Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Delta Tucker Holdings, Inc.dth9252015ex311.htm
EX-32.2 - EXHIBIT 32.2 - Delta Tucker Holdings, Inc.dth9252015ex322.htm
EX-32.1 - EXHIBIT 32.1 - Delta Tucker Holdings, Inc.dth9252015ex321.htm
EX-31.2 - EXHIBIT 31.2 - Delta Tucker Holdings, Inc.dth9252015ex312.htm




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 September 25, 2015
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 November 6, 2015, 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, our ability to refinance or amend the terms of that indebtedness, and changes in availability of capital and cost of capital;
the ability to generate sufficient cash to repay our Senior Credit Facility, consisting of our Term Loan and Revolver, maturing on July 7, 2016, or to repay our other indebtedness which may force us to take other actions to satisfy our obligations under our indebtedness, which may not be successful;
the outcome of any material litigation, government investigation, audit or other regulatory matters;
the 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;
the inability of Congress to pass appropriations bills in a timely manner, and any resulting government shutdown;
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, performance or incentive fees 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;
further declines in the estimated fair value of a reporting unit resulting in additional goodwill impairments 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;
uncertainty created by management turnover;
termination or modification of key subcontractor performance or delivery;
the ability to receive timely payments from prime contractors where we act as a subcontractor; and
statements covering our business strategy, those described in "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission ("SEC") on March 31, 2015 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 loss for the three and nine months ended September 25, 2015 and September 26, 2014, the related statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 and the unaudited condensed consolidated balance sheets as of September 25, 2015 and December 31, 2014.

4




PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
479,808

 
$
540,327

 
$
1,437,000

 
$
1,744,052

Cost of services
(427,529
)
 
(510,965
)
 
(1,290,880
)
 
(1,606,045
)
Selling, general and administrative expenses
(35,237
)
 
(44,192
)
 
(107,920
)
 
(110,277
)
Depreciation and amortization expense
(9,039
)
 
(12,094
)
 
(25,587
)
 
(35,621
)
Earnings from equity method investees
6

 
152

 
131

 
9,918

Impairment of goodwill, intangibles and long lived assets
(6,690
)
 
(50,955
)
 
(93,485
)
 
(142,714
)
Operating income (loss)
1,319

 
(77,727
)
 
(80,741
)
 
(140,687
)
Interest expense
(17,201
)
 
(17,237
)
 
(50,429
)
 
(53,438
)
Loss on early extinguishment of debt

 
(242
)
 

 
(862
)
Interest income
19

 
68

 
61

 
151

Other income, net
73

 
956

 
1,675

 
3,314

Loss before income taxes
(15,790
)
 
(94,182
)
 
(129,434
)
 
(191,522
)
Benefit for income taxes
540

 
23,160

 
10,025

 
39,028

Net loss
(15,250
)
 
(71,022
)
 
(119,409
)
 
(152,494
)
Noncontrolling interests
(499
)
 
(492
)
 
(1,227
)
 
(1,857
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(71,514
)
 
$
(120,636
)
 
$
(154,351
)
See notes to unaudited condensed consolidated financial statements

5




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

 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Net loss
$
(15,250
)
 
$
(71,022
)
 
$
(119,409
)
 
$
(152,494
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment

 
(42
)
 
(101
)
 
(116
)
Other comprehensive income (loss), before tax

 
(42
)
 
(101
)
 
(116
)
Income tax (expense) benefit related to items of other comprehensive loss

 
15

 
36

 
42

Other comprehensive income (loss)

 
(27
)
 
(65
)
 
(74
)
Comprehensive loss
(15,250
)
 
(71,049
)
 
(119,474
)
 
(152,568
)
Comprehensive loss attributable to noncontrolling interests
(499
)
 
(492
)
 
(1,227
)
 
(1,857
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(71,541
)
 
$
(120,701
)
 
$
(154,425
)

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
September 25, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
65,549

 
$
94,004

Restricted cash
1,673

 
707

Accounts receivable, net of allowances of $16,466 and $4,736 respectively
423,791

 
448,496

Prepaid expenses and other current assets
53,262

 
74,200

Assets held for sale
12,385

 

Total current assets
556,660

 
617,407

Long-term restricted cash

 
952

Property and equipment, net
16,341

 
23,786

Goodwill
42,093

 
128,888

Tradenames, net
28,536

 
28,762

Other intangibles, net
122,678

 
149,480

Long-term deferred taxes
13,860

 
5,696

Other assets, net
16,062

 
27,516

Total assets
$
796,230

 
$
982,487

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
187,272

 
$

Accounts payable
107,601

 
146,546

Accrued payroll and employee costs
95,732

 
93,707

Deferred income taxes
29,195

 
31,477

Accrued liabilities
110,012

 
130,026

Income taxes payable
202

 
4,424

Total current liabilities
530,014

 
406,180

Long-term debt, less current portion
455,000

 
642,272

Other long-term liabilities
7,838

 
11,312

Total liabilities
992,852

 
1,059,764

EQUITY
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 25, 2015 and December 31, 2014, respectively

 

Additional paid-in capital
554,055

 
552,894

Accumulated deficit
(756,015
)
 
(635,379
)
Accumulated other comprehensive loss
(346
)
 
(281
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(202,306
)
 
(82,766
)
Noncontrolling interests
5,684

 
5,489

Total deficit
(196,622
)
 
(77,277
)
Total liabilities and deficit
$
796,230

 
$
982,487

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
Cash flows from operating activities
 
 
 
Net loss
$
(119,409
)
 
$
(152,494
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
27,626

 
36,328

Amortization of deferred loan costs
4,798

 
4,487

Impairment of goodwill, intangibles and long-lived assets
93,485

 
142,714

Earnings from equity method investees
(1,328
)
 
(11,583
)
Distributions from equity method investees
150

 
9,588

Deferred income taxes
(10,446
)
 
(42,197
)
Share based compensation
364

 
2,754

Other
144

 
1,901

Changes in assets and liabilities:
 
 
 
Restricted cash
(14
)
 

Accounts receivable
23,416

 
96,231

Prepaid expenses and other current assets
16,690

 
32,011

Accounts payable and accrued liabilities
(58,358
)
 
(132,263
)
Income taxes payable
(2,636
)
 
(5,198
)
Net cash used in operating activities
(25,518
)
 
(17,721
)
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(2,680
)
 
(7,129
)
Proceeds from sale of property, plant and equipment
478

 
44

Purchase of software
(998
)
 
(1,101
)
Return of capital from equity method investees
3,683

 
2,884

Contributions to equity method investees
(1,427
)
 

Net cash used in investing activities
(944
)
 
(5,302
)
Cash flows from financing activities
 
 
 
Borrowings on debt
139,600

 
40,100

Payments on debt
(139,600
)
 
(130,100
)
Borrowings under other financing arrangements

 
20,214

Payments under other financing arrangements
(2,055
)
 
(23,306
)
Equity contribution from affiliates of Cerberus
750

 

Payment of dividends to noncontrolling interests
(688
)
 
(1,373
)
Net cash used in financing activities
(1,993
)
 
(94,465
)
Net decrease in cash and cash equivalents
(28,455
)
 
(117,488
)
Cash and cash equivalents, beginning of period
94,004

 
170,845

Cash and cash equivalents, end of period
$
65,549

 
$
53,357

 
 
 
 
Income taxes paid, net
$
8,108

 
$
9,980

Interest paid
$
57,882

 
$
60,840

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Equity (Deficit)
(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

 

 
2,754

 

 

 
2,754

 

 
2,754

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(154,351
)
 
(74
)
 
(154,425
)
 
1,857

 
(152,568
)
DIFZ financing, net of tax

 

 
95

 

 

 
95

 

 
95

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(2,061
)
 
(2,061
)
Balance at September 26, 2014

 
$

 
$
552,430

 
$
(519,950
)
 
$
(271
)
 
$
32,209

 
$
5,671

 
$
37,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Deficit Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total Deficit
Balance at December 31, 2014

 
$

 
$
552,894

 
$
(635,379
)
 
$
(281
)
 
$
(82,766
)
 
$
5,489

 
$
(77,277
)
Share based compensation, net

 

 
364

 

 

 
364

 

 
364

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(120,636
)
 
(65
)
 
(120,701
)
 
1,227

 
(119,474
)
Capital contribution

 

 
750

 

 

 
750

 

 
750

DIFZ financing, net of tax

 

 
47

 

 

 
47

 

 
47

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(1,032
)
 
(1,032
)
Balance at September 25, 2015

 
$

 
$
554,055

 
$
(756,015
)
 
$
(346
)
 
$
(202,306
)
 
$
5,684

 
$
(196,622
)
See notes to unaudited condensed consolidated financial statements

9




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, 2014.
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of September 25, 2015 and December 31, 2014, the results of operations and statements of comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 and the statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 have been included. The results of operations and statements of comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 and the statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 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, our Senior Credit Facility matures on July 7, 2016. We intend to address our upcoming maturity under the Senior Credit Facility before the filing of our Annual Report on Form 10-K for the year ending December 31, 2015 (the "2015 Form 10-K"). However, there can be no assurances that we will be able to do so with terms that are favorable to us or at all. If we are unable to enter into an amendment to extend the maturity or otherwise refinance the Senior Credit Facility prior to its scheduled maturity date or prior to an event which could result in an acceleration of the maturity date, then the failure to pay all amounts due under the Senior Credit Facility at maturity would be an event of default under the Senior Credit Facility. This potential outcome results in significant doubt in the Company’s ability to continue as a going concern. Such an event of default to pay principal due at scheduled maturity under the Senior Credit Facility would also cause an event of default under our Senior Unsecured Notes (as defined below). 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. The Senior Credit Facility has been classified as short-term debt as the maturity date is less than one year from the balance sheet date.
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.

10




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 loss 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' interests in less than wholly owned consolidated joint ventures as noncontrolling interests. Currently, DynCorp International FZ-LLC ("DIFZ") is our only consolidated joint venture 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 statements of operations as an increase or reduction in arriving at "Net loss attributable to Delta Tucker Holdings, Inc." Noncontrolling interests is located in the equity section on the consolidated balance sheets. See Note 10 for further discussion regarding DIFZ.
Use of Estimates
The preparation of the financial statements 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. Changes in contract estimates are the result of changes in assumptions of cost and/or level of effort expected to perform our contracts. Changes resulting from contract options, extensions, or other contract modifications are deemed contract changes, the effects of which are excluded from the gross favorable and unfavorable adjustments below. 
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 nine months ended September 25, 2015 and September 26, 2014.
 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Gross favorable adjustments
$
2.8

 
$
1.8

 
$
8.9

 
$
3.9

Gross unfavorable adjustments
(5.7
)
 
(43.1
)
 
(10.1
)
 
(42.6
)
Net adjustments
$
(2.9
)
 
$
(41.3
)
 
$
(1.2
)
 
$
(38.7
)
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, 2014.
Accounting Developments
In January 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 changes the consolidation guidance to address concerns of stakeholders that current accounting for certain legal entities might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. ASU 2015-02 will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently evaluating both methods of adoption as well as the effect ASU 2015-02 will have on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the

11




carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update is effective for fiscal years beginning after December 15, 2015, and required retrospective application. Early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the potential effects of the adoption of ASU 2015-03 on our consolidated financial position.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to who measures inventory using FIFO or average cost to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs. The update is effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017 and applied prospectively. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential effects of the adoption of ASU 2015-11 on our consolidated financial position.
There have been no material changes to our accounting developments from those described in our Annual Report on Form 10-K for the year ended December 31, 2014 with the exception of ASU No. 2014-09, Revenue from Contracts with Customers, issued by the FASB in May 2014, which outlines a single set of comprehensive principles for recognizing revenue under GAAP. In August 2015, the FASB deferred the effective date of the new standard to after December 15, 2018. The standard permits the use of either the retrospective or modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-14 will have on our consolidated financial position, results of operations and cash flows.
Other accounting standards updates effective after September 25, 2015 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows.


