Unisys Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unisys provides Services (systems integration and consulting, outsourcing, infrastructure services and maintenance) and Technology (enterprise software, servers and other technology). Figures below are in millions of dollars except per-share data.
Financial results and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $921.3 | $937.2 | $1,849.7 | $1,848.4 |
| Gross margin | 26.4% | 22.8% | 25.4% | 22.8% |
| Operating profit | $79.0 | $48.1 | $143.4 | $90.0 |
| Income (loss) attributable to common shareholders | $46.6 | $(11.6) | $60.0 | $(52.4) |
| Diluted EPS | $0.99 | $(0.27) | $1.33 | $(1.22) |
| Operating cash flow | Not stated by quarter | $90.5 | $63.9 |
- Q2 Services revenue fell 3% to $815.7; Technology revenue rose 12% to $105.6. First-half Services revenue was nearly flat at $1,638.7, while Technology increased 3% to $211.0.
- Q2 segment operating margins were 8.0% for Services and 28.6% for Technology, versus 7.1% and 2.4%, respectively, a year earlier. First-half margins were 6.5% and 27.1%, versus 5.6% and 7.0%.
- At June 30, cash was $659.7, down from $714.9 at year-end 2011. Total debt was $292.4, down $67.3; balance-sheet long-term debt was $291.8, with $0.6 current maturities. Stockholders’ deficit was $1,199.0 and total deficit was $1,190.0.
- Six-month investing cash use was $59.6 and financing cash use was $87.3. Cash declined $55.2 over the period to $659.7. Approximately $384 of cash was held by foreign subsidiaries.
- Gross margin improvement reflected better margins in both businesses. SG&A was $142.0 in Q2 and $283.4 for the half; R&D was $22.2 and $42.2, respectively.
Changes versus prior comparable periods
- Revenue declined 2% in Q2, but was essentially unchanged for the first half. Foreign exchange reduced reported revenue growth by five percentage points in Q2 and three points in the first half.
- U.S. Federal revenue fell approximately 20%: $30.6 in Q2 and $62.1 in the first half. Management said this softness significantly weighed on revenue growth.
- Outsourcing grew 7% in Q2 and 4% for the half. Systems integration and consulting fell 8% in Q2 but was flat for the half. Infrastructure services and core maintenance declined in both periods. Enterprise-class software and servers grew 27% in Q2 and 10% for the half, driven by ClearPath; other technology revenue declined.
- Interest expense fell to $7.9 in Q2 and $17.2 for the first half, from $13.3 and $39.2, respectively, reflecting debt reduction. Other expense improved substantially year over year, partly because prior-year debt-retirement charges were much larger.
- First-half 2012 net income included a $10.6 pretax gain on the sale of the South African joint venture. The 2011 comparison included a $77.5 debt-retirement charge and a $7.1 Brazil-related charge. Q2 2011 also included a $30.3 benefit from settling two European tax matters.
Outlook, risks and unusual items
- No revenue or earnings guidance is provided in the supplied filing text. Management said it expected adequate near-term liquidity and expected to meet its financing covenants.
- Management estimated 2012 worldwide defined-benefit pension contributions of approximately $200, including $110 for the U.S. qualified plan, following $118.8 contributed in the first half. A July 2012 law was expected to reduce 2012 U.S. qualified-plan funding from an earlier $143 estimate to about $110. Expected 2012 pension expense was approximately $100, versus $34.3 in 2011. Postretirement-plan contributions were estimated at $23 for 2012.
- On July 25, 2012, after quarter-end, Unisys called $84.5 of its 12.5% senior notes for redemption. It expected a third-quarter charge of about $6.4 and an approximately $10 annual reduction in interest expense.
- The company had no borrowings under its $150 revolving credit facility; $26.3 of letters of credit were outstanding and availability was $80.9 net of letters of credit. The agreement includes financial covenants and collateral provisions.
- Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $140. The filing also describes ongoing government reviews of the TSA contract, including labor categorization, overtime and cyber-intrusion protection, and a GSA pricing and disclosure review. Outcomes were not predictable. Other disclosed litigation includes Belgian government and Lufthansa contract disputes; management said possible losses beyond accruals were generally not estimable or were not expected to be material, while acknowledging adverse outcomes could materially affect a particular period.
- Other risks include declining federal demand, competition, contract performance and renewal, outsourcing implementation and asset recoverability, data security, international and foreign-exchange exposure, pension funding, and possible limits on U.S. tax attributes under ownership-change rules. A full valuation allowance applies to U.S. deferred tax assets; management did not expect near-term U.S. cash tax liability based on available information and tax-planning strategies.
- Q2 pension expense was $21.1 versus $8.7 a year earlier and included a $5.7 curtailment gain related to a Netherlands plan amendment. First-half pension expense was $46.8 versus $17.7.
Important facts for investors to verify
- Whether Services trends—especially federal, infrastructure and maintenance revenue—stabilize, and whether ClearPath growth persists.
- Actual pension expense and cash contributions versus management’s 2012 estimates, and the effects on liquidity.
- Progress, charges and interest savings from the post-quarter $84.5 note redemption; also monitor remaining debt and facility availability.
- Developments in the TSA and GSA reviews, Brazilian tax exposures and other litigation, including whether accruals remain adequate.
- How much of reported earnings improvement reflects ongoing operations versus debt-retirement comparisons, the South African sale gain, pension items and tax effects.
- Foreign cash repatriation needs and potential taxes, plus any determination of ownership changes that could limit use of tax attributes.