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Executives

Cindy Green – Director of Investor Relations

William L. Ballhaus – President & Chief Executive Officer

Michael J. Thorne – Senior Vice President & Chief Financial Officer

Analysts

Peter Skibitski – Credit Suisse

William Loomis – Stifel Nicolaus

Joseph Vafi – Jefferies & Company

Myles Walton – Oppenheimer & Company

Ed Caso – Wachovia Capital Markets

Richard Safran – Goldman Sachs

Mehmet Agyuz – Stanford Group

DynCorp International Inc. (DCP) F3Q09 (Qtr End 01/02/09) Earnings Call February 5, 2009 8:30 AM ET

Operator

Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to the DynCorp International third quarter fiscal year 2009 earnings conference call. (Operator Instructions). Thank you. I would now like to turn the conference over to Cindy Green, Director of Investor Relations.

Cindy Green

Thank you, Darla, and good morning everyone. Welcome to DynCorp International's third 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 description 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'll turn the call over to Bill. Bill?

William L. Ballhaus

Thank you Cindy, and good morning everyone, Thank you for joining our call. This morning, I will provide an overview of our performance for the third quarter, hand it over to Mike to talk about the quarterly financials in greater detail, and then conclude our prepared remarks with our perspective on the balance of fiscal 2009.

Third quarter revenue was very strong at $792.3 million, an increase of $269.2 million or 51.5%, compared to the third quarter of fiscal year 2008. Adjusted EBITDA increased 28.8% to $57 million for the third quarter of fiscal year 2009, as compared to $44.3 million for the third quarter of fiscal year 2008.

Cash generated from operations for the nine-months ended January 2, 2009 was $70.2 million and we finished the quarter with days sales outstanding of 69 days, as compared to 92 days at the end of the third quarter last fiscal year, and 73 days at the end of fiscal year 2008. We are very pleased with our cash collections for the quarter and our second consecutive quarter with DSO below 70. And just to reiterate what we said last quarter, we expect our DSO to remain in the high 60s to low 70s going forward.

Once again these financial results for the quarter reflect the underlying strength of our core business with respect to top line growth, profitability, and cash generation. And I would like to acknowledge our employees around the globe and our leadership team for serving our customers and delivering these results. As we have discussed in prior calls, our year-over-year growth this year and our near term growth looking forward into fiscal year 2010 are driven largely by contracts in hand. So, I would like to spend a few minutes updating several of our key programs.

Let me start by discussing INSCOM, CIVPOL, MRAP and LOGCAP, where as expected we continue to observe two common things. First, in Iraq some ambiguity in operational requirements tied to the planning and timetable for U.S. troop withdraw and transitioning a security responsibility to our Iraqi forces. And second in Afghanistan across a number of our programs indication for increased resources to support an increased troop presence.

On INSCOM, the program team continues to perform very well. And we expect full year revenue to be around $700 million. Staffing has leveled off at about 8,700 linguists versus 8,047 linguists in Q2 primarily driven by a reduction in demand for local national linguists. While we did receive an increase in the authorized linguist level to approximately 10,400 during Q3 we are seeing a leveling off in operational requirement at approximately 8,800 resulting in a current effective operational fill rate of over 98%.

Additionally, we are seeing a shift in mix towards higher end U.S. linguists and finally given market conditions and our focus on continuously improving our program performance, we are currently implementing cost savings initiatives largely in the form of linguist salary reductions. So, although we received a task order modification exercising option year one with a period of performance of December ’08 through December ’09 and an increased value of $765 million, the combination of constant operational requirements shift and mix and lower salaries could net out to create top line revenue pressure on our INSCOM contract beyond fiscal 2009. This is clearly something we will keep a close eye on as we wrap up this fiscal year and head into 2010.

On CIVPOL, our main task orders in Iraq and Afghanistan awarded earlier this year continue through February 2010. While the authorized levels of police mentors of approximately 700 in Iraq and 600 in Afghanistan have remained constant. There is again some budgetary ambiguity around the Iraq number tied to the transition planning underway and signals of an increase in Afghanistan levels around mid-year, which we think will be to a net increase on the program overall.

Additionally, on MRAP, the Mine Resistant Ambush Protected vehicle support program we are seeing a similar dynamic with an increase in our Afghanistan presence and a continued ramp up expected into the next fiscal year. It will take us a few months to see how this increase nets with any change in demand for support in Iraq. As we mentioned, last quarter we expect revenue this year of approximately $80 million to $90 million on MRAP.

LOGCAP IV as expected continues to slowly ramp up and we are starting to see task order activity increase. To-date, we won two Kuwait task orders worth just under a $100 million annually in total both currently under protest. We are expecting the Afghanistan task order, RFPs to be released soon with the spring award and the larger Iraq task orders RFPs to follow starting this summer. As we said before, we are not expecting any meaningful contribution from LOGCAP during our 2009 fiscal year due to the timing of these task orders and the protest, but we still expect LOGCAP to be a significant contributor to our revenue growth in fiscal year 2010.

