Unisys Corp (UIS) 2010 Q2 法說會逐字稿

Good day and welcome to the Unisys second quarter 2010 results conference call.

At this time I will turn the conference over to Mr.

Niels Christensen at Unisys Corporation.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone, and think you for joining us.

Earlier today Unisys released its first quarter 2010 financial results.

With us this morning to discuss our results are Ed Coleman, our CEO, and Janice 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 and the presentation slides that we will be using this morning 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 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 have provided reconciliation charts at the end of the presentation.

Finally, I'd like to remind you all -- 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 will turn the call over to Ed.

Thanks, Niels.

Hello, everyone.

Thank you for joining us today to discuss our second quarter 2010 financial results.

Please turn to slide one to begin our discussion today.

This was another solid quarter for the Company as we continued to make progress in enhancing our profitability and reshaping our business model at Unisys.

By staying focused on our business priorities, we delivered our fifth consecutive quarter of year-over-year improved profitability.

We also generated positive free cash flow in the quarter and continued to make progress in strengthening our balance sheet.

Driven by a strong performance in our technology business, our second quarter operating profit grew 58% to $107 million and we reported a 10.1% operating margin in the quarter.

Including the pretax gain of $65 million from the sale of our health information management business, we reported net income of a $120 million up from $38 million a year ago.

Net income from continuing operations rose 77% to $59 million.

Our technology business had a great quarter, growing revenue 47%, as sales of ClearPath servers more than doubled in the quarter.

In our services business, while revenue declined in the quarter, we saw growth of 9% in IT outsourcing outside of the US federal government.

Services revenue also strengthened sequentially, enabling us to drive higher services margins and operating profit compared to the first quarter of the year.

We've also maintained our focus on expense management, with operating expenses down 6% year-over-year.

And we continue to increase our use of lower-cost labor pools to improve our direct labor cost, with offshore and lower-cost onshore resources now accounting for 25% of our employee headcount, up from 23% at the end of the first quarter and 20% at the start of the year.

Through the first six months of 2010 our operating income has doubled over the first half of 2009.

The net income from continuing operations is up almost ninefold over the same period.

I'm pleased by the continued solid execution we're seeing against our business priorities, as evidenced in our results for the quarter and over the first half of 2010.

Our four business priorities, as you may recall, are to better focus and concentrate our resources, sharpen our value propositions, enhance the cost efficiency of our services delivery organization, and simplify the organization to reduce expenses.

Through these priorities we aim to create a business model for Unisys that produces consistent and predictable probability and cash flow and delivers superior customer service and profitable growth in our focus markets.

Against these priorities we have made striking progress over the past 18 months.

Slide two shows how far we've come over this period in terms of enhancing the profitability of our operations.

This chart shows our trailing 12 months operating profit by quarter over the past six quarters.

As you can see, trailing 12 months operating income has improved quarter by quarter over this period from about $10 million in the first quarter of 2009 to $409 million in the most recent quarter.

We've also made progress in reshaping our revenue profile and laying a foundation for profitable growth.

Turning to slide three, as you may recall from our past calls to drive profitable growth at Unisys we're focusing on leveraging our core strengths in the area of security, data center transformation, including our server business, end-user outsourcing and application modernization.

These are the solution areas that we're investing in for profitable growth.

We deliver these solutions by drawing on capabilities and systems integration and consulting, IT outsourcing and technology, as shown on the left side of this chart.

The areas shown on the right our focus is not to grow, but rather to maintain our capabilities or in some cases deemphasize lower margin areas in order to enhance our profitability.

It takes time to make a business model transition of this magnitude, to redirect our investments, to strengthen and reposition our portfolio, to create clearly differentiated value propositions, to refocus a workforce of some 24,000 people around the world, but I'm encouraged by the progress we've made.

In our technology business we've seen three consecutive quarters of year-over-year ClearPath revenue growth as we continue to reposition and revitalize ClearPath as an open powerful extremely reliable main frame platform capable of supporting the state-of-the-art tools and technologies needed by today's enterprises.

Last week for instance, we introduced a development in test Cloud for ClearPath.

This is one of a planned series of new Cloud-based solutions coming for ClearPath, which complement the production level of operator service Cloud we have been running in support of our air cargo solutions in several airlines for over seven years.

In our services business, excluding the vested businesses, we continue to see good growth in our IT outsourcing revenue outside of our US federal government business.

