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Executives

Niels Christensen -

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

Janet Brutschea Haugen - Chief Financial Officer and Senior Vice President

Analysts

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Ned Davis - Wm Smith & Co.

David Smith - Citigroup Global Markets Limited

Unknown Analyst

Geoffrey K. Dancey - Cutler Capital Management LLC

William Smith

Unisys (UIS) Q4 2011 Earnings Call January 31, 2012 5:30 PM ET

Operator

Good day, everyone, and welcome to the Unisys Fourth Quarter and Full Year 2011 Results Conference Call. At this time, I'd like to turn the conference over to Mr. Niels Christensen, Vice President, Investor Relations. Please go ahead, sir.

Niels Christensen

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

Earlier today, Unisys released its fourth quarter and full year 2011 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. These materials are available for viewing, as well as downloading and printing. Third, today's presentation, which is complementary to the earnings press release, includes 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 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'd like to turn the call over to Ed.

J. Edward Coleman

Thanks, Niels. Hello, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2011 financial results. We made continued progress towards our financial and strategic goals during the year despite softness in our U.S. Federal business. I'm pleased with the work we're doing and the progress we're making in enhancing the company's financial profile.

In 2011, we completed our third consecutive year of profitability and positive free cash flow, an important milestone for the company. Turning to Page 4. A little over a year ago, we outlined our 3-year financial goals for Unisys, building on the company's more streamlined, cost-competitive business foundation. Our overall financial objective is to be a company that is consistently and predictably profitable and known for our financial strength.

Specifically, we want to: grow our IT outsourcing and systems integration revenue at market rates, adjusted for the loss of the TSA business, while maintaining stable revenue in our Technology business, particularly within our flagship ClearPath business; consistently achieve an 8% to 10% services operating profit margin;, improve our annual pretax profit to $350 million in 2013, excluding any change in pension income or expense from 2010 levels; and reduce our outstanding debt by 75% or $625 million from September 30, 2010 levels.

In the first year of executing on this plan, we've made tangible progress towards these financial objectives. In terms of our top line goals, while the decline in our important U.S. Federal business had a negative impact on our overall revenue growth in 2011, we were encouraged by growth in other revenue focus areas. Outside the U.S. Federal market, we grew our IT outsourcing revenue by 9% in 2011, our second consecutive year of growth in this business. Our non-Federal systems integration revenue, while essentially flat in 2011 following declines in prior years, grew in each of the last 2 quarters of the year.

Now our Technology business, for the second year in a row, were able to maintain stable revenue in our ClearPath business. Overall, Technology revenue declined in 2011 due to lower sales of third-party equipment. In terms of our margin goals, we reported a services operating profit margin of 6.9% in 2011, up from 2010, but below our targeted 8% to 10% range primarily due to the impact of the lower U.S. Federal revenue. Outside of that business, our services operating margin increased from 2010 levels and was within our targeted margin range.

Against our pretax profit goal, which I mentioned earlier, was to achieve $350 million of pretax profit in 2013 excluding any change in pension income or expense from 2010 levels, we made significant progress in 2011. Our pretax profit in 2011, excluding the $85 million debt reduction charges and $34 million of pension expense, was $326 million.

Finally, we also made major progress in 2011 toward our debt reduction goal. In 2011, we reduced our debt by $464 million or 56% to $360 million at year end. Our cash position net of debt increased by more than $350 million during the year. Since September of 2010, we've reduced our debt by a total of $478 million, getting us about 76% of the way toward our 2013 goal and cutting our annualized interest expense by more than $60 million.

Today, we're announcing further steps toward our debt reduction goal. We're calling an additional $65.5 million of senior notes. This action will further cut our annualized interest expense by about $9 million and get us about 87% of the way to our 2013 goal.

Moving to Page 5. As we work toward our 3-year financial objectives, we also remain focused on continuing to strengthen our competitive position and market differentiation. From a marketplace perspective, our goal is for Unisys to be recognized as an industry leader in our areas of strength. A company that differentiates itself through the quality of our solution portfolio and our passion for service excellence. Here too, we've made much progress as a company, building a strong foundation for competitive differentiation as shown in this slide. We've identified and narrowed our focus around our core areas of strength, namely Security, Data Center Transformation and Outsourcing, which includes our Technology business, End User Outsourcing and Application Modernization.