12




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
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Prepaid expenses
$
27,184

 
$
30,821

Income tax refunds receivable
199

 
655

Inventories
13,857

 
25,198

Aircraft parts inventory held on consignment

 
2,278

Work-in-process inventory
1,844

 
5,772

Joint venture receivables
487

 
1,497

Current deferred financing costs, net
3,640

 

Other current assets
6,051

 
7,979

Total prepaid expenses and other current assets
$
53,262

 
$
74,200

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.
Deferred financing costs of $3.6 million related to the Senior Credit Facility were classified as current assets due to both the Term Loan and the Revolver maturing on July 7, 2016. See Note 7 for further discussion.
During the third quarter of 2015, we executed an agreement to expedite the sale of a portion of our inventory at an auction which was held at the end of October 2015. As a result of this strategic decision to auction these assets, we recorded an expense of approximately $3.1 million during the three months ended September 25, 2015 to increase our inventory reserve. The expense has been presented within Cost of services in the unaudited condensed consolidated statement of operations. Subsequent to September 25, 2015, the inventory was sold at auction and title was transferred. As of November 6, 2015, the sale is pending final funding.
Held for Sale Assets
During the third quarter of 2015, we took strategic actions to begin the sale of the remaining assets of Heliworks LLC (“Heliworks”). The assets, excluding cash and cash equivalents, of Heliworks LLC have been classified as held for sale as of September 25, 2015. Assets held for sale of $12.4 million consists primarily of accounts receivable, inventory, property and equipment, net, and intangible assets.
We assessed the fair market value of the assets held for sale, based on independent third party evaluations. For property and equipment, the market approach was used which utilized observable level 2 inputs as it considered the inputs of other comparable property and equipment. For the remaining assets, we used unobservable inputs and management judgment which are Level 3 fair value measurements. See Note 6 for further discussion of fair value. As a result of our fair value assessment, we recognized a $2.8 million impairment expense in the third quarter of 2015, included within the impairment of goodwill, intangibles and long-lived assets within our consolidated statement of operations, to impair the assets held for sale.
Property and equipment, net
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Helicopters
$
983

 
$
7,108

Computers and other equipment
10,326

 
11,061

Leasehold improvements
19,488

 
19,055

Office furniture and fixtures
4,461

 
4,203

Gross property and equipment
35,258

 
41,427

Less accumulated depreciation
(18,917
)
 
(17,641
)
Total property and equipment, net
$
16,341

 
$
23,786

Property and equipment, net no longer includes four helicopters previously utilized on an existing program which are classified as held for sale as of September 25, 2015. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.3 million and $4.8 million during the three and nine months ended September 25, 2015, respectively.

13




Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $4.2 million during the three and nine months ended September 26, 2014, respectively.
Other assets, net
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Deferred financing costs, net
$
3,337

 
$
11,775

Investment in affiliates
5,919

 
8,191

Palm promissory note, long-term portion
2,659

 
2,853

Other
4,147

 
4,697

Total other assets, net
$
16,062

 
$
27,516

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $1.6 million and $4.8 million during the three and nine months ended September 25, 2015, respectively. Amortization related to deferred financing costs was $1.5 million and $4.5 million during the three and nine months ended September 26, 2014, respectively.
Deferred financing costs of $3.6 million related to the Term Loan and Revolver were classified as current assets due to both the Term Loan and the Revolver maturing on July 7, 2016.
Deferred financing costs for the three and nine months ended September 26, 2014 were reduced $0.2 million and $0.8 million, related to the pro rata write–off of deferred financing costs to loss on early extinguishment of debt as a result of the $90.0 million in principal prepayment made on the term loan facility under the Senior Credit Facility ("Term Loan") during the nine months ended September 26, 2014. See Note 7 for further discussion.
Accrued payroll and employee costs
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Wages, compensation and other benefits
$
76,852

 
$
74,416

Accrued vacation
17,954

 
18,889

Accrued contributions to employee benefit plans
926

 
402

Total accrued payroll and employee costs
$
95,732

 
$
93,707

Accrued liabilities
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Customer liabilities
$
16,901

 
$
22,635

Accrued insurance
32,654

 
20,551

Accrued interest
11,892

 
24,250

Unrecognized tax benefit
3,293

 
7,999

Contract losses
20,655

 
27,864

Legal reserves
9,488

 
8,657

Subcontractor retention
2,044

 
1,761

Financed insurance

 
2,055

Other
13,085

 
14,254

Total accrued liabilities
$
110,012

 
$
130,026

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. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Legal matters include reserves related to various lawsuits and claims that arise in the normal course of business. See Note 8 for further discussion.

14




Other long-term liabilities
As of September 25, 2015 and December 31, 2014, Other long-term liabilities were $7.8 million and $11.3 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 $3.9 million and $4.3 million as of September 25, 2015 and December 31, 2014, respectively.
During calendar year 2013 and 2014, we vacated previously occupied properties at various locations and consolidated to the new Tysons Corner location. 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 $1.4 million and $1.7 million as of September 25, 2015 and December 31, 2014, respectively, and were included within Other long-term liabilities.
We recorded a postemployment benefit expense of $0.5 million and $3.2 million for the three and nine months ended September 25, 2015, respectively, related to severance in accordance with ASC 712 - Compensation which was included in Selling, general and administrative expenses in the statements of operations. We recorded a postemployment benefit expense of $12.8 million and $15.7 million for the three and nine months ended September 26, 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 September 25, 2015 and December 31, 2014, we had approximately $5.9 million and $10.6 million, respectively, in total accrued postemployment benefit expense for estimated future payments in accordance with ASC 712, of which $0.2 million and $3.9 million, respectively, relate to our long-term accrued postemployment benefit expense.



15




Note 3 — Goodwill and Other Intangible Assets
We have two operating and reporting segments: DynAviation and DynLogistics. DynAviation and DynLogistics provide services domestically and in foreign countries primarily under contracts with the U.S. government. Our current structure includes five reporting units for which we assess goodwill for potential impairment; two reporting units in DynAviation and three reporting units in DynLogistics. Of our five reporting units, only two had a goodwill balance as of September 25, 2015.
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 impairment in the period in which the event is identified.
In connection with our annual assessment of goodwill during the fourth quarter of each year, we update our key assumptions, including our forecasts of revenue and income for each reporting unit. There can be no assurance that the estimates and assumptions regarding forecasted earnings and cash flows, the period of strength of the U.S. defense spending, and other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
During the second quarter of 2015, we concluded a triggering event had occurred in our Aviation reporting unit within the DynAviation segment due to lower than forecasted earnings in 2015 and declines in future projections and assumptions. We performed an interim step one assessment to identify any possible goodwill impairment. The first step of the impairment test indicated the carrying value of the Aviation reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the Aviation reporting unit was fully impaired. As a result, a non-cash impairment charge of approximately $86.8 million was recorded during the three months ended June 26, 2015 to impair the full carrying value of the Aviation 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.
There were no triggering events 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 September 25, 2015 and December 31, 2014.
The carrying amounts of goodwill for each of our segments as of September 25, 2015 were as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Goodwill balance as of December 31, 2014
$
86,795

 
$
42,093

 
$
128,888

Changes between January 1, 2015 and September 25, 2015
(86,795
)
 

 
(86,795
)
Goodwill balance as of September 25, 2015
$

 
$
42,093

 
$
42,093


16




The following tables provide information about changes relating to certain intangible assets:
 
As of September 25, 2015
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Transfer to Assets Held for Sale
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
4.0
 
$
317,524

 
$
(198,828
)
 
$

 
$

 
$
118,696

Other
 
 
 
 
 
 
 
 
 
 
 
Finite-lived
4.8
 
15,983

 
(11,991
)
 

 
(10
)
 
3,982

Indefinite-lived
 
 
5,059

 

 
(3,949
)
 
(1,110
)
 

Total other intangibles
 
 
$
338,566

 
$
(210,819
)
 
$
(3,949
)
 
$
(1,120
)
 
$
122,678

 
 
 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
 
 
Finite-lived
0.0
 
$
869

 
$
(869
)
 
$

 
$

 
$

Indefinite-lived
 
 
28,700

 

 

 
(164
)
 
28,536

Total tradenames
 
 
$
29,569

 
$
(869
)
 
$

 
$
(164
)
 
$
28,536

 
December 31, 2014
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
4.6
 
$
350,912

 
$
(178,126
)
 
$
(33,388
)
 
$
139,398

Other
 
 
 
 
 
 
 
 
 
Finite-lived
4.8
 
15,418

 
(10,395
)
 

 
5,023

Indefinite-lived
 
 
5,059

 

 

 
5,059

Total other intangibles
 
 
$
371,389

 
$
(188,521
)
 
$
(33,388
)
 
$
149,480

 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
Finite-lived
0.4
 
$
869

 
$
(807
)
 
$

 
$
62

Indefinite-lived
 
 
43,222

 

 
(14,522
)
 
28,700

Total tradenames
 
 
$
44,091

 
$
(807
)
 
$
(14,522
)
 
$
28,762

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $8.2 million and $22.7 million for the three and nine months ended September 25, 2015, respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $10.9 million and $32.1 million for the three and nine months ended September 26, 2014, respectively. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $4.0 million and $5.0 million as of September 25, 2015 and December 31, 2014, respectively.
During the third quarter of 2015, we took strategic actions to no longer utilize or maintain our FAA Part 135 certification and Commercial Aviation Review Board ("CARB") approval. As a result, a non-cash impairment charge of approximately $3.9 million was recorded during the three months ended September 25, 2015 to fully impair the carrying value of the intangible asset. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $8.9 million for the three months ending December 31, 2015, $30.2 million in 2016, $27.6 million in 2017, $24.3 million in 2018, $21.1 million in 2019 and $10.7 million thereafter.



17




Note 4 — Income Taxes
The domestic and foreign components of Loss before income taxes are as follows:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Domestic
$
(17,120
)
 
$
(93,861
)
 
$
(129,375
)
 
$
(188,962
)
Foreign
1,330

 
(321
)
 
(59
)
 
(2,560
)
Loss before income taxes
$
(15,790
)
 
$
(94,182
)
 
$
(129,434
)
 
$
(191,522
)
The Benefit for income taxes consists of the following:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Current portion:
 
 
 
 
 
 
 
Federal
$

 
$
(311
)
 
$

 
$
(311
)
State
192

 
292

 
678

 
674

Foreign
1,286

 
1,383

 
4,567

 
4,441

 
$
1,478

 
$
1,364

 
$
5,245

 
$
4,804

Deferred portion:
 
 
 
 
 
 
 
Federal
$
(1,846
)
 
$
(23,369
)
 
$
(14,663
)
 
$
(42,245
)
State
(79
)
 
(612
)
 
(465
)
 
(1,103
)
Foreign
(93
)
 
(543
)
 
(142
)
 
(484
)
 
(2,018
)
 
(24,524
)
 
(15,270
)
 
(43,832
)
Benefit for income taxes
$
(540
)
 
$
(23,160
)
 
$
(10,025
)
 
$
(39,028
)
Deferred tax liabilities, net consist of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Current deferred tax liabilities, net
$
(29,195
)
 
$
(31,477
)
Non-current deferred tax assets, net
13,860

 
5,696

Deferred tax liabilities, net
$
(15,335
)
 
$
(25,781
)
Our effective tax rate ("ETR") was 3.4% and 7.7% for the three and nine months ended September 25, 2015, respectively. Our ETR was 24.6% and 20.4% for the three and nine months ended September 26, 2014, respectively. During the three and nine months ended September 25, 2015, the ETR was primarily impacted by impairments of goodwill, intangibles and long lived assets and an increase in the valuation allowance. Our ETR for the three and nine months ended September 26, 2014 was primarily impacted by a goodwill impairment of our Logistics Sustainment Services reporting unit.
Management assesses both the available positive and negative evidence to determine whether it is more likely than not that there will be sufficient sources of future taxable income to recognize deferred tax assets. We incurred cumulative losses over the three-year period ended December 31, 2014. Cumulative losses in recent years are considered significant objective negative evidence in evaluating deferred tax assets under the more likely than not criteria for recognition of deferred tax assets. As a result of additional losses for which we could not recognize a tax benefit, we increased our valuation allowance from $47.8 million as of December 31, 2014 to $66.7 million as of September 25, 2015.
As of September 25, 2015 and December 31, 2014, we had $2.6 million and $7.3 million of total unrecognized tax benefits, respectively, of which $2.3 million would impact our effective tax rate if recognized. During the second quarter of 2015, we decreased the balance of the liability for unrecognized tax benefits and related deferred tax assets by a net of approximately $4.7 million attributable to the expiration of statute of limitations for tax years ended March 30, 2009, March 30, 2010, and July 30, 2010.
During the nine months ended September 25, 2015, we made no estimated federal income tax payments. All of our income taxes paid during the nine months ended September 25, 2015 were to state or foreign jurisdictions.