This ITO revenue has grown year-over-year for two consecutive quarters, including 9% growth in the second quarter.

Turning to slide four, as we focus our resources and investments on driving growth opportunities and system integration, ITO and technology, our revenue profile is shifting.

Again these are the elements of our business that are integral to the delivery of our security, data center transformation, end-user outsourcing, and application modernization solutions.

This side shows our portfolio revenue mix in the first half of 2010, excluding divested businesses, compared with full year 2008 revenue as reported.

As you can see, [our refocus] businesses today account for an increase in percentage of our overall revenue, going from roughly two-thirds of the business in 2008 to about three-quarters today.

One challenge we face this year in terms of driving profitable revenue growth, particularly in our services business, is a slowdown in our US federal government business.

Following a solid 2009, our US federal government revenue has declined 12% in the quarter and 14% in the first half of 2010.

However, we're encouraged by continued work being done by our federal system's team to expand and diversify its base into new agencies and programs.

For instance, we recently won significant new contracts with the USDA, including the rural development program, as well as an IDIQ contract vehicle with the National Geospatial Intelligence Agency.

We also recently announced the opening of a new application modernization center of excellence in St.

Louis to support growth in these programs.

Turning to slide five, looking ahead to the second half of 2010 we want to build on the positive momentum we've seen in the first half of the year.

We're staying focused on executing against our business priorities, continuing to reshape our business model toward growth markets, continuing to reduce costs and enhance our cost efficiency, continuing to drive improved profitability and cash flow.

We're encouraged by the progress we've made and the improvements we've seen in the business.

Thank you again for joining us this morning.

Now here's Janet to take you through our results in more detail and then we will be happy to take your questions.

Thanks, Ed, and hello, everyone.

Our results this quarter showed our continued progress improving our profitability, generating free cash flow and strengthening our balance sheet.

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

Additionally, I will give an update on pension.

Before commenting on our continuing operations, I want to discuss our divested health information management business, HIM.

As previously disclosed, we sold this business in the quarter.

Net proceeds from the sale were approximately $126 million.

In the quarter, we recognized a $65 million pretax gain on the transaction.

The Company's financial statements have been retroactively restated to report the HIM business as a discontinued operation.

As a result, HIM operating results, as well as the gain on sale, are reported in one line, the income from discontinued operations on the income statement.

Additionally, HIM assets and liabilities are reported as assets and liabilities as discontinued operations on the December 31, 2009 balance sheet.

Now please turn to slide six for an overview of our services, backlog and order trends in the quarter.

We closed the quarter with $5.7 billion in services backlog.

This was up from the June 30, 2009 services backlog of $5.5 billion.

June 30, 2010 backlog was down from March 31, 2010 backlog of $5.9 billion, principally due to the impact of translating the backlog at different quarter and currency rates.

Approximately $810 million of the June 30, 2010 services backlog is anticipated to convert into third quarter 2010 services revenue.

Over the past six quarters, we typically have between 87% to 91% of our quarterly services revenue in our opening backlog.

The balance of our services revenue in a quarter comes from sell and build business during the quarter.

Our services orders showed single-digit declines in the quarter.

The decline primarily reflected a double-digit decline in outsourcing orders following three consecutive quarters of strong outsourcing order growth.

Growth in BPO orders only partially offset the decline in ITO orders, as we saw some orders slip into the third quarter.

Systems integration and consulting orders were up slightly against the year ago quarter.

Infrastructure services grew by double digits and orders for core maintenance declined double-digits, reflecting the impact of the sale of our check and cash automation equipment business and the ongoing secular decline.

Geographically total US orders increased in the quarter, as growth outside our US federal business was partially offset by order declines in our US federal government business.

Total international orders were flat in the quarter, as substantial order gains in Europe were offset by order declines in Asia Pacific and Latin America.

Slide seven shows a comparison of our financial results in the second quarter.

At the top-line we reported revenue of $1.06 billion.

This was down 4% year-over-year and down 2% excluding the businesses we have divested over the past year.

Currency had a 1 percentage point positive impact on our revenue in the quarter.

Based on today's rates, we anticipate a 1 percentage point negative impact on revenue in the third quarter of 2010.

As Ed mentioned, our technology business had a strong quarter, growing revenue 47% as sales of our ClearPath servers more than doubled year-over-year.

Despite growth in our outsourcing, ITO outsourcing revenue outside of the US federal government, services revenue declined 9% in the quarter, 7% excluding divestitures.

