Unisys Corp (UIS) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to the Unisys Corporation fourth quarter and full year 2002 results conference call.

At this time all participants have been placed on listen-only mode, and the floor will be open for questions and comments following today's presentation.

If you should have a question or a comment, you may press the number 1 followed by 4 on your telephone keypad.

It is now my pleasure to introduce today's host, Mr. Jack McHale.

Sir, you may begin.

Well, thank you very much, operator.

And good afternoon, everyone.

Thank you for joining us today.

A half an hour ago Unisys released its fourth quarter and full year 2002 earnings report.

You can find today's earnings release on First Call and on Unisys Investor Website.

As we all know, the economic and IT spending environment was a real challenge in 2002.

Unisys managed through this environment and posted a solid performance in the fourth quarter and for the year.

Also during the year we continued to make important investments in our products, in our service business, in our brand and in our people.

With us today to talk about the quarter and the year are Unisys Chairman and CEO, Larry Weinbach and our Chief Financial Officer, Janice Haugen.

Before we begin, just a few housekeeping details.

First, we will be using some presentation cells this afternoon to guide the discussion.

These cells are available on our investor Website for viewing or downloading, and you can advance through them as Larry and Janet make their remarks.

Second, a recording of this conference call will be available shortly after the conclusion of today's live call.

The replay will be available for about ten days.

You can access this replay on the Internet by Unisys investor Website.

Finally, please note that all forward-looking statements made in this conference call are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

These factors are discussed more fully in the company's reports filed with the SEC.

Copies of these SEC reports are available from the SEC and from the Unisys investor Website.

Now let me turn the call over to Larry.

Thanks, Jack.

And good afternoon, everybody.

I also want to thank you for joining us today.

We have very strong results to report for our fourth quarter of 2002.

Strong earnings, strong margins and strong cash flow.

But before we get into the numbers, I'd like to step back for a moment and review with you our accomplishments in 2002 and give you a report card on the year.

Let me note that all prior year comparisons exclude the charges for the cost reductions and the early retirement of debt that we took in 2001.

First, please turn to slide 1 of the presentation materials. 2002 was an exciting year for Unisys.

This isn't something you're going to hear from any technology companies.

But for Unisys, 2002 was a year when we really demonstrated the value and the benefits of our services-led technology-enabled strategy.

We met or exceeded our stated earnings targets every quarter throughout the year.

We achieved a significant improvement in our services operating margins.

We achieved double digit revenue growth in our outsourcing business.

And we continue to build our base of long-term annuity contracts.

We launched the global advertising campaign that has been very well received in the market.

Part of a major new effort to build our brand awareness worldwide.

We continue to enhance and transform our skill base so that we have the right people and the right capabilities to communicate, sell and deliver at the highest level of client organizations.

In our consulting and systems integration business, we hired more than 100 experienced, high-level partners and principals from leading service firms.

These individuals have brought new leadership, new ideas, and new energy to our industry practices.

In our infrastructure business, we've brought on 300 security experts, experts to work with clients and strengthen our capabilities in the enterprise security market.

We now have a combined force of some 1,500 security professionals around the world, and they're helping us achieve a leadership position in this emerging market space.

In outsourcing, we brought on thousands of new individuals as part of long-term contracts and payment processing, insurance processing, mortgage processing and other processing areas.

In fact, of the 9,000 plus people we have working in outsourcing engagements today around the world, about 5,000 of these individuals have transitioned to Unisys over the past several years under our new outsourcing contracts.

So we've made a massive change in our skill set.

And this has had a major impact on our culture and our ability to compete in the marketplace.

These were just some of the highlights of our accomplishments in 2002.

Overall, we turned in a strong, consistent performance in eye challenging spending environment for IT services and products.

So let's now turn to slide 2.

This gives our final report card for 2002.

This is the kind of report card you feel pretty good about.

Goal 1 was to accelerate growth in our long-term annuity-based business.

We did that.

We grew our outsourcing revenue by 13% in the fourth quarter of 2002 and 11% in 2002 overall.

This growth was driven by substantial double-digit order growth in business process outsourcing and it managed infrastructure services.

We also continued to build our backlog of long-term annuity-based business.

After a weak first half of 2002 in terms of service bookings, we really picked up the pace in the second half of the year, winning a number of very significant long-term services contracts.

As a result, we ended 2002 with service backlog of $6b, up 5% over our year-end 2001 service backlog of $5.7b.

We also closed 2002 with an additional $2.9b of unfunded backlog based on orders we've received from agencies of the U.S. federal government.

And this, too, is up, up from $2.8b of unfunded government backlog at year-end 2001.

The $2.9b includes about $500m for our TSA contract even though the contract has a $1b order potential.

Goal 2 in 2002 was to expand our security solutions program, to enhance our capabilities in enterprise security, and to establish a leadership position in this emerging market.

We achieved this goal.

We introduced the comprehensive new security methodology called zero GAAP planning.

We also won a number of significant security engagements including a landmark contract with the U.S.

Transportation Security Administration, and that contract is to implement a new nationwide network to help improve security throughout the country's transportation system.

Goal 3 was to drive profitable growth in our systems integration and consulting business.

To turn around the margins in this business, and to do so in the myths of a continued industry-wide slump in the systems integration and consulting market.

We met this goal as well.

We achieved a significant improvement in the margins of our systems integration and consulting business.

We also saw double-digit revenue growth in the fourth quarter, driven primarily by work in our federal business.

So while the systems integration and consulting market remains challenging, and we haven't seen a broad base pickup in demand, we're making great progress in improving our own practice economics and positioning this business to benefit when demand trends improve.

Goal 4 for 2002 was to accelerate sales of our ES7000 line of high-end Intel base servers.

We fell short of this goal.

As full year sales of our ES7000 servers were flat with 2001 sales levels.

However, we did see a pickup in the fourth quarter.

With our ES7000 revenue up double digits over the year-ago quarter.

In fact, the fourth quarter of 2002 was the best quarter ever for sales of the ES7000 since we started the program.

We hope to build on this fourth quarter momentum as we move into 2003.

Overall, we achieved about $120m of ES7000 sales in 2002, and our goal is to increase this by about 50% in 2003.

