Unisys Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited; amounts are in millions of U.S. dollars except per-share data.
Business context and results
Unisys operates Services and Technology segments. Q2 revenue was nearly flat year over year; first-half revenue growth was materially affected by adoption of the new revenue-recognition standard, so reported comparisons are not fully comparable.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $667.4 | $666.2 | $1,375.8 | $1,330.7 |
| Operating income (loss) | $54.0 | $(3.5) | $155.8 | $18.3 |
| Income (loss) attributable to Unisys | $3.8 | $(42.0) | $44.4 | $(74.7) |
| Diluted EPS | $0.07 | $(0.83) | $0.74 | $(1.48) |
| Gross margin | 22.9% | 17.8% | 25.7% | 19.3% |
Q2 Services revenue rose 2.1% to $586.7, while Technology revenue fell 11.7% to $80.7. First-half Services revenue declined 0.4% to $1,155.2; Technology revenue rose 29.3% to $220.6, but declined 1.8% excluding the $53.0 Topic 606 timing adjustment. First-half operating income was $102.8 excluding that adjustment.
Cash flow, debt and liquidity
- First-half operating cash flow was a use of $61.9, versus a use of $90.2 in 2017. Investing cash use was $80.4 and financing cash use was $3.4. Cash, cash equivalents and restricted cash declined $163.0 to $601.1; cash and cash equivalents alone were $584.3 at June 30, down from $733.9 at year-end.
- Total debt was $648.3, including $430.8 of 10.75% secured notes due 2022 and $190.2 carrying value of 5.50% convertible notes due 2021. Interest expense was $32.3 for the first half, up from $20.0.
- The revolving facility was increased to $145.0; there were no borrowings, $6.9 of letters of credit, and $128.1 of reported availability. The company stated it was in compliance with lending covenants and expected to remain compliant.
- Unisys reported a total deficit of $1,244.1 and long-term postretirement liabilities of $1,886.8. It expects 2018 pension-plan contributions of approximately $147.3; $67.7 had been contributed in the first half.
Material changes and unusual items
- Topic 606 was adopted January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated earnings by $21.4. A $53.0 Technology revenue timing item was included in first-quarter 2018 results, representing renewals contracted in 2017; the filing says this item will not recur. Without Topic 606, first-half revenue was $1,280.3 and Unisys-attributable net income was a loss of $40.2.
- Q2 and first-half comparisons benefited from substantially lower cost-reduction charges than in 2017, ongoing savings from prior actions, and a $7.1 gain on sale of U.K. property. No new cost-reduction charges were recorded in the first half; a $2.2 net income from estimate changes was recorded.
- The 2017 second-quarter tax benefit included a one-time $20.0 benefit from an election involving alternative minimum tax credits. The 2018 first-half tax provision was $35.2 versus $9.1 in 2017; management cautions that taxes may vary with geographic income and valuation allowances.
- Effective July 1, 2018, the Argentinian subsidiary will use highly inflationary accounting; related exchange gains and losses will flow through other income or expense.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said it believed liquidity sources were adequate for expected near-term needs and expected to meet credit covenants. It forecast 2018 postretirement expense of approximately $72.8, compared with $98.1 in 2017.
Management identified risks including Services revenue and margin improvement, Technology installed-base retention and product sales, competition, cybersecurity and IT disruptions, client retention, international operations and currency exposure, pension funding needs, financing access, contract profitability, and litigation. The company reported ordinary-course legal matters, including Belgian government claims of approximately €28 million (with a company counterclaim of approximately €18.5 million), Brazilian unreserved tax-related matters estimated up to approximately $116 million, and Louisiana claims alleging approximately $68 million in prescription-drug overpayments. The company said it believed it had adequate provisions, but adverse outcomes could materially affect a particular period.
A material weakness in internal control over financial reporting related to Technology revenue recognition remained under remediation. Management concluded disclosure controls were not effective as of June 30, 2018; it described added personnel, training, transaction reviews and analytics, but the weakness would not be considered remediated until controls were tested and found effective.
Most important facts for investors to verify
- Separate underlying operating performance from the one-time $53.0 Topic 606 timing adjustment and other accounting adoption effects.
- Assess whether Services trends, Technology sales and reported margin improvement are sustainable after excluding property-sale gains, restructuring differences and other unusual items.
- Monitor recurring operating cash use, the decline in cash, planned pension contributions, debt-service costs and revolving-credit availability.
- Track remediation and testing of the Technology revenue-recognition control weakness.
- Review the status and potential exposure of Brazilian tax matters, Belgian litigation and the Louisiana claim, which remain uncertain.