Unisys Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Dollar amounts are in millions except per-share data. Unisys reports Services and Technology segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $761.7 | $809.9 |
| Gross margin | 17.5% | 19.9% |
| Operating income (loss) | $(19.9) | $1.6 |
| Loss before income taxes | $(31.7) | $(6.0) |
| Income tax provision | $16.0 | $21.4 |
| Net loss attributable to Unisys common shareholders | $(53.5) | $(33.9) |
| Loss per diluted share | $(1.15) | $(0.77) |
| Cash provided by operations | $20.1 | $14.1 |
Revenue declined 6%; foreign currency movements reduced the year-over-year comparison by two percentage points. Operating performance weakened as gross margins fell and operating costs exceeded gross profit. The tax provision despite a pretax loss reflects, in part, full valuation allowances on U.S. and certain foreign deferred tax assets; tax expense can vary with the geographic distribution of income.
Segments and changes versus prior year
- Services: Revenue of $690.9, down 4.4%. Outsourcing revenue fell 5.5% and infrastructure services fell 11.7%; systems integration and consulting was nearly flat. Segment operating margin declined to 1.9% from 3.1%. Management cited lower in-quarter hardware and software sales to outsourcing customers and timing and execution issues on several IT services projects.
- Technology: Revenue of $70.8, down 18.5%, largely from lower ClearPath sales. Enterprise-class software and servers revenue fell 21.6%. Segment operating loss was $17.0, versus $0.2 operating income a year earlier; operating margin was (21.2)% versus 0.2%.
- Management attributed the overall revenue and margin pressure to lower technology sales, project timing and execution, and lower-than-normal sell-and-bill revenue among IT outsourcing customers.
Cash, debt and liquidity
- Cash and cash equivalents were $613.8 at March 31, down from $639.8 at December 31, 2013; $378.2 was held outside the United States. Repatriation for U.S. use could incur taxes.
- Operating cash flow was $20.1, including a $121.2 benefit from lower receivables, offset in part by $55.5 of pension contributions. Investing activities used $41.1, including $20.7 invested in marketable software and $15.2 in property additions. Cash decreased $26.0 during the quarter.
- Long-term debt was $210.0. The $150 million secured revolving facility had no borrowings, $23.9 of letters of credit outstanding and $85.3 of availability at quarter-end. The company reported compliance with its lending covenants.
- Current assets were $1,389.4 and current liabilities $968.0. Total deficit was $659.6. Long-term postretirement liabilities were $1,648.1.
Outlook, unusual items and risks
- No revenue or earnings forecast is provided in the supplied filing text. Management expects 2014 pension expense of approximately $78, compared with $93.5 in 2013, and pension-plan cash contributions of approximately $234, compared with $147.2 in 2013. Expected 2014 postretirement-plan contributions are approximately $19.
- Unisys recorded $9.8 of other expense, including $9.1 of foreign exchange losses. The Venezuela remeasurement to the SICAD I rate of 10.7 bolivars per U.S. dollar resulted in a $5.8 pretax loss; the rate may change materially.
- Brazilian tax-related matters not assessed as remote had estimated unreserved exposure, including interest, of up to approximately $141. The company said it had adequate provisions, but acknowledged that litigation outcomes are unpredictable and could materially affect a period.
- Notable cases include a Lufthansa contract dispute in which a German court found Unisys liable at the initial stage; Unisys appealed. Belgium seeks approximately €28 million, while Unisys counterclaimed approximately €18.5 million. Molina continues to allege approximately $35 million in losses in a dispute over the sale of Unisys’s health information management business.
- Key stated risks include pension funding needs, technology and competitive change, retaining major clients, contract profitability and execution, international and foreign-exchange exposure, data security, government-contract compliance and pending litigation. Management said disclosure controls were effective and identified no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ClearPath demand and Services project execution recover, and whether lower outsourcing billings persist.
- Progress against the $234 million expected 2014 pension contributions and the effect on cash and liquidity.
- Developments in the Brazil tax matters, Lufthansa appeal, Belgium dispute and Molina litigation, including any change in estimated exposure or accruals.
- Changes to Venezuela’s exchange-rate mechanisms and the resulting impact on reported earnings and asset values.
- Revolver availability and covenant compliance, and any tax cost if foreign-held cash is repatriated.