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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2014
or
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: 333-173746
 
 
DELTA TUCKER HOLDINGS, INC.
(Exact name of registrant as specified in its charter) 
 
  
Delaware
27-2525959
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1700 Old Meadow Road, McLean, Virginia 22102
(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  o    No  þ
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   þ     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
o
Non-accelerated filer
þ  (Do not check if a smaller reporting company)
Smaller reporting company
o
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 August 11, 2014, the registrant had 100 shares of its Class A common stock outstanding.






Delta Tucker Holdings, Inc.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 

2




Disclosure Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). 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 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, international and technological factors that could cause our business, strategy, projections 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 mergers, acquisitions, divestitures, joint ventures or teaming agreements;
our substantial level of indebtedness and changes in availability of capital and cost of capital;
the outcome of any material litigation, government investigation, audit or other regulatory matters;
restatement of our financial statements causing credit ratings to be downgraded or covenant violations under our debt agreements;
policy and/ or spending changes implemented by the Obama Administration, any subsequent administration or Congress, including any further changes to the sequestration that the United States ("U.S.") Department of Defense ("DoD") is currently operating under;
termination or modification of key U.S. government or commercial contracts, including subcontracts;
changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the International Narcotics and Law ("INL") Enforcement, Contract Field Teams ("CFT") and Logistics Civil Augmentation Program ("LOGCAP IV") contracts;
changes in the demand for services provided by our joint venture partners;
changes due to pursuit of new commercial business in the U.S. and abroad;
activities of competitors and the outcome of bid protests;
changes in significant operating expenses;
impact of lower than expected win rates for new business;
general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;
acts of war or terrorist activities, including cyber security threats;
variations in performance of financial markets;
the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity ("IDIQ") contracts and indefinite quantity contracts ("IQC");
the timing or magnitude of any award fee granted under our government 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;
decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;
changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more contracts and our performance;
changes in our tax provisions or exposure to additional income tax liabilities that could affect our profitability and cash flows;
termination or modification of key subcontractor performance or delivery; and
statements covering our business strategy, those described in "Item 1A. Risk Factors" of this Quarterly Report and under "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission ("SEC") on March 14, 2014 and other risks detailed from time to time in our reports filed with 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 statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.


3




Calendar Year
We report the results of our operations using a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income for the three and six months ended June 27, 2014 and June 28, 2013, the related statements of equity and cash flows for the six months ended June 27, 2014 and June 28, 2013 and the unaudited condensed consolidated balance sheets as of June 27, 2014 and December 31, 2013.

PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Revenue
$
590,966

 
$
876,522

 
$
1,203,725

 
$
1,808,630

Cost of services
(534,589
)
 
(794,573
)
 
(1,095,080
)
 
(1,639,699
)
Selling, general and administrative expenses
(32,611
)
 
(34,148
)
 
(66,085
)
 
(69,692
)
Depreciation and amortization expense
(12,025
)
 
(12,274
)
 
(23,528
)
 
(24,121
)
Earnings from equity method investees
19

 
927

 
9,766

 
3,373

Impairment of goodwill, intangibles and long lived assets
(91,759
)
 

 
(91,759
)
 

Operating (loss) income
(79,999
)
 
36,454

 
(62,961
)
 
78,491

Interest expense
(18,184
)
 
(19,838
)
 
(36,201
)
 
(39,001
)
Loss on early extinguishment of debt
(448
)
 

 
(621
)
 

Interest income
31

 
28

 
84

 
46

Other income (expense), net
1,469

 
(2,557
)
 
2,358

 
(460
)
(Loss) income before income taxes
(97,131
)
 
14,087

 
(97,341
)
 
39,076

Benefit (provision) for income taxes
15,779

 
(4,588
)
 
15,867

 
(13,384
)
Net (loss) income
(81,352
)
 
9,499

 
(81,474
)
 
25,692

Noncontrolling interests
(720
)
 
(1,157
)
 
(1,365
)
 
(2,349
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,072
)
 
$
8,342

 
$
(82,839
)
 
$
23,343

See notes to unaudited condensed consolidated financial statements

4




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Net (loss) income
$
(81,352
)
 
$
9,499

 
$
(81,474
)
 
$
25,692

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(39
)
 
(43
)
 
(73
)
 
(454
)
Other comprehensive loss, before tax
(39
)
 
(43
)
 
(73
)
 
(454
)
Income tax (provision) benefit related to items of other comprehensive (loss) income
(68
)
 
15

 
26

 
163

Other comprehensive loss
(107
)
 
(28
)
 
(47
)
 
(291
)
Comprehensive (loss) income
(81,459
)
 
9,471

 
(81,521
)
 
25,401

Comprehensive income attributable to noncontrolling interests
(720
)
 
(1,157
)
 
(1,365
)
 
(2,349
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,179
)
 
$
8,314

 
$
(82,886
)
 
$
23,052


See notes to unaudited condensed consolidated financial statements

5




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
June 27, 2014
 
December 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
153,413

 
$
170,845

Restricted cash
1,659

 
1,659

Accounts receivable, net of allowances of $2,063 and $1,621 respectively
483,235

 
577,136

Prepaid expenses and other current assets
118,017

 
124,510

Total current assets
756,324

 
874,150

Property and equipment, net
23,576

 
24,120

Goodwill
203,025

 
293,767

Tradenames, net
43,376

 
43,464

Other intangibles, net
205,050

 
225,239

Other assets, net
31,832

 
39,181

Total assets
$
1,263,183

 
$
1,499,921

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Accounts payable
173,743

 
193,146

Accrued payroll and employee costs
109,142

 
114,334

Deferred income taxes
19,131

 
30,965

Accrued liabilities
153,885

 
200,533

Income taxes payable
8,020

 
14,020

Total current liabilities
463,921

 
552,998

Long-term debt
672,272

 
732,272

Long-term deferred taxes
11,528

 
17,359

Other long-term liabilities
6,852

 
7,632

Total liabilities
1,154,573

 
1,310,261

EQUITY
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at June 27, 2014 and December 31, 2013, respectively

 

Additional paid-in capital
551,457

 
549,581

Accumulated deficit
(448,438
)
 
(365,599
)
Accumulated other comprehensive loss
(244
)
 
(197
)
Total equity attributable to Delta Tucker Holdings, Inc.
102,775

 
183,785

Noncontrolling interests
5,835

 
5,875

Total equity
108,610

 
189,660

Total liabilities and equity
$
1,263,183

 
$
1,499,921

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
Cash flows from operating activities
 
 
 
Net (loss) income
(81,474
)
 
25,692

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
24,002

 
24,998

Amortization of deferred loan costs
3,016

 
3,533

Loss on impairment of goodwill, intangibles and long-lived assets
91,759

 

Earnings from equity method investees
(10,790
)
 
(2,385
)
Distributions from equity method investees
9,588

 
3,063

Deferred income taxes
(17,772
)
 
2,147

Share based compensation
1,831

 

Other
1,062

 
(776
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
93,458

 
38,935

Prepaid expenses and other current assets
6,578

 
13,242

Accounts payable and accrued liabilities
(61,739
)
 
(54,408
)
Income taxes payable
(5,434
)
 
(3,130
)
Net cash provided by operating activities
54,085

 
50,911

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(6,448
)
 
(1,220
)
Proceeds from sale of property, plant and equipment
33

 
167

Purchase of software
(887
)
 
(2,557
)
Return of capital from equity method investees
2,884

 
769

Net cash used in investing activities
(4,418
)
 
(2,841
)
Cash flows from financing activities
 
 
 
Borrowings on long-term debt
2,500

 
317,600

Payments on long-term debt
(62,500
)
 
(318,237
)
Payment of deferred financing costs

 
(2,139
)
Borrowings related to financed insurance
16,472

 
1,063

Payments related to financed insurance
(22,634
)
 
(26,471
)
Payment of dividends to noncontrolling interests
(937
)
 
(2,812
)
Net cash used in financing activities
(67,099
)
 
(30,996
)
Net (decrease) increase in cash and cash equivalents
(17,432
)
 
17,074

Cash and cash equivalents, beginning of period
170,845

 
118,775

Cash and cash equivalents, end of period
$
153,413

 
$
135,849

 
 
 
 
Income taxes paid, net
$
8,755

 
$
6,916

Interest paid
$
33,466

 
$
35,844

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Equity
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive (Loss)
 
Total Equity Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total
Equity
Balance at December 31, 2012

 
$

 
$
549,322

 
$
(111,863
)
 
$
83

 
$
437,542

 
$
8,212

 
$
445,754

Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.

 

 

 
23,343

 
(291
)
 
23,052

 

 
23,052

Noncontrolling interests

 

 

 

 

 

 
2,349

 
2,349

DIFZ financing, net of tax

 

 
156

 

 

 
156

 

 
156

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(4,218
)
 
(4,218
)
Balance at June 28, 2013

 
$

 
$
549,478

 
$
(88,520
)
 
$
(208
)
 
$
460,750

 
$
6,343

 
$
467,093

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive (Loss)
 
Total Equity Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total
Equity
Balance at December 31, 2013

 
$

 
$
549,581

 
$
(365,599
)
 
$
(197
)
 
$
183,785

 
$
5,875

 
$
189,660

Share based compensation

 

 
1,831

 

 

 
1,831

 

 
1,831

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(82,839
)
 
(47
)
 
(82,886
)
 

 
(82,886
)
Noncontrolling interests

 

 

 

 

 

 
1,365

 
1,365

DIFZ financing, net of tax

 

 
45

 

 

 
45

 

 
45

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(1,405
)
 
(1,405
)
Balance at June 27, 2014

 
$

 
$
551,457

 
$
(448,438
)
 
$
(244
)
 
$
102,775

 
$
5,835

 
$
108,610

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Accounting Policies
Basis of Presentation
Delta Tucker Holdings, Inc. ("Holdings"), the parent of DynCorp International Inc., through its subsidiaries (together, "the Company"), provides defense and technical services and government outsourced solutions primarily to U.S. government agencies domestically and internationally. The Company was incorporated in the state of Delaware on April 1, 2010. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and our consolidated subsidiaries.
The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These unaudited condensed consolidated financial statements have been prepared 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 and do not make the information presented misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
In the opinion of management, all adjustments necessary to fairly present our financial position as of June 27, 2014 and December 31, 2013, the results of operations and statements of comprehensive income for the three and six months ended June 27, 2014 and June 28, 2013 and the statements of equity and cash flows for the six months ended June 27, 2014 and June 28, 2013 have been included. The results of operations and the statements of comprehensive income for three and six months ended June 27, 2014 and June 28, 2013 and the statements of equity and cash flows for the six months ended June 27, 2014 and June 28, 2013 are not necessarily indicative of the results to be expected for the full calendar 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. Our actual results may differ from these estimates.
As described in Note 7, we are required to comply with financial maintenance covenants as specified in the Senior Credit Facility including reporting such compliance on a quarterly basis to our Administrative Agent (the "Agent"). We closely evaluate our expected ability to remain in compliance with our financial maintenance covenants. We performed a re-assessment of our projections during the second quarter of 2014 due to continued challenges in our industry and declines in our business through the first half of the year. Based on these revised projections, we believe we may not satisfy our financial maintenance covenants for the twelve month period ending December 31, 2014, unless we either obtain a waiver from our lenders or amend the terms of our Senior Credit Facility. We are currently in discussions with our Agent with respect to amending the terms of our Senior Credit Facility should we need to address the compliance with our financial maintenance covenants. If we fail to comply with our financial maintenance covenants and are unable to achieve one of these alternatives, the Agent or the lenders could declare an event of default under the Senior Credit Facility, thereby allowing them to demand immediate payment in full, of the amounts outstanding, and may terminate their obligation to make additional loans and issue new letters of credit under the Senior Credit Facility. This outcome would result in doubt in the Company’s ability to continue as a going concern. If such actions were taken by our Agent or lenders, it could also cause an event of default under our senior unsecured notes. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has investments in joint ventures that are variable interest entities ("VIEs"). The VIE investments are accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810 — Consolidation. In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, the Company consolidates the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method.

9




We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our segments and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.
Noncontrolling interests
We record the impact of our partners' interest in less than wholly owned consolidated VIEs as noncontrolling interests. Currently, DynCorp International FZ-LLC ("DIFZ") is our only consolidated VIE for which we do not own 100% of the entity. We hold 25% ownership interest in DIFZ. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ. Noncontrolling interests is presented on the face of the statement of operations as an increase or reduction in arriving at net income attributable to Delta Tucker Holdings, Inc. Noncontrolling interests on the balance sheet is located in the equity section. See Note 10 for further discussion regarding DIFZ.
Use of Estimates
We prepare our financial statements in conformity with GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the unaudited condensed consolidated statements of operations in the period that they are determined.
The following table presents the aggregate gross favorable and unfavorable adjustments to income before income taxes resulting from changes in contract estimates for the three and six months ended June 27, 2014 and June 28, 2013.
 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Gross favorable adjustments
$
3.7

 
$
13.0

 
$
4.3

 
$
25.3

Gross unfavorable adjustments
(2.2
)
 
(11.8
)
 
(5.4
)
 
(20.9
)
Net adjustments
$
1.5

 
$
1.2

 
$
(1.1
)
 
$
4.4

Accounting Policies
There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2013.
Accounting Developments
On May 28, 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including ASC No. 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 will be effective January 1, 2017, and may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-09 will have on the company’s consolidated financial position, results of operations and cash flows.
Other accounting standards updates effective after June 27, 2014 are not expected to have a material effect on the Company’s consolidated financial position or its annual results of operations and cash flows.


10




Note 2 — Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions.
Prepaid expenses and other current assets — Prepaid expenses and other current assets were:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Prepaid expenses
$
32,886

 
$
29,611

Income tax refunds receivable
7,745

 
7,334

Inventories
27,674

 
27,008

Aircraft parts inventory held on consignment
2,324

 
2,404

Work-in-process inventory
32,955

 
28,444

Joint venture receivables
1,928

 
2,251

Assets held for sale
2,000

 
3,017

Other current assets
10,505

 
24,441

Total prepaid expenses and other current assets
$
118,017

 
$
124,510

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.
We value our inventory at lower of cost or market. Included in inventory as of June 27, 2014 are six helicopters, valued at $4.8 million that are currently not deployed on any existing programs. During the six months ended June 27, 2014, we sold one helicopter previously included within our inventory. We also have six helicopters classified as held for sale as of June 27, 2014 and December 31, 2013 that were previously deployed on an existing program. During the second quarter of 2014, we executed a sales agreement to sell these six helicopters for a total of $2.0 million, resulting in an impairment expense of $1.0 million, included within the Impairment of goodwill, intangibles and long-lived assets within our consolidated statement of operations. As of August 11, 2014, the sale is pending final funding and transfer of title.
The aircraft parts inventory held on consignment represents $2.3 million and $2.4 million in inventory related to our former Life Cycle Support Services ("LCCS") Navy contract as of June 27, 2014 and December 31, 2013, respectively. Work-in-process inventory includes equipment for vehicle modifications for specific customers and other deferred costs related to certain contracts. Included in Other current assets as of December 31, 2013 was an insurance receivable related to a settlement of a certain legal matter. This matter was settled and the insurance company paid out the settlement amount during the three months ended June 27, 2014. See Note 8 for further legal discussion.
Property and equipment, net — Property and equipment, net were:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Helicopters
$
4,007

 
$
4,007

Computers and other equipment
14,969

 
14,258

Leasehold improvements
17,981

 
17,585

Office furniture and fixtures
4,027

 
3,006

Gross property and equipment
40,984

 
38,856

Less accumulated depreciation
(17,408
)
 
(14,736
)
Total property and equipment, net
$
23,576

 
$
24,120

Included in Property and equipment, net as of December 31, 2013 was $3.8 million related to the accrual for property additions. Accrued property additions were immaterial as of June 27, 2014. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.4 million and $2.7 million during the three and six months ended June 27, 2014, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $3.0 million during the three and six months ended June 28, 2013, respectively.

