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Executives

Cindy Roberts – Director of IR

Bill Ballhaus – President and CEO

Mike Thorne – CFO, SVP and Treasurer

Analysts

Myles Walton – Oppenheimer

Joseph Vafi – Jefferies

Bill Loomis – Stifel Nicolaus

Peter Skibitski – Credit Suisse

Ed Caso – Wachovia

Richard Safran – Goldman Sachs

DynCorp International Inc. (DCP) F2Q09 (Qtr End 10/03/08) Earnings Call Transcript November 6, 2008 8:30 AM ET

Operator

Good morning. My name is Cristal and I will be your conference operator today. At this time, I would like to welcome everyone to the DynCorp International second quarter fiscal year 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) I will now turn the conference over to Ms. Cindy Roberts, Director of Investor Relations. Please go ahead, ma’am.

Cindy Roberts

Thank you Cristal and good morning everyone. Welcome to DynCorp International’s second quarter fiscal year 2009 earnings conference call. With me today are DynCorp International's President and Chief Executive Officer, Bill Ballhaus; and Chief Financial Officer, Mike Thorne. After they have made their formal remarks we will take your questions. But before turning the call over to Bill, I would like to remind our audience that today’s comments may include forward-looking statements reflecting DynCorp International’s views about future events and their potential impact on performance.

The forward-looking statements are based on management's current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A discussion of the risk factors can be found in our earnings release issued last night and in our SEC filings. The company undertakes no obligation to update any forward-looking statements.

With that I will turn the call over to Bill. Bill?

Bill Ballhaus

Thank you, Cindy, and good morning everyone. Thank you for joining our call. This morning I’ll provide an overview of our performance for the second quarter, hand it over to Mike to talk about the quarterly financials in greater detail, and then conclude our prepared remarks with updated guidance for our fiscal year. I’ll start the Q2 discussion with a summary of our performance and our recent new business activities and then share our thoughts on recent environmental changes and how those might affect our business going forward.

Second quarter revenue was very strong revenue at $779.2 million, an increase of $284.1 million or 57.4% over Q2 of fiscal 2008. Adjusted EBITDA, including a nonrecurring charge of $24.5 million by Afghanistan construction increased 10.7% to $51.6 million for the second quarter fiscal year 2009 as compared to $46.6 million for the second quarter of fiscal year 2008. Cash generated from operations in the quarter was $109 million and we finished the quarter with days sales outstanding of 63 days as compared to 82 days at the end of the first quarter of fiscal year 2009. We are very pleased with our cash collections for the quarter, which reflect the benefits of the increased focus, process improvements, and system changes we initiated in Q1 and discussed on our last call. These results for the quarter reflect the underlying strength of our core business.

As we have discussed in prior calls, we expect to see growth this year continuing into fiscal year 2010 driven largely by contracts we have in hand. So I would like to spend a few minutes updating several of our key programs INSCOM, LOGCAP IV, CIVPOL, (inaudible) Afghanistan construction, and CFT.

INSCOM is continuing to ramp up and growing very well. We were at 8847 linguists at the end of the quarter versus the authorized level of 9234 for an overall flow rate of 95.8%. This number is up from the 8387 linguists we reported at the end of Q1. The program is performing very well as evidenced by our award fee score of 89, which translates to 80% of available award fee pool. And we now expect full year revenues to be between $675 million and $700 million.

LOGCAP IV continues to be slow to develop. As a reminder, this is a ten year ID/IQ contract and DynCorp International is one of three contractors on the program. Three task orders for work in Kuwait have been released by the customer and we have submitted proposals for all three. The first two task orders have been protested and these two awards are on hold pending the results of the protest. One other task order has been released and awarded to a competitor for construction and operation of for forward operating basis in Afghanistan. As we discussed last quarter, we are not expecting any meaningful contribution from LOGCAP during our 2009 fiscal year due to the timing of these task orders, but we still expect LOGCAP to be a significant revenue generator during fiscal year 2010.

Our CIVPOL Program is going with a well. The two main task orders in Iraq and Afghanistan which were awarded earlier this year and will continue through February, 2010 are at current authorized levels of least mentors of 711 in Iraq and 591 in Afghanistan. Current staffing against these authorized levels is right at 100% [ph].

On the Mine-Resistant Ambush Protective Vehicles support program, we’re saying increased demand for support in both Iraq and now Afghanistan. We expect revenue this year of approximately $80 million to $90 million on MRAP.

Our one disappointment for the quarter was the financial performance on Afghanistan construction projects. As you can imagine, these projects are very challenging for many reasons including the deteriorating security condition in Afghanistan. Across the country security incidents are up 40% over this time last year. (inaudible) civilian deaths and kidnappings are all on the rise. The impact of this deteriorating security situation is that numerous aspects of the projects have become more challenging including the protection of our personnel and country, the need to airlift rather than truck people and equipment to our construction project sites and the management of our supply chain.

