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Executives

Niels Christensen - Vice President, Investor Relations Officer

Ed Coleman - Chairman, CEO

Janet Haugen - Chief Financial Officer

Analysts

Joseph Vafi - Jefferies & Company

Jeff Harlib – Barclays Capital

John Moore – KDP Investment Advisors

Bill Smith – Lowering, Smith and Company

Frank German – Goldman Sachs

Unisys Corp (UIS) Q3 2010 Earnings Call October 26, 2010 8:16 AM ET

Operator

Good day and welcome to the Unisys Third Quarter 2010 Results Conference Call.

At this time I will turn the conference over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

Niels Christensen

Thank you, Operator. Good morning, everyone, and thank you for joining us.

Earlier today Unisys released its Third Quarter 2010 Financial Results. With us this morning to discuss our results are Ed Coleman, our CEO and Janet Haugen, our CFO.

Before we begin I want to cover just 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 on our investor website. The presentation slides will be available later today. These materials are available for viewing as well as downloading and printing. Third, today's presentation, which is complementary to the earnings press release, include some non-GAAP financial measures. These have been provided in an effort to give investors additional information.

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

Finally, I'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.

Now, I will turn the call over to Ed.

Ed Coleman

Thanks, Niels. Hello, everyone. Thank you for joining us today to discuss our Third Quarter 2010 Financial Results.

The third quarter was another profitable quarter for Unisys; one where we met a significant milestone, achieving a 8% operating margin in our services business, putting us in our targeted range of an 8 to 10% services operating margin. Reaching this margin threshold is the result of first, the continued reshaping of our services business to focus on IT outsourcing, and systems integration services, while de-emphasizing our BPO and infrastructure services.

Second, the continued shifting of our service delivery model to take advantage of lower-cost labor pools which now accounts for 27% of our employees.

Third, our implementation of a consistent high quality, idle-based global-delivery model, where we believe we’re the first global player to achieve ISO 2000 certification in all its major operational centers around the globe.

And fourth, intense focus on services operational management. While services revenue was down in the quarter, services backlog remained flat with the year ago period. And we continue to see sequential increases in services operating profit driven by improved gross margins in our IT outsourcing and systems integration services, and continued effective cost management.

On the technology front, both revenue and operating profit were down in the quarter, but I should note that this comes after three strong quarters of year-over-year growth. On a year-to-year basis, technology revenue is up slightly, and operating profit margin is up more than 14 percentage points.

We also had another strong quarter of cash generation with free cash flow of $81 million, up from $46 million a year ago. And our adjusted net debt declined to $138 million from $555 million a year ago; a reduction of $417 million.

While the quarter showed important progress in key areas, we recognize that we have much to do for Unisys to fully realize its potential. Most notably, we must take advantage of our more competitive cost structure by returning the company to topline growth, even as we continue reshaping the business, to focus on our key areas of strength.

Our objective is to be a company known as the leading provider of mission-critical IT solutions in our areas of strength with differentiated portfolio and reputation for providing consistently high levels of client service and satisfaction.

Our first business priority that I had spoken to in previous calls, hasn’t changed. Our first business priority continues to be focusing our resources and portfolio on narrower set of offerings that leverages our strength as a company.

We continue to make progress in this area. In the third quarter, we divested our insurance processing operations in the UK, which followed earlier divestitures this year of our Health Information Management business, and our U.S. Check Reader and Sorter Equipment business.

Our second business priority is to offer clearly differentiated value propositions in our chosen markets. Our offerings are centered on four critical areas of our clients operations; security, data center transformation and outsourcing including our server business, in user outsourcing and application modernization.

These areas are where we’re focusing for growth over the next few years because they’re markets for uses has the capabilities and expertise to win business and growth profitably.

Security is an integral part of clients infrastructure. Our security offerings are designed to secure people, assets, systems, and data for governments and businesses with no room for error. We integrate physical and digital security technology. Our securities solutions protect borders, airports, data centers, financial information, and classified data.

In the third quarter we received a major contract award for the U.S. Land Border Integration Initiative representing an expansion of our work with the Customs and Border Patrol to secure the U.S. borders.

