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Unisys (NYSE:UIS)

Q4 2013 Earnings Call

January 30, 2014 5:30 pm ET

Executives

Niels Christensen

J. Edward Coleman - Chairman, Chief Executive Officer and Member of Finance Committee

Janet Brutschea Haugen - Chief Financial Officer and Senior Vice President

Analysts

Glenn Mattson - Sidoti & Company, LLC

William S. Smith - Wm Smith Securities, Inc.

Operator

Good day, and welcome to the Unisys Fourth Quarter 2013 Financial Results Conference Call. At this time, I'd like to turn the conference over to Mr. Niels Christensen, Vice President, Investor Relations at Unisys Corporation. Please go ahead.

Niels Christensen

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today, Unisys released its fourth quarter and full year 2013 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. Second, 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. Third, today's presentation, which is complementary 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'd 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 expectation. These factors are discussed more fully in the earnings release and in the company's SEC filings. Copies of those SEC reports are available from the SEC and from the Unisys Investor website.

Now I'd like to turn the call over to Ed.

J. Edward Coleman

Thank you, Niels. Hello, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2013 financial results.

Please turn to Slide 4 to begin our discussion. We closed 2013 with a good fourth quarter, delivering significantly increased profits on higher revenue. Our revenue grew 2%, with growth in both our technology and services businesses. We are also pleased to see a third consecutive quarter of year-over-year services order growth.

At the bottom line, we reported fourth quarter 2013 diluted earnings per share of $2.37, up from $1.67 in the year-ago quarter. We were particularly pleased with margin improvement in our services business, where we achieved an operating profit margin of 9.8%, at the high end of our targeted 8% to 10% range. This improvement was driven by a richer mix of higher-margin services and solutions, as well as continued progress in enhancing the cost efficiency of service delivery.

Our technology business also turned in a solid profit performance in the quarter, although we were disappointed that we did not close all the ClearPath opportunities or at the size we had anticipated. This kept us from meeting our goal of maintaining flat ClearPath technology revenue for the full year of 2013 compared with 2012.

Moving to Slide 5. As we review 2013 and our accomplishments over the past 3 years, we can see the progress we've made against our goals, as well as those areas that need further improvement. Overall, 2013 was our fifth consecutive year of profitability in free cash flow generation, a record we're proud of and it speaks to the progress we've made as a company.

Over the past 3 years, we further simplified our operations and reduced costs, met our aggressive $1 billion debt reduction goal and built a much stronger, more competitive financial foundation for the company. From a products and solution perspective, we brought to market a range of new offerings that build on our core strengths in mission-critical computing and help our clients take advantage of disruptive technology trends and emerging delivery models.

We believe our portfolio today is more competitive than it's been in years, with innovative offerings, including our Unisys Stealth line of cybersecurity software, our breakthrough Forward! by Unisys fabric-based servers, our IT Service Management as a Service offering and our other cloud-based solutions. We've also enhanced our existing portfolio. Clients have responded positively to innovations in our flagship ClearPath server technology. And in our services business, we've strengthened our portfolio of systems integration solution and end user data center and application outsourcing services.

At the same time, we recognize that we didn't achieve all the goals we've set for year-end 2013, particularly in terms of growing our systems integration and IT outsourcing businesses and delivering consistent 8% to 10% service operating profit margins.

Looking ahead, over the next 3 years, we're focused on profitably growing our revenue and achieving our services operating profit margin targets, while maintaining cost discipline and strong cash generation.

Slide 6 shows the growth drivers that will be important to our success in reaching these goals over the 2014 to 2016 time period. In our services business, we look to drive growth in systems integration and IT outsourcing by leveraging areas where we currently have market leadership, such as in End User Outsourcing Services. We are focusing on higher-margin services that utilize Unisys' industry and cross-industry application software and frameworks, as well as services that take advantage of highly leveraged delivery models, such as IT Service Management as a Service and other cloud-based services.

Some examples of these cloud-based leveraged solutions include our air cargo solution, our InfoImage as a Service Enterprise Content Management solution, our mortgage solutions in the U.K. and as-a-service versions of our retail banking solution in Latin America and Asia. We also look to drive growth in Application Managed Services to complement our portfolio of data center and End User Outsourcing Services. We've seen some initial success over the past year in growing this business and have a healthy pipeline of opportunities.