Over the last quarter, we have deployed a number of our senior leaders into Afghanistan to support the execution of these projects. I was recently in Afghanistan to review our teams’ projects and our project schedules. On our first project, Jalalabad Phase 1, we are behind schedule but are closing it out quickly and expect to have Phase I operational in December.

Our other 4 construction projects in Afghanistan are early enough in their schedules that we believe we can apply lessons learned from Jalalabad and complete these projects on a timely basis. Additionally to mitigate any future financial exposure we have taken the program profit rates to break even for these 4 projects and we expect to work very closely with our customers to minimize the risk in executing these projects going forward. Regarding future construction work in Afghanistan while we believe there will continue to be strong demand in general and from the Army Corps of Engineers specifically to build additional base camps. We’re unlikely to pursue future fixed priced programs until the security situation improves and more appropriate contract terms and conditions are considered.

Lastly on CFT, we are now beginning to see a flurry of activity with respect to task order recompete. As a reminder we were notified we won the new CFT contract in July and awarded the formal contract on October first. While many of our task orders have been extended through December or January we are now in the early stages of what we believe to be an intense process of bidding on about 100 task orders. While we are very early on in that process we have had some success to date with two task order wins at sites where we weren’t the incumbent. Unfortunately, we’re not yet able to discuss the specifics publicly.

In addition to these major programs, we are successful on a number of competitions during the quarter that continue to solidify our base going forward. We were awarded three task orders under the CNTPO program, where we are a subcontractor to Northrop Grumman. Two of the task orders are for work on Mi-17 helicopters and the third test order consolidates two existing aviation programs, Afghan National Army Air Corps logistics support and Afghan Ministry of Interior counter-narcotics squadron under one program. These past quarters have a total potential value of $135 million. During the quarter, we were selected by the Air Force under the Contract Augmentation Program or AFCAP III to provide maintenance and support services at the Al Udeid Air Base in Qatar. The revenue is $8.5 million for the base period plus two option years for a potential value of $26.1 million. AFCAP III is a ten year ID/IQ contract to provide base operations support and temporary construction for the U.S. Air Force worldwide.

We were awarded a contract by the naval facilities engineering command to support the joint special operations task force in the Philippines. The initial award is in the amount of $44.3 million for the first option period, with a potential value of $202.1 million if all four options are exercised. This is a cost plus award fee contract to provide support services for logistics and base operations.

In addition to these wins during Q2, we started Q3 with a win on the MNSTC-I program. On this program DynCorp International will provide advisors and mentors to the Iraqi Ministries of Defense and Interior. We will assess MNSTC-I in transitioning security responsibilities from multinational forces to the Iraqi government. The award was made through the Joint Contracting Command Iraq on behalf of the Multinational Security Transition Command Iraq. Under the contract DynCorp International will provide up to 128 senior level positions for mentors and advisors. This was a strategic win in that we believe the mentoring an advising services in Iraq will continue to see strong demand beyond the forecasted troop drawdown over the next three years.

Lastly before turning the call over to Mike I would like to comment on the strength of our business going forward in light of significant recent events most notably recent economic developments in the U.S. presidential election results. With respect to recent shifts in the economy we have managed to largely distance ourselves from direct impacts from the economic crisis and specifically the credit crunch. As you know, we increased our liquidity back in July with a new credit agreement and we made great progress in our collections and overall cash management.

That said the $700 billion financial rescue plan and the possibility of Congress approving a second economic stimulus package will likely have an eventual impact on the defense budget given that the defense makes up over 60% of the discretionary budget. It is our belief, however, that within the defense budget weapons systems acquisition will be the most likely set of initial targets and O&M budgets will remain robust, driven by the need to reset equipment coming out of Iraq and fund the logistics and support chain associated with repositioning of forces and eventual drawdown in Iraq and deployments into Afghanistan.

With respect to the new administration subject to the outcome of negotiations between the U.S. and Iraqi governments, we believe it is likely that President-Elect Obama will push for withdrawal of troops from Iraq along the lines of the current language in the draft so far [ph] specifically the withdrawal of U.S. combat forces by December 31, 2011, and possibly faster. And support a buildup presence in Afghanistan of approximately 20,000 additional troops. As a result in Iraq we see a relatively stable business outlook with the potential for a tick up over the next three years prior to an eventual drawdown.

Fueled to demand for logistics, equipment reset, training and mentoring of Iraqi forces and government agencies and the continued need for translation services to support security and peacekeeping activities. Our recent MNSTC-I win to provide advisors to the Iraq MoD and MoI, a recent ramp up from 183 to 427 personnel on the CFT program to provide maintenance on helicopters in Mannheim Germany coming out of Iraq and the continued ramp up of translators on our GLS contract all support this thesis.

