UIS

Unisys Corp. Q1 2003 Financial Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for Unisys Corporation, a provider of information technology services and enterprise-class servers. The company operates through two primary segments: Services (systems integration, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise-class servers and specialized technologies).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3% year-over-year, driven by a 6% increase in Services revenue and a 4% positive impact from foreign currency translation. This offset a 7% decline in Technology revenue.
• Segment Performance:
  • Services: Outsourcing revenue grew 20% ($409.3M vs $342.3M), while Systems Integration and Infrastructure Services declined slightly.
  • Technology: Revenue fell due to a 12% drop in specialized technologies and a 5% drop in enterprise-class servers, reflecting weak industry-wide demand.
• Profitability: Net income rose 18% despite a decline in operating income. The increase in net income was aided by a reduction in interest expense and lower foreign exchange losses. Operating margins compressed primarily due to a significant decline in pension income ($6M in 2003 vs $38M in 2002) resulting from lower expected rates of return on plan assets.
• Cash Flow: Operating cash flow turned negative ($64.9M used) compared to a positive $9.6M in the prior year, attributed to lower customer prepayments and the payment of 2002 incentive compensation.
• Debt: Total debt increased by approximately $297.7 million due to the issuance of $300 million in 6 7/8% senior notes due in 2010.

Outlook, Risks, and Unusual Items

• Restructuring: Cash expenditures related to prior-year restructuring charges were $31 million. Future expected cash outflows are approximately $35 million for the remainder of 2003 and $14 million for subsequent years, primarily for workforce reductions and idle lease costs.
• Pension Liability: The company recorded a significant charge to accumulated other comprehensive loss ($2.2 billion gross) related to minimum pension liabilities, though this did not impact net income or liquidity.
• Accounting Changes: The company adopted SFAS No. 145, SFAS No. 146, and FIN No. 45 effective January 1, 2003. Additionally, the company expects to consolidate a variable interest entity (facility lease) effective July 1, 2003, which will increase assets and debt by approximately $30 million.
• Risks: Management cites a challenging economic environment with customers delaying IT purchases. Key risks include intense competition, reliance on government contracts (subject to funding availability), foreign currency fluctuations (52% of revenue is international), and the need to successfully transition to new high-end server architectures (CMP).

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 Growth: Confirm the sustainability of the 20% growth in outsourcing revenue and the margin profile of new contracts.
• Debt Covenants: Review the $450 million credit agreement covenants and the impact of the new $300 million senior notes on leverage ratios.
• Deferred Tax Assets: Assess the realizability of the $2.187 billion net deferred tax assets, which currently carry a $460 million valuation allowance.
• Technology Transition: Monitor market acceptance of the new Cellular MultiProcessing (CMP) server line to offset declines in legacy hardware sales.