Unisys Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2018 periods.
Business context and results
Unisys operates Services and Technology segments. Management attributed first-half growth mainly to new business, particularly U.S. Federal and other U.S. business, and higher proprietary enterprise software sales. U.S. revenue grew while international revenue was pressured by currency effects and, for the six-month comparison, a prior-year accounting adjustment.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $753.8 | $667.4 | $1,449.6 | $1,375.8 |
| Operating income | $87.0 | $54.0 | $129.9 | $155.8 |
| Income before taxes | $41.9 | $20.3 | $38.9 | $82.9 |
| Net income attributable to Unisys | $26.2 | $3.8 | $6.8 | $44.4 |
| Diluted EPS attributable to Unisys | $0.42 | $0.07 | $0.13 | $0.74 |
| Gross margin | 25.7% | 22.9% | 23.7% | 25.7% |
| Operating margin | 11.5% | 8.1% | 9.0% | 11.3% |
Financial position and cash flow
- Cash and liquidity: Cash and cash equivalents were $507.2 at June 30, down from $605.0 at year-end 2018; cash, cash equivalents and restricted cash totaled $517.5. Of cash and equivalents, $309.6 was held outside the U.S.; the company said up to one-third might not be readily transferable. The revolving facility had $139.4 available, with no borrowings and $5.6 of letters of credit outstanding.
- Cash flow, first half: Operating cash use was $19.5, improved from $61.9 used in 2018. Investing cash use was $101.1 versus $80.4; financing provided $13.1 versus $3.4 used. Cash, equivalents and restricted cash decreased $106.6.
- Debt: Total debt was $676.1, up from $652.8 at December 31, 2018. Major obligations include $433.2 carrying value of 10.75% secured notes due 2022 and $198.3 of 5.50% convertible notes due 2021. The revolver is subject to springing-maturity provisions linked to those note maturities.
- Deficit and postretirement obligations: Total stockholders’ deficit was $1,213.7; long-term postretirement liabilities were $1,888.0. Pension contributions were $45.9 in the first half.
Material changes and notable items
- Q2 revenue rose 12.9%; Services revenue increased 11.4% and Technology 24.4%. First-half revenue increased 5.4%, but excluding the $53.0 prior-year Topic 606 revenue adjustment, management said growth was 9.6%. First-half Technology revenue fell 16.5% reported, but rose 9.8% excluding that adjustment.
- Q2 Services operating margin rose to 6.0% from 3.2%; Technology operating margin rose to 53.8% from 45.1%, with management citing lower Services delivery costs, new business and a higher mix of higher-margin software. First-half Technology margin comparisons were affected by the prior-year accounting adjustment.
- Other expense was $28.9 in Q2 and $59.3 for the first half, including postretirement expense of $22.8 and $45.5, respectively. The company also increased its environmental reserve by $5.4 in Q2 and $9.8 in the first half.
- A prospective useful-life change for proprietary enterprise software lowered cost of revenue and increased net income by $4.9 in Q2 and $9.3 in the first half; disclosed diluted EPS effects were $0.06 and $0.18, respectively.
- First-half 2018 comparisons included a $7.1 pretax gain on sale of U.K. property. First-half 2019 cost-reduction charges were $5.2; $57.6 remained in workforce-reduction liabilities at June 30.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Remaining performance obligations were approximately $1.0 billion, with about 24% expected to be recognized by year-end 2019.
- Management estimated 2019 worldwide defined-benefit pension contributions of approximately $104.5. Based on conditions at year-end 2018, it anticipated approximately $1.3 billion of required contributions in 2020–2024 and said additional financing would likely be needed; financing is not assured. Expected 2019 pension expense was approximately $90.3.
- Key risks include pension funding and access to financing; Services pricing, utilization and profitability; client retention and contract performance; competition and technology change; cybersecurity and IT disruption; U.S. Federal government shutdowns; foreign currency and international operations; and the ability to retain skilled personnel.
- Contingencies include Brazilian unreserved tax-related matters estimated at up to approximately $106, excluding matters assessed as remote; the Belgian government’s approximately €28 claim and Unisys Belgium’s approximately €18.5 counterclaim; and Louisiana Medicaid litigation remanded for further proceedings. The company said it believed provisions were adequate, while noting that adverse outcomes could materially affect a reporting period.
- The company reported compliance with lending covenants at June 30. Its senior secured notes require a quarterly collateral coverage test. The filing also notes that a full valuation allowance applies to U.S. and certain foreign deferred tax assets, so tax expense may vary with the geographic distribution of income.
Important facts for investors to verify
- Whether Services growth and margins are sustainable as new contracts move beyond implementation and foreign-exchange pressures persist.
- Funding sources and timing for the projected $1.3 billion of pension contributions in 2020–2024, including effects on liquidity and debt refinancing.
- The drivers of elevated other expense, including pension costs and environmental reserves, and any subsequent reserve developments.
- Progress and potential exposure in the Brazilian, Belgian and Louisiana matters, as well as the adequacy of recorded legal and tax provisions.
- Effects of the software useful-life estimate and the 2018 Topic 606 comparison adjustment when assessing underlying earnings and margins.