In Afghanistan, we feel well positioned with our footprint in police training and mentoring, aircraft logistics and operations, infrastructure development, MRAP services, poppy eradication and logistics services under LOGCAP. With the expected increase in forces and the corresponding increase in support services, we’re expecting our business in Afghanistan to remain solid with continued growth in our current service offerings.

All of that said while there have been major changes in our environment since the last call we remain confident in our relative positioning and continued growth of our business fueled largely by contracts largely in hand and the fact we faced no significant recompetes outside of CFT task orders over the next five quarters.

While there is some ambiguity around the future of the defense budget in general, we believe that our markets will remain relatively robust over the next two to three year window. So to wrap up my discussion on the second quarter, I would say all in all this was a solid quarter with strong revenue growth, good overall program performance despite challenges in Afghanistan construction and outstanding cash generation. We have good visibility for the balance of fiscal year 2009 and a solid base for fiscal year 2010.

With that, I’ll turn the call over to Mike for a more detailed discussion of our financial results and then come back and make some closing remarks. Mike?

Mike Thorne

Okay. Thanks, Bill, and good morning everyone. Our press release was issued last night and I hope everyone has had a chance to review the information. The press release contains a lot of detail and I will try to address the highlights in my prepared remarks.

In terms of second quarter of fiscal 2009 revenue increased to $779.2 from $495.1 million during our second quarter of fiscal year 2008. Each of our three operating segments contributed to this 57.4% revenue increase, with International Security Services growing by 74.4%, Logistics and Construction Management revenue increase 79.5%, and Maintenance and Technical Support Services revenue growing 26%.

The drivers of this growth for ISS was the continued ramp-up army intelligence and security command or INSCOM contract as well as increases in law enforcement and security services contracts in Iraq, Palestine, Haiti, and Qatar. Additional revenue growth for ISS was attributed to new contracts in fiscal year 2009 associated with training services for the Afghan military.

Growth for LCM was primarily from support services provided in Iowa in response to the sever summer flooding that state, peace keeping work in the Philippines and Africa and increases in our revenue from our construction business in Afghanistan.

For MTSS we had added revenue for Mine Resistant and Ambush Protected vehicle program increases in equipment demand in our increases in equipment demand in the Life Cycle Contractor Support programs, new work in the Field Service Operations area primarily from a new logistics services contract at Fort Campbell, Kentucky and increased personnel levels on the Contract Field Teams program.

Operating income for the quarter was $46.6 million versus $33.9 million in Q2 of fiscal 2008. Our adjusted EBITDA increased to $51.6 million for the second quarter of 2009 as compared to $46.6 for the second quarter of fiscal year of 2008. This increase was driven primarily by a combination of strong revenue growth, positive margin adjustments on our MRAP program, accrual of the GLS award fees earned, benefits from selling, general and administrative expense efficiencies implemented earlier in the fiscal year and positive outcomes on several programs allowing us to reverse previously recorded reserves, offset by accrued loss reserves and the revision of contract margins associated with our Afghan construction contracts of $24.5 million.

Now looking at the results on a year to date basis it is a similar story to what I’ve just discussed for the quarter with revenue for the first six months of fiscal year 2009 increasing to $1495.9 million from $1,043.8 million for the same period last year. Again the three segments each showed revenue increases year-to-date as compared to last year with ISS up 56.9%, LCM up to 61.6% and MTSS up 18.2%. The primary drivers for the growth of the same as the previously discussed when comparing Q2 revenue from fiscal 2009 to Q2 revenue from fiscal year 2008. So, I will not repeat them.

Operating income was $86.6 million for the first 6 months of fiscal 2009 as compared to $65.6 million for the first six months of fiscal 2008. On a year-to-date basis our earnings per share was $0.54 for the first six months of fiscal year 2009 compared to $0.46 for the first six months of fiscal year 2008. Our year-to-date EPS includes nonrecurring impacts of $0.05 per share from the write-off of deferred financing costs last July when we revised of debt structure and $0.24 per share attributed to estimated contract losses and reduced margins on our Afghan construction work. We expect to complete our existing Afghanistan Construction projects during Q3 of fiscal year 2010.

On a year-to-date basis, adjusted EBITDA was $106.8 million or 7.1% of revenue as compared to $91 million or 8.7% of revenue we reported for EBITDA in the first half of fiscal year 2008. This reduction in margin is primarily due to the increase in the percentage of our business that comes from cost type contracts due the INSCOM contract. Cost type contracts typically have lower margins and the fact that GLS is a consolidated joint venture with a 100% of the revenue included on our results but only 51% of the EBITDA further impacts our overall margin.

As Bill mentioned our operating cash flow was strong and we ended the quarter with $132.8 million of cash on the balance sheet, which compares favorably to the $85.4 million we had at the beginning of the fiscal year.

