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Executives

Cindy Roberts – Director of IR

Bill Ballhaus – President and CEO

Mike Thorne – CFO

Analysts

Bill Loomis – Stifel Nicolaus

Ed Yang – Oppenheimer

Ed Caso – Wachovia

Joseph Vafi – Jefferies & Company

Noah Papanek [ph] – Goldman Sachs

DynCorp International Inc. (DCP) F1Q09 (Qtr End 06/30/08) Earnings Call Transcript August 7, 2008 8:30 AM ET

Operator

Good morning. My name is Sandral and I will be your conference operator today. At this time, I would like to welcome to the DynCorp International first quarter fiscal 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) And now I would let the call over to Cindy Roberts, Director of Investor Relations. Please go ahead, ma’am.

Cindy Roberts

Thank you, Sandral. And good morning, everyone. Welcome to DynCorp International’s first quarter fiscal 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 view about future events and the 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.

And now it is my pleasure to turn the call over to Bill. Bill?

Bill Ballhaus

Thank you, Cindy, and good morning everyone. Glad you could be with us. In this morning’s call, I’ll provide an overview of our performance for the first quarter, hand it over to Mike to talk about the quarterly financials in greater detail, and then conclude our prepared remarks with a look ahead at the remainder of the fiscal year. I’ll start the Q1 discussion with a summary of our performance followed by an update on two of our new programs, INSCOM and LOGCAP IV, and then close with a summary of our recent new business activities.

For our first quarter fiscal 2009, we had solid performance and a good quarter overall. Q1 revenue was $716.8 million, an increase of $168.1 million or 30.6% over Q1 of fiscal 2008. Adjusted EBITDA was $56.4 million or 7.9% of revenue, driven by strong revenue growth combined with solid contract execution. Cash used in operations for the quarter was $71.1 million and we finished the quarter with days sales outstanding of 82 days. While both of these numbers are off of our plan, we are aggressively working on improved DSO performance. And I expect our DSO to become more closely aligned with our plan in Q2.

Next I’d like to provide an update on our two new programs, INSCOM and LOGCAP IV. First, INSCOM is going very well. The transition went smoothly, and we had 346 total staff and 8,387 linguists at the end of the quarter. Revenue for the quarter was right on track with our full year plan of $600 million. We anticipate revenue to continue to increase throughout the year as new task orders are issued and we continue to increase our bill rate against our current authorized linguist headcount of 9,234.

LOGCAP, on the other hand, continues to be slow getting off the ground. And as we mentioned in our last call, we don’t expect LOGCAP IV to be a major contributor in fiscal 2009. However, we do expect it to give us momentum going from fiscal 2009 to fiscal 2010, and to contribute significantly to revenue in fiscal 2010. The first three task orders the Army plans to compete under LOGCAP IV will be in Kuwait and should all be awarded by the end of the 2008 calendar year.

Now I’d like to spend a few minutes talking about our new business activities, covering both growth on existing programs and new business wins. Two program areas that continue to show growth potential are our MRAP field service and maintenance program and our Afghanistan construction efforts. On MRAP, we received an official contract from Navistar Defense, a division of Navistar International, to provide field service support and training for its Mine-Resistant Ambush Protective Vehicles. Up to this point, we have performed this work under purchase orders. The new contract has a potential value of up to $500 million over five years and we are now anticipating the program to generate $80 million in revenue this fiscal year.

We also saw growth in Afghan construction during the last quarter. We are awarded Kunduz II, an expansion of a base we are building under contract to the U.S. Army Corps of Engineers. The base award is for $23.2 million with a potential value of more than $43 million. This is the fourth project for the Army Corps of Engineers awarded to DynCorp International in recent months for construction in Afghanistan.

We expect construction projects in Afghanistan to be a growth area for fiscal 2009 and beyond. And currently we have multiple bids representing over $400 million in work submitted to the army for evaluation. Beyond existing programs, we’ve had good results on new business and re-compete since the start of the fiscal year. Our most significant wins were the CIVPOL task orders for Iraq and Afghanistan. We’ve been performing these training missions under CIVPOL for predecessor contracts since 2003 and 2004 respectively. These wins extend our performance until February 2010 in both countries. That is a total period of almost seven years performing one of the most difficult complex missions our government offers.