In our technology business, we intend to grow this business by leveraging our continued investments in Forward! and Stealth, while building on our flagship ClearPath platform as the base. With our Forward! by Unisys server platform, we have a compelling product to sell to organizations looking to migrate from expensive UNIX systems to consolidate sprawling data centers on to a standard x86 environment and to run ERP and cloud applications more securely and cost-effectively. We've seen a great deal of interest in Forward!, and we have already received some early orders since the system became available in December. For one of our beta clients, Italian-based IT services provider, Especial, we migrated the client's SAP applications from the IBM AIX system to an Intel-based Forward! system running 2K Linux in a matter of days, yielding impressive results in terms of faster application performance and increased flexibility.

With our Unisys Stealth family of cybersecurity software, we believe we have a disruptive technology that breaks the established paradigm of security at a time when traditional approaches to security aren't working, as we can see from almost daily reports of high-profile data breaches in the news. Stealth makes use of advanced encryption and data cloaking technology to render critical data and endpoints essentially invisible on the network. We're seeing early adopters begin to make use of Unisys Stealth. A large public sector organization, for example, recently chose Stealth to provide security for mission-critical operations as part of a data center consolidation project involving thousands of servers. Another example is a large commercial client that is using Stealth to protect systems running Windows XP in a process control environment.

A third revenue growth driver in the years ahead is the work we're doing to build out our reseller channel. As I've noted in the past, currently, less than 5% of our revenue comes through value-added resellers and distributors, which is well below that of our competitors. We want to increase that percentage in the years ahead. We've made much progress in building our reseller channel program and, today, have about 60 VARs in our network focused initially on selling Stealth in North America and Europe. These channel partners are opening up sales opportunities for Stealth and new accounts for Unisys. We recently added systems integrator Capgemini as a value-added reseller of Stealth in the U.K., and we're thrilled to have them in our network. Overall, we're pleased with the interest and level of activity around Stealth in the channel.

Moving to Slide 7. To achieve our growth goals, we plan to increase our investments in sales and marketing initiatives in 2014 around our growth programs, such as Stealth and Forward!. Just this month, we've strengthened our sales leadership by bringing on Jeff Renzi as President of Global Sales, with responsibility for leading our sales efforts across all lines of business and geographies. Jeff is a highly experienced executive with demonstrated success in creating high-performing sales organizations and driving profitable revenue growth at Dell, Perot Systems, and EDS. I'm confident that he will make a significant contribution to our success. In addition, we're mobilizing new dedicated sales teams focused on selling Forward! in select markets to complement our existing direct and indirect sales efforts. On the marketing side, we're making increased investments in product promotion and advertising to drive awareness of our products and solutions, particularly for Stealth, and we plan to roll out new Forward! advertising in the near future.

Turning to Slide 8. As we implement these initiatives, we believe we are well positioned to profitably grow the company over the next 3 years and move Unisys to the next level of success. Our financial goals over the 2014 to 2016 time frame are as follows: First, to grow our technology business. Building on the investments we've made and continue to make in Forward!, Stealth, our cloud offering, as well as ClearPath, we look for technology products to be a driver of growth for the overall business over the next 3 years.

Second, to sell new products through new channels to reach new customers. We're continuing our efforts to build out our reseller channel to address broader market opportunities and increase the percentage of our revenue coming from the channel.

Third, to reach our goal of consistently achieving an 8% to 10% operating profit margin in our services business. As part of that, we continue to look for ways to grow our higher-margin services, simplify our operations and provide services more cost-efficiently. All of these goals support our mission to become a company known for financial strength, for the quality of our services and solutions provides ongoing differentiation and where we're an acknowledged industry leader. We're excited about the opportunities in front of us, and I look forward to updating you on our progress on our next call.

Again, thank you for joining us today. Now I'd like to turn the call over to Janet to take you through our results in more detail, and then we'll be happy to take your questions.

Janet Brutschea Haugen

Thanks, Ed, and hello, everyone. After a challenging start to the year and a difficult third quarter, we ended 2013 with solid fourth quarter performance. In my comments today, I'll be referring to certain GAAP and non-GAAP comparisons. For the fourth quarter comparisons, the non-GAAP results exclude pension expense. For the full year comparisons, non-GAAP references exclude pension expense in both years and debt reduction charges in 2012.

Now let me start with our overall fourth quarter and full year 2013 financial results. Please turn to Slide 10. At the top line, we reported revenue of $996 million in the quarter, which was up 2% year-over-year. Currency had minimal impact on the year-over-year comparison.

