使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, everyone, and welcome to this first-quarter 2006 results conference call for Unisys Corporation.
Today's conference is being recorded.
At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jack McHale, Vice President of Investor Relations at Unisys Corporation.
Mr. McHale, please go ahead.
Jack McHale - VP-IR
Thank you, operator.
Hello, everyone, and thank you for joining us this morning.
About an hour ago, Unisys released its first-quarter 2006 financial results.
And with us this morning to discuss those results are Joe McGrath, our CEO, and Janet Haugen, our CFO.
Before we begin, I want to cover just a few housekeeping items.
First, today's conference call and the Q&A session are being Webcast by the Unisys investor web site.
A replay of the Webcast will be available on our Website shortly after the conclusion of the live event.
Second, you can find on our investor Website the earnings release, the associated spreadsheets, as well as the presentation slides we will be using this morning to guide the discussion.
These materials are available for viewing, as well as printing and downloading.
Third, today's presentation, which is complementary to the earnings release, includes some non-GAAP financial measures.
Certain financial comparisons made in this call will be with and without the impact of pension accounting.
We believe that providing this non-GAAP information is meaningful to fully understand our operating performance, because while pension accounting is non-operational in nature, it does impact our reported results.
On the Unisys investor Website, we have also provided a reconciliation of our reported results on a U.S.
GAAP basis compared with our results excluding the impact of pension accounting.
Finally, I'd like to remind you 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 earnings release and in the Company's periodic reports as filed with the SEC.
Copies of these SEC reports are available from the SEC and are also available on Unisys' investor Website.
Let's now get the call started with Joe.
Thank you.
Joe McGrath - CEO, President
Thanks, Jack.
Hello, everyone, and welcome to today's call.
To begin our discussion this morning, please turn to slide 1 for an overview of the quarter.
Last October, we laid out an aggressive, multiyear plan to reposition Unisys for significantly enhanced profitability and revenue growth by 2008.
This plan involves changes at every level of the business -- what growth markets we will focus on going forward, how we sell and market to clients, how we deliver services to clients, and how we will rightsize our cost structure to reflect our new, more focused business model.
During the first quarter, we made significant progress in implementing these changes to drive our new business model.
While we have much more work to do, I am encouraged by the progress we are making and the speed with which Unisys employees are embracing the changes in our business.
The benefits of this work will come quickly.
As I've stressed over the past six months, this is a long-term repositioning that we are driving at Unisys aimed at significantly improving our profitable growth over the 2007, 2008 timeframe.
We continue to look for 2006 to be a transitional year as we work through all the changes.
This morning, I would like to give you an update on our progress against the repositioning plan and the actions we took in the first quarter.
But first, please turn to slide 2 for an overview of our financial results in the first quarter.
All of the changes we are making to the business had a mixed impact on our results in the quarter.
On the positive side, we saw continued order strength in the quarter.
For the second straight quarter, we experienced double-digit growth in overall orders.
This was driven by double-digit growth in Services’ orders.
In Services, we saw order gains in infrastructure services and in systems integration and consulting.
So, in our Services business we are beginning to see some results from the changes we've been making in our sales and marketing efforts.
Driven by strengthening orders, our revenue is growing.
Our revenue grew 2% in the quarter and 5% on a constant currency basis.
This was driven by 6% growth in Services revenue.
Excluding core maintenance, which is in a long-term secular decline, our Services revenue grew 9% in the quarter.
We also saw some improvement in our Services margins in the quarter, although we have a long way to go to bring our Services margins up to acceptable levels.
The biggest pressure point in the quarter was in our technology business.
Our technology revenues declined 18% in the quarter, driven by a double-digit decline in enterprise server revenue.
We are seeing generally weak demand right now for enterprise servers based on where customers are at in their technology life cycles and buying patterns.
Because we have a relatively fixed cost structure in our technology business, this lower revenue volume is impacting our technology margins, which swung to a negative operating margin in the quarter.
We expect our technology business to remain weak in the second quarter and then strengthen in the second half of the year as we roll out new enterprise server models and customer demand picks up.
We are addressing the cost structure in our technology business and in our business overall by taking aggressive cost reduction actions.
During the first quarter, we began the process of reducing our global headcount.
I will give you more details on our cost reduction actions in a few minutes.
Let me reiterate that the goal of our cost reduction plan and other actions we are taking is to streamline and significantly reduce the expense base of the Company at the same time that we grow our revenue in our targeted high growth areas.
As we do so, we are confident we can achieve the long-term goals of mid to high single digit revenue growth and 8 to 10% operating profit margins by 2008.
Our Chief Financial Officer, Janet Haugen, will provide more financial details about the quarter in her remarks.
Before we move into our business accomplishments in the quarter, I'd first like to highlight just a few of our key wins in the quarter.
For this, please turn to slide 3.
Unisys was recently selected as part of a team led by Harris Corporation for the five-year, approximately 600 million field data collection automation program for the U.S.
Census Bureau.
This program involves integrating the multiple automated systems used by the Census Bureau for collecting field data for the 2010 census.
As part of the contract, which has a potential value out of approximately $75 million, including all option years, will involve providing nationwide support and service for approximately 500 Census Bureau field offices.
In Brazil, Unisys received a five-year IT infrastructure services contract from Unibanco, one of the largest financial institutions in Latin America and the third-largest private bank in Brazil.
Unisys will provide management and support services for nearly 25,000 devices in 1150 branches throughout Brazil.
The five-year contract has a value of approximately $47 million.
