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Profit Tanks at Unisys Corporation

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IT services provider Unisys Corporation (UIS - Free Report) reported disappointing results for the third quarter of 2010. Net income plummeted 54% year over year to $28.3 million. Earnings per share (EPS) came in at 65 cents compared to $1.48 in the year-ago quarter.

Net income from continuing operations came in at $21.8 million or 50 cents per share compared with a net income of $52.4 million or $1.27 per share in the year-ago quarter, much below the Zacks Consensus Estimate of 85 cents.

Revenue declined 13% year over year (2 percentage points was attributable to divested businesses) to $961 million in the third quarter of 2010 and was much below the Zacks Consensus Estimate of $1,029 million. Foreign exchange rates had an approximately one percentage-point negative impact on revenues in the quarter. Businesses divested by the company include UK-based Unisys Insurance Services Limited business and health information management business.

On a geographical basis, revenue in the United States declined 15% to $483 million. Revenue in international markets declined 12% to $523 million.

On a segment basis, revenues in the Services segment declined 10.2% year over year despite growth in IT Outsourcing. Unisys closed the quarter with $5.8 billion in services backlog, flat with the year-ago quarter but up from $5.5 billion at the end of the June quarter. Approximately $800 million of the September 30, 2010 services backlog is anticipated to be converted into fourth quarter 2010 services revenue.

Revenues in the Technology segment declined 31.3% year over year, driven by lower sales of ClearPath servers.

Moving onto margins, consolidated gross margin came in at 24.7%, down from 27.3% in the previous quarter and down from 26.9% in the year-ago quarter, driven by lower ClearPath enterprise sales. Services gross margin increased to 20.6% from 19.9% in the year-ago quarter a year ago due to an improved revenue mix and improved cost efficiencies in the services labor model.

Technology gross margin declined to 47.6% from 55.2% in the year-ago quarter, pulling down the consolidated gross margin. Operating margin declined to 7.9% from 10.1% in the year-ago quarter despite a 13% reduction in operating expenses.

During the quarter, Unisys used $127 million of cash in operating activities compared with cash generation of $94 million in the third quarter of 2009. Capital expenditures came in at $46 million compared with $48 million in the year-ago quarter. The company generated $81 million of free cash flow (cash from operations less capital expenditures) in the reported quarter compared with $46 million in the year-ago quarter.

As of September 30, 2010, Unisys had $688.7 million of cash on hand, up from $496.5 million on June 30, 2010.

Unisys had approximately $837.5 million of total debt at the end of the quarter, up from $836.4 million at the end of the previous quarter.

Shares plunged 23% in regular trading due to weaker-than-expected results and declined 0.33% in after-hours trading.

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