Total debt was $615.8 million as of October 3, 2008, an increase of $22.7 million from March 28, 2008. The increase was due to our debt refinancing to give us added liquidity which we completed in July, 2008. Our net debt at the end of Q2 was $483.1 million which is $24.7 million reduction from net debt as of the end of fiscal year 2008.

We’re very pleased that are available at liquidity was $320 million as of the end of the second quarter.

Our accounts receivable increased to $577.6 million at the end of the second quarter of fiscal year 2009 from $513.3 million at the end of fiscal year 2008 due to our significant revenue growth. However, our days sales outstanding has decreased to 63 days as of the second quarter of fiscal year 2009 from 73 days as of the end of our fiscal year 2008 and 82 days as of the first quarter of fiscal year 2009. This improvement in DSO is a direct result of the increased focus, process improvements and system changes initiated during Q1.

Given the current conditions of the credit market we’re very pleased with both the increased liquidity with put in place last July to support our growth and the improvement in our cash position directly resulting from the intense focus across the company on reducing DSO.

We ended Q2 with funded backlog of $1.3 billion and total backlog of $6.5 billion both of which compared to favorably to the corresponding backlog numbers at the beginning of fiscal year 2009 of $1.1 billion and $6.0 billion respectively. The increase in funded backlog is primarily due to the timing of funding on 4 task orders and the driver to the total backlog increase was the award of the new War Reserve Materiel Contract.

Our estimated remaining contract value has also increased to $10.1 billion at the end of Q2 to $7.5 billion at the end of fiscal 2008, primarily due to the – through the award of the new seven-year CFT contract.

I will now turn the call back over to Bill to provide some insight into what we’re expecting for the reminder of the year and a few closing remarks. Bill?

Bill Ballhaus

Thanks Mike. Before we get to the Q&A I would like to briefly discuss the revised fiscal year 2009 guidance we provided in our press release yesterday.

We have revised our previously provided revenue guidance for fiscal year ending April 3, 2009. Revenue guidance has been adjusted to $2.95 billion to $3.05 billion from a range of $2.825 billion and $2.925 billion. The midpoint of the revenue guidance assumes no new business wins for the remainder of the year and maintaining our CFT base in the upcoming task order recompete.

Adjusted EBITDA remains in the range of $205 million and $215 million, EPS remains in the range of $1.15 to $1.25 per share. Overall, I am pleased with our second quarter performance and the momentum we have going into the second half of fiscal year 2009.

So with that, I’d like to turn this over to our operator to manage the question-and-answer session. Cristal?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Myles Walton with Oppenheimer.

Myles Walton – Oppenheimer

Good morning.

Bill Ballhaus

Good morning Myles.

Myles Walton – Oppenheimer

Bill may be our Mike, could you comment on the margin performance in the quarter. You absorbed a $24.5 million Afghan charge but the operating margins were actually pretty reasonable which – I’m just wondering what were the positive offsets. I know in the release you talked about some of the GLS award fees catching up as well as MRAP contract adjustments, can you just quantify what may be the positives nonrecurring benefits were in the margin?

Mike Thorne

Yes. Hi, Myles. This is Mike and I will respond to that one. Yes, we did have some positive events in the quarter without a doubt to offset that. There is probably about $12 million that were related to one-time events. Two of the larger ones that make that up were – because we’ve got the GLS award fee for the first award fee period that gave us the basis to accrue it for the second period. So, you really had kind of two quarters worth of GLS award fee instead of one. That will get more of a steady state going forward. And then we had some reserves on CIVPOL related to some unbilled items due to the slow collections and now that we have improved all that and got those collections we’re able to release those results. Those were the two largest items in the sort of $12 million worth of one time items. And we had another approximately $8 million that was more related to contract true ups sand just some excellent performance. And the two drivers there were getting some final negotiations related to MRAP and also we had a real strong quarter in CFT program. So that is the highlights of the offsets we had to write-off on the Afghan construction.

Myles Walton – Oppenheimer

Okay, that is really helpful in terms of the laying those out. And maybe Bill, can you quantify how much of your ‘09 outlook is Iraq direct revenue and how much is Afghanistan and you also made the comment about how you expect the next couple of years to flow out from a standpoint of what you see going up and down in Iraq and Afghanistan. But what is the first program in your portfolio that would feel pressure from our troop drawdown?

Bill Ballhaus

Mike do you want to comment first on the numbers in terms of (inaudible) Afghanistan has been.

Mike Thorne

Yes, I actually will Bill. Myles if you look at the kind of the midpoint of our forecast, there is probably between $1.1 billion and $1.2 billion of work in fiscal ‘09 that is related to Iraq. Obviously that the driver there is the INSCOM program followed by CIVPOL and then in Afghanistan we’re in the approximately $500 million range.

