Unisys Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparisons are with Q1 2012 unless noted.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $809.9 | $928.4; down 12.8% (reported by management as down 13%) |
| Gross profit margin | 19.9% | 24.3% |
| Operating profit | $1.6 | $64.4 |
| Income (loss) before taxes | $(6.0) | $41.9 |
| Consolidated net income (loss) | $(27.4) | $19.9 |
| Net income (loss) attributable to common shareholders | $(33.9); diluted loss per share $(0.77) | $13.4; diluted earnings per share $0.30 |
| Cash provided by operating activities | $14.1 | $33.4 |
| Cash and cash equivalents | $628.6 at March 31 | $655.6 at December 31, 2012 |
| Long-term debt | $210.0, plus $0.3 current maturities | Unchanged from December 31, 2012 |
Cash used in investing activities was $24.6 million and cash used in financing activities was $3.1 million. Cash declined by $27.0 million during the quarter, including a $13.4 million adverse foreign-exchange effect. Cash held by foreign subsidiaries and branches was $393.4 million; repatriating it for U.S. use could incur taxes.
The company reported a shareholders’ deficit of $1,559.2 million and total deficit, including noncontrolling interests, of $1,545.4 million at March 31. Its $150 million secured revolving credit facility had no borrowings, $26.3 million of letters of credit outstanding, and $90.7 million of availability net of letters of credit. The company said it was in compliance with lending covenants and expected to remain compliant.
Material changes and business trends
- Services revenue fell 12.2% to $723.0 million; Technology revenue fell 17.6% to $86.9 million. Services gross margin declined to 17.4% from 18.9%; Technology gross margin fell to 45.8% from 62.2%.
- Systems integration and consulting revenue declined 31.2% to $211.7 million, reflecting weak demand for project-based work, particularly public-sector in-quarter “sell and bill” activity. Management also said execution in this area needed improvement. Outsourcing revenue rose 2.8% to $361.3 million; infrastructure services and core maintenance revenue declined.
- Technology operating margin fell to 0.2% from 25.6%, with lower ClearPath sales and a comparison against a strong prior-year quarter. Overall operating margin was approximately 0.2%, versus 6.9%.
- U.S. revenue decreased 15%; international revenue decreased 11%. Management cited delayed government decisions, lower funding on certain U.S. Federal contracts, contract roll-offs, and declines in Latin America and Asia/Pacific.
- Operating cash flow was lower year over year, though pension contributions fell to $26.6 million from $68.2 million. The prior-year quarter included a $71.7 million debt repayment and a $11.3 million gain on sale of the South African joint venture, which was sold in March 2012.
Outlook, commentary, risks, and unusual items
- No revenue or earnings guidance was provided in the supplied filing text. Management expected approximately $142 million of 2013 contributions to worldwide defined-benefit pension plans ($108 million primarily non-U.S. and $34 million U.S.), compared with $201.5 million contributed in 2012. Full-year 2013 pension expense was expected to be approximately $92 million, versus $108.2 million in 2012.
- Q1 2013 included $6.5 million of pretax foreign-exchange loss from Venezuela’s February currency devaluation and $4.3 million of total pretax foreign-exchange losses. The reported tax provision was $21.4 million despite a pretax loss; U.S. operations generally receive no tax benefit because of a full valuation allowance, and tax expense can vary with geographic income mix.
- If enacted, the announced U.K. corporate tax-rate reductions were expected to increase the company’s tax provision by approximately $12.2 million due to their effect on U.K. deferred tax assets.
- Brazilian tax-related matters not assessed as remote had estimated unreserved exposure of up to approximately $140 million, including related interest. The company said it had established appropriate accruals based on information then available. Other disclosed disputes include TSA contract reviews and settlement discussions; Belgian and Lufthansa litigation; and claims relating to the former Health Information Management business, including Maine’s approximately $32 million demand and Molina’s approximately $35 million alleged losses. The company said it believed it had valid defenses; outcomes and any losses beyond accruals were not generally estimable from the filing.
- Key risks cited include weak demand and execution in systems integration, competition and pricing pressure, contract performance and government funding or audits, pension funding needs, international and currency exposure, data-security breaches, and unpredictable litigation. The company said interim results may not indicate full-year results.
- The board had authorized up to $50 million of common and preferred stock repurchases through December 31, 2014. No shares were repurchased through March 31; the company reported that it purchased 612,332 common shares for approximately $11.5 million from April 1 through May 2, 2013.
Important facts for investors to verify
- Whether systems integration demand and execution improve, and whether the steep declines in segment margins stabilize.
- Cash generation, foreign cash accessibility, revolving-facility availability and covenant headroom, alongside planned pension contributions.
- The status and potential financial exposure of the Brazil, TSA, Belgian, Lufthansa, Maine, and Molina matters, including amounts accrued.
- Whether the U.K. tax-rate changes are enacted and whether the estimated $12.2 million deferred-tax impact is recorded.
- Post-quarter share repurchases and their effect on cash and share count.
- Distinguish the $27.4 million consolidated net loss from the $33.9 million loss attributable to common shareholders, which includes the preferred-stock dividend.