Unisys Corp (UIS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Unisys second-quarter 2012 results conference call.

At this time I'd like to turn the conference over to Mr. Niels Christensen at Unisys Corporation.

Please go ahead, sir.

Thank you, Operator.

Good afternoon, everyone, and thank you for joining us.

Earlier today, Unisys released its second-quarter 2012 financial results.

With us this afternoon to discuss our results are Ed Coleman, our CEO, and Janet Haugen, our CFO.

Before we begin, I want to cover a few housekeeping details.

First, today's conference call and the Q&A session are being webcast via the Unisys investor website.

Secondly, you can find the earnings press release and the presentation slides that we will be using this afternoon to guide our discussion on our investor website.

These materials are available for viewing as well as downloading and printing.

Third, today's presentation, which is complimentary to the earnings press release, includes some non-GAAP financial measures.

These have been provided in an effort to give investors additional information.

The non-GAAP measures have been reconciled to the related GAAP measures and we provided reconciliation charts at the end of the presentation.

Finally I would like to remind you that all forward-looking statements made during 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 SEC filings.

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

Now I would like to turn the call over to Ed.

Thanks, Niels.

Hello, everyone.

Thank you for joining us to discuss our second-quarter 2012 financial results.

This is a solid quarter for Unisys.

We reported significantly higher profits, grew revenue on a constant currency basis and continued to make progress on our three-year financial objectives.

Please see page 4 of the presentation materials for highlights of our results.

We reported net income of $46.6 million, compared with an $11.6 million net loss a year ago.

The year-ago net loss included a $45.7 million debt reduction charge.

Excluding debt reduction charges and pension expense in both years, as well as the impact of a Brazilian tax matter in the year-ago quarter, our non-GAAP earnings per share rose to $1.41 from $1.07 in the year ago quarter.

Revenue declined 2% but grew 3% in constant currency, despite a 20% revenue decline in our US federal business where market conditions continue to be challenging.

This was the third quarter out of the past four that we've grown our overall revenue on a constant currency basis.

Our technology business had a particularly strong quarter, growing revenue 12% on strong ClearPath sales.

Year-to-date, our technology revenue is up 3%.

We continue to believe the best way to measure this business is on an annual basis and our goal is to maintain stable technology revenue for the full year; most importantly, in our flagship ClearPath platform.

Revenue in our services business declined 3% but was up 1% in constant currency.

Within services, we grew our IT outsourcing revenue 8%.

We saw good margin improvement year-over-year in both our services and technology businesses.

In services, we were pleased to reach our targeted 8% to 10% operating profit margin range.

Cash flow also improved in the quarter.

And we're announcing today a further debt reduction action of $84.5 million that will enable us to achieve, over a year early, our debt reduction goal for year-end 2013.

Turning to page 5, as you recall at the end of 2010, we set financial objectives that we wanted to achieve by the end of 2013.

Those objectives are to increase our pretax profit to $350 million, assuming no change in pension income or expense from 2010 levels.

To consistently achieve an 8% to 10% operating profit margin in our services business.

To grow our IT outsourcing and systems integration revenue at market rates while maintaining stable revenue in our technology business, particularly within the ClearPath business, and to reduce our debt by 75% from September 2010 levels.

As we're now at the midway point of this three-year plan, I would like to step back and review how we're doing against those objectives.

In terms of our pretax profit goal, our first half 2012 pretax profit, excluding pension expense and debt reduction charges, is $171 million.

From a margin perspective our services operating profit margin was 8% in the second quarter, and through the first half of 2012 has improved 90 basis points year-over-year to 6.5%.

While we still have work to do to get to our targeted 8% to 10% range on a consistent basis, we're pleased with the progress we've made in improving the profitability of our services business.

As you know, a portion of that improvement has been driven by the increase in our use of lower cost labor pools which now represent 31% of our employee base.

We're also encouraged with progress toward our revenue growth goals.

In IT outsourcing, as I mentioned, we grew revenue by 8% in the second quarter, and year-to-date in 2012 our IT outsourcing revenue is up 4%.

We continue to strengthen our portfolio of IT outsourcing offerings with new solutions, such as a new cloud-based IT service management service aimed at helping our clients simplify the delivery of IT support services to their end users.

These services take advantage of our global service delivery network, which is based on idle compliant processes.

As we enhance our portfolio and market reputation in IT outsourcing, we've expanded our base of clients, particularly in the area of end user outsourcing and support services.

