Unisys, Earnings, BPO

Unisys reports second-quarter 2004 earnings

15 Jul 2004 | (News)

Unisys Corporation today reported second-quarter 2004 net income of $36.3 million, or 11 cents per diluted share, compared with second-quarter 2003 net income of $47.2 million, or 14 cents per diluted share, excluding the impact of pension accounting in both years.

In the second quarter of 2004, pension expense was $24.8 million compared with pension income of $7.9 million in the prior-year quarter. On a GAAP basis including pension accounting in both periods, net income for the second quarter of 2004 was $19.4 million, or 6 cents per diluted share, compared with net income of $52.5 million, or 16 cents per diluted share, in the year-ago period. Revenue for the second quarter of 2004 declined 3% to $1.39 billion from revenue of $1.43 billion in the second quarter of 2003. Currency had a 4 percentage-point positive impact on the company's revenue in the second quarter, reflecting a weak U.S. dollar against most major currencies worldwide.


Comments from Chairman and CEO Larry Weinbach

"This was a disappointing quarter for Unisys, particularly given the track record of consistency that Unisys had shown in meeting or exceeding our earnings forecasts over the past several years," said Unisys Chairman and CEO Lawrence A. Weinbach. "Late in the quarter we saw an unexpected slowdown, especially in infrastructure services projects and in enterprise servers. This resulted in deferrals and delays of certain technology contracts and services projects late in the quarter, leading to results that were below our original expectations as communicated in April.

"However, we did see continued growth in business process outsourcing (BPO) and in consulting and systems integration, two areas of strategic focus for the company. We were also encouraged by double-digit growth in our services orders year-over-year, driven by outsourcing, as we closed several key long-term contracts in the quarter."

Unisys said major services orders booked in the second quarter included a contract with the state of Louisiana valued at about $162 million over the base five-year period to provide Medicaid administration services for the Louisiana Department of Health and Hospitals; with all options included, the contract could be worth in excess of $300 million over a 10-year period. Other significant orders in the quarter included a five-year contract valued at approximately $27 million to provide managed services for a major U.S. financial institution; a two-year contract extension worth over $60 million with Caixa Economica Federal of Brazil to support the bank's home loan operations; and a five-year, approximately $50 million contract to provide infrastructure management and support services for a major European financial institution.

Second-Quarter Company Highlights

On a geographic basis, U.S. revenue declined 5% to $634 million. Revenue in international markets was flat in the quarter at $754 million, as growth in Europe offset revenue declines in other international regions.

Overall orders showed growth in the quarter. Services orders showed double-digit growth, driven by outsourcing, while technology orders declined.

Excluding the impact of pension accounting in both periods, the company's second-quarter 2004 gross profit margin improved slightly over the prior year to 27.7% while the second-quarter operating margin declined 210 basis points year-over-year to 3.4%. On a reported basis including the impact of pension accounting in both years, the second-quarter 2004 gross margin declined from 27.5% a year ago to 26.4% and operating margin declined from 6.0% to 1.6%.

SG&A expenses, excluding the impact of pension accounting, represented 19.3% of revenue in the second quarter of 2004, compared with 17.2% of revenue in the year-ago quarter. Including pension expense, SG&A expenses represented 19.7% of revenue in the quarter as compared with 17.0% of revenue a year ago. The higher SG&A expenses in the quarter were due in large part to foreign exchange currency impacts.

Other income of $24.0 million in the second quarter, compared to $10.6 million in the second quarter of 2003, primarily reflected foreign exchange gains in the current quarter compared to foreign exchange losses a year ago.

Second-Quarter Business Segment Highlights

Customer revenue in the company's services segment was flat in the second quarter of 2004 compared to the year-ago period, as growth in consulting and systems integration offset double-digit revenue declines in infrastructure services. Outsourcing revenue was down slightly in the quarter, with double-digit growth in BPO offset by revenue declines in infrastructure managed services and data center outsourcing. Excluding the impact of pension accounting in both periods, services gross profit margin was flat in the quarter at 20.0%, while services operating margin declined to 2.5% from 5.2% a year ago. On a reported basis including the impact of pension accounting, gross profit margin in the services business declined from 20.0% to 18.5% and services operating margin declined from 5.5% to 0.7%.

Customer revenue in the company's technology segment declined 12% in the second quarter, reflecting single-digit declines in enterprise servers and double-digit declines in specialized technologies. In the enterprise server area, ClearPath sales showed single-digit declines while sales of Intel-based ES7000 servers rose slightly from the year-ago period. Excluding the impact of pension accounting in both periods, technology gross margin improved to 53.5% in the second quarter of 2004 from 46.4% in the year-ago quarter, reflecting a richer mix of enterprise server sales. Technology operating margin improved slightly to 6.7% compared with 6.4% in the year-ago period. On a reported basis including the impact of pension accounting, technology gross margin improved from 46.6% to 53.3% and operating margin declined from 7.8% to 5.4%.

Cash Flow Highlights

Unisys generated $98 million of cash flow from operations in the second quarter compared with $113 million in the year-ago quarter. Capital expenditures in the second quarter of 2004 were $104 million, including $67 million invested in revenue-generating projects. Unisys ended the quarter with $643 million of cash on hand.

Year-to-Date Results

Excluding the impact of pension accounting in both periods, Unisys reported net income of $80.3 million, or 24 cents per share, for the six months ended June 30, 2004, compared with net income of $81.4 million, or 25 cents per share, in the year-ago period. Net income, including the impact of pension accounting, was $48.3 million, or 14 cents per share, for the first half of 2004 compared with $91.0 million, or 28 cents per share, in the year-ago period. Revenue for the first six months of 2004 was $2.85 billion compared to $2.82 billion in the first half of 2003.

Business Outlook

"Given the business conditions we experienced in the second quarter, we have revised our estimate for the remainder of the year," Weinbach said. "We now expect full-year 2004 earnings per share, excluding the impact of pension accounting, in the 68 - 72 cents range on low single-digit revenue growth. The breakout of earnings between the third and fourth quarter is more difficult to call. Last year, we had a strong third quarter in our technology business. This year we expect technology sales in the second half of 2004 to approximate second-half 2003 levels, but expect technology revenue to decline in the third quarter and increase in the fourth quarter. Therefore, we expect earnings per share, excluding the impact of pension accounting, in the 8 - 12 cents range in the third quarter on flat revenue from the prior year. We look for full-year 2004 free cash flow (cash from operations minus capital expenditures) in excess of $50 million."

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