Unisys Corporation — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. Unisys reports Services (systems integration and consulting, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise software, servers, and other technology). Amounts are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,020.1 | $960.6 | $2,868.5 | $2,975.0 |
| Operating profit | $113.0 | $76.1 | $203.0 | $241.1 |
| Gross margin | 27.9% | 24.7% | 24.6% | 25.6% |
| Income from continuing operations before tax | $117.1 | $50.9 | $94.7 | $119.7 |
| Net income attributable to common shareholders | $78.6 | $28.3 | $26.2 | $136.9 |
| Diluted EPS | $1.63 | $0.65 | $0.60 | $3.16 |
- Q3 revenue rose 6%, including an almost six-percentage-point positive foreign-exchange impact. Services revenue increased 2%; Technology rose 36%, led by ClearPath. Q3 operating margin was 11.1%, versus 7.9% a year earlier.
- Nine-month revenue declined 4%; foreign exchange contributed a four-percentage-point positive impact. Operating profit and gross margin fell, reflecting lower U.S. Federal revenue and margin. Nine-month common earnings included a $77.6 million pretax debt-reduction charge and higher pension expense.
- Cash from operations was $157.7 million for the first nine months, versus $150.0 million in 2010. Investing used $83.6 million and financing used $222.1 million. Cash declined to $667.3 million from $828.3 million at December 31, 2010.
- Total debt was $445.3 million at September 30, down $378.7 million from year-end 2010. The balance sheet reports $444.4 million of long-term debt and $0.9 million of current maturities. Unisys had a $594.5 million total stockholders’ deficit.
- Current assets were $1,562.6 million and current liabilities $1,097.9 million. The company said it met lending covenants and believed available liquidity was adequate for near-term requirements.
Material changes and unusual items
- U.S. Federal revenue fell $42.9 million (19%) in Q3 and $154.2 million (24%) over nine months. Management attributed the weakness to budget uncertainty, delayed awards and funding, and the end of the TSA contract in November 2010; that contract generated about $95 million of revenue in the first nine months of 2010.
- Q3 Technology revenue increased to $143.8 million from $105.4 million, with ClearPath software and servers driving growth. For nine months, Services revenue declined 3% and Technology revenue declined 7%.
- Unisys issued mandatory convertible preferred stock for net proceeds of $249.7 million and used the proceeds, together with cash, to retire approximately $392 million of senior notes during the first nine months. Debt-redemption charges totaled $77.6 million. Preferred stock carries a 6.25% annual dividend and is scheduled to convert in 2014, potentially increasing common shares.
- Interest expense declined to $12.5 million in Q3 from $25.0 million and to $51.7 million for nine months from $76.8 million. Management estimated the debt reductions would lower annual interest expense by about $58 million.
- Nine-month taxes included a $29.2 million benefit from settling two European tax matters; the UK tax-rate change increased Q3 tax expense by $7.6 million. Unisys maintains a full valuation allowance on U.S. deferred tax assets and said a potential Section 382 ownership change could limit use of tax attributes.
Outlook, risks, and contingencies
- Unisys called for redemption of its remaining $65.9 million of 8% senior notes due 2012, with redemption scheduled for November 25, 2011. It expected a roughly $4.5 million Q4 charge related to this redemption.
- Management expected about $115 million of 2011 cash contributions to worldwide defined-benefit pension plans; $63.6 million had been contributed through September. It also expected up to approximately $140 million of contributions to the U.S. qualified plan in 2012, subject to legislation, interest rates, and asset returns. Expected 2011 postretirement-plan contributions were about $22 million.
- A new five-year secured revolving facility provides up to $150 million of loans and letters of credit, subject to eligible U.S. receivables and financial covenants. If cash plus facility availability falls below $130 million, a maximum secured leverage covenant applies.
- Government-related matters include DOJ review of labor categorization, overtime, and cyber-intrusion protection under TSA-related contracts, with preliminary settlement discussions on labor and overtime; and a GSA review of pricing and disclosure compliance, which Unisys said it was addressing cooperatively. Outcomes were not predictable.
- Other disclosed litigation includes Belgian court-system software claims of approximately €28 million, counterclaimed by Unisys for approximately €18.5 million, and Lufthansa claims of approximately €21.4 million, counterclaimed for approximately €1.5 million. The company said it believed it had adequate provisions, but noted litigation outcomes could affect results or cash flow.
- Key business risks include continued U.S. Federal weakness and government contract funding or termination, contract execution and profitability, competition, technology shifts, international and currency exposure, pension funding, and potential limits on U.S. tax attributes. The filing also notes Venezuela operates under highly inflationary accounting.
Important facts for investors to verify
- Whether U.S. Federal contract delays and the TSA contract expiration continue to pressure revenue, and whether ClearPath growth can offset that weakness.
- How much of reported revenue growth and international performance reflects currency movements, and whether margins remain resilient.
- The cash and earnings effects of debt redemptions, the preferred-stock dividend and conversion terms, and the scheduled 2012-note redemption.
- Actual pension contributions and plan funding needs, particularly the potential 2012 U.S. contribution of up to approximately $140 million.
- Developments in TSA and GSA reviews, pending litigation, and the determination of any Section 382 ownership change affecting tax attributes.