We also received a multimillion dollar data center outsourcing contract from Cathay Pacific Airlines based in Hong Kong.
Unisys will host and manage the Airline's mainframe platform for passenger reservations and cargo systems for a period of three years plus options.
In addition, a major Asian airline chose the Unisys AirCore Solution, our next-generation passenger reservation and departure control system, to replace its legacy systems.
Using the Unisys 3-D visible enterprise methodology, AirCore helps airlines improve service and grow revenue by providing integrated, up-to-date information about passengers, including customer preferences and interest.
This is our first deal involving a high-volume, enterprise-level, Open Source Linux application.
So we received a number of significant and exciting wins in the first quarter and we did so even amidst very significant changes in the business as we reinvent Unisys for profitable growth.
Please turn to slide 4 for a summary of the changes we announced during the first quarter.
As you can see, there are many achievements across all areas of our repositioning plan.
First, in early January, we reached a definitive agreement with our partner banks to restructure our iPSL check processing joint venture in the United Kingdom.
This was one of the two challenging large BPO operations that have been impacting our financial results.
I discussed our new agreement on iPSL in our last earnings call in January, so I won't go over the details again.
But this new agreement does significantly improve the financial result of the iPSL operation.
Let me also add that we continue to make good progress in improving the results of our second challenging BPO operation.
Second, we began the process of divesting assets in businesses that are noncore and outside our focused areas of the business.
As part of this divestiture program, we sold our share stake in Nihon Unisys Limited in Japan.
Third, based on the successful sale of the NUL shares, we began the difficult, but necessary, process of rightsizing our cost structure by implementing global headcount reductions, as I mentioned.
Fourth, as part of our overall effort to reduce expenses and create a more competitive cost structure, we announced that we made changes to our U.S. defined benefit pension plans and enhanced our U.S. defined contribution plan.
This was a major change for the Company and one that will significantly reduce our expenses and create more predictable retirement-related expenses.
Fifth, we reached a series of alliance agreements with NEC to collaborate in server technology, research and development, manufacturing, and solutions delivery.
Among other benefits, this relationship will allow the two companies to combine R&D on Intel-based platforms, allowing us to expand innovation for clients while reducing our overall R&D costs.
Six, at the beginning of January, we implemented a new account-centric sales coverage and compensation program aimed at increasing our business with large, selected accounts.
This was a major change for us in our sales focus, and I will talk more about it later.
Finally, we realigned our service delivery force by implementing the pooling concept that I spoke about last quarter.
During the quarter, we created integrated teams now with the critical mass to deliver services in our focused, high-growth market areas.
So it was a very busy quarter, a very productive quarter.
We executed against our repositioning plan and took major strides forward in transforming the profile of our Company.
To begin our discussion of these accomplishments, please turn to slide 5.
During the first quarter, we made progress in our divestiture program.
You will recall that as we focus on our core growth areas, we plan to divest assets and businesses outside of the core areas.
We've also said that we plan to use the proceeds from these divestitures to fund our cost reduction program and for other strategic uses.
As we reviewed our various assets and businesses in recent months, we saw an opportunity to unlock value from the shares we held in Nihon Unisys Limited of Japan.
Unisys has been a partner with NUL for many years, and NUL has exclusive rights to market and sell Unisys hardware and software products in Japan.
As part of this relationship, Unisys held a 28% stake in NUL for about 30.5 million shares.
During the quarter, we saw the opportunity to sell these shares while retaining the business relationship with NUL.
Overall, we received cash proceeds of $378 million, which will be more than enough to fund our planned cost reduction program.
The share sale does not affect our business relationship with NUL.
In addition to this transaction, we continue to explore divestitures of businesses and assets that are outside of our core focused growth areas.
Overall, we are looking to possibly divest businesses and assets with a combined annual revenue of up to $500 million.
In March, we also sold a part of our Unigen semiconductor testing equipment business.
We continue to have active discussions with interested outside parties on other potential business divestitures, and we will keep you informed as this program progresses.
So we are making good progress on our divestiture program and this program is allowing us to get started on our cost reduction program.
For this, please turn to slide 6.
In the first quarter, we took a $145.9 million charge for [3,600] headcount reductions.
These headcount reductions are principally in the U.S., the United Kingdom, Asia-Pacific and Latin America.
These reductions are expected to be substantially completed by the end of 2006.
We are also in the process of finalizing additional cost reduction actions, primarily in continental Europe.
As you know, making headcount reductions in Europe is more time-consuming and expensive, with longer payback period than in other parts of the world.
We are currently targeting additional headcount reductions, which we will expect will be implemented at the end of 2006 and through 2007.
We expect to take a second-quarter charge for these reductions.
Overall, we expect these actions will generate annualized cost savings in excess of 250 million on a run-rate basis by the second half of 2007, which is somewhat earlier than we previously anticipated.
While actions like this are always difficult, we are trying to complete the reductions as quickly as possible to minimize disruption in the business and in morale.
We are also implementing other actions to reduce costs and create a more cost-competitive company.
One of the key ways we plan to do this is through offshore sourcing.
We are planning a major expansion of our offshore delivery resources over the next two to three years.
We are targeting this expansion not just in India, but also in China and Eastern Europe.
In March, for example, we announced that we are establishing a new global sourcing and services center in Shanghai, China.
We expect to continue to expand our offshore services in China, as well as in India and Eastern Europe.
By the end of 2008, we hope to have about 20% of our employees based in these low-cost countries and engaged in providing services to client engagements around the world.
We also continue to look for cost efficiencies in other areas.
