Unisys Corporation (NYSE: UIS) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Unisys is a global IT company operating in Services and Technology.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2,948.7 million | $2,825.0 million |
| Operating income | $238.2 million | $284.1 million |
| Operating margin | 8.1% | 10.1% |
| Net income (loss) attributable to Unisys common shareholders | $(17.2) million | $75.5 million |
| Diluted earnings (loss) per share | $(0.31) | $1.30 |
| Cash provided by operating activities | $123.9 million | $73.9 million |
| Cash and cash equivalents at year-end | $538.8 million | $605.0 million |
| Total debt at year-end | $579.6 million | $652.8 million |
Gross margin was 22.6%, versus 24.3% reported in 2018; excluding the prior-year revenue-recognition adjustment, 2018 gross margin was 22.8%. 2019 operating income includes a $19.8 million benefit from extending the estimated useful life of proprietary enterprise software. Other expense was $136.4 million, including $93.3 million of postretirement expense, a $20.1 million loss on the convertible-note exchange and $10.4 million of foreign-exchange losses. Income tax expense was $53.0 million despite $39.7 million of pretax income.
Fourth quarter: Revenue was $741.5 million, gross profit $150.2 million, pretax loss $5.7 million, net loss attributable to common shareholders $10.8 million and diluted loss per share $0.17.
Segments and changes versus 2018
- Services: Revenue grew 7.0% to $2,552.7 million. Cloud and infrastructure services rose 15.0%; application services declined 2.8%; BPO services declined 6.3%. Segment operating margin increased to 4.2% from 2.8%, reflecting lower delivery costs.
- Technology: Revenue declined 9.7% to $396.0 million as reported. Excluding the $53.0 million 2018 Topic 606 timing adjustment, revenue increased 2.7%. Segment operating margin was 41.9%, versus 45.0% on an adjusted 2018 basis, primarily due to a lower mix of higher-margin software sales.
- Consolidated revenue increased 4.4% as reported, or 6.4% excluding the $53.0 million prior-year Topic 606 adjustment. Foreign exchange reduced 2019 revenue growth by approximately three percentage points.
- Reported operating income fell from $284.1 million to $238.2 million; excluding the 2018 Topic 606 adjustment, 2018 operating income was $231.1 million.
Liquidity, debt and commitments
Operating cash flow increased to $123.9 million from $73.9 million. Investing activities used $158.2 million and financing activities used $38.0 million. Unisys had $139.1 million available under its revolving facility at year-end, with no borrowings and $5.9 million of letters of credit outstanding. Management stated that available liquidity was expected to meet requirements through at least February 28, 2021, while warning that additional financing may be needed for pension funding.
Debt included $440.0 million face value of 10.75% senior secured notes due 2022 and $84.2 million face value of 5.50% convertible notes due 2021. In an August 2019 exchange, Unisys issued 10.6 million shares and paid $59.4 million in exchange for $129.3 million principal amount of convertible notes. Common shares outstanding increased to 62.4 million at January 31, 2020, from 51.1 million at year-end 2018.
Pension obligations are a significant liquidity risk. The company contributed $103.9 million to worldwide defined benefit plans in 2019 and estimated 2020 contributions of $278.9 million; expected contributions for 2020–2024 were approximately $1.2 billion. An IRS waiver request could defer approximately $115 million of 2020 U.S. contributions, but had not been approved. U.S. qualified defined benefit plans were underfunded by approximately $1.4 billion at year-end. Cash held by foreign subsidiaries was $303.1 million, some of which may not be readily transferable.
Outlook, transaction, risks and unusual items
- On February 5, 2020, after year-end, Unisys agreed to sell its U.S. Federal business to SAIC for $1.2 billion cash, subject to a working-capital adjustment and closing conditions. The business generated approximately $725 million of 2019 revenue and $100 million of pretax income. Closing was expected in the first half of 2020; the company anticipated an approximately $1 billion after-tax gain. Proceeds were primarily intended for redeeming the 2022 secured notes and reducing U.S. pension obligations. The transaction was pending when the 10-K was filed.
- The sale would reduce revenue and cash flows and shift the remaining company toward commercial and international markets. The company also identified closing, execution, employee/customer retention, tax-attribute and stock-volatility risks. A Tax Asset Protection Plan was adopted to reduce the likelihood of an ownership change that could limit use of net operating losses.
- Services backlog was $4.3 billion at year-end, down from $4.8 billion; $1.8 billion was expected to convert to revenue in 2020. Remaining performance obligations were approximately $1.0 billion, with about 44% expected to be recognized by the end of 2020.
- Key risks include substantial pension funding needs, refinancing and credit-rating exposure, intense competition, technology and cybersecurity risks, dependence on significant clients and government contracts, foreign exchange exposure, and execution risks on long-term or fixed-price contracts. Unisys cited possible effects from economic disruption, infectious disease, Brexit and U.S. government shutdowns.
- Contingencies include Brazilian tax-related matters with up to approximately $103 million of unreserved exposure, excluding matters assessed as remote, and a Louisiana Medicaid reimbursement lawsuit alleging approximately $100 million of overpayments. The company said it had defenses and adequate provisions overall, but noted litigation outcomes are uncertain.
- Cost-reduction and other charges were $28.7 million in 2019. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the SAIC transaction closed on the anticipated terms and timing, and how proceeds were allocated between debt repayment and pension funding.
- Actual pension contributions, the IRS waiver decision and the company’s ability to fund the multiyear pension schedule without impairing liquidity.
- Underlying revenue and margin trends, especially Services growth and Technology software mix, using comparable figures that account for the 2018 Topic 606 adjustment.
- Debt refinancing and maturity risks, including the 2021 convertible notes, 2022 secured notes and related credit-facility springing maturities.
- Resolution and potential cash impact of Brazilian tax matters, the Louisiana litigation and other contingencies; actual values may differ from estimates.
- Effects of the 2019 note exchange and resulting share-count increase on dilution and per-share performance.