Based on these strengths we've defined our market position, Unisys competes as mission-critical IT solutions provider that delivers practical innovation and continuously improves service delivery for our clients. We have streamlined our cost structure and narrowed our geographic footprint, which has enabled Unisys to be a more cost-competitive company. We've enhanced our solutions and services portfolio with innovative new functionality in areas such as cloud computing, mobile computing, social computing and cybersecurity. We're using the strengthened portfolio to differentiate Unisys in the market and help clients such as California State University, the U.S. Coast Guard, McDonald's, Hertz, and Rio de Janeiro's water utility, Sedai, find more secure, cost-effective ways to operate and serve their customers and constituents.

In our Technology business, we continue to do exciting work to enhance and expand the leading edge capabilities of our ClearPath platform. Investing in innovative new features and functionality such as enterprise class virtualization, integrated specialty appliances and mobile device support. This has enabled us to stabilize our ClearPath revenue while opening up this platform to potential new markets.

Turning to Page 6. As a result of all this work, Unisys today is being recognized for our increasing market leadership in our key areas of strength. For example, in the growth market of end user outsourcing in 2011, once again Gartner placed Unisys in the Leaders quadrant for North America help desk outsourcing. Unisys was also ranked as a strong performer in 2011 in the Forrester wave report for global IT infrastructure outsourcing. Our client satisfaction ratings and service quality continue to improve, and we're pleased to see the degree to which our clients are willing to recommend Unisys to new prospects. These are all positive indicators of a more focused, cost-efficient, competitive Unisys. And while we have more work to do, we're pleased with the progress we've made.

Turning to Page 7. We entered 2012 a much stronger company. We're confident in our strategy and are focused on continuing progress toward our financial and strategic objectives. Looking at the market, we continue to see exciting growth opportunities for Unisys. Organizations need to reduce cost and operate more efficiently while addressing major disruptive technologies such as cloud, mobile computing, social computing, big data and smart computing, IT alliances and cybersecurity -- IT appliances and cybersecurity by changing the way people live and work and the way businesses and governments operate.

These are challenges that Unisys, with their mission-critical capabilities and portfolio, is well-suited to tackle. In our U.S. Federal business, we expect the market to remain challenging, but we're focused on improving our results in this important part of our business. Even with the ongoing challenges from this market, we see opportunities to help government agencies modernize their mission-critical systems and use new IT delivery models such as cloud computing to reduce cost and serve their constituents more cost effectively.

As we move into 2012, we will continue efforts to drive profitable revenue growth and we'll be making needed investments in building our sales channels and investing in our software-based industry solutions with good growth potential. We'll also continue to invest in enhancing our sales effectiveness and refreshing our sales force by bringing in the kind of talent we need to represent and sell our enhanced portfolio of solutions and services.

In 2011, we refreshed about 27% of our global sales force in line with our plan and are focused on continuing this work in 2012. Even with these investments, we look to at least maintain our 2011 pre-tax profitability, excluding debt reduction charges and changes in pension income and expense from 2010 levels as we drive towards our 2013 targets. 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.

Janet Brutschea Haugen

Thanks, Ed, and hello, everyone. We closed out 2011 with good services orders, continued progress against our top line goals led by revenue growth from IT outsourcing and systems integration outside of our U.S. Federal business, stable ClearPath revenues and a solid cash flow performance. We made continued progress in reducing our debt and are extending that progress into 2012.

This afternoon, I will provide more details on our fourth quarter results, as well as more details on our full year 2011 results. I will also update you on capital and pension funding expectations for 2012. To start our financial review, please turn to Page 9 for an overview of the services orders trends in the quarter.

Services orders rose by low double digits year-over-year and represented our highest quarterly orders in 2 years. This increase was primarily attributable to higher orders in ITO and systems integration. In terms of geographic trends, we saw services order growth in North America and Latin America. And within North America, we saw order growth in our U.S. Federal business. Orders were flat in Europe and down in Asia-Pacific. Internationally, our service orders were flat on a constant-currency basis. Services orders grew by low double digits in all of our industry verticals. We closed 2011 with $5.5 billion in services backlog, which was up about 4% sequentially from September 30, and down 4% from December 31, 2010. Currency had about 1% negative impact on the year-over-year comparison. Approximately $680 million of the December 31, 2011 services backlog is anticipated to convert into first quarter 2012 services revenue. Over the past 12 quarters, we have typically had between 86% to 93% of our quarterly services revenue in our opening backlog. The balance of our services revenue comes from sell and bill business during the quarter. For the full year, approximately $2.25 billion or 41% of our overall 2011 backlog -- overall services backlog is expected to convert into 2012 services revenue.

