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 In March 2023, the company purchased a group annuity contract, with plan assets, for approximately $265 million to transfer projected benefit obligations related to approximately 8,650 retirees of one of the company’s U.S. defined benefit pension plans resulting in a pre-tax settlement loss of $183.2 million for the three months ended March 31, 2023. For the three months ended March 31, 2023, the company reported net loss attributable to Unisys Corporation of $175.4 million, or $2.58 per diluted share, compared with a loss of $57.3 million, or $0.85 per diluted share, for the three months ended March 31, 2022. Included in the loss for the three months ended March 31, 2023 was the U.S. pension settlement loss of $183.2 million described above. Results of operations Company results Three months ended March 31, 2023 compared with the three months ended March 31, 2022 Revenue for the three months ended March 31, 2023 was $516.4 million compared with $446.7 million for the three months ended March 31, 2022, an increase of 15.6% from the prior year. The increase was primarily due to higher software license renewals within the Enterprise Computing Solutions segment. Foreign currency fluctuations had a 3 percentage-point negative impact on revenue in the current period compared with the year-ago period. U.S. revenue increased 1.0% in the current period compared with the year-ago period. International revenue increased 27.3% in the current period compared with the prior-year period, principally due to increases in Europe and Latin America. Foreign currency had a 7 percentage-point negative impact on international revenue in the three months ended March 31, 2023 compared with the three months ended March 31, 2022. During the three months ended March 31, 2023, the company recognized net charges related to workforce reductions of $0.7 million, principally related to severance costs. These net charges were comprised of: (a) a charge of $2.6 million and (b) a credit of $1.9 million for changes in estimates. In addition, the company recorded a credit of $3.5 million for net foreign currency gains related to exiting foreign countries. During the three months ended March 31, 2022, the company recognized net cost-reduction charges and other costs of $3.0 million. The credit related to workforce reductions was $0.6 million for changes in estimates. In addition, the company recorded net charges of $3.6 million comprised of a charge of $1.1 million for net foreign currency losses related to exiting foreign countries, a charge of $3.8 million for asset impairments and a credit of $1.3 million for changes in estimates related to other cost-reduction efforts. 21 The charges (credits) were recorded in the following statement of income (loss) classifications: Three Months Ended March 31, 2023 2022 Cost of revenue $ 0.6 $ 2.7 Selling, general and administrative — (0.7) Research and development 0.1 (0.1) Other (expense), net (3.5) 1.1 Total $ (2.8) $ 3.0 Gross profit and gross profit margin were $159.0 million and 30.8% in the three months ended March 31, 2023, respectively, compared with $87.4 million and 19.6% for the three months ended March 31, 2022, respectively. The increase was principally due to higher software license renewals. Selling, general and administrative expense in the three months ended March 31, 2023 was $102.9 million (19.9% of revenue) compared with $104.4 million (23.4% of revenue) for the three months ended March 31, 2022. Research and development (R&D) expense for the three months ended March 31, 2023 and 2022 was $6.2 million and $6.5 million, respectively. For the three months ended March 31, 2023, the company reported an operating profit of $49.9 million compared with an operating loss of $23.5 million in the three months ended March 31, 2022. The increase was primarily driven by higher revenue and gross profit. Interest expense for the three months ended March 31, 2023 and 2022 was $7.6 million and $8.4 million, respectively. Other (expense), net was expense of $196.9 million for the three months ended March 31, 2023 compared with expense of $21.0 million for the three months ended March 31, 2022. Other (expense), net for the three months ended March 31, 2023 included $183.2 million of a U.S. pension settlement loss. See Note 5 of the Notes to Consolidated Financial Statements for details of other (expense), net. The loss before income taxes for the three months ended March 31, 2023 was $154.6 million compared with a loss of $52.9 million for the three months ended March 31, 2022. Included in the loss for the three months ended March 31, 2023 was a U.S. pension settlement loss of $183.2 million. The provision for income taxes was $19.9 million for the three months ended March 31, 2023 compared with a provision of $4.1 million for the three months ended March 31, 2022. The change in the tax provision is a result of the geographic distribution of income as 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 March 31, 2023 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. Net loss attributable to Unisys Corporation for the three months ended March 31, 2023 was $175.4 million, or $2.58 per diluted share, compared with a loss of $57.3 million, or $0.85 per diluted share, for the three months ended March 31, 2022. Included in the loss for the three months ended March 31, 2023 was a U.S. pension settlement loss of $183.2 million. Segment 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 22 • 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. 