Over the past four years we've won an average of one new outsourcing client each month, including such organizations as the American Red Cross, McDonald's, Hinkle, and De Beers.

In project based system integration, our revenue has been impacted by softness in our US federal business.

Outside the US federal business, however, we've grown our systems integration revenue 16% year-over-year in the first half of 2012.

Year two, we continue to enhance our portfolio of offerings to address growing areas of market needs, such as cloud computing, mobility, enterprise security, and storage.

In the second quarter, for instance, we announced a comprehensive suite of services to help clients manage, secure, and support a growing number of end users within their organizations who are using personally owned devices and applications to get their work done.

This is a growing challenge for global organizations and we believe Unisys is well positioned to address it.

In our technology business we've seen good success in stabilizing revenue from our ClearPath business.

In recent years we've invested in innovative new features that build on ClearPath's recognized advantages in security, reliability, scalability, and price performance.

At the same time, we've been working on an exciting future vision for ClearPath, including new features and delivery models that opens up the market for this technology to new uses and new users.

Last, but not least among our goals, as I mentioned when we complete the additional debt reduction actions announced today, we will have achieved our goal of reducing debt by 75%, or about $625 million from September 2010 levels.

Page 6 shows the progress we've made in recent years in reducing debt.

When we complete the additional $84.5 million debt reduction actions, we will have reduced our debt, including borrowings under our former account receivable facility, by about $1 billion since the end of 2008.

In the process we've significantly cut annualized interest expense, which has further enhanced our profitability.

And we've achieved this during arguably the worst economic environment in decades.

Beyond the bottom line benefits, this de-leveraging process has made Unisys a more competitive company when bidding for long-term IT outsourcing and other services and technology contracts.

Overall we're pleased with the progress we've made toward our three-year financial goals.

And while we have much more work to do, we're focused on continuing our progress over the second half of 2012.

Challenges remain, particularly in our US federal business.

US federal agencies are under pressure to cut costs while finding new, more efficient ways to provide services to citizens, such as through the cloud.

We're also seeing a strategic shift in the US Federal Government towards smaller contract awards.

We're repositioning our federal systems business to take advantage of these trends.

In the area of cloud, for example, we continue to see growth opportunities in helping federal agencies move to cloud-based e-mail and collaboration environments, such as the work we've done for the General Services Administration, the National Oceanic and Atmospheric Administration, and the Department of Energy's Idaho National Laboratory.

As another example, Unisys has just been awarded a task order by the Internal Revenue Service to provide an innovative, private cloud-based solution to manage the IRS's mission-critical information assets.

Our solution will allow the IRS to take advantage of storage capacity on an as-needed basis.

The task order has a one year base period with nine one-year options, and is potentially worth up to $139 million over 10 years.

We were also pleased during the second quarter to be selected as part of multi-billion-dollar ID/IQ contracts with the Department of Homeland Security and the National Institutes of Health.

These awards allow Unisys to compete for task orders under these contract vehicles.

So while we expect the rest of the year to continue to be challenging for our US federal business, we're excited about the contracts we've won and remain focused on improving our results in this business.

Turning to page 7, in closing, we're pleased with our overall performance in the second quarter and through the first half of 2012.

Looking ahead, we continue to see the opportunity for Unisys to differentiate itself as the Company that provides services and solutions to help organizations and individuals operate more safely and securely in an ever more connected world.

We deliver these solutions through project based systems integration engagements or through outsourced managed services, and by providing technologies that support secure, mission-critical environments.

To drive profitable growth, we continue to enhance our portfolio and delivery capabilities to help organizations address and take advantage of the major disruptive trends occurring in the marketplace, such as mobility, cloud computing, and cyber security.

We believe the work we've done has strengthened our competitiveness in the marketplace, and we believe we're well positioned to take advantage of these growth opportunities.

Thanks again for joining us today.

Now here's Janet to take you through our results in more detail, and then we'll be happy to take your questions.

Thanks, Ed, and hello, everyone.

Page 9 highlights our financial results in the second quarter.

At the top line, we reported total revenue of $921.3 million in the quarter, which was down 2% year-over-year.

Currency had a five percentage point negative impact on our revenue in the quarter, so as Ed noted, on a constant currency basis, revenue rose 3%.

We have now grown revenue three of the last four quarters on a constant currency basis.

Based on today's rates, we anticipate currency to have about a five to six percentage point negative impact on revenue in the third quarter of 2012.

