Unisys Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Figures are in millions of dollars except per-share data. Unaudited results; interim performance may not indicate full-year results.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $757.6 | $688.3 | $2,207.2 | $2,064.1 |
| Operating income | $70.9 | $55.8 | $200.8 | $211.6 |
| Income before taxes | $6.5 | $22.2 | $45.4 | $105.1 |
| Net income (loss) attributable to Unisys | ($13.2) | $6.1 | ($6.4) | $50.5 |
| Diluted EPS | ($0.23) | $0.12 | ($0.12) | $0.89 |
| Gross margin | 22.8% | 22.3% | 23.4% | 24.6% |
- Q3 revenue rose 10.1%; Services increased 8.0% and Technology 25.2%. U.S. revenue rose 33.7%, while international revenue fell 9.7%; foreign exchange reduced reported revenue growth.
- Nine-month revenue rose 6.9% (9.8% excluding the prior-year $53.0 million Topic 606 timing adjustment). Services grew 9.0%; Technology declined 5.2%, but grew 14.9% excluding that adjustment.
- Q3 operating margin was approximately 9.4%, versus 8.1%. Nine-month operating income was lower year over year, although the comparable 2018 figure excluding the Topic 606 adjustment was $158.6 million.
- Other expense was $49.2 million in Q3 and $108.5 million year to date. Nine-month items included $69.1 million postretirement expense, a $20.2 million debt-exchange loss, foreign-exchange losses and a $10.3 million increase in the environmental reserve.
Cash flow, liquidity and debt
- Cash and cash equivalents were $425.4 million at September 30, down from $605.0 million at December 31, 2018; restricted cash was another $7.9 million. $255.0 million of cash was held outside the U.S., with some subject to transfer restrictions or potential taxes.
- Nine-month operating cash use was $1.8 million, improved from $77.4 million used in 2018. Investing cash use was $141.7 million and financing cash use was $37.3 million. Cash, cash equivalents and restricted cash decreased $190.8 million.
- Total debt was $577.0 million, down from $652.8 million at year-end 2018. The company had $139.3 million available under its revolving facility and no revolver borrowings. It reported compliance with lending covenants.
- Current assets were $1,119.0 million and current liabilities $852.9 million. Total deficit was $1,117.4 million. Long-term postretirement liabilities were $1,830.5 million.
Material changes and unusual items
- In August, Unisys exchanged $129.3 million principal amount of 5.50% convertible notes for $59.4 million cash and 10.6 million common shares. $84.2 million principal remained outstanding; the transaction produced a $20.2 million charge. This reduced debt but increased share count.
- Changing the estimated useful life of proprietary enterprise software from three to five years reduced cost of revenue by $5.8 million in Q3 and $15.1 million year to date, increasing reported net income by those amounts. The estimate change is prospective.
- Adoption of lease accounting in 2019 added $126.8 million of operating lease right-of-use assets and $153.0 million of operating lease liabilities at September 30; prior periods were not restated.
- Q3 Services margins improved, with management citing reduced delivery costs, partly offset by implementation costs on new contracts incurred ahead of revenue. Technology margins fell in Q3 due to a large, lower-margin third-party equipment delivery.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said it expects adequate near-term liquidity.
- Management estimated 2019 worldwide pension contributions of approximately $103.4 million and anticipated approximately $1.3 billion of required contributions for 2020–2024, based on conditions at year-end 2018. It said additional funding may be needed and is not assured.
- The company applied to the IRS for waivers that, if approved, would defer approximately $115 million of required 2020 contributions, with deferred amounts paid over five years. Approval and timing were uncertain.
- Remaining performance obligations were approximately $1.0 billion; about 13% was expected to be recognized by the end of 2019 and another 34% by the end of 2020.
- Key disclosed risks include pension funding and access to financing, Services revenue and margin execution, competition, cybersecurity and IT disruption, reliance on U.S. federal government business (about 25% of revenue), customer retention, contract profitability, foreign-exchange and international risks, and Brexit-related uncertainty.
- Legal matters include Brazilian unreserved tax-related exposures estimated up to approximately $98 million, a Belgian government claim of approximately €28 million with a company counterclaim, and a Louisiana Medicaid case remanded for further proceedings. The company said it believes its provisions are adequate, but outcomes are unpredictable.
Important facts for investors to verify
- Progress and profitability of new Services contracts, especially costs incurred during implementation and whether U.S.-led growth can offset international declines.
- Actual pension contributions, the IRS waiver decision, and the company’s ability to fund the anticipated 2020–2024 obligations while meeting debt maturities.
- Cash accessibility outside the U.S., cash generation, and refinancing options for the 2021 convertible notes and 2022 secured notes.
- The effect of the notes exchange and share issuance on dilution, and whether the software-life estimate benefit and other unusual items distort comparisons.
- Developments in the Brazilian, Belgian and Louisiana matters, and any changes to the environmental reserve or other contingencies.