UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                  

Commission File Number: 001-32869

DYNCORP INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		01-0824791 (I.R.S. Employer Identification No.)

3190 Fairview Park Drive, Suite 700, Falls Church, Virginia 22042
(571) 722-0210
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of February 4, 2010, the registrant had 56,285,726 shares of its Class A common stock outstanding.

 

 

DYNCORP INTERNATIONAL INC.
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Forward-Looking Statements
Item 1. Financial Statements
Unaudited Consolidated Statements of Income—Three Months Ended January 1, 2010 and January 2, 2009			3
Unaudited Consolidated Statements of Income—Nine Months Ended January 1, 2010 and January 2, 2009			4
Unaudited Consolidated Balance Sheets—January 1, 2010 and April 3, 2009			5
Unaudited Consolidated Statements of Cash Flows—Nine Months Ended January 1, 2010 and January 2, 2009			6
Unaudited Consolidated Statements of Shareholders’ Equity—Nine Months Ended January 1, 2010 and January 2, 2009			7
Notes to Consolidated Financial Statements (unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION
Item 1. Legal Matters			44
Item 1A. Risk Factors			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			45
Item 6. Exhibits			45
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Disclosure Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements, written, oral or otherwise made, represent our expectation or belief concerning future events. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog, estimated remaining contract values and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental or internal and technological factors that could cause our business, strategy or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following: the future impact of acquisitions, joint ventures or teaming agreements; our substantial level of indebtedness; the outcome of any material litigation, government investigation or other regulatory matters; policy and/or spending changes implemented by the Obama administration; termination or modification of key U.S. government contracts; changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the Civilian Police, International Narcotics and Law Enforcement, Worldwide Personnel Protection Services (“WPPS”) and Logistics Civil Augmentation Program (“LOGCAP IV”) contracts; pursuit of new commercial business in the U.S. and abroad; activities of competitors; bid protests; changes in significant operating expenses; changes in availability of or cost of capital; general political, economic and business conditions in the United States (“U.S.”); acts of war or terrorist activities; variations in performance of financial markets; the inherent difficulties of estimating future contract revenue; changes in anticipated revenue from indefinite delivery, indefinite quantity contracts; changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts; and statements covering our business strategy, those described in “Risk Factors” and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission (“SEC”). Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore there can be no assurance that any forward-looking statement contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

DYNCORP INTERNATIONAL INC.

		For the Three Months Ended
		January 1, 2010				January 2, 2009
Revenue		$	914,970			$	792,327
Cost of services			(822,700	)			(704,210	)
Selling, general and administrative expenses			(32,350	)			(26,505	)
Depreciation and amortization expense			(10,530	)			(10,029	)
Operating income			49,390				51,583
Interest expense			(13,655	)			(15,322	)
Earnings from affiliates			1,278				1,319
Interest income			67				730
Other income (loss), net			285				(856	)
Income before income taxes			37,365				37,454
Provision for income taxes			(10,493	)			(11,639	)
Net income			26,872				25,815
Noncontrolling interests			(6,444	)			(6,062	)
Net income attributable to DynCorp International Inc.		$	20,428			$	19,753
Basic earnings per share		$	0.36			$	0.35
Diluted earnings per share		$	0.36			$	0.34

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		For the Nine Months Ended
		January 1, 2010				January 2, 2009
Revenue		$	2,521,519			$	2,288,272
Cost of services			(2,249,072	)			(2,039,118	)
Selling, general and administrative expenses			(87,092	)			(80,350	)
Depreciation and amortization expense			(30,913	)			(30,594	)
Operating income			154,442				138,210
Interest expense			(41,956	)			(44,442	)
Loss on early extinguishment of debt			(146	)			(4,443	)
Earnings from affiliates			3,859				3,959
Interest income			509				1,751
Other income, net			44				809
Income before income taxes			116,752				95,844
Provision for income taxes			(36,421	)			(30,086	)
Net income			80,331				65,758
Noncontrolling interests			(18,703	)			(15,154	)
Net income attributable to DynCorp International Inc.		$	61,628			$	50,604
Basic earnings per share		$	1.10			$	0.89
Diluted earnings per share		$	1.09			$	0.88

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		As of
		January 1, 2010				April 3, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	67,082			$	200,222
Restricted cash			24,490				5,935
Accounts receivable, net of allowances of $74 and $68, respectively			781,047				564,432
Prepaid expenses and other current assets			108,631				124,214
Total current assets			981,250				894,803
Property and equipment, net			54,518				18,338
Goodwill			448,356				420,180
Tradename			18,683				18,318
Other intangibles, net			127,973				142,719
Deferred income taxes			3,348				12,788
Other assets, net			32,378				32,068
Total assets		$	1,666,506			$	1,539,214
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	29,137			$	30,540
Accounts payable			284,178				160,419
Accrued payroll and employee costs			121,825				137,993
Deferred income taxes			12,210				8,278
Other accrued liabilities			112,080				111,590
Income taxes payable			4,408				5,986
Total current liabilities			563,838				454,806
Long-term debt, less current portion			522,949				569,372
Other long-term liabilities			11,633				6,779
Total liabilities			1,098,420				1,030,957
Commitments and contingencies			—				—
Shareholders’ equity:
Common stock, $0.01 par value - 232,000,000 shares authorized; 57,000,000 shares issued and 56,285,726 and 56,306,800 shares outstanding, respectively			570				570
Additional paid in capital			367,228				366,620
Retained earnings			205,001				143,373
Treasury shares, 714,274 shares and 693,200 shares, respectively			(8,948	)			(8,618	)
Accumulated other comprehensive loss			(2,090	)			(4,424	)
Total shareholders’ equity attributable to DynCorp International Inc.			561,761				497,521
Noncontrolling interests			6,325				10,736
Total equity			568,086				508,257
Total liabilities and shareholders’ equity		$	1,666,506			$	1,539,214