Also in the quarter, the USDA awarded us a contract to build the Virtual Agricultural Security Operation Center that allows the USDA to track security incidence across its 29 agencies. In Data Center Transformation and Outsourcing, we enable our clients to update their operations to meet the ever-increasing demands for increased IT efficiency.

We help optimize infrastructure through virtualization techniques and we build and deploy secure, scalable, reliable computing platforms.

In the third quarter we won a key contract to partner with Colt Technology Services in the U.K. to deliver cloud-based services to its customers in Europe. We also received an extension of our IT end-user services contract for the City of Minneapolis, under which we’ll be delivering cloud-based email and other expanded services for city employees.

And last week we announced innovated new offerings that significantly increased the performance in cost efficacy of data centers powered by our ClearPath family of mainframe servers.

The new offerings include secure partitioning for sPar, a unisystem-evolved virtualization technology for ClearPath system, based on Intel processors. The sPar capability brings enterprise class virtualization to client’s data centers, enabling ClearPath users to make more efficient use of special purpose processors, called specialty engines, to modernize their applications and streamline resources management.

Our third area of strength is providing end-user outsourcing and support. Our services provide anywhere-anytime support for our client’s end users with a one-call global model that increases user satisfaction while driving down support cost.

With the rapid increase of knowledge workers and their fundamental dependency on laptops, and mobile devices of all shapes and sizes, providing services to end users takes on a level of importance rising to mission critical. Our services, tools and methods are designed to support the global enterprise 24 by 7.

During the quarter we won significant contract extensions, including the City of Minneapolis contract mentioned earlier as well as [inaudible] and we continue successful rollouts of other major client projects.

Within our fourth area of strength, we use our engine learning experience to help our clients modernize their application. This may involve rewriting applications using state-of-the-art development languages and application development environments, creating new features and functions, or integrating various applications to achieve the desired business outcome.

We deliver industry-specific systems for governments in the financial transportation and telecommunication sectors. For instance, we recently announced significant new applications modernization works with the USDA to modernize and integrate the agency’s dispersed systems and transition to a service-oriented architecture environment. To deliver these services, we’ll be drawing on our new application, modernization center of excellence, established in St. Louis, Missouri.

Overall, we’ve done good work over the past two years to refocus and refresh our portfolio of services and solutions. This work positions us well to capitalize on disruptive trends that are reshaping the IT industry such as cloud, mobile and social computing, smart computing, and appliance offering.

Our last two businesses priorities are about driving cost efficiencies across the businesses. And I am pleased by the continued progress we’re making in those areas. In terms of enhancing the efficiency of our services labor model, we continue to increase our use of lower-cost labor pools during the quarter. Offshore and lower-cost onshore resources now account for 27% of our overall employee headcount, up from 25% at the end of the second quarter and 20% at the start of the year.

And finally, in the last business priority of simplifying our business and reducing our overhead. We continue to make good progress in this area as well as operating expenses declined 13% year over year in the quarter.

As a result of our work for the past two years, we’ve shifted our portfolio more towards our area of strength, and our focus growth market. Comparing our portfolio mix in 2008 to our mix today about 75% of our revenue today comes from the areas of IT outsourcing, systems integration and consulting, and technology. This compares to about 66% in 2008. This work has helped reshape our profitability, our trailing 12-month profitability, while down somewhat from the second quarter of 2010, is up by $235 million compared to the third quarter of 2009.

As we look ahead, our four business priorities that I just discussed will continue to be our road map. By focusing on these four priorities, we’ve returned the company to profitable performance and cash generation, and significantly strengthened the balance sheet. And in this most recent quarter, we reached the 8% operating margin target in our services business.

Having recently completed our strategic planning cycle, I’d like to take a moment to describe our longer-term goals for the business. Over the next three years, we want to build on the stronger foundation we have built over the last two.

Our three-year goals for Unisys are; to grow the business and our areas of strength, to consistently deliver an 8-to-10% services operating margin, to continue to strengthen the balance sheet to a 75% reduction in debt by the end of 2013, and to significantly improve our annual pre-tax profit to $350 million in 2013, assuming no change in pension income or expense.

We believe that if we achieve these goals, it will put Unisys in a strong competitive position with solid financial underpinnings.

Thank you again for joining us this morning. Now, here’s Janet, to take you through our third quarter results in more detail, and then we’ll be happy to take your questions.

