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SRA International, Inc. (NYSE:SRX)

F4Q09 Earnings Call

August 12, 2009 5:00 pm ET

Executives

Dave Keffer - VP, Investor Relations

Stan Sloane - President and Chief Executive Officer

Tim Atkin – Chief Operating Officer

Rick Nadeau – Chief Financial Officer

Analysts

Tim Quillin - Stephens Incorporated

Bill Loomis - Stifel Nicolaus

Tobey Sommer - SunTrust Robinson Humphrey

Ed Caso - Wachovia

Michael Lewis - BB&T Capital Markets

Joseph Vafi – Jefferies & Company

Brian Kinstlinger - Sidoti & Company

Jeff Houston – William Blair

Jason Kupferberg - UBS

Mark Jordan – Noble Financial

Alex Hamilton – Jessup & Lamont

Operator

Welcome everyone to the SRA International fourth quarter fiscal year 2009 earnings conference call. (Operator Instructions). I would like to turn the call over to Mr. Dave Keffer, Vice President of Investor Relations.

Dave Keffer

Thank you, Kelley, and welcome everyone. On the call today are Stan Sloane, our President and CEO, Tim Atkin, our COO, and Rick Nadeau, our CFO.

During this conference call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made during this earnings call represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

During this call, we will also refer to certain non-GAAP financial measures. A discussion of any non-GAAP financial measures is available in our SEC filings which can be found in the IR section of our website at www.sra.com.

Stan Sloane

We’re pleased to finish our fiscal year 2009 with a solid quarter of program execution, cost management, cash generation, and new business wins. Revenue for the fourth quarter was $402 million, our operating margin was 7.2% and diluted earnings per share were $0.30. We generated $60 million of cash flow from operations during the quarter. For the full year, we generated $1.541 billion of revenue and $1.01 of diluted EPS. Our full year operating margin was 6.5%.

After a challenging first half of the year, we effectively contained our SG&A spending and restructured our commercial and international businesses leading to a rebound in our operating margins. We also continued to invest in business development, and our FY09 book to bill ratio of 1.5 positions us well for organic revenue growth during fiscal year 2010.

Turning to the industry environment, the White House’s fiscal year 2010 budget request includes 3.9% annual growth in IT spending, 3.4% in the Defense Department, and an average of 4.3% in civilian agencies. The House has now passed all 12 of the fiscal year 2010 appropriation bills, and the Senate has passed 4 of the twelve. This puts Congress in a better position to complete the appropriations process with hopefully fewer continuing resolutions than last year.

Growing segments of the government IT market include cyber security, health IT, energy, environmental services, aviation systems, and C4ISR. Cyber security is a top priority for the Obama administration following the recently completed 60-day review of current cyber security efforts across the government. Federal spending in this area is expected to go up from $7 billion to $11 billion over the next few years. Cyber security and information assurance had been focus areas at SRA for the last decade, and our practice has grown to nearly 10% of our revenue.

The economic stimulus package has also begun to fund some IT programs in our market over the last few months. We’re tracking it closely, and we’ve had a few small wins and ceiling increases funded by the stimulus, but we’re not expecting it to be a major driver of expansion for our business.

With regard to the longer term industry outlook, we’re mindful of several potential headwinds. The administration intends to reduce the levels of Deference Department outsourcing over time, and while most the initially targeted reductions fall outside our current business focus, we may feel more pressure from insourcing efforts in the future. Also, the bid protest environment continues to be very active, and competition for new business remains intense.

Turning now to our new business results, our Q4 contract awards totaled $434 million. About 45% of this total represented new work for SRA and an additional 40% comprised ceiling increases on existing contracts. We received $2.37 billion of awards in fiscal year 2009, above the $2.3 billion target we established early in the fiscal year. Our total backlog was $4.1 billion as of June 30, 2009 This was down slightly from the March quarter because we removed $77 million FERS ITSS contract which was awarded to the incumbent contractor following a protest. Excluding protested contracts, our year over year backlog growth as of June 30th, 2009, was 10%. Funded backlog was $762 million.

