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

Commission File Number: 001-32869

DYNCORP INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware		01-0824791
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 November 3, 2009, the registrant had 56,273,575 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 October 2, 2009 and October 3, 2008			3
Unaudited Consolidated Statements of Income—Six Months Ended October 2, 2009 and October 3, 2008			4
Unaudited Consolidated Balance Sheets—October 2, 2009 and April 3, 2009			5
Unaudited Consolidated Statements of Cash Flows—Six Months Ended October 2, 2009 and October 3, 2008			6
Unaudited Consolidated Statements of Shareholders’ Equity—Six Months Ended October 2, 2009 and April 3, 2009			7
Notes to Consolidated Financial Statements (unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1. Legal Matters			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. Submission of Matters to a Vote of Security Holders			41
Item 5. Other Information			42
Item 6. Exhibits			42
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 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 or internal investigation or other regulatory matter; policy and/or spending changes implemented by the Obama administration; termination of key U.S. government contracts; changes in the demand for services that we provide; 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; anticipated revenue from indefinite delivery, indefinite quantity contracts; 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
		October 2, 2009				October 3, 2008
Revenue		$	821,372			$	779,151
Cost of services			(727,279	)			(696,519	)
Selling, general and administrative expenses			(31,304	)			(25,994	)
Depreciation and amortization expense			(10,238	)			(10,005	)
Operating income			52,551				46,633
Interest expense			(13,691	)			(14,905	)
Loss on early extinguishment of debt			(162	)			(4,443	)
Earnings from affiliates			1,527				1,523
Interest income			103				677
Other (loss)/income, net			(12	)			960
Income before income taxes			40,316				30,445
Provision for income taxes			(13,301	)			(9,131	)
Net income			27,015				21,314
Noncontrolling interests			(6,460	)			(8,443	)
Net income attributable to DynCorp International Inc.		$	20,555			$	12,871
Basic and diluted earnings per share		$	0.37			$	0.23

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		For the Six Months Ended
		October 2, 2009				October 3, 2008
Revenue		$	1,606,549			$	1,495,945
Cost of services			(1,426,372	)			(1,334,908	)
Selling, general and administrative expenses			(54,742	)			(53,845	)
Depreciation and amortization expense			(20,383	)			(20,565	)
Operating income			105,052				86,627
Interest expense			(28,301	)			(29,120	)
Loss on early extinguishment of debt			(146	)			(4,443	)
Earnings from affiliates			2,581				2,640
Interest income			442				1,021
Other (loss)/income, net			(241	)			1,665
Income before income taxes			79,387				58,390
Provision for income taxes			(25,928	)			(18,447	)
Net income			53,459				39,943
Noncontrolling interests			(12,259	)			(9,092	)
Net income attributable to DynCorp International Inc.		$	41,200			$	30,851
Basic and diluted earnings per share		$	0.73			$	0.54

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		As of
		October 2, 2009				April 3, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	132,084			$	200,222
Restricted cash			15,990				5,935
Accounts receivable, net of allowances of $348 and $68, respectively			636,352				564,432
Prepaid expenses and other current assets			116,277				124,214
Total current assets			900,703				894,803
Property and equipment, net			54,166				18,338
Goodwill			420,180				420,180
Tradename			18,318				18,318
Other intangibles, net			125,377				142,719
Deferred income taxes			9,530				12,788
Other assets, net			30,177				32,068
Total assets		$	1,558,451			$	1,539,214
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	14,137			$	30,540
Accounts payable			213,699				160,419
Accrued payroll and employee costs			113,275				137,993
Deferred income taxes			14,700				8,278
Other accrued liabilities			108,390				111,590
Income taxes payable			3,843				5,986
Total current liabilities			468,044				454,806
Long-term debt, less current portion			537,887				569,372
Other long-term liabilities			6,101				6,779
Total liabilities			1,012,032				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 56,273,575 and 56,306,800 shares outstanding, respectively			570				570
Additional paid-in capital			367,225				366,620
Retained earnings			184,573				143,373
Treasury shares, 726,425 shares and 693,200 shares, respectively			(9,085	)			(8,618	)
Accumulated other comprehensive loss			(3,257	)			(4,424	)
Total shareholders’ equity attributable to DynCorp International Inc.			540,026				497,521
Noncontrolling interests			6,393				10,736
Total equity			546,419				508,257
Total liabilities and shareholders’ equity		$	1,558,451			$	1,539,214