18




Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Billed
$
126,374

 
$
146,286

Unbilled
297,417

 
302,210

Total accounts receivable, net
$
423,791

 
$
448,496

Unbilled receivables as of September 25, 2015 and December 31, 2014 include $38.0 million and $50.7 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. Our largest contract, LOGCAP IV, accounted for approximately 54% and 59% of these amounts as of September 25, 2015 and December 31, 2014, respectively. We believe we have legal and contractual basis for these amounts and are working with our customer to complete the contract actions that will allow us to bill and collect our receivables. If we cannot reach an agreement with the customer, we believe we have other avenues to pursue resolution, including the claims process. LOGCAP IV accounted for approximately 14% and 20% of total unbilled receivables as of September 25, 2015 and December 31, 2014, respectively.
As of September 25, 2015 and December 31, 2014, we had four contract claims with no associated 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. However, other billed receivables include approximately $25.9 million, net of reserves, for which we have yet to be paid where we operated under a subcontract for a prime contractor on a U.S. government program that ended December 31, 2014. We are currently seeking payment through legal action to resolve the matter. See Note 8 for further discussion.

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 debt is based on Level 1 and Level 2 inputs, as defined above.  
 
As Of
 
September 25, 2015
 
December 31, 2014
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$
455,000

 
$
336,700

 
$
455,000

 
$
373,100

Term Loan
187,272

 
183,058

 
187,272

 
185,868

Total indebtedness
642,272

 
519,758

 
642,272

 
558,968

Less current portion of long-term debt
(187,272
)
 
(183,058
)
 

 

Total long-term debt
$
455,000

 
$
336,700

 
$
642,272

 
$
558,968



19




Note 7 — Debt
Debt consisted of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
10.375% senior unsecured notes
$
455,000

 
$
455,000

Term loan
187,272

 
187,272

Total indebtedness
642,272

 
642,272

Less current portion of long-term debt
(187,272
)
 

Total long-term debt
$
455,000

 
$
642,272

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, August 10, 2011 and June 19, 2013, DynCorp International Inc. entered into amendments to the Senior Credit Facility.
On November 5, 2014, we entered into a fourth amendment and waiver (the "Fourth Amendment") to the Senior Credit Facility. The Fourth Amendment, among other things, (i) amended the Senior Credit Facility by modifying financial maintenance covenants; (ii) reduced the amount of the Revolver credit commitments of the lenders consenting to the Fourth Amendment by 20%, which represented a reduction of approximately $36.2 million; (iii) amended the definition of Consolidated Net Income as defined in the Senior Credit Facility to exclude up to $35.0 million for a one-time charge during the three month period ended September 26, 2014 related to a certain U.S. Air Force contract; and (iv) waived compliance with the financial maintenance covenants with respect to the three month period ended September 26, 2014.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of September 25, 2015, the Senior Credit Facility provided for a $187.3 million Term Loan and the $144.8 million Revolver, which includes a $100.0 million letter of credit subfacility. As of September 25, 2015 and December 31, 2014, the available borrowing capacity under the Senior Credit Facility was approximately $102.2 million and $108.1 million, respectively, and includes $42.6 million and $36.7 million, respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of September 25, 2015 and December 31, 2014 there were no amounts borrowed under the Revolver. The current portion of long-term debt as of September 25, 2015 consisted of our Term Loan and the Revolver as both have a maturity date of 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 margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin 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, depreciation and 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 September 25, 2015 and December 31, 2014, the interest rate on the Term Loan was 6.25%.


20




Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. The applicable interest rates for our letter of credit subfacility was 4.25% as of each of September 25, 2015 and December 31, 2014. The applicable interest rate for our unused commitment fees was 0.50% as of each of September 25, 2015 and December 31, 2014. All of our letters of credit are also subject to a 0.25% fronting fee.
Principal Payments
Pursuant to our Term Loan, 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 nine months ended September 25, 2015, we made no principal payments on the Term Loan. During the nine months ended September 26, 2014, we made principal prepayments of $90.0 million on the Term Loan. Deferred financing costs associated with the prepayments totaled $0.8 million and were expensed and included in the Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 26, 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, 2014, we were not required to make any additional principal payments under the Excess Cash Flow requirement related to activity during the year ended December 31, 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 nine months ended September 25, 2015.
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, 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 addition, the Senior Credit Facility contains two financial maintenance covenants, a maximum total leverage ratio and a minimum interest coverage ratio.
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 EBITDA, as defined in the Senior Credit Facility, for the applicable period.
The maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
June 25, 2016 and thereafter
6.60 to 1.0
 

21




The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
June 25, 2016 and thereafter
1.30 to 1.0
We are required to comply with the financial maintenance covenants 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. If unforeseen events were to occur or if our estimates change that would put us in violation of the financial maintenance covenants in future periods, we would intend to seek to obtain a waiver from our lenders or to amend the terms of our Senior Credit Facility prior to there being an event of default under the Senior Credit Facility. As of September 25, 2015 and December 31, 2014, we were in compliance with our financial maintenance covenants.
Our Senior Credit Facility matures on July 7, 2016 and as of September 25, 2015 is classified within the current portion of long-term debt. We intend to address the upcoming maturity of the Senior Credit Facility before the filing of our 2015 Form 10-K. However, there can be no assurances that we will be able to do so with terms that are favorable to us or at all. If we are unable to complete an amendment to extend the maturity or otherwise refinance the Senior Credit Facility prior to its scheduled maturity date, then the failure to pay all amounts due under the Senior Credit Facility at maturity would be an event of default under the Senior Credit Facility. In addition, the Senior Credit Facility contains customary financial as well as non-financial, affirmative and negative covenants (including, without limitation, the requirement to deliver a report on the audited financial statements that is unqualified and not subject to any “going concern” or like qualifications) that if we violate and do not cure or have waived within any applicable grace period would trigger an event of default prior to the maturity. The failure to pay principal due at scheduled maturity or an acceleration by the lenders due to a default under the Senior Credit Facility would also cause an event of default under our Senior Unsecured Notes.
Senior Unsecured Notes
On July 7, 2010, DynCorp International Inc. completed an offering of $455.0 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, National Association (as successor by merger to 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 September 25, 2015 and December 31, 2014, the quoted market value of the Senior Unsecured Notes was approximately 74.0% and 82.0%, respectively, of stated value.

22




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 plus the accrued and unpaid 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
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 $15.0 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 real estate leases are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $10.0 million and $39.4 million for the three and nine months ended September 25, 2015, respectively. Lease rental expense was $21.2 million and $76.9 million for the three and nine months ended September 26, 2014, respectively. We have no significant long-term purchase agreements with service providers.
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 $9.5 million and $8.7 million as of September 25, 2015 and December 31, 2014, 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 September 25, 2015. 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 September 25, 2015. 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.

23




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. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.
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. We filed another motion for summary judgment, which is fully briefed and remains pending. 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.
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 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 filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. We believe 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. On April 22, 2015, the customer withdrew a substantial number of its claims and amended certain of those claims that remain in the case. We believe our actions were permissible under the terms of the contract, and we intend to vigorously contest the remaining claims against us. As of December 31, 2014, we had recorded an immaterial liability for this matter. As of September 25, 2015, we have recorded a liability that reflects both the remaining claims as well as the $3 million contractual limitation on damages (except in situations of gross negligence and willful misconduct).
In 2009, a former subcontractor on a U.S. Army contract filed a lawsuit against us alleging breach of contract and good faith and fair dealing claiming we directed certain efforts to other subcontractors. The subcontractor alleged that certain efforts on a prior contract were exclusive to them and we had violated that exclusivity. In April 2015, the parties agreed to a settlement and the matter is now closed.
In 2011, a former employee filed a lawsuit against us alleging a breach of a stock purchase agreement regarding the 2009 purchase of Phoenix Consulting Group. In 2012, the parties settled one of the claims and we successfully compelled arbitration

24




of the claim for a contingent “earn out” payment. In May 2015, the arbitrator awarded the claimed “earn out” payment, totaling approximately $3.3 million but denied the claim for pre-award interest on that payment. We have subsequently paid the award in full and recorded the charge for the claim.
In October 2007, we entered into a subcontract with Northrop Grumman Technical Services, Inc. (“Northrop”) to support Northrop’s prime contract with the Department of Defense Counter Narcotics Terrorism Program Office ("CNTPO"). We performed the services requested by Northrop, the government determined that it received “intended quality and skills of personnel,” and Northrop paid our invoices until July 2014. Subsequent to July 2014, Northrop stopped paying our periodic invoices. The contract operations ended on December 31, 2014. In March 2015, Northrop filed a civil action against us to obtain documents regarding our invoices and now asserts approximately $5 million in damages. We believe the damages asserted by Northrop represent a loss contingency that is remote. In September 2015, we filed an Answer and Counterclaim seeking approximately $41 million for unpaid invoices.
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.
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 business 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 we are 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.
We have received a series of 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. 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. Over the past several years, we have worked with the DCAA and our customer in resolving matters inclusive in the Form 1s as well as other transmittals. We have provided responses to the DCAA and the Department of State that 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 $7.7 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

25




that we consider reasonably possible. However, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer and the DCAA in providing clarification of the facts and circumstances surrounding the issues.
On April 30, 2013, we received several Form 1s from DCAA disapproving approximately $152.0 million of cost incurred for the periods ranging between 2000 to 2011 on the War Reserve Materiel program related to concerns on items such as the adequacy of documentation and reasonableness of costs. We are working with the Air Force to resolve these questions. Based on our recent correspondence with the customer, a substantial portion of these items represent loss contingencies are remote. The remaining portion of these items totaling $1.8 million represent loss contingencies that we consider reasonably possible; however, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer.
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 to 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. We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of September 25, 2015, 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.


26




Note 9 — Segment Information
We have two operating and reporting segments: DynAviation and DynLogistics. The 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 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
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
 
 
 
 
 
 
 
DynAviation
$
316,337

 
$
293,238

 
$
950,749

 
$
889,710

DynLogistics
163,187

 
247,829

 
485,781

 
855,337

Headquarters / Other (1)
284

 
(740
)
 
470

 
(995
)
Total revenue
$
479,808

 
$
540,327

 
$
1,437,000

 
$
1,744,052

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
DynAviation
$
(4,137
)
 
$
(65,282
)
 
$
(76,509
)
 
$
(43,382
)
DynLogistics
16,800

 
1,800

 
27,807

 
(66,974
)
Headquarters / Other (2)
(11,344
)
 
(14,245
)
 
(32,039
)
 
(30,331
)
Total operating income (loss)
$
1,319

 
$
(77,727
)
 
$
(80,741
)
 
$
(140,687
)
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
DynAviation
$
491

 
$
372

 
$
2,291

 
$
1,104

DynLogistics
75

 
9

 
187

 
31

Headquarters / Other
8,913

 
11,947

 
25,148

 
35,193

Total depreciation and amortization (3)
$
9,479

 
$
12,328

 
$
27,626

 
$
36,328

(1)
Headquarters revenue primarily represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(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.
(3)
Includes amounts included in Cost of services of $0.4 million and $2.0 million and for the three and nine months ended September 25, 2015, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 26, 2014, 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)
September 25, 2015
 
December 31, 2014
Assets
 
 
 
DynAviation
$
351,016

 
$
393,246

DynLogistics
217,318

 
299,961

Headquarters / Other (1)
227,896

 
289,280

Total assets
$
796,230

 
$
982,487

(1)
Assets primarily include cash, investments in unconsolidated joint ventures, deferred tax assets, intangible assets (excluding goodwill) and deferred debt issuance costs.


