Unisys Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless otherwise noted, amounts are in millions of dollars. The filing states that certain balance-sheet amounts were revised by $15.2 million to increase both assets and liabilities compared with previously filed statements.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $461.2 | $488.0 | $1,422.9 | $1,515.1 |
| Gross profit margin | 22.6% | 26.0% | 23.9% | 26.9% |
| Operating income (loss) | $(8.0) | $25.1 | $2.2 | $109.5 |
| Net loss attributable to Unisys | $(40.1) | $(18.7) | $(114.5) | $(317.3) |
| Diluted loss per share | $(0.59) | $(0.28) | $(1.69) | $(4.79) |
| Cash from (used for) operations | Not stated for quarter | Not stated for quarter | $(22.2) | $64.5 |
- Q3 revenue fell 5.5%; management said foreign exchange reduced the year-over-year comparison by 6 percentage points. U.S. revenue rose 9.3%, while international revenue fell 15.0%.
- For the nine-month period, revenue declined 6.1%; U.S. revenue increased 2.6% and international revenue decreased 12.2%. Foreign exchange reduced the comparison by 4 percentage points overall.
- Management attributed weaker gross margin primarily to lower software license renewals. Q3 SG&A rose to $106.3 million from $95.1 million, partly reflecting cost-reduction charges and other non-recurring expenses. Nine-month SG&A was $320.3 million versus $279.7 million, including increased marketing investment and non-recurring costs.
- The prior-year nine-month net loss included $368.7 million of pension settlement losses before tax ($317.0 million net of tax). This largely explains why the 2022 nine-month loss was lower despite weaker operating performance.
Segments
- Digital Workplace Solutions: Q3 revenue $130.1 million, down 9.1%; gross margin 15.1%, compared with 12.4%. Nine-month revenue declined 12.1%; margin was 13.7% in both years. Management cited run-off of exited non-strategic contracts and, for Q3 margin improvement, automation and productivity gains.
- Cloud, Applications & Infrastructure Solutions: Q3 revenue $122.3 million, up 5.5%; margin 5.6%, versus 5.9%. Nine-month revenue rose 6.5%, while margin fell to 5.5% from 8.4%, reflecting higher labor costs and additional expense on certain contracts.
- Enterprise Computing Solutions: Q3 revenue $137.7 million, down 9.0%; margin 58.7%, versus 65.2%. Nine-month revenue declined 9.8% and margin fell to 60.0% from 62.7%; management cited lower software license renewals.
Financial position and liquidity
- At September 30, cash and cash equivalents were $351.4 million, down from $552.9 million at year-end 2021. Cash, cash equivalents and restricted cash totaled $365.0 million. Current assets were $878.4 million and current liabilities $642.0 million.
- Total debt was $515.9 million, down from $529.4 million at December 31, 2021; reported long-term debt was $498.4 million and current maturities $17.5 million. The principal borrowing is $485.0 million of 6.875% senior secured notes due 2027.
- The revolving ABL facility had no borrowings, $6.3 million of letters of credit outstanding and $66.3 million of availability net of letters of credit. The facility expires October 2025. The company said it met lending covenants and expected to continue doing so for at least 12 months.
- Nine-month operating cash use was $22.2 million, compared with $64.5 million provided in 2021; management primarily attributed the change to accounts receivable. Cash declined by $195.6 million over the nine months. Investing activities used $124.4 million and financing activities used $18.4 million.
- Foreign subsidiaries held $276.7 million of cash; the company said up to one-third may not be readily transferable to the U.S. due to restrictions or other considerations.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management stated that it expects adequate liquidity for at least the next 12 months.
- For 2022, the company expected approximately $38.5 million of pension contributions, primarily for international plans; $30.9 million had been contributed in the first nine months. Based on current estimates, it did not expect mandatory U.S. qualified-plan contributions until 2025, but market, discount-rate and other changes could increase future funding needs.
- Cost-reduction and related charges were $8.1 million in Q3 and $14.2 million for nine months in 2022. Nine-month charges included $9.4 million of asset impairments and $4.8 million of foreign-currency losses related to exiting countries.
- After quarter-end, market capitalization fell from $0.5 billion to $0.3 billion. Management was assessing whether this was an impairment trigger for goodwill of $286.2 million and intangible assets of $54.8 million in Q4.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at September 30 because of material weaknesses involving timely communication of information from IT and legal/compliance functions to governance and accounting personnel. The company said the weaknesses had not caused a financial-statement misstatement and described remediation plans.
- Unreserved Brazilian tax-related matters, excluding matters assessed as remote, were estimated at up to approximately $103.3 million. The filing says loss ranges for other specified proceedings generally were not reasonably estimable or were not expected to be material, while noting litigation outcomes remain uncertain.
- A purported shareholder securities class action was filed November 11, 2022, alleging misleading statements concerning projections, business prospects and the company’s controls. Unisys said it believed it had adequate provisions for legal matters but acknowledged adverse outcomes could materially affect a reporting period.
- Management said the Russia-Ukraine conflict had not materially affected the business to date, but future effects were difficult to predict. The filing also highlights cybersecurity, pension funding, international operations, tax-attribute utilization and control-remediation risks.
Important facts for investors to verify
- Progress in remediating the disclosed material weaknesses and whether controls are later determined effective.
- Q4 impairment assessment following the market-capitalization decline, including any effect on goodwill and intangible assets.
- Cash generation, liquidity availability and the accessibility of cash held outside the U.S.
- Software-renewal trends and margin performance, particularly in ECS and CA&I.
- Developments in pension funding requirements, Brazilian tax matters and the shareholder class action.