We are very proud of these two wins because they reflect strong performance and a great deal of confidence by the US government and specifically the State Department in DynCorp International. We won the War Reserve Materiel re-compete to manage pre-position with military resources and materials Persian Gulf region for the US Air Force. This contract award is for a base share of 47.8 million and seven one-year options and have the total potential value of $418.5 million if all options are exercised.

Since the end of the quarter, we’ve been notified on several other important awards. We are once again awarded the contract deal teams program to provide depot and organizational level inspection, maintenance, modification and repair work worldwide for the US Air Force and other branches of the military that uses CFT vehicle for their aviation support needs. This is our strongest legacy contracts and we’ve been performing on this program for 57 consecutive years. This contract has a maximum value of $10.1 billion for multiple awardees over seven years.

Additionally our one of the California Department of Forestry re-compete was unsealed in court following a prolonged protest by another bidder. We’ve been performing on this program for the last seven years. The contract was re-awarded to us on November 2007 and then protested. The new contract became effective July 1, 2008 and runs through December 2014 for a total value of $137.7 million. This is another contract that gives us the opportunity to do important work that directly affects people’s lives. And we perform these services right here in the United States. Our pilots and mechanics have been working seriously since the beginning of the fire season in California to help contain and extinguish wild fires. I visited with them at the beginning of this week and I can tell you they are a very dedicated group of employees.

So, to wrap up my discussion on the first quarter, I’d say that all in all this was a good first quarter with solid execution and encouraging results on a new business front. 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. As Bill mentioned, our press release was issued last night and I hope everyone has had a chance to review the information. I’d now like to kind of address the highlights and provide you with some additional detail. As a reminder, please remember that our first quarter of fiscal 2009 was 14 weeks as compared to most of our quarters, including Q1 of fiscal 2008, which are 13 weeks in duration.

In our first quarter of fiscal 2009, revenue increased by $168.1 million to $716.8 million from $548.7 million during our fiscal 2008 first quarter. Each of the three operating segments contributed to this overall 30.6% revenue increase, with International Security Services growing by 4%, Logistics and Construction Management growing by 48.1%, and Management and Technical Support Services revenue increasing 10.7% over the first quarter 2008 results.

The primarily driver for growth under International Security Services was a transition in ramp-up of the INSCOM contract. Increases to our drug eradication and training services in Afghanistan and additional civilian police and security services in Palestine, Liberia, and Haiti. These increases were partially offset by a decrease in our law enforcement security services in Afghanistan and Iraq. The decline in Afghanistan was due to our construction of a camp facility, which was completed in August of 2007. And in Iraq, revenues were lower due to the transition of our operations from lease facilities to customer furnished facilities in May of 2007.

The Logistics and Construction Management revenue growth was driven by increases in the ramp-up of various construction projects in Africa and Afghanistan. We also had added revenue due to operations in peace-keeping services provided in the Philippines and Somalia. The revenue growth under the Maintenance and Technical Support Services segment can primarily be attributed to the increased level of effort associated with MRAP vehicles and revenue from the ramp-up of the new task order at Fort Campbell, as well as higher support requirements under the Life Cycle Contractor Support program.

Adjusted EBITDA for the recently completed quarter was $56.4 million or 7.9% of revenue as compared to $44.4 million and 8.1% of revenue in the same quarter last year. The $56.4 million of adjusted EBITDA includes the add-back of $4.1 million related to the severance cost of our previous CEO. The increase in adjusted EBITDA was driven by the strong revenue growth combined with selling, general and administrative expense efficiencies implemented during the quarter along with the beneficial impact of the higher base for SG&A absorption.

The relatively higher cost of services resulted from unrecognized award fees in ISS and MTSS and a shift from fixed price to cost reimbursable type contracts as compared to the same period in the prior fiscal year. Our percentage of cost type contracts in Q1 of fiscal 2009 was 43% as compared to 25% during Q1 of fiscal ’08.

