Unisys Corporation — 2015 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars except per-share data. Unisys reports Services and Technology segments; certain product revenue was reclassified between segments beginning in 2015, with prior periods conformed.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $739.2 | $882.5 | $2,225.2 | $2,450.6 |
| Gross margin | 19.0% | 26.6% | 17.2% | 21.8% |
| Operating income (loss) | $8.6 | $76.6 | ($70.9) | $72.5 |
| Net income (loss) attributable to Unisys common shareholders | ($9.6) | $47.8 | ($111.0) | ($17.8) |
| Diluted earnings (loss) per share | ($0.19) | $0.95 | ($2.22) | ($0.36) |
- Q3 revenue fell 16%; foreign currency translation reduced year-over-year revenue by 8 percentage points. Services revenue declined 8% and Technology revenue 51%.
- Nine-month revenue declined 9%, including an 8-percentage-point negative currency impact. Services declined 7% and Technology 24%. Application services grew 5% for the nine months, while cloud and infrastructure and business processing outsourcing revenue declined 11% and 15%, respectively.
- Q3 margins and operating results weakened with lower segment margins, restructuring charges and higher pension expense. Technology sales of proprietary enterprise software and servers were notably lower, principally reflecting fewer software-license renewal opportunities. Services margins also faced start-up costs on new multiyear engagements and lower project work in existing accounts.
- Nine-month net loss included $65.0 million of after-tax cost-reduction charges, or $1.30 per diluted share. The company recorded a $33.3 million income-tax provision despite its pretax loss; tax expense can vary with the geographic distribution of income, and U.S. operations generally have a full valuation allowance on deferred tax assets.
Cash flow, liquidity and debt
- Cash and cash equivalents were $293.1 at September 30, 2015, down from $494.3 at December 31, 2014. $233.5 was held by foreign subsidiaries and branches; repatriating funds for U.S. use could result in taxes.
- Nine-month operating cash flow was a use of $108.5, versus $15.9 provided in 2014. Management cited the larger net loss, lower receivable collections and $37.6 used for cost-reduction efforts; lower pension contributions partly offset these uses.
- Investing activities used $141.5; financing activities provided $89.0. Cash declined $201.2 over the period, including a $40.2 adverse effect from exchange rates.
- Total debt was $310.3, compared with $224.0 at year-end 2014. This included $55.0 of short-term revolving-facility borrowings and $244.1 of long-term debt, plus $11.2 of current long-term debt maturities. The revolving facility expires in June 2018; $83.6 of availability remained after outstanding letters of credit. The company reported compliance with lending covenants.
- Defined-benefit pension contributions were $115.6 through September; the company expected approximately $151 for full-year 2015. Long-term postretirement liabilities were $2,185.6 at quarter-end.
Outlook, significant items and risks
- The company expected approximately $300 of pretax restructuring charges over several quarters and approximately $200 of annualized savings by the end of 2016. It recorded $70.0 of charges through September, including workforce reductions affecting 1,233 employees and $17.7 of asset impairments and other costs.
- Management expected 2015 pension expense of approximately $108.7, versus $73.8 in 2014. Pension contributions and potential increases in required funding may pressure liquidity.
- Unisys changed the exchange rate used to remeasure its Venezuelan subsidiary to the SIMADI rate at September 30, 2015 (about 198.45 bolivars per U.S. dollar), recording an approximately $7 foreign-exchange loss in the quarter. The company reported immaterial Venezuelan net monetary assets after remeasurement.
- Contingencies include Brazilian tax-related matters with estimated unreserved exposure of up to approximately $92, the Belgian government’s claim for approximately €28 (with a company counterclaim of approximately €18.5), and ongoing litigation involving Molina and Louisiana Medicaid matters. The company said it had adequate provisions, but noted that adverse litigation outcomes could materially affect results or cash flow; some potential losses were not reasonably estimable.
- Key stated risks include declining technology-product demand, intense competition, service-contract pricing and delivery risks, dependence on significant clients and government contracts, cybersecurity and IT-system disruption, international and currency exposure, pension obligations, and legal proceedings. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned cost reductions deliver the projected $200 annualized savings by the end of 2016, and the remaining restructuring charges and cash costs.
- Whether revenue and margins stabilize, particularly in Technology and cloud and infrastructure services, and whether application-services growth continues.
- Cash generation, revolving-credit availability and covenant headroom, including the effect of pension funding and foreign-held cash.
- Actual pension expense and contributions versus estimates, and any changes in pension assumptions or funding requirements.
- Developments in the Brazilian, Belgian, Molina and Louisiana matters, including changes to accruals or estimates of exposure.
- Currency impacts and the treatment or repatriation of foreign cash; the filing does not provide a specific revenue or earnings forecast.