Unisys Corporation — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2010. Dollar amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2009 periods; prior-year statements were reclassified for discontinued operations.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $960.6 | $1,106.4 | $2,975.0 | $3,227.1 |
| Operating income | $76.1 | $111.6 | $241.1 | $195.9 |
| Operating margin | 7.9% | 10.1% | 8.1% | 6.1% |
| Gross margin | 24.7% | 26.9% | 25.6% | 24.0% |
| Income from continuing operations attributable to Unisys | $21.8 | $52.4 | $63.7 | $58.5 |
| Net income attributable to Unisys, including discontinued operations | $28.3 | $61.1 | $136.9 | $74.8 |
| Diluted EPS, continuing operations | $0.50 | $1.27 | $1.47 | $1.51 |
| Diluted EPS, total | $0.65 | $1.48 | $3.16 | $1.93 |
For the first nine months, operating income improved despite lower revenue, reflecting higher ClearPath sales and cost-reduction benefits. Q3 operating income and margin fell, principally amid weaker high-margin enterprise server sales. Services revenue declined 10% in Q3 and 9% year to date; Technology revenue declined 31% in Q3 but increased 2% year to date.
Cash flow, liquidity and balance sheet
- Nine-month operating cash flow was $150.0, versus $181.8 in 2009. The company attributed much of the decrease to a $100 reduction in use of its receivables securitization facility.
- Investing activities used $25.8, compared with $231.7 used in the prior-year period; the 2010 period included $121.2 of net proceeds from business and asset sales. Financing activities used $76.8, including $78.0 of debt payments.
- Cash and equivalents were $688.7 at September 30, up from $647.6 at December 31, 2009. Management said it expected adequate liquidity for near-term cash requirements.
- Total debt was $837.5, down $74.2 from year-end 2009. The company reported compliance with lending and funding covenants. Its $150 receivables facility had no receivables sold at quarter-end; accounting changes require the facility to be treated as secured borrowing rather than a sale.
- Stockholders’ deficit was $1,034.2. Long-term postretirement liabilities were $1,498.2. The company expected approximately $115 of 2010 contributions to worldwide defined-benefit pension plans and approximately $24 to postretirement plans.
Material changes and unusual items
- Unisys completed the sale of its health information management business on April 30 and its UK insurance services business on August 31. The nine-month discontinued-operations income of $73.2 included a $69.0 aggregate gain on sale; total net income therefore substantially exceeded continuing-operations income. Approximately $10.9 of HIM sale proceeds remained restricted at quarter-end. The UISL sale also entails approximately $24 of payments over the next five quarterly periods.
- A U.S. check-sorter equipment and maintenance business was sold in February; the company recorded an approximately $3.3 loss on that sale in the first nine months of 2010.
- Nine-month other expense included approximately $38.4 of foreign-exchange losses, including about $19.9 from Venezuela’s January currency devaluation. Unisys reported approximately $20 of Venezuelan net monetary assets denominated in local currency at quarter-end.
- Unisys plans to reinstate its U.S. 401(k) match effective January 1, 2011, estimating a 2011 cost of approximately $14, funded with company shares.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management described near-term liquidity as adequate and expected no required contribution to the U.S. qualified pension plan in 2011 under the amended Pension Protection Act; it noted that pension asset deterioration could increase future funding needs.
- Management cited economic uncertainty, client spending and contract renewals, competitive and technology changes, execution and profitability of outsourcing and fixed-price projects, and demand for ClearPath systems as risks to future results. More than half of revenue comes from outside the United States, exposing the company to currency, political, tax and regulatory risks.
- Legal matters include U.S. government reviews concerning TSA contract labor/overtime and cyber-intrusion protection, and GSA pricing audits (one concluded with a de minimis payment; another remained preliminary). The company also disclosed Belgian government and Lufthansa contract litigation, with claims of approximately €28 million and €21.4 million, respectively; Unisys disputes the claims and has asserted counterclaims.
- The company maintained a full valuation allowance for U.S. and certain foreign deferred tax assets. It estimated its Section 382 ownership-change level exceeded 45 percentage points, creating potential limits on future use of tax attributes if an ownership change occurs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It expected upcoming revenue-recognition standards to result in earlier recognition in some cases, but was still assessing the impact.
Investor verification priorities
- Separate recurring continuing-operations results from discontinued-operations income and sale gains when assessing earnings quality.
- Track revenue trends and margins by segment, particularly ClearPath/server sales and Services declines, and assess whether cost reductions can offset lower demand.
- Reconcile operating cash flow, debt reduction and receivables-facility accounting; verify restrictions on sale proceeds and future UISL payment obligations.
- Monitor pension funding requirements, postretirement obligations, and any effects of asset performance or regulatory changes.
- Follow the status and potential financial exposure of government reviews and disclosed litigation, along with foreign-exchange exposure in Venezuela.