postretirement benefits | | 437.7 |
| | 728.9 |
|
Foreign tax credit carryforwards | | 127.0 |
| | 317.6 |
|
Other tax credit carryforwards | | 29.1 |
| | 91.4 |
|
Deferred revenue | | 40.9 |
| | 81.0 |
|
Employee benefits and compensation | | 35.2 |
| | 49.1 |
|
Purchased capitalized software | | 22.2 |
| | 32.6 |
|
Depreciation | | 24.5 |
| | 28.3 |
|
Warranty, bad debts and other reserves | | 5.3 |
| | 16.1 |
|
Capitalized costs | | 3.1 |
| | 10.9 |
|
Other | | 39.3 |
| | 27.7 |
|
| | 1,601.9 |
| | 2,273.2 |
|
Valuation allowance | | (1,441.1 | ) | | (2,084.6 | ) |
Total deferred tax assets | | $ | 160.8 |
| | $ | 188.6 |
|
Deferred tax liabilities | | | | |
Capitalized research and development | | $ | 24.3 |
| | $ | 20.3 |
|
Other | | 25.8 |
| | 28.4 |
|
Total deferred tax liabilities | | $ | 50.1 |
| | $ | 48.7 |
|
Net deferred tax assets | | $ | 110.7 |
| | $ | 139.9 |
|
The TCJA reduced the U.S. federal tax rate from 35% to 21% effective in 2018. This rate decrease resulted in a remeasurement of U.S. deferred tax balances in 2017, with no net financial statement impact due to the valuation allowance recorded against all U.S. deferred tax assets.
At December 31, 2017,2019, the company has tax effected U.S. Federal ($319.5 million), state and local ($250.7 million), and foreign ($267.4 million) tax loss carryforwards the total of which is $837.6 million. as follows:
|
| | | | |
As of December 31, | | 2019 |
|
U.S. Federal | | $ | 348.2 |
|
State and local | | 247.8 |
|
Foreign | | 245.1 |
|
Total tax loss carryforwards | | $ | 841.1 |
|
These carryforwards will expire as follows: 2018, $5.3; 2019, $7.3; 2020, $28.5; 2021, $14.5; 2022, $114.0; and $668.0 thereafter.
|
| | | |
Year | |
2020 | $ | 23.9 |
|
2021 | 13.5 |
|
2022 | 15.8 |
|
2023 | 13.3 |
|
2024 | 12.2 |
|
Thereafter | 762.4 |
|
Total | $ | 841.1 |
|
The company also has available tax credit carryforwards, of $127.0 million, which will expire as follows: 2018, $10.1; 2019, $10.2; 2020, $20.9; 2021, $8.7; 2022, $7.7; and $69.4 thereafter.
|
| | | |
Year | |
2020 | $ | 31.5 |
|
2021 | 35.0 |
|
2022 | 38.1 |
|
2023 | 27.0 |
|
2024 | 22.5 |
|
Thereafter | 87.7 |
|
Total | $ | 241.8 |
|
Failure to achieve forecasted taxable income might affect the ultimate realization of the company’s net deferred tax assets. Factors that may affect the company’s ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: increased competition, a decline in sales or margins, loss of market share, the impact of the economic environment, delays in product availability and technological obsolescence.
Under U.S. tax law effective through December 31, 2017, undistributed earnings of foreign subsidiaries were generally taxable upon repatriation to the U.S.U.S shareholder. Under the TCJA, effective January 1, 2018, distributions from foreign subsidiaries to U.S. shareholders are generally exempt from taxation. As a part of the transition to this new participation exemption system of taxation, the TCJA requires a transition tax to be paid on the net accumulated post-1986 undistributed earnings of foreign subsidiaries. The company has determined that, due to accumulated deficits of foreign subsidiaries offsetting the accumulated earnings of foreign subsidiaries, the company will not incur a transition tax.
With this change in U.S. taxation of earnings of foreign subsidiaries under the TCJA, future distributions of earnings from foreign subsidiaries will generally be exempt from U.S. taxation. Consequently, the deferred income tax liability on undistributed earnings is generally limited to any foreign withholding or other foreign taxes that will be imposed on such distributions. As the company currently intends to indefinitely reinvest the earnings of certain foreign subsidiaries, no0 provision has been made for income taxes that may become payable upon distribution of the earnings of such subsidiaries. The unrecognized deferred income tax liability at December 31, 20172019 approximated $21.5$29.2 million.
While subsequent to 2017,As of January 1, 2018 the U.S. will not generally tax distributions from foreign subsidiaries, the TCJA introduced a tax on GILTI. Beginning in 2018, U.S. taxable income will includeincluded GILTI, which essentially includes net foreign subsidiaries’ earnings above a routine 10% return on their aggregate specified tangible assets. TheAt December 31, 2017, the company has made an accounting policy election to treat the GILTI as a period cost when included in U.S. taxable income, and consequently GILTI has no impact on the 2017 financial statements.
income.
Cash paid for income taxes, net of refunds, during 2017, 2016 and 2015for the three years ended December 31, 2019, was $34.3 million, $46.4 million and $59.7 million, respectively.as follows:
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Cash paid for income taxes, net of refunds | | $ | 37.6 |
| | $ | 39.1 |
| | $ | 34.3 |
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: |
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Balance at January 1 | | $ | 18.9 |
| | $ | 27.9 |
| | $ | 35.8 |
|
Additions based on tax positions related to the current year | | 11.1 |
| | 2.6 |
| | 4.2 |
|
Changes for tax positions of prior years | | (0.6 | ) | | (6.1 | ) | | (11.2 | ) |
Reductions as a result of a lapse of applicable statute of limitations | | (2.3 | ) | | (2.4 | ) | | (2.7 | ) |
Settlements | | (1.1 | ) | | (1.5 | ) | | (0.2 | ) |
Changes due to foreign currency | | (0.4 | ) | | (1.6 | ) | | 2.0 |
|
Balance at December 31 | | $ | 25.6 |
| | $ | 18.9 |
| | $ | 27.9 |
|
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Balance at January 1 | | $ | 35.8 |
| | $ | 27.7 |
| | $ | 35.0 |
|
Additions based on tax positions related to the current year | | 4.2 |
| | 2.7 |
| | 3.4 |
|
Changes for tax positions of prior years | | (11.2 | ) | | 12.0 |
| | (4.0 | ) |
Reductions as a result of a lapse of applicable statute of limitations | | (2.7 | ) | | (2.8 | ) | | (3.4 | ) |
Settlements | | (0.2 | ) | | (0.1 | ) | | (0.9 | ) |
Changes due to foreign currency | | 2.0 |
| | (3.7 | ) | | (2.4 | ) |
Balance at December 31 | | $ | 27.9 |
| | $ | 35.8 |
| | $ | 27.7 |
|
The company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its consolidated statements of income. At December 31, 20172019 and 2016,2018, the company had an accrual of $2.3$3.0 million and $1.2$2.6 million, respectively, for the payment of penalties and interest.
At December 31, 2017,2019, all of the company’s liability for unrecognized tax benefits, if recognized, would affect the company’s effective tax rate. Within the next 12 months, the company believes that it is reasonably possible that the amount of unrecognized tax benefits may significantly change; however, various events could cause this belief to change in the future.
The company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Several U.S. state and foreign income tax audits are in process. The company is under an audit in India, for which years prior to 20062009 are closed. For the most significant jurisdictions outside the U.S., the audit periods through 20122014 are closed
for Brazil, and the audit periods through 20132015 are closed for the United Kingdom. All of the various ongoing income tax audits throughout the world are not expected to have a material impact on the company’s financial position.
Internal Revenue Code Sections 382 and 383 provide annual limitations with respect to the ability of a corporation to utilize its net operating loss (as well as certain built-in losses) and tax credit carryforwards, respectively (“Tax Attributes”)(Tax Attributes), against future U.S. taxable income, if the corporation experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. The company regularly monitors ownership changes (as calculated for purposes of Section 382). The company has determined that, for purposes of the rules of Section 382 described above, an ownership change occurred in February 2011. Any future transaction or transactions and the timing of such transaction or transactions could trigger additional ownership changes under Section 382.
As a result of the February 2011 ownership change, utilization for certain of the company’s Tax Attributes, U.S. net operating losses and tax credits, is subject to an overall annual limitation of $70.6 million. The cumulative limitation as of December 31, 20172019 is approximately $416.0$470.3 million. This limitation will be applied first to any recognized built in losses, then to any net operating losses, and then to any other Tax Attributes. Any unused limitation may be carried over to later years. Based on presently available information and the existence of tax planning strategies, the company does not expect to incur a U.S. cash tax liability in the near term. The company maintains a full valuation allowance against the realization of all U.S. deferred tax assets as well as certain foreign deferred tax assets in excess of deferred tax liabilities.
Note 7 — Earnings per common share
The following table shows how earnings (loss) per common share attributable to Unisys Corporation was computed for the three years ended December 31, 2019 (shares in thousands).
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Basic earnings (loss) per common share computation: | | | | | | |
Net income (loss) attributable to Unisys Corporation common shareholders | | $ | (17.2 | ) | | $ | 75.5 |
| | $ | (65.3 | ) |
Weighted average shares | | 55,961 |
| | 50,946 |
| | 50,409 |
|
Basic earnings (loss) per common share | | $ | (0.31 | ) | | $ | 1.48 |
| | $ | (1.30 | ) |
Diluted earnings (loss) per common share computation: | | | | | | |
Net income (loss) attributable to Unisys Corporation common shareholders | | $ | (17.2 | ) | | $ | 75.5 |
| | $ | (65.3 | ) |
Add interest expense on convertible senior notes, net of tax of zero | | — |
| | 19.6 |
| | — |
|
Net income (loss) attributable to Unisys Corporation for diluted earnings per share | | $ | (17.2 | ) | | $ | 95.1 |
| | $ | (65.3 | ) |
Weighted average shares | | 55,961 |
| | 50,946 |
| | 50,409 |
|
Plus incremental shares from assumed conversions: | | | | | | |
Employee stock plans | | — |
| | 541 |
| | — |
|
Convertible senior notes | | — |
| | 21,868 |
| | — |
|
Adjusted weighted average shares | | 55,961 |
| | 73,355 |
| | 50,409 |
|
Diluted earnings (loss) per common share | | $ | (0.31 | ) | | $ | 1.30 |
| | $ | (1.30 | ) |
| | | | | | |
Anti-dilutive weighted-average stock options and restricted stock units(i) | | 1,393 |
| | 1,226 |
| | 2,206 |
|
Anti-dilutive weighted-average common shares issuable upon conversion of the 5.50% convertible senior notes(i) | | 16,578 |
| | — |
| | 21,868 |
|
(i)Amounts represent shares excluded from the computation of diluted earnings per share, as their effect, if included, would have been anti-dilutive for the periods presented.
Note 8 — Accounts receivable
Accounts receivable consist principally of trade accounts receivable from customers and are generally unsecured and due within 30 to 90 days. Credit losses relating to these receivables consistently have been within management’s expectations. Expected credit losses are recorded as an allowance for doubtful accounts in the consolidated balance sheets. Estimates of expected credit losses are based primarily on the aging of the accounts receivable balances. The company records a specific reserve for individual accounts when it becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. The collection policies and procedures of the company vary by credit class and prior payment history of customers.
Revenue recognized in excess of billings on services contracts, or unbilled accounts receivable, was $102.8 million and $94.4 million at December 31, 2019 and 2018, respectively.
Unearned income, which is deducted from accounts receivable, was $8.7 million and $8.4 million at December 31, 2019 and 2018, respectively. The allowance for doubtful accounts, which is reported as a deduction from accounts receivable, was $11.8 million and $13.7 million at December 31, 2019 and 2018, respectively. The provision for doubtful accounts, which is reported in selling, general and administrative expenses in the consolidated statements of income, was (income) expense of $(1.6) million, $(5.1) million and $3.1 million, in 2019, 2018 and 2017, respectively.
Note 9 — Contract assets and contract liabilities
Contract assets represent rights to consideration in exchange for goods or services transferred to a customer when that right is conditional on something other than the passage of time. Contract liabilities represent deferred revenue.
Net contract assets (liabilities) as of December 31, 2019 and 2018 are as follows:
|
| | | | | | | |
As of December 31, | 2019 |
| | 2018 |
|
Contract assets - current | $ | 53.0 |
| | $ | 29.7 |
|
Contract assets - long-term(i) | 21.6 |
| | 22.2 |
|
Deferred revenue - current | (288.6 | ) | | (294.4 | ) |
Deferred revenue - long-term | (147.4 | ) | | (157.2 | ) |
(i)Reported in other long-term assets on the company’s consolidated balance sheets
As of December 31, 2019 and 2018, deposit liabilities of $25.3 million and $21.2 million, respectively, were principally included in current deferred revenue. These deposit liabilities represent upfront consideration received from customers for services such as post-contract support and maintenance that allow the customer to terminate the contract at any time for convenience.
Significant changes during the years ended December 31, 2019 and 2018 in the above contract asset and liability balances were as follows: |
| | | | | | | |
Year ended December 31, | 2019 |
| | 2018 |
|
Revenue recognized that was included in deferred revenue at the beginning of the period | $ | 287.9 |
| | $ | 307.1 |
|
Note 10 — Capitalized contract costs
The company’s incremental direct costs of obtaining a contract consist of sales commissions which are deferred and amortized ratably over the initial contract life. These costs are classified as current or noncurrent based on the timing of when the company expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and in other long-term assets, respectively, in the company’s consolidated balance sheets.
Deferred commissions as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
As of December 31, | 2019 |
| | 2018 |
|
Deferred commissions | $ | 12.4 |
| | $ | 12.1 |
|
Amortization expense related to deferred commissions for the years ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | |
Year ended December 31, | 2019 |
| | 2018 |
|
Deferred commissions - amortization expense(i) | $ | 3.8 |
| | $ | 6.9 |
|
(i)Reported in selling, general and administrative expense in the company’s consolidated statements of income
Costs on outsourcing contracts are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract (costs to fulfill a contract), principally initial customer setup, are capitalized and expensed over the initial contract life. These costs are included in outsourcing assets, net in the company’s consolidated balance sheets, and are amortized over the initial contract life and reported in Services cost of sales.
Costs to fulfill a contract as of December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
As of December 31, | 2019 |
| | 2018 |
|
Costs to fulfill a contract | $ | 75.9 |
| | $ | 79.5 |
|
During the years ended December 31, 2019 and 2018, amortization expense related to costs to fulfill a contract was as follows:
|
| | | | | | | |
Year ended December 31, | 2019 |
| | 2018 |
|
Costs to fulfill a contract - amortization expense | $ | 24.2 |
| | $ | 21.7 |
|
The remaining balance of outsourcing assets, net is comprised of fixed assets and software used in connection with outsourcing contracts. These costs are capitalized and depreciated over the shorter of the initial contract life or in accordance with the company’s fixed asset policy.
Note 11 — Financial instruments and concentration of credit risks
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 December 31, 2019 and 2018, the notional amount of these contracts was $437.0 million and $384.7 million, respectively. 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.
The following table summarizes the fair value of the company’s foreign exchange forward contracts as of December 31, 2019 and 2018.
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Balance Sheet Location | | | | |
Prepaid expenses and other current assets | | $ | 2.1 |
| | $ | 3.4 |
|
Other accrued liabilities | | 0.1 |
| | 0.3 |
|
Total fair value | | $ | 2.0 |
|
| $ | 3.1 |
|
The following table summarizes the location and amount of gains and losses recognized on foreign exchange forward contracts
for the three years ended December 31, 2019.
|
| | | | | | | | | | | |
Year Ended December 31, | 2019 |
| | 2018 |
| | 2017 |
|
Statement of Income Location | | | | | |
Other income (expense), net | $ | 1.7 |
| | $ | (14.2 | ) | | $ | 27.5 |
|
Financial instruments also include temporary cash investments and customer accounts receivable. Temporary investments are placed with creditworthy financial institutions, primarily in money market funds, time deposits and certificate of deposits which may be withdrawn at any time at the discretion of the company without penalty. At December 31, 2019 and 2018, the company’s cash equivalents principally have maturities of less than one month or can be withdrawn at any time at the discretion of the company without penalty. Due to the short maturities of these instruments, they are carried on the consolidated balance sheets at cost plus accrued interest, which approximates market value. Receivables are due from a large number of customers that are dispersed worldwide across many industries. At December 31, 2019 and 2018, the company had no significant concentrations of credit risk with any one customer. At December 31, 2019 and 2018, the company had $77.3 million and $85.8 million, respectively, of receivables due from various U.S. federal governmental agencies. At December 31, 2019 and 2018, the carrying amount of cash and cash equivalents approximated fair value.
Note 12 — Properties
Properties comprise the following:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Land | | $ | 2.3 |
| | $ | 2.3 |
|
Buildings | | 63.5 |
| | 63.5 |
|
Machinery and office equipment | | 534.3 |
| | 530.0 |
|
Internal-use software | | 171.0 |
| | 164.7 |
|
Rental equipment | | 34.9 |
| | 39.7 |
|
Total properties | | $ | 806.0 |
| | $ | 800.2 |
|
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Land | | $ | 2.8 |
| | $ | 2.7 |
|
Buildings | | 91.3 |
| | 88.2 |
|
Machinery and office equipment | | 601.7 |
| | 591.7 |
|
Internal-use software | | 157.4 |
| | 145.9 |
|
Rental equipment | | 45.6 |
| | 58.1 |
|
Total properties | | $ | 898.8 |
| | $ | 886.6 |
|
In 2018, the company sold a building and land located in the United Kingdom. The company received net proceeds of $19.2 million and recorded a pretax gain of $7.3 million which was recorded in selling, general and administrative expenses in the consolidated statements of income.
Note 913 — Goodwill
During the fourth quarter of 2019, the company performed its annual impairment test of goodwill for all of its reporting units. The fair values of each of the reporting units exceeded their carrying values; therefore, 0 goodwill impairment was required.
At December 31, 2019, the amount of goodwill allocated to reporting units with negative net assets was as follows: Business Process Outsourcing Services, $10.3 million.
