To Our Shareholders:
I am pleased to report that in 2012 we completed our fourth consecutive year of profitability and positive free cash flow generation. Despite an uncertain economic environment, we have made Unisys a more profitable and competitive company.
We reported 2012 net income of $129.4 million, or $2.84 per diluted share, which included $105.4 million of pension expense and $30.6 million of debt reduction charges. These results compare to 2011 net income of $120.5 million, or $2.71 per diluted share, which included $28.0 million of pension expense, $85.2 million of debt reduction charges and an $8.9 million charge related to the settlement of a Brazilian non-income tax matter. Excluding these items, our non-GAAP earnings per share* for 2012 rose to $5.50 from $5.18 in 2011.
Our revenue in 2012 declined 4 percent (1 percent on a constant currency basis) primarily reflecting weakness in our U.S. Federal government business, where market conditions remained challenging. Outside of our U.S. Federal business, we grew revenue when measured at constant currency rates.
Our services revenue declined 5 percent (2 percent in constant currency) in 2012. Our technology business, however, had a strong year in 2012, growing revenue 3 percent (6 percent in constant currency) with the benefit of some earlier-than-expected fourth quarter sales of ClearPath software and servers as customers responded favorably to our technology announcements and innovations.
Progress Against Three-Year Financial Goals
In October 2010, we set four financial goals to be achieved by year-end 2013. Two of the four goals were achieved in 2012.
- Our three-year goal was to increase our pretax profit to $350 million in 2013, excluding pension income or expense. In 2012, we generated pretax profit above this goal level;
- In 2012, we reached our goal to reduce our debt by 75 percent from September 2010 levels more than a year ahead of plan. Since 2008, we have reduced debt by about $1 billion. This is a major milestone for Unisys, one that has significantly reduced our interest expense and strengthened our financial profile.
Our progress in 2012 against our other two financial goals was mixed. These 2013 goals are:
- To consistently achieve an 8 to 10 percent operating profit margin in our services business;
- To grow our IT outsourcing and systems integration revenue at market rates while maintaining stable revenue in our technology business, particularly within our flagship ClearPath business.
In our services business, we are not yet performing at our targeted 8 to 10 percent operating profit margin goal. To meet this target on a consistent basis, we must drive profitable revenue growth while continuing to identify ways to deliver services more efficiently.
Against our revenue goals, in 2012 we exceeded our goal of maintaining flat revenue in our technology business, driven by higher ClearPath sales. This was the third consecutive year that we have maintained or grown ClearPath revenue.
However, in our systems integration and IT outsourcing businesses, we did not meet our goal of growing these businesses at market rates in 2012 as the weakness in our U.S. Federal business significantly impacted our progress. While we have more work to do to fully capitalize on our strengthened solution portfolio, our client satisfaction ratings and service quality continue to improve and we are winning contracts with new and existing clients such as the American Red Cross, Nutreco, Royal DSM, TravelSky, the Internal Revenue Service, the U.S. National Archives, and the Department of Energy.
Investments to Drive Profitable Revenue Growth
We continue to position Unisys as a provider of mission-critical solutions and services. Our goal remains to become a company known for its financial strength, where the quality of our services and solutions provides ongoing differentiation and where we are an acknowledged industry leader in our four areas of strength -- security; data center transformation and outsourcing (including our server business); end user outsourcing and support services; and application modernization and outsourcing.
In recent years, we have narrowed our focus to concentrate more effectively on select target markets. We exited several businesses and changed our business model in certain countries. In 2013 and beyond, we plan to build on our current geographic and business footprint. To do so, we are developing enhanced and new solutions and are building new sales channels in order to win new customers. To drive growth, we are making investments to enhance our current solutions to take greater advantage of disruptive industry trends such as cloud, consumerization of IT and mobility, cybersecurity, big data, smart computing, social computing, and IT appliances.
In our technology business, we have evolved our ClearPath family of enterprise software and servers to a more open architecture based on industry-standard Intel technology. We believe this work has put Unisys ahead of the industry in delivering modern, open, Intel-based servers that deliver mainframe-class performance, security, and reliability. In 2013 we are planning additional product innovations and enhancements that will allow us to meet evolving client needs and address new mission-critical markets.
We are also targeting new markets for our advanced software solutions, such as our Stealth Solution Suite of cybersecurity products. We believe the Stealth Solution Suite is unique in the market in its ability to cloak data, applications, and users within a network or data center, and we see growth opportunities in helping organizations deal with increasingly sophisticated cyber threats.
To complement and expand our data center and end user outsourcing services, we are investing in application managed services, where we see the opportunity to help organizations deal with the challenges of managing their applications in an increasingly decentralized, mobile and cloud-based computing environment.
Finally, we are building a reseller channel to reach new customers and markets for our software solutions. Currently, less than 5 percent of Unisys revenue comes through resellers and distributors, which is low relative to many of our competitors. Starting with our Stealth Solution Suite, we believe establishing a strong reseller channel will allow us to address a larger portion of the IT market.
Focused on Achieving Our Long-Term Vision for Unisys
In closing, 2012 was another year of significant profitability and free cash flow generation for Unisys. Building on this progress, as well as our much stronger financial condition and improved customer satisfaction, we are focused on driving profitable revenue growth.
These are times of great change in the IT industry, brought about by the forces of new disruptive technologies that are changing the way organizations procure, deliver, and apply IT services.
Because of the work we've done, we believe Unisys is positioned to benefit from these changes. I look forward to reporting on our continued progress in the year ahead.
-J. Edward Coleman
*See "Reconciliation of Selected GAAP to Non-GAAP Measures" elsewhere in this report.
Statements made by Unisys in this annual report that are not historical facts, including those regarding future performance, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ from expectations. These risks and uncertainties are discussed in the Management's Discussion and Analysis section under "Factors that may affect future results."|