Document




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 30, 2018
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 every Interactive Data File required to be submitted 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 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 
Smaller reporting company
o
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter).





 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 13, 2018, 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:
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 refinance, amend or generate sufficient cash to repay our New Senior Credit Facility, consisting of our Revolver (as defined herein) and Term Loan (as defined herein) maturing on July 7, 2019 and July 7, 2020, respectively, or to refinance, amend or repay our other indebtedness, including any future indebtedness, which may force us to take other actions to satisfy our obligations under our indebtedness, which may not be successful;
the future impact of mergers, acquisitions, divestitures, joint ventures or teaming agreements;
the outcome of any material litigation, government investigation, audit or other regulatory matters;
restatement of our financial statements causing credit ratings to be downgraded or covenant violations under our debt agreements;
policy and/or spending changes implemented by the Trump Administration, any subsequent administration or Congress, including any further changes to the sequestration that the United States ("U.S.") Department of Defense ("DoD") is currently operating under;
termination or modification of key U.S. government or commercial contracts, including subcontracts;
changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the Logistics Civil Augmentation Program IV ("LOGCAP IV") and Afghanistan Life Support Services ("ALiSS") contract;
the outcome of future extensions on awarded contracts and the outcomes of recompetes on existing programs;
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 fee granted under our government contracts;
changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;
decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;
changes in underlying assumptions, circumstances or estimates that may have a material adverse effect upon the profitability of one or more contracts and our performance;
implementation of the tax reform legislation known colloquially as the Tax Cuts and Jobs Act (the "Tax Act") or other tax reform implemented by the Trump Administration, and any subsequent administration or Congress;
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 or other restructuring activities;
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, including those described in "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission ("SEC") on March 21, 2018 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. Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are

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specified elsewhere in this report and in the Company's other SEC reports, which are accessible on the SEC's website at www.sec.gov and the Company's website at www.dyn-intl.com. Information on the Company's website is not part of this quarterly report on Form 10-Q. We assume no obligation to update the forward-looking statements.

4




Calendar Year
Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2018 and September 30, 2017, the related statements of deficit and cash flows for the nine months ended September 30, 2018 and September 30, 2017 and the unaudited condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017.



5




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 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Revenue
$
525,022

 
$
502,974

 
$
1,609,676

 
$
1,437,133

Cost of services
(454,270
)
 
(447,796
)
 
(1,396,291
)
 
(1,256,924
)
Selling, general and administrative expenses
(21,163
)
 
(21,243
)
 
(71,192
)
 
(80,129
)
Depreciation and amortization expense
(6,022
)
 
(8,792
)
 
(18,053
)
 
(25,936
)
(Loss) earnings from equity method investees
(60
)
 
53

 
209

 
105

Operating income
43,507

 
25,196

 
124,349

 
74,249

Interest expense
(16,197
)
 
(17,149
)
 
(49,268
)
 
(53,628
)
Loss on early extinguishment of debt

 

 
(239
)
 
(24
)
Interest income
863

 
15

 
1,796

 
39

Other income (expense), net
790

 
(43
)
 
1,931

 
1,474

Income before income taxes
28,963

 
8,019

 
78,569

 
22,110

Provision for income taxes
(2,040
)
 
(3,338
)
 
(9,924
)
 
(11,677
)
Net income
26,923

 
4,681

 
68,645

 
10,433

Noncontrolling interests
(278
)
 
(295
)
 
(783
)
 
(858
)
Net income attributable to Delta Tucker Holdings, Inc.
$
26,645

 
$
4,386

 
$
67,862

 
$
9,575

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Net income
$
26,923

 
$
4,681

 
$
68,645

 
$
10,433

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(22
)
 
247

 
(50
)
 
263

Other comprehensive (loss) income, before tax
(22
)
 
247

 
(50
)
 
263

Income tax benefit (expense) related to items of other comprehensive income (loss)
5

 
(88
)
 
11

 
(94
)
Other comprehensive (loss) income
(17
)
 
159

 
(39
)
 
169

Comprehensive income
26,906

 
4,840

 
68,606

 
10,602

Comprehensive loss attributable to noncontrolling interests
(278
)
 
(295
)
 
(783
)
 
(858
)
Comprehensive income attributable to Delta Tucker Holdings, Inc.
$
26,628

 
$
4,545

 
$
67,823

 
$
9,744


See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
239,145

 
$
168,250

Accounts receivable, net of allowances of $5,076 and $10,142 respectively
119,567

 
352,550

Contract assets
163,876

 

Prepaid expenses and other current assets
49,826

 
52,542

Total current assets
572,414

 
573,342

Property and equipment, net
22,985

 
23,568

Goodwill
42,093

 
42,093

Tradenames, net
28,536

 
28,536

Other intangibles, net
38,074

 
55,302

Long-term deferred taxes
874

 
369

Other assets, net
11,234

 
12,507

Total assets
$
716,210

 
$
735,717

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

 
$
53,652

Accounts payable
100,078

 
109,396

Accrued payroll and employee costs
79,739

 
105,391

Contract liabilities
39,842

 

Accrued liabilities
56,416

 
98,684

Income taxes payable
14,854

 
18,401

Total current liabilities
290,929

 
385,524

Long-term debt, net
536,945

 
527,039

Other long-term liabilities
11,437

 
13,081

Total liabilities
839,311

 
925,644

DEFICIT
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
596,816

 
596,393

Accumulated deficit
(724,923
)
 
(791,445
)
Accumulated other comprehensive loss
(443
)
 
(404
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(128,550
)
 
(195,456
)
Noncontrolling interests
5,449

 
5,529

Total deficit
(123,101
)
 
(189,927
)
Total liabilities and deficit
$
716,210

 
$
735,717

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(Amounts in thousands)
September 30, 2018
 
September 30, 2017
Cash flows from operating activities
 
 
 
Net income
$
68,645

 
$
10,433

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,635

 
27,245

Loss on early extinguishment of debt
239

 
24

Amortization of deferred loan costs and original issue discount
4,008

 
4,049

Allowance on accounts receivable and other noncash gains or losses
(24,659
)
 
2,724

Earnings from equity method investees
(209
)
 
(105
)
Distributions from equity method investees

 
222

Deferred income taxes
(505
)
 
(755
)
Other, including paid in kind interest
6,082

 
6,226

Changes in assets and liabilities:
 
 
 
Accounts receivable and contract assets
74,680

 
(25,731
)
Prepaid expenses and other current assets
576

 
(4,867
)
Accounts payable, accrued liabilities and contract liabilities
(14,757
)
 
(14,168
)
Income taxes payable
(3,632
)
 
4,840

Net cash provided by operating activities
131,103

 
10,137

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(8,377
)
 
