Unisys Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are in millions of dollars except per-share data. Unisys provides Services and Technology offerings.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $664.5 | $666.8 |
| Gross profit margin | 18.1% | 14.8% |
| Operating loss | $(2.7) | $(27.6) |
| Loss before taxes | $(16.8) | $(33.2) |
| Net loss attributable to Unisys | $(32.7) | $(39.9) |
| Diluted loss per share | $(0.65) | $(0.80) |
| Cash from (used in) operations | $(41.0) | $25.9 |
- Services revenue was $585.3, down 1.6%; Technology revenue was $79.2, up 10.5%. Services gross margin improved to 18.2% from 14.2%; Technology gross margin declined to 46.6% from 48.6%.
- Services operating margin rose to 4.7% from 0.7%; Technology operating margin fell to 15.4% from 18.1%. Management attributed Services improvement to efficiency initiatives and a particularly profitable transaction; Technology margin pressure reflected revenue mix.
- Q1 selling, general and administrative expense was $109.1 versus $110.1; research and development expense was $13.8 versus $16.0. Interest expense increased to $5.7 from $4.4, principally following issuance of convertible notes in 2016.
- Cash and cash equivalents were $302.0 at March 31, down from $370.6 at year-end; cash, cash equivalents and restricted cash totaled $335.5. Operating cash use was attributed principally to timing of receivables collection and lower accounts payable/accrued liabilities. Investing cash use was $28.1; financing cash use was $2.8.
- Total debt was $301.4, including $106.3 of current maturities. The $150.0 secured revolving facility had no borrowings and $100.1 of availability after letters of credit. The company reported compliance with lending covenants.
- Total deficit was $1,626.7. Long-term postretirement liabilities were $2,258.5. Q1 pension expense was $24.5 versus $20.3.
Changes and notable items
- Revenue was nearly flat year over year, down 0.3%. U.S. revenue increased 1%; international revenue declined 2%, principally due to Europe and Asia Pacific, partly offset by Latin America. Foreign exchange had an insignificant effect on overall international revenue.
- Operating loss narrowed substantially, reflecting improved Services margins and cost savings, partly offset by higher interest expense and $5.3 of foreign-currency translation losses tied to exiting a country.
- Unisys recorded $25.4 of Q1 cost-reduction and related charges, versus $26.9 in Q1 2016. The 2015 initiative was estimated to involve approximately $300 of charges through 2017; the filing gives no updated total estimate beyond that plan.
- Cash from operations swung from a $25.9 inflow to a $41.0 outflow. Receivables decreased only $0.1 in Q1 2017 versus a $69.4 decrease in the prior-year quarter; accrued-liability and accounts-payable movements also used cash.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said it expects adequate near-term liquidity and expects to meet debt covenants.
- For 2017, the company expected approximately $128.3 of defined-benefit pension contributions and approximately $97.9 of pension expense, compared with $82.7 of pension expense in 2016. These obligations are significant cash demands.
- On April 17, 2017, after quarter-end, Unisys issued $440 of 10.75% senior secured notes due 2022 and deposited sufficient funds to redeem the remaining 6.25% notes due 2017. The new notes carry restrictive covenants and a quarterly collateral-coverage test requiring at least 1.50:1.00.
- Q1 income-tax provision was $12.9 despite the pretax loss. A full valuation allowance applies to U.S. and certain foreign deferred tax assets; tax expense can vary with geographic income distribution.
- Disclosed litigation includes a Belgian government claim of approximately €28 and a Louisiana Medicaid claim alleging approximately $68 of overpayments. Unreserved Brazilian tax-related matters were estimated at up to approximately $132, excluding matters assessed as remote. The company stated it believes adequate provisions exist, but adverse outcomes could materially affect a reporting period.
- Principal risks cited include improving Services revenue and margins, retaining clients, competition and technology change, financing access, pension funding, cybersecurity and IT disruption, international exposure, contract profitability, and litigation. Management reported no significant change to the 2016 Form 10-K risk factors.
Important facts for investors to verify
- Whether Services margin gains persist, given the filing’s warning that one unusually profitable transaction benefited Q1 results.
- Cash conversion and working-capital trends, particularly receivables collection and accrued liabilities.
- Effects of the post-quarter $440 note issuance, its 10.75% interest cost and covenants, and redemption of the 2017 notes.
- Progress and remaining costs of the restructuring plan, and whether targeted efficiencies translate into durable operating improvement.
- Actual pension contributions and expense versus estimates, and developments in the disclosed legal and tax contingencies.