Unisys Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context and results
Unisys provides digital workplace, cloud and infrastructure, and enterprise computing solutions. Revenue fell 12.4% year over year, primarily because of lower Enterprise Computing Solutions (ECS) license renewals and the run-off of non-strategic Digital Workplace Solutions (DWS) contracts exited in 2021. Foreign currency movements reduced reported revenue growth by 2 percentage points.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $446.7 | $509.8 |
| Gross profit | $87.4 | $139.2 |
| Gross margin | 19.6% | 27.3% |
| Operating income (loss) | $(23.5) | $43.6 |
| Net loss attributable to Unisys | $(57.3) | $(157.8) |
| Diluted loss per share | $(0.85) | $(2.45) |
| Interest expense | $8.4 | $10.1 |
| Cash used for operating activities | $33.0 | $42.9 |
The smaller year-over-year net loss largely reflects the prior-year $158.0 million U.S. pension settlement loss; it does not indicate improved operating performance. Q1 2022 also included $3.0 million of cost-reduction and other charges. Selling, general and administrative expense rose to $104.4 million from $90.0 million, reflecting investment in sales support and higher compensation costs. Research and development expense was $6.5 million, versus $5.6 million.
Segments and operating changes
| Segment | Revenue, Q1 2022 | Year-over-year change | Gross margin |
|---|---|---|---|
| DWS | $124.8 | Down 12.7% | 12.8%, versus 13.4% |
| Cloud and Infrastructure Solutions (C&I) | $129.1 | Up 7.0% | 5.4%, versus 8.2% |
| ECS | $120.6 | Down 28.8% | 52.1%, versus 61.5% |
ECS’s revenue and margin declines were principally tied to lower license renewals. C&I’s margin decline reflected additional expenses on certain contracts. DWS revenue and gross profit were affected by exited contracts. Segment revenue excludes other revenue and reflects the filing’s segment presentation.
Cash, liquidity, debt and obligations
- Cash and cash equivalents were $491.4 at March 31, 2022, down from $552.9 at December 31, 2021. Cash, cash equivalents and restricted cash totaled $500.9 at quarter-end.
- Cash used in investing activities was $21.7 and cash used in financing activities was $11.2. Cash and restricted cash decreased by $59.7 during the quarter.
- Total debt was $523.1, compared with $529.4 at year-end. This included $485.0 principal amount of 6.875% senior secured notes due November 2027; their carrying value was $478.4.
- The $145.0 revolving asset-based credit facility had no borrowings; $5.6 of letters of credit were outstanding and reported availability was $90.5. The company reported compliance with lending covenants and expected to remain compliant for at least 12 months.
- Management said it expects adequate liquidity for at least the next 12 months. Of cash and cash equivalents, $350.7 was held by foreign subsidiaries and branches; up to one-third may not be readily transferable, and transfers could trigger taxes.
- Long-term postretirement liabilities were $932.7. The company expected 2022 cash contributions of approximately $40.2 to defined-benefit pension plans and approximately $6 to its postretirement plan. Pension asset declines or other assumption and legislative changes could require additional U.S. plan contributions.
- Remaining performance obligations were approximately $0.7 billion; about 28% was expected to be recognized by year-end 2022 and an additional 33% by year-end 2023. These obligations exclude certain short-term and right-to-invoice contracts.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management cited difficult-to-predict direct and indirect effects from Russia’s invasion of Ukraine and related sanctions, which had not materially affected the business, financial condition or results through the reported period.
Risks highlighted include revenue and margin execution, retaining clients and skilled employees, contract profitability, competition and technological change, cybersecurity, international operations, financing access, significant underfunded pension obligations, and limitations on use of tax attributes. Management maintained a full valuation allowance for U.S. and certain foreign deferred tax assets; changes in that allowance could materially affect earnings. The company also noted that an adverse legal outcome could materially affect results or cash flows. Unreserved Brazilian tax-related matters, including interest and excluding matters assessed as remote, were estimated at up to approximately $89 million; the ultimate outcome is uncertain.
Other notable items: Q1 cost-reduction charges were $3.0, versus $8.5 in Q1 2021. CompuGain, acquired in December 2021 for $87.0, remained subject to preliminary purchase accounting; its reported results were not material. Management stated that disclosure controls were effective and reported no significant change in risk factors from the 2021 Form 10-K.
Investor verification priorities
- Whether ECS license renewals stabilize and whether revenue declines in DWS and ECS persist.
- Whether C&I contract costs and overall margins improve after the sharp year-over-year margin deterioration.
- Cash generation, the availability and transferability of foreign-held cash, and ongoing access to the ABL facility.
- Pension funding needs, underfunded obligations, and any effect on liquidity or the ABL facility’s springing-maturity provisions.
- Developments in Brazilian tax litigation and other contingencies, including potential losses beyond recorded accruals.
- Final CompuGain purchase-price allocation and progress converting remaining performance obligations into revenue.