Our new contract with DoD supporting the Multi-National Security Transition Command-Iraq or MNSTC-I is ramping up as we fill the required positions for mentors and advisors. On this two-year program, we are assisting MNSTC-I in transitioning security responsibilities for multi-national forces to the Iraqi government. This is an area where we expect to see increased demand in Iraq supporting the MOD and MOI beyond fiscal 2009. On our last conference call, we discussed some of the challenges on our Afghanistan construction projects. The deteriorating security situation and other challenges in Afghanistan negatively affected our financial performance last quarter.

We replaced management on those programs and implemented other changes to prevent significant further negative impact from those projects. In spite of the progress and improvements achieved, we determined this past quarter that an additional loss of $1.9 million should be recognized. We continue to closely manage these construction projects and are working aggressively to avoid further losses. And while we still believe that the Army Corp of Engineers will have continued demand for infrastructure development, we have made it clear that we won't pursue firm-fixed-price construction work in Afghanistan with the Corp until more appropriate contract terms are offered and the security situation in the region improves.

Lastly, on Contract Field Teams, we continue to see a flurry of task order re-competes as a reminder all task orders approximately a 100 are being competed under the new IDIQ vehicle, which represents both an opportunity and a risk to our CFT revenue base. So far we have managed to maintain our base with some slight upside and a majority of our current task orders won't be competed until the April 2009 timeframe, which eliminates our CFT revenue risks for the current fiscal year.

We were recently awarded two task orders under the CFT program. The first task order is to provide aviation services at the Naval Station in Norfolk, Virginia. The firm-fixed-price contract is for one base year and one option year, and has a two-year value of more than $10.6 million. The second task order is to provide logistic support and maintenance and repair services at Letterkenny Army Depot in Chambersburg, Pennsylvania. The task order, which contains firm-fixed-price and time-and-material elements, has a one-year base value of $24.6 million plus a one-year option period with a potential value of $49 million. Overall, CFT continues to be an important area of interest and attention for us as these task order competitions are currently based solely on price and are very competitive.

In addition to these major programs, we successfully captured a handful of other awards during the quarter that continue to solidify our base. We were selected by the United States Army Aviation Missile Command to support the Kuwait Air Force with a Maintenance Augmentation Team for its Apache aircraft fleet. The firm-fixed-price contract is valued at approximately $11.2 million for the first two years and will increase to more than $16 million if an option year is exercised to extend the contract through December 2011. Additionally, on Africa Peacekeeping we were recently awarded a task order worth approximately $28 million to support personnel and equipment deployment in Africa. This task order will largely be executed in Q4 helping to solidify our revenue base for fiscal 2009.

Before turning the call over to Mike, I’d like to briefly comment on the new Status of Forces Agreements or SOFA that went into effect January 1. In short, while the SOFA makes significant changes in many important areas affecting the relationship between the U.S. and Iraqi governments and to a certain extent government contractors, we have not yet experienced any major operational impact. We understand that the two governments are negotiating critical policies and procedures that will implement the SOFA and in the interim the Iraqi government has provided a grace period before actively enforcing certain elements of the SOFA pertaining to U.S. government personnel and affiliated contractors. For our part, we plan to continue our important in-country missions in a manner that complies with the SOFA in Iraqi war.

We feel confident that the SOFA requirements will not have a negative impact on our contract performance if anything implies a premium on a high quality program management we delivered. So, to wrap up my discussion on the quarter, we posted solid results for Q3. These results confirm the robust growth seen over the first nine months of fiscal 2009 and support our positive outlook for the remainder of fiscal year 2009 and into fiscal year 2010. With that I will turn the call over to Mike for a more detailed discussion of our financial results and then come back and update our full year guidance. Mike?

Michael J. Thorne

Okay, thanks Bill and good morning everyone. As Bill mentioned our press release was issued last night and I hope everyone has had a chance to review the information. In terms of the third quarter of fiscal 2009, revenue increased to $792.3 million from $523.1 million during our third quarter of fiscal year 2008. Each of the three operating segments contributed to this 51.5% revenue increase with International Security Services growing by 75.3%, Logistics and Construction Management revenue increasing 23.7% and Maintenance and Technical Support Services revenue growing 29%.

While revenue from the INSCOM contract was the largest contributor to our revenue growth it is important to note that the balance of the business grew 13.5% quarter-over-quarter. The main contributors to this revenue growth were added staffing on MRAP, growth under the LCCS program related to the global war on terror, added support effort under the CIVPOL contract and growth in our program that supports the U.S. Army in the Philippines. These increases were partially offset by lower activity under the Africa Peacekeeping and Air Wing contracts.