Goal 5 in 2002 was to maintain tight cost controls.

Here again, the people of Unisys did a great job.

We reduced SG&A expenses by 8% in 2002.

Slide 3 shows the progress we've made in reducing expenses.

Over the past three years, we've taken out about $400m of SG&A expenses from our cost base and we'll continue to place a strong focus on cost control in 2003.

This is one goal that never disappears from our list of objectives year to year.

Turning back to our 2002 report card, which is now slide 4 in the presentation materials, you can see that our final goal for 2002 was to significantly increase our earnings per share.

Despite the business environment we stuck to this earnings guidance throughout the entire year of 2002.

We grew our earnings sequentially over the course of the year, and we ended with full year 2002 earnings per share of $.69.

This was at the higher end of our targeted EPS range of $.67 to $.70, and it was up 44% from our EPS in 2001.

For those of you who followed us for any length of time, you know that it's been my goal from the very first day that I came here to bring greater consistency and greater predictability that the company's results through the strategy we've been pursuing, and I think we demonstrated that with our results in 2002.

The credit for this performance goes to Unisys people around the world, people who work so hard in 2002 to serve clients, close deals, bring in cash and reduce costs to have a tough challenge in meeting our corporate goals and delivering consistency in such an uncertain global environment, and they delivered.

Let me add that we achieved our earnings growth in 2002 despite a lower contribution from pension income.

Our pension income contribution declined to $144m in 2002 from $170m in 2001.

So we really had to overcome two major drags to earnings in 2002.

The weak I.T. spending environment and lower pension income.

And despite these, we've achieved a solid improvement in our margins and in our earnings.

Slide 5 shows the improvement we've made quarter by quarter in our operating margins over the past 18 months.

Starting from a low of about 3% in the second quarter of 2001, we've steadily improved our margins, and we achieved a 9.7% operating margin in the fourth quarter of 2002.

We still have work to do.

We need to get our long-term goal of a company-wide operating margin in the 11 to 12% range.

But step by step, we're getting there, and all of us at Unisys are very excited by the progress we've made in the profitability of our business.

While our technology business remains a very critical generator of profits for Unisys, the key driver behind our profit improvement has been the progress we've made in our services business.

Slide 6 shows the margin progress we've made in our services business over this 18-month time period.

We've steadily increased our services operating margin from about break-even in the second quarter of 2001 to an operating margin of 7.1% in the fourth quarter of 2002.

Our long-term goal is to get our services operating margin into the 10% to 12% range, and that would make us competitive with best in class service firms in the marketplace.

As a result of this progress in our services margins, Unisys is a much more balanced company in terms of where we generate our profits.

In 2002, about 60% of our operating profits came from our services business.

This compares to year 2001 when only about 35% of our operating profits came from our services business.

This profit balance is critical, since the majority of our revenue today comes from services.

In 2002, services represented 76% of our revenue, with technology comprising 24% of full-year 2002 revenue.

So our profit composition today is much more reflective of our services-led technology-enabled business model.

At the analysts meeting in December, I spoke about two factors that are driving our progress.

These factors, which you can see on slide 7, are focus and execution.

Focus, of course, begins with strategy.

And we've been pursuing a highly focused strategy at Unisys for a number of years now.

Our strategy is quite straightforward.

We pursue value-added business opportunities where we can apply our end-to-end solutions and capabilities to differentiate ourselves from the competition, to deliver clear value to clients, and achieve our targeted profit margins.

As you can see in slide 8, we pursue this value-added strategy in a highly focused set of industries.

We focus on five industry markets on the global basis.

They’re financial services, the public sector, transportation, communications and commercial.

In terms of our business portfolio, we focus on five core competencies that you see on the right side of this chart, our core competencies are systems integration, outsourcing, infrastructure services, server technology and consulting.

In our view, these focus markets and these business areas afford us the greatest potential for profitable revenue growth, and that's our overriding objective next to serving our clients, to build a base of high-quality business that will allow us to grow our profits steadily over a long time period.

The other key factor in our progress is execution.

It's not enough to have a highly-focused strategy.

You have to execute the strategy relentlessly with precision, day in and day out.

And our management team and the entire work force is doing a very good job executing our value-added strategy.

We've executed a dramatic change in our business mix toward higher value-added business and away from low-margin commoditized areas in the marketplace.

We've walked away from about $2b of low margin commodity based revenue in our services and technology business over the past several years.

It's not easy walking away from $2b of revenue, but these moves have been instrumental in our margin improvement, and they've also kept us away from areas in the market that have been hardest hit by the weak economy and dot com implosion in the past couple years, so we're focused, executing well, and this is yielding a dramatic improvement in our financial results.

I was particularly pleased with the way we closed out the year.

Our fourth quarter results met or exceeded our financial targets and particularly in the area of cash flow.

Slide 9 shows our financial results for the fourth quarter.

I'm not going to go through every line on the chart, but I would like to highlight a few items.

First, our services revenue grew 4% in the quarter.

This was driven by double-digit growth in outsourcing and systems integration.

Our outsourcing growth was driven by strong growth in business process outsourcing and managed infrastructure services.

In systems integration, we saw strong revenue growth in our federal business.

Our other market sectors, including financial services and non-federal public sector markets remain weak.

We do not yet believe the market for systems integration projects has turned.

Still, relative to most other players in this market, our systems integration business performed well in 2002.

Our revenue in this business was down only 1% for the full year.

Moving on to margins, you can see the operating of margin improvement we've made in our services business in the fourth quarter.

Much of this was driven by the improvement we've made in our systems integration business.

Our technology business also sharply increased its operating margins in the quarter, driven by our richer mix of software sales in our clear path business.

Overall, we achieved an operating profit margin of 9.7% in the quarter.

And that was more than double the 4.8% operating margin of the year-ago quarter.

And at the bottom line, we achieved earnings per share of $.27 in the quarter, which was up 145% from the $.11 we earned in the fourth quarter of 2001, excluding the charge we took in that quarter.

Turning to slide 10, I'd like to briefly comment on two other areas in the fourth quarter; cash flow and orders.

We had a very strong cash performance in the quarter.