(3,931
)
Proceeds from sale of property and equipment
13

 
537

Purchase of software
(274
)
 
(646
)
Return of capital from equity method investees
8,278

 
6,017

Contributions to equity method investees
(4,433
)
 
(3,250
)
Net cash used in investing activities
(4,793
)
 
(1,273
)
Cash flows from financing activities
 
 
 
Payments on senior secured credit facility
(54,943
)
 
(25,114
)
Payment to bondholders of senior unsecured notes

 
(39,319
)
Equity contribution from affiliates of Cerberus
300

 
40,899

Payment of dividends to noncontrolling interests
(772
)
 
(555
)
Net cash used in financing activities
(55,415
)
 
(24,089
)
Net increase (decrease) in cash, cash equivalents and restricted cash
70,895

 
(15,225
)
Cash, cash equivalents and restricted cash, beginning of period
168,250

 
125,882

Cash, cash equivalents and restricted cash, end of period
$
239,145

 
$
110,657

 
 
 
 
Income taxes paid, net of receipts
$
14,107

 
$
7,692

Interest paid
$
49,200

 
$
55,786

See notes to unaudited condensed consolidated financial statements

9




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Deficit
(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, 2016

 
$

 
$
555,163

 
$
(822,045
)
 
$
(510
)
 
$
(267,392
)
 
$
5,455

 
$
(261,937
)
Share based compensation, net

 

 
27

 

 

 
27

 

 
27

Comprehensive income attributable to Delta Tucker Holdings, Inc.

 

 

 
9,575

 
169

 
9,744

 
858

 
10,602

Capital contribution

 

 
40,899

 

 

 
40,899

 

 
40,899

DIFZ financing, net of tax

 

 
4

 

 

 
4

 

 
4

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(832
)
 
(832
)
Balance at September 30, 2017

 
$

 
$
596,093

 
$
(812,470
)
 
$
(341
)
 
$
(216,718
)
 
$
5,481

 
$
(211,237
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 2017

 
$

 
$
596,393

 
$
(791,445
)
 
$
(404
)
 
$
(195,456
)
 
$
5,529

 
$
(189,927
)
Adjustment due to adoption of ASC 606

 

 

 
(1,340
)
 

 
(1,340
)
 

 
(1,340
)
Share based compensation, net

 

 
54

 

 

 
54

 

 
54

Comprehensive income attributable to Delta Tucker Holdings, Inc.

 

 

 
67,862

 
(39
)
 
67,823

 
783

 
68,606

Capital contribution

 

 
300

 

 

 
300

 

 
300

DIFZ financing, net of tax

 

 
69

 

 

 
69

 

 
69

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(863
)
 
(863
)
Balance at September 30, 2018

 
$

 
$
596,816

 
$
(724,923
)
 
$
(443
)
 
$
(128,550
)
 
$
5,449

 
$
(123,101
)
See notes to unaudited condensed consolidated financial statements

10




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. ("DynCorp International"), 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 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, 2017.
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of September 30, 2018 and December 31, 2017, the results of operations and statements of comprehensive income for the three and nine months ended September 30, 2018 and September 30, 2017 and the statements of deficit and cash flows for the nine months ended September 30, 2018 and September 30, 2017 have been included. The results of operations and statements of comprehensive income for the three and nine months ended September 30, 2018 and September 30, 2017 and the statements of deficit and cash flows for the nine months ended September 30, 2018 and September 30, 2017 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. 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.
Use of Estimates
General - We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement. As such, systems, equipment or materials are not generally separable from the services we provide. Revenue is recognized for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability is probable. Our contracts are primarily with U.S. government customers and are generally structured under the following contract types: (i) fixed-price; (ii) time-and-materials; and (iii) cost-reimbursement contracts. In a fixed-price contract, the price is generally not subject to adjustment based on costs incurred and may include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive elements. Time-and-materials 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 contracts provide for payment for allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee, incentive-fee or a combination thereof.
Our contracts contain promises to provide distinct goods or services to the customer which represent performance obligations and is the unit of account under ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation or whether two or more contracts should be combined and accounted for as one single contract. For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and deliverables into a single service solution. Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract has multiple performance obligations, the contract’s transaction price is allocated based on the estimated relative standalone selling prices of the promised goods or services underlying each performance. The primary method used to estimate standalone selling price is the expected cost plus a margin approach. In instances where a

11




performance obligation does not have an observable standalone selling price, we select an estimation method that maximizes the use of observable inputs.
Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other less significant contract provisions are evaluated throughout the life of our contracts when estimating transaction price. We inherently have risks related to our estimates with long-term contracts. Actual amounts could materially differ from these estimates. We believe the following are the risks associated with our estimation process: (i) assumptions are uncertain and inherently judgmental at the time of the estimate; (ii) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues, costs and recoverability of assets; and (iii) changes in estimates could have material effects on our financial condition or results of operations. The impact of any one of these factors could contribute to a material cumulative adjustment.
Our revenues are primarily derived from long-term contracts and programs with a base period and multiple option periods for services provided to the U.S. federal government. We recognize revenue over time and our contracts typically have one year base periods and multiple one year option periods. The option periods are considered separate purchase obligations from the base period. Generally, the terms and conditions of the contracts result in a continuous transfer of control over the relevant goods and services. As a result of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use a cost-to-cost measure of progress for our contracts because it best depicts the transfer of assets to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs. In certain instances, we may recognize revenue at the point in time at which control is transferred to the customer using an output method based on units produced or delivered.
We consider the unfunded portions of a contract and award and incentive fees to be variable consideration. Some of our long-term contracts with the U.S. government are only partially funded at inception as a result of the U.S. government’s annual budget and appropriations process. The unfunded portion of a contract is included in the estimated transaction price to the extent it is probable that the unfunded portion of the contract will become funded. We consider the following factors in determining the likelihood that the unfunded portion of the contract would not result in a significant revenue reversal: (i) period of time before contract funding is expected; (ii) history of receiving funding in similar situations; and (iii) communication from the customer that funding will be obtained. Award and incentive fees are generally awarded upon achievement of specified performance objectives, milestones, or cost targets and are considered variable consideration. We do not consider the mere existence of potential award or incentive fees as presumptive evidence that award or incentive fees are to be included in determining total transaction price. We include award or incentive fees in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. These estimates are based largely on an assessment of our anticipated performance, historical award experience, and information that is reasonably available to us.
Pre-contract costs are costs incurred to fulfill a contract in anticipation of a contract award. Pre-contract costs such as those specifically chargeable to a customer and probable of recovery under a specific anticipated contract would be capitalized. All other pre-contract costs, including start-up costs, would be expensed as incurred.
Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project's contractual requirements and management's assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our consolidated results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. We believe long-term contracts, contracts in a loss position, contracts with material award fees, and contract modifications drive the significant changes in estimates in our contracts.
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 consolidated statements of operations in the period that they are determined. The majority of our contracts are accounted for under series guidance, as the performance obligation represents a series of distinct goods and services where each day of the promised service is a distinct obligation, and the effects of changes in contract estimates related to certain types of contracts accounted for using an input method measure of progress, such as cost-to-cost, are recognized prospectively. Changes in these estimates can occur over the life of a contract for a variety of reasons, including changes in scope, estimated incentive or award fees, cost estimates, level of effort and/or other assumptions impacting