27




Note 10 — Related Parties, Joint Ventures and Variable Interest Entities
Consulting Fee
We have 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 $1.9 million and $6.1 million on a gross basis before considering the effect of our contract mix which provides for partial recovery, during the three and nine months ended September 25, 2015, respectively, and $1.5 million and $3.1 million during the three and nine months ended September 26, 2014, respectively.
We have three executives who are Cerberus Operations and Advisory Company, LLC (“COAC”) employees, who are seconded to us: (i) our former Interim Chief Executive Officer and now non-executive chairman of our Board of Directors; (ii) our Senior Vice President, Chief Administrative Officer and Chief Legal Officer; and (iii) our Senior Vice President of Business Development. Inclusive of the $1.9 million and $6.1 million recognized during the three and nine months ended September 25, 2015 in COAC consulting fees, we recognized $1.0 million and $3.3 million of administrative expense in conjunction with these three COAC individuals for the three months and nine months ended September 25, 2015, respectively. Inclusive of the $1.5 million and $3.1 million recognized during the three and nine months ended September 26, 2014 in COAC consulting fees, we recognized $0.3 million of administrative expense in conjunction with these COAC employees for the three and nine months ended September 26, 2014, respectively.
Certain members of executive management and board members of the Company and seconded COAC individuals may have agreements and conduct business with Cerberus and its affiliates for which they receive compensation. We recognize such compensation as an expense in the consolidated financial statements.
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 September 25, 2015, 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 $0.5 million and $1.5 million as of September 25, 2015 and December 31, 2014, 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 $0.0 million and $0.4 million during the three and nine months ended September 25, 2015 and $0.4 million and $3.4 million during the three and nine months ended September 26, 2014, respectively. The related cost of services was $0.1 million and $0.5 million during the three and nine months ended September 25, 2015 and $0.4 million and $3.4 million during the three and nine months ended September 26, 2014, respectively. Additionally, we earned $0.5 million and $1.3 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 25, 2015 and $0.8 million and $11.6 million in equity method income during the three and nine months ended September 26, 2014, respectively.
GLS’ revenue was $6.5 million and $20.0 million during the three and nine months ended September 25, 2015, respectively, and $5.1 million and $14.8 million during the three and nine months ended September 26, 2014. GLS’ operating and net loss was $0.8 million and $1.4 million during the three and nine months ended September 25, 2015, and operating income was $0.3 million and operating loss was $2.2 million during the three and nine months ended September 26, 2014, respectively. GLS did not pay a cash dividend during the nine months ended September 25, 2015. GLS paid cash dividends of $18.8 million during the nine months ended September 26, 2014. Based on our 51% ownership in GLS, we recognized $9.6 million in equity method income during the nine months ended September 26, 2014.
We currently hold one promissory note included in Other assets on our consolidated balance sheet from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The loan balance outstanding was $2.7 million and $2.9 million as of September 25, 2015 and December 31, 2014, 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.

28




As discussed above and in accordance with ASC 810 - Consolidation, we consolidate DIFZ. The following tables present selected financial information for DIFZ as of September 25, 2015 and December 31, 2014 and for the three and nine months ended September 25, 2015 and September 26, 2014:
 
As Of
(Amounts in millions)
September 25, 2015
 
December 31, 2014
Assets
$
4.3

 
$
4.7

Liabilities
0.9

 
1.5

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
54.9

 
$
67.8

 
$
162.2

 
$
231.5

The following tables present selected financial information for our equity method investees as of September 25, 2015 and December 31, 2014 and for the three and nine months ended September 25, 2015 and September 26, 2014:
 
As Of
(Amounts in millions)
September 25, 2015
 
December 31, 2014
Current assets
$
25.7

 
$
65.8

Total assets
25.7

 
65.9

Current liabilities
15.9

 
44.4

Total liabilities
15.9

 
44.4

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
19.6

 
$
53.7

 
$
87.0

 
$
178.1

Gross profit
4.5

 
7.9

 
13.2

 
17.4

Net income
3.5

 
6.7

 
10.3

 
12.8

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) $5.9 million investment in unconsolidated joint ventures, (ii) $0.5 million in receivables from our unconsolidated joint ventures, (iii) $2.7 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 25, 2015.


29




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.
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.
A summary of the Class B Interest plans activity for the nine months ended September 25, 2015 and September 26, 2014 is as follows:
 
 
Number of Interests
Outstanding at December 31, 2014
 
5,901

Granted:
 
 
Class B-1
 

Class B-2
 

Exercised
 

Forfeited or expired
 
(135
)
Outstanding at September 25, 2015
 
5,766

 
 
Number of Interests
Outstanding at December 31, 2013
 
3,144

Granted:
 
 
Class B-1
 
4,339

Class B-2
 

Exercised
 

Forfeited or expired
 
(1,298
)
Outstanding at September 26, 2014
 
6,185


Awards to our management team consist of options qualifying as profits interests under Revenue Procedure 93-27, that are exercisable only upon a change in control as defined in the Plan. The awards do not expire and the awards do not have a fixed strike price. The value of the Class B Interest as of the grant date is calculated using a Monte Carlo simulation consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” and is amortized over the respective vesting period. The Monte Carlo simulation, similar to a Black-Scholes option pricing formula, requires the input of subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility of the market-based guideline companies as a basis for projecting the expected volatility of the underlying Class B interest and estimated the expected life of our Class B grants to be 4 years as of the grant date. The 2013 fair value utilized for determining the profits interests for Class B-1 and B-2 interests was $819.26 and $258.30, respectively. The initial fair value was utilized for all grants through the period ending March 28, 2014. After the period ending March 28, 2014, another valuation was performed to determine the fair value of future grants resulting in Class B-1 interests granted after March 28, 2014 having a fair value of $32.73.
No shares were granted during the nine months ended September 25, 2015. Total compensation expensed for the three and nine months ended September 25, 2015 was $0.1 million and $0.4 million, respectively. Total compensation expensed for the three and nine months ended September 26, 2014 was $0.7 million and $2.8 million, respectively.

30




A summary of the changes in non-vested shares for the period ended September 25, 2015 and September 26, 2014 is as follows:
 
 
Number of Interests
Non-vested shares at December 31, 2014
 
1,234

Granted
 

Vested
 
(893
)
Forfeited
 
(135
)
Non-vested shares at September 25, 2015
 
206

 
 
Number of Interests
Non-vested shares at December 31, 2013
 
2,123

Granted
 
4,339

Vested
 
(3,296
)
Forfeited
 
(1,298
)
Non-vested shares at September 26, 2014
 
1,868

As of September 25, 2015, the total compensation cost related to the non-vested Class B awards, not yet recognized, was $0.1 million which will be recognized over a weighted average period of approximately 0.34 years. As of September 26, 2014, the total compensation cost related to the non-vested Class B awards, not yet recognized, was $0.7 million which will be recognized over a weighted average period of approximately 3.3 years.

Note 12 — Collaborative Arrangements
We have historically participated in a collaborative arrangement with CH2M Hill on the LOGCAP IV program. The collaborative arrangement shared some of the risks and profit associated with this U.S. government contract and was accounted for under ASC 808 - Collaborative Arrangements where we recorded revenue gross as the principal participant. The cash inflows and outflows, as well as expenses incurred, were recorded in Cost of services in the period realized. Through August 25, 2015, our share of the profits was 70%
On August 25, 2015, we executed an agreement with CH2M Hill to end our collaborative arrangement on the LOGCAP IV contract. Subsequent to August 25, 2015, we no longer share any of the risks or profit associated with the contract.


31




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 Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group LLC and Casals & 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.
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of September 25, 2015 and December 31, 2014, (ii) unaudited condensed consolidating statements of operations and comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014, (iii) unaudited condensed consolidating statements of cash flows for the nine months ended September 25, 2015 and September 26, 2014 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.

32




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended September 25, 2015 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
484,403

 
$
61,093

 
$
(65,688
)
 
$
479,808

Cost of services

 

 
(432,723
)
 
(60,467
)
 
65,661

 
(427,529
)
Selling, general and administrative expenses

 

 
(35,254
)
 
(10
)
 
27

 
(35,237
)
Depreciation and amortization expense

 

 
(8,867
)
 
(172
)
 

 
(9,039
)
Earnings from equity method investees

 

 
6

 

 

 
6

Impairment of goodwill, intangibles and long-lived assets

 

 
(6,690
)
 

 

 
(6,690
)
Operating income

 

 
875

 
444

 

 
1,319

Interest expense

 
(16,486
)
 
(715
)
 

 

 
(17,201
)
Interest income

 

 
17

 
2

 

 
19

Equity in (loss) income of consolidated subsidiaries
(15,749
)
 
(5,030
)
 
(90
)
 

 
20,869

 

Other income, net

 

 
139

 
(66
)
 

 
73

(Loss) income before income taxes
(15,749
)
 
(21,516
)
 
226

 
380

 
20,869

 
(15,790
)
Benefit (provision) for income taxes

 
5,767

 
(5,256
)
 
29

 

 
540

Net (loss) income
(15,749
)
 
(15,749
)
 
(5,030
)
 
409

 
20,869

 
(15,250
)
Noncontrolling interests

 

 

 
(499
)
 

 
(499
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(15,749
)
 
$
(5,030
)
 
$
(90
)
 
$
20,869

 
$
(15,749
)

33




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended September 26, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
543,980

 
$
72,070

 
$
(75,723
)
 
$
540,327

Cost of services

 

 
(515,408
)
 
(71,280
)
 
75,723

 
(510,965
)
Selling, general and administrative expenses

 

 
(44,156
)
 
(36
)
 

 
(44,192
)
Depreciation and amortization expense

 

 
(11,943
)
 
(151
)
 

 
(12,094
)
Earnings from equity method investees

 

 
152

 

 

 
152

Impairment of goodwill, intangibles and long-lived assets

 

 
(50,955
)
 

 

 
(50,955
)
Operating (loss) income

 

 
(78,330
)
 
603

 

 
(77,727
)
Interest expense

 
(16,827
)
 
(410
)
 

 

 
(17,237
)
Loss on early extinguishment of debt

 
(242
)
 

 

 

 
(242
)
Interest income

 

 
64

 
4

 

 
68

Equity in (loss) income of consolidated subsidiaries
(71,514
)
 
(67,102
)
 
304

 

 
138,312

 

Other income, net

 

 
871

 
85

 

 
956

(Loss) income before income taxes
(71,514
)
 
(84,171
)
 
(77,501
)
 
692

 
138,312

 
(94,182
)
Benefit for income taxes

 
12,657

 
10,399

 
104

 

 
23,160

Net (loss) income
(71,514
)
 
(71,514
)
 
(67,102
)
 
796

 
138,312

 
(71,022
)
Noncontrolling interests

 

 

 
(492
)
 

 
(492
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(71,514
)
 
$
(71,514
)
 
$
(67,102
)
 
$
304

 
$
138,312

 
$
(71,514
)


34




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Nine Months Ended September 25, 2015 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
1,450,444

 
$
180,400

 
$
(193,844
)
 
$
1,437,000

Cost of services

 

 
(1,306,232
)
 
(178,434
)
 
193,786

 
(1,290,880
)
Selling, general and administrative expenses

 

 
(107,939
)
 
(39
)
 
58

 
(107,920
)
Depreciation and amortization expense

 

 
(24,637
)
 
(950
)
 

 
(25,587
)
Earnings from equity method investees

 

 
131

 

 

 
131

Impairment of goodwill, intangibles and long-lived assets

 

 
(93,485
)
 

 

 
(93,485
)
Operating (loss) income

 

 
(81,718
)
 
977

 

 
(80,741
)
Interest expense

 
(48,423
)
 
(2,006
)
 

 

 
(50,429
)
Interest income

 

 
57

 
4

 

 
61

Equity in (loss) income of consolidated subsidiaries
(120,636
)
 
(89,158
)
 
(535
)
 

 
210,329

 

Other income, net

 

 
1,659

 
16

 

 
1,675

(Loss) income before income taxes
(120,636
)
 
(137,581
)
 
(82,543
)
 
997

 
210,329

 
(129,434
)
Benefit (provision) for income taxes

 
16,945

 
(6,615
)
 
(305
)
 

 
10,025

Net (loss) income
(120,636
)
 
(120,636
)
 
(89,158
)
 
692

 
210,329

 
(119,409
)
Noncontrolling interests

 

 

 
(1,227
)
 

 
(1,227
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(120,636
)
 
$
(120,636
)
 
$
(89,158
)
 
$
(535
)
 
$
210,329

 
$
(120,636
)


35




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Nine Months Ended September 26, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
1,755,045

 
$
244,138

 
$
(255,131
)
 
$
1,744,052

Cost of services

 

 
(1,619,964
)
 
(241,199
)
 
255,118

 
(1,606,045
)
Selling, general and administrative expenses

 

 
(110,130
)
 
(160
)
 
13

 
(110,277
)
Depreciation and amortization expense

 

 
(35,174
)
 
(447
)
 

 
(35,621
)
Earnings from equity method investees

 

 
329

 
9,589

 

 
9,918

Impairment of goodwill, intangibles and long-lived assets

 

 
(142,714
)
 

 

 
(142,714
)
Operating (loss) income

 

 
(152,608
)
 
11,921

 

 
(140,687
)
Interest expense

 
(51,924
)
 
(1,514
)
 

 

 
(53,438
)
Loss on early extinguishment of debt

 
(862
)
 

 

 

 
(862
)
Interest income

 

 
133

 
18

 

 
151

Equity in (loss) income of consolidated subsidiaries
(154,351
)
 
(120,040
)
 