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

		For the Six Months Ended
		October 2, 2009				October 3, 2008
Cash flows from operating activities
Net income		$	53,459			$	39,943
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			20,979				21,087
Amortization of deferred loan costs			1,969				1,723
Loss on early extinguishment of debt			146				4,443
Recovery for losses on accounts receivable			(12	)			(173	)
Equity-based compensation			2,171				1,225
Loss on disposition of assets, net			453				—
Earnings from affiliates			(2,581	)			(2,640	)
Distributions from affiliates			1,725				1,385
Deferred income taxes			13,540				(4,112	)
Other			195				(304	)
Changes in assets and liabilities:
Restricted cash			(10,055	)			7,326
Accounts receivable			(71,908	)			(64,104	)
Prepaid expenses and other current assets			7,054				(26,070	)
Accounts payable and accrued liabilities			21,519				54,096
Income taxes payable			(5,276	)			4,128
Net cash provided by operating activities			33,378				37,953
Cash flows from investing activities
Purchase of property and equipment			(34,687	)			(2,303	)
Purchase of computer software			(1,635	)			(1,212	)
Change in cash restricted as collateral on letters of credit			—				(16,568	)
Other			60				365
Net cash (used in) investing activities			(36,262	)			(19,718	)
Cash flows from financing activities
Borrowings on long-term debt			—				323,751
Payments on long-term debt			(48,626	)			(301,129	)
Purchases of treasury stock			(712	)			—
Borrowings under other financing arrangements			—				16,158
Payments of deferred financing cost			13				(9,645	)
Payments of dividends to noncontrolling interests			(15,936	)			—
Other financing activities			7				30
Net cash (used in) provided by financing activities			(65,254	)			29,165
Net (decrease) increase in cash and cash equivalents			(68,138	)			47,400
Cash and cash equivalents, beginning of period			200,222				85,379
Cash and cash equivalents, end of period		$	132,084			$	132,779
Income taxes paid, net of refunds		$	9,848			$	18,965
Interest paid		$	27,103			$	30,054
Non-cash investing activities		$	3,394			$	10,722

See notes to consolidated financial statements.

DYNCORP INTERNATIONAL INC.

UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars and Shares in thousands)

																						Accumulated				Total Shareholders’
										Additional												Other				Equity Attributable
										Paid in				Retained				Treasury				Comprehensive				to DynCorp				Noncontrolling
		Common Stock								Capital				Earnings				Shares				Income (Loss)				International Inc.				Interests				Total 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											—				53,459								—				53,459				—				53,459
Interest rate swap, net of tax											—				—				—				769				769				—				769
Currency translation adjustment, net of tax											—				—				—				398				398				—				398
Comprehensive income											—				53,459				—				1,167				54,626				—				54,626
Noncontrolling interests															(12,259	)			—								(12,259	)							(12,259	)
Comprehensive income attributable to DynCorp International Inc.															41,200				—				1,167				42,367				—				42,367
Net Income and comprehensive income attributable to noncontrolling interests															—				—				—				—				12,259				12,259
DIFZ financing, net of tax											189				—				—				—				189				—				189
Treasury share repurchases			(55	)							—				—				(712	)			—				(712	)			—				(712	)
Treasury shares issued to settle RSU liability			22								55				—				245				—				300				—				300
Equity-based compensation											354				—				—				—				354				—				354
Tax benefit reduction associated with equity-based compensation											7				—				—				—				7				—				7
Dividends paid to noncontrolling interests											—				—				—				—				—				(16,602	)			(16,602	)
Balance at October 2, 2009			56,274			$	570			$	367,225			$	184,573			$	(9,085	)		$	(3,257	)		$	540,026			$	6,393			$	546,419

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 October 2, 2009 was a 13-week period from July 4, 2009 to October 2, 2009. The three months ended October 3, 2008 was a 13-week period from July 5, 2008 to October 3, 2008. The six months ended October 2, 2009 was a 26-week period from April 4, 2009 to October 2, 2009. The six months ended October 3, 2008 was a 27-week period from March 29, 2008 to October 3, 2008.