12




revenue or cost to perform a contract. Changes in contract estimates related to past performance are recognized in the period in which such changes are made for the inception to date effect of the changes.
The gross favorable and unfavorable adjustments to income before income taxes below reflect changes in contract estimates during each reporting period, excluding new or completed contracts where no comparative estimates exist between reporting periods. The following amounts during the three and nine months ended September 30, 2018 and September 30, 2017 are presented under ASC 605, due to the adoption of ASC 606 on January 1, 2018 using the modified retrospective method.
 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Gross favorable adjustments
$
7.9

 
$
8.0

 
$
18.2

 
$
22.1

Gross unfavorable adjustments
(7.5
)
 
(1.0
)
 
(1.5
)
 
(2.0
)
Net adjustments
$
0.4

 
$
7.0

 
$
16.7

 
$
20.1

Contract Assets
Contract assets primarily consist of unbilled receivables which represent rights to consideration for work completed but not billed as of the reporting date. Due to the adoption of ASC 606, amounts previously presented as unbilled receivables in Accounts receivable, net of allowances, for the year ended December 31, 2017 of $191.8 million, have prospectively been presented as Contract assets within the Company’s consolidated balance sheets.
Contract Liabilities
Contract liabilities represent advanced payments, billings in excess of costs and earnings, and deferred revenue amounts. These amounts are recognized as revenue once the performance progress has occurred. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Advance payments and billings in excess of revenue as current, and deferred revenue as current or noncurrent based on the timing of when revenue is expected to be recognized. Due to the adoption of ASC 606, amounts received from customers in excess of revenue recognized previously presented within customer liabilities in Total accrued liabilities, for the year ended December 31, 2017 of $9.2 million, have prospectively been presented as Contract liabilities within the Company’s consolidated balance sheets.
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, 2017, except as described below.
Recently Adopted Accounting Standards
In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 clarifies the guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents. The Company elected to adopt ASU 2016-18 during the fourth quarter of calendar year 2017 and therefore, amounts generally described as restricted cash or restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. The Company recasted its statement of cash flows for the nine months ended September 30, 2017.
Our statement of cash flows explains the change in the total of cash, cash equivalents, and restricted cash. The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of such amounts in the consolidated statements of cash flows:

13




 
Nine Months Ended
(Amounts in thousands)
September 30, 2017
Beginning of period
 
Cash and cash equivalents
$
118,218

Restricted cash
7,664

Total cash, cash equivalents and restricted cash, beginning of period
125,882

 
 
End of period
 
Cash and cash equivalents
110,657

Restricted cash

Total cash, cash equivalents and restricted cash, end of period
110,657

 
 
Net decrease in cash, cash equivalents and restricted cash
$
(15,225
)
The following table illustrates changes in the Company's Condensed Consolidated Statements of Cash Flows as reported and as previously reported prior to the adoption of ASU 2016-18 in the fourth quarter of calendar year 2017:
 
Nine Months Ended
 
September 30, 2017
 
As Reported
 
As Previously Reported
(Amounts in thousands)
 
Net cash provided by operating activities
$
10,137

 
$
10,744

Net cash (used in) provided by investing activities
(1,273
)
 
5,784

Net cash used in financing activities
(24,089
)
 
(24,089
)
Net decrease in cash, cash equivalents and restricted cash (1)
(15,225
)
 
(7,561
)
Cash, cash equivalents and restricted cash, beginning of period (1)
125,882

 
118,218

Cash, cash equivalents and restricted cash, end of period (1)
110,657

 
110,657

(1) Amounts in the As Reported column include cash, cash equivalents and restricted cash as required upon the adoption of ASU 2016-18. Amounts in the As Previously Reported column reflects only cash and cash equivalents.
In May 2014, the FASB issued ASC 606, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. We adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018 using the modified retrospective approach only on contracts not completed at the date of initial application with the cumulative effect of adoption recorded as an adjustment to the opening balance of equity as of that date without restatement of comparative periods. See this Note and Note 2 for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition.
Recently Issued Accounting Developments
In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Entities are required to adopt ASU 2016-02 using a modified retrospective approach, subject to certain optional practice expedients, and apply the provisions of ASU 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard will be effective for the Company in the first quarter of calendar year 2019. The Company has established a cross-functional team of key stakeholders for implementing the new standard. As part of the Company’s assessment and implementation plan, the Company performed a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to its business policies, processes, systems and internal controls in order to determine the best implementation strategy. All of the Company's material leases are classified as operating leases, which the Company expects will continue to be classified as operating under the new standard. The Company's long-term leases (term in excess of 12 months) will be subject to the new guidance and recognized as right-of-use assets and lease liabilities upon adoption, resulting in a material impact to our total assets and total liabilities on the consolidated balance sheets. The Company

14




does not expect the adoption of the new standard to impact its results of operations and cash flows. The Company's existing debt agreements exclude the impact of this standard on its debt covenants, accordingly the new standard will have no impact on the Company's debt-covenant compliance under the current debt agreements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019 and applied using a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are currently evaluating the potential effects of the adoption of ASU 2016-13 on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income to help businesses and other organizations present some effects from the Tax Act’s reduction in the corporate tax rate in their income statements. ASU 2018-02 gives the option of reclassifying what are called the “stranded” tax effects within accumulated other comprehensive income (loss) to retained earnings (deficit) during each fiscal year or quarter in which the effect of the lower tax rate is recorded. ASU 2018-02 instructs businesses and other organizations to provide a disclosure in their financial statement footnotes that describes the accounting policy they used to release the income tax effects from accumulated other comprehensive income (loss), whether they are reclassifying the stranded income tax effects from the Tax Act, and information about the other effects on taxes from the reclassification. The update is effective for fiscal years beginning after December 15, 2018, and the interim periods in those years, and early adoption is permitted. We are currently evaluating the potential effects of the adoption of ASU 2018-02 on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective for public companies in fiscal years beginning after December 15, 2019 with early adoption permitted. We are currently evaluating the potential effects of the adoption of ASU 2018-13 on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract to provide guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of such arrangements that are service contracts and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the potential effects of the adoption of ASU 2018-15 on our consolidated financial statements.
In August 2018, the SEC issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of its disclosure requirements and is intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The final rule includes a requirement to provide an analysis of changes in stockholders’ deficit for the current and comparative year-to-date interim periods in interim reports. The final rule is effective for all filings submitted on or after November 5, 2018. The Company plans to adopt the guidance on the presentation of changes in the statements of deficit in its Form 10-Q for the quarter ending March 31, 2019.
Other accounting standards updates effective after September 30, 2018 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows for the period ended September 30, 2018.

