Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Factors that could affect future results include the following:
IMPLEMENTATION OF BUSINESS STRATEGY IN INFORMATION TECHNOLOGY MARKET
Future results may be adversely impacted if we are unable to grow revenue and expand margin in our Digital Workplace Solutions and Cloud, Applications & Infrastructure Solutions businesses.
Our strategy places an emphasis on growing revenue, including specifically from higher-value and higher-margin offerings in our Digital Workplace Solutions and Cloud, Applications & Infrastructure Solutions businesses. Our ability to grow revenue and profitability in these businesses will depend our ability to win contracts with clients for higher growth and higher-margin user experience-based solutions, which in turn depends on our ability to offer differentiated solutions that meet client needs. It will also depend on an efficient utilization of delivery personnel. Revenue and profit margins in these businesses are a function of both the portfolio of solutions sold and the rates we are able to charge for solutions. The rates we are able to charge for our solutions are affected by a number of factors, including clients’ perception of our ability to add value through our solutions, introduction of new offerings by us or our partner eco-system, market pricing pressure, and general economic conditions such as inflation or an economic downturn, or the perception of the risk of these occurrences. Chargeability is also affected by a number of factors, including our ability to transition resources from completed projects to new engagements and across geographies, and our ability to forecast demand for services and thereby maintain appropriate resource levels. Our results of operations and financial condition may be adversely impacted if sales of higher-margin offerings do not offset declines in revenue and profitability of lower-margin offerings, including lower-margin contracts that we voluntarily exit.
Future results may be adversely impacted if we are unable to maintain our installed base and sell new solutions and related services.
We continue to invest in our ClearPath Forward operating system software in order to retain and extend our existing client base included in our Enterprise Computing Solutions business. If clients do not believe in the value proposition provided by ClearPath Forward or choose not to renew their contracts, there may not be a meaningful return on these investments, and revenue could decline meaningfully. Furthermore, if ClearPath Forward is sold in the form of Software as a Service (SaaS) at an accelerated pace, this would have a negative impact on our short- and medium-term cash position and could adversely impact our operations, financial condition and liquidity. Additionally, we also continue to invest in other software and solutions and related services. If we are unsuccessful in selling these other solutions and related services, there may not be a meaningful return on these investments. Further, the revenues generated by other solutions and related services may be insufficient to offset any revenue declines caused if we are unable to retain our installed base.
If we are unable to attract and retain experienced personnel in key positions, our future results could be adversely impacted.
Our ability to retain, train and develop our existing associate base in the skills and solutions required to service our clients is critical to our future success. We also need to attract new talent to augment the skills required to deliver our solutions to our clients. Our failure to retain, train and develop existing personnel or attract new talent with the requisite skill set, retain key personnel or implement an appropriate succession plan for such personnel could adversely impact our ability to successfully carry out our business strategy.
We face aggressive competition, which could lead to reduced demand for our solutions and related services and could have an adverse effect on our business.
The market in which we operate includes a large number of companies vying for customers and market share both domestically and internationally. Our competitors include systems integrators, consulting and other professional services firms, outsourcing providers, infrastructure services providers, computer hardware manufacturers and software providers. If we are unable to differentiate our offerings from those of our competitors and renew existing contracts and win new contracts, our revenues may decline. Some of our competitors may develop competing services and products that offer better price for performance or that reach the market in advance of our offerings. Some competitors also have or may develop greater financial and other resources than us, providing them with the enhanced ability to compete for market share, in some instances through significant economic incentives to secure contracts. Some also may be better able to compete for skilled professionals. Any of these factors could lead to reduced demand for our solutions and related services and could have an adverse effect on our business. Future results will depend on our ability to mitigate the effects of aggressive competition on revenues, pricing and margins.
Our future results may be adversely impacted if we are unable to effectively anticipate and respond to rapid technological innovation in our industry.
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We operate in an industry characterized by rapid technological innovation, evolving technology standards, short product life cycles and continually changing customer demand patterns. Future success will depend in part on our ability to anticipate and respond to these market trends and to design, develop, introduce, deliver or obtain new and innovative services and products on a timely and cost-effective basis using newer delivery models. Additionally, we may not be successful in anticipating or responding to changes in technology, industry standards or customer preferences, and the market may not demand or accept our services and product offerings. In addition, services and products developed by competitors may make our offerings less competitive.
