Unisys Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unless otherwise noted, amounts are in millions of dollars. Comparisons are with Q1 2011; balance-sheet comparisons are with December 31, 2011.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $928.4 | $911.2 |
| Operating profit | $64.4 | $41.9 |
| Gross margin | 24.3% | 22.8% |
| Operating margin | 6.9% | 4.6% |
| Income (loss) attributable to Unisys common shareholders | $13.4 | $(40.8) |
| Diluted earnings (loss) per share | $0.30 | $(0.95) |
| Cash provided by operating activities | $33.4 | $28.4 |
- Services revenue rose 2.8% to $823.0; Technology revenue fell 5.0% to $105.4. Services and Technology operating margins were 5.0% and 25.6%, respectively, compared with 4.0% and 10.9% a year earlier.
- Cash and cash equivalents were $654.7, down from $714.9 at year-end; approximately $396.3 was held by foreign subsidiaries. Total debt was $295.5, down $64.2. The company had no revolver borrowings and $89.9 of availability net of letters of credit.
- Long-term postretirement liabilities were $2,154.4. Total stockholders’ deficit was $1,246.6. The filing reports no clear current ratio or other specific liquidity ratio.
Changes and unusual items
- Revenue increased 1.9% overall, but a $31 million, or 20%, decline in U.S. Federal revenue reduced reported growth. U.S. revenue increased 6%; international revenue decreased 1%.
- Systems integration and consulting revenue increased 8.0%, while core maintenance fell 8.8%; outsourcing was essentially flat. Lower ClearPath and third-party product sales contributed to Technology’s decline.
- Operating profit and gross margin improved, with management citing better margins in both segments and a richer Technology mix. SG&A included an $11.3 gain on the sale of the South African joint venture, completed March 30.
- Q1 included $7.2 of debt-redemption charges and $7.0 of foreign-exchange losses; Q1 2011 included $31.8 of debt-reduction charges and $7.6 of foreign-exchange gains. Interest expense fell to $9.3 from $25.9, reflecting debt reduction.
- The company redeemed the remaining $25.5 of 14.25% senior secured notes and $40.0 of 12.5% senior notes. Operating cash flow was higher year over year, but included working-capital movements and was affected by increased pension contributions.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management expected approximately $103 of pension expense in 2012, versus $34.3 in 2011, and approximately $240 of worldwide defined-benefit pension contributions, including $143 to the U.S. qualified plan. Contributions through March 31 were $68.2.
- Management stated it expected adequate near-term liquidity and to meet lending covenants. The revolving facility is subject to financial covenants, including a maximum secured leverage ratio if consolidated cash plus facility availability falls below $130.
- Potentially material legal and regulatory matters include federal reviews concerning TSA contract labor categorization, overtime and cyber-intrusion protection, and a GSA pricing-compliance review. Outcomes are not predictable from the filing.
- Brazilian matters include unreserved tax-related exposures estimated at up to approximately $150, excluding matters assessed as remote; unreserved labor-related matters could not be estimated. Other disclosed litigation includes Belgian and Lufthansa contract disputes. The company says it has adequate provisions but notes adverse outcomes could materially affect results or cash flow.
- Other key risks include significant pension funding needs, possible limits on U.S. tax attributes following a potential 2011 ownership change, international and foreign-exchange exposure, competition, contract profitability and government-contract compliance. The filing says expected UK tax-rate changes, when enacted, could increase tax provision by approximately $9.
Most important facts for investors to verify
- Whether Services growth and improved segment margins can continue, particularly amid the U.S. Federal business decline and weaker Technology revenue.
- Actual pension contributions and expense versus the stated 2012 estimates, and their impact on liquidity and operating results.
- Progress and outcomes of the TSA and GSA reviews, Brazil exposures and other litigation, including whether additional accruals become necessary.
- Debt, revolver availability and covenant compliance, especially given the company’s large postretirement obligations and stockholders’ deficit.
- The final determination of any Section 382 ownership change and its effect on the use of tax attributes and future cash taxes.