15




Note 2 — Revenue Recognition
In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We adopted ASC 606, as of January 1, 2018 using the modified retrospective approach with the cumulative effect of adoption recorded as an adjustment to the opening balance of equity as of that date without restatement of comparative periods.
The impacts related to the adoption of ASC 606 on our portfolio of contracts primarily relate to the units of account and methods used to measure of progress toward satisfaction of a performance obligation. Previously, certain of our contracts that included multiple promises related to the transfer of goods or services to the customer were combined or segmented based on profit center and the requisite revenue was recognized by profit center using the percentage-of-completion method or completed-contract method. We now evaluate all promises in an arrangement to determine if they represent one or more distinct performance obligations. The adoption of ASC 606 will not change the total revenue or operating earnings recognized under these contracts, only the timing of when those amounts are recognized.
Nature of Goods and Services
The Company generally derives revenue from long-term, service-based contracts and programs for commercial, government, and military customers. Our contracts typically fall into the following two categories with the first representing substantially all of our revenue: (i) federal government contracts and (ii) other contracts.
Federal Government Contracts - Contracts with the U.S. federal government, primarily to the Department of Defense (“DoD”) and the Department of State (“DoS”), contemplate the provision of services related to aviation solutions, construction management, base and logistics operations, intelligence training, and operations and linguistics support. Certain contracts are structured using an IDIQ vehicle awarded to multiple contractors. However, many IDIQ vehicles permit the customer to direct work to a particular contractor. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contract awardees and task orders are awarded under a best-value approach. The task orders awarded may be fixed-priced, time-and-materials, or cost-reimbursement contracts.
The Company generally performs over a base period with multiple option periods. The U.S. government is not obligated to exercise options under a contract after the base period. At the time of completion of the contract term of a U.S. government contract, the contract may be re-competed to the extent the service is still required. Historically, the Company has received additional revenue through increases in program scope beyond that of the original contract and “over and above” requests derived from changes in customer requests. For most of our contracts, we provide a significant service of integrating equipment, materials, and services into a single project which is accounted for as one performance obligation. In certain instances, we also provide a stand-ready service in the case where the Company responds to the customer’s needs on the basis of its demand.
For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the best estimate of the standalone selling price for each distinct good or service. Where a series of distinct services has been identified, the Company generally allocates variable consideration to distinct time increments of service (e.g. hours, days, etc.). Where the variable consideration is not directly tied to the base pricing structure of the contract (e.g. cost incurrence), the Company allocates variable consideration to a subset of services within a period (e.g. evaluation periods for awards/incentives).
Revenues are recognized over time upon contract specifications. The method utilized to measure performance progress reflects the best depiction of control to the customer. If control is transferred over time, revenue is recognized over time using the cost-to-cost-method to measure performance progress.
Typical payment terms for U.S. federal government contracts are in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. In most instances, the customer generally pays the Company for actual costs incurred within a short period of time. In certain cases, the Company receives interim payments as work progresses or an advance payment. The Company recognizes a liability for advance payments in excess of revenue recognized which is included in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract.
Other Contracts - Contracts with non-federal government customers are predominantly service arrangements which may involve various combinations related to the provision of services, delivery of equipment and materials, grant licenses and other rights, or take certain actions. For most of our contracts, we provide a significant service of integrating equipment, materials, or other services into a single project which is accounted for as one performance obligation. In certain instances, we also provide a stand-ready service in the case where the Company responds to the customer’s needs on the basis of its demand.

16




In determining transaction price, the Company considers the unfunded portions of a contract and award and incentive fees to be variable consideration which is estimated using the best estimate of consideration to which the Company expects to be entitled per the terms and conditions of the contract at inception and reassessed quarterly. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the best estimate of the standalone selling price for each distinct good or service. Where a series of distinct services has been identified, the Company generally allocates variable consideration to distinct time increments of service (e.g. hours, days, etc.). Where the variable consideration is not directly tied to the base pricing structure of the contract (e.g. cost incurrence), the Company allocates variable consideration to a subset of services within a period (e.g. evaluation periods for awards/incentives).
Revenue is recognized over time upon contract specifications. The method utilized to measure performance progress reflects the best depiction of control to the customer. If consideration is considered fixed, revenue is recognized over time using the cost-to-cost-method to measure performance progress. If consideration is considered variable, revenue is recognized as performance occurs. In instances where the contract structure is time-and-materials, the Company may utilize the practical expedient allowing the recognition of revenue in the amount at which the Company invoices as the invoiced amounts correspond directly with the value provided to the customer and to which it is entitled to payment for performance to date. The Company is electing the practical expedient on not disclosing remaining performance obligations as the Company's performance obligations, with one exception, have an original expected duration of one year or less. The contract exception relates to a contract executed during the quarter ended June 30, 2018 which has a 30 month term with a remaining performance obligation of $208.0 million as of September 30, 2018. We expect to recognize approximately 40% and 88% of our September 30, 2018 backlog as revenue over the next 12 and 24 months, respectively, with the remainder to be recognized thereafter. In addition, during the second quarter of calendar year 2018, we received a $45.1 million advance payment on this contract which is included in Contract liabilities, net of revenue recognized through September 30, 2018.
Typical payment terms for non-federal government contracts are in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. In certain cases, the Company receives interim payments as work progresses or an advance payment. The Company recognizes a liability for advance payments in excess of revenue recognized which is included in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract.