Changes in the carrying amount of goodwill by segment for the years ended December 31, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | |
| | Total |
| | Services |
| | Technology |
|
Balance at December 31, 2017 | | $ | 180.8 |
| | $ | 72.1 |
| | $ | 108.7 |
|
Translation adjustments | | (3.0 | ) | | (3.0 | ) | | — |
|
Balance at December 31, 2018 | | 177.8 |
| | 69.1 |
| | 108.7 |
|
Translation adjustments | | (0.6 | ) | | (0.6 | ) | | — |
|
Balance at December 31, 2019 | | $ | 177.2 |
| | $ | 68.5 |
| | $ | 108.7 |
|
Note 14 — Debt
Long-term debt is comprised of the following:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
10.75% senior secured notes due April 15, 2022 ($440.0 million face value less unamortized discount and fees of $5.5 million and $8.0 million at December 31, 2019 and 2018, respectively) | | $ | 434.5 |
| | $ | 432.0 |
|
5.50% convertible senior notes due March 1, 2021 (Face value of $84.2 million and $213.5 million less unamortized discount and fees of $4.2 million and $19.3 million at December 31, 2019 and 2018, respectively) | | 80.0 |
| | 194.2 |
|
Finance leases | | 5.3 |
| | 5.8 |
|
Other debt | | 59.8 |
| | 20.8 |
|
Total | | 579.6 |
| | 652.8 |
|
Less – current maturities | | 13.5 |
| | 10.0 |
|
Total long-term debt | | $ | 566.1 |
| | $ | 642.8 |
|
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
10.75% senior secured notes due April 15, 2022 ($440.0 million face value less unamortized discount and fees of $10.4 million at December 31, 2017) | | $ | 429.6 |
| | $ | — |
|
5.50% convertible senior notes due March 1, 2021 ($213.5 million face value less unamortized discount and fees of $27.2 million and $34.4 million at December 31, 2017 and 2016, respectively) | | 186.3 |
| | 179.1 |
|
6.25% senior notes | | — |
| | 94.7 |
|
Capital leases | | 7.5 |
| | 10.1 |
|
Other debt | | 21.3 |
| | 16.1 |
|
Total | | 644.7 |
| | 300.0 |
|
Less – current maturities | | 10.8 |
| | 106.0 |
|
Total long-term debt | | $ | 633.9 |
| | $ | 194.0 |
|
Long-term debt is carried at amortized cost and its estimated fair value is based on market prices classified as Level 2 in the fair value hierarchy. Presented below are the estimated fair values of long-term debt as of December 31, 20172019 and 2016.2018.
|
| | | | | | | |
As of December 31, | 2019 |
| | 2018 |
|
10.75% senior secured notes due April 15, 2022 | $ | 474.2 |
| | $ | 486.8 |
|
5.50% convertible senior notes due March 1, 2021 | 115.8 |
| | 298.5 |
|
|
| | | | | | | |
As of December 31, | 2017 |
| | 2016 |
|
10.75% senior secured notes due April 15, 2022(a) | $ | 492.8 |
| | $ | — |
|
5.50% convertible senior notes due March 1, 2021 | 237.9 |
| | 379.8 |
|
6.25% senior notes(b) | — |
| | 97.8 |
|
(a) Issued in April 2017
(b) Retired in April 2017
Maturities of long-term debt, including capitalfinance leases, in each of the next five years and thereafter are as follows:
|
| | | | | | | | | | | |
Year | Total |
| | Long-Term Debt |
| | Finance Leases |
|
2020 | $ | 13.5 |
| | $ | 11.7 |
| | $ | 1.8 |
|
2021 | 94.6 |
| | 92.8 |
| | 1.8 |
|
2022 | 447.8 |
| | 446.4 |
| | 1.4 |
|
2023 | 12.2 |
| | 12.0 |
| | 0.2 |
|
2024 | 6.9 |
| | 6.8 |
| | 0.1 |
|
Thereafter | 4.6 |
| | 4.6 |
| | — |
|
Total | $ | 579.6 |
| | $ | 574.3 |
| | $ | 5.3 |
|
|
| | | | | | | | | | | |
Year | Total |
| | Long-Term Debt |
| | Capital Leases |
|
2018 | $ | 10.8 |
| | $ | 8.2 |
| | $ | 2.6 |
|
2019 | 1.4 |
| | — |
| | 1.4 |
|
2020 | 2.3 |
| | 0.9 |
| | 1.4 |
|
2021 | 189.5 |
| | 188.1 |
| | 1.4 |
|
2022 | 432.3 |
| | 431.5 |
| | 0.8 |
|
Thereafter | 8.4 |
| | 8.4 |
| | — |
|
Total | $ | 644.7 |
| | $ | 637.1 |
| | $ | 7.6 |
|
Cash paid for interest during 2017, 2016 and 2015 was $39.9 million, $22.1 million and $14.4 million, respectively. Capitalizedcapitalized interest expense during 2017, 2016 and 2015the three years ended December 31, 2019 was $4.2 million, $3.0 million and $3.1 million, respectively.as follows:
On April 17, |
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Cash paid for interest | | $ | 61.5 |
| | $ | 59.5 |
| | $ | 39.9 |
|
Capitalized interest expense | | $ | 6.6 |
| | $ | 6.0 |
| | $ | 4.2 |
|
Senior Secured Notes
In 2017, the company issued $440.0 million aggregate principal amount of 10.75% Senior Secured Notes due 2022 (the “Notes”)2022 Notes). The 2022 Notes are initially fully and unconditionally guaranteed on a senior secured basis by Unisys Holding Corporation, Unisys AP Investment Company I and Unisys NPL, Inc. (together with the Company, the “Grantors”)Grantors). In the future, the 2022 Notes will be guaranteed by each material domestic subsidiary and each restricted subsidiary that guarantees the secured revolving credit facility and other indebtedness of the company or another subsidiary guarantor. The 2022 Notes and the guarantees will rank equally in right of payment with all of the existing and future senior debt of the company and the subsidiary guarantors. The 2022 Notes and the guarantees will be structurally subordinated to all existing and future liabilities (including preferred stock, trade payables and pension liabilities) of the company’s subsidiaries that are not subsidiary guarantors.
The 2022 Notes payrequire interest payments semiannually on April 15 and October 15 commencing on October 15, 2017, at an annual rate of 10.75%, and will mature on April 15, 2022, unless earlier repurchased or redeemed.
The company may, at its option, redeem some or all of the 2022 Notes at any time on or after April 15, 2020 at a redemption price determined in accordance with the redemption schedule set forth in the indenture governing the Notes (the “indenture”)indenture), plus accrued and unpaid interest, if any.
Prior to April 15, 2020, the company may, at its option, redeem some or all of the 2022 Notes at any time, at a price equal to 100% of the principal amount of the 2022 Notes redeemed plus a “make-whole” premium, plus accrued and unpaid interest, if any. The company may also redeem, at its option, up to 35% of the 2022 Notes at any time prior to April 15, 2020, using the proceeds of certain equity offerings at a redemption price of 110.75% of the principal amount thereof, plus accrued and unpaid interest, if any. In addition, the company may redeem all (but not less than all) of the 2022 Notes at any time that the Collateral Coverage Ratio is less than the Required Collateral Coverage Ratio (as such terms are described below and further defined in the indenture) at a price equal to 100% of the principal amount of the 2022 Notes plus accrued and unpaid interest, if any.
The indenture contains covenants that limit the ability of the company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness and guarantee indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem its capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) make certain prepayments in respect of pension obligations; (v) issue certain preferred stock or similar equity securities; (vi) make loans and investments (including investments by the company and subsidiary guarantors in subsidiaries that are not guarantors); (vii) sell assets; (viii) create or incur liens; (ix) enter into transactions with affiliates; (x) enter into agreements restricting its subsidiaries’ ability to pay dividends; and (xi) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to several important limitations and exceptions.
The indenture also includes a covenant requiring that the company maintain a Collateral Coverage Ratio of not less than 1.50:1.00 (the “RequiredRequired Collateral Coverage Ratio”)Ratio) as of any test date. The Collateral Coverage Ratio is based on the ratio of (A) Grantor unrestricted cash and cash equivalents plus 4.75 multiplied by of the greater of (x) Grantor EBITDA for the most recently ended four fiscal quarters and (y) (i) the average quarterly Grantor EBITDA for the most recently ended seven fiscal quarters, multiplied by (ii) four,4, to (B) secured indebtedness of the Grantors. The Collateral Coverage Ratio is tested quarterly.
If the Collateral Coverage Ratio is less than the Required Collateral Coverage Ratio as of any test date, and the company has not redeemed the 2022 Notes within 90 days thereafter, this will be an event of default under the indenture.
If the company experiences certain kinds of changes of control, it must offer to purchase the 2022 Notes at 101% of the principal amount of the 2022 Notes, plus accrued and unpaid interest, if any. In addition, if the company sells assets under certain circumstances it must apply the proceeds towards an offer to repurchase the 2022 Notes at a price equal to par plus accrued and unpaid interest, if any.
The indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding 2022 Notes to be due and payable immediately.
On May 8, 2017,Interest expense related to the company redeemed all of its then outstanding 6.25% senior notes due 2017. As a result of this redemption, the company recognized a charge of $1.5 million in “Other income (expense), net” in the second quarter of 2017, which2022 Notes is comprised of $1.3 million of premium and expenses paid and $0.2 million for the write-off of unamortized discount and fees related to the portion of the notes redeemed.following: |
| | | | | | | | | | | |
Year ended December 31, | 2019 |
| | 2018 |
| | 2017 |
|
Contractual interest coupon | $ | 47.3 |
| | $ | 47.3 |
| | $ | 33.2 |
|
Amortization of debt issuance costs | 2.4 |
| | 2.4 |
| | 1.7 |
|
Total | $ | 49.7 |
| | $ | 49.7 |
| | $ | 34.9 |
|
Convertible Senior Notes
In 2016, the company issued $213.5 million aggregate principal amount of Convertible Senior Notes due 2021 (the “2021 Notes”)2021 Notes). The 2021 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.year. The 2021 Notes are not redeemable by the company prior to maturity andmaturity. The 2021 Notes are convertible by the holders into shares of the company’s common stock.stock if certain conditions set forth in the indenture governing the 2021 Notes have been satisfied. The conversion rate for the 2021 Notes is 102.4249 shares of the company’s common stock per $1,000 principal amount of the 2021 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. On the maturity date, the company will be required to repay in cash the principal amount, plus accrued and unpaid interest, of any 2021 Notes that remain outstanding on that date.
In connection with the issuance of the 2021 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 2021 Notes. The capped call transactions will effectively raise the conversion premium on the 2021 Notes from approximately 22.5% to approximately 60%, which raises the initial conversion price from approximately $9.76 per share of common stock to approximately $12.75 per share of common stock. 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 2021 Notes.
On August 2, 2019, the company entered into separate, privately negotiated exchange agreements pursuant to which it (i) issued an aggregate of 10,593,930 shares of its common stock, and (ii) paid cash in an aggregate amount of $59.4 million, such cash amount included $3.1 million of accrued and unpaid interest on the exchanged 2021 Notes up to, but excluding, the settlement date, in exchange for $129.3 million in aggregate principal amount of its outstanding 2021 Notes. The transactions closed on August 6, 2019. Upon closing, $84.2 million aggregate principal amount of 2021 Notes remain outstanding. In connection with the transactions, the company unwound a pro rata portion of the capped call transactions described above and received proceeds of $7.2 million. Following the convertible note exchange, the capped call transactions remaining cover approximately 8.6 million shares of the company’s common stock. As a result of the exchange, the company recognized a charge of $20.1 million in other income (expense), net in 2019.
Interest expense related to the 2021 Notes(a) is comprised of the following: |
| | | | | | | | | | | |
Year ended December 31, | 2019 |
| | 2018 |
| | 2017 |
|
Contractual interest coupon | $ | 8.9 |
| | $ | 11.8 |
| | $ | 11.8 |
|
Amortization of debt discount | 5.5 |
| | 6.6 |
| | 6.0 |
|
Amortization of debt issuance costs | 0.9 |
| | 1.2 |
| | 1.2 |
|
Total | $ | 15.3 |
| | $ | 19.6 |
| | $ | 19.0 |
|
|
| | | | | | | |
Year ended December 31, | 2017 |
| | 2016 |
|
Contractual interest coupon | $ | 11.8 |
| | $ | 9.2 |
|
Amortization of debt discount | 6.0 |
| | 4.3 |
|
Amortization of debt issuance costs | 1.2 |
| | 1.0 |
|
Total | $ | 19.0 |
| | $ | 14.5 |
|
(a)Issued in 2016Revolving Credit Facility
The company has a secured revolving credit facility (the “Credit Agreement”)Credit Agreement) that provides for loans and letters of credit up to an aggregate amount of $125.0$145.0 million (with a limit on letters of credit of $30.0 million). The Credit Agreement includes an
accordion feature allowing for an increase in the amount of the facility up to $150.0 million. Availability under the credit facility is subject to a borrowing base calculated by reference to the company’s receivables. At December 31, 2017,2019, the company had no0 borrowings and $4.7$5.9 million of letters of credit outstanding, and availability under the facility was $110.5$139.1 million net of letters of credit issued. The Credit Agreement expires October 5, 2022, subject to a springing maturity (i) on the date that is 91 days prior to the maturity date of the 2021 Notes unless, on such date, certain conditions are met; or (ii) on the date that is 60 days prior to the maturity date of the 2022 Notes unless, by such date, such secured notes have not been redeemed or refinanced.
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 the company and the subsidiary guarantors, other than certain excluded assets, under a security agreement entered into by the company and the subsidiary guarantors in favor of JPMorgan Chase Bank, N.A., as agent for the lenders under the credit facility.
The company is required to maintain a minimum fixed charge coverage ratio if the availability under the credit facility falls below the greater of 10% of the lenders’ commitments under the facility and $15$15.0 million.
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. The Credit Agreement includes limitations on the ability of the company and its subsidiaries to, among other things, incur other debt or liens, dispose of assets and make acquisitions, loans and investments, repurchase its equity, and prepay other debt. 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 $50.0 million.
Other
On March 27, 2019, the company entered into an Installment Payment Agreement (IPA) with a syndicate of financial institutions to finance the acquisition of certain software licenses necessary for the provision of services to a client. The IPA was in the amount of $27.7 million, of which $4.8 million matures on March 30, 2022 and $22.9 million matures on December 30, 2023. Interest accrues at an annual rate of 7.0% and the company is required to make monthly principal and interest payments on each agreement in arrears.
On September 5, 2019, the company entered into a vendor agreement in the amount of $19.3 million to finance the acquisition of certain software licenses used to provide services to our clients. Interest accrues at an annual rate of 5.47% and the company is required to make annual principal and interest payments in advance with the last payment due on March 1, 2024.
At December 31, 2017,2019, the company has met all covenants and conditions under its various lending agreements. The company expects to continue to meet these covenants and conditions.conditions through, at least, February 28, 2021.
The company’s principal sources of liquidity are cash on hand, cash from operations and its revolving credit facility, discussed above. The company and certain international subsidiaries have access to uncommitted lines of credit from various banks.
The company’s anticipated future cash expenditures include anticipated contributions to its defined benefit pension plans. The company believes that it has adequate sources of liquidity to meet its expected 2018 cash requirements.requirements through at least February 28, 2021.
Note 1015 — Other accrued liabilities
Other accrued liabilities (current) are comprised of the following:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Payrolls and commissions | | $ | 117.1 |
| | $ | 108.1 |
|
Operating leases | | 70.0 |
| | — |
|
Cost-reduction | | 47.5 |
| | 75.8 |
|
Accrued vacations | | 31.7 |
| | 41.2 |
|
Income taxes | | 28.6 |
| | 32.3 |
|
Taxes other than income taxes | | 18.3 |
| | 31.2 |
|
Postretirement | | 13.6 |
| | 14.8 |
|
Accrued interest | | 11.8 |
| | 13.8 |
|
Other | | 34.6 |
| | 32.8 |
|
Total other accrued liabilities | | $ | 373.2 |
| | $ | 350.0 |
|
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Payrolls and commissions | | $ | 120.2 |
| | $ | 110.6 |
|
Cost reduction | | 87.7 |
| | 21.2 |
|
Accrued vacations | | 42.8 |
| | 47.1 |
|
Taxes other than income taxes | | 29.1 |
| | 25.4 |
|
Income taxes | | 26.0 |
| | 35.3 |
|
Postretirement | | 18.5 |
| | 19.3 |
|
Accrued interest | | 13.8 |
| | 6.1 |
|
Other | | 53.4 |
| | 84.2 |
|
Total other accrued liabilities | | $ | 391.5 |
| | $ | 349.2 |
|
Note 1116 — Rental expenseEmployee plans
Stock plans Under stockholder approved stock-based plans, stock options, stock appreciation rights, restricted stock and commitments
Rental expenserestricted stock units may be granted to officers, directors and income from subleases for the three years ended December 31, 2017 were as follows: |
| | | | | | | | | | | |
Year ended December 31, | 2017 |
| | 2016 |
| | 2015 |
|
Rental expense, less income from subleases | $ | 71.7 |
| | $ | 77.4 |
| | $ | 80.6 |
|
Income from subleases | $ | 4.4 |
| | $ | 7.8 |
| | $ | 9.1 |
|
Minimum net rental commitments under noncancelable operating leases, including idle leases, outstanding at December 31, 2017, substantially all of which relate to real properties, were as follows: |
| | | |
Year | |
2018 | $ | 47.4 |
|
2019 | 41.3 |
|
2020 | 32.9 |
|
2021 | 21.5 |
|
2022 | 16.2 |
|
Thereafter | 39.4 |
|
Total | $ | 198.7 |
|
Such rental commitments have been reduced by minimum sublease rentals of $7.2 million, due in the future under noncancelable subleases.
other key employees. At December 31, 2017,2019, 5.8 million shares of unissued common stock of the company had outstanding standby letters of credit and surety bonds totaling approximately $318 million related to performance and payment guarantees. On the basis of experience withwere available for granting under these arrangements, the company believes that any obligations that may arise will not be material. In addition, at December 31, 2017, the company had deposits and collateral of approximately $14 million in other long-term assets, principally related to tax contingencies in Brazil.plans.
Note 12 — Financial instruments and concentration of credit risks
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 December 31, 2017 and 2016, the notional amount of these contracts was $514.0 million and $428.9 million, respectively. 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.