Our first quarter earnings per share increased from $0.22 per share last fiscal year to $0.32 per share for Q1 of fiscal 2009. We have adjusted our EPS guidance from $1.25 to $1.35, to $1.15 to $1.25. This reflects the impact of the recently credit facility and the issuance of additional notes under the existing indenture. The $0.10 per share adjustment breaks down into approximately $0.05 per share of non-cash expense from the write-off of the remaining deferred financing cost for the old credit agreement with the balance of the adjustment attributed to higher interest costs.

While the new financing arrangements will impact our EPS, we were very pleased to close both the new credit agreement and the sale of the additional $125 million of bonds under our existing indenture given the current marketing conditions. The completion of these transactions gives us the liquidity and financial flexibility we needed to support our new contracts and strategic growth initiatives.

As Bill mentioned, our cash flow from operations resulted in $71.1 million use of cash for the quarter. This was due to both a working capital increase as a result of our higher revenues, which was expected, and the increase in our DSO from 73 days at the end of fiscal 2008 to 82 days for the most recently completed quarter, which was not expected. The main driver to the DSO increase was a delay in the invoice approval by our Department of State customer.

In May, we implemented a team that covers all areas of the company that touch the invoicing and collection process in order to reduce our DSO. And the leader of this team reports directly to the CEO each Friday afternoon. Since May this team has implemented improvements in systems process and cycle time in our invoicing and collection activities. We expect to see results of this focused effort during the second quarter.

Our total debt at the end of Q1 was $591.6 million, which is a reduction of $1.5 million from our fiscal 2008 year end and net debt was $552 million. The last topic I’ll discuss before turning the call back over to Bill is backlog. Our total backlog increased from $6 billion at the end of fiscal 2008 to $6.6 billion at the end of our first quarter with the primary driver to the increase being the award of the WRM program.

Funded backlog decreased from $1.16 billion at the end of fiscal 2008 to $936 million at the end of Q1. With the majority of our revenue coming from IDIQ contracts, the timing of funding varies by task order and is often incremental. We view this change in funded backlog as particularly a timing issue and not something that will impact our currently awarded task orders.

I’ll now turn the call back over to Bill to provide some insight into what we are expected for the coming year and a few closing remarks. Bill?

Bill Ballhaus

Thanks, Mike. Let me now spend a minute talking about the business going forward. First, I want to just reiterate that our number one priority continues to be performance. Using the midpoint of our guidance as a reference, with our recent wins, approximately 95% of this year’s revenue is in backlog. So delivering on our guidance is a matter of staying focused and performing. Additionally, we are putting significant attention on our new business activities, growing our existing programs, and assuring that we are successful in winning our share of contract task orders including the LOGCAP task orders to be released later this year.

Now turning to financial guidance for the rest of the year. We remain comfortable with our previously issued 2009 guidance. We expect our fiscal 2009 revenue to be between $2.825 billion and $2.925 billion. We expect our adjusted EBITDA for fiscal 2009 to be between $205 million and $215 million. Our earnings per share will be between $1.15 and $1.25 per share. This revision to EPS guidance is a result of our refinancing as previously described by Mike.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bill Loomis of Stifel Nicolaus.

Bill Loomis – Stifel Nicolaus

Hi, thank you. Strong quarter guys. Could you talk a little bit about first of all, Mike, on the interest expense, what should we be assuming as far as are you taking down debt ahead of the working capital needs? I’m trying to understand on the higher interest costs I assume is funding primarily INSCOM ramping up and that’s going to add to earnings. Could you give us some detail there? And then also just talk about on LOGCAP, how bigger is the Kuwait task orders and when do you expect them to be awarded? You said before [ph] calendar 2008, is that just the three or is there more in there?