Our largest award in the fourth quarter was a five-year $68 million contract for a classified intelligence customer. Our next largest win was a $63 million task ordered to support the joint staff systems integration network for the Department of Defense over 31 months. A competitive takeaway from a tier 1 incumbent, the contract involves operation, maintenance, and modernization of a suite of joint staff IT systems.

We also won recompete task orders totaling $30 million for the Environmental Protection Agency through which we will continue to provide IT and specialized scientific services for its office of research and development. The Defense Department awarded SRA a $28 million contract to support the office of the director of defense research and engineering. We also won a new contract with a $24 million ceiling value to provide identity management services for the Center for Information Technology at the National Institutes of Health as well as an Air Force contract for $19 million in support of the distributed common grounds system.

In addition to these single award contracts, we won two important multiple award IDIQ contracts in the quarter. The first was a $388 million vehicle awarded by the Department of Homeland Security to provide systems engineering and technical assistance for the national communication system. The second was the army’s $478 million program management support services or PMSS-2 contract which was originally awarded in 2008 but was protested by several losing bidders. We look forward to competing for new business under each of these key vehicles. As always, we have excluded any value for multiple award IDIQs from our award totals or backlog.

Looking forward, we’re in the midst of a busy first quarter for proposal activity, and we anticipate a number of contract award decisions as the government fiscal year comes to a close next month. Our total pipeline stands at $31.5 billion, of which $10.9 billion is in the qualified category and $1.4 billion is pending adjudication. One particularly critical pending bid is our FDIC recompete, for which we expect an award decision to be made in the September timeframe. The FDIC contract represented 7% of our fiscal year 2009 revenue and winning the recompete is a vital component of our fiscal year 2010 plan.

Tim Atkin

Thanks, Stan, and hello everyone. First, I want to update you on several aspect of program performance. Our Global Clinical Development or GCD business continues to experience weak market conditions. We made another headcount reduction in June and incurred severance costs of approximately $600,000 as a result. While GCD has won a few new contracts in the last month which should help with revitalization going forward, this market remains a challenge for the foreseeable future.

Era’s operational and financial performance improved in the fourth quarter and has generated positive operating income for the quarter demonstrating that our rightsizing efforts were effective. Era had no new military sales in Q4.

Our logistics business received well-deserved recognition. In May, we were pleased to receive the Supply Chain Council’s prestigious operational excellence award. This honor which we share with our Army’s CECOM client in Fort Monmouth, NJ, recognizes the outstanding work our lifecycle management team is doing in the defense logistics area. We’re engaged across the national security market with defined offering and performance based logistics, supply chain management, total asset visibility, and logistics related field services and training. These solution offerings are aimed at DOD retrograde and reset operations along with major weapon systems and other platforms.

Looking at the personnel metrics for the June quarter, we added 83 net new hires and had a voluntary attrition rate of 14.1%. For the year, we added 325 net new hires and had an average voluntary attrition rate of 14.3%, and both figures are much improved from fiscal year 2008. We also opened two new offices in Q4 in Maryland and Illinois to support our growth around the country. At our Frederick, MD, location, we performed peer reviews of grant applications and client management services of the awarded grants for customers in the health market. Our O’Fallon, IL, office houses our Center for Logistics Transformation, a focus lab in which we develop emerging technology solutions and provide services for the US Transportation command and other defense clients. Both offices were built with environmentally friendly resources and focused on energy efficiency which has been a major corporate commitment.

Rick Nadeau

Revenue was $402 million in the fourth quarter which was up 4.5% year over year and represented organic growth of 3.5%. For fiscal year 2009, our revenue was $1.541 billion for an increase of 2.2% from the prior fiscal year. Our operating margin was 7.2% for the fourth quarter as compared to 7.9% for the same quarter in the prior fiscal year. For fiscal year 2009, the operating margin was 6.5%, as compared to 7.9% in the prior fiscal year. The full year results exceeded our May 7th guidance as revenue was $1 million above the high end of the range we had provided and diluted earnings per share was $1.01.