11




Other assets, net — Other assets, net were:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Deferred financing costs, net
$
13,890

 
$
17,526

Investment in affiliates
10,771

 
13,477

Palm promissory note, long-term portion
2,281

 
2,731

Other
4,890

 
5,447

Total other assets, net
$
31,832

 
$
39,181

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $1.5 million and $3.0 million during the three and six months ended June 27, 2014, respectively. Amortization related to deferred financing cost was $1.6 million and $3.5 million during the three and six months ended June 28, 2013, respectively. Deferred financing costs for the three and six months ended June 27, 2014 were reduced $0.4 million and $0.6 million, related to the pro rata write–off of deferred financing costs to loss on early extinguishment of debt as a result of the $60.0 million in principal prepayment made on the term loan facility under the Senior Credit Facility ("Term Loan") during the six months ended June 27, 2014. See Note 7 for further discussion.
Accrued payroll and employee costs — Accrued payroll and employee costs were:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Wages, compensation and other benefits
$
86,320

 
$
93,007

Accrued vacation
22,015

 
20,383

Accrued contributions to employee benefit plans
807

 
944

Total accrued payroll and employee costs
$
109,142

 
$
114,334

Accrued liabilities — Accrued liabilities were:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Customer liabilities
$
67,762

 
$
61,856

Accrued insurance
20,316

 
40,120

Accrued interest
24,287

 
24,641

Unrecognized tax benefit
8,533

 
10,132

Contract losses
5,954

 
13,738

Legal reserves
4,471

 
14,147

Subcontractor retention
2,800

 
4,300

Financed insurance

 
6,162

Other
19,762

 
25,437

Total accrued liabilities
$
153,885

 
$
200,533

Customer liabilities are primarily due to amounts received from customers in excess of revenue recognized. Other is comprised primarily of accrued rent and workers' compensation related claims and other balances that are not individually material to the consolidated financial statements. Legal matters include reserves related to various lawsuits and claims that arise in the normal course of business. See Note 8 for further discussion.
Other long-term liabilities
As of June 27, 2014 and December 31, 2013, Other long-term liabilities were $6.9 million and $7.6 million, respectively. Other long-term liabilities are primarily due to our obligations in connection with the restructuring plan entered into in 2013 including a long-term leasehold obligation related to our new Tysons Corner facility in McLean, Virginia, of $4.5 million and $4.7 million as of June 27, 2014 and December 31, 2013, respectively.

12




During the fourth quarter of calendar year 2013, the Company vacated the previously occupied properties at various locations and consolidated to the new Tysons Corner location. Additionally, in April of 2014 we entered into an agreement to buy out our previous headquarter facility lease. Accrued costs associated with vacating these properties, such as lease vacancy obligations, net of estimated sublease rental assumptions as well as the buyout were approximately $5.5 million and $7.8 million as of June 27, 2014 and December 31, 2013, respectively, and were included within Other accrued liabilities above.
As a result of the restructuring plan, we recorded a postemployment benefit expense of $2.0 million and $3.1 million for the three and six months ended June 27, 2014, respectively, related to severance in accordance with ASC 712 - Compensation which was included in Selling, general and administrative expenses in the statements of operations. As of June 27, 2014, we had approximately $1.7 million in accrued postemployment benefit expense for estimated future payments in accordance with ASC 712.

Note 3 — Goodwill and Other Intangible Assets
The Company has three operating and reporting segments; DynAviation, DynLogistics and DynGlobal. DynAviation and DynLogistics provide services domestically and in foreign countries primarily under contracts with the U.S. government. The initial focus of DynGlobal is the pursuit and growth of international and commercial business.
During the second quarter of 2014 the Company amended its organizational structure within our DynLogistics segment to improve efficiencies within existing businesses, resulting in the combination of two reporting units within our DynLogistics segment. Our DynLogistics segment now includes three reporting units. The reporting units within DynAviation, which has two reporting units, and DynGlobal remain unchanged. The amendment in the Company's organizational structure did not result in any reallocation of goodwill.
We assess goodwill and other intangible assets with indefinite lives for impairment annually in October or when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified.
During our annual goodwill impairment test performed during the fourth quarter of 2013, we noted significant changes to our assumptions and projections for the Air Wing reporting unit that resulted in a non-cash impairment charge of $281.5 million for the year ended December 31, 2013. Any further negative changes to this contract, such as the loss of the contract during re-compete or additional de-scope notifications from the customer, could yield operating results that differ from our projected forecasts and further result in a triggering event and an additional impairment.
During the three months ended June 27, 2014, we performed a re-assessment of our projections due to continued challenges in our industry and declines in our business through the first half of the year. As a result of the re-assessment, the Company noted significant declines in future projections and assumptions with respect to new business opportunities within the Logistics Sustainment Services (“LSS”) reporting unit within the DynLogistics segment, which represented a carrying value of $120.6 million in goodwill as of December 31, 2013. The Company concluded that the change in circumstances represented a triggering event and an interim step one assessment was performed to identify any possible goodwill impairment. The first step of the impairment test indicated the carrying value of the LSS reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the LSS reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $90.7 million was recorded during the three months ended June 27, 2014 to impair the carrying value of the LSS reporting unit goodwill. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations. Any further declines in performance within this reporting unit in 2014 could result in a triggering event and a potential goodwill impairment.
Further, in light of the re-assessment of our future projections discussed above, we also determined that it was appropriate for us to perform a step one interim goodwill impairment test on the Aviation reporting unit within the DynAviation segment. The step one results indicated that the fair value of the goodwill exceeded its carrying value by approximately 17%. Any further declines in performance within this reporting unit in 2014 could result in a triggering event and a potential goodwill impairment.
Other than those discussed above, no triggering events were identified in our remaining reporting units and the estimated fair values of each of our remaining reporting units exceed their respective carrying values as of June 27, 2014 and December 31, 2013.

13




The carrying amounts of goodwill for each of our segments as of June 27, 2014 were as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Goodwill balance as of December 31, 2013
$
160,932

 
$
132,835

 
$
293,767

Changes between January 1, 2014 and June 27, 2014

 
(90,742
)
 
(90,742
)
Goodwill balance as of June 27, 2014
$
160,932

 
$
42,093

 
$
203,025

The following tables provide information about changes relating to certain intangible assets:
 
As of June 27, 2014
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Other intangible assets:
 
 
 
 
 
 
 
Customer-related intangible assets
5.1
 
$
350,912

 
$
(157,888
)
 
$
193,024

Other
 
 
 
 
 
 
 
Finite-lived
7.0
 
20,825

 
(13,858
)
 
6,967

Indefinite-lived
 
 
$
5,059

 
$

 
$
5,059

Total other intangibles
 
 
$
376,796

 
$
(171,746
)
 
$
205,050

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
0.9
 
$
869

 
$
(715
)
 
$
154

Indefinite-lived
 
 
43,222

 

 
43,222

Total tradenames
 
 
$
44,091

 
$
(715
)
 
$
43,376

 
 
 
 
 
 
 
 
 
As of December 31, 2013
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Other intangible assets:
 
 
 
 
 
 
 
Customer-related intangible assets
5.6

$
350,912

 
$
(138,623
)
 
$
212,289

Other
 
 
 
 
 
 
 
Finite-lived
6.3
 
22,042

 
(14,151
)
 
7,891

Indefinite-lived
 
 
5,059

 

 
5,059

Total other intangibles
 
 
$
378,013

 
$
(152,774
)
 
$
225,239

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
1.4
 
$
869

 
$
(627
)
 
$
242

Indefinite-lived
 
 
43,222

 

 
43,222

Total tradenames
 
 
$
44,091

 
$
(627
)
 
$
43,464

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $10.9 million and $21.3 million for the three and six months ended June 27, 2014, respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $11.2 million and $22.0 million for the three and six months ended June 28, 2013, respectively. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $7.0 million and $7.9 million as of June 27, 2014 and December 31, 2013, respectively.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $22.3 million for the six months ending December 31, 2014, $42.3 million in 2015, $38.7 million in 2016, $36.2 million in 2017, $28.8 million in 2018 and $31.9 million thereafter.


14




Note 4 — Income Taxes
The domestic and foreign components of (Loss) income before income taxes are as follows:
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Domestic
$
(94,549
)
 
$
13,950

 
$
(95,103
)
 
$
40,370

Foreign
(2,582
)
 
137

 
(2,238
)
 
(1,294
)
(Loss) income before income taxes
$
(97,131
)
 
$
14,087

 
$
(97,341
)
 
$
39,076

The Benefit (provision) for income taxes consists of the following:
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Current portion:
 
 
 
 
 
 
 
Federal
$

 
$

 
$

 
$

State
(389
)
 
(147
)
 
(383
)
 
(375
)
Foreign
(1,062
)
 
(3,691
)
 
(3,058
)
 
(5,058
)
 
$
(1,451
)
 
$
(3,838
)
 
$
(3,441
)
 
$
(5,433
)
Deferred portion:
 
 
 
 
 
 
 
Federal
$
16,798

 
$
(683
)
 
$
18,876

 
$
(7,773
)
State
491

 
(62
)
 
491

 
(175
)
Foreign
(59
)
 
(5
)
 
(59
)
 
(3
)
 
17,230

 
(750
)
 
19,308

 
(7,951
)
Benefit (provision) from income taxes
$
15,779

 
$
(4,588
)
 
$
15,867

 
$
(13,384
)
Deferred tax liabilities, net consist of the following:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Current deferred tax liabilities, net
$
(19,131
)
 
$
(30,965
)
Non-current deferred tax liabilities, net
(11,528
)
 
(17,359
)
Deferred tax liabilities, net
$
(30,659
)
 
$
(48,324
)
A reconciliation of the statutory federal income tax rate to our effective rate is provided below: 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax, less effect of federal deduction
0.1
 %
 
1.5
 %
 
0.1
 %
 
1.4
 %
Goodwill Impairment
(18.2
)%
 
 %
 
(18.2
)%
 
 %
Noncontrolling interests
0.4
 %
 
(1.9
)%
 
0.4
 %
 
(2.1
)%
Other
(1.1
)%
 
(2.0
)%
 
(1.1
)%
 
 %
Effective tax rate
16.2
 %
 
32.6
 %
 
16.2
 %
 
34.3
 %
During the six months ended June 27, 2014, we made no estimated federal income tax payments.
In evaluating our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. We assess such factors as the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and available tax planning strategies in determining the need for or sufficiency of a valuation allowance. Based on this assessment, we concluded that no valuation allowance was necessary as of June 27, 2014.

15




As of June 27, 2014 and December 31, 2013, we had $7.9 million and $9.5 million of total unrecognized tax benefits, respectively, of which $2.7 million in each period would impact our effective tax rate if recognized. We anticipate that all $7.9 million of unrecognized tax benefits will be settled in the next twelve months.
On January 22, 2014, a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance ("MOF") was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 to 2012. The majority of this assessment was income tax related; however, approximately $10.2 million of the assessed amount is non-income tax related and is discussed further in Note 8. We filed our initial appeal of the assessment on February 19, 2014. In May 2014, the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million. We reversed the uncertain tax position related to the dividend withholding issue during the quarter ended June 27, 2014.

Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Billed
$
144,430

 
$
179,586

Unbilled
338,805

 
397,550

Total accounts receivable, net
$
483,235

 
$
577,136

Unbilled receivables as of June 27, 2014 and December 31, 2013 include $73.7 million and $41.6 million, respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed as of the end of the respective periods. As of June 27, 2014 and December 31, 2013, respectively, we had no contract claims outstanding with associated accounts receivable balances.
The balance of unbilled receivables consists of costs and fees billable immediately upon contract completion or other specified events, all of which are expected to be billed and collected within one year, except items that may result in a request for equitable adjustment or formal claim. We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government. Our largest contract, LOGCAP IV, accounted for approximately 27% and 34% of total unbilled receivables as of June 27, 2014 and December 31, 2013, respectively.

Note 6 — Fair Value of Financial Assets and Liabilities
ASC 820 – Fair Value Measurements and Disclosures establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts receivable, and accounts payable, the fair value of these instruments approximates the carrying value. Our estimate of the fair value of our long-term debt is based on Level 1 and Level 2 inputs, as defined above.  
 
As Of
 
June 27, 2014
 
December 31, 2013
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$
455,000

 
$
468,650

 
$
455,000

 
$
468,650

Term Loan
217,272

 
217,272

 
277,272

 
278,658

Total long-term debt
$
672,272

 
$
685,922

 
$
732,272

 
$
747,308



16




Note 7 — Long-Term Debt
Long-term debt consisted of the following:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
10.375% senior unsecured notes
$
455,000

 
$
455,000

Term loan
217,272

 
277,272

Total long-term debt
$
672,272

 
$
732,272

Senior Credit Facility
On July 7, 2010, we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Administrative Agent (the " Agent"). On January 21, 2011 and on August 10, 2011, DynCorp International Inc. entered into amendments to the Senior Credit Facility.
On June 19, 2013, we entered into a third amendment (the “Amendment”) to the Senior Credit Facility. The Amendment, among other things, amended the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016, increased the amount of the Revolver to $181.0 million and modified the maximum total leverage threshold test and certain other covenants.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of June 27, 2014, the Senior Credit Facility provided for a $217.3 million Term Loan and the $181.0 million Revolver, which includes a $100.0 million letter of credit subfacility. As of June 27, 2014 and December 31, 2013, the available borrowing capacity under the Senior Credit Facility was approximately $146.3 million and $144.6 million, respectively, which includes $34.7 million and $36.4 million, respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of June 27, 2014 and December 31, 2013 there were no amounts borrowed under the Revolver. The maturity date on both the Term Loan and the Revolver is July 7, 2016.
Interest Rates on Term Loan & Revolver
Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") as defined in the Senior Credit Facility plus an applicable rate or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") as defined in the Senior Credit Facility plus an applicable rate. The applicable rate for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable rate for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency Rate option based on our Secured Leverage Ratio at the end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%.
The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two business days prior to the commencement of such interest period. The variable Eurocurrency Rate has a floor of 1.75%. As of June 27, 2014 and December 31, 2013, the interest rate on the Term Loan was 6.25%.

