UNISYS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis of the company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this quarterly report. In this discussion and analysis of the company’s financial condition and results of operations, the company has included information that may constitute “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “believes,” “expects,” “intends,” “plans,” “projects” and similar expressions may identify such forward-looking statements. All forward-looking statements rely on assumptions and are subject to risks, uncertainties and other factors that could cause the company’s actual results to differ materially from expectations. Factors that could affect future results include, but are not limited to, those discussed under “Risk Factors” in Part II, Item 1A. Any forward-looking statement speaks only as of the date on which that statement is made. The company assumes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made. Overview For the three months ended September 30, 2022, the company reported net loss attributable to Unisys Corporation of $40.1 million, or $0.59 per diluted share, compared with a loss of $18.7 million, or $0.28 per diluted share, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, the company reported net loss attributable to Unisys Corporation of $114.5 million, or $1.69 per diluted share, compared with a loss of $317.3 million, or $4.79 per diluted share, for the nine months ended September 30, 2021. Included in the loss for the nine months ended September 30, 2021 were pension plan settlement losses net of tax of $317.0 million. In February 2022, Russian military forces launched significant military action against Ukraine. In response to this action, many governments around the world, including the U.S., imposed several financial and economic sanctions against Russia. While this conflict has not had a material impact to the company’s business, financial condition, or results of operation, the direct and indirect impacts of this evolving situation and its effect on global economies in future periods are difficult to predict. Results of operations Company results Three months ended September 30, 2022 compared with the three months ended September 30, 2021 Revenue for the three months ended September 30, 2022 was $461.2 million compared with $488.0 million for the three months of 2021, a decrease of 5.5% from the prior year. Foreign currency fluctuations had a 6 percentage-point negative impact on revenue in the current period compared with the year-ago period. U.S. revenue increased 9.3% in the current period compared with the year-ago period. International revenue decreased 15.0% in the current period compared with the prior-year period principally due to decreases in Europe, Asia/Pacific and Latin America. Foreign currency had a 9 percentage-point negative impact on international revenue in the three months ended September 30, 2022 compared with the three months ended September 30, 2021. During the three months ended September 30, 2022, the company recognized cost-reduction charges and other costs of $8.1 million. The charges related to work-force reductions were $0.5 million for changes in estimates. In addition, the company recorded charges of $7.6 million comprised of $1.9 million for net foreign currency losses related to exiting foreign countries, $4.7 million for asset impairments and $1.0 million for other expenses related to cost-reduction efforts. During the three months ended September 30, 2021, the company recognized net cost-reduction charges and other costs of $0.8 million. The net credits related to work-force reductions were $0.6 million, principally related to severance costs, and were comprised of: (a) a charge of $0.7 million and (b) a credit of $1.3 million for changes in estimates. In addition, the company recorded net charges of $1.4 million comprised of a charge of $1.3 million for net foreign currency losses related to exiting foreign countries, a charge of $0.5 million for asset impairments and a credit of $0.4 million related to other cost reduction efforts. 24 The charges (credits) were recorded in the following statement of income (loss) classifications: Three Months Ended September 30, 2022 2021 Cost of revenue $ 3.9 $ (0.2) Selling, general and administrative 2.4 (0.1) Research and development (0.1) (0.2) Other (expense), net 1.9 1.3 Total $ 8.1 $ 0.8 Gross profit margin was 22.6% in the three months ended September 30, 2022 compared with 26.0% in the three months ended September 30, 2021. The decrease was principally due to lower software license renewals. Selling, general and administrative expense in the three months ended September 30, 2022 was $106.3 million (23.0% of revenue) compared with $95.1 million (19.5% of revenue) in the year-ago period. The change was primarily due one-time charges related to cost reduction activities and other non-recurring expenses. Research and development (R&D) expense for the three months ended September 30, 2022 and 2021 was $6.0 million and $6.7 million, respectively. For the three months ended September 30, 2022, the company reported an operating loss of $8.0 million compared with an operating profit of $25.1 million for prior year period. The decrease was primarily driven by lower software license renewals, one-time charges related to cost reduction activities and other non-recurring expenses. Interest expense for the three months ended September 30, 2022 was $7.9 million compared with $8.5 million for the three months ended September 30, 2021. Other (expense), net was expense of $23.3 million for the three months ended September 30, 2022 compared with expense of $24.2 million for the three months ended September 30, 2021. See Note 7 