Our future results will depend on our ability to retain significant clients and attract new clients.
We have a number of significant long-term contracts with clients, including governmental entities, and our future success will depend, in part, on retaining our relationships with these clients and attracting new clients. We could lose clients for reasons such as contract expiration, conversion to a competing service provider, disputes with clients or a decision to in-source services. We could also lose clients as a result of their merger, acquisition or business failure. We may not be able to replace the revenue and earnings from any such lost client. We are expecting revenue, margin and market share expansion due to our differentiated solutions and the decisions by some of our competitors to exit or de-emphasize their focus on our target markets. If such competitors change that position, it could impact our ability to gain market share.
Our contracts may not be as profitable as expected or provide the expected level of revenues.
In a number of our long-term services contracts, our revenue is based on the volume of services and products provided. As a result, revenue levels anticipated at contract inception are not guaranteed. Our contracts with governmental entities are subject to the availability of appropriated funds and appropriations may be delayed or may not be made at all. Further, appropriations are subject to many different factors, including budget priorities, economic cycles, change in political administrations and other circumstances beyond our control that may impact our revenues from government contracts. In addition, some of our contracts may permit termination at the customer’s discretion before the end of the contract term or may permit termination or impose other penalties if we do not meet the performance levels specified in the contracts.
Some of our services contracts are fixed-price contracts under which we assume the risk for delivery of the contracted services and products at an agreed-upon fixed price. Should we experience problems in performing fixed-price contracts on a profitable basis, adjustments to the estimated cost to complete may be required and may or may not be obtained. Future results will depend on our ability to perform these services contracts profitably.
We could face business and financial risk in implementing acquisitions or dispositions.
As part of our business strategy, we may from time to time acquire complementary technologies, products and businesses, or dispose of existing technologies, products and businesses, including transactions of a material size. Any acquisitions may result in the incurrence of substantial additional indebtedness or contingent liabilities. Acquisitions could also result in potentially dilutive issuances of equity securities and an increase in amortization expenses related to intangible assets. Additional potential risks associated with acquisitions include technical, cultural and operational integration challenges; difficulties in maintaining or enhancing the profitability of any acquired business; risks of entering markets in which we have no or limited prior experience; potential loss of employees or failure to maintain or renew any contracts of any acquired business; and expenses of any undiscovered or potential liabilities of the acquired product or business, including relating to employee benefits contribution obligations or environmental requirements. Potential risks with respect to dispositions include difficulty finding buyers or alternative exit strategies on acceptable terms in a timely manner; potential loss of employees or clients; dispositions at unfavorable prices or on unfavorable terms, including relating to retained liabilities; and post-closing indemnity claims. Further, with respect to both acquisitions and dispositions, management’s attention could be diverted from other business concerns. Adverse credit conditions could also affect our ability to consummate acquisitions or dispositions. The risks associated with acquisitions and dispositions could have a material adverse effect upon our business, financial condition and results of operations. There can be no assurance that we will be successful in consummating future acquisitions or dispositions on favorable terms or at all.
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DEFINED BENEFIT PENSION PLANS
We have significant underfunded pension obligations.
We have significant underfunded obligations under our U.S. and non-U.S. defined benefit pension plans. In 2022, we made cash contributions of $39.3 million, primarily for our international defined benefit pension plans. Based on current legislation, global regulations, recent interest rates and expected returns, in 2023 we expect to make cash contributions of approximately $40 million, primarily for our international defined benefit pension plans. Based upon our most current estimates as of December 31, 2022, we do not expect to make mandatory cash contributions to our U.S. qualified defined benefit pension plans until 2025. Estimates for future cash contributions are likely to change based on a number of factors including market conditions and changes in discount rates. We may need to obtain additional funding in order to make future contributions. In this event, there is no assurance that we would be able to obtain such funding or that we will have enough cash on hand to pay the required cash contributions.