For the full year, revenue of $3.5 billion was down 7%, with currency having a 1-point negative impact on the year-over-year comparison. Based on today's rates, we anticipate currency to have about a 2-percentage-point negative impact on the revenue in the first quarter of 2014 compared to the first quarter of 2013. At today's rate, we do not expect currency to have a significant impact on the full year comparisons in 2014.

We reported an operating profit of $155.9 million for the fourth quarter of 2013. Our gross profit margin improved 250 basis points to 31.7%. Operating expenses declined 7% in the fourth quarter of 2013 compared to the year-ago quarter as lower SG&A and R&D expenses more than offset increased investments in growth programs like Stealth, Forward!, ITSM as a Service and Application Managed Services. I think it's important to note that we've reached a point with a number of our new solutions, notably Stealth and Forward!, where we believe it is appropriate to accelerate our sales, marketing and R&D investments in support of these revenue growth opportunities.

As Ed mentioned in his comments, we are continuing to see momentum in these programs. In 2014, we are increasing our spend to support these growth opportunities. While we have historically been able to fund our investments in new solutions using cost reduction efforts elsewhere, we expect that 2014 will represent a year of higher selling and marketing expense. We will remain focused on cost reduction wherever possible throughout the company, and we'll be carefully managing any incremental spend. But our current view is that operating expenses will grow by approximately 1% to 2% of revenue in 2014 versus 2013 levels.

For the full year 2013, on lower revenue, our operating profit of $219.5 million was down 31% versus 2012. The operating margin decreased to 6.4% from 8.6% on lower gross profit margin. The decline in profitability is primarily attributable to lower sales of Enterprise Software and Servers during 2013. Interest expense in the fourth quarter of 2013 was roughly the same as the year-ago period. Interest expense for the full year 2013 decreased $17.6 million, a 64% reduction from 2012 as a result of the debt reduction and refinancing that were completed in the third quarter of 2012.

For the full year 2013, we reported $9.8 million of other income versus other expense of $37.6 million in 2012. The major item causing the year-over-year change was the 2012 debt reduction charges totaling $30.6 million. The remaining year-over-year difference is primarily attributable to favorable foreign exchange movements in 2013 compared to 2012.

Our fourth quarter 2013 pension expense decreased to $24.1 million from $31.5 million in the fourth quarter of 2012. Consistent with our prior estimates, we reported $93.5 million in pension expense in 2013 compared with pension expense of $108.2 million in 2012.

For the fourth quarter of 2013, pretax income of $152.4 million was $43 million higher than the $109.4 million reported in the fourth quarter of 2012. Our non-GAAP pretax income for the fourth quarter was $176.5 million in 2013 compared to $140.9 million in 2012. Pretax income in 2013 was $219.4 million compared to $254.1 million in 2012. Our non-GAAP pretax income was $312.9 million in '13 compared with $392.9 million in 2012 due to lower revenue and gross margin.

At the tax line, we had a $28.2 million tax provision in the quarter compared with a $20.5 million tax provision in the year-ago quarter. For the full year of 2013, we had a $99.3 million tax provision versus a $97.3 million tax provision in 2012. As I have said previously, our tax provision continues to be highly variable from quarter-to-quarter and year-to-year, depending upon the geographic distribution of our income.

We reported net income of $117.4 million in the quarter versus net income of $81.8 million in the year-ago quarter. The non-GAAP net income rose to $140.6 million for the fourth quarter of 2013 from $112.2 million in the fourth quarter of last year. For 2013, net income decreased to $92.3 million from $129.4 million for 2012 from lower revenue and gross margin. Non-GAAP net income was $182.3 million in 2013 compared to $265.4 million in 2012.

Our fourth quarter 2013 diluted earnings per common share was $2.37 per share compared to $1.67 in the year-ago quarter. Our fourth quarter 2013 non-GAAP diluted EPS improved to $2.82 per share compared to $2.27 in the fourth quarter of 2012. For 2013, diluted earnings per common share declined to $2.08 per share from $2.84 per share a year ago. Our 2013 non-GAAP diluted earnings per share was $3.87 per share compared to $5.50 in 2012.

Moving to our fourth quarter and full year revenue, please turn to Slide 11. Services revenue, which represented 82% of our revenue in the fourth quarter of 2013, rose 1% year-over-year. Currency had a 1-percentage-point negative impact in the quarter, so services revenue rose 2% on a constant currency basis. Services revenue declined 6% for the full year in 2013, 5% on a constant currency basis. Fourth quarter technology revenue accounted for 18% of our total revenue and rose 5% year-over-year. Technology revenue was down 10% for the full year of 2013, and I will talk about the technology business in more detail on Slide 13.

