Unisys Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts are in millions unless stated otherwise. Unisys operates Services and Technology businesses.
Financial performance and position
- Q2 revenue: $858.6, down 6.8% year over year. Services revenue fell 9.3% to $739.7; Technology revenue rose 12.6% to $118.9.
- First-half revenue: $1,668.5, down 9.8% from $1,849.7. Services declined 10.7% to $1,462.7; Technology declined 2.5% to $205.8.
- Profit: Q2 operating profit was $38.0 versus $79.0; net income attributable to common shareholders was $20.4, or $0.46 diluted per share, versus $46.6, or $0.99. First-half operating profit was $39.6 versus $143.4; the company recorded a common-shareholder loss of $13.5, or $0.31 per share, versus income of $60.0, or $1.33.
- Margins: Q2 gross margin decreased to 23.4% from 26.4%; first-half gross margin decreased to 21.7% from 25.4%. Services and Technology segment operating margins were 4.0% and 23.9% in Q2, versus 8.0% and 28.6%. First-half segment operating margins were 3.5% and 13.6%, versus 6.5% and 27.1%.
- Cash flow: First-half operating cash flow was $30.2, down from $90.5. Cash decreased $80.0 to $575.6; investing used $67.4 and financing used $18.2. Pension contributions were $61.3, compared with $118.8 in the prior-year period.
- Liquidity and debt: Cash was $575.6 at June 30, including approximately $358 held by foreign subsidiaries. Long-term debt was $210.0, with no revolver borrowings; revolver availability, net of letters of credit, was $72.1. The company reported total stockholders’ deficit of $1,536.0, including long-term postretirement liabilities of $2,429.2.
Changes, outlook, and risks
- Management attributed weaker results principally to soft demand in Services, especially project-based systems integration and consulting. First-half systems integration revenue fell 21.8%. Q2 Technology growth was led by ClearPath products, although Technology margins fell on revenue mix.
- The prior-year first half included $47.6 of South African subsidiary revenue and a $10.6 pretax gain on its sale, as well as $7.6 of pretax income from its operations. Lower interest expense in 2013 reflected 2012 debt reductions. Q2 other income included $15.7 of foreign-exchange gains; first-half 2013 included a $6.5 Venezuela devaluation loss in Q1.
- Management expected approximately $140 of 2013 defined-benefit pension contributions and approximately $20 of postretirement contributions. Expected full-year 2013 pension expense was approximately $91. The company stated that it expected adequate near-term liquidity and compliance with lending covenants. The filing provides no clear full-year revenue or earnings guidance.
- The UK tax-rate change was expected to increase the income-tax provision by approximately $11.7 when reflected in Q3 2013. U.S. deferred tax assets remain subject to a full valuation allowance, and tax expense may vary with geographic income.
- Material legal matters include TSA contract labor/overtime settlement discussions and a continuing cyber-protection review; a Belgian government claim of approximately €28 (with Unisys counterclaiming approximately €18.5); and a July 2 German court decision finding a subsidiary liable to Lufthansa, which Unisys said it would appeal. Brazil unreserved tax-related matters were estimated at up to approximately $130. Maine had demanded approximately $32 from the buyer of Unisys’s former HIM business; Unisys accepted a partial indemnity obligation. A separate buyer lawsuit concerning Idaho was dismissed, with leave to amend. The company said outcomes are uncertain and adverse resolutions could materially affect a reporting period.
- Other risks highlighted include continued weak IT demand, competition and pricing pressure, execution and profitability of outsourcing and fixed-price contracts, client retention, international currency and regulatory exposure, data security, and significant pension obligations.
Important facts for investors to verify
- Whether Services demand and margins stabilize, particularly in systems integration and outsourcing.
- Whether operating cash generation can support pension contributions, investment needs, and other obligations; also assess the location and accessibility of foreign-held cash.
- Developments, accruals, and potential exposure in the TSA, Lufthansa, Brazil, and former HIM-related matters; the filing does not provide a clear aggregate maximum loss for these proceedings.
- Actual pension funding and plan assumptions versus the stated 2013 contribution estimate, and the implications of the substantial postretirement liability.
- Execution of the $50 stock-repurchase authorization: $11.5 was spent in Q2, with approximately $38.5 remaining at June 30.