Janet Haugen

Thanks, Ed, and hello everyone. Our results this quarter showed our continued progress in improving our services operating margin, improving our free cash flow and strengthening our balance sheet. We made this progress despite lower overall revenue, including lower high-margin ClearPath revenue.

This morning I will provide more details on our financial results, including expenses, margin trends, and cash flow.

Before commenting our continuing operation, I want to discuss our divested Unisys Insurance Services Limited business, UYSL in the U.K. As previously disclosed, we sold this business in the quarter. We recognized that pre-tax gain of $4.5 million on the transaction. The company’s financial statement has been retroactively restated to report the UYSL business as a discontinued operation.

As a result, UYSL operating result, as well as the gain on the sale, are reported in one line, income from discontinued operations, on the income statement, along with the results of our Health Information Management, or HIM, discontinued operation which was sold in the second quarter of 2010. Additionally, UYSL assets and liabilities are reported as assets or liabilities of discontinued operation on the December 31, 2009 balance sheet.

We closed the quarter with $5.8 billion in services backlog, which is a similar level as a year ago. September 30, 2010 backlog was up from June 30, 2010 backlog of $5.5 billion, principally due to the impact of translating the backlog at different quarter and currency rate.

Approximately $800 million of the September 30, 2010 services backlog is anticipated to be converted into fourth quarter 2010 services revenue.

We typically have between 87 to 93% of our quarterly services revenue in our opening backlog. The balance of our services revenue in a quarter comes from sale-and-build business during the quarter. Excluding the $500 million third quarter 2009 BPO, contract expansion in our IPSL joint venture in the U.K, our services orders showed low single-digit declines in the quarter.

This decline primarily reflected a double-digit decline in system integration and consulting orders, infrastructure services and core maintenance orders, which was more than offset by double-digit growth in information technology outsourcing, ITO orders.

The third quarter represents the second consecutive quarter of sequential double-digit order growth in our ITO business. The decline in orders for core maintenance reflected the impact of the sales of our Check Reader and Sorter Equipment business and the ongoing secular decline.

Geographically, total U.S. orders increased by double-digits in the quarter with growth in both our U.S. Federal and Commercial businesses. Total international orders were down double-digits in the quarter. Substantially, all of this decline was in the U.K. which had the large 2009 BPO win in IPSL that I mentioned earlier.

Moving on to Slide 7, which shows the comparison of our financial results in the quarter. At the top line, we reported revenue of $961 million. This was down 13% year-over-year. Approximately 2 percentage points of the decline is attributable to the divested businesses.

Currency had a 1 percentage point negative impact on our revenue in the quarter. Based on today’s rates, we anticipate no currency impact on the revenue comparison when comparing fourth quarter 2010 revenue to fourth quarter 2009.

Our technology business saw revenue decline of 31% as sales of our ClearPath servers were down versus prior year. This decline follows three good quarters of ClearPath growth. Year to date, technology revenue is up 2%.

Services revenue declined 10% in the quarter despite growth in ITO revenue. Approximately 2 percentage points of the decline resulted from businesses we have divested over the past year.

On lower technology revenue we reported a third quarter growth profit margin of 24.7% down from 26.9% in the year ago quarter. We continue to make progress and reducing cost and enhancing the efficiency of the business. Operating expenses, which include SG&A and R&D declined 13% in the quarter. Our overall operating profit margin was 7.9%, down from 10.1% a year ago, due to the impact of lower ClearPath revenue.

Our services operating margin of 8% improved by 50 basis points, year over year and was within the targeted long-term operating margin range for our services businesses.

We had a $28 million tax provision in the quarter compared to 28 million in the third quarter of 2009. Included in our third quarter 2010 tax provision, is a $4 million charge related to a change in U.K. tax rate. And as we said previously, our tax provision can vary significantly from quarter to quarter, depending on the geography distribution of our income.

After taxes, we reported net income from continuing operations of $22 million in the third quarter down 58% from the net income of 52 million in the third quarter of 2009. Including the gain on the sale of UYSL, we reported third quarter 2010 net income of $28 million or $0.65 per diluted share compared with net income of 61 million or $1.48 per diluted share in the third quarter of 2009.

Fully diluted shares for the third quarter of 2010, were 43.3 million compared to 41.4 million in the third quarter of 2009.