On Slide 12, you can see our services revenue and margin. Fourth quarter 2013 services revenue of $813 million increased 1% year-over-year. 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 of services over the previous 11 quarters. The fourth quarter services revenue of $813 million was above the high end of that range implied by the amount of revenue in opening backlog at the start of the quarter due to higher sell-and-bill revenue in the quarter.

In the fourth quarter of 2013, we saw a year-over-year revenue growth of 4% in IT outsourcing and 2% in systems integration. For the full year 2013, IT outsourcing revenue was down 3% and systems integration revenue was down 11%.

Moving to services gross margins. Fourth quarter 2013 services gross profit margin increased 170 basis points year-over-year to 21.9% from 20.2% due to a richer mix of higher-margin services and solutions and improved delivery efficiency. Our services operating margin rose by 320 basis points year-over-year to 9.8%, as lower operating expenses, which reflected our continued focus on cost control, complemented the improved gross profit. As I mentioned, while we were pleased with the year-over-year sequential improvement in our services operating margin, the fourth quarter 2013 operating margin benefited from higher levels of Unisys' IP-based solution. We are not yet to the point where we are operating consistently in our long-term targeted range of 8% to 10%, and we still have work to do to achieve services operating margins at or above 8% on a consistent basis.

For the full year 2013, on lower revenue, we reported services gross margin of 19.7%, down 30 basis points from 2012. Our operating margin of 6.2% was down 20 basis points compared to 2012.

Moving on to technology revenue and margins on Slide 13. Enterprise-class software and server revenue in the fourth quarter was down 3% year-over-year, while sales of other technology, all of which is third-party product, increased largely due to sales into the U.S. Federal government. Our annual goal has been to maintain stable technology revenue, most importantly, in our flagship ClearPath platform, which is the largest component of our Enterprise Software and Server business.

During 2013, our technology revenue was down 10% due to lower ClearPath revenue. While we were able to maintain or grow our ClearPath revenue in the 3 years prior to 2013 and had the pipeline opportunities to meet our objective in 2013, a number of deals fell out of the fourth quarter. As a result of a higher proportion of third-party product sales within the technology segment, we reported a technology gross margin of 61.4% in the fourth quarter, down 670 basis points from the prior year. Our technology operating margin declined to 40.6% from 43.9% in the fourth quarter of 2012. Our full year growth and operating margins in this segment declined to 53.9% and 21.1%, respectively.

Slide 14 shows our fourth quarter and full year revenue by geography and industry. North America revenue declined 4% in the fourth quarter despite a slight year-over-year increase in our U.S. Federal government revenue, which I'll discuss in a moment. The decline in North America was driven primarily by lower services revenue. In 2013, our North American revenue represented 41% of our revenue and declined 7%.

In the fourth quarter, international revenue rose 2% and was up 3% on a constant currency basis. For the full year, international revenue was down 7%, down 6% on a constant currency basis. Revenue in our European region was up 7% in the fourth quarter on an as-reported basis and rose 4% in constant currency. This was due to good performance in Continental Europe. For the full year, European revenue, which represented 33% of our total revenue, was down 4%, 5% on a constant currency basis. Adjusted for our 2012 South Africa divestiture, European revenue was essentially flat from 2012 to 2013.

The fourth quarter revenue from our Asia Pacific region rose 20% as reported and 25% on a constant currency basis, reflecting higher revenue in our IT outsourcing and technology businesses. 2013 revenue in the region was down 14% as reported and 12% on a constant currency basis. Fourth quarter revenue declined 15% in our Latin America region on a reported basis and 9% on a constant currency basis, as both the systems integration and technology were down year-over-year. For the full year, revenue was down 5%, but was up 2% on a constant currency basis.

From an industry perspective, public sector remained our largest single industry revenue source, accounting for 41% of our 2013 and 2012 revenue. Public sector revenue increased 1% year-over-year in the fourth quarter, but was down 7% for the year. Revenue from commercial industry customers represented 36% of our 2013 revenue versus 35% in 2012, while the financial sector was 23%, down from 24% in 2012. Our commercial revenue rose 12% in the quarter and was down 5% for the full year, while revenue from our financial services customers declined 10% in the quarter and for the full year, reflecting declines in both services and technology.