We reported an operating profit of $79 million in the quarter, which was $30.9 million, or 64% higher than the year-ago quarter's operating profit of $48.1 million.

Our gross profit margin improved year-over-year by 360 basis points, and our operating profit margin was 8.6%, up from 5.1% a year ago.

Interest expense decreased $5.4 million, from $13.3 million in the second quarter of 2011, to $7.9 million in the second quarter of 2012, reflecting the impact of our ongoing debt reduction.

Other income expense for the second quarter of 2012 was $4.1 million of other income, of which $3.1 million related to a favorable currency impact.

In the second quarter of 2011, other income and expense was $49.4 million of other expense, which included the $45.7 million charge related to the debt reduction.

Our second-quarter 2012 US GAAP pension expense increased $12.4 million to $21.1 million, compared to $8.7 million in the second quarter of 2011.

Within the income statement, pension expense is allocated to cost of revenue, SG&A, and R&D on the same basis as the salaries of active employees.

Pension expense is not included in the segment results.

We expect approximately $100 million in pension expense in 2012, compared with pension expense of about $34 million in 2011.

For the second quarter of 2012, pretax income was $75.2 million, compared to a loss of $14.6 million in the second quarter of 2011.

Excluding the impact of pension expense and debt reduction charges in both years, as well as excluding the second quarter 2011's $13.5 million Brazil non-income tax matter, our non-GAAP pretax income increased to $96.6 million, compared to $53.3 million of non-GAAP pretax income last year.

At the tax line, we had a $22.1 million tax provision in the quarter, compared with a $9.2 million tax benefit in the year-ago quarter.

The second quarter 2011 tax benefit reflected the settlement of two European tax cases which benefited our tax provision by $30.3 million.

And as I have said previously, our tax provision continues to be highly variable from quarter to quarter, depending upon the geographic distribution of our income.

We reported net income of $46.6 million in the quarter, versus a net loss of $11.6 million in the year-ago quarter.

Excluding the impact of the debt reduction charges and pension expense in the second quarter of 2012 and 2011, as well as the Brazilian non-income tax item in the second quarter of 2011, Unisys generated adjusted EBITDA of $148.6 million for the quarter, versus $114.2 million in the second quarter of 2011.

Our diluted earnings per common share improved to $0.99 per share from a loss of $0.27 per share in the year-ago quarter.

The diluted EPS calculation reflected an average share count of 51.2 million shares for the second quarter of 2012, and 43.1 million shares for the second quarter of 2011.

Excluding the impact of the debt reduction charges, pension expense, and the prior year Brazilian tax matter, our second-quarter 2012 non-GAAP diluted EPS was $1.41 per share, compared to $1.07 in the second quarter of 2011.

Please turn to page 10 for some context on the progress we have made in terms of strengthening our operating profitability.

With our performance in the second quarter of 2012, we have achieved the highest trailing 12-month operating profit margin we have recorded since our turnaround efforts began.

We recognize that we still have work to do to achieve consistent and predictable profitability each quarter, but we are encouraged by our progress to date.

Moving to our second-quarter revenue, please turn to page 11.

Services revenue, which represented 89% of our revenue in the second quarter of 2012, declined 3% year-over-year.

Currency had a four percentage point negative impact in the quarter, so services revenue grew 1% on a constant currency basis.

Excluding our US federal business, services revenue was flat, up 5% on a constant currency basis.

Technology revenue, which accounted for 11% of our revenue, rose 12% year-over-year.

On page 12, you can see services revenue and margins.

Services gross profit margin increased 90 basis points year-over-year to 21%, from 20.1% in the second quarter of 2011.

This primarily reflected improved gross profit margins in IT outsourcing.

Our services operating margin rose by 90 basis points year-over-year to 8%, which reached our targeted range for services operating profit in the quarter.

Within outsourcing, IT outsourcing revenue was up 8% versus the second quarter of 2011.

Moving on to technology revenue and margins on page 13, ClearPath revenue rose year-over-year.

Sales of other technology, which includes third-party equipment, declined by $10 million.

Our annual goal continues to be to maintain stable technology revenue, most importantly in our flagship ClearPath platform.

Benefiting from higher ClearPath sales, we reported a technology gross margin of 63.4%, up over 14 percentage points from the prior year.

Our technology operating margin improved significantly to 28.6% from 2.4% in the second quarter of 2011.

Page 14 provides more detail on our US Federal Government revenue over the past six quarters.

