Unisys Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $683.3 | $739.2 | $2,099.0 | $2,225.2 |
| Operating income (loss) | $(9.8) | $8.6 | $12.1 | $(70.9) |
| Net loss attributable to Unisys | $(28.2) | $(9.6) | $(46.5) | $(111.0) |
| Diluted loss per share | $(0.56) | $(0.19) | $(0.93) | $(2.22) |
| Gross margin | 17.8% | 19.0% | 19.0% | 17.2% |
Q3 revenue fell 8% year over year (7.6% as reported); nine-month revenue declined 6%. Foreign exchange reduced revenue growth by 2 percentage points in Q3 and 3 points year to date. Services revenue fell 8% in Q3 and 7% year to date; Technology revenue was down 1% in Q3 but up 8% year to date. Nine-month margin improvement reflected stronger proprietary software and services sales and lower pension expense, partly offset by restructuring charges. Q3 margin declined largely because cost-reduction charges increased.
- Segments: Q3 Services revenue was $600.9, down 8.4%, with a 16.7% gross margin and 2.6% operating margin. Technology revenue was $82.4, down 1.0%, with a 59.8% gross margin and 32.3% operating margin. Year-to-date Technology revenue rose 7.6%, with higher proprietary software and server sales.
- Cash flow: Operating activities provided $101.3 for nine months, versus $108.5 used in the prior-year period. Investing activities used $132.4; financing activities provided $111.0. Cash increased $77.5 to $442.7.
- Liquidity and debt: Total debt was $421.6 at September 30, versus $310.5 at year-end 2015. The company had no revolver borrowings, $10.9 of letters of credit outstanding, and $98.5 of availability under its $150.0 secured facility. Cash held outside the U.S. was $278.7 and may incur taxes if repatriated.
- Balance sheet: Current assets were $1,133.7 and current liabilities $1,067.9. Total deficit was $1,258.1. Long-term postretirement liabilities were $1,943.9.
Material changes, outlook, and risks
- Unisys issued $213.5 principal amount of 5.50% convertible senior notes due 2021 in March and April 2016. Net proceeds were $178.9 after capped-call and issuance costs. The notes have a 9.5% effective interest rate; interest expense rose to $19.9 for nine months from $8.3.
- The cost-reduction plan, begun in 2015 and estimated at approximately $300 through 2017, generated charges of $69.0 in the first nine months of 2016, including $31.9 in Q3. Management attributed improved year-to-date operating results partly to savings from the plan. A $39.2 workforce-reduction liability remained at quarter-end.
- Management expected 2016 pension contributions of approximately $134.0 and pension expense of approximately $84.5; $104.0 of pension contributions had been made through September. Management stated it expected adequate near-term liquidity and continued compliance with lending covenants.
- The $210 of 6.25% senior notes due August 2017 create refinancing and facility-maturity considerations. The revolver’s maturity may accelerate to May 2017 unless specified conditions are met; the filing discusses refinancing conditions but does not provide a broader revenue or earnings forecast.
- Risks include declining Services revenue, competition and technology change, ability to improve Services margins and realize cost savings, significant pension obligations, refinancing access, customer and contract risks, cybersecurity and IT disruption, international exposure, and litigation. Management said risk factors had not changed significantly from its 2015 Form 10-K.
- Legal matters include Belgian government claims of approximately €28 and a counterclaim of approximately €18.5; Brazilian tax-related matters with unreserved exposure estimated up to approximately $124; a Molina matter with an agreement in principle to settle; and Louisiana Medicaid-related claims. Management considered its provisions adequate, but noted adverse outcomes could materially affect a particular period.
- Income taxes include a $16.4 benefit from revised assessment of deferred-tax-asset realizability and a $3.4 charge from a UK tax-rate change. A full valuation allowance remains on U.S. and certain foreign deferred tax assets, so tax expense may vary with geographic income.
Important facts for investors to verify
- Progress in stabilizing Services revenue and improving its margins, particularly cloud and infrastructure and business processing outsourcing.
- Whether the cost-reduction program delivers expected savings relative to remaining charges and cash payments.
- Plans and capacity to refinance or repay the 2017 notes and satisfy the related revolver maturity conditions.
- Cash availability, including the use and potential tax cost of repatriating foreign-held cash, and required pension contributions.
- Developments in the disclosed litigation and Brazilian tax exposures, and any changes in deferred-tax-asset realizability.