Our Q4 earnings performance benefited from aggressive cost containment at the company in the second half of fiscal year 2009 as well as two extra working days as compared with Q3. Each incremental working day in a quarter yields approximately $1.5 million in incremental operating income. These benefits offset a $3 million expense associated with the change in our cash bonus compensation program.

In order to align ourselves with current industry practices, we chose to end our prior practice of paying 70% of bonuses in year 1, 15% in year 2, and 15% in year 3. As a result, we expensed 100% of the fiscal year 2009 bonuses in fiscal year 2009, along with 30% remaining from fiscal year 2008 and the 15% remaining from fiscal year 2007. All of the bonus payments were made earlier this week. This change reduced Q4 and the full year fiscal 2009 EPS by $0.03.

Our Era business produced an operating profit in Q4 excluding corporate SG&A allocations and before amortization of purchase accounting intangibles. Although the nature of its contracts will always entail quarterly revenue and earnings variability, we’re pleased with the results of the right-sizing efforts and that business execution has shown consistent improvement.

Our GCD business experienced an operating loss of approximately $2 million in the fourth quarter of fiscal year 2009 as we continue to rightsize the business amid difficult market conditions. In addition, we took an impairment charge of approximately $1 million related to the fixed assets in GCD. For fiscal year 2009, GCD had an operating loss of approximately $7 million, or $8 million including the impairment charge.

Excluding the GCD, the remainder of SRA produced an operating income margin of 7.2% for fiscal year 2009.

Net interest expense, which is the interest expense minus the interest income, was $300,000 in the June quarter. Low outstanding balances driven by debt repayments from our operating cash flows and the low interest environment reduced our interest costs as the fiscal year progressed. Our effective income tax rate was 40.0% for fiscal year 2009.

Net income was $17.5 million for Q4 and $58.0 million for the full year. Diluted earnings per share were $0.30 for Q4 and $1.01 for fiscal year 2009.

Turning to the balance sheet, we had $75 million of borrowings on our bank credit facility and $74.7 million cash balances as of June 30, so our net debt was approximately $300,000. We had total assets of $1.1 billion and stockholders equity of $742 million.

Our cash flow from operations was $60 million for the fourth quarter and $91 million for the year. The primary components of the fiscal year 2009 cash flow from operations were net income of $58 million, depreciation and amortization expense of $30 million, and stock-based compensation of $11 million, offset by an increase in the working capital elements of approximately $9 million.

Our accounts receivable balance at June 30, 2009, was $356 million, which computes to a days sales outstanding of 75, down from 77 days for the same quarter a year ago and 80 days last quarter. It’s worth nothing that like some of our competitors we have offered discounts in the past for accelerated customer payments. Given today’s low interest rate environment, we expect to significantly scale back or eliminate this practice going forward. We would therefore expect our DSOs to be higher and our reported cash flow from operations to be lower in the September quarter.

Turning back to the Q4 statement of cash flows, capital expenditures were $4 million and were $15 million for the fiscal year 2009. We expect capital expenditures of 1% to 1.2% of revenue going forward.

SRA did not repurchase any stock during the quarter. We have $85 million remaining on our share buyback authorization. At this time, we do not anticipate any near term stock repurchases. Market conditions could cause us to reevaluate this decision.

Before discussing the guidance for fiscal year 2010, let me provide you with a few other key metrics—first, the contract mix. As a percentage of Q4 revenue, time-and-materials contract revenues were 43%, cost-plus contract revenue was 34% and fixed price contract revenue was 23%. Our national security contracts accounted for 50% of our Q4 revenue, civil was 35%, and health was 15%. We were the prime contractor for 84% of our revenue for Q4. We finished the year with 6977 employees which was 7% higher than the prior year of 6494.

