Unisys Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Unisys is a global IT company operating in Services and Technology, serving government, financial services and commercial customers.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2.742 billion | $2.821 billion |
| Gross profit margin | 17.4% | 19.8% |
| Operating income | $4.6 million | $47.6 million |
| Net loss attributable to Unisys shareholders | $65.3 million; $1.30 per diluted share | $47.7 million; $0.95 per diluted share |
| Cash from operating activities | $166.4 million | $218.2 million |
| Cash and cash equivalents at year-end | $733.9 million | $370.6 million |
| Total debt at year-end | $644.7 million | $300.0 million |
- Revenue fell 2.8% year over year. Services revenue declined 3.2% to $2.328 billion; Technology revenue was nearly flat at $413.6 million.
- Services gross margin was 16.8%, versus 16.2%; Technology gross margin was 59.4%, versus 59.9%. Segment operating margins were 2.8% and 38.8%, respectively.
- Lower consolidated gross margin and operating income reflected higher restructuring charges and pension expense. Interest expense rose to $52.8 million from $27.4 million, principally following the issuance of secured notes. Other expense was $23.9 million, including foreign-exchange losses and costs related to exiting countries.
- Investing activities used $152.5 million; financing activities provided $329.9 million, principally from debt issuance. The company reported $110.5 million available under its $125 million revolving credit facility, with no borrowings and $4.7 million of letters of credit outstanding. Management said liquidity was adequate for expected 2018 cash requirements.
- Debt includes $440 million face value of 10.75% senior secured notes due 2022 and $213.5 million face value of 5.50% convertible notes due 2021. The company had a shareholders’ deficit of $1.327 billion.
Material changes and unusual items
- The 2015 cost-reduction program generated $146.8 million of charges in 2017, bringing cumulative charges through 2017 to $347.4 million. The company reported approximately $270 million of annualized net cost savings exiting 2017 and estimated program cash expenditures of about $320 million through 2019.
- Services revenue declines were concentrated in cloud and infrastructure services (down 2.7%) and application services (down 5.9%); BPO services grew 4.4%. International operations generated more than half of revenue. U.S. government agency sales were about 21% of consolidated revenue.
- Year-end cash increased substantially after the company issued the secured notes. Total debt increased by $344.7 million from 2016.
- The Tax Cuts and Jobs Act generated a $50.4 million 2017 tax benefit from the repeal of the corporate AMT and refundable AMT credits. The company said the U.S. tax-rate reduction had no net 2017 financial-statement impact because of its valuation allowance against U.S. deferred tax assets.
- Fourth-quarter revenue was $744.8 million and net income attributable to Unisys shareholders was $50.5 million, following losses in each of the first three quarters. Fourth-quarter diluted EPS was $0.76; full-year diluted EPS remained a loss of $1.30.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance for 2018 is provided. Management estimated 2018 pension expense of approximately $72.8 million and worldwide defined-benefit pension contributions of approximately $149.7 million.
- Defined-benefit pension obligations remain a major funding risk: the company reported approximately $1.78 billion of underfunding at year-end and warned that required contributions could rise in 2020 and subsequent years. It expects a 2018 plan reorganization to reduce administrative costs and related funding by about $10 million annually through 2021, without changing participant benefits.
- Unisys planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected an immaterial opening accumulated-deficit adjustment and a net increase to 2018 revenue and results, mostly in the first quarter; consequently, 2017 and 2018 results may not be directly comparable.
- A material weakness in internal controls over Technology revenue recognition made disclosure controls and internal control over financial reporting ineffective at year-end. The weakness concerned risk assessment, trained personnel and controls for multiple-element arrangements. Preliminary immaterial errors were corrected; the financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control effectiveness. Management outlined remediation measures.
- Litigation and tax matters include Brazilian unreserved tax-related matters estimated at up to approximately $135 million, a Louisiana Medicaid reimbursement claim seeking about $68 million for a specified period, and a Belgian contract claim of about €28 million. The company stated it believes it has defenses and adequate provisions; outcomes remain uncertain.
- Other principal risks include declining Services revenue or margins, retaining Technology customers and winning sales of new offerings, intense competition and rapid technological change, cybersecurity and IT disruption, customer and government contract termination, international and foreign-exchange exposure, financing access, and pension-plan termination risk. The company reported about $318 million of performance and payment letters of credit and surety bonds and did not expect obligations under them to be material.
Most important facts for investors to verify
- Whether Services revenue and margins stabilize, and whether reported cost savings translate into sustained operating improvement.
- Progress remediating the Technology revenue-control material weakness and whether subsequent filings report effective controls.
- Cash generation and refinancing capacity against the 10.75% secured debt, the 2021 convertible notes and substantial pension contributions.
- The realized 2018 effects of the revenue-standard adoption, including the timing-related first-quarter increase described by management.
- Developments in pension funding requirements and in the Brazilian, Louisiana and Belgian matters, including any changes to estimated exposure or provisions.