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at an applicable rate as defined in the Senior Credit Facility and ranges from 4.0% to 4.5% based on our Secured Leverage Ratio at the end of the quarter. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. The applicable interest rate for our letter of credit subfacility was 4.25% as of June 27, 2014 and December 31, 2013, respectively. The applicable interest rate for our unused commitment fees was 0.50% as of June 27, 2014 and December 31, 2013, respectively. All of our letters of credit are also subject to a 0.25% fronting fee.

17




Principal Payments
Pursuant to our Term Loan facility, quarterly principal payments are required. However, certain principal prepayments made during the year ended December 30, 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.
During the six months ended June 27, 2014 we made principal prepayments of $60.0 million on the Term Loan facility. We made no principal prepayments or quarterly principal payments on the Term Loan facility during the six months ended June 28, 2013. Deferred financing costs associated with the prepayment totaled $0.6 million and were expensed and included in the Loss on early extinguishment of debt in our consolidated statement of operations for the six months ended June 27, 2014.
Our Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the Senior Credit Facility, as additional principal payments. Based on our annual financial results and the additional principal prepayments made during the year ended December 31, 2013, we are not required to make any additional principal payments under the Excess Cash Flow requirement during calendar year 2014. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the six months ended June 27, 2014.
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. These covenants can, among other things, limit our ability to:
declare dividends and make other distributions;
redeem or repurchase our capital stock;
prepay, redeem or repurchase certain of our indebtedness;
grant liens;
make loans or investments (including acquisitions);
incur additional indebtedness;
modify the terms of certain debt;
restrict dividends from our subsidiaries;
change our business or business of our subsidiaries;
merge or enter into acquisitions;
sell our assets;
enter into transactions with our affiliates; and
make capital expenditures.
In particular, the Senior Credit Facility stipulates two financial maintenance covenants, a maximum total leverage ratio and a minimum interest coverage ratio that must be maintained.
Effective with the Amendment, total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period.
As of June 27, 2014 our total leverage ratio, cannot be greater than 4.50 to 1.00 after which, the maximum total leverage diminishes quarterly or semi-annually to a maximum of 3.75 to 1.00 beginning September 26, 2015. The Amendment made adjustments to the levels at which the maximum total leverage ratio diminishes over the remainder of the facility.
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratio as of June 27, 2014, must not be less than 2.00 to 1.00 through the period ending June 27, 2014, after which, the minimum total interest coverage ratio increases to 2.05 to 1.00 through March 27, 2015 and 2.25 to 1.00 thereafter.
In the event we fail to comply with the financial maintenance covenants as specified in the Senior Credit Facility, we may be in default. We closely evaluate our expected ability to remain in compliance with our financial covenants. We performed a re-assessment of our projections during the second quarter of 2014 due to continued challenges in our industry and declines in our business through the first half of the year. Based on revised projections, we believe we may not satisfy certain financial maintenance covenants for the twelve month period ending December 31, 2014, unless we either obtain a waiver from our lenders or amend the terms of our Senior Credit Facility. We are currently in discussions with our Agent with respect to amending the terms of our Senior Credit Facility. As of June 27, 2014, we were in compliance with our financial maintenance covenants.
Senior Unsecured Notes

18




On July 7, 2010, DynCorp International Inc. completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes due 2017 (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International Inc., and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes is payable on January 1 and July 1 of each year, and commenced on January 1, 2011.
The Senior Unsecured Notes contain various covenants that restrict our ability to:
incur additional indebtedness;
make certain payments, including declaring or paying certain dividends;  
purchase or retire certain equity interests;
retire subordinated indebtedness;
make certain investments;
sell assets;
engage in certain transactions with affiliates;
create liens on assets;
make acquisitions; and
engage in mergers or consolidations.
The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings by both Moody’s Investor Services and Standard and Poor’s.
The fair value of the Senior Unsecured Notes is based on their quoted market value. As of June 27, 2014 and December 31, 2013, the quoted market value of the Senior Unsecured Notes was approximately 103.0% of stated value.
Call and Put Options
We can voluntarily settle all or a portion of the Senior Unsecured Notes at any time prior to maturity at an applicable redemption price. Such a voluntary settlement would require payment of 100% of the principal amount plus the accrued and unpaid interest and additional interest, if any, as of the applicable redemption date. The applicable redemption prices with respect to the Senior Unsecured Notes on any applicable redemption date if redeemed during the 12-month period commencing on July 1 of the years set forth below are as follows:
Year
Redemption Price
2014
105.2
%
2015
102.6
%
2016 and thereafter
100.0
%
The Indenture requires us to offer to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events. In the case of Asset Sales (as defined in the Indenture), we are required under the Indenture to use the proceeds from such asset sales to either (i) prepay secured debt or nonguarantor debt, (ii) reinvest in our business or (iii) to the extent asset sale proceeds not applied in accordance with clause (i) or (ii) exceed $15 million, make an offer to repurchase the Senior Unsecured Notes at 100% of the principal amount thereof.
In the event of a change in control, each holder of the Senior Unsecured Notes will have the right to require the Company to repurchase some or all of the Senior Unsecured Notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date.

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 was $26.0 million and $55.7 million for the three and six months ended June 27, 2014, respectively. Lease rental expense was $41.3 million and $87.7 million for the three and six months ended and June 28, 2013, respectively. We have no significant long-term purchase agreements with service providers.

19




Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $4.5 million and $14.1 million as of June 27, 2014 and December 31, 2013, respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at June 27, 2014. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of June 27, 2014. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.
Pending Litigation and Claims
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 were dismissed by court orders and, on September 15, 2010, the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims.
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 U.S. 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. We filed multiple motions for summary judgment and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. 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. We are also entitled to indemnification by Computer Sciences Corporation, the Company’s previous owners, 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.

20




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, and the carriers have paid the majority of the litigation expenses. In a related action, the aviation insurance 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. On May 19, 2010, our aviation insurance carriers also filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. The Company believes that the claims asserted by the insurance carriers are without merit and the likelihood of an unfavorable judgment in this matter is remote.
In 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. 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, was challenged in certain instances. In December 2011, the customer filed arbitration alleging fraud, gross negligence, contract violations, and conversion of funds and asserted damages of approximately $150 million. We believe our right to terminate this contract was justified and permissible under the terms of the contract, and we intend to vigorously contest the claims brought against us. Additionally, we believe the contract limits any damages to a maximum of $3 million, except in situations of gross negligence and willful misconduct. As of June 27, 2014 and December 31, 2013, we have recorded an immaterial liability for this matter and believe the likelihood of loss for amounts in excess of this accrual, up to the amount limited by the contract, is reasonably possible.
On July 8, 2009, a lawsuit was filed in the United Arab Emirates ("UAE") Abu Dhabi Court of First Instance, by Al Hamed ITC (hereafter "Al Hamed") concerning an October 2002 business development contract focused on obtaining business directly with the UAE General Military Directorate ("GMD"). Al Hamed was unsuccessful in assisting the company in soliciting business with GMD and, as such, the contract with Al Hamed was terminated in July 2006. We became a subcontractor to the successful bidder, Al Taif, in December 2006. Al Hamed filed a claim seeking $57.0 million in damages under the business development contract. On May 9, 2012, the court awarded Al Hamed 8.2 million in UAE Dirhams ($2.2 million U.S. dollars) plus 5% interest and expenses. The Company and Al Hamed both appealed the judgment. On September 12, 2012, the appellate court altered the judgment stating the amount should not have been in UAE Dirhams rather in U.S. dollars, which amounts to $8.2 million U.S. dollars. As of September 28, 2012, a reserve had been established for the full amount of the judgment. The judgment was further appealed to the Supreme Court in Abu Dhabi, and, on February 27, 2013, we were advised that our appeal was unsuccessful. On April 7, 2013, the judgment was paid and the matter is now closed. During calendar year 2013, the Company was made aware of a new case filed by Al Hamed in the UAE Abu Dhabi Court of First Instance seeking $23.3 million U.S. dollars in damages under the same business development contract. The case alleges we obtained additional business with Al Taif. We have not been awarded any new contracts with Al Taif and therefore believe this case is without merit.
In February 2014, the Company received a judgment related to a past helicopter accident in Aviano, Italy. As of December 31, 2013 we had a recorded liability for $9.8 million related to this matter. This matter was fully insured and a corresponding receivable from the insurance company was recorded within Other current assets. In April 2014, the insurance company paid out the settlement amounts and the case is now considered closed.
U.S. Government Investigations
We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements, including, as previously disclosed in our periodic filings, the Special Inspector General for Iraq Reconstruction report regarding certain reimbursements and the U.S. Department of State Office of Inspector General's records subpoena with respect to Civilian Police ("CivPol"). 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 on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.

21




On August 16, 2005, we were served with a Department of Justice Federal Grand Jury Subpoena seeking documents concerning work performed by a former subcontractor, Al Ghabban in 2002-2005. Specifically, during the 2002-2005 timeframe, Al Ghabban performed line haul trucking work to transport materials throughout the Middle East on the War Reserve Materiel program. In response to the subpoena in 2005, we provided the requested documents to the Department of Justice and the matter was subsequently closed in 2005 without any action taken. In April 2009, we received a follow up telephone call concerning this matter from the Department of Justice Civil Litigation Division. Since that time, we have had several discussions with the government regarding the civil matter. In response to requests, we provided additional information to the Department of Justice Civil Litigation Division. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. The Company believes that the likelihood of an unfavorable judgment resulting from this matter is reasonably possible; however, as this matter is still under review and no formal complaint has been filed, a reasonable estimate of loss or range of loss cannot be made.
On February 24, 2012, we were advised by the Department of Justice Civil Litigation Division that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. The Department of Justice Civil Litigation Division has requested information from the Company, and we are fully cooperating with the government's review. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. At this time, an estimate or a range of potential damages is not possible as this matter is still under review by the Department of Justice and no formal complaint has been filed.
U.S. Government Audits
Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management accounting systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If the Company is unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed, which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations. Since we cannot reasonably estimate the results of a DCAA or other government entity audit, these items represent loss contingencies that we consider reasonably possible. Due to the nature of our business, the continual oversight of and audits by governmental agencies and the number of contracts under which we perform, we cannot, at this time, provide a reasonable estimate of the range of loss for these contingencies.
We have received a series of final audit reports from the DCAA, some of which have resulted in Form 1s, related to their examination of certain incurred, invoiced and reimbursed costs on our CivPol program for periods ranging from April 17, 2004 through April 2, 2010. The Form 1s identify several cost categories where the DCAA has asserted instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The asserted amounts are derived from extrapolation methodologies used to estimate potential exposure amounts for the cost categories which when aggregated for all Form 1's and demand letters total approximately $185.8 million. Over the past year, we have worked with the DCAA in resolving matters inclusive in the Form 1s. We have provided responses to the DCAA for each letter, in which we have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. We have also sought to obtain clarification from our customer through formal contract modifications in an attempt to assist the DCAA in closing these issues. We believe the majority of these issues will continue to be resolved and thus represent loss contingencies that we consider remote. For the remaining issues, which total approximately $19.1 million, we believe the DCAA did not consider certain contractual provisions and long standing patterns of dealing with the customer. Since we cannot reasonably estimate the DCAA's acceptance of our initial responses and the ultimate outcome related to these remaining issues we believe these items represent loss contingencies that we consider reasonably possible. We continue to work with the customer and the DCAA to resolve any remaining questions they may have and provide clarification of the facts and circumstances surrounding the issues.
On April 30, 2013, we received several demand Form 1s from DCAA disapproving approximately $152.0 million of cost incurred by the Company for the periods ranging between 2000 to 2011 on the War Reserve Materiel program for concerns on items such as the adequacy of documentation and reasonableness of costs. We have responded to the Form 1s and are awaiting a contracting officer's final decision. Based on our initial assessment, we believe a substantial portion of these items represent loss contingencies that we consider remote. We believe the remaining portion of these items represent loss contingencies that we consider reasonably possible; however, a reasonable estimate of loss or range of loss cannot be made at this time as we cannot reasonably estimate the ultimate outcome related to the issues raised in the Form 1s.

22




Foreign Contingencies
On January 22, 2014, a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance (“MOF”) was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 and 2012. The majority of this assessment was income tax related; however, $10.2 million of the assessed amount is non-income tax related and represents loss contingencies that we consider reasonably possible. We filed our initial appeal of the assessment with the MOF on February 19, 2014. In May 2014, the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million. See Note 4 for further discussion of the income tax related issue. We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of June 27, 2014, a reasonable estimate of loss or range of loss could not be made as we could not reasonably estimate the ultimate outcome related to the issues assessed.
Credit Risk
We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, we continuously review all accounts receivable and record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic workers' compensation and employers' liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.75 million for total costs per covered participant per calendar year.


23




Note 9 — Segment Information
The Company has three operating and reporting segments; DynAviation, DynLogistics and DynGlobal. The reporting segments are the same as the operating segments. DynAviation and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies. The DynGlobal segment focuses on the pursuit and growth of the international and commercial business. The current revenue, operating income, depreciation and amortization and assets associated with the DynGlobal segment for the three and six months ended June 27, 2014 were not material and as such are presented in Headquarters / Other within the tables below.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Revenue
 
 
 
 
 
 
 
DynLogistics
$
290,340

 
$
500,518

 
$
607,507

 
$
1,067,575

DynAviation
300,737

 
380,418

 
596,472

 
748,094

Headquarters / Other (1)
(111
)
 
(4,414
)
 
(254
)
 
(7,039
)
Total revenue
$
590,966

 
$
876,522

 
$
1,203,725

 
$
1,808,630

 
 
 
 
 
 
 
 
Operating (loss) income
 
 
 
 
 
 
 
DynLogistics
$
(80,803
)
 
$
14,328

 
$
(68,773
)
 
$
32,857

DynAviation
10,613

 
31,857

 
21,900

 
64,618

Headquarters / Other (2)
(9,809
)
 
(9,731
)
 
(16,088
)
 
(18,984
)
Total operating (loss) income
$
(79,999
)
 
$
36,454

 
$
(62,961
)
 
$
78,491

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
DynLogistics
$
11

 
$
221

 
$
23

 
$
449

DynAviation
367

 
316

 
733

 
621

Headquarters / Other
11,883

 
12,173

 
23,246

 
23,928

Total depreciation and amortization (3)
$
12,261

 
$
12,710

 
$
24,002

 
$
24,998

(1)
Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments. Additionally, revenue for our DynGlobal segment during the three and six months ended June 27, 2014 is currently included in Headquarters / Other.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers. Additionally, operating income for our DynGlobal segment in support of the development of this business during the three and six months ended June 27, 2014 are currently included in Headquarters / Other.
(3)
Includes amounts included in Cost of services of $0.2 million and $0.5 million and for the three and six months ended June 27, 2014, respectively, and $0.4 million and $0.9 million for the three and six months ended June 28, 2013, respectively.
The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
As Of
(Amounts in thousands)
June 27, 2014
 
December 31, 2013
Assets
 
 
 
DynLogistics
$
422,324

 
$
591,304

DynAviation
419,659

 
447,646

Headquarters / Other (1)
421,200

 
460,971

Total assets
$
1,263,183

 
$
1,499,921

(1)
Assets primarily include cash, investments in unconsolidated subsidiaries, deferred tax liabilities, intangible assets (excluding goodwill) and deferred debt issuance costs. Additionally, assets for our DynGlobal segment, in support of the development of the business, during the six months ended June 27, 2014 is currently included in Headquarters / Other.