We generated $255m of cash flow from operations, and we increased our cash position by $136m in the quarter.

On a full-year basis, we achieved operational cash flow of $325m in 2002, up 60% from our operational cash flow in 2001.

And this was after absorbing $104m of cash paid out in 2002 for past restructuring actions.

We also achieved positive cash flow from operations in every quarter throughout 2002.

We've placed a strong focus on cash throughout the company, and I'm very pleased with the progress we're making.

In terms of orders, our overall orders in the quarter showed mid-single digit declines from a year ago.

However, on a sequential basis, our orders were up nearly 50% compared to the third quarter of 2002, so it really was a pretty strong quarter for us in terms of order bookings.

We closed nearly $800m of long-term business process outsourcing and manage infrastructure services contracts in the fourth quarter.

Slide 11 shows the major contracts that we booked in the quarter in our services businesses.

In business process outsourcing, we received a very significant seven-year contract in the fourth quarter from Washington Mutual, and this contract was for payment processing.

It is our first major payment processing outsourcing contract in the United States.

As you know, we've been successful in establishing leadership and payment processing in the United Kingdom and Australia, and now we're expanding into the very significant U.S. market.

We also received our first payment processing BPO contract in Malaysia from MayBank, that country's largest bank.

And we continue to target other promising geographic locations for expanding our payment processing business.

In Australia, we received a seven-year BPO contract from Rams Home Loans for mortgage processing.

This is our first mortgage processing outsourcing contract in that country, and here again, we see tremendous opportunities for growth in mortgage processing around the world.

In managed infrastructure services, we received a long-term award from the Bavarian Ministry of Justice, the largest state in Germany.

We won this contract against intense competition from firms across Europe, and it gives us a foothold in the largest IT services market in Europe, where we haven't had a significant presence.

Let me add that many of these contracts are coming from new clients, Washington Mutual, Ram's Home Loans, the Bavarian Ministry of Justice.

These are all new clients who have not done business with Unisys before.

We're also winning some significant new business in our systems integration and consulting business.

In 2002, Unisys was awarded more than $20m contract from Nextell Communications.

The contract was for voice messaging solutions and services so we can help Nextell accommodate their growth in their largest markets.

Our communications applications platform will replace Nextell's existing platform in these markets.

Our system will support Nextell's voice mail customers nationwide, and it will provide a platform for launching additional revenue-generating services such as speech solutions and multimedia messaging.

This is an exciting new U.S. client for our communications business.

We've also started 2003 by booking a seven-year, $56m outsourcing contract in the City of Minneapolis, and this will be to manage the city's complete I.T. infrastructure from its data center to its desktops, networks and mobile devices.

So while the global business environment hasn't gotten any easier, we're winning our fair share of contracts that are steadily adding to our client base and our backlog of services business.

We're also winning many exciting contracts in our technology business.

You can see some of these client names on slide 12 of the presentation material.

I've mentioned in it is past that we view our ES7000 business as an important generator of new clients that's allowing us to expand our customer base for our technology products.

In 2002, about 40% of our ES7000 sales went to brand-new Unisys technology clients.

Some of these new client names include Minolta Europe, Molina Healthcare, Die Haut Sue(ph.) of Japan, and Paramount Pictures.

Another new ES7000 client is Jet Blue, the three-year old airline based in New York city that flies along the east coast and also to selective cities on the West Coast.

To deliver its goal of low cost players with high-quality customer service, Jet Blue came to Unisys for high-end server technology, running Microsoft software.

The airline recently purchased two Unisys ES7000 systems to run a number of missions critical applications.

We won this new account, and many of the other new accounts I mentioned working jointly with Microsoft so our joint marketing efforts are working.

And while we'd all like to see things moving at an even faster rate, we're excited by these new client wins, and we believe the ES7000 will be a winner in the marketplace.

As we focus on ES7000 for future growth in the technology business, ClearPath remains the bed rock of this business.

We continue to see good customer reception of our new CNP base models, and ClearPath was a major contributor to our profitability in the fourth quarter and the full year of 2002.

Obviously, our first focus with ClearPath is satisfying the needs of our existing client base.

But we also focus on new customers, primarily through the applications that run on ClearPath.

For instance, because our voice messaging solution runs on ClearPath, Nextell is also a new client for ClearPath.

Some other ClearPath clients that we won in 2002 include Shangewau Bank in Taiwan, Datavary(ph.) in Korea and about a dozen new community banks that we won through our software partnership with ITI.

So in addition to winning new clients and services, we're expanding our client base and our technology business, and this is a very encouraging sign that we're bringing the right offerings to the marketplace.

Turning now to slide 13.

I'd like to close my remarks today by providing our financial outlook going forward.

We go into 2003 with momentum, we're winning significant new contracts around the world, expanding our client base, and expanding our margins and profitability.

Obviously, we continue to operate in a challenging business environment, with constrained spending on IT services and technology.

We're not looking for IT spending to increase dramatically in 2003.

And our assumptions at this point are for a gradual improvement in spending levels, particularly later in the year.

We also continue to work against the declining base of pension income.

Based on market conditions in December, we now estimate that our pretax pension income of 2003 will be about $30m, which is down $114m from pension income in 2002.

That $114m decrease in pension income amounts to approximately $.23 per share.

Despite this, we expect double-digit growth in our earnings per share in 2003 with full-year 2003 earnings per share in the $.77 to $.82 range.

For the first quarter of 2003, we look for earnings per share in the $.11 to $.13 range.

In terms of revenue, we look for our revenue to start out relatively flat, maybe up a point or two in the first quarter of 2003 compared to the prior year.

We expect to see slight growth in services in the first quarter driven by outsourcing while technology revenues should be down slightly from a year ago.

We expect revenue growth to increase as we move through the year, leading to a mid-single digit revenue growth for the full year of 2003.

About a couple points of this growth will come from our new contract with TSA.

So we're looking for a solid year in 2003.

With continued earnings growth as well as modest growth at the top line for the full year.

While we're very excited with our performance in 202, we're now focused on the new year, and we believe we're well positioned to continue our progress in 2003.

Now I'd like to turn the call over to Janet Haugen, our Chief Financial Officer, for more details on our financial results for the fourth quarter and the full year.