EBITDA for the third quarter of fiscal 2009 was $57 million as compared to $44.3 million for the third quarter of fiscal 2008. The increase was primarily the result of revenue growth, solid program performance and tight cost controls in our SG&A expenses. As you may have noted in the tables attached to our press release, our actual SG&A expense was down $2.5 million quarter-over-quarter, despite a 51.5% growth in revenue. The revenue results for the first nine-months of fiscal 2009 provide a very similar picture as the recently completed quarter. Overall revenue for the first nine months of fiscal 2009 was $2.29 billion, compared to $1.57 billion for the same nine months during fiscal 2008.

This 46% increase reflects growth in all three of our operating segments. While the main driver to the overall 46% revenue growth was the INSCOM contract, we are pleased that the balance of the business was growing at 12.9%. This growth came from MRAP, LCCS, the CFT program, Afghan construction and support to the U.S. Army in the Philippines partially offset by reductions on Africa Peacekeeping and Air Wing. Our adjusted EBITDA for the first nine months was a $163.8 million versus a $135.3 million for the comparable period of fiscal 2008.

This 21% increase was primarily the result of increased revenue, but was also positively impacted by MRAP margins and SG&A efficiencies previously discussed. Partially, offsetting these increases was the contract loss provision related to the Afghan construction work. Our adjusted EBITDA margin reduced from 8.6% for the first nine months of fiscal 2008 to 7.2% for the recently completed nine months. This lower margin is primarily the result of our cost type contract mix increasing to 48% for the first nine months of fiscal 2009 versus 25.1% for the first nine months of fiscal 2008.

Our basic EPS excluding certain items for the first nine months of fiscal 2009 was $0.97, which compares favorably to the $0.67 per share for the comparable period of fiscal 2008. We are focused on basic versus diluted EPS, because while our restricted stock grants are added to the share count for the diluted EPS calculation, our past practice and intent going forward is to settle these grants in cash so there will not be any dilution to current shareholders.

In addition, we have excluded our non-recoverable severance expense and the non-cash write-off of deferred financing from our prior term loan both of which occurred in prior quarters because these expenses do not reflect the ongoing performance of the business. As Bill mentioned our operational cash flow was strong this quarter and we ended the quarter with a $150.6 million of unrestricted 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 $615.9 million as of January 2, 2009, an increase of $25.9 million from March 28 of 2008. The increase was due to our debt refinancing we completed in July of 2008 to give us added liquidity. Our net debt as of the end of Q3 was $465.3 million, which is $42.5 million reduction from net debt as of the end of fiscal 2008. We are very pleased with our total liquidity of $336 million as of the January 2, which includes both unrestricted cash and availability under our revolver.

Our accounts receivable increased to $634.9 million at the end of the third quarter of fiscal 2009 from $513.3 million at the end of fiscal year 2008 due to our significant revenue growth. Importantly, our days sales outstanding was 69 days at the end of the third quarter of fiscal 2009, which while up from the 63 days we reported at the end of the second quarter of fiscal 2009 is our second consecutive quarter under 70 days, and a significant improvement from the 92 days as of the end of the third quarter of fiscal 2008.

This improvement in DSO is a direct result of the increased focus process improvements and system changes we initiated during Q1. We ended Q3 with a funded backlog of $1.5 billion and total backlog of $6.6 billion, both of which compare favorably to the corresponding backlog numbers at the beginning of fiscal 2009 of $1.2 billion and $6.0 billion respectively. The increase in funded backlog is primarily due to the timing of funding on CIVPOL task orders and funding new option years for several contracts. And the driver to the total backlog increase was the award of the new War Reserve Materials contract.

Our estimated remaining contract value also increased to $9.7 billion at the end of Q3 from $7.5 billion at the end of fiscal 2008 primarily due to the successful recompete of the Contract Field Teams contract. I will now turn the call back over to Bill to provide some insight into what we are expecting for the remainder of the year and a few closing remarks. Bill?

William L. Ballhaus

Thanks Mike. Let me now spend a minute talking about the business going forward, first with respect to our financial guidance for the rest of the year, we have raised our 2009 guidance. We expect our fiscal 2009 revenue to be between $3.03 billion and $3.06 billion. We expect our adjusted EBITDA for fiscal 2009 to be between $211 million and $216 million. Our earnings per share excluding certain items will be between $1.20 and $1.26 per share. Looking ahead, our number one priority continues to be performance in three areas.

First, growing the top line by winning our share of new business and contract task orders. Second, managing our bottom line by maintaining a LEAN infrastructure and improving program management. And third continuing solid cash management. While we remain focused on delivering our guidance for the year, we are also taking steps to position ourselves for market opportunities that we see ahead in fiscal year 2010 and beyond specifically in the areas of platform support and stabilization and development solutions.

Going forward, we see continued growth opportunities in these two markets driven by platform reset requirements and the ongoing need for post conflict support and the application of soft power or smart power globally, but most notably in Iraq and Afghanistan. As we wrap up fiscal 2009, we are working to align our organization with this market focus beginning in fiscal 2010 and continuing to drive organizational efficiencies to improve our competitiveness in these market areas.