Moving to Page 10 for highlights on our financial results in the fourth quarter. At the top line, we reported total revenue of $985 million, and I will discuss revenues further shortly. Currency had an insignificant impact on our fourth quarter year-over-year revenue comparison. We reported operating income of $121.6 million in the quarter, which was down from the year-ago quarter's operating income of $134.6 million. Lower gross profit margin on our services revenue more than offset a 10% reduction in operating expenses. And resulted in operating profit margin of 12.3% versus 12.9% a year ago. Interest expense was significantly lower due to lower average outstanding debt. And pretax income from continuing operations was $111.3 million and up 8% from $103.2 million in the year-ago quarter. At the tax line, we had a $12.4 million tax provision in the quarter compared with a $6.1 million tax provision in the year-ago quarter. As I've said previously, our tax provision continues to be highly variable from quarter-to-quarter depending on the geographic distribution of our income. At the bottom line after taxes, we reported $94.3 million in net income from continuing operations in the quarter, down slightly from the $95.2 million in the year-ago quarter.

Moving to EBITDA, excluding the impact of debt reduction charges and non-cash pension expense, Unisys generated adjusted EBITDA of $182.7 million for the quarter versus $187 million in the fourth quarter of 2010. The fourth quarter 2011 diluted earnings per common share from continuing operations was $1.94 versus $2.20 in the fourth quarter of 2010. The diluted EPS calculation reflects an average share count of 50.8 million shares for fourth quarter '11 and 43.3 million for fourth quarter '10. The increased share count primarily reflects the effect of the mandatory convertible preferred stock issuance in February 2011. Excluding the impact of the debt reduction charges, our fourth quarter '11 non-GAAP diluted earnings per share was $2.08 compared to $2.21 in the fourth quarter of 2010.

Moving to our fourth quarter revenue. On Page 11, you see revenue declined 6% year-over-year. Half of this decline was attributable to our U.S. Federal business and the balance of the decrease was attributable to a decline in our other Technology revenue, specifically low margin sales of third-party technology product. Services revenue, which represented 85% of our fourth quarter '11 revenue, declined 3% year-over-year due to lower revenue from our U.S. Federal business. Excluding U.S. Federal, services revenue increased, driven primarily from growth in ITO and systems integration. This growth represented the second consecutive quarter of growth for systems integration and ITO. And ITO has shown quarterly year-over-year growth in each -- for each of the quarters in the last 2 years. Within Technology, our ClearPath revenue was flat year-over-year. Overall technology revenue declined due to lower sales of third-party technology.

Turning to Page 12 for more detail on our fourth quarter services revenue and margins. Services growth profit margin decreased year-over-year to 20% from 20.9% in the fourth quarter of 2010, partly due to fourth quarter 2011 severance cost as we further reduced our services cost base in the quarter.

Services operating margin was 7.6%, a decline of 40 basis points year-over-year, primarily due to the increased severance. Excluding the impact of our U.S. Federal business, services operating margins increased and were within our targeted range of 8% to 10%. Revenue declined year-over-year across our services portfolio except infrastructure services. Outside of our U.S. Federal business, ITO revenue was up 7% and systems integration grew by 2%.

Moving on to Technology revenue and margins on Page 13. Technology revenue in the fourth quarter decreased year-over-year driven by lower sales of third-party equipment. Our Enterprise Class Software and Servers business reported a 7% decline in revenue in the fourth quarter, with ClearPath revenue flat and declines in sales of our x86 servers and storage. We reported technology gross margin of 65.9% in the quarter, up from 56.5% a year ago, due to the higher proportion of ClearPath sales in the overall Technology revenue. Our Technology operating margin improved by 760 basis points to 37.7%, compared with 30.1% in the fourth quarter of 2010.

Page 14 provides more details on the performance of our U.S. Federal Government business over the past 8 quarters. As you can see, our overall U.S. Federal revenue declined 18% in the fourth quarter of 2011 to $162 million, approximately 60% of this decline related to the end of the TSA contract, which ended in November of 2010. Civilian agencies represented 47% of our overall U.S. Federal government revenue for the year. Revenues from the U.S. Department of Defense and various intelligence agencies represented about 29% of our full year U.S. Federal government revenue. And with the end of the TSA contract, revenue from Homeland Security Agencies has declined significantly. Revenue from Homeland Security Agencies represented about 24% of our U.S. Federal government revenue in both the fourth quarter and for 2011 overall.