In the opinion of management, all adjustments necessary to fairly present our financial position at October 2, 2009 and April 3, 2009, the results of operations for the three and six months ended October 2, 2009 and October 3, 2008, and cash flows for the six months ended October 2, 2009 and October 3, 2008, have been included. The results of operations for the three months and the six months ended October 2, 2009 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 October 2, 2009, 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 October 2, 2009. For the entities list 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. The presentation of 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 $1.0 million and $0.7 million for the three months ended October 2, 2009 and October 3, 2008, respectively. Depreciation expense was $2.0 million and $1.5 million for the six months ended October 2, 2009 and October 3, 2008, respectively. Accumulated depreciation was $9.2 million and $8.6 million at October 2, 2009 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 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 will apply 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 will apply the newly codified guidance in ASC 805 for any applicable events and transactions in fiscal year 2010.

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 15.

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 will become 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 will be 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 future impact to SFAS No. 167 on our financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-013, “Revenue Recognition Multiple-Deliverable Revenue Arrangements” (“ASU-12”). 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 October 2, 2009, we did not have any common stock equivalents that contained non-forfeitable rights to dividends or dividend equivalents.

As of the period ended October 2, 2009, 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 earnings per share calculations or anti-dilutive and excluded as they are liability awards per the guidance in ASC 718 — Compensation — Stock Compensation. 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 Six Months Ended
		October 2,				October 3,				October 2,				October 3,
(Amounts in thousands, except per share data)		2009				2008				2009				2008
Numerator
Net income attributable to DynCorp International Inc.		$	20,555			$	12,871			$	41,200			$	30,851
Denominator
Weighted average common shares — basic			56,268				57,000				56,263				57,000
Weighted average affect of dilutive securities:
Restricted and performance stock units			—				61				33				40
Weighted average common shares-diluted			56,268				57,061				56,296				57,040
Basic earnings per share		$	0.37			$	0.23			$	0.73			$	0.54
Diluted earnings per share		$	0.37			$	0.23			$	0.73			$	0.54

Note 3—Goodwill and Other Intangible Assets

As announced on April 6, 2009, we changed from reporting financial results on our three segments utilized in fiscal year 2009 to reporting under three new segments beginning with fiscal year 2010. Under the new organizational alignment, the three prior operating segments of International Security Services (“ISS”), Logistics and Construction Management (“LCM”) and Maintenance and Technical Support (“MTSS”) were realigned into three segments, two of which, Global Stabilization and Development Solutions (“GSDS”) and Global Platform Support Solutions (“GPSS”) are wholly-owned, and a third segment, Global Linguist Solutions (“GLS”), is a 51% owned joint venture.

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 October 2, 2009 is as follows:

(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				—
Goodwill balance as of October 2, 2009		$	209,073			$	—			$	211,107			$	420,180

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:

		October 2, 2009
		Weighted
		Average
		Useful Life				Gross				Accumulated
(Amounts in thousands, except years)		(Years)				Carrying Value				Amortization				Net
Finite-lived intangible assets:
Customer-related intangible assets			8.5			$	290,716			$	(172,443	)		$	118,273
Other			5.3				17,012				(9,908	)			7,104
						$	307,728			$	(182,351	)		$	125,377
Indefinite-lived intangible assets — Tradename						$	18,318			$	—			$	18,318

		April 3, 2009
		Weighted
		Average
		Useful Life				Gross				Accumulated
(Amounts in thousands, except years)		(Years)				Carrying Value				Amortization				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
Indefinite-lived intangible assets — Tradename						$	18,318			$	—			$	18,318

Amortization expense for customer-related and other intangibles was $9.5 million for the three months ended October 2, 2009 and October 3, 2008, and $19.0 million and $19.6 million for the six months ended October 2, 2009 and October 3, 2008, respectively.

The following schedule outlines an estimate of future amortization based upon the finite-lived intangible assets owned at October 2, 2009:

		Amortization
		Expense
		(Dollars in
		thousands)
Six month period ended October 2, 2010		$	18,995
Estimate for fiscal year 2011			33,926
Estimate for fiscal year 2012			23,248
Estimate for fiscal year 2013			19,480
Estimate for fiscal year 2014			8,282
Thereafter			21,446

Note 4—Income Taxes

The provision for income taxes consists of the following:

		Three Months Ended
		October 2,				October 3,
		2009				2008
		(Dollars in thousands)
Current portion:
Federal		$	5,346			$	11,024
State			676				842
Foreign			1,968				1,271
			7,990				13,137
Deferred portion:
Federal			5,146				(3,874	)
State			172				(130	)
Foreign			(7	)			(2	)
			5,311				(4,006	)
Provision for income taxes		$	13,301			$	9,131

