Unisys Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions of dollars except per-share data. Continuing-operations comparisons exclude the U.S. Federal business, which was reclassified as discontinued operations following its March 2020 sale.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $438.8 | $569.4 | $954.2 | $1,123.9 |
| Gross margin | 17.1% | 26.8% | 19.7% | 24.7% |
| Operating income (loss) | $(8.5) | $53.0 | $11.6 | $78.2 |
| Continuing-operations net income (loss) attributable to Unisys | $(76.5) | $0.7 | $(129.7) | $(32.0) |
| Continuing-operations diluted EPS | $(1.21) | $0.01 | $(2.06) | $(0.62) |
- Q2 revenue declined 22.9%; Services revenue fell 17.7% and Technology revenue fell 51.6%. For the first half, revenue declined 15.1%.
- Management attributed declines to COVID-19 effects, reduced U.K. check-processing and volume-based BPO activity, and timing of Technology contract renewals. Q2 gross margin fell mainly because of a lower mix of higher-margin software sales.
- Q2 other expense, net was $53.7, including a $28.5 debt-extinguishment loss and $24.1 postretirement expense. Interest expense was $4.6, down from $16.2 a year earlier.
- Reported first-half net income attributable to Unisys was $936.7, or $14.91 diluted EPS, primarily reflecting $1,066.4 of after-tax discontinued-operations income, including the Federal business sale gain. This does not represent continuing-business earnings.
Cash, debt and liquidity
- June 30 cash and cash equivalents were $782.2, versus $538.8 at year-end; restricted cash was an additional $10.2. Approximately $306.3 of cash was held outside the U.S., and up to one-third might not be readily transferable.
- First-half operating cash flow was a use of $392.1, compared with a $19.5 use in 2019. The company cited higher pension contributions; it contributed $329.9 to defined-benefit pension plans during the half.
- Investing cash flow provided $1,075.5, including $1,159.4 net proceeds from the Federal business sale. Financing cash flow used $412.5, principally reflecting debt repayment.
- Total debt was $205.1 at June 30 versus $579.4 at December 31, 2019. Unisys redeemed $440.0 of 10.75% notes for $487.3, including premium and accrued interest. The redemption generated a $28.5 extinguishment loss.
- The company had $59.0 drawn on its revolving facility, $5.7 of letters of credit outstanding, and $40.6 of availability net of letters of credit. It reported compliance with lending covenants. The remaining $81.8 carrying amount of 5.50% convertible notes is due March 2021; the credit facility includes a springing-maturity provision tied to those notes.
- Unisys reported a total deficit of $238.7 and long-term postretirement liabilities of $1,574.4 at June 30.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said COVID-19’s duration and business effects were uncertain; it had reduced discretionary spending, third-party costs and travel, and temporarily reduced senior-leadership salaries.
- Management expected approximately $634 of 2020 worldwide defined-benefit pension contributions, including approximately $600 for U.S. qualified plans. It targeted about $1 billion of global pension-liability reduction over the following eight months through buyouts, annuity purchases and other actions; these could produce significant one-time noncash settlement charges. Management said additional funding may be needed for contributions beyond 2022.
- Expected remaining-2020 items included approximately $10 of additional charges related to costs formerly allocated to the sold Federal business, an approximately $20 noncash currency-translation charge in Q3, and a charge associated with reassessing real estate. The U.K. tax-rate enactment was expected to produce an estimated $5.7 deferred tax benefit in Q3.
- Remaining performance obligations were approximately $0.8 billion; management estimated 22% would be recognized by year-end 2020 and a further 34% by year-end 2021.
- Key risks include pandemic-related demand and collection pressures, continued revenue and margin weakness, substantial pension funding needs, refinancing and liquidity access, international and foreign-exchange exposure, customer contract performance and retention, cybersecurity, and the reduced diversification following the Federal business sale.
- Contingencies include up to approximately $77 of unreserved Brazilian tax-related matters and a Louisiana Medicaid reimbursement lawsuit alleging approximately $50 of damages plus interest. The company said it believed it had adequate provisions, but noted litigation outcomes are unpredictable.
Important facts for investors to verify
- Whether revenue and margins stabilize as COVID-19 effects, BPO/check-processing volumes and Technology renewal timing evolve.
- Cash generation after unusually large pension contributions, and the company’s ability to fund future pension obligations without impairing liquidity.
- The March 2021 convertible-note maturity, revolving-facility availability and any refinancing requirements or covenant implications.
- Actual timing, cost and accounting effects of planned pension-risk reduction, restructuring, currency-translation and real-estate actions.
- Progress on the $0.8 billion performance-obligation balance and whether the disclosed recognition schedule converts into revenue as estimated.
- Developments in the identified litigation and tax contingencies, and any material changes in COVID-19 impacts or other disclosed risks.