Unisys Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Unless stated otherwise, amounts are in millions of U.S. dollars. Unisys provides Services (including systems integration, outsourcing, infrastructure services and maintenance) and Technology (including enterprise servers). Prior-year results include discontinued operations from businesses sold in 2010; continuing-operations comparisons are more informative.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $937.2 | $1,037.0 | $1,848.4 | $2,014.4 |
| Operating profit | $48.1 | $106.5 | $90.0 | $165.0 |
| Income (loss) from continuing operations before tax | $(14.6) | $73.7 | $(22.4) | $68.8 |
| Net income (loss) attributable to common shareholders | $(11.6) | $120.2 | $(52.4) | $108.6 |
| Diluted earnings (loss) per common share | $(0.27) | $2.77 | $(1.22) | $2.50 |
- Revenue and margins: Q2 revenue fell 9.6%; first-half revenue declined 8.2%. Gross margin was 22.8% in Q2 versus 27.8% a year earlier, and 22.8% for the first half versus 26.0%. Q2 operating margin was 5.1% versus 10.3%.
- Segment trends: Q2 Services revenue decreased 5.5% to $842.7; Services operating margin improved to 7.1% from 6.1%. Technology revenue fell 34.8% to $94.5, with Technology operating margin down to 2.4% from 26.8%, mainly due to weaker ClearPath sales. First-half Services and Technology revenue fell 5.7% and 24.5%, respectively.
- Cash flow: First-half operating cash flow was $63.9, compared with $23.2 in 2010. Investing used $69.7 and financing used $215.9. Cash declined by $203.3 to $625.0 from $828.3 at year-end 2010, principally reflecting debt repayments.
- Debt and capital: Total debt was $447.4 at June 30, down $376.6 from December 31, 2010. The company issued $249.7 net proceeds of 6.25% mandatory convertible preferred stock, then redeemed or repurchased $389.9 principal amount of secured notes. Management estimated annual interest expense would decline about $53, against preferred dividends of approximately $16.2 annually until conversion in 2014. Stockholders’ deficit was $661.8.
- Liquidity: The company reported $625.0 cash and a new five-year secured revolving facility of up to $150, subject to eligible U.S. receivables and facility covenants. The facility replaced the prior receivables securitization facility. Management said near-term liquidity was adequate and reported compliance with lending covenants at quarter-end.
- Pensions: First-half pension expense was $17.7 versus pension income of $1.5 in 2010. Expected 2011 defined-benefit pension contributions were approximately $115, mainly to international plans; the company also expected about $22 of postretirement contributions.
Material changes and unusual items
- Management attributed the revenue and operating-profit decline chiefly to weaker Technology/ClearPath sales and a decline in U.S. Federal business. Q2 U.S. Federal revenue fell approximately $62 (29%); the prior-year quarter included about $31 from a TSA contract that expired in November 2010. Federal budget uncertainty delayed awards and funding.
- Q2 other expense, net was $49.4, including a $45.7 debt-repurchase charge and $7.1 for a Brazilian non-income-tax matter. The first-half debt-related charge was $77.5. These charges materially affected reported results.
- Q2 income taxes included a $30.3 benefit from settling two European tax matters. The company maintained a full valuation allowance on U.S. deferred tax assets. It expected an approximately $8 tax-provision increase in Q3 from enacted UK tax-rate reductions.
- Prior-year net income included discontinued-operation income of $61.0 for Q2 and $66.7 for the first half, including a gain on sale; 2011 had no discontinued-operation income.
- The company adopted revised revenue-recognition standards prospectively from January 1, 2011. It said applying them to 2010 transactions would not have materially changed reported revenue, but it could not reasonably estimate the impact on future periods.
Outlook, risks and contingencies
The filing provides no specific full-year revenue or earnings guidance. Management expected adequate near-term liquidity, lower annual interest expense following debt reduction, and continued pension funding requirements; it anticipated an approximately $100 pension contribution to the U.S. qualified plan in 2012 based on then-current assumptions. Management cautioned that interim results may not indicate full-year results.
- Key business risks include continued weakness or volatility in U.S. government awards, demand for ClearPath and other enterprise servers, competition and pricing pressure, execution and profitability of long-term outsourcing and systems-integration contracts, and retention of major clients.
- Unisys cited substantial pension obligations, foreign-exchange and international operating exposures, access to capital markets, and possible limitations on U.S. tax attributes. It believed a Section 382 ownership change may have occurred in Q1 2011, but the determination remained uncertain; the company did not expect near-term cash taxes based on then-available information.
- Government matters include a DOJ review of labor categorization, overtime and cyber-intrusion protection under TSA-related contracts, with preliminary settlement discussions on labor issues, and a preliminary GSA audit of contract pricing and disclosure compliance. Outcomes were not predictable.
- Other disclosed litigation included the Belgian court-system software dispute (government claim of approximately €28 million; company counterclaim of approximately €18.5 million) and Lufthansa’s software-design dispute (claim of approximately €21.4 million; company counterclaim of approximately €1.5 million). The company said it had adequate provisions overall, but noted litigation outcomes could materially affect results or cash flow.
Important facts for investors to verify
- Whether the deterioration in Technology revenue and margins, especially ClearPath demand, continued after Q2.
- Progress on U.S. Federal contract awards and funding, and the revenue impact of the expired TSA contract.
- Cash generation, debt balances, access to the $150 revolving facility, and compliance with its financial covenants.
- Actual pension contributions and any changes to funding assumptions or the expected 2012 U.S. plan contribution.
- Developments in the DOJ, GSA, Brazil, Belgium and Lufthansa matters, and any effect on cash or reported results.
- The Section 382 ownership-change determination, potential limits on tax attributes, and the timing and effect of the expected UK tax-rate adjustment.