UIS

Unisys Corp. 10-Q Summary: Period Ended June 30, 2002

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Unisys Corporation for the three and six months ended June 30, 2002. Unisys operates in two primary segments: Services (systems integration, consulting, outsourcing, network services, and maintenance) and Technology (enterprise-class servers and specialized technologies). The company is navigating a challenging economic environment characterized by deferred customer spending on IT products and services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 7% year-over-year for the quarter and 12% for the six-month period.
  • Services: Revenue declined 4% (quarter) and 8% (six months), driven by a 14% drop in network services and a 7% drop in systems integration, partially offset by an 8% increase in outsourcing revenue.
  • Technology: Revenue declined 15% (quarter) and 23% (six months), with specialized technology sales down 36% and enterprise server sales down 4%.
• Profitability Improvement: Despite revenue declines, Net Income increased significantly (248% for the quarter, excluding the prior year's extraordinary item). Operating income rose 112% for the quarter and 16% for the six months.
  • Margins: Gross profit margin improved to 29.7% from 27.2% (quarter), and operating margin improved to 7.1% from 3.1% (quarter). This was driven by cost reduction actions, a higher mix of high-margin ClearPath server sales, and a shift away from low-margin commodity hardware.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 11% year-over-year for the quarter. R&D expenses decreased 18% due to efficiency improvements and the use of lower-cost offshore resources.
• Restructuring: The company recorded an additional provision of $20.2 million for workforce reductions (568 people) in the current quarter. It also reduced its accrued workforce reserve by $12.5 million due to retained employees.

Guidance, Outlook, and Risks

• Outlook: Management expects continued pressure from the weak economic environment. Future results depend on accelerating growth in outsourcing and managed services, recovering demand for systems integration, and market acceptance of new high-end CMP-based servers.
• Restructuring Costs: Expected future cash utilization for restructuring is approximately $72 million for the remainder of 2002 and $42 million for subsequent years. Personnel reductions are expected to total 819 for the remainder of 2002.
• Pension Liability Risk: While the U.S. pension plan assets currently exceed the accumulated benefit obligation (ABO) by ~$200 million, a decline in asset value or interest rates could trigger a minimum pension liability charge to stockholders' equity. This would not affect net income or cash flow but could impact net worth covenants.
• Deferred Tax Assets: The company holds $1,379 million in net deferred tax assets but has a valuation allowance of $342 million. Realization depends on achieving approximately $3.2 billion in future taxable income.
• Liquidity: The company maintains a $450 million credit facility with no current borrowings and a $225 million trade accounts receivable facility ($157 million utilized). Management believes funding sources are adequate.

Investor Verification Checklist

• Revenue Mix: Verify the sustainability of the outsourcing revenue growth versus the decline in network services and systems integration.
• Server Transition: Assess market acceptance of the new CMP-based ClearPath Plus systems and the competitive landscape for Intel-based ES7000 servers.
• Restructuring Execution: Monitor the actual cash outflows for the remaining 2002 restructuring charges against the projected $72 million.
• Pension Assumptions: Review the sensitivity of the pension plan's funded status to changes in interest rates and asset performance, given the potential for a balance sheet charge.
• Deferred Tax Realization: Evaluate the company's forecast for future taxable income required to realize the $1,037 million of net deferred tax assets currently recognized.