Once again overall I’m very pleased with our third quarter performance and the momentum we have going into the last quarter of fiscal year 2009 and the start of fiscal 2010. So, with that I’d like to turn this over to our operator to manage the question-and-answer session. Darla?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Peter Skibitski with Credit Suisse.

Peter Skibitski – Credit Suisse

Hi, guys nice quarter.

William L. Ballhaus

Hi, Pete.

Peter Skibitski – Credit Suisse

Bill, I was just wondering if you had an initial view on fiscal 2010 just directionally revenue wise up down or flat?

William L. Ballhaus

Yeah. I will take that, and first of all I think it's a little premature given the environment for us to give specific guidance relative to fiscal 2010, but I will give you a sense for what we are thinking about and what we will be looking at over the next few months, while we are solidifying our view for 2010. Really looking at three areas. The first is what I characterize as our core business, which Mike described has grown this year so far at about 12% to 13%.

And so we will be looking to see if we think that's sustainable going forward, we do see a number of opportunities in the near future, in the stabilization and development area on programs like WPPS, ONM opportunities in the Middle East, LOGCAP. And in platform support we have some upside opportunities and some risk on CFT and we’re seeing another platform support opportunities in the not too distant future here in the U.S. And then of course across both of those markets, we’re seeing the potential for increased demand for our services in Afghanistan and we hope over the next few months to start to get some more insight into the ramp up for trainers and advisors for police training. The ramp up for airlift operations and personnel support and things like that in Afghanistan. So, the first area that we will be looking at over the next couple of months is just that core business and evaluating whether or not that 12% to 13% is sustainable going forward.

The second area that we’re looking at is GLS, and we’re seeing a number of factors happening all at once on GLS and INSCOM. The first is we’re seeing operational demand flat now and I think that was reflected in our third quarter where our linguists count, our revenue was essentially flat quarter-over-quarter in Q3. Second, beyond the number of linguists being fixed, we are seeing an increase in the skill mix and what I mean by increase is the demand for the higher end U.S. linguists that tend to have a higher salary per linguist tied to them.

And then third recently, we have implemented a salary reduction on the program, because we think we can deliver to our customer a more cost effective solution and this is one of the steps that we are implementing to continue to get better and improve our performance on that program even though our last award fee was pretty high. It's not clear yet how those three factors will net out on GLS. We do think there is the potential force in top line pressure and we will be looking at it over the next couple of months in evaluating it, and that will clearly impact our view on 2010. And this is out there a little bit beyond 2010, but we do see an opportunity for us to seek for linguists opportunities in other countries and that full competitive landscape is starting to take shape and we don't have absolute clarity on it right now, but we think over the next couple of three months we might.

And then finally third and the big driver is LOGCAP. As I said to-date coming into fiscal year 2009, we had relatively modest views of what LOGCAP would do and contribute to our financials we have been successful in one, two task orders in Kuwait, they're under protest, but we think those will get resolved in the not too distant future. And the big opportunities are right in front of us; we have the Afghan task orders we expect to get the RFPs for Afghanistan in the very near future over the next couple of weeks in the spring award. And then the large volume of work in Iraq we expect to see the task orders in the summer early fall timeframe. So, those three areas will really shape our view of 2010 as I said I think its given the dynamics in those three areas it's probably pre-mature at this point in time to pinpoint it, but as we said in our prepared remarks I feel very good about our momentum coming out of 2009 into 2010.

Peter Skibitski – Credit Suisse

Okay. A lot of moving pieces clearly, let me follow-up on the LOGCAP part of it. Do you have sense right now of what the contract is running in Iraq versus Afghanistan just to get a sense of the potential value there?

Michael J. Thorne

Yeah. Pete this is Mike. I think our, while we don't have detailed view of that I think our best estimates are the Afghanistan piece is probably running around a billion dollars and I would expect that could easily increase going forward and on the flip side I think Iraq is running about $3 plus billion and that one would probably have a tendency to drop off a little bit over the next few years.

Peter Skibitski – Credit Suisse

Okay. And just one follow-up, Bill you mentioned WPPS, and I think a lot of people are wondering with a black quarter situation, is DynCorp going to kind of fill the gap. Can you talk a) about the opportunity size there and b) about is it worth a political risk?

William L. Ballhaus

Yeah. I think it’s a great question and obviously we read what’s in the news and I want to be careful and not comment in too much detail there I think it in our view right now is the State Department is a very important customer for us, we are in that business, we are in Iraq performing similar services and to the extent that we can help in that area we will be happy to chat with the State Department about how we can do that. I would expect those conversations still unfold in the not too distant future here, but for us to say anything more on that right now I think it would be not only pre-mature, but I think its more appropriate given the environment for the State Department to comment in more detail.

Peter Skibitski – Credit Suisse

Okay. Fair enough. Thanks very much guys.

Operator

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

Bill Loomis – Stifel Nicolaus

Just more questions on the INSCOM linguist contract, with the security agreement in place now, we stay in our – in the basis by the end of June, how could that revenue in that contract not go down through the year, what kind of scenario do you see where it could be flat?