Moving to Slide 8, outlining some of our key profitability metrics over the past several quarters. Aggregate gross margins decreased year over year due to lower ClearPath revenue.

Services gross margin as a percent of revenue increased from 19.9% a year ago to 20.6%, due to an improved revenue mix and improved cost efficiencies in our services labor model.

Operating margins continue to benefit from the impact of our cost reduction actions on SG&A and R&D expenditures. Operating expense were reduced by $25 million from the year ago quarter and remain stable as a percentage of sales at 17%.

EBITDA was 14% of revenue for the third quarter of 2010. Moving to our third quarter revenue and margins by portfolio, on Slide 9 you can see that services revenue declined 10% year over year, 8% excluding the impacted divested businesses.

Margins as a percent of revenue, increased year over year in our services business on lower services revenue. Services gross margins improved to 20.6% from 19.9 a year ago, and services operating margins also improved to 8% from 7.5% a year ago.

Services margins improved sequentially for the second consecutive quarter.

Within our outsourcing revenue, ITO revenue was up slightly in the quarter. Outside of our U.S. Federal business, ITO revenue grew 4% and we were also encouraged to see overall ITO revenue grew 4% sequentially after growing 5% sequentially in the second quarter.

Business Integration and Consulting revenue declined 11% in the quarter. Infrastructure Services revenue declined 13% in the quarter, approximately 5 percentage points of that decline resulting from the sale of our Check Reader and Sorter Equipment business, earlier this year.

Core maintenance revenue declined 32% in the quarter; approximately 12 percentage points of that decline was the impact of the divested businesses. And BPO revenue declined 25% in the quarter.

Last quarter we indicated that we typically have between 9 and 13% of our quarterly services revenue coming from sale-and-bill business in the quarter. In the third quarter after adjusting for the UYSL divestiture, 93% of our services revenue was in backlog at the beginning of the quarter. Our services sale-and-bill revenue was lower than prior quarters, due to lower volume of federal services and low margin infrastructure services revenue.

Moving on to technology on Slide 10, technology revenue decreased 31%, this included a 1% impact -- one percentage point impact related to divestitures made in the past year. Lower ClearPath sales drove the reduction and technology margins in the quarter. We reported a technology growth margin of 47.6% down from 55.2% a year ago.

Our technology operating margin declined to 7.9%, compared with 21.2% in the third quarter of 2009.

It’s worth noting that disputed the lower reported revenue and margins for technology business in the third quarter, for the year to date our technology revenue is 2% above prior-year level, and the technology profit is 80 million or 488% higher than the first nine months of 2009. And our operating profit margin is 14.6 percentage points higher than at the same point last year.

Slide 11 shows our third quarter revenue by geography and industry. Within North America, our U.S. revenue in the quarter was $438 million, a decline of 15%, about 4 percentage points of this decline results from divestitures. The rest of the decline was driven by lower revenue outside our U.S. Federal business. Our U.S. Federal business was up slightly compared to a year ago quarter, and improved by 5% sequentially.

International revenue was down 12% in the quarter. On a constant currency basis, international revenue was down 10% as the revenue growth in Latin America was offset by declines elsewhere.

From an industry view, our public sector, which includes our U.S. Federal Government business, remained our largest single vertical with 47% of our revenue in the quarter coming from this sector.

Our commercial sector at 32% of our revenue is at a consistent percentage of our revenue as the prior year. And our financial sector, which declined year over year continues to struggle with the challenges, our clients and our space within that industry.

Turning to Slide 12, as Ed mentioned, our revenue mix is shifting as we focus on our areas of strength and deliver solutions in those areas by leveraging our capabilities in systems integration and consulting, ITO outsourcing, and technology. And this slide demonstrates that shift over the past number of quarters.

Moving to cash flow, we generated $127 million of cash from operations in the quarter, up from $94 million in the year ago quarter. We continue to manage our business without utilizing our accounts receivable securitization facility during the third quarter. In contrast, utilization under this facility was $118 million at September 30, 2009.

Capital expenditures declined to $46 million from $48 million in the year ago quarter. Looking ahead, we continue to anticipate capital expenditures of 200 to 225 million for the full year of 2010. After capital expenditures, we generated $81 million of free cash in the third quarter, compared with free cash flow of $46 million in the year ago period.

