UIS

Business Context and Reporting Period

Company: Unisys Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1998
Business Overview: Unisys operates in the information technology industry, providing computer systems, information services, and global customer services. The company is undergoing a strategic shift away from manufacturing personal computers and low-end servers to focus on mid-range and enterprise-class servers and higher-margin service solutions.

Key Financial Metrics

Note: Total Debt for Q1 1998 is calculated as Notes Payable ($51.8M) + Current Maturities ($15.4M) + Long-term Debt ($1,436.2M). Q1 1997 debt figures are not explicitly aggregated in the text.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 8% year-over-year to $1.65 billion. Excluding foreign currency impacts, revenue rose 11%.
• Profitability Improvement: Net income more than tripled to $62.7 million from $19.3 million. Operating income margin expanded from 7.0% to 9.5%.
• Cash Flow Turnaround: Operating cash flow swung from a $137.0 million usage in Q1 1997 to a $124.5 million generation in Q1 1998, driven by improved working capital management (inventory turns and receivables).
• Debt Reduction: Total debt declined by $188.6 million from the previous quarter. Interest expense decreased to $46.5 million from $60.4 million due to debt reduction efforts.
• Segment Performance:
  • Information Services: Revenue up 19% with operating margin improving from -11.4% to 1.4%.
  • Global Customer Services: Revenue up 9%, though gross margin declined from 30.0% to 23.8% due to a large Federal government networking project rollout.
  • Computer Systems: Revenue slightly down; strategy shifted to discontinue PC manufacturing in favor of enterprise servers.

Guidance, Outlook, and Risks

Management Commentary: Management attributes improved results to cost reduction actions, better working capital management, and a focus on higher-margin solution programs. The company has reached an agreement in principle with Hewlett-Packard to supply PCs and entry-level servers.

Outlook and Risks:

• Deferred Tax Assets: The company holds $1.419 billion in net deferred tax assets but has established a $393 million valuation allowance, realizing only $1.026 billion. Realization depends on achieving approximately $3.0 billion in future taxable income.
• Legal Contingencies: Unisys is involved in significant litigation with Ceska Sporitelna, a.s. (Czech Republic). The bank seeks over $100 million in damages; Unisys has filed a counterclaim for over $100 million. Trial is scheduled for August 1998.
• Year 2000 (Y2K): The company is addressing Y2K compliance for internal systems and products. While costs are not expected to be material, delays or implementation failures pose a risk.
• Market Risks: Approximately 60% of revenue is international, exposing the company to currency fluctuations and political risks. The industry faces aggressive competition and rapid technological change.

Investor Verification Checklist

• Deferred Tax Realization: Verify the company's ability to generate the $3.0 billion in future taxable income required to fully utilize net deferred tax assets.
• Legal Exposure: Monitor the outcome of the Ceska Sporitelna litigation scheduled for August 1998, which involves potential claims exceeding $100 million on both sides.
• Debt Structure: Confirm the impact of recent debt refinancing (issuance of 7 7/8% notes vs. redemption of higher-rate notes) on future interest expenses.
• Segment Margins: Track the margin recovery in Information Services and the margin pressure in Global Customer Services related to the Federal government contract.
• Y2K Progress: Assess the timeline and cost implications of Year 2000 compliance for both internal operations and customer deliverables.