Unisys Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Unisys is a global IT company operating in Services and Technology, serving government, commercial and financial-services customers.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $2,825.0 million | $2,741.8 million |
| Operating income | $284.1 million | $97.1 million |
| Net income (loss) attributable to Unisys | $75.5 million | $(65.3) million |
| Diluted earnings (loss) per share | $1.30 | $(1.30) |
| Operating cash flow | $73.9 million | $166.4 million |
| Cash and cash equivalents at year-end | $605.0 million | $733.9 million |
| Total debt at year-end | $652.8 million | $644.7 million |
| Gross profit margin | 24.3% | 20.0% |
- Revenue increased 3.0%; excluding the $53.0 million Topic 606 timing adjustment, it increased 1.1%. Foreign-exchange effects were immaterial.
- Services revenue rose 2.5% to $2,386.3 million; Services gross margin declined to 16.0% from 16.8%, with new contracts in implementation weighing on margins. BPO revenue grew 23.5%, while application-services revenue fell 2.4%.
- Technology revenue rose 6.1% to $438.7 million as reported, but fell 6.7% excluding the $53.0 million Topic 606 adjustment, partly reflecting a lighter ClearPath Forward renewal schedule.
- Operating income included the Topic 606 adjustment, lower restructuring charges, prior restructuring savings and a $7.3 million gain on a U.K. property sale. Excluding the $53.0 million adjustment, operating income was $231.1 million. The company recorded $19.7 million of full-year cost-reduction and other charges, including $27.7 million of fourth-quarter workforce-reduction charges offset in part by an $8.0 million benefit from prior-plan estimate changes.
- Fourth-quarter revenue was $760.9 million and net income attributable to Unisys was $25.0 million. Fourth-quarter pretax cost-reduction charges and other costs were $22.8 million.
- Investing cash use was $185.0 million; capital expenditures were $189.3 million in aggregate, comprising property, outsourcing-asset and marketable-software additions. Management attributed weaker operating cash flow principally to higher working-capital needs, including a $28.0 million collection delay associated with the U.S. federal government shutdown.
- Year-end current assets were $1,301.4 million and current liabilities were $923.3 million. Stockholders’ deficit was $1,343.5 million. Cash held by foreign subsidiaries and branches was $325.8 million.
Material changes and accounting effects
- Adoption of Topic 606 increased reported 2018 revenue and profit through timing differences. The $53.0 million software-renewal adjustment related to contracts recorded in 2017 under prior rules and will not recur. Without Topic 606, the filing shows 2018 net loss attributable to Unisys of $44.1 million, versus reported net income of $75.5 million.
- Cash from operations fell by $92.5 million year over year; cash and cash equivalents declined by $128.9 million. Debt increased modestly, while interest expense rose to $64.0 million from $52.8 million.
- The company committed in the fourth quarter to reduce 589 employees, with $27.7 million of charges. It had approximately 21,700 employees at year-end.
- The 2017 comparison included $146.8 million of cost-reduction and other charges, substantially more than in 2018.
Outlook, liquidity, risks and contingencies
- No specific 2019 revenue or earnings guidance is provided. Management said it expected adequate liquidity for 2019 cash requirements. It estimated 2019 defined-benefit pension contributions of $105.6 million and pension expense of approximately $90.5 million; required contributions were expected to rise in 2020 and subsequent years.
- The company reported $138.5 million of availability under its $145.0 million secured revolving facility, net of letters of credit, with no borrowings outstanding at year-end. It reported compliance with debt covenants.
- Debt includes $440.0 million face value of 10.75% secured notes due 2022 and $213.5 million face value of 5.50% convertible notes due 2021. The company also disclosed $200.0 million of future debt-interest payments in its contractual-obligations table.
- Pension obligations are a substantial financial exposure: the filing cites approximately $1.4 billion of underfunded U.S. qualified defined-benefit pension obligations. It warns that asset declines, lower discount rates or other assumption changes could increase required cash contributions; involuntary plan termination could trigger severe consequences, including debt default.
- Other principal risks include Services revenue and margin execution, Technology installed-base retention and new-product sales, intense competition, cybersecurity and IT disruptions, client and contract profitability, international operations, financing access and U.S. government contracting. U.S. federal agencies represented approximately 20% of 2018 revenue.
- Unisys disclosed up to approximately $101.0 million of unreserved Brazilian tax-related matters, including interest, excluding matters assessed as remote. The Louisiana Medicaid case was granted review by the state supreme court in January 2019 after an appellate dismissal. The filing says possible losses beyond accruals are generally not reasonably estimable or are not expected to be material, but adverse outcomes could materially affect a particular period.
- Standby letters of credit and surety bonds totaled approximately $272 million; management believed resulting obligations, if any, would not be material. The company reported no goodwill impairment and effective internal control over financial reporting; KPMG issued unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess underlying revenue and earnings excluding the one-time $53.0 million Topic 606 benefit, and distinguish reported results from the filing’s without-adoption figures.
- Track whether Services margins recover as new contracts move beyond implementation and whether Technology can offset ClearPath renewal variability with new solutions.
- Review pension funding needs, plan-asset performance and the assumptions behind expected returns and discount rates.
- Monitor operating cash generation, working-capital collections, debt maturities and refinancing needs, including the notes due in 2021 and 2022.
- Follow developments in the Brazilian tax matters and Louisiana litigation, as well as U.S. government funding and contract exposure.