Depreciation and amortization was $61 million in the quarter. For the full year of 2010, we expect D&A of around $240 million.

As you may recall from our discussions last quarter, under the terms of certain of debt indentures, proceeds from the HIM sale, we closed in April of 2010, are restricted to be used for certain capital expenditures, acquisition of certain assets, and repayment of certain debt obligations.

During the third quarter we used approximately $90 million of the proceeds for purposes allowed under the indentures. The remaining $11 million is restricted, and is included in pre-paid expense and other current assets on the company’s September 30 balance sheet.

We ended the quarter with $689 million of cash on hand, up from $497 million at June 30, 2010. As we have said previously, one of our primarily goals is strengthening our balance sheet through reduced net debt. The graphic on Slide 13 demonstrates the progress we have made towards that goal since December 31, 2008. We have reduced our long-term debt and the utilization of our AR securitization facility by a combined $364 million from $1.2 billion at December 31, 2008 to $838 million at September 30, 2010.

Sequentially, our adjusted net debt position, or the amount by which our debt obligations exceed our cash and restricted cash balance associated with the HIM sales proceeds, has declined by $520 million since December 31, 2008 to approximately $138 million at September 30, 2010.

As Ed noted earlier, $417 million of this reduction occurred during the past 12 months. This has significantly improved the operating flexibility of the company. We will continue to reduce debt where possible, and maintain our effort to strengthen the balance sheet.

On to pension, for 2010 we have not changed our expectation for $115 million of cash pension funding requirements. We have made $61 million of contributions in the first 9 months of 2010. Beginning on January 1, 2011, we will reinstate the company’s U.S. 401(k) matching contribution, but at a lower rate than when we suspended these contributions on January 1, 2009. As before, we expect to fund the match in Unisys common stock. We estimate that our matching contributions will be approximately $14 million during 2011.

In closing, we continue to make progress during the quarter in reducing expenses, getting our services operating margins within our long-term targeted range, and strengthening the balance sheet. A progress in these areas was recognized from external perspective by S&P, Moody’s and Finch during the third quarter. We are pleased with the improved ratings these agencies have awarded us, but know we have still a lot of work ahead of us.

As we move through the final quarter of 2010 and look forward into 2011, we will remain focused on those areas, while working to drive profitable revenue growth in our areas of strength.

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

Ed Coleman

Thanks Janet, very much. Operator, we’d like to open the call up to questions at this point, if we may.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

We’ll go first to Joseph Vafi of Jefferies & Company.

Joseph Vafi – Jefferies & Company

Hi. Good morning, thanks for taking my question. First question on services operating margins, a nice list there. I was wondering if we could get a little bit more color as to what percentage of that list – and maybe especially on the gross line, was due to efficiencies and how much due to mix change? And what do you expect on Mix change relative to that margin moving forward?

Janet Haugen

Hi, Joe. When we’re looking at the services operating margins improvement, we believe most of that change is driven by the operating efficiencies. We, within services, have some declining revenue within the core maintenance, which is at a higher margin rate than the rest of our services business. So you have that offsetting growth in – that decline in that revenue at higher margin dollars not being replaced, coming at almost a two-for-one type of rate with the rest of the new services portfolio.

So as we deal through that reduction, our operating efficiencies and focus on quality services are the main driver for the improvements in the margin.

Ed Coleman

And I think the efficiencies come from the greater use of lower-cost labor as well, but it’s also, a lot of it is just operational execution. Services business is about doing 1,000 things right every day, and I think we’re just getting better and better at execution of those 1,000 things. So it’s all the things that we talked about, Joe. It’s the consistent delivery on a global basis, a better low-cost, better utilization of low cost, lower-cost labor pools, more automation in our service delivery, and probably be more selective in the opportunities that we pursue.

Joseph Vafi – Jefferies & Company

Okay. That’s fair. And then, you know, second kind of quarter here of growth and IT outsourcing, which is nice to see. Maybe a little bit more color there on the types of organizations, maybe verticales where some of your new service offerings are finding – where you’re seeing strength in those new lines of business.

