Unisys Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars except per-share data. Unisys provides Services and Technology offerings.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $748.9 | $764.8 | $1,415.7 | $1,486.0 |
| Gross margin | 23.8% | 16.3% | 19.6% | 16.2% |
| Operating income (loss) | $49.5 | $(49.5) | $21.9 | $(79.5) |
| Net income (loss) attributable to Unisys | $21.6 | $(58.2) | $(18.3) | $(101.4) |
| Diluted EPS | $0.36 | $(1.17) | $(0.37) | $(2.03) |
Q2 revenue fell 2% year over year; first-half revenue fell 5%. Services revenue declined 7% in both periods, while Technology revenue rose 31% in Q2 and 11% in the first half. The mix shift toward Technology—particularly ClearPath Forward—helped lift consolidated gross margin and operating results. Services remained under pressure: Q2 Services operating margin was 2.1%, versus 2.2% a year earlier; Technology operating margin rose to 48.0% from 15.6%.
First-half operating cash flow was $58.8, versus cash use of $64.4 in 2015. Investing activities used $71.9 and financing activities provided $111.8. Cash and equivalents were $463.6 at June 30, up from $365.2 at year-end; $245.3 was held outside the U.S. Total debt was $419.9, versus $310.5 at year-end. The company had no revolver borrowings and reported $116.0 of availability. Total deficit was $1,273.6.
Material changes and notable items
- Q2 returned to operating and net income from losses in the prior-year quarter. First-half net loss narrowed substantially, but the company remained loss-making for the six-month period.
- The cost-reduction program generated charges of $10.2 in Q2 and $37.1 in the first half. Management estimates approximately $300 of pretax charges through 2017; $32.5 of workforce-reduction costs remained accrued at June 30.
- Unisys issued $213.5 of 5.50% convertible senior notes due 2021. The notes have a 9.5% effective interest rate, are convertible at an initial price of about $9.76 per share, and increased interest expense. The company also paid $27.3 for capped-call transactions intended to reduce potential dilution or conversion-related cash payments.
- First-half pension expense was $41.8, down from $54.3. Expected 2016 cash contributions are approximately $136.1 to defined-benefit pension plans and $15.0 to postretirement plans.
- Foreign currency reduced first-half revenue by an estimated 3 percentage points. The company reported $14.1 of first-half losses on foreign-exchange forward contracts in the financial-statement note.
Outlook, risks and contingencies
Management said it expects adequate near-term liquidity and expects to meet lending-agreement covenants. It provided no specific revenue or earnings guidance in the supplied filing text. The company expects pension expense of approximately $84.5 for full-year 2016 and continues its cost-reduction plan. Tax expense may vary significantly with the geographic distribution of income; U.S. operating results generally have no tax provision or benefit because of a full valuation allowance.
Risks identified include execution of cost savings and service-margin improvement, competition and rapid technology change, customer retention and contract profitability, financing and refinancing access, substantial pension obligations, international exposure, cybersecurity and IT disruptions, and litigation. Unreserved Brazilian tax-related matters, including interest, were estimated at up to approximately $122. The filing also discusses Belgian government litigation, claims involving Molina and Idaho Medicaid, and Louisiana Medicaid litigation. Management believes provisions are adequate, but notes that adverse outcomes could materially affect results or cash flow. No significant changes to the risk factors in the 2015 Form 10-K were reported.
Important facts for investors to verify
- Whether Technology growth and ClearPath Forward revenue can continue to offset Services declines, especially in cloud and infrastructure services.
- Whether cost reductions produce sustainable margin improvements and how much of the estimated $300 program cost remains to be incurred.
- Cash available for U.S. operations, including potential taxes on repatriation of foreign-held cash, and the company’s capacity to fund pension contributions and debt service.
- The effects of the convertible notes, including future interest costs and possible share dilution or cash settlement.
- Potential outcomes and exposure from Brazilian tax matters and the other disclosed litigation and contingencies.