Mike Thorne

Okay. Thanks, Bill. I’ll talk about the interest first. Yes, it’s not so much that our total borrowing has increased as the cost of that borrowing has increased a little bit. When we had a – we had a term loan of about $300 million and the interest on that was at around 7%. We had kind of a favorable rate there. But unfortunately, to do any modifications to that would have caused a significant increase in that. So instead we issued 125 million of bonds under the existing indenture and those are at 9.5%. And then the term loan we now have is $200 million and the current interest rate on that is about 7.75%. And then in addition there is a $200 million revolver on top of that. So given market conditions, that’s what kind of causing our interest cost to go up in the second half of the year. But we really felt we needed to do that to get the liquidity to support INSCOM and then LOGCAP as we move into next year. Now talking about the three task orders on LOGCAP, as Bill mentioned, the initial ones are all going to be in Kuwait. The latest schedule we have is, for the first one, the RFP will come out late this month, proposals will be due in September with an award in October. And then the other two will follow behind with RFPs in late September, proposals due in late October, and awards in December. Now the other thing that affects the timing of that is, for all three of these task orders, it’s our belief at the moment there is going to be about 100-day transition period, which strikes us just maybe a little long, but that’s what the customer is currently planning on. So even with those October and December awards, you have the transition period in there is not going to be much revenue generation during this fiscal year. Following on from that, we expect Afghanistan to happen spring of next year and then the Iraq work will start to spread over from summer of next year through summer of 2010. That’s sort of the current schedule as we understand it.

Bill Loomis – Stifel Nicolaus

And what’s the size of those first task orders?

Mike Thorne

We think the three in Kuwait are between $200 million and $300 million in total, the first one being the largest.

Bill Loomis – Stifel Nicolaus

Over five years?

Mike Thorne

I’m not sure of the time period of that, Bill. I’m sure we have that information, but I don’t. I’m sorry.

Bill Loomis – Stifel Nicolaus

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Myles Walton with Oppenheimer.

Ed Yang – Oppenheimer

Hi, this is Ed Yang for Myles. Can you hear me?

Mike Thorne

Yes, Ed, how you doing?

Ed Yang – Oppenheimer

Good. Nice quarter. On the Afghan police training effort, we were wondering if you could give a little more detail on how that will flow. We had been thinking of that as a $300 million a year effort, but the 18-month period of performance reference in the press release makes it kind of a little bit less than that.

Mike Thorne

Right. I think it’s more about $200 million a year under the program going forward. Now, at the moment, the level of police officers, police trainers is pretty consistent with what we are doing. There is no construction included at the moment. I mean, there is always a possibility of that, but that $300 million is just for police officers, trainers and mentors going forward basically at the level we are currently operating at.

Ed Yang – Oppenheimer

Okay. And then one more on the cash flow front, are you still expecting the working capital demands driven by program starts to be about 120 for the year?

Mike Thorne

Yes.

Ed Yang – Oppenheimer

Okay. Thanks. Nice quarter.

Operator

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

Ed Caso – Wachovia

Good morning. My question is, are you seeing a trend in the market to more multiple award situations where maybe previously it was a sole situation? And is that happening for political reasons, or could you just give some color on that front? Thanks.

Mike Thorne

Yes. I mean, I’ll give you my opinion on that, Ed. And yes, without a doubt we are seeing that trend. And I think we’ve seen it for the last several years. I mean – and I do think part of it is for political reasons. I think the primary example of that is LOGCAP. The first three LOGCAP contracts were all single awards. And I think when they got into the LOGCAP III, they realized tying themselves to one contractor for such a long period of time put them in a bit of a bind if the volume of work was so large one contract couldn’t handle or they weren’t happy with that contractor’s performance. So I definitely think we’ve seen that trends in multiple award contracts. So that gives the customer more flexibility.

Ed Caso – Wachovia

Can you talk a little bit about the several contracts mentioned post-quarter? Can you sort of put a value, how much that equates to in awards that you would book and sort of the annual – and what the split is between new business and re-competes?

