Unisys Corp (UIS) 2012 Q4 法說會逐字稿

Good day, and welcome to the Unisys fourth quarter and full year 2012 results conference call.

At this time, I would like to turn the conference over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation.

Please go ahead, sir.

Thank you, operator.

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

Earlier today, Unisys released its fourth quarter and full year 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 Q&A session are being webcast via the Unisys investor website.

Second, you can find the earnings press release and 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've 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.

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

Thanks, Niels.

Hello, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2012 financial results.

Please turn to page 4 of the presentation to begin our discussion.

We completed another profitable year for Unisys in 2012 with a good fourth quarter, lead by a strong performance in our technology business.

We reported diluted earnings per share of $1.67.

On a non-GAAP basis, excluding pension expense and debt reduction charges, our fourth quarter diluted EPS rose to $2.27 from $2.22 in the fourth quarter of 2011.

Our fourth quarter results closed out a year of continued progress for Unisys in 2012.

In an uncertain IT spending environment, we increased our profitability and generated significant cash flow.

For the full year of 2012, we reported diluted earnings per share of $2.84, up from $2.71 in 2011.

Our non-GAAP diluted EPS rose to $5.50 from $5.18 in 2011.

Cash flow was also strong in 2012.

Before pension contributions, we generated free cash flow of $330 million in 2012, up from $266 million in 2011.

Turning to page 5, in 2012 we made continued progress toward our three year financial goals through 2013 against our 2013 goal of increasing our pretax profit to $350 million, excluding pension expense.

We exceeded that goal in 2012.

We also met our debt reduction goal more than a year ahead of schedule.

We have not yet hit our services operating margin objective of 8% to 10% consistently and predictably.

To do so, we must couple revenue growth with continued work to identify ways to operate more efficiently.

Revenue growth continues to be our biggest challenge with mixed results in 2012.

In our technology business, we exceeded the target of maintaining flat revenue in 2012, growing revenue 3% with the benefit of some earlier than expected sales of ClearPath as customers continued to respond positively to recent innovations in our flagship technology platform.

Notably, we have now maintained or grown ClearPath revenue in each of the past three years.

However, in our services business, we did not achieve our revenue growth targets for systems integration in IT outsourcing due to a challenging IT services market and softness in our US federal business.

Turning to page 6, as we enter 2013, we are taking steps to further improve our performance.

Our goal remains to become a Company known for financial strength, where the quality of our services and solutions provides ongoing differentiation, and where we are an acknowledged industry leader in our four areas of strength -- security; data center transformation and outsourcing, which includes our server business; end-user outsourcing and support services; and application modernization and outsourcing.

In recent years, we have narrowed our focus to concentrate more effectively on select target markets.

We exited several businesses and changed our business model in certain countries.

In 2013 and beyond, we plan to build on our current geographic and business footprint.

To do so, we are developing enhanced and new solutions and are building new sales channels in order to win new customers.

To drive growth, we are making investments to enhance our current solutions to take greater advantage of disruptive industry trends such as cloud, consumerization of IT and mobility, cyber security, big data, smart computing, social computing and IT appliances.

Moving to page 7, new solution investments include what we are calling ClearPath forward and follow-on systems.

We are building on our leadership in providing mainframe class computing functionality and performance on industry standard Intel Xeon-based platforms to allow customers to add Windows and Linux workloads to their Intel-based ClearPath systems, and provide these new workloads with the mission critical performance, security, reliability and scalability that they have come to expect from ClearPath.

Another investment is in developing new uses for a Stealth solution suite of cyber security products.

We see exciting growth opportunities for Stealth, which we believe is unique in the market in its ability to cloak data, applications and users within a network or data center to help organizations deal with increasingly sophisticated cyber threats.

In 2012, Stealth was named by Computer Reseller News as one of the hot products at the Interop Technology conference.

We also continued to enhance our data center and end-user outsourcing services which have been recognized with placement in the leaders quadrant as the Gartner Magic quadrant for help desk services.

To compliment expander IT outsourcing services, we are investing in application management services where we see the opportunity to help organizations deal with the challenges of managing their applications in an increasingly decentralized mobile and cloud-based computing environment.

All of our offerings are in support of our commitment to providing consistently high levels of service quality and customer satisfaction.

Further supporting our growth objectives, we have implemented an improved marketing platform for driving sales campaigns for our key offerings in support of our direct sales force.