Bill Ballhaus

I will comment on the programs. I think in general there are a number of programs that we’re on today in Iraq that we would expect to continue through a troop drawdown and specifically the training and mentoring activities that we do on CIVPOL are consistent with our past experience in other conflicts and other countries whereas troops drawdown we maintain a presence that goes on for several years beyond the troop drawdown. I also think that the recent win in MNSTC-I really help to solidify our role in the transition from the multinational security forces to Iraq and gives our business some (inaudible) in Iraq. I think the areas where we would see the drawdown happen the quickest would be some of the aircraft maintenance and even land systems maintenance work that we do in country although that could be offset by the need for reset that might be performed outside the country. So we have obviously looked at this very hard and have looked at the various scenarios that might emerge with respect to troop drawdown. It is very difficult to try and predict the future. Right now we think that on balance, our business looks pretty stable over the next three years in Iraq and given the moment of troops around that country and out of that country and the moment of equipment we actually think there is the potential for a tick up largely through LOGCAP as well as our training and mentoring activities within that two to three year window before we start to see a draw down over time. In Afghanistan and Mike commented about the size of our business there, we feel very well positioned in Afghanistan as I said in my prepared remarks with the current footprint that they have.

You know General McKernan [ph] has called for an additional 20,000 troops, President elect Obama is very supportive of an increased presence in Afghanistan. We expect to see a troop buildup in Afghanistan and with that the possibility for demand across the board in the services that we provide in Afghanistan. So we think that in the near term and over the net next few years Afghanistan has some really good growth prospects for us.

Myles Walton – Oppenheimer

Okay, Bill that is really helpful. On CFT you mentioned that you picked up a couple of task force orders that you weren’t the incumbent on. You couldn’t say what they were but you also said in your guidance that you assume that CFT essentially had no erosion from your current run rate. Have you actually lost any task orders were you that the incumbent and is the guidance just conservative or the two new ones that you won just relatively small at this point.

Bill Ballhaus

We lost – Myles, we lost one small task order on California that was on the order of 40 to maybe 45 people. That was more than offset by the two task orders that we won. And right now I think our current posture with respect to our guidance is we’re very early on in that CFT process and over the next 60 to 90 days we will have a much clearer picture of what our base or CFT base looks like going forward.

Myles Walton – Oppenheimer

Okay great and last one for you Mike on the expectation for cash for the full year, I think you previously said break even for cash from operations to up $25 million. Is that still the target given the nice turnaround in cash in the second quarter?

Bill Ballhaus

No Myles, we’re actually increased that a little bit. I think we will be somewhere between $40 million to $60 million of cash from operations for the full year. And that assumes a 75 day DSO. You know, potentially I think we can get under that. But based on 75 days, I think we will be like I said plus or minus around the $50 million mark for the year. Really kind of the timing in our ramp up for the year has occurred earlier than we thought. So the fourth quarter is not as high as we originally thought which helps us a little bit in terms of debt what is driving that improved cash generation.

Myles Walton – Oppenheimer

Okay, thanks a lot.

Bill Ballhaus

Thanks, Myles.

Operator

Your next question comes from the line of Joseph Vafi with Jefferies.

Joseph Vafi – Jefferies

Hi gentlemen, good morning. If we kind of start thinking about reset in the army in Iraq and you know, how that might play out over time, have you identified what the contract vehicles might be there at this point for those existing vehicles do you think the army has in place now or those new vehicles that you think to get without to bid.

Bill Ballhaus

I will start with that one and then Mike you can add. We see the two primary vehicles that we have in hand that are relevant to reset being LOGCAP and CFT. And in fact we have already – as I mentioned we have already seen on CFT an increased requirement staffing in Germany of about 240 folks to provide helicopter reset maintenance for equipment that has been beat up pretty bad in Iraq and we expect that to continue in terms of CFT use as a vehicle and then also LOGCAP both from a logistics and a support perspective, we think that will be a solid vehicle for us going forward with respect to reset.

Joseph Vafi – Jefferies

Okay, that is helpful and are there any other fixed costs construction contracts out there at this point in Afghanistan or maybe even in Iraq that we should be worried about at this point in terms of the earnings outlook?

Bill Ballhaus

No, we have – as I mentioned in the script we have five projects ongoing right now that are in Afghanistan and that is where – that are from fixed priced contracts. As we have mentioned in the call, last quarter’s call, we had a large number of bids outstanding and I think the number we gave was about $400 million in contracts. We were awarded a couple of those during the quarter, which is in the number of projects I provided earlier. Many of those weren’t awarded and the reason that we’re given for them not being awarded is the deteriorating security condition in Iraq and the remainder of our bids have expired and as I said in the script we won’t be resubmitting those bids under the current terms and conditions.