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		For the Nine Months Ended
		January 1, 2010				January 2, 2009
Cash flows from operating activities
Net income		$	80,331			$	65,758
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			31,736				31,388
Amortization of deferred loan costs			2,931				2,696
Loss on early extinguishment of debt			146				4,443
Recovery for losses on accounts receivable			(12	)			(283	)
Equity based compensation			2,536				2,385
Loss on disposition of assets, net			(34	)			—
Earnings from affiliates			(3,859	)			(3,959	)
Distributions from affiliates			1,725				2,439
Deferred income taxes			12,860				32,193
Other			33				(772	)
Changes in assets and liabilities:
Restricted cash			(18,555	)			8,429
Accounts receivable			(208,696	)			(121,329	)
Prepaid expenses and other assets			12,775				(20,711	)
Accounts payable and accrued liabilities			105,354				68,957
Income taxes payable			( 3,692	)			(1,439	)
Net cash provided by operating activities			15,579				70,195
Cash flows from investing activities
Cash paid for acquisition, net of cash acquired			(37,905	)			—
Purchase of property and equipment			(37,830	)			(3,407	)
Purchase of computer software			(1,615	)			(1,634	)
Change in cash restricted as collateral on letters of credit			—				(15,160	)
Other investing activities			60				(1,869	)
Net cash (used in) investing activities			(77,290	)			(22,070	)
Cash flows from financing activities
Borrowings on long-term debt			51,500				323,751
Payments on long-term debt			(100,126	)			(301,129	)
Purchases of treasury stock			(712	)			—
Borrowings under other financing arrangements			—				4,299
Payments of deferred financing cost			13				(9,834	)
Payments of dividends to noncontrolling interests			(22,067	)			—
Other financing activities			(37	)			(11	)
Net cash (used in) provided by financing activities			(71,429	)			17,076
Net (decrease) increase in cash and cash equivalents			(133,140	)			65,201
Cash and cash equivalents, beginning of period			200,222				85,379
Cash and cash equivalents, end of period		$	67,082			$	150,580
Income taxes paid, net of refunds		$	18,409			$	18,622
Interest paid		$	31,103			$	34,354
Non-cash investing activities		$	—			$	8,296
Non-cash dividends		$	1,047			$	—

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

For the nine months ended January 2, 2009
(Dollars and shares in thousands)

																						Other				Total Shareholders
																						Accumulated				Equity Attributable
										Additional Paid				Retained				Treasury				Comprehensive				to DynCorp				Noncontrolling				Total
		Common Stock								in Capital				Earnings				Shares				Income (Loss)				International lnc.				Interests				Equity
Balance at March 28, 2008			57,000			$	570			$	357,026			$	73,603			$	—			$	(6,914	)		$	424,285			$	—			$	424,285
Comprehensive income (loss):
Net income											—				65,758				—				—				65,758				—				65,758
Interest rate swap, net of tax											—				—				—				1,710				1,710				—				1,710
Currency translation adjustment, net of tax											—				—				—				(634	)			(634	)			—				(634	)
Comprehensive income											—				65,758				—				1,076				66,834				—				66,834
Noncontrolling interests											—				(15,154	)			—				—				(15,154	)			—				(15,154	)
Comprehensive income attributable to DynCorp International Inc.											—				50,604				—				1,076				51,680				—				51,680
Net Income and comprehensive income attributable to noncontrolling interests											—				—				—				—				—				15,154				15,154
Equity-based compensation											575				—				—				—				575				—				575
Tax benefit associated with equity-based compensation											(10	)			—				—				—				(10	)			—				(10	)
Sale of noncontrolling interests of DIFZ											8,190				—				—				—				8,190				—				8,190
DIFZ financing, net of tax											106				—				—				—				106				—				106
Dividends paid to noncontrolling interests											—				—				—				—				—				(3,306	)			(3,306	)
Balance at January 2, 2009			57,000			$	570			$	365,887			$	124,207			$	—			$	(5,838	)		$	484,826			$	11,848			$	496,674

For the nine months ended January 1, 2010
(Dollars and shares in thousands)

																										Total Shareholders
																						Accumulated				Equity Attributable
										Additional Paid				Retained				Treasury				Comprehensive				to DynCorp				Noncontrolling				Total
		Common Stock								in Capital				Earnings				Shares				Income (Loss)				International lnc.				Interests				Equity
Balance at April 3, 2009			56,307			$	570			$	366,620			$	143,373			$	(8,618	)		$	(4,424	)		$	497,521			$	10,736			$	508,257
Comprehensive income (loss):
Net income											—				80,331				—				—				80,331				—				80,331
Interest rate swap, net of tax											—				—				—				1,985				1,985				—				1,985
Currency translation adjustment, net of tax											—				—				—				349				349				—				349
Comprehensive income											—				80,331				—				2,334				82,665				—				82,665
Noncontrolling interests											—				(18,703	)			—				—				(18,703	)			—				(18,703	)
Comprehensive income attributable to DynCorp International Inc.											—				61,628				—				2,334				63,962				—				63,962
Net Income and comprehensive income attributable to noncontrolling interests											—				—				—				—				—				18,703				18,703
DIFZ financing, net of tax											298				—				—				—				298				—				298
Treasury shares repurchases			(21	)			—				—				—				(712	)			—				(712	)			—				(712	)
Treasury Shares issued to settle RSU liability											90				—				382				—				472				—				472
Equity-based compensation											257				—				—				—				257				—				257
Tax benefit associated with equity-based compensation											(37	)			—				—				—				(37	)			—				(37	)
Dividends declared to noncontrolling interests															—				—				—				—				(23,114	)			(23,114	)
Balance at January 1, 2010			56,286			$	570			$	367,228			$	205,001			$	(8,948	)		$	(2,090	)		$	561,761			$	6,325			$	568,086

See notes to consolidated financial statements

DYNCORP INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Basis of Presentation and Accounting Policies

Basis of Presentation

DynCorp International Inc., through its subsidiaries, is a leading provider of specialized, mission-critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments. Our specific global expertise is in law enforcement training and support, security services, base and logistics operations, construction management, aviation services and operations and linguist services. References herein to “DynCorp International”, the “Company”, “we”, “our”, or “us” refer to DynCorp International Inc. and its subsidiaries unless otherwise stated or indicated by the context.

The consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These consolidated financial statements have been prepared, without audit, pursuant to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s fiscal 2009 Annual Report on Form 10-K, filed with the SEC on June 11, 2009.

We report our results on a 52/53 week fiscal year with the fiscal year ending on the Friday closest to March 31 of such year (April 2, 2010 for fiscal year 2010 which is a 52 week fiscal year). The three months ended January 1, 2010 was a 13-week period from October 3, 2009 to January 1, 2010. The three months ended January 2, 2009 was a 13-week period from October 4, 2008 to January 2, 2009. The nine months ended January 1, 2010 was a 39-week period from April 4, 2009 to January 1, 2010. The nine months ended January 2, 2009 was a 40-week period from March 29, 2008 to January 2, 2009.

In the opinion of management, all adjustments necessary to fairly present our financial position at January 1, 2010 and April 3, 2009, the results of operations for the three and nine months ended January 1, 2010 and January 2, 2009, and cash flows for the nine months ended January 1, 2010 and January 2, 2009, have been included. The results of operations for the three months and the nine months ended January 1, 2010 are not necessarily indicative of the results to be expected for the full fiscal year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. However, actual results could differ from the estimates.

As a result of the implementation of the noncontrolling interest rules in accordance with the Financial Accounting Standards Board Codification (“ASC”) 810 — Consolidation, certain prior year amounts have been reclassified to conform to the current year presentation. This includes moving the $10.7 million noncontrolling interests balance (previously “minority interest”) as of April 3, 2009 out of the mezzanine section of the balance sheet and into the equity section. Such reclassifications have no impact on previously reported net income attributable to DynCorp International Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Generally, investments in which we own a 20% to 50% ownership interest are accounted for by the equity method. These investments are in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies and are not the primary beneficiary as defined in ASC 810 — Consolidation. We have no investments in business entities of less than 20%.

We have ownership interests in three active joint ventures that are not consolidated into our financial statements as of January 1, 2010, and are accounted for using the equity method. Economic rights in active joint ventures are indicated by the ownership percentages in the table listed below.

Contingency Response Services LLC			45.0	%
Babcock DynCorp Limited			44.0	%
Partnership for Temporary Housing LLC			40.0	%

The following table sets forth our ownership in joint ventures that are consolidated into our financial statements as of January 1, 2010. For the entities listed below, we are the primary beneficiary as defined in ASC 810 — Consolidation.

Global Linguist Solutions LLC			51.0	%
DynCorp International FZ-LLC			50.0	%

Noncontrolling Interests

We hold various ownership interests in a number of joint ventures as disclosed in Note 1 to our fiscal 2009 Annual Report on Form 10-K filed with the SEC on June 11, 2009. We are required by GAAP to consolidate certain joint ventures for which we do not hold a 100% interest. We record the impact of our joint venture partners’ interests in these consolidated joint ventures as noncontrolling interests. Noncontrolling interests is presented on the face of the income statement as an increase or reduction in arriving at net income attributable to DynCorp International Inc. Noncontrolling interests on the balance sheet is located in the equity section.

Restricted Cash

Restricted cash represents cash restricted by certain contracts in which advance payments are not available for use except to pay specified costs and vendors for work performed on the specific contract and cash restricted and invested as collateral as required by our letters of credit. Changes in restricted cash related to our contracts are included as operating activities whereas changes in restricted cash for funds invested as collateral are included as investing activities in the consolidated statements of cash flows.

Property and Equipment

Depreciation expense was $0.9 million and $0.8 million for the three months ended January 1, 2010 and January 2, 2009, including certain depreciation amounts classified as Cost of services. Depreciation expense was $2.9 million and $2.3 million for the nine months ended January 1, 2010 and January 2, 2009, respectively, including certain depreciation amounts classified as Cost of services. Accumulated depreciation was $10.1 million and $8.6 million at January 1, 2010 and April 3, 2009, respectively.

Accounting Policies

There have been no material changes to our other significant accounting policies not disclosed above.

Accounting Developments

Pronouncements Implemented

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin No. 51. Certain portions of this statement were incorporated into the Accounting Standards Codifications (“ASC”) 810 — Consolidation. ASC 810 covers several areas including (i) defining the way the noncontrolling interests should be presented in the financial statements and notes, (ii) clarifying that all transactions between a parent and subsidiary are to be accounted for as equity transactions if the parent retains its controlling financial interest in the subsidiary and (iii) requiring that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We adopted this statement in the first quarter of fiscal year 2010, which changed our presentation of noncontrolling interests on our consolidated statements of income, consolidated balance sheets, consolidated statements of cash flows and consolidated statements of shareholders’ equity. We have applied the newly codified noncontrolling interest rules in ASC 810 retrospectively to the presentation of our balance sheets, statements of income, statements of cash flows and statements of equity.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). This statement replaces FASB Statement No. 141, “Business Combinations.” Certain portions of this statement were incorporated into the ASC 805 — Business Combinations. This topic area retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Additionally, ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. Furthermore, ASC 805 also requires acquisition related costs to be expensed as incurred. ASC 805 was adopted in the first quarter of fiscal year 2010.

In December 2007, the FASB ratified EITF 07-1, “Accounting for Collaborative Arrangements”. Certain portions of this statement were incorporated into the ASC 808 — Collaborative Arrangements. ASC 808 provides guidance for determining if a collaborative arrangement exists and establishes procedures for reporting revenue and costs generated from transactions with third parties, as well as between the parties within the collaborative arrangement, and provides guidance for financial statement disclosures of collaborative arrangements. ASC 808 became effective for us in the first quarter of fiscal year 2010. The adoption of ASC 808 did not have a material effect on our consolidated financial position or results of operations. We have included additional disclosure on a collaborative arrangement in Note 12.