24




Note 10 — Related Parties, Joint Ventures and Variable Interest Entities
Consulting Fee
The Company has a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $0.9 million and $1.6 million in conjunction with the COAC Agreement during the three and six months ended June 27, 2014, respectively, and $0.8 million and $2.0 million during the three and six months ended June 28, 2013, respectively.
Joint Ventures and Variable Interest Entities
We account for our investments in VIEs in accordance with ASC 810 - Consolidation. In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of June 27, 2014, we accounted for PaTH, CRS, Babcock, GRS and GLS as equity method investments. Alternatively, we consolidated DIFZ based on the aforementioned criteria. We present our share of the PaTH, CRS, GRS and GLS earnings in Earnings from equity method investees as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.
Receivables due from our unconsolidated joint ventures totaled $1.9 million and $2.3 million as of June 27, 2014 and December 31, 2013, respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled, $1.0 million and $3.0 million during the three and six months ended June 27, 2014 and $3.7 million and $4.3 million during the three and six months ended and June 28, 2013, respectively. The related cost of services was $1.0 million and $2.9 million during the three and six months ended June 27, 2014 and $3.6 million and $4.1 million during the three and six months ended June 28, 2013, respectively. Additionally, we earned $0.5 million and $10.8 million in equity method income (includes operationally integral and non-integral income) during the three and six months ended June 27, 2014, respectively, and $(2.0) million and $2.4 million during the three and six months ended June 28, 2013, respectively.
GLS’ revenue was $4.9 million and $9.7 million during the three and six months ended June 27, 2014, respectively and $7.1 million and $20.5 million during the three and six months ended June 28, 2013, respectively. GLS’ operating loss was $0.9 million and $2.4 million during the three and six months ended June 27, 2014, and operating loss of $1.2 million and operating income of $0.2 million during the three and six months ended June 28, 2013, respectively. GLS paid cash dividends of $18.8 million during the six months ended June 27, 2014. Based on our 51% ownership in GLS, the Company recognized $9.6 million in equity method income during the six months ended June 27, 2014.
In October 2011, the DCAA issued GLS a Form 1 in the amount of $95.9 million which pertained to inconsistencies of certain contractual requirements and withheld a portion of outstanding invoices until the Form 1 was resolved. In February 2012, the DCAA issued GLS a second Form 1 in the amount of $102.0 million, asserting inconsistencies with labor related costs for the fiscal year ended April 3, 2009. GLS did not agree with the DCAA's findings on either of the Form 1s and continued to work with the DCAA and the customer to provide clarification and resolve both matters. In February 2014, a final determination was received from the DCAA's Contracting Officer on the outstanding Form 1s resulting in total withholdings of $0.3 million and allowing GLS to submit invoices totaling $19.1 million for recovery of previous invoices. The Form 1s are now considered closed.
We currently hold one promissory note from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The note is included in (i) Prepaid expenses and other current assets and in (ii) Other assets on our unaudited condensed consolidated balance sheet for the short and long-term portions, respectively. The loan balance outstanding was $3.1 million and $3.5 million as of June 27, 2014 and December 31, 2013, respectively, reflecting the initial value plus accrued interest, less payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.

25




As discussed above and in accordance with ASC 810 - Consolidation, we consolidate DIFZ. The following tables present selected financial information for DIFZ as of June 27, 2014 and December 31, 2013 and for the three and six months ended June 27, 2014 and June 28, 2013:
 
As Of
(Amounts in millions)
June 27, 2014
 
December 31, 2013
Assets
$
5.4

 
$
25.9

Liabilities
0.8

 
22.2

 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Revenue
$
81.3

 
$
109.0

 
$
163.7

 
$
222.8

The following tables present selected financial information for our equity method investees as of June 27, 2014 and December 31, 2013 and for the three and six months ended June 27, 2014 and June 28, 2013:
 
As Of
(Amounts in millions)
June 27, 2014
 
December 31, 2013
Current assets
$
68.0

 
$
86.3

Total assets
69.4

 
88.2

Current liabilities
46.5

 
44.5

Total liabilities
46.5

 
44.5

 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Revenue
$
45.7

 
$
48.0

 
$
124.4

 
$
123.7

Gross profit
4.2

 
2.2

 
9.4

 
11.8

Net income
2.9

 
1.5

 
6.1

 
9.6

Many of our joint ventures and VIEs only perform on a single contract. The modification or termination of a contract under a joint venture or VIE could trigger an impairment in the fair value of our investment in these entities. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i) $10.8 million investment in unconsolidated subsidiaries, (ii) $1.9 million in receivables from our unconsolidated joint ventures, (iii) $3.1 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of June 27, 2014.

Note 11 — Share Based Payments
On December 17, 2013 DynCorp Management LLC authorized 100,000 Class B shares as available for issuance to certain members of management and outside directors of Defco Holdings, Inc. (“Defco Holdings”), its non-member manager, and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. The grant and vesting of the awards is contingent upon the executives' consent to the terms and conditions set forth in the Class B interests agreements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
In accordance with the provisions of ASC Topic 718, “Compensation—Stock Compensation” we estimate the grant date fair value of the Class B shares using a Monte Carlo simulation, which takes into account subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option.

26




A summary of the Class B share activity for the six months ended June 27, 2014 is as follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value per share
 
Contractual Term (years)
 
 
 
 
 
 
 
Outstanding at December 31, 2013
 
3,144

 
594.70

 
 
Granted:
 
 
 
 
 
 
Class B-1
 
4,339

 
819.26

 
5
Class B-2
 

 

 
 
Exercised
 

 

 
 
Forfeited or expired
 
(306
)
 
819.26

 
 
Outstanding at June 27, 2014
 
7,177

 
790.77

 
 

The total fair value of shares granted during the six months ended June 27, 2014 was $3.6 million. Total compensation cost expensed for the three and six months ended June 27, 2014 was $0.5 million and $2.1 million, respectively.
The following is a summary of the changes in non-vested shares for the period ended June 27, 2014.
 
 
Shares
 
Weighted Average Fair Value
Non-vested shares at December 31, 2013
 
2,123

 
$
603.37

Granted
 
4,339

 
$
819.26

Vested
 
(1,713
)
 
$
819.26

Forfeited
 
(306
)
 
$
819.26

Non-vested shares at June 27, 2014
 
4,443

 
$
790.48

As of June 27, 2014, the total compensation cost related to the non-vested Class B awards, not yet recognized, was $2.2 million which will be recognized over a weighted average period of approximately 3.56 years.

Note 12 — Collaborative Arrangements
We participate in a collaborative arrangement with CH2M Hill on the LOGCAP IV program. This arrangement sets forth the sharing of some of the risks and rewards associated with this U.S. government contract. Our current share of profits of the LOGCAP IV program is 70%. 
We account for this collaborative arrangement under ASC 808 — Collaborative Arrangements and record revenue gross as the principal participant. The cash inflows and outflows, as well as expenses incurred, are recorded in Cost of services in the period realized. Revenue on LOGCAP IV was $175.6 million and $366.9 million during the three and six months ended June 27, 2014, respectively, and $308.3 million and $671.0 million during the three and six months ended June 28, 2013, respectively. Cost of services on LOGCAP IV program was $162.1 million and $340.7 million during three and six months ended June 27, 2014, respectively, and $292.9 million and $631.4 million during the three and six months ended June 28, 2013, respectively. Our share of the total LOGCAP IV profits was $6.4 million and $11.5 million during the three and six months ended June 27, 2014, respectively, and $7.2 million and $17.7 million during the three and six months ended June 28, 2013, respectively.


27




Note 13 — Consolidating Financial Statements of Subsidiary Guarantors
The Senior Unsecured Notes issued by DynCorp International Inc. ("Subsidiary Issuer") and the Senior Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Humanitarian Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks, LLC, Phoenix Consulting Group LLC and Casals and Associates Inc.("Subsidiary Guarantors"). Each of the Subsidiary Issuers and the Subsidiary Guarantors is 100% owned by the Company. Under the indenture governing the Senior Unsecured Notes, a guarantee of a Subsidiary Guarantor will terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.
Subsequent to the issuance of the Company’s consolidated financial statements on Form 10-K for the period ended December 31, 2013, management determined that within the condensed consolidating statement of cash flows for the six months ended June 28, 2013, the intercompany transfers of the Subsidiary Guarantors in the amount of $24.6 million, previously presented as financing activities, should be classified as investing activities.  The classification of these intercompany transfers has been corrected in the condensed consolidating statement of cash flows for the six months ended June 28, 2013 to be presented within investing activities.  This correction has no impact on the consolidated statement of cash flows for the six months ended June 28, 2013
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of June 27, 2014 and December 31, 2013, (ii) unaudited condensed consolidating statements of operations and comprehensive income for the three and six months ended June 27, 2014 and June 28, 2013, (iii) unaudited condensed consolidating statements of cash flows for the six months ended June 27, 2014 and June 28, 2013 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.
The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.
DynCorp International Inc. is considered the Subsidiary Issuer as it issued the Senior Unsecured Notes.


28




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended June 27, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
595,440

 
$
85,244

 
$
(89,718
)
 
$
590,966

Cost of services

 

 
(540,026
)
 
(84,219
)
 
89,656

 
(534,589
)
Selling, general and administrative expenses

 

 
(32,609
)
 
(64
)
 
62

 
(32,611
)
Depreciation and amortization expense

 

 
(11,874
)
 
(151
)
 

 
(12,025
)
Earnings from equity method investees

 

 
19

 

 

 
19

Impairment of Goodwill, intangibles and long-lived assets

 

 
(91,759
)
 

 

 
(91,759
)
Operating (loss) income

 

 
(80,809
)
 
810

 

 
(79,999
)
Interest expense

 
(17,596
)
 
(588
)
 

 

 
(18,184
)
Loss on early extinguishment of debt

 
(448
)
 

 

 

 
(448
)
Interest income

 

 
24

 
7

 

 
31

Equity in (loss) income of consolidated subsidiaries
(82,072
)
 
(62,397
)
 
216

 

 
144,253

 

Other income, net

 

 
1,446

 
23

 

 
1,469

(Loss) income before income taxes
(82,072
)
 
(80,441
)
 
(79,711
)
 
840

 
144,253

 
(97,131
)
(Provision) benefit for income taxes

 
(1,631
)
 
17,314

 
96

 

 
15,779

Net (loss) income
(82,072
)
 
(82,072
)
 
(62,397
)
 
936

 
144,253

 
(81,352
)
Noncontrolling interests

 

 

 
(720
)
 

 
(720
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,072
)
 
$
(82,072
)
 
$
(62,397
)
 
$
216

 
$
144,253

 
$
(82,072
)

29




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended June 28, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
879,469

 
$
117,739

 
$
(120,686
)
 
$
876,522

Cost of services

 

 
(799,549
)
 
(115,682
)
 
120,658

 
(794,573
)
Selling, general and administrative expenses

 

 
(34,037
)
 
(139
)
 
28

 
(34,148
)
Depreciation and amortization expense

 

 
(12,125
)
 
(149
)
 

 
(12,274
)
Earnings from equity method investees

 

 
(1,623
)
 
2,550

 

 
927

Operating income

 

 
32,135

 
4,319

 

 
36,454

Interest expense

 
(18,858
)
 
(980
)
 

 

 
(19,838
)
Interest income

 

 
21

 
7

 

 
28

Equity in income of consolidated subsidiaries
8,342

 
20,562

 
3,016

 

 
(31,920
)
 

Other (expense) income, net

 

 
(2,634
)
 
77

 

 
(2,557
)
Income (loss) before income taxes
8,342

 
1,704

 
31,558

 
4,403

 
(31,920
)
 
14,087

Benefit (provision) for income taxes

 
6,638

 
(10,996
)
 
(230
)
 

 
(4,588
)
Net income (loss)
8,342

 
8,342

 
20,562

 
4,173

 
(31,920
)
 
9,499

Noncontrolling interests

 

 

 
(1,157
)
 

 
(1,157
)
Net income (loss) attributable to Delta Tucker Holdings, Inc.
$
8,342

 
$
8,342

 
$
20,562

 
$
3,016

 
$
(31,920
)
 
$
8,342


30




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Six Months Ended June 27, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
1,211,065

 
$
172,068

 
$
(179,408
)
 
$
1,203,725

Cost of services

 

 
(1,104,555
)
 
(169,919
)
 
179,394

 
(1,095,080
)
Selling, general and administrative expenses

 

 
(65,974
)
 
(125
)
 
14

 
(66,085
)
Depreciation and amortization expense

 

 
(23,231
)
 
(297
)
 

 
(23,528
)
Earnings from equity method investees

 

 
177

 
9,589

 

 
9,766

Impairment of Goodwill, intangibles and long-lived assets

 

 
(91,759
)
 

 

 
(91,759
)
Operating (loss) income

 

 
(74,277
)
 
11,316

 

 
(62,961
)
Interest expense

 
(35,097
)
 
(1,104
)
 

 

 
(36,201
)
Loss on early extinguishment of debt

 
(621
)
 

 

 

 
(621
)
Interest income

 

 
70

 
14

 

 
84

Equity in (loss) income of consolidated subsidiaries
(82,839
)
 
(52,939
)
 
10,022

 

 
125,756

 

Other income, net

 

 
2,340

 
18

 

 
2,358

(Loss) income before income taxes
(82,839
)
 
(88,657
)
 
(62,949
)
 
11,348

 
125,756

 
(97,341
)
Benefit for income taxes

 
5,818

 
10,010

 
39

 

 
15,867

Net (loss) income
(82,839
)
 
(82,839
)
 
(52,939
)
 
11,387

 
125,756

 
(81,474
)
Noncontrolling interests

 

 

 
(1,365
)
 

 
(1,365
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,839
)
 
$
(82,839
)
 
$
(52,939
)
 
$
10,022

 
$
125,756

 
$
(82,839
)

31




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Six Months Ended June 28, 2013 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
1,815,203

 
$
239,972

 
$
(246,545
)
 
$
1,808,630

Cost of services

 

 
(1,650,552
)
 
(235,599
)
 
246,452

 
(1,639,699
)
Selling, general and administrative expenses

 

 
(69,435
)
 
(350
)
 
93

 
(69,692
)
Depreciation and amortization expense

 

 
(23,826
)
 
(295
)
 

 
(24,121
)
Earnings from equity method investees

 

 
823

 
2,550

 

 
3,373

Operating income

 

 
72,213

 
6,278

 