The following table summarizes the fair value of the company’s foreign exchange forward contracts asAs of December 31, 2017 and 2016.
|
| | | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Balance Sheet Location | | | | |
Prepaid expenses and other current assets | | $ | 4.9 |
| | $ | 2.4 |
|
Other accrued liabilities | | 1.6 |
| | 1.9 |
|
Total fair value | | $ | 3.3 |
| 0.5 |
| $ | 0.5 |
|
The following table summarizes the location and amount of gains and losses recognized on foreign exchange forward contracts
for the three years ended December 31, 2017.
|
| | | | | | | | | | | |
Year Ended December 31, | 2017 |
| | 2016 |
| | 2015 |
|
Statement of Income Location | | | | | |
Other income (expense), net | $ | 27.5 |
| | $ | (29.1 | ) | | $ | 15.6 |
|
Financial instruments also include temporary cash investments and customer accounts receivable. Temporary investments are placed with creditworthy financial institutions, primarily in money market funds, time deposits and certificate of deposits which may be withdrawn at any time at the discretion of2019, the company without penalty. At December 31, 2017has granted non-qualified stock options and 2016,restricted stock units under these plans. The company recognizes compensation cost, net of a forfeiture rate, in selling, general and administrative expenses, and recognizes the company’s cash equivalents principally have maturities of less than one month or can be withdrawn at any time atcompensation cost for only those awards expected to vest. The company estimates the
discretion of the company without penalty. Due to the short maturities of these instruments, they are carried forfeiture rate based on the consolidated balance sheets at cost plus accrued interest, which approximates market value. Receivables are due from a large number of customers that are dispersed worldwide across many industries. At December 31, 2017its historical experience and 2016, the company had no significant concentrations of credit risk with any one customer. At December 31, 2017 and 2016, the company had $75.8 million and $74.0 million, respectively, of receivables due from various U.S. federal governmental agencies. At December 31, 2017 and 2016, the carrying amount of cash and cash equivalents approximated fair value.
Note 13 — Foreign currencyits expectations about future forfeitures.
During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the company recognized foreign exchange gains (losses) in “Other income (expense), net” in its consolidated statements of income of $(9.9)$13.2 million, $2.3$13.2 million and $8.1$11.2 million of share-based compensation expense, which is comprised of $13.2 million, $13.1 million and $10.1 million of restricted stock unit expense and 0, $0.1 million and $1.1 million of stock option expense, respectively. The
There were 0 grants of stock option awards for the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, 0.5 million stock option awards with a weighted-average exercise price of $23.60 are outstanding.
Restricted stock unit awards may contain time-based units, performance-based units, total shareholder return market-based units, or a combination of these units. Each performance-based and market-based unit will vest into 0 to 2 shares depending on the degree to which the performance or market conditions are met. Compensation expense for performance-based 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. Compensation expense for market-based awards is recognized as expense ratably over the measurement period, regardless of the actual level of achievement, provided the service requirement is met. Time-based restricted stock unit grants for the company’s directors vest upon award and compensation expense for such awards is recognized upon grant.
A summary of restricted stock unit activity for the year ended December 31, 2019 follows (shares in thousands):
|
| | | | | | | |
| | Restricted Stock Units | | Weighted-Average Grant-Date Fair Value |
Outstanding at December 31, 2018 | | 2,151 |
| | $ | 12.90 |
|
Granted | | 1,321 |
| | 15.03 |
|
Vested | | (1,129 | ) | | 13.23 |
|
Forfeited and expired | | (303 | ) | | 13.81 |
|
Outstanding at December 31, 2019 | | 2,040 |
| | 14.17 |
|
The aggregate weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2019, 2018 and 2017 also includeswas $16.9 million, $17.9 million and $14.4 million, respectively. The fair value of restricted stock units with time and performance conditions is determined based on the trading price of the company’s common shares on the date of grant. The fair value of awards with market conditions is estimated using a Monte Carlo simulation with the following weighted-average assumptions.
|
| | | | | | | | |
Year Ended December 31, | | 2019 |
| | 2018 |
|
Weighted-average fair value of grant | | $ | 16.58 |
| | $ | 15.20 |
|
Risk-free interest rate(i) | | 2.49 | % | | 2.26 | % |
Expected volatility(ii) | | 47.91 | % | | 52.97 | % |
Expected life of restricted stock units in years(iii) | | 2.87 |
| | 2.88 |
|
Expected dividend yield | | — | % | | — | % |
|
| |
(i) | Represents the continuously compounded semi-annual zero-coupon U.S. treasury rate commensurate with the remaining performance period |
(ii) | Based on historical volatility for the company that is commensurate with the length of the performance period |
(iii) | Represents the remaining life of the longest performance period |
As of December 31, 2019, there was $11.8 million of net foreign currency lossestotal unrecognized compensation cost related to exiting foreign countriesoutstanding restricted stock units granted under the company’s plans. That cost is expected to be recognized over a weighted-average period of 1.8
years. The aggregate weighted-average grant-date fair value of restricted stock units vested during the years ended December 31, 2019, 2018 and 2017 was $14.9 million, $10.4 million and $7.4 million, respectively.
Common stock issued upon exercise of stock options or upon lapse of restrictions on restricted stock units are newly issued shares. During 2019 and 2018, the company did not recognize any tax benefits from the exercise of stock options or upon issuance of stock upon lapse of restrictions on restricted stock units because of its tax position. Any such tax benefits resulting from tax deductions in connectionexcess of the compensation costs recognized are classified as operating cash flows.
Defined contribution and compensation plans U.S. employees are eligible to participate in an employee savings plan. Under this plan, employees may contribute a percentage of their pay for investment in various investment alternatives. The company matches 50 percent of the first 6 percent of eligible pay contributed by participants to the plan on a before-tax basis (subject to IRS limits). The company funds the match with cash. The charge to income related to the company match for the years ended December 31, 2019, 2018 and 2017, was $12.8 million, $11.1 million and $10.8 million, respectively.
The company has defined contribution plans in certain locations outside the United States. The charge to income related to these plans was $19.3 million, $21.3 million and $18.5 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
The company has non-qualified compensation plans, which allow certain highly compensated employees and directors to defer the receipt of a portion of their salary, bonus and fees. Participants can earn a return on their deferred balance that is based on hypothetical investments in various investment vehicles. Changes in the market value of these investments are reflected as an adjustment to the liability with an offset to expense. As of December 31, 2019 and 2018, the liability to the participants of these plans was $14.7 million and $11.6 million, respectively. These amounts reflect the accumulated participant deferrals and earnings thereon as of that date. The company makes no contributions to the deferred compensation plans and remains contingently liable to the participants.
Retirement benefits For the company’s more significant defined benefit pension plans, including the U.S., U.K. and the Netherlands, accrual of future benefits under the plans has ceased.
During 2018, cash lump-sum payments were paid to certain plan participants in 2 of the company’s international defined benefit pension plans which resulted in a non-cash pension settlement charge of $6.4 million for the year ended December 31, 2018.
Retirement plans’ funded status and amounts recognized in the company’s consolidated balance sheets at December 31, 2019 and 2018 follows:
|
| | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, | | 2019 | | 2018 | | 2019 | | 2018 |
Change in projected benefit obligation | | | | | | | | |
Benefit obligation at beginning of year | | $ | 4,558.0 |
| | $ | 5,001.6 |
| | $ | 2,829.5 |
| | $ | 3,189.7 |
|
Service cost | | — |
| | — |
| | 2.8 |
| | 3.2 |
|
Interest cost | | 197.5 |
| | 186.6 |
| | 68.3 |
| | 67.3 |
|
Plan participants’ contributions | | — |
| | — |
| | 1.3 |
| | 1.5 |
|
Plan amendment | | — |
| | — |
| | — |
| | 20.6 |
|
Plan curtailment | | — |
| | — |
| | (1.6 | ) | | — |
|
Plan settlement | | — |
| | — |
| | (3.5 | ) | | (16.4 | ) |
Actuarial loss (gain) | | 357.7 |
| | (270.7 | ) | | 284.1 |
| | (169.5 | ) |
Benefits paid | | (357.6 | ) | | (359.5 | ) | | (118.1 | ) | | (108.7 | ) |
Foreign currency translation adjustments | | — |
| | — |
| | 81.0 |
| | (158.2 | ) |
Benefit obligation at end of year | | $ | 4,755.6 |
| | $ | 4,558.0 |
| | $ | 3,143.8 |
| | $ | 2,829.5 |
|
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 3,112.8 |
| | $ | 3,578.4 |
| | $ | 2,539.4 |
| | $ | 2,833.9 |
|
Actual return on plan assets | | 505.2 |
| | (193.3 | ) | | 300.0 |
| | (75.4 | ) |
Employer contribution | | 73.8 |
| | 87.2 |
| | 30.1 |
| | 42.5 |
|
Plan participants’ contributions | | — |
| | — |
| | 1.3 |
| | 1.5 |
|
Plan settlement | | — |
| | — |
| | (3.5 | ) | | (16.4 | ) |
Benefits paid | | (357.6 | ) | | (359.5 | ) | | (118.1 | ) | | (108.7 | ) |
Foreign currency translation and other adjustments | | — |
| | — |
| | 67.2 |
| | (138.0 | ) |
Fair value of plan assets at end of year | | $ | 3,334.2 |
| | $ | 3,112.8 |
| | $ | 2,816.4 |
| | $ | 2,539.4 |
|
Funded status at end of year | | $ | (1,421.4 | ) | | $ | (1,445.2 | ) | | $ | (327.4 | ) | | $ | (290.1 | ) |
Amounts recognized in the consolidated balance sheets consist of: | | | | | | | | |
Prepaid postretirement assets | | $ | — |
| | $ | — |
| | $ | 135.9 |
| | $ | 146.4 |
|
Other accrued liabilities | | (6.8 | ) | | (6.7 | ) | | (0.2 | ) | | (0.1 | ) |
Long-term postretirement liabilities | | (1,414.6 | ) | | (1,438.5 | ) | | (463.1 | ) | | (436.4 | ) |
Total funded status | | $ | (1,421.4 | ) | | $ | (1,445.2 | ) | | $ | (327.4 | ) | | $ | (290.1 | ) |
Accumulated other comprehensive loss, net of tax | | | | | | | | |
Net loss | | $ | 2,672.7 |
| | $ | 2,718.6 |
| | $ | 1,067.2 |
| | $ | 988.0 |
|
Prior service credit | | $ | (34.8 | ) | | $ | (37.3 | ) | | $ | (46.4 | ) | | $ | (46.8 | ) |
Accumulated benefit obligation | | $ | 4,755.6 |
| | $ | 4,558.0 |
| | $ | 3,035.3 |
| | $ | 2,828.2 |
|
Information for defined benefit retirement plans with an accumulated benefit obligation in excess of plan assets at December 31, 2019 and 2018 follows:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Accumulated benefit obligation | | $ | 6,896.5 |
| | $ | 6,433.6 |
|
Fair value of plan assets | | $ | 5,014.1 |
| | $ | 4,553.2 |
|
Information for defined benefit retirement plans with a projected benefit obligation in excess of plan assets at December 31, 2019 and 2018 follows:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Projected benefit obligation | | $ | 6,898.7 |
| | $ | 6,434.9 |
|
Fair value of plan assets | | $ | 5,014.1 |
| | $ | 4,553.2 |
|
Net periodic pension cost (income) for 2019, 2018 and 2017 includes the following components:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
Service cost(i) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.8 |
| | $ | 3.2 |
| | $ | 5.1 |
|
Interest cost | | 197.5 |
| | 186.6 |
| | 211.3 |
| | 68.3 |
| | 67.3 |
| | 72.8 |
|
Expected return on plan assets | | (218.2 | ) | | (230.6 | ) | | (235.2 | ) | | (104.6 | ) | | (114.4 | ) | | (127.5 | ) |
Amortization of prior service credit | | (2.5 | ) | | (2.5 | ) | | (2.5 | ) | | (2.5 | ) | | (3.7 | ) | | (2.4 | ) |
Recognized net actuarial loss | | 116.6 |
| | 125.1 |
| | 126.4 |
| | 34.2 |
| | 42.3 |
| | 49.8 |
|
Curtailment gain | | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (5.4 | ) |
Settlement loss | | — |
| | — |
| | — |
| | 1.2 |
| | 6.4 |
| | — |
|
Net periodic pension cost (income) | | $ | 93.4 |
| | $ | 78.6 |
| | $ | 100.0 |
| | $ | (0.7 | ) | | $ | 1.1 |
| | $ | (7.6 | ) |
(i) Service cost is reported in cost of revenue - services and selling, general and administrative expenses. All other components of net periodic pension cost are reported in other income (expense), net in the consolidated statements of income.
Weighted-average assumptions used to determine net periodic pension cost for the years ended December 31 were as follows: |
| | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
| | 2019 |
| | 2018 |
| | 2017 |
|
Discount rate | | 4.50 | % | | 3.87 | % | | 4.38 | % | | 2.55 | % | | 2.24 | % | | 2.34 | % |
Expected long-term rate of return on assets | | 6.80 | % | | 6.80 | % | | 6.80 | % | | 4.18 | % | | 4.38 | % | | 5.30 | % |
| | | | | | | | | | | | |
Weighted-average assumptions used to determine benefit obligations at December 31 were as follows: |
Discount rate | | 3.53 | % | | 4.50 | % | | 3.87 | % | | 1.82 | % | | 2.55 | % | | 2.24 | % |
The company’s investment policy targets and ranges for each asset category are as follows: |
| | | | | | | | | | |
| | U.S. | | International |
Asset Category | | Target |
| | Range | | Target |
| | Range |
Equity securities | | 42 | % | | 36-48% | | 19 | % | | 16-23% |
Debt securities | | 38 | % | | 35-41% | | 61 | % | | 54-67% |
Real estate | | 0 | % | | 0% | | 1 | % | | 0-3% |
Cash | | 0 | % | | 0-5% | | 1 | % | | 0-5% |
Other | | 20 | % | | 10-30% | | 18 | % | | 11-26% |
The company periodically reviews its asset allocation, taking into consideration plan liabilities, local regulatory requirements, plan payment streams and then-current capital market assumptions. The actual asset allocation for each plan is monitored at least quarterly, relative to the established policy targets and ranges. If the actual asset allocation is close to or out of any of the ranges, a review is conducted. Rebalancing will occur toward the target allocation, with due consideration given to the liquidity of the investments and transaction costs.
The objectives of the company’s investment strategies are as follows: (a) to provide a total return that, over the long term, increases the ratio of plan assets to liabilities by maximizing investment return on assets, at a level of risk deemed appropriate, (b) to maximize return on assets by investing primarily in equity securities in the U.S. and for international plans by investing in appropriate asset classes, subject to the constraints of each plan design and local regulations, (c) to diversify investments within asset classes to reduce the impact of losses in single investments, and (d) for the U.S. plan to invest in compliance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended and any subsequent applicable regulations and laws, and for international plans to invest in a prudent manner in compliance with local applicable regulations and laws.
The company sets the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. The company considered the current expectations for future returns and the actual historical returns of each asset class. Also, since the company’s restructuringinvestment policy is to actively manage certain asset classes where the potential exists to
outperform the broader market, the expected returns for those asset classes were adjusted to reflect the expected additional returns.
In 2020, the company expects to make cash contributions of $278.9 million to its worldwide defined benefit pension plans, which are comprised of $238.8 million for the company’s U.S. qualified defined benefit pension plans and $40.1 million primarily for international defined benefit pension plans.
As of December 31, 2019, the following benefit payments are expected to be paid from the defined benefit pension plans: |
| | | | | | | | |
Year ending December 31, | | U.S. |
| | International |
|
2020 | | $ | 358.3 |
| | $ | 104.4 |
|
2021 | | 355.0 |
| | 106.3 |
|
2022 | | 351.5 |
| | 115.1 |
|
2023 | | 347.6 |
| | 120.6 |
|
2024 | | 342.5 |
| | 125.2 |
|
2025 - 2029 | | 1,585.7 |
| | 649.0 |
|
Other postretirement benefits A reconciliation of the benefit obligation, fair value of the plan assets and the funded status of the postretirement benefit plans at December 31, 2019 and 2018, follows:
|
| | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
|
Change in accumulated benefit obligation | | | | |
Benefit obligation at beginning of year | | $ | 96.2 |
| | $ | 103.2 |
|
Service cost | | 0.5 |
| | 0.6 |
|
Interest cost | | 4.8 |
| | 4.8 |
|
Plan participants’ contributions | | 2.7 |
| | 3.1 |
|
Actuarial loss (gain) | | 1.0 |
| | (4.2 | ) |
Federal drug subsidy | | — |
| | 0.2 |
|
Benefits paid | | (8.9 | ) | | (11.5 | ) |
Foreign currency translation and other adjustments | | (0.6 | ) | | — |
|
Benefit obligation at end of year | | $ | 95.7 |
| | $ | 96.2 |
|
Change in plan assets | | | | |
Fair value of plan assets at beginning of year | | $ | 7.8 |
| | $ | 7.6 |
|
Actual return on plan assets | | (0.2 | ) | | (0.4 | ) |
Employer contributions | | 5.5 |
| | 9.0 |
|
Plan participants’ contributions | | 2.7 |
| | 3.1 |
|
Benefits paid | | (8.9 | ) | | (11.5 | ) |
Fair value of plan assets at end of year | | $ | 6.9 |
| | $ | 7.8 |
|
Funded status at end of year | | $ | (88.8 | ) | | $ | (88.4 | ) |
Amounts recognized in the consolidated balance sheets consist of: | | | | |
Prepaid postretirement assets | | $ | 0.3 |
| | $ | 1.2 |
|
Other accrued liabilities | | (6.6 | ) | | (8.0 | ) |
Long-term postretirement liabilities | | (82.5 | ) | | (81.6 | ) |
Total funded status | | $ | (88.8 | ) | | $ | (88.4 | ) |
Accumulated other comprehensive loss, net of tax | | | | |
Net loss | | $ | 11.1 |
| | $ | 10.5 |
|
Prior service credit | | (6.6 | ) | | (8.2 | ) |
Net periodic postretirement benefit cost for 2019, 2018 and 2017, follows:
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Service cost(i) | | $ | 0.5 |
| | $ | 0.6 |
| | $ | 0.5 |
|
Interest cost | | 4.8 |
| | 4.8 |
| | 5.6 |
|
Expected return on assets | | (0.4 | ) | | (0.4 | ) | | (0.5 | ) |
Amortization of prior service cost | | (1.7 | ) | | (1.6 | ) | | (0.7 | ) |
Recognized net actuarial loss | | 0.7 |
| | 1.0 |
| | 0.8 |
|
Net periodic benefit cost | | $ | 3.9 |
| | $ | 4.4 |
| | $ | 5.7 |
|
(i) Service cost is reported in selling, general and administrative expenses. All other components of net periodic benefit cost are reported in other income (expense), net in the consolidated statements of income.
