Unisys Corp. 10-Q Summary: Quarter Ended September 30, 1999
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1999, and the nine-month period ended on that date. Unisys Corporation operates in the information technology and services industry, reporting results through two primary segments: Services and Technology. The filing includes restated prior periods due to the pooling of interests accounting for acquisitions made in August 1999 (PulsePoint Communications, Tech Hackers, Inc., and Publishing Partners International, Inc.).
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Revenue | $1,865.4M | $1,792.3M | $5,584.7M | $5,185.6M |
| Operating Income | $229.2M | $197.9M | $716.6M | $532.1M |
| Net Income | $138.4M | $93.8M | $366.3M | $240.7M |
| Earnings Per Share (Diluted) | $0.43 | $0.25 | $1.13 | $0.60 |
| Operating Margin | 12.3% | 11.0% | 12.8% | 10.3% |
| Gross Profit Margin | 35.9% | 33.8% | 35.9% | 33.6% |
| Cash from Operations (9M) | $320.1M | $432.2M | ||
| Total Debt | $1.0B | $1.14B (Dec 31, 1998) | ||
| Cash & Equivalents | $374.0M | $616.4M (Dec 31, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenue increased 4% year-over-year, driven by a 7% increase excluding foreign currency impacts. The Services segment grew 4% due to outsourcing revenue, while the Technology segment grew 4% as customers shifted Year 2000 spending from Q4 to Q3.
- Profitability: Operating income rose 16% in Q3 and 35% for the nine-month period. Margins expanded due to cost reduction programs and improved gross profit percentages in both segments.
- Debt Reduction: Total debt decreased by $142.4 million from year-end 1998. The company redeemed $197.0 million of preferred stock and extinguished $115.8 million of senior notes, resulting in a $12.1 million extraordinary charge.
- Cash Flow: Operating cash flow for the nine months ended September 30, 1999, was $320.1 million, a decrease from $432.2 million in the prior year, primarily due to a decrease in working capital and increased days sales outstanding.
Guidance, Outlook, and Risks
- Outlook: Management expects negative impacts on revenue for the next two quarters due to issues in network and NT services, foreign currency exchange rates, the Year 2000 transition, and organizational changes planned for the fourth quarter.
- Year 2000 Status: The company has completed remediation of major mission-critical IT systems, with remaining non-critical systems expected to be compliant by December 1, 1999. Total internal remediation costs are estimated at $26 million. Risks include potential supplier failures and litigation.
- Legal Proceedings: Several purported class action lawsuits were filed in late 1999 alleging violations of federal securities laws regarding statements made about services contracts. The company intends to defend these vigorously.
- Unusual Items: Q3 earnings included a one-time tax benefit of $22.0 million related to a U.S. Treasury regulation on net operating loss carryforwards. Excluding this benefit and the debt extinguishment charge, Q3 diluted EPS was $0.40.
Investor Verification Checklist
- Verify the sustainability of the 60% year-over-year increase in adjusted EPS, given the one-time $22.0 million tax benefit.
- Monitor the impact of the anticipated revenue decline in Q4 1999 due to the shift of Year 2000 spending from Q4 to Q3.
- Assess the progress of the fourth-quarter organizational realignment and its effect on cost structures.
- Review the status of the pending class action lawsuits regarding services contract disclosures.
- Confirm the realization of deferred tax assets, noting the $321 million valuation allowance and the requirement of $3.4 billion in future taxable income to realize the full amount.