 
78,491

Interest expense

 
(36,986
)
 
(2,015
)
 

 

 
(39,001
)
Interest income

 

 
33

 
13

 

 
46

Equity in (loss) income of consolidated subsidiaries
23,343

 
47,311

 
3,891

 

 
(74,545
)
 

Other (loss) income, net

 

 
(613
)
 
153

 

 
(460
)
Income (loss) before income taxes
23,343

 
10,325

 
73,509

 
6,444

 
(74,545
)
 
39,076

Benefit (provision) for income taxes

 
13,018

 
(26,198
)
 
(204
)
 

 
(13,384
)
Net income (loss)
23,343

 
23,343

 
47,311

 
6,240

 
(74,545
)
 
25,692

Noncontrolling interests

 

 

 
(2,349
)
 

 
(2,349
)
Net income (loss) attributable to Delta Tucker Holdings, Inc.
$
23,343

 
$
23,343

 
$
47,311

 
$
3,891

 
$
(74,545
)
 
$
23,343



32




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Three Months Ended June 27, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(82,072
)
 
$
(82,072
)
 
$
(62,397
)
 
$
936

 
$
144,253

 
$
(81,352
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(39
)
 
(39
)
 

 
(39
)
 
78

 
(39
)
Other comprehensive loss, before tax
(39
)
 
(39
)
 

 
(39
)
 
78

 
(39
)
Income tax expense related to items of other comprehensive income
(68
)
 
(68
)
 

 
(68
)
 
136

 
(68
)
Other comprehensive loss
(107
)
 
(107
)
 

 
(107
)
 
214

 
(107
)
Comprehensive (loss) income
(82,179
)
 
(82,179
)
 
(62,397
)
 
829

 
144,467

 
(81,459
)
Noncontrolling interests

 

 

 
(720
)
 

 
(720
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,179
)
 
$
(82,179
)
 
$
(62,397
)
 
$
109

 
$
144,467

 
$
(82,179
)

33




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Three Months Ended June 28, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
8,342

 
$
8,342

 
$
20,562

 
$
4,173

 
$
(31,920
)
 
$
9,499

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(43
)
 
(43
)
 
38

 
(81
)
 
86

 
(43
)
Other comprehensive (loss) income, before tax
(43
)
 
(43
)
 
38

 
(81
)
 
86

 
(43
)
Income tax expense related to items of other comprehensive income
15

 
15

 
(14
)
 
29

 
(30
)
 
15

Other comprehensive (loss) income
(28
)
 
(28
)
 
24

 
(52
)
 
56

 
(28
)
Comprehensive income
8,314

 
8,314

 
20,586

 
4,121

 
(31,864
)
 
9,471

Noncontrolling interests

 

 

 
(1,157
)
 

 
(1,157
)
Comprehensive income (loss) attributable to Delta Tucker Holdings, Inc.
$
8,314

 
$
8,314

 
$
20,586

 
$
2,964

 
$
(31,864
)
 
$
8,314



34




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Six Months Ended June 27, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(82,839
)
 
$
(82,839
)
 
$
(52,939
)
 
$
11,387

 
$
125,756

 
$
(81,474
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(73
)
 
(73
)
 

 
(73
)
 
146

 
(73
)
Other comprehensive loss, before tax
(73
)
 
(73
)
 

 
(73
)
 
146

 
(73
)
Income tax expense related to items of other comprehensive income
26

 
26

 

 
26

 
(52
)
 
26

Other comprehensive loss
(47
)
 
(47
)
 

 
(47
)
 
94

 
(47
)
Comprehensive (loss) income
(82,886
)
 
(82,886
)
 
(52,939
)
 
11,340

 
125,850

 
(81,521
)
Noncontrolling interests

 

 

 
(1,365
)
 

 
(1,365
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,886
)
 
$
(82,886
)
 
$
(52,939
)
 
$
9,975

 
$
125,850

 
$
(82,886
)

35




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Six Months Ended June 28, 2013 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
23,343

 
$
23,343

 
$
47,311

 
$
6,240

 
$
(74,545
)
 
$
25,692

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(454
)
 
(454
)
 
(241
)
 
(213
)
 
908

 
(454
)
Other comprehensive loss, before tax
(454
)
 
(454
)
 
(241
)
 
(213
)
 
908

 
(454
)
Income tax expense related to items of other comprehensive income
163

 
163

 
86

 
77

 
(326
)
 
163

Other comprehensive loss
(291
)
 
(291
)
 
(155
)
 
(136
)
 
582

 
(291
)
Comprehensive income
23,052

 
23,052

 
47,156

 
6,104

 
(73,963
)
 
25,401

Noncontrolling interests

 

 

 
(2,349
)
 

 
(2,349
)
Comprehensive income attributable to Delta Tucker Holdings, Inc.
$
23,052

 
$
23,052

 
$
47,156

 
$
3,755

 
$
(73,963
)
 
$
23,052



36




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet Information
June 27, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
139,657

 
$
13,756

 
$

 
$
153,413

Restricted cash

 

 
1,659

 

 

 
1,659

Accounts receivable, net

 

 
481,763

 
1,369

 
103

 
483,235

Intercompany receivables

 

 
224,574

 
8,936

 
(233,510
)
 

Prepaid expenses and other current assets

 

 
117,400

 
513

 
104

 
118,017

Total current assets

 

 
965,053

 
24,574

 
(233,303
)
 
756,324

Property and equipment, net

 

 
23,339

 
237

 

 
23,576

Goodwill

 

 
170,626

 
32,399

 

 
203,025

Tradenames, net

 

 
43,376

 

 

 
43,376

Other intangibles, net

 

 
204,173

 
877

 

 
205,050

Investment in subsidiaries
147,861

 
1,009,111

 
55,318

 

 
(1,212,290
)
 

Other assets, net
555

 
13,891

 
17,386

 

 

 
31,832

Total assets
$
148,416

 
$
1,023,002

 
$
1,479,271

 
$
58,087

 
$
(1,445,593
)
 
$
1,263,183

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$

 
$
174,530

 
$
859

 
$
(1,646
)
 
$
173,743

Accrued payroll and employee costs

 

 
105,560

 
1,555

 
2,027

 
109,142

Intercompany payables
45,641

 
178,932

 
8,937

 

 
(233,510
)
 

Deferred income taxes

 

 
19,125

 
6

 

 
19,131

Other accrued liabilities

 
23,937

 
129,670

 
349

 
(71
)
 
153,885

Income taxes payable

 

 
8,123

 

 
(103
)
 
8,020

Total current liabilities
45,641

 
202,869

 
445,945

 
2,769

 
(233,303
)
 
463,921

Long-term debt, less current portion

 
672,272

 

 

 

 
672,272

Long-term deferred taxes

 

 
11,528

 

 

 
11,528

Other long-term liabilities

 

 
6,852

 

 

 
6,852

Noncontrolling interests

 

 
5,835

 

 

 
5,835

Equity
102,775

 
147,861

 
1,009,111

 
55,318

 
(1,212,290
)
 
102,775

Total liabilities and equity
$
148,416

 
$
1,023,002

 
$
1,479,271

 
$
58,087

 
$
(1,445,593
)
 
$
1,263,183



37




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet Information
December 31, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
144,025

 
$
26,820

 
$

 
$
170,845

Restricted cash

 

 
1,659

 

 

 
1,659

Accounts receivable, net

 

 
596,901

 
1,990

 
(21,755
)
 
577,136

Intercompany receivables

 

 
173,987

 
7,857

 
(181,844
)
 

Prepaid expenses and other current assets

 

 
123,761

 
456

 
293

 
124,510

Total current assets

 

 
1,040,333

 
37,123

 
(203,306
)
 
874,150

Property and equipment, net

 

 
23,797

 
323

 

 
24,120

Goodwill

 

 
261,367

 
32,400

 

 
293,767

Tradenames, net

 

 
43,464

 

 

 
43,464

Other intangibles, net

 

 
224,152

 
1,087

 

 
225,239

Investment in subsidiaries
228,870

 
1,095,853

 
45,383

 

 
(1,370,106
)
 

Other assets, net
891

 
17,525

 
20,765

 

 

 
39,181

Total assets
$
229,761

 
$
1,113,378

 
$
1,659,261

 
$
70,933

 
$
(1,573,412
)
 
$
1,499,921

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$

 
$
192,456

 
$
2,243

 
$
(1,553
)
 
$
193,146

Accrued payroll and employee costs

 

 
111,547

 
22,770

 
(19,983
)
 
114,334

Intercompany payables
45,976

 
128,011

 
7,857

 

 
(181,844
)
 

Deferred income taxes

 

 
30,960

 
5

 

 
30,965

Other accrued liabilities

 
24,225

 
175,796

 
438

 
74

 
200,533

Income taxes payable

 

 
13,926

 
94

 

 
14,020

Total current liabilities
45,976

 
152,236

 
532,542

 
25,550

 
(203,306
)
 
552,998

Long-term debt, less current portion

 
732,272

 

 

 

 
732,272

Long-term deferred taxes

 

 
17,359

 

 

 
17,359

Other long-term liabilities

 

 
7,632

 

 

 
7,632

Noncontrolling interests

 

 
5,875

 

 

 
5,875

Equity
183,785

 
228,870

 
1,095,853

 
45,383

 
(1,370,106
)
 
183,785

Total liabilities and equity
$
229,761

 
$
1,113,378

 
$
1,659,261

 
$
70,933

 
$
(1,573,412
)
 
$
1,499,921



38




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flow Information
For the Six Months Ended June 27, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
334

 
$
9,080

 
$
55,721

 
$
(10,114
)
 
$
(936
)
 
$
54,085

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net

 

 
(6,448
)
 

 

 
(6,448
)
Proceeds from sale of property, plant and equipment

 

 
33

 

 

 
33

Purchase of software

 

 
(887
)
 

 

 
(887
)
Return of capital from equity method investees

 

 
2,884

 

 

 
2,884

Contributions to equity method investees

 

 

 

 

 

Transfer to Parent

 

 
(50,586
)
 
(1,077
)
 
51,663

 

Net cash used in investing activities

 

 
(55,004
)
 
(1,077
)
 
51,663

 
(4,418
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt

 
2,500

 

 

 

 
2,500

Payments on long-term debt

 
(62,500
)
 

 

 

 
(62,500
)
Payments of deferred financing costs

 

 

 

 

 

Borrowings related to financed insurance

 

 
16,472

 

 

 
16,472

Payments related to financed insurance

 

 
(22,634
)
 

 

 
(22,634
)
Payments of dividends to Parent

 

 

 
(1,873
)
 
936

 
(937
)
Transfers (to) from Affiliates
(334
)
 
50,920

 
1,077

 

 
(51,663
)
 

Net cash used in financing activities
(334
)
 
(9,080
)
 
(5,085
)
 
(1,873
)
 
(50,727
)
 
(67,099
)
Net decrease in cash and cash equivalents

 

 
(4,368
)
 
(13,064
)
 

 
(17,432
)
Cash and cash equivalents, beginning of period

 

 
144,025

 
26,820

 

 
170,845

Cash and cash equivalents, end of period
$

 
$

 
$
139,657

 
$
13,756

 
$

 
$
153,413



39




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flow Information
For The Six Months Ended June 28, 2013 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
99

 
$
12,462

 
$
56,793

 
$
(15,631
)
 
$
(2,812
)
 
$
50,911

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net

 

 
(1,212
)
 
(8
)
 

 
(1,220
)
Proceeds from sale of property, plant and equipment

 

 
167

 

 

 
167

Purchase of software

 

 
(2,557
)
 

 

 
(2,557
)
Return of capital from equity method investees

 

 
769

 

 

 
769

Transfer to Parent

 

 
(24,584
)
 

 
24,584

 

Net cash used in investing activities

 

 
(27,417
)
 
(8
)
 
24,584

 
(2,841
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt

 
317,600

 

 

 

 
317,600

Payments on long-term debt

 
(318,237
)
 

 

 

 
(318,237
)
Payments of deferred financing costs

 

 
(2,139
)
 

 

 
(2,139
)
Borrowings related to financed insurance

 

 
1,063

 

 

 
1,063

Payments related to financed insurance

 

 
(26,471
)
 

 

 
(26,471
)
Payments of dividends to Parent

 

 

 
(5,624
)
 
2,812

 
(2,812
)
Transfers (to) from Affiliates
(99
)
 
(11,825
)
 

 
36,508

 
(24,584
)
 

Net cash (used in) provided by financing activities
(99
)
 
(12,462
)
 
(27,547
)
 
30,884

 
(21,772
)
 
(30,996
)
Net increase in cash and cash equivalents

 

 
1,829

 
15,245

 

 
17,074

Cash and cash equivalents, beginning of period

 

 
74,907

 
43,868

 

 
118,775

Cash and cash equivalents, end of period
$

 
$

 
$
76,736

 
$
59,113

 
$

 
$
135,849



40




Note 14 — Subsequent Events
We evaluated potential subsequent events occurring after the period end date through the date the financial statements were issued and concluded that there were no subsequent events for the quarter ended June 27, 2014, except as disclosed within the Notes to the unaudited condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our unaudited condensed consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. unaudited condensed consolidated financial statements, and the notes thereto, and other data contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013. References to "Delta Tucker Holdings", the "Company", "we", "our" or "us" refer to Delta Tucker Holdings, Inc. and its subsidiaries unless otherwise stated or indicated by context.

Company Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies.
Reportable Segments
The Company's organizational structure includes three operating and reporting segments; DynAviation, DynLogistics and DynGlobal. DynAviation and DynLogistics provide services domestically and in foreign countries primarily under contracts with the U.S. government. The focus of DynGlobal is the pursuit and growth of our international and commercial business.
DynLogistics
This segment provides best-value mission readiness to its customers through total support solutions including conventional and contingency logistics, operations and maintenance support, platform modification and upgrades, supply chain management and training, security and full spectrum intelligence mission support services. The LOGCAP IV contract is the most significant contract within this segment and performs under a single IDIQ contract. Under the LOGCAP IV contract, the U.S. Army contracts for us to perform selected services, operations and maintenance, engineering and construction and logistics in theater to augment the U.S. Army, the U.S. Marine Corps and North Atlantic Treaty Organization ("NATO") forces and to release military units for other missions or to fill the U.S. military resource shortfalls.
This segment also provides international policing and police training, judicial support, immigration support and base operations to a variety of international and national customers. We provide senior advisors and mentors to foreign governmental agencies to provide leadership, operations and training, intelligence, logistics and security capabilities. This includes the services we provide under key contracts such as the Afghanistan Ministry of Defense Program ("AMDP") and the Combined Security Transition Command Afghanistan ("CSTC-A") programs.
DynLogistics supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions. This segment also provides base operations support, engineering, supply and logistics, pre-positioned war reserve materials, facilities, marine maintenance services, program management services primarily for ground vehicles and contingency response on a worldwide basis. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.