Weighted-average assumptions used to determine net periodic postretirement benefit cost for the years ended December 31 were as follows: |
| | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Discount rate | | 5.67 | % | | 5.30 | % | | 5.53 | % |
Expected return on plan assets | | 5.50 | % | | 5.50 | % | | 5.50 | % |
Weighted-average assumptions used to determine benefit obligation at December 31 were as follows:
|
| | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Discount rate | | 5.13 | % | | 5.67 | % | | 5.30 | % |
The company reviews its asset allocation periodically, taking into consideration plan liabilities, plan payment streams and then-current capital market assumptions. The company sets the long-term expected return on asset assumption, based principally on the long-term expected return on debt securities. These return assumptions are based on a combination of current market conditions, capital market expectations of third-party investment advisors and actual historical returns of the asset classes. In 2020, the company expects to contribute approximately $7 million to its postretirement benefit plans. |
| | | | | | |
Assumed health care cost trend rates at December 31, | | 2019 |
| | 2018 |
|
Health care cost trend rate assumed for next year | | 5.8 | % | | 6.8 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | 4.5 | % | | 4.8 | % |
Year that the rate reaches the ultimate trend rate | | 2025 |
| | 2023 |
|
As of December 31, 2019, the following benefits are expected to be paid from the company’s postretirement plans: |
| | | | |
Year ending December 31, | | Expected Payments |
|
2020 | | $ | 7.7 |
|
2021 | | 6.7 |
|
2022 | | 6.3 |
|
2023 | | 6.0 |
|
2024 | | 5.6 |
|
2025 – 2029 | | 22.3 |
|
The following provides a description of the valuation methodologies and the levels of inputs used to measure fair value, and the general classification of investments in the company’s U.S. and international defined benefit pension plans, and the company’s other postretirement benefit plan.
Level 1 – These investments include cash, common stocks, real estate investment trusts, exchange traded funds, futures and options and U.S. government securities. These investments are valued using quoted prices in an active market. Payables, receivables and cumulative futures contracts variation margin received from brokers are also included as Level 1 investments and are valued at face value.
Level 2 – These investments include the following:
Pooled Funds – These investments are comprised of money market funds and fixed income securities. The money market funds are valued using the readily determinable fair value (RDFV) provided by trustees of the funds. The fixed income securities are valued based on quoted prices for identical or similar investments in markets that may not be active.
Commingled Funds – These investments are comprised of debt, equity and other securities and are valued using the RDFV provided by trustees of the funds. The fair value per share for these funds are published and are the basis for current transactions.
Other Fixed Income – These investments are comprised of corporate and government fixed income investments and asset and mortgage-backed securities for which there are quoted prices for identical or similar investments in markets that may not be active.
Derivatives – These investments include forward exchange contracts and options, which are traded on an active market, but not on an exchange; therefore, the inputs may not be readily observable. These investments also include fixed income futures and other derivative instruments.
Level 3 – These investments include the following:
Insurance Contracts – These investments are insurance contracts which are carried at book value, are not publicly traded and are reported at a fair value determined by the insurance provider.
Certain investments are valued using net asset value (NAV) as a practical expedient. These investments may not be redeemable on a daily basis and may have redemption notice periods of up to 120 days. These investments include the following:
Commingled Funds – These investments are comprised of debt, equity and other securities.
Private Real Estate and Private Equity - These investments represent interests in limited partnerships which invest in privately-held companies or privately-held real estate or other real assets. Net asset values are developed and reported by the general partners that manage the partnerships. These valuations are based on property appraisals, utilization of market transactions that provide valuation information for comparable companies, discounted cash flows, and other methods. These valuations are reported quarterly and adjusted as necessary at year end based on cash flows within the most recent period.
The following table sets forth by level, within the fair value hierarchy, the plans’ assets (liabilities) at fair value at December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, 2019 | | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Pension plans | | | | | | | | | | | | | | | | |
Equity Securities | | | | | | | | | | | | | | | | |
Common Stocks | | $ | 955.3 |
| | $ | 952.8 |
| | $ | 2.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Commingled Funds | | 578.8 |
| | | | 578.8 |
| | | | 176.7 |
| | | | 176.7 |
| | |
Debt Securities | | | | | | | | | | | | | | | | |
U.S. Govt. Securities | | 436.0 |
| | 436.0 |
| | | | | | | | | | | | |
Other Fixed Income | | 278.1 |
| | | | 278.1 |
| | | | 91.0 |
| | | | 91.0 |
| | |
Insurance Contracts | | | | | | | | | | 123.1 |
| | | | | | 123.1 |
|
Commingled Funds | | 433.6 |
| | | | 433.6 |
|
| | | 441.0 |
| | | | 441.0 |
| | |
Real Estate | | | | | | | | | | | | | | | | |
Real Estate Investment Trusts | | 14.0 |
| | 14.0 |
| | | | | | 1.0 |
| | | | 1.0 |
| | |
Commingled Funds | | 186.5 |
| | | | 186.5 |
| | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
Derivatives(i) | | (103.5 | ) | | (8.2 | ) | | (95.3 | ) | | | | 6.5 |
| | | | 6.5 |
| | |
Commingled Funds | | | | | | | | | | 372.8 |
| | | | 372.8 |
| | |
Pooled Funds | | 135.5 |
| | | | 135.5 |
| | | | 189.2 |
| | | | 189.2 |
| | |
Cumulative futures contracts variation margin paid to brokers | | 8.2 |
| | 8.2 |
| | | | | | | | | | | | |
Cash | | 2.0 |
| | 2.0 |
| | | | | | 18.1 |
| | 18.1 |
| | | | |
Receivables | | 14.4 |
| | 14.4 |
| | | | | | 0.2 |
| | 0.2 |
| | | | |
Payables | | (7.4 | ) | | (7.4 | ) | | | | | | (7.3 | ) | | (7.3 | ) | | | | |
Total plan assets in fair value hierarchy | | $ | 2,931.5 |
| | $ | 1,411.8 |
| | $ | 1,519.7 |
| | $ | — |
| | $ | 1,412.3 |
| | $ | 11.0 |
| | $ | 1,278.2 |
| | $ | 123.1 |
|
Plan assets measured using NAV as a practical expedient(ii): | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | — |
| | | | | | | | $ | 406.9 |
| | | | | | |
Debt | | 86.3 |
| | | | | | | | 941.0 |
| | | | | | |
Other | | 127.0 |
| | | | | | | | 24.8 |
| | | | | | |
Private Real Estate | | 189.0 |
| | | | | | | | 31.4 |
| | | | | | |
Private Equity | | 0.4 |
| | | | | | | | — |
| | | | | | |
Total pension plan assets | | $ | 3,334.2 |
| | | | | | | | $ | 2,816.4 |
| | | | | | |
Other postretirement plans | | | | | | | | | | | | | | | | |
Insurance Contracts | | $ | 6.9 |
| | | | | | $ | 6.9 |
| | | | | | | | |
(i) Level 1 derivatives represent unrealized appreciation or depreciation on open futures contracts. The value of open futures contracts includes derivatives and the cumulative futures contracts variation margin paid to or received from brokers.
(ii) Investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
The following table sets forth by level, within the fair value hierarchy, the plans’ assets (liabilities) at fair value at December 31, 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, 2018 | | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Pension plans | | | | | | | | | | | | | | | | |
Equity Securities | | | | | | | | | | | | | | | | |
Common Stocks | | $ | 911.7 |
| | $ | 909.0 |
| | $ | 2.7 |
| |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Commingled Funds | | 494.8 |
| | | | 494.8 |
| | | | 165.6 |
| | | | 165.6 |
| | |
Debt Securities | | | | | | | | | | | | | | | | |
U.S. Govt. Securities | | 498.5 |
| | 498.5 |
| | | | | | | | | | | | |
Other Fixed Income | | 374.6 |
| | | | 374.6 |
| | | | 145.5 |
| | 0.2 |
| | 145.3 |
| | |
Insurance Contracts | |
|
| | | | | |
|
| | 123.7 |
| | | | | | 123.7 |
|
Commingled Funds | | 196.6 |
| | | | 196.6 |
| | | | 321.4 |
| | | | 321.4 |
| | |
Real Estate | | | | | | | | | | | | | | | | |
Real Estate Investment Trusts | | 17.0 |
| | 17.0 |
| | | | | | 1.3 |
| | | | 1.3 |
| | |
Commingled Funds | | 156.7 |
| | | | 156.7 |
| | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
Derivatives(i) | | 35.8 |
| | 33.6 |
| | 2.2 |
| | | | 2.4 |
| | | | 2.4 |
| | |
Commingled Funds | | | | | | | | | | 317.0 |
| | | | 317.0 |
| | |
Pooled Funds | | 143.7 |
| | | | 143.7 |
| | | | 123.6 |
| | | | 123.6 |
| | |
Cumulative futures contracts variation margin received from brokers | | (29.3 | ) | | (29.3 | ) | | | | | | | | | | | | |
Cash | | 3.7 |
| | 3.7 |
| | | | | | 29.6 |
| | 29.6 |
| | | | |
Receivables | | 20.5 |
| | 20.5 |
| | | | | | 2.0 |
| | 2.0 |
| | | | |
Payables | | (1.4 | ) | | (1.4 | ) | | | | | | (2.3 | ) | | (2.3 | ) | | | | |
Total plan assets in fair value hierarchy | | $ | 2,822.9 |
| | $ | 1,451.6 |
| | $ | 1,371.3 |
| | $ | — |
| | $ | 1,229.8 |
| | $ | 29.5 |
| | $ | 1,076.6 |
| | $ | 123.7 |
|
Plan assets measured using NAV as a practical expedient(ii): | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | — |
| | | | | | | | $ | 454.9 |
| | | | | | |
Debt | | — |
| | | | | | | | 814.0 |
| | | | | | |
Other | | 110.2 |
| | | | | | | | 23.9 |
| | | | | | |
Private Real Estate | | 179.1 |
| | | | | | | | 16.8 |
| | | | | | |
Private Equity | | 0.6 |
| | | | | | | | — |
| | | | | | |
Total pension plan assets | | $ | 3,112.8 |
| | | | | | | | $ | 2,539.4 |
| | | | | | |
Other postretirement plans | | | | | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.8 |
| | | | | | $ | 7.8 |
| | | | | | | | |
(i) Level 1 derivatives represent unrealized appreciation or depreciation on open futures contracts. The value of open futures contracts includes derivatives and the cumulative futures contracts variation margin received from brokers.
(ii) Investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2019. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, 2019 | | Realized gains (losses) | | Purchases or acquisitions | | Sales or dispositions | | Currency and unrealized gains (losses) relating to instruments still held at December 31, 2019 | | December 31, 2019 |
U.S. plans | | | | | | | | | | | | |
Other postretirement plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.8 |
| | $ | (0.3 | ) | | $ | — |
| | $ | (0.6 | ) | | $ | — |
| | $ | 6.9 |
|
International pension plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 123.7 |
| | $ | — |
| | $ | 6.4 |
| | $ | (12.0 | ) | | $ | 5.0 |
| | $ | 123.1 |
|
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, 2018 | | Realized gains (losses) | | Purchases or acquisitions | | Sales or dispositions | | Currency and unrealized gains (losses) relating to instruments still held at December 31, 2018 | | December 31, 2018 |
U.S. plans | | | | | | | | | | | | |
Other postretirement plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.6 |
| | $ | (0.4 | ) | | $ | 0.6 |
| | $ | — |
| | $ | — |
| | $ | 7.8 |
|
International pension plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 135.8 |
| | $ | — |
| | $ | 3.5 |
| | $ | (11.7 | ) | | $ | (3.9 | ) | | $ | 123.7 |
|
The following table presents additional information about plan assets valued using the net asset value as a practical expedient within the fair value hierarchy table. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Fair Value | | Unfunded Commit-ments | | Redemption Frequency | | Redemption Notice Period Range | | Fair Value | | Unfunded Commit-ments | | Redemption Frequency | | Redemption Notice Period Range |
U.S. plans | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Debt | | $ | 86.3 |
| | $ | — |
| | Monthly | | 45 days | | $ | — |
| | $ | — |
| |
| |
|
Other | | 127.0 |
| | — |
| | Monthly | | 5 days | | 110.2 |
| | — |
| | Monthly | | 5 days |
Private Real Estate(i) | | 189.0 |
| | 44.4 |
| | Quarterly | | 60-90 days | | 179.1 |
| | — |
| | Quarterly | | 60-90 days |
Private Equity(ii) | | 0.4 |
| | — |
| | | | | | 0.6 |
| | — |
| | | | |
Total | | $ | 402.7 |
| | $ | 44.4 |
| | | | | | $ | 289.9 |
| | $ | — |
| | | | |
International pension plans | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | 406.9 |
| | $ | — |
| | Weekly | | Up to 2 days | | $ | 454.9 |
| | $ | — |
| | Weekly | | Up to 2 days |
Debt | | 941.0 |
| | 117.9 |
| | Daily, Weekly, Biweekly, Bimonthly, Monthly, Quarterly | | Up to 120 days | | 814.0 |
| | — |
| | Daily, Weekly, Biweekly, Bimonthly | | Up to 30 days |
Other | | 24.8 |
| | — |
| | Monthly | | Up to 30 days | | 23.9 |
| | — |
| | Monthly | | Up to 30 days |
Private Real Estate | | 31.4 |
| | — |
| | Monthly | | Up to 90 days | | 16.8 |
| | — |
| | Monthly | | Up to 90 days |
Total | | $ | 1,404.1 |
| | $ | 117.9 |
| | | | | | $ | 1,309.6 |
| | $ | — |
| | | | |
(i) Includes investments in private real estate funds. The funds invest in U.S. real estate and allow redemptions quarterly, though queues, restrictions and gates may extend the period. A redemption has been requested from 1 fund, which has a redemption queue with estimates of full receipt of three to four years.
(ii) Includes investments in limited partnerships, which invest primarily in U.S. buyouts and venture capital. The investments can never be redeemed. The partnerships are all currently being wound up, and are expected to make all distributions over the next three years.
Note 1417 — Litigation 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 matters. 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 flows 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”)(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 €28.0 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 addedvalue-added taxes, customs, duties, sales and other non-income relatednon-income-related tax exposures. The labor-related matters include claims related to compensation. The company believes that appropriate accruals have been established for such matters based on information currently available. At December 31, 2017,2019, 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 $135.0$103 million.
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 alleged 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 State contends overpayments of approximately $68.0$100 million for the period January 20021995 through July 2011 and is seeking data to identify the claims at issue for the remaining time period.2012. 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 December 31, 2017,2019, it has adequate provisions for any such matters.
Note 18 — Stockholders’ equity
The company has 150 million authorized shares of common stock, par value $.01 per share, and 40 million shares of authorized preferred stock, par value $1 per share, issuable in series.
At December 31, 2019, 22.6 million shares of unissued common stock of the company were reserved for stock-based incentive plans and the company’s convertible senior notes.
Accumulated other comprehensive income (loss) as of December 31, 2019, 2018 and 2017, is as follows: |
| | | | | | | | | | | | |
| | Total |
| | Translation Adjustments |
| | Postretirement Plans |
|
Balance at December 31, 2016 | | $ | (4,152.8 | ) | | $ | (927.1 | ) | | $ | (3,225.7 | ) |
Other comprehensive income before reclassifications | | 506.8 |
| | 121.9 |
| | 384.9 |
|
Amounts reclassified from accumulated other comprehensive income | | (169.8 | ) | | (11.8 | ) | | (158.0 | ) |
Current period other comprehensive income | | 337.0 |
| | 110.1 |
| | 226.9 |
|
Balance at December 31, 2017 | | (3,815.8 | ) | | (817.0 | ) | | (2,998.8 | ) |
Reclassification pursuant to ASU No. 2018-02 | | (208.7 | ) | | — |
| | (208.7 | ) |
Other comprehensive income before reclassifications | | 96.7 |
| | (79.7 | ) | | 176.4 |
|
Amounts reclassified from accumulated other comprehensive income | | (157.0 | ) | | — |
| | (157.0 | ) |
Current period other comprehensive income | | (269.0 | ) | | (79.7 | ) | | (189.3 | ) |
Balance at December 31, 2018 | | (4,084.8 | ) | | (896.7 | ) | | (3,188.1 | ) |
Other comprehensive income before reclassifications | | 136.8 |
| | 23.8 |
| | 113.0 |
|
Amounts reclassified from accumulated other comprehensive income | | (140.6 | ) | | — |
| | (140.6 | ) |
Current period other comprehensive income | | (3.8 | ) | | 23.8 |
| | (27.6 | ) |
Balance at December 31, 2019 | | $ | (4,088.6 | ) | | $ | (872.9 | ) | | $ | (3,215.7 | ) |
Amounts reclassified out of accumulated other comprehensive income for the three years ended December 31, 2019 are as follows: |
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Translation Adjustments: | | | | | | |
Adjustment for substantial completion of liquidation of foreign subsidiaries(i) | | $ | — |
| | $ | — |
| | $ | (11.8 | ) |
Postretirement Plans: | | | | | | |
Amortization of prior service cost(ii) | | 5.9 |
| | 7.1 |
| | 5.6 |
|
Amortization of actuarial losses(ii) | | (149.7 | ) | | (165.9 | ) | | (174.1 | ) |
Curtailment gain(ii) | | — |
| | — |
| | 5.4 |
|
Settlement loss(ii) | | (1.1 | ) | | (3.9 | ) | | — |
|
Total before tax | | (144.9 | ) | | (162.7 | ) | | (174.9 | ) |
Income tax benefit | | 4.3 |
| | 5.7 |
| | 5.1 |
|
Total reclassifications for the period | | $ | (140.6 | ) | | $ | (157.0 | ) | | $ | (169.8 | ) |
(i) Reported in other income (expense), net in the consolidated statements of income
(ii) Included in net periodic postretirement cost (see Note 1516)
The following table summarizes the changes in shares of common stock and treasury stock during the three years ended December 31, 2019: |
| | | | | | |
| | Common Stock |
| | Treasury Stock |
|
Balance at December 31, 2016 | | 52.8 |
| | 2.7 |
|
Stock-based compensation | | 0.6 |
| | 0.2 |
|
Balance at December 31, 2017 | | 53.4 |
| | 2.9 |
|
Stock-based compensation | | 0.8 |
| | 0.2 |
|
Balance at December 31, 2018 | | 54.2 |
| | 3.1 |
|
Debt exchange | | 10.6 |
| | — |
|
Stock-based compensation | | 1.1 |
| | 0.4 |
|
Balance at December 31, 2019 | | 65.9 |
| | 3.5 |
|
Note 19 — Segment information
Effective January 1, 2018, the company adopted the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which resulted in an adjustment to Technology revenue and profit of $53.0 million in the first quarter of 2018. The adjustment represents revenue from software license extensions and renewals, which were contracted for in the fourth quarter of 2017 and properly recorded as revenue at that time under the revenue recognition rules then in effect (Topic 605). Topic 606 requires revenue related to software license renewals or extensions to be recorded when the new license term begins, which in the case of the $53.0 million, is January 1, 2018.
