Unisys Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Quarter ended March 31, 2020. Unisys operates Services and Technology businesses. On March 13, it completed the $1.2 billion cash sale of its U.S. Federal business to Science Applications International Corporation; that business is presented as discontinued operations, and prior-period results were reclassified. Continuing-operations comparisons below therefore exclude the Federal business.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $515.4 million | $554.5 million |
| Operating income | $20.1 million | $25.2 million |
| Loss from continuing operations attributable to Unisys | $53.2 million; $0.85 loss per share | $32.7 million; $0.64 loss per share |
| Net income (loss) attributable to Unisys, including discontinued operations | $1,015.3 million; $16.21 per share | $(19.4) million; $(0.38) per share |
| Operating cash flow | $(377.9) million | $(70.4) million |
| Cash and cash equivalents at period end | $789.6 million | $538.8 million at Dec. 31, 2019 |
| Total debt | $636.7 million | $579.4 million at Dec. 31, 2019 |
- Revenue fell 7.1%; foreign exchange reduced the year-over-year comparison by 2 percentage points. Services revenue declined 10.1%, while Technology revenue increased 11.2%.
- Gross margin was 21.9%, down from 22.6%. Services gross margin was 12.9% versus 15.1%; Technology gross margin improved to 68.4% from 58.1%, primarily on a higher mix of software sales.
- Services operating margin was (3.3)% versus (0.3)%; Technology operating margin rose to 45.9% from 34.1%. Consolidated operating margin was 3.9% versus 4.5%.
- The reported $1,015.3 million net income chiefly reflects the Federal business sale: discontinued operations included a $1,061.7 million gain on sale and $1,068.5 million after-tax income. Continuing operations remained loss-making.
- Operating cash use increased mainly because of pension funding. The company reported $325.6 million of pension contributions in the quarter; the cash-flow statement separately shows $327.7 million of postretirement contributions.
Liquidity, debt and balance sheet
- Cash, cash equivalents and restricted cash totaled $1,287.5 million at March 31. This includes $487.3 million restricted for redemption of the 10.75% senior secured notes and not available for general use.
- Unisys used $1,164.7 million of net sale proceeds in investing activities. It had $59.0 million drawn on its $145.0 million secured revolving credit facility, $5.7 million of letters of credit outstanding and $20.1 million of remaining availability.
- The company deposited sufficient funds to redeem its $440.0 million senior secured notes. Redemption was completed April 15, 2020; the company expects a $28.5 million debt-extinguishment loss in Q2.
- The $84.2 million principal amount of 5.50% convertible notes remaining is due March 1, 2021. The balance sheet classified $530.1 million of long-term debt as current maturities at quarter end.
- Current assets were $1,883.3 million and current liabilities $1,310.9 million, but current assets include the restricted redemption funds. Unisys stated it expected adequate liquidity for the next 12 months.
Material changes, outlook and risks
- Services declines included cloud and infrastructure revenue down 8.2%, application services down 6.0%, and BPO down 26.2%; the BPO decline was attributed to lower check-processing volumes. International revenue decreased 17.4%, while U.S. revenue increased 12.6%.
- Q1 included $27.5 million of cost-reduction and other charges: $8.5 million for workforce actions and $19.0 million of foreign-currency losses associated with exiting countries. Unisys expects an additional $10–$20 million of employee-related costs during the remainder of 2020 as costs previously allocated to the Federal business shift to continuing operations.
- Management cited COVID-19-related uncertainty and said the pandemic had not materially disrupted operations through the reporting period. Actions included temporary senior-leadership salary reductions, lower contractor spending, workforce redeployment, travel limits and reduced discretionary capital spending. The future impact on demand, customers’ ability to pay and operations was uncertain.
- Unisys expected approximately $640 million of worldwide defined-benefit pension contributions in 2020, including approximately $600 million for U.S. qualified plans. It said future contributions could change with markets and discount rates and that additional funding may be needed beyond 2022; financing availability and cash sufficiency are not assured.
- Remaining performance obligations were approximately $0.9 billion; about 34% was expected to be recognized as revenue by the end of 2020 and a further 26% by the end of 2021. The filing provides no formal revenue or earnings guidance.
- Risks include COVID-19, Services revenue and margin pressure, competition and technology shifts, customer and contract retention, substantial pension obligations, financing access, international and currency exposure, cybersecurity, and changes to the business after the Federal sale. The company reported it was in compliance with lending covenants at March 31.
- Legal matters include Belgian contract litigation, Louisiana Medicaid-related claims and Brazilian tax-related matters. Unreserved Brazilian tax-related exposures were estimated at up to approximately $81 million; possible losses on specified proceedings were generally not reasonably estimable or were assessed as not material, though adverse outcomes could affect results or cash flow.
Important facts for investors to verify
- Whether continuing-operations revenue, Services margins and BPO volumes stabilize after the Federal business divestiture and amid COVID-19 effects.
- Actual cash available after excluding restricted funds, and the company’s ability to meet near-term debt maturities, credit-facility terms and future financing needs.
- Actual pension contributions versus the approximately $640 million 2020 estimate, and implications for liquidity beyond 2022.
- Q2 recognition of the expected $28.5 million note-redemption loss and the realized savings or transition costs following the sale.
- Any subsequent changes in customer demand, remaining performance obligations, litigation exposures, or COVID-19 impacts on asset valuations and cash flows.