Deterioration in the value of our worldwide defined benefit pension plan assets, as well as discount rate changes, asset return changes, or changes in economic or demographic trends, could require us to make cash contributions to our defined benefit pension plans in the future in an amount larger than currently anticipated. Increased cash contribution requirements or an acceleration in the due date of such cash contributions would further reduce the cash available for working capital, capital expenditures and other corporate uses and may worsen the adverse impact on our operations, financial condition and liquidity.
GENERAL BUSINESS RISKS
Cybersecurity incidents have occurred and may continue to occur and could result in the incurrence of significant costs and harm to our business and reputation.
Our business includes managing, processing, storing and transmitting proprietary and confidential data, including personal information, intellectual property and proprietary business information, within our own IT systems and those that we design, develop, host or manage for clients. These systems are critical to our business activities, and unauthorized access to or disruptions of, and cybersecurity attacks on, these systems pose increasing risks. Like other companies, we have experienced cybersecurity attacks and have had to expend increasing human and financial resources to respond. Cyberattacks from computer hackers and cyber criminals and other malicious internet-based activity continue to increase generally, and our services and systems, including the systems of our outsourced service providers, have been and may in the future continue to be the target of various forms of cybersecurity incidents such as DNS attacks, wireless network attacks, viruses and worms, malicious software, ransomware, cyber extortion, misconfigurations, supply chain attacks, application centric attacks, peer-to-peer attacks, phishing attempts, backdoor trojans and distributed denial of service attacks, among other cybersecurity threats. Attacks also may include social engineering and cyber extortion to induce customers, contractors, business partners, vendors, employees and other third parties to disclose information, transfer funds, or unwittingly provide access to systems or data. As a known provider of IT solutions, we pose an attractive target for such attacks.
The techniques used by computer hackers and cyber criminals to obtain unauthorized access to data or to sabotage computer systems change frequently and are growing in sophistication, and these new techniques may not be detected until after an incident has occurred. Despite established security controls, cybersecurity incidents involving our systems could result in disruption of our services, misappropriation, misuse, alteration, theft, loss, corruption, leakage, falsification, and accidental or premature release or improper disclosure or misuse of confidential or other information, including intellectual property, personal information, and other confidential information (of the company, third parties, employees, clients or others). We could be exposed to liability, litigation, and regulatory or other government action, as well as the loss of existing or potential customers, damage to our brand and reputation, damage to our competitive position, and other financial loss, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, the cost and operational consequences of responding to cybersecurity incidents and implementing remediation measures could be significant. In our industry, security vulnerabilities are increasingly discovered, publicized and exploited across a broad range of hardware, software or other infrastructure, elevating the risk of attacks and the potential cost of response and remediation for us.
Although we continuously take significant steps to mitigate cybersecurity risk across a range of functions, such measures can never eliminate the risk entirely or provide absolute security, and we have experienced and expect to continue to experience cyberattacks on our information systems.
The failure of our internal control over financial reporting and disclosure controls and procedures to be effective and the potential for material weaknesses in our internal control over financial reporting could result in material misstatements in our financial statements.
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Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Annually, we perform activities that include reviewing, documenting and testing our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain an effective internal control environment, we could suffer misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could result in significant expenses to remediate any internal control deficiencies and lead to a decline in our stock price.
Following an investigation by our Audit & Finance Committee into our internal control environment, during the fourth quarter of 2022, we reevaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting and identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In response to these material weaknesses, management implemented remedial actions to improve controls, which included enhancing our written policy regarding information escalation for cyber-incidents, enhancing our disclosure committee, and other measures described under “Status of Remediation Plan for Material Weaknesses” in the “Report of Management” subsection of “Financial Statements and Supplementary Data” (Part II, Item 8 of this Form 10K). Management anticipates that the new controls, as implemented and when tested for a sufficient period of time, will remediate the material weaknesses. However, due to the timing of the design and implementation of our remediation efforts during the fourth quarter of 2022, there has been insufficient time for us to demonstrate consistent execution against all newly implemented actions. As such, management is unable to determine whether the implemented remedial actions are operating effectively at December 31, 2022, and as a result, management has concluded that our internal control over financial reporting was not effective as of December 31, 2022. We expect to continue to enhance our internal controls and assess our operating effectiveness in 2023.