The company has two2 business segments: Services and Technology. Revenue classifications within the Services and Technology segment are as follows:
Cloud and infrastructure services. This represents revenue from helping clients apply cloud and as-a-service delivery models to capitalize on business opportunities, make their end users more productive and manage and secure their IT infrastructure and operations more economically.
Application services. This represents revenue from helping clients transform their business processes by developing and managing new leading-edge applications for select industries, offering advanced data analytics and modernizing existing enterprise applications.
Business process outsourcing (“BPO”)(BPO) services. This represents revenue from the management of critical processes and functions for clients in target industries, helping them improve performance and reduce costs.
Technology. This represents revenue from designing and developing software and offering hardware and other related products to help clients improve security, reduce costs improve security and flexibility and improve the efficiency of their data-center environments.
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 software and hardware shipments to customers under Services contracts. The
Services segment, in turn, recognizes customer revenue and marketing profits on such shipments of company software and hardware to customers. The Services segment also includes the sale of software and hardware 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 software and hardware 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 years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $6.3$5.7 million, $0.7$4.2 million and $9.2$6.3 million, respectively. The profit on these transactions is eliminated in Corporate.
The company evaluates business segment performance based on operating income exclusive of pensionpostretirement 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. NoNaN single customer accounts for more than 10% of revenue. Revenue from various agencies of the U.S. Government, which is reported in both business segments, was approximately $726 million, $574 million and $571 million $564 millionin 2019, 2018 and $569 million in 2017, 2016 and 2015, respectively.
Corporate assets are principally cash and cash equivalents, prepaid postretirement assets and deferred income taxes. The expense or income related to corporate assets is allocated to the business segments.
Customer revenue by classes of similar products or services, by segment, is presented below:
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Services | | | | | | |
Cloud & infrastructure services | | $ | 1,567.7 |
| | $ | 1,363.4 |
| | $ | 1,334.3 |
|
Application services | | 750.4 |
| | 772.4 |
| | 791.0 |
|
BPO services | | 234.6 |
| | 250.5 |
| | 202.9 |
|
Total Services | | 2,552.7 |
| | 2,386.3 |
| | 2,328.2 |
|
Technology | | 396.0 |
| | 438.7 |
| | 413.6 |
|
Total customer revenue | | $ | 2,948.7 |
| | $ | 2,825.0 |
| | $ | 2,741.8 |
|
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Services | | | | | | |
Cloud & infrastructure services | | $ | 1,317.0 |
| | $ | 1,352.9 |
| | $ | 1,513.1 |
|
Application services | | 808.3 |
| | 859.0 |
| | 868.9 |
|
BPO services | | 202.9 |
| | 194.4 |
| | 223.6 |
|
Total Services | | 2,328.2 |
| | 2,406.3 |
| | 2,605.6 |
|
Technology | | 413.6 |
| | 414.4 |
| | 409.5 |
|
Total customer revenue | | $ | 2,741.8 |
| | $ | 2,820.7 |
| | $ | 3,015.1 |
|
Presented below is a reconciliation of segment operating income to consolidated income (loss) before income taxes: | | Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
| | 2019 |
| | 2018 |
| | 2017 |
|
Total segment operating income | | $ | 235.4 |
| | $ | 208.4 |
| | $ | 174.9 |
| | $ | 280.4 |
| | $ | 305.4 |
| | $ | 235.4 |
|
Interest expense | | (52.8 | ) | | (27.4 | ) | | (11.9 | ) | | (62.1 | ) | | (64.0 | ) | | (52.8 | ) |
Other income (expense), net | | (23.9 | ) | | 0.3 |
| | 8.2 |
| | (136.4 | ) | | (76.9 | ) | | (116.4 | ) |
Cost reduction charges(a)(i) | | (135.0 | ) | | (82.1 | ) | | (118.5 | ) | | (28.7 | ) | | (19.7 | ) | | (135.0 | ) |
Corporate and eliminations | | (95.8 | ) | | (78.7 | ) | | (111.5 | ) | | (13.5 | ) | | (1.6 | ) | | (3.3 | ) |
Total income (loss) before income taxes | | $ | (72.1 | ) | | $ | 20.5 |
| | $ | (58.8 | ) | | $ | 39.7 |
| | $ | 143.2 |
| | $ | (72.1 | ) |
(a)(i) Year ended December 31, 2017 excludes $11.8 million for net foreign currency losses related to exiting foreign countries which are reported in Otherother income (expense), net in the consolidated statements of income.
Presented below is a reconciliation of total business segment assets to consolidated assets: |
| | | | | | | | | | | | |
As of December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Total segment assets | | $ | 1,450.9 |
| | $ | 1,436.6 |
| | $ | 1,364.5 |
|
Cash and cash equivalents | | 538.8 |
| | 605.0 |
| | 733.9 |
|
Deferred income taxes | | 114.0 |
| | 109.3 |
| | 119.9 |
|
Operating lease right-of-use assets | | 127.1 |
| | — |
| | — |
|
Prepaid postretirement assets | | 136.2 |
| | 147.6 |
| | 148.3 |
|
Other corporate assets | | 137.0 |
| | 159.1 |
| | 175.8 |
|
Total assets | | $ | 2,504.0 |
| | $ | 2,457.6 |
| | $ | 2,542.4 |
|
|
| | | | | | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Total segment assets | | $ | 1,364.5 |
| | $ | 1,339.0 |
| | $ | 1,486.0 |
|
Cash and cash equivalents | | 733.9 |
| | 370.6 |
| | 365.2 |
|
Deferred income taxes | | 119.9 |
| | 146.1 |
| | 127.4 |
|
Prepaid postretirement assets | | 148.3 |
| | 33.3 |
| | 45.1 |
|
Other corporate assets | | 175.8 |
| | 132.6 |
| | 106.3 |
|
Total assets | | $ | 2,542.4 |
| | $ | 2,021.6 |
| | $ | 2,130.0 |
|
A summary of the company’s operations by business segment for 2017, 20162019, 2018 and 20152017 is presented below:
|
| | | | | | | | | | | | | | | | |
| | Total |
| | Corporate |
| | Services |
| | Technology |
|
2019 | | | | | | | | |
Customer revenue | | $ | 2,948.7 |
| | $ | — |
| | $ | 2,552.7 |
| | $ | 396.0 |
|
Intersegment | | — |
| | (15.2 | ) | | — |
| | 15.2 |
|
Total revenue | | $ | 2,948.7 |
| | $ | (15.2 | ) | | $ | 2,552.7 |
| | $ | 411.2 |
|
Operating income (loss) | | $ | 238.2 |
| | $ | (42.2 | ) | | $ | 108.2 |
| | $ | 172.2 |
|
Depreciation and amortization | | 147.4 |
| | — |
| | 91.9 |
| | 55.5 |
|
Total assets | | 2,504.0 |
| | 1,053.1 |
| | 1,037.7 |
| | 413.2 |
|
Capital expenditures | | 159.8 |
| | 7.1 |
| | 74.0 |
| | 78.7 |
|
2018 | | | | | | | | |
Customer revenue | | $ | 2,825.0 |
| | $ | — |
| | $ | 2,386.3 |
| | $ | 438.7 |
|
Intersegment | | — |
| | (24.7 | ) | | — |
| | 24.7 |
|
Total revenue | | $ | 2,825.0 |
| | $ | (24.7 | ) | | $ | 2,386.3 |
| | $ | 463.4 |
|
Operating income (loss) | | $ | 284.1 |
| | $ | (21.3 | ) | | $ | 67.6 |
| | $ | 237.8 |
|
Depreciation and amortization | | 164.1 |
| | — |
| | 97.2 |
| | 66.9 |
|
Total assets | | 2,457.6 |
| | 1,021.0 |
| | 1,013.1 |
| | 423.5 |
|
Capital expenditures | | 189.3 |
| | 8.0 |
| | 92.9 |
| | 88.4 |
|
2017 | | | | | | | | |
Customer revenue | | $ | 2,741.8 |
| | $ | — |
| | $ | 2,328.2 |
| | $ | 413.6 |
|
Intersegment | | — |
| | (25.9 | ) | | — |
| | 25.9 |
|
Total revenue | | $ | 2,741.8 |
| | $ | (25.9 | ) | | $ | 2,328.2 |
| | $ | 439.5 |
|
Operating income (loss) | | $ | 97.1 |
| | $ | (138.3 | ) | | $ | 64.8 |
| | $ | 170.6 |
|
Depreciation and amortization | | 156.5 |
| | — |
| | 84.6 |
| | 71.9 |
|
Total assets | | 2,542.4 |
| | 1,177.9 |
| | 985.9 |
| | 378.6 |
|
Capital expenditures | | 176.5 |
| | 4.3 |
| | 102.7 |
| | 69.5 |
|
|
| | | | | | | | | | | | | | | | |
| | Total |
| | Corporate |
| | Services |
| | Technology |
|
2017 | | | | | | | | |
Customer revenue | | $ | 2,741.8 |
| | $ | — |
| | $ | 2,328.2 |
| | $ | 413.6 |
|
Intersegment | | — |
| | (25.9 | ) | | — |
| | 25.9 |
|
Total revenue | | $ | 2,741.8 |
| | $ | (25.9 | ) | | $ | 2,328.2 |
| | $ | 439.5 |
|
Operating income (loss) | | $ | 4.6 |
| | $ | (230.8 | ) | | $ | 64.8 |
| | $ | 170.6 |
|
Depreciation and amortization | | 156.5 |
| | — |
| | 84.6 |
| | 71.9 |
|
Total assets | | 2,542.4 |
| | 1,177.9 |
| | 985.9 |
| | 378.6 |
|
Capital expenditures | | 176.5 |
| | 4.3 |
| | 102.7 |
| | 69.5 |
|
2016 | | | | | | | | |
Customer revenue | | $ | 2,820.7 |
| | $ | — |
| | $ | 2,406.3 |
| | $ | 414.4 |
|
Intersegment | | — |
| | (22.6 | ) | | — |
| | 22.6 |
|
Total revenue | | $ | 2,820.7 |
| | $ | (22.6 | ) | | $ | 2,406.3 |
| | $ | 437.0 |
|
Operating income (loss) | | $ | 47.6 |
| | $ | (160.8 | ) | | $ | 46.9 |
| | $ | 161.5 |
|
Depreciation and amortization | | 155.6 |
| | — |
| | 81.8 |
| | 73.8 |
|
Total assets | | 2,021.6 |
| | 682.6 |
| | 963.3 |
| | 375.7 |
|
Capital expenditures | | 147.1 |
| | 3.0 |
| | 74.8 |
| | 69.3 |
|
2015 | | | | | | | | |
Customer revenue | | $ | 3,015.1 |
| | $ | — |
| | $ | 2,605.6 |
| | $ | 409.5 |
|
Intersegment | | — |
| | (49.0 | ) | | 0.1 |
| | 48.9 |
|
Total revenue | | $ | 3,015.1 |
| | $ | (49.0 | ) | | $ | 2,605.7 |
| | $ | 458.4 |
|
Operating income (loss) | | $ | (55.1 | ) | | $ | (230.0 | ) | | $ | 61.2 |
| | $ | 113.7 |
|
Depreciation and amortization | | 180.1 |
| | — |
| | 104.8 |
| | 75.3 |
|
Total assets | | 2,130.0 |
| | 644.0 |
| | 1,081.7 |
| | 404.3 |
|
Capital expenditures | | 213.7 |
| | 1.9 |
| | 143.3 |
| | 68.5 |
|
Geographic information about the company’s revenue, which is principally based on location of the selling organization, properties and outsourcing assets, is presented below:
|
| | | | | | | | | | | | |
Year ended December 31, | | 2019 |
| | 2018 |
| | 2017 |
|
Revenue | | | | | | |
United States | | $ | 1,549.9 |
| | $ | 1,240.0 |
| | $ | 1,257.0 |
|
United Kingdom | | 334.3 |
| | 360.7 |
| | 315.8 |
|
Other foreign | | 1,064.5 |
| | 1,224.3 |
| | 1,169.0 |
|
Total Revenue | | $ | 2,948.7 |
| | $ | 2,825.0 |
| | $ | 2,741.8 |
|
Properties, net | | | | | | |
United States | | $ | 90.7 |
| | $ | 85.3 |
| | $ | 85.8 |
|
United Kingdom | | 10.5 |
| | 5.3 |
| | 16.7 |
|
Other foreign | | 23.2 |
| | 30.7 |
| | 40.0 |
|
Total Properties, net | | $ | 124.4 |
| | $ | 121.3 |
| | $ | 142.5 |
|
Outsourcing assets, net | | | | | | |
United States | | $ | 99.9 |
| | $ | 97.6 |
| | $ | 81.1 |
|
United Kingdom | | 71.7 |
| | 86.5 |
| | 89.9 |
|
Australia | | 21.5 |
| | 21.7 |
| | 18.1 |
|
Other foreign | | 9.4 |
| | 10.6 |
| | 13.2 |
|
Total Outsourcing assets, net | | $ | 202.5 |
| | $ | 216.4 |
| | $ | 202.3 |
|
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Revenue | | | | | | |
United States | | $ | 1,257.0 |
| | $ | 1,309.3 |
| | $ | 1,454.9 |
|
United Kingdom | | 315.8 |
| | 348.0 |
| | 375.8 |
|
Other foreign | | 1,169.0 |
| | 1,163.4 |
| | 1,184.4 |
|
Total Revenue | | $ | 2,741.8 |
| | $ | 2,820.7 |
| | $ | 3,015.1 |
|
Properties, net | | | | | | |
United States | | $ | 85.8 |
| | $ | 91.4 |
| | $ | 96.9 |
|
United Kingdom | | 16.7 |
| | 15.1 |
| | 18.8 |
|
Other foreign | | 40.0 |
| | 38.8 |
| | 38.1 |
|
Total Properties, net | | $ | 142.5 |
| | $ | 145.3 |
| | $ | 153.8 |
|
Outsourcing assets, net | | | | | | |
United States | | $ | 81.1 |
| | $ | 105.1 |
| | $ | 119.4 |
|
United Kingdom | | 89.9 |
| | 39.0 |
| | 36.6 |
|
Other foreign | | 31.3 |
| | 28.4 |
| | 26.0 |
|
Total Outsourcing assets, net | | $ | 202.3 |
| | $ | 172.5 |
| | $ | 182.0 |
|
Note 20 — Remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes (1) contracts with an original expected length of one year or less and (2) contracts for which the company recognizes revenue at the amount to which it has the right to invoice for services performed. At December 31, 2019, the company had approximately $1.0 billion of remaining performance obligations of which approximately 44% is estimated to be recognized as revenue by the end of 2020.
Note 1621 — Employee plansSubsequent event
Stock plans Under stockholder approved stock-based plans, stock options, stock appreciation rights, restricted stockOn February 5, 2020, the company entered into an asset purchase agreement to sell its U.S. Federal business to Science Applications International Corporation for a cash purchase price of $1.2 billion, subject to a net working capital adjustment. The U.S. Federal business provides certain products and restricted stock units may be grantedservices to officers, directorsU.S. federal government customers. The sale is expected to close in the first half of 2020 and is subject to receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as well as the satisfaction or waiver of other key employees. At December 31, 2017, 3.2 million shares of unissued common stockcustomary closing conditions. The U.S. Federal business, which has operations in both of the company were available for granting under these plans.company’s reporting segments of Services and Technology, generated 2019 revenue and pre-tax income of approximately $725 million and $100 million, respectively. The U.S. Federal business will be reported as discontinued operations in 2020.
As of December 31, 2017,When the sale is complete, the company has granted non-qualified stock options and restricted stock units under these plans. The company recognizes compensation cost netexpects to report an after-tax gain on the sale of a forfeiture rate in selling, general and administrative expenses, and recognizesapproximately $1 billion. Due to the compensation cost for only those awardscompany’s U.S. tax position, no federal income tax is expected to vest. The company estimatesbe payable on the forfeiture rate based on its historical experiencesale and, its expectations about future forfeitures.
The company’s employee stock option grants include a provision that, if termination of employment occurs after the participant has attained age 55 and completed 5 years of service with the company, the participant shall continue to vest in each of his or her awards in accordance with the vesting schedule set forth in the applicable award agreement. Compensation expense for such awards is recognized over the periodsubject to the datefinal purchase price allocation to the employee first becomes eligible for retirement. Time-based restricted stock unit grants for the company’s directors vest upon award and compensation expense for such awards is recognized upon grant.
Options have been granted to purchase the company’s common stock at an exercise price equal to or greater than the fair market value at the date of grant, generally have a maximum duration of seven years for options issued in 2015 and later and five years for options issued before 2015, and become exercisable in annual installments over a three-year period following date of grant.
During the years ended December 31, 2017, 2016 and 2015, the company recognized $11.2 million, $9.5 million and $9.4 million of share-based compensation expense, which is comprised of $10.1 million, $7.5 million and $4.7 million of restricted stock unit expense and $1.1 million, $2.0 million and $4.7 million of stock option expense, respectively.
For stock options, the fair value is estimated at the date of grant using a Black-Scholes option pricing model. Principal assumptions used are as follows: (a) expected volatility for the company’s stock price is based on historical volatility and implied market volatility, (b) historical exercise data is used to estimate the options’ expected term, which represents the period of time that the options grantedassets sold, state income taxes are expected to be outstanding, and (c) the risk-free interest rate is the rate on zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.minimal. The company recognizes compensation expense forprimarily intends to use the fair value of stock options, which have graded vesting, on a straight-line basis over the requisite service period of the awards. The compensation expense recognized as of any date must be at least equal to the portion of the grant-date fair value that is vested at that date.
There were no grants of stock option awards for the year ended December 31, 2017.
