Unisys Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Unisys provides digital workplace, cloud, applications and infrastructure, and enterprise computing solutions.
Financial results
- Revenue: $516.4 million, up 15.6% from $446.7 million. Services revenue was $403.9 million versus $392.1 million; Technology revenue was $112.5 million versus $54.6 million. Management attributed the increase primarily to higher software license renewals in Enterprise Computing Solutions (ECS). Currency movements reduced reported revenue growth by 3 percentage points.
- Gross profit and margins: Gross profit was $159.0 million, or 30.8% of revenue, versus $87.4 million, or 19.6%. Operating income was $49.9 million, compared with an operating loss of $23.5 million.
- Net result: Net loss attributable to Unisys was $175.4 million, or $2.58 per diluted share, compared with a loss of $57.3 million, or $0.85 per diluted share. The 2023 loss included a $183.2 million pretax pension settlement loss. Interest expense was $7.6 million; income tax provision was $19.9 million.
- Cash flow: Operating activities provided $12.8 million, versus $33.0 million used in the prior-year quarter. Investing activities used $11.5 million and financing activities used $7.6 million. Cash, cash equivalents and restricted cash totaled $400.5 million at quarter-end.
- Liquidity and debt: Cash and cash equivalents were $391.9 million at March 31, 2023. Total debt was $506.1 million, down from $513.1 million at December 31, 2022; the 6.875% secured notes have $485.0 million principal and mature in 2027. The company had no ABL revolver borrowings, $6.6 million of letters of credit outstanding and $64.0 million of availability. It reported covenant compliance and expects to maintain compliance for at least 12 months.
- Other metrics: Remaining performance obligations were approximately $0.6 billion; the company estimated 26% would be recognized by the end of 2023. Deferred revenue was $346.9 million, current and long-term combined.
Material changes and segment performance
- Revenue growth and the improvement in gross profit and operating income were primarily driven by ECS software license renewals. ECS revenue rose 56.1% to $188.2 million and gross margin was 66.7%, versus 52.1%.
- Digital Workplace Solutions (DWS) revenue increased 5.0% to $131.0 million, while gross margin declined to 11.9% from 12.8%; management cited incremental labor costs supporting recent contract signings.
- Cloud, Applications & Infrastructure Solutions (CA&I) revenue declined 2.4% to $126.0 million; gross margin improved to 13.0% from 5.4%, reflecting prior-year contract costs and delivery improvements.
- International revenue increased 27.3%, principally in Europe and Latin America; foreign exchange reduced international revenue growth by 7 percentage points. U.S. revenue increased 1.0%.
- Postretirement-related expense rose sharply, principally due to the $183.2 million settlement loss. In March, Unisys used approximately $265 million of plan assets to purchase an annuity transferring obligations for about 8,650 U.S. retirees. Management said global defined-benefit obligations had been reduced by $1.7 billion since December 2020.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said it expects adequate liquidity for at least the next 12 months. It expects approximately $40 million of pension contributions in 2023, primarily for international plans, and does not expect mandatory U.S. qualified-plan contributions until 2025 based on current estimates.
- Management cautioned that pension contributions could change with asset performance, discount rates, legislation, and economic or demographic developments. Approximately $248.9 million of cash was held outside the U.S.; the company said about one-third may not be readily transferable and transfers could incur taxes.
- Controls: Disclosure controls and internal control over financial reporting were not effective at March 31, 2023 because of previously identified material weaknesses involving timely communication of information from IT and legal/compliance functions to accounting and governance. Remediation actions had been implemented, but there had not been sufficient time to demonstrate consistent operation. The weaknesses had not resulted in a financial-statement misstatement, according to the filing.
- Legal matters: Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $111 million, including interest. Unisys also disclosed a putative securities class action alleging misleading statements about projections, business and controls. The filing says possible losses beyond accrued amounts are generally not reasonably estimable or are not expected to be material, but warns that litigation outcomes are unpredictable.
- Other stated risks include pension underfunding, cybersecurity and IT disruptions, competition, client retention, execution of business strategy, international operations, financing access, tax-attribute limitations, and possible goodwill or intangible-asset impairment.
Most important facts for investors to verify
- How much future operating performance depends on ECS license renewals, and whether DWS and CA&I revenue and margins improve.
- The cash, liquidity and debt position, including restrictions on foreign-held cash, ABL availability and covenant thresholds.
- Whether the pension transaction and future funding needs affect cash requirements, earnings volatility or ABL springing-maturity conditions.
- Progress in demonstrating sustained effectiveness of remediation for the material weaknesses in financial reporting controls.
- Developments in the Brazilian tax matters and securities class action, including any change in estimated exposure or accruals.