Unisys Beats Easily, Margins Swell

Unisys Corp. (UIS - Analyst Report) recently reported third-quarter revenues of $1.16 billion, down 12% from last year. The unfavorable movement in foreign exchange negatively impacted the top-line by 5%. On a constant currency basis, revenue declined 7%.

Revenues in the United States declined 3% to $542 million as growth in the U.S. federal government business was offset by declines in its commercial business. International revenues declined 18% to $618 million.

On a segment basis, revenues from the services department declined 13% year over year. Revenues from the technology department declined 4% year over year.

Gross margin improved to 26.4% from 23.9% in the previous quarter and 22.2% in the year-ago quarter as the company benefited from improved cost efficiencies in services delivery and a stronger mix of high-end enterprise servers. Management also made significant reductions in selling, general, and administrative expenses to align the cost model with the market demand. Consequently, operating profit margin increased to 10.2%, compared with 2.9% recorded a year ago and 6.7% in the previous quarter.

EPS came in at $1.48, easily beating the Zacks Consensus Estimate of 50 cents, primarily due to the reverse stock split.

During the quarter, the company generated $94 million of cash. Capital expenditures in the third quarter declined to $48 million compared to $78 million in the year-ago quarter as the company continued to tightly focus its investments.

As of Sept 30, 2009, Unisys had $474 million of cash and equivalents and total debt of $911 million. Unisys also had $1410.5 million of long-term post-retirement liabilities on its balance sheet.

Earlier, in the quarter, Unisys successfully completed private offers to exchange unsecured senior notes for secured senior notes, cash and common stock. As a result of the exchange, Unisys reduced its long-term debt and cut its 2010 debt maturities to $66 million but increased shares outstanding to 42.3 million shares (adjusted for the reverse stock split).

Last month, Unisys executed a reverse stock split of the company’s common stock at a ratio of 1:10. Management is currently engaged in a multi-step strategy of reducing costs and focusing resources on high growth areas of the IT market. Unisys is now expected to demonstrate tangible results from its ongoing restructuring, after several mistakes in execution in the past. Although management is making progress in expanding margins, we remain cautiously optimistic regarding the pace of IT spending recovery and the maturing of higher-margin legacy product sales and services.

Our long-term recommendation for Unisys remains unchanged at Neutral, which means the company will perform roughly in line with the broader market.

Based in Blue Bell, Pennsylvania Unisys is a worldwide information technology company.