Unisys Corporation (UIS) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in millions of dollars except per-share data. Unisys provides digital workplace, cloud and infrastructure, and enterprise computing solutions and services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $517.3 | $438.8 | $1,027.1 | $954.2 |
| Operating income (loss) | $40.8 | $(8.5) | $84.4 | $11.6 |
| Other expense, net | $(227.8) | $(53.7) | $(410.4) | $(101.8) |
| Net loss from continuing operations attributable to Unisys | $(140.8) | $(76.5) | $(298.6) | $(129.7) |
| Diluted loss per share from continuing operations | $(2.10) | $(1.21) | $(4.54) | $(2.06) |
- Q2 revenue rose 17.9%; first-half revenue rose 7.6%. Foreign exchange contributed approximately 6 percentage points and 4 percentage points, respectively, to those growth rates.
- Gross margin improved to 27.5% in Q2 from 17.1%, and to 27.4% for the first half from 19.7%. Management attributed improvement to higher enterprise software sales, efficiency gains and cost-reduction initiatives.
- Q2 revenue by category: Services $430.5 versus $396.0; Technology $86.8 versus $42.8. First-half revenue: Services $850.9 versus $821.9; Technology $176.2 versus $132.3.
- Q2 operating income improved to $40.8 from an operating loss of $8.5; first-half operating income was $84.4 versus $11.6. Despite this operating improvement, GAAP losses widened because of pension settlement charges recorded in other expense.
Cash, debt and liquidity
- Cash and cash equivalents were $596.7 at June 30, 2021, down from $898.5 at year-end 2020. Cash, cash equivalents and restricted cash totaled $606.2.
- Operating cash use was $1.0 for the first half, compared with $392.1 used in the prior-year period, principally reflecting much lower pension contributions. Investing activities used $201.7; financing activities used $97.9. Cash, cash equivalents and restricted cash decreased by $300.5.
- Total debt was $536.9, down from $629.9 at December 31, 2020. This included $517.5 of long-term debt and $19.4 of current maturities. The 6.875% senior secured notes are due in 2027.
- The $145.0 asset-based revolving facility had no borrowings; availability was $103.3 net of letters of credit. The company reported compliance with debt covenants and expected to remain compliant for at least 12 months. Management said it believed liquidity sources were adequate for expected needs over that period.
- Of cash and cash equivalents, $311.9 was held by foreign subsidiaries and branches; the company noted that up to one-third may not be readily transferable to the U.S. and transfers may entail taxes.
- Total deficit was $263.8 at quarter-end. Current assets were $1,146.2 and current liabilities were $678.9.
Material changes and unusual items
- Pension settlements: Unisys settled approximately $932 of gross defined-benefit pension liabilities during the first half. Settlement losses of $210.7 in Q2 and $368.7 for the first half drove the large increase in other expense. The actions included transferring Dutch and Swiss plan obligations and purchasing a U.S. group annuity contract.
- Pension funding: Following U.S. pension relief under the American Rescue Plan Act, the company said current projections indicated no required U.S. qualified-plan contributions over the projected period and it would not make a previously contemplated voluntary $200 contribution in 2021. It expected approximately $48.7 of 2021 contributions, primarily to international plans. Future funding needs remain sensitive to asset performance, rates, legislation and other assumptions.
- Tax items: Q2 included a $53.1 income tax benefit, including $51.7 related to Dutch and Swiss pension settlements and an approximately $17.7 deferred tax benefit from the enacted U.K. tax-rate increase. A full valuation allowance applies to U.S. and certain foreign deferred tax assets, so tax results may vary with geographic earnings.
- Acquisition: Unisys acquired Unify Square on June 3 for preliminary consideration of $150.1, funded with cash on hand. Preliminary purchase accounting included $117.6 of goodwill and $34.5 of intangible assets; the allocation remained subject to adjustment. Acquisition-related costs were $1.6.
- Debt conversion: The remaining $84.2 principal of 2021 convertible notes was converted in March for cash and shares. The transaction involved approximately $86.5 in cash payments and increased net shares outstanding by approximately 3.3 million.
- Cost-reduction charges and other costs were $5.1 in Q2 and $13.6 for the first half, compared with $7.9 and $35.4 in the respective 2020 periods.
Segments, outlook and risks
- Q2 segment revenue and gross profit percentages: Digital Workplace Solutions (DWS) $146.5 and 15.2%; Cloud & Infrastructure Solutions (C&I) $124.4 and 12.5%; Enterprise Computing Solutions (ECS) $169.5 and 61.3%. ECS growth was principally attributed to higher enterprise software sales. DWS and C&I gross profit percentages also improved year over year.
- For the first half, DWS revenue declined 2.1% to $287.6, which management linked partly to COVID-affected field-service volumes. C&I revenue increased 14.0% to $247.7, and ECS revenue increased 15.2% to $337.1.
- Remaining performance obligations were approximately $0.8 billion at June 30; about 20% was expected to be recognized by year-end 2021 and a further 37% by year-end 2022. The filing does not provide specific revenue or earnings guidance.
- Risks include COVID-19 uncertainty, competition and technology changes, retention and growth challenges in DWS and C&I, significant underfunded pension obligations, international exposure, cybersecurity, financing access and tax-attribute limitations. Brazilian tax-related matters not reserved were estimated at up to approximately $75; litigation outcomes remain uncertain and could affect results or cash flow.
Important facts for investors to verify
- Whether operating improvement and segment margin gains persist after adjusting for foreign-exchange effects and unusual items.
- The final Unify Square purchase-price allocation, integration progress and contribution to results.
- The effect of future pension asset, interest-rate or regulatory changes on required contributions and liquidity.
- Cash accessibility by jurisdiction, revolving-facility availability and compliance with debt covenants, including the facility’s pension-related springing-maturity terms.
- Developments in Brazilian tax matters and other litigation, and the realizability of deferred tax assets and tax attributes.