Following successful test drives to the platform in 2012, we are ready to leverage it more strongly in 2013 and beyond.

Additionally, we are building a reseller channel to reach new customers and grow our revenue.

Currently less than 5% of our revenue comes through resellers and distributors, which is quite low relative to other companies in the IT industry.

Establishing a strong Unisys reseller channel will allow us to address a larger portion of the IT market.

In 2012, we made a good start in building a reseller channel for Stealth.

As this effort progresses and we demonstrate success with the channel, we intend to add other Unisys products to the reseller channel program.

In closing, 2012 was another year of significant profitability and free cash flow generation.

Building on this progress, as well as our much stronger financial condition and improved customer satisfaction, we are focused on driving profitable top line growth.

We look forward to reporting on our continued progress in the year ahead.

Thanks for joining us today.

Now here is 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.

In my comments today, I will be preferring to certain GAAP and non-GAAP comparisons throughout my remarks.

For the fourth quarter comparison, the non-GAAP results exclude pension expense and debt reduction charges.

For the full year comparisons, non-GAAP references exclude pension expense and debt reduction charges in both years, as well as a charge related to a Brazilian non-income tax case in the second quarter of 2011.

Now, let me start with our overall fourth quarter and full year 2012 financial result.

Please turn to page 9. At the top line, we reported revenue of $979 million in the quarter which was down 1% year over year.

Currency had a 1 percentage point negative impact, so on a constant currency basis, revenue was flat.

For the full year revenue of $3.7 billion was down 4%, down 1% on a constant currency basis.

Based on today's rates, we anticipate currency to have about a 1 percentage point negative impact on revenue comparisons in the first quarter of 2013 when compared to the first quarter of 2012.

We reported an operating profit of $114.6 million for the fourth quarter of 2012.

Our gross profit margin improved 80 basis points to 29.2%.

Operating expenses rose in the fourth quarter of 2012 compared to the year-ago quarter as both SG&A and R&D increased.

This increase was largely attributable to higher pension expense and investments in growth programs.

For the full year 2012 on lower revenue, our operating profit of $319.2 million was down 2% versus 2011.

However, the operating margin improved to 8.6% from 8.4% on higher gross profit margins and lower operating expenses.

Higher research and development funding for the full year was more than offset by lower SG&A.

Interest expense in the fourth quarter of 2012 decreased by over 75% from $11.4 million in the fourth quarter of 2011 to $2.5 million, reflecting the impact of our debt reduction.

Interest expense for the full year 2012 was $28 million, or 56% lower than 2011.

As a result of the debt reduction and the refinancing in the third quarter of 2012, we have reduced annual interest expense from about $102 million in 2010 to approximately $10 million going forward.

The fourth quarter of 2012 represented the first quarter at this new run rate.

For the full year 2012, we reported other expense of $37.6 million versus $55.5 million during 2011.

Debt reduction charges of $85 million in 2011 were $55 million higher than in 2012, but the Company had a $25 million swing from foreign exchange gains of $17 million in 2011 to foreign exchange losses of $8 million in 2012.

Our fourth quarter 2012 pension expense increased to $31.5 million from $8.1 million in the fourth quarter of 2011.

We reported $108.2 million in pension expense in 2012, compared with pension expense of $34.3 million in 2011.

For the fourth quarter of 2012, pretax income was $109.4 million, compared to $111.3 million in the fourth quarter of 2011.

Our non-GAAP pretax income for the fourth quarter was $140.9 million in 2012, compared to $127 million in 2011.

Pretax income in 2012 was $254.1 million, compared to $206 million in 2011.

Our non-GAAP pretaxed income was $392.9 million in 2012, compared to $339 million in 2011.

Achieving our revenue growth goals and improving our services operating margins are both important factors in our ability to sustain and grow that level of profitability on a consistent and a predictable basis in the future.

At the tax line, we had $20.5 million on a tax provision in the quarter, compared with $12.4 million of a tax provision in the year-ago quarter.

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

We reported net income of $81.8 million in the quarter versus net income of $94.3 million in the year-ago quarter.

The non-GAAP net income rose to $112.2 million for the fourth quarter of 2012 from $108.6 million in the fourth quarter of last year.

For 2012, net income increased to $129.4 million from $120.5 million for 2011.

Non-GAAP net income was $265.4 million in 2012, compared to $242.6 million in 2011.