Driven by the strong technology performance, we reported a second quarter gross profit margin of 27.3%, up from 23.7% in the year ago quarter.

We continue to make progress in reducing costs and enhancing the efficiency of our business, operating expenses, which include SG&A and R&D, declined 6% in the quarter.

Our operating profit margin improved to 10.1%, up 400 basis points from 6.1% a year ago.

We had a $13 million tax provision in the quarter, about the same as our tax provision in the year ago quarter.

Our tax provision can still vary significantly from quarter to quarter depending upon the geographic distribution of our income.

After taxes, we reported net income from continuing operations of $59 million in the quarter, up 77% from net income of $34 million in the second quarter of 2009.

During the quarter we recorded a pretax gain of $65 million related to the sale of HIM.

And including the gain on the sale of HIM, we reported second quarter 2010 net income of $120 million or $2.77 per diluted share compared with net income of $38 million or $1.02 per diluted share in the second quarter of 2009.

Fully diluted shares for second quarter 2010 were 43.33 million compared to second quarter 2009 fully diluted shares up 37.45 million.

The increase in weighted average diluted shares outstanding principally relates to the debt exchange which we completed in the third quarter of 2009.

The impact on diluted EPS of the shares issued in the debt exchange is $0.39 per share when comparing the second quarter 2010 diluted EPS to the second quarter of 2009.

Slide eight outlines some of the key trends in our improved profitability over the past several quarters.

Gross margins continue to increase year-over-year based on higher ClearPath sales and improved cost efficiencies in our services labor model.

Likewise operating margins have benefited from the increased gross margins and the impact of cost reduction efforts on SG&A and R&D expenditures.

These benefits are further shown in our EBITDA for the quarter, which was 15% of revenue for 2Q 2010.

This is a 1 percentage point improvement in EBITDA as a percent of revenue when compared to 2Q 2009.

Moving to our second quarter revenue and margin by portfolio, on slide nine you can see that services revenue declined 9% year-over-year, 7% excluding the impact of divested businesses.

Despite reduced expenses margins declined year-over-year in our services business on lower revenue.

Services gross margins declined to 19% from 20.7% in the second quarter of 2009, while services operating margins declined to 6% from 7.4% a year ago, but both services revenue and margins improved sequentially from the first quarter.

Within our outsourcing revenue ITO declined 2% in the quarter.

Outside of our US federal business ITO revenue grew about 9%.

And we are also encouraged to see our overall ITO revenue grow 5% sequentially.

Business process outsourcing, or BPO, declined 20% in the quarter.

Systems integration and consulting revenue declined 5% in the quarter.

Sequentially, however, our systems integration and consulting revenue grew 14% reflecting in part the order growth we reported last quarter.

Infrastructure services declined 20% in the quarter.

4 percentage points of the decline resulted from the sale of our check and cash automation equipment business.

Core maintenance revenue declined 23% in the quarter, but was down 9% excluding the impact of divested businesses.

Moving onto technology on slide ten, you see that technology revenue increased 47% and an increase of 56% when you exclude the impact of divestitures made during the past 12 months.

Strong ClearPath sales drove the substantial increase in technology margins in the quarter.

We reported technology gross margin of 61.3%, up from 40.4% a year ago.

And our technology operating margin improved to 27.4% compared with an operating loss of 5.4% in the second quarter of 2009.

Enterprise server revenue grew 71%, driven by a more than doubling of our ClearPath sales.

Slide 11 shows our second quarter revenue by geography and industry.

Within North America our US revenue in the quarter was $450 million, a decline of 13%.

About half of this decline results from divestiture and the rest of the decline was predominately from lower revenue in our US federal government business.

As we have mentioned in prior calls, our US federal government business has been impacted in the first half of 2010 by lower revenue from our TSA and GSA same contract.

International revenue grew 3% in the quarter.

On a constant currency basis international revenue was flat, as revenue growth in Latin America and Asia-Pacific was offset by a decline in Europe.

Our public-sector, which includes our US federal government business, remained our largest single vertical revenue industry.

The year-over-year change is largely due to the reduced US federal government revenue.

Our commercial sector grew 12%, primarily due to strength in our transportation business, while our financial sector declined 20% due to continued challenges for our clients within that industry.

On to cash flow.

We generated $52 million of cash from operations in the current quarter, up from $48 million in the year ago quarter.

