Unisys Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unisys provides technology and services through its Services and Technology segments. Amounts are in millions of dollars except per-share data.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $695.8 | $708.4 |
| Gross margin | 21.5% | 28.4% |
| Operating income | $42.9 | $101.8 |
| Income (loss) before taxes | $(3.0) | $62.6 |
| Net income (loss) attributable to Unisys | $(19.4) | $40.6 |
| Diluted EPS | $(0.38) | $0.62 |
| Cash used for operating activities | $(70.4) | $(50.2) |
Services revenue rose 7.7% to $612.1; Technology revenue fell 40.2% to $83.7. The year-over-year Technology comparison was affected by a $53.0 Topic 606 revenue and profit item recorded in Q1 2018. Excluding that item, total revenue increased 6.2%, Technology revenue declined 3.7%, and 2018 operating income was $48.8. Q1 2019 operating margin was 6.2%, versus 14.4% reported in Q1 2018.
Services growth was led by cloud and infrastructure services, up 13.4%; application services declined 2.0%, while BPO services increased 8.0%. Services operating margin fell to 2.5% from 3.0%, which management attributed to implementation-stage contracts where costs precede revenue. Technology operating margin was 34.1%, compared with 54.7% reported; management said the prior-year Topic 606 item principally explains the difference.
Cash, liquidity and debt
- Cash and cash equivalents were $504.6 at March 31, down from $605.0 at December 31, 2018; cash, cash equivalents and restricted cash totaled $516.8.
- Operating cash use was $70.4. Investing cash use was $51.9 and financing provided $14.6. Cash declined $107.3, including restricted cash.
- Total debt was $674.4, up from $652.8 at year-end. It included $432.6 carrying value of 10.75% senior secured notes due 2022 and $196.2 of 5.50% convertible notes due 2021.
- The company issued $27.7 of installment-payment financing at 7.0% for software licenses supporting a client contract. The revolving facility had no borrowings, $6.4 of letters of credit and $132.7 of availability.
- Current assets were $1,207.3 and current liabilities were $861.9. The balance sheet reported a total deficit of $1,282.5, including $1,927.2 of long-term postretirement liabilities.
Material changes and unusual items
- Q1 2018 results included a $53.0 Topic 606 adjustment for software renewals and extensions, making reported year-over-year comparisons less representative of underlying trends.
- Effective January 1, 2019, Unisys extended the estimated useful life of its proprietary enterprise software from three to five years. This reduced Q1 cost of revenue by $4.4 and reduced net loss by $4.4, or $0.08 per diluted share.
- Other expense, net was $30.4, including $22.7 of postretirement expense, $4.5 of foreign-exchange losses and a $4.4 increase in the environmental reserve. Pension expense rose to $22.6 from $18.2.
- Cost-reduction charges were $2.6, comprising $3.5 for lease abandonment and asset write-offs, partly offset by $0.9 of estimate changes. Remaining workforce-reduction liabilities were $71.1.
- Adoption of lease accounting standard Topic 842 added $115.5 of operating lease right-of-use assets and $143.1 of operating lease liabilities at March 31; management said adoption materially affected financial position but not results or cash flows.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said it expects adequate near-term liquidity and expects to meet lending covenants.
- Unisys expected approximately $105.0 of 2019 defined-benefit pension contributions; it warned contributions could increase in 2020 and subsequent years. Management forecast 2019 pension expense of approximately $90.6, versus $79.7 in 2018.
- Remaining performance obligations were approximately $1.1 billion, with about 36% expected to be recognized as revenue by year-end 2019.
- Key stated risks include improving Services revenue and margins, retaining Technology customers and selling new solutions, competition, contract profitability and customer retention, pension funding needs, cybersecurity and IT-system disruption, government-contract exposure, international operations and access to financing.
- Unreserved Brazilian tax-related matters, including interest, were estimated at up to approximately $102. The filing also describes a Belgian government contract dispute seeking about €28 and a Louisiana Medicaid case alleging about $68 of overpayments; the Louisiana Supreme Court had granted review. The company said it believes its provisions are adequate, but adverse litigation outcomes could materially affect results or cash flows.
Important facts for investors to verify
- Whether Services growth converts into improved margins as new contracts move beyond implementation.
- How much reported profitability depends on the revised software useful-life estimate and other accounting or unusual items.
- Cash generation, working-capital movements and the ability to fund pension contributions while servicing debt, including the 2021 and 2022 maturities.
- Progress toward recognizing the $1.1 billion performance-obligation balance and the assumptions behind the 36% expected 2019 recognition.
- Developments in the Brazilian tax exposures, Louisiana and Belgian litigation, and the environmental reserve.