Mike Thorne

Yes. I mean, I think they are basically -- most of them are re-competes. I mean, CFT is obviously the biggest one and obviously the hardest one to place any real value at this point in time because its IDIQ and they kind of change the way the contract is going to work a little bit. And by that I mean we’ll have -- in the past they haven’t competed much of the work under CFT and then going forward their plan is to compete pretty much all of the work. At the moment, we think we will stay at our current run rate on CFT, which runs between $300 million and $350 million a year. The WRM program, again, that was a re-compete and it was $440 million over seven years I think. But it runs in the $40 million to $50 million a year range, which is consistent with what we’ve been doing here recently. A few years ago there was a lot of construction activity, which drilled it up, but that’s sort of consistent with where it’s been recently. We already talked about the so-called Afghanistan award. It’s going to be about $200 million a year at run rate based on the current level of police trainers and mentors and assuming no construction. I think – have I hit them all, Ed, on the recent awards?

Ed Caso – Wachovia

That sounds right. Just one last question. On the severance that did happen in the June quarter, is that correct?

Mike Thorne

Yes, that happened in May.

Ed Caso – Wachovia

And did it impact the guidance or had you already assumed that when you had given the guidance the time before?

Mike Thorne

It didn’t impact EBITDA guidance because that’s why we referred to it as adjusted EBITDA before. We were always assuming that we would add that back. So it had no impact on EBITDA and we’ve had enough –

Ed Caso – Wachovia

More from an EPS perspective, which you talk about it only moving because of the interest, but it’s $0.45?

Mike Thorne

Right. We felt that the after-tax impact of that on an EPS point of view was small enough that we were still within that range. So we didn’t adjust the range for that just for the impact of the refinancing.

Ed Caso – Wachovia

Thank you.

Operator

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

Joseph Vafi – Jefferies & Company

Hi, good morning and good results here today. I just want to kind of talk a little bit more on the guidance. Obviously you did have a 14-week quarter instead of a 13-week quarter. And with the Afghan re-compete now done and really strong top line at least here in the June quarter, just wanted to – but you are leaving your top line intact. Just wanted to get a little more color, we’re just being a little bit more conservative here, but the top line outlook than we were before in terms of guidance, or has there been a slip relative some piece of the business we should be looking at ?

Bill Ballhaus

That’s a great question. I’ll take that one. There haven’t been any slips or downward aspects of the business. I think there are a number of program areas that we are watching very closely over the next quarter -- quarter to two quarters. First of all – and there is five areas. First of all, INSCOM, the ramp-up on that program and our success in driving towards the authorized number of linguists, which is around 9,200. We are going to watch our progress on that very carefully over the next quarter. Second area is Afghan construction. We have a number of bids -- and this is a new area for us. We have a number of bids that are submitted, that represent about $400 million worth of work that we are waiting on notification from the Army Corp of Engineers. The third area is CIVPOL. We talked where we’ve been awarded. We are just keeping an eye on that program to see what kind of growth potential or add-ons to our work in Iraq and Afghanistan materialize over the next one to two quarters. And then two programs, CFT and LOGCAP, where we expect to get little bit more clarification over the next quarter uncertainty around timing of task orders and how new task orders will be committed in particular on a CFT program. So in over the next one to two quarters, we think in those five areas we’ll get a lot more clarity around what the future holds.

Joseph Vafi – Jefferies & Company

Okay. So – right, it sounds like – but just a lot of edging and a lot of decisions, are there kind of imminent here even though you had a strong quarter here, we are just kind of waiting to make sure things fall into place or if did anything else--?

Bill Ballhaus

I think that’s fair. We have a big chunk of our revenue for the year that lines up with the mid-range of the guidance. That’s very certain. And then we have some moving parts tied to those five program areas that I mentioned. And over the next quarter to two quarters, we expect to get clarification in each of those areas.

Joseph Vafi – Jefferies & Company

Okay, that’s helpful. And then just a little bit more on INSCOM? I think I heard a $600 million revenue quarter and that was still trending higher. Maybe just a little bit more color? Is the contract going to hit full run rate here in the September quarter, what rate would that be at? And then secondly, how are the margins progressing on the contracts so far?

