UIS

Unisys Corp. Q3 2003 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2003. Unisys Corporation operates in two primary segments: Services (systems integration, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise-class servers and specialized technologies). The company reported 330.4 million shares of common stock outstanding as of the period end.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 9% year-over-year, driven by an 11% increase in Services revenue and a 3% increase in Technology revenue. U.S. revenue grew 11%, while international revenue grew 7%.
• Profitability: Net income for Q3 declined slightly to $56.2 million from $59.0 million, primarily due to a significant reduction in pension income (approx. $9 million in Q3 2003 vs. $37 million in Q3 2002) and foreign exchange losses of $3.7 million.
• Segment Performance:
  • Services: Revenue rose 11% to $1.12 billion, led by a 23% jump in systems integration and 7% growth in outsourcing. However, operating margins compressed to 3.9% from 5.7% due to lower pension income.
  • Technology: Revenue rose 3% to $325.4 million. Enterprise-class server sales increased 21%, offsetting a 31% decline in specialized technologies. Operating margins improved to 16.5% from 10.1% due to a richer product mix.
• Cash Flow: Operating cash flow for the nine months ended September 30, 2003, more than doubled to $162.1 million from $70.0 million, reflecting improved working capital management and higher customer prepayments.

Outlook, Risks, and Contingencies

• Debt and Liquidity: In March 2003, the company issued $300 million in senior notes due 2010. In July 2003, a new $500 million credit agreement was established, replacing an expiring facility. The company maintains a $225 million trade accounts receivable facility expiring in December 2003.
• Pension Obligations: The company faces significant pension liabilities. A minimum pension liability charge of $2.2 billion (net of tax $1.5 billion) was recorded in equity at year-end 2002. The company expects to contribute approximately $60 million to non-U.S. defined benefit plans in 2003.
• Restructuring: Cash expenditures related to prior restructuring charges were $51 million for the nine months ended September 30, 2003. Remaining expected cash outflows are approximately $7 million for the rest of 2003 and $20 million for subsequent years.
• Lease Commitments: The company entered a new 15-year lease for a Reston, VA facility (approx. $110 million rent) and a 5-year lease for a Malvern, PA facility with a residual value guarantee of up to $29 million.
• Risks: Key risks include the challenging economic environment delaying IT purchases, intense competition, foreign currency fluctuations (53% of revenue is international), and the ability to execute fixed-price contracts profitably.

Investor Verification Checklist

• Pension Assumptions: Verify the impact of the reduced expected long-term rate of return (8.75%) and discount rates on future pension income and cash contributions.
• Working Capital Trends: Confirm if the surge in operating cash flow ($162.1M) is sustainable or driven by one-time customer prepayments.
• Debt Covenants: Review the financial ratios required by the new $500 million credit agreement to ensure compliance.
• Deferred Tax Assets: Assess the realizability of the $1.728 billion net deferred tax assets, which requires approximately $5.2 billion in future taxable income.
• Technology Mix: Monitor the continued decline in specialized technology revenue versus the growth in high-end enterprise servers.