In April 2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). Certain portions of this statement were incorporated into both ASC 350 — Intangibles as well as ASC 275 — Risks and Uncertainties. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The applicable portions of the ASC are effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We have applied the newly codified rules for any applicable events and transactions in fiscal year 2010.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Certain portions of this statement were incorporated into ASC — 260 Earnings Per Share. The codification provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of the newly codified rules in ASC 260 did not have a material impact on basic or diluted earnings per share.

In April 2009, the FASB issued FSP FAS 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-1”). Certain portions of this statement were incorporated into ASC 805 — Business Combinations. This clarifies guidance pertaining to contingencies. The updated guidance states that an acquirer shall recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of an asset acquired or a liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, an asset or a liability shall be recognized at the acquisition date if both of the following criteria are met which are (i) information available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. We adopted this recently codified guidance in ASC 805 in connection with our acquisition of Phoenix Consulting Group, Inc. (“Phoenix”), as further described in Note 15.

In May 2009, the FASB issued Statement of Financial Standards No. 165 “Subsequent Events (as amended)” (“SFAS No. 165”), which provides guidance on management’s assessment of subsequent events. Certain portions of this statement were incorporated into the ASC — 855 Subsequent Events. The new guidance clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. Management must perform its assessment for both interim and annual financial reporting periods. ASC 855 requires management to disclose, in addition to the disclosures in the American Institute of Certified Public Accountants Auditing Standards (“AU”) 560, the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued or were available to be issued. ASC 855 is effective prospectively for interim or annual financial periods ending after June 15, 2009. We have adopted this guidance through enhanced disclosures for any applicable events and transactions as further described in Note 16.

In June 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”). Certain portions of this statement were incorporated into ASC 105 — Generally Accepted Accounting Principles. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. ASC 105 replaced SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”), and establishes only two levels of GAAP, authoritative and non-authoritative. The codification is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the codification became non-authoritative. As the codification was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.

Pronouncements Not Yet Implemented

In June 2009, the FASB issued Statement of Financial Standards No. 167, “Amendments to FASB Interpretation 46(R)” (“SFAS No. 167”) SFAS No. 167 was converted to Accounting Standards Update (“ASU”) 17 (“ASU-17”) and has been incorporated into ASC 810 — Consolidation once effective. This statement amends the guidance for (i) determining whether an entity is a variable interest entity (“VIE”), (ii) the determination of the primary beneficiary of a variable interest entity, (iii) requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and (iv) changes the disclosure requirements in FIN 46(R)-8. This statement is effective as of our first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. We are currently evaluating the potential impact of the adoption of this new guidance to our financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-013, “Revenue Recognition Multiple-Deliverable Revenue Arrangements” (“ASU-13”). This update (i) removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, (ii) replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the Fair Value Measurements and Disclosures guidance, (iii) provides a hierarchy that entities must use to estimate the selling price, (iv) eliminates the use of the residual method for allocation, and (v) expands the ongoing disclosure requirements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. Management is currently evaluating the effect that adoption of this update will have on the company’s consolidated financial position and results of operations.

Note 2—Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents during each period.

As discussed in Note 1, we adopted ASC 260 during fiscal year 2010. Under ASC 260, common stock equivalents that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and, therefore, are included in the computation of basic earnings per share pursuant to the two-class method. As of January 1, 2010, we did not have any common stock equivalents that contained non-forfeitable rights to dividends or dividend equivalents.

As of the period ended January 1, 2010, our only common stock equivalents were restricted stock units (“RSUs”) and performance stock units (“PSUs”). Our RSUs and PSUs may be dilutive and included in diluted earnings per share calculations or anti-dilutive and excluded from such calculations. For the periods ended January 1, 2010 and January 2, 2009, we had no anti-dilutive units. The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share:

		For the Three Months Ended								For the Nine Months Ended
(Amounts in thousands, except per share data)		January 1, 2010				January 2, 2009				January 1, 2010				January 2, 2009
Numerator
Net income attributable to DynCorp International Inc.		$	20,428			$	19,753			$	61,628			$	50,604
Denominator
Weighted average common shares — basic			56,275				57,000				56,267				57,000
Weighted average affect of dilutive securities:
Restricted and performance stock units			226				437				169				324
Weighted average common shares-diluted			56,501				57,437				56,436				57,324
Basic earnings per share		$	0.36			$	0.35			$	1.10			$	0.89
Diluted earnings per share		$	0.36			$	0.34			$	1.09			$	0.88

Note 3—Goodwill and Other Intangible Assets

As announced on April 6, 2009, we changed from reporting financial results on the three segments utilized in fiscal year 2009 to reporting three new segments beginning with fiscal year 2010. The three prior operating segments were International Security Services (“ISS”), Logistics and Construction Management (“LCM”) and Maintenance and Technical Support (“MTSS”). Under the new organizational alignment, our three segments are Global Stabilization and Development Solutions (“GSDS”), Global Platform Support Solutions (“GPSS”) and Global Linguist Solutions (“GLS”).

The goodwill carrying value was reallocated to the three new operating segments using a relative fair value approach based on the new reporting unit structure. The GLS segment has no goodwill carrying value as this distinct service line came into existence after the legacy goodwill carrying value was established. The change in presentation of our goodwill balance by operating segment from April 3, 2009 to January 1, 2010 is included in the following table as well as additional goodwill obtained as a result of the acquisition of Phoenix. See Note 15 for additional information regarding the Phoenix acquisition.

(Dollars in thousands)		LCM/GSDS				ISS/GLS				MTSS/GPSS				Total
Goodwill balance as of April 3, 2009		$	39,935			$	300,094			$	80,151			$	420,180
Reallocation of goodwill			169,138				(300,094	)			130,956				—
Phoenix acquisition			28,176				—				—				28,176
Goodwill balance as of January 1, 2010		$	237,249			$	—			$	211,107			$	448,356

All of the contracts that made up the ISS and LCM operating segments were realigned into the GSDS operating segment except for GLS, which became a unique operating segment and the Specialty Aviation & Counter Drug strategic business area (“SBA”), which was realigned into the GPSS operating segment. In addition to the Specialty Aviation & Counter Drug SBA, all legacy MTSS programs were realigned into the GPSS operating segment.