of the Notes to Consolidated Financial Statements for details of other (expense), net. The loss before income taxes for the three months ended September 30, 2022 was $39.2 million compared with a loss of $7.6 million for the three months ended September 30, 2021. The provision for income taxes was $0.7 million for the three months ended September 30, 2022 compared with a provision of $10.9 million for the three months ended September 30, 2021. The change in the tax provision is described below. The company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting such amount, if necessary. The company records a tax provision or benefit for those international subsidiaries that do not have a full valuation allowance against their deferred tax assets. Any profit or loss recorded for the company’s U.S. operations will have no provision or benefit associated with it due to the company’s valuation allowance, except with respect to refundable tax credits and withholding taxes not creditable against future taxable income. As a result, the company’s provision or benefit for taxes may vary significantly period to period depending on the geographic distribution of income. The realization of the company’s net deferred tax assets as of September 30, 2022 is primarily dependent on the ability to generate sustained taxable income in various jurisdictions. Judgment is required to estimate forecasted future taxable income, which may be impacted by future business developments, actual results, strategic operational and tax initiatives, legislative, and other economic factors and developments. Any increase or decrease in the valuation allowance would result in additional or lower income tax expense in that period and could have a significant impact on that period’s earnings. As a result of its projections of future taxable income, the company has determined that a portion of its non-U.S. net deferred tax assets no longer requires a valuation allowance as of September 30, 2022. The release of the valuation allowance for the three months ended September 30, 2022 was approximately $10.4 million, primarily in the United Kingdom and other European jurisdictions. Net loss attributable to Unisys Corporation for the three months ended September 30, 2022 was $40.1 million, or $0.59 per diluted share, compared with a loss of $18.7 million, or $0.28 per diluted share, for the three months ended September 30, 2021. Nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 Revenue for the nine months ended September 30, 2022 was $1,422.9 million compared with $1,515.1 million for the nine months ended September 30, 2021, a decrease of 6.1% from the prior year period. Foreign currency fluctuations had a 4 percentage-point negative impact on revenue in the current period compared with the year-ago period. 25 U.S. revenue increased 2.6% in the current period compared with the year-ago period. International revenue decreased 12.2% in the current period compared with the prior-year period due to decreases in Europe and Asia/Pacific. Foreign currency had a 6 percentage-point negative impact on international revenue in the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021. During the nine months ended September 30, 2022, the company recognized net cost-reduction charges and other costs of $14.2 million. The credit related to work-force reductions was $0.4 million for changes in estimates. In addition, the company recorded charges of $14.6 million comprised of $4.8 million for net foreign currency losses related to exiting foreign countries, $9.4 million for asset impairments and a net charge of $0.4 million for other expenses related to cost-reduction efforts. During the nine months ended September 30, 2021, the company recognized net cost-reduction charges and other costs of $14.4 million. The net credits related to work-force reductions were $2.5 million, principally related to severance costs, and were comprised of: (a) a charge of $6.5 million and (b) a credit of $9.0 million for changes in estimates. In addition, the company recorded charges of $16.9 million comprised of $2.9 million for net foreign currency losses related to exiting foreign countries, $7.3 million for asset impairments and $6.7 million for other expenses related to cost-reduction efforts. The charges (credits) were recorded in the following statement of income (loss) classifications: Nine Months Ended September 30, 2022 2021 Cost of revenue $ 7.4 $ 0.9 Selling, general and administrative 2.2 8.7 Research and development (0.2) 1.9 Other (expense), net 4.8 2.9 Total $ 14.2 $ 14.4 Gross profit margin was 23.9% in the nine months ended September 30, 2022 compared with 26.9% in the nine months ended September 30, 2021. The decrease was primarily due to lower software license renewals. Selling, general and administrative expense in the nine months ended September 30, 2022 was $320.3 million (22.5% of revenue) compared with $279.7 million (18.5% of revenue) in the year-ago period. The change was primarily due to increased investments in marketing, one-time charges related to cost reduction activities and other non-recurring expenses. Research and development (R&D) expense for the nine months ended September 30, 2022 and 2021 was $17.3 million and $19.1 million, respectively. For the nine months ended September 30, 2022, the company reported an operating profit of $2.2 million compared with an operating profit of $109.5 million for the prior-year period. The decrease was primarily driven by lower software license renewals and the increased selling, general and administrative expenses discussed above. Interest expense for the nine months ended September 30, 2022 was $24.6 million compared with $27.0 million for the nine months ended September 