Thank you, Larry.

And hello, everyone.

I appreciate the opportunity to speak with you today.

At our last conference call in October, I spoke about the focus and discipline that Unisys people were demonstrating in the marketplace and how this focus and discipline was paying off in terms of improved profitability, financial consistency and predictability.

Our results this quarter show that same level of intense focus and discipline, despite the tough business environment, we are meeting our financial targets and showing that we are committed to winning in the marketplace.

In my remarks today, I will cover four areas.

First, I'll provide additional details on our results in the quarter.

Second, I'll provide an overview of our full-year 2002 revenue compositions.

Third, I'll cover accounting for pensions.

And finally, I will review our cash flow performance in the fourth quarter of 2002 and give you our view on cash flow for 2003.

Starting with an overall perspective on geographic and market sector trends that we saw in the fourth quarter, please advance to slide 14.

From a geographic perspective, the United States and Asia-Pacific were the most resilient in the fourth quarter.

Europe remained weak in the quarter as the economic conditions there continue to be difficult.

And in addition, we continue to face challenges in Latin America due to the economic and currency issues there.

From an industry perspective, our strongest market continues to be the U.S. federal sector as agencies work to enhance security and improve operational efficiency.

We also saw some strength in the transportation market in the fourth quarter.

And financial services, we continue to see a mixed environment, outsourcing opportunities are holding up fairly well in this environment as financial institutions work to cut costs and improve productivity.

However, we continue to see weak demand by financial institutions for project-based work such as systems integration and infrastructure services.

Slide 15 shows how our geographies performed in the fourth quarter in the terms of order and revenue.

Starting with orders, our U.S. orders were very strong in the quarter, led by our breakthrough payment processing outsourcing.

Depending on the timing and geographic location of our outsourcing contract wins, we can experience significant swings in our geographic order performance measured on a quarterly basis.

For example, in the fourth quarter of 2001, we booked a large outsourcing contract in our U.K. business.

As a result, on a comparative base, our international orders in the fourth quarter of 2002 showed substantial year over year declines with order declines in Europe and in Latin America.

However, we did see year over year order gains in Asia-Pacific.

On a revenue basis, our U.S. revenue increased 8% in the fourth quarter, driven by growth in our federal government business.

Revenue from international markets declined 6 percentage points in the quarter.

Internationally, we saw slight declines in all regions except for a double digit decline in Latin America where we continue to be impacted by the economic and currency weakness.

Compared to the prior year, currency had about a 1 percentage point positive impact on our fourth quarter revenue.

For the full year, currency had no negligible impact on revenues.

Using year end 2002 rates, we expect currency to have about a 3 percentage point positive impact on revenue in the first quarter of 2003.

Now, moving to our expense trends in the fourth quarter, please turn to slide 16.

We continue to aggressively control costs.

We reduced our SG&A expenses by 10% in the quarter as we continue to benefit from cost-reduction actions and process improvements throughout the company.

SG&A expenses represented 16.7% of revenue in the fourth quarter compared to 18.5% of revenue in the fourth quarter of 2001.

For the full year of 2002, our SG&A expenses represented 17.7% of revenues.

We continue to work towards our target of full year SG&A in the 17% of revenue range, and we believe we will get there with improved economic conditions and volume.

Our head count at the end of the year was about 36,400, which is down about 2500 positions from the beginning of 2002.

And this is net of new hires and employees who have joined Unisys as part of our new outsourcing contract.

Our research and development expenditures in the fourth quarter were $81m compared to $79m in the year-ago quarter.

For the full year of 2002, R & D expenses declined to $273m from $304m in 2001.

As I noted in my remarks last quarter, our lower R&D levels in 2002 reflect changes we've made in our processes to improve efficiencies, consolidate software initiatives and make use of lower cost offshore development capabilities.

We continue to invest in our high-end server technologies and in key solution programs within our industry practices.

R&D represented 4.9% of our overall revenue in 2002.

And within our technology business, our technology-related R&D represented about 14% of our technology revenue in 2002.

So we continue to invest heavily in innovation.

At the operating profit line, we reported overall operating profit margin of 9.7% in the fourth quarter.

This was up about 5 percentage points from our 4.8% margin in the year-ago quarter.

I'd like to now provide just a few slides showing how our full year 2002 revenue breaks down by geography and by business.

Slide 17 shows our 2002 revenue by geography.

North America represented 46% of our revenues for the full year, while international business represented 54% of our revenues.

Slide 18 shows our 2002 revenue by business segments.

Services revenue for the full year declined 4%, and represented 76% of our revenues for the full year.

Technology revenue represented 24% of our revenue in 2002 and declined 16% year over year.

Slide 19 shows our 2002 services revenue of $4.3b by each business.

Outsourcing revenue grew 11% in 2002 and represented 34% of our services revenue in the year.

Systems integration and consulting revenues declined 1% in the year, and also represented 34% of services revenue in 2002.

Please note that within the services business, the area we used to refer to as network services is now called infrastructure services.

This is project-based work that we do in the areas of network design and implementation, desktop support and other IT infrastructure services.

This revenue represented 19% of our services revenue in 2002 and declined 24% in 2002, reflective of the weakness in project-based infrastructure work industry-wide and the continued movement toward long-term managed outsourcing contracts.

Our infrastructure services revenue in 2002 was also impacted by our continuing de-emphasis of low margin commodity-based hardware content in infrastructure contracts.

Finally, poor maintenance represented 13% of our services revenue and declined 4% in 2002.

Moving to technology, slide 20 shows 2002 technology revenue of $1.3b.

Enterprise servers declined 9% in 2002 and represented 72% of our technology revenue.

Within this area, ClearPath showed modest declines for the year, and sales of our ES7000 family of Intel-based servers were flat in 2002.

Specialized equipment, which represented 28% of technology revenue in 2002, declined 30% during the year.

This primarily reflected lower sales of third-party equipment in various areas of the world.

Now I'd like to spend a few minutes discussing pension accounting and the funding positions of our defined benefit pension plan.

Slide 21 provides an overview of this discussion.

Our pretax income in the fourth quarter of 2002 included $35m of pension income.

This was down $8m from the pension income contribution in the year-ago quarter.

