What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-03-01 · 86 added, 86 removed, 220 unchanged (44% of the section changed)

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In 2023, the company recorded a net loss attributable to Unisys Corporation of $430.7 million, or $6.31 per diluted share, compared with a loss of $106.0 million, or $1.57 per diluted share, in 2022.

In 2022, the company recorded cost-reduction charges and other costs of $54.9 million compared with $23.2 million in 2021.

Included in the 2023 results were defined benefit pension plan settlement losses of $348.9 million compared with zero in 2022.

The provision for income tax comparison for 2022 compared with 2021 was impacted by a $51.5 million tax benefit recorded in 2021 related to the pension plan settlement losses compared with zero in 2022.

During 2023, the company purchased two group annuity contracts, with pension plan assets, for approximately $516 million to transfer projected benefit obligations related to approximately 12,550 retirees of the company’s U.S.

defined benefit pension plans.

As a result of these actions, the company recorded pre-tax settlement losses of $348.2 million for the year ended December 31, 2023.

Additionally in 2023, the company recorded cost-reduction charges and other costs of $9.3 million compared with $54.9 million in 2022.

Results of operations

Company results

Revenue for 2022 was $1.98 billion compared with $2.05 billion for 2021, a decrease of 3.6%.

Foreign currency fluctuations had a 3.7-percentage-point negative impact on revenue in the current year compared with the year-ago period.

Revenue from international operations for 2022 was $1.13 billion compared with $1.20 billion for 2021, a decrease of 6.1% principally due to decreases in Europe and Asia/Pacific.

Foreign currency had a 6.4-percentage-point negative impact on international revenue in 2022 compared with 2021.

Revenue for 2023 was $2.02 billion compared with $1.98 billion for 2022, an increase of 1.8%.

Foreign currency fluctuations had a negligible impact on revenue in 2023 compared with 2022.

Revenue from international operations for both 2023 and 2022 was $1.13 billion.

Foreign currency had a negligible impact on international revenue in 2023 compared with 2022.

Revenue from U.S.

operations was $854.9 million for 2022 compared with $856.2 million for 2021, a decrease of 0.2%.

operations was $889.0 million for 2023 compared with $854.9 million for 2022, an increase of 4.0%.

During 2023, the company recognized cost-reduction charges and other costs of $9.3 million.

The net charges related to work-force reductions were $7.5 million, principally related to severance costs, and were comprised of:

(a) a charge of $7.1 million and (b) a charge of $0.4 million for changes in estimates.

In addition, the company recorded net charges of $47.4 million comprised of $35.8 million for asset impairments, $8.7 million for other expenses related to cost-reduction efforts and $2.9 million for net foreign currency losses related to exiting foreign countries.

The net charges related to workforce reductions were $8.3 million, principally related to severance costs, and were comprised of:

(a) a charge of $15.2 million and (b) a credit of $6.9 million for changes in estimates.

In addition, the company recorded net charges of $1.0 million comprised of charges of $4.7 million primarily related to professional fees and other expenses related to cost-reduction efforts and a credit of $3.7 million for net foreign currency gains related to exiting foreign countries.

See Note 4, “Cost-reduction actions,” of the Notes to Consolidated Financial Statements for details of the cost reduction activities.

During 2022, the company recognized cost-reduction charges and other costs of $54.9 million.

The net charges related to work-force reductions were $0.4 million, principally related to severance costs, and were comprised of:

(a) a charge of $12.3 million and (b) a credit of $11.9 million for changes in estimates.

The net charges related to workforce reductions were $7.5 million, principally related to severance costs, and were comprised of:

(a) a charge of $7.1 million and (b) a charge of $0.4 million for changes in estimates.

In addition, the company recorded charges of $47.4 million comprised of $35.8 million for asset impairments, $8.7 million for other expenses related to cost-reduction efforts and $2.9 million for net foreign currency losses related to exiting foreign countries.

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Gross profit and gross profit margin were $551.3 million and 27.4% in 2023, respectively, and $529.6 million and 26.7% in 2022, respectively.

The decrease in gross profit and gross profit margin in 2022 was primarily due to higher cost-reduction charges in the current year compared with the year-ago period and the impact from non-strategic contracts exited in 2021.

The increase in gross profit and gross profit margin in 2023 were primarily due lower cost reduction charges in 2023 and gross profit improvement in the Cloud, Applications & Infrastructure Solutions (CA&I) segment, partially offset by lower gross profit in Enterprise Computing Solutions (ECS) segment.

