Unisys Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions of dollars except per-share data and percentages. Unisys provides Services and Technology offerings.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $666.2 | $748.9 | $1,330.7 | $1,415.7 |
| Gross margin | 15.4% | 23.8% | 16.7% | 19.6% |
| Operating income (loss) | $(24.8) | $49.5 | $(27.5) | $21.9 |
| Net income (loss) attributable to Unisys | $(42.0) | $21.6 | $(74.7) | $(18.3) |
| Diluted earnings (loss) per share | $(0.83) | $0.36 | $(1.48) | $(0.37) |
Q2 revenue declined 11% year over year; first-half revenue declined 6%. Services revenue fell 6% in Q2 and 4% in the first half, while Technology revenue fell 32% and 18%, respectively. Lower enterprise software and server sales were the principal Technology pressures. In Q2, Services operating margin was (1.6)% versus 2.1% a year earlier; Technology operating margin was 35.5% versus 48.0%. First-half margins were 1.5% for Services and 26.1% for Technology.
- Cash flow: Operating activities used $90.2 in the first half, versus providing $56.9 in 2016; management cited lower operating income and timing of receivables collections. Investing activities used $67.0; financing activities provided $333.5.
- Liquidity: Cash and cash equivalents were $571.1 at June 30, 2017, up from $370.6 at year-end; cash, cash equivalents and restricted cash totaled $590.2. The increase primarily reflected the new notes. The company had $101.3 of borrowing availability under its revolving facility, with no borrowings and $11.4 of letters of credit outstanding.
- Debt: Total debt was $641.1, compared with $300.0 at December 31, 2016. In April, Unisys issued $440.0 face value of 10.75% senior secured notes due 2022; it redeemed the remaining $95.0 face value of 6.25% notes due 2017 in May. The 10.75% notes include a quarterly collateral-coverage covenant of at least 1.50:1.00. Unisys reported compliance with its lending and funding covenants at quarter-end.
- Balance sheet: Total assets were $2,318.9 and total deficit was $1,630.1 at June 30. Long-term postretirement liabilities were $2,230.3.
Material changes and unusual items
- Q2 operating results swung from profit to loss as revenue and gross margin fell, Technology sales weakened, and cost-reduction charges rose. Q2 cost-reduction charges were $27.5, versus $10.2 a year earlier; first-half charges were $52.9, versus $37.1.
- Q2 interest expense rose to $14.3 from $7.8, principally due to the new secured notes. The first-half expense was $20.0 versus $12.2.
- The Q2 income-tax benefit was $3.8, including a $20.0 benefit from electing to receive refunds of U.S. alternative minimum tax credit carryforwards rather than claim bonus depreciation. Expected refunds were approximately $9 in 2017 and a further $11 in future periods. Tax results may vary with the geographic distribution of income; a valuation allowance applies to substantially all U.S. deferred tax assets.
- First-half pension contributions were $71.2. The company expected approximately $141.0 of defined-benefit pension contributions for 2017 and pension expense of approximately $97 for the full year.
- The cost-reduction plan, initiated in 2015, was estimated to involve approximately $300 of charges through 2017. At June 30, accrued related liabilities were $67.2, with $29.3 expected to be used in the remainder of 2017.
Outlook, risks and contingencies
The filing gives no specific full-year revenue or earnings guidance. Management said it believed available liquidity would meet near-term cash requirements and expected to continue meeting debt covenants. Results are subject to risks including improving Services revenue and margins, sustaining Technology customers and product sales, executing cost reductions, retaining significant clients, competition, cybersecurity and IT disruption, international exposure, financing access, substantial pension obligations, contract profitability and pending litigation.
Unisys disclosed ongoing legal matters, including a Belgian government claim of approximately €28 million (with a company counterclaim of approximately €18.5 million), unreserved Brazilian tax-related exposures estimated up to approximately $129 million, and a Louisiana Medicaid-related claim alleging approximately $68 million in overpayments for a specified period. The company said it believed it had valid defenses and adequate provisions; potential losses beyond accrued amounts were not clearly estimable in certain matters, and adverse outcomes could materially affect a reporting period.
Important facts for investors to verify
- Whether the sharp Technology revenue and margin declines stabilize, and whether Services can return to operating profitability.
- Cash conversion and working-capital trends, given first-half operating cash outflow and the increase in receivables.
- Ability to service the higher-cost debt while funding pension contributions and completing the cost-reduction plan; monitor collateral-coverage covenant compliance.
- Realization and timing of the AMT refunds, and the impact of tax valuation allowances on future reported tax expense.
- Developments and potential financial exposure in the disclosed legal matters, especially Brazilian tax assessments and the Louisiana claim.