Unisys Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless stated otherwise, financial amounts are in millions of U.S. dollars.
Business context and results
Unisys reported results from Services (systems integration and consulting, outsourcing, infrastructure services, and core maintenance) and Technology (enterprise software, servers, and other technology). Management attributed weaker results primarily to lower project-based services revenue and reduced sales of ClearPath products.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $792.1 | $877.4 | $2,460.6 | $2,727.1 |
| Operating profit | $24.0 | $61.2 | $63.6 | $204.6 |
| Income (loss) attributable to Unisys common shareholders | $(11.6) | $(12.4) | $(25.1) | $47.6 |
| Diluted earnings (loss) per share | $(0.26) | $(0.28) | $(0.57) | $1.08 |
| Gross margin | 21.7% | 24.9% | 21.7% | 25.2% |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $46.2 | $107.4 |
Q3 revenue fell 9.7%; Services declined 3.7% and Technology 44.3%. For the nine-month period, revenue declined 9.8%, with Services down 8.6% and Technology down 18.4%. Nine-month results in 2012 included revenue and pretax income from the South African joint venture sold in March 2012, as well as a sale gain and debt-redemption charges.
Financial position, liquidity, and debt
- Cash and cash equivalents were $555.9 at September 30, 2013, down from $655.6 at year-end 2012; approximately $369 was held by foreign subsidiaries.
- Long-term debt was $210.0, consisting of 6.25% senior notes due 2017; current debt maturities were $0.1. The company had no revolver borrowings, $24.1 of letters of credit outstanding, and $75.5 of stated availability under its secured revolving facility.
- Operating cash flow for the first nine months was $46.2, versus $107.4 in 2012. Pension contributions were lower year over year ($101.6 versus $175.1), partially supporting cash flow. Investing activities used $109.5 and financing activities used $19.1.
- Long-term postretirement liabilities were $2,404.8. Total stockholders’ deficit was $1,531.2; total deficit including noncontrolling interests was $1,509.9.
- The company reported compliance with its lending covenants at September 30, 2013.
Material changes and management commentary
- Q3 operating profit declined to $24.0 from $61.2, largely reflecting lower Technology revenue and margins. Technology’s Q3 operating margin was negative 11.0%, versus positive 29.1% a year earlier; Services’ margin improved to 7.7% from 6.0%.
- Nine-month operating profit was $63.6 versus $204.6. Services and Technology operating margins were 4.9% and 6.7%, respectively, compared with 6.3% and 27.8% in 2012.
- Interest expense declined to $2.4 for Q3 and $7.7 for nine months, reflecting 2012 debt reduction. Other income was $1.9 in Q3 and $11.1 for nine months; nine-month other income included $11.7 of foreign-exchange gains. The 2012 comparison included debt-redemption charges.
- Income tax expense was $27.0 in Q3 and $71.1 for nine months. The nine-month provision included an $11.4 charge from UK tax-rate changes. A full valuation allowance on U.S. deferred tax assets means U.S. operating profit or loss generally does not produce a corresponding tax provision or benefit.
- Management said results for interim periods are not necessarily indicative of full-year results. The filing provides no specific revenue or earnings guidance.
Outlook, risks, and contingencies
- For 2013, the company expected approximately $144 of defined-benefit pension contributions ($110 primarily for non-U.S. plans and $34 for the U.S. qualified plan), and approximately $20 of postretirement-plan contributions. It expected full-year pension expense of approximately $94.
- Management cited risks including continued demand weakness, competition and pricing pressure, execution and profitability of services and outsourcing contracts, ClearPath demand and product development, client retention, technology change, international and currency exposure, and significant pension funding needs.
- Unreserved Brazilian tax-related matters, including related interest and excluding matters assessed as remote, were estimated at up to approximately $130. The company stated that potential losses for several other proceedings could not be reasonably estimated; adverse outcomes could materially affect results or cash flow.
- Notable proceedings include TSA contract discussions with an uncertain outcome; a Belgian government claim of approximately €28 million, countered by Unisys’ approximately €18.5 million claim; and a German court decision finding a subsidiary liable in a Lufthansa dispute, which Unisys appealed. Molina’s amended complaint continued to allege approximately $35 million in losses; the company moved to dismiss. Maine had sought approximately $32 million from Molina concerning a Medicaid-system implementation delay, and Unisys accepted a partial indemnity obligation and undertook the defense.
- Unisys recorded a $6.5 pretax foreign-exchange loss following Venezuela’s February 2013 currency devaluation. It also repurchased approximately 0.6 million common shares for $11.5 during the first nine months under its $50 million authorization.
Important facts for investors to verify
- Whether Services revenue stabilizes and whether the sharp ClearPath-related Technology decline reverses, including the effect on Technology margins.
- Cash generation, foreign-held cash availability and potential repatriation taxes, revolver availability, and continued compliance with facility covenants.
- Actual pension and postretirement contributions versus estimates, and any changes in plan funding requirements.
- Developments, accruals, and potential exposure in the Brazilian tax matters, TSA discussions, Lufthansa appeal, and Molina/Maine disputes.
- The effects of tax valuation allowances, UK tax-rate changes, currency movements, and the Venezuela devaluation on future earnings and cash taxes.