Selling, general and administrative expenses were $450.3 million in 2023 (22.3% of revenue) and $453.2 million in 2022 (22.9% of revenue).

The change was primarily due to increased investments in marketing and higher cost-reduction charges and other expenses.

Research and development (R&D) expenses in 2023 were $24.1 million compared with $24.2 million in 2022.

In 2023, the company reported an operating profit of $76.9 million compared with an operating profit of $52.2 million in 2022.

The decrease in 2022 was primarily driven by increased investments in marketing and higher cost-reduction charges and other non-recurring expenses.

The increase in 2023 was primarily driven by higher gross profit as discussed above.

Interest expense was $30.8 million in 2023 compared with $32.4 million in 2022.

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Pension expense in 2023 was $391.3 million compared with $47.1 million in 2022.

Pension expense in 2021 included $499.4 million of settlement losses related to defined benefits plans in the Netherlands, the United States and Switzerland.

Pension expense in 2023 included $348.9 million of settlement losses primarily related to the company’s U.S.

defined benefits plans.

See Note 17, “Employee plans,” of the Notes to Consolidated Financial Statements for details of the settlement losses.

The loss from continuing operations before income taxes in 2022 was $62.6 million compared with a loss of $461.7 million in 2021, which included $499.4 million of settlement losses related to the company’s defined benefit pension plans.

Additionally, 2022 was impacted by investments in marketing and higher cost-reduction charges and other non-recurring expenses.

The provision for income taxes in 2022 was $42.3 million compared with a benefit of $11.9 million in 2021.

The change in the tax provision (benefit) is described below.

The loss before income taxes in 2023 was $347.8 million compared with a loss of $62.6 million in 2022.

Included in the loss in 2023 were $348.9 million of settlement losses related to the company’s defined benefit pension plans.

The provision for income taxes in 2023 was $79.3 million compared with a provision of $42.3 million in 2022.

The change in the tax provision is 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.

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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.

As a result of its projections of future taxable income during 2022, the company has determined that a portion of its non-U.S.

net deferred tax assets no longer requires a valuation allowance.

During 2023, the company determined that a portion of its non-U.S.

net deferred tax assets required an additional valuation allowance.

The net change in the valuation allowance impacting the effective tax rate in 2023 was approximately $2.1 million, primarily in Latin America.

During 2022, the company determined that a portion of its non-U.S.

net deferred tax assets no longer required a valuation allowance.

The net change in the valuation allowances impacting the effective tax rate in 2022 was approximately $9.8 million of a tax benefit, primarily in the United Kingdom and other foreign jurisdictions.

The benefit from income tax benefits in 2021 included $51.5 million related to the pension plan settlement losses in the Netherlands and Switzerland.

In addition, in June 2021, the UK enacted an income tax rate increase from 19% to 25% for the fiscal year beginning April 1, 2023.

The UK rate increase resulted in a deferred tax benefit of $17.7 million in 2021.

Net loss from continuing operations attributable to Unisys Corporation for 2022 was $106.0 million, or $1.57 per diluted share, compared with a net loss of $448.5 million, or $6.75 per diluted share in 2021.

In 2021, the Organization for Economic Cooperation and Development introduced a framework to implement a global minimum corporate tax of 15%, referred to as Pillar Two, effective January 1, 2024, and onward.

While it is uncertain whether the U.S.

will enact legislation to adopt Pillar Two, certain countries in which the company operates have adopted legislation, and other countries are in the process of introducing legislation to implement this minimum tax directive.

Pillar Two is not expected to have a material effect on the company’s global effective tax rate and its consolidated financial statements.

Net loss attributable to Unisys Corporation for 2023 was $430.7 million, or $6.31 per diluted share, compared with a net loss of $106.0 million, or $1.57 per diluted share in 2022.

Included in the loss in 2023 was $348.9 million of after-tax settlement losses related to the company’s defined benefit pension plans.

Segment results

In January 2022, the company changed the grouping of certain immaterial revenue streams.

As a result, certain prior period segment revenue as well as the related cost of sales amounts have been reclassified to be comparable to the current period’s presentation.

In addition, during 2022, the company renamed its Cloud and Infrastructure Solutions segment as Cloud, Applications & Infrastructure Solutions to better represent the nature of the segment’s operations.

There was no change to the composition of the segment or its historical results.

The company’s reportable segments are as follows:

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The accounting policies of each segment are the same as those followed by the company as a whole.