As you may recall from our last earnings call, we did not utilize our accounts receivable securitization facility during the first quarter of 2010 and we continue to manage our business without utilizing that facility during the second quarter.

In contrast, utilization under the facility was $130 million at June 30, 2009.

Capital expenditures declined to $48 million from $53 million in the year ago quarter.

And capital expenditures are also down sequentially from first quarter 2010 CapEx of $69 million.

Looking ahead, we continue to anticipate capital expenditures of between $200 million to $225 million for the full year of 2010.

After capital expenditures we generated $4 million of free cash in the second quarter compared with a free cash usage of $5 million in the year ago period.

Depreciation and amortization was $63 million in the quarter and for the full year of 2010 we expect depreciation and amortization of around $250 million.

A comment on the HIM sale proceeds.

Under the terms of certain of our debt indentures, proceeds from the sale are restricted to be used for certain capital expenditures, acquisition of certain assets and repayment of certain debt obligation.

As I commented earlier, the net cash proceeds from the sale were $126 million.

During the second quarter we used approximately $25 million of the proceeds for purposes allowed under the indentures.

The remaining $101 million is classified as restricted cash and included in other long-term assets on the Company's June 30th balance sheet.

We ended the quarter with $497 million of cash on hand.

As we have noted over the past six quarters, one of our primary goals is strengthening our balance sheet through reduced net debt.

The graphic on slide 12 demonstrates the progress we've made towards that objective since December of 2008.

We have reduced our long-term debt and the utilization of our accounts receivable securitization facility by a combined $365 million from $1.2 billion at December 31, 2008 to $836 million at June 30, 2010.

Our cash balance has remained approximately $500 million during the period and in addition we have the remaining $101 million of the HIM sale proceeds in restricted cash at June 30, 2010.

Consequently, our adjusted net debt position, or the amount by which our debt obligations exceed our cash in this restricted cash balance, has declined by over $485 million to approximately $172 million at June 30, 2010, which has significantly improved the operating flexibility of the Company.

We will continue to reduce debt were possible and maintain our efforts to strengthen the balance sheet.

I'd like to make a few comments related to our US pension obligations.

On June 30, 2010, a new legislation, the preservation of access to care for medical beneficiaries and pension relief act of 2010, was signed into law.

This act, which amends the pension protection act of 2006, includes two relief options that pertain to the required cash contributions to our US pension plan.

Prior to the relief act, Unisys cash contributions in the US pension plan were expected to be about $30 million in 2011.

Relief under this amendment is expected to defer any required cash contributions by Unisys until at least 2012.

There are two relief options.

One defers principal payments for two years and requires the unfunded obligation to be paid over the following seven.

And the second option provides that the unfunded obligation be paid over 15 years.

We are evaluating which option is optimal for Unisys.

For 2010 we have not changed our expectation for $115 million of cash pension funding requirement and we have made $39.5 million of contributions in the first half of 2010.

In closing, we continued to make good progress during the quarter in reducing expenses, enhancing our profitability, and strengthening our balance sheet.

We will remain focused on those areas while working to drive profitable revenue growth in our areas of strength as we move through the second half of the year.

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

Thanks Janet.

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

(Operator Instructions) Our first question today will come from Eric Boyer with Wells Fargo.

Hi, Eric.

Hi.

Just want to talk about -- I think you noted a slowdown in outsourcing orders for the quarter.

Some of the advisor calls have highlighted that decision-making is starting to lengthen again in duration.

Just wanted to know if you had any comments there.

Yes.

We were expecting some orders in Q2 that got deferred into Q3, we believe.

We don't believe those are losses at this point, but rather deferred decisions by the customers.

So it does appear to be lengthening a bit.

Is that more of a kind of a macro concern they are having on kind of the second half.

Yes, I don't -- I wouldn't give it so much as a macro.

We just had some specific transactions in Q2 that we believe got deferred to Q3, but we're not a big enough player industrywide to really think of that as being a macro issue.

I think the outsourcing value proposition is still a powerful proposition for our customers.

Okay.

Then ClearPath, another strong quarter there.

Can you give us any sense of kind of what you're expecting, not in terms of a, obviously, a dollar amount, but just kind of the general trend you're expecting there for ClearPath sales.

Yes, let me say again how pleased we are with the growth in ClearPath over the last three-quarters, as we've revitalized or repositioned it in the marketplace.

And I think it's validation that we're on the right track with the platform.