William L. Ballhaus

Well I think the mix plays into this pretty heavily. Our current mix has a heavy density towards local nationals, and I think of the roughly 9,000 that we are authorized on initially 7,000 were local nationals, 2,000 roughly were U.S. So, one way in which that could stay flat is if we saw a significant shift in the mix, I mean there is a quite a difference between the salaries for the U.S. linguist and the local nationals. But I think there is again a lot of moving parts on the transition that need to be defined and based on how that all sorts out, we will get then get a sense for the linguists role and translator role in supporting that transition. And so we will be, we will be watching to see how that sorts out and working with INSCOM to make sure we provide the right linguist support and support the mix that's driven by the operational requirements.

Bill Loomis – Stifel Nicolaus

And as far as Afghanistan any, how does that play into the contract and are doubling the troops there over the next year. And then secondly, well why did you have to do the salary reduction were there something in the contract that required you to move your price points down?

William L. Ballhaus

Yeah, now I will take the second one first. We have a philosophy in the D&A around continuous performance improvement on our contracts, and a lot of characteristics of the market environment has shifted, and we felt there is an opportunity for us to give our customer a more cost effective solution, and one of the areas that we could do it was through the salary cuts that we’ve implemented. With respect to Afghanistan we do expect with the true build-up that there would be an increase in the demand for linguists and that’s an area that we would be interested in exploring and we think downstream there may be an opportunity for us to compete and provide service in Afghanistan similar to what we’re providing in Iraq with linguists.

Bill Loomis – Stifel Nicolaus

No specific contracts on the horizon there?

William L. Ballhaus

We’ve heard some notional timelines unfolding, but I think again they're notional, and I think over the next two, three months we’ll have a lot more clarity on a specific timetable for a competition that would allow us to compete head-to-head for that work.

Bill Loomis – Stifel Nicolaus

Thank you.

Operator

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

Joseph Vafi – Jefferies & Company

Hi. And good quarter to hear this morning. I was wondering if you could talk a little bit on LOGCAP there I guess, as you stated there were a couple of task orders that are now under protest that you have won, do you have a feel for the timing on a decision on those protests, and if those protests do go the decisions go favorably for you how quickly would that business be able to ramp?

William L. Ballhaus

We think that, there is a timeline associated with the GAO review that ends at the end of this month. So, there is the possibility that those task orders and judgment on those protests could be made and settled at the end of this month. If that were to happen, we could ramp up and would ramp up very quickly and so we could see these task orders kick in at the beginning of fiscal 2010, I've made that comment with caution now because there is no certainty around timing when it comes to protest I think what I just described would be a best case scenario and I think there is a potential that the protest delay could slip well into 2010 and again this is a one of those items that we will keep a close eye on over the next few months as we look to crystallize our guidance for fiscal year 2010.

Joseph Vafi – Jefferies & Company

Okay, that's helpful. And then on those cost over runs on the Army Corp work is, how do we feel now about the reserve, we have taken up on those contracts, do you think that at this point those are now fully reserved at this point?

William L. Ballhaus

Well, I will say that we are very confident that we have taken all the right steps to improve our performance. These are firm-fixed-price contracts and as we all now with firm-fixed-price contracts the risk isn't fully retired until the projects are done, a bow is wrapped around them and they're signed off and handed over to the customer and so while we think we have it all and have identified the risk and reserved for it. And we are very confident we've taken all the right steps, we really won't know for sure until we burn through the entire backlog and that's, that will carry us through fiscal year 2010 is my expectation until we burn through the entire backlog.

Joseph Vafi – Jefferies & Company

Okay. If indeed the Army Corp is not, if you're not going to bid anymore Army Corp work of this type, after these deliveries, does that potentially create a headwind in your P&L in your revenue line relative to this type of work you are doing?

William L. Ballhaus

Well, I think there is two possible scenarios and just to put this into context, right now we have in total about $200 million in business on Afghanistan and it's relatively spread out across two years. So, it's about a $100 million a year in revenue. So, just to put it in context, I think the point here for us, revenue wise is LOGCAP, and it will be tied to our success in winning the Afghanistan task orders and the Iraq task orders, but just to come back to your question on the construction work. I really see two possible scenarios that could unfold.

One is we continue to have challenges over the next year, comparable to what we saw this quarter and eventually convince ourselves that we aren’t able to work with the Corp and developing a set of contractual terms and conditions that we think are appropriate to this environment or the security environment has reached a certain level that we are absolutely not comfortable going forward doing this kind of work in a firm-fixed-price relationship and the revenue stream would go away if that were the case it would be, on the order of a $100 million a year that we would have to deal with.

Another scenario is over the next year on the four, five projects that we have with the very strong team that we've put in place in country and the focus that we've put in putting rigorous processes in place that we think are necessary especially when you are dealing with a very difficult security environment. One scenario is that we work our way through the next year and partnership with the Corp successfully complete these projects, convince ourselves that we have the recipe, enhance our relationship with the Corp and we decide that we will continue to bid these projects in the future.