Intersegment sales and transfers are priced as if the sales or transfers were to third parties.

Accordingly, the ECS segment records intersegment revenue and manufacturing profit on hardware and software shipments to customers under contracts of other segments.

These segments, in turn, record customer revenue and marketing profits on such shipments of company hardware and software to customers.

the company’s consolidated statements of income, the manufacturing costs of products sourced from the ECS segment and sold to other segments’ customers are reported in cost of revenue for these other segments.

Also included in the ECS segment’s sales and gross profit are sales of software and hardware sold to other segments for internal use in their engagements.

The amount of such profit included in gross profit of the ECS segment for the year ended December 31, 2021 was $1.4 million.

The sale and profit on these transactions is eliminated in consolidation.

The company evaluates segment performance based on gross profit exclusive of the service costs component of postretirement income or expense, restructuring charges, amortization of purchased intangibles and unusual and nonrecurring items, which are included in other gross profit.

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(millions) Total Segments DWS CA&I ECS

Customer revenue $ 1,699.9 $ 509.9 $ 520.3 $ 669.7

Intersegment — — — —

Total revenue $ 1,699.9 $ 509.9 $ 520.3 $ 669.7

Gross profit 32.4 % 14.0 % 9.1 % 64.5 %

Customer revenue $ 1,745.8 $ 574.5 $ 485.6 $ 685.7

Intersegment 1.4 — — 1.4

Total revenue $ 1,747.2 $ 574.5 $ 485.6 $ 687.1

Gross profit 32.2 % 13.8 % 9.7 % 63.4 %

Gross profit percent is as a percent of total revenue.

$ 1,725.1 $ 546.1 $ 531.0 $ 648.0

Gross profit percent

32.2 % 14.0 % 15.4 % 61.2 %

$ 1,699.9 $ 509.9 $ 520.3 $ 669.7

Gross profit percent

32.4 % 14.0 % 9.1 % 64.5 %

DWS revenue was $546.1 million in 2023 and $509.9 million in 2022.

Revenue in 2022 was negatively impacted by the run-off effect of certain non-strategic contracts that the company exited in 2021.

Foreign currency fluctuations had a 3.9-percentage-point negative impact on DWS revenue in 2022 compared with 2021.

Gross profit percent was 14.0% in 2022 and 13.8% in 2021.

The increase in revenue in 2023 was primarily driven by new business with existing clients.

Foreign currency fluctuations had a negligible impact on DWS revenue in 2023 compared with 2022.

Gross profit percent was 14.0% in both 2023 and 2022.

CA&I revenue was $531.0 million in 2023 and $520.3 million in 2022.

The increase in revenue in 2022 compared with 2021 was driven by expansion of the digital platforms and applications solutions and acquired application development solutions.

Foreign currency fluctuations had a 2.2-percentage-point negative impact on CA&I revenue in 2022 compared with 2021.

Foreign currency fluctuations had a negligible impact on CA&I revenue in 2023 compared with 2022.

Gross profit percent was 15.4% in 2023 and 9.1% in 2022.

The decrease in gross profit percent in 2022 compared with 2021 was primarily due to additional expense associated with certain contract exits and higher labor costs.

The increase in revenue and gross profit percent in 2023 compared with 2022 was primarily due to certain prior year contract exits and new business with existing clients.

ECS revenue was $648.0 million in 2023 and $669.7 million in 2022.

Foreign currency fluctuations had a 2.4 percentage-point negative impact on ECS revenue in 2022 compared with 2021.

Foreign currency fluctuations had a negligible impact on ECS revenue in 2023 compared with 2022.

Gross profit percent was 61.2% in 2023 and 64.5% in 2022.

The decrease in revenue and gross profit percent was driven by the timing of software license renewals.

New accounting pronouncements

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During 2023, cash provided by operating activities was $74.2 million compared with cash provided by operations of $12.7 million during 2022.

The decline in operating cash in 2022 was primarily driven by the change in accounts receivable.

Cash used for investing activities during 2022 was $131.4 million compared with cash used for by investing activities of $360.3 million during 2021.

Cash usage during 2021, included $239.3 million for acquisitions.

Net purchases of investments were $44.3 million in 2022 compared with net purchases of $19.9 million in 2021.

The increase in operating cash in 2023 was primarily due to improvements in working capital.

Cash used for investing activities during 2023 was $69.6 million compared with cash used for investing activities of $131.4 million during 2022.

Net proceeds from investments were $11.2 million in 2023 compared with net purchases of $44.3 million in 2022.

