October 26, 2020 - 9:53pm EST by
2020 2021
Price: 12.00 EPS 0 0
Shares Out. (in M): 72 P/E 0 0
Market Cap (in $M): 868 P/FCF 0 0
Net Debt (in $M): 736 EBIT 0 0
TEV (in $M): 1,520 TEV/EBIT 0 0

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Investment Summary:
Unisys is on track to resume an impressive operational and balance sheet restructuring that has been
obscured by a massive pension overhang and then interrupted by a Covid induced hiccup in the entire IT
service marketplace.
At the current price of 5-5.4x run rate EBITDA and with the pension issue largely in the rear view, UIS is
priced for substantial upside if the management team can deliver on the prospects for even a decent IT
services business going forward.
There are several upside shots on goal which may contribute to even greater returns for shareholders,
including new treatment for pension obligations under the various stimulus bills, realization of
substantial hidden value in deferred tax assets and a continued mix shift towards the growth markets of
digital workplace, cloud infrastructure and enterprise security.
We think UIS could double over the Next 12-24 months. At 7X the $320M Ebitda we expect by yearend
2021, UIS would trade at $22. This excludes any Value from potential Tax Assets ($1.5B) or Legislative Pension Relief.
Long Term we expect accelerating top line growth and EBITDA margins to continue to imprive from the
current mid-teens levels with a significant ramp in free cash flow as cash pension contribution drops to
only the $30M required for the international plans.
NOTE: Saltaire posted an excellent pitch on UIS back in Feb which seems like a lifetime ago. That
writeup is quite informative so I will attempt to avoid duplication but also add a number of important
updates and additional perspectives.
NOTE: my numbers are as of the Q3 results announced tonight (cc tmo) and adjusted/annotated for
various pro formas where appropriate/clarifying. I have been working on the write-up sporadically for a
few days and have tried to drop in the most current numbers where available. Follow Up to come after
the call tmo.
The basics:
Unisys (UIS): $12 X 72.3M fd shares = $868M mkt cap + $736M net debt (inc $1.05B pension) = $1.52B
Run rate: $2B revs, $280-$300 EBITDA, 5-5.5X EBITDA. TTM EBITDA including (Covid-Ugly) Q2-20 =
$275M. 2019: $2.2B revs and $319M EBITDA.
The $736M net debt includes $1.05B of net pension obligation so net cash ex pension.
Transformative deal: Q1-20 Sold US Federal IT sub for 13X TTM EBITDA, paid down debt, pre-funded
Business is rebounding post-Covid hiccup. Recently posted in an updated corporate presentation and
confirmed with solid (if optically messy) Q3 results. COVID impacted markets (Field Services, BPO and
Travel & Transportation) are still down substantially from last year but showed clear improvement from
the Q2 trough.
IT services: not just BPO legacy; legitimate and growing digital workplace (29% in Q3), cloud & infrastructure
(30%) and security. ClearPath Forward branding for highly secure operating environments for high-
intensity enterprise computing. The company will need to break out faster growing service offerings
and improve the relatively low Services Segment margins (5%) in Q3 to claim a higher valuation among
the IT services universe. The Technology division (15% of revs) reports high operating margins (30-40%)
but can be lumpy based on ClearPath Forward contract timing. Not arguing that this is a great business
by any means but it had been on an improving path prior to COVID and management is VERY clear on
what activities are adding LT value.
Pension Liability at YE 2019 exceeded market cap by almost 2x, but that is NET. Actual assets and
liabilities dwarf market cap and income statement impact is complex and viable, while cash flow impact
dominates cash flow statements. (I will develop the pension analysis further in the Q&A for those
New stimulus bills include pension relief: 5% minimum discount rate on liabilities AND amortization
period extended to 15 years from 7 years. Huge Potential Positive. Generally supported by both
parties. Combined, the discount rate change would reduce the PBO (offsetting the recent decline in
rates which likely increased PBO) and the extended amortization would reduce the financial statement
hit. TBD, how this flows through for UIS with all the moving pieces. Note: UIS has also taken measures
to reduce the GROSS accumulated benefit through plan changes, buyouts, etc. Expect some color on
the call tomorrow.
Management - 3rd time’s a charm. If you succeed at first (and second), do it again! Peter Altabef has
sold two previous companies; will he do it again? While not specifically a part of our thesis at present,
this industry continues to consolidate and a cleaner UIS would be highly accretive to a potential buyer.
Note: Cap structure #s treat the 3/21 convert as equity (in share count, not in debt) as instrument is
short term and in the $.
Q3 Highlights:
$495M revs, up 12% Q/Q though still down 10% Y/Y. Covid impacted sectors still behind
last year but healing.
Adj EBITDA $74M (14.9% mgn) vs. $84M LY (15.5% mgn). Adj op mgn back up to 8.5% actually up versus
8.0% LY and about breakeven in the Covid impacted Q2.
FCF positive at $34M
Cash $774M after paying down $59M on prior precautionary revolver draw. Note Cash includes $200-
$285M potentially earmarked for Pension plan in 2020/2021.
Services Total Contract Value (TCV) up 4.3% Q/Q.
Non-GAAP EPS 51c versus 26c LY and a loss in Q2.
Pension Update: Pro Forma for just completed $485M Debt offering, UIS has “effectively pre-funded
substantially all currently-expected future contributions to the U.S. pension plan”. (explored further
The NET Pension Deficit was $1.75B at 12/31/19, but the GROSS Accumulated Obligation for
UNDERFUNDED plans was $6.9B and the GROSS Projected Benefit Obligation for all plans was $4.8B.
Plan assets were $3.3B. Thanks to the arcane world of pension accounting which incorporates discount
rates on future obligations (3.5%-4.50%), assumed returns on plan assets (6.8%), expected lives and in
UIS’s case the amortization into expense of a staggering $3B hole in the pension assets, the Company
recognized $93M of periodic pension cost in 2019. NOTE: all of the company’s “Adjusted” numbers
exclude the pension costs. Yes, it’s rose colored glasses for sure but it does illustrate the operating
results ex- the historical pension debacle, and the DO include the net pension obligation in the net debt
I originally intended to do a deeper dive on the pension impact on cash flows and the p&l but the
company is coming out with all new #s given the sale of the Fed IT business and the intended funding of
the pension plan with some of those proceeds and the recent $485M debt deal.
NOTE:A careful reading of the just released Q3 deck seems to indicate that the Net Pension liability has
improved marginally as the intended debt proceeds appear to have largely offset an increase in the
pension obligation due to lower interest rates (discount rate). I will offer greater clarity after a follow up
with management. The company appears to have updated the slide for “current market conditions”
versus prior pro formas which used the 12/31/19 measurement date. It appears that the Pension Deficit
would have gone UP by $300M from YE 2019 through 9/30/20 before a $400M pro forma net reduction
from the Oct debt offering. I cannot presently reconcile why Net Debt which includes the pension
deficit does not reflect this estimated $300M deterioration. The debt offering should be net neutral to
net debt as defined. I hope to clarify following the conference call and a follow up with management.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued post COVID recovery in rev growth and margins

FCF ramp as US pension contributions end.

Stimulus Bill relief on discount rate and amortization period

Clarity on Realization of Tax Asset

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