The following tables provide information about changes relating to intangible assets:

		January 1, 2010
		Weighted
		Average
		Useful Life				Gross				Accumulated
(Amounts in thousands, except years)		(Years)				Carrying Value				Amortization				Net
Other intangibles, net
Finite lived intangible assets:
Customer related intangible assets			8.5			$	293,544			$	(181,171	)		$	112,373
Other			6.6				26,110				(10,510	)			15,600
						$	319,654			$	(191,681	)		$	127,973
Tradename
Finite lived intangible assets Tradename — Phoenix			5.0			$	381			$	(16	)		$	365
Indefinite lived intangible assets — Tradename			—				18,318				—				18,318
						$	18,699			$	(16	)		$	18,683

		April 3, 2009
		Weighted
		Average
		Useful Life				Gross Carrying				Accumulated
(Amounts in thousands, except years)		(Years)				Value				Amortization				Net
Other intangibles, net
Finite lived intangible assets:
Customer related intangible assets			8.5			$	290,716			$	(155,142	)		$	135,574
Other			5.5				15,351				(8,206	)			7,145
						$	306,067			$	(163,348	)		$	142,719
Tradename
Indefinite lived intangible assets — Tradename			—			$	18,318			$	—			$	18,318

Amortization expense for customer related and other intangibles was $9.8 million and $9.5 million for the three months ended January 1, 2010 and January 2, 2009, and $28.8 million and $29.1 million for the nine months ended January 1, 2010 and January 2, 2009, respectively.

The following schedule outlines an estimate of future amortization based upon the finite-lived intangible assets owned at January 1, 2010:

		Amortization
(Amounts in thousands)		Expense
Three month period ending April 2, 2010		$	9,879
Estimate for fiscal year 2011			35,644
Estimate for fiscal year 2012			24,857
Estimate for fiscal year 2013			20,971
Estimate for fiscal year 2014			9,605
Thereafter			27,382
Total		$	128,338

Note 4— Income Taxes

The provision for income taxes consists of the following:

		Three Months Ended
(Amounts in thousands)		January 1, 2010				January 2, 2009
Current portion:
Federal		$	9,292			$	(27,825	)
State			781				(1,397	)
Foreign			1,100				1,046
			11,173				(28,176	)
Deferred portion:
Federal			(687	)			38,586
State			(23	)			1,290
Foreign			30				(61	)
			(680	)			39,815
Provision for income taxes		$	10,493			$	11,639

		Nine Months Ended
(Amounts in thousands)		January 1, 2010				January 2, 2009
Current portion:
Federal		$	17,800			$	(7,217	)
State			1,850				253
Foreign			3,911				4,857
			23,561				(2,107	)
Deferred portion:
Federal			12,417				31,218
State			416				1,044
Foreign			27				(69	)
			12,860				32,193
Provision for income taxes		$	36,421			$	30,086

Deferred tax assets and liabilities are reported as:

(Amounts in thousands)		January 1, 2010				April 3, 2009
Current deferred tax liabilities		$	(12,210	)		$	(8,278	)
Non-current deferred tax assets			3,348				12,788
Deferred tax (liabilities)/assets, net		$	(8,862	)		$	4,510

For the three and nine months ended January 1, 2010 our effective tax rate was 28.0% and 31.2%, respectively, as compared to 31.1% and 31.4% for the three and nine months ended January 2, 2009, respectively. The reduction in the effective tax rate below the U.S. marginal federal statutory rate of 35% was primarily due to the impact of our reduced outlook for the fiscal year combined with the impact of our consolidated joint ventures such as GLS and DIFZ. These joint ventures are consolidated for financial reporting purposes; but, are considered unconsolidated entities for U.S. income tax purposes.

As of January 1, 2010 and April 3, 2009, we have $13.0 million and $6.1 million, respectively, of total unrecognized tax benefits. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.1 million and $0.1 million for January 1, 2010 and April 3, 2009, respectively.

It is reasonably possible that in the next 12 months the gross amount of unrecognized tax benefits will increase by $0.5 million. However, we do not expect any material changes to our effective tax rate as a result.

We recognize interest accrued related to uncertain tax positions in interest expense and penalties in income tax expense in our unaudited Consolidated Statements of Income, which is consistent with the recognition of these items in prior periods. We have recorded a liability of approximately $0.7 million and $0.2 million for the payment of interest and penalties as of January 1, 2010 and April 3, 2009, respectively.

We file income tax returns in U.S. federal and state jurisdictions and in various foreign jurisdictions. The statute of limitations is open for federal and state examinations for our fiscal year 2005 forward and, with few exceptions, foreign income tax examinations for the calendar year 2005 forward.

Note 5— Accounts Receivable

Accounts receivable, net consisted of the following:

(Amounts in thousands)		January 1, 2010				April 3, 2009
Billed		$	276,095			$	220,501
Unbilled			504,952				343,931
Total		$	781,047			$	564,432

Unbilled receivables at January 1, 2010 and April 3, 2009 include $59.3 million and $30.7 million, respectively, related to costs incurred on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract, and for which formal contracts or contract modifications have not been executed at the end of the respective periods. These amounts include $5.3 million related to contract claims at January 1, 2010 and April 3, 2009. The balance of unbilled receivables consists of costs and fees billable immediately on contract completion or other specified events, the majority of which is expected to be billed and collected within one year.

Note 6—Long-Term Debt

Long-term debt consisted of the following:

(Amounts in thousands)		January 1, 2010				April 3, 2009
Term loans		$	176,637			$	200,000
9.5% Senior subordinated notes(1)			375,449				399,912
Total debt			552,086				599,912
Less current portion of long-term debt			(29,137	)			(30,540	)
Total long-term debt		$	522,949			$	569,372

For a full description of our indebtedness, see Note 7, Long-Term Debt, to the consolidated financial statements in our fiscal 2009 Annual Report on Form 10-K filed with the SEC on June 11, 2009.