And we remain committed to our goal of reversing what some have projected to be a long-term secular decline in ClearPath.

And we're working hard to do that and, again, I think we're showing progress against that.

That being said, forecasting quarterly results for ClearPath remains difficult due to the transaction nature of that business in the amount of sell and build that occurs within any given quarter.

So we've got a lot of work to do the second half of the year to keep the momentum going.

And then just along ClearPath lines, again.

Could you just talk about the profitability of another really,really strong quarter in margins there.

Is that a result of the higher end software that you are configuring with the ClearPath.

ClearPath essentially today is a software business.

It's really selling and implementing and running two of the finest high-availability operating environments in the industry and it's really based on the operating systems themselves.

So, are we at kind of a new level or how should we think about the margins, because obviously that line has kind of been -- it's moved all over the place over the years here.

Eric, I think when looking at the ClearPath it's best to look at it on an annualized basis.

A fair amount of the costs in that software business are more fixed and so as the volume comes in stronger in a given quarter more of that incrementally drops to the bottom-line.

Okay.

I don't think that we've seen a change in the overall, when you look at it from an overall program standpoint.

In the margins it's pretty good testament to our ClearPath team that we haven't seen a decline in those margins compared to what we may see across the industry.

Final one, you talked about the federal government some slowdown in revenue growth there but you are encouraged with some of the new signings.

Could you just give us a status on TSA where that is right now.

We've protested the most recent TSA decision and we're waiting to hear the results of that protest.

In the meantime we continue to perform, we think, very well for TSA.

Is there any kind of transition your undertaking now or kind of ramping down the work that you're doing.

I think it's multiple speakers).

I wouldn't say we're ramping it down.

What we've been doing over the course of several months now is planning for an eventuality that we hope doesn't come, but if we were to leave that contract we've had several months to plan for how we would handle that and deal with it, which is a good thing.

But, again, our great hope is that we would continue to stay engaged with TSA and continue to provide great service to them, like we have for the last several years.

All right, thinks a lot.

You bet, Eric.

Thank you.

And our next question will come from Joseph Vafi with Jefferies & Company.

Hi, good morning and congratulations on the strong earnings results and thanks for the extra disclosure in color on some of the business lines.

I think I will just kind of circle back to ClearPath and the strong results here.

It would be, I think it would be useful for us if we should get an idea of some of the growth here in ClearPath this quarter and even last quarter has been broad-based or if it's been concentrated within a few customers, just to get an idea of the trends in that line of business.

Joe, I would characterize it as broad-based.

I think a number of things have occurred over the last few quarters to help there.

One, I think we've made new investments in ClearPath, both in terms of the technology as well as our commitment to the platforms that we're sharing with our customers.

Secondly, our own improved financial results have given customers greater confidence in acquiring ClearPath.

And third, I think as the industry moves more to providing technology as a service, the emphasis is more on the reliability, the security, and the performance characteristics of that service more so than the underlying platform itself.

And these are all attributes where ClearPath absolutely shines.

Okay.

And another question on the ClearPath businesses would be, what -- are you seeing more new ClearPath sales or are we still really focused on the ClearPath investor base or installed base at this point as our target market for ClearPath.

It is very much the install base continue to bring value to them and help clients move additional work load to ClearPath.

Right, okay.

Okay, that's helpful.

And then secondly, I guess, Janet, the tax rate was down a fair bit and I know that that does move around and just was there, were there a couple areas where there were some positive tax performance for you in the quarter.

Right.

I think as you look at the tax rate it was about the same as last year on higher earnings just relates to the mix of the business.

Joe, we were in, we were starting to see some profitability come back in countries where we don't have -- were not required to book a tax provision given the loss provision and then it is just the rest of it just is a mix of where the revenue came in.

50% of our entities we provide a tax provision for, 50% we don't under the US GAAP rules that we're in, so the rest of it just was a mix.

Okay.

So if we're going to see, if we see a general lift or positive earnings contribution in some of those geographies where, I guess, maybe you have a NOL, would we expect to potentially see further use of kind of global NOLs in coming quarters.

Yes.

Yes, you would.

Okay.

And then, let's see here.

It sounded like you gave us almost a little bit of guidance on the services revenue line with the 87% to 91% visibility to revenue, so that was helpful.

I was wondering if in the sequential numbers on services, obviously a little bit better margin sequentially, is there anything structural there that's gone on between Q1 and Q2 to drive better sequential margin or are we really talking about higher volumes just flowing down through the P&L.

