Unisys Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unisys provides technology products and services, including infrastructure, application and business-processing services. Financial amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $764.8 | $806.4 | $1,486.0 | $1,568.1 |
| Gross margin | 16.3% | 20.5% | 16.2% | 19.0% |
| Operating income (loss) | $(49.5) | $15.8 | $(79.5) | $(4.1) |
| Net income (loss) attributable to Unisys common shareholders | $(58.2) | $(12.1) | $(101.4) | $(65.6) |
| Diluted loss per share | $(1.17) | $(0.24) | $(2.03) | $(1.35) |
- Revenue and segments: Q2 revenue fell 5.2%; Services declined 6.0% to $661.5, while Technology was essentially flat at $103.3. In Services, cloud and infrastructure revenue decreased 10.0%, application services grew 6.0%, and business-processing outsourcing declined 16.6%. First-half revenue fell 5.2%, with Services down 6.1% and Technology up 1.4%.
- Margins and operating results: Management attributed weaker gross margins to restructuring charges, higher pension expense and lower segment margins. Services margins were pressured by new-engagement start-up costs and reduced project work in existing accounts. Technology’s Q2 operating margin improved to 15.6% from 4.3%, while Services’ declined to 2.2% from 3.6%.
- Cash flow: First-half operating cash flow was a use of $64.4, versus $23.4 provided a year earlier. Investing used $83.8; financing provided $34.9, including $31.8 of long-term borrowing. Cash declined $129.5 during the half to $364.8.
- Balance sheet and debt: At June 30, cash was $364.8, total debt $255.5 (versus $224.0 at year-end 2014), and total deficit $1,455.9. Long-term postretirement liabilities were $2,258.1. Foreign subsidiaries and branches held $274.9 of cash; repatriation for U.S. use may incur taxes.
- Credit facility: The $150 revolving facility had no borrowings, $12.1 of letters of credit outstanding and $89.6 of availability at June 30. The company reported compliance with lending covenants and said it expected to continue to comply.
Changes, outlook and risks
- Restructuring: Announced in April 2015 to improve cost structure and rebalance skills. Unisys expects approximately $300 of pretax charges over several quarters and approximately $200 of annualized savings by the end of 2016. Q2 charges were $52.6, including workforce reductions affecting 943 employees; $48.6 was included in the first-half common-shareholder loss after tax.
- Foreign exchange: Currency movements reduced Q2 revenue by 9 percentage points and first-half revenue by 8 percentage points, according to management. International revenue fell 24% in Q2 and 20% in the first half. Other income included foreign-exchange gains of $2.9 in Q2 and $6.3 in the first half.
- Pensions: First-half pension expense rose to $54.3 from $37.4. Management expected full-year 2015 pension expense of approximately $109, compared with $73.8 in 2014, and defined-benefit pension contributions of approximately $150 in 2015. It also expected approximately $16 of postretirement-plan contributions.
- Outlook: Management said liquidity was adequate for expected near-term cash requirements. The filing provides no clear broader revenue or earnings forecast. Results remain exposed to restructuring execution, services margins, contract demand and renewals, competition, technology changes, currency movements, pension funding needs, cybersecurity and operational disruptions, and international and government-contract risks.
- Contingencies: Unreserved Brazilian tax-related matters, including interest, were estimated at up to approximately $115. Other disclosed proceedings include a Belgian government claim of approximately €28 (with an €18.5 counterclaim), Molina litigation alleging approximately $35 of losses, and Louisiana Medicaid-related litigation. Unisys stated that it had adequate provisions, but adverse outcomes could materially affect results or cash flow; possible losses beyond accruals were generally not reasonably estimable or were considered not material where estimable.
- Other items: Segment classifications were changed effective January 1, 2015, with prior periods reclassified. The company was assessing the impact and adoption method for the new revenue-recognition standard, effective for it in 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the restructuring program delivers the targeted approximately $200 of annualized savings by the end of 2016, and how much additional cost will be incurred.
- Whether Services revenue and margins stabilize, particularly in cloud and infrastructure and business-processing outsourcing, and whether new federal application-services work sustains growth.
- How foreign-exchange movements and international revenue trends affect reported and underlying performance.
- Cash generation, revolving-facility availability, debt levels, and the timing and amount of pension contributions.
- Developments in the Brazilian, Belgian, Molina and Louisiana matters, including any changes to estimated exposure or accruals.
- Whether the stated near-term liquidity assessment and covenant compliance remain valid as operating cash flow and pension needs evolve.