UIS

Unisys Corp. Q2 2003 Financial Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 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 329.2 million shares of common stock outstanding as of the period end.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5% in Q2 and 4% YTD compared to the prior year. This was driven by a 12% increase in Services revenue, partially offset by an 18% decline in Technology revenue due to weak industry demand for large-scale hardware.
• Profitability: Net income rose 24% in Q2 and 21% YTD. However, operating income declined 11% in Q2 and 8% YTD. The decline in operating margins was primarily attributed to a significant reduction in pension income (approx. $8M in Q2 2003 vs. $34M in Q2 2002) resulting from lower expected rates of return on plan assets and lower discount rates.
• Segment Performance:
  • Services: Outsourcing revenue grew 22% and Systems Integration grew 13%, driven by new contracts including the U.S. Transportation Security Administration.
  • Technology: Enterprise-class server sales fell 19% and specialized technologies fell 15%.
• Debt and Liquidity: Total debt increased by $236.9M to $1.06B following the issuance of $300M in senior notes in March 2003. Cash and cash equivalents increased to $381.8M, up from $301.8M at year-end 2002.

Outlook, Risks, and Unusual Items

• Guidance: The filing does not provide specific numerical guidance for future quarters. Management notes that interim results are not necessarily indicative of full-year results due to seasonal factors.
• Restructuring: Cash expenditures related to prior-year restructuring charges were $45M YTD. Future expected cash outflows are approximately $18M for the remainder of 2003 and $17M for subsequent years.
• Pension Obligations: A significant non-cash charge of $2.2B (net of tax $1.5B) was recorded in 2002 to accumulated other comprehensive loss due to minimum pension liability requirements. This did not affect net income but reduced stockholders' equity.
• Risks:
  • Economic Environment: Customers are delaying IT purchases, impacting demand.
  • Competition: Intense competition in hardware and services markets with competitors having greater resources.
  • Fixed-Price Contracts: Risk of underperformance on fixed-price systems integration contracts.
  • International Exposure: 53% of revenue is international, exposing the company to currency fluctuations and geopolitical risks.
• Unusual Items: Other income improved significantly in Q2 2003 ($10.6M income vs. $16.0M expense in Q2 2002) due to the absence of a $21.8M early retirement charge recorded by Nihon Unisys, Ltd. in the prior year.

Investor Verification Checklist

• Pension Assumptions: Verify the impact of the reduced expected long-term rate of return (8.75%) and discount rate (6.75%) on future operating income.
• Outsourcing Margins: Monitor gross margins in the outsourcing segment, as early phases of new contracts often yield lower margins before rationalization.
• Technology Demand: Assess market acceptance of the new Cellular MultiProcessing (CMP) server architecture to reverse the 18% revenue decline in the Technology segment.
• Deferred Tax Assets: Review the $469M valuation allowance on deferred tax assets; realization depends on generating approximately $5.2B in future taxable income.
• Debt Covenants: Confirm continued compliance with financial ratios and net worth covenants under the new $500M credit agreement entered into July 1, 2003.