Slide 15 provides more detail on our U.S. Federal government revenue over the past 8 quarters. Revenue from the U.S. Federal government represented 15% of total Unisys revenue in 2013. Compared to the year-ago quarter, our overall U.S. Federal revenue rose $3 million or approximately 2% to $151 million. This increase represents our first quarterly growth in U.S. Federal revenue for a number of years.

Increased sales of third-party technology products more than offset the decline in services revenue, which was impacted by the government shutdown during the first half of October. We were encouraged by the relative stability we saw in this business during 2013, and we'll continue to pursue new revenue opportunities in 2014 with a focus on growing this business.

In the fourth quarter of 2013, revenue from civilian agencies represented 45% of our revenue base within the U.S. Federal government, while homeland security agencies accounted for 30% and defense and intelligence agencies represented the remaining 25%. For the full year, civilian agencies represented about 44% of our U.S. Federal government revenue, homeland security agencies represented 32% and defense and intelligence agencies accounted for the remaining 24%. We ended the fourth quarter of 2013 with about $349 million of U.S. Federal services backlog, which was up 5% versus the fourth quarter of 2012.

For some comments on services orders, please turn to Slide 16. In the fourth quarter, our services orders increased year-over-year and sequentially. This was the third straight quarter of year-over-year services orders growth. From a geographic perspective, we saw year-over-year services order growth in our Asia Pacific and Latin America region during the fourth quarter. Orders in our other regions declined in comparison to the fourth quarter of 2012, although we saw order growth in the U.S. outside of our U.S. Federal business.

Services orders grew in systems integration, IT outsourcing, business process outsourcing and core maintenance. We ended the fourth quarter with $4.8 billion in services backlog, which was down by 5% from the December 31, 2012, backlog, but flat with the last 2 quarters. The year-over-year decline in backlog primarily reflected reductions in IT outsourcing and business process outsourcing backlog. Currency had about a 1-percentage-point negative impact on the year-over-year comparison.

Approximately $630 million of the December 31, 2013, services backlog is anticipated to convert into first quarter 2014 services revenue. This is the same level as we saw at the start of the fourth quarter of 2013. During the past 12 quarters, the amount of revenue and backlog at the start of the quarter has typically ranged between 85% and 90% of our quarterly services revenue for the full quarter, and then sell-and-bill revenue has accounted for the remainder. Of our $4.8 billion in services backlog, we expect approximately $2.1 billion or 44% will convert into 2014 services revenue.

Moving to cash, please turn to Slide 17 for an overview of our cash flow performance in the quarter. We generated $141.2 million of cash from operations in the fourth quarter of 2013 compared to $153.9 million in the year-ago quarter. The company generated $187.4 million in cash from operations during 2013 versus $261.3 million in 2012. The year-over-year decline in cash generated from operations during 2013 was largely attributable to the lower technology revenue and margin. We contributed $45.6 million in cash to our defined benefit pension plans in the fourth quarter of 2013 versus $26.4 million in the fourth quarter of 2012. During 2013, we contributed $147.2 million compared to $201.5 million in 2012. The pension funding contributions are reflected in cash flow from operations.

Capital expenditures were $48.4 million in the fourth quarter of 2013 versus $35.9 million in the fourth quarter of 2012. Capital expenditures for the full year were $151.4 million, consistent with our prior estimate and compared to $132.6 million in 2012. Growth in capital expenditures in the fourth quarter of 2013 and for the full year was led by higher investments in marketable software to support ClearPath, Stealth and Forward!, outsourcing assets within our IT outsourcing business and automation tools to enhance our service delivery efficiency.

We anticipate full year capital expenditures during 2014 to be in the range of $150 million to $200 million. We generated free cash flow of $92.8 million in the fourth quarter of 2013 versus free cash flow generation of $118 million for the same period last year. Our free cash flow before pension contribution was $138.4 million for the fourth quarter of 2013 versus $144.4 million in the fourth quarter of 2012. During 2013, we generated free cash flow of $36 million versus $128.7 million in 2012.

Free cash flow before pension contribution was $183.2 million during 2013 versus $330.2 million in 2012. Unisys generated adjusted EBITDA of $214.7 million for the fourth quarter of 2013 versus $186.6 million in the fourth quarter of 2012 and $470.8 million for the full year 2013 versus $583.8 million in 2012. Depreciation and amortization was $38.7 million in the quarter compared to $46.2 million in the fourth quarter of 2012. Full year depreciation and amortization was $159.6 million in 2013 versus $174.6 million in 2012. During 2014, we expect full year depreciation and amortization to be approximately $150 million.

