Unisys Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are against December 31, 2014. Unisys provides technology products and services, reported in Services and Technology segments. The company revised certain revenue classifications effective January 1, 2015 and reclassified prior-period segment data for comparability.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $721.2 million | $761.7 million |
| Gross margin | 16.2% | 17.5% |
| Operating loss | $30.0 million | $19.9 million |
| Loss before income taxes | $27.7 million | $31.7 million |
| Net loss attributable to Unisys common shareholders | $43.2 million; $0.87 per diluted share | $53.5 million; $1.15 per diluted share |
| Cash (used for) provided by operating activities | $(43.3) million | $20.1 million |
- Revenue declined 5.3%. Services revenue fell 6.3% to $639.0 million; Technology revenue rose 2.8% to $82.2 million.
- Services gross margin was 14.1%, down from 15.8%, and its operating margin was (1.3)%, versus 1.5%. Management cited start-up costs on new multiyear engagements and lower project work in existing accounts.
- Technology gross margin improved to 49.6% from 41.3%, and operating margin to 5.2% from (16.4)%, reflecting higher proprietary enterprise software and server sales.
- Cloud and infrastructure services revenue declined 9.8%; application services increased 3.2%; business processing outsourcing declined 12.1%. Foreign exchange reduced total revenue growth by 6 percentage points and international revenue by 11 percentage points.
- SG&A decreased to $128.8 million from $138.5 million; research and development increased to $18.2 million from $14.4 million. Higher pension expense was a major pressure on gross margin and operating results.
Financial position and liquidity
- Cash and cash equivalents were $402.0 million, down from $494.3 million at year-end; $303.2 million was held by foreign subsidiaries and branches. The filing notes potential tax costs if foreign cash is repatriated to the U.S.
- Current assets were $1,106.1 million and current liabilities $863.3 million. Total debt was $223.8 million, comprising $2.2 million current and $221.6 million long-term debt. Long-term postretirement liabilities were $2,272.1 million; total stockholders’ deficit was $1,432.2 million.
- Operating cash use was $43.3 million, compared with operating cash generation of $20.1 million in the prior-year quarter. Working-capital movements included a $106.8 million decrease in receivables and a $106.4 million decrease in accounts payable and other accrued liabilities. Pension contributions were $38.7 million versus $55.5 million.
- Investing activities used $29.1 million and financing activities provided $3.2 million. Cash declined by $92.3 million during the quarter, including a $23.1 million adverse effect from exchange rates.
- The $150 million secured revolving facility had no borrowings and $120.7 million of availability after letters of credit at March 31. The company reported compliance with its lending covenants. On April 1, it entered into a $31.8 million secured borrowing against an account receivable, to be reported as debt in Q2.
Outlook, commentary, and risks
- Management expects approximately $300 million of pretax restructuring charges over the next several quarters, an approximately 8% reduction in worldwide headcount, and a smaller facilities footprint. It targets about $200 million of annualized savings by the end of 2016.
- Expected 2015 pension expense is approximately $111 million, versus $73.8 million in 2014. Expected 2015 defined-benefit pension contributions are approximately $130.8 million; postretirement-plan contributions are expected to be about $16 million.
- Management said it expects adequate near-term liquidity. Results remain exposed to foreign exchange, international operations, competition, technology and customer-demand changes, service-contract profitability, client retention, cybersecurity and IT disruption, and the ability to execute cost reductions.
- Legal matters include a Belgian government claim of approximately €28 million, counterclaimed by Unisys for approximately €18.5 million; ongoing litigation with Molina concerning the sale of the health information management business; and Brazilian tax-related matters with estimated unreserved exposure of up to approximately $108 million, excluding matters assessed as remote. The company believes its provisions are adequate, but adverse outcomes could materially affect a period.
- Other notable items: foreign-exchange forward contract gains were $25.6 million in Q1 2015 and were recognized in other income; the company recorded a $13.3 million tax provision despite a pretax loss, with U.S. operations generally subject to a full valuation allowance. A new revenue-recognition standard is effective for the company in 2017; its adoption method and impact were still under assessment.
Important facts for investors to verify
- Whether the restructuring charges, workforce and facilities actions, and targeted savings are delivered on schedule and without impairing service execution.
- Whether Services revenue and margins stabilize, and whether Technology growth and improved margins persist, including after considering foreign-exchange effects.
- Actual pension expense and contributions, and their effect on cash generation and liquidity.
- Cash-flow trends, use of the revolving facility, and the effect of the April 1 secured borrowing on subsequent-period debt and liquidity.
- Developments in the Brazilian tax exposures, Belgian dispute, and Molina litigation, including any changes to accruals or estimated exposure.
- The eventual cost and financial-statement impact of adopting the new revenue-recognition standard.