Senior Secured Credit Facility

We are required, under certain circumstances as defined in our credit agreement, to use a percentage of excess cash generated from operations to reduce the outstanding principal of the term loans in the following year. Such payments are due near the end of the first quarter of the following fiscal year. We paid $23.4 million under the excess cash flow requirement in June 2009 stemming from our fiscal year 2009 results. This payment was lower than the $30.5 million estimate in our fiscal year 2009 annual report as several members of our banking syndicate waived their excess cash flow principal payment option. The excess cash flow measurement is an annual requirement of the credit agreement and, as a result, we cannot predict with certainty the excess cash flow that will be generated, if any, for the results related to the fiscal year ending April 2, 2010.

At January 1, 2010, availability under the revolving credit facility for additional borrowings was approximately $170.6 million (which gives effect to approximately $29.4 million of outstanding letters of credit, which reduced our availability by that amount). The credit agreement requires an unused line fee equal to 0.38% per annum, payable quarterly in arrears, for the unused portion of the revolving credit facility. The fair value of our borrowings under our senior secured credit facility approximates 98.8% of the carrying amount based on market quotes as of January 1, 2010.

9.5% Senior Subordinated Notes

Under the indenture, we can redeem the senior subordinated notes, in whole or in part, at defined redemption prices plus accrued interest as of the redemption date. Our Board of Directors approved a plan in fiscal year 2009, which allowed for up to $25.0 million in repurchases for a combination of common stock and/or senior subordinated notes per fiscal year during fiscal years 2009 and 2010. In June 2009, our Board of Directors added a requirement that stock repurchases could only occur if the price was less than or equal to $14.00 per share.

In the first quarter of fiscal year 2010, we purchased 54,900 shares for $0.7 million at an average price of $12.93 per share. We also repurchased $10.3 million in face value of our senior subordinated notes for $10.0 million, including applicable fees. In the second quarter of fiscal year 2010, we repurchased $14.5 million in face value of our senior subordinated notes for $14.3 million including applicable fees. The repurchases, when including the impact of the discount and deferred financing fees, produced an overall loss of $0.1 million as of the nine months ended January 1, 2010. These repurchases utilized approximately 100% of the $25.0 million, leaving no availability for additional repurchases during the current fiscal year.

The fair value of the senior subordinated notes is based on their quoted market value. As of January 1, 2010, the quoted market value of the senior subordinated notes was approximately 102.9% of stated value.

Note 7— Interest Rate Derivatives

At January 1, 2010, our derivative instruments consisted of two interest rate swap agreements. The $168.6 million derivative is designated as a cash flow hedge that effectively fixes the interest rate on the applicable notional amount of our variable rate debt. The $31.4 million swap derivative no longer qualifies for hedge accounting as it continues to be fully dedesignated as of January 1, 2010.

Fixed

Variable

Date Entered

Notional

Interest

Interest Rate

(Dollars in thousands)

Amount

Rate Paid*

Received

Expiration Date

April 2007

$

168,620

4.975

%

3-month LIBOR

May 2010

April 2007

$

31,380

4.975

%

3-month LIBOR

May 2010

During the three and nine months ended January 1, 2010, we paid $2.4 million and $6.5 million in net settlements and incurred $2.0 million of expenses, which was recorded to interest expense, and incurred $6.3 million of expenses, of which $5.8 million was recorded to interest expense and $0.5 million was recorded to other (loss)/income, respectively.

During the three and nine months ended January 2, 2009, we paid $0.9 million and $4.0 million in net settlements and incurred $1.0 million of expenses, which was recorded to interest expense, and incurred $4.0 million in expenses of which $3.6 million was recorded to interest expense and $0.4 million was recorded to other (loss)/income, respectively.

Amounts are reclassified from accumulated other comprehensive income into earnings as net cash settlements occur, changes from quarterly derivative valuations are updated, new circumstances dictate the disqualification of hedge accounting and adjustments for cumulative ineffectiveness are recorded.

The fair values of our derivative instruments and the line items on the Consolidated Balance Sheet to which they were recorded as of January 1, 2010 and April 3, 2009 are summarized as follows (in thousands):

				Fair Value at				Fair Value at
Derivatives designated as hedges under ASC 815		Balance Sheet Location		January 1, 2010				April 3, 2009
Interest rate swaps		Other accrued liabilities		$	3,341			$	5,259
Interest rate swaps		Other long-term liabilities			—				957
Total				$	3,341			$	6,216

				Fair Value at				Fair Value at
Derivatives not designated as hedges under ASC 815		Balance Sheet Location		January 1, 2010				April 3, 2009
Interest rate swaps		Other accrued liabilities		$	613			$	893
Interest rate swaps		Other long-term liabilities			—				182
Total				$	613			$	1,075
Total Derivatives				$	3,954			$	7,291

The effects of our derivative instruments on other comprehensive income (“OCI”) and our Consolidated Statements of Income for the three months ended January 1, 2010 are summarized as follows (in thousands):

Change in OCI from

Gains (Losses)

Recognized in OCI

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

on Derivatives

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

Derivatives Designated as

(Effective Portion)

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Cash Flow Hedging

Three Months ended

Line Item in Statements

Line Item in Statements

Instruments under ASC 815

January 1, 2010

of Income

Amount

of Income

Amount

Interest rate derivatives

$

1,902

Interest expense

$

(2,022

)

Other (loss)/income, net

$

—

Total

$

1,902

$

(2,022

)

$

—

The effects of our derivative instruments on OCI and our Consolidated Statements of Income for the nine months ended January 1, 2010 are summarized as follows (in thousands):

     

Change in OCI from

Gains (Losses)

Recognized in OCI

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

on Derivatives

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

Derivatives Designated as

(Effective Portion)

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Cash Flow Hedging

Nine Months ended

Line Item in Statements

Line Item in Statements

Instruments under ASC 815

January 1, 2010

of Income

Amount

of Income

Amount

Interest rate derivatives

$

3,109

Interest expense

$

(5,776

)

Other (loss)/income net

$

—

Total

$

3,109

$

(5,776

)

$

—

The effects of our derivative instruments on OCI and our Consolidated Statements of Income for the three months ended January 2, 2009 are summarized as follows (in thousands):