Overall in 2002, our pretax pension income declined to $144m, compared to $170m in 2001.

Our 2003 expectation is for pretax pension income to decline to approximately $30m.

The major driver in these changes is the performance of the debt and equity market and their impact on the fair value of pension plan assets as well as the impact on two significant actuarial assumptions used in the determination of pension income.

The discount rate, which is the rate used to present value of future obligations, and the expected long-term rate of return, the rate used to estimate the earnings ability of the pension assets.

The principal reason for the $26m decline in pension income in 2002 was a change in our expected long-term rate of return in our U.S. pension plan, which is our largest pension plan worldwide.

The long-term rate of return on this plan declined to 9.5% in 2002 from 10% in prior years.

The $114m decline in pension income for 2003 from 2002 results from 3 principal reasons.

First, our worldwide defined benefit pension assets decline, consistent with the global equity market decline in 2002.

In the U.S., our largest plant, plan assets went from $4.3b to $3.57b in the year.

This results in less investment income.

Second, given the downward trend in global debt and equity markets, we are reducing our expected long-term rate of return on assets assumptions.

In our U.S. plan, this rate will decline to 8.75% in 2003 from 9.5% in 2002.

This significantly reduces the level of pension income.

Third, the market conditions also caused a significant reduction in the discount rate used to calculate the present value of our pension plan liability.

For our U.S. plan, the discount rate declined to 6.75% at December 31, 2002, from the 7.5% discount rate we used at year-end 2001.

This decline in the discount rate significantly increases the present value of the plan liabilities and negatively impacts pension income.

This expected $30m of pension income for 2003 is significantly lower than the $100m estimate we provided at the time of our analysts meeting in early December.

Those estimates were based on preliminary actuarial information as of November 30.

As you know, the global debt and equity markets declined in December.

This caused a significant decrease in plant assets as well as changes to our 2003 discount rate and long-term rate of return assumptions.

Despite the very significant reduction in pension income, we still believe we can achieve double-digit growth in our 2003 earnings per share as Larry discussed.

As a result of all these factors at December 31, 2002, all of the company's defined benefit pension plan were in a minimum liability position.

This occurs when the fair value of plant assets is less than the pension plan liability.

The accumulated benefit obligation, the ABO, as it's known.

In accordance with U.S. accounting rules, this required us to eliminate our prepaid pension assets from our December 31, 2002, bs.

And we also had to report a $728m pension liability, which can also be seen on our bs.

And we reported an after-tax charge to stockholders equity of $1.5b.

As previously disclosed, this will have no effect on the company's net income, liquidity, cash flow, credit arrangements or debt security.

In 2002, the company contributed cash of $42m to its defined benefit plans worldwide.

And we expect this contribution to be about $60m in 2003.

The company is not required to make a contribution to its U.S.-defined benefits plan, it's largest plan, in 2003.

Now, moving to cash flow and balance sheet highlights, please advance to slide 22.

We had strong cash flow performance in the fourth quarter.

We generated $255m of cash from operations in the quarter after absorbing $17m of cash for prior restructuring actions.

For the full year of 2002, we achieved operational cash flow of $429m before the $104m that we paid in 2002 for prior restructuring actions.

On a net basis, after absorbing these restructuring payments, we achieved operating cash flow of $325m, which was up $122m, or more than 60% from our operational cash flow in 2001.

Our better than expected cash performance in the fourth quarter was driven by a worldwide focus on cash collections and solid management of receivables and inventory.

We achieved an eight-day improvement in DSO in the quarter compared to a year ago.

An inventory turnover increase by two terms to reach 13.2 turns per year.

Total capital expenditures for the year were $336m, while CAPEX was basically flat from last year, we increased the percentage of capital expenditures spent on direct revenue generating assets to 77% in 2002, up from 61% in 2001.

Depreciation and amortization was $82m in the fourth quarter of 2002, compared to $107m in the year-ago quarter.

On a full-year basis, depreciation and amortization was $298m, compared to $318m in 2001.

We ended the quarter with no borrowings against our revolving credit facility, and with the strong cash flow performance in the quarter, our cash position increased by $136m in the fourth quarter, and we closed 2002 with $302m of cash on hand.

Our total debt as of December 31 was $830m, essentially flat with total debt at year-end 2001.

As we look ahead to 2003, we are currently targeting full-year operational cash flow of about $325m to $350m.

This is after absorbing cash payments of about $60m for restructuring actions.

Our expectations for CAPEX for the full year of 2003 is in the $325m to $350m range.

And our expectation for G&A for 2003 is in the $310m to $320m range.

In closing, this was a very solid quarter for Unisys.

In a very tough environment.

We continue to show good execution of our value-added business strategy as well as tight cost control.

We, again, significantly increased our margins and profitability.

We showed strong cash flow improvements.

I continue to be pleased by the discipline and focus we are showing throughout our operations as we work through this tough business period.

And now I'd like to turn the call back to Jack.

Well, Janet and Larry, thank you very much for those comments.

Operator, we'd now like to open the call for questions.

Thank you.

The call is now open for questions.

If you do have a question or a comment, you may press the number 1 followed by 4 on your telephone keypad.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Once again, that is 1 followed by 4 for any questions or comments at this time.

Our first question is coming from John Jones of Wit SoundView Technology.

Please go ahead with your question.

Thanks.

Larry, nice quarter, by the way.

My questions relate to the 100-plus partners that you've added to the business, and the success you're having right now in both the outsourcing business and the systems integration business.

Can you correlate the actions you've taken on those higher -- hires to the success you're having in SI and outsourcing, or are they driving both of these businesses, or is something else driving SI or is something else driving outsourcing, I guess?

John, let me begin by saying that to be successful in outsourcing, particularly the nature of the outsourcing that we do, you need to have domain knowledge.

We need to have industry skills, and we need to have the competency and capability in systems integration in order to design the front end of these systems as we move them into outsourcing so that they can be profitable to us.

These people that we're hiring all have either industry -- strong industry skills or strong competencies which bring -- they can bring the bear on systems integration, and that's what's enabling us to also move aggressively in outsourcing.

We didn't have enough of those skills before, and with this 100-plus people, we're now able to cover the marketplace much better.

