Unisys Corporation — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2014. Unisys reports Services (systems integration and consulting, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise software, servers, and other technology). Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $806.4 | $858.6 | $1,568.1 | $1,668.5 |
| Operating income (loss) | $15.8 | $38.0 | $(4.1) | $39.6 |
| Income (loss) before taxes | $11.0 | $49.5 | $(20.7) | $43.5 |
| Net income (loss) attributable to common shareholders | $(12.1) | $20.4 | $(65.6) | $(13.5) |
| Diluted earnings (loss) per share | $(0.24) | $0.46 | $(1.35) | $(0.31) |
| Gross profit margin | 20.5% | 23.4% | 19.0% | 21.7% |
- Revenue and margins: Q2 revenue declined 6% year over year; Services fell 4% and Technology fell 21%. First-half revenue also declined 6%, with Services down 4% and Technology down 20%. Lower margins in both segments reduced gross margin by 2.9 percentage points in Q2 and 2.7 points for the first half.
- Segment performance: Q2 Services revenue was $712.9 and Technology revenue was $93.5. Services operating margin was 4.0%, unchanged year over year; Technology operating margin fell to 1.9% from 23.9%. For the first half, Services operating margin was 3.0% versus 3.5%, while Technology recorded an 8.0% operating loss margin versus a 13.6% profit margin.
- Costs and other income: Q2 SG&A was $133.6 (16.6% of revenue), down from $144.9; R&D was $15.8, down from $17.8. First-half SG&A and R&D were $272.1 and $30.2, respectively. Other expense was $2.5 in Q2 and $12.3 for the first half, versus other income of $14.1 and $9.2 in the comparable 2013 periods. Foreign-exchange results included a Q2 loss of $4.0 versus a gain of $15.7, and a first-half loss of $13.1 versus a gain of $11.5.
- Cash flow: First-half operating cash flow was $23.4, compared with $30.2 in 2013. Investing activities used $77.7 and financing activities used $15.1. Cash declined $65.6 to $574.2. Operating cash flow was affected by pension contributions of $103.1, compared with $61.3 in the prior-year period.
- Liquidity and debt: Cash was $574.2 at June 30, 2014, including $378.8 held by foreign subsidiaries. Long-term debt was $210.0; the company reported no borrowings on its $150 million secured revolving facility, $22.8 of letters of credit outstanding, and $78.9 of availability net of letters of credit. Management said it expected adequate near-term liquidity and reported compliance with lending covenants.
- Balance sheet: Total assets were $2,336.1, down from $2,510.0 at year-end 2013. Long-term postretirement liabilities were $1,599.6. Total stockholders’ deficit was $628.5. The company’s $249.7 mandatory convertible preferred stock balance at year-end was eliminated upon conversion in March 2014.
Material changes and management commentary
- Management attributed first-half weakness to lower enterprise-server, systems-integration, and infrastructure-services revenue, as well as execution issues on several projects. These factors reduced margins and contributed to the first-half net loss.
- ClearPath product sales drove much of the Technology decline. Services systems integration and consulting was affected by project execution and lower in-period work; infrastructure-services revenue declined partly because of lower contract volumes and contract completions. Q2 outsourcing revenue increased 2.1%, while first-half outsourcing revenue decreased 1.7%.
- Management cited continued cost controls and lower SG&A and R&D spending. The filing provides no specific revenue or earnings guidance.
- Estimated 2014 defined-benefit pension contributions were approximately $235, compared with $147.2 contributed in 2013; $103.1 had been contributed by June 30. Expected 2014 pension expense was approximately $75, versus $93.5 in 2013. Expected 2014 postretirement-plan contributions were approximately $19.
- During the first half, Unisys repurchased 552,806 common shares for approximately $14.0; about $24.3 remained under the repurchase authorization at June 30. The mandatory preferred stock converted into approximately 6.9 million common shares in March.
Risks, contingencies, and unusual items
- Pensions and liquidity: Pension funding needs may rise if plan assets deteriorate or discount rates change; contributions could reduce cash available for operations and other uses. Some foreign cash may incur taxes if repatriated to the U.S.
- Legal and tax matters: Unreserved Brazilian tax-related matters, excluding those assessed as remote, were estimated at up to approximately $145. The filing also describes disputes involving the Belgian government, Lufthansa, and Molina. Lufthansa’s trial court found Unisys liable in 2013; Unisys appealed. Molina’s amended complaint alleges approximately $35 in losses. The company said it had adequate provisions but cautioned that outcomes are inherently unpredictable and could materially affect a particular period.
- Foreign exchange: Unisys remeasured its Venezuelan subsidiary using the SICAD I rate, recording pretax foreign-exchange losses of $5.8 in Q1 and $0.5 in Q2. The company noted that the auction-based rate and Venezuelan currency rules could change materially.
- Other risks: The filing highlights technology and competitive change, client retention and contract profitability, fixed-price project execution, government-contract audits and funding, cybersecurity and data privacy, international operations, and access to capital markets.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management stated interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether Technology revenue and ClearPath sales stabilize, and whether the segment returns to profitability.
- Whether Services project execution and infrastructure-services volumes improve enough to recover margin.
- Actual pension contributions versus the approximately $235 estimate, and the effect on operating cash flow and liquidity.
- Developments in the Brazilian tax exposures, Lufthansa appeal, Molina litigation, and Belgian contract dispute.
- Foreign-cash repatriation constraints and changes to Venezuela’s exchange-rate regime.
- Share-count and dilution effects following preferred-stock conversion and ongoing repurchases.