I would point out two things.

One, systems integration did improve sequentially and not contribute to that improvement on the margins, but it is still a benefit of the continuing progress we're making in the services labor delivery model, as we continue to move work into lower-cost locations.

Okay.

And then, I guess, finally for me would be, I don't know if I heard a CapEx number for the quarter and it does look like the ITO business continues to grow and even potentially ClearPath on a Cloud solution, how should we be thinking about Cap Ex run rate and trends there.

Right.

So, CapEx declined to $48 million in the quarter, that is down sequently from the first quarter CapEx of $69 million.

As we said on the first quarter call, the first quarter CapEx was a little bit higher than what we normally run, running with, combined from a specific, two specific deals in the first quarter that required CapEx from a timing standpoint.

And then second, investments in facilities.

As we moved to lower-cost facilities there have been some leasehold improvements that happened in the first quarter.

For the full year we're still staying with the same capital expenditures guidelines that we had given previously, the 200 to 225 for the full year, that is in-line with what we been running at and we feel like we can achieve the opportunities we have in the pipeline at that CapEx rate.

Okay, great and then just one final one.

And I know you're not providing guidance, but in general in the past you've said that ClearPath is more of an H2 business than an H1 business.

Do the strong results here in Q2 in ClearPath at all change that outlook on how that business tracks seasonally.

As I said before, it's hard to forecast ClearPath quarter by quarter.

One of the things we've worked hard on this year, though, is to try and remove some of that seasonality from the ClearPath business so we can get more of a consistent flow through all four quarters.

So I believe that seasonality is still there, but we have made a concerted effort to do more in Q2, or in the first half of the year then perhaps we have in previous years.

I'd also comment on your first question about whether the ClearPath in Q2 was broad-based or not.

I think it's accurate to characterize as broad-based, but you have to remember that ClearPath is everything from relatively small systems to very large systems.

And we certainly had some large transactions in Q2 to deliver the kind of results we did.

All right, great, that's good color.

Thanks, Ed.

Thanks, Janet.

Thank you, Joe.

Thanks, Joe.

And our next question will come from Arun Seshadri with Credit Suisse.

Thanks for taking my questions, guys.

First, I just wanted to ask about TSA.

What would your -- you've said that the federal revenue declined about 12% in the quarter.

What would that have been ex the TSA decline.

Arun, we -- in this time last year the TSA contract moved from a fixed price to a cost plus, so we've seen that contract -- the third quarter will hit an anniversary date of one year of having moved to that contract term.

We generally run about $10 million a quarter in TSA revenue a month -- I'm sorry, $10 million a month in TSA revenue from a quarter and it's in the second quarter of this year we ran about $30 million of revenue, which compared to $42 million in the second quarter last year.

Got it.

Helpful color, thank you.

And then I just wanted to get a sense for the disclosure you made on pension you mentioned the two options, could you go over sort of what those two options would mean from a cash flow standpoint and I guess releasing over 7 versus releasing over 15 years.

A little bit additional color in terms of what the cash obligations would be two years out in the first option and then in the second option as well would be helpful.

Thanks.

Obviously, we are still looking at the legislation and we are looking at where the updated unfunded obligation and the discount rate would be and all that would factor into the calculation.

But if I give you an outlook based upon where the December 31, 2009 information was I will give you a sense of that.

If you -- for us if we moved to the 15 year amortization that would mean that pension contributions would be in the $90 million to $100 million a year level, based up the December 31, 2009.

And on the seven year you would probably, you would double that essentially.

Now those are based upon the interest rate and the assets and the unfunded obligation that existed at December 31, 2009.

As those change as market returns change, as discount rates change, those numbers can change in the future and so that just, I just wanted to give you a sense in response to your question about how large could it be over that time period, but realize that neither one of those numbers are probably, are going to be what the calculation looks like at December 31, 2010 when we have to make that decision.

Okay, again, that's extremely helpful.

I appreciate that.

And those numbers are against the US cash numbers for 2011 that they disclosed previously of $30 million, correct?

Correct.

And as I said in my comments based upon the pension relief we do not anticipate any contribution in 2011 for the US pension plan.

Got it.

And then the last question, you mentioned you bought back -- you used $25 million of the proceeds from the HIM sale to do various things.