Our federal systems business serves three primary sectors of the US Federal Government; Civilian, Homeland Security, and Department of Defense and Intelligence.

In the second quarter of 2012, civilian agencies represented our single largest revenue base within the US Federal Government, accounting for about 51% of our overall US Federal Government revenue.

Revenue from agencies within the US Department of Defense and various intelligence agencies represented about 26% of our overall Federal Government revenue.

And revenue from Homeland Security agencies represented about 23% of our overall US Federal Government revenue.

Compared to the year-ago quarter, our overall US federal revenue declined $31 million, or approximately 20%, to $121 million.

This decline resulted from lower funding on certain services contracts, as well as the loss of some services contracts in prior quarters.

We ended the second quarter of 2012 with about $292 million of US federal services backlog, which was down 3% versus the second quarter of 2011.

Page 15 shows our second-quarter revenue by geography and industry.

Our North America revenue represented 41% of our revenue in the quarter and rose 1%.

Revenue from US Federal Government represented 13% of total Unisys revenue in the second quarter.

Excluding the US Federal Government business, our North America revenue rose by 15%.

International revenue declined 3% in the quarter.

On a constant currency basis, international revenue was up 5%.

Revenue in our European region was down 5% in the second quarter on an as-reported basis, but rose 3% in constant currency.

The revenue decline in our Latin America region was 14% on a constant currency basis and primarily reflected the seasonal nature of our technology business there.

From an industry perspective, public sector remained our largest single industry revenue source.

The 10% decline in public sector revenue, year-over-year, was largely driven by the decline in our US Federal Government revenue.

Revenue from commercial industry customers represented 37% of our second-quarter revenue, while the financial sector was 23%.

Our commercial revenue grew by 6%, while revenue from our financial services customers grew by 3%.

For some comments on services orders please turn to page 16.

In the second quarter, our services orders declined when compared to last year.

From a geographic perspective, we saw year-over-year services order growth in our Asia Pacific and Latin America regions during the second quarter.

Orders in our North American and European regions declined in comparison to the second quarter of 2011.

We ended the second quarter with $5.1 billion in services backlog, which was down 8% from December 31, 2011.

This decline primarily reflects reductions in systems integration and IT outsourcing backlog.

Year-over-year, services backlog was down 10%.

This decrease is largely a result of lower IT outsourcing and business process outsourcing backlog.

Currency had a 4% negative impact on the year-over-year comparison.

Approximately $670 million of the June 30, 2012, services backlog is anticipated to convert into third-quarter 2012 services revenue.

Over the past six quarters, we have noted an increase in the level of sell and build business as a percentage of the total quarterly services revenue.

During that period, the amount of revenue and backlog at the start of the quarter has ranged between 85% and 90% of our quarterly services for the full quarter, and the sell and build revenue has accounted for the remainder.

Moving to cash, please turn to page 17 for an overview of our cash flow performance in the quarter.

We generated $57 million of cash from operations in the second quarter of 2012, compared to $36 million in the year-ago quarter.

We contributed $51 million in cash to our defined benefit pension plans in the second quarter of 2012, versus $21 million in the second quarter of 2011.

The pension funding contributions are reflected in cash flow from operations.

With the recent passage of the Moving Ahead for Progress in the 21st Century Act in the United States, referred to as MAP-21, there have been changes to our US funding requirements which I will address in a moment.

Capital expenditures were $35 million in the second quarter of 2012, versus $29 million in the second quarter of 2011.

We expect full year capital expenditures in the range of $150 million to $180 million.

Our free cash flow was $22 million in the second quarter of 2012 versus $7 million for the same period last year.

Our free cash flow before pension cash contributions was $73 million in the second quarter of 2012, versus $27 million in the second quarter of 2011.

Depreciation and amortization was $47 million in the quarter, down from $50 million in the second quarter of 2011.

Our cash balance was $660 million at June 30, 2012, compared to $625 million at June 30, 2011.

Turning to page 18, as Ed said earlier, we announced today that we will call for redemption $84.5 million of the 12.5% senior notes due in 2016.

When complete, this transaction will reduce our debt to about $208 million and will represent the early achievement of our 2013 debt reduction goal.

A debt redemption charge of approximately $6 million will be recorded in the third quarter of 2012.

Annualized interest expense will decline by approximately $10 million as a result.

Completion of our debt reduction goal is a very important milestone for us.