Our fourth quarter 2012 diluted earnings per common share was $1.67 per share, compared to $1.94 in the year-ago quarter.

For 2012, diluted earnings per common share rose to $2.84 per share from $2.71 per share a year ago.

Our fourth quarter non-GAAP diluted EPS improved to $2.27 per share, compared to $2.22 in the fourth quarter of 2011.

And our 2012 non-GAAP diluted earnings per share was $5.50 per share, compared to $5.18 in 2011.

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

This chart shows a view of our trailing 12 month operating profit.

Our operating profitability, excluding the impact of pension income and expense, continued to trend up as a result of our improving business mix and sustained cost control efforts.

We still have some more work to do to achieve consistent and predictable profitability in each quarter.

Moving to our fourth quarter and full year revenue, please turn to page 11.

Services revenue, which represented 82% of our revenue in the fourth quarter of 2012, declined 4% year over year.

Currency had a 1 percentage point negative impact in the quarter, so services revenue declined 3% on a constant currency basis.

Services revenue declined 5% for the full year in 2012, 2% on a constant currency basis.

Fourth quarter technology revenue accounted for 18% of our total revenue and rose 16% year over year on a reported basis, up 17% on a constant currency basis.

Technology revenue rose 3% for the full year 2012 and was up 6% on a constant currency basis.

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

On our last earnings call, we provided the amount of opening services backlog for the fourth quarter.

We also provided the range that opening backlog has represented of a given quarter's services revenue over the previous six quarters.

The fourth quarter services revenue of $806 million was at the high end of the range implied by the amount of revenue in opening backlog at the start of the quarter.

Our sell and bill business in the quarter returned to levels more consistent with recent quarters after the decrease noted in Q3, 2012.

Systems integration revenue for the fourth quarter of 2012 declined 4%, compared to the year-ago quarter.

For the full year, systems integration revenue was down 7%, due largely to the declines in our US federal business.

Within outsourcing, ITO revenue was down 4% versus the fourth quarter of 2011.

For the full year, our ITO revenue was down 2%.

Our goal remains to grow our systems integration and ITO businesses at market rates.

In the fourth quarter of 2012, services gross profit margin increased 20 basis points year over year to 20.2% from 20%.

Our services operating margin declined by 100 basis points year over year to 6.6% as higher operating expenses associated with increased growth investments offset the improved gross profit.

For the full year 2012, we reported a flat services gross margin of 20% and a 50 basis point decrease in operating margins to 6.4%.

Moving onto technology, revenue and margins on page 13, enterprise class software and server revenue in the fourth quarter was up 13% year over year while sales of other technology, all of which is third party product, increased by $4.6 million.

Our annual goal is to maintain stable technology revenue, most importantly in our flagship ClearPath platform, which is the largest component of our enterprise software and servers business.

During 2012, our technology revenue was up 3%, driven by increased ClearPath revenue.

We did benefit from some earlier than expected ClearPath revenue in the fourth quarter.

As we have said previously, this business is best measured on an annual basis, and we are pleased that we have been able to maintain or grow our ClearPath revenue in each of the past three years.

As a result of the higher proportion of ClearPath sales within the technology segment, we reported a technology gross margin of 68.1% in the fourth quarter, up 220 basis points from the prior year.

Our technology operating margin rose to 43.9% from 37.7% in the fourth quarter of 2011.

Our full year gross and operating margins in this segment improved to 63.9% and 33.1% respectively, up significantly from 2011.

Page 14 shows our fourth quarter and full year revenue by geography and industry.

North America revenue declined 5% in the fourth quarter.

Excluding the US federal business, our North America revenue was down 3%.

In 2012, our North America revenue represented 41% of our total revenue and declined 7%.

Revenue from the US federal government represented 14% of our total Unisys revenue.

Excluding the US federal government business, our North American revenue rose by 2% in 2012, reflecting higher services and technology revenue.

In the fourth quarter, international revenue rose 6% and was up 7% on a constant currency basis.

For the full year, international revenue was down 1%, but up 4% on a constant currency basis.

Revenue in our European region was up 9% in the fourth quarter on an as-reported basis and rose 10% in constant currency.

This was due to a strong technology performance in the quarter.

For the full year, European revenue, which represented 33% of our total revenue for the year, was down 2%, but up 3% on a constant currency basis; again, largely attributable to the strength of our technology business.