How much debt did you buyback and what debt did you buyback and if you could update us on what your plans are with the remainder of the $101 million proceeds.

Sure.

We bought around $11 million of debt back in the quarter.

Now that's -- they have been through open market purchases during the quarter and, as we said previously, we continue to look at all options for use of that $101 million proceeds to improve our capital structure.

We may from time to time make open market purchases, but we continue to evaluate all options and can't comment on them right now, but we will once we've made a final decision and begin implementing them.

Just a quick follow-up.

The open market purchases what bonds or what debt did you buyback, what specific debt instrument did you buyback.

A little on the 12s and some on the 14s.

Got it.

Thank you.

Our next question will come from Jeff Harlib with Barclays Capital.

Hi, good morning.

I was wondering if you could talk about the services pipeline.

You commented on a double-digit decline in outsourcing orders and I know federal government is weak, but what about -- you did make some positive comments on the non-federal business.

So maybe you can talk about the pipeline and how you expect to reduce those high single digit revenue declines in services.

Yes.

Specifically at the outsourcing business our comment was the IT outsourcing business outside the federal government from a revenue perspective grew 9% year-over-year in the quarter.

So we're very pleased with that, encouraged by that and that's really a reflection, I think, of orders growth that we'd seen in the previous quarters.

This particular quarter orders were down.

As I mentioned earlier, we had a number of transactions that we were expecting and hoping to sign in Q2 that we believe have been deferred to Q3.

We don't believe we've lost those opportunities, but we think that the decisions were just deferred.

So the order number can be fairly spiky based on customer decisions in the timeframe of those customer decisions, as well as the timing of renewals of existing contracts.

Okay.

And just the pipeline in terms of contracts you are bidding on and that kind of thing as you've targeted certain growth areas.

Again, we're focusing our efforts around these four solution areas of security, data center transformation, end-user outsourcing, application modernization.

We feel that we have a good solid robust pipelines in each of those areas and we're working hard on bringing them through the pipeline.

Okay.

And do you have any comments to make on the technology or ClearPath outlook for the second half given what seems like a pretty significant refresh that has gone on more recently and some pretty strong revenues.

Are you more cautious about the second half or do you see pretty good pipeline and interest from your customers.

As I said earlier, the challenge with ClearPath, first of all, we're, again, very pleased with the last three-quarters of year-over-year growth and we think that's an indication of validation that the plans that we have in ClearPath are very improved.

But again, forecasting ClearPath on a quarterly basis is difficult, because it's really not so much a backlog business.

It's very much a sell and build business that oftentimes both sides of that transaction occurs within the quarter.

So again, we think we have some good positive momentum, but we have to execute quarter by quarter in that business.

Okay.

And Janet, just the $160 million EBITDA that you reported there, were there any unusual items either in operating income or EBITDA restructuring or other items.

And then what about the $7.6 million other expense item, what did that relate to.

In the EBITDA item, line item with regard to unusual items, there's about $8 million worth of expenses that would be for restructuring or non-recurring type of items.

In the other income expense, which was a loss of $7.6 million, most of that expense comes from foreign exchange losses in the quarter.

Okay, okay.

But that does reduce EBITDA per your calculation or -- .

Yes.

Yes, okay.

Thank you.

And now we will take a question from Tony Venturino with Federated Investors.

Good morning.

How are you guys doing today.

Good, Tony, how are you.

Pretty good, thank you.

Ed, last call you had talked about having some difficulty with translating the pipeline and the order, orders into revenue.

Are you still seeing that this quarter, have you seen any change in that activity.

I think what I was referring to is the nature of IT outsourcing engagements is that you sign the order and then you go through a transition process before running into a full production mode on that contract and sometimes those transition periods can be relatively lengthy.

I think what we saw this quarter is the fruits of getting through those transitions on a number of major contracts that we signed late last year, early this year as the ITO outside again, outside the federal business, again, grew 9% year-over-year.

So I think that's what you're seeing is working your way through those transitions and getting into production mode and a billable mode on those contracts.

Are the transitions taking longer than historically or kind of are they in-line with historical.

I think it's pretty much in-line.

We've had some large wins and some large engagements that we're undertaking on a global basis and that by the nature of that kind of deal creates a more complex and sometimes lengthier transition, but I don't think it's anything out of the ordinary.

Yes.

And then if I switch over to kind of -- well, I guess talking about the Cloud business.

How big is that business and where is it located in terms of segment revenue.