Joseph Vafi – Jefferies

Okay that is helpful and then on LOGCAP, is that vehicle used at all for any of these kinds of fixed price construction projects?

Mike Thorne

Hi Joe. This is Mike Thorne. We have not historically, while a lot of construction work is often done under LOGCAP, it is all historically been on a cost plus basis. So, that would be a definite change if they were to go that route in the future.

Joseph Vafi – Jefferies

Okay and you don’t have a problem doing this type of work under a different scheme like cost plus at this point?

Bill Ballhaus

No, not at all this is a capability that you know we provided in the past in very successfully in other countries on significant construction projects and the fundamental challenge here is largely driven by the environment in Afghanistan and particularly the security environment. It just makes every aspect of the project very tough and fairly unpredictable. When you are working in an environment where there are (inaudible) on the roadways and quite frankly our personnel are oftentimes their lives is threatened. So, no – construction is a capability that we will continue to bring to the marketplace. We will be very thoughtful and deliberate around the types of vehicles that we will pursue and the contract types that they will sign up to with construction going forward.

Mike Thorne

Just to add onto that Joe, another difference is when you doing construction under LOGCAP you are typically going to get security from the military and these jobs we are doing in Afghanistan there is no security provided by the customer. So it is strictly on us which makes it more challenging and again probably why you wouldn’t want to do those under fixed price arrangements.

Joseph Vafi – Jefferies

Makes sense, I mean makes sense. And then switching gears real quick on INSCOM, it sounds like you were you got an award fee here this quarter. Now that you are kind of in that contract you have better visibility to kind of the timing of award fees there and you know how we might want to look at that over the rest of your fiscal year here?

Bill Ballhaus

Yes, Joe we think going forward you’ll see that be much smoother for two reasons. One is we think now that the customer has done the first one that they will do them regularly but also now that we have some history in giving award fees, we have a basis to accrue them even if there is delays from the customer doing the formal award fee announcement. So, I think from an earnings point of view that will smooth out. You may see some spikes in terms of cash based on timing of the award fee but you shouldn’t see it from an earnings point of view.

Joseph Vafi – Jefferies

Okay, that is helpful and finally some of the other players in this space have some nice kind of budget flush [ph] this quarter in terms of funding and new contract signings and there are – with some good contract activity on war reserve material. I was wondering if you got some any commentary generally on the quarter and kind of if there was any kind of flush that you saw here at the end of the government’s fiscal year.

Bill Ballhaus

Joe, are you asking in terms of cash or in terms of funding?

Joseph Vafi – Jefferies

In terms of funding contract vehicles in place and maybe awarding new contracts as well?

Bill Ballhaus

No I would have to say we didn’t really see any impact from that. We had some good funding in the quarter on some of our existing programs but I do not attribute that to year-end flush of money.

Joseph Vafi – Jefferies

Thank you very much.

Bill Ballhaus

Thank you.

Operator

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

Bill Loomis – Stifel Nicolaus

Hi, thank you. Good quarter. Just Mike on the add backs, so the $20 million you mentioned the $12 million and $8 million after-tax is that roughly $0.23 a share in positive impacts that you had in the quarter?

Bill Ballhaus

I haven’t done the math on that Bill. But that sounds about right.

Bill Loomis – Stifel Nicolaus

So, I mean that you know still hasn’t offset the negative impacts of and if I add it back I get roughly $0.32 in the quarter. Is it fair to think that if everything was kind of normalized and the extra positive taken out, the extra negative taken out that that is what we would have been looking at roughly?

Mike Thorne

Yes, you’re adding back the net difference and then also the financing charge.

Bill Loomis – Stifel Nicolaus

Correct.

Mike Thorne

Right, yes, I think, I would agree you are in the ballpark.

Bill Loomis – Stifel Nicolaus

And you said, Bill you said no recompetes. If I hear you right no major recompetes over the next five quarters, what is the status of AFRICAP and then next spring would be as far as this overall CIVPOL contract.

Bill Ballhaus

Let us see, yes, that is right. So we have no outside of the CFT task order recompetes over the next 90 days, really no significant recompetes over the 5 quarters. As you know, the big ones are largely behind us. We do have a couple of small recompetes that are out there. Africa peacekeeping we submitted our proposal earlier in the quarter and 3 [ph] next June. Right now our current thinking on CIVPOL is that that contract runs out in the early part of calendar year 2010 and we will see a recompete in that timeframe and that would be one of the next big recompetes coming up for us.

Bill Loomis – Stifel Nicolaus

So, AFRICAP is fairly low as a percent of revenue now?

African peacekeeping?

Bill Ballhaus

Yes, it is probably nor more than 2% of our revenue.

Bill Loomis – Stifel Nicolaus

And Mike what is the tax rate we should be using further going forward?

