Unisys Corporation (NYSE: UIS) — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021. Unisys is a global IT services and solutions company operating through Digital Workplace Solutions (DWS), Cloud, Applications & Infrastructure Solutions (CA&I), and Enterprise Computing Solutions (ECS). No customer represented more than 10% of revenue.
Financial results and key metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $1,979.9 million | $2,054.4 million |
| Gross profit / margin | $529.6 million / 26.7% | $572.0 million / 27.8% |
| Operating income / margin | $52.2 million / 2.6% | $154.0 million / 7.5% |
| Net loss attributable to Unisys | $106.0 million; $1.57 per diluted share | $448.5 million; $6.75 per diluted share |
| Cash from operating activities | $12.7 million | $132.5 million |
| Cash and cash equivalents at year-end | $391.8 million | $552.9 million |
| Total debt at year-end | $513.1 million | $529.4 million |
Revenue declined 3.6%; foreign exchange reduced the year-over-year comparison by 3.7 percentage points. International revenue fell 6.1% to $1.13 billion, while U.S. revenue was nearly flat at $854.9 million. Gross and operating margins contracted; management cited higher cost-reduction and other non-recurring charges, increased marketing investment, and the impact of non-strategic contracts exited in 2021. Interest expense was $32.4 million, down from $35.4 million.
Operating cash flow fell by $119.8 million, primarily due to changes in accounts receivable and other working-capital movements. Investing activities used $131.4 million, including $46.3 million for marketable software, $31.0 million for property additions and $8.6 million for outsourcing assets. Financing activities used $21.6 million. Approximately $274 million of year-end cash was held outside the U.S.; the company said about one-third of those funds may not be readily transferable.
Debt included $485 million face value of 6.875% secured notes due in 2027. The company had no ABL revolver borrowings, $6.3 million of letters of credit outstanding and $67.9 million of availability at year-end. It reported compliance with lending covenants and expected to meet them for at least the next 12 months. The $145 million facility expires in October 2025 and is subject to a borrowing base and other conditions.
Material changes and segment performance
- DWS: Revenue was $509.9 million, down from $574.5 million, largely reflecting the run-off of exited contracts and currency headwinds; gross margin was 14.0%, versus 13.8%.
- CA&I: Revenue increased to $520.3 million from $485.6 million, supported by digital platforms and applications and acquired application-development solutions; gross margin declined to 9.1% from 9.7%, with contract-exit expenses and higher labor costs cited.
- ECS: Revenue was $669.7 million, versus $685.7 million; gross margin increased to 64.5% from 63.4%.
- 2022 cost-reduction and related charges were $54.9 million, compared with $23.2 million in 2021. Components included asset impairments, contract-exit and idle-facility costs, workforce reductions, and costs of exiting foreign countries.
- The 2021 comparison included $499.4 million of defined-benefit pension settlement losses. This largely explains why the 2022 net loss was substantially smaller, despite weaker operating income and cash generation.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s stated strategy is to grow higher-value Next-Gen offerings, particularly in DWS and CA&I, and improve revenue growth, margins and free cash flow.
- Firm order backlog was $2.9 billion at year-end, down from $3.0 billion; approximately $1.3 billion, or 45%, was expected to convert to revenue in 2023. Separately, remaining performance obligations were approximately $0.7 billion, with about 31% expected to be recognized by the end of 2023. These measures have different stated scopes.
- Unisys reported significant underfunded defined-benefit pension obligations. It expected approximately $40 million of 2023 cash contributions, primarily to international plans; it did not expect mandatory U.S. qualified-plan contributions until 2025 based on estimates at year-end.
- For the first quarter of 2023, the company expected to use plan assets to transfer approximately $250 million of U.S. pension obligations through an annuity contract, with an estimated non-cash pre-tax settlement loss of approximately $200 million.
- Financial reporting controls: Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2022 due to material weaknesses in formal procedures for timely communication of information from IT and legal/compliance functions to accounting and governance. Remediation steps had been implemented, but operating effectiveness had not yet been demonstrated. The auditor nevertheless gave an unqualified opinion on the financial statements and an adverse opinion on internal control. Management said the weaknesses did not result in a financial-statement misstatement.
- Legal and regulatory exposure: A putative securities class action filed in November 2022 alleges misleading statements concerning projections, business prospects and internal controls. The filing also estimates up to approximately $109 million of unreserved Brazilian tax-related matters, excluding matters assessed as remote; potential losses beyond accruals for other proceedings were generally not estimable or were stated not to be material.
- Other notable risks include cybersecurity, competition and execution of the growth strategy, foreign exchange, contract profitability, pension funding, financing access and tax-attribute limitations. The annual goodwill test found no impairment, but CA&I fair value exceeded carrying value by only 6%, leaving sensitivity to future assumptions and conditions.
- Unisys recorded a $13.6 million write-down on a data-center facility held for sale. The sale had not been completed by year-end, and the company continued marketing the property.
Important facts for investors to verify
- Whether remediation of the material weaknesses is operating effectively and whether any regulatory, investigative, litigation or related costs increase.
- Whether operating cash generation recovers, given the sharp 2022 decline and the reduction in year-end cash.
- Whether CA&I growth and DWS stabilization improve consolidated margins, and how currency movements affect reported results.
- The timing and actual cash impact of pension contributions, and whether the planned annuity transfer proceeds on expected terms and produces the estimated settlement loss.
- How much backlog and remaining performance obligations convert to revenue, considering their different definitions and the possibility of cancellations.
- Developments in the securities lawsuit, Brazilian tax matters, facility sale and CA&I goodwill valuation headroom.