UIS

Unisys Corp. 10-Q Summary: Period Ended June 30, 1995

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Unisys Corporation for the period ended June 30, 1995. The company operates in information management, providing sales, services, and equipment maintenance. A material event during this period was the sale of its defense business to Loral Corporation in May 1995 for $862 million in cash. Results for the defense business are reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenue increased 4% to $1.496 billion for the quarter compared to $1.442 billion in the prior year, driven primarily by foreign currency translation. Sales revenue declined 5%, while Services revenue increased 23% to $508.3 million.
• Profitability: Net income from continuing operations improved significantly to $39.8 million ($0.06/share) from $22.7 million ($0.04 loss/share) in the prior year quarter. Total net income was $39.8 million compared to $49.9 million in the prior year, which included $27.2 million from discontinued operations.
• Margins: Total gross profit margin decreased to 36% from 38% in the prior year. Services gross margin declined to 20% from 25% due to project cost adjustments. Operating margin was 4.4% compared to 5.4% in the prior year.
• Cash Flow: Operating activities used $260.4 million in cash for the six-month period, a significant increase in usage compared to $49.4 million in the prior year. This was due to reduced payables, higher tax payments, and reduced accounts receivable discounting.
• Balance Sheet: Total debt decreased by $38.3 million to $1.91 billion. Stockholders' equity increased by $74.7 million to $2.68 billion.

Outlook, Risks, and Management Commentary

• Capital Structure: Proceeds from the defense business sale ($862 million) are expected to strengthen the capital structure and fund investments. Net debt as a percent of total capital decreased to 26% from 29%.
• Cost Management: R&D expenses declined to $87.5 million (from $111.8 million) due to a shift to common hardware platforms. SG&A expenses increased, largely due to foreign currency effects and higher marketing costs.
• Risks: Management notes continued pressure on gross margins due to competitive pricing and a shift to lower-margin products. Volatility in services margins remains a risk due to large, fixed-price contracts.
• Tax Contingencies: The company has a valuation allowance of $327 million against deferred tax assets. It expects to settle open tax years with the IRS in 1996, resulting in cash payments of approximately $130 million, which will not affect earnings.
• Foreign Currency: A weakening U.S. dollar had a positive effect on net income and revenue translation.

Investor Verification Checklist

• Verify the final purchase price adjustment for the defense business sale to Loral Corporation, as the full impact will be reported in a future period.
• Monitor the realization of deferred tax assets, specifically the $1.057 billion net deferred tax asset position and the $327 million valuation allowance.
• Assess the sustainability of the 23% growth in Services revenue against the declining 20% gross margin in that segment.
• Review the $130 million expected cash outflow for IRS settlements in 1996 and its impact on liquidity.
• Track the company's ability to maintain operating cash flow given the significant cash usage ($260.4 million) in the first half of 1995.