So there's no question that this has been an integral part of some of the successes we've had.

The second part of it is, these people also have now learned our common methodology, but are moving in on some of the jobs where we needed to get people with more experience in some of these areas, and they are helping us.

So a few of the problem jobs, thief been able to jump in, and we had significantly reduced the number of jobs that have potential problems.

So we're really getting the benefit of these people on two sides.

So is the SI -- is the SI success more than federal, or –

The major part of the SI success is federal.

But the way we put the numbers together is if we get an outsourcing and SI helped in the outsourcing, we treat that as outsourcing.

If there's a separate, distinct SI engagement, then what we do is treat that as SI.

So there is an interrelationship between the two, and yet, you know, for external reporting, we give it to you in two buckets, John.

Thanks.

Nice quarter.

Thank you.

Our next question is coming from Steve Milunovich with Merrill Lynch.

Thank you.

First is there a point at which you might voluntarily put money in to be fully funded, or at what point will you be forced to do so?

And second, $.23 year to year hits obviously very significant.

So could you help us kind of understand -- I mean, otherwise you would have had over 50% earnings growth.

So could you help us understand what it is in, say, the gross margin improvement or suspensions that allows you to have double-digit earnings growth while taking that $.23 hit?

Well, first, Steve, we did have a 44% earnings growth in this year, and we did that with absorbing $34m pension reduction.

So you know, we've been through a little bit of this -- not quite of the same size.

First off, from a fully funded standpoint, could there come a time?

Sure.

There could come a time.

I mean, we're following generally accepted accounting principals.

Whether we agree with them or not, that’s what we have to follow, there could come a time when it gets very implicated in pensions.

But when the different attributes that we have to deal with say that funding is required.

And if funding is required, we obviously will fund it.

We have funded?

Small amounts, as Janet mentioned, when that was needed.

As far as an operational standpoint, I think you've got to look at some of the accomplishments that we've made.

Number one, look at where we've gone with operating margin, particularly in the service business.

Look at the operating margin that we're able to accomplish particularly in the fourth quarter in our technology.

Take a look at the chart we showed you and what we've been able to do with SG&A.

We've talked about maybe a modest single-digit growth in revenue, there will be some revenue, but certainly the TSA contract, which is going to contribute a couple points of that, makes a difference.

So we look at this, sure, there's always challenges when you look at the environment here.

But we wouldn't come out with a number if we didn't feel like this was something that we were targeting for the year.

Does that answer your question?

Yes.

Thank you.

You're welcome.

Our next question is coming from Jim Kissane of Bear Stearns.

Please go ahead with your question.

Thanks.

Larry, can you elaborate why you're making the year so back end loaded and can you kind of hit on each one of the different business lines in terms of that, on the services side, is it primarily due to the ramp of the new contract signings?

Well, first off, I don't think we're making it, you know, so back-end loaded any different than if you look at where we were in 2002, Jim, you know, the fourth quarter in this industry tends to be the strongest quarter.

And you can look at that and see what our revenue is and our earnings are in the fourth quarter.

If you look at the first quarter we gave an estimate of $.11 to $.13.

We earned a year ago $.10 in the quarter.

If you look at that, it goes somewhere between 10%, 20%, maybe a 30% increase.

I mean, that's pretty sizeable to me when I look at the increase in the first quarter.

So I think you look at our Historical patterns, and I think you'll see that we are building off of those same kind of historical patterns.

Secondly, when you look at the business that we have in house, certainly the TSA contract we've been working along, we'd love to see the government fund or actually create a budget and then create funding, but nevertheless, even in spite of that, we still look for, you know, some increased revenue -- last year we had nothing in the first quarter.

We see some coming in the first quarter and throughout the rest of the year.

So I don't think that the quarterly mix is any different than we have experienced before.

And as we mentioned, we think that there will be some gradual pickup in IT spending in the second half of the year, and that's where, you know, over and above the couple points we get from TSA, we see some of the increase coming into our revenue.

Okay.

Great.

And if I can just get a detailed question to Janet, Janet, can you break out the services revenue by the different lines in term of the growth?

You gave them for the full year in the slide, but can you break out systems integration growth, outsourcing, infrastructure and core maintenance?

Sure.

You're talking about for the fourth quarter of '02 comparison to a year ago?

That's right.

In the systems integrations space, we saw low double-digit the increase in revenue in the fourth quarter.

We saw double-digit growth in outsourcing, core maintenance was down about 4% consistent with the full year, and then in the network services area, that was down double digits year over year.

So strong performance in systems integration and outsourcing both up double digits, low double digits.

If you can do the same for technology, you know, servers and specialized technology.

Right.

In the total server business, we saw declines in the magnitude of the high single digits, low double digits range, and specialized equipments is down low double digits.

So technology overall was down 12% year over year.

Very similar patterns between servers and specialized equipment.

Okay.

Great.

Thanks, Janet.

Our next question is coming from Ashwin Shirvaikar with Salomon Smith Barney please go ahead.

Thanks for taking the question.

Nice quarter.

Could you comment on, you know, the recent announcement that you had in your subsidiary in Japan, you know, 30% work force cuts, is it likely to have maybe a particularly strong impact in Q1 given the seasonality of the business?

Ashwin, there was -- as that was reported in the press, it was somewhat inaccurately reported in the quarter.

It was not a layoff.

It's related to, first, the continuing actions of the early retirement that we had discussed before.

But as is common within Japan, there is sometimes movement of employees from one subsidiary to another.

And as a result of moving those employees with different benefit schemes in each of the different subsidiaries, you do see some cost benefits from that.

So there was not a 30% head count reduction as was reported in the press.

There is a movement about that equivalent size amongst different subsidiaries within NUL, and there was no charge in the quarter taken for that.

Okay.

Another question, it seems like security solutions is becoming a strong initiative for you guys.

So you know, what are the expected margins in that business as that grows?

Well, the -- we have about a half a dozen or more actual firm contracts in–house, the backlog is probably somewhere between $50m to $100m today in those security engagements.

I can tell you the margins are good.

The margins are where we would like all of our SI work to be.