41




DynAviation
This segment provides worldwide maintenance of aircraft fleet and ground vehicles, which includes logistics support on aircraft and aerial firefighting services, weapons systems, and related support equipment to the DoD, other U.S. government agencies and direct contracts with foreign governments. This segment also provides foreign assistance programs to help foreign governments improve their ability to develop and implement national strategies and programs to prevent the production, trafficking and abuse of illicit drugs. The INL Air Wing program is the most significant programs in the DynAviation segment. The INL Air Wing program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan.
DynGlobal
This segment focuses resources and energy into the pursuit of business with governments and commercial entities around the world. Initial activities of this segment are focused on the development and growth of this business.

Current Operating Environment and Outlook
The following discussion is a supplement to and should be read in conjunction with the accompanying unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2013.
External Factors
After a decade of unprecedented defense spending to support operations in Iraq and Afghanistan, the defense industry continues to adapt to a period of reduced funding brought about by the convergence of a variety of policy, political and fiscal realities.  Budgetary challenges at home and policy decisions in Afghanistan have not occurred in a geopolitical vacuum; instability and on-going and potential conflicts around the globe will likely drive adjustments to U.S. national security and foreign policy objectives, as well as the funding levels and mechanisms to support necessary policy shifts. External factors driving influencing industry include:
Adhering to discretionary spending caps mandated by the Budget Control Act of 2011 ("BCA");
The ongoing draw-down of U.S. troops in Afghanistan; and
Increased instability and challenges to the existing international framework.
While the BCA-mandated spending caps and related sequestration still remains the law of the land, enactment of the Bipartisan Budget Act of 2013 ("BBA") in December 2013 adjusted the caps upward and brought some much needed clarity and stability to both defense and non-defense discretionary budgets, at least for fiscal years 2014 (FY14) and 2015 (FY15). The BBA ensures there will be no sequestration in FY15, and while Congress will exercise its prerogative to alter and prioritize the President’s budget requests, the topline numbers are defined and will be adhered to by the President and Congress. It is important to note, the BBA does not impact or resolve the caps mandated by the BCA in 2016 and beyond.
Specifically, the FY15 budget request for the Department of Defense ("DoD") is $555.0 billion. The request consists of a $496.0 billion for the base budget, which is essentially flat with FY14, and $59.0 billion for Overseas Contingency Operations ("OCO") request, which represents an anticipated 31% decrease from FY14. 
The base budget request for the Operations and Maintenance ("O&M") accounts total $199.0 billion, which is a 3% increase over FY14, with all services seeing an increase in O&M funding. The increased request for O&M activities demonstrates DoD’s continued focus on recapturing lost readiness and returning the force to the highest possible levels of preparedness.
As stated above, the reduction in OCO funds requested was anticipated based on the drawdown of troops in Afghanistan. However, the $59.0 billion request is still significant, especially when viewed in the context of the expected force structure in Afghanistan moving forward.
The on-going requirement for substantial OCO budgets is being driven by several factors, including retrograding and resetting of war equipment; sustaining and professionalizing the Afghan National Security Forces ("ANSF"); supporting a large U.S. presence in the greater Middle East; and supporting new counter-terrorism and European security initiatives. 
Starting with retrograde and reset, the FY15 Army OCO request includes $2.8 billion, 27% more than FY14, for resetting equipment. The outgoing Vice Chief of the Army, General John Campbell, recently stated that the OCO requirement to fully complete the retrograde and reset of the force coming out of Afghanistan will take three years after the last piece of equipment leaves the country. 

42




In Afghanistan, the U.S. reaffirmed its commitment to the Afghan people by providing $4.1 billion, $600.0 million below FY14, for the continued training and development of the ANSF. Importantly, these funds are increasingly utilized for sustaining and professionalizing the force and not for equipping or building additional infrastructure. This is a real shift from building quantity to ensuring quality in maintenance, logistics and other enablers. 
Related to the ANSF training mission is the overall U.S. military footprint in Afghanistan. The FY15 OCO request reflects the Administration’s plans to shrink U.S. troops from 37,000 in 2014 to an average of 11,700 in 2015, with a goal of 9,800 by year’s end.  
Lastly on OCO, the off-budget requests have traditionally only supported operations in Afghanistan, Iraq and related activities.  The FY15 OCO includes two new programs: the $5.0 billion Counter-terrorism Partnership Fund ("CTPF") and the $1.0 billion European Reassurance Initiative ("ERI"). Both of these funds are intended to reaffirm to our allies that the U.S. is prepared to lead and react to events in Ukraine, Syria, Iraq and other hot spots around the world. The CTPF and ERI will emphasize increased U.S. presence, more multi and bilateral training, and the building of host-nation capacity. 
The FY15 OCO budget request reflects how the external drivers of the Afghanistan troop drawdown and increased global instability are influencing U.S. national security and national security objectives, as well as the allocation of limited resources to support shifts in policy and priorities. 
The U.S. and its allies are confronted with a complex, challenging and often violent world. Whether it is on our own Southwest border, Iraq, Ukraine, the South China Sea, Africa or any number of other locations, U.S. leadership is still required. This leadership includes assisting in the development of and equipping of allied security forces and related civil institutions to bolster international stability and security.
While there exists potential challenges that could adversely impact our business on a short-term basis, we believe the following longer-term industry trends are positive and will result in continued demand for the types of services we provide:
Realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life cycle;
Asset management of equipment ranging from organizational to depot-level maintenance;
Requirement to maintain, overhaul and upgrade for returning rolling stocks and aging platforms;
Sustain and support forward-deployed rotational troops and equipment;
Growth in outsourcing by foreign allies of maintenance, supply-support, facilities management, infrastructure upgrades, and construction management-related services;
Continued focus on smart power initiatives by the DoS, USAID, the United Nations ("UN"), and the DoD, including development and smaller-scale stability operations; and
Further efforts by the U.S. government to move from single-award to multiple-award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.
With regard to the greater Middle East, we expect instability and challenges to our regional relationships will persist. However, as acknowledged in the OCO request, U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and our allies. We believe that base operations and support and maintenance capacity will be key enablers in this environment and we are especially well positioned to provide these services to both U.S. forces and allied nations.
In Asia, the re-balance verifies the increased importance of the Asia-Pacific regions, in both security and economic terms for the U.S. As the U.S. revitalizes and reinforces its presence in this vital region, we expect to see increased demand for base operations support, logistics support and capacity building, all of which we provide best-in-class.


43




Notable Events for the Six Months Ended June 27, 2014
In January 2014, DynLogistics announced the award of a subcontract to provide training assistance in support of the Afghan Engineer Training Security Assistance Team. DynCorp will perform as a subcontractor to GovSource, Inc., a provider of professional and training services to the U.S. Government, on the U.S. Army Security Assistance Training Management Organization ("USASATMO") task order under the SATMO indefinite delivery, indefinite quantity contract. The firm fixed-price subcontract has a one year period of performance and a total value of $4.0 million.
In January 2014, DynLogistics announced the award of a new task order under the Air Force Contract Augmentation Program III ("AFCAP") to provide engineering design and support services in the United Arab Emirates ("UAE"). The competitively-awarded task order has a one-year base period with two, one-year options and a total contract value of $4.4 million, if all options are exercised.
In February 2014, DynLogistics’ Casals & Associates announced that it has been awarded a position on a multiple award, IQC to support U.S. Agency for International Development ("USAID") transition initiatives as part of the Support Which Implements Fast Transition IV ("SWIFT IV") program. The competitively-awarded, multiple award IQC has a five year period of performance with a total shared ceiling contract value of $2.5 billion.
In February 2014, DynLogistics announced the award of a contract by the Naval Facilities Engineering Command-Pacific ("NAVFAC Pacific") to provide operations support services in Cambodia. The contract has a one-year base period with four, one-year options for a total contract value of $8.5 million, if all options are exercised.
In March 2014, DynAviation announced the award of a contract to provide aviation maintenance services throughout the Theater Aviation Sustainment Manager - OCONUS ("TASM-O") region under the Army Aviation Field Maintenance ("AFM") contract. The hybrid firm fixed price, cost-plus incentive fee contract has a one year base with four, one year options and a total potential contract value of $307.1 million.
In March 2014, our DynGlobal business announced the opening of its London office, in order to support the pursuit of opportunities in the United Kingdom, continental Europe and Africa.
In March 2014, we made a principal prepayment of $15.0 million, on our Term Loan. This payment caused the acceleration of unamortized deferred financing fees of $0.2 million, which was recorded as a Loss on extinguishment of debt within our Statement of Operations.
In April 2014, DynAviation announced the award of a task order under the Contract Field Teams ("CFT") contract to provide aviation maintenance support to the 512th Airlift Wing at Dover Air Force Base. The task order has a one year base and one, one-year option and a potential total value of $8.5 million.
In April 2014, the Company announced that DynAviation was awarded a task order under the Logistics Worldwide multiple award contract from the General Services Administration to provide engineering support services. The competitively-awarded task order has one base year with four, one-year options, and a total potential value of $5.0 million.
In June 2014, we made a principal prepayment of $45.0 million, on our Term Loan. This payment caused the acceleration of unamortized deferred financing fees of $0.4 million, which was recorded as a Loss on extinguishment of debt within our Statement of Operations.
In June 2014, DynLogistics received notice to proceed award of a task order from the U.S. Department of State Bureau of Information Resource Management to provide global information technology services. The task order has a five-year period of performance, with a total contract value of $165 million, if all options are exercised.

Contract Types
Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these is described below.
Fixed-Price Type Contracts: In a fixed-price contract, the price is generally not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the contracted service. Our fixed-price contracts may include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive elements.
Time-and-Materials Type Contracts: Time-and-materials type contracts provide for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.

44




Cost-Reimbursement Type Contracts: Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee, incentive-fee or a combination thereof. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets. Award and incentive fees are excluded from estimated total contract revenue until a reasonably determinable estimate of award and incentive fees can be made.
A single contract may be performed under one or more of the contracts types discussed above. Any of these three types of contracts may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CFT and LOGCAP IV programs are two examples of IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.
Our historical contract mix by type, as a percentage of revenue, is indicated in the table below.
 
Three Months Ended
 
Six Months Ended
 
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
Fixed-Price
25
%
 
23
%
 
25
%
 
22
%
Time-and-Materials
12
%
 
12
%
 
11
%
 
12
%
Cost-Reimbursement
63
%
 
65
%
 
64
%
 
66
%
Total
100
%
 
100
%
 
100
%
 
100
%
Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. We anticipate cost-reimbursable type contracts will continue to represent a large portion of our business for the remainder of calendar year 2014.
Under many of our contracts, we may rely on subcontractors to perform all or a portion of the services we are obligated to provide to our customers. We use subcontractors primarily for specialized, technical labor and certain functions such as construction and catering. We often enter into subcontract arrangements in order to meet government requirements that certain categories of services be awarded to small businesses.
Backlog
We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised, priced contract options and the unfunded portion of exercised contract options. These priced options may or may not be exercised at the sole discretion of the customer. Historically, it has been our experience that the customer has typically exercised contract options.
Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years. The U.S. government is legally prohibited from ordering work under a contract in the absence of funding.
The following table sets forth our approximate backlog as of the dates indicated:
 
As Of
(Amounts in millions)
June 27, 2014

December 31, 2013
Funded backlog
$
1,134


$
1,541

Unfunded backlog
2,100


2,439

Total
$
3,234


$
3,980

The decrease in backlog as of June 27, 2014 was primarily due to orders being adjusted downward for contract de-scopes and potential contract wins being pushed to subsequent periods.


45




Results of Operations

Consolidated Three Months Ended June 27, 2014 compared to the Three Months Ended June 28, 2013
The following tables set forth our unaudited consolidated results of operations, both in dollars and as a percentage of revenue, for the three months ended June 27, 2014 and June 28, 2013:
 
Three Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
Revenue
$
590,966

 
100.0
 %
 
$
876,522

 
100.0
 %
Cost of services
(534,589
)
 
(90.5
)
 
(794,573
)
 
(90.7
)
Selling, general and administrative expenses
(32,611
)
 
(5.5
)
 
(34,148
)
 
(3.9
)
Depreciation and amortization expense
(12,025
)
 
(2.0
)
 
(12,274
)
 
(1.4
)
Earnings from equity method investees
19

 

 
927

 
0.1

Impairment of goodwill, intangibles and long lived assets
(91,759
)
 
(15.5
)
 

 

Operating (loss) income
(79,999
)
 
(13.5
)
 
36,454

 
4.2

Interest expense
(18,184
)
 
(3.1
)
 
(19,838
)
 
(2.3
)
Loss on early extinguishment of debt
(448
)
 
(0.1
)
 

 

Interest income
31

 

 
28

 

Other income (expense), net
1,469

 
0.3

 
(2,557
)
 
(0.3
)
(Loss) income before income taxes
(97,131
)
 
(16.4
)
 
14,087

 
1.6

Benefit (provision) for income taxes
15,779

 
2.7

 
(4,588
)
 
(0.5
)
Net (loss) income
(81,352
)
 
(13.8
)
 
9,499

 
1.1

Noncontrolling interests
(720
)
 
(0.1
)
 
(1,157
)
 
(0.1
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,072
)
 
(13.9
)
 
$
8,342

 
1.0

Revenue — Revenue for the three months ended June 27, 2014 was $591.0 million, a decrease of 32.6% compared to $876.5 million for the three months ended June 28, 2013. The decrease was primarily driven by the continued drawdown of U.S. forces in Afghanistan, which impacted the demand for services under the Company's LOGCAP IV contract and caused reduced training needs under the Afghanistan Ministry of Defense Program ("AMDP") contract; reduced service needs in Iraq for DoS, affecting the INL Air Wing contract as well as the completion of the WPS contract, and the delays and losses in new business awards caused by United States budget uncertainty and increased competition. See further discussion of our revenue results in the "Results by Segment" section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the three months ended June 27, 2014 was $534.6 million, a decrease of $260.0 million, or 32.7%, compared to the three months ended June 28, 2013. The decrease in Cost of services was primarily driven by the reduction in volume as discussed above. Cost of services as a percentage of revenue decreased to 90.5% for the three months ended June 27, 2014 compared to 90.7% for the three months ended June 28, 2013. The reduction in Cost of services as a percentage of revenue was driven by the decline in the LOGCAP IV and AMDP contracts and was partially offset by certain loss contracts within our DynAviation segment. See further discussion of the impact of program margins in the "Results by Segment" section below.
Selling, general and administrative expenses ("SG&A") — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $1.5 million, or 4.5%, to $32.6 million during the three months ended June 27, 2014 primarily as a result of reductions in consulting and professional fees, contract labor, rent expense and compensation. SG&A as a percentage of revenue increased to 5.5% for the three months ended June 27, 2014 compared to 3.9% for the three months ended June 28, 2013 primarily as a result of the decline in revenue out pacing general and administrative reductions. We continue to focus on cost containment measures to better position the Company operationally for the future.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC (“PaTH”), Contingency Response Services LLC (“CRS”), Global Response Services LLC (“GRS”) and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the three months ended June 27, 2014 was $0.02 million compared to $0.9 million for the three months ended June 28, 2013, primarily as a result of the reduced activity in our PATH and GRS joint ventures. See Note 10 for additional information.