We have reduced annual interest expense from about $102 million in 2010 to approximately $25 million post-completion of this redemption.

We believe there is still opportunity to further reduce interest cost, based on the coupon rates we pay on our outstanding obligations, which are now above 12%.

In light of our operational performance and improved balance sheet position, we believe we may have opportunities to lower our cost of funding and are evaluating those options.

As I mentioned earlier, with the recent legislative changes in the US, we expect a significant change in the timing of the required cash contributions related to our US pension plan.

I would like to provide an updated estimate of future funding requirements related to our US defined benefit pension plan, based on our understanding of the legislation.

MAP-21 provides pension plan sponsors like Unisys near-term funding relief by stabilizing interest rates used to determine the required cash funding contributions to the defined benefit plan in the US.

Turning to page 19, our revised estimates for minimum cash funding of our US defined benefit pension plan in 2012 decreased from approximately $143 million in our prior estimate to approximately $110 million.

The estimated contributions in 2013 declined from $155 million in our prior estimate to $85 million.

In 2014 and beyond, the funding requirements increased relative to our previous estimates.

It's important to note that MAP-21 does not have any direct impact on the discount rates that are used for US GAAP reporting.

Unrelated to the MAP-21 legislation, but based on the impact of changes in foreign currency rates and reduced contribution requirements for one of our European plans, the previous estimate of $97 million for contributions to our other defined benefit plans in 2012 declined to approximately $90 million.

On a total basis, therefore, the 2012 and 2013 estimated pension cash funding requirements are expected to decrease by approximately $40 million and $70 million respectively from our prior estimate.

Total contributions are then estimated to increase to approximately $235 million in 2014, $250 million in 2015, $190 million in 2016, $170 million in 2017.

Beyond 2017, we expect these contributions to continue to decline annually.

All these estimates are based on expected asset returns and discount rate assumptions as calculated at December 31, 2011, except for the discount rate used for the US qualified defined benefit plan, which has been updated for our estimate of the impact of the recent US legislation.

These are likely to change for 2012 and beyond based on, among other items, market conditions, published IRS discount rates, and changes in currency rates.

As we move throughout 2012, we will continue to build on our successes in the first half and remain focused on driving towards our longer term financial goals.

Thank you for your time.

And now I would like to turn the call back over to Ed.

Thank you, Janet, very much.

Operator, we'd like to open the call up to questions now, if we may.

(Operator Instructions) Jamie Friedman, Susquehanna.

Thanks and congratulations on the great numbers.

I was hoping to get a little -- the thing that jumps out, first off, is the ClearPath performance.

I was hoping that you could share a little bit more detail.

Is this a reflection of one large project or a couple of good sized projects or a general improvement in the demand environment?

Jamie, I think it's fair to characterize it as a good quarter for ClearPath across many clients around the world.

As you know, we've been working hard to reaffirm our commitment to ClearPath, to reaffirm our investments and accelerate our investments in ClearPath, and I think all of that is paying dividends in terms of our clients continuing to view ClearPath as a mission-critical platform to run their businesses on.

As we've said before, it's hard to look at ClearPath quarter to quarter, or quarter by quarter, and better to look at it on a yearly basis.

Our goal is still, as it has been for the last three years, to maintain stable revenue, most particularly in ClearPath, and we're glad to be able to say that we have done that for the last three years, and we're on track so far this year.

Ed, was there a call-out of a large contract in there, or it was more distributed demand observation?

I would characterize it as more distributed demand observation for the ClearPath platform.

Janet, could you say again what the currency exposures are for the Company, specifically what percentage is euro, if you have that, and I recall you do a fair amount in Brazil, if I'm not mistaken, maybe some more color on the currency?

Jamie, I said in my comments that currency, as we go into the third quarter, we'll have about a five to six percentage point impact on the revenue comparisons year-over-year for the third quarter.

The four main currencies that are impacting us right now, in order of significance is the euro, the Brazilian real, then the pound, then the Aussie dollar, with the euro and Brazilian real movements making up the majority of that change.

I appreciate the updated color with regard to the pension, and I may be embarrassing myself here, but can you state again what the discount rate is that you're using to update the pension contribution?

The discount rate that is being used as a result of the US legislation is different from the US GAAP rate.

At the end of the year we determined that the year-end GAAP discount rate was 4.96% for the US plans, internationally, 4.65%.

Under the MAP-21 legislation, you now have the ability to look at the 25-year average of rates by segment as it's defined in the legislation.

