Unisys Corporation — Q1 2016 Form 10-Q
Business context and reporting period. Unisys reported unaudited results for the three months ended March 31, 2016, compared with the same period in 2015. Its two segments are Services and Technology. Unless otherwise stated, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $666.8 | $721.2; down 7.5% |
| Gross margin | 14.8% | 16.2% |
| Operating loss | $(27.6) | $(30.0) |
| Loss before taxes | $(33.2) | $(27.7) |
| Net loss attributable to Unisys | $(39.9), or $(0.80) per diluted share | $(43.2), or $(0.87) per diluted share |
| Operating cash flow | $24.2 | $(43.3) |
- Revenue declined in Services (down 6.9%) and Technology (down 12.8%). Cloud and infrastructure services revenue fell 11.3%; application services grew 4.1%; business processing outsourcing fell 16.2%.
- Cash and cash equivalents were $513.8 at March 31, up from $365.2 at year-end. The increase principally reflected the convertible-note issuance, rather than operating cash generation alone. Cash held outside the U.S. was $278.2.
- Total debt was $465.0, compared with $310.5 at December 31, 2015. Cash exceeded reported debt by $48.8, before considering restrictions or other liquidity needs. Unisys had $65.0 drawn on its secured revolving facility, $11.3 of letters of credit outstanding, and $57.7 of availability.
- Total assets were $2,265.1; total deficit was $1,354.3. Long-term postretirement liabilities were $2,070.4.
Material changes and management commentary
- Revenue fell 7.5%; management attributed a five-percentage-point negative impact to foreign currency. International revenue declined 11%, with weakness in Europe and Latin America partly offset by slight growth in Asia/Pacific. U.S. revenue declined 3%.
- Gross margin decreased 1.4 percentage points, reflecting higher cost-reduction charges, partly offset by lower pension expense. SG&A declined to $110.1 from $128.8, which management attributed principally to cost-reduction savings. R&D expense fell to $16.0 from $18.2.
- Q1 included $26.9 of cost-reduction charges, principally severance. Management stated the net loss included $24.7 after tax of these charges, or $0.49 per diluted share. The company had incurred $118.5 of such charges in 2015 and estimated approximately $300 of pretax charges through 2017.
- Pension expense was $20.3, versus $27.9 a year earlier. Management expected approximately $81.5 of pension expense for full-year 2016, and approximately $141.8 of 2016 cash contributions to defined-benefit pension plans. The company also expected about $15 of postretirement-plan contributions.
- Operating cash flow improved year over year, aided by lower pension contributions and working-capital movements; it was negatively affected by an $18 increase in cash used for cost-reduction actions. Investing cash use was $39.4.
Debt, outlook, risks and contingencies
- On March 15, Unisys issued $190 of 5.50% convertible senior notes due 2021. The notes are unsecured and convertible at an initial price of approximately $9.76 per share; the company may settle conversions in cash, shares or a combination. It paid $24.3 for capped-call transactions intended to reduce dilution or excess conversion payments. On April 13, it issued a further $23.5 under the purchasers’ over-allotment option and paid $3.0 for additional capped calls.
- The company said it expected adequate near-term liquidity and reported compliance with lending covenants at March 31. Its revolving credit facility expires in June 2018 and has borrowing limits tied to eligible U.S. receivables.
- No specific revenue or earnings guidance was provided in the filing. Management’s stated outlook includes the cost-reduction plan and pension estimates noted above; results may vary, and interim results are not necessarily indicative of full-year results.
- Key stated risks include execution of cost savings, services margins, technology product sales and installed-base retention, refinancing access, substantial pension obligations, international operations and currency exposure, client retention, competition, cybersecurity and IT disruption, government-contract risks, and litigation.
- Unisys disclosed ongoing lawsuits and claims, including Belgian government litigation, Molina-related litigation, Louisiana Medicaid litigation, and Brazilian tax and labor matters. Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $108. The company said it believed accruals were adequate, but noted litigation outcomes are unpredictable and adverse outcomes could materially affect a period.
- The company maintained a full valuation allowance for U.S. and certain foreign deferred tax assets; tax expense may vary with the geographic distribution of income. Management reported disclosure controls were effective and no significant risk-factor changes from the 2015 Form 10-K.
Most important facts for investors to verify
- Whether revenue declines, particularly in cloud and infrastructure services and Technology, stabilize, and how much future performance is affected by currency.
- Whether planned cost savings are realized and the remaining restructuring charges and cash expenditures through 2017.
- Ability to sustain operating cash flow while funding approximately $141.8 of 2016 pension contributions and meeting other obligations.
- Debt service, revolving-facility availability and covenant headroom, including the effects of the convertible notes and potential dilution or cash settlement.
- Developments in the disclosed Brazilian tax exposures and material litigation, and whether existing accruals remain adequate.