Unisys Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in millions of dollars except per-share data. Comparisons are with Q1 2017 unless noted.
Business context and financial performance
Unisys reports Services and Technology segments. Q1 results were materially affected by adoption of the new revenue-recognition standard, Topic 606, and by cost savings from prior restructuring actions.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $708.4 | $664.5 |
| Operating income | $101.8 | $21.8 |
| Income (loss) before tax | $62.6 | $(16.8) |
| Net income (loss) attributable to Unisys | $40.6 | $(32.7) |
| Diluted EPS | $0.62 | $(0.65) |
| Cash used in operating activities | $50.2 | $41.0 |
Reported revenue increased 6.6%; management said it declined 1% excluding the $53.0 Topic 606 item. Foreign exchange added approximately 4 percentage points to revenue growth. Services revenue fell 2.9% to $568.5; Technology revenue rose 76.6% to $139.9, but increased 9.7% excluding the accounting item.
Gross margin was 28.4%, versus 20.9%; excluding the Topic 606 adjustment, Q1 2018 gross margin was 22.6%. Operating income was $48.8 excluding that adjustment. Services operating margin declined to 3.0% from 4.7%; Technology operating margin was 54.7%, or 29.9% excluding the adjustment. SG&A fell to $90.9 from $105.0, and R&D to $8.5 from $11.8.
Liquidity, debt and balance sheet
Cash and cash equivalents were $656.4 at March 31, down from $733.9 at year-end; cash, cash equivalents and restricted cash totaled $683.0, down $81.1 during the quarter. Cash from operations was negative $50.2. Investing activities used $34.9 and financing activities used $2.8. The filing attributes operating cash-flow changes principally to working capital.
Total debt was $646.8, including $430.2 of 10.75% secured notes due 2022 and $188.2 of 5.50% convertible notes due 2021. Interest expense rose to $16.6 from $5.7, principally following issuance of the secured notes in 2017. The company had no revolver borrowings, $113.1 of availability net of letters of credit, and reported compliance with its lending covenants. Stockholders’ deficit was $1,301.3; total deficit was $1,270.8. Long-term postretirement liabilities were $1,973.2.
Changes, outlook and risks
- Accounting change: Unisys adopted Topic 606 on a modified retrospective basis from January 1, 2018. A one-time $53.0 Technology revenue and profit item related to software renewals/extensions contracted in 2017 was recognized in Q1 under the new timing rules; it will not recur. Adoption also reduced accumulated equity by $21.4 at January 1. The filing’s comparisons are therefore not fully like-for-like.
- Restructuring: No new cost-reduction charges were recorded in Q1 2018; changes in estimates produced $2.9 of income. Q1 2017 included $25.4 of charges and other costs. Remaining cost-reduction liabilities were $101.3 at March 31.
- Management outlook: Management said near-term liquidity sources should be adequate. It expected 2018 pension contributions of approximately $150.6 and postretirement contributions of approximately $12.0. Expected 2018 postretirement expense was approximately $72.7, compared with $98.1 in 2017. Remaining performance obligations were approximately $1.5 billion, with about 50% expected to be recognized by the end of 2019. No specific revenue or earnings guidance is provided in the supplied filing text.
- Control weakness: Management concluded disclosure controls were not effective at March 31 because of a material weakness involving Technology revenue risk assessment and controls over multiple-element arrangements. Remediation was underway; management stated the weakness would not be remediated until measures were implemented and tested as effective.
- Contingencies and risks: Unreserved Brazilian tax-related matters, including interest, were estimated at up to approximately $137.5. Other disclosed litigation includes a Belgian government claim of approximately €28 and a Louisiana Medicaid-related claim alleging approximately $68 of overpayments. The company says it believes it has adequate provisions, but adverse outcomes could materially affect a period. Key risks also include Services revenue and margin performance, pension funding, cybersecurity, international operations, client retention, contract profitability and litigation.
Most important facts for investors to verify
- How much of reported growth and profit reflects the nonrecurring Topic 606 timing effect, and how underlying Technology and Services trends develop.
- Whether operating cash flow improves despite working-capital demands and planned pension contributions.
- Progress in remediating the Technology revenue-control material weakness.
- Debt servicing capacity, the 2021 and 2022 maturities, and continued compliance with debt covenants.
- Developments in Brazilian tax exposures and the Belgian and Louisiana litigation.