Page 15 shows our fourth quarter revenue by geography and industry. Our North America revenue represented 42% of our revenue in the quarter and declined 4% as a result of lower U.S. Federal revenue. Excluding U.S. Federal, our North American revenue grew 9%. International revenue declined 7% in the quarter due to lower revenue in Europe and Latin America. On a constant-currency basis, international revenue declined 8%. From an industry perspective, public sector remained our largest revenue source and grew outside of the U.S. Federal market. Revenue from commercial industry customers represented 35% of our fourth quarter 2011 revenue and rose slightly year-over-year. Revenue from our financial customers was about 21% of our overall revenue and declined in the quarter.

Please move to Page 16, which summarizes our financial results for the full year of 2011. At the top line, we reported revenue of $3.85 billion in 2011, which was down 4% year-over-year. Currency had a 3 percentage point positive impact on revenue in 2011 versus 2010. Based on today's rates, we anticipate currency will have about a 1 to 2 percentage point negative impact on revenue in the first quarter of 2012 and about the same impact on the full year. Our gross profit margin declined 110 basis points in 2011 versus 2010. And operating expenses declined 5% year-over-year. Our 2011 pension expense increased $37 million, reflecting a swing from pension income of about $3 million in 2010 to $34 million in pension expense in 2011.

We reported an operating profit of $324.6 million or 8.4% of revenue compared with an operating profit of $375.7 million or 9.3% of revenue in 2010. Other expense for 2011 was $55.5 million, which included $85.2 million in debt reduction charges and the net benefit of approximately $17 million from favorable foreign currency movements.

In 2010, other expense was $51 million, of which $20 million resulted from the Venezuelan devaluation and another approximately $20 million for the negative impact of currency movement. We benefited from the $38.7 million reduction in interest expense year-over-year due to lower average debt. We reported pretax income from continuing operations of $206 million compared with $222.9 million in 2010.

In 2011, we made significant progress against our pretax profit goals, which is to achieve $350 million of pretax profit in 2013, excluding any change in pension income or expense from the 2010 levels. Our 2011 pretax profit, excluding the $85 million of debt reduction charges and the $34.3 million of pension expense, was $325.5 million. After taxes, we reported net income from continuing operations of $120.5 million compared with $158.9 million in 2010. For 2011, we reported diluted earnings per share from continuing operations of $2.71 compared to $3.67 in 2010. The diluted EPS calculation used an average share count of 49.5 million shares in 2011 and 43.3 million shares in 2010. The increase primarily reflected the effect of the mandatory convertible preferred stock issuance in February of 2011. Excluding the impact of the debt reduction charges, our non-GAAP diluted earnings per share improved to $4.43 per share versus $3.72 in 2010.

Now I'll briefly cover details on our full year 2011 revenue and margins by portfolio. In summary, as you can see on Page 17, overall revenue was down 4% for the year due to lower U.S. Federal revenue. Currency had a 3 percentage point favorable impact. Excluding U.S. Federal, our overall revenue grew by 1% and our services revenue rose 3% driven by growth in ITO infrastructure services. Systems integration revenue was flat. Within technology, which represented 13% of our Unisys revenue, our ClearPath revenue was flat. Overall, technology revenue declined due to lower sales of third-party technology.

Page 18 shows our services revenue by portfolio. For the full year, we saw year-over-year revenue declines across our services portfolio with the exception of our Infrastructure Services business, which grew by 3%. Outside of U.S. Federal, ITO was up 9% and systems integration revenue was essentially flat. Despite the lower revenue, services margins remained essentially flat as a percentage of revenues. Services gross margin was 20% in 2011 versus 20.1% in 2010. Our services operating margin of 6.9% was up 20 basis points from the prior year, reflecting continued good control of operating expenses.

Turning to Page 19. Overall Technology revenue was down 11% for the year despite flat ClearPath revenue. As I noted earlier, lower sales of third-party equipment in other technology caused most of this decline. Gross profit margins rose by 190 basis points year-over-year to 56.9% in 2011 due to the higher relative mix of ClearPath sales in the overall technology revenue. The operating margin of 21.5% was up 40 basis points. Within Enterprise Class Software and Servers, our flagship ClearPath revenue was flat in 2011 while x86 servers and storage revenue declined. The other technology business declined 45% year-over-year driven by lower third-party equipment sales.

Page 20 outlines our full year revenue profile by geography and industry. North America revenue, including our U.S. Federal Government business, represented 42% of our revenue for the year and declined 9% in 2011. Outside of U.S. Federal, our North America revenue grew 3%. International revenue was flat year-over-year, down 6% in constant currency. Asia-Pacific saw a modest growth of 3% for the year, while Latin America was flat and Europe declined 2%.