Now to forward guidance for fiscal year 2010, we will continue our prior practice of providing annual guidance. For fiscal year 2010, we expect total revenue to be in the range of $1.585 billion to $1.645 billion for organic and total growth of 3-7%, as we have not assumed any growth from possible future acquisitions. With year over year backlog growth of 10% excluding the protested wins for fiscal year 2008 which were removed in fiscal year 2009, we believe we have good visibility into our fiscal year 2010 revenue.

We project our operating income margin to be between 7.1% and 7.5%. We expect net interest expense to be less than $1 million and the tax rate to be approximately 39.6%. Based on an average diluted share count of 58.6 million, our range for diluted earnings per share is projected to be $1.15 to $1.25.

In terms of the quarterly profile, we note that there are 64 workings in Q1 of FY10, 62 days in Q2, 62 days in Q3, and 64 days in Q4. Q2 typically has the highest vacation leave taking of all quarters. As I’ve mentioned, these seasonal patterns affect our labor revenue volume and profitability on time and material contracts with an incremental working day representing about $1.5 million of operating income or 1.5 cents of earnings per share.

While the fourth quarter of FY09 reflected strong improvement in our operating performance, our guidance takes into account several risks that could influence our business over the next year. First, our federal government services business faces a higher than normal volume of recompetes to be awarded over the next year, the largest of which is our FDIC contract. Second, the global economy will continue to influence parts of our business, particularly those in commercial and international markets. Third, the Defense Department has emphasized its desire to continue to in-source certain types of work, including some that we perform for our customers. With these factors in mind, we believe we’ve offered an appropriately cautious outlook for FY2010.

Stan Sloane

I’m pleased with the progress we’ve made in the fourth quarter of fiscal year 2009, and the team and I are looking forward to FY10. All of our nearly 7000 employees have worked hard to raise our financial performance to a level commensurate with the value we’re delivering to our customers every day. These latest results indicate we’re making good progress.

We’re now ready to take your questions. To ensure that we can get to as many people as possible, please restrict yourself to one question and one followup if necessary.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tim Quillin - Stephens Incorporated.

Tim Quillin - Stephens Incorporated

It sounds like there were a couple or maybe more of one-time costs that you incurred during the quarter, and I am just trying to figure it out. I guess one was associated with the bonuses and how you expensed that. I think I understand that it was a $0.03 EPS impact. What was that in terms of the dollar expense and what was the $1 million charge taken in GCD and also what was the composition of that as regards to SG&A versus cost of services?

Rick Nadeau

That was $1 million net in SG&A.

Operator

Your next question comes from the line of Bill Loomis - Stifel Nicolaus.

Bill Loomis - Stifel Nicolaus

Keeping along that line of questioning on GCD, looking to the first quarter, do you expect a continued loss on GCD and then also on Era, when you say there was a profit in the fourth quarter, if we included the amortization on Era from the acquisition, would that have turned into a loss, and what’s the outlook there in the first quarter?

Stan Sloane

I’ll let Rick fill in the details in a second. Let me just comment on GCD. I don’t think we are going to see much of a change on GCD until the economy changes and that particular sector, the CRO sector, improves. We’re doing what’s appropriate to keep the business right-sized and keep focusing on new business, but my anticipation is that that will probably continue to operate at or below breakeven for a while until we see that change. Era, the turnaround has been pretty good. I’m very pleased with that. The expectation there is that it’ll be sustained going forward.

Rick Nadeau

For guidance what we assumed for GCD was that we could continue to have operating losses in the first half of the year and then as we got toward the end of the fiscal year that we would be getting that business toward breakeven. So you would expect to see in Q1 and Q2 losses. I would say they’ll be a little less than what we experienced in Q4 as we did right-size, but we’ll continue to suffer in Q1 and Q2, and we’re hoping to get it toward breakeven at the back half of the fiscal year.

Operator

Your next question comes from the line of Tobey Sommer - SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey

I was wondering if you could give us some perspective on in-sourcing, where you expect some sort of impact and kind of what you’re hearing in the market.

