Unisys Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2014. Unisys reports Services (systems integration and consulting, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise software, servers, and other technology).
Financial performance and position
- Q3 revenue: $882.5 million, up 11.4% from $792.1 million. Services revenue rose 6.0% to $763.0 million; Technology revenue rose 65.7% to $119.5 million.
- Q3 profitability: Gross margin was 26.6%, versus 21.7%; operating profit was $76.6 million, versus $24.0 million. Net income attributable to common shareholders was $47.8 million, or $0.95 per diluted share, versus a loss of $11.6 million, or $0.26 per share.
- Nine-month results: Revenue was $2,450.6 million, down 0.4%. Operating profit was $72.5 million, versus $63.6 million. The company reported a common-shareholder net loss of $17.8 million, or $0.36 per diluted share, compared with a loss of $25.1 million, or $0.57 per share.
- Margins and segments: Nine-month gross margin improved to 21.8% from 21.7%. Services revenue declined 0.7%, with Services operating margin falling to 4.4% from 4.9%; infrastructure services revenue fell 15.7%. Technology revenue rose 2.1%, and its operating margin improved to 7.2% from 6.7%. Q3 Technology growth and margin gains reflected higher ClearPath software and server sales; Services margins weakened amid revenue mix and lower infrastructure-services volume.
- Cash flow: Operating cash flow for the first nine months was $15.9 million, down from $46.2 million. Pension contributions were $161.3 million versus $101.6 million. Investing activities used $129.1 million and financing activities used $30.6 million. Cash declined $163.3 million to $476.5 million.
- Liquidity and debt: Long-term debt was $214.1 million, with $1.0 million of current maturities; the company had no borrowings under its revolving facility. Facility availability was $98.6 million, net of letters of credit. Cash included approximately $364 million held by foreign subsidiaries, which could incur taxes if repatriated.
- Other balance-sheet items: Total deficit was $521.2 million, improved from $663.9 million at year-end 2013. Long-term postretirement liabilities were $1,457.8 million, down from $1,697.2 million. The mandatory convertible preferred stock converted into common shares in March 2014.
Changes, outlook, and management commentary
- Q3’s revenue and operating-profit improvement was driven chiefly by Technology sales, particularly ClearPath, while Services revenue grew. For the nine-month period, overall revenue was nearly flat; lower infrastructure-services revenue offset growth in outsourcing, consulting, and Technology.
- Nine-month other expense was $9.0 million, compared with $11.1 million of other income in 2013. The current period included $10.6 million of foreign-exchange losses, compared with $11.7 million of gains a year earlier. The filing also reports $7.4 million of Venezuelan-related pretax foreign-exchange losses in the first nine months.
- Management estimated 2014 worldwide defined-benefit pension contributions of approximately $188 million, including $80 million for the U.S. qualified plan and $108 million primarily for non-U.S. plans. U.S. pension funding needs were reduced by new legislation. Estimated 2014 pension expense was approximately $74 million, versus $93.5 million in 2013.
- The filing does not provide a clear full-year revenue or earnings forecast. Management stated it believed liquidity was adequate for expected near-term cash requirements. Technology revenue may fluctuate with the timing of customer purchases.
- The September 2014 amendment extended the $150 million secured revolving facility to June 2018 and removed the maximum secured leverage covenant. A minimum fixed-charge coverage covenant applies only if facility availability falls below specified thresholds. The company reported compliance with its lending and funding agreements.
Risks, contingencies, and unusual items
- Key risks include rapid technology change and competition; execution and profitability of consulting, fixed-price, and outsourcing contracts; client retention and contract renewals; talent retention; data-security breaches; international, currency, and economic exposures; and the potential for further pension funding requirements.
- Unisys disclosed ordinary-course litigation and claims. Examples include a Belgian government claim of approximately €28 million, with an €18.5 million counterclaim; a Lufthansa claim of approximately €21.4 million, with a lower-court liability decision under appeal; and a Molina claim of approximately $35 million. The company stated that outcomes are uncertain and that adverse resolutions could materially affect a particular period.
- Brazilian tax-related matters not assessed as remote were estimated at up to approximately $133 million, including related interest; the filing says appropriate accruals were established. The company also noted that U.S. profits or losses generally have no tax provision or benefit because of a full valuation allowance, so reported taxes can vary with the geographic mix of income.
- Management stated that disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q3 Technology sales growth, especially ClearPath, is repeatable given the company’s warning that Technology revenue varies with purchase timing.
- Whether declining infrastructure-services revenue and weaker Services margins continue, and how much of the Q3 Services growth reflected in-quarter hardware and software sales.
- Cash generation after pension contributions, projected 2014 pension funding, and the liquidity implications of cash held by foreign subsidiaries.
- Developments in the disclosed litigation and Brazilian tax matters, including any changes to estimated exposure or accruals.
- The future impact of foreign-exchange movements, tax valuation allowances, and adoption of the new revenue-recognition standard, which the company was still assessing for its January 2017 effective date.