Looking at revenue by our customers' industry, our largest industry remains the public sector, which includes our U.S. Federal Government business, as well as revenue from other government agencies worldwide. Public sector represented 44% of our 2011 revenue. The public sector revenue outside the U.S. Federal market grew 6% in 2011. Revenue from our commercial customers declined 1% for the year and represented 34% of our 2011 revenue. Financial services revenue was down 2% year-over-year and represented 22% of our 2011 revenue.

Please turn to Page 21 for an overview of our cash flow performance in the quarter and for the full year. We generated $150 million of cash from operations in the fourth quarter of 2011 compared to $187 million a year ago. As part of our ongoing focus on the cash requirements of our business model, capital expenditures were $33 million in the fourth quarter of 2011, down from $41 million a year ago. We generated $126 million of free cash flow in the fourth quarter. This compares to free cash flow of $146 million in the fourth quarter of 2010. Overall, for 2011, we generated $317 million of cash from operations, compared to $337 million in cash from operations during 2010. For the full year of 2011, capital expenditures of $134 million were down $69 million from 2010. For 2012, we anticipate capital expenditures in the range of $150 million to $200 million. Free cash flow was $183 million for the full year of 2011 compared to free cash flow of $134 million for 2010. Depreciation and amortization was $45 million in the quarter and $195 million for the full year of 2011. For 2012, we expect D&A of about $170 million.

Turning to Page 22, which highlights the improvements we have made in the company's capital structure, you can see that we continue to build net cash, and our cash balance at December 31 was almost double our debt balance of $360 million. We ended 2011 with a cash balance of $715 million, a decrease of $113 million year-over-year, which reflects the use of our cash through our ongoing debt reduction efforts.

Turning to Page 23 for an update on our balance sheet and capital structure. During 2011, we reduced debt by $464 million and have eliminated debt with maturities before October 2014. Today, we announced that we are calling for the redemption of the remaining $25.5 million of our 14 1/4 senior secured notes due in 2015 and $40 million of the 12 1/2% senior notes due in 2016. These transactions, when complete, will reduce our debt to about $295 million and bring us to within $85 million of our 2013 debt reduction target. A debt redemption charge of approximately $7 million will be recorded in the first quarter of 2012 and annual interest expense will decline by approximately $9 million as a result.

Turning to Page 24, I would now like to provide an update on our worldwide pension plan, funding position and expected cash funding level.

The discount rate used to present value of the U.S. pension obligation at December 31, 2011, was 4.96%. This rate is lower than the December 31, 2010 discount rate of 5.68%, reflective of the change in interest rates from last year end. The lower discount rate has increased the present value of our U.S. pension plan liabilities at year end 2011. Taking into account the increase in pension liabilities and decrease in pension assets, we ended 2011 in an underfunded position in our U.S. plans of $1.6 billion, which was approximately $630 million above the level at year end 2010.

A change of 25 basis points in the U.S. discount rate causes an approximate $127 million change in the pension obligation. The underfunded position of the international plans at December 31, 2011 increased by approximately $60 million from the prior year end. For the major international plans, a change of 25 basis points in the discount rate causes an approximate $95 million change in the pension obligation. From a cash funding perspective, we contributed $83 million of cash in 2011 primarily to our international pension plan. We made no contributions to our U.S. qualified defined benefit pension plan in 2011.

As I've said previously, we plan to contribute approximately $140 million in 2012 into the U.S. plan. We anticipate contributing another $100 million into our other plans for a total 2012 contribution of $240 million. You will see the impact of this flow through cash from operations. We expect approximately $102 million in pension expense in 2012, compared with a pension expense of about $34 million in 2011. The change from 2011 to 2012 is principally due to a lower discount rate and a lower expected rate of return on plan assets in the company's U.S. qualified defined benefit pension plan.

In 2012, a significant element in comparing our year-over-year performance will be the change in pension expense. Accordingly, we will provide non-GAAP earnings to isolate the impact of these noncash expenses from the operational performance of the company.

In closing, we made progress during the quarter and the full year in driving towards our 3-year financial goal. 2011 has been the third consecutive year of profitability and positive free cash flow generation for the company. As we move through 2012, we will remain focused on making progress towards the longer term financial goals that Ed discussed earlier. In particularly, against our debt reduction goal, we will start 2012 with further reduction with today's announcement to call $65.5 million of debt. Against our pretax profit goal in 2012, we will continue to invest in building our sales channel and in our software-based industry solutions with growth potential. We will also invest in enhancing our sales effectiveness and refreshing our sales force. Even with these investments, we look to, at least, maintain our 2011 pretax profitability, excluding the debt reduction charges and changes in pension and expense from 2010 levels, as we take further steps towards our 2013 goal. Thank you for your time and now I'd like to turn the call back over to Ed.