The fair value of stock option awards granted in 2016 and 2015 was estimated using the Black-Scholes option pricing model with the following assumptions and weighted-average fair values as follows:
|
| | | | | | | | |
Year Ended December 31, | | 2016 |
| | 2015 |
|
Weighted-average fair value of grant | | $ | 4.53 |
| | $ | 8.92 |
|
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 | | — |
| | — |
|
A summary of stock option activity for the year ended December 31, 2017 follows (shares in thousands):
|
| | | | | | | | | | | | | |
| | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($ in millions) |
Outstanding at December 31, 2016 | | 2,099 |
| | $ | 25.41 |
| | | | |
Granted | | — |
| | — |
| | | | |
Exercised | | (1 | ) | | 10.65 |
| | | | |
Forfeited and expired | | (340 | ) | | 20.59 |
| | | | |
Outstanding at December 31, 2017 | | 1,758 |
| | 26.35 |
| | 1.56 | | $ | — |
|
Expected to vest at December 31, 2017 | | 198 |
| | 23.20 |
| | 3.42 | | $ | — |
|
Exercisable at December 31, 2017 | | 1,558 |
| | 26.76 |
| | 1.33 | | $ | — |
|
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 December 31, 2017. 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 year ended December 31, 2017 was immaterial, and for the years ended December 31, 2016 and 2015 was zero and $0.6 million, respectively. As of December 31, 2017, $0.1 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 0.5 years.
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 installmentnet proceeds from the date of grant until the date the restrictions lapsesale to redeem its senior secured notes due 2022 and is based on the fair market value at the date of grant and the probability of achievement of the specific performance-related goals.
A summary of restricted stock unit activity for the year ended December 31, 2017 follows (shares in thousands):
|
| | | | | | | |
| | Restricted Stock Units | | Weighted-Average Grant-Date Fair Value |
Outstanding at December 31, 2016 | | 1,454 |
| | $ | 12.68 |
|
Granted | | 1,042 |
| | 13.85 |
|
Vested | | (555 | ) | | 13.31 |
|
Forfeited and expired | | (253 | ) | | 11.88 |
|
Outstanding at December 31, 2017 | | 1,688 |
| | 13.39 |
|
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 years ended December 31, 2017, 2016 and 2015 was $14.4 million, $12.9 million and $10.2 million, respectively. As of December 31, 2017, there was $9.8 million of total unrecognized compensation cost related to outstanding restricted stock units grantedreduce its obligations under the company’s plans. That cost is expected to be recognized over a weighted-average period of 1.9 years. The aggregate
weighted-average grant-date fair value of restricted stock units vested during the years ended December 31, 2017, 2016 and 2015 was $7.4 million, $3.5 million and $2.1 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 year ended December 31, 2017 was immaterial, and for the year ended December 31, 2016 was zero. During 2017 and 2016, the company did not recognize any tax benefits from the exercise of stock options or upon issuance of stock upon lapse of restrictions on restricted stock units because of its tax position. Any such tax benefits resulting from tax deductions in excess of the compensation costs recognized are classified as operating cash flows.
Defined contribution and compensation plansU.S. employees are eligible to participate in an employee savings plan. Under this plan, employees may contribute a percentage of their pay for investment in various investment alternatives. The company matches 50 percent of the first 6 percent of eligible pay contributed by participants to the plan on a before-tax basis (subject to IRS limits). The company funds the match with cash. The charge to income related to the company match for the years ended December 31, 2017, 2016 and 2015, was $10.8 million, $10.7 million and $9.9 million, respectively.
The company has defined contribution plans in certain locations outside the United States. The charge to income related to these plans was $18.5 million, $19.0 million and $21.4 million, for the years ended December 31, 2017, 2016 and 2015, respectively.
The company has non-qualified compensation plans, which allow certain highly compensated employees and directors to defer the receipt of a portion of their salary, bonus and fees. Participants can earn a return on their deferred balance that is based on hypothetical investments in various investment vehicles. Changes in the market value of these investments are reflected as an adjustment to the liability with an offset to expense. As of December 31, 2017 and 2016, the liability to the participants of these plans was $13.4 million and $12.3 million, respectively. These amounts reflect the accumulated participant deferrals and earnings thereon as of that date. The company makes no contributions to the deferred compensation plans and remains contingently liable to the participants.
Retirement benefits For the company’s more significant defined benefit pension plans, includingplans.
In connection with the entry into the asset purchase agreement to sell the U.S., U.K. and the Netherlands, accrual of future benefits under the plans has ceased.
The company adopted changes to a foreign defined benefit pension plan, which ended the accrual of future benefits, effective June 30, 2017. A curtailment gain of $5.4 million was recorded in 2017.
In December 2016, Federal business, the company completedalso adopted a lump-sum offer for eligible former associates who had a deferred vested benefit underTax Asset Protection Plan designed to protect the company’s U.S. pensiontax assets in contemplation of the sale transaction. This plan is similar to receive the value of their entire pensiontax benefit in a lump-sum payment. As a result, the pension plan trust made lump sum paymentsprotection plans adopted by other public companies with significant tax attributes and is designed to approximately 5,800 former associates of $215.9 million. In accordance with accounting guidance on settlements of a pension benefit obligation, no settlement charges were recorded as a result of this action.
Retirement plans’ funded status and amounts recognized inprotect the company’s consolidated balance sheets at December 31, 2017 and 2016 follows:
|
| | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, | | 2017 | | 2016 | | 2017 | | 2016 |
Change in projected benefit obligation | | | | | | | | |
Benefit obligation at beginning of year | | $ | 4,972.0 |
| | $ | 5,231.4 |
| | $ | 3,076.2 |
| | $ | 2,987.8 |
|
Service cost | | — |
| | — |
| | 5.1 |
| | 7.4 |
|
Interest cost | | 211.3 |
| | 231.3 |
| | 72.8 |
| | 87.8 |
|
Plan participants’ contributions | | — |
| | — |
| | 1.9 |
| | 2.3 |
|
Plan amendment | | — |
| | — |
| | (52.5 | ) | | — |
|
Plan curtailment | | — |
| | — |
| | (2.2 | ) | | (3.7 | ) |
Actuarial loss (gain) | | 177.0 |
| | 87.2 |
| | (93.8 | ) | | 502.2 |
|
Benefits paid | | (358.7 | ) | | (577.9 | ) | | (117.1 | ) | | (110.0 | ) |
Foreign currency translation adjustments | | — |
| | — |
| | 299.3 |
| | (397.6 | ) |
Benefit obligation at end of year | | $ | 5,001.6 |
| | $ | 4,972.0 |
| | $ | 3,189.7 |
| | $ | 3,076.2 |
|
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 3,452.1 |
| | $ | 3,759.4 |
| | $ | 2,429.7 |
| | $ | 2,496.8 |
|
Actual return on plan assets | | 424.0 |
| | 211.8 |
| | 172.3 |
| | 287.7 |
|
Employer contribution | | 61.0 |
| | 58.8 |
| | 77.4 |
| | 73.7 |
|
Plan participants’ contributions | | — |
| | — |
| | 1.9 |
| | 2.3 |
|
Benefits paid | | (358.7 | ) | | (577.9 | ) | | (117.1 | ) | | (110.0 | ) |
Foreign currency translation and other adjustments | | — |
| | — |
| | 269.7 |
| | (320.8 | ) |
Fair value of plan assets at end of year | | $ | 3,578.4 |
| | $ | 3,452.1 |
| | $ | 2,833.9 |
| | $ | 2,429.7 |
|
Funded status at end of year | | $ | (1,423.2 | ) | | $ | (1,519.9 | ) | | $ | (355.8 | ) | | $ | (646.5 | ) |
Amounts recognized in the consolidated balance sheets consist of: | | | | | | | | |
Prepaid postretirement assets | | $ | — |
| | $ | — |
| | $ | 147.4 |
| | $ | 31.9 |
|
Other accrued liabilities | | (6.8 | ) | | (6.7 | ) | | (0.2 | ) | | (0.2 | ) |
Long-term postretirement liabilities | | (1,416.4 | ) | | (1,513.2 | ) | | (503.0 | ) | | (678.2 | ) |
Total funded status | | $ | (1,423.2 | ) | | $ | (1,519.9 | ) | | $ | (355.8 | ) | | $ | (646.5 | ) |
Accumulated other comprehensive loss, net of tax | | | | | | | | |
Net loss | | $ | 2,690.6 |
| | $ | 2,828.8 |
| | $ | 1,067.8 |
| | $ | 1,144.7 |
|
Prior service credit | | $ | (39.8 | ) | | $ | (42.4 | ) | | $ | (69.8 | ) | | $ | (27.7 | ) |
Accumulated benefit obligation | | $ | 5,001.6 |
| | $ | 4,972.0 |
| | $ | 3,188.0 |
| | $ | 3,072.1 |
|
Information for defined benefit retirement plans withvaluable tax assets by reducing the likelihood of an accumulated benefit obligation in excess“ownership change” through actions involving the company’s securities. See “Risk Factors--Risks Related to the Announced Sale of plan assets at December 31, 2017 and 2016 follows:
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Accumulated benefit obligation | | $ | 7,151.7 |
| | $ | 7,551.8 |
|
Fair value of plan assets | | 5,227.0 |
| | 5,357.2 |
|
Information for defined benefit retirement plans with a projected benefit obligation in excess of plan assets at December 31, 2017 and 2016 follows:
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Projected benefit obligation | | $ | 7,153.4 |
| | $ | 7,555.2 |
|
Fair value of plan assets | | 5,227.0 |
| | 5,357.2 |
|
Net periodic pension cost (income) for 2017, 2016 and 2015 includes the following components:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
Service cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5.1 |
| | $ | 7.4 |
| | $ | 8.7 |
|
Interest cost | | 211.3 |
| | 231.3 |
| | 224.1 |
| | 72.8 |
| | 87.8 |
| | 94.1 |
|
Expected return on plan assets | | (235.2 | ) | | (253.1 | ) | | (254.8 | ) | | (127.5 | ) | | (139.5 | ) | | (155.4 | ) |
Amortization of prior service credit | | (2.5 | ) | | (2.5 | ) | | (2.4 | ) | | (2.4 | ) | | (3.0 | ) | | (1.9 | ) |
Recognized net actuarial loss | | 126.4 |
| | 116.0 |
| | 132.7 |
| | 49.8 |
| | 40.3 |
| | 63.6 |
|
Curtailment gain | | — |
| | — |
| | — |
| | (5.4 | ) | | (2.0 | ) | | — |
|
Net periodic pension cost (income) | | $ | 100.0 |
| | $ | 91.7 |
| | $ | 99.6 |
| | $ | (7.6 | ) | | $ | (9.0 | ) | | $ | 9.1 |
|
Weighted-average assumptions usedCompany’s U.S. Federal Business--An ‘ownership change’ could limit the company’s ability to determineutilize net periodic pension cost for the years ended December 31 were as follows: |
| | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
Discount rate | | 4.38 | % | | 4.56 | % | | 4.09 | % | | 2.34 | % | | 3.30 | % | | 3.05 | % |
Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | 1.66 | % | | 1.66 | % | | 1.68 | % |
Expected long-term rate of return on assets | | 6.80 | % | | 6.80 | % | | 6.80 | % | | 5.30 | % | | 5.99 | % | | 6.45 | % |
| | | | | | | | | | | | |
Weighted-average assumptions used to determine benefit obligations at December 31 were as follows: |
Discount rate | | 3.87 | % | | 4.38 | % | | 4.56 | % | | 2.24 | % | | 2.34 | % | | 3.30 | % |
Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | 1.55 | % | | 1.66 | % | | 1.68 | % |
The expected pretax amortization in 2018 of net periodic pension cost is as follows: net loss, $167.6 million; and prior service credit, $(6.3) million. The amortization of these items is recorded as an element of pension expense. In 2017, pension expense included amortization of $176.2 million of netoperating losses and $(4.9) million of prior service credit.
The company’s investment policy targets and ranges for each asset category are as follows: |
| | | | | | | | | | | |
| | U.S. | | International |
Asset Category | | Target |
| | Range |
| | Target |
| | Range |
Equity securities | | 58 | % | | 52-64% |
| | 24 | % | | 18-30% |
Debt securities | | 36 | % | | 33-39% |
| | 60 | % | | 53-66% |
Real estate | | 6 | % | | 3-9% |
| | 1 | % | | 0-3% |
Cash | | — | % | | 0-5% |
| | 1 | % | | 0-5% |
Other | | — | % | | — | % | | 14 | % | | 7-21% |
The company periodically reviews its asset allocation, taking into consideration plan liabilities, local regulatory requirements, plan payment streams and then-current capital market assumptions. The actual asset allocation for each plan is monitored at least quarterly, relativecertain other tax attributes to offset the established policy targets and ranges. Ifgain from the actual asset allocation is close to or out of anypending sale of the ranges, a review is conducted. Rebalancing will occur toward the target allocation, with due consideration given to the liquidity of the investments and transaction costs.U.S. Federal business” for more information.
The objectives of the company’s investment strategies are as follows: (a) to provide a total return that, over the long term, increases the ratio of plan assets to liabilities by maximizing investment return on assets, at a level of risk deemed appropriate, (b) to maximize return on assets by investing primarily in equity securities in the U.S. and for international plans by investing in appropriate asset classes, subject to the constraints of each plan design and local regulations, (c) to diversify investments within asset classes to reduce the impact of losses in single investments, and (d) for the U.S. plan to invest in compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended and any subsequent applicable regulations and laws, and for international plans to invest in a prudent manner in compliance with local applicable regulations and laws.
The company sets the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. The company considered the current expectations for future returns and the actual historical returns of each asset class. Also, since the company’s investment policy is to actively manage certain asset classes where the potential exists to
outperform the broader market, the expected returns for those asset classes were adjusted to reflect the expected additional returns.
In 2018, the company expects to make cash contributions of $149.7 million to its worldwide defined benefit pension plans, which are comprised of $63.4 million primarily for international defined benefit pension plans and $86.3 million for the company’s U.S. qualified defined benefit pension plan.
As of December 31, 2017, the following benefit payments, which reflect expected future service where applicable, are expected to be paid from the defined benefit pension plans: |
| | | | | | | | |
Year ending December 31, | | U.S. |
| | International |
|
2018 | | $ | 364.4 |
| | $ | 98.7 |
|
2019 | | 361.4 |
| | 102.8 |
|
2020 | | 359.3 |
| | 106.9 |
|
2021 | | 357.6 |
| | 110.3 |
|
2022 | | 355.1 |
| | 117.5 |
|
2023 - 2027 | | 1,693.6 |
| | 642.5 |
|
Other postretirement benefits A reconciliation of the benefit obligation, fair value of the plan assets and the funded status of the postretirement benefit plan at December 31, 2017 and 2016, follows:
|
| | | | | | | | |
As of December 31, | | 2017 |
| | 2016 |
|
Change in accumulated benefit obligation | | | | |
Benefit obligation at beginning of year | | $ | 120.1 |
| | $ | 131.5 |
|
Service cost | | 0.5 |
| | 0.4 |
|
Interest cost | | 5.6 |
| | 6.2 |
|
Plan participants’ contributions | | 3.5 |
| | 3.8 |
|
Amendments | | (7.4 | ) | | (3.3 | ) |
Actuarial gain | | (4.3 | ) | | (1.4 | ) |
Federal drug subsidy | | 0.3 |
| | 1.4 |
|
Benefits paid | | (15.7 | ) | | (16.9 | ) |
Foreign currency translation and other adjustments | | 0.6 |
| | (1.6 | ) |
Benefit obligation at end of year | | $ | 103.2 |
| | $ | 120.1 |
|
Change in plan assets | | | | |
Fair value of plan assets at beginning of year | | $ | 7.9 |
| | $ | 7.7 |
|
Actual return on plan assets | | (0.3 | ) | | (0.3 | ) |
Employer contributions | | 12.2 |
| | 13.6 |
|
Plan participants’ contributions | | 3.5 |
| | 3.8 |
|
Benefits paid | | (15.7 | ) | | (16.9 | ) |
Fair value of plan assets at end of year | | $ | 7.6 |
| | $ | 7.9 |
|
Funded status at end of year | | $ | (95.6 | ) | | $ | (112.2 | ) |
Amounts recognized in the consolidated balance sheets consist of: | | | | |
Prepaid postretirement assets | | $ | 0.9 |
| | $ | 1.4 |
|
Other accrued liabilities | | (11.5 | ) | | (12.4 | ) |
Long-term postretirement liabilities | | (85.0 | ) | | (101.2 | ) |
Total funded status | | $ | (95.6 | ) | | $ | (112.2 | ) |
Accumulated other comprehensive loss, net of tax | | | | |
Net loss | | $ | 14.9 |
| | $ | 19.0 |
|
Prior service credit | | (9.8 | ) | | (3.2 | ) |
Net periodic postretirement benefit cost for 2017, 2016 and 2015, follows:
|
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Service cost | | $ | 0.5 |
| | $ | 0.4 |
| | $ | 0.6 |
|
Interest cost | | 5.6 |
| | 6.2 |
| | 6.9 |
|
Expected return on assets | | (0.5 | ) | | (0.4 | ) | | (0.4 | ) |
Amortization of prior service cost | | (0.7 | ) | | — |
| | 1.1 |
|
Recognized net actuarial loss | | 0.8 |
| | 0.5 |
| | 1.8 |
|
Net periodic benefit cost | | $ | 5.7 |
| | $ | 6.7 |
| | $ | 10.0 |
|
Weighted-average assumptions used to determine net periodic postretirement benefit cost for the years ended December 31 were as follows: |
| | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Discount rate | | 5.53 | % | | 5.61 | % | | 5.27 | % |
Expected return on plan assets | | 5.50 | % | | 5.50 | % | | 5.50 | % |
Weighted-average assumptions used to determine benefit obligation at December 31 were as follows:
|
| | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Discount rate | | 5.30 | % | | 5.53 | % | | 5.61 | % |
The expected pretax amortization in 2018 of net periodic postretirement benefit cost is as follows: net loss, $1.2 million; and prior service cost, $(1.6) million.