Our debt balance was $210 million at December 31, 2013, and is comprised of our 6 ¼% senior notes due in 2017, which were issued in the third quarter of 2012. Our cash balance was $640 million at December 31, 2013, compared to $656 million at December 31, 2012. Our cash balance at the end of 2013 was more than 3x our debt level.

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. During 2013, $11.7 million in purchases were made under this authorization.

With respect to our capital structure, I want to take a moment to remind our investors that the 2.6 million shares of our 6.25% mandatory convertible preferred stock will convert into common stock on March 1, 2014. If the price of Unisys common stock is below $37.43 per share through February 26, the conversion rate per share of mandatory convertible preferred stock will be 2.6717 shares of common stock for a total of approximately 6.9 million common shares.

Turning to Slide 18, I would now like to provide an update on our worldwide pension plans, funded position and expected cash funding level. The net deficit in our defined benefit plans improved by $918 million from the December 31, 2012 amount. As I will discuss, good asset returns, higher discount rates used to present value of the obligation and $147 million in contribution are the primary reasons behind the improvement. The actual returns on assets in the U.S. plan were 16.42%, more than double the 2013 expected long-term rate of return of 8%.

Our actual returns on the assets within our international plans were generally consistent with the expected rate of return of 6.4%. The assets in the international plans are more heavily weighted towards fixed income versus equity in the U.S. plan. 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 U.S. GAAP.

It is important to note that the discount rate and certain other assumptions for funding and GAAP purposes are derived on different bases. The discount rate used to present value of the U.S. obligation at December 31, 2013, was 5.02%. This was up 101 basis points from the December 31, 2012, discount rate of 4.01%, reflective of the change in the broader interest rate environment from last year.

Taking into account the net effect of the decrease in the present value of our pension liability, the increase in pension assets driven by strong market returns and contributions made into the plan, we ended 2013 in an underfunded position in our U.S. plan of $1.1 billion, an improvement of approximately $715 million from the level at year-end 2012. The weighted average discount rate used to present value of the international pension obligations at December 31, 2013, was 4.15%. This rate represented a 23-basis-point increase from the discount rate at December 31, 2012.

The underfunded position of the international plans at December 31, 2013, improved by approximately $170 million from the prior year end. A change of 25 basis points in the U.S. discount rate causes an approximate $136 million change in the pension obligation. For international plans, a change of 25 basis points in the discount rate causes an approximate $126 million change in the pension obligation.

From a U.S. GAAP expense perspective, we expect approximately $78 million in pension expense in 2014 compared with pension expense of about $94 million in 2013.

Slide 19 shows the change in the underfunded position on our balance sheet from December 31, 2012 to December 31, 2013. The funding estimates for our U.S. qualified defined benefit pension plan are based on current estimated asset returns and the funding discount rate used for the U.S. qualified defined benefit pension plan, which have been updated to reflect the 2014 discount rates.

The future funding requirements are likely to change based on, among other items, market conditions and changes in discount rate. Current estimates for future contributions to international plans are based on local funding regulations and agreements and are likely to change in 2015 and beyond based on a number of factors, including market condition, changes in discount rates and changes in currency rates.

Turning to Slide 20, we have updated our estimated future pension contribution through 2025. This chart also shows the change from our prior estimate in 2013 by reflecting on the fact that for the period from 2014 to 2025, the estimated future contributions have declined by approximately $150 million, with approximately $120 million of the decline estimated to occur in the 5-year period from 2014 through 2018.

Please turn to Slide 21 for some additional detail on our pension funding over the next 5 years. We contributed $147 million of cash in 2013 to our pension plan, $34 million into the U.S. qualified plan and $113 million into the other plans. We expect to contribute approximately $126 million in 2014 into the U.S. plan and anticipate contributing another $106 million into our other plans during 2014, for a total 2014 contribution of approximately $232 million.

As I said, the funding estimates for our U.S. qualified defined benefit pension plans are based on current estimated asset returns, the funding discount rates used for the U.S. qualified defined benefit pension plan, which have been updated to reflect the 2014 discount rate. The future funding requirements are likely to change based on and among other things, market conditions and changes in discount rates. And as I said, the current estimates for the future contributions to international plans are based on local funding regulations and agreements and are likely to change in 2015 and beyond based on a number of factors, including market conditions, changes in discount rates and changes in currency rates.

Again, as I mentioned earlier, the discount rates and certain other assumptions are different for funding purposes and for GAAP purposes.

