Unisys Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless otherwise noted, dollar amounts are in millions. Unisys provides Digital Workplace Solutions (DWS), Cloud, Applications & Infrastructure Solutions (CA&I), and Enterprise Computing Solutions (ECS).
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $476.8 | $515.0 | $993.2 | $961.7 |
| Gross profit / margin | $115.8 / 24.3% | $148.1 / 28.8% | $274.8 / 27.7% | $235.5 / 24.5% |
| Operating income | $0.1 | $33.7 | $50.0 | $10.2 |
| Net loss attributable to Unisys | $(40.0) | $(17.1) | $(215.4) | $(74.4) |
| Diluted loss per share | $(0.59) | $(0.25) | $(3.16) | $(1.10) |
Q2 revenue fell 7.4%, mainly because of lower ECS software license renewals; foreign exchange reduced the year-over-year revenue comparison by about 1 percentage point. Six-month revenue rose 3.3%, despite a 2-point negative currency impact. Six-month operating income improved with higher gross profit, particularly in CA&I and ECS, but the period’s net loss was dominated by a $183.2 million pre-tax pension settlement loss.
Q2 other expense was $16.7 million versus $21.9 million a year earlier. Six-month other expense rose to $213.6 million from $42.9 million, including the pension settlement loss. Interest expense was $7.5 million for Q2 and $15.1 million for the half-year. Income tax provisions were $15.4 million and $35.3 million, respectively; tax expense can vary with the geographic distribution of income and valuation allowances.
Segments and material changes
- Q2: DWS revenue increased 6.1% to $135.0 million; CA&I increased 1.9% to $132.6 million; ECS declined 27.6% to $134.6 million. ECS gross margin fell to 54.1% from 66.2%, while CA&I improved to 16.9% from 5.5% and DWS was 13.6% versus 13.0%.
- First half: DWS revenue increased 5.6% to $266.0 million; CA&I was nearly flat at $258.6 million; ECS increased 5.4% to $322.8 million. Segment gross profit improved overall, with CA&I margin rising to 15.0% from 5.4%.
- Q2 consolidated gross margin declined primarily with lower software license renewals. Management attributed the six-month gross profit improvement chiefly to CA&I and ECS performance.
Cash flow, liquidity, debt and pension
- First-half operating cash flow was positive $55.3 million, compared with use of $66.7 million in 2022, primarily reflecting timing of Technology collections. Investing cash use was $23.5 million and financing cash use was $11.0 million.
- Cash and cash equivalents were $423.2 million at June 30, 2023, up from $391.8 million at year-end; restricted cash was another $9.0 million. Approximately $264.4 million of cash was held outside the U.S.; about one-third may not be readily transferable, and transfers may incur taxes.
- Total debt was $503.0 million, down from $513.1 million at year-end. The $485.0 million face-value senior secured notes bear 6.875% interest and mature in 2027. The ABL facility had no borrowings, $6.6 million of letters of credit, and $56.5 million of availability. The company reported compliance with debt covenants and expects to remain compliant for at least 12 months.
- In March, Unisys used approximately $265 million of pension plan assets to buy an annuity transferring obligations for about 8,650 retirees, generating the $183.2 million settlement loss. Management expects approximately $41 million of 2023 defined-benefit pension contributions, primarily for international plans, and $4 million of postretirement contributions. It does not currently expect mandatory U.S. qualified-plan contributions until 2025, subject to pension asset performance, rates, legislation, and other assumptions.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings, or margin guidance. Remaining performance obligations were approximately $0.6 billion; management estimated 17% would be recognized by year-end 2023, 27% by year-end 2024, 22% by year-end 2025, 16% by year-end 2026, and 18% thereafter.
- Management said liquidity should be adequate for expected requirements over at least the next 12 months. This outlook is subject to cash availability, pension funding needs, operating performance, and credit-facility conditions.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30 because of material weaknesses in formal procedures for timely escalation of information from IT and legal/compliance to accounting and governance. Remediation steps had been implemented, but there had not been enough time to establish their operating effectiveness; assessment was to continue through 2023. Management said the weaknesses had not caused a financial-statement misstatement and that additional procedures were performed.
- Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $119 million, including interest. The company also disclosed a putative securities class action alleging misleading statements concerning projections, business prospects, and internal and disclosure controls. Management considers provisions adequate, but notes outcomes may be unpredictable; excess possible losses were not reasonably estimable or were not expected to be material.
- Other stated risks include competition, technology change, customer and contract retention/profitability, cybersecurity, international operations, access to financing, and significant underfunded pension obligations. No material changes to the 2022 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether ECS software-license renewals recover and whether Q2’s revenue and gross-margin decline persists.
- Underlying earnings and cash generation excluding the $183.2 million pension settlement loss, while accounting for pension contributions and other recurring costs.
- Progress and testing results for remediation of the material weaknesses in financial-reporting controls.
- Liquidity accessibility, ABL borrowing-base availability and covenant headroom, alongside upcoming debt maturities and pension funding requirements.
- Developments in the Brazilian tax matters and securities class action, and any changes to estimated exposure or required accruals.