17




Disaggregation of Revenue
The following tables represent revenues disaggregated by customer-type and contract-type and include a reconciliation of the disaggregated revenue with reportable segments for the three and nine months ended September 30, 2018:
 
Under ASC 606
 
Three months ended September 30, 2018
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Headquarters / Other
 
Total
Customer
 
 
 
 
 
 
 
DOD
$
231,094

 
$
225,729

 
$

 
$
456,823

DOS
5,282

 
42,424

 

 
47,706

Other
14,622

 
6,740

 
(869
)
 
20,493

Total revenue
$
250,998

 
$
274,893

 
$
(869
)
 
$
525,022

 
 
 
 
 
 
 
 
Contract Type
 
 
 
 
 
 
 
Fixed-Price
$
105,900

 
$
79,437

 
$
(271
)
 
$
185,066

Time-and-Materials
25,481

 
3,234

 
(36
)
 
28,679

Cost-Reimbursement
119,617

 
192,222

 
(562
)
 
311,277

Total revenue
$
250,998

 
$
274,893

 
$
(869
)
 
$
525,022


 
Under ASC 606
 
Nine months ended September 30, 2018
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Headquarters / Other
 
Total
Customer
 
 
 
 
 
 
 
DOD
$
715,040

 
$
625,649

 
$

 
$
1,340,689

DOS
105,480

 
107,547

 

 
213,027

Other
45,164

 
10,467

 
329

 
55,960

Total revenue
$
865,684

 
$
743,663

 
$
329

 
$
1,609,676

 
 
 
 
 
 
 
 
Contract Type
 
 
 
 
 
 
 
Fixed-Price
$
369,698

 
$
234,109

 
$
123

 
$
603,930

Time-and-Materials
67,723

 
5,755

 
15

 
73,493

Cost-Reimbursement
428,263

 
503,799

 
191

 
932,253

Total revenue
$
865,684

 
$
743,663

 
$
329

 
$
1,609,676


Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method and we recorded a net increase to opening accumulated deficit of $1.3 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Additionally, amounts previously presented as unbilled receivables in Accounts receivable, net of allowances, for the year ended December 31, 2017, have prospectively been presented as Contract assets and amounts received from customers in excess of revenue recognized previously presented within customer liabilities in Total accrued liabilities for the year ended December 31, 2017, have prospectively been presented as Contract liabilities within the Company's consolidated balance sheets. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the condensed consolidated balance sheet as of January 1, 2018:

18




 
As reported
 
Adjustments
 
Adjusted
(Amounts in thousands)
December 31, 2017
 
Contract Assets
 
Contract Liabilities
 
Accumulated Deficit
 
January 1, 2018
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
168,250

 
$

 
$

 
$

 
$
168,250

Accounts receivable, net of allowance of $10,142
352,550

 
(191,780
)
 

 

 
160,770

Contract assets

 
191,780

 

 
(1,340
)
 
190,440

Prepaid expenses and other current assets
52,542

 

 

 

 
52,542

Total current assets
573,342

 

 

 
(1,340
)
 
572,002

Property and equipment, net
23,568

 

 

 

 
23,568

Goodwill
42,093

 

 

 

 
42,093

Tradenames, net
28,536

 

 

 

 
28,536

Other intangibles, net
55,302

 

 

 

 
55,302

Long-term deferred taxes
369

 

 

 

 
369

Other assets, net
12,507

 

 

 

 
12,507

Total assets
$
735,717

 
$

 
$

 
$
(1,340
)
 
$
734,377

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt, net
$
53,652

 
$

 
$

 
$

 
$
53,652

Accounts payable
109,396

 

 

 

 
109,396

Accrued payroll and employee costs
105,391

 

 

 

 
105,391

Contract liabilities

 

 
9,164

 

 
9,164

Accrued liabilities
98,684

 

 
(9,164
)
 

 
89,520

Income taxes payable
18,401

 

 

 

 
18,401

Total current liabilities
385,524

 

 

 

 
385,524

Long-term debt, net
527,039

 

 

 

 
527,039

Other long-term liabilities
13,081

 

 

 

 
13,081

Total liabilities
925,644

 

 

 

 
925,644

 
 
 
 
 
 
 
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at December 31, 2017

 

 

 

 

Additional paid-in capital
596,393

 

 

 

 
596,393

Accumulated deficit
(791,445
)
 

 

 
(1,340
)
 
(792,785
)
Accumulated other comprehensive loss
(404
)
 

 

 

 
(404
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(195,456
)
 

 

 
(1,340
)
 
(196,796
)
Noncontrolling interests
5,529

 

 

 

 
5,529

Total deficit
(189,927
)
 

 

 
(1,340
)
 
(191,267
)
Total liabilities and deficit
$
735,717

 
$

 
$

 
$
(1,340
)
 
$
734,377



19




Impact of New Revenue Guidance on Financial Statement Line Items
The following tables compare the reported condensed consolidated statement of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2018 and the condensed consolidated balance sheet as of September 30, 2018, to the pro-forma amounts had the previous guidance been in effect.
Consolidated Statements of Operations
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
(Amounts in thousands)
As reported
 
Pro forma as if the previous accounting guidance was in effect
 
As reported
 
Pro forma as if the previous accounting guidance was in effect
Revenue
$
525,022

 
$
520,133

 
$
1,609,676

 
$
1,609,864

Cost of services
(454,270
)
 
(454,270
)
 
(1,396,291
)
 
(1,396,286
)
Selling, general and administrative expenses
(21,163
)
 
(21,163
)
 
(71,192
)
 
(71,192
)
Depreciation and amortization expense
(6,022
)
 
(6,022
)
 
(18,053
)
 
(18,053
)
(Loss) earnings from equity method investees
(60
)
 
(60
)
 
209

 
209

Operating income
43,507

 
38,618

 
124,349

 
124,542

Interest expense
(16,197
)
 
(16,197
)
 
(49,268
)
 
(49,268
)
Loss on early extinguishment of debt

 

 
(239
)
 
(239
)
Interest income
863

 
863

 
1,796

 
1,796

Other income, net
790

 
790

 
1,931

 
1,931

Income before income taxes
28,963

 
24,074

 
78,569

 
78,762

Provision for income taxes
(2,040
)
 
(1,298
)
 
(9,924
)
 
(9,947
)
Net income
26,923

 
22,776

 
68,645

 
68,815

Noncontrolling interests
(278
)
 
(278
)
 
(783
)
 
(783
)
Net income attributable to Delta Tucker Holdings, Inc.
$
26,645

 
$
22,498

 
$
67,862

 
$
68,032

The following summarizes the significant changes on the Company's condensed consolidated statement of operations for the three and nine months ended September 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenues under ASC 605. The effect of the change was primarily driven by the change in period of performance of our contracts under ASC 605 as compared to ASC 606 and the impact of timing of recognition on variable consideration on certain contracts. The remaining impacts were not material.


20




Consolidated Statements of Comprehensive Income
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
(Amounts in thousands)
As reported
 
Pro forma as if the previous accounting guidance was in effect
 
As reported
 
Pro forma as if the previous accounting guidance was in effect
Net income
$
26,923

 
$
22,776

 
$
68,645

 
$
68,815

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(22
)
 
(22
)
 
(50
)
 
(50
)
Other comprehensive (loss) income, before tax
(22
)
 
(22
)
 
(50
)
 
(50
)
Income tax benefit related to items of other comprehensive (loss) income
5

 
5

 
11

 
11

Other comprehensive loss
(17
)
 
(17
)
 
(39
)
 
(39
)
Comprehensive income
26,906

 
22,759

 
68,606

 
68,776

Comprehensive income attributable to noncontrolling interests
(278
)
 
(278
)
 
(783
)
 
(783
)
Comprehensive income attributable to Delta Tucker Holdings, Inc.
$
26,628

 
$
22,481

 
$
67,823

 
$
67,993

The Company's statements of comprehensive income were only impacted by the change in net income due to the adoption of ASC 606.