Ed Coleman

Yeah, from a vertical standpoint, you know, I don’t think you can point to any one vertical that’s really being key to it. I think the way I’m looking at it in terms of where we’ve been most successful is where we’ve been able to work with clients that are interested in integrating the full scope of end-user support. So instead of looking at a deal that’s strictly for field engineering support, or strictly for help-desk support, or strictly network management, where clients are looking to consolidate that full scope of support.

Joseph Vafi – Jefferies & Company

And then just a final question, Jan, thanks for the color here on how much the service backlog makes in Q4. I was just kind of looking for maybe some extra color here on the hardware side of the business. By looking at the U.S. decline versus International, I’d probably make a bet that a lot of the clear path business was U.S. based in the second, or in the third quarter. I’m sorry, in the first couple of quarter in the year, and that might have dropped off. Would you expect to see kind of normal seasonal uplifting in Q4 in the hardware business?

Janet Haugen

I think as we said in the call last quarter, and would continue now, we do think we’d have to look at the technology business on an annual basis. Our first goal, as Ed had mentioned, was to stop the decline. We had a very strong first half of the year. Actually, three strong quarter of growth in that ClearPath business.

The geographic makeup of the customer base is pretty consistent with our overall geography and as – we look forward to closing out the quarter strong, but we do recognize that we have had a very strong three quarters in the end of 2009 and the first half of 2010.

Joseph Vafi – Jefferies & Company

All right. Thanks very much.

Operator

Our next question comes from Jeff Harlib of Barclays Capital

Jeff Harlib – Barclays Capital

Hi. Good morning. Just following up on the technology business, can you talk about why the business has been so strong during typically not a seasonally strong period? Does it have to do with product refresh, or what’s been going on with the revenue trends in the business?

Ed Coleman

Yeah. I think a number of different things. I’m hoping I get your question right, you’re breaking up a little bit. In terms of what are all the different factors that are coming into play in the technology business is the way I heard the question.

Jeff Harlib – Barclays Capital

Yeah.

Ed Coleman

You know, a number of things have been going on over the last year, year and a half. There’s certainly elements of strong performance in the last half of 2009 and early 2010 that are related to a refresh cycle. But I think it’s also related to our recommitment to the ClearPath technology, the platform and reassuring our clients that we are embracing that technology and continuing to invest in it to deliver greater capability now and into the future. I think if we’ve addressed our debt situation, customers that were concerned about us from a viability standpoint and perhaps reluctant to invest in our technology, has resulted that. We’ve seen a retracing of those thought processes and they now are re-embracing our technology.

So there’s all those things that are factors into the overall flow, the technology business. And as Janet said, what we’re focused on is making sure that we don’t continue this assumed secular decline in the technology business. We think our platform has continued to be the most innovative, open mainframe platforms in the industry and we’re seeing, I think over the last 12 months, very good uptake in our client’s embracing those enhancements. It continues to be a difficult business though to forecast on a quarter-by-quarter basis because so much of it’s dependent on individual customer decisions and sell and build transactions during the quarter.

Jeff Harlib – Barclays Capital

Okay, that’s helpful. And just in services, can you talk a little bit about systems integrations being somewhat soft, down 11%. And just more generally about, you know, how you can reduce some of these year-over-year revenues declines in services?

Ed Coleman

Well, you know what, I think it’s – on systems integration in particular, it seems to be project oriented and those are discretionary projects in some cases where in a difficult economic climate clients can defer or down scale the size of those projects. But more importantly, we’re also focusing on profitability in that part of our business. I think we’re being more selective in what we pursue and making sure that we can deliver the solutions that we’re proposing in a profitable way. The services business in total, I think we’re moving more to an annuity-based business, as you can see in the relative strength of our IT outsourcing business.

And in terms of overall revenue growth as a part of your question on the services side, I think we’re following a fairly logical progression as we improve the company. First is to get the cost structure right. The second is to improve the balance sheet, and third is make sure we have a portfolio of offerings in the market in areas that are of interest to clients. And that builds a strong foundation on which to start focusing on revenue growth. So we’re certainly aware of the challenges and we’re committed.

Jeff Harlib – Barclays Capital

Okay. And just on the, you know, you’re generating pretty good free cash flow, you have almost 700 million in cash on the balance sheet. What about the use of that liquidity? You know, you have three bond issues that are not callable now. What are you – what’s your thinking on how to deleverage the company?

