Unisys Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts are in millions of dollars except per-share data. Unisys provides technology services and products through Digital Workplace Services (DWS), Cloud & Infrastructure Services (C&I), and ClearPath Forward (CPF).
Financial results
- Revenue: $509.8, down 1.1% from $515.4. Foreign exchange added approximately 2 percentage points to the year-over-year comparison. U.S. revenue rose 8.8%; international revenue declined 8.2%, principally due to Latin America.
- Gross profit and operating results: Gross profit was $139.2, or 27.3% of revenue, versus $113.1, or 21.9%. Operating income increased to $43.6 from $20.1. Management attributed the improvement mainly to efficiency and cost-reduction initiatives, particularly in DWS and C&I.
- Net income and EPS: Net loss from continuing operations attributable to Unisys was $157.8, or $2.45 per diluted share, compared with a $53.2 loss, or $0.85 per diluted share. The 2021 loss included a $158.0 pension settlement charge. Q1 2020 reported net income of $1,015.3, or $16.21 per diluted share, largely because of the $1,061.7 gain on sale of the U.S. Federal business; the sale closed in March 2020. Thus, reported net income comparisons are not representative of continuing operations.
- Expenses: SG&A was $90.0, or 17.7% of revenue, versus $86.8, or 16.8%. R&D was $5.6 versus $6.2. Interest expense declined to $10.1 from $13.9, principally following the 2020 redemption of higher-cost notes.
- Cash flow: Operating activities used $42.9, compared with $377.9 used in Q1 2020, mainly reflecting lower pension contributions. Investing activities used $33.9; financing activities used $94.8, including cash paid in the convertible-note conversion. Cash, cash equivalents and restricted cash fell by $180.2 during the quarter to $726.5; balance-sheet cash and cash equivalents were $716.6.
- Liquidity and debt: Total debt was $541.1 at March 31, 2021, down from $629.9 at year-end 2020, principally after conversion of the 2021 convertible notes. The company had $123.4 of availability under its $145.0 revolving ABL facility, with no borrowings and $5.7 of letters of credit outstanding. Management said it expects adequate liquidity and covenant compliance for at least the next 12 months.
- Balance sheet: Total assets were $2,456.7 and total deficit was $285.8. Long-term postretirement liabilities were $1,230.0. Of cash and cash equivalents, $284.4 was held outside the U.S.; the company cautioned that some may not be readily transferable and transfers may trigger taxes.
Segment performance and material changes
- DWS: Revenue of $141.1, down 11.9%; gross margin rose to 13.1% from 4.5%. Management cited reduced field-services volumes and improved efficiency.
- C&I: Revenue of $123.3, up 18.6%, driven by public-sector momentum; gross margin improved to 9.7% from negative 2.7%.
- CPF: Revenue of $167.6, down 2.4%; gross margin increased to 61.2% from 58.3%.
- Unisys reorganized its reportable segments and changed its internal segment-profitability measure in January 2021; prior-period segment information was reclassified for comparability. The reorganization did not affect the December 31, 2020 consolidated financial statements.
- The $84.2 principal amount of convertible notes was converted on March 3 for cash and shares. The company paid approximately $86.5 in cash and issued 4.54 million shares, while receiving 1.25 million treasury shares through capped-call settlement; net shares outstanding increased by approximately 3.29 million.
Outlook, risks and unusual items
- Pensions: The January purchase of a $279 group annuity contract transferred obligations for approximately 11,600 U.S. retirees and generated the $158.0 settlement loss. Unisys expects second-quarter transfers of Dutch and Swiss pension obligations, with estimated settlement losses of approximately $186 and $29, respectively. The Swiss transfer required an additional $10 contribution in Q1.
- The American Rescue Plan pension relief led Unisys to project no required future contributions to U.S. qualified plans based on year-end 2020 assumptions; it therefore canceled a previously contemplated voluntary $200 contribution for 2021. It expects approximately $50.3 of 2021 contributions, primarily for international plans. Deteriorating plan assets, discount rates, returns, legislation, or economic and demographic factors could increase required contributions.
- Orders and visibility: Remaining performance obligations were approximately $0.8 billion at March 31; management estimated 29% would be recognized by year-end 2021 and a further 35% by year-end 2022. The filing provides no clear formal revenue or earnings guidance.
- Contingencies: Unreserved Brazilian tax-related matters, including interest and excluding matters assessed as remote, were estimated at up to approximately $66. Unisys said it had adequate provisions overall, but warned that litigation outcomes are inherently unpredictable and could materially affect results or cash flow.
- Other risks: The filing identifies COVID-19 uncertainty, competition and technology change, customer retention, international operations, cybersecurity, tax-attribute limitations, financing access, and significant underfunded pension obligations. The company maintains a full valuation allowance for U.S. and certain foreign deferred tax assets in excess of deferred tax liabilities.
- Q1 cost-reduction charges and other costs totaled $8.5, versus $27.5 in Q1 2020. Management reported no material COVID-19-related impact on financial position from its quarter-end accounting assessments, while noting future impacts could be material.
Important facts for investors to verify
- Whether the expected Dutch and Swiss pension transfers occurred, and the actual settlement charges, cash contributions, and effect on pension liabilities.
- Whether operating cash flow improves beyond the quarter and whether the company maintains the stated liquidity and debt-covenant headroom.
- Revenue trends by segment and geography, especially DWS field-services demand, C&I public-sector momentum, and international performance.
- Conversion of remaining performance obligations into revenue, including any changes to the stated recognition schedule.
- Developments in Brazilian tax matters and other litigation, and any change in estimated exposure or recorded provisions.
- Actual costs and savings from restructuring, and any further dilution or capital-allocation effects following the convertible-note conversion.