21




Consolidated Balance Sheets
 
As of September 30, 2018
(Amounts in thousands)
As reported
 
Pro forma as if the previous accounting guidance was in effect
Current assets:
 
 
 
Cash and cash equivalents
$
239,145

 
$
239,145

Accounts receivable, net of allowances of $5,076
119,567

 
285,519

Contract assets
163,876

 

Prepaid expenses and other current assets
49,826

 
49,826

Total current assets
572,414

 
574,490

Property and equipment, net
22,985

 
22,985

Goodwill
42,093

 
42,093

Tradenames, net
28,536

 
28,536

Other intangibles, net
38,074

 
38,074

Long-term deferred taxes
874

 
874

Other assets, net
11,234

 
11,234

Total assets
$
716,210

 
$
718,286

 
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
100,078

 
$
100,078

Accrued payroll and employee costs
79,739

 
79,739

Contract liabilities
39,842

 

Accrued liabilities
56,416

 
96,801

Income taxes payable
14,854

 
14,877

Total current liabilities
290,929

 
291,495

Long-term debt, net
536,945

 
536,945

Other long-term liabilities
11,437

 
11,437

Total liabilities
839,311

 
839,877

 
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 30, 2018

 

Additional paid-in capital
596,816

 
596,816

Accumulated deficit
(724,923
)
 
(723,413
)
Accumulated other comprehensive loss
(443
)
 
(443
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(128,550
)
 
(127,040
)
Noncontrolling interests
5,449

 
5,449

Total deficit
(123,101
)
 
(121,591
)
Total liabilities and deficit
$
716,210

 
$
718,286


Total reported assets were $2.1 million greater than total assets in the pro-forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was largely due to the change in period of performance of our contracts under ASC 605 as compared to ASC 606 and the impact of timing of recognition on variable consideration on certain contracts.
Total reported liabilities were $0.6 million less than total liabilities in the pro-forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was primarily due to the change in amounts received from customers in excess of revenue recognized. The remaining impacts were not material.

22




Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2018
(Amounts in thousands)
As reported
 
Pro forma as if the previous accounting guidance was in effect
Cash flows from operating activities
 
 
 
Net income
$
68,645

 
$
68,815

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,635

 
20,635

Loss on early extinguishment of debt
239

 
239

Amortization of deferred loan costs and original issue discount
4,008

 
4,008

Allowance on accounts receivable and other noncash gains or losses
(24,659
)
 
(24,659
)
Earnings from equity method investees
(209
)
 
(209
)
Deferred income taxes
(505
)
 
(505
)
Other, including paid in kind interest
6,082

 
6,082

Changes in assets and liabilities:
 
 
 
Accounts receivable and contract assets
74,680

 
73,945

Prepaid expenses and other current assets
576

 
576

Accounts payable, accrued liabilities and contract liabilities
(14,757
)
 
(14,215
)
Income taxes payable
(3,632
)
 
(3,609
)
Net cash provided by operating activities
131,103

 
131,103

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(8,377
)
 
(8,377
)
Proceeds from sale of property and equipment
13

 
13

Purchase of software
(274
)
 
(274
)
Return of capital from equity method investees
8,278

 
8,278

Contributions to equity method investees
(4,433
)
 
(4,433
)
Net cash used in investing activities
(4,793
)
 
(4,793
)
Cash flows from financing activities
 
 
 
Payments on senior secured credit facility
(54,943
)
 
(54,943
)
Equity contribution from affiliates of Cerberus
300

 
300

Payment of dividends to noncontrolling interests
(772
)
 
(772
)
Net cash used in financing activities
(55,415
)
 
(55,415
)
Net increase in cash, cash equivalents and restricted cash
70,895

 
70,895

Cash, cash equivalents and restricted cash, beginning of period
168,250

 
168,250

Cash, cash equivalents and restricted cash, end of period
$
239,145

 
$
239,145

The adoption of ASC 606 had no impact on the totals of the Company's cash flows from operating, investing and financing activities.


23




Note 3 — 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 30, 2018
 
December 31, 2017
Prepaid expenses
$
39,556

 
$
38,423

Inventories, net
4,794

 
8,240

Work-in-process inventory
459

 
520

Joint venture receivables
37

 
29

Other current assets
4,980

 
5,330

Total prepaid expenses and other current assets
$
49,826

 
$
52,542

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. The change in prepaid expenses is primarily due to the timing of insurance payments. Inventory is valued at the lower of cost or net realizable value.
Property and equipment, net
 
As Of
(Amounts in thousands)
September 30, 2018
 
December 31, 2017
Aircraft
$
3,868

 
$
3,868

Computers and related equipment
9,960

 
7,967

Leasehold improvements
17,401

 
17,614

Office furniture and fixtures
3,374

 
4,184

Vehicles
14,533

 
12,659

Gross property and equipment
49,136

 
46,292

Less accumulated depreciation
(26,151
)
 
(22,724
)
Total property and equipment, net
$
22,985

 
$
23,568

As of September 30, 2018 and December 31, 2017, Property and equipment, net, included the accrual for property additions of $1.4 million and $4.4 million, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $4.6 million during the three and nine months ended September 30, 2018, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.3 million and $3.3 million during the three and nine months ended September 30, 2017, respectively.
Other assets, net
 