Janet Haugen

As Ed mentioned in his comments, our goal over the next three years is to reduce the dept by 75%. All of our debt instruments that we have outstanding either mature or are callable during that time period and we will continue to look for the appropriate transactions that provide us with the long-term capital improvement that we are working towards that strengthen the balance sheet and help position the company from a financial standpoint and better competitive situations.

But I don’t want to speculate on what transaction it may or may not be to have a portfolio debt, as I said, that has either maturity or call provisions happening in that entire three-year window.

Jeff Harlib – Barclays Capital

Okay, but you’re still focused on debt reduction as opposed to other use of cash?

Janet Haugen

Yes, we are. That’s in one of the objects that Ed outlined.

Jeff Harlib – Barclays Capital

Thank you.

Operator

Our next question comes from John Moore of KDP Investment Advisors.

John Moore – KDP Investment Advisors

Hi. Good morning. Just on the technology business, based on orders and such for this quarter, is – while it’s hard to predict on a quarterly basis, is it sort of a restoration of that business? Is that something that could be getting back on track as soon as this quarter is – or say more into 2011 expectations?

Ed Coleman

Well, again as we said, you know, we believe that we have made some significant improvements in the technology business over the last 18-24 months. As Janet mentioned, it seems to be more of a business that you think of in annual terms opposed to in quarterly terms because there’s so much sell-and-bill activity that occurs within a quarter, so much dependent on individual customer transactions within that quarter, makes it a difficult one to forecast on a quarterly basis.

But we’re pleased with the strength that we saw in the back half of 2009 and early in 2010. As we mentioned, on a year-to-date basis, the technology business is up year over year. But again, it’s a difficult one to forecast on a quarterly basis coming off a strong first half this year, and also a comparative very strong fourth quarter of 2009.

John Moore – KDP Investment Advisors

Okay. And then for BPO Services, do we expect some sort of stabilization there as the outlook in your view stabilizing for the topline in that particular business?

Janet Haugen

Just a comment, you know, in the BPO area, the largest BPO operation that we have is in the UK, our IPS L-Joint Venture, which processes check and as you would expect, that would continue to decline over time. It is not an area of focus as Ed mentioned and I’ve mentioned in our comments both this quarter and prior quarters.

John Moore – KDP Investment Advisors

Okay.

Ed Coleman

You know, but I want to add to it that when we say we’re not focusing on it, what we mean is that we’re not investing for further growth in that part of the business. We have a number of engagements that are business-processing outsourcing oriented that we’re quite happy with.

John Moore – KDP Investment Advisors

Okay. Then on the TSA, how should we think about that going forward and that transition?

Janet Haugen

As a TSA, we’re under contract with TSA through the end of November. As I mentioned on the call last quarter, we’re running at about $10 million of revenue a month on that contract and we expect our obligations with TSA to end on November 30th.

John Moore – KDP Investment Advisors

And the last one is tough. On restricted versus unrestricted cash, what – how much are the cash balances restricted?

Janet Haugen

None of the cash balances is restricted. The restricted cash is in prepaid and other current assets.

John Moore – KDP Investment Advisors

Okay. Thank you very much.

Operator

We’ll take a follow up from Joseph Vafi of Jefferies and Company

Joseph Vafi – Jefferies & Company

Hi. Thanks for the follow up. You know, SG&A continues – we continue to get leverage there. How should we think about that moving forward and has there been any pullback or dial back on bidding proposal spend that may be driving lower SG&A?

Ed Coleman

The second part of your questions, the answer is no. There has been no deliberate dial back in bidding proposal. And on how to think about going forward, I just would reflect back that late 2008, we set ourselves a goal of reducing our overhead by $250 million. And we delivered that by the end of the first half of this year. We have not set, you know, a discrete further goal beyond that, but I think we have an organization that on a continuous basis is looking for further opportunities to become more efficient and more effective. I think you see that in the continued reduction of SG&A in Q3 of this year and we’ll keep at it.

Joseph Vafi – Jefferies & Company

Okay. And then just going back to the IT outsourcing business that’s starting to grow here a little bit, can you give us an idea of the length of the average contracts in that business so we can kind of start getting an idea of the visibility in the recurring revenue that you have in that line of business?

