Unisys Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Amounts are in millions of dollars, except per-share data. The filing reports Services and Technology continuing operations; the HIM business is presented as discontinued operations.
Financial performance
- Q2 revenue: $1,056.3, down 4% from $1,101.2 a year earlier. Services revenue fell 9% to $911.3; Technology revenue rose 47% to $145.0, led by enterprise-class server sales.
- Q2 profitability: Gross margin increased to 27.3% from 23.7%; operating income rose to $106.7 from $67.7, and operating margin improved to 10.1% from 6.1%. Continuing-operations income attributable to Unisys was $59.4, or $1.37 diluted EPS, versus $33.5, or $0.90.
- First-half revenue and profit: Revenue was $2,054.6, down 5%; gross margin improved to 25.5% from 21.9%. Operating income doubled to $165.6 from $82.7, with margin rising to 8.1% from 3.8%. Continuing-operations income attributable to Unisys was $42.5, or $0.98 diluted EPS, versus $4.9, or $0.13.
- Reported net income: Unisys attributable net income was $120.2 in Q2 and $108.6 for the first half, compared with $38.1 and $13.7, respectively, in 2009. The 2010 results include discontinued-operations income of $60.8 in Q2 and $66.1 for the first half, principally reflecting the HIM sale gain.
- Cash flow: First-half operating cash flow was $23.2, down from $87.7; investing used $66.2 versus $173.3, and financing used $76.9 versus $0.7. Cash declined $151.1 to $496.5. The cash-flow comparison was affected by the $100 million reduction in use of the receivables facility.
- Liquidity and debt: Cash was $496.5 at June 30, versus $647.6 at year-end 2009. Total debt was $836.4, down $75.3, including repayment of $78.0 of debt. Current assets were $1,526.7 and current liabilities $1,160.6. Stockholders’ deficit was $1,080.1; long-term postretirement liabilities were $1,507.7.
Material changes and unusual items
- Unisys completed the sale of its HIM business on April 30, 2010. The first-half discontinued-operations results include a $64.8 gain on sale; $130.3 of sale proceeds were reported in investing cash flows. At June 30, $101.3 remained in a segregated account subject to secured-note restrictions, including a potential offer to repurchase notes if more than $75 million remains 360 days after closing.
- The U.S. specialized technology check sorter and related maintenance business was sold February 1. The filing reports an additional first-half sale loss of approximately $2.8.
- First-half other expense, net, was $44.4, including $38.9 of foreign-exchange losses. The Venezuelan bolivar devaluation contributed approximately $19.9 of loss; the subsidiary adopted highly inflationary accounting effective January 1.
- Technology’s higher ClearPath sales and richer server mix drove substantial segment-margin improvement. Services revenue and operating margin remained under pressure; the company cited weaker U.S. federal project demand, declines in BPO, infrastructure services and core maintenance, and its decision to de-emphasize lower-margin work.
- U.S. accounts receivable securitization is accounted for as a secured borrowing from January 1 under a new accounting standard. No receivables were sold under the facility at June 30; the facility has a $150 million limit and includes financial and other covenants.
Outlook, risks and contingencies
- Management said it had adequate sources of liquidity for expected near-term cash requirements and expected to meet lending and funding covenants. No specific revenue or earnings guidance was provided.
- Expected 2010 cash contributions are approximately $115 million to worldwide defined-benefit pension plans and $24 million to the postretirement plan. The company reported $39.5 million and $10.4 million, respectively, contributed in the first half. It expected no U.S. qualified pension contribution in 2011 following a June 2010 legislative amendment.
- Management expected approximately $22.2 million of 2010 cash expenditures for prior cost-reduction actions. It said future results depend in part on the success of cost reductions, business focus and restructuring efforts.
- On July 27, 2010, after quarter-end, Unisys learned it had lost its protest over the TSA IT Infrastructure Program award. Its current TSA contract was due to expire at the end of August, with a three-month extension option to support transition. First-half TSA revenue was approximately $60 million.
- Risks highlighted include economic weakness and reduced IT spending, competition and technology shifts, customer and contract losses, execution and profitability of outsourcing and fixed-price work, pension funding needs, international currency and political risks, and access to credit. The filing also describes ongoing government contract reviews and litigation, including TSA and GSA matters and claims in Belgium and Germany; outcomes were uncertain. Management stated it believed provisions for legal matters were adequate.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring continuing operations versus the HIM disposal gain.
- Whether ClearPath/server demand and Technology margins can persist while Services revenue and U.S. federal business remain weak.
- The cash-flow impact of lower receivables-facility utilization, restricted HIM proceeds, debt obligations and pension contributions.
- The revenue and transition consequences of the TSA contract loss, including whether the three-month extension is exercised.
- Developments in government reviews and litigation, and any resulting financial exposure.