So you have a combination of a segment approach, as well as a 25-year average, compared to previously it was about a two-year average.

We've made an estimate based upon what we understand the legislation, based upon some discussion with our actuaries, but the rate will not be final until the IRS publishes the rate.

Ned Davis, William Smith & Company.

Excellent quarter.

Focusing again on the pension numbers, you can't release what the rate is that you're assuming in your actuarial analysis so that we at least know what it is?

And secondly, could you tell us the precise key assumptions that go into the -- what looks like an increase in the domestic funding of $10 million in 2014, notwithstanding the benefits of the federal legislation?

I'm sorry, I just don't understand what the mix of assumptions that go into that increase are.

It's probably a more complex answer to do in a short time period, Ned.

It's a function of the way the layers get amortized in under the US funding calculation.

As you go out, we have the impact of multiple things happening.

Earlier legislative change provided a 15-year amortization of some of the earlier under performance corridors.

So that goes out over time.

The second thing is, the discount rate, which is a 25-year average of different segments, compared to the two-year average.

The combination of those two things, combined with the funding regulations that vary depending upon what percentage funded you are in triggering the subsequent year's funding, result in this calculation.

What we believe was the best way to approach it as we did in the last quarter is, given the fact that there are many nuances into that calculation, the best approach was to provide what we see those calculations to be over the out years, because it is very difficult to get through all the moving pieces in a real short, concise way.

So the impact of the MAP-21 legislation provides funding relief for companies for 2012 and 2013 funding, but it doesn't go beyond that based upon the passage of the current legislation.

They may come back and extend the release that's in '12 and '13 beyond that, but right now it is only expected to be there -- it's only in the legislation for '12 and '13.

I've asked you before about, as time goes on, what the capability of the [cut] would be to in effect de-seize all or part of the pension liability.

Can you provide any color as a result of the legislation and the Company's progress in cash flow and reducing your expensive debt, as to what the chances of that would be over the next five years?

To put perspective, as you know Ned, the December 31, 2011 under funding was $1.6 billion in the US and $400 million internationally for a total of about $2 billion.

We are very excited that we early achieved our debt reduction goal.

As a result of doing that, and continuing to work on proving the free cash flow generation of the business, we believe that gives us more opportunities for options, and we are currently evaluating a number of different options as we go forward.

I don't want to comment on a specific one at this point in time.

Once the debt redemptions are completed, that you've announced, what would your weighted average interest rate be on your debt going forward?

It's going to be slightly -- about 12.5%, a little higher than that, 12.6%.

Going forward on the -- you mean on the outstandings after the redemptions?

That's right, because after these redemptions, we will have $183.1 million of the 2014 maturities that are at 12.75% and $26 million of the 2016 maturities that are 12.5%.

As I said in my comments, and last quarter I said we were going to look at ways to reduce the outstanding debt to hit our goal.

We did that with today's announcement.

We are, as well, looking to reduce our interest expense on the remaining debt by continuing to evaluate options going forward for refinancing.

One last thing on the capital side.

Has the Company got any more to say about the potential of a share buyback?

We are pleased that we've met our 2013 debt reduction goal early.

This creates greater options for us We are continuing to evaluate the best choices to make for that as market and other conditions change over time, but we don't -- I don't want to comment specifically on any particular option at this point in time.

The good news is we've accomplished the debt reduction goal, and that gives us greater optionality going forward.

(Operator Instructions) Frank Jarman, Goldman Sachs.

This is [Carl Bulin] on for Frank.

A quick question on the success that you've had in addressing your balance sheet.

Have you initiated discussions with the rating agencies around a potential future upgrade and do you expect an upgrade following these actions?

I don't know that I would ever be in a position to forecast what the rating agencies are going to do, just comment that we're BB minus from S&P, and Moody's has us at B1, both have us at stable.

Their recent reports have commented on the pension obligations.

They recognize the performance we've made in improving the debt position, but they do recognize the uncertainty around the pension area.

We have ongoing conversations with the rating agencies, keeping apprised, making sure they understand the progress we've made, but I don't want to comment on any future action by the rating agencies.

And ladies and gentlemen, this does conclude today's question-and-answer session.

At this time for closing remarks I would like to turn the conference over to the Chairman and CEO, Mr. Ed Coleman.

Thank you, operator, and more importantly, thank all of you for being on the call today.

We certainly appreciate your participation and look forward to speaking with you on our next call.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

We appreciate your participation.