For instance, during the first quarter, we selected DHL as our global lead logistics provider for replacement service parts on service and support engagement.
Under this agreement, we will consolidate our current logistics services operations from about 100 different service providers to one lead logistics provider, DHL.
In doing so, we will be able to streamline our logistic process by allowing DHL to manage the inventory and distribution of electronic replacement parts, and to provide other logistic services, such as depot repair and parts refurbishment.
We expect this new arrangement to significantly reduce the cost of our logistics services operation over the next few years.
Moving to slide 7.
Another area where we have been working to reduce expenses is our defined benefit pension plans.
I'm sure you have been reading in the press about many companies, both inside and outside our industry, that are shifting their retirement plan focus from defined benefit pension plans to defined contribution plans, such as 401(k) plans.
The reason is simple -- defined contribution plans are much more predictable in terms of expense levels than defined benefit pension plans, which can vary significantly from year-to-year based on interest rates, the rate of return in the plan, actuarial assumptions and other factors.
Growing pension expense has been a very significant factor in our reported results in recent years.
Even though our cash contribution costs have not significantly increased over the past several years, pension expense has grown as interest rates have come down and we have amortized plan losses in 2000, 2001 and 2002.
Unisys simply cannot afford such high and volatile pension expense levels if we are to be cost competitive with other IT service providers, including low-cost providers from India and elsewhere.
We considered this issue carefully over the past several months and in March we announced significant changes to our U.S. retirement plans.
As of December 31st, 2006, we will end the accrual of future benefits under the U.S. defined benefit pension plans.
This change will not impact the vested benefits that retirees or current employees have earned through that date.
At the same time, to help our employees prepare for retirement and create a competitive plan to attract and retain employees, we have enhanced our U.S. 401(k) savings plan.
Starting on January 1, 2007, we will match in company stock employee 401(k) contributions up to 6%.
That is up from a 2% stock match currently.
Overall, we expect the changes we've announced to significantly reduce our overall retirement-related expenses over the next decade, while also offering an attractive retirement plan for our employees.
Moving to slide 8.
Another key accomplishment in the first quarter was reaching a series of alliance agreements with NEC Corporation in Japan.
Partnerships are a key component of our overall repositioning effort.
By partnering with the right industry leaders, we can leverage each other's resources and strengths and jointly pursue and drive profitable business.
We are concentrating our alliance programs on a select group of partners, Microsoft, Oracle, SAP, EMC, Dell, Cisco, Intel and IBM.
With this new agreement, NEC joins that list of focused partners.
We are partnering with NEC in a number of areas, server hardware technology, middleware, security solutions and telecommunication solutions.
Through the alliance, NEC has also chosen Unisys as a preferred provider of technology support and maintenance services and managed security services in regions outside of Japan.
One of the key focus areas of the new alliance is joint design and development between Unisys and NEC of future high-end Intel-based servers.
By combining our Intel-based hardware R&D dollars, we believe we will be able to offer clients greater access to product innovation, while also significantly reducing our technology hardware R&D expenses in the 2007/2008 timeframe.
We will give greater insights into our specific product roadmaps over the next several quarters.
Turning to slide 9.
We also made good progress in the first quarter by changing the way we market and sell our portfolio in the marketplace.
At the beginning of January, we put in place a new account-centric approach to our selling efforts.
We are targeting our sales efforts to meeting the needs of specific clients in specific geographies where we have the greatest opportunity to grow.
Our first priority is serving our top 500 clients, which represent about 85% of our revenue.
To increase our share of wallet among those clients, we have assigned a dedicated team of individuals to serving these accounts by providing the full portfolio of Unisys services, solutions and technology.
These sales teams are compensated based on the volume of business they do through these clients, the success they have in selling the full one-Unisys portfolio of services and solutions, and the overall satisfaction level of these clients.
Complementing this core group of sales teams, we have assigned additional sales resources to winning business with smaller existing accounts and with promising new clients.
Driving this program is a highly experienced and motivated sales leadership team.
As I mentioned to you last quarter, in recent months we have recruited new leaders for nearly every geography and industry that we serve and we are already beginning to see the results of this new team in terms of greater productivity, accountability and client focus.
While all of this represents a great deal of change in the sales organization that needs to be digested, we believe these changes will significantly enhance our sales productivity as the new programs gain traction in the market.
Turning to slide 10.
During the first quarter, we also made significant changes to the way we deliver services in the market.
During the quarter, we rolled out what we are calling the 3D-VE high-performance center.
This is not a physical center, but a rather integrated process cross-organizational team of services delivery personnel organized according to our focused areas of growth.
You will recall that our five growth areas are outsourcing, security, Microsoft Solutions, Open Source solutions and real-time infrastructure.
Our real-time infrastructure software competencies support both our ClearPath and ES7000 platforms, as well as our outsourcing business.
Realigning our services delivery force is critical to enhancing our utilization rates, especially in our systems integration and consulting business.
We currently have approximately 4000 services delivery personnel worldwide who deliver project-based services and systems integration and consulting.
In the past, these services personnel were assigned to small, compartmentalized niche program areas.
This limited our ability to leverage these individuals to meet other large, growing areas of the market, which in turn impacted our utilization and our profitability.
By pooling these delivery resources into a handful of crossed organizational teams, we will have the resources to meet demand in large, mainstream, fast-growing markets, such as security, Open Source Linux support and Microsoft Solutions.
In the first quarter, we did an enormous amount of work to realign our delivery force into these integrated pools of resources.
We identified skill sets and mapped individuals against our growth areas.