It's pretty much across the board in the 20’s, but, you know, we think on some of the consulting we will even get higher margins because of the expertise that we have there, Ashwin.

Okay.

And I have a final question.

With regards to the range required for EPS, $.77 to $.82, just looking at the extremes of that range, what needs to happen for $.77, what are the assumptions for $.82?

Well, if you give me a wonderful market, we can go to $.82 or above, and if you give me the kind of market we're living in right now, we will, know, we'll still be in the range but at the lower end of the range.

We have forecasted, in looking at this, that the market will pick up in the second half of the year.

The revenue forecasts that we put together, although it's mid single digits, about a couple points comes from TSA as I mentioned before.

So we're not looking for runaway growth, but if we get a year like this and we find that even that number is a little optimistic, it will be on the lower end.

Okay.

Thank you.

Our next question is coming from Greg Gould of Goldman Sachs.

Please go ahead with your question.

Hi.

Thanks.

Larry, to follow up on one of the earlier questions on the -- with the pension income decline, can you just elaborate a little bit more on what specific cost initiatives are in place to give you the confidence to offset that decline?

Well, first off, Greg, we're down about 2500 people from where we were a year ago.

Secondly, as I mentioned before, you look at the operating margins and the sequential growth, you won't see every quarter a guaranteed improvement in that.

But as the year goes on, you will see improvement year over year in our operating margins, particularly in our services business.

Thirdly, I think we have proven and have a history of showing that we can manage our costs within the company.

We've taken down, you know, roughly $400m in SG&A.

So looking at, you know, controlling head count, assuming that we don't see major pickup in revenue, looking at our SG&A costs, looking at the margin improvement that we're getting because of the new hires that we've brought on and the competency of the people, and by the way, we probably will hire another 30 or 40 partner principals over the course of this year, so we're not done doing that yet, we believe that we can be in that range.

Okay.

And then one other question.

Sales cycles and pricing for BPO deals, any change?

In industry trends?

There's no change.

I mean, it's still taking a long time to close deals.

Some of these deals that used to close or should close in a 9-month cycle probably go 15 to 18 months.

So that cycle, Greg, continues to be a long cycle.

As far as pricing goes, you know we have looked for deals where we can bring value, and we try to stay away from deals which are beauty contrast based on the lowest price.

We are not interested in being the low-cost provider because then what you're dealing with is change order after change order after change order.

That's not our style.

We're looking for a partnership relationship.

We also look very much at BPO as the way for us to go versus IPO.

We feel that IPO is very, very capital-intensive, whereas BPO really looks at what kind of value do you bring to the customer, to the client through your application.

So that's kind of how we see the market at this point.

But nevertheless, it is competitive.

It's rare.

I don't think ever that you go into a deal where you're the sole source.

Every one that we've got, we won through a competitive process.

Every one we're working on now, and there are a number, are also a competitive process.

Okay.

Thank you.

Thanks, Greg.

Our next question is coming from Bill Zinsmeister of Deutsche Banc.

Please go ahead with your question.

Bill Zinsmeister Hi, this question is for Janet and just asked a different way.

Take the mid-point of your '03 guidance, around $.80.

Just curious, what would be the assumed operating margin behind that?

Bill, what we have said all along and consistent with the guidance we gave at the analysts meeting, that as we go -- continue forward through 2003, we're looking for continual improvement in the operating margins of both the services and the technology business.

We didn't say it was going to be a straight line.

There may be some bumpiness to it.

But for the full year we expect to continue to expand at the operating profit line.

Okay.

Thank you.

Our next question is coming from Greg Gieber of A.G. Edwards.

Please go ahead with your question.

First, a question for Janet.

When you look at revenue for the fourth quarter in the U.S., you said it was up largely driven -- services driven by the federal sector.

If you backed out the federal sector, what happened to U.S. commercial revenue during this -- during the quarter?

Greg, when you we look at North American, particularly the U.S. commercial sector, it's essentially flat in the fourth quarter, so the 8% growth in North America, as I mentioned and within U.S. was really fueled by the growth in the federal business.

Was that mostly all TSA, or were there other areas?

No, it's driven by TSA.

However, we did have some nice wins, particularly the GSA area is one contract in particular that fueled an additional amount of growth.

Probably the second largest one.

Okay.

When we look at the margin improvements you've registered in services, so far are anticipating further improvements next year.

How much is that is coming because some of these large contracts you won a year ago are finally becoming profitable as you're moving down the cost curve and how much is just coming from sheer cost cutting?

Do you have any guidance or thoughts there?

Greg, I just want to reiterate, we do not take lost contracts, the contracts that we have been awarded in the past 18 months and what we're pursuing are internal [ Inaudible ] levels and for those to be profitable, not in a loss situation, but they are improving on profitability as they roll forward.

That's what I meant.

How much of that improved on profitability is driving the improvement in margins and how much is coming from other factors?

Greg, this is Larry.

Let me respond this way.

If you look at our outsourcing contracts, most of them record no profit for the first 6 to 9 months.

This is because we do not try and create a common gross margin that runs through the life of the contract.

We absorb all costs except for those directly transitioned costs to the client.

So as these things come on board we do get a kick-up in our margins because the contracts become profitable.

To go through all those and give you, you know, what piece of the kick-up, it's hard, because as we bring on new jobs, they don't have the same kick-up.

But we look at this and believe that we will begin to see the impact in 2003 of our new outsourcing contracts.

Okay.

Final question, look at the SG&A percentage, was most of that a decline there?

Was most of that G&A?

You were actually going to be increasing your marketing efforts, and just how far down with that SG&A be driven if there's no growth in the economy this year?

Our goal is to get SG&A down 17%.

We're not going to be happy till our overall is down 17%.

I believe we're at 17.7% -- 17.7% for the year, so we still have some work to do.

As you look at the SG&A, I mean, there's a lot of marketing.

There's a lot of advertising that we're doing.

And obviously, there's administrative expenses.

We look at all those expenses and try to come back and do some zero-based budgeting, you know, why and start right from the beginning.

Part of this where you can really control the business is in the presales.

And with these 100 new people we've brought on board, a lot of them are involved in the sales and also involved in overseeing the work.

So we get some benefits that we didn't have before.