     

Change in OCI from

Gains (Losses)

Recognized in OCI

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

on Derivatives

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

Derivatives Designated as

(Effective Portion)

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Cash Flow Hedging

Three months ended

Line Item in Statements

Line Item in Statements

Instruments under ASC 815

January 2, 2009

of Income

Amount

of Incomes

Amount

Interest rate derivatives

$

(2,892

)

Interest expense

$

(980

)

Interest expense

$

9

Total

$

(2,892

)

$

(980

)

$

9

The effects of our derivative instruments on OCI and our Consolidated Statements of Income for the nine months ended January 2, 2009 are summarized as follows (in thousands):

Change in OCI from

Gains (Losses)

Recognized in OCI

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

on Derivatives

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

Derivatives Designated as

(Effective Portion)

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Cash Flow Hedging

Nine months ended

Line Item in Statements

Line Item in Statements

Instruments under ASC 815

January 2, 2009

of Income

Amount

of Incomes

Amount

Interest rate derivatives

$

2,679

Interest expense

$

(3,764

)

Interest expense

$

167

Total

$

2,679

$

(3,764

)

$

167

The effects of our derivative instruments not designated as hedging instruments under ASC 815 — Derivatives and Hedging on our Consolidated Statement of Income are summarized as follows (in thousands):

     

		AMOUNT OF GAIN OR (LOSS) RECOGNIZED		Three Months Ended				Three Months Ended
Derivatives not Designated		IN INCOME ON DERIVATE		January 1, 2010				January 2, 2009
as Hedging Instruments		Line Item in Statements
under ASC 815		of Income		Amount				Amount
Interest rate derivatives		Other (loss)/ income, net		$	11			$	—
Total				$	11			$	—

     

		AMOUNT OF GAIN OR (LOSS) RECOGNIZED		Nine months Ended				Nine months Ended
Derivatives not Designated		IN INCOME ON DERIVATE		January 1, 2010				January 2, 2009
as Hedging Instruments		Line Item in Statements
under ASC 815		of Income		Amount				Amount
Interest rate derivatives		Other (loss)/ income, net		$	(495	)		$	(404	)
Total				$	(495	)		$	(404	)

As of January 1, 2010, we estimate that approximately $3.1 million of losses associated with the interest rate swap related to $168.6 million of notional debt included in accumulated other comprehensive income will be reclassified into earnings over the remaining life of the derivative which expires in May 2010. The other interest rate swap does not qualify for hedge accounting and has been marked to market, which generated a $0.6 million liability at January 1, 2010. See Note 14 for fair value disclosures associated with these hedges.

Note 8—Commitments and Contingencies

Commitments

We have operating leases for the use of real estate and certain property and equipment which are non-cancelable, cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense amounted to $12.3 million and $15.1 million for the three months ended January 1, 2010 and January 2, 2009, respectively, and $37.6 million and $38.8 million for the nine months ended January 1, 2010 and January 2, 2009, respectively.

General Legal Matters

We are involved in various lawsuits and claims that have arisen in the normal course of business. In most cases, we have denied, or believe we have a basis to deny any liability. Related to these matters, we have recorded a reserve of approximately $21.1 million as of January 1, 2010. While it is not possible to predict with certainty the outcome of litigation and other matters discussed below, we believe that liabilities in excess of those recorded, if any, arising from such matters would not have a material adverse effect on our results of operations, consolidated financial condition or liquidity over the long-term.

As previously disclosed, we identified certain payments made on our behalf by two subcontractors to expedite the issuance of a limited number of visas and licenses from a foreign government’s agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. We retained outside counsel to investigate these payments. In November 2009, we voluntarily brought these matters to the attention of the U.S. Department of Justice and the SEC. We are cooperating with the government’s review of these matters. We are also continuing our evaluation of our internal policies and procedures. We cannot predict the ultimate consequences of these matters at this time, nor can we reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flow. We have not recorded any reserves with respect to these matters.

Pending litigation and claims

On May 14, 2008, a jury in the Eastern District of Virginia found against us in a case brought by a former subcontractor, Worldwide Network Services (“WWNS”), on two Department of State (“DoS”) contracts, in which WWNS alleged racial discrimination, tortuous interference and certain other claims. The jury awarded WWNS approximately $15.7 million in compensatory and punitive damages and awarded us approximately $0.2 million on a counterclaim. In addition to the jury award, the court awarded WWNS approximately $3.0 million in connection with certain contract claims. On September 22, 2008, WWNS was awarded approximately $1.8 million in attorneys’ fees. On February 2, 2009, we filed an appeal with respect to this matter. On September 22, 2009, the Court of Appeals heard oral arguments. We are awaiting the courts determination. As of January 1, 2010, we believe we have adequate reserves recorded for this matter.

On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of international law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010, 1,256 of the plaintiffs have been dismissed by court orders. The amended complaint does not demand any specific monetary damages; however, a court decision against us, although we believe to be remote, could have a material adverse effect on our results of operations and financial condition. The aerial spraying operations were and continue to be managed by us under a DoS contract in cooperation with the Colombian government. The DoS contract provides indemnification to us against third-party liabilities arising out of the contract, subject to available funding. The DoS has reimbursed us for all legal expenses to date.

A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and United States treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010, fifteen of the plaintiffs have been dismissed by court order. The terms of the DoS contract provide that the DoS will indemnify our operating company against third-party liabilities arising out of the contract, subject to available funding. The DoS has reimbursed us for all legal expenses to date. We are also entitled to indemnification by Computer Sciences Corporation in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote and that, even if that were to occur, the judgment is unlikely to result in a material adverse effect on our results of operations or financial condition as a result of the third party indemnification and apportionment of damages described above.

Arising out of the litigation described in the preceding two paragraphs, on September 22, 2008, we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. On November 9, 2009, the court granted our Partial Motion for Summary Judgment regarding the duty to defend. The carriers filed a motion for reargument, which has been fully briefed and is pending judgment. In a related action, the carriers filed a lawsuit against us on February 5, 2009, seeking rescission of certain aviation insurance policies based on an alleged misrepresentation by us concerning the existence of certain of the lawsuits relating to the eradication of narcotic plant crops. Since we filed an answer to the complaint, there has not been any significant activity.

