These results compared with a third-quarter 2005 net loss of $1.63 billion, or $4.78 per share, which included a:
* $1.57 billion charge for an increase in the company’s deferred tax asset valuation allowance
* Pre-tax pension expense of $44.2 million.
Comments from President and CEO Joseph W. McGrath
"We made solid progress in the third quarter in repositioning Unisys for profitability," said Joseph W. McGrath, Unisys president and chief executive officer. "Our services orders showed double-digit growth in the quarter as clients respond favorably to our more focused portfolio of services and solutions. Unisys is increasingly being chosen for leading-edge projects in security, outsourcing, and open source solutions.
"While we work to grow in our targeted market areas, we also continue to reduce our cost base in line with our more focused business model," McGrath continued. "During the quarter we continued to move aggressively to implement headcount reductions as part of our cost reduction program, and we increased our target for annualized cost savings to more than $340 million by the second half of 2007. We also expanded our use of offshore resources and announced the planned opening of two additional global sourcing centers in India. We are beginning to see benefits from our efforts in terms of reduced costs and improved margins as we work toward our goal of significantly improved operating margins in 2007 and 2008."
"While we have much more work yet to do, I am encouraged by the progress we are making in our operations and our results," McGrath said. "We look to build on our progress in the fourth quarter as we lay the foundation for stronger profitability in 2007 and 2008."
Third-Quarter Company Results
The company reported a double-digit increase in services orders in the third quarter. Services order growth was driven by growth in outsourcing orders. Technology orders declined. Overall orders rose by a single-digit percentage compared to year-ago levels.
Major wins in the third quarter included:
* The U.S. Department of Homeland Security awarded a groundbreaking contract to a Boeing-led team, which includes Unisys, to implement the first phase of its Secure Border Initiative (SBI), a comprehensive, three-phase program to secure the U.S. borders. The first phase, called SBInet, will use surveillance and information systems to enable agents and officers to detect, identify, classify, respond to, and resolve illegal entry attempts beginning at a 28-mile stretch of the Tucson, Ariz. border. Unisys is Boeing’s co-integrator on the program and is responsible for information systems integration, IT infrastructure, and certain surveillance, targeting systems, and law enforcement systems.
* The U.S. Federal Bureau of Investigation (FBI) awarded Unisys a contract to develop and implement a next-generation DNA indexing system that will allow federal, state, and local laboratories to share and compare DNA profiles in linking convicted offenders to violent crimes. The contract has a two-year base period, with an estimated value of $11 million, and a two-year option and two one-year options. If the FBI exercises all option years, the contract has an estimated total value of approximately $50 million.
* The Australian Department of Immigration and Multicultural Affairs awarded Unisys a significant contract for an identity authentication solution, using facial recognition, fingerprint scanning, and biometrics technology, to strengthen the country’s borders.
* The European Commission awarded frame contracts to a consortium led by Unisys. The contracts, which have a potential combined value of approximately $200 million to the consortium, cover a range of IT services including systems integration and application management and support.
* In the United Kingdom, Unisys continues to strengthen its partnership with BT and signed a five-year, approximately $23 million data center services contract in the quarter.
* Starbucks Coffee Company, the largest coffee retailer in the U.S., awarded Unisys a five-year contract for a range of IT services to support Starbucks’ expansion into international markets. The services include data center support, network and server monitoring, and security services.
* Unisys partnered with leading India-based IT services firm Wipro to win a five-year, $27.5 million outsourcing contract in the third quarter with a U.S. Fortune 500 company. Under the contract, Unisys will provide managed services to the client as a subcontractor to Wipro.
* The U.S. Centers for Disease Control (CDC) awarded Unisys an outsourcing contract to continue managing and expanding the CDC’s data center. The contract has one base year, with an estimated value of approximately $11 million, and four additional one-year options. If the CDC exercises all options, the contract has an estimated total value of approximately $50 million.