And some of these are floating through our financial statements now.

So we think there's still more to go.

And with the additional people that we intend to hire this year we think we'll continue to see some more benefits.

Obviously, if revenue grows, it makes it a lot easier for that number to come down, but we're not basing everything on, as I mentioned before, a huge growth in revenue.

Okay.

A final question, you've obviously, from what you said in December, a little over a month ago, about a month ago, had a significant reduction in the pension income that you'll have in '03.

What of your guidance remains for same for the year, what exclusively are the offsets?

Well, I've had two questions on that already and responded on it.

The offsets are better operating margins, control over our costs, bringing these new people on, which is helping us in some of the jobs which are low margin, which will give us additional margin because we've got more confidence in dealing in these areas, some of the outsourcing contracts which are through the startup period which kick in, so we look at this and believe that the $.77 to $.82 cents is appropriate from where we see right now.

But let me talk a little about December.

We based December's estimate on what the pension shortfall would be in '03 on a November 30 market.

And if you look at the November 30 market versus the December 31 market, you see there's a huge shortfall.

And the shortfall has created really, as Janet mentioned, three buckets, one, the value of the fund went down, which means you've got less income.

Number two, because of the shortfall, the long-term earning rate had to come down.

And number three, because the debt markets were not as robust as we would like, we had to take down the discount rate.

So we were looking at a 9% and 7% 9% long-term earnings rate, and 7%, we then had to go to 8.75% and 6.75%.

And at the same time, the whole fund came down.

So if you look at the fund that we were dealing with in 2002, if you multiply 9% -- 9.5% times roughly $4.4b, and then if you look at $3.5b at the end of the year times 8.75, you'll see, that's about $70m.

And then on top of it, we had to take down the discount rate from 7.5% to 6.75%, and that's about another $35m.

So it's $114m, I mean, there's $105m or so then there's a bunch of miscellaneous ins and outs.

As I said, that's the way you have to the pension accounting.

We gave our best estimate in December.

We're now giving you what the actuals are.

These are certified by a third party, and therefore, we are comfortable going forward right now with what we're going to have to deal with.

That's understood.

Just everybody faces that but to take that much more out of your cost plan in a short period of time is a fairly major step, it would seem to me.

Well, I appreciate your views.

I mean, we shall see what happens as we go through of the course of the year.

But we still feel that, you know we'll be in the $.11 to $.13 in the first quarter.

And we'll take you through it quarter by quarter as we did this past year.

We've made our earnings estimates eight quarters in a row now, quarter by quarter, and that's where we are.

And you're to be congratulated for that.

Thank you.

Our next question is coming from Don Young of UBS Warburg.

Please go ahead with your question.

Yes.

And let me add my congratulations, particularly to your services profitability.

It's been a long time coming, but impressive.

Larry, I'm wondering if you can talk about services in the sense that you're at 9.7% operating margin, your goal is 11% to 12%.

I think from your comments, you said you've made the improvement in systems integration.

I'm curious as to what gets you to the rest of the way, is it a mix shift or some of the aging of these outsourcing contracts?

What still remains to be done on services.

And then for Janet I had a couple of questions on looking at the outlook for '03 if she could share what your base line assumptions are for employment change and what the FAS 123 stock option costs might be next year.

Thank you.

On the first point, Don, let me correct a couple numbers.

The 9.7% is the overall operating margin against which we have a goal of getting the 10% to 12%.

The services margin was 7.1%.

And our goal was 10 %to 12%.

So on the services 7.1% to 10% to 12%, first off, we look at the whole systems integration business as weak now.

You know, as soon as this business picks up and I believe it will pick up, you'll see more ability to leverage some of the top people that we have.

We've brought in these senior people, and one of the ways that you know, you are able to generate better margins is through leveraging the different price talents that you put on an assignment.

So we think that to get from the 7.1% up to the 10% and the 12%, if the market stays the way it is right now, it will probably take us a couple years.

If the market gets more robust, we can probably speed up the process.

But it's really going to come from leverage that we will get when the market picks up.

And if the market doesn't pick up, it's going to get through, you know, the quarter by quarter by quarter oversight of all of these engagements and making sure that we bring them in on budget and we bring them in, you know, meeting the metrics that we've established.

So you look at where we've been in the service business, we hit bottom in the second quarter of '01, and we've really been able to move this up.

So we've gone from the first quarter of '02 of 4.9% up to 7.1% in the fourth quart ever.

So I'm not forecasting we're going to have, 2.2 points of improvement each year, but it will be close to that.

Don, this is Janet.

With regards to your comment on base line employment levels, we're anticipating for it to be about flat in 2003 compared to the end of 2002.

With regards to FAS 123, what you'll see in our financial statements that were published is that the FAS 123 extends for 2002 would be $49m after tax, and that compares to $51.8m in 2001.

So add the earnings per share, that would give you diluted earnings per share of [ Inaudible ] and $.54 of pro forma if FAS 123 was adopted.

As we had said previously, we will not adopt the expensing of options until that's required.

However, we do anticipate that we would see a decline in that rate for 2003.

Don, if I could just add something on the stock options, we have already said that we -- this year we would be reducing the number of people getting stock options.

We are looking at various other alternatives to our long-term incentive plans including performance restricted stock and other kinds of benefit plans.

We don't think for a company like us that black shows really tells the story.

I mean, those are the numbers.

We'll put them in a footnote, but we will not expense.

And if we do have to expense, I assume that -- or at least I hope there will be some latitude so we don't live with a formula that makes absolutely no sense, more volatile, the stock of a company, the higher the price, and if that is supposed to know, truly recognize particularly the technology in this with so many companies have options underwater, I just hope that there's some reality when they come forward with whatever they're going to come forward with.

Great.

Thank you.

Thank you, everyone.

I appreciate all the questions.

We obviously are very excited about the fourth quarter.

It was a great quarter for us, a great quarter for all of our people.

We go into 2003 really charged up for what's ahead of us in '03.

We certainly hope the market gets better, but if it doesn't, we still feel that we did can deliver as we have in the past couple of years, and we continue to deliver.

So with that, thank you, and we appreciate your joining us today.

Bye-bye.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

And have a wonderful day.