10,328

 

 
264,063

 

Other income, net

 

 
3,212

 
102

 

 
3,314

(Loss) income before income taxes
(154,351
)
 
(172,826
)
 
(140,449
)
 
12,041

 
264,063

 
(191,522
)
Benefit for income taxes

 
18,475

 
20,409

 
144

 

 
39,028

Net (loss) income
(154,351
)
 
(154,351
)
 
(120,040
)
 
12,185

 
264,063

 
(152,494
)
Noncontrolling interests

 

 

 
(1,857
)
 

 
(1,857
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(154,351
)
 
$
(154,351
)
 
$
(120,040
)
 
$
10,328

 
$
264,063

 
$
(154,351
)








36




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive Loss Information
For the Three Months Ended September 25, 2015 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(15,749
)
 
$
(15,749
)
 
$
(5,030
)
 
$
409

 
$
20,869

 
$
(15,250
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment

 

 

 

 

 

Other comprehensive income, before tax

 

 

 

 

 

Income tax expense related to items of other comprehensive income

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

Comprehensive loss
(15,749
)
 
(15,749
)
 
(5,030
)
 
409

 
20,869

 
(15,250
)
Noncontrolling interests

 

 

 
(499
)
 

 
(499
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(15,749
)
 
$
(5,030
)
 
$
(90
)
 
$
20,869

 
$
(15,749
)

37




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Three Months Ended September 26, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(71,514
)
 
$
(71,514
)
 
$
(67,102
)
 
$
796

 
$
138,312

 
$
(71,022
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(42
)
 
(42
)
 

 
(42
)
 
84

 
(42
)
Other comprehensive loss, before tax
(42
)
 
(42
)
 

 
(42
)
 
84

 
(42
)
Income tax benefit related to items of other comprehensive loss
15

 
15

 

 
15

 
(30
)
 
15

Other comprehensive loss
(27
)
 
(27
)
 

 
(27
)
 
54

 
(27
)
Comprehensive (loss) income
(71,541
)
 
(71,541
)
 
(67,102
)
 
769

 
138,366

 
(71,049
)
Noncontrolling interests

 

 

 
(492
)
 

 
(492
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(71,541
)
 
$
(71,541
)
 
$
(67,102
)
 
$
277

 
$
138,366

 
$
(71,541
)



38




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive Loss Information
For the Nine Months Ended September 25, 2015 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(120,636
)
 
$
(120,636
)
 
$
(89,158
)
 
$
692

 
$
210,329

 
$
(119,409
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(101
)
 
(101
)
 

 
(101
)
 
202

 
(101
)
Other comprehensive loss, before tax
(101
)
 
(101
)
 

 
(101
)
 
202

 
(101
)
Income tax benefit related to items of other comprehensive loss
36

 
36

 

 
36

 
(72
)
 
36

Other comprehensive loss
(65
)
 
(65
)
 

 
(65
)
 
130

 
(65
)
Comprehensive (loss) income
(120,701
)
 
(120,701
)
 
(89,158
)
 
627

 
210,459

 
(119,474
)
Noncontrolling interests

 

 

 
(1,227
)
 

 
(1,227
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(120,701
)
 
$
(120,701
)
 
$
(89,158
)
 
$
(600
)
 
$
210,459

 
$
(120,701
)

39




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive (Loss) Income Information
For the Nine Months Ended September 26, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net (loss) income
$
(154,351
)
 
$
(154,351
)
 
$
(120,040
)
 
$
12,185

 
$
264,063

 
$
(152,494
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(116
)
 
(116
)
 

 
(116
)
 
232

 
(116
)
Other comprehensive loss, before tax
(116
)
 
(116
)
 

 
(116
)
 
232

 
(116
)
Income tax benefit related to items of other comprehensive loss
42

 
42

 

 
42

 
(84
)
 
42

Other comprehensive loss
(74
)
 
(74
)
 

 
(74
)
 
148

 
(74
)
Comprehensive (loss) income
(154,425
)
 
(154,425
)
 
(120,040
)
 
12,111

 
264,211

 
(152,568
)
Noncontrolling interests

 

 

 
(1,857
)
 

 
(1,857
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(154,425
)
 
$
(154,425
)
 
$
(120,040
)
 
$
10,254

 
$
264,211

 
$
(154,425
)






40




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet Information
September 25, 2015
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
52,053

 
$
13,496

 
$

 
$
65,549

Restricted cash

 

 
1,673

 

 

 
1,673

Accounts receivable, net

 

 
430,301

 
1,372

 
(7,882
)
 
423,791

Intercompany receivables

 

 
216,605

 
13,249

 
(229,854
)
 

Prepaid expenses and other current assets

 
3,640

 
60,842

 
1,709

 
(544
)
 
65,647

Total current assets

 
3,640

 
761,474

 
29,826

 
(238,280
)
 
556,660

Property and equipment, net

 

 
15,211

 
1,130

 

 
16,341

Goodwill

 

 
9,694

 
32,399

 

 
42,093

Tradenames, net

 

 
28,536

 

 

 
28,536

Other intangibles, net

 

 
122,340

 
338

 

 
122,678

Investment in subsidiaries

 
668,046

 
54,680

 

 
(722,726
)
 

Long-term deferred taxes

 

 
13,860

 

 

 
13,860

Other assets, net

 
3,337

 
11,798

 
927

 

 
16,062

Total assets
$

 
$
675,023

 
$
1,017,593

 
$
64,620

 
$
(961,006
)
 
$
796,230

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
187,272

 
$

 
$

 
$

 
$
187,272

Accounts payable

 

 
105,294

 
3,580

 
(1,273
)
 
107,601

Accrued payroll and employee costs

 

 
91,345

 
4,387

 

 
95,732

Intercompany payables
45,085

 
171,520

 
13,249

 

 
(229,854
)
 

Deferred income taxes

 

 
29,172

 
23

 

 
29,195

Accrued liabilities
157,222

 
18,452

 
96,462

 
1,950

 
(164,074
)
 
110,012

Income taxes payable

 

 
503

 

 
(301
)
 
202

Total current liabilities
202,307

 
377,244

 
336,025

 
9,940

 
(395,502
)
 
530,014

Long-term debt

 
455,000

 

 

 

 
455,000

Long-term deferred taxes

 

 

 

 

 

Other long-term liabilities

 

 
7,838

 

 

 
7,838

Noncontrolling interests

 

 
5,684

 

 

 
5,684

(Deficit) equity
(202,307
)
 
(157,221
)
 
668,046

 
54,680

 
(565,504
)
 
(202,306
)
Total liabilities and deficit
$

 
$
675,023

 
$
1,017,593

 
$
64,620

 
$
(961,006
)
 
$
796,230



41




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet Information
December 31, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
87,300

 
$
6,704

 
$

 
$
94,004

Restricted cash

 

 
707

 

 

 
707

Accounts receivable, net

 

 
452,938

 
719

 
(5,161
)
 
448,496

Intercompany receivables

 

 
234,109

 
28,231

 
(262,340
)
 

Prepaid expenses and other current assets

 

 
73,456

 
1,217

 
(473
)
 
74,200

Total current assets

 

 
848,510

 
36,871

 
(267,974
)
 
617,407

Long-term restricted cash

 

 
952

 

 

 
952

Property and equipment, net

 

 
23,615

 
171

 

 
23,786

Goodwill

 

 
96,489

 
32,399

 

 
128,888

Tradenames, net

 

 
28,762

 

 

 
28,762

Other intangibles, net

 

 
148,825

 
655

 

 
149,480

Investment in subsidiaries

 
805,417

 
55,087

 

 
(860,504
)
 

Long-term deferred taxes

 

 
5,696

 

 

 
5,696

Other assets, net
558

 
11,775

 
15,183

 

 

 
27,516

Total assets
$
558

 
$
817,192

 
$
1,223,119

 
$
70,096

 
$
(1,128,478
)
 
$
982,487

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$

 
$
146,016

 
$
1,253

 
$
(723
)
 
$
146,546

Accrued payroll and employee costs

 

 
84,725

 
13,296

 
(4,314
)
 
93,707

Intercompany payables
45,643

 
188,466

 
28,231

 

 
(262,340
)
 

Deferred income taxes

 

 
31,453

 
24

 

 
31,477

Accrued liabilities
37,681

 
24,135

 
105,404

 
436

 
(37,630
)
 
130,026

Income taxes payable

 

 
5,072

 

 
(648
)
 
4,424

Total current liabilities
83,324

 
212,601

 
400,901

 
15,009

 
(305,655
)
 
406,180

Long-term debt

 
642,272

 

 

 

 
642,272

Other long-term liabilities

 

 
11,312

 

 

 
11,312

Noncontrolling interests

 

 
5,489

 

 

 
5,489

(Deficit) Equity
(82,766
)
 
(37,681
)
 
805,417

 
55,087

 
(822,823
)
 
(82,766
)
Total liabilities and deficit
$
558

 
$
817,192

 
$
1,223,119

 
$
70,096

 
$
(1,128,478
)
 
$
982,487



42




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flow Information
For the Nine Months Ended September 25, 2015 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
557

 
$
16,197

 
$
(35,909
)
 
$
(5,675
)
 
$
(688
)
 
$
(25,518
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net

 

 
(1,542
)
 
(1,138
)
 

 
(2,680
)
Proceeds from sale of property, plant and equipment

 

 
478

 

 

 
478

Purchase of software

 

 
(998
)
 

 

 
(998
)
Return of capital from equity method investees

 

 
3,683

 

 

 
3,683

Contributions to equity method investees

 

 
(1,427
)
 

 

 
(1,427
)
Transfers from (to) affiliates

 

 
17,504

 
14,981

 
(32,485
)
 

Net cash provided by investing activities

 

 
17,698

 
13,843

 
(32,485
)
 
(944
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on debt

 
139,600

 

 

 

 
139,600

Payments on debt

 
(139,600
)
 

 

 

 
(139,600
)
Borrowings under other financing arrangements

 

 

 

 

 

Payments under other financing arrangements

 

 
(2,055
)
 

 

 
(2,055
)
Equity contributions from affiliates to Cerberus

 
750

 

 

 

 
750

Payments of dividends to Parent

 

 

 
(1,376
)
 
688

 
(688
)
Transfers (to) from affiliates
(557
)
 
(16,947
)
 
(14,981
)
 

 
32,485

 

Net cash used in financing activities
(557
)
 
(16,197
)
 
(17,036
)
 
(1,376
)
 
33,173

 
(1,993
)
Net (decrease) increase in cash and cash equivalents

 

 
(35,247
)
 
6,792

 

 
(28,455
)
Cash and cash equivalents, beginning of period

 

 
87,300

 
6,704

 

 
94,004

Cash and cash equivalents, end of period
$

 
$

 
$
52,053

 
$
13,496

 
$

 
$
65,549



43




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flow Information
For The Nine Months Ended September 26, 2014 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
305

 
$
11,769

 
$
(20,810
)
 
$
(7,612
)
 
$
(1,373
)
 
$
(17,721
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net

 

 
(7,129
)
 

 

 
(7,129
)
Proceeds from sale of property, plant and equipment

 

 
44

 

 

 
44

Purchase of software

 

 
(1,101
)
 

 

 
(1,101
)
Return of capital from equity method investees

 

 
2,884

 

 

 
2,884

Transfers (to) from affiliates

 

 
(77,928
)
 
965

 
76,963

 

Net cash used in investing activities

 

 
(83,230
)
 
965

 
76,963

 
(5,302
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt

 
40,100

 

 

 

 
40,100

Payments on long-term debt

 
(130,100
)
 

 

 

 
(130,100
)
Borrowings under other financing arrangements

 

 
20,214

 

 

 
20,214

Payments under other financing arrangements

 

 
(23,306
)
 

 

 
(23,306
)
Payments of dividends to Parent

 

 

 
(2,746
)
 
1,373

 
(1,373
)
Transfers (to) from affiliates
(305
)
 
78,231

 
(963
)
 

 
(76,963
)
 

Net cash used in financing activities
(305
)
 
(11,769
)
 
(4,055
)
 
(2,746
)
 
(75,590
)
 
(94,465
)
Net decrease in cash and cash equivalents

 

 
(108,095
)
 
(9,393
)
 

 
(117,488
)
Cash and cash equivalents, beginning of period

 

 
144,025

 
26,820

 

 
170,845

Cash and cash equivalents, end of period
$

 
$

 
$
35,930

 
$
17,427

 
$

 
$
53,357


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 material subsequent events for the quarter ended September 25, 2015, except as disclosed within the Notes to the unaudited condensed consolidated financial statements.