The fourth quarter revenue from our Asia Pacific region declined 3% as reported, 5% on a constant currency basis.

2012 revenue in this region was up 8% as reported and 9% on a constant currency basis, reflecting higher services and technology revenue.

Fourth quarter revenue declined 8% in our Latin America region on a reported basis, but was up slightly on a constant currency basis.

For the full year, revenue was down 13%, 3% on a constant currency basis.

From an industry perspective, public sector remained our largest single industry revenue source, accounting for 41% of our 2012 revenue.

The 5% year over year decline in the fourth quarter and the 9% annual decline in the public sector revenue was largely driven by the decrease in our US federal government revenue.

Excluding our US federal government business, public sector revenue declined 3% in the fourth quarter and was down 2% for the full year.

Revenue from commercial industry customers represented 35% of our 2012 revenue while the financial sector was 24%.

Our commercial revenue declined 11% in the quarter and was down 2% for the full year, while revenue from our financial services customers rose 26% in the quarter and was up 2% for the full year.

Page 15 provides more detail on our US federal government revenue over the past eight quarters.

In the fourth quarter of 2012, revenue from civilian agencies and revenue from defense and intelligence agencies each represented 38% of our revenue base within the US federal government.

Revenue from Homeland Security agencies represented the remaining 24% of our overall US federal government revenues.

Compared to the year ago quarter, our overall US federal revenue declined $14 million, or approximately 9% to $148 million.

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

Sequentially, however, we saw a 15% increase in revenue, due primarily to higher technology revenue.

For the full year, civilian agencies represented 47% of our US federal government revenue while defense and intelligence agencies together got counted for 28% and Homeland Security represented 25%.

We ended the fourth quarter of 2012 with about $332 million of US federal services backlog, which was down 8% versus the first quarter of 2011, but up 1% from the third quarter of 2012 as we saw some modest sequential improvement in our services order closure during the final quarter of 2012.

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

In the fourth quarter, our services orders declined year over year, but increased sequentially.

From a geographic perspective, we saw year over year services order growth in our Asia Pacific region during the fourth quarter.

Orders in our other regions declined in comparison to the fourth quarter of 2011.

We ended the fourth quarter with $5.1 billion in services backlog, which is down 8% from December 31, 2011, but flat with the last two quarters.

The year-over-year decline primarily reflected reductions in IT outsourcing and business process outsourcing backlog.

Currency had about a 1 percentage point positive impact on the year-over-year comparison.

Approximately $640 million of the December 31, 2012 services backlog is anticipated to convert into first quarter 2013 services revenue.

During seven of the past eight quarters, we have noted an increase in the level of sell and bill business as a percentage of total quarterly services revenue.

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

At the start of 2012, we reported services backlog of $5.5 billion.

Approximately 70% of our full year 2012 services revenue was in backlog at January 1, 2012.

We start 2013 with approximately $2.1 billion of services backlog, which is expected to convert into 2013 services revenue.

Historically, between 60% and 70% of our full year services revenue is in backlog at the start of the year.

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

We generated $153.9 million of cash from operations in the fourth quarter of 2012, compared to $159.5 million in the year-ago quarter.

The Company generated $261.3 million in cash from operations during 2012 versus $317.2 million in 2011.

We contributed $26.4 million in cash to our defined benefit pension plans in the fourth quarter of 2012 versus $19.1 million in the fourth quarter of 2011.

During 2012, we contributed $201.5 million, compared to $82.7 million in 2011.

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

Capital expenditures were $35.9 million in the fourth quarter of '12 versus $33.3 million in the fourth quarter of 2011.

Capital expenditures for the full year were $132.6 million versus $134.4 million in 2011.

We anticipate full year capital expenditures during 2013 to be in the range of $150 million to $175 million.

We generated free cash flow of $118 million in the fourth quarter of 2012 versus free cash flow generation of $126.2 million for the same period last year.

Our free cash flow before the pension cash contributions was $144.4 million for the fourth quarter of 2012 versus $145.3 million in the fourth quarter of 2011.

Free cash flow before pension cash contribution was $330.2 million during 2012 versus $265.5 million in 2011.

Depreciation and amortization was $46.2 million in the quarter, compared to $44.9 million in the fourth quarter of 2011.

Full year depreciation and amortization was $174.6 million in 2012 versus $194.8 million in 2011.