Revenue in the U.S. declined 5 percent in the quarter to $637 million. Revenue in international markets increased 8 percent in the quarter to $773 million.
The company’s gross profit margin and operating profit margin in the third quarter of 2006 were 18.3 percent and (3.0 percent), respectively, which include the cost-reduction charge. These compared with gross and operating profit margins of 17.7 percent and (5.5 percent), respectively, in the third quarter of 2005.
The company gave the following update with regard to ongoing cost-reduction activities as part of its strategic repositioning program:
* During the quarter Unisys identified an additional approximately 100 position reductions, primarily in continental Europe. These reductions are in addition to the 5,500 headcount reductions previously announced.
* Of the total 5,600 reductions, approximately 1,400 reductions were completed in the third quarter, and approximately 3,600 reductions have been implemented year-to-date in 2006.
* The company said it expects to complete approximately 1,400 headcount reductions in the fourth quarter, with the remaining approximately 600 reductions expected in the first half of 2007.
* Unisys expects the headcount actions to yield net annualized cost savings of about $280 million by year-end 2006 and more than $340 million by the second half of 2007.
Third-Quarter Business Segment Results
Unisys has a long-standing policy to evaluate business segment performance on operating income exclusive of restructuring charges and unusual and non-recurring items. Therefore, the comparisons below exclude the third-quarter 2006 cost-reduction charge discussed above.
Customer revenue in the company’s services segment increased 4 percent in the third quarter of 2006 compared with the year-ago period. The company reported double-digit revenue growth in outsourcing and single-digit growth in infrastructure services, which more than offset revenue declines in systems integration and consulting and in core maintenance. Gross profit margin in the services business improved to 13.9 percent from 11.3 percent a year ago, while the services operating margin improved to (1.3 percent) compared with (5.1 percent) a year ago.
Customer revenue in the company’s technology segment declined 10 percent in the third quarter of 2006 driven by a double-digit decline in enterprise servers. Gross profit margin in the technology business increased to 46.3 percent from 42.4 percent a year ago while operating margins improved to 5.5 percent from (5.9 percent) a year ago.
Cash Flow and Balance Sheet Highlights
Unisys generated $27 million of cash from operations in the third quarter compared with cash usage of $68 million in the third quarter of 2005. The company used $71 million of cash in the third quarter of 2006 for restructuring payments, compared to $15 million of cash for restructuring payments in the third quarter of 2005.
Capital expenditures in the third quarter of 2006 were $60 million compared to $85 million in the year-ago quarter. After deducting for capital expenditures, Unisys used $33 million of free cash in the quarter compared with usage of $154 million in the third quarter of 2005. The company ended the third quarter of 2006 with $612 million of cash on hand.
For the nine months ended September 30, 2006, Unisys reported a net loss of $300.0 million, or 87 cents per share. These results included total pre-tax charges of $323.5 million for headcount reductions; a first-quarter 2006 pre-tax gain of $149.9 million on the sale of the company’s shares in Nihon Unisys Limited; and a first-quarter 2006 pre-tax curtailment gain of $45.0 million related to changes in the company’s U.S. defined benefit pension plans. Pre-tax pension expense in the first nine months of 2006, including the first-quarter curtailment gain, was $91.8 million compared with pre-tax pension expense of $136.8 million in the first nine months of 2005. In the first nine months of 2005, the company reported a net loss of $1.7 billion, or $5.01 per share, which included the $1.57 billion charge for an increase in the deferred tax asset valuation allowance. Revenue for the first nine months of 2006 was $4.21 billion compared to revenue of $4.19 billion for the comparable period in 2005.
Unisys will hold a conference call today at 8:15 am EDT to discuss its results. The listen-only Webcast, as well as the accompanying presentation materials, can be accessed via a link on the Unisys Investor Web site at www.unisys.com/investor. Following the call, an audio replay of the Webcast, and accompanying presentation materials, can be accessed through the same link.
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