30, 2021. Other (expense), net was expense of $66.2 million for the nine months ended September 30, 2022 compared with expense of $434.6 million for the nine months ended September 30, 2021. Other (expense), net for the nine months ended September 30, 2021 included $368.7 million of pension plan settlement losses. See Note 7 of the Notes to Consolidated Financial Statements. The loss before income taxes for the nine months ended September 30, 2022 was $88.6 million compared with a loss of $352.1 million for the nine months ended September 30, 2021. Included in the loss for the nine months ended September 30, 2021 were pension plan settlement losses of $368.7 million. The provision for income taxes was $25.1 million for the nine months ended September 30, 2022 compared with a benefit of $33.8 million for the nine months ended September 30, 2021. Included in the provision for the nine months ended September 30, 2022 was a partial release of valuation allowances of approximately $12.1 million. See Note 8 of the Notes to the Consolidated Financial Statements. The prior year period included income tax benefits of $51.7 million related to the pension plan settlement losses in the Netherlands and Switzerland. Net loss attributable to Unisys Corporation for the nine months ended September 30, 2022 was $114.5 million, or $1.69 per diluted share, compared with a loss of $317.3 million, or $4.79 per diluted share, for the nine months ended September 30, 2021. Included in the loss for the nine months ended September 30, 2021 were pension plan settlement losses net of tax of $317.0 million. 26 Segment results Effective January 1, 2022, the company changed the grouping of certain immaterial revenue streams. As a result, certain prior period segment revenue as well as the related cost of sales amounts have been reclassified to be comparable to the current period’s presentation. In addition, during the second quarter of 2022, the company renamed its Cloud and Infrastructure Solutions segment as Cloud, Applications & Infrastructure Solutions to better represent the nature of the segment’s operations. There was no change to the composition of the segment or its historical results. The company’s reportable segments are as follows: • Digital Workplace Solutions (DWS), which provides modern and traditional workplace solutions; • Cloud, Applications & Infrastructure Solutions (CA&I), which provides digital platform, applications, and infrastructure solutions; and • Enterprise Computing Solutions (ECS), which provides solutions that harness secure, continuous high-intensity computing and enable digital services through software-defined operating environments. The accounting policies of each segment are the same as those followed by the company as a whole. Intersegment sales and transfers are priced as if the sales or transfers were to third parties. Accordingly, the ECS segment records intersegment revenue and manufacturing profit on hardware and software shipments to customers under contracts of other segments. These segments, in turn, record customer revenue and marketing profits on such shipments of company hardware and software to customers. In the company’s consolidated statements of income, the manufacturing costs of products sourced from the ECS segment and sold to other segments’ customers are reported in cost of revenue for these other segments. Also included in the ECS segment’s sales and gross profit are sales of hardware and software sold to other segments for internal use in their engagements. The amount of such profit included in gross profit of the ECS segment for the three and nine months ended September 30, 2021 was $0.3 million and $1.4 million, respectively. The sales and profit on these transactions are eliminated in consolidation. The company evaluates segment performance based on gross profit exclusive of the service cost component of postretirement income or expense, restructuring charges, amortization of purchased intangibles and unusual and nonrecurring items, which are included in other gross profit. Three months ended September 30, 2022 compared with the three months ended September 30, 2021 A summary of the company’s operations by segment is presented below: Total Segments DWS CA&I ECS Three Months Ended September 30, 2022 Customer revenue $ 390.1 $ 130.1 $ 122.3 $ 137.7 Intersegment — — — — Total revenue $ 390.1 $ 130.1 $ 122.3 $ 137.7 Gross profit percent 27.5 % 15.1 % 5.6 % 58.7 % Three Months Ended September 30, 2021 Customer revenue $ 410.4 $ 143.2 $ 115.9 $ 151.3 Intersegment — — — — Total revenue $ 410.4 $ 143.2 $ 115.9 $ 151.3 Gross profit percent 30.0 % 12.4 % 5.9 % 65.2 % Gross profit percent is as a percent of total revenue. DWS revenue was $130.1 million for the three months ended September 30, 2022, a decline of 9.1% compared with the three months ended September 30, 2021. Revenue for the three months ended September 30, 2022 was negatively impacted by the run-off effect of certain non-strategic contracts that the company exited in 2021. Foreign currency fluctuations had a 5 percentage-point negative impact on DWS revenue in the current period compared with the year-ago period. Gross profit percent was 15.1% in the current period compared with 12.4% in the year-ago period. The increase in gross profit for the three months ended September 30, 2022 compared with the year-ago period reflected automation and productivity improvements. CA&I revenue was $122.3 million for the three months ended September 30, 2022, an increase of 5.5% compared with the three months ended September 30, 2021. Foreign currency fluctuations had a 2 percentage-point negative impact on CA&I 27 revenue in the current period compared with the year-ago period. Gross profit percent was 