Ed Coleman

Yeah, it’s a good question Joe. I would estimate it’s probably in the three-to-five year range.

Joseph Vafi – Jefferies & Company

Okay.

Ed Coleman

It’s not any closer to the three than to the five.

Joseph Vafi – Jefferies & Company

Okay, great. Thanks very much.

Ed Coleman

Thank you.

Operator

We’ll go next to Bill Smith of Lowering, Smith and Company.

Bill Smith – Lowering, Smith and Company

Hi, Ed. Could you comment a little bit on the announcement yesterday regarding your relationship with Apple and how you see that developing going forward?

Ed Coleman

Yeah, thanks, Bill for the question. I read the article yesterday and I would say I think the article suggests that there’s more there than there is. We signed a systems integration agreement with Apple where it provides us the opportunity to be a system’s integrator working with Apple in the marketplace. There is no dollar value associated with that contract. We’re pleased to have it. We’re pleased to have the opportunity to work with Apple. We think they offer some, obviously, some solutions in the marketplace that are quite hot now and we’re working with them on some live opportunities. But there’s really nothing there at this point from a revenue standpoint that you should be reading into that.

Bill Smith – Lowering, Smith and Company

Okay. And then could you also comment on the Colt Technology announcement and what that – what those opportunities are with Colt and that Unisys as it relates to Europe and where they’re involved?

Ed Coleman

Yeah, well, if we put in a press release along with Colt, we’re helping Colt stand up a cloud solution where they can take a set of offerings to their clients in Europe that will be branded under their name. So we’re helping them create the cloud solutions that they’ll be taking to the market for their customers.

Bill Smith – Lowering, Smith and Company

Okay. Thank you.

Operator

We’ll go next to Frank German of Goldman Sachs.

Frank German – Goldman Sachs

Thanks for taking my question. I guess just to follow up on the balance sheet, you know, given your comments about goals of paying down 75% of your debt by 2013, can you provide some more details just around how you plan to go about that? It sounds like you’re primarily focused on calls of natural maturities. But specifically, I wanted to sort of push you on given sort of low returns on cash today as well as your relatively high-carry cost of debt, does it make sense to actually try and proactively tender for some of those bonds at this point and issue at a relatively lower coupon? Thanks.

Janet Haugen

What I had said in my comments is that our goal to reduce debt by 75% over the next three years that would in our existing debt instrument, they all are mature or call within 2012. So that gives us flexibility. We obviously have a significant cash balance and both with will absolutely come into play as we decide how to reduce that 75% debt overtime, but I’m not going to comment on any specific plan until we announce what we’re intending to do.

Frank German – Goldman Sachs

Okay, thanks. And then as I do think about the balance sheet, you know, how much cash do you typically think you need to operate with on a go-forward basis, and how much should I consider as sort of access cash on the balance sheet right now?

Janet Haugen

We have not commented on that. All I will say is that we have run with substantially less cash than we have right now, and we do have more than sufficient cash on hand to run operations.

Frank German – Goldman Sachs

Great. And then I guess the last question I had was just on the CapEx plan, you know, you updated us on, so your 2010 expectations for 200 to 225, can you provide me with any color for CapEx needs in 2011 as well as pension funding needs for 2011? Thanks.

Janet Haugen

On – we have not provided guidance on either one of those items for 2011 for either the CapEx or for pensions. And so, I think what I want to point you back to is the rate in which we have been funding with great capital expenditures we’ve had in 2010 as well as the funding in 2011. In prior quarters we have comment that in the U.S. Pension Plan, we are not currently funding that plan but as a result of the asset positions and the change in legislation, we do think that we will begin funding into that plan starting in 2012.

Frank German – Goldman Sachs

Great. Thanks. That’s all I had. Appreciate it.

Janet Haugen

Thanks, Frank.

Operator

At this time we have no further questions in queue. I’d like to turn the conference back over to the Chairman, Ed Coleman for closing remarks.

Ed Coleman

Well again, thank you, everyone for joining us on the call today. For all the Unisys employees that are listening to this call, I also want to thank you for all of your hard work and the contributions you’re making. We’ll talk about again soon. Thank you very much.

Operator

That does conclude today’s conference, Ladies and Gentlemen. We appreciate everyone’s participation today.

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