UIS

Unisys Corp. 10-Q Summary: Period Ended September 30, 2000

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000, and the nine-month period ended on that date. Unisys Corporation is a provider of information technology services and products. The company is currently undergoing a strategic business review to transition toward higher-growth, higher-margin e-business opportunities. This involves streamlining its portfolio of industry-specific solutions, enhancing its outsourcing business, and reducing its cost structure to align with lower revenue levels.

Key Financial Metrics

Note: Total Debt calculated as Notes Payable + Current Maturities of Long-term Debt + Long-term Debt. Operating Cash Flow provided for nine-month periods only.

Material Changes vs. Prior Period

• Revenue Decline: Q3 revenue decreased 9% year-over-year, driven by weakness in the Services segment (down 9%) and the Technology segment (down 10%). Excluding foreign currency impacts, revenue declined 6%.
• Margin Compression: Gross profit margin fell from 35.9% to 28.1% in Q3. This was attributed to a lower mix of high-margin products/services and reduced utilization of services personnel. Operating margin dropped from 12.3% to 4.6%.
• Cash Flow Reversal: Operating cash flow turned negative, using $72.7 million in the first nine months of 2000 compared to providing $320.1 million in the prior year. This shift reflects lower profitability and increased receivables.
• Debt Restructuring: The company redeemed $399.5 million of 12% senior notes in April 2000, resulting in an extraordinary after-tax charge of $19.8 million. Total debt increased slightly to approximately $1.0 billion due to short-term borrowings used to fund the redemption.

Guidance, Outlook, and Risks

• Strategic Actions: Management plans to implement cost-reduction measures in Q4 2000, including an early retirement incentive for approximately 1,500 U.S. employees. A one-time pre-tax charge of approximately $200 million is expected in Q4 related to these actions.
• Portfolio Shift: The company is de-emphasizing low-margin commodity products and non-strategic businesses to focus on wealth management, mobile-commerce, and high-end enterprise servers.
• Accounting Changes: The company is reassessing the impact of SEC Staff Accounting Bulletin (SAB) No. 101 on revenue recognition, which must be implemented retroactively to Q1 2000. Additionally, adoption of SFAS No. 133 (Derivatives) in 2001 will change how the yen cross currency swap is accounted for, potentially increasing reported interest expense.
• Risks: Key risks include aggressive competition, rapid technological change, fixed-price contract risks, and foreign currency fluctuations (58% of revenue is international). The company also faces ongoing securities litigation regarding statements made about services contracts.

Investor Verification Checklist

• Verify the magnitude of the $200 million pre-tax charge expected in Q4 2000 related to restructuring and early retirement.
• Monitor the impact of SAB No. 101 implementation on Q4 2000 revenue recognition and potential restatements of prior quarters.
• Assess the sustainability of the Services segment's margin recovery given the decline in proprietary maintenance revenue.
• Review the status of the securities litigation filed in the Eastern District of Pennsylvania.
• Confirm the company's ability to generate positive operating cash flow in the second half of the year given the Q3 burn rate.