Bill Ballhaus

I’ll talk about the run rate and then I’ll let – I’ll ask Mike talk about the margins. We are really happy with, first of all, the transition that the team made on the program. The big program with close to 8,500 folks on the program and to transition that many folks has cleanly and successfully as a team did over a 60-day period I think is pretty impressive. At rate, the program will be somewhere between $50 million and $60 million a month. We did just north of $100 million in the first quarter. So we are expecting as we grow towards the 9,200 authorized level, we expect to see a little bit more growth in revenue in Q2 over Q1 and then full growth that we flatten in the third and fourth quarter. And I’ll turn it over to Mike and have him provide some color on the margins.

Mike Thorne

Okay. Thanks, Bill. And just to be clear, Joe, the $600 million is our estimate for the full year, that wasn’t for the quarter. I’m not sure that came across clearly. But anyway, in terms of margins at the moment – remember, as a reminder, this is a cost plus award fee contract with a 1.5% base fee and 6% award fee. Since we’ve just started and we haven’t had any award fee announcements yet, all we book for Q1 and all we expect to book during Q2 is the base fee, the 1.5%. Once we start getting award fees, there will be sort of a catch-up, if you will, and then we’ll book award fees based on how it’s been running going forward. So to answer your question, the fee is fairly low at the moment at the 1.5% and our assumption is we won’t be able to book any award fee until the third quarter, though it’s possible that could occur during Q2. We’ll just have to see how that plays out. We just don’t have any prior experience with this customer in terms of how quickly they do that. The first award fee period ended in June. So hopefully we’ll get something in Q2, but different customers do that on different timelines.

Joseph Vafi – Jefferies & Company

Okay, that’s helpful. And then I guest that the award fees – I mean, I think there is a little bit of uncertainty on timing, but has the award fees generally then included in the way you came up with your guidance in terms of earnings?

Mike Thorne

Yes. In terms of full year guidance, we assume there would definitely be award fees for the year.

Joseph Vafi – Jefferies & Company

Okay. And then just one final question on the Afghan CIVPOL re-compete, it sounded earlier as if there was some – maybe this might have been a higher risk re-compete for you. Is it a state one to maybe spread some of this capability out to other vendors? Was this some – will you kind of call this little bit of an upside surprise relative to the decision that was done there?

Mike Thorne

Well, I’ll give you my comments and Bill may want to expand on it, Joe. I don’t know if I’d call it a surprise, but we were very pleased with the award, and I think it’s a reflection of the good performance we’ve been giving them on the program and giving a very fair price. So I think it reinforces the focus we have on performance and execution and how in this business that is a real key to winning your re-compete and winning new businesses that your customer is confident in your performance, that they are going to get what they ask for in terms of the quality service.

Bill Ballhaus

Yes, I would reiterate it – and what Mike said. We are very pleased with the award. There was some discussion around political pressures to try and diversify the contractor base on the contract in Afghanistan, but we’ve been performing well. And that’s really reflected in the relationships that we have with the customer both here and DC and in country, not only with state, but the DoD leaders in country as well as administrative interiors. So I think we -- we’ve been performing well. We have a very solid team that we put on the program and put in front of the customers during the awards and during the proposal period. I think we delivered a very competitive offering and we are very pleased with the result.

Joseph Vafi – Jefferies & Company

All right. Thank you very much.

Operator

Thank you. (Operator instructions) Your next question comes from the line of Noah Papanek [ph] with Goldman Sachs.

Noah Papanek – Goldman Sachs

Hi, good morning.

Bill Ballhaus

Good morning, Noah.

Mike Thorne

Good morning.

Noah Papanek – Goldman Sachs

Can you tell me what the MRAP contribution was in the quarter?

Mike Thorne

MRAP, I can – just a second. MRAP for the quarter was about $12 million revenue.

Noah Papanek – Goldman Sachs

Okay. And you gave the $80 million for FY ’09 on that program, any idea what you expect that to do in 2010 even if it’s just directionally?

Mike Thorne

I really – that would be just a guess at this point I think. No, I mean, I don’t see any reason it would drop off at this point, but I don’t think we really have much clarity going out that far.

Noah Papanek – Goldman Sachs

Fair enough. Question on the LOGCAP program, we have this new law from the end of May where contractors are allowed to protest task orders and we saw a lot of protest activity on this program to date. So just wondering what your expectation is there, how you are planning on handling that, and whether or not you expect that to occur?