In addition, we are also putting these individuals through intensive training programs.
These realigned delivery forces are being trained in their specific growth areas, such as Microsoft Solutions and Open Source, and receiving further in-depth training in our 3D-VE methodology.
This is a major and ongoing process of training and development, and it will continue throughout all of 2006.
We feel we will end up with one of the best-trained, best-skilled delivery forces in the industry in our focused areas of growth.
As with any major change, it will take time for these new delivery teams to get grounded and build productivity, but over time, we believe this effort will significantly improve our utilization rates and positively impact our Services profit margins.
Turning to slide 11.
To summarize from my comments this morning, I hope you can see the extent of the work we accomplished in the first quarter in executing against our repositioning plan.
From beginning the process of divesting our noncore assets to changing our U.S. pension plans and beginning our cost reduction efforts, to realigning our sales and services delivery force, we took major strides forward in fundamentally repositioning Unisys for profitable growth.
So where do we go from here?
Our major focus in this next quarter and for every quarter in 2006 will be to continue to be on execution of the repositioning actions.
The number one priority in the second quarter is executing the cost reduction effort I spoke about earlier.
We also have a great deal more work to do in the areas of refocusing the business around our growth markets, enhancing sales and marketing, and realigning and training our services delivery force.
As I stated in our last earnings call in January, we are not giving financial guidance in 2006 as we work through all these changes in our business.
But I'd like to remind you and keep you focused on the financial goals we are aiming for by 2008.
Again, we are focused on transforming the business to a model where we are growing our overall revenue in a mid to high single digit rate and achieving an 8 to 10% operating profit margin, excluding retirement-related expenses, by the end of 2008.
2006 is a transition year, a year of executing our plan and putting in place a new foundation for growth.
And if we can keep on executing as well as we have in the first quarter, I am confident we can reach our financial goals by 2008.
Now here is our CFO, Janet Haugen, for more details on the first-quarter results.
Janet?
Janet Haugen - CFO, SVP
Thank you, Joe, and hello, everyone.
This morning I would like to provide more details on our first-quarter 2006 financial results, including our cash flow performance and some additional comments with regard to the U.S. pension plan.
To begin, please turn to slide 12 for an overview of our first-quarter results.
At the top line, we reported revenue of $1.39 billion for the first quarter of 2006.
This was up 2% from the year-ago period.
Currency had a 3 percentage point negative impact on our revenue in first quarter.
On a constant currency basis, our revenue was up 5% in the quarter.
On a pre-tax basis, we recorded a first-quarter 2006 pretax loss of $35.2 million.
This compares to a pretax loss of $78.3 million in the year-ago quarter.
With regard to taxes, as we have said previously, our tax rate will vary significantly quarter to quarter depending upon the geographic distribution of income.
In this quarter, we had a tax benefit of $7.3 million compared to a tax benefit of $32.8 million in the year-ago quarter.
We reported a bottom-line net loss of $27.9 million, or $0.08 per share.
By comparison, in the year-ago quarter, we had a net loss of $45.5 million, or $0.13 per share.
Moving to slide 13, this chart shows additional information on our results for the quarter, our first-quarter 2006 results including three significant items.
One, a gain on the sale of our NUL shares; second, a restructuring charge; and three, pension expense, including the impact of our previously announced change to our U.S. defined benefit plan.
Let me talk about each of those in a little bit more detail.
First, we recorded a pre-tax gain of $149.9 million on our sale of our ownership interest in Nihon Unisys Limited in Japan.
This gain was reported in our Other Income and Expense line and did not impact the operating profit line.
Second, we recorded a pre-tax restructuring charge of $145.9 million for the cost of 3600 headcount reduction as the first phase of our cost reduction plan.
Third, we recorded a pre-tax curtailment gain of $45 million related to the adoption of changes in our U.S. defined benefit plans that Joe discussed.
This gain was netted against our pension expense in the quarter, resulting in pension expense of $7.9 million, which compares to pension expense of $46.8 million in the year-ago quarter.
Given the variability in our tax rate right now, I'd like to focus your attention on the pre-tax line in this table.
On slide 13, the first column shows our pre-tax results.
The next three columns show the income statement impact for each of the three significant items I discussed.
The last column shows our results before the impact of these items.
For the first quarter of 2006, it was a pre-tax loss of $31.3 million compared to a pre-tax loss of $31.5 million, excluding pension expense, in the year-ago quarter.
Now moving on to revenue in the first quarter, please turn to slide 14 for an overview of our first-quarter revenue by geography.
Our U.S. revenue was flat in the quarter and represented 45% of our revenue in the quarter.
Revenue from international regions grew 3% and accounted for 55% of our revenue in the quarter.
Slide 15 shows our revenue by business segment.
Services revenue grew 6% in the quarter and represented 85% of our first-quarter revenue.
On a constant currency basis, Services revenue grew 10%.
Technology revenue declined 18%, or 16% on a constant currency basis, and represented 15% of our revenue in the quarter.
For more detail on our Services revenue, please turn to slide 16.
Within Services, we saw double-digit revenue growth in Outsourcing and Infrastructure services.
We also saw single-digit growth in Systems Integration and Consulting.
This more than offset a 15% revenue decline in core maintenance, and this resulted in Services revenue, excluding core, growing at 9%.
Turning to slide 17.
In our Technology business, we saw a 15% decline in Enterprise Server revenue, reflecting the weak demand conditions in this business, as Joe discussed earlier.
Within Enterprise Servers we saw double-digit declines in both ClearPath and ES7000.