		Six Months Ended
		October 2,				October 3,
		2009				2008
		(Dollars in thousands)
Current portion:
Federal		$	8,509			$	20,610
State			1,069				1,650
Foreign			2,810				3,811
			12,388				26,071
Deferred portion:
Federal			13,105				(7,370	)
State			438				(246	)
Foreign			(3	)			(8	)
			13,540				(7,624	)
Provision for income taxes		$	25,928			$	18,447

Deferred tax assets and liabilities are reported as:

		October 2,				April 3,
		2009				2009
		(Dollars in thousands)
Current deferred tax liabilities		$	(14,700	)		$	(8,278	)
Non-current deferred tax assets			9,530				12,788
Deferred tax (liabilities)/assets, net		$	(5,170	)		$	4,510

As of October 2, 2009 and April 3, 2009, we have $11.0 million and $6.1 million, respectively, of total uncertain tax positions. The amount of unrecognized tax positions that, if recognized, would affect the effective tax rate was $0.3 million and $0.1 million for October 2, 2009 and April 3, 2009, respectively.

We do not expect any material changes to our effective tax rate as a result of unrecognized tax liabilities. 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 $0.4 million and $0.2 million for the payment of interest and penalties as of October 2, 2009 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.

For the three and six months ended October 2, 2009 our effective tax rate was 33.0% and 32.7%, respectively, as compared to 30.0% and 31.6% for the three and six months ended October 3, 2008, 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 consolidated joint ventures such as GLS and DynCorp International FZ-LLC (“DIFZ”). These are consolidated for financial reporting purposes; but, are not consolidated entities for U.S. income tax purposes.

Note 5— Accounts Receivable

Accounts receivable, net consisted of the following:

		October 2,				April 3,
(Dollars in thousands)		2009				2009
Billed		$	239,303			$	220,501
Unbilled			397,049				343,931
Total		$	636,352			$	564,432

Unbilled receivables at October 2, 2009 and April 3, 2009 include $43.4 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 October 2, 2009 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:

		October 2,				April 3,
		2009				2009
		(Dollars in thousands)
Term loans		$	176,637			$	200,000
9.5% Senior subordinated notes(1)			375,387				399,912
			552,024				599,912
Less current portion of long-term debt			(14,137	)			(30,540	)
Total long-term debt		$	537,887			$	569,372

For a 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 October 2, 2009, 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 0.5% 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 99.5% of the carrying amount based on market quotes as of October 2, 2009.

9.5% Senior Subordinated Notes

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 six months ended October 2, 2009. These repurchases utilized approximately 100% of the $25.0 million, leaving no availability for additional repurchases under the current plan.

The fair value of the senior subordinated notes is based on their quoted market value. As of October 2, 2009, the quoted market value of the senior subordinated notes was approximately 102% of stated value.

Note 7— Interest Rate Derivatives

At October 2, 2009, 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 October 2, 2009.

Fixed

Variable

Notional

Interest

Interest Rate

Date Entered

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 six months ended October 2, 2009, we paid $2.2 million and $4.1 million in net settlements and incurred $2.2 million of expenses of which $1.9 million was recorded to interest expense and $0.3 million was recorded to other (loss)/income and incurred $4.3 million of expenses, of which $3.8 million was recorded to interest expense and $0.5 million was recorded to other (loss)/income, respectively.

During the three and six months ended October 3, 2008, we paid $1.5 million and $3.1 million in net settlements and incurred $1.1 million of expenses, which was recorded to interest expense and incurred $3.0 million in expenses of which $2.6 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 October 2, 2009 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				October 2, 2009				April 3, 2009
Interest Rate Swaps		Other accrued liabilities				$	5,221			$	5,259
Interest Rate Swaps		Other long-term liabilities					—				957
		Total				$	5,221			$	6,216

						Fair Value at				Fair Value at
Derivatives not designated as hedges under ASC 815		Balance Sheet Location				October 2, 2009				April 3, 2009
Interest Rate Swaps		Other accrued liabilities				$	964			$	893
Interest Rate Swaps		Other long-term liabilities					—				182
		Total				$	964			$	1,075
Total Derivatives						$	6,185			$	7,291

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

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Change in OCI from

Gains (Losses)

Recognized in OCI

on Derivatives

Derivatives Designated as

(Effective Portion)

Line Item

Cash Flow Hedging

Three Months ended

Line Item in Statements

in Statements

Instruments under ASC 815

October 2, 2009

of Income

Amount

of Income

Amount

Interest rate derivatives

$

320

Interest expense

$

(1,854

)