As Of
(Amounts in thousands)
September 30, 2018
 
December 31, 2017
Investment in affiliates
$
2,110

 
$
5,746

Palm promissory note, long-term portion
1,751

 
1,876

Other
7,373

 
4,885

Total other assets, net
$
11,234

 
$
12,507

Accrued payroll and employee costs
 
As Of
(Amounts in thousands)
September 30, 2018
 
December 31, 2017
Wages, compensation and other benefits
$
61,615

 
$
90,583

Accrued vacation
17,034

 
13,625

Accrued contributions to employee benefit plans
1,090

 
1,183

Total accrued payroll and employee costs
$
79,739

 
$
105,391


24




Accrued liabilities
 
As Of
(Amounts in thousands)
September 30, 2018
 
December 31, 2017
Customer liabilities
$
6,803

 
$
23,486

Accrued insurance
19,456

 
23,793

Accrued interest
12,069

 
23,194

Contract losses
1,699

 
2,660

Legal reserves
4,743

 
9,233

Other
11,646

 
16,318

Total accrued liabilities
$
56,416

 
$
98,684

We adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018 using the modified retrospective approach. Due to the adoption of ASC 606, amounts received from customers in excess of revenue recognized previously presented within customer liabilities in Total accrued liabilities for the year ended December 31, 2017, have prospectively been presented as Contract liabilities within the Company's consolidated balance sheets without restatement to prior periods. See Note 6 for further discussion.
Customer liabilities represent amounts due back to a customer. The reduction in customer liabilities is partially due to the settlement of certain liabilities in advance of the closeout of the Civilian Police ("CivPol") contract during the third quarter of calendar year 2018. 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. Changes to the provision for contract losses are presented in Cost of services on our Statement of Operations. Legal matters include reserves related to various lawsuits and claims. See Note 9 for further discussion. 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.
Other long-term liabilities
As of September 30, 2018 and December 31, 2017, Other long-term liabilities were $11.4 million and $13.1 million, respectively. Other long-term liabilities are primarily due to our long-term incentive bonus plan and nonqualified unfunded deferred compensation plan of $2.9 million and $3.3 million as of September 30, 2018 and December 31, 2017, respectively, and a long-term leasehold obligation related to our Tysons Corner facility in McLean, Virginia, of $2.5 million and $2.8 million as of September 30, 2018 and December 31, 2017, respectively. Other long-term liabilities also include an uncertain tax benefit of $3.5 million as of September 30, 2018 and December 31, 2017. See Note 5 for further discussion.

25




Note 4 — Goodwill and Other Intangible Assets
In January 2018, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s three operating and reporting segments, Aviation Engineering, Logistics and Sustainment ("AELS"), Aviation Operations and Life Cycle Management ("AOLC") and DynLogistics, were re-aligned into two operating and reporting segments by combining AELS and AOLC into DynAviation with DynLogistics continuing to operate as a separate segment. Our two operating and reporting segments provide services domestically and in foreign countries primarily under contracts with the U.S. government. Each operating and reportable segment is its own reporting unit and only the DynLogistics reporting unit had a goodwill balance as of September 30, 2018, which we assess for potential goodwill impairment. The carrying amount of goodwill for DynLogistics was $42.1 million as of both September 30, 2018 and December 31, 2017.
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 goodwill impairment test 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. The projections for these reporting units include significant estimates related to new business opportunities. If we are unsuccessful in obtaining these opportunities in 2018, a triggering event could be identified and a goodwill impairment test would be performed to identify any possible goodwill impairment in the period in which the event is identified. 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 nine months ended September 30, 2018, we did not have a triggering event in any of our reporting units.
Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $5.4 million and $16.0 million for the three and nine months ended September 30, 2018, respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $8.0 million and $24.0 million for the three and nine months ended September 30, 2017, respectively.
Other intangibles are primarily representative of our capitalized software which had a net carrying value of $1.5 million and $3.2 million as of September 30, 2018 and December 31, 2017, respectively.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $5.4 million for the three months ending December 31, 2018, $21.4 million in 2019, $11.1 million in 2020, $0.1 million in 2021, $0.0 million in 2022 and $0.0 million thereafter.


26




Note 5 — Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Act. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act creates limitations on interest expense deductions (if certain conditions apply) and reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company is required to value its deferred tax assets and liabilities applying the rates prescribed by the enacted law for the period in which such deferred tax assets and liabilities are expected to reverse. SEC Staff Accounting Bulletin (“SAB”) 118 allows us to provide a provisional estimate of the impacts of the Tax Act due to the complexities involved in accounting for the enactment of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment of the Tax Act to complete the accounting under ASC 740, Income Taxes. Specific impacts of the Tax Act are discussed below.
The domestic and foreign components of Income before income taxes are as follows:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Domestic
$
23,886

 
$
7,683

 
$
72,967

 
$
19,909

Foreign
5,077

 
336

 
5,602

 
2,201

Income before income taxes
$
28,963

 
$
8,019

 
$
78,569

 
$
22,110

Non-current deferred tax assets, net, was $0.9 million and $0.4 million as of September 30, 2018 and December 31, 2017, respectively.
Our effective tax rate ("ETR") was 7.0% and 12.6% for the three and nine months ended September 30, 2018, respectively. Our ETR was 41.6% and 52.8% for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2018, the ETR was primarily driven by a decrease in the corporate federal tax rate effective January 1, 2018 and a reduction in the valuation allowance partially offset by an increase in foreign taxes and pretax book income.
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. The Company must also assess whether its valuation allowance analyses are affected by the Tax Act. The following items impacted the valuation allowance due to the enacted Tax Act:
A reduction in deductible interest expense for federal income tax purposes which will create an indefinite lived asset;
The prevention of deferring revenue with respect to unbilled receivables; and
The recognition of revenue it had previously deferred as unbilled receivables over a four-year period pursuant to Internal Revenue Code ("IRC") Section 481.
While we anticipate that the Tax Act will result in the Company enhancing its ability to recognize existing deferred tax assets in the future, the Company also anticipates that the Tax Act will create new deferred tax assets that will be subject to future valuation allowance. As such, the Company will remain in a valuation allowance on most domestic deferred tax assets for the period ended September 30, 2018 but will assess the need for valuation allowance each period. As of September 30, 2018 and December 31, 2017, our valuation allowance was $58.0 million and $66.6 million, respectively.
As of September 30, 2018, we had $4.1 million of total unrecognized tax benefits of which $2.7 million would impact our effective tax rate if recognized. As of December 31, 2017, we had $2.8 million of total unrecognized tax benefits of which $2.7 million would impact our effective tax rate if recognized. We do not expect the unrecognized tax benefit and any related interest or penalties to be settled within the next twelve months.
During the nine months ended September 30, 2018, we made no estimated federal income tax payments. All of our income taxes paid or refunds received during the nine months ended September 30, 2018 were related to state or foreign jurisdictions.
During the nine months ended September 30, 2018, a tax assessment from the Saudi Arabia Tax Authority ("GAZT") was received, seeking approximately $7.7 million in taxes and penalties specific to an existing audit of a branch location for periods between 2002 to 2013. We filed an initial appeal on the assessment with the GAZT and we previously established an accrual for the more likely than not amount of the estimated tax liability. We will continue to monitor and revise the liability accordingly.