44




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, 2014. In addition, please see "Disclosure Regarding Forward-Looking Information" for a discussion of the risks, uncertainties and assumptions associated with these statements. 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 two operating and reporting segments: DynAviation and DynLogistics. Our segments provide services domestically and internationally primarily under contracts with the U.S. government.
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 one of 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.
In January 2015 the DoS issued a letter notifying us that our proposal on the recompete related to the INL Air Wing program was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS's evaluation. We filed a protest with the U.S. Government Accountability Office ("GAO") to challenge the decision by the DoS. In response to our protest, the DoS notified the GAO that it will take corrective action, which will include a reconsideration of its evaluations of the recompete proposals, and a determination of whether discussions are necessary and, if so, it will make a new competitive range decision. In July 2015, DynAviation was notified that the Department of State intends to extend the INL Air Wing program by at least 12 months through the use of a justification and approval ("J&A"). In October 2015 we received notification of a new competitive range decision that reinstated us back into the competitive range.

45




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 and War Reserve Materiel ("WRM II") contracts are the most significant contracts within this segment. Under the LOGCAP IV contract which performs under a single IDIQ contract, the U.S. Army contracts for us to perform selected services, operations and maintenance, engineering as well as construction and logistics predominately in the Middle East Theater to augment the U.S. Army, the U.S. Marine Corps and North Atlantic Treaty Organization ("NATO") forces and to release military units from combat service support missions or to fill the U.S. military resource shortfalls. Under the WRM II contract, the U.S. Air Force contracts the Company to perform, out-load, and reconstitute the pre-positioned war reserve materiel in the U.S. Air Force Central Area of Responsibility as well as maintenance services on ground support equipment vehicles.
This segment also provides international policing and police training, 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 from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Interior and the Afghanistan Ministry of Defense.
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.
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, 2014.
External Factors
Recent decisions and actions by the President and Congress have positively changed the policy and budget outlook. The unexpected passage of the Bipartisan Budget Act of 2015 ("BBA") brings much needed clarity to the fiscal years 2016 and 2017 defense budgets. The agreement averts sequestration for the next two fiscal years, avoids a full-year continuing resolution ("CR") and significantly reduces the potential for a damaging government shut-down by increasing the debt ceiling limit into 2017. The new BBA allows for a return to growth in the defense base budget. Congress still has to set and appropriate the final funding levels for the DoD topline and Operations and Maintenance ("O&M") accounts, but we know the parameters. After a period of protracted budget uncertainty, this is welcome relief.
While we have seen sudden improvements on the domestic political and budgetary fronts, the international environment continues to be driven by instability, with ongoing and potential conflicts around the globe. Global events are driving adjustments to U.S. national security and foreign policy objectives, as well as the requirements, funding levels and mechanisms to support necessary policy shifts. External factors influencing the industry continue to include:
Adhering to discretionary spending caps mandated by the BCA;
Reduced troop levels and tempo of operations in Afghanistan;
Conflicts in Iraq, Syria and the wider Middle East; and
Increased instability and challenges to the existing international framework.
The BBA addresses the first factor by adding $80 billion - $50 billion in fiscal year 2016 and $30 billion in fiscal year 2017 - equally split between the Security and Non-Security budget accounts. The budget deal also includes an additional $32 billion - $16 billion in fiscal year 2016 and $16 billion in fiscal year 2017 - in Overseas Contingency Operations ("OCO") funding, which is also equally split between the Security and Non-Security accounts. Please note, the Security accounts included some Department of Energy ("DoE") and other national security programs; roughly 95% of added Security funding will flow to DoD.
Specifically, in fiscal year 2016, the Security budget cap that includes some DoE accounts is increased by $25 billion with an additional $8 billion being added to the OCO request. In total, the fiscal year 2016 Security budget cap is now $607 billion with $548 billion in base budget authority and $59 billion in OCO. The total for the Security accounts is $5 billion below the President’s request. However, the funding levels are appreciably better than potential alternatives. For fiscal year 2017, the Security cap will be $610 billion with $551 billion in the base and $59 billion in OCO.

46




The defense services sector is predominately funded in the Operations and Maintenance ("O&M") accounts. While Congress has not set the final O&M funding levels, the fiscal year 2016 defense base budget request for O&M activities is $210 billion, which is $15 billion, or 7%, above fiscal year 2015. We believe growth in the O&M request reflects DoD’s continued focus on readiness above all else. We also believe Congress will appropriate significant funds to address readiness concerns.
With regard to fiscal year 2016, the OCO O&M request is $40 billion, which is $11 billion, or 21%, below fiscal year 2015. However, the predicted decreases in OCO O&M are not in alignment with continued DoD readiness challenges and global turmoil. To help remedy this unbalance, the vast majority of the BBA-added $16 billion in OCO funds will be expended on O&M activities.
Internationally, we believe the decision to delay further troop reductions in Afghanistan, the decision to send U.S. Special Forces advisors into Syria while increasing operational tempo in Iraq and Syria, as well as continued conflict and instability in Yemen, Ukraine and others, argues for continued robust OCO funding. The U.S. and its allies are confronted with a complex, challenging and often violent world where U.S. leadership is still required. We believe 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 potential challenges exist that could adversely impact our business on a short-term basis, we believe the following longer-term industry trends demonstrate the 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 to persist, especially given the unknowns brought by Russia’s provocative actions in Syria and elsewhere. Yet, we believe 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.




47




Notable Events for the Nine Months Ended September 25, 2015 and to Date
In January 2015, DynLogistics announced the award of a contract from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Interior. The contract has a nine-month base period with two, three-month options and a total potential contract value of $84.0 million.
In January 2015, DynLogistics announced the award of a contract from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Defense. The contract has a nine-month base period with two, three-month options and a total potential contract value of $67.8 million.
In January 2015, DynAviation announced the award of a task order on a contract from the Naval Air Systems Command to provide aircraft maintenance and logistics support for aircraft assigned to the Naval Strike and Air Warfare Center. The task order has a one-year period of performance and is valued up to $44.5 million. The contract vehicle has a five-year period of performance, cumulatively, with a total potential value of $93.3 million.
In January 2015, DynLogistics was awarded a contract from the U.S. Department of State to provide life support services on the Afghanistan Life Support Services ("ALiSS") contract. DI is one of two awardees on the IDIQ contract which has one base year with four, one-year options with a total potential contract value of $540 million.
In February 2015, DynAviation announced the award of a contract extension from the California Department of Forestry and Fire Protection ("CAL FIRE") to continue support of its aviation program to help suppress and control wildfires. The contract has a one-year period of performance with a total potential value of $27.8 million.
In February 2015, DynAviation was awarded a contract from the United States Army to provide integrated maintenance support services for the Saudi Arabian National Guard ("SANG") Aviation Brigade. The contract has a three-year base period, with two one-year options and a total potential contract value of $127.2 million.
In March 2015, DynAviation announced the award of a contract modification to provide aviation maintenance services throughout the TASM-O region under the Army AFM contract. The contract modification has a one-year period of performance for a total value of $56.0 million.
In April 2015, DynAviation announced the award of a contract from CAL FIRE to help suppress and control wildfires. The contract has a two-year base period with three, one-year options and a total potential contract value of $126.2 million.
In April 2015, the U.S. Air Force awarded DynLogistics a new task order under the Air Force Contract Augmentation Program III ("AFCAP") to provide support services for fire alarm systems and fire suppression systems at Al Dhafra Air Base, UAE. The task order has a one-year base period with a four-month option period and a possible six-month extension for a total contract value of $1.1 million.
In May 2015, the Company was selected to bid for task orders under the Tank-Automotive and Armaments Command ("TACOM") Strategic Service Solutions Equipment Related Services contract to provide maintenance and repair support services. The contract is an eight year, IDIQ vehicle with a potential total value of $1.1 billion.
In June 2015, the Company named Lewis Von Thaer as Chief Executive Officer. Mr. Von Thaer replaced James E. Geisler, our then Interim Chief Executive Officer, who continues to serve the Company as non-executive chairman of the Board of Directors.
In June 2015, DynLogistics announced the award of the two new task orders under AFCAP to provide Air Traffic Management Services at Forward Operating Base ("FOB") Fenty and Fire Emergency Services ("FES") Equipment Services. The competitively awarded task orders have a one-year period of performance with a total contract value of $1.6 million and a one-year base period and 77-day option period with a total potential value of $1.6 million, respectively.
In June 2015, DynLogistics was awarded a contract modification to continue supporting the U.S. Government in the Republic of the Philippines. The third of four, one-year options is valued at $18.3 million.
In June 2015, the Company was selected to bid for task orders under the Air Force Contract Augmentation Program IV ("AFCAP IV") in support of base operations and logistical support services. The contract is a competitively-awarded IDIQ vehicle with one base year and four, one-year options with a potential value of $5 billion.
In July 2015, DynAviation was notified that the Department of State intends to extend the INL Air Wing program by at least 12 months through the use of a J&A. 
In July 2015, DynAviation was awarded a contract modification from the U.S. Air Force to continue providing aircraft maintenance, transient alert, munitions, base supply and fuels at Joint Base Andrews, Maryland. The competitively-awarded contract was originally awarded in August 2011, with a total potential value of $400.9 million. This contract modification is the fourth of seven possible option years, with a total value of approximately $65.6 million.

48




In July 2015, DynLogistics was awarded a one-year contract extension from the U.S. Army Sustainment Command on a task order to continue providing base life support and operation and maintenance services in Afghanistan under the LOGCAP IV contract. The extension is valued at $154.3 million.
In August 2015, DynAviation was awarded a contract modification to continue providing aviation maintenance and logistic support at the Naval Aviation Warfighting Development Center ("NAWDC") in Patuxent River, Maryland. The contract modification is the last of four possible option years and is valued at $104.1 million.
In August 2015, DynAviation was awarded a contract modification valued at $17.3 million to continue providing maintenance support to the Royal Saudi Land Forces Aviation Command.
In August 2015, DynLogistics was awarded a contract from the U.S. Army Contracting Command to provide technical support services to the Iraqi Army in Taji, Iraq. The contract has a total potential value of $139.3 million.
In August 2015, DynLogistics was awarded two task orders under LOGCAP IV from the U.S. Army Sustainment Command to provide support services to the Geographic Combatant Command ("GCC") headquarters at the United States North America Command ("NORTHCOM") and United States Pacific Command ("PACOM") in several locations worldwide. These task orders have a one-year base period and two one-year options, with a total potential value of $77 million.
We have historically participated in a collaborative arrangement with CH2M Hill on LOGCAP IV, in which our share of the profits was 70%. On August 25, 2015, we executed an agreement with CH2M Hill to end our collaborative arrangement on the LOGCAP IV contract. Subsequent to August 25, 2015, we no longer share any of the risks or profit associated with the contract.
In September 2015, DynLogistics was awarded two three-month options from the U.S. Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Interior. The two, three-month options have a total potential value of $33.6 million.
In September 2015, DynLogistics was awarded two three-month options from the U.S. Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Defense. The two, three-month options have a total potential value of $27.1 million.
In September 2015, DynAviation finalized negotiations with the Department of State regarding the INL Air Wing program and definitized an agreement for a 12-month extension of services. The extension has a total potential value of $311.9 million.
In October 2015 we received notification of a new competitive range decision that reinstated us back into the competitive range related to the recompete of the INL Air Wing program.
In October 2015, DynAviation was notified by the State of California that we were re-awarded the CAL FIRE contract following a customer driven recompete for the expansion of contractual scope. The new contract award will begin January 1, 2016 and has a one-year base period and three one-year options with a total potential contract value of $155.2 million.

49




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.
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
 
Nine Months Ended
 
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Fixed-Price
38
%
 
25
%
 
38
%
 
25
%
Time-and-Materials
15
%
 
13
%
 
14
%
 
12
%
Cost-Reimbursement
47
%
 
62
%
 
48
%
 
63
%
Total
100
%
 
100
%
 
100
%
 
100
%
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.
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 following table sets forth our approximate backlog as of the dates indicated:
 
As Of
(Amounts in millions)
September 25, 2015

December 31, 2014
Funded backlog
$
1,188


$
1,171

Unfunded backlog
1,607


2,160

Total
$
2,795


$
3,331


50




The decrease in backlog as of September 25, 2015 was primarily due to revenue outpacing orders as potential contract wins continue to be pushed to subsequent periods.