Now moving on to our segment margins, as a background, the Company has historically not reflected the results of restructuring charges in the measurements of its segments, so all of the segment margins that I'm commenting on today exclude the impact of restructuring, consistent with our policy.
Slide 18 provides a comparison of our Services operating margin.
Excluding pension expense, our Services operating margin was near breakeven at a negative 0.1% margin in the first quarter of 2006.
The year-ago quarter, Services operating margin was -3.2%, so we improved our Services operating margin by 310 basis points year-over-year.
Please move to slide 19.
In the Technology segment, the lower Technology sales volume had a significant impact on our Technology margins in the quarter.
Excluding pension expense, we reported a -6.1% Technology operating margin in the first quarter of 2006.
This compares to a Technology operating margin, excluding pension expense, of 8.5% in the first quarter of 2005.
The significant swing in Technology margins year-over-year is due to lower enterprise server demand in the current quarter.
Now please turn to slide 20 for our cash flow and balance sheet highlights for the first quarter.
We generated $27 million of cash from operations in the first quarter of 2006, which is the same amount as the first quarter of 2005.
Total capital expenditures in the first quarter of 2006 were $73 million, down from $97 million in the year-ago period, as we continue to place tight controls over capital expenditures.
After deducting capital expenditures, we used $46 million of free cash in the first quarter of 2006 compared to free cash usage of $70 million in the year-ago quarter.
Depreciation and amortization was $98 billion and the first quarter of 2006, and interest expense was $19.8 million for the first quarter of 2006, which compares to $12.6 million of interest expense for the first quarter of 2005, reflecting higher average debt level.
We ended the first quarter with no borrowings against our revolving credit facility, and with a cash balance of $980 million.
Now turning to restructuring, I'd like to take a moment to discuss expected cash requirements for the 3600 headcount reductions that were included in the first-quarter charge.
Overall, we expect to use about $140 million of cash in 2006 related to these current headcount reductions.
As the reductions roll out throughout the year, we expect cash requirements of about $50 million in the second quarter and approximately $90 million in the second half of 2006, with the remainder in 2007, early 2007.
As Joe mentioned, we are expecting a further restructuring charge in the second quarter of 2006 for additional headcount reductions, principally in Continental Europe.
Lastly, I would like to take a few minutes to discuss our retirement-related expenses.
As you know, during the first quarter we announced the adoption of significant changes to our U.S. defined benefit pension plan.
By making these changes, we expect to significantly reduce overall retirement-related expense to the Company over the coming years.
At the time of the announced change to the Unisys U.S. pension plan, we provided information on our historical and expected retirement-related expense levels over the 2003 to 2008 timeframe on our investor website.
As we noted on the website, this information was based on the December 31st, 2005 actuarial analysis and is subject to change.
For 2006, we now expect U.S. defined benefit pension expense of $56 million, which is net of the $45 million curtailment gain, and down $26 million from our prior estimate.
This change results from an actuarial remeasurement which was triggered by the plan change, and I'll discuss that further in a moment.
We will be providing new estimates for 2007 and 2008 at the next quarter's earnings call.
We anticipate that total retirement expense estimates for 2007 and 2008 will be reduced further, reflecting the remeasurement, which I will talk about in a moment, and the impact of reducing our headcount.
The changes to the U.S. defined benefit pension plans have also impacted our balance sheet at March 31, 2006.
Accounting rules normally require an annual measurement of plan assets and obligations for the determination of pension expense and for balance sheet accounting.
When there is a significant event, such as a plan change like we've had, the accounting rules require an updated measurement of the plan assets and obligations, which we did, as of March 31, 2006.
So, for example, the impact of that remeasurement is to look at the discount rate.
The discount rate used for the U.S. defined benefit plan was changed from the year-end rate of 5.84% to 6.29% at March 31st, reflecting the changed interest rate environment between December and March 31st.
Based on this remeasurement, our U.S. qualified defined benefit pension plan is no longer in a minimum pension liability position.
As a result, we reclassified our $1.26 billion prepaid pension assets from stockholders' equity, other comprehensive income, to a prepaid pension asset.
Now it might not be there long, because as many of you know, the accounting for pension plans is currently under review by the FASB.
While this project may take a number of years to complete, we do expect an interim standard by the end of the year.
This interim standard could have the impact of reversing this reclassification out of stockholders' equity into a prepaid pension asset that we did at March 31st, and moving it back into stockholders' equity.
It is too early right now to determine if and when any changes are going to be required.
We believe the changes we've announced to our U.S. plan strike the right balance of significantly reducing retirement-related expense to Unisys, while also providing a competitive 401(k) plan to help employees save for retirement.
We believe these changes will make our Company more competitive in the industry.
That is all for my comments this morning and now I would like to turn the call over to Jack for questions.
Jack McHale - VP-IR
Thank you, Janet, and thank you, Joe, for the overview.
Operator, we are now ready to open the call for questions, please.
Operator
(OPERATOR INSTRUCTIONS) Ashwin Shirvaikar with Citigroup.
Ashwin Shirvaikar - Analyst
Thanks.
The first question, Joe, with regards to your comments that appear in the press release, where you are basically talking about profitable revenue growth over the 2007/2008 timeframe.
Just looking for a clarification of that statement, because that does seem a little bit farther out than I had originally thought in terms of profitable revenue growth.
Joe McGrath - CEO, President
No, actually.
If you looked at what we said in today's comments in terms of restructuring, we have been able to pull in restructuring and we believe that that will positively impact our overall Services gross margins and operating margins faster than we initially expected.
