Unisys(UIS) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended September 30, 2020, show a year-over-year decline in revenue and operating income, primarily driven by COVID-19 impacts and expected business line declines Consolidated Statements of Income (Loss) Q3 2020 revenue declined to $495.2 million, while nine-month net income reached $923.8 million, significantly boosted by discontinued operations Consolidated Statements of Income (Loss) Highlights (in Millions) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $495.2 | $552.1 | $1,449.4 | $1,676.0 | | Services Revenue | $426.0 | $478.8 | $1,247.9 | $1,433.8 | | Technology Revenue | $69.2 | $73.3 | $201.5 | $242.2 | | Operating Income | $27.7 | $49.4 | $39.3 | $127.6 | | Net Loss from Continuing Operations | ($13.3) | ($25.4) | ($142.5) | ($51.2) | | Income from Discontinued Operations | $0.4 | $16.0 | $1,066.8 | $54.8 | | Net Income (Loss) to Unisys | ($12.9) | ($13.2) | $923.8 | ($6.4) | | Diluted EPS (Total) | ($0.20) | ($0.23) | $14.69 | ($0.12) | Consolidated Balance Sheets The balance sheet as of September 30, 2020, shows improved liquidity with cash at $774.0 million and reduced long-term debt, but a total stockholders' deficit persists Consolidated Balance Sheet Highlights (in Millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $774.0 | $538.8 | | Total current assets | $1,302.6 | $1,221.3 | | Total assets | $2,407.4 | $2,504.0 | | Liabilities and Deficit | | | | Total current liabilities | $753.2 | $927.3 | | Long-term debt | $48.4 | $565.9 | | Long-term postretirement liabilities | $1,563.6 | $1,960.2 | | Total deficit | ($200.3) | ($1,228.3) | Consolidated Statements of Cash Flows Net cash used for operating activities was $325.8 million, while investing activities provided $1,055.8 million, primarily from the U.S. Federal business sale, leading to a $232.3 million increase in cash Consolidated Cash Flow Highlights (Nine Months Ended Sep 30, in Millions) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used for operating activities | ($325.8) | ($1.8) | | Net cash provided by (used for) investing activities | $1,055.8 | ($141.7) | | Net cash used for financing activities | ($472.4) | ($37.3) | | Increase (decrease) in cash | $232.3 | ($190.8) | - The primary driver for the increase in cash from investing activities was the $1.16 billion in net proceeds from the sale of the U.S. Federal business[12] - The significant cash usage in operating activities was largely due to postretirement contributions of $344.5 million, compared to $82.3 million in the same period of 2019[12] - Financing activities included payments of long-term debt amounting to $451.0 million, reflecting the redemption of senior secured notes[12] Notes to Consolidated Financial Statements The notes detail the $1.2 billion sale of the U.S. Federal business, significant pension contributions, cost-reduction charges, and subsequent debt issuance for pension funding - On March 13, 2020, the company completed the sale of its U.S. Federal business for $1.2 billion in cash, reclassifying it as discontinued operations[19] - For the nine months ended September 30, 2020, the company recognized $48.6 million in cost-reduction charges, including severance and asset impairments[27] - The company made cash contributions of $340.2 million to its pension plans in the first nine months of 2020 and expects total 2020 contributions to be approximately $825.8 million[31] - On April 15, 2020, the company redeemed all $440.0 million of its 10.75% Senior Secured Notes, resulting in a loss on debt extinguishment of $28.5 million in Q2 2020[59] - Subsequent to the quarter's end, on October 22, 2020, the company priced a private offering of $485.0 million in Senior Secured Notes due 2027, with proceeds intended to fund its underfunded U.S. pension liability[93] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q3 2020 revenue decline to COVID-19 and a U.K. joint venture, while the U.S. Federal business sale significantly strengthened financial condition, enabling debt reduction and pension contributions Overview The company's Q3 2020 performance was impacted by COVID-19, leading to a 10.3% revenue decline, while the $1.2 billion U.S. Federal business sale enabled debt redemption and substantial pension contributions - The COVID-19 pandemic negatively impacted the business, contributing to a 10.3% revenue decline in Q3 2020 due to disruptions in field services, travel, and volume-based BPO contracts[96][97] - The company completed the sale of its U.S. Federal business for $1.2 billion in cash on March 13, 2020, reclassifying its historical results as discontinued operations[98] - On April 15, 2020, the company redeemed all $440.0 million of its 10.750% Senior Secured Notes, recording a loss on debt extinguishment of $28.5 million[100] - The company expects to contribute approximately $793.1 million to its U.S. qualified defined benefit pension plans in 2020, covering minimum required contributions for 2020, 2021, and 2022[101] Results of Operations Q3 2020 revenue fell 10.3% to $495.2 million, with