Letter to Shareholders

To Our Shareholders:

Last year in this report I outlined a four-part plan to improve our financial results at Unisys and achieve consistent, predictable profitability and free cash flow.

A year later I am pleased to report that we made significant progress on this plan in 2009. In an extremely challenging economic environment, our 26,000 employees stayed focused on executing on our priorities and delivered three consecutive profitable quarters and a much improved year for Unisys.

For the full year of 2009 we reported net income of $189 million compared to a year-ago net loss of $130 million, which included pretax cost-reduction charges of $103 million. Our operating profit margin improved dramatically to 7.5 percent of revenue in 2009, up from less than one percent of revenue in 2008.

Just as important, we generated $397 million of operating cash flow in 2009, up 56 percent from 2008. We generated $196 million of free cash flow (cash generated from operations less capital expenditures) in 2009 compared with negative free cash flow the prior year. This enabled us to increase our cash position at year-end 2009 by more than $100 million.

We also made progress in strengthening our balance sheet in 2009. During the year we completed a private debt exchange that reduced our long-term debt and, along with our improved free cash flow, allowed us to successfully address the maturity of $300 million of senior notes due in March 2010.

We made this progress despite lower revenue as we narrowed our focus, refreshed our portfolio, and worked our way through a global recession. Our revenue declined 12 percent in 2009 to $4.6 billion, with about four percentage points of that decline coming from foreign currency fluctuations. From an industry perspective, our public sector revenue grew in 2009, driven by growth in our U.S. federal government business, but this was not enough to offset revenue declines in our financial services and commercial sectors.

Progress on Business Priorities

The economic environment over the past year made it critical that we move quickly and with urgency to execute on our business priorities, reduce costs, and strengthen our balance sheet.

As you recall from my letter last year, we have four priorities in our turnaround program at Unisys. Those priorities are to:

  • Concentrate the company's resources and investments on fewer, high-potential markets with a focused set of offerings;
  • Create clear value propositions within our chosen markets that differentiate Unisys in the minds of our customers;
  • Enhance the cost-efficiency of our labor model and drive expansion in our gross margins; and
  • Simplify the organization and significantly reduce our expense structure.

We made good progress across these priority areas over the past year. While there were many accomplishments, here are some of the highlights:

Resource Concentration. During 2009 we concentrated our investments and resources around four large, growing markets where Unisys has core strength.

Those four growth markets are security; data center transformation, including our server business; end user outsourcing; and applications modernization. Within these markets, we are leveraging the company's expertise, experience, and solution offerings to pursue opportunities for profitable growth.

In addition, to narrow our focus we are also divesting selected operations that fall outside of our focus areas. During 2009 we made a number of smaller divestitures, including specific country operations where we lacked the scale to compete cost-effectively.

Early in 2010, we completed the sale of our check and cash automation equipment and related U.S. maintenance business and supplies business to a private equity firm. We are currently in the process of completing the sale of our U.S. health information management business to Molina Healthcare for approximately $135 million in cash. We expect this divestiture to take place in the first half of 2010.

Value Propositions and Market Differentiation. Across our four focus areas, we did a great deal of work in 2009 to strengthen our portfolio of offerings and differentiate Unisys and our offerings in the marketplace.

In security, for instance, we announced our Secure Cloud solutions and continued to enhance our biometric-based solutions. In data center and end user outsourcing, we announced improved Converged Remote Infrastructure Management offerings and an enhanced set of End-User Productivity Services.

In our server business, we introduced new features and price-performance for our ClearPath family, including enhancements that broaden our capability to modernize legacy applications that run on this powerful platform.

Recognizing the critical importance of service quality, we also continued to expand the list of externally audited ISO and ITIL certifications we have earned for our services portfolio and global service locations. This is important to help ensure our clients receive a consistently high level of service from Unisys around the world. We believe the scope of our global certifications is among the strongest in the industry, and we will continue this focus on service excellence in 2010.

Our refocused portfolio is helping us win major new service contracts across our areas of strength. Over the past year we've announced significant contracts with such organizations as Unilever, Henkel, the European Union, Nationwide Building Society, Travelsky, the U.S. Department of Agriculture, the U.S. Federal Emergency Management Agency, the Commonwealth of Pennsylvania and the city of Santa Clara, California.

We have more work to do in this area of market focus and differentiation. But with the work we've done to date, we are in a stronger position to pursue opportunities, and we will be stepping up our focus on profitable growth in our chosen market areas.

Service Cost-Efficiency. To enhance the profitability of our services business, we set a goal last year to lower our annualized cost of services delivery by $250 million.

Against that goal, to date we've taken actions to reduce cost of services delivery by about $220 million. We saw initial benefits from this effort in improved services gross profit margins in 2009.

While this is good progress, we must continue our work to deliver our services more cost efficiently. For instance, while we've increased our use of lower-cost labor to about 20 percent of our workforce at year-end 2009, our competitors have a much higher percentage of their workforce in low-cost labor. So this area will remain a key focus for us.

Business Simplification and Overhead Reduction. A year ago I told you that our business was too complicated and our overhead structure too expensive for Unisys to compete effectively in the information technology industry. We set a goal to reduce our annualized selling, general and administration (SG&A) expenses by $250 million.

We've made a great deal of progress on this front. By simplifying the organization and taking other actions, we achieved about $240 million of our targeted savings in 2009 and reduced our SG&A expenses by 28 percent.

But here, too, we are not done. As the economic and competitive environment remains challenging, we will continue to look for opportunities to reduce our expenses and operate more cost-effectively.

Priorities in 2010

For 2010, our priorities haven't changed.

Our goal for Unisys is to become a consistently and predictably profitable company that generates free cash flow and delivers outstanding customer service and profitable growth in our targeted markets.

To get there, we must continue to focus. We must continue to strengthen our offerings and differentiation to drive profitable growth in our focused markets. We must continue to enhance the cost-efficiency of our labor model, simplify our operations and reduce overhead. And we must continue our work to strengthen our balance sheet and reduce debt.

So as we move through the year ahead, we are maintaining our sense of urgency and are focused on execution. Unisys today is a stronger, more profitable, more focused company than we were a year ago. But our potential is even greater. I look forward to reporting to you on our continued progress.

J. Edward Coleman