Unisys Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; filed November 1, 2012. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2011 periods unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $877.4 | $1,020.1 | $2,727.1 | $2,868.5 |
| Operating profit | $61.2 | $113.0 | $204.6 | $203.0 |
| Operating margin | 7.0% | 11.1% | 7.5% | 7.1% |
| Gross margin | 24.9% | 27.9% | 25.2% | 24.6% |
| Income before taxes | $27.6 | $117.1 | $144.7 | $94.7 |
| Consolidated net income (loss) | $(5.1) | $83.7 | $67.9 | $42.3 |
| Net income (loss) attributable to Unisys common shareholders | $(12.4) | $78.6 | $47.6 | $26.2 |
| Diluted EPS attributable to Unisys | $(0.28) | $1.63 | $1.08 | $0.60 |
Revenue and segments: Q3 revenue fell 14%; Services declined 14.6% to $748.0, while Technology fell 10.0% to $129.4. Systems integration and consulting decreased 24.6%, and outsourcing fell 7.1%. Enterprise-class software and servers were essentially flat in Q3. For the first nine months, revenue declined 4.9%; Services decreased 5.3% and Technology 2.5%. Nine-month ClearPath and other enterprise-class software/server revenue rose 5.8%, while other Technology revenue fell 56.2%.
Cash flow and liquidity: Nine-month operating cash flow was $107.4, down from $157.7. Investing used $90.2 and financing used $200.1; cash declined $173.3 to $541.6 at September 30, from $714.9 at year-end 2011. Cash included approximately $351 held by foreign subsidiaries, potentially subject to tax upon repatriation. The company reported total debt of $210.8, down $148.9 from year-end. Its $150 revolving facility had no borrowings, $26.3 of letters of credit, and $75.1 availability net of letters of credit. Management said it expected adequate near-term liquidity and reported compliance with lending covenants.
Margins and other metrics: Q3 Services operating margin declined to 6.0% from 8.7%; Technology operating margin increased to 29.1% from 25.8%. For nine months, the respective segment margins were 6.3% and 27.8%. Interest expense fell to $25.0 for nine months from $51.7, reflecting debt reduction. The balance sheet showed a $1,152.6 total deficit and $2,032.1 of long-term postretirement liabilities at September 30.
Material changes and unusual items
- Management attributed revenue weakness to soft U.S. Federal business, weak demand for systems integration, and foreign-exchange headwinds. U.S. Federal revenue declined $52.4, or 29%, in Q3 and $114.4, or 23%, for the first nine months. Currency reduced revenue by approximately 4 percentage points in Q3 and 3 percentage points over nine months.
- Q3 results included $23.1 of debt-redemption charges and $3.4 of foreign-exchange losses. Nine-month results included $30.6 of debt-redemption charges and $7.3 of foreign-exchange losses. The company issued $210 of 6.25% senior notes due 2017 and retired $362.3 principal amount of higher-coupon debt. The nine-month debt retirement charge was $30.6.
- Pension expense rose to $76.7 for nine months from $26.2; Q3 expense was $29.9 versus $8.5. A $10.6 pretax gain from the sale of the South African joint-venture interest was recorded as a reduction of SG&A. The venture had approximately $40 of 2011 revenue and $8 of pretax income.
- Nine-month cash pension contributions were $175.1 versus $63.6 a year earlier, contributing to lower operating cash flow. The filing reported $9.2 of additional tax provision from a U.K. tax-rate change. The prior-year period included a $29.2 tax benefit from settlement of two European tax matters.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management estimated 2012 pension expense of approximately $107, compared with $34.3 in 2011, and worldwide defined-benefit pension contributions of approximately $200. The filing cites lower expected returns on U.S. plan assets and lower discount rates as drivers of higher pension expense.
- Management said July 2012 U.S. legislation reduced the estimated 2012 cash funding requirement for the U.S. qualified pension plan to $111.1 from a prior estimate of $143. Deteriorating plan assets or discount rates could increase future contributions and constrain liquidity.
- The company maintained a full valuation allowance against U.S. deferred tax assets and certain foreign deferred tax assets. A 2011 ownership change subjects U.S. tax attributes to annual limitations; management did not expect near-term U.S. cash tax liability based on available information and tax-planning strategies.
- Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $143, inclusive of related interest. The company said it had adequate provisions overall but warned that litigation outcomes are unpredictable and could materially affect a particular period.
- Government-contract matters include Department of Justice reviews of labor categorization, overtime and cyber-intrusion protection relating to TSA contracts, with settlement discussions underway on labor and overtime; and a GSA review of pricing and disclosure compliance, for which the company made a voluntary disclosure. Outcomes were not predictable.
- Other named litigation includes a Belgian government claim of approximately €28 million, with a company counterclaim of approximately €18.5 million, and a Lufthansa claim of approximately €21.4 million, with a company counterclaim of approximately €1.5 million. The company stated it believed it had valid defenses.
- Risks identified include competition and pricing pressure, weak economic conditions, dependence on major and government clients, contract execution and profitability, pension funding, international currency and regulatory exposure, data-security breaches, and access to capital. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether U.S. Federal demand and systems-integration activity recover, given their role in the revenue decline.
- Cash generation and liquidity after substantial pension contributions; confirm the timing and amount of the remaining 2012 contributions and foreign cash repatriation constraints.
- Whether pension assumptions, funding requirements, and the expected $107 full-year pension expense change.
- Developments and potential financial exposure in the TSA, GSA, Brazilian tax, Belgian, and Lufthansa matters, including amounts accrued versus reasonably possible losses.
- The sustainability of Technology segment growth and margins, alongside declines in Services and other Technology revenue.
- Debt terms and refinancing capacity following the 2017 notes issuance and retirement of higher-coupon debt; also monitor revolving-facility availability and covenant headroom.