Proceeds from investments and purchases of investments represent derivative financial instruments used to manage the company’s currency exposure to market risks from changes in foreign currency exchange rates.

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Cash used for financing activities during 2023 was $17.3 million compared with cash used for financing activities of $21.6 million during 2022.

The decrease in cash used in 2022 was principally due to redemptions of debt in the prior year period.

In March 2023, the company purchased a group annuity contract, with plan assets, for approximately $263 million to transfer projected benefit obligations related to approximately 8,650 retirees of one of the company’s U.S.

defined benefit pension plans.

This action resulted in a pre-tax settlement loss of $181.0 million for the year ended December 31, 2023.

In November 2023, the company purchased a group annuity contract, with plan assets, for approximately $253 million to transfer projected benefit obligations related to approximately 3,900 retirees of one of the company’s U.S.

defined benefit pension plans.

This action resulted in a pre-tax settlement loss of $167.2 million for the year ended December 31, 2023.

After considering these most recent group annuity contract purchases, the company has successfully reduced its global defined benefit pension obligations since December 2020 by approximately $2.0 billion, including approximately $1.3 billion in the U.S.

The company will continue to evaluate opportunities for additional reduction of its global defined benefit pension obligations in future periods depending on overall market conditions.

Due to the company’s significant postretirement plans accumulated other comprehensive losses, future group annuity contract purchases could result in material non-cash settlement losses.

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.

In 2023, we made cash contributions of $42.4 million, primarily for our international defined benefit pension plans.

Based on current legislation, global regulations, recent interest rates and expected returns, the company estimates future cash contributions of approximately $21 million in 2024, primarily for our international defined benefit pension plans.

The company estimates that cash contributions to its U.S.

defined benefit pension plans will begin to increase in 2025, increasing the total estimated contributions for the company’s U.S.

defined benefit pension plans to approximately $110 million in 2025 and approximately $770 million in the aggregate from 2026 through 2033.

If the company is not able to generate sufficient cash flows from operations, we may need to obtain additional funding in order to make these contributions.

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.

Based upon our most current estimates as of December 31, 2022, the company does not expect to make mandatory cash contributions to its U.S.

qualified defined benefit pension plans until 2025.

In the first quarter of 2023, the company expects to sign an agreement with an insurance company to purchase, with plan assets, a group annuity contract to transfer approximately $250 million of projected benefit obligations related to approximately 8,600 retires of the company’s U.S.

defined benefit pension plans.

This action is expected to result in a first quarter 2023 non-cash pre-tax settlement loss of approximately $200 million.

As described in Note 18, “Employee plans,” of the Notes to Consolidated Financial Statements, the company expects to make cash contributions of approximately $40 million in 2023, primarily for its international defined benefit pension plans compared with cash contributions of $39.3 million in 2022.

qualified defined benefit pension plan assets, as well as changes in pension legislation, volatility in the capital markets, 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.

At December 31, 2023, total debt was $504.2 million compared with $513.1 million at December 31, 2022.

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See Note 5, “Leases and commitments,” of the Notes to Consolidated Financial Statements for more information pertaining to future minimum lease payments relating to the company’s operating and finance lease obligations.

Additionally, as described in Note 5, “Cost-reduction actions,” of the Notes to Consolidated Financial Statements, the company expects to make payments of approximately $11.7 million in 2023 related to the company’s work-force reduction actions.

Additionally, as described in Note 4, “Cost-reduction actions,” of the Notes to Consolidated Financial Statements, the company expects to make payments of approximately $9.4 million in 2024 related to the company’s workforce reduction actions.

In March 2021, the company completed the conversion of $84.2 million aggregate principal amount of Convertible Senior Notes due 2021 (the 2021 Notes) that remained outstanding for a combination of cash and shares of the company’s common stock.

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The issuance of the common stock was made in exchange for the 2021 Notes pursuant to an exemption from the registration requirements provided by Section 3(a)(9) of the Securities Act of 1933, as amended.

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.

The company has a secured revolving credit facility (the Amended and Restated ABL Credit Facility), which matures on October 29, 2025, and 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 specified conditions.

The Amended and Restated ABL Credit Facility was amended on June 2, 2023, primarily to replace the reference rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate.

Availability under the credit facility is subject to a borrowing base calculated by reference to the company’s receivables.

At December 31, 2023, the company had no borrowings and $7.1 million of letters of credit outstanding, and availability under the facility was $88.6 million net of letters of credit issued.