We may nevertheless be unsuccessful in remediating the material weaknesses identified by management, or we may be unable to identify and remediate additional control deficiencies, including material weaknesses, in the future. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
We have received, and may receive in the future, regulatory, investigative and enforcement inquiries, subpoenas or demands arising from, related to, or in connection with these matters. Professional costs resulting from the investigation that resulted in the identification of the material weaknesses have been significant and are expected to continue to be significant, in particular if litigation costs relating to these regulatory, investigative and enforcement inquiries, subpoenas and demands grow. Although we believe that no significant business has been lost to date, it is possible that a change in the perceptions of our business partners could occur as a result of the investigation and the material weaknesses. In addition, as a result of the investigation and remediation efforts, certain operational changes have occurred and may continue to occur in the future. Any or all of these impacts based on the findings of the investigation and related matters and the surrounding circumstances could exacerbate the other risks described herein and directly or indirectly have a material adverse effect on our operations and/or financial performance.
If we are unable to access the financing markets, it may adversely impact our business and liquidity.
Market conditions may impact our ability to access the financing markets on terms acceptable to us or at all. If we are unable to access the financing markets, we would be required to use cash on hand to fund operations and our required pension contributions and repay outstanding debt as it comes due. There is no assurance that we will generate sufficient cash to fund our operations and required pension contributions and refinance such debt. A failure by us to generate such cash would have a material adverse effect on our business if we were unable to access financing markets and may result in a default with respect to our pension obligation and under our debt agreements. Market conditions may also impact our ability to utilize surety bonds, letters of credit, foreign exchange derivatives or other financial instruments we use to conduct our business.
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A significant portion of our revenue is derived from international operations, and we are subject to the risks of doing business internationally.
A significant amount of our total revenue is derived from international operations. The risks of doing business internationally include foreign currency exchange rate fluctuations, changing and increasingly more stringent global data privacy regulations, currency restrictions and devaluations, changes in political or economic conditions, increases in inflation rate, trade protection measures, import or export licensing requirements, multiple and possibly overlapping and conflicting tax laws, new tax legislation, weaker intellectual property protections in some jurisdictions and additional legal and regulatory compliance requirements applicable to businesses that operate internationally, including the U.S. Foreign Corrupt Practices Act, economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control, regulations in the European Union such as the General Data Protection Regulation, the U.K. Bribery Act and other U.S. and non-U.S. laws and regulations.
Our business may be adversely affected by global economic conditions, acts of war, terrorism, natural disasters or the widespread outbreak of infectious diseases.
If global economic conditions deteriorate, or clients anticipate that they could deteriorate, we could see reductions in demand and increased pressure on revenue and profit margins. We could also see a further consolidation of clients, which could also result in a decrease in demand. Our business could also be affected by acts of war, terrorism, natural disasters and the widespread outbreak of infectious diseases. Geopolitical conditions could escalate, and this could have unpredictable consequences on the world economy and on our business. If, as a result of such an event, our clients in a particular industry were to suffer material adverse impacts, we may experience a reduction in demand for our services and products from such clients, which may materially and adversely affect our business, results of operations and financial condition.
A reduction in our credit rating could adversely affect our business and/or the holders of our securities.
The credit rating agencies rating our indebtedness regularly evaluate us, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including conditions affecting the information technology industry and the economy and changes in rating methodologies. There can be no assurance that we will maintain our current credit ratings. A downgrade of our credit ratings could adversely affect our access to liquidity and capital, and could significantly increase our cost of funds, decrease the number of investors and counterparties willing to lend to us or purchase our securities and impact our ability to utilize surety bonds or other financial instruments we use to conduct our business. This could affect our growth, profitability, and financial condition, including liquidity.
A significant disruption in our IT systems could adversely affect our business and reputation.