I do believe with a great deal of confidence that there will be a continued demand and an increased demand from the Corp and other services for infrastructure development and construction in Afghanistan. So, I think we have the potential to develop the capability to do this work in Afghanistan early in relative terms. So, one scenario is it could turn out to this does end up being the growth engine that we thought it would be a year and half ago and the revenue stream has just slipped out effectively 12 months from our initial thought. So, I could, really at this point I could see it going either way and in my mind it will depend on our ability to work with the Corp and execute over the several months to either convince ourselves, we can create the recipe or we have the recipe for doing this work in Afghanistan in '09.

Joseph Vafi – Jefferies & Company

Okay, that's helpful. And then maybe one quick one for Mike, on INSCOM was there, are you continuing to recognize some of the award fees on that cost plus contract?

Michael J. Thorne

Yes we are Joe. We have only gotten the one award fee, which was an 89 score, which equates to 80% for the first award fee period, but based on that we are accruing award fee as we go now and then obviously when we get additional award fee scores if there is any difference there will be an adjustment either up or down, but we think we are pretty close to where those scores will come in. So, you won't see the kind of spike you saw in Q2 going forward, it will be more leveled.

Joseph Vafi – Jefferies & Company

All right. Thanks a lot guys.

William L. Ballhaus

Thank you.

Operator

Your next question comes from the line of Myles Walton with Oppenheimer & Company.

Myles Walton – Oppenheimer & Company

Mike maybe on cash to start it looks like for the first three quarters you are already above kind of the target you put out there for cash guidance on the last call, apologies if I missed it, but what is the cash operating cash flow you are looking for the full year?

Michael J. Thorne

Yes. You are right, Myles we've had good performance, we are at $70 million on year-to-date, and our projection now is that year-end cash from operations will be in the $80 million to a $100 million range, we are basing that on continuing to maintain our DSO at around 70 days, our prior forecast was a little more conservative, but now that we have got two straight quarters we are adjusting that down, the DSO down to about 70 days, which would translate to cash from operations for the full year in the $80 million to $100 million range.

Myles Walton – Oppenheimer & Company

Okay, that’s great. And then, Bill given or if you feel that the cash dynamics are now reasonably stable and you have kind to got to a point where the contracts are evenly stable. Can you comment on cash deployment, and how your priorities may be evolving there, you're obviously in a pretty good position with the cash balance you have and it sounds like the cash performance you are getting more comfortable on the sustainability there. So, maybe just on M&A if your thinking has evolved or kind of where your priorities are there?

William L. Ballhaus

Yeah I think our thinking has evolved, but, given current market conditions our number one priority is to maintain as much flexibility as we can. So, we are not in a hurry to deploy any of our cash along those lines. However, strategically I think we are getting clarity around the opportunities in the markets that we are in, platform support stabilization and development, and we see demand there and some legs and some enduring needs. I think the strategic challenge that we want to work and this is where M&A would come to play would be to continue to diversify our portfolio both our geographic footprint and our customer base and obviously M&A is a lever that we are looking to pull to diversify along those two dimensions. And so at this point I want to continue to drive cash, maximize our flexibility, refine our thinking, but the M&A is definitely in our trade space. As we said for several months now we'll look at consider and evaluate what we would consider bolt-on size or small acquisitions that would give us access, give us channels that we could partner up with other parts of the organization to try and go after some big programs and deliver synergies. That's about where we are right now and our thinking just again the shift in our thinking over the last nine months driven by the external environment is, the number one priority is the flexibility.

Myles Walton - Oppenheimer & Company

That's fair. And then maybe on the guidance, it looks like the diluted EPS implied guidance actually is down maybe a nickel is that all interest expense Mike and kind of what's was the driver there?

Michael J. Thorne

Yeah I mean part of it is interest expense Myles, part of it is, our sort of our previous guidance ranges, which were of course broader. We were more towards the top end on the EBITDA side and more towards the centre on the EPS. So, as we narrow those ranges that became more of an issue in terms of getting those better aligned. So that’s part of what’s driving that also.

Myles Walton - Oppenheimer & Company

Okay. And then lastly on the guidance with respect to the full year, it looks you are implying a sequential decline into 4Q on both sales and margin. Usually, I anticipate kind of a 4Q pickup on revenue and Martin is less predictable, but could you comment on both those dynamics?

Michael J Thorne

Yeah, I sure can Myles. I mean we have had, if you look at Q3 going to Q4. We've got a total of about $25 million of kind of revenue that was either one-time or programs going away, we had about 8.5 million related to kind of winding down the Nigeria program, we’ve had probably about $10 million or $11 million on LCCS related to the global war on terror material items or modifications that’s going away in the fourth quarter. We have a TSMO contract that’s fairly small, but it’s winding down, California Department of Forestry, we see a bit of a drop off that its one of our few programs that’s got some seasonality to it. So, we do see some revenue drop off going from Q3 to Q4 nothing real major, but just kind of driving that and then correspondingly on the profit side. We had some we have had some little good margins on some of our one of our programs in UAE that we think may reduce a little bit, we had some profit again on the Nigeria close out just going to go away offsetting that you'll have, we don’t expect any further degradation on the Afghan construction, we did book an additional 1.9 million this quarter as Bill said. So, all that wrapped together we do think Q4 will be down just a little bit on the top line and slightly lower margins than Q4 will be slightly lower than Q3.