51




Results of Operations

Consolidated Three Months Ended September 25, 2015 compared to the Three Months Ended September 26, 2014
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 September 25, 2015 and September 26, 2014:
 
Three Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
Revenue
$
479,808

 
100.0
 %
 
$
540,327

 
100.0
 %
Cost of services
(427,529
)
 
(89.1
)
 
(510,965
)
 
(94.6
)
Selling, general and administrative expenses
(35,237
)
 
(7.3
)
 
(44,192
)
 
(8.2
)
Depreciation and amortization expense
(9,039
)
 
(1.9
)
 
(12,094
)
 
(2.2
)
Earnings from equity method investees
6

 

 
152

 

Impairment of goodwill, intangibles and long lived assets
(6,690
)
 
(1.4
)
 
(50,955
)
 
(9.4
)
Operating loss
1,319

 
0.3

 
(77,727
)
 
(14.4
)
Interest expense
(17,201
)
 
(3.6
)
 
(17,237
)
 
(3.2
)
Loss on early extinguishment of debt

 

 
(242
)
 

Interest income
19

 

 
68

 

Other income, net
73

 

 
956

 
0.2

Loss before income taxes
(15,790
)
 
(3.3
)
 
(94,182
)
 
(17.4
)
Benefit for income taxes
540

 
0.1

 
23,160

 
4.3

Net loss
(15,250
)
 
(3.2
)
 
(71,022
)
 
(13.1
)
Noncontrolling interests
(499
)
 
(0.1
)
 
(492
)
 
(0.1
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
(3.3
)
 
$
(71,514
)
 
(13.2
)
Revenue — Revenue for the three months ended September 25, 2015 was $479.8 million, a decrease of $60.5 million, or 11.2%, compared to $540.3 million for the three months ended September 26, 2014. The decrease was primarily driven by the continued drawdown of U.S. forces in Afghanistan which impacted the demand for services under our LOGCAP IV program, the completion of certain task orders under the Africa Peacekeeping Program ("AFRICAP"), partially offset by new contracts wins in our DynAviation segment. 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 September 25, 2015 was $427.5 million, a decrease of $83.4 million, or 16.3%, compared to the three months ended September 26, 2014. The decrease in Cost of services was primarily driven by a reduction in demand for services, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services improved to 89.1% for the three months ended September 25, 2015 compared to 94.6% for the three months ended September 26, 2014, primarily due to a one-time $35.0 million charge during the three month period ended September 26, 2014 on a certain U.S. Air Force contract related to a contract dispute. 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 $9.0 million, or 20.3%, to $35.2 million during the three months ended September 25, 2015 primarily as a result of the decrease in severance and legal expense combined with our cost reduction initiatives. SG&A as a percentage of revenue decreased to 7.3% for the three months ended September 25, 2015 compared to 8.2% for the three months ended September 26, 2014 as a result of the reduction in SG&A discussed above.
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"). We expect our earnings from equity method investees to remain minimal throughout the remainder of the year unless additional task orders are received by our joint ventures. See Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
Interest expense — Interest expense for the three months ended September 25, 2015 was $17.2 million, which remained consistent compared to the three months ended September 26, 2014.

52




Other income, net — Other income, net consists primarily of our share of earnings from Babcock DynCorp Limited ("Babcock"), sublease income, as well as gains/losses from foreign currency and asset sales. Other income, net during the three months ended September 25, 2015 was $0.1 million, a decrease of $0.9 million, primarily due to a loss on sale of helicopters.
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 September 25, 2015 was 3.4%, as compared to 24.6% for the three months ended September 26, 2014, a change primarily driven by recording a valuation allowance against our deferred tax assets.

Consolidated Nine Months Ended September 25, 2015 compared to the Nine Months Ended September 26, 2014
The following tables set forth our unaudited consolidated results of operations, both in dollars and as a percentage of revenue, for the nine months ended September 25, 2015 and September 26, 2014:
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
Revenue
$
1,437,000

 
100.0
 %
 
$
1,744,052

 
100.0
 %
Cost of services
(1,290,880
)
 
(89.8
)
 
(1,606,045
)
 
(92.1
)
Selling, general and administrative expenses
(107,920
)
 
(7.5
)
 
(110,277
)
 
(6.3
)
Depreciation and amortization expense
(25,587
)
 
(1.8
)
 
(35,621
)
 
(2.0
)
Earnings from equity method investees
131

 

 
9,918

 
0.6

Impairment of goodwill, intangibles and long lived assets
(93,485
)
 
(6.5
)
 
(142,714
)
 
(8.2
)
Operating loss
(80,741
)
 
(5.6
)
 
(140,687
)
 
(8.1
)
Interest expense
(50,429
)
 
(3.5
)
 
(53,438
)
 
(3.1
)
Loss on early extinguishment of debt

 

 
(862
)
 

Interest income
61

 

 
151

 

Other income, net
1,675

 
0.1

 
3,314

 
0.2

Loss before income taxes
(129,434
)
 
(9.0
)
 
(191,522
)
 
(11.0
)
Benefit for income taxes
10,025

 
0.7

 
39,028

 
2.2

Net loss
(119,409
)
 
(8.3
)
 
(152,494
)
 
(8.8
)
Noncontrolling interests
(1,227
)
 
(0.1
)
 
(1,857
)
 
(0.1
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(120,636
)
 
(8.4
)
 
$
(154,351
)
 
(8.9
)
Revenue — Revenue for the nine months ended September 25, 2015 was $1,437.0 million, a decrease of $307.1 million, or 17.6%, compared to $1,744.1 million for the nine months ended September 26, 2014. The decrease was primarily driven by the continued drawdown of U.S. forces in Afghanistan, which impacted the demand for services under our LOGCAP IV contract and caused reduced training needs under the Afghanistan Ministry of Defense Program ("AMDP") and the Combined Security Transition Command Afghanistan ("CSTC-A") contract; lower volume on the CivPol task orders and the completion of certain contracts, partially offset by new contracts, primarily in DynAviation. 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 nine months ended September 25, 2015 was $1,290.9 million, a decrease of $315.2 million, or 19.6%, compared to the nine months ended September 26, 2014. The decrease in Cost of services was primarily driven by a reduction in demand for services, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services improved to 89.8% for the nine months ended September 25, 2015 compared to 92.1% for the nine months ended September 26, 2014, primarily due to a one-time $35.0 million charge during the three month period ended September 26, 2014 on a certain U.S. Air Force contract related to a contract dispute. 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 $2.4 million, or 2.1%, to $107.9 million during the nine months ended September 25, 2015 primarily as a result of the decrease in severance expense combined with our cost reduction initiatives, partially offset by higher legal costs in the current year. SG&A as a percentage of revenue increased to 7.5% for the nine months ended September 25, 2015 compared to 6.3% for the nine months ended September 26, 2014 as a result of the decline in revenue outpacing general and administrative reductions and the higher legal costs noted above.

53




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 nine months ended September 25, 2015 was $0.1 million primarily as a result of activity in our PaTH joint venture, as compared to $9.9 million for the nine months ended September 26, 2014. The decrease was 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. We expect our earnings from equity method investees to remain minimal throughout the remainder of the year unless additional task orders are received by our joint ventures. See Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
Interest expense — Interest expense for the nine months ended September 25, 2015 was $50.4 million, a decrease of $3.0 million, or 5.6%, compared to the nine months ended September 26, 2014. The decrease is the result of the reduction of the principal balance of our Term Loan by $90.0 million of principal prepayments during the year ended December 31, 2014.
Other income, net — Other income, 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, net during the nine months ended September 25, 2015 was $1.7 million, a decrease of $1.6 million, or 49.5%, primarily due to a loss on sale of helicopters.
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 nine months ended September 25, 2015 was 7.7%, as compared to 20.4% for the nine months ended September 26, 2014, a change primarily driven by recording a valuation allowance against our deferred tax assets.

Results by Segment – Three Months Ended September 25, 2015 Compared to Three Months Ended September 26, 2014
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income (loss) and operating margin for our operating segments for the three months ended September 25, 2015 and September 26, 2014. The following amounts agree to our segment disclosures. See Note 9 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.
 
Three Months Ended
 
September 25, 2015
 
September 26, 2014
(Amounts in thousands)
Revenue
 
% of
Total Revenue
 
Revenue
 
% of
Total Revenue
DynAviation
$
316,337

 
65.9
 %
 
$
293,238

 
54.2
 %
DynLogistics
163,187

 
34.0

 
247,829

 
45.9

Headquarters (1)
284

 
0.1

 
(740
)
 
(0.1
)
Consolidated revenue
$
479,808

 
100.0

 
$
540,327

 
100.0

 
 
 
 
 
 
 
 
 
Operating
(Loss) Income
 
Profit Margin
 
Operating
(Loss) Income
 
(Loss) Profit Margin
DynAviation
$
(4,137
)
 
(1.3
)%
 
$
(65,282
)
 
(22.3
)%
DynLogistics
16,800

 
10.3

 
1,800

 
0.7

Headquarters (2)
(11,344
)
 
 
 
(14,245
)
 
 
Consolidated operating income (loss)
$
1,319

 
 
 
$
(77,727
)
 
 
(1)
Represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating loss primarily relates 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.

54




DynAviation
Revenue of $316.3 million increased $23.1 million, or 7.9%, for the three months ended September 25, 2015 compared to the three months ended September 26, 2014 primarily as a result of increased revenues from T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"), the new Naval Aviation Warfighting Development Center ("NAWDC"), T-34/T-44/T-6 and Future Flexible Acquisition and Sustainment Tool (“F2AST”) contracts and continued organic growth in our Middle East contracts. The increase in revenue was partially offset by the completion of certain task orders under the Contract Field Teams ("CFT") program, the completion of the CNTPO program, and declining operational tempo in Iraq and Afghanistan impacting the INL Air Wing contract. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in the government procurement environment could result in future declines within the DynAviation segment.
Operating loss of $4.1 million for the three months ended September 25, 2015 as compared to $65.3 million for the three months ended September 26, 2014 was primarily due to the costs associated with the exit of the FAA Part 135 commuter and on demand operations line of business at Heliworks and contract losses on certain U.S. Navy contracts partially offset by the increase in revenue discussed above. The $65.3 million operating loss for the three months ended September 26, 2014 was primarily as a result of the goodwill impairment charge of $50.8 million recorded within our Aviation reporting unit, additional contract loss on a U.S. Air Force contract to resolve a contract dispute, and a change in contract mix on the Theater Aviation Sustainment Manager ("TASM") task order, moving under the AFM contract vehicle.
DynLogistics
Revenue of $163.2 million decreased $84.6 million, or 34.2%, for the three months ended September 25, 2015 compared to the three months ended September 26, 2014 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 and the completion of certain task orders under the AFRICAP program. Additionally, revenue was impacted by de-scoping on the Philippines Operations Support ("POS") contract and the completion of certain other contracts. This decline was partially offset by the new Afghanistan Ministry of Interior and Afghanistan Ministry of Defense task orders under the United States Army Contracting Command and growth in our national strategic programs portfolio. We expect our revenue for the DynLogistics segment to continue to hold in line with our third quarter revenue for the remainder of 2015 despite the decline in the efforts in Afghanistan and with the continued pressure on U.S. defense budgets.
Operating income of $16.8 million for the three months ended September 25, 2015 as compared to $1.8 million for the three months ended September 26, 2014 was primarily due to the definitization of cost and fee on certain legacy programs, the execution of an agreement to end our LOGCAP IV collaborative fee sharing arrangement and by contract reserve adjustments in the prior year that negatively impacted operating income, partially offset by the decline in revenue in 2015.




55




Results by Segment – Nine Months Ended September 25, 2015 Compared to Nine Months Ended September 26, 2014
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating (loss) income and operating margin for our operating segments for the nine months ended September 25, 2015 and September 26, 2014. The following amounts agree to our segment disclosures. See Note 9 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.
 