J. Edward Coleman

Thanks, Janet, very much. Operator, we'd like to open the call up to questions if we may.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Eric Boyer with Wells Fargo.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

For your 2013 pretax profit goal, I know you talked about -- excluded any change in the pension expense, but if we were to include that, would that be around $280 million now, am I thinking about that right?

Janet Brutschea Haugen

I'm sorry, Eric, I was on mute. So for the $350 million target. You're right, it's without the pension expense difference from 2010. So that's roughly -- you would need to adjust that for the fourth quarter 2012 -- I'm sorry, you would need to adjust it for the 2012 pension expense, which I discussed earlier in the call.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Which will be $70 million difference, right? From what you were expecting before?

Janet Brutschea Haugen

Right.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Okay. And then just -- at -- on a high level, can you talk about how we should be thinking about services revenue in 2012? Specifically the Federal piece of business? Because that seems like it's the wildcard as far as whether or not it's going to bottom or not?

J. Edward Coleman

Yes. Eric, again, we think overall, our objective is to continue to grow the IT outsourcing part of our business at market rates, which we think is for better, which we think is in the mid- to single-digits, same thing with systems integration. And our goal is to offset any uncertainty or challenges in the Federal business on the commercial side of the house. So we're not coming off of our overall goals.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Okay. And then, Janet, did you say -- what did you say as for the backlog is expected to convert into services revenue for 2012? $2 billion or...?

Janet Brutschea Haugen

Eric, I'm sorry, that broke up. Did you ask the question about what the conversion rate is on the services backlog for the full year?

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Yes, for the full year, what you were expecting.

Janet Brutschea Haugen

We haven't given any particular guidance on that, other than if you look historically, that's been anywhere between 60% to 70%. It does have a wild swing on that. A lot of that's driven by how the federal government is funding projects. What I said on the call earlier was that we have $2.25 billion of backlog that we expect to convert into 2012 services revenue and that does represent about 41% of our overall backlog. But if you look historically, we've been between the 60% and 70% conversion rate.

Operator

And next we'll move on to James Friedman with Susquehanna Financial.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

With regard to the public sector. I was wondering, Ed, if you have might have a Plan B at this point. In the instance that public sector doesn't come back, what can you do in terms of, say, utilization rates or other defensive measures that you can take to protect the business?

J. Edward Coleman

Yes. Since -- a couple of comments. One, I think you're talking specifically about U.S. Federal, because the public sector business worldwide is a different story. So I don't want to color all our public sector with the challenges in U.S. Federal business. I think we recognize that we need to be agile and adept at looking at opportunities in Federal and taking the necessary actions on the cost side and expense side to keep that in balance with what we see as the opportunities in the Federal business. That being said, we're not being defensive about the Federal business. Since we think that there's still a lot of opportunity there. We've had some good successes there in 2011 in spite of some of the overall challenges. And we're working hard to build that pipeline and go after those opportunities. But again, to your point, we're being careful about making sure that we have plans in place to share resources across all of the business in order to protect utilization rates and billability rates and the like.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Okay. And then with regards to the 26% refresh in the sales force. If you could share with us, what is the profile of the people that you're recruiting? Where are you getting them from, and how do you measure their effectiveness relative to their corporate goals?

J. Edward Coleman

So the second part of the question is pretty straightforward. They get quotas like everybody else and we measure them against their success in achieving those quotas and bringing in business. In terms of what we're looking for, are people that are experienced in selling complex solutions to clients across the whole bandwidth of IT services and solutions. People that understand the disruptive trends in IT. People that have good consultative selling skills. People that have strong beliefs and opinions about where the industry is going. And people that have a strong curiosity, not only about our industry, but also about the customers that they're dealing with. So I think you find those in lots of the IT services companies, as well as technology and software companies.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Last thing. I think you said in the public forum you had recently that some of the technology innovation in ClearPath has made the sales cycles less episodic or regular. What are some of the innovations you've referred to for 2012 that can keep ClearPath steady?