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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 December 31, 2022, the company has met all covenants and conditions under its various lending and funding agreements.

At December 31, 2023, the company had met all covenants and conditions under its various lending and funding agreements.

The company expects to continue to meet these covenants and conditions through at least the next twelve months.

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however, some agreements contain multiple performance obligations or non-standard terms and conditions.

As discussed in Note 1, “Summary of significant accounting policies,” of the Notes to Consolidated Financial Statements, the company enters into arrangements that may

include any combination of hardware, software or services.

As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including how many performance obligations are present in an arrangement, whether they should be treated as separate performance obligations and when to recognize revenue and under what method for each performance obligation.

As discussed in Note 1, “Summary of significant accounting policies,” of the Notes to Consolidated Financial Statements, the company enters into arrangements that may include any combination of hardware, software or services.

As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including how many performance obligations are present in an arrangement, whether

they should be treated as separate performance obligations and when to recognize revenue and under what method for each performance obligation.

Accounting rules governing income taxes require that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.

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The company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting such amount, if necessary.

The realization of the company’s deferred tax assets is dependent on the ability to generate sustained taxable income in various jurisdictions.

The realization of the company’s deferred tax assets 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.

See “Item 1A.

Risk Factors.” 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.

See “Risk Factors” (Part I, Item 1A of this Form 10-K).

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.

As a result, the company’s provision or benefit for taxes may vary significantly from period to period depending on the geographic distribution of income.

Internal Revenue Code Sections 382 and 383 provide annual limitations with respect to the ability of a corporation to utilize its net operating loss (as well as certain built-in losses) and tax credit carryforwards, respectively (Tax Attributes), against future U.S.

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The company regularly monitors ownership changes (as calculated for purposes of Section 382).

The company has determined that, for purposes of the rules of Section 382 described above, an ownership change occurred in February 2011.

The company has determined that, for purposes of the rules of Section 382 described above, an ownership change occurred in 2011.

Any future transaction or transactions and the timing of such transaction or transactions could trigger additional ownership changes under Section 382.

As a result of the February 2011 ownership change, utilization for certain of the company’s Tax Attributes, U.S.

As a result of the ownership change in 2011, utilization for certain of the company’s Tax Attributes, U.S.

net operating losses and tax credits, is subject to an overall annual limitation of $70.6 million.

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Based on presently available information and the existence of tax planning strategies, the company does not expect to incur a U.S.

cash tax liability in the near term.

federal cash tax liability in the near term.

The company maintains a full valuation allowance against the realization of all U.S.

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At December 31, 2023, the company determined this rate to be 5.70% for its U.S.

defined benefit pension plans, an increase of 286 basis points from the rate used at December 31, 2021, and 4.80% for the company’s non-U.S.

defined benefit pension plans, an increase of 307 basis points from the rate used at December 31, 2021.

defined benefit pension plans, a decrease of 34 basis points from the rate used at December 31, 2022, and 4.24% for the company’s non-U.S.

defined benefit pension plans, a decrease of 56 basis points from the rate used at December 31, 2022.

A change of 25 basis points in the U.S.

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pension plans was $1.02 billion and $400 million, respectively.

For the year ended December 31, 2022, the company recognized consolidated pension expense of $47.1 million compared with $553.9 million for the year ended December 31, 2021 (which includes a $499.4 million settlement losses).

For the year ended December 31, 2023, the company recognized consolidated pension expense of $391.3 million (which includes $348.9 million of settlement losses) compared with $47.1 million for the year ended December 31, 2022.

For 2024, the company expects to recognize pension expense of approximately $57.7 million.

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and other macro-economic factors that could impact the discount rate.

It is reasonably possible that the judgments and estimates described above could change in future periods.

It is reasonably possible that the judgments and estimates described above could change in future periods, which could have a significant impact on the fair value of the related reporting units.

During the fourth quarter of 2023, the company performed a quantitative goodwill impairment test for each reporting unit.

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These methodologies involve significant assumptions that are subject to variability.

Based on the annual impairment analysis performed during the fourth quarter of 2022, the reporting unit that was closest to impairment was the CA&I reporting unit with fair value in excess of book value, including goodwill, of 6%.

Based on the annual impairment analysis performed during the fourth quarter of 2023, all reporting units had a fair value in excess of book value.

The reporting units that were closest to impairment were the CA&I and DWS reporting units with fair value in excess of book value, including goodwill, of 10% and 16%, respectively.

All other reporting units had a fair value substantially in excess of book value.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis