Unisys Corporation — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; the filing also reports fourth-quarter results. Unisys provides IT services and enterprise computing technology. The U.S. Federal business was sold to Science Applications International Corporation on March 13, 2020, and is presented as discontinued operations; prior periods were reclassified accordingly.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $2,026.3 million | $2,222.8 million |
| Operating income | $87.0 million | $137.9 million |
| Gross margin | 23.8% | 24.0% |
| Continuing-operations net loss attributable to Unisys | $317.7 million | $92.2 million |
| Continuing-operations diluted EPS | $(5.05) | $(1.65) |
| Cash from operating activities | $(681.2) million | $123.9 million |
| Cash and cash equivalents at year-end | $898.5 million | $538.8 million |
| Total debt at year-end | $629.9 million | $579.4 million |
- Reported 2020 net income was $750.7 million, or $11.93 diluted EPS, but included $1,068.4 million of after-tax discontinued-operations income, principally a $1,060.7 million gain on the U.S. Federal sale. Continuing operations remained loss-making.
- Revenue fell 8.8%; Services revenue decreased 10.6% to $1,692.9 million, while Technology revenue rose 1.0% to $333.4 million. Services declines reflected COVID-19 effects, lower check-processing volumes, and weakness in field services, travel and entertainment, and volume-based BPO contracts.
- Operating margin was approximately 4.3%, versus 6.2% in 2019. Operating income was affected by higher cost-reduction charges; 2020 charges and other costs totaled $95.5 million versus $28.7 million.
- Fourth-quarter revenue was $576.9 million; pretax loss from continuing operations was $155.9 million and net loss attributable to Unisys was $173.1 million, or $(2.75) per diluted share. The quarter included a $142.1 million pension settlement charge.
- Operating cash use was driven principally by $826.2 million of worldwide defined-benefit pension contributions. Investing cash flow was $1,041.6 million, including $1,162.9 million of net sale proceeds. Cash at year-end included $326.3 million held outside the U.S.; some may not be readily transferable.
- Unisys reported a total deficit of $312.1 million. Its $898.5 million cash balance and $112.9 million of available ABL capacity supported liquidity; the company said it expected adequate liquidity for at least 12 months.
Material changes and notable items
- The sale reduced the company’s scale and diversified revenue base. Services backlog declined to $3.4 billion from $4.3 billion; approximately $1.3 billion, or 39%, was expected to convert to revenue in 2021. Remaining performance obligations were approximately $850 million, with about 40% expected to be recognized by the end of 2021.
- Unisys redeemed $440 million of 10.75% notes in April 2020 for $487.3 million, including premium and accrued interest, recording a $28.5 million extinguishment charge. In October it issued $485 million of 6.875% secured notes due 2027; proceeds were contributed to its U.S. pension plan.
- The ABL facility was extended to October 2025, with commitments up to $145 million and an accordion to $175 million. There were no borrowings at year-end; $5.7 million of letters of credit were outstanding.
- In March 2021, the $84.2 million convertible notes were expected to be settled with $84.2 million cash and shares; after capped-call shares, estimated net dilution was approximately 3.4 million shares.
- In January 2021, Unisys announced new reporting segments: Digital Workplace Services, Cloud & Infrastructure, ClearPath Forward, and Other. Comparable segment data was to be provided prospectively in its first-quarter 2021 Form 10-Q.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management cited continuing uncertainty over COVID-19’s duration and effects on customers, demand, operations, cash flows and liquidity. Cost controls included temporary senior-leadership salary reductions, lower contractor spending, workforce redeployment, travel limits and reduced discretionary capital spending.
- For 2021, the company estimated pension contributions of $250.6 million, including a voluntary $200 million U.S. contribution. It forecast pension expense of approximately $418.6 million, including approximately $373 million of settlement charges associated with expected U.S., Dutch and Swiss plan actions. These are estimates and are subject to change.
- Key risks include substantial pension obligations and sensitivity to discount rates and asset returns; continued revenue and margin pressure; competition and technology change; customer and contract retention and profitability; COVID-19; cybersecurity and IT disruption; international and currency exposure; financing access and credit ratings; and limitations on using tax attributes.
- At year-end, Unisys disclosed up to approximately $81 million of unreserved Brazilian tax-related matters, excluding matters assessed as remote. It also settled a Louisiana Medicaid-related lawsuit for $10.6 million. Standby letters of credit and surety bonds totaled approximately $191 million; management believed any resulting obligations would not be material. The filing cautions that litigation outcomes are inherently unpredictable.
- The auditor identified valuation of U.S. and certain international defined-benefit pension obligations as a critical audit matter, particularly the discount-rate assumptions. The auditor gave an unqualified opinion on the financial statements and internal control; management also concluded internal control was effective.
Investor verification priorities
- Separate continuing-business performance from the large sale-related gain when assessing earnings and cash generation.
- Track revenue trends, Services backlog conversion, and whether the business stabilizes after the U.S. Federal divestiture and COVID-19 effects.
- Verify actual 2021 pension contributions, settlement charges, plan transfers, and the resulting funded status and liquidity impact.
- Review debt maturities, the 2021 convertible-note settlement and dilution, ABL availability and springing-maturity conditions, and compliance with debt covenants.
- Monitor realization of deferred tax assets, potential Section 382 ownership-change limitations, and developments in Brazilian and other legal contingencies.