Unisys Corporation (UIS) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless noted, amounts are in millions of dollars. Comparisons are with the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $464.6 | $461.2 | $1,457.8 | $1,422.9 |
| Gross profit / margin | $95.3 / 20.5% | $104.3 / 22.6% | $370.1 / 25.4% | $339.8 / 23.9% |
| Operating income (loss) | $(17.1) | $(8.0) | $32.9 | $2.2 |
| Net loss attributable to Unisys | $(50.0) | $(40.1) | $(265.4) | $(114.5) |
| Diluted loss per share | $(0.73) | $(0.59) | $(3.89) | $(1.69) |
| Interest expense | $7.8 | $7.9 | $22.9 | $24.6 |
Q3 revenue was nearly flat year over year; nine-month revenue rose 2.5%. Q3 gross margin fell 2.1 percentage points, primarily due to lower software license renewals, partly offset by improvement in Cloud, Applications & Infrastructure Solutions (CA&I). Nine-month gross margin increased 1.5 points, mainly reflecting CA&I improvement.
Segments and operating trends
- Q3: Digital Workplace Solutions (DWS) revenue was $140.9, up 8.3%; CA&I revenue was $133.5, up 9.2%; Enterprise Computing Solutions (ECS) revenue was $122.2, down 11.3%. ECS’s decline and lower gross profit reflected fewer software license renewals.
- Nine months: DWS revenue was $406.9, up 6.5%; CA&I was $392.1, up 2.8%; ECS was $445.0, up 0.2%.
- Management attributed DWS growth principally to expanded scope with existing clients. CA&I gross profit improved from prior-year contract costs and delivery improvements.
Cash flow, liquidity, and debt
- Operating cash flow was $51.2 for the first nine months, versus cash use of $22.2 in 2022; management cited the timing of Technology collections as a principal factor.
- Cash and cash equivalents were $385.0 at September 30, 2023, versus $391.8 at December 31, 2022. About $232.2 was held outside the U.S.; the company said approximately one-third of foreign-held cash may not be readily transferable and transfers may trigger taxes.
- Total debt was $499.7, down from $513.1 at year-end 2022. The $485.0 principal amount of 6.875% senior secured notes is due November 2027.
- The $145.0 asset-based revolving facility had no borrowings, $6.6 of letters of credit outstanding, and $71.9 of availability at quarter-end. The company reported compliance with lending covenants and expects to remain compliant for at least 12 months.
- Management stated it expects adequate liquidity for expected cash needs for at least the next 12 months. This is not quantified earnings guidance.
Material changes and unusual items
- A March 2023 group annuity purchase transferred pension obligations for approximately 8,650 U.S. retirees. It generated a $183.2 pre-tax pension settlement loss, driving much of the nine-month increase in net loss. The purchase was funded with approximately $265 of plan assets.
- Nine-month postretirement expense was $213.0, compared with $32.5 in the prior-year period; reported operating income does not include this item in the same way as the settlement loss recorded in other expense.
- Cost-reduction charges were $4.6 in Q3 and $5.3 for the first nine months, compared with $8.1 and $14.2, respectively, in 2022.
- The nine-month tax provision was $55.7 versus $25.1. Management cited income geography and valuation allowances; a $3.9 additional allowance was recorded for certain Latin American deferred tax assets. U.S. losses generally receive no tax benefit due to a full valuation allowance.
Outlook, risks, and contingencies
- Management expects approximately $41 of 2023 pension contributions, primarily for international plans, and $6.0 of postretirement plan contributions. It does not expect mandatory U.S. qualified pension contributions until 2025 based on current estimates; asset performance, discount rates, legislation, and other assumptions could change required contributions.
- Remaining performance obligations were approximately $0.7 billion at September 30; the company estimated 11% would be recognized by year-end 2023, 35% by year-end 2024, and the balance thereafter.
- Disclosure controls and internal control over financial reporting were not effective at quarter-end because previously identified material weaknesses remained under remediation. Management said remedial actions had been implemented but had not operated long enough to establish effectiveness; additional procedures were used to prepare the financial statements.
- Unreserved Brazilian tax-related matters were estimated at approximately $115, and unreserved client-related matters at approximately $18, excluding matters considered remote. The company said excess losses, if any, were not reasonably estimable or were not expected to be material where estimable.
- An environmental liability of approximately $31 was recorded for a former site, with an expected recovery of approximately $32 included in other long-term assets. Recovery depends on an agreement and final approval of cleanup work.
- The company disclosed a putative securities class action concerning statements about disclosure controls and internal controls, and said it was cooperating with an SEC investigation relating to cybersecurity policies, procedures, and disclosures. Outcomes are uncertain.
- Other disclosed risks include competition, contract profitability, technology change, cybersecurity, international operations, pension funding, financing access, legal proceedings, and potential goodwill or intangible-asset impairment. No material changes to the prior Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether remediation of the material control weaknesses is tested and found effective in subsequent filings.
- Operating trends in ECS software renewals and whether CA&I margin improvements are sustained.
- Cash generation, accessibility of foreign-held cash, revolving-facility availability, and compliance with debt covenants.
- Future pension settlement activity, contributions, and any resulting earnings or liquidity effects.
- Developments in the securities litigation, SEC cybersecurity investigation, Brazilian tax matters, and environmental reimbursement.
- Whether the $0.7 billion of remaining performance obligations convert to revenue on the estimated schedule.