Myles Walton – Oppenheimer & Company

That's great. And last one if I could Bill, back to you on the SOFA commentary you had. You said that even under the new, the anticipated new requirements you'd still be able to perform well on your contracts and wouldn't see that as an obstacle, but could you comment on the people side and if you would anticipate that would be more of an obstacle to find the qualified people and get them in place quickly and smoothly?

Michael J. Thorne

Yeah. That's probably the biggest concern that we have. But so far, first we've been very active in communicating with our team in country to make sure that they are aware and also to just reemphasize our previous guidance around processes, policies, procedures, et cetera and make them aware of what the new environment means for them. We haven’t seen from a personnel standpoint a fall off in our folks that are currently there and so far it hasn’t been an issue with our recruiting and attracting people to go over. Now, that could change as the details that are getting worked out between the U.S. government and Iraqi government unfold. But so far there hasn’t been a problem.

Myles Walton – Oppenheimer & Company

Okay. Thank you very much.

Operator

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

Ed Caso – Wachovia Capital Markets

Good morning. Can you Mike, can you just what would the guidance be on a dilutive basis for EPS?

Michael J. Thorne

I’m sorry Ed, it was hard to hear you, could you repeat that?

Ed Caso – Wachovia Capital Markets

Sure. What is the guidance for EPS when done on a dilutive basis?

Michael J. Thorne

It would be, on fully diluted, it would be about $0.08 less, it would be $1.12 to a $1.18. Then I guess, I’m assuming you wanted that including the items we excluded?

Ed Caso – Wachovia Capital Markets

Right. I just want to match it up with the $1.15 to $1.25 you gave last quarter. So, that would be the equivalent of that?

Michael J. Thorne

On a fully diluted GAAP basis yeah, it would be about $1.12 to $1.18.

Ed Caso – Wachovia Capital Markets

Great. Bill, can you talk a little bit about the chatter of Obama now moving more quickly to sort of a just overall spending in FY’10, which is supposed to appear in – the budget appear in April as supposed to letting applied for a year and making more major changes in FY’11 if how that might impact this?

William L. Ballhaus

Yeah, I mean there is currently a lot of chatter on that front, and I think there is an increased awareness that he may and his administration may have an impact, and make some decisions about a year, that would take effect about a year earlier than people were expecting. We sort of anticipated all along that the pressure on the defense budgets could be little bit more intense, and a little sooner than people think, just a personal view with the commitments over a trillion dollars in commitments that would be made around various stimulus packages et cetera, at some point that has to put pressure on the discretionary items in the budget. So, our view is that that pressure will be there, and it will emerge and probably sooner rather than later. That all said we feel very good in relative terms with respect to where we sit in that budget and to set priorities, and we said before that we think the weapon systems will be the first area that is up for review, and with the increased focus on Afghanistan and the priority there from President Obama and his administration, where we think we are very well positioned, we think that scenario that even though there maybe an overall decline in the budgets that scenario that we may see some growth and we would certainly benefit from that. So, really our view on our business going forward, the mix between Iraq, Afghanistan the level that we see in Iraq, the potential for increase in Afghanistan that we articulated in the last call isn't really changed by the increased commentary on making adjustments sooner. I'd make that comment, just with a wrap around that I think in this environment it is important to be very cautionary, there are big changes, a lot of moving parts so we are watching things very closely to see how they unfold so that we can respond as quickly and as appropriately as we can.

Ed Caso – Wachovia Capital Markets

Maybe related question, a lot of chatter in last six months about moving away from contractors are using them less and returning to the use of government employees, any sense for an update on that particularly with the stock market down and peoples retirement fund hit maybe government employees staying on longer than previously thought as well?

William L. Ballhaus

Yeah. I think that's hitting certain sectors harder than others certainly we hear about is in the intelligence community where certain disciplines are being brought in-house. I guess in our space the one area where we do hear conversations about that is in the security arena, but as you know, that's just over 1% of our business right now. And the services that we provide largely are complementary to our troops or men and women in uniform and to the extent that they continue to be stressed with two major conflicts. I think that the demand for the nature of the services that we provide from outside contractors will continue.

Ed Caso – Wachovia Capital Markets

Thank you.

Operator

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

Richard Safran – Goldman Sachs

Good morning.

William L. Ballhaus

Good morning.