And so we believe that we're going to be able to drive these businesses to these targets faster than we thought we could in the second half of 2007.
Ashwin Shirvaikar - Analyst
So second half of 2007 would be a good time to look for profitability, and then from then on, you head towards -- do you still believe in the 8 to 10% eventual operating profit target?
Joe McGrath - CEO, President
Yes, we absolutely do.
As you saw with our first proceeds of the restructuring, we only spent a portion of that in this first-quarter restructuring.
We expect to spend additional money in the second quarter to go even further and move faster than we first announced, and so we are more confident than ever before in meeting those targets in 2008.
Ashwin Shirvaikar - Analyst
Okay.
And last question on pensions.
What is the cash flow impact for both the U.S. and international pension plan as we head out?
Because the earnings impact you've outlined; what is the cash flow impact?
Janet Haugen - CFO, SVP
The cash flow impact -- for 2006, we're anticipating to be about $70 million.
And that is all international plan.
The U.S. plans have not required a cash funding in the past number of years.
We don't expect this change requires any type of cash funding requirement.
The change that we made to move from the defined benefit into the 401(k) will be with a stock contribution, not a cash contribution.
Ashwin Shirvaikar - Analyst
Okay.
So that is a stock contribution.
Is there anything else in the pipeline that you are thinking for other postretirement benefits?
Janet Haugen - CFO, SVP
We will always look at all the plans to make sure that we do the appropriate balance between what makes us cost competitive in the marketplace and what makes us competitive in attracting and retaining the talent within Unisys.
So that is a continual process that we go through to make sure that we are doing the balance.
The U.S. plan change was the most significant one that we have had under review for a while.
Ashwin Shirvaikar - Analyst
Okay.
Thank you.
Operator
Jason Kupferberg with UBS.
Jason Kupferberg - Analyst
Let me ask the last question maybe a little bit differently.
It's encouraging here to see the fully annualized run rate of savings being moved up a little bit for the second half of '07 versus year-end '07.
Can you help us understand directionally, therefore, where operating margins could go during 2007 as a stepping stone toward your '08 goals, understanding that it is going to probably be somewhat linear during the course of the year, as the cost savings accelerate quarter-by-quarter?
Joe McGrath - CEO, President
Jason, as you know, we haven't given out guidance specifically for that reason.
Because remember, we're also looking at potential other divestitures downstream, and so the timing of those are very difficult.
But if you look at the mix that we first talked about in terms of where we expected to take these people out, if you remember -- $125 million of that was toward delivery.
And so you can put that directly toward improving Services gross margins; we won't give you a calendarization of that.
If you looked at R&D, that is predominantly in the Technology business, although not entirely in the Technology business.
And if you look at the General and Administrative reductions that we've targeted at 75, think of that roughly right as spreading equally across the revenue streams.
And you know our revenue splits.
So frankly, we haven't been explicit in exactly when and how it will affect each of those margins.
But I think if you looked at how we parsed out those actions.
Now I will also be frank with you.
You've seen that in this first tranche of restructuring actions, we've already talked about $250 million.
We've talked about a second tranche of restructuring actions.
So I think you just have to take those rules of thumb that we said and map them against the respective businesses to get a better understanding of how they will move gross and operating margins across both sides of our business.
Jason Kupferberg - Analyst
Okay.
We'll work through some of those numbers.
Last quarter, if I remember correctly, you guys had talked about a target for the full year '06 of low to mid single digit revenue growth.
And I'm not certain at the time exactly what sort of currency assumptions were embedded in that.
Can you just update us on the thinking there?
Joe McGrath - CEO, President
Yes.
As you heard, the first part of the year, the Technology business has been softer and has had weaker demand than we first anticipated.
But we expect a rebound to that business in the second half of the year.
We also expect an acceleration of our Federal business in the second half of the year.
As you've probably watched in the press, the budget wasn't finalized until February of '06.
Many of the major agencies we work with continued to operate on continuing resolutions over that time.
That forced major procurements to move to the right, like Alliant Networks, Eagle, and a lot of that things that you may have been tracking.
And so we expect orders and revenue to pick up in the third and the fourth quarters in our public sector business.
So, I think you'd see a rebound in both of those.
And I think Janet wanted to add something on currency expectations.
Janet Haugen - CFO, SVP
As I said in my comments, the total impact on revenue was negative 3 percentage points in the first quarter.
As we plan for the year, based upon the currency rates at the time we did the plan and if I update them for where they are right now, we think that for the full year it's about a -1% to -2%.
If that helps, Jason.
Jason Kupferberg - Analyst
So, just to be clear, if we kind of net this all out, do you guys still expect to grow low to mid single digit in U.S. dollar terms this year?
Joe McGrath - CEO, President
Yes, that is fully our expectation.
Jason Kupferberg - Analyst
Okay.
And just a last question.
If you can give us some color on Ric Duques' involvement in the business.
Obviously, he has been in the Chairman spot for, I guess, about 2.5 months now, but understanding he's got significant responsibilities over at First Data at the same time.
To what extent is he proving input with you guys on key strategic and operational issues?
Joe McGrath - CEO, President
It may or may not surprise you that he is involved weekly with us.
Every single week we have an in-depth discussion on every one of the major elements we've just talked to you about.
So he gets a weekly update, he has major input into our decisions, including, as you've heard us say before, this NUL transaction allowed us to drive for higher prices in the other divestiture candidates we are looking at, and he has been a very wise counsel in helping us there and all of these other areas.