For 2013, we expect full year depreciation and amortization to be in a range of $150 million to $175 million.

Excluding the impact of the debt reduction charges and the pension expense, Unisys generated adjusted EBITDA of $186.6 million for the fourth quarter of 2012 versus $182.7 million in the fourth quarter of 2011, and $583.8 million for the full year of 2012 versus $589.7 million in 2011.

Our debt balance was $210 million at December 31, 2012 and is primarily comprised over 6.25% senior notes due in 2017 which were issued in the third quarter.

Our debt was down $149 million year over year as a result of a series of debt reduction actions during 2012.

Our cash balance was $656 million at December 31, 2012 ,compared to $715 million at December 31, 2011.

Despite the $149 million net reduction in debt during 2012 and $119 million in incremental pension funding, our cash balance was only $59 million below the level reported a year ago.

You can see the progress we have made in the reduction in leverage over the past four years by turning to page 18.

As we announced in the fourth quarter of 2012, our board of directors authorized the purchase of up to $50 million of the Company's common or preferred stock through December 2014.

As of today, no purchases have been made under this authorization.

Turning to page 19, I would like now to provide update on our worldwide pension plans, funded positions and expected cash funding level.

At the end of each year we determine the discount rate that will be used to calculate the present value of our pension liabilities under US GAAP.

The discount rate used to present value the US pension obligation at December 31, 2012 was 4.01%, down from the December 31, 2011, discount rate of 4.96%, reflective of the change in the interest rates from last year end.

This lower discount rate has increased the present value of our US pension plan liabilities at year end 2012.

A change of 25 basis points in the US discount rate causes an approximate $140 million change in the pension obligation.

Taking into account the net effect of the increase in pension liability and the increase in pension assets driven by good market performance, we ended 2012 in an underfunded position in our US pension plan of approximately $1.9 billion, which was approximately $265 million above the level at year end 2011.

The weighted average discount rate used to present value the international pension obligations at December 31, 2012 was 3.92%.

This rate represented a 73 basis point decrease from the discount rate at December 31, 2011.

As is the case with the US plan, this lower discount rate increased the present value of our international pension plan liabilities at year end 2012.

The underfunded position of the international plan at December 31, 2012 increased by approximately $105 million from the prior year end.

For the major international plan, a change of 25 basis in the discount rate causes an approximate $122 million change in the pension obligation.

From a US GAAP expense perspective, we expect approximately $93 million in pension expense in 2013 compared with pension expense of about $108 million in 2012.

Please turn to page 20 for a discussion of our pension funding.

From a cash funding perspective, we contributed $202 million of cash in 2012 into our pension plan, $111 million into the US qualified plan and $91 million into the other plan.

We expect to contribute approximately $34 million in 2013 into the US plan and anticipate contributing another $112 million into our other plans during 2013 for a total 2013 contribution of approximately $146 million.

For 2014, our cash funding estimate for US-qualified defined-benefit pension plan is approximately $95 million with an expected contribution of $150 million for 2015.

The estimated contributions for 2016 and 2017 are approximately $145 million and $160 million respectively.

Beyond 2017, we estimate that these contributions will decline from this level.

These funding estimates for our US-qualified defined-benefit pension plan are based on current expected asset returns and the funding discount rates used for the US-qualified defined-benefit plan, which have been updated to reflect the published IRS discount rate.

The future funding requirements are likely to change, based, among other things, market conditions and future published IRS discount rates.

Also on page 20, we have shown our current estimates for future contributions to the international plan.

This will be based -- these will be based on local funding regulations and agreements and are likely to change in 2014 and beyond, based on a number of factors including market conditions, change in discount rates and change in currency rates.

As we have mentioned previously, it's important to know that the discount rates for funding and GAAP purposes are derived on different bases.

In closing, 2012 was the fourth consecutive year of profitability and positive free cash flow generation for the Company.

We have exited 2012 having achieved our debt reduction goal and significantly reduced our interest obligation.

We exceeded our 2013 goal of increasing pretax profit to $350 million, excluding pension expense.

As we move through 2013, we will remain focused on driving towards the financial goals of revenue growth and operating profitability that Ed discussed earlier.

Thank you for your time, and now I'd like to turn the call back over to Ed.

Thanks, Janet, very much.

Operator, at this time we'd like to open the call up to questions, if we may.