J. Edward Coleman

I think there's been a lot that we've announced of late in terms of how we make that a more open platform capable of operating in a service-oriented architecture environment more effectively than it could in the past. The ability to support Java, the ability to support Microsoft, things like secure partitioning, which is the enterprise virtualization that I was referring to, which allows it to become a more open platform but without jeopardizing any of the reliability and security attributes, which have been at the core of ClearPath appeal to our customers for running mission-critical workloads. So that's a continuing effort. We have a program underway now that we call ClearPath Forward, which is about how we're taking that technology into the future and continuing to make it ever more open so that it can be more attractive for additional workloads and additional environments. So we're very excited about where we're headed with that.

Operator

And we'll move next to Ned Davis with William Smith & Company.

Ned Davis - Wm Smith & Co.

I wanted to drill down a little bit on the pension fund situation -- I mean, the pension liability situation. Have you changed your performance targets that are implicit in the evaluation formula or the viability formula?

Janet Brutschea Haugen

Yes. As you can see on the chart, Ned, we have reduced the anticipated earnings assumption from 8.75% to 8%. That does reflect -- during the course of the 2011, we shifted about 5% of the pension assets from equity into fixed income. And that is one of the drivers for the change in the assumption rate change from 8.75% to 8%.

Ned Davis - Wm Smith & Co.

Supposing, hypothetically, that the discount rate stays the same for the next 2 years, and the fed has guided for not too much of an increase in the U.S. interest rate. So let's make that assumption for the moment in taking your new performance guidance. Will you be funding well over $100 million for the next -- beyond 2012 if that assumption were told true? Would you actually hit your performance objectives, but the discount rate remains where it is today, will you -- because you're on a 15-year, I believe, sort of funding cycle?

Janet Brutschea Haugen

That's for the U.S.

Ned Davis - Wm Smith & Co.

Right.

Janet Brutschea Haugen

And so given that, that we are on that amortization cycle, assuming that the discount rate would remain at this level and that asset returns are at the 8% range, we would be expecting to fund at this level going forward, at least in the near term.

Ned Davis - Wm Smith & Co.

For the domestic. And then what about the international?

Janet Brutschea Haugen

The international has historically stayed in the kind of $85 million to $100 million range over the past number of years. Currency may swing that up or down. We would expect that the funding levels to be about that same going forward. Included in the estimate is an increase from $83 million for those plans in 2011, to about $100 million in 2012.

Ned Davis - Wm Smith & Co.

And then, finally, kind of relating to the overall capital situation, can you give us any kind of sense of when the company might start buying back common stock given your liquidity situation?

Janet Brutschea Haugen

We have no current plans to buy back stock and we will continue to evaluate that as market and other conditions change over time.

Operator

And we'll move next to David Smith with Citi.

David Smith - Citigroup Global Markets Limited

I guess I'll ask something different on the capital structure. You are replacing a bunch of your high-cost debt and I'm just curious how you consider the debt markets this time, and potentially doing a refinancing to get down to the target level that you would like to be at?

Janet Brutschea Haugen

David, we -- I don't want to speculate as to what our future plans would be. We obviously, want to continue to make the progress to reduce our goal to hit our 2013 target. As I've said previously, all of our debt is callable in 2012. And we do believe that it's at a higher coupon rate than what we might experience if we went to the market now. But market is not investment grade, it can be fickle over time and change. And so we don't want to leave out any option. We will look -- continue to look at ways to reduce the outstanding debt to hit the target and as well reduce the interest expense on that. And if over time, that includes refinancing based upon market opportunities, we will consider that.

Operator

Next we'll move to Arvin Malik [ph] with KMS Investments [ph] .

Unknown Analyst

Yes. As shareholders, we're very heartened to see the operational turnaround progressing so well. First I want to applaud the management team for that. It's clear that the market simply has not grasped what you've accomplished here. Unisys stock is still extremely undervalued at just 3x pretax profit and even quite cheap given the pension overhang, which of course is artificially affected by interest rate factors of -- that you've already discussed. And on top, the assets as through the NOLs that you guys have. So a couple of questions. When will your discussions with the investment community finally focus more on valuation? It seems that much of the discussion that takes place is about the product offerings and so it seems that you're not well understood by the investors who follow you and so it seems that it's high time to focus much more on valuation of the moving parts given the wonderful progress that has been made on the operational turnaround, that's one question. The second one is, given how undervalued Unisys shares are, it can -- there be something that you would do to exploit this cheapness, the allusion was made earlier to share buybacks and I wish there was going to be a bit more buyer response, given the strengthened balance sheet and simply how undervalued the shares may be, given the benefit that could provide shareholders. I wish you could -- probably more on [indiscernible]

