Unisys Corporation (NYSE: UIS) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Unisys provides IT services and technology products through its Services and Technology segments. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Revenue | $2,820.7 | $3,015.1 | Down 6.4%; currency reduced 2016 revenue growth by about 2 percentage points. |
| Gross profit / margin | $558.6 / 19.8% | $540.9 / 17.9% | Margin improved, mainly from stronger proprietary software and server sales, lower pension expense, and lower restructuring charges. |
| Operating profit (loss) / margin | $47.6 / 1.7% | $(55.1) / (1.8)% | Turned profitable. |
| Income (loss) before taxes | $20.5 | $(58.8) | Improved; income tax provision was $57.2, leaving a $47.7 net loss attributable to common shareholders, or $(0.95) per diluted share. |
| Cash from operations | $218.2 | $1.2 | Improved with lower net loss, working-capital gains, and lower pension contributions. |
| Cash and cash equivalents | $370.6 | $365.2 | $262.3 was held by foreign subsidiaries and branches. |
| Total debt | $300.0 | $310.5 | Included $106.0 of current maturities at year-end. |
Investing activities used $182.2 and financing activities used $16.7 in 2016. Current assets of $1,027.3 compared with current liabilities of $981.6. The secured revolving facility had no borrowings, $11.3 of letters of credit outstanding, and $102.5 of availability at year-end.
Segments and changes versus prior year
- Services: Revenue fell 7.6% to $2,406.3. Cloud and infrastructure revenue declined 10.6% to $1,352.9; application services fell 1.1% to $859.0; BPO fell 13.1% to $194.4. Gross margin increased to 16.2% from 15.8%, while operating margin declined to 1.9% from 2.3% amid investment in capabilities.
- Technology: Revenue rose 1.2% to $414.4, reversing part of the prior-year decline, with increased proprietary enterprise software and server sales. Gross margin rose to 59.9% from 55.3%; operating margin increased to 37.0% from 24.8%.
- Revenue fell from $3,356.4 in 2014 to $3,015.1 in 2015 and $2,820.7 in 2016. Services revenue has contracted for consecutive years; Technology revenue fell 28.2% in 2015 before its modest 2016 recovery.
- Fourth-quarter 2016 revenue was $721.7, versus $789.9 in fourth-quarter 2015. Fourth-quarter 2016 net loss attributable to common shareholders was $1.2.
Outlook, risks and unusual items
- The company expected to generate approximately $230 million of annualized net cost savings exiting 2017, with the cost-reduction program expected to conclude in 2017. It had recognized $200.6 million of program charges through 2016 and estimated total cash expenditures of approximately $280 million through 2019.
- Management estimated 2017 worldwide defined-benefit pension contributions of approximately $127.7 million and pension expense of approximately $98.0 million. Required pension contributions were expected to increase in 2018 and beyond. Worldwide underfunded pension obligations were approximately $2.17 billion at year-end; the U.S. plan alone was underfunded by approximately $1.52 billion.
- A significant near-term financing risk was the $95 million face amount of 6.25% senior notes due August 2017. The company also had $213.5 million face amount of 5.50% convertible senior notes due 2021; their reported effective interest rate was 9.5%. Management stated it believed liquidity was adequate for expected 2017 needs, while warning that refinancing access was not assured.
- Other notable risks include continued Services revenue and margin pressure, customer retention and contract profitability, competition and technology change, foreign-currency exposure, cybersecurity and IT-system disruption, government contract audits and funding, and significant pension obligations.
- Contingencies include Brazilian tax-related matters with estimated unreserved exposure of up to approximately $126 million, Louisiana claims alleging about $68 million of Medicaid overpayments, and a Belgian government claim of approximately €28 million. The company reported it believed it had valid defenses and adequate provisions; outcomes remain uncertain. It also reported approximately $298 million of standby letters of credit and surety bonds, with potential obligations believed not material based on experience.
- Unusual items included $82.1 million of 2016 cost-reduction and other charges, a $4.0 million loss on debt extinguishment, and a $215.9 million lump-sum pension payment to approximately 5,800 former associates. The filing states no pension settlement charge was recorded for that payment.
Important facts for investors to verify
- How the company will refinance or repay the 2017 senior-note maturities, and whether liquidity and credit-facility availability remain adequate.
- Whether Services revenue declines stabilize and projected cost savings translate into sustained operating-margin improvement.
- Actual pension funding requirements, plan asset performance, and sensitivity to discount-rate changes.
- Developments in the Brazilian, Louisiana, and Belgian legal matters and any changes to related accruals or potential exposure.
- Whether Technology growth and software/server margins can offset Services contraction, and the potential dilution or cash effects of convertible-note conversion.