Yes thank you.

(Operator Instructions)

We'll go first to James Friedman with Susquehanna.

Hi, thank you for taking my questions.

I had a couple questions.

I guess I'll ask them all at first, and then I'll go back in the queue.

Ed, this was a terrific quarter in terms of the things that you can control, namely the P&L.

I wanted to ask you about slide 6, with your four areas of strengths.

Maybe as you look forward to 2013, what of these are different than what they used to be between security, data center, end-user and application outsourcing?

That's more my operational question, and then I've just got two quick ones for Janet.

I'll get them out of the way.

Janet, do you think that for modeling purposes in 2013 we should contemplate somewhere relative to your services targets finally for 2013 margins?

That's my one question, and then my second one is first, some folks who may be new to the name, could you just, on slide 19, describe how the 4% and 4.96% work in terms of your annual assumptions?

Because that $5 million increase in liability may be misinterpreted by some people.

I know it's long winded, but the first one, slide 6, the second about the service and the third is about the pension discount assumptions, thank you.

Thanks, Jamie.

On the slide 6, the points that we're trying to make there fundamentally is that we want to continue to focus on the same areas of strength that we have been focused on for the last four years.

We think this is where we have real capability in the marketplace and where we can provide real value to our clients.

As you see, it's security, data center, end-user outsourcing and application modernization.

But what changes in that is really our ability to infuse the solutions in those four areas with the technologies represented by the disruptive trends.

So, how do we bring big data and smart computing more into our security solutions?

How do we bring social computing into our application modernization?

And bring mobility and consumerization of IT, not only into the end-user support, but also into the impacts it has on both security and data centers, the way customers are going to operate data centers.

The areas of strength remain the same, but we're constantly looking for ways to enhance those solutions to take into account those disruptive trends.

One of the things I mentioned, Jamie, is that we're focused on enhanced and new solutions going to market through new channels in order to win new customers, but all built around these four areas of strength.

Does that help?

Yes.

Thank you very much.

Jamie, on the first of the two questions that you sent my way, the first regards our services operating margin.

And as we have said, we have a goal of driving that services business to the point where it generates 8% to 10% services margin.

As we go forward, we expect to see improvement from where we're at right now to get in that targeted range coming from three areas.

We need to see revenue growth from our strategic portfolio and some improvement in the US federal business.

The commentary we are close to that low end of that range outside of the US federal business, so the impact of the demand really does -- the lower revenue has impacted our overall services operating margins.

So, we clearly need to get to the revenue growth from our strategic portfolio and some improvement in the US federal business.

Outside of the US federal business and currency, services in 2012 was up about 0.5%.

So, we have seen growth, but we need to beyond the trajectory in our strategic goals as we have outlined before.

The second area that we continue to make sure that the way we deliver our offerings are cost effective from both the use of automation as well as using a cost effective resource allocation strategy.

We think we still have more room to go there, and that should also help us achieve the services operating margin.

And lastly, we'll continue to look for opportunities for us to improve SG&A as a percentage of revenue.

However, as you saw in our results for the quarter, we have set aside some investments in order to help drive the revenue growth.

So, we clearly have a target, a goal for us to get to that 8% to 10% services operating margin on a consistent basis.

To get there in 2013, we need to hit the three items which is revenue growth from the strategic portfolio, some improvement in US federal business; the second, continuing to improve the way we deliver our offerings as cost effective as possible through the use of increased automation and resource allocation strategies.

And then lastly, continue to balance opportunities for us to improve SG&A, particularly in the G&A area, as we allocate funds to allow us to further support revenue growth.

On the second question, referring to slide 19 which relates to pension, let me just comment again that we do have a defined benefit pension plan in the US and international, the largest one is in the US.

These plans for the most part have been frozen for a number of years, and the discount rate that I was referring to from a US GAAP perspective is the rate in which the future obligations are present valued.

Under US GAAP purposes you set the rate at the end of the year for us, December 31 is our measurement date.

If you're looking at those same obligations which are frozen for the US plan and most of the international plan, at December 31, 2011, those obligations were present valued at 4.96%.

At December 31, 2012, those obligations for the US plan were present valued at 4.01%.

That did have the impact in increasing the pension obligation.

As we have said previously, this is a longer term obligation.

We have improved the business to the point that we are able to have made the increased pension contributions during 2012 and continue to generate free cash flow, and we expect to do so over the horizon as we have discussed going into 2013 and beyond.