Nine Months Ended
 
September 25, 2015
 
September 26, 2014
(Amounts in thousands)
Revenue
 
% of
Total Revenue
 
Revenue
 
% of
Total Revenue
DynAviation
$
950,749

 
66.2
 %
 
$
889,710

 
51.0
 %
DynLogistics
485,781

 
33.8

 
855,337

 
49.1

Headquarters (1)
470

 

 
(995
)
 
(0.1
)
Consolidated revenue
$
1,437,000

 
100.0

 
$
1,744,052

 
100.0

 
 
 
 
 
 
 
 
 
Operating
(Loss) Income
 
Profit Margin
 
Operating
Loss
 
Profit Margin
DynAviation
$
(76,509
)
 
(8.0
)%
 
$
(43,382
)
 
(4.9
)%
DynLogistics
27,807

 
5.7

 
(66,974
)
 
(7.8
)
Headquarters (2)
(32,039
)
 
 
 
(30,331
)
 
 
Consolidated operating loss
$
(80,741
)
 
 
 
$
(140,687
)
 
 
(1)
Represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating loss primarily relates 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.
DynAviation
Revenue of $950.7 million increased $61.0 million, or 6.9%, for the nine months ended September 25, 2015 compared to the nine months ended September 26, 2014 primarily as a result of increased revenues from T-6 COMBS, NAWDC, T-34/T-44/T-6, SANG, and F2AST contracts and continued organic growth in our Middle East contracts. The increase in revenue was partially offset by the completion of CNTPO, C20, and C21 programs and certain task orders under the CFT program. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in the government procurement environment could result in future declines within the DynAviation segment.
Operating loss of $76.5 million for the nine months ended September 25, 2015 as compared to $43.4 million for the nine months ended September 26, 2014 was primarily due to the goodwill impairment charge of $86.8 million associated with our Aviation reporting unit, the completion of contracts that historically commanded higher margins, costs associated with the exit of the FAA Part 135 commuter and on demand operations line of business at Heliworks and a contract loss accrual on a new U.S. Navy program. The decline in operating income was partially offset by continued organic growth and enhanced productivity on our existing Middle East contracts.
DynLogistics
Revenue of $485.8 million decreased $369.6 million, or 43.2%, for the nine months ended September 25, 2015 compared to the nine months ended September 26, 2014 primarily as a result of reductions in manning, materials and other direct costs under the AOR task order under the LOGCAP IV program. Additionally, revenue was impacted by de-scoping on AMDP, CSTC-A, and POS contracts, lower volume on the CivPol task orders and the completion of certain contracts. This decline was partially offset by the new Afghanistan Ministry of Interior and Afghanistan Ministry of Defense task orders under the United States Army Contracting Command and growth in our national strategic programs portfolio. We expect our revenue for the DynLogistics segment to continue to hold in line with our third quarter revenue for the remainder of 2015 despite the decline in the efforts in Afghanistan and with the continued pressure on U.S. defense budgets
Operating income of $27.8 million for the nine months ended September 25, 2015 as compared to an operating loss of $67.0 million was primarily due to the goodwill impairment charge of $90.7 million associated with our LSS reporting unit during the nine months ended September 26, 2014, the definitization of cost and fee on certain legacy programs, the execution of an agreement to end our LOGCAP IV collaborative fee sharing arrangement and the decrease in revenue discussed above.


56




Liquidity and Capital Resources
Cash generated by operations and borrowings available under our Senior Secured Credit Facility ("Senior Credit Facility") are our primary sources of short-term liquidity. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of our Senior Credit Facility. We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months (subject to our ability to extend or refinance the Revolver as noted below). However, our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable and access to our Revolver for the next twelve months is dependent upon (1) our meeting financial and non-financial covenants and (2) extending the maturity of the Revolver through an amendment to the Senior Credit Facility or refinancing such debt prior to its scheduled maturity in July 2016. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections, significant future losses on any of our contracts 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 prior to its scheduled maturity could result in an earlier 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 we will be able to refinance our Senior Credit Facility at terms acceptable to us prior to its maturity in July 2016. 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 77 days as of September 25, 2015 from 80 days as of December 31, 2014, primarily due to favorable timing of payment cycles on our LOGCAP IV contract. DSO was negatively impacted by outstanding receivables from one prime contractor which has yet to pay us for accounts receivable on a recently ended contract as well as fee receivable on undefinitized work related to our LOGCAP IV contract. We expect to resolve the fee receivable on LOGCAP IV in the fourth quarter. We will continue to focus on working capital management and growth in our business as we approach the maturity of our Senior Credit Facility in July 2016. We expect cash to continue to be impacted by operational working capital needs and interest payments on the Senior Credit Facility and the Senior Unsecured Notes. Depending on the outcome of our annual financial results, and in particular the two accounts receivable matters discussed above, we may be required to submit a portion of our Excess Cash Flow, as defined in the Senior Credit Facility, as additional principal payments within five business days following the release of our Form 10-K filing. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Senior Credit Facility.



57




Cash Flow Analysis
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
Net cash used in operating activities
$
(25,518
)

$
(17,721
)
Net cash used in investing activities
(944
)

(5,302
)
Net cash used in financing activities
(1,993
)

(94,465
)
Cash Flows
Cash used in operating activities during the nine months ended September 25, 2015 was $25.5 million compared to $17.7 million during the nine months ended September 26, 2014. Cash used in operating activities during the nine months ended September 25, 2015 was primarily due to our net loss position, excluding the impact of non-cash impairments, and changes in working capital, primarily driven by a reduction in accounts payable and accrued liabilities. Cash used in operating activities during the nine months ended September 26, 2014 was primarily due to our net loss, excluding the impact of non-cash impairments, for the nine months ended September 26, 2014 and our change in working capital, partially offset by the dividends received from equity method investees.
Cash used in investing activities during the nine months ended September 25, 2015 was $0.9 million compared to $5.3 million during the nine months ended September 26, 2014. Cash used in investing activities during the nine months ended September 25, 2015 was primarily due to purchases of capital assets and contributions to GLS partially offset by returns of capital from Babcock. Cash used in investing activities during the nine months ended September 26, 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 financing activities during the nine months ended September 25, 2015 was $2.0 million compared to $94.5 million during the nine months ended September 26, 2014. Cash used in financing activities during the nine months ended September 25, 2015 was primarily the result of payments related to financed insurance. Cash used in financing activities during the nine months ended September 26, 2014 was primarily the result of a $90.0 million prepayment on our Term Loan.
Financing
As of September 25, 2015, our debt was comprised of (i) $455.0 million of Senior Unsecured Notes and (ii) $187.3 million of the Term Loan principal associated with our Senior Credit Facility. The Senior Credit Facility also contains a $144.8 million revolving credit facility (the "Revolver") under which we had no outstanding borrowings as of September 25, 2015. As of September 25, 2015 and December 31, 2014, the available borrowing capacity under the Senior Credit Facility was approximately $102.2 million and $108.1 million, respectively, amounts take into account $42.6 million and $36.7 million, respectively, in issued letters of credit.
As of September 25, 2015, the Senior Credit Facility includes the $187.3 million Term Loan and the $144.8 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 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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. The Senior Unsecured Notes mature 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 September 25, 2015 for our debt was 9.2%, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the three and nine months ended September 25, 2015.

58




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;
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. We refer to these two covenants as the financial maintenance 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.
The maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
June 25, 2016 and thereafter
6.60 to 1.0
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The minimum interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
June 25, 2016 and thereafter
1.30 to 1.0

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. Based on our current projections, we believe we will be compliant with our financial maintenance covenants for the next twelve months. If unforeseen events were to occur or if our estimates change that would put us in violation of the financial maintenance covenants in future periods, we would intend to seek to obtain a waiver from our lenders or to amend the terms of our Senior Credit Facility prior to there being an event of default under the Senior Credit Facility. As of September 25, 2015 and December 31, 2014, we were in compliance with our financial maintenance covenants.
Our Senior Credit Facility matures July 7, 2016 and as of September 25, 2015 is classified within the current portion of long-term debt. We intend to address the upcoming maturity under the Senior Credit Facility before the filing of our Annual Report on Form 10-K for the year ending December 31, 2015. However, there can be no assurances that we will be able to do so with terms that are favorable to us or at all. If we are unable complete an amendment to extend the maturity or otherwise refinance the Senior Credit Facility prior to its scheduled maturity date, then the failure to pay all amounts due under the Senior Credit Facility at maturity would be an event of default under the Senior Credit Facility. In addition, the Senior Credit Facility contains customary financial as well as non-financial, affirmative and negative covenants (including, without limitation, the requirement to deliver a report on the audited financial statements that is unqualified and not subject to any “going concern” or like qualifications) that if

59




we violate and do not cure or have waived within any applicable grace period would trigger an event of default prior to the maturity. The failure to pay principal due at scheduled maturity or an acceleration by the lenders due to a default under the Senior Credit Facility would also cause an event of default under our Senior Unsecured Notes.


60




Non-GAAP Measures
We define EBITDA as Generally Accepted Accounting Principles ("GAAP") net 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/or 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.

61




The following table provides a reconciliation of net 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
 
Nine Months Ended
 
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
 
Net loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(71,514
)
 
$
(120,636
)
 
$
(154,351
)
 
Benefit for income taxes
(540
)
 
(23,160
)
 
(10,025
)
 
(39,028
)
 
Interest expense, net of interest income
17,182

 
17,169

 
50,368

 
53,287

 
Depreciation and amortization (1)
9,479

 
12,328

 
27,626

 
36,328

 
EBITDA
10,372

 
(65,177
)
 
(52,667
)
 
(103,764
)
 
Non-recurring or unusual gains or losses or income or expenses (2)
13,202

 
87,001

 
114,452

 
185,910

 
Employee non-cash compensation, severance, and retention expense (3)
2,575

 
5,137

 
6,237

 
7,934

 
Management fees (4)
1,008

 
705

 
3,052

 
1,424

 
Other (5)
(445
)
 
1,111

 
(931
)
 
1,565

 
Adjusted EBITDA
$
26,712

 
$
28,777

 
$
70,143

 
$
93,069

(1)
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 certain intangibles and assets held for sale of $6.7 million in the third quarter of 2015, the impairment of goodwill within the Aviation reporting unit in the second quarter of 2015 and the impairment of goodwill within the LSS and Aviation reporting units in 2014, a one-time charge related to a certain contract of $35 million as defined in the Fourth Amendment to the Senior Credit Facility in 2014, 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)
Includes Cerberus Operations and Advisory Company management fees.
(5)
Includes changes due to fluctuations in foreign exchange rates, earnings from affiliates not received in cash, costs incurred pursuant to ASC 805 - Business Combination and other immaterial items.



62




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, 2014. 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, 2014 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 September 25, 2015. 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, 2014.

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 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 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.



63




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.
There have been no material changes in the risk factors from those described in "Risk Factors" disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, except as follows:

Economic conditions could impact our business.

Our business may be adversely affected by factors in the U.S. and other countries that are beyond our control, such as disruptions in the financial markets or downturns in the economic activity in specific countries or regions, or in the various industries in which we operate. These factors could have an adverse impact in the availability of capital and cost of capital, interest rates, tax rates, or regulations in certain jurisdictions. If for any reason we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms. Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of our insurers and financial institutions.

In particular, if the U.S. government, due to budgetary considerations, fails to sustain the troops in Afghanistan, continues to reduce the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate or if a government shutdown occurs, our business, financial condition and results of operations could be adversely affected. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. government, including sequestration.

A credit crisis, further tightening of credit or our lenders view concerning the outlook of our business could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion regarding liquidity.

We may not be able to generate sufficient cash to repay our Senior Credit Facility, consisting of our Term Loan and Revolver, maturing on July 7, 2016, or to repay our other indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to repay or to refinance our Senior Credit Facility maturing on July 7, 2016 or our other debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to repay the Senior Credit Facility by the maturity date or to pay the principal and interest on our other outstanding indebtedness.

If our cash flows and capital resources are insufficient to repay our Senior Credit Facility at maturity or to pay the principal and interest on our other outstanding indebtedness, including the Senior Unsecured Notes, we may be forced to seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

A decline or reprioritization of funding in the U.S. defense budget or delays in the budget process could adversely affect our operating performance and our ability to generate cash flow to fund our operations.

Our government contracts and sales are highly correlated and dependent upon the U.S. defense budget which is subject to the congressional budget authorization and appropriations process. Defense budgets are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic

64




conditions, presidential administration priorities, changing national security and defense requirements, geo-political developments and actual fiscal year congressional appropriations for defense budgets. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.

While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends will result in continued demand in our target markets for the types of services we provide. However, U.S. government defense spending levels are difficult to predict. Significant changes in defense spending, changes in U.S. government priorities, policies and requirements, and/or events such as a government shutdown could have a material adverse effect on our results of operations, financial condition or liquidity.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.

ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.

ITEM 5. OTHER INFORMATION.
None.


65




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
 
 
 
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:
November 6, 2015
DELTA TUCKER HOLDINGS, INC.
 
 
 
 
 
/s/ William T. Kansky
 
 
William T. Kansky
 
 
Senior Vice President and Chief Financial Officer


66