Well, we don't give out the specific size of the business and the cloud business from our perspective really takes various forms.

It can either be a hosting of a Cloud on behalf of clients, which we do, and the most notable example is one that we've been doing for seven years in support of our air cargo solution, a mission critical production system that we run for a number of airlines.

It can also take the form of helping clients build their own internal Clouds and that can take either providing technology for that, as well as a set of consulting and systems integration services that help the client work their way through that path of consolidation, virtualization, automation, which leads to them operating their own Cloud.

So it can take a number of different forms.

In some cases it would show up in our systems integration business, other cases it would show up in our outsourcing business, other cases they would show up in our technology segment.

So it's really a different model for delivering service either internally by the customer or utilizing an external site that really flows through the whole business.

And are all the external sites owned and operated by you, are these all your data centers.

To date yes.

I believe so.

Are there any plans to increase that.

I mean, do you have maybe a utilization number for your data center's.

I wouldn't comment on that.

Okay.

And then along the same lines, is this potentially playing into the growth that we're seeing in the server sales.

Is the increase in the cloud, we're seeing it with other companies, is this maybe driving some of that growth.

It's hard to say.

I mean, to the degree that clients are building internal Clouds that are utilizing capacity that we're providing to them through our technology solutions perhaps, but it's not something that we would call out specifically as saying our ClearPath business is growing because of Cloud.

And we just announced a new test and development Cloud last week that augments what we've been doing from a production Cloud for the cargo system, it's a more general purpose Cloud.

And we will see how that goes.

And how would you rate your Cloud services, vis a vis, some of the other competitors, specifically like a Savvis or Terrremark.

Outstanding.

I thought you'd say something else.

No.

Can you, not to be lib or anything, can you maybe add a little more color, like how you differentiate your product versus theirs or what you might provide that is different.

I think what we bring to bare across either hosting a Cloud environment or helping customers build their own Cloud environment is a legacy of data center expertise and a focus on mission critical operations.

That's really what this Company stands for and what it's been built on, is mission-critical operational support for clients.

Okay.

And then just, Janet, if I could just a couple quick ones.

Did you actually give us the debt balances, the individual debt balances so I can get up-to-date.

You said -- I think you said total was 839.

Right, so on slide 12 we did go through the debt balances of 839.

I commented on our adjusted net debt and I showed that the net debt had declined when you consider the cash balance and the restricted cash of $101 million proceeds that are sitting off to the side.

That decline over the net debt position at June 30th provide us $239 million.

When you consider that we also during the same time period had to move $67 million of cash into restricted cash to back up our letters of credits when our revolving credit agreement went away, that reduced our adjusted net debt position to $172 million at June 30, 2010.

So hopefully during this time period if we see an improvement in credit markets we can go back to a letter of credit facility that does not require cash collateralization.

So in looking at our adjusted net debt position we considered the cash on the chart you see, the restricted cash for the $101 million for the HIM balance, which takes you to $239 million and if you consider that over the longer term we can improve our performance, improve our access and some improvement in the credit markets, hopefully we can go back to a letter of credit facility.

That would free up about $67 million that sitting in restricted cash, which would reduce that net, adjusted net debt position to $172 million.

Okay.

Do you have like the individual balances.

Yes, I can tell you.

At June 30th the October 12 are sitting at $68 million in outstanding maturities, the October 14s are sitting at $375 million, the September 15s are at $247 million, the October 15s are at $14 million, and then the January 16s are at $150 million.

$151 million it rounds to.

And all of that will be disclosed when you see our 10-Q being filed.

Okay.

And then pension expense for the quarter and any sort of cash restructuring or cash OPEB.

As I said on one of the earlier questions, we had about $8 million worth of net restructuring charges in the quarter, pension expense was $1 million in the quarter.

Was that $8 million a charge or the actual cash outlay.

Charge.

Okay.

Was there any cash that went out for restructuring.

Roughly about $10 million went out for restructuring in the quarter.

Okay.

And cash OPEB.

That has got to be about $20 million a year, $5 million a quarter.

Okay, so not much difference from last quarter.

Okay, great.

Thank you very much.

Thank you, Tony.

Thank you.

And that does conclude our question and answer session.

I will turn the conference over to our host for any closing or additional remarks.

Great.

Well, thank you all so much for being on the call today and we look forward to speaking with you next time.

Have a great day.

And that does conclude our conference call.

Thank you for your participation.