Unisys Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 2, 2011. Unisys provides services and technology products through its Services and Technology segments. Amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $911.2 | $977.4 |
| Gross profit margin | 22.8% | 24.1% |
| Operating profit | $41.9 | $58.5 |
| Loss from continuing operations before tax | $(7.8) | $(4.9) |
| Income tax provision | $28.2 | $11.2 |
| Net loss attributable to Unisys | $(39.4) | $(11.6) |
| Net loss attributable to common shareholders | $(40.8) | $(11.6) |
| Diluted loss per common share | $(0.95) | $(0.27) |
| Cash from (used in) operations | $28.4 | $(28.4) |
| Cash and cash equivalents, March 31 | $833.1 | $468.5 |
Revenue fell 6.8% year over year. Services revenue declined 5.9% to $800.3, and Technology revenue declined 12.6% to $110.9. Segment operating margins were 4.0% for Services and 10.9% for Technology, compared with 4.7% and 13.3%, respectively, in Q1 2010. SG&A was $146.0, or 16.0% of revenue, versus $155.9 and the same revenue percentage a year earlier. Interest expense was $25.9, compared with $26.5. Other expense, net, was $23.8.
Investing activities used $47.1; financing activities provided $12.0. Cash increased $4.8 during the quarter. At March 31, total debt was $619.3, down $204.7 from year-end 2010. Current and long-term debt on the balance sheet totaled $619.3. Total stockholders’ deficit was $692.1. Management said cash on hand, operating cash flow and the receivables facility were principal liquidity sources and believed near-term liquidity was adequate. No receivables were sold under the facility at quarter-end; Unisys was evaluating alternatives for a new credit facility.
Material changes and notable items
- Management attributed the revenue and margin decline primarily to a $49.6 decline in U.S. Federal business. The first quarter was the first without the TSA contract, which expired in November 2010 and had contributed about $30 of Q1 2010 revenue. Federal results were also affected by U.S. budget uncertainty and delays in contract awards and funding.
- On February 28, Unisys issued 2,587,500 shares of 6.25% mandatory convertible preferred stock, receiving net proceeds of approximately $249.7. On March 30, it used proceeds to redeem $211.0 principal amount of senior secured notes. The redemptions generated a $31.8 charge in Q1.
- On April 11, 2011, after quarter-end, Unisys purchased $178.9 principal amount of notes in a tender offer. It expects an approximately $45.6 charge in Q2. The company estimated that the debt reductions would lower annual interest expense by approximately $53; the preferred stock carries an estimated annual dividend of $16.2 until conversion.
- The income tax provision rose to $28.2 despite a pretax loss. Unisys cited its geographic mix of earnings and full valuation allowances on U.S. and certain foreign deferred tax assets. It expected a UK tax-rate change, when enacted, to increase its tax provision by approximately $8.
- Unisys recorded pension expense of $9.0, versus pension income of $0.3 in Q1 2010. It expected 2011 cash contributions of about $115 to worldwide defined-benefit pension plans and about $22 to its postretirement plan. It was not required to fund its U.S. qualified pension plan in 2011, but estimated a contribution of about $100 in 2012 based on then-current assumptions.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected adequate near-term liquidity and continued compliance with lending covenants. It noted that results for interim periods may not indicate full-year results. Revenue-recognition standards adopted prospectively from January 1, 2011 could affect future periods, but the company could not reasonably estimate the impact.
Key risks include competition and pricing pressure; dependence on profitable systems integration, outsourcing execution and retention of significant clients; government-contract funding, audits and termination rights; pension funding needs; international, currency and economic exposure; access to credit; and litigation. The company disclosed U.S. government reviews involving TSA labor categorization/overtime and cyber-intrusion protection, and GSA contract pricing reviews. One GSA matter concluded with a de minimis payment; another remained preliminary. Other disclosed litigation included Belgian government claims of approximately €28 million, against which Unisys asserted a counterclaim of approximately €18.5 million, and Lufthansa claims of approximately €21.4 million, against which Unisys asserted a counterclaim of approximately €1.5 million. Management believed provisions were adequate but cautioned that litigation outcomes are inherently unpredictable.
Unisys believed an ownership change occurred in January 2011 for U.S. tax purposes, potentially limiting use of tax attributes under Sections 382 and 383. The company said it did not expect near-term cash tax liability based on available information and tax-planning strategies. Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether U.S. Federal revenue stabilizes after the TSA contract expiration and amid government budget and procurement uncertainty.
- Actual interest savings, the cost of preferred dividends and conversion dilution, and the impact of the April note tender and its expected Q2 charge.
- Cash generation, renewal or replacement of the receivables facility, debt covenants and planned pension contributions.
- Developments in the TSA and GSA reviews, significant commercial litigation, and the potential effects of the U.S. tax-attribute limitation and UK tax changes.