Stan Sloane

My expectation and based on Secretary Gates’ memo in the Defense Department’s documentation is that they will focus in priority order first on things that are classified as inherently governmental and then secondly there is a whole list of other qualifications, and I would refer you to Secretary Gates’ memo for the details there, but mostly it will be in areas that provide direct contract support for the government or work where it involves contract administration and things that are a little closer to inherently government work. I don’t anticipate that that will be a major impact on our business based on the current direction, although we’re watching it and obviously concerned about it. I think the nature of our business mix today is such that I don’t see a major impact.

Tobey Sommer - SunTrust Robinson Humphrey

Could you describe how things are proceeding in terms of government procurement in the summer as we head into the last fiscal quarter for the government?

Stan Sloane

Yes. Things seem to be moving along okay. The way I would say it is with government you typically see some delays in procurement. I don’t think there is anything unusual last quarter, and I haven’t seen any direction this quarter that would suggest anything different.

Operator

Your next question comes from the line of Ed Caso – Wells Fargo Securities.

Ed Caso – Wells Fargo Securities

Was there any foreign exchange impact in the quarter?

Rick Nadeau

Yes. Give me a second.

Ed Caso – Wells Fargo Securities

My other question while you’re digging that is for Stan. You mentioned FDIC. What are the other major recompetes and roughly what percent of revenue and what percent of the revenue base is being recompeted in FY10?

Stan Sloane

We don’t usually get into the specific ones. FDIC is an obvious one because it’s such a large portion of revenue, but there is a variety of others. I’ll mention two big ID/IQs for example. CIOSP and TIPSS-4, and there is a whole array of other things that are in the $50-$75 million category. Some classified things as well.

Rick Nadeau

We had a loss from foreign currency in Q4 of $1.1 million. That would give us a net gain for the year on foreign currency of $1.3 million.

Stan Sloane

Let me just give you a little more data also on recompetes. There are about 20 of them in the $10 to $50 million range this year, and that’s about double what it was at this point last year, so it’s a heavy year for recompete for us.

Operator

Your next question comes from the line of Michael Lewis - BB&T Capital Markets.

Michael Lewis - BB&T Capital Markets

Rick, I wanted to ask you with regard to the guidance. You talked a little bit about the in-sourcing trends coming from DOD. If in-sourcing was not an issue right now, would the fiscal year 2010 guidance have been a little bit higher, or did you account for some of that revenue going away?

Rick Nadeau

I think our guidance a range from a low end to a high end, and I think that we show appropriate caution on the low end because we’re concerned that there could be an increasing amount of in-sourcing. I think as you would hope that the year progresses we would move toward the middle of that guidance, but being cautious and being prudent, I think we want to recognize that risk as we go to the low end of the guidance.

Michael Lewis - BB&T Capital Markets

Stan, let me ask you just a quick question about your cyber contribution. Thanks for the detail saying it was around 10% of revenue, but data mining has been a core business to SRA for many years. We know that SRA has very strong presence there, but can you talk a little bit about some of the other areas that SRA is focusing on with regard to its cyber strategy and where have you seen some positive execution here in the near term?

Stan Sloane

We have a fairly broad-based cyber practice, and it ranges everything from architectures or networks for high-security networks to outsourced services for operations and analysis including forensics, risk assessments, and including some software applications, and you mentioned data mining, so we have pretty broad-based capability in the cyber space and a good base across the federal government space across in terms of contract. We have cyber security contracts, state department, FAA, Defense Department, intelligence agencies, so we’re pretty broad based.

Operator

Your next question comes from the line of Joseph Vafi – Jefferies & Company.

Joseph Vafi – Jefferies & Company

Bookings were up, performance was pretty good in the quarter, and I think that was a little bit better than some of your peers. Anything there to kind of point to in terms of certain customers or certain areas of strength that you might be seeing versus, and then also how is the bookings performance going here early in the September quarter?

Stan Sloane

Let me start with observations in changes in focus, for example, in Iraq. We also have a pretty broad-based business across the federal space, roughly half in civil government and roughly half in defense. That tends to buffer us from some of those changes. I don’t see major delays or other impacts that I’ve heard a little bit about. I haven’t experienced that. Our win rates are doing well. We’ve been focusing on new business for about two years here, and I think that investment is starting to pay off, so I think it’s more broad based. I wouldn’t point to any particular thing.