I don't know how he fits it in with all his other responsibilities, but he has been invaluable to us in helping us through the significant and number of changes that we are going through at this moment in time.
Jason Kupferberg - Analyst
Okay.
Thanks, guys.
Operator
Julio Quinteros, Goldman Sachs.
Julio Quinteros - Analyst
Janet, real quickly on the -- I'm trying to get a sense, basically, on the possible headcount reduction that you guys are thinking about going forward.
With the majority of it being in Europe, it sounded like, maybe can you just give us a sense of what the percentage of your total headcount is in Europe today?
Janet Haugen - CFO, SVP
Sure.
If you look at our headcount and our revenue mix, we're about 50-50 domestic and international from a revenue perspective.
And we have a corporate headquarters -- most of our corporate headquarters and R&D staff is based in the States -- or the vast majority of it.
So I want to say roughly about 20 to 24% of our headcount is in Europe, broadly defined, both UK and Continental Europe.
I just want to comment, Julio, as you well know, when we take restructuring charges in Continental Europe in particular, the cost of doing those actions are much higher per person with a much longer payback than the type of charge we took in this quarter, which was focused geographically in the U.S., the UK, Latin America and Asia Pacific.
So the charge that is coming in the second quarter, primarily in Continental Europe, will not have anywhere near the payback -- the quick payback or the low cost per person that you see in the current charge.
Julio Quinteros - Analyst
I'm sorry -- just to reconcile against the cash needs that you have, that you outlined.
I think you said $50 million in the second quarter and then $90 million in the second half of '06.
Does that already include the requirements that you'll have for this reduction or is that --?
Janet Haugen - CFO, SVP
No, that is just related to the charge we took in the first quarter.
Julio Quinteros - Analyst
Okay.
So anything -- I guess it would all be incremental then.
Janet Haugen - CFO, SVP
That is correct.
Joe McGrath - CEO, President
Julio, this is Joe.
Let me put it in context, though.
If we look at the cost per individual -- and that is the reason we have parsed this out the way we have -- the cost per individual in Continental Europe is almost 3X the cost per individual in this first tranche of actions we took.
The payback period was slightly over six months for this first tranche, and it will probably be close to two years in the second tranche.
So these are very different economic models.
That is the reason we have taken longer.
We still have some works in working through the Works Council and the unions to finalize some of these.
So in the spirit of speed, we unhooked this first set of actions and went out quickly with it to get a faster payback.
The second, we will go out in the second quarter, and, as you might imagine, when you kind of overlay these two different sets of actions, you would get very different returns when you build your model.
Janet Haugen - CFO, SVP
Julio, if I can just clarify -- when you asked for the percentage of headcount in Europe/Africa, I did mention UK and Continental Europe together.
I was not including the individuals that we have focused on the BPO.
So if I can give you a revised number, that number for UK and Continental Europe is about 35% of our headcount.
Earlier, I misspoke, because I wasn't including the BPO headcount.
Julio Quinteros - Analyst
Okay.
And so 35% of headcount.
And what is the total headcount then at the end of the current quarter?
Janet Haugen - CFO, SVP
The total headcount at the end of the quarter is 35,890, roughly.
Julio Quinteros - Analyst
Okay, great.
And I'm sorry -- just to be sure, you did not actually give us an explicit target of what the percentage would actually be in terms of the European headcount?
Janet Haugen - CFO, SVP
No, we did not.
Let me just be clear -- the first-quarter charge of the $149 million relates to primarily to the U.S., Latin America -- I'm sorry -- U.S., UK, Asia-Pacific and Latin America.
The cash requirements that I commented on in my comments reflect to that charge only.
In the second quarter, we expect to take an additional charge, primarily in Continental Europe.
It will have a longer payback and will be significantly more costly per person.
We are in the process of finalizing the number of heads, the cost per head, and when that cash requirement is needed over time.
We do believe that with the sale of the NUL shares, that we have adequately raised the cash that we had set for ourselves as an internal target to be able to fund the restructuring program.
Julio Quinteros - Analyst
Okay, great.
And I guess just kind of focusing or refocusing back on the short-term volatility of the Technology business.
What gives you confidence in the second-half recovery?
Can you just go through what the data points are that you are looking at that give you the confidence that thing this thing will snap back in the second half?
Is it just a seasonal factor or is there something that you guys can really point to in the conviction on the second-half recovery?
Joe McGrath - CEO, President
Yes, Julio, this is Joe again.
There are a couple of different things.
The first is that we -- and it began in the fourth quarter, actually -- we strengthened our leadership team, predominately in the area of sales and operations.
So we have a new head of Worldwide sales for that organization, a new head of North American sales, and frankly, two new regional vice presidents in North America to bolster our sales organization -- and a new VP of operations.
So part one, strengthened the leadership team.
Part two, cost reduction.
We have said that we really needed to lower our breakeven point.
Some of the actions that you have seen, there is a specific research and development action within that business and an SG&A action that were just part of this recent announcement.
So we believe we will lower the breakeven.
Part three, the collaboration with NEC.
That allows us to combine our leverage in research and development on all Intel-based platforms; we think that will have a big payback.
That is not '06, but it gives people comfort, many of our clients, knowing that this combined efforts plays out and we have product roadmaps they go throughout 2008 and beyond, gives them much greater confidence in our commitment to this product line.
A short-term one here is new product introductions in the second half.
There are two families of ClearPath, and both ClearPath families have new product introductions in the second half.
And finally, the last piece is we've talked about these five strategic areas -- Microsoft Solutions, Open Source Linux, RTI.