Mike Thorne

Yes. I mean, I think it’s obviously way too soon to tell. We had a question earlier about the trend to more IDIQ contracts, we have a lot of those. And as you mentioned that with the change in law, people can protest task order awards. We haven’t seen any yet where people have protested awards to us nor have we protested any task order awards to another company. So how that’s going to play out, I think it’s really just too soon to tell. It’s definitely a change. We’ll have to see what the impact is because it could slow things down, but we’ll just have to see what happens.

Noah Papanek – Goldman Sachs

Okay. And also on LOGCAP, I think you previously said you expect the split to be about 40, 40, 30, with you guys being one of the 40 pieces. And I’m just wondering if you could update your expectations with regard to that.

Mike Thorne

No, I think you may be thinking about – we have two team mates – two partners on the LOGCAP program that we are splitting the profits 40, 40, 30 as well as the funding for the program. I don’t think we ever thought we’d get 40% of the work under the LOGCAP contract.

Noah Papanek – Goldman Sachs

Can you say how much you think you would get?

Mike Thorne

No, I mean, I don’t – one way we’ve looked at it, it’s hard to predict until you start seeing what happens in the task orders. But obviously there are three competitors. So our goal would be to get our fair share of it, but I think realistically at least in the first years, the incumbent is probably going to get more than their fair share. So I think a reasonable goal would be to get 25% of it. The logic being the incumbent keeps half, and the other two competitors split the other half. But I’d call that more of a call than an expectation at this point having not seen the first task order yet.

Noah Papanek – Goldman Sachs

Okay, that makes sense. And then just one quick question on the cash, you had previously given a full year expectation of flat to $25 million. If you could just update us on that? And maybe – I think you’ve previously given a June target of having the Department of State problem fixed. And it sounds like maybe that’s taking longer than expected. So if you could just update on a time frame in which you expect that problem to be fixed?

Mike Thorne

Sure. For the full year, at this point we are still sticking with kind of the flat to $25 million range in terms of cash flow from operations just again due to the working capital ramp-up driven by the INSCOM as well as other growth. You’re right. We thought we have things in better shape than we did at the end of Q1. That was definitely a disappointment to us. But as we mentioned, we’ve put some actions in place and we really – I feel good that we’ll have that back on track by the end of Q2. I don’t know what else to say other than it’s a frustrating situation, but I can assure you it has the utmost attention from both myself and from Bill. As I mentioned, we have about a two-hour call every Friday afternoon where we go through down to the invoice-by-invoice level to make sure we are getting them submitted where they are in the approval process et cetera. And I think we are going to see the results of that by the end of our second quarter.

Noah Papanek – Goldman Sachs

Okay, thanks a lot.

Bill Ballhaus

I’ll just add to that. From our standpoint, we are doing everything that we can to make sure that our part of the process is clean and our house is in order, and we get our invoices submitted on time. There is clean and they absolutely convey to facilitate the Department of State paying us. It’s a pretty intense focused effort that cuts across our enterprise around the globe. And as Mike said, every Friday we’re spending about two hours with all of the finance folks and program managers going through invoice-by-invoice to make sure we know exactly where we are, and we are driving to get those invoices on time so that we can collect cash. And that takes a little bit of time for the improvements and the benefits to work their way through the system. But we are pretty confident that we’ll improvements as we go through the second quarter.

Noah Papanek – Goldman Sachs

Thanks.

Operator

Thank you. Now I’d like to turn the call back over to the CEO, Bill Ballhaus, for any closing remarks.

Bill Ballhaus

Well, Sandral, thank you very much for your help today. We’d like to thank everyone on the call for your participation and your interest. We certainly appreciate it. And I want to thank you on behalf of the DynCorp International and its employees worldwide for joining us this morning. This concludes our first quarter conference call. Thank you very much.

Operator

Thank you, ladies and gentlemen. This does conclude today’s DynCorp International first quarter fiscal 2009 earnings conference call. You may now disconnect.

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Source: DynCorp International Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript
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