The company reviews its asset allocation periodically, taking into consideration plan liabilities, plan payment streams and then-current capital market assumptions. The company sets the long-term expected return on asset assumption, based principally on the long-term expected return on debt securities. These return assumptions are based on a combination of current market conditions, capital market expectations of third-party investment advisors and actual historical returns of the asset classes. In 2018, the company expects to contribute approximately $12 million to its postretirement benefit plan. |
| | | | | | |
Assumed health care cost trend rates at December 31, | | 2017 |
| | 2016 |
|
Health care cost trend rate assumed for next year | | 6.6 | % | | 5.8 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | 4.8 | % | | 4.8 | % |
Year that the rate reaches the ultimate trend rate | | 2023 |
| | 2023 |
|
A one-percentage-point change in assumed health care cost trend rates would have the following effects: |
| | | | | | | | |
| | 1-Percentage- Point Increase |
| | 1-Percentage- Point Decrease |
|
Effect on service and interest cost | | $ | 0.1 |
| | $ | (0.1 | ) |
Effect on postretirement benefit obligation | | 2.0 |
| | (1.7 | ) |
As of December 31, 2017, the following benefits are expected to be paid to or from the company’s postretirement plan: |
| | | | | | | | |
Year ending December 31, | | Gross Medicare Part D Receipts |
| | Gross Expected Payments |
|
2018 | | $ | 0.1 |
| | $ | 12.7 |
|
2019 | | — |
| | 10.5 |
|
2020 | | — |
| | 10.0 |
|
2021 | | — |
| | 9.4 |
|
2022 | | — |
| | 8.8 |
|
2023 – 2027 | | — |
| | 34.4 |
|
The following provides a description of the valuation methodologies and the levels of inputs used to measure fair value, and the general classification of investments in the company’s U.S. and international defined benefit pension plans, and the company’s other postretirement benefit plan.
Level 1 – These investments include cash, common stocks, real estate investment trusts, exchange traded funds, futures and options and U.S. government securities. These investments are valued using quoted prices in an active market. Payables and receivables are also included as Level 1 investments and are valued at face value.
Level 2 – These investments include the following:
Pooled Funds – These investments are comprised of money market funds and fixed income securities. The money market funds are valued using the readily determinable fair value (“RDFV”) provided by trustees of the funds. The fixed income securities are valued based on quoted prices for identical or similar investments in markets that may not be active.
Commingled Funds – These investments are comprised of debt, equity and other securities and are valued using the RDFV provided by trustees of the funds. The fair value per share for these funds are published and are the basis for current transactions.
Other Fixed Income – These investments are comprised of corporate and government fixed income investments and asset and mortgage backed securities for which there are quoted prices for identical or similar investments in markets that may not be active.
Derivatives – These investments include forward exchange contracts and options, which are traded on an active market, but not on an exchange; therefore, the inputs may not be readily observable. These investments also include fixed income futures and other derivative instruments.
Level 3 – These investments include the following:
Insurance Contracts – These investments are insurance contracts which are carried at book value, are not publicly traded and are reported at a fair value determined by the insurance provider.
Certain investments are valued using net asset value (“NAV”) as a practical expedient. These investments may not be redeemable on a daily basis and may have redemption notice periods of up to 90 days. These investments include the following:
Commingled Funds – These investments are comprised of debt, equity and other securities.
Private Real Estate and Private Equity - These investments represent interests in limited partnerships which invest in privately held companies or privately held real estate or other real assets. Net asset values are developed and reported by the general partners that manage the partnerships. These valuations are based on property appraisals, utilization of market transactions that provide valuation information for comparable companies, discounted cash flows, and other methods. These valuations are reported quarterly and adjusted as necessary at year end based on cash flows within the most recent period.
The following table sets forth by level, within the fair value hierarchy, the plans’ assets (liabilities) at fair value at December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, 2017 | | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Pension plans | | | | | | | | | | | | | | | | |
Equity Securities | | | | | | | | | | | | | | | | |
Common Stocks | | $ | 1,465.1 |
| | $ | 1,461.9 |
| | $ | 3.2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Commingled Funds | | 584.4 |
| | | | 584.4 |
| | | | 84.0 |
| | | | 84.0 |
| | |
Debt Securities | | | | | | | | | | | | | | | | |
U.S. Govt. Securities | | 139.8 |
| | 139.8 |
| | | | | | | | | | | | |
Other Fixed Income | | 830.6 |
| | | | 830.6 |
| | | | 254.1 |
| | 2.6 |
| | 251.5 |
| | |
Insurance Contracts | | | | | | | | | | 135.8 |
| | | | | | 135.8 |
|
Commingled Funds | | | | | | |
| | | 267.5 |
| | | | 267.5 |
| | |
Real Estate | | | | | | | | | | | | | | | | |
Real Estate Investment Trusts | | 113.5 |
| | 113.5 |
| | | | | | 1.4 |
| | 0.4 |
| | 1.0 |
| | |
Other | | | | | | | | | | | | | | | | |
Derivatives | | 2.6 |
| | 13.1 |
| | (10.5 | ) | | | | 1.2 |
| | | | 1.2 |
| | |
Commingled Funds | | | | | | | | | | 357.1 |
| | | | 357.1 |
| | |
Pooled Funds | | 228.0 |
| | | | 228.0 |
| | | | 29.2 |
| | | | 29.2 |
| | |
Cash | | 34.8 |
| | 34.8 |
| | | | | | 25.1 |
| | 25.1 |
| | | | |
Receivables | | 58.1 |
| | 58.1 |
| | | | | | 19.9 |
| | 19.9 |
| | | | |
Payables | | (116.7 | ) | | (116.7 | ) | | | | | | (1.5 | ) | | (1.5 | ) | | | | |
Total plan assets in fair value hierarchy | | $ | 3,340.2 |
| | $ | 1,704.5 |
| | $ | 1,635.7 |
| | $ | — |
| | $ | 1,173.8 |
| | $ | 46.5 |
| | $ | 991.5 |
| | $ | 135.8 |
|
Plan assets measured using NAV as a practical expedient(a): | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | — |
| | | | | | | | $ | 780.7 |
| | | | | | |
Debt | | 19.8 |
| | | | | | | | 837.7 |
| | | | | | |
Other | | 105.1 |
| | | | | | | | 25.2 |
| | | | | | |
Private Real Estate | | 112.4 |
| | | | | | | | 16.5 |
| | | | | | |
Private Equity | | 0.9 |
| | | | | | | | — |
| | | | | | |
Total pension plan assets | | $ | 3,578.4 |
| | | | | | | | $ | 2,833.9 |
| | | | | | |
Other postretirement plans | | | | | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.6 |
| | | | | | $ | 7.6 |
| | | | | | | | |
(a) Investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
The following table sets forth by level, within the fair value hierarchy, the plans’ assets (liabilities) at fair value at December 31, 2016. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
As of December 31, 2016 | | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | Fair Value |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Pension plans | | | | | | | | | | | | | | | | |
Equity Securities | | | | | | | | | | | | | | | | |
Common Stocks | | $ | 1,443.1 |
| | $ | 1,438.3 |
| | $ | 4.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Commingled Funds | | 517.9 |
| | | | 517.9 |
| | | | 76.0 |
| | | | 76.0 |
| | |
Debt Securities | | | | | | | | | | | | | | | | |
U.S. Govt. Securities | | 158.5 |
| | 158.5 |
| | | | | | | | | | | | |
Other Fixed Income | | 812.4 |
| | | | 812.4 |
| | | | 241.4 |
| | 0.5 |
| | 240.9 |
| | |
Insurance Contracts | |
|
| | | | | |
|
| | 116.2 |
| | | | | | 116.2 |
|
Commingled Funds | | | | | | | | | | 242.8 |
| | | | 242.8 |
| | |
Real Estate | | | | | | | | | | | | | | | | |
Real Estate Investment Trusts | | 156.2 |
| | 156.2 |
| | | | | | 1.6 |
| | 1.2 |
| | 0.4 |
| | |
Other | | | | | | | | | | | | | | | | |
Derivatives | | 3.1 |
| | (1.1 | ) | | 4.2 |
| | | | 4.9 |
| | | | 4.9 |
| | |
Commingled Funds | | | | | | | | | | 294.5 |
| | | | 294.5 |
| | |
Pooled Funds | | 272.0 |
| | | | 272.0 |
| | | | 6.7 |
| | | | 6.7 |
| | |
Cash | | 12.2 |
| | 12.2 |
| | | | | | 11.4 |
| | 11.4 |
| | | | |
Receivables | | 107.2 |
| | 107.2 |
| | | | | | | | | | | | |
Payables | | (195.3 | ) | | (195.3 | ) | | | | | | |
| | |
| | | | |
Total plan assets in fair value hierarchy | | $ | 3,287.3 |
| | $ | 1,676.0 |
| | $ | 1,611.3 |
| | $ | — |
| | $ | 995.5 |
| | $ | 13.1 |
| | $ | 866.2 |
| | $ | 116.2 |
|
Plan assets measured using NAV as a practical expedient(a): | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | — |
| | | | | | | | $ | 726.7 |
| | | | | | |
Debt | | 18.6 |
| | | | | | | | 640.0 |
| | | | | | |
Other | | 104.6 |
| | | | | | | | 25.8 |
| | | | | | |
Private Real Estate | | 40.5 |
| | | | | | | | 41.7 |
| | | | | | |
Private Equity | | 1.1 |
| | | | | | | | — |
| | | | | | |
Total pension plan assets | | $ | 3,452.1 |
| | | | | | | | $ | 2,429.7 |
| | | | | | |
Other postretirement plans | | | | | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.9 |
| | | | | | $ | 7.9 |
| | | | | | | | |
(a) Investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to permit reconciliation of the fair value hierarchy to the total plan assets.
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, 2017 | | Realized gains (losses) | | Purchases or acquisitions | | Sales or dispositions | | Currency and unrealized gains (losses) relating to instruments still held at December 31, 2017 | | December 31, 2017 |
U.S. plans | | | | | | | | | | | | |
Other postretirement plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.9 |
| | $ | (0.2 | ) | | $ | 0.2 |
| | $ | (0.3 | ) | | $ | — |
| | $ | 7.6 |
|
International pension plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 116.2 |
| | $ | — |
| | $ | 10.8 |
| | $ | (11.4 | ) | | $ | 20.2 |
| | $ | 135.8 |
|
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2016. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, 2016 | | Realized gains (losses) | | Purchases or acquisitions | | Sales or dispositions | | Currency and unrealized gains (losses) relating to instruments still held at December 31, 2016 | | December 31, 2016 |
U.S. plans | | | | | | | | | | | | |
Other postretirement plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 7.7 |
| | $ | (0.3 | ) | | $ | 0.5 |
| | $ | — |
| | $ | — |
| | $ | 7.9 |
|
International pension plans | | | | | | | | | | | | |
Insurance Contracts | | $ | 120.6 |
| | $ | — |
| | $ | 4.7 |
| | $ | (11.0 | ) | | $ | 1.9 |
| | $ | 116.2 |
|
The following table presents additional information about plan assets valued using the net asset value as a practical expedient within the fair value hierarchy table. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Fair Value | | Unfunded Commit-ments | | Redemption Frequency | | Redemption Notice Period Range | | Fair Value | | Unfunded Commit-ments | | Redemption Frequency | | Redemption Notice Period Range |
U.S. plans | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Debt | | $ | 19.8 |
| | $ | — |
| | Daily | | 5 days | | $ | 18.6 |
| | $ | — |
| | Daily | | 5 days |
Other | | 105.1 |
| | — |
| | Monthly | | 5 days | | 104.6 |
| | — |
| | Monthly | | 5 days |
Private Real Estate(a) | | 112.4 |
| | — |
| | Quarterly | | Up to 90 days | | 40.5 |
| | — |
| | Quarterly | | 60 days |
Private Equity(b) | | 0.9 |
| | — |
| | | | | | 1.1 |
| | — |
| | | | |
Total | | $ | 238.2 |
| | $ | — |
| | | | | | $ | 164.8 |
| | $ | — |
| | | | |
International pension plans | | | | | | | | | | | | | | | | |
Commingled Funds | | | | | | | | | | | | | | | | |
Equity | | $ | 780.7 |
| | $ | — |
| | Weekly, Monthly | | Up to 30 days | | $ | 726.7 |
| | $ | — |
| | Weekly, Monthly | | Up to 90 days |
Debt | | 837.7 |
| | — |
| | Weekly, Biweekly, Bimonthly, Monthly | | Up to 30 days | | 640.0 |
| | — |
| | Weekly, Biweekly, Bimonthly, Monthly | | Up to 90 days |
Other | | 25.2 |
| | — |
| | Monthly | | Up to 30 days | | 25.8 |
| | — |
| | Monthly, Quarterly | | Up to 90 days |
Private Real Estate | | 16.5 |
| | — |
| | Monthly | | Up to 90 days | | 41.7 |
| | — |
| | Monthly, Quarterly | | Up to 90 days |
Total | | $ | 1,660.1 |
| | $ | — |
| | | | | | $ | 1,434.2 |
| | $ | — |
| | | | |
(a) Includes investments in private real estate funds and limited partnerships. The funds invest in U.S. real estate and allow redemptions quarterly, though queues, restrictions, and gates may extend the period. The limited partnerships include investments in primarily U.S. real estate, and can never be redeemed. The partnerships are all currently being wound up, and are expected to make all distributions over the next three years.
(b) Includes investments in limited partnerships, which invest primarily in U.S. buyouts and venture capital. The investments can never be redeemed. The partnerships are all currently being wound up, and are expected to make all distributions over the next three years.
Note 17 — Stockholders’ equity
The company has 150 million authorized shares of common stock, par value $.01 per share, and 40 million shares of authorized preferred stock, par value $1 per share, issuable in series.
At December 31, 2017, 35.1 million shares of unissued common stock of the company were reserved for stock-based incentive plans and the company’s convertible senior notes.
Accumulated other comprehensive income (loss) as of December 31, 2017, 2016 and 2015, is as follows:
|
| | | | | | | | | | | | |
| | Total |
| | Translation Adjustments |
| | Postretirement Plans |
|
Balance at December 31, 2014 | | $ | (4,113.4 | ) | | $ | (737.8 | ) | | $ | (3,375.6 | ) |
Other comprehensive income before reclassifications | | 346.2 |
| | (96.0 | ) | | 442.2 |
|
Amounts reclassified from accumulated other comprehensive income | | (178.1 | ) | | — |
| | (178.1 | ) |
Current period other comprehensive income | | 168.1 |
| | (96.0 | ) | | 264.1 |
|
Balance at December 31, 2015 | | (3,945.3 | ) | | (833.8 | ) | | (3,111.5 | ) |
Other comprehensive income before reclassifications | | (64.9 | ) | | (93.3 | ) | | 28.4 |
|
Amounts reclassified from accumulated other comprehensive income | | (142.6 | ) | | — |
| | (142.6 | ) |
Current period other comprehensive income | | (207.5 | ) | | (93.3 | ) | | (114.2 | ) |
Balance at December 31, 2016 | | (4,152.8 | ) | | (927.1 | ) | | (3,225.7 | ) |
Other comprehensive income before reclassifications | | 506.8 |
| | 121.9 |
| | 384.9 |
|
Amounts reclassified from accumulated other comprehensive income | | (169.8 | ) | | (11.8 | ) | | (158.0 | ) |
Current period other comprehensive income | | 337.0 |
| | 110.1 |
| | 226.9 |
|
Balance at December 31, 2017 | | $ | (3,815.8 | ) | | $ | (817.0 | ) | | $ | (2,998.8 | ) |
Amounts reclassified out of accumulated other comprehensive income for the three years ended December 31, 2017 are as follows: |
| | | | | | | | | | | | |
Year ended December 31, | | 2017 |
| | 2016 |
| | 2015 |
|
Translation Adjustments: | | | | | | |
Adjustment for substantial completion of liquidation of foreign subsidiaries(a) | | $ | (11.8 | ) | | $ | — |
| | $ | — |
|
Postretirement Plans: | | | | | | |
Amortization of prior service cost(b) | | 5.6 |
| | 5.6 |
| | 3.1 |
|
Amortization of actuarial losses(b) | | (174.1 | ) | | (155.2 | ) | | (189.7 | ) |
Curtailment gain(b) | | 5.4 |
| | 2.0 |
| | — |
|
Total before tax | | (174.9 | ) | | (147.6 | ) | | (186.6 | ) |
Income tax benefit | | 5.1 |
| | 5.0 |
| | 8.5 |
|
Total reclassifications for the period | | $ | (169.8 | ) | | $ | (142.6 | ) | | $ | (178.1 | ) |
(a) Reported in Other income (expense), net in the consolidated statements of income
(b) These items are included in net periodic postretirement cost (see Note 16).
The following table summarizes the changes in shares of common stock and treasury stock during the three years ended December 31, 2017: |
| | | | | | |
| | Common Stock |
| | Treasury Stock |
|
Balance at December 31, 2014 | | 52.4 |
| | 2.7 |
|
Stock-based compensation | | 0.2 |
| | — |
|
Balance at December 31, 2015 | | 52.6 |
| | 2.7 |
|
Stock-based compensation | | 0.2 |
| | — |
|
Balance at December 31, 2016 | | 52.8 |
| | 2.7 |
|
Stock-based compensation | | 0.6 |
| | 0.2 |
|
Balance at December 31, 2017 | | 53.4 |
| | 2.9 |
|
Note 1822 — Quarterly financial information (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter |
| | Year |
|
2019 | | | | | | | | | | |
Revenue | | $ | 695.8 |
| | $ | 753.8 |
| | $ | 757.6 |
| | $ | 741.5 |
| | $ | 2,948.7 |
|
Gross profit | | 149.9 |
| | 193.9 |
| | 172.4 |
| | 150.2 |
| | 666.4 |
|
Income (loss) before income taxes | | (3.0 | ) | | 41.9 |
| | 6.5 |
| | (5.7 | ) | | 39.7 |
|
Net income (loss) attributable to Unisys Corporation common shareholders | | (19.4 | ) | | 26.2 |
| | (13.2 | ) | | (10.8 | ) | | (17.2 | ) |
Earnings (loss) per common share attributable to Unisys Corporation | | | | | | | | | | |
Basic | | $ | (0.38 | ) | | $ | 0.51 |
| | $ | (0.23 | ) | | $ | (0.17 | ) | | $ | (0.31 | ) |
Diluted | | $ | (0.38 | ) | | $ | 0.42 |
| | $ | (0.23 | ) | | $ | (0.17 | ) | | $ | (0.31 | ) |
2018 | | | | | | | | | | |
Revenue | | $ | 708.4 |
| | $ | 667.4 |
| | $ | 688.3 |
| | $ | 760.9 |
| | $ | 2,825.0 |
|
Gross profit | | 201.2 |
| | 152.9 |
| | 153.8 |
| | 178.4 |
| | 686.3 |
|
Income before income taxes | | 62.6 |
| | 20.3 |
| | 22.2 |
| | 38.1 |
| | 143.2 |
|
Net income attributable to Unisys Corporation common shareholders | | 40.6 |
| | 3.8 |
| | 6.1 |
| | 25.0 |
| | 75.5 |
|
Earnings per common share attributable to Unisys Corporation | | | | | | | | | | |
Basic | | $ | 0.80 |
| | $ | 0.07 |
| | $ | 0.12 |
| | $ | 0.49 |
| | $ | 1.48 |
|
Diluted | | | | $ | 0.62 |
| | $ | 0.07 |
| | $ | 0.12 |
| | $ | 0.41 |
| | $ | 1.30 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter |
| | Year |
|
2017 | | | | | | | | | | |
Revenue | | $ | 664.5 |
| | $ | 666.2 |
| | $ | 666.3 |
| | $ | 744.8 |
| | $ | 2,741.8 |
|
Gross profit | | 120.2 |
| | 102.5 |
| | 86.1 |
| | 169.5 |
| | 478.3 |
|
Income (loss) before income taxes | | (16.8 | ) | | (42.3 | ) | | (40.4 | ) | | 27.4 |
| | (72.1 | ) |
Net income (loss) attributable to Unisys Corporation common shareholders | | (32.7 | ) | | (42.0 | ) | | (41.1 | ) | | 50.5 |
| | (65.3 | ) |
Earnings (loss) per common share attributable to Unisys Corporation | | | | | | | | | | |
Basic | | (0.65 | ) | | (0.83 | ) | | (0.81 | ) | | 1.00 |
| | (1.30 | ) |
Diluted | | (0.65 | ) | | (0.83 | ) | | (0.81 | ) | | 0.76 |
| | (1.30 | ) |
2016 | | | | | | | | | | |
Revenue | | $ | 666.8 |
| | $ | 748.9 |
| | $ | 683.3 |
| | $ | 721.7 |
| | $ | 2,820.7 |
|
Gross profit | | 98.5 |
| | 178.3 |
| | 121.6 |
| | 160.2 |
| | 558.6 |
|
Income (loss) before income taxes | | (33.2 | ) | | 44.3 |
| | (15.2 | ) | | 24.6 |
| | 20.5 |
|
Net income (loss) attributable to Unisys Corporation common shareholders | | (39.9 | ) | | 21.6 |
| | (28.2 | ) | | (1.2 | ) | | (47.7 | ) |
Earnings (loss) per common share attributable to Unisys Corporation | | | | | | | | | | |
Basic | | (0.80 | ) | | 0.43 |
| | (0.56 | ) | | (0.02 | ) | | (0.95 | ) |
Diluted | | | | (0.80 | ) | | 0.36 |
| | (0.56 | ) | | (0.02 | ) | | (0.95 | ) |
In the third quarter of 2019, the company recorded a pretax loss on debt exchange of $20.1 million. See Note 14, “Debt,” of the Notes to Consolidated Financial Statements.