both segments declining, while operating profit decreased due to cost-reduction charges, but interest expense dropped significantly after debt redemption Q3 2020 vs Q3 2019 Performance | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $495.2M | $552.1M | -10.3% | | Services Revenue | - | - | -11.0% | | Technology Revenue | - | - | -5.6% | | Gross Profit Margin | 24.2% | 25.4% | -1.2 p.p. | | Operating Profit | $27.7M | $49.4M | -43.9% | | Interest Expense | $2.4M | $15.2M | -84.2% | YTD 2020 vs YTD 2019 Performance | Metric | YTD 2020 | YTD 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,449.4M | $1,676.0M | -13.5% | | Services Revenue | - | - | -13.0% | | Technology Revenue | - | - | -16.8% | | Gross Profit Margin | 21.2% | 24.9% | -3.7 p.p. | | Operating Profit | $39.3M | $127.6M | -69.2% | | Interest Expense | $20.9M | $46.9M | -55.4% | Segment Results In Q3 2020, Services revenue declined 11.0% to $426.0 million, while Technology revenue decreased 5.6% to $69.2 million, with both segments experiencing operating margin shifts Q3 2020 Segment Performance vs Q3 2019 | Segment | Revenue | Revenue Change | Operating Profit % | | :--- | :--- | :--- | :--- | | Services | $426.0M | -11.0% | 4.9% (vs 3.7%) | | Cloud & Infrastructure | $294.1M | -9.6% | - | | Application Services | $91.1M | -2.6% | - | | BPO Services | $40.8M | -31.9% | - | | Technology | $69.2M | -5.6% | 33.1% (vs 42.1%) | - The decline in Services revenue was primarily due to expected decreases in the U.K. check-processing joint venture and COVID-19 impacts on field services and volume-based BPO contracts[133] - The decrease in Technology segment margins was attributed to a lower mix of higher-margin software sales[139] Financial Condition The company's financial condition improved significantly with cash rising to $774.0 million and total debt falling to $148.4 million, primarily due to the U.S. Federal business sale, despite negative cash from operations - Cash and cash equivalents increased to $774.0 million at Sep 30, 2020, from $538.8 million at Dec 31, 2019, mainly from the sale of the U.S. Federal business[151] - Cash used for operations was $325.8 million for the first nine months of 2020, primarily due to higher cash contributions to the company's defined benefit pension plans[153] - Total debt decreased to $148.4 million from $579.4 million at year-end 2019, following the redemption of all $440.0 million of the 10.750% Senior Secured Notes[155][156] - As of September 30, 2020, the company had $71.2 million of availability under its secured revolving credit facility[158] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there has been no material change in its assessment of sensitivity to market risk since the disclosure in its 2019 Form 10-K - The company's assessment of its sensitivity to market risk has not materially changed from its 2019 Form 10-K disclosure[169] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting identified - Based on an evaluation by management, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[170] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[170] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, including governmental assessments and labor disputes in Brazil, with unreserved tax matters up to $75 million, and a $48 million lawsuit from the State of Louisiana - The company faces various litigation in Brazil related to indirect taxes and labor disputes, with estimated unreserved tax-related matters up to approximately $75 million[76] - The State of Louisiana has filed a lawsuit claiming approximately $48 million in damages, plus interest, related to alleged incorrect Medicaid reimbursement formulas used between 1989 and 2012[77] Item 1A. Risk Factors Key risks include the ongoing COVID-19 pandemic, significant unfunded pension obligations, aggressive competition, cybersecurity threats, and increased business concentration post-U.S. Federal business sale - The COVID-19 pandemic continues to pose a significant risk, with potential adverse impacts on global economic conditions, customer demand, and the company's operations and financial results[172] - The company has significant unfunded pension obligations and estimates it will make cash contributions of approximately $826 million in 2020, with future contributions potentially requiring additional funding[177] - The company faces aggressive competition from a wide range of firms, which could reduce demand and pressure pricing and margins[176] - Cybersecurity breaches are a major risk, as they could lead to data loss, legal liability, loss of clients, and reputational damage[191] - The sale of the U.S. Federal business has increased the company's business concentration in the global commercial sector, potentially leading to increased volatility and risk[192] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications required by the Sarbanes-Oxley Act - The exhibits include certifications from the CEO (Peter A. Altabef) and CFO (Michael M. Thomson) as required by Rules 13a-14(a) and 13a-14(b) and Section 906 of the Sarbanes-Oxley Act[209]