U.S. Government Investigations

We also are occasionally the subject of investigations by various agencies of the U.S. government. Such investigations, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting.

On January 30, 2007, the Special Inspector General for Iraq Reconstruction (“SIGIR”) issued a report on one of our task orders concerning the Iraqi Police Training Program. Among other items, the report raises questions about our work to establish a residential camp in Baghdad to house training personnel. Specifically, the SIGIR report recommends that the DoS seek reimbursement of $4.2 million paid by the DoS to us for work that the SIGIR maintains was not contractually authorized. In addition, the SIGIR report recommends that the DoS request the Defense Contract Audit Agency (“DCAA”) to review two of our invoices totaling $19.1 million. On June 28, 2007, we received a letter from the DoS contracting officer requesting our repayment of approximately $4.0 million for work performed under this task order, which the letter claims was unauthorized. We responded to the DoS contracting officer in letters dated July 7, 2007 and September 4, 2007, explaining that the work for which we were paid by DoS was appropriately performed and denying DoS’ request for repayment of approximately $4.0 million. By letter dated April 30, 2008, the DoS contracting officer responded to our July 7, 2007 and September 4, 2007 correspondence by taking exception to the explanation set forth in our letters and reasserting the DoS’ request for a refund of approximately $4.0 million. On May 8, 2008, we replied to the DoS letter dated April 30, 2008 and provided additional support for our position.

On September 17, 2008, the U.S. Department of State Office of Inspector General (“OIG”) served us with a records subpoena for the production of documents relating to our Civilian Police Program in Iraq. Among other items, the subpoena seeks documents relating to our business dealings with a former subcontractor, Corporate Bank. We have been cooperating with the OIG’s investigation. In October 2009, we were notified by the Department of Justice that this investigation is being done in connection with a qui tam litigation brought by a private individual on behalf of the U.S. government. The subject matter of this litigation is still under seal; therefore, we cannot assess its effects on our operating performance.

U.S. Government Audits

Our contracts are regularly audited by the DCAA and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts.

The Defense Contract Management Agency (“DCMA”) formally notified us of non-compliance with Cost Accounting Standard 403, Allocation of Home Office Expenses to Segments, on April 11, 2007. We issued a response to the DCMA on April 26, 2007 with a proposed solution to resolve the area of non-compliance, which related to the allocation of corporate general and administrative costs between our divisions. On August 13, 2007, the DCMA notified us that additional information would be necessary to justify the proposed solution. We issued responses on September 17, 2007, April 28, 2008 and September 10, 2009 and the matter is pending resolution. Based on facts currently known, we do not believe the matters described in this and the preceding paragraph will have a material adverse effect on our results of operations or financial condition.

We are currently under audit by the Internal Revenue Service (“IRS”) for employment taxes covering the calendar years 2005 through 2007. In the course of the audit process, the IRS has questioned our treatment of exempting from U.S. employment taxes all U.S. residents working abroad for a foreign subsidiary. While we believe our treatment with respect to employment taxes, for these employees, was appropriate, a negative outcome on this matter could result in a potential liability, including penalties, of approximately $113.8 million related to these calendar years.

Contract Matters

During the first quarter of fiscal year 2009 we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Based on our experience with this particular Nigerian state government customer, we believe it is likely the customer will challenge our termination of the contract for cause and initiate legal action against us. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit is being challenged in certain instances. Although we believe our right to terminate this contract and such subcontracts was justified and permissible under the terms of the contracts, and we intend to rigorously contest any claims brought against us arising out of such terminations, if courts were to conclude that we were not entitled to terminate one or more of the contracts and damages were assessed against us, such damages could have a material adverse effect on our results of operations or financial condition.

Note 9—Equity-Based Compensation

As of January 1, 2010, we have outstanding equity-based compensation through the grant of Class B interests in DIV Holding LLC, the largest holder of our common stock and have granted restricted stock units and performance stock units under our 2007 Omnibus Incentive Plan (the “2007 Plan”). All of our equity-based compensation is accounted for under ASC 718 – Compensation-Stock Compensation. Under this method, we recorded equity-based compensation expense of $0.3 million and $1.2 million for the three months ended January 1, 2010 and January 2, 2009, respectively, and $2.5 million and $2.4 million for the nine months ended January 1, 2010 and January 2, 2009, respectively.

Class B Equity

During the nine months ended January 1, 2010, we had no new grants but had forfeiture events in both the first quarter and third quarter of fiscal year 2010. Consequently, the fiscal year to date expense recognized for Class B activity was the result of the quarterly amortization from the graded vesting schedule, partially offset by the impact of the forfeited class B interests.

A summary of Class B activity during the first nine months of fiscal year 2010 is as follows:

		% Interest in				Grant Date
		DIV Holding				Fair Value
Balance April 3, 2009			4.71	%		$	9,669
First quarter fiscal year 2010 forfeitures			(0.03	%)			(37	)
Balance July 3, 2009			4.68	%		$	9,632
Second quarter fiscal year 2010 forfeitures			—				—
Balance October 2, 2009			4.68	%		$	9,632
Third quarter fiscal year 2010 forfeitures			(0.10	%)			(318	)
Balance January 1, 2010			4.58	%		$	9,314
April 3, 2009 vested			3.69	%		$	6,950
First quarter fiscal year 2010 vesting			0.04	%			174
July 3, 2009 vested			3.73	%		$	7,124
Second quarter fiscal year 2010 vesting			0.05	%			73
October 2, 2009 vested			3.78	%		$	7,197
Third quarter fiscal year 2010 vesting			0.20	%			702
January 1, 2010 vested			3.98	%		$	7,899
April 3, 2009 nonvested			1.02	%		$	2,719
July 3, 2009 nonvested			0.95	%		$	2,508
October 2, 2009 nonvested			0.90	%		$	2,435
January 1, 2010 nonvested			0.60	%		$	1,415