UIS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1995, for Unisys Corporation. The company is a provider of information services, support services, and computer systems. During this period, Unisys announced a major restructuring to dismantle its matrix management structure and realign into three business units, aiming to reduce costs by at least $400 million by the end of 1996. Additionally, the company sold its defense business to Loral Corporation in May 1995 for $862 million, which is reported as a discontinued operation.

Key Financial Metrics

Note: Net income for the nine months includes $72.4 million from discontinued operations. Earnings per share figures reflect a loss from continuing operations.

Material Changes vs. Prior Period

• Revenue: Total revenue for the quarter declined 1% to $1.46 billion compared to $1.48 billion in the prior year. Sales revenue dropped 21% due to lower enterprise system and server sales, while Services revenue increased 27% to $546.3 million.
• Profitability: The company reported an operating loss of $28.2 million for the quarter, a significant reversal from the $63.0 million operating income in the same period in 1994. Net income from continuing operations turned negative ($32.2 million loss) compared to a $30.8 million profit in 1994.
• Margins: Total gross profit margin decreased to 31% from 37% in the prior year. Sales gross margin fell to 38% from 46%, and Services gross margin declined to 19% from 23%, attributed to project cost adjustments and a shift to lower-margin products.
• Cash Flow: Operating cash flow swung from a positive $120.9 million in the prior nine-month period to a negative $251.4 million in 1995, driven by restructuring payments, reduced payables, and higher tax payments.
• Discontinued Operations: The sale of the defense business generated $862 million in cash proceeds, reported as discontinued operations, significantly impacting the nine-month net income figure.

Guidance, Outlook, and Risks

• Restructuring Charge: Management expects to take a significant charge against earnings in the fourth quarter of 1995 related to the restructuring initiatives. The exact size of the charge and impact on employment levels are being determined.
• Cost Savings: The realignment into three business units targets annual savings of at least $400 million by the end of 1996 through overhead reduction and facility consolidation.
• Deferred Tax Assets: The company holds $1,057 million in net deferred tax assets but has established a $327 million valuation allowance, deeming only $730 million realizable based on forecasted taxable income. Management will re-evaluate this in light of the restructuring.
• Covenant Waiver: Banks waived compliance with the interest coverage covenant for the third quarter of 1995. Further discussions are expected regarding the anticipated fourth-quarter charge.
• Risks: Risks include competitive pricing pressure, volatility in services contract margins (particularly fixed-price contracts), and the potential inability to realize deferred tax assets if forecasted income is not achieved.

Investor Verification Checklist

• Verify the magnitude of the anticipated fourth-quarter restructuring charge and its impact on full-year earnings.
• Confirm the status of discussions with banks regarding the interest coverage covenant waiver and future compliance.
• Monitor the realization of deferred tax assets and potential adjustments to the valuation allowance following the restructuring.
• Assess the sustainability of the 27% growth in Services revenue amidst declining gross margins.
• Review the final purchase price adjustment for the defense business sale, expected to be reported in the December 1995 quarter.