Unisys Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. Unisys reports Services and Technology segments. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $666.3 | $683.3 | $1,997.0 | $2,099.0 |
| Gross margin | 12.9% | 17.8% | 15.5% | 19.0% |
| Operating income (loss) | $(27.0) | $(9.8) | $(54.5) | $12.1 |
| Net loss attributable to Unisys | $(41.1) | $(28.2) | $(115.8) | $(46.5) |
| Diluted loss per share | $(0.81) | $(0.56) | $(2.30) | $(0.93) |
| Interest expense | $16.4 | $7.7 | $36.4 | $19.9 |
- Revenue and segments: Q3 revenue decreased 2.5% year over year: Services fell 4.2% to $575.5, while Technology rose 10.2% to $90.8. For the first nine months, revenue fell 4.9%; Services declined 4.1% and Technology 9.6%.
- Margins: The nine-month gross-margin decline reflected weaker Technology sales and higher restructuring charges. Technology gross margin was 53.2% versus 60.2% a year earlier; Services gross margin was 16.3% versus 15.9%.
- Cash flow: Operating activities used $36.3 in the first nine months, compared with $103.0 provided in 2016. Investing activities used $98.6; financing activities provided $334.7. Cash, cash equivalents and restricted cash totaled $620.0 at September 30, including $598.7 of cash and cash equivalents.
- Debt and liquidity: Total debt was $642.8, up from $300.0 at December 31, 2016. The increase principally reflects issuance of $440.0 of 10.75% senior secured notes due 2022; the company also redeemed its remaining $95.0 of 6.25% notes due 2017. At quarter-end, its revolving facility had no borrowings and $91.5 available after letters of credit. On October 5, 2017, it replaced that facility with a $125.0 revolving credit agreement, with an accordion feature up to $150.0.
- Balance sheet: Current assets were $1,262.1 and current liabilities $921.5. Total deficit was $1,649.9, including a $2,195.2 long-term postretirement liability.
Material changes versus the prior comparable period
- Nine-month operating results moved from $12.1 of operating income to a $54.5 loss; attributable net loss widened to $115.8 from $46.5.
- Cost-reduction charges and related costs were $46.1 in Q3 and $99.0 for the first nine months, compared with $31.9 and $69.0, respectively, in 2016. The actions principally involved workforce reductions.
- Interest expense increased, principally following the 2022 secured-note issuance. Nine-month other expense was $8.6, versus $3.7 of other income in 2016, including foreign-exchange losses.
- Cash increased from $370.6 at year-end 2016, primarily due to debt proceeds, while operating cash flow deteriorated and total debt rose.
Outlook, commentary, risks and contingencies
- Management said it expects adequate near-term liquidity and expects to meet debt covenants. The filing provides no specific revenue or earnings guidance. The cost-reduction plan was expected to generate estimated charges of approximately $320–$330 through 2017.
- For 2017, Unisys expected pension contributions of approximately $137.5 and pension expense of approximately $92.7. Nine-month pension contributions were $110.8. These obligations are a significant cash requirement.
- The company recorded a $21.1 tax benefit in 2017 from electing cash refunds of certain U.S. alternative minimum tax credits; $9.1 was received in October and approximately $12 was expected in future periods. Tax expense may vary with the geographic distribution of income, and substantially all U.S. and certain foreign deferred tax assets were subject to valuation allowances.
- The 10.75% secured notes require a quarterly collateral coverage ratio of at least 1.50:1.00 and contain restrictive covenants. The October 2017 revolver also has borrowing-base and covenant provisions, including a minimum fixed-charge coverage ratio if availability falls below specified thresholds.
- Disclosed legal matters include a Belgian government claim of approximately €28 and a company counterclaim of approximately €18.5; Brazilian unreserved tax matters estimated at up to $138.3; and Louisiana’s approximately $68 claim concerning Medicaid prescription-drug reimbursements. The company says it has defenses and adequate provisions, but adverse outcomes could materially affect results or cash flow; some possible losses are not reasonably estimable.
- Management identified risks including declining Services revenue and margins, maintaining Technology customers and product sales, competition and rapid technological change, pension funding, executing cost reductions, client retention, cybersecurity and IT disruption, international operations, contract profitability, litigation, and access to financing. It reported no significant changes to the risk factors in its 2016 Form 10-K.
- Unisys planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Management did not then expect a material impact, but said the final effect remained undetermined.
Most important facts for investors to verify
- Whether Services revenue and consolidated margins stabilize, and whether Technology sales and margins recover.
- Whether operating cash flow improves after the reported $36.3 use, particularly given pension contributions and investment needs.
- The ongoing cost and cash effects of restructuring, including whether expected savings offset the charges.
- Debt-service capacity and compliance with the secured-note collateral coverage test and revolving-credit covenants.
- Actual outcomes and reserves for the Brazilian, Belgian and Louisiana legal matters, and the realized amount and timing of expected tax refunds.