Richard Safran – Goldman Sachs

To just back on cash for a second, you've had really done an improvement in DSOs. The first part is I’m assuming, Department of State issues have been resolved that's the first part, but I just wanted to know are there still any bullets left to fire in terms of improving free cash flow I know its like working capital has been going a bit against you, is that something you could improve going forward?

William L. Ballhaus

Yeah, absolutely and this ties into a comment I made in a previous answer, we’re never satisfied from an execution standpoint, and are continuously looking to get better, and we’ve done better, we’re at 63 days in Q2 and so we’ve got internal goals that are very aggressive with respect to cash, the challenge is, reporting on DSO on a quarterly basis, it can be very lumpy. We can receive significant checks on a Monday after the quarter ends on a Friday they can put four, five days of variability into the DSO number that we report every quarter. So, this is something that literally everyday in this company around the world we have a focus on cash, and every week it comes up to my level and Mike's level and we look at not only the current collections on an invoice-by-invoice basis, but process improvements, system enhancements that we’re putting in place at our various sites around the world to try and continue to improve. So, no I don’t think we are putting a stake in the ground and declaring victory, we want to keep it better on cash it really is a major driver in the performance of this business and because of that we take it very seriously.

Richard Safran – Goldman Sachs

Okay. Now, if you said this and I missed it I apologize, on the MRAP are you still looking for about 80 to 90 on that program and also if you could if you have any comment on what your expectations are for the MRAP-ATV program, what are your expectations there sole source award do you think incumbency is going to be a bit of an advantage?

William L. Ballhaus

Well, let's take your first question 80 to 90 million is the range that we are still expecting for the year on MRAP and I don’t have a view on the ATV program, the second question that you have.

Richard Safran – Goldman Sachs

Okay. And then just finally, would you consider a request, we will have the release come out before 8.30 pm in the evening?

William L. Ballhaus

Absolutely, we would consider that.

Richard Safran - Goldman Sachs

Okay. Thanks a lot.

Operator

The next question comes from the line of Mehmet Agyuz with Stanford Group.

Mehmet Agyuz – Stanford Group

Good morning guys nice quarter.

Michael J. Thorne

Good morning Mehmet.

Mehmet Agyuz – Stanford Group

Could you give us an update on the re-compete of your two contracts AFRICAP and LCCS, the timing of the re-compete?

Michael J. Thorne

Yeah. The first one was AFRICAP and what was the second one Mehmet?

Mehmet Agyuz – Stanford Group

And LCCS life cycle?

Michael J. Thorne

The LCCS yeah sure. AFRICAP we have submitted the proposals they are in evaluation by the Department of State, hasn’t we haven’t had any discussions at this point yet. I think our latest expectation is the award would be in late April. In terms of LCCS, the current contract runs through January of 2010. There is no RFP out yet, I think the customer is working on that, we are expecting that in the next several months, and we'll just have to see how that one plays out, because it's a little bit early yet and there is not really a schedule yet for the RFP and for the competitive process. But they have got a little bit of time, because the current contract doesn't run out until January of 2010.

Mehmet Agyuz – Stanford Group

Okay, great. And the margin profile on your WPPS contracts is it lower than your corporate margins?

Michael J. Thorne

No, WPPS is pretty close to the average.

Mehmet Agyuz – Stanford Group

Okay. And your market shares there, is it fair to assume that down 10% currently?

Michael J. Thorne

I wouldn’t know how to put a percentage on it, but we are definitely a much smaller player in that business then Blackwater is. Yeah, I don’t know what the percentage is on that, but we are fairly small. Its just over 1% of our business, we are doing Northern Iraq and so that’s all we are doing right now on WPPS.

Mehmet Agyuz – Stanford Group

Okay thanks.

Operator

Your final question is a follow-up from the line of Peter Skibitski with Credit Suisse.

Peter Skibitski – Credit Suisse

I wonder what tax rate you are assuming in the fourth quarter as part of your guidance?

Michael J. Thorne

Yeah, Pete we are assuming pretty similar to the year-to-date of 31.4%.

Peter Skibitski – Credit Suisse

Okay, gotcha. And then Bill just wondered, there is a big aviation maintenance opportunity out there that we have been tracking as JOG contract, Joint Operations Group, just wondered if you guys were trying to get to become a part of that as either prime or sub…

William L. Ballhaus

We don’t have a current effort pursuing that contract as a prime or sub.

Peter Skibitski – Credit Suisse

Okay, okay was there a reason for that?

William L. Ballhaus

Not that, I can give you right now.

Peter Skibitski – Credit Suisse

Okay. Gotcha. Okay, thank you.

Operator

I would now like to the turn the call back to Bill Ballhaus, CEO for any closing remarks.

William L. Ballhaus

Okay, thanks Darla. Great, we'd like to thank everybody on the call for your participation and your interest. We are pleased to be able to report another strong quarter and a solid outlook for the rest of fiscal year 2009. And once again I would like to thank all of our employees for their service everyday around the world supporting our customers and our country. This concludes our third 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. F3Q09 (Qtr End 01/02/09) Earnings Call Transcript
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