Other (loss)/income, net

$

—

Total

$

320

$

(1,854

)

$

—

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

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Change in OCI from

Gains (Losses)

Recognized in OCI

on Derivatives

Derivatives Designated as

(Effective Portion)

Line Item

Cash Flow Hedging

Six Months ended

Line Item in Statements

in Statements

Instruments under ASC 815

October 2, 2009

of Income

Amount

of Income

Amount

Interest rate derivatives

$

1,206

Interest expense

$

(3,754

)

Other (loss)/income net

$

—

Total

$

1,206

$

(3,754

)

$

—

The effects of our derivative instruments on OCI and our Consolidated Statements of Income for the three months ended October 3, 2008 are summarized as follows (in thousands):

						GAINS (LOSSES) RECLASSIFIED FROM								GAINS (LOSSES) RECOGNIZED
						ACCUMULATED OCI INTO INCOME								IN INCOME ON DERIVATIVES
						(EFFECTIVE PORTION)								(INEFFECTIVE PORTION)
		Change in OCI from Gains
		(Losses)
		Recognized in OCI
		on Derivatives
Derivatives Designated as		(Effective Portion)												Line Item
Cash Flow Hedging		Three Months ended				Line Item in Statements								in Statements
Instruments under ASC 815		October 3, 2008				of Income				Amount				of Incomes				Amount
Interest rate derivatives		$	(56	)		Interest expense				$	(918	)		Interest expense				$	(152	)
Total		$	(56	)						$	(918	)						$	(152	)

The effects of our derivative instruments on OCI and our Consolidated Statements of Income for the six months ended October 3, 2008 are summarized as follows (in thousands):

GAINS (LOSSES) RECLASSIFIED FROM

GAINS (LOSSES) RECOGNIZED

ACCUMULATED OCI INTO INCOME

IN INCOME ON DERIVATIVES

(EFFECTIVE PORTION)

(INEFFECTIVE PORTION)

Change in OCI from

Gains (Losses)

Recognized in OCI

on Derivatives

Derivatives Designated as

(Effective Portion)

Line Item

Cash Flow Hedging

Six Months ended

Line Item in Statements

in Statements

Instruments under ASC 815

October 3, 2008

of Income

Amount

of Incomes

Amount

Interest rate derivatives

$

5,571

Interest expense

$

(2,784

)

Interest expense

$

158

Total

$

5,571

$

(2,784

)

$

158

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):

						Three Months				Three Months
		AMOUNT OF GAIN OR (LOSS) RECOGNIZED IN				Ended				Ended
Derivatives not Designated		INCOME ON DERIVATE				October 2,				October 3,
as Hedging Instruments		Line Item in Statements				2009				2008
under ASC 815		of Income				Amount				Amount
Interest rate derivatives		Other (loss)/ income, net				$	(319	)		$	—
Total						$	(319	)		$	—

						Six Months				Six Months
		AMOUNT OF GAIN OR (LOSS) RECOGNIZED IN				Ended				Ended
Derivatives not Designated		INCOME ON DERIVATE				October 2,				October 3,
as Hedging Instruments		Line Item in Statements				2009				2008
under ASC 815		of Income				Amount				Amount
Interest rate derivatives		Other (loss)/ income, net				$	(506	)		$	(404	)
Total						$	(506	)		$	(404	)

As of October 2, 2009, we estimate that approximately $5.0 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 $1.0 million liability at October 2, 2009. 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 either 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 $12.2 million and $10.1 million for the three months ended October 2, 2009 and October 3, 2008, respectively, and $25.4 million and $23.8 million for the six months ended October 2, 2009 and October 3, 2008, 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 $21.3 million as of October 2, 2009. 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.

We have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. The payments, which we believe totaled approximately $300,000 in the aggregate, were made to sub-contractors in connection with servicing a single existing task order that the Company has with a U.S. government agency. We have retained outside counsel to investigate these payments. We are in the process of evaluating our internal policies and procedures and are committed to improving our compliance procedures. During the past week, we voluntarily brought these matters to the attention of the U.S. Department of Justice and the Securities and Exchange Commission. 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 this matter.

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. As of October 2, 2009, 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. 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. 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, we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. 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.

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 October 2, 2009, 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 $1.3 million and $1.4 million for the three months ended October 2, 2009 and October 3, 2008, respectively, and $2.2 million and $1.2 million for the six months ended October 2, 2009 and October 3, 2008, respectively.

