Unisys Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unisys reports Services and Technology segments. The U.S. Federal business was sold on March 13, 2020; its results are presented as discontinued operations, and comparative periods were reclassified.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $495.2 million | $552.1 million | $1,449.4 million | $1,676.0 million |
| Gross margin | 24.2% | 25.4% | 21.2% | 24.9% |
| Operating income | $27.7 million | $49.4 million | $39.3 million | $127.6 million |
| Continuing-operations net loss attributable to Unisys | $(13.3) million | $(29.2) million | $(143.0) million | $(61.2) million |
| Continuing-operations diluted loss per share | $(0.21) | $(0.50) | $(2.27) | $(1.14) |
- Q3 total net loss attributable to Unisys was $12.9 million, including $0.4 million of discontinued-operations income. Nine-month total net income was $923.8 million, principally reflecting the $1,060.6 million after-tax gain on sale of the U.S. Federal business; continuing operations remained loss-making.
- Q3 Services revenue fell 11.0% to $426.0 million; Technology revenue declined 5.6% to $69.2 million. BPO revenue fell 31.9%, largely from lower check-processing volumes. Technology margin deterioration reflected a lower mix of higher-margin software sales.
- Cash and cash equivalents were $774.0 million at September 30, versus $538.8 million at year-end 2019. Cash used in operations was $325.8 million for the nine months, compared with $1.8 million used a year earlier, primarily due to substantially higher pension contributions. Net investing cash inflow was $1,055.8 million, including $1,162.9 million of sale proceeds; financing used $472.4 million, including debt redemption payments.
- Total debt was $148.4 million, down from $579.4 million at December 31, 2019. Cash and restricted cash totaled $784.1 million. The company had no revolver borrowings, $5.8 million of letters of credit outstanding, and $71.2 million of stated availability under its asset-based credit facility. Total deficit was $200.3 million.
Material changes and unusual items
- Revenue declined 10.3% year over year in Q3 and 13.5% for the nine-month period. Management attributed weakness to COVID-19 effects, expected declines in the U.K. check-processing joint venture, reduced field-services and travel-related activity, lower volume-based BPO, and—in the nine-month comparison—technology contract-renewal timing. Foreign currency negatively affected international revenue.
- Unisys redeemed $440.0 million of 10.75% senior secured notes in April for $487.3 million, including principal, call premium and accrued interest. It recorded a $28.5 million extinguishment loss. Lower interest expense followed the redemption and the prior-year convertible-note exchange.
- Nine-month cost-reduction charges and other costs were $48.6 million, including $19.0 million of asset impairments, $17.8 million of foreign-currency losses related to exiting countries, and $6.2 million of workforce-reduction charges, net of estimate changes. Q3 charges and other costs were $13.2 million.
- Other expense, net was $32.5 million in Q3 and $134.3 million for nine months. Q3 included $23.5 million of postretirement expense and $7.5 million for environmental matters. The nine-month amount also included the debt-extinguishment loss and $17.8 million of accumulated currency-translation losses written off.
Outlook, liquidity, risks and contingencies
- Management said it expected adequate liquidity for at least the next 12 months. However, it identified uncertainty from COVID-19 and stated that its full business and financial effects could not be predicted. Measures taken included reducing third-party spend, limiting travel and discretionary expenses, and temporary senior-leadership salary reductions.
- Unisys expected approximately $825.8 million of worldwide pension contributions in 2020, including approximately $793.1 million for U.S. qualified plans. It stated that future contributions could change with market conditions and discount rates, and that additional funding might be needed beyond 2022.
- The company targeted approximately $1.0 billion of global pension-liability reduction over the following six months through potential lump-sum buyouts, annuity purchases and other actions; these could produce significant one-time non-cash settlement charges.
- Management expected a fourth-quarter non-cash charge of approximately $20 million from liquidation of foreign subsidiaries and a $5 million to $10 million charge related to reassessing real estate. Remaining performance obligations were approximately $0.8 billion; management estimated 13% would be recognized by year-end 2020 and a further 37% by year-end 2021.
- After quarter-end, Unisys announced a planned $485 million secured-notes offering due 2027 at 6.875%, with proceeds intended for part of its underfunded U.S. pension liability. It also received lender commitments to extend and amend its $145 million asset-based facility, subject to conditions; completion and final terms were not assured.
- Legal matters include Brazilian tax and labor disputes, with unreserved tax-related matters estimated at up to approximately $75 million, excluding matters assessed as remote. Louisiana alleges approximately $48 million of damages plus interest in a Medicaid reimbursement case. The company said it believed it had adequate provisions, but adverse outcomes could materially affect a period.
- Other principal risks include pension-funding demands, COVID-19-related revenue and liquidity impacts, competition and execution of Services growth plans, contract volume and profitability, international and currency exposure, financing access, cyber and IT disruptions, and limitations on use of tax attributes. The company reported compliance with lending covenants at quarter-end.
Important facts for investors to verify
- Whether ongoing commercial revenue and margins stabilize after the U.S. Federal divestiture, particularly BPO/check-processing volumes and Technology software sales mix.
- Actual pension contributions, funding needs beyond 2022, and progress and costs associated with the targeted pension-liability reductions.
- Completion, terms and use of proceeds of the announced $485 million notes offering and proposed credit-facility amendment.
- Cash generation excluding the one-time Federal business sale proceeds, and the accessibility of cash held by foreign subsidiaries; the filing notes that some foreign cash may be restricted or costly to transfer.
- Developments in environmental and other legal contingencies, including the Brazilian matters and Louisiana litigation, and any additional restructuring or impairment charges.