46




Impairment of goodwill, intangibles and long lived assets — Impairment of goodwill, intangibles and long lived assets for the three months ended June 27, 2014 was $91.8 million primarily from an impairment charge of $90.7 million on our goodwill associated with our Logistics Sustainment Solutions ("LSS") reporting unit within our DynLogistics segment as a result of our assessment of a triggering event in the quarter. See Note 2 and Note 3 for further discussion.
Interest expense — Interest expense for the three months ended June 27, 2014 was $18.2 million, a decrease of $1.7 million, or 8.3%, compared to the three months ended June 28, 2013. The decrease is the result of the reduction of the principal balance of our Term Loan as a result of principal prepayments of $50.0 million during the year ended December 31, 2013 and $60.0 million through the first two quarters of 2014.
Other income (expense), net — Other income (expense), net consists primarily of our share of earnings from Babcock DynCorp Limited ("Babcock"), as well as gains/losses from foreign currency and asset sales. Other income (expense), net during the three months ended June 27, 2014 was $1.5 million, an increase of $4.0 million or 157.5% due to income recognized upon the sale of a helicopter during the six months ended June 27, 2014 and as a result of earnings recognized from Babcock.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discreet items. The effective tax rate for the three months ended June 27, 2014 was 16.2%, as compared to 32.6% for the three months ended June 28, 2013, a change primarily driven by the impact of the goodwill impairment as it relates to the pretax book loss compared to pretax book income in the prior year.

Consolidated Six Months Ended June 27, 2014 compared to the Six Months Ended June 28, 2013
The following tables set forth our unaudited consolidated results of operations, both in dollars and as a percentage of revenue, for the six months ended June 27, 2014 and June 28, 2013:
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
Revenue
$
1,203,725

 
100.0
 %
 
$
1,808,630

 
100.0
 %
Cost of services
(1,095,080
)
 
(91.0
)
 
(1,639,699
)
 
(90.7
)
Selling, general and administrative expenses
(66,085
)
 
(5.5
)
 
(69,692
)
 
(3.9
)
Depreciation and amortization expense
(23,528
)
 
(2.0
)
 
(24,121
)
 
(1.3
)
Earnings from equity method investees
9,766

 
0.8

 
3,373

 
0.2

Impairment of goodwill, intangibles and long lived assets
(91,759
)
 
(7.6
)
 

 

Operating (loss) income
(62,961
)
 
(5.2
)
 
78,491

 
4.3

Interest expense
(36,201
)
 
(3.0
)
 
(39,001
)
 
(2.2
)
Loss on early extinguishment of debt
(621
)
 
(0.1
)
 

 

Interest income
84

 

 
46

 

Other income (expense), net
2,358

 
0.2

 
(460
)
 

(Loss) income before income taxes
(97,341
)
 
(8.1
)
 
39,076

 
2.1

Benefit (provision) for income taxes
15,867

 
1.3

 
(13,384
)
 
(0.7
)
Net (loss) income
(81,474
)
 
(6.8
)
 
25,692

 
1.4

Noncontrolling interests
(1,365
)
 
(0.1
)
 
(2,349
)
 
(0.1
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,839
)
 
(6.9
)
 
$
23,343

 
1.3

Revenue — Revenue for the six months ended June 27, 2014 was $1,203.7 million, a decrease of $604.9 million, or 33.4%, compared to the six months ended June 28, 2013. The decrease was primarily driven by the accelerated pace of the drawdown in Afghanistan, which impacted the demand for services under the Company's LOGCAP IV contract and caused reduced training needs under the AMDP contract; reduced service needs in Iraq for DoS, affecting the INL Air Wing contract as well as the completion of the WPS contract, and the delays in new business awards caused by United States budget uncertainty. See further discussion of our revenue results in the "Results by Segment" section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the six months ended June 27, 2014 was $1,095.1 million, a decrease of $544.6 million, or 33.2%, compared to the six months ended June 28, 2013. The decrease in Cost of services was primarily driven by the reduction in volume as discussed above. The reduction in volume also drove a slight increase in Cost of services as a percentage of revenue to 91.0% for the six months ended June 27, 2014 compared to 90.7% for the six months ended June 28, 2013. Cost of services as a percentage of revenue increased due to certain loss contracts within our DynAviation segment. See further discussion of the impact of program margins in the "Results by Segment" section below.

47




Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $3.6 million, or 5.2%, to $66.1 million during the six months ended June 27, 2014 primarily as a result of reductions in consulting and professional fees, contract labor, rent expense and compensation. SG&A as a percentage of revenue increased to 5.5% for the six months ended June 27, 2014 compared to 3.9% for the six months ended June 28, 2013. The increase in SG&A as a percentage of revenue for the six months ended June 27, 2014 was primarily a result of the decline in revenue out pacing general and administrative reductions.
Depreciation and amortization — Depreciation and amortization during the six months ended June 27, 2014 was $23.5 million, a decrease of $0.6 million, or 2.5%, compared to the six months ended June 28, 2013. The decrease was primarily due to the full amortization of certain internally developed software as well as the write-down and disposal of fixed assets during the year ended 2013.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as PaTH, CRS, GRS and GLS. Earnings from operationally integral unconsolidated affiliates for the six months ended June 27, 2014 was $9.8 million, an increase of $6.4 million compared to the six months ended June 28, 2013, primarily as a result of equity method income recognized upon the receipt of a $9.6 million distribution from GLS related to the finalization of Form 1s in February 2014 allowing GLS to submit previous invoices for recovery. See Note 10 for additional information.
Impairment of goodwill, intangibles and long lived assets — Impairment of goodwill, intangibles and long lived assets for the six months ended June 27, 2014 was $91.8 million primarily from an impairment charge of $90.7 million on our goodwill associated with our Logistics Sustainment Solutions ("LSS") reporting unit within our DynLogistics segment as a result of our assessment of a triggering event in the quarter. See Note 3 for further discussion.
Interest expense — Interest expense for the six months ended June 27, 2014 was $36.2 million, a decrease of $2.8 million, or 7.2%, compared to the six months ended June 28, 2013. The decrease is the result of the reduction of the principal balance of our Term Loan as a result of principal prepayments of $50.0 million during the year ended December 31, 2013 and $60.0 million through the first two quarters of 2014.
Other income (expense), net — Other income (expense), net consists primarily of our share of earnings from Babcock, as well as gains/losses from foreign currency and asset sales. Other income, net during the six months ended June 27, 2014 was $2.4 million, an increase of $2.8 million compared to Other expense, net of $(0.5) million for the six months ended June 28, 2013, due to the income recognized upon the sale of a helicopter and as a result of earnings recognized from Babcock.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discreet items. The effective tax rate for the six months ended June 27, 2014 was 16.2%, as compared to 34.3% for the six months ended June 28, 2013 a change primarily driven by the impact of the goodwill impairment as it relates to the pretax book loss compared to pretax book income in the prior year.


48




Results by Segment – Three Months Ended June 27, 2014 Compared to Three Months Ended June 28, 2013
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the three months ended June 27, 2014 and June 28, 2013. The following amounts agree to our segment disclosures. See Note 9 for further discussion.
 
Three Months Ended
 
June 27, 2014
 
June 28, 2013
(Amounts in thousands)
Revenue
 
% of
Total Revenue
 
Revenue
 
% of
Total Revenue
DynLogistics
$
290,340

 
49.1
 %
 
$
500,518

 
57.1
 %
DynAviation
300,737

 
50.9

 
380,418

 
43.4

Headquarters / Other (1)
(111
)
 

 
(4,414
)
 
(0.5
)
Consolidated revenue
$
590,966

 
100.0

 
$
876,522

 
100.0

 
 
 
 
 
 
 
 
 
Operating
 (Loss) Income
 
Profit Margin
 
Operating
Income (Loss)
 
Profit Margin
DynLogistics
$
(80,803
)
 
(27.8
)%
 
$
14,328

 
2.9
 %
DynAviation
10,613

 
3.5

 
31,857

 
8.4

Headquarters / Other (2)
(9,809
)
 
 
 
(9,731
)
 
 
Consolidated operating income
$
(79,999
)
 
 
 
$
36,454

 
 
(1)
Headquarters revenue primarily represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures. The DynGlobal associated revenue for the three months ended June 27, 2014 is also included in Headquarters / Other. The amount of revenue for DynGlobal represented less than 1% of total revenue for the period.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income. The DynGlobal associated costs for the three months ended June 27, 2014 are also included in Headquarters / Other. The amount of cost for DynGlobal represented less than 1% of total cost for the period.
DynLogistics
Revenue of $290.3 million decreased $210.2 million, or 42.0%, for the three months ended June 27, 2014 compared to the three months ended June 28, 2013 primarily as a result of reductions in manning, materials and other direct costs under the Afghan Area of Responsibility ("AOR") task order under the LOGCAP IV program, consistent with our expectation of reduced volume resulting from the continued drawdown of troops in Afghanistan. Additionally, revenue was impacted by de-scoping on the AMDP contract, lower volume on the CivPol task orders, as well as, the completion of the Worldwide Protective Services ("WPS") program in Iraq. This decline was partially offset by revenue from programs including the Enhanced Army Global Logistics Enterprise ("EAGLE") Fort Campbell program, the War Reserve Materiel II ("WRM II") program and the new task order for the Criminal Justice Program Support ("CJPS") in Haiti. As efforts in Afghanistan continue to decline and with the continued pressure on U.S. defense budgets, we expect our revenue for the DynLogistics segment to continue to decline in 2014 primarily due to the decline in the LOGCAP program as well as de-scopes in other programs within DynLogistics.
Operating loss of $80.8 million and operating income of $14.3 million for the three months ended June 27, 2014 and June 28, 2013, respectively was related to the goodwill impairment charge of $90.7 million on our goodwill associated with our Logistics Sustainment Solutions ("LSS") reporting unit. See Note 3 for further discussion. Excluding the impact of the goodwill impairment, Operating loss increased primarily as a result of the decline in revenue discussed above.
DynAviation
Revenue of $300.7 million decreased $79.7 million, or 20.9%, for the three months ended June 27, 2014 compared to the three months ended June 28, 2013 primarily as a result of the decrease in demand resulting from the de-scoping of the INL-Air Wing program in Iraq in addition to a reduction in volume of certain task orders under the Contract Field Teams (“CFT”) program and the completion of the G222 and Columbus Support Division contracts. The decrease in revenue was partially offset by the revenue from the Army Field Maintenance ("AFM") program and the Multi Sensor Aerial Intelligence Surveillance Reconnaissance ("MAISR") program. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in the government procurement environment could result in continued declines within the DynAviation segment.
 

49




Operating income of $10.6 million decreased $21.2 million, or 66.7%, for the three months ended June 27, 2014 compared to the three months ended June 28, 2013 primarily as a result of the decrease in revenue discussed above, the impact of loss contracts and a change in contract mix on the Theater Aviation Sustainment Manager ("TASM") task order, moving under the AFM contract vehicle.

Results by Segment – Six Months Ended June 27, 2014 Compared to Six Months Ended June 28, 2013
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the six months ended June 27, 2014 and June 28, 2013.
The following amounts agree to our segment disclosures, see Note 9 for further discussion.
 
Six Months Ended
 
June 27, 2014
 
June 28, 2013
(Amounts in thousands)
Revenue
 
% of
Total Revenue
 
Revenue
 
% of
Total Revenue
DynLogistics
$
607,507

 
50.5
 %
 
$
1,067,575

 
59.0
 %
DynAviation
596,472

 
49.5

 
748,094

 
41.4

Headquarters / Other (1)
(254
)
 

 
(7,039
)
 
(0.4
)
Consolidated revenue
$
1,203,725

 
100.0

 
$
1,808,630

 
100.0

 
 
 
 
 
 
 
 
 
Operating
 (Loss) Income
 
Profit Margin
 
Operating
Income (Loss)
 
Profit Margin
DynLogistics
$
(68,773
)
 
(11.3
)%
 
$
32,857

 
3.1
 %
DynAviation
21,900

 
3.7

 
64,618

 
8.6

Headquarters / Other (2)
(16,088
)
 
 
 
(18,984
)
 
 
Consolidated operating income
$
(62,961
)
 
 
 
$
78,491

 
 
(1)
Headquarters revenue primarily represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures. The DynGlobal associated revenue for the six months ended June 27, 2014 is also included in Headquarters / Other in support of the bidding and proposal process of business development. The amount of revenue for DynGlobal represented less than 1% of total revenue for the period.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income. The DynGlobal associated costs for the six months ended June 27, 2014 are also included in Headquarters / Other.
DynLogistics
Revenue of $607.5 million decreased $460.1 million, or 43.1%, for the six months ended June 27, 2014 compared to the six months ended June 28, 2013 primarily as a result of reductions in manning, materials and other direct costs under the AOR task order under the LOGCAP IV program, consistent with our expectation of reduced volume resulting from the continued drawdown of troops in Afghanistan. Additionally, revenue was impacted by de-scoping on the AMDP contract, lower volume on the CivPol task orders, as well as, the completion of the WPS program in Iraq. This decline was partially offset by revenue from programs including the EAGLE Fort Campbell program, the WRM II program, and the new task order for the CJPS in Haiti. As efforts in Afghanistan continue to decline and with the continued pressure on U.S. defense budgets, we expect our revenue for the DynLogistics segment to continue to decline in 2014 primarily due to the decline in the LOGCAP program as well as de-scopes in other programs within DynLogistics.
Operating loss of $68.8 million and operating income of $32.9 million for the six months ended June 27, 2014and June 28, 2013 was related to the goodwill impairment charge of $90.7 million on our goodwill associated with our Logistics Sustainment Solutions ("LSS") reporting unit. See Note 3 for further discussion. Excluding the impact of the goodwill impairment, Operating loss increased primarily as a result of the decline in revenue discussed above.
DynAviation
Revenue of $596.5 million decreased $151.6 million, or 20.3%, for the six months ended June 27, 2014 compared to the six months ended June 28, 2013 primarily as a result of the decrease in demand resulting from the de-scoping of the INL-Air Wing program in Iraq in addition to a reduction in volume of certain task orders under the CFT program and the completion of the G222 and Columbus Support Division contracts. The decrease in revenue was partially offset by the AFM program and the MAISR program. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in the government procurement environment could result in continued declines within the DynAviation segment.

50




Operating income of $21.9 million decreased $42.7 million, or 66.1%, for the six months ended June 27, 2014 compared to the six months ended June 28, 2013 primarily as a result of the decrease in revenue discussed above, the impact of loss contracts and a change in contract mix on the TASM task order, moving under the AFM contract vehicle. This change drove Operating income as a percentage of revenue to 3.7% for the six months ended June 27, 2014 compared to 8.6% for the six months ended June 28, 2013.