Operator

Your next question comes from the line of Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

You guys put out two press releases about your team for NISC-3 which is unusual for a contractor before RFP. Obviously, that gives you a sense that you have a high degree of confidence in that large deal. Can you give us some comments on that such as is there a high degree of direct labor, is there a big piece similar to the margin profile of Era since it’s a similar business, and is the current contractor getting poor grades that you elected to be so vocal about this contract?

Stan Sloane

I wouldn’t comment on the current contractor. I’d refer you to the FAA for comments on that. This contract is not at all like Era’s business. It’s a technical services engineering support contract for the FAA’s infrastructure in the US and wherever the FAA operates. It is personnel intense. I think there’s about 1000 folks working in that job today, and it’s pretty broad based in terms of the kinds of technical support that are in the contract. We announced our team because we wanted everybody to understand we were serious about it. We’re proud of the team we’ve got on it, and we’re going to very competitive, but I’ll also tell you everything else is very competitive, so I wouldn’t expect that the current contractor or other potential bidders would do anything other than compete fiercely for it.

Operator

Your next question comes from the line of Jeff Houston – William Blair.

Jeff Houston – William Blair

Could you talk a little bit about your acquisition pipeline and the kind of valuation levels you’re seeing out there?

Stan Sloane

We continue to look for potential things in acquisition. At the moment, I haven’t run across anything that I think is a good fit with us, and the second part of that is of course is valuations. For the kinds of things we’re interested in, the valuations continue to be high. They have been high. The valuations have never really come down commensurate with the economics, so we’ll continue to look, but at the moment, there are fairly slim pickings out there.

Operator

Your next question comes from the line of Jason Kupferberg – UBS.

Jason Kupferberg - UBS

I wanted to start with a question on FDIC. Can you give us some color on the general pricing structure on that contract? Have you assumed any material amount of pricing concessions in your fiscal 2010 guidance as part of the rebid process and any comments on any lesions learned from AITS in the past in terms of defending a contract of this magnitude before the competition you mentioned in the past you expect there?

Stan Sloane

The contract is a cost plus award fee contract, so that’s the financial structure. We treat that as we do everything as there is fierce competition. We work hard to put our best proposal foot forward when we do that, but we also understand everybody else is working hard to take our business away. I would expect FDIC to be no different than anything else, and we’re working hard on it. It’s an important contract to us, and we’ve put our best folks and our best energy and intellectual capacity on it, so we’ll have to see how it turns out. What was the second part of your question, Jason?

Jason Kupferberg - UBS

Is there any assumption in your FY10 guidance that there is some amount of pricing concession assuming that you win the re-bid?

Stan Sloane

We set the revenue and earnings guidance at the low end with the recognition that we’ve got a very tough year ahead of us for competition, FDIC included, and so because the competition is getting harder, we have to be conservative at the low end of the guidance. So that’s the way we’ve approached it. I wouldn’t want to get into specifics about FDIC particularly because it’s still on the competition, but that’s generally the thought.

Jason Kupferberg - UBS

Bookings and cash flow assumptions in FY 10, as part of your guidance, what are you guys thinking there?

Rick Nadeau

We would project on the low end of guidance orders around $2.2 billion, and for the upper end, we’re assuming $2.5 billion. Operating cash flow, I think we would be thinking in the range of $50 to $65 million. The reason that’s down is as I said I don’t think we’re going to be as many discounts to accelerate cash flow, and I think we will have a negative impact from that.

Operator

Your next question comes from the line of Mark Jordan – Noble Financial.

Mark Jordan – Noble Financial

Considering the acquisitions have hit a few speed bumps along the way, were the goodwill assumptions reviewed here at the end of the fiscal year end or is that done at the end of December which I guess has been your historical practice?

