Unisys Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. All dollar amounts are in millions unless noted. Comparisons are with the corresponding 2021 periods.
Business context and financial results
Unisys provides digital workplace, cloud, applications and infrastructure, and enterprise computing solutions. Second-quarter revenue was $515.0, down 0.4%; first-half revenue was $961.7, down 6.4%. First-half weakness was attributed primarily to lower software license renewals and unfavorable foreign exchange.
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $515.0 | $517.3 | $961.7 | $1,027.1 |
| Gross margin | 28.8% | 27.5% | 24.5% | 27.4% |
| Operating income | $33.7 | $40.8 | $10.2 | $84.4 |
| Net loss attributable to Unisys | $(17.1) | $(140.8) | $(74.4) | $(298.6) |
| Diluted loss per share | $(0.25) | $(2.10) | $(1.10) | $(4.54) |
Q2 gross margin improved chiefly on higher software license renewals; first-half margin declined on lower renewals. SG&A increased to $109.6 in Q2 and $214.0 in H1, driven primarily by higher sales and marketing investment. Operating margin was approximately 6.5% in Q2 and 1.1% in H1.
Revenue mix was uneven. Q2 Services revenue fell to $400.3 from $430.5, while Technology revenue rose to $114.7 from $86.8. For H1, Services revenue was $792.4 versus $850.9 and Technology revenue was $169.3 versus $176.2. Segment trends included H1 DWS revenue down 13.5% with lower gross margin, CA&I revenue up 6.9% but gross margin lower, and ECS revenue down 10.1% amid lower renewals.
Cash flow, debt and liquidity
H1 operating cash flow was a use of $66.7, compared with a use of $1.0 in 2021. Investing cash use was $74.4, versus $201.7, which included $150.1 for acquisitions in the prior-year period. Financing cash use was $15.0, versus $97.9. Cash, cash equivalents and restricted cash decreased $171.3 to $389.3; cash and cash equivalents alone were $380.1 at June 30, down from $552.9 at year-end.
Total debt was $519.6, including $478.7 carrying value of 6.875% secured notes due 2027. The company had no ABL borrowings, $6.3 of letters of credit, and $74.7 of facility availability. Management said liquidity should be adequate for at least 12 months and expected compliance with debt covenants over that period. Of cash and cash equivalents, $294.9 was held outside the U.S.; some may be restricted from transfer or subject to taxes. Total deficit was $98.5, and long-term postretirement liabilities were $884.5.
Material changes, outlook and risks
- Losses improved substantially year over year, largely because 2021 included pension settlement losses of $210.7 in Q2 and $368.7 in H1. The improvement does not indicate comparable operating growth: H1 operating income fell to $10.2 from $84.4.
- Q2 revenue was nearly flat, but H1 revenue contracted. Management cited foreign-exchange headwinds, international declines, lower renewals, and run-off of certain exited non-strategic DWS contracts. Higher labor costs pressured DWS and CA&I margins; increased sales and marketing spending weighed on operating income.
- Remaining performance obligations were approximately $0.6 billion; about 19% was expected to be recognized by year-end 2022 and a further 35% by year-end 2023. The filing does not provide specific revenue or earnings guidance.
- Management expected approximately $39.3 of pension contributions in 2022, primarily for international plans. Deteriorating plan assets or changes in rates, returns, legislation, or demographic assumptions could increase future contributions.
- Unreserved Brazilian tax-related matters, excluding remote matters, were estimated at up to approximately $84. The company said it had adequate provisions overall, but litigation outcomes are unpredictable and could materially affect a period.
- Tax expense was $20.3 in Q2 despite pretax income of $3.5, and $24.4 in H1 despite a pretax loss. Full valuation allowances on U.S. and certain foreign deferred tax assets, jurisdictional income mix, and possible valuation-allowance changes could materially affect future tax expense.
- The company said the Ukraine conflict had not materially affected its business to date, but future effects were difficult to predict. It also identified risks involving talent retention, competition, contract profitability, cybersecurity, international operations, pension obligations, financing access, and tax-attribute limitations.
Important facts for investors to verify
- Whether renewal-related revenue weakness and the H1 gross-margin decline persist, and whether sales and marketing investment produces growth.
- Operating cash generation, cash balances, and the availability and borrowing-base limits of the ABL facility, including restrictions on foreign-held cash.
- Pension funding requirements and the effect of asset performance or actuarial changes on contributions and liquidity.
- Developments in the Brazilian tax disputes, other litigation, and the adequacy of recorded contingencies.
- Tax valuation allowances and the ability to realize deferred tax assets; the filing cautions that changes could materially affect earnings.
- Progress toward recognizing remaining performance obligations and any subsequent guidance or significant operating updates.