Class B Equity

During the six months ended October 2, 2009, we had no new grants but had one forfeiture event in the first quarter of fiscal year 2010. Consequently, the fiscal year to date expenses recognized were 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 six 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			0.0	%			—
Balance October 2, 2009			4.68	%		$	9,632
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
April 3, 2009 nonvested			1.02	%		$	2,718
October 2, 2009 nonvested			0.90	%		$	2,436

Assuming each grant outstanding, net of estimated forfeitures, as of October 2, 2009 fully vests, we will recognize the related non-cash compensation expense as follows (in thousands):

Six month period ending April 2, 2010		$	259
Fiscal year ending April 1, 2011			229
Fiscal year ending March 30, 2012 and thereafter			62
Total		$	550

Restricted Stock Units and Performance Stock Units

Our RSUs vest based on the passage of time and our PSUs vest based on the achievement of performance criteria. During the first six months of fiscal year 2010, we had 510,350 RSU and PSU grants. Additionally, we issued 12,500 RSUs to our Chief Executive Officer (“CEO”) as a result of fiscal year 2009 performance, with one third vesting on his employment anniversary date in fiscal year 2010, fiscal year 2011 and fiscal year 2012.

During the six months ended October 2, 2009, 37,500 RSU vested awards held by our CEO were settled by issuing 21,675 treasury shares, net of payroll withholding, with a value of $0.3 million.

During the six months ended October 2, 2009, one of our consolidated joint ventures, DIFZ, in which we have a 50% ownership interest, established a 2009 Omnibus Incentive Plan (the “DIFZ Plan”). Under the DIFZ Plan, the joint venture can issue equity based awards to its employees. Although these awards are only paid in cash, the value of these awards is tied to our common stock. As such, these awards qualify as equity-based compensation under ASC 718. As of the six months ended October 2, 2009, the liabilities and expenses associated with the DIFZ Plan were not material.

In accordance with ASC 718 and our policy, we recognize compensation expense related to the RSUs and PSUs on a graded schedule over the requisite service period, net of estimated forfeitures. Compensation expense related to RSUs and PSUs was approximately $1.1 million for the three months ended October 2, 2009, and approximately $1.8 million for the six months ended October 2, 2009. Additionally, all RSUs and PSUs have been determined to be liability awards; therefore, the fair value of the RSUs and PSUs are re-measured at each financial reporting date as long as they remain liability awards. The estimated fair value of the RSUs and PSUs outstanding as of October 2, 2009, was approximately $13.0 million excluding the impact of estimated future forfeitures based on the closing market price of our stock on the grant date and was approximately $13.6 million excluding the impact of estimated future forfeitures based on the closing market price of our stock on October 2, 2009.

A summary of the combined RSU and PSU activity during the six months of fiscal year 2010 is as follows:

						Weighted
		Outstanding				Average
		Restricted				Grant Date
		Stock Units				Fair Value
Outstanding, April 3, 2009			345,895			$	16.71
Units granted			510,350			$	16.89
Units forfeited			(48,170	)		$	16.40
Units vested and settled(1)			(37,500	)		$	15.74
Outstanding, October 2, 2009			770,575			$	16.90

Assuming each grant outstanding as of October 2, 2009, net of estimated forfeitures, fully vests, we will recognize the related equity-based compensation expense as follows based on the value of these liability awards based on our closing stock price on October 2, 2009 (in thousands):

Six month fiscal period ended April 2, 2010		$	2,217
Fiscal year ended April 1, 2011			3,846
Fiscal year ended March 30, 2012 and thereafter			4,619
Total		$	10,682

Note 10—Composition of Certain Financial Statement Captions

The following tables present financial information of certain consolidated balance sheet captions (dollars in thousands).

Prepaid expenses and other current assets — Prepaid expenses and other current assets were:

		October 2,				April 3,
		2009				2009
Prepaid expenses		$	53,608			$	61,570
Inventories			16,971				10,840
Work-in-process			30,184				33,885
Joint venture receivables			5,125				2,491
Other current assets			10,389				15,428
Total		$	116,277			$	124,214

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. Inventories include helicopter assets purchased and available for sale.

Other assets, net — Other assets, net were:

		October 2,				April 3,
		2009				2009
Deferred financing costs, net		$	11,464			$	13,828
Investment in affiliates			9,517				8,982
Promissory notes, long-term portion			6,968				6,631
Other			2,228				2,627
Total		$	30,177			$	32,068