Rick Nadeau

Yes, you’re right. Our historical practice is we look at goodwill on January 1st, so we look at it in the context of Q3. You’re required under the accounting rules to review goodwill anytime that you have impairment indicators, and so we did a thorough review of it at the end of the third quarter and then would have had discussions with our auditor during Q4 about whether there were impairment indicators that would require us to revisit.

Mark Jordan – Noble Financial

So you have formally reviewed that then?

Rick Nadeau

Yes.

Operator

Your next question comes from the line of Alex Hamilton – Jessup & Lamont.

Alex Hamilton – Jessup & Lamont

Can you just repeat what the DSO level was?

Rick Nadeau

DSO was 75 days at the end of Q4.

Alex Hamilton – Jessup & Lamont

You’ve made great strides in terms of SG&A. Can you talk about what’s implicit in your guidance going forward, or more particularly do you think your year end SG&A level is sustainable?

Rick Nadeau

When I think about the guidance, I think you should be thinking about SG&A at around 18% of revenue in FY10. SG&A did benefit from good cost containment in Q4. We’ve included in the guidance an amount of SG&A that we think we need to run the business but also to make the proper investments in business growth.

Operator

(Operator Instructions). The next question comes from the line of Tim Quillin with Stephens Inc.

Tim Quillin – Stephens Inc.

With regards to interest expense assumption for fiscal ’10, how are you thinking about uses of cash flow? Do you plan to further reduce debt or accumulate cash, and then the second question is if you have any pipeline metrics, especially with regards to the dollar amount of bids that you have already submitted and expect to submit in the current quarter?

Rick Nadeau

Well, we have $75 millions of borrowings at June 30th. It’s gone up slightly since then for cash requirements. I would anticipate that we would use the cash flow from operations to pay down the debt throughout the year, so I would think that we would be reducing interest expense that I would anticipate interest expense net to be less than $1 million for FY10, and so, yes, we would use cash to pay down debt at this point.

Stan Sloane

Just to add a couple of more comments on that. One is, we always try and balance the appropriate use of the capital so as I said before, we’ll continue to look at potential acquisitions, and we’ll also continue to evaluate whether it makes sense to buy back shares. You asked about pipeline, so let me just gave you some numbers and see if I can answer that question. Total pipeline for the fiscal year ended up at $31.5 billion, and about 29% of that pipeline is qualified, so that’s I think pretty good. I think our qualified pipeline is up a billion from last year roughly, well over a billion, so I feel pretty good about that. We did make some administrative adjustments on the total pipeline number, so that number may look a little lower, but that I think is going in the right direction, and like I said before, I think our investments in new business are paying off. We have a lot of work currently pending, about $1.4 billion that’s in adjudication right now. That will be a big driver of this year.

Operator

The next question comes from the line of Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

I didn’t hear any discussion on the future prospects of Era’s military business. I heard that no bookings were had this quarter, so I guess I’m curious what is your outlook for some of those orders that were delayed in the last fiscal year and how is it assumed in the low to mid to high range of the EPS range?

Stan Sloane

First of all, to be precise, there were some military bookings, but it was basically for spare parts and logistics, support, and training. It was not any of the major military orders that we were talking to you about last year. Guidance going forward assumes no major military orders. We’ve sized the business for that, and I believe the business is sustainable going forward. With that said, the customers that we have in the pipeline are telling us they still intend to execute those orders. I just don’t want to continue to bet on what comes, so we’re going to run the business like we don’t have them, and if they come in, then that’s opportunity for us.

Brian Kinstlinger - Sidoti & Company

Incremental to those two that were delayed, can you quantify the number without the dollar values of maybe how many other those kind of deals that you’re tracking in the military side of Era?

Stan Sloane

There’s lot more in the pipeline. The total pipeline for military stuff today is much bigger than it was when we started, but the maturity of the orders is not such that they are qualified.

Operator

Thank you for your questions. I’ll now turn the call back to Dave Keffer for closing remarks.

Dave Keffer

We appreciate everyone taking the time to join us this afternoon, and that’s concludes today’s call.

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Source: SRA International, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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