There is a major emphasis, at least on those three, in driving both the ClearPath and ES7000 growth in the second half around these.
So we believe that the confluence of all of those will drive demand and increase in orders revenue and profit in the second half.
Julio Quinteros - Analyst
Okay.
And then just to clarify then, the order growth in the Technology business that you saw in the current quarter, what was that number again?
You cited a double-digit number.
Was that also for Technology?
Janet Haugen - CFO, SVP
The order growth -- I'm sorry.
The order growth in the Technology business was down single digits in the quarter -- high single -- mid to high single digits in the quarter.
Julio Quinteros - Analyst
Okay.
Janet Haugen - CFO, SVP
The revenue growth was what we had commented on that was down 18%.
Joe McGrath - CEO, President
But Julio, let me just add, our clients are frankly very wise.
And when they know that there is a new product introduction in the second half, they will delay procurements.
If you look at the depreciation periods that they depreciate the equipment over and so on, they are very smart in timing their procurement.
And if they get wind that there is an upgrade in a certain period of time during the year, they will kind of eke their way through until those new products are available.
So we have taught them well and they've learned accordingly.
Julio Quinteros - Analyst
Okay.
Thank you very much.
Good luck.
Operator
Julie Santoriello with Morgan Stanley.
Julie Santoriello - Analyst
Good morning.
Joe, can you comment somewhat on some of the employee metrics?
I imagine you have been tracking these, especially during this volatile time.
And I'm wondering if you can give as any indication on how things are tracking, at least directionally, when it comes to employee turnover and employee utilization in the Services business, and if you have any internal targets there you could share with us?
Joe McGrath - CEO, President
Yes.
In terms of -- let may start with turnover and retention -- that was your first question.
We have been running at about an 11% voluntary turnover rate.
That is essentially the same as 2005 and slightly higher than 2004.
From the best that we've seen in comparing benchmarks in the overall services industry, we're pretty close.
We might edge slightly higher than average, but not out of line.
So we were frankly worried, especially around our changes in pension and the number of changes that we're putting the organization through, and we have not seen an increase in voluntary turnover as a result and we are very pleased by that.
Just as an aside on that, we were very concerned about the pension.
As you know, we've worked long and hard in evaluating all our major competitors' actions here, benchmarking them and so on.
And we went out of our way to have an in-depth education program for our employee population; there are Websites that you can use modeling tools to figure out kind of the old way and the new way; there are hotlines for these people.
And there is a continued communication process, a regular cadence of information to them about kind of their old plan and their new plan.
And frankly, we've gotten a favorable reaction.
We were very concerned about it.
Remember, this is largely a U.S. impact at this stage.
And it has been pretty positive.
In the area of chargeability, frankly, we haven't seen a significant upward movement yet.
And I think part of that is we spent most of the quarter going through this change around what externally we call pooling and internally we call the 3D-VE High Performance Center.
And so we've essentially touched not just the 4000 people that go into the pools, but remember, they treed up to the other 3500 people -- partners, senior managers and so on.
So we broke a lot of relationships over that period of time to put them in the pools to train them.
So we haven't seen chargeability increase; as you know, we don't give our chargeability numbers externally.
But we believe we will start to see an improvement in the second quarter there.
I will be frank, until they go through this training, where they get more in-depth training in Microsoft, Open Source Linux, security and so on, I don't think you'll see demand, and therefore rate realization, the other major metric, start to improve.
As you know, chargeability is just a reflection of utilization -- rate utilization is discount versus list price in the market, which is a more effective indicator of the perception of the value of those people through the eyes of our clients.
So neither of those have moved significantly since we made the change.
Again, a fair amount of -- I'm reluctant to say disruption -- but a fair amount of change that has affected everyone in the Systems Integration and Consulting organization, and we think we'll start to see some payback in Q2.
Any other metrics that you had in mind?
Julie Santoriello - Analyst
No, those are the ones that I was most interested in -- (indiscernible) and chargeability.
Joe McGrath - CEO, President
So haven't seen a payback on the second.
Very pleasantly surprised by no increase in voluntary attrition in the first.
Julie Santoriello - Analyst
Thank you.
That is very helpful.
If I can just get one follow-up.
It was good to see double-digit order growth in the Services business; we weren't sure we would see that during, again, this time of so much change.
Anything you can share with us on the pipeline in the Services business?
Can we expect to see strong order growth continuing over the course of the year, or do you see potentially some seasonal slowdown?
Joe McGrath - CEO, President
As you know, any time you have a very large outsourcing component, it is a lumpy order picture.
I don't know who invented lumpy.
But it is a lumpy order picture, and it is very hard to predict sequentially quarter-over-quarter, because things can slip out.
Very often, not -- outside of our control, because as you know, there are very many intermediaries, like TPI and others, that are involved in driving these procurement cycles.
And so overall for the year, we are encouraged.
As you know the largest of those deals generally come out of our outsourcing business and our federal business.
And we have big expectations for them in the second half of the year in both cases.
Julie Santoriello - Analyst
Okay, thank you.
Operator
And due to time constraints, this does conclude our question-and answer-session.
At this time, I'll turn the conference back over to Mr. McHale for any additional or closing comments.
Jack McHale - VP-IR
Again, thank you everyone for joining us.
And I know we couldn't get everyone in, so please follow up and give myself or Jim Kerr a call and we will answer any questions that you have.
Thank you.
Operator
This does conclude today's conference.
Thank you for your participation.
You may disconnect your line at this time.