Unisys Corp. 10-Q Summary: Period Ended June 30, 1999
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the six-month period ended on that date. Unisys Corporation operates in two primary segments: Services (outsourcing, systems integration) and Technology (servers, software, PCs). The company is actively managing a transition involving the elimination of its Series A preferred stock and significant Year 2000 remediation efforts.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Revenue | $1,886.4M | $1,728.5M | $3,698.8M | $3,378.2M |
| Net Income | $119.7M | $90.1M | $230.9M | $152.8M |
| Earnings Per Share (Diluted) | $0.38 | $0.24 | $0.70 | $0.38 |
| Operating Income | $235.8M | $184.3M | $490.2M | $340.4M |
| Operating Margin | 12.5% | 10.7% | 13.3% | 10.1% |
| Gross Profit Margin | 34.9% | 33.7% | 35.7% | 33.8% |
| Cash from Operations (YTD) | $136.6M (vs $226.6M YTD 1998) | |||
| Total Debt | $1.2 billion (as of June 30, 1999) | |||
| Cash & Equivalents | $438.8M (as of June 30, 1999) |
Material Changes vs. Prior Period
- Revenue Growth: Q2 revenue increased 9% year-over-year (12% excluding foreign currency impacts). Services revenue grew 12%, driven by outsourcing and systems integration. Technology revenue grew 3%, led by ClearPath servers offsetting PC declines.
- Profitability Expansion: Operating income rose 28% in Q2 and 44% YTD. Margins improved due to cost reduction programs and stringent controls on discretionary spending.
- Capital Structure: The company significantly reduced preferred stock obligations. During the first half of 1999, 15.0 million preferred shares were converted or redeemed. By August 2, 1999, all $1.4 billion of Series A preferred stock was eliminated, saving $106.5 million in annual dividends.
- Acquisitions: Cash used for investing activities increased due to the purchase of 88% of Datamec, a Brazilian application outsourcing company, for $51.9 million.
- Credit Ratings: Following the preferred stock elimination, Moody's, S&P, and Duff & Phelps upgraded the company's senior long-term debt ratings in July and August 1999.
Outlook, Risks, and Unusual Items
- Year 2000 (Y2K) Readiness: The company estimates $14.5 million in internal remediation costs incurred to date, with $0.5 million expected for the remainder of 1999. Management believes internal systems are largely compliant but notes risks regarding supplier readiness and potential litigation.
- Deferred Tax Assets: The company holds $1,404 million in net deferred tax assets. A valuation allowance of $311 million was recorded, as management determined it is more likely than not that $1,093 million will be realized. Realization depends on achieving approximately $3.3 billion in future taxable income.
- Forward-Looking Risks: Risks include foreign currency fluctuations (56% of revenue is international), fixed-price contract performance risks, and the impact of the Euro currency transition (expected to have no material effect).
- Pending Acquisition: Unisys signed an agreement to acquire PulsePoint Communications in a stock-for-stock merger, expected to close in Q3 1999.
Investor Verification Checklist
- Verify the final status of the PulsePoint Communications acquisition and the number of shares issued.
- Confirm the realization of deferred tax assets against actual future taxable income forecasts.
- Monitor the impact of the eliminated preferred stock dividends on future cash flow and earnings per share.
- Assess the actual costs and disruptions related to Year 2000 compliance for both internal systems and key suppliers.
- Review the performance of the newly acquired Datamec subsidiary in subsequent quarters.