Mike Thorne

From an effective tax rate Bill I would use between 31.5% and 32% and you know, one of the things that drives that down from an effective tax rate is our income before tax includes 100% of the earnings from the GLS joint venture and 49% of those earnings are not taxable to DynCorp International, obviously they are taxable to our partners. So, that is why that number may strike you as low.

Bill Loomis – Stifel Nicolaus

And Bill you mentioned on the reset, you didn’t mention the army first contract on reset, and you had a real good win there last year, what is your view on that?

Bill Ballhaus

Yes I would also think that would be a potential vehicle as well.

Bill Loomis – Stifel Nicolaus

Have you seen an activity of task orders of first today?

Bill Ballhaus

No, not at this time.

Bill Loomis – Stifel Nicolaus

And then – just on LOGCAP, can you just review that one, you said the Kuwait task orders, initial ones are out but then you mentioned an Afghan program with LOGCAP, is the order still to go in order by country or what is the latest thinking on that now?

Bill Ballhaus

Yes, we’re still seeing the strategy driven by country starting with Kuwait first and then going to Afghanistan next spring and then next summer recompetes on the task orders in Iraq. So I don’t think that that strategy has changed much since our last call.

Bill Loomis – Stifel Nicolaus

Okay. So – is the Afghan task order, was it an initial one or you expect a lot more to follow up or most of that can be next year?

Bill Ballhaus

Yes, this was a very small construction, temporary based construction activity and O&M for those temporary bases. The big ones in Afghanistan are coming up in the spring.

Bill Loomis – Stifel Nicolaus

Like March, April you think?

Bill Ballhaus

In that time frame, yes.

Bill Loomis – Stifel Nicolaus

And then Iraq is that still in the summertime?

Bill Ballhaus

Still looking at the summertime although you know, that – we think right now that Iraq will be split up into several different task orders and be completed from you summer times through the fall.

Bill Loomis – Stifel Nicolaus

Okay, thank you.

Bill Ballhaus

Thank you.

Operator

Your next question comes from the line of Peter Skibitski with Credit Suisse.

Peter Skibitski – Credit Suisse

I was wondering if you could pass sort of the charge for us in terms of, I guess in terms of the Jalalabad versus the remaining four task orders.

Bill Ballhaus

Yes, the charge is largely driven by Jalalabad. And if the charge reversing profit that we took earlier in the year and at the end of last year and update to our EAC on that program. For the rest of the projects we have effectively taken them as I said to 0 profit looking ahead.

Peter Skibitski – Credit Suisse

So, near a 100% Jalalabad.

Bill Ballhaus

Yes.

Peter Skibitski – Credit Suisse

Okay, got you. And in terms of revenue on the remaining contracts, is that roughly $100 million to $150 million total.

Mike Thorne

Yes, Pete. It is about a $142 million, $143 million to go.

Peter Skibitski – Credit Suisse

Okay, got you.

Mike Thorne

Some of that will be this year and some of that next year as I said. The last one will end in Q3 of 2010 or fiscal 2010.

Peter Skibitski – Credit Suisse

Okay, and then on SG&A, I mean the trend has been pretty strongly down I would say, is that been deliberate on the part of you guys and is it sustainable?

Bill Ballhaus

Yes, we have taken a real hard look at our infrastructure costs dating back to the June time frame and we actually took two actions this year, one in June and one in the late August early September time frame to keep a tight handle on our infrastructure costs and we expect to stay pretty efficient with our infrastructure going forward.

Peter Skibitski – Credit Suisse

And then on – Hi Mike can you give us EBIT by segment?

Mike Thorne

That will be, we will file our Q Pete early next week, probably on Tuesday and that will be in there?

Peter Skibitski – Credit Suisse

Okay got you. Okay, thanks guys.

Operator

Your next question comes from the line of Ed Caso with Wachovia.

Ed Caso –Wachovia

Ed Caso, Wachovia. My question is sort of there was a lot of conversation around Iraq and Afghanistan and I’m sort of curious about your efforts outside of that region. We have been picking up some market chatter that maybe you’re less interested in pursuing work in Africa. So I’m just trying to understand beyond these two core markets what is your level of interest?

Bill Ballhaus

Thanks Ed. We obviously do have a big business base in Iraq and Afghanistan. Our strategy, you know, stays the same and it has two elements to it one is maximizing value of the contracts that we have in hand and then second look to diversify our business over time both in terms of contracts, customers, services that we offer, in regions in which we operate. We’re seeing good activity in other countries in the Middle East. We have got some new work in Oman, Kuwait, pretty good business based in the UAE and a couple of ventures that we are working on there. We do see work emerging in Africa may be slower than we initially thought but we do think that the there will be a need for training and mentoring infrastructure development, various services that we offer in Africa and we also think that there will be some demand in central and South America as well. I think the question will be given the pressures facing the new administration what sort of priorities will they be able to place and afford from a foreign policy perspective in those countries and then I think the funding and their corresponding business growth in those countries will follow from there.