Liquidity and Capital Resources
Cash generated by operations and borrowings available under our Senior Credit Facility are our primary sources of short-term liquidity. See Note 7 for further discussion. We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable and access to our Revolver is dependent upon our meeting financial and non-financial covenants. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections or loss of our ability to access our Revolver, could materially impact liquidity and our ability to fund our working capital needs. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility or other remedies by our Agent, such as the acceleration of our debt, which would materially affect our future expansion strategies and our ability to meet our operational obligations. See further discussion of our covenants in the Financing section below.
Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash.
Management believes Days Sales Outstanding ("DSO") is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. DSO decreased to 64 days as of June 27, 2014 from 69 days as of December 31, 2013, as we continued to focus on managing our customer payment cycles. We expect cash to continue to be impacted by operational working capital needs, potential acquisitions and interest payments on the Senior Credit Facility and the Senior Unsecured Notes.



51




Cash Flow Analysis
 
Six Months Ended
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
Net cash provided by operating activities
$
54,085


$
50,911

Net cash used in investing activities
(4,418
)

(2,841
)
Net cash used in financing activities
(67,099
)

(30,996
)
Cash Flows
Cash provided by operating activities during the six months ended June 27, 2014 was $54.1 million as compared to cash provided by operating activities of $50.9 million during the six months ended June 28, 2013. Cash provided by operations for the six months ended June 27, 2014 was primarily due to (i) improvements in working capital, specifically a decrease in accounts receivable partially offset by a reduction in accrued liabilities as well as cash expended to reduce accounts payable and (ii) dividends received from equity method investees. Cash provided by operating activities during the six months ended June 28, 2013 was primarily due to higher net income and working capital improvements resulting from the collection of accounts receivable and utilization of prepaid expenses partially offset by cash expended to reduce accounts payable.
Cash used in investing activities during the six months ended June 27, 2014 was $4.4 million as compared to cash used in investing activities during the six months ended June 28, 2013 of $2.8 million. Cash used in investing activities during the six months ended June 27, 2014 was primarily due to leasehold improvements related to our Tyson's Corner lease, partially offset by a return of capital from Babcock. Cash used in investing activities during the six months ended June 28, 2013 was primarily due to the purchase of fixed assets and software.
Cash used in financing activities during the six months ended June 27, 2014 was $67.1 million compared to $31.0 million of cash used in financing activities during the six months ended June 28, 2013. Cash used in financing activities during the six months ended June 27, 2014 was primarily the result of the $60.0 million prepayment on our Term Loan. Cash used in financing activities during the six months ended June 28, 2013 was primarily the result of payments related to financed insurance.

Financing
As of June 27, 2014, our debt was comprised of (i) $455.0 million of Senior Unsecured Notes and (ii) $217.3 million of the Term Loan principal associated with our Senior Credit Facility. The Senior Credit Facility also contains a $181.0 million revolving credit facility (the "Revolver") under which we had no borrowings during the six months ended June 27, 2014. As of June 27, 2014 and December 31, 2013, the available borrowing capacity under the Senior Credit Facility was approximately $146.3 million and $144.6 million, respectively, that takes into account $34.7 million and $36.4 million, respectively, in issued letters of credit.
As of June 27, 2014, the Senior Credit Facility includes the $217.3 million Term Loan and the $181.0 million Revolver which matures July 7, 2016. Pursuant to the Senior Credit facility, quarterly principal payments on the Term Loan are required. However, certain principal prepayments made during the year ended December 30, 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through maturity.
We incur quarterly interest payments on both the Term Loan and the Revolver comprised of (i) interest for Term Loan and Revolver borrowings, (ii) letter of credit commitments and (iii) unused commitment fees. See Note 7 for additional information related to the Senior Credit Facility.
The Senior Unsecured Notes carry $455.0 million of principal with a 10.375% interest rate. This Indenture matures on July 1, 2017. The interest payments are payable semi-annually on January 1st and July 1st.
We or our affiliates may, from time to time, purchase our Senior Unsecured Notes. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.
The weighted-average interest rate as of June 27, 2014 for our debt was 9.0%, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the three and six months ended June 27, 2014.
Debt Covenants and Other Matters
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. These covenants can, among other things, limit our ability to:
declare dividends and make other distributions;

52




redeem or repurchase our capital stock;
prepay, redeem or repurchase certain of our indebtedness;
grant liens;
make loans or investments (including acquisitions);
incur additional indebtedness;
modify the terms of certain debt;
restrict dividends from our subsidiaries;
change our business or business of our subsidiaries;
merge or enter into acquisitions;
sell our assets;
enter into transactions with our affiliates; and
make capital expenditures.
In addition, the Senior Credit Facility stipulates a maximum total leverage ratio, as defined in the Senior Credit Facility, and a minimum interest coverage ratio, as defined in the Senior Credit Facility, that must be maintained. As of June 27, 2014 and December 31, 2013, we were in compliance with our financial covenants.
The total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated Earnings Before Interest Taxes Depreciation and Amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot be greater than 4.50 to 1.00 through the period ending June 27, 2014, after which, the maximum total leverage diminishes quarterly or semi-annually.
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 2.00 to 1.00 through the period ending June 27, 2014, after which, the minimum total interest coverage ratio increases periodically thereafter.
We are required to comply with financial maintenance covenants as specified in the Senior Credit Facility including reporting such compliance on a quarterly basis to our Agent. We closely evaluate our expected ability to remain in compliance with our financial maintenance covenants. We performed a re-assessment of our projections during the second quarter of 2014 due to continued challenges in our industry and declines in our business through the first half of the year. Based on these revised projections, we believe we may not satisfy our financial maintenance covenants for the twelve month period ending December 31, 2014, unless we either obtain a waiver from our lenders or amend the terms of our Senior Credit Facility. We are currently in discussions with our Agent with respect to amending the terms of our Senior Credit Facility should we need to address the compliance with our financial maintenance covenants. If we fail to comply with our financial maintenance covenants and are unable to achieve one of these alternatives, the Agent or the lenders could declare an event of default under the Senior Credit Facility, thereby allowing them to demand immediate payment in full of the amounts outstanding and may terminate their obligation to make additional loans and issue new letters of credit under the Senior Credit Facility. This outcome would result in doubt in the Company’s ability to continue as a going concern. If such actions were taken by our Agent or lenders, it could also cause an event of default under our senior unsecured notes. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. See Note 7 for further discussion.
As of June 27, 2014 and December 31, 2013, the Company was in compliance with all of its debt agreements.

53




Non-GAAP Measures
We define EBITDA as Generally Accepted Accounting Principles ("GAAP") net income (loss) attributable to Delta Tucker Holdings, Inc. adjusted for interest expense, taxes and depreciation and amortization. Adjusted EBITDA is calculated by adjusting EBITDA for the items described in the table below. We use EBITDA and Adjusted EBITDA as supplemental measures in the evaluation of our business and believe that EBITDA and Adjusted EBITDA provide a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense and is consistent with one of the measures we use to evaluate management’s performance for incentive compensation. In addition, Adjusted EBITDA as presented in the table below corresponds to the definition of Consolidated EBITDA used in the Senior Secured Credit Facilities and the definition of EBITDA used in the Indenture governing the Senior Unsecured Notes to test the permissibility of certain types of transactions, including debt incurrence. Neither EBITDA nor Adjusted EBITDA is a financial measure calculated in accordance with GAAP. Accordingly, they should not be considered in isolation or as substitutes for net income attributable to Delta Tucker Holdings, Inc. or other financial measures prepared in accordance with GAAP.
Management believes these non-GAAP financial measures are useful in evaluating operating performance and are regularly used by security analysts, institutional investors and other interested parties in reviewing the Company. Non-GAAP financial measures are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of the performance of other companies. When evaluating EBITDA and Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in EBITDA and Adjusted EBITDA, (ii) whether EBITDA and Adjusted EBITDA have remained at positive levels historically, and (iii) how EBITDA and Adjusted EBITDA compare to our debt outstanding. The non-GAAP measures of EBITDA and Adjusted EBITDA do have certain limitations. They do not include interest expense, which is a necessary and ongoing part of our cost structure resulting from the incurrence of debt. EBITDA and Adjusted EBITDA also exclude tax, depreciation and amortization expenses. Because these are material and recurring items, any measure, including EBITDA and Adjusted EBITDA, which excludes them has a material limitation. To mitigate these limitations, we have policies and procedures in place to identify expenses that qualify as interest, taxes, loss on debt extinguishments and depreciation and amortization and to approve and segregate these expenses from other expenses to ensure that EBITDA and Adjusted EBITDA are consistently reflected from period to period. Our calculation of EBITDA and Adjusted EBITDA may vary from that of other companies. Therefore, our EBITDA and Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not give effect to the cash we must use to service our debt or pay income taxes and thus does not reflect the funds generated from operations or actually available for capital investments.

54




The following table provides a reconciliation of net income (loss) attributable to Delta Tucker Holdings, Inc. and EBITDA and Adjusted EBITDA for the periods included below:
 
Delta Tucker Holdings, Inc.
Unaudited Adjusted EBITDA
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
(Amounts in thousands)
June 27, 2014
 
June 28, 2013
 
June 27, 2014
 
June 28, 2013
 
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(82,072
)
 
$
8,342

 
$
(82,839
)
 
$
23,343

 
(Benefit) provision for income taxes
(15,779
)
 
4,588

 
(15,867
)
 
13,384

 
Interest expense, net of interest income
18,153

 
19,810

 
36,117

 
38,955

 
Depreciation and amortization (1)
12,261

 
12,710

 
24,002

 
24,998

 
EBITDA
(67,437
)
 
45,450

 
(38,587
)
 
100,680

 
Non-recurring or unusual gains or losses or income or expenses and non-cash impairments (2)
94,659

 
41

 
98,909

 
592

 
Employee non-cash compensation, severance, and retention expense (3)
1,062

 
1,309

 
2,797

 
1,397

 
Management fees (4)
484

 
346

 
719

 
820

 
Acquisition accounting and Merger-related items (5)
548

 
(1,092
)
 
576

 
(1,961
)
 
Other (6)
412

 
2,570

 
(123
)
 
395

 
Adjusted EBITDA
$
29,728

 
$
48,624

 
$
64,291

 
$
101,923

(1)
Amount includes certain depreciation and amortization amounts which are classified as Cost of services in our Unaudited Condensed Consolidated Statements of Operations.
(2)
Includes the impairment of goodwill within the LSS reporting unit as well as certain unusual income and expense items, as defined in the Indenture and Senior Credit Facility.
(3)
Includes post employment benefit expense related to severance in accordance with ASC 712 - Compensation, relocation expenses and share based compensation expense.
(4)
Amount includes Cerberus Operations and Advisory Company management fees.
(5)
Includes costs incurred pursuant to ASC 805 - Business Combination.
(6)
Includes changes due to fluctuations in foreign exchange rates, earnings from affiliates not received in cash and other immaterial items.


55




Off Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements subsequent to the filing of our consolidated financial statements in our Annual Report on Form 10-K as defined under SEC rules.
Critical Accounting Policies and Estimates
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based on information available at the time of the estimates or assumptions, including our historical experience, where relevant. Significant estimates and assumptions are reviewed quarterly by management. The evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may materially differ from the estimates.
Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
For a discussion of our critical accounting policies and estimates please refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the notes to the Delta Tucker Holdings, Inc. consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Any material changes to our accounting policies and estimates, from those described in our Annual Report on Form 10-K for the year ended December 31, 2013 are further discussed in Note 1 and Note 3.
Accounting Developments
The information regarding recent accounting pronouncements is included in Note 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no significant change in our exposure to market risk during the three months ended June 27, 2014. For discussion of our exposure to market risk, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of the Company’s Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered in this Quarterly Report on Form 10-Q. Based on the evaluation performed, the Company’s Interim Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting (as such term is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



56




PART II. OTHER INFORMATION.

ITEM 1. LEGAL PROCEEDINGS.
Information related to various commitments and contingencies is described in Note 8 included elsewhere in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS.
We may not be able to continue to deploy or sell our helicopter assets.
We had thirteen Huey helicopters we planned to sell or utilize on our programs as of December 31, 2013. The Company was successful in selling one of the UH-1H helicopters during the first quarter of 2014 and executed a sales agreement to sell an additional six helicopters during the second quarter of 2014 that were previously classified as held for sale. However, we are not certain that we will be able to successfully sell the remaining six helicopters or utilize them on our programs. The inability to sell or deploy the helicopters could lead to an impairment charge in the future. See Note 2 for further discussion on helicopters.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our debt agreements contain, and the agreements governing any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things:
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
make certain investments;
sell certain assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our indenture and, in the case of our revolving credit facility, permit the Agent to cease making loans to us. In addition, the covenants in our senior secured credit facilities require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. We closely evaluate our expected ability to remain in compliance with our financial maintenance covenants. We performed a re-assessment of our projections during the second quarter of 2014 due to continued challenges in our industry and declines in our business through the first half of the year. Based on these revised projections, we believe we may not satisfy our financial maintenance covenants for the twelve month period ending December 31, 2014, unless we either obtain a waiver from our lenders or amend the terms of our Senior Credit Facility. We are currently in discussions with our Agent with respect to amending the terms of our Senior Credit Facility should we need to address the compliance with our financial maintenance covenants. If we fail to comply with our financial maintenance covenants and are unable to achieve one of these alternatives, the Agent or the lenders could declare an event of default under the Senior Credit Facility, thereby allowing them to demand immediate payment in full, of the amounts outstanding, and may terminate their obligation to make additional loans and issue new letters of credit under the Senior Credit Facility. This outcome would result in doubt in the Company’s ability to continue as a going concern. If such actions were taken by our Agent or lenders, it could also cause an event of default under our senior unsecured notes.
If we were unable to repay those amounts, the Agent under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the Agent or lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities, and we may not have sufficient assets to repay our unsecured indebtedness thereafter, including our notes.
Other than the risk factor discussed above, there have been no material changes in risk factors from those described in "Risk Factors" disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.


57




ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.

ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.

ITEM 5. OTHER INFORMATION.
None.

ITEM 6. EXHIBITS.
The following exhibits are filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q.
Exhibit No.
 
Description
 
 
 
10.30
 
Employment Agreement between DynCorp International LLC and Gordon Walsh (incorporated by reference to Exhibit 10.30 to Delta Tucker Holdings, Inc.'s Current Report on Form 8-K filed with the SEC on July 14, 2014)
 
 
 
31.1*
 
Certification of the Chief Executive Officer of Delta Tucker Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2*
 
Certification of the Chief Financial Officer of Delta Tucker Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1*
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2*
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS XBRL
 
Instance document
 
 
 
101.SCH XBRL
 
Taxonomy Extension Schema
 
 
 
101.CAL XBRL
 
Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF XBRL
 
Taxonomy Extension Definition Linkbase
 
 
 
101.LAB XBRL
 
Taxonomy Extension Labels Linkbase
 
 
 
101.PRE XBRL
 
Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
*
 
Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 11, 2014
DELTA TUCKER HOLDINGS, INC.
 
 
 
 
 
/s/ William T. Kansky
 
 
William T. Kansky
 
 
Senior Vice President and Chief Financial Officer


58