In closing, 2013 was the fifth consecutive year of profitability and free cash flow generation for the company. As we move through 2014, we are focused on achieving the financial goals of revenue growth and operating profitability that Ed discussed earlier. We also remain committed to cost management and optimizing cash flow. We have some important investments planned for 2014 in support of our revenue growth goal.

As I noted earlier, we expect higher selling, marketing and R&D costs in support of our efforts to increase awareness and build revenue opportunities for Stealth, Forward! and some of our other innovative solutions we are bringing to market. In addition, our pension contributions are expected to rise by $85 million in 2014, and we may have higher capital expenditures in 2014 based on timing of new deal signing. Our goal is to minimize the net cash and earnings impact of these factors through prudent financial management. Ultimately, we believe that the investments in sales, marketing and R&D, as well as the incremental capital expenditures should yield meaningful returns to the company and our shareholders.

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

J. Edward Coleman

Thank you, Janet, very much for that. Operator, we'd like to open the call up now for questions, if we may.

Question-and-Answer Session

Operator

[Operator Instructions] We will go first to Glenn Mattson with Sidoti & Company.

Glenn Mattson - Sidoti & Company, LLC

Real quick, before I forget, can you just tell us what that funding discount rate is for the cash contribution for 2015?

Janet Brutschea Haugen

For the U.S. plan, the discount rate determined under the U.S. funding regulation is 5.70%.

Glenn Mattson - Sidoti & Company, LLC

And what was it last year?

Janet Brutschea Haugen

At June 30, it was about 5.72%. And Glenn, I am...

Glenn Mattson - Sidoti & Company, LLC

You have to get that? Okay.

Janet Brutschea Haugen

Yes. I'll have to get back to you. It's roughly around the same.

Glenn Mattson - Sidoti & Company, LLC

Okay. Okay, great. And then maybe we could talk about the services business, the strength there a little bit. I guess, is the market getting better, and you guys are executing, or would you attribute it more to execution?

J. Edward Coleman

Yes. I think, as you saw, we had a good fourth quarter and our strength in our services business in that quarter -- and this quarter was really driven by certain projects and opportunities and deals that we won that included a significant amount of uses of intellectual property within those deals. So when we have Unisys' IP in a transaction or a project or an outsourcing engagement, it really helps the overall margin quite a bit. As Janet said, we're not ready to declare victory on being able to consistently deliver that 8% to 10% operating profit margin, but we are encouraged by this quarter and recognize, again, that driving service engagements that include Unisys' IP is really key to getting to that kind of successful conclusion.

Glenn Mattson - Sidoti & Company, LLC

So it's more the mix, is that what you're saying?

J. Edward Coleman

Yes. Well, I think in this case is a strong mix of services. And again, as I mentioned in my comments, one of the things we're looking at is how do we continue to drive growth in that higher-margin services portion of our business.

Glenn Mattson - Sidoti & Company, LLC

Okay. And then in Federal, how should we think about that space in general as far as the market backdrop? Is it a space that's kind of bottoming in your guys' view, or still declining or turning or anything? What's the general market picture there?

J. Edward Coleman

Yes. I think it continues to be a difficult market. But as Janet noted, 2013 represented a flattening of the environment for us as opposed to previous declines. So we feel good about some of the new business that we won. It felt like there's a bit more visibility than there was 12 or 24 months ago into that business.

Glenn Mattson - Sidoti & Company, LLC

Okay. That's helpful. And the strength then in Asia Pacific, what do you attribute that to? Is it like 1 or 2 deals, or is it more broad-based or...

Janet Brutschea Haugen

Right. Earlier in the year, we had a little bit of weakness in the Australian marketplace where we had the government change, particularly in public sector. So that's one of the areas that we saw improving sequentially in the -- particularly in the services business. Beyond that, we had a number of nice new opportunities, particularly in the outsourcing space in the Australia and New Zealand area and some continued financial services client wins in the China region.

Glenn Mattson - Sidoti & Company, LLC

Okay. And if we could jump to the technology segment, if you don't mind, so things came in a little bit below what you had hoped for, I think. So is this another situation where things are kind of lumpy quarter-to-quarter and some stuff got pushed out into Q1, or is it more the things just kind of slipped through your fingers there? Is it...

J. Edward Coleman

Yes. I think it's the situation, again, where we had the opportunities in the pipeline, worked hard to close them, and there were a number that just did not close, either because we didn't get the decision -- the customer decision-making process at the right time. So we would again suggest not to look at that business on a quarter-to-quarter business -- quarter-to-quarter basis, but rather on a full year basis. Some of what we saw in the fourth quarter that we didn't get, we do think moves to Q1, but not necessarily all of it. So we think it's more of a 2014 play than necessarily a Q1 play.