Thank you.

And sorry to monopolize the time, but just to contextualize it, can you remind people what the pension obligation -- what the unfunded pension obligation was when you started?

Yes, Jamie, it was October 7 of 2008, I think.

And as of September 30, 2008, the pension plans were fully funded.

The US plan.

The US plan was fully funded.

And that's the impact, again, of the recession and some on asset returns, but primarily, the reduction in interest rates has driven it from fully funded to the numbers that Janet reported earlier.

From December -- from October of 2008, I know we have seen assets move consistent with where market returns have been.

They're approximately around the same level they were at 2008, so the increase in that underfunded situation is coming from the change in the discount rates.

All right.

Thanks.

I'll go back into the queue.

Thanks, Jamie.

Thank you, Jamie.

We'll go next to Ned Davis with William Smith & Company.

Yes, thank you, and thank you for the clarity on the pension, but I just wanted to understand a little bit more granularity on this.

Supposing that the federal index rate were to rise by 25 basis points, what would happen to the schedule of funding requirements on the domestic plan that you've got, I think on slide 20?

Can you give us the sensitivity of those future funding obligations relative to that federal rate as opposed to the GAAP rate?

Ned, the US GAAP rate is one rate as determined, and so there is only one data element for which you can flex the 25 basis point change.

For the international -- for the funding of the US plan, based upon the way the MAPE21 legislation works, it's based on a number of factors, so I really can't at this time tell you what a 25 basis point change in your scenario would do because it does-- there are choices in which you make and 25 year averages versus averages at other points in the year.

So, it is a little bit hard to pinpoint exactly that a current 25 basis point change, how that would correlate to a funded change.

Could you, in a more -- I understand the limitations of trying to do that.

But if you kept all the other factors kind of constant, wouldn't you be able to at least do a theoretical calculation that would reflect this over time?

At this point in time, given the number of moving elements in there, we feel it's most appropriate to give our best estimate over that extended horizon.

There can be a number of pieces that would change, and I think we're more comfortable with the point estimates reflecting the current market because I don't want to speculate on what that would do because it could also affect the assets based upon if a change in interest rate environment could effect returns on the fixed income assets.

And depending upon how long that 25 basis point change happens and what time period, it may or may not have an impact on the MAPE21 rate that we use for the pension funding.

Okay.

On a related question, under the new guidelines, you have higher predictability, I think, in any scenario of your funding requirements, at least domestic, and I was interested that you hadn't bought back shares.

You had a great fourth quarter in terms of cash flow, particularly on the technology side.

Is the Company looking to be aggressive in buying back shares, or can you give us some kind of flavor as to what your appetite will be based on your financial situation?

I think we announced this board approved and authorized us in mid December, so close to the end of the fourth quarter, and they authorized $50 million of repurchases over the next two years.

And we're going do that as we think is appropriate, and we'll report back on that when we do.

Finally, on the technology side, very impressive Q4, you have cautioned us many times not to look at -- put too much into a quarter.

But from the tone of your remarks and your comments about the technology, it sounded like you are a lot more constructive about the outlook for selling software to your user base and expanding that user base.

Can you give us a little more flavor on that, on the technology side, ClearPath.

Yes, I think the goal as stated is to keep technology flat year over year, and we're very pleased the with the fact that we have done that or grown it some each of the last three years.

We continue, and certainly it's an important set of investments for us to look for ways to continue to make that a more open platform, a more capable platform as I described and look for additional market opportunities for our technology.

Great.

Thank you.

Great.

Thank you.

We'll go next to Brian Gesuale with Raymond James.

Yes.

Good job on the quarter, guys.

How are you?

Good, thanks.

How are you?

Doing well.

I wanted to follow up on that technology question that was just asked.

ClearPath seems to have a really nice product road map that's being accepted by the customers.

Stealth is now getting into your channel and your commentary about roaming sales from channel seemed to imply some optimism.

Should we think of that business as growing going forward and maybe a new benchmark is not flat?

Or maybe even a more direct way to ask the question is what's more likely, technology growing next year or this year rather in 2013 or your services business hitting that 8% to 10% operating margin number?

It's important for us that the services-- our goal remains, as we said, for the technology business, we want to at least maintain that business.