In the first, second, third and fourth quarters of 2017,2019, the company recorded pretax cost-reduction and other charges of $25.4$2.6 million, $27.5$2.6 million, $46.1$0.2 million and $47.8$23.3 million, respectively. See Note 3, “Cost reduction actions,” of the Notes to Consolidated Financial Statements.
In the first, second, third and fourth quarters of 2016,2018, the company recorded pretax cost-reduction and other charges (benefits) of $26.9$(2.9) million, $10.2$0.7 million, $31.9$(0.9) million and $13.1$22.8 million, respectively. See Note 3, “Cost reduction actions,” of the Notes to Consolidated Financial Statements.
The individual quarterly per-share amounts may not total to the per-share amount for the full year because of accounting rules governing the computation of earnings per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, management performed, with the participation of the Chief Executive Officer (“CEO”)(CEO) and the Chief Financial Officer (“CFO”)(CFO), an evaluation of the effectiveness of the company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)Exchange Act). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon that evaluation, the CEO and the CFO concluded that, as of December 31, 2017, due to2019, the material weakness in our internal control over financial reporting described below, ourcompany’s disclosure controls and procedures were not effective.effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding such material weakness in internal control over financial reporting, our management concluded that our consolidated financial statements in this Annual Report on Form 10-K present fairly, in all material respects, the company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with generally accepted accounting principles (“GAAP”).
Management’s Report on Internal Control Over Financial Reporting
The management of the company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The company’s internal control over financial reporting is a process designedRefer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effectManagement's Report on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, we identified the following deficiencies in our internal control described below.
Our risk assessment procedures over Technology revenue did not adequately identify risks and consider changes in business operations and the demands on personnel created by the efforts required to adopt the new revenue accounting pronouncement that will impact future financial reporting. As a result, the company had missing process level controls and insufficient trained personnel to operate process level controls over the measurement and recognition of multiple-element arrangements within Technology revenue.
Although no material misstatements were identified in our consolidated financial statements, these control deficiencies resulted in immaterial misstatements in the preliminary consolidated financial statements as of and for the year ended December 31, 2017 related to Technology revenue and deferred revenue that were corrected. However, the control deficiencies create a reasonable possibility that a material misstatement in the company’s consolidated financial statements will not be prevented or detected on a timely basis and we concluded that our internal control over financial reporting as of December 31, 2017 was not effective due to a material weakness in internal control.
KPMG LLP, an independent registered public accounting firm, has audited the company’s financial statements in this Annual Report on Form 10-K and, as part of its audit, has issued an adverse opinion on the effectiveness of the company’s internal control over financial reporting as of December 31, 2017, which is included in this Annual Report on Form 10-KFinancial Reporting on page 3633.
Remediation Plan
Management is actively remediating the identified material weakness, and has identified the following remediation steps:
The company will add personnel with an appropriate level of U.S. GAAP revenue recognition knowledge and experience by hiring additional personnel or by internal realignment.
Additional revenue recognition training will be provided to responsible staff.
Implementation of enhanced procedures whereby a comprehensive review will be performed for a sample of low dollar Technology transactions.
Enhanced processes to review all major multiple-element transactions will be implemented.
•Data elements that support enhanced analytics and controls will be added to the revenue recognition process.
The company will continue to supplement existing revenue recognition resources with consultants where necessary.
Changes in Internal Control over Financial Reporting
Except for the identification of the material weakness described above, there have been no changesNo change in our internal control over financial reporting occurred during the fourth quarter of 2017ended December 31, 2019 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our leases and properly assessed the impact of the new accounting standard related to leases on our consolidated financial statements to facilitate the adoption of this standard on January 1, 2019 as well as the ongoing accounting under the new standard. There were no significant changes to our internal control over financial reporting during 2019 as a result of the ongoing accounting under the new accounting standard.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our executive officers appears in Part I, Item 1 of this Form 10-K.
The following information is incorporated herein by reference to our Definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (the “Proxy Statement”)Proxy Statement):
Information regarding our directors is set forth under the heading “Information Regarding Nominees.”
Information regarding the Unisys Code of Ethics and Business Conduct is set forth under the heading “Code of Ethics and Business Conduct.”
Information regarding our audit and finance committee and audit committee financial experts is set forth under the heading “Committees.”
Information regarding compliance with Section 16(a) is set forth under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information regarding our director nomination process is set forth under the heading “Director Nomination Process.”
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the heading “EXECUTIVE COMPENSATION” in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following information is incorporated herein by reference to the Proxy Statement:
Information regarding securities authorized for issuance under equity compensation plans is set forth under the heading “EQUITY COMPENSATION PLAN INFORMATION.”
Information regarding the security ownership of certain beneficial owners, directors and executive officers is set forth under the heading “SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following information is incorporated herein by reference to the Proxy Statement:
Information regarding transactions with related persons is set forth under the heading “Related Party Transactions.”
Information regarding director independence is set forth under the heading “Independence of Directors.”
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
Information concerning fees and services of the company’s principal accountants is set forth under the heading “Independent Registered Public Accounting Firm Fees and Services” in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
1. Unisys Corporation’s consolidated financial statements are filed as a part of this report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and a list of Unisys Corporation’s consolidated financial statements are found on page 32 on this report. Schedule II, Valuation and Qualifying Accounts, is found on page 8184 on this report; all other financial statement schedules are omitted because the required information is not applicable, or because the information required is included in the consolidated financial statements and notes thereto. 2. Exhibits required to be filed by Item 601 of Regulation S-K:
|
| |
Exhibit Number | Description |
| |
| Asset Purchase Agreement, dated as of February 5, 2020, by and between Unisys Corporation and Science Applications International Corporation (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 6, 2020) |
| |
| Restated Certificate of Incorporation of Unisys Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 30, 2010) |
| |
| Certificate of Amendment of the Restated Certificate of Incorporation of Unisys Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8–K8-K filed on April 28, 2011) |
| |
| Certificate of Amendment of the Restated Certificate of Incorporation of Unisys Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017)
|
| |
| By-Laws of Unisys Corporation, as amended through April 30, 2015May 10, 2019 (incorporated by reference to Exhibit 3.33.1 to the Company’s QuarterlyCurrent Report on Form 10-Q8-K filed on April 30, 2015)May 15, 2019) |
| |
4.1 | Agreement to furnish to the Commission on request a copy of any instrument defining the rights of the holders of long-term debt which authorizes a total amount of debt not exceeding 10% of the total assets of the Company (incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1982 (File No. 1-145)) |
| |
| Indenture, dated as of March 15, 2016, between Unisys Corporation and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 15, 2016) |
| |
| Indenture, dated as of April 17, 2017, among Unisys Corporation, Unisys Holding Corporation, Unisys AP Investment Company I, Unisys NPL, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K filed on April 17, 2017) |
| |
| Specimen Stock Certificate representing the Company’s common stock, par value $.01 share (incorporated by reference to Exhibit 4.9 to the Company’s Form S-3 filed on June 12, 2018) |
| |
| Tax Asset Protection Plan, dated as of February 4, 2020, between Unisys Corporation and Computershare Inc., as Rights Agent, including as Exhibit A the forms of Rights Certficate and of Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of the Participating Preferred Stock of Unisys Corporation (incorporated by reference to Exhibit 4.1 to the Company Current Report on Form 8-K filed on February 6, 2020) |
| |
10.1 | Form of Indemnification Agreement between Unisys Corporation and each of its Directors (incorporated by reference to Exhibit B to the Company’s Proxy Statement, dated March 22, 1988, for its 1988 Annual Meeting of Stockholders) |
| |
| Unisys Corporation Director Stock Unit Plan, as amended and restated effective September 22, 2000 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000) |
| |
| Deferred Compensation Plan for Directors of Unisys Corporation, as amended and restated effective April 22, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) |
| |
| 2005 Deferred Compensation Plan for Directors of Unisys Corporation, as amended and restated effective December 2, 2010 except as otherwise noted therein (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010) |
| |
|
| |
| Unisys Corporation 2003 Long-Term Incentive and Equity Compensation Plan, as amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
| Amendment to Unisys Corporation 2003 Long-Term Incentive and Equity Compensation Plan, effective February 12, 2009 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
| Unisys Corporation 2007 Long-Term Incentive and Equity Compensation Plan, as amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
|
| |
| Amendment to Unisys Corporation 2007 Long-Term Incentive and Equity Compensation Plan, effective February 12, 2009 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
| Unisys Corporation 2010 Long-Term Incentive and Equity Compensation Plan (incorporated by reference to Appendix E to the Company’s Proxy Statement, dated March 18, 2010, for its 2010 Annual Meeting of Stockholders) |
| |
| Unisys Corporation 2016 Long-Term Incentive and Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016) |
| |
| Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015) |
| |
| Form of Performance-Based Restricted Stock Unit Agreement |
| |
| Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014) |
| |
| Form of Stock Option Agreement (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014) |
| |
| Form of Performance Cash Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016) |
| |
10.1510.16 | Unisys Executive Annual Variable Compensation Plan (incorporated by reference to Exhibit A to the Company’s Proxy Statement, dated March 23, 1993, for its 1993 Annual Meeting of Stockholders) |
| |
| Unisys Corporation Deferred Compensation Plan as amended and restated effective September 22, 2000 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000) |
| |
| Unisys Corporation 2005 Deferred Compensation Plan, as amended and restated effective September 19, 2014 except as otherwise noted therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014) |
| |
| Form of Executive Employment Agreement for U.S.by and between Unisys Corporation and each of its executive officers (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012) |
| |
| Form of letter agreement by and between Unisys Corporation and each of its executive officers who report directly to the Chief Executive Officer (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 16, 2014) |
| |
| Unisys Corporation Executive Life Insurance Program, as amended and restated effective April 22, 2004 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005) |
| |
| Amendment to the Unisys Corporation Executive Life Insurance Program, effective January 1, 2009 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
| Unisys Corporation Supplemental Executive Retirement Income Plan, as amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008) |
| |
| Unisys Corporation Savings Plan, as amended and restated effective January 1, 2016 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015) |
| |
|
| |
| Amendment 2017-1 to the Unisys Savings Plan effective January 1, 2017 (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016) |
| |
| Summary of supplemental benefits provided to elected officers of Unisys Corporation (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014) |
| |
| Letter Agreement, dated December 12, 2014, between Unisys Corporation and Peter Altabef (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 16, 2014) |
| |
| Employment Agreement, dated December 12, 2014, between Unisys Corporation and Peter Altabef (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 16, 2014) |
| |
| Letter Agreement, dated April 23, 2019, between Unisys Corporation and Michael Thomson (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019) |
| |
| Security Agreement dated as of April 17, 2017 by and among Unisys Corporation, Unisys Holding Corporation, Unisys AP Investment Company I, Unisys NPL, Inc. and Wells Fargo Bank, National Association, as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 17, 2017) |
|
| |
| Collateral Trust Agreement dated as of April 17, 2017 by and among Unisys Corporation, Unisys Holding Corporation, Unisys AP Investment Company I, Unisys NPL, Inc. and Wells Fargo Bank, National Association, as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 17, 2017) |
| |
| Credit Agreement dated as of October 5, 2017 by and among Unisys Corporation, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 6, 2017) |
| |
| Amendment No. 1 dated as of June 15, 2018 to Credit Agreement dated as of October 5, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018) |
| |
| Security Agreement dated as of October 5, 2017 by Unisys Corporation, Unisys Holding Corporation, Unisys NPL, Inc., and Unisys AP Investment Company I in favor of JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 6, 2017) |
| |
| Intercreditor Agreement dated as of October 5, 2017 by and among JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo Bank, National Association, as Collateral Trustee, and Unisys Corporation, Unisys Holding Corporation, Unisys NPL, Inc., and Unisys AP Investment Company I (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 6, 2017) |
| |
| Statement of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| |
| Subsidiaries of the Company |
| |
| Consent of KPMG LLP |
| |
| Power of Attorney |
| |
| Certification of Peter A. Altabef required by Rule 13a-14(a) or Rule 15d-14(a) |
| |
| Certification of InderMichael M. SinghThomson required by Rule 13a-14(a) or Rule 15d-14(a) |
| |
| Certification of Peter A. Altabef required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
| |
| Certification of InderMichael M. SinghThomson required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
|
| |
101.INSXBRL101 | Instance DocumentThe following financial information from Unisys Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Deficit, and (vi) Notes to Consolidated Financial Statements |
| |
101.SCHXBRL104 | Taxonomy Extension Schema Document |
| |
101.CALXBRL | Taxonomy Extension Calculation Linkbase Document |
| |
101.LABXBRL | Taxonomy Extension Labels Linkbase Document |
| |
101.PREXBRL | Taxonomy Extension Presentation Linkbase Document |
| |
101.DEFXBRL | Taxonomy Extension Definition Linkbase DocumentCover page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL (Inline Extensible Business Reporting Language) document) |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| UNISYS CORPORATION |
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| By: | /s/ Peter A. Altabef |
| | Peter A. Altabef |
| | Chairman, President and Chief Executive Officer |
Date: March 12, 2018February 28, 2020 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2018.February 28, 2020.
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| /s/ Peter A. Altabef | | *Denise K. Fletcher Philippe Germond |
| Peter A. Altabef | | Denise K. Fletcher
Director Philippe Germond |
| Director,Chairman, President and Chief Executive Officer | | Director |
| (principal executive officer) | | |
| | | |
| /s/ InderMichael M. SinghThomson | | *Philippe GermondLisa A. Hook |
| InderMichael M. SinghThomson | | Philippe GermondLisa A. Hook |
| Senior Vice President and Chief Financial Officer | | Director |
| (principal financial officer) | | |
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| /s/ Michael M. Thomson | | *Deborah Lee James |
| Michael M. Thomson | | Deborah Lee James |
| Vice President and Corporate Controller | | Director |
| (principal accounting officer) | | |
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| *Jared L. Cohon | | *Deborah Lee James |
| Jared L. Cohon | | Deborah Lee James |
| Director | | Director |
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| *Nathaniel A. Davis | | *Paul E. Martin |
| Jared L. CohonNathaniel A. Davis | | Paul E. Martin |
| Director | | Director |
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| *Alison DavisMatthew J. Desch | | *Lee D. Roberts Regina M. Paolillo |
| Alison DavisMatthew J. Desch | | Lee D. RobertsRegina M. Paolillo |
| Director | | Director |
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| *Nathaniel A. Davis Denise K. Fletcher | | *Paul E. WeaverLee D. Roberts |
| Nathaniel A. DavisDenise K. Fletcher | | Paul E. WeaverLee D. Roberts |
| Director | | Director |
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*By: | /s/ Peter A. Altabef | | |
| Peter A. Altabef | | |
| Attorney-in-fact | | |
UNISYS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Millions)
| | Description | | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Deductions (a) | | Balance at End of Period | | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Deductions (i) | | Balance at End of Period |
Allowance for doubtful accounts (deducted from accounts receivable): | | | | | | | | | | | | | | | | |
Year Ended December 31, 2015 | | $ | 30.1 |
| | $ | 3.0 |
| | $ | (12.0 | ) | | $ | 21.1 |
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Year Ended December 31, 2016 | | $ | 21.1 |
| | $ | 2.2 |
| | $ | (0.5 | ) | | $ | 22.8 |
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Year Ended December 31, 2017 | | $ | 22.8 |
| | $ | 3.1 |
| | $ | (3.9 | ) | | $ | 22.0 |
| | $ | 22.8 |
| | $ | 3.1 |
| | $ | (3.9 | ) | | $ | 22.0 |
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Year Ended December 31, 2018 | | | $ | 22.0 |
| | $ | (5.1 | ) | | $ | (3.2 | ) | | $ | 13.7 |
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Year Ended December 31, 2019 | | | $ | 13.7 |
| | $ | (1.6 | ) | | $ | (0.3 | ) | | $ | 11.8 |
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(a) | Includes write-off of bad debts less recoveries, reclassifications from other current liabilities and foreign currency translation adjustments. |
(i)Includes write-off of bad debts less recoveries, reclassifications from other current liabilities and foreign currency translation adjustments.