Glenn Mattson - Sidoti & Company, LLC

And then so you say -- in general, if you're looking for growth in the technology segment, would you say, I guess, in '14, it's going to be off an easy compare because of the 10% drop in technology? So now we think 2014 would be growth. But had you made like this quarter's tech numbers, do you think you'd still be seeing growth off of that level? Or is it...

J. Edward Coleman

Yes. I hesitate to say anything's ever an easy compare. But as Janet noted, 3 out of the last 4 years, we've kept that technology business, particularly the ClearPath business, either flat or we've grown it. And we want to get back to that foundational base in 2014 and then use products like Stealth and Forward! to be the emphasis for changing that technology curve from being a flat curve to an upward trajectory and a growth environment for us.

Glenn Mattson - Sidoti & Company, LLC

Okay. Great. And then on Stealth, you have all these VARs signed up. And I guess, part of that strategy is to get them to become resellers of other products from Unisys' services and whatnot. Do you need to see some success from Stealth to get that channel really energized?

J. Edward Coleman

Well, yes. I mean, it's a key part of our strategy. And we want -- first of all, we think that having a reseller channel is important for us to address a broader set of customers and prospects than we can with our direct sales force. The first product that we have put into a channel, the reseller channel, is Stealth. And the resellers we've recruited to sell Stealth are security software specialists, by and large. So some of them, we think, can carry more of our products than just Stealth. But a large number of them, we've really selected them and signed them up really to drive the Stealth business. As we look at Forward! and taking that to market, we're also going to be looking at building a channel operation in support of Forward!. In some cases, that will be utilizing the same resellers. But in many cases, they'll be looking for a different type of reseller.

Operator

And today's final question will come from Bill Smith with William Smith Company.

William S. Smith - Wm Smith Securities, Inc.

Ed, maybe could you comment a little bit about the relationship with Amazon? And can you talk about Stealth? What kind of progress momentum have you seen there? In yesterday's news, Amazon talking about getting into the point-of-sale business and the concerns about breaches and everything with respect to security. It seems to play pretty well with Stealth. But could you comment a little bit on that Amazon relationship, and how that's playing out?

J. Edward Coleman

Yes. We're not in a position to break out Stealth as an individual product and the numbers on that or a particular use case like the use case where you can protect virtual machines in the Amazon cloud with Stealth. But the relationship is a good relationship. We've actually done some joint advertising in the Washington, D.C. area around Stealth and the Amazon Web Services cloud, and we're working together, looking at how we can design new solutions that work to both of our companies' advantage. And I guess I'll have to leave it at that.

William S. Smith - Wm Smith Securities, Inc.

Let's see. And on ClearPath, so some of that business may have flown through to the first quarter, but do you think there was any impact on -- that Forward! may have had on that business that people may have held back in anticipation of Forward!, or do we think about that as 2 separate services or products?

J. Edward Coleman

Yes. No, I don't think so, Bill. I think, what Forward! allows us to do within the ClearPath customer base is begin to look at non-ClearPath workloads that can be moved on to a Unisys platform. So I don't think it had any impact -- negative impact on the ClearPath business in the fourth quarter.

William S. Smith - Wm Smith Securities, Inc.

So that gets back to your point about the example you gave on moving that business off of the IBM on to Forward! then.

J. Edward Coleman

Well, that's right -- I mean, that's right. We think it's a great solution. If you're running a mission-critical application on an IBM AIX platform or Sun Solaris or HP-UX, this is a great opportunity to move it to an x86 Intel Xeon-based platform and still maintain those mission-critical attributes at a much lower price point than you were able to achieve with any of those other UNIX-based solutions.

William S. Smith - Wm Smith Securities, Inc.

Well, that's all incremental then to what you already have on Forward! because you're taking from a competitor and moving that on to x86.

J. Edward Coleman

That's correct. Okay. Well, operator, thank you very much for attending to us today. Thank you to everyone who participated and listened in on today's call.

I just would like to close by saying again how excited we are about the opportunities in front of us, and we look forward to updating you on our progress on our next call. Thank you very much.

Operator

And this does conclude today's conference call. Thank you, again, for your participation, and have a wonderful day.

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Source: Unisys Management Discusses Q4 2013 Results - Earnings Call Transcript

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