Business Context and Reporting Period
This Form 10-Q covers Unisys Corporation for the quarterly period ended September 30, 1998. Unisys operates in the information technology industry, providing computer systems, information services, and global customer services. The company is actively shifting its business mix toward higher-growth, lower-margin services businesses while reducing its exposure to personal computer hardware.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 | Three Months Ended Sep 30, 1997 | Nine Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Revenue | $1,781.4 million | $5,159.6 million | $1,621.4 million | $4,737.4 million |
| Net Income | $95.6 million | $248.4 million | $50.9 million | $112.1 million |
| Earnings Per Share (Diluted) | $0.26 | $0.64 | $0.13 | $0.16 |
| Operating Income | $199.8 million | $540.2 million | $160.5 million | $396.3 million |
| Operating Margin | 11.2% | 10.5% | 9.9% | 8.4% |
| Gross Profit Margin | 33.7% | 33.7% | 35.5% | 34.4% |
| Cash from Operations (9mo) | $439.5 million (vs. -$10.2 million in 1997) | |||
| Total Debt | $1.5 billion (Sep 30, 1998) | |||
| Cash and Equivalents | $781.1 million (Sep 30, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10% year-over-year for the quarter and 9% for the nine-month period. Excluding foreign currency impacts, quarterly revenue rose 12%.
- Profitability: Net income for the quarter more than doubled to $95.6 million from $50.9 million. Operating income margin improved to 11.2% from 9.9%.
- Segment Performance:
- Information Services: Revenue up 25% to $640.6 million; operating margin improved from -1.9% to 4.1%.
- Global Customer Services: Revenue up 12% to $597.7 million; gross margin declined slightly to 25.0% due to a shift toward lower-margin distributed computing support.
- Computer Systems: Revenue down 5% to $543.1 million due to a strategic decline in PC revenue, offset by growth in ClearPath servers and software.
- Debt Reduction: Total debt decreased by $231.7 million from year-end 1997. Interest expense dropped significantly due to debt reduction programs.
- Cash Flow: Operating cash flow turned strongly positive ($439.5 million) compared to a usage of $10.2 million in the prior year, driven by higher net income and improved working capital management.
Guidance, Outlook, and Risks
- Debt Strategy: The company announced early redemptions of $130 million in 10 5/8% notes and $160 million in 9 3/4% debentures in late 1998. These actions will save over $30 million in annual interest but will result in an extraordinary after-tax charge of approximately $5 million in the fourth quarter.
- Year 2000 (Y2K) Readiness: Unisys estimates $10 million has been spent on internal Y2K remediation, with an additional $5 million expected for the balance of 1998 and 1999. The company faces risks regarding supplier readiness and potential litigation related to Y2K compliance.
- Working Capital Impact: The termination of a U.S. facility used to sell accounts receivable in October 1998 is expected to reduce operational cash flow by $120 million in the fourth quarter.
- Deferred Tax Assets: The company maintains a valuation allowance of $387 million against net deferred tax assets, citing the need for approximately $3.0 billion of future taxable income to realize the full asset value.
- Legal Proceedings: Unisys is involved in significant litigation with Ceska Sporitelna (Czech Republic) involving claims and counterclaims exceeding $100 million each, with a trial scheduled for January 1999.
Investor Verification Checklist
- Verify the impact of the $120 million reduction in operating cash flow due to the termination of the accounts receivable facility in Q4 1998.
- Confirm the timing and magnitude of the $5 million extraordinary charge related to debt redemptions in the fourth quarter.
- Monitor the progress of the Y2K remediation program and any emerging litigation risks associated with customer or supplier failures.
- Assess the sustainability of the shift from hardware to services, specifically the margin pressure in Global Customer Services.
- Review the status of the Ceska Sporitelna litigation and the potential for material financial impact from the $100 million+ claims.