We rely extensively on our IT systems to conduct our business and perform services for our clients. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses and malicious attacks, cybersecurity breaches and catastrophic events. If our systems are accessed without our authorization, damaged or fail to function properly, we could incur substantial repair or replacement costs, experience data loss and impediments to our ability to conduct our business, and damage the market’s perception of our services and products. In addition, a disruption could result in our failure to meet performance standards and obligations in our client contracts, which could subject us to liability, penalties and contract termination. This may adversely affect our reputation and financial results.
Future results will depend in part on the performance and capabilities of third parties with whom we have commercial relationships.
We maintain business relationships with key partners, suppliers, channel partners and other parties that have complementary products, services or skills. Future results will depend, in part, on the performance and capabilities of these third parties, on the ability of external suppliers to deliver components at reasonable prices and in a timely manner, and on the financial condition of, and our relationship with, distributors and other indirect channel partners, which can affect our capacity to effectively and efficiently serve current and potential customers and end users. Additionally, cost inflation and supply chain disruptions may lead to higher labor and other costs, as well as an inability to procure products needed to deliver our solutions, which could adversely affect our results of operations.
Our reputation and relationship with our clients are critical to our business and any harm to our reputation could have a material adverse effect on our future revenue and profitability.
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The success of our business is dependent on strong, long-term client relationships and on our reputation for responsiveness and quality. As a result, if a client is not satisfied with our services or products, our reputation could be damaged and our business adversely affected. Allegations by private litigants or regulators of improper conduct, as well as negative publicity and press speculation about us, whatever the outcome and whether or not valid, may harm our reputation. In addition to harm to reputation, if we fail to meet our contractual obligations, we could be subject to legal liability, which could adversely affect our business, operating results and financial condition.
Our services or products may infringe upon the intellectual property rights of others.
We cannot be sure that our services and products do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us or against our clients. These claims could cost us money, prevent us from offering some services or products, or damage our reputation.
Legal proceedings could affect our results of operations or cash flow or may adversely affect our business or reputation.
Various lawsuits, claims, investigations and proceedings have been brought or asserted against us in the past relating to matters arising in the ordinary course of business, including actions with respect to commercial and government contracts, labor and employment, employee benefits, environmental matters, securities matters, intellectual property and non-income tax matters. We believe that we have valid defenses with respect to legal matters pending against us. Litigation is inherently unpredictable, however, and it is possible that our results of operations or cash flows could be materially affected in any particular period as a result of future developments of the legal matters pending against us, including the resolution of any such matters. In addition, legal proceedings or environmental matters may arise in the future with respect to our existing and legacy operations that may adversely affect our business or reputation.
Impairment of goodwill or intangible assets may negatively impact our results of operations.
On an annual basis, and whenever circumstances arise, we review goodwill and intangible assets for impairment. The impairment test is based on several factors, estimates and assumptions, including macroeconomic conditions, industry and market consideration, overall financial performance, market capitalization and relevant entity-specific events. Significant changes to these factors could impact the assumptions used in calculating the fair value of goodwill or intangible assets and may indicate potential impairment. An impairment of a significant portion of our goodwill or intangible assets could adversely affect our results of operations.
A failure to meet standards or expectations with respect to our environmental, social and governance practices could adversely impact our business and reputation.
Many governmental bodies and current and prospective investors, clients, partners, and employees are increasing their focus on corporate environmental, social and governance (ESG) practices. If we fail to meet the standards or expectations of any of these groups, we may suffer reputational damage, our business may be adversely impacted and we may find it more difficult to recruit or retain key personnel.
Our ability to use our net operating loss (NOL) carryforwards and certain other tax attributes may be limited.
A corporation’s ability to deduct its federal NOL carryforwards and utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the U.S. Internal Revenue Code (Section 382) if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material shareholders exceed 50 percent during a rolling three-year period). Similar rules may apply under state tax laws. A future tax “ownership change” pursuant to Section 382 or future changes in tax laws that impose tax attribute utilization limitations may severely limit or effectively eliminate our ability to utilize our NOL carryforwards and other tax attributes.
Other factors discussed in this report, although not listed here, also could materially affect our future results.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2022, the company did not own or lease any physical properties that are material to its business.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to litigation is set forth in Note 19, “Litigation and contingencies,” of the Notes to Consolidated Financial Statements and is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II