5.6% in the current period compared with 5.9% in the year-ago period. ECS revenue was $137.7 million for the three months ended September 30, 2022, a decline of 9.0% compared with the three months ended September 30, 2021. Foreign currency fluctuations had a 6 percentage-point negative impact on ECS revenue in the current period compared with the year-ago period. Gross profit percent was 58.7% in the current period compared with 65.2% in the year-ago period. The decrease in both revenue and gross profit was principally due to lower software license renewals. Nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 A summary of the company’s operations by segment is presented below: Total Segments DWS CA&I ECS Nine Months Ended September 30, 2022 Customer revenue $ 1,207.7 $ 382.1 $ 381.5 $ 444.1 Intersegment — — — — Total revenue $ 1,207.7 $ 382.1 $ 381.5 $ 444.1 Gross profit percent 28.1 % 13.7 % 5.5 % 60.0 % Nine Months Ended September 30, 2021 Customer revenue $ 1,284.9 $ 434.5 $ 358.3 $ 492.1 Intersegment 1.4 — — 1.4 Total revenue $ 1,286.3 $ 434.5 $ 358.3 $ 493.5 Gross profit percent 31.0 % 13.7 % 8.4 % 62.7 % Gross profit percent is as a percent of total revenue. DWS revenue was $382.1 million for the nine months ended September 30, 2022, a decline of 12.1% compared with the nine months ended September 30, 2021. Revenue for the nine months ended September 30, 2022 was negatively impacted by the run-off effect of certain non-strategic contracts that the company exited in 2021. Foreign currency fluctuations had a 3 percentage-point negative impact on DWS revenue in the current period compared with the year-ago period. Gross profit percent was 13.7% in both the nine months ended September 30, 2022 and 2021. CA&I revenue was $381.5 million for the nine-months ended September 30, 2022, an increase of 6.5% compared with the nine months ended September 30, 2021. Foreign currency fluctuations had a 2 percentage-point negative impact on CA&I revenue in the current period compared with the year-ago period. Gross profit percent was 5.5% in the current period compared with 8.4% in the year-ago period. The decrease in gross profit was primarily due to higher labor costs and additional expense recognized associated with certain contracts. ECS revenue was $444.1 million for the nine months ended September 30, 2022, a decline of 9.8% compared with the nine months ended September 30, 2021. Foreign currency fluctuations had a 3 percentage-point negative impact on ECS revenue in the current period compared with the year-ago period. Gross profit percent was 60.0% in the current period compared with 62.7% in the year-ago period. The decrease in both revenue and gross profit was principally due to lower software license renewals. Financial condition The company’s principal sources of liquidity are cash on hand, cash from operations and its revolving credit facility, discussed below. The company and certain international subsidiaries have access to uncommitted lines of credit from various banks. The company believes that it will have adequate sources of liquidity to meet its expected cash requirements for at least the next 12 months. Cash and cash equivalents at September 30, 2022 were $351.4 million compared to $552.9 million at December 31, 2021. As of September 30, 2022, $276.7 million of cash and cash equivalents were held by the company’s foreign subsidiaries and branches operating outside of the U.S. The company may not be able to readily transfer up to one-third of these funds out of the country in which they are located as a result of local restrictions, contractual or other legal arrangements or commercial considerations. Additionally, any transfers of these funds to the U.S. in the future may require the company to accrue or pay withholding or other taxes on a portion of the amount transferred. 28 During the nine months ended September 30, 2022, cash used for operations was $22.2 million compared to cash provided $64.5 million during the nine months ended September 30, 2021, primarily driven by the change in accounts receivable. Cash used for investing activities during the nine months ended September 30, 2022 was $124.4 million compared to cash usage of $236.0 million during the nine months ended September 30, 2021. Cash usage during the nine months ended September 30, 2021 included $150.4 million for acquisitions. Net purchases of investments were $58.4 million for the nine months ended September 30, 2022 compared with net purchases of $8.2 million in the prior-year period. Proceeds from investments and purchases of investments represent derivative financial instruments used to reduce the company’s currency exposure to market risks from changes in foreign currency exchange rates. In the current period, the investment in marketable software was $35.2 million compared with $42.1 million in the year-ago period, capital additions of properties were $21.5 million compared with $19.7 million in the year-ago period and capital additions of outsourcing assets were $8.1 million compared with $14.7 million in the year-ago period. Cash used for financing activities during the nine months ended September 30, 2022 was $18.4 million compared to cash used of $100.8 million during the nine months ended September 30, 2021. The decrease in cash used was principally due to redemptions of debt in the prior year period. In 2022, the company expects to make cash contributions of approximately $38.5 million primarily for its international defined benefit pension plans. In 2021, the company made cash contributions of $52.4 million to its worldwide defined benefit pension plans. For the nine months ended September 30, 2022 and 2021, the company made cash contributions of $30.9 million and $40.3 