Ed Caso – Wachovia

I believe the Obama campaign has pledged to a 10% reduction in contractors and a move to sort of put traditionally governmental work back in the hands of government employees. Are you seeing any of that, what is their ability to actually do that you know, what thoughts do you have on that front?

Bill Ballhaus

As you know that was a large topic of conversation with the finalization of the authorization bill. And there was initially some language about inherently governmental functions being performed only by the government. I think the real pressure there is on the troops and the demand for more troops across the board and the fact is that contractors play a very valuable role in augmenting their capabilities and their capacities at a time when we’re pretty stretched. So, while there has been more discussion on that topic of late, I think the real need is there and that is to augment our forces with capabilities that you don’t specifically need trained troops to perform and that is where contractors like ourselves really add value.

Ed Caso – Wachovia

One of the companies that we follow mentioned that in the Intel [ph] world that they’re actually seeing some increase in sort of people taken away from them and the jobs moving back inside. Are you seeing that in any of the work you a performing at this point where work you thought you might have gotten in the contractor format is now being done by the client?

Bill Ballhaus

No, we’re not and in fact as you know in the Intel space specific leadership has been very vocal on that topic and we have number one, haven’t seen that sort of vocal statement on the defense side and number two, we aren’t any major trends in that direction on the contract spreads we are currently on and contracts that we’re pursuing. But I don’t see it as a urgent or near term of a trend that other companies are seeing on the Intel side.

Ed Caso – Wachovia

Thank you.

Bill Ballhaus

Thank you.

Operator

Your next question comes from the line of Richard Safran with Goldman Sachs.

Richard Safran – Goldman Sachs

Hi good morning.

Bill Ballhaus

Good morning Richard.

Richard Safran – Goldman Sachs

You know, regarding your – the remarks that you are making about Obama administration and your opening comments about platforms and OEMs, do you see the changes or any shifts occurring, is this – do you think this is a government fiscal 2010 event, do you think this is something that has to go into fiscal 2011. When do you actually see – or do you think this is something you could actually start doing in fiscal ’09?

Bill Ballhaus

It is a great question Richard. It remains to be seen. I think my sense is we wouldn’t see anything dramatic in fiscal ’09, might see the initial indications of the shift in policy in 2010 and then more dramatic changes in government fiscal year 2011. And again our sense is the first set of targets will be the large weapon system procurements and less on the O&M side where you know the fundamentals just drive demand or moving troops around, moving equipment around and providing support services to those troops as well as security and stabilization activities in Iraq and increased efforts in Afghanistan. As I said over the next two to three years we expect that our programs and the funding levels will remain fairly robust.

Richard Safran – Goldman Sachs

Okay and on MRAP, with Navistar [ph]. So, is it possible here now I guess it could an MRAP contract coming and I wanted to know if that is an opportunity also that you guys are looking at as well?

Bill Ballhaus

Yes, I would say that and we have seen it this year. Our support to ground systems, MRAP systems in particular has been a nice growth area for us and we seem to provide a capability that that is very complementary to the OEMs and that is specifically our ability to recruit and find qualified maintenance technicians and deploy them into the regions where the equipment is deployed. As we have discussions increasingly with OEMs, we are finding that to be a – you know as I said a complementary capability. So, we are going to continue to pursue that work. It is strategic for us and you know we will look to grow regionally and that is into Afghanistan and also with new equipment that we can support in the future.

Richard Safran – Goldman Sachs

Okay, and I apologize if I missed this if you did say this ,but on the issues with the Department Of State now completely resolved, should we expect no more – that this is basically a done deal with that.

Bill Ballhaus

You know, I would say this, we have done a number of things internally to improve our entire collection process. Those things take a few months to sort themselves out and we have seen in the quarter now the benefits of those actions that we took. You know, cash collections tend to be a little bit cyclic but going forward as Mike said our plan is built around 75 days and we are pretty confident that we can be in the low 70s to high 60s going forward and the number may bounce around a little bit quarter-to-quarter but we are pretty confident that that is a good range for us.

Richard Safran – Goldman Sachs

Okay, thanks a lot.

Bill Ballhaus

Thank you.

Operator

At this time, there are no further questions in queue. Are there any closing remarks?

Cindy Roberts

Yes.

Bill Ballhaus

Yes, there are. Thanks Cristal. We would like to thank everybody on the call for your participation and interest. We are pleased to be to report another strong quarter and a solid outlook for the rest of fiscal year 2009. This concludes our second quarter conference call. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: DynCorp International Inc. F2Q09 (Qtr End 10/03/08) Earnings Call Transcript
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