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 March 31, 2023 compared with the three months ended March 31, 2022 A summary of the company’s operations by segment is presented below: Total Segments DWS CA&I ECS Three Months Ended March 31, 2023 Revenue $ 445.2 $ 131.0 $ 126.0 $ 188.2 Gross profit percent 35.4 % 11.9 % 13.0 % 66.7 % Three Months Ended March 31, 2022 Revenue $ 374.5 $ 124.8 $ 129.1 $ 120.6 Gross profit percent 22.9 % 12.8 % 5.4 % 52.1 % DWS revenue was $131.0 million for the three months ended March 31, 2023, an increase of 5.0% compared with the three months ended March 31, 2022. The increase in revenue was primarily due to recent contract signings. Foreign currency fluctuations had a 3 percentage-point negative impact on DWS revenue in the current period compared with the prior-year period. Gross profit percent was 11.9% in the current period compared with 12.8% in the prior-year period. The decrease in gross profit was primarily due to incremental labor costs in support of recent contract signings. CA&I revenue was $126.0 million for the three months ended March 31, 2023, a decline of 2.4% compared with the three months ended March 31, 2022. Foreign currency fluctuations had a 1 percentage-point negative impact on CA&I revenue in the current period compared with the prior-year period. Gross profit percent was 13.0% in the current period compared with 5.4% in the prior-year period. The increase in gross profit was primarily due to additional cost incurred in the prior-year period associated with certain contracts as well as delivery improvements. ECS revenue was $188.2 million for the three months ended March 31, 2023, an increase of 56.1% compared with the three months ended March 31, 2022. Foreign currency fluctuations had a 4 percentage-point negative impact on ECS revenue in the current period compared with the prior-year period. Gross profit percent was 66.7% in the current period compared with 52.1% in the prior-year period. The increase in revenue and gross profit was driven by higher 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 twelve months. Cash and cash equivalents at March 31, 2023 were $391.9 million compared to $391.8 million at December 31, 2022. As of March 31, 2023, $248.9 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 approximately 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. During the three months ended March 31, 2023, cash provided by operations was $12.8 million compared to cash usage of $33.0 million during the three months ended March 31, 2022, primarily driven by higher Technology collections. Cash used for investing activities during the three months ended March 31, 2023 was $11.5 million compared to cash usage of $21.7 million during the three months ended March 31, 2022. Net proceeds of investments were $9.2 million for the three months ended March 31, 2023 compared with net purchases of $2.3 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 23 $10.3 million compared with $11.1 million in the prior-year period, capital additions of properties were $7.3 million compared with $5.2 million in the prior-year period and capital additions of outsourcing assets were $2.7 million compared with $2.4 million in the prior-year period. Cash used for financing activities during the three months ended March 31, 2023 was $7.6 million compared to cash used of $11.2 million during the three months ended March 31, 2022. In March 2023, the company purchased a group annuity contract, with plan assets, for approximately $265 million to transfer projected benefit obligations related to approximately 8,650 retirees of one of the company’s U.S. defined benefit pension plans resulting in a pre-tax settlement loss of $183.2 million for the three months ended March 31, 2023. After considering this most recent group annuity contract purchase, the company has successfully reduced its global defined benefit pension obligations since December 2020 by $1.7 billion, including $1.0 billion in the U.S. The company will continue to evaluate opportunities for additional reductions in future periods depending on overall market conditions. In 2023, the company expects to make cash contributions of approximately $40 million primarily for its international defined benefit pension plans. In 2022, the company made cash contributions of $39.3 million to its worldwide defined benefit pension plans. For the three months ended March 31, 2023 and 2022, the company made cash contributions of $14.5 million and $15.1 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 in different amounts and on a different schedule than previously contemplated. Based upon our most current estimates as of March 31, 2023, the company does not expect to make mandatory cash contributions to its U.S. qualified defined benefit pension plans until 2025. At March 31, 2023, total debt was $506.1 million compared to $513.1 million at December 31, 2022. 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 March 31, 2023, the company had no borrowings and $6.6 million of letters of credit outstanding, and availability under the facility was $64.0 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. and Unisys AP Investment Company I, each of which is a U.S. corporation 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. 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 March 31, 2023, 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. 24 From time to time, the company may explore a variety of additional 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. The company does not have any off-balance sheet arrangements that are material or reasonably likely to become material to its financial condition or results of operations. 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 Annual Report on Form 10-K for the year ended December 31, 2022.