And you're right to pick up in our commentary that we continue to enhance those product offerings and are excited about the customer reactions to both ClearPath and initial reactions to the Stealth and by the reseller community.

But equally important to us is to hit that services operating profit 8% to 10%.

And they remain goals for us going forward, and we are focused on both.

In the near term though, is it fair to say that you have more visibility in '13 in your technology business -- in your technology goals than your service goals, just given the challenging federal environment and some of the delayed buying patterns we have seen globally?

I'm not sure I would say that, Brian.

The services has a backlog and you at least have a backlog to be working off of in getting some directional sense based on the backlog, and orders are a leading indicator.

On the technology side is fundamentally as sell and bill business within the same quarter.

That can make it, as we have said many times before, a spikier business.

And again, that's why we recommend not drawing too many conclusions from any one quarter but looking more to full year performance.

Right, absolutely.

And you guys keep growing that business.

I know our expectations keep expanding as you guys continue to execute.

Maybe just two other quick ones for you.

Where does this federal business bottom out?

We are hearing from a lot of folks that are selling IT into the federal space that uncertainty has just kind of even exacerbated and grown more recently with the fiscal cliff solution and the mini cliff as they're numbered here coming up over the next few months.

How do you feel about that business?

Well, it's a challenging environment for sure.

I think the macro environment and the uncertainty in federal budgets, sequestration and all those issues isn't going away.

It seems like that just lingers or gets worse over time.

At the same time, I think we have been fairly forthright in saying that we think our issues in the federal business were not just macro related, that we had some execution issues.

We lost some recompetes over a year ago, they're washing through year over year compares and as that happens, we're finding ourselves having the opportunity not to be focused on recompetes so much as we are focused on winning new business.

And we have been excited to get the [TASO] award back in Q3.

I think you saw in the press recently we won a significant IRS deal.

We won that IRS storage as a service project.

There are a lot of good things going on in that federal business, and I feel like it's getting better, but we're going to have to wait and see.

Our issues have been a combination of our own issues as well as macro.

I think we're dealing with our own issues.

The macro still has a lot of uncertainty to it.

Okay, that's very helpful.

And then maybe just one follow-up as you guys have paid down all this debt and built up the cash balances.

You mentioned about the $50 million authorization to buy back stock.

I think you went into the detail that you are going to go into with that.

Are you entertaining or looking at any minor tuck-in acquisitions?

Anything to bolster your technology or services portfolio?

I think the areas that we are really focused on are the ones I mentioned.

How do we enhance our existing solutions with those disruptive trends, and how do we invest in areas like the ClearPath program, Stealth and application management services, which are all more organic in nature, I would say?

Right.

Okay, terrific.

Thanks very much, guys.

Thank you.

Thanks Brian.

We'll go next to Bill Smith with William Smith & Company.

Hi, Ed and Janet and Niels, congratulations on a tremendous quarter, but also the last four years, Ed, what you have accomplished under your leadership.

I think it speaks for itself, so we appreciate that.

My question is on your capital expenditures.

I think you mentioned or Janet did that they're going to increase a little bit from $132 million or $133 million to $155 million or so.

Can you comment on what that capital allocation might look like and where that might go here in 2013?

Sure, Bill.

Thank you for your comments earlier.

As I did say in my comments, we anticipate 2013 CapEx in the $150 million to $175 million range.

Our capital expenditures are in three areas, largest being the amount that supports our outsourcing business followed by investments in marketable software and the last of the internal infrastructure capital expense.

Every year when we have given a range, we have always said it's somewhat deal dependent, dependant upon the opportunities that we see in the pipeline from new deal, new business opportunities.

And as we go from 2012 into 2013, the increase would be in the areas of revenue generating revenue supporting type of capital expenditures.

Either of those in support of the outsourcing business or to a lesser extent, in software for revenue growth.

Does that answer your question, Bill?

Those two primary areas, is that correct?

Yes, it is.

Okay, great.

Thank you.

Thanks, Bill.

That does conclude our question and answer session.

At this time, I would like to turn the conference back over to the speakers for any additional or closing remarks.

Great.

Thanks, operator.

Let me just thank all the people that are on the call and have participated in the call.

We appreciate your interest, we appreciate you being with us today.

I would like to thank all the members of the Unisys team for their hard work, and we look forward to speaking with you again to report on our first quarter results.

Thank you very much.

Thank you.

That does conclude our conference.

You may now disconnect.