Janet Brutschea Haugen

Arvin, thank you for your comments and management does appreciate the recognition that you have given with regard to the turnaround. We do believe that our investor community message has been addressing one of the top remaining questions is about when are we going to be able to be at consistent revenue growth. That has been a very key question that we get from investors and potential investors on a regular basis. And we want to make sure that we are commenting on the improvements that we are making that all around strengthening the financial condition of the company. As we go forward, we obviously will adjust the message based upon the type of questions and other items we get from investors, as well as making sure that we are communicating as clearly as possible the methods and ways we are working towards enhancing shareholder value. With regard to the comment whether I would expand on the comment that I made earlier that we have no current plans for share -- buyback of shares. I will comment that we were seeing as we turn through -- into 2012 a significant change in the funding into our pension plan. You mentioned earlier that, that is an overhang and that is something that we want to see how that plays out. That has been a significant change for us from a cash expenditure as we look at 2012 compared to where we would have been looking at 2012 entering into 2011. So we do appreciate the comments and support. We appreciate your suggestions and advice. And rest assured that the focus of the management team is about enhancing shareholder value. We will continue to work on doing that and we will continue to expand and adjust the investor message to address the issues to have a greater understanding of the value that we are creating.

Operator

[Operator Instructions] We'll move to Jeff Dancey with Cutler Capital Management.

Geoffrey K. Dancey - Cutler Capital Management LLC

Just have a question for some clarification on the continued funding requirements for the pension plans. I believe you said it was going to be about this level. So potentially $240 million for the next few years, is that about right?

Janet Brutschea Haugen

Jeff, what I said was the question that Ned had asked me is that if the discount rate remained the same, and given the fact in the U.S. based upon the regulations and the funding levels, given that we're in a 15-year amortization approach to have the funding level determined, I said we would expect to see the significant funding into those plans as we've seen in the change from '11 to '12. Obviously, cannot give the exact amount of funding levels because it does have a lot of variables in it. It depends upon where market returns are as we go forward in 2012 and beyond. It depends upon where interest rates are. And it also depends upon whether there's any type of regulatory change with regard to funding. But with the comments that I did make was in relation to Ned's comment with this funding level, we expect it to continue going forward. It may not be the exact funding level, but it is funding that's more in line with the significant change we see in 2012 than compared to the funding levels we saw in 2011 and earlier.

Geoffrey K. Dancey - Cutler Capital Management LLC

Sure. And so assuming that plan assets do grow at this expected rate, I'm trying to gain a sense how many years it may take at these elevated levels before we see a decrease in that -- in the contribution. Can you give me any more clarification on that?

Janet Brutschea Haugen

Jeff, we do not want to speculate as to what the future funding levels are going to be, because of the significance that change in assumptions and changing the returns can make to those funding levels.

Operator

We'll take our final question from Bill Smith with William Smith & Company.

William Smith

Ed and Janet, just a couple of things. One, congratulations on the significant improvement that you've made operationally. And also, just thinking about where you were 3 years ago on the balance sheet and to come today where you have over $7 or something close to that in net cash per share, I think is a pretty significant accomplishment. And also, looking at your free cash flow number, which is almost $4 a share in free cash flow. So I think just operationally and from a balance sheet perspective, those are pretty significant accomplishments over a 3-year period. My question, Ed, is could you comment on the double-digit order growth that you had in the fourth quarter on the services side. And I think on both the systems integration and on the ITO business, could you comment on that on what's driving the business, and if you think that has sustainability going forward?

J. Edward Coleman

So, thanks, Bill, very much. It is a good quarter for orders, and a lot of these projects that we work on, both on the SI side and the IT outsourcing side, are relatively long sale cycles. So sometimes, they we move from quarter-to-quarter in ways that you don't necessarily predict. But, yes, it was a very good quarter. I think that's probably the best services order quarter growth we've seen in a couple of years. So we're very pleased with it. Again, I think, we've got good momentum with our offerings in the solutions that we're bringing to the marketplace, and I think we saw it in terms of those orders in Q4. Our job is to keep it going. And again, our goal is to be more consistent and predictable and I appreciate the comments about the progress that we've made, and we're pleased and proud of it as well, to recognize that we have more to do.

Operator

That does conclude our question-and-answer session. At this time, I'll turn the call back over to our speakers for any final or additional comments.

J. Edward Coleman

Well, great. Let me just say thank you to each and every one of you for joining the call today, for your active participation. We are well into 2012 and look forward to speaking with you again at our next earnings call. Thank you very much.

Operator

That does conclude our conference call for today, everyone. We do thank you for your participation.

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