million, respectively. At the end of each year, the company estimates its future cash contributions to its U.S. qualified defined benefit pension plans based on year-end pension data and assumptions. Any material deterioration in the value of the company’s U.S. qualified defined benefit pension plan assets, as well as changes in pension legislation, discount rate changes, asset return changes, or changes in economic or demographic trends, could require the company to make cash contributions to its U.S. qualified defined benefit pension plans. Based upon current estimates, the company does not expect to make mandatory cash contributions to its U.S. qualified defined benefit pension plans until 2025. At September 30, 2022, total debt was $515.9 million compared to $529.4 million at December 31, 2021. In March 2021, the company completed the conversion of $84.2 million aggregate principal amount of the 2021 Notes that remained outstanding for a combination of cash and shares of the company’s common stock. As a result of the conversion of the outstanding 2021 Notes, the company delivered to the holders (i) aggregate cash payments totaling approximately $86.5 million, which included an aggregate cash payment for outstanding principal of approximately $84.2 million, an aggregate cash payment for accrued interest of approximately $2.3 million and a nominal cash payment in lieu of fractional shares, and (ii) the issuance of 4,537,123 shares of the company’s common stock. The issuance of the common stock was made in exchange for the 2021 Notes pursuant to an exemption from the registration requirements provided by Section 3(a)(9) of the Securities Act of 1933, as amended. The company has a secured revolving credit facility (the Amended and Restated ABL Credit Facility) that expires on October 29, 2025 that provides for revolving loans and letters of credit up to an aggregate amount of $145.0 million (with a limit on letters of credit of $40.0 million), with an accordion feature provision allowing for the aggregate amount available under the credit facility to be increased up to $175.0 million upon the satisfaction of certain conditions specified in the Amended and Restated ABL Credit Facility. Availability under the credit facility is subject to a borrowing base calculated by reference to the company’s receivables. At September 30, 2022, the company had no borrowings and $6.3 million of letters of credit outstanding, and availability under the facility was $66.3 million net of letters of credit issued. The Amended and Restated ABL Credit Facility is subject to a springing maturity, under which the Amended and Restated ABL Credit Facility will immediately mature 91 days prior to any date on which contributions to pension funds in the United States in an amount in excess of $100.0 million are required to be paid unless the company is able to meet certain conditions, including that the company has the liquidity (as defined in the Amended and Restated ABL Credit Facility) to cash settle the amount of such pension payments, no default or event of default has occurred under the Amended and Restated ABL Credit Facility, the company’s liquidity is above $130.0 million and the company is in compliance with the then applicable fixed charge coverage ratio on a pro forma basis. The Amended and Restated ABL Credit Facility is guaranteed by Unisys Holding Corporation, Unisys NPL, Inc., Unisys AP Investment Company I, CompuGain LLC and CompuGain Public Services, LLC, each of which is a U.S. corporation or limited liability company that is directly or indirectly owned by the company (the subsidiary guarantors). The facility is secured by the assets of the company and the subsidiary guarantors, other than certain excluded assets, under a security agreement entered into by the company and the subsidiary guarantors in favor of JPMorgan Chase Bank, N.A., as agent for the lenders under the credit facility. 29 The company is required to maintain a minimum fixed charge coverage ratio if the availability under the Amended and Restated ABL Credit Facility falls below the greater of 10% of the lenders’ commitments under the facility and $14.5 million. The Amended and Restated ABL Credit Facility contains customary representations and warranties, including, but not limited to, that there has been no material adverse change in the company’s business, properties, operations or financial condition. The Amended and Restated ABL Credit Facility includes restrictions on the ability of the company and its subsidiaries to, among other things, incur other debt or liens, dispose of assets and make acquisitions, loans and investments, repurchase its equity, and prepay other debt. These restrictions are subject to several important limitations and exceptions. Events of default include non-payment, failure to comply with covenants, materially incorrect representations and warranties, change of control and default under other debt aggregating at least $50.0 million, subject to relevant cure periods, as applicable. At September 30, 2022, the company has met all covenants and conditions under its various lending and funding agreements. For at least the next 12 months, the company expects to continue to meet these covenants and conditions. From time to time, the company may explore a variety of institutional debt and equity sources to fund its liquidity and capital needs. The company may, from time to time, redeem, tender for, or repurchase its securities in the open market or in privately negotiated transactions depending upon availability, market conditions and other factors. Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the company’s assessment of its sensitivity to market risk since its disclosure in its 2021 Form 10-K.