27




Note 6 — Contract Balances
Our contract balances consist of accounts receivable, contract assets and contract liabilities.
We adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018 using the modified retrospective approach. Due to the adoption of ASC 606, amounts previously presented as unbilled receivables in Accounts receivable, net of allowances, for the year ended December 31, 2017, have prospectively been presented as Contract assets within the Company's consolidated balance sheets without restatement to prior periods. Contract assets primarily consist of unbilled receivables which represent rights to consideration for work completed but not billed as of the reporting date. The balance of unbilled receivables consists of costs and fees that are: (i) billable immediately; (ii) billable on contract completion; or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment or formal claim. Contract assets as of September 30, 2018 include $14.1 million related to costs incurred on projects for which we are awaiting final funding, definitization or other contract actions in order for us to bill our customer. As of December 31, 2017, unbilled accounts receivable included $12.0 million related to costs incurred on projects for which we are awaiting final funding, definitization or other contract actions in order for us to bill our customer. As of September 30, 2018 and December 31, 2017, we had one contract claim outstanding totaling $2.8 million and $2.7 million, respectively, net of reserves. We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government.
Due to the adoption of ASC 606, amounts previously presented as customer liabilities in Total accrued liabilities for the year ended December 31, 2017, have prospectively been presented as Contract liabilities within the Company's consolidated balance sheets without restatement to prior periods. Contract liabilities represent advanced payments, billings in excess of costs and earnings, and deferred revenue amounts. These current and noncurrent contract liabilities are transferred to contract assets once the performance progress has occurred. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Our contract balances consisted of the following:
(Amounts in thousands)
September 30, 2018
 
December 31, 2017
 
$ Change
Accounts receivable, net of allowances
$
119,567

 
$
160,770

 
$
(41,203
)
Unbilled accounts receivable

 
191,780

 
(191,780
)
Contract assets
163,876

 

 
163,876

Contract liabilities
39,842

 

 
39,842

During the nine months ended September 30, 2018:
we reclassified $191.8 million of Unbilled accounts receivable to Contract assets due to the implementation of ASC 606;
we increased Contract assets by $1.6 billion due to the recognition of revenue in calendar year 2018, which included adjustments for changes in estimates arising from a change in the measure of progress, a change in an estimate of the transaction price or contract modifications;
we reclassified $1.6 billion of Contract assets to Accounts receivable when the right to consideration became unconditional;
we recognized revenue of $7.5 million related to our Contract liabilities as of January 1, 2018.
Our allowance for doubtful accounts was $5.1 million as of September 30, 2018 compared to $10.1 million as of December 31, 2017, and is primarily due to the collection of a majority of the previously reserved outstanding receivables where we operated under a subcontract for a prime contractor on a U.S. government program that ended December 31, 2014. See Note 9 for further discussion.

28




Note 7 — 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 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 11.875% senior secured second lien notes (the "Second Lien Notes"), and New Senior Credit Facility (as defined in Note 8) is based on Level 1 and Level 2 inputs, as defined above. Our estimate of the fair value of our Cerberus 3L Notes (as defined in Note 8) is based on Level 3 inputs, as defined above. We used the following techniques in determining the fair value disclosed for the Cerberus 3L Notes classified as Level 3. The fair value as of September 30, 2018 has been calculated by discounting the expected cash flows using a discount rate of 6.3%. This discount rate is determined using the Moody's credit rating for the Second Lien Notes and reducing the rating one level lower for the Cerberus 3L Notes as they are subordinated to the Second Lien Notes.
 
As Of
 
September 30, 2018
 
December 31, 2017
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
11.875% senior secured second lien notes
$
384,713

 
$
402,025

 
$
379,006

 
$
401,273

Term loan
127,343

 
127,343

 
182,286

 
182,286

Cerberus 3L notes
33,665

 
30,404

 
32,420

 
30,267

Total indebtedness
545,721

 
559,772

 
593,712

 
613,826

Less current portion of long-term debt

 

 
(54,943
)
 
(54,943
)
Total long-term debt
$
545,721

 
$
559,772

 
$
538,769

 
$
558,883



29




Note 8 — Debt
Debt consisted of the following:
 
As of September 30, 2018
(Amounts in thousands)
Carrying Amount
 
Original Issue Discount on Term Loan
 
Deferred Financing Costs, Net
 
Carrying Amount less Original Issue Discount on Term Loan and Deferred Financing Costs, Net
11.875% senior secured second lien notes
$
384,713

 
$

 
$
(876
)
 
$
383,837

Term loan
127,343

 
(6,324
)
 
(1,511
)
 
119,508

Cerberus 3L notes
33,665

 

 
(65
)
 
33,600

Total indebtedness
545,721

 
(6,324
)
 
(2,452
)
 
536,945

Less current portion of long-term debt, net (1)

 

 

 

Total long-term debt, net
$
545,721

 
$
(6,324
)
 
$
(2,452
)
 
$
536,945

(1)
The carrying amount of the current portion of long-term debt as of September 30, 2018 includes the Revolver (as defined below). As of September 30, 2018, there were no amounts borrowed under the Revolver.
 
As of December 31, 2017
(Amounts in thousands)
Carrying Amount
 
Original Issue Discount on Term Loan
 
Deferred Financing Costs, Net
 
Carrying Amount less Original Issue Discount on Term Loan and Deferred Financing Costs, Net
11.875% senior secured second lien notes
$
379,006

 
$

 
$
(1,177
)
 
$
377,829

Term loan
182,286

 
(8,996
)
 
(2,776
)
 
170,514

Cerberus 3L notes
32,420

 

 
(72
)
 
32,348

Total indebtedness
593,712

 
(8,996
)
 
(4,025
)
 
580,691

Less current portion of long-term debt, net (2)
(54,943
)
 
1,110

 
181

 
(53,652
)
Total long-term debt, net
$
538,769

 
$
(7,886
)
 
$
(3,844
)
 
$
527,039

(2)
The carrying amount of the current portion of long-term debt as of December 31, 2017 includes our Excess Cash Flow Payment of $54.9 million, which was paid on March 21, 2018.
The original issue discount on the Term Loan facility under the New Senior Credit Facility (the "Term Loan") and deferred financing costs are amortized through interest expense. Amortization related to the original issue discount was $0.9 million and $2.7 million during the three and nine months ended September 30, 2018, respectively, and was $0.9 million and $2.7 million during the three and nine months ended September 30, 2017. Amortization related to deferred financing costs was $0.4 million and $1.3 million during the three and nine months ended September 30, 2018, respectively, and was $0.5 million and $1.4 million during the three and nine months ended September 30, 2017, respectively.
Deferred financing costs for the nine months ended September 30, 2018 were reduced by $0.2 million related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $54.9 million Excess Cash Flow principal payment made on the Term Loan on March 21, 2018, which was the only principal payment made on the Term Loan during the nine months ended September 30, 2018. Deferred financing costs for the nine months ended September 30, 2017 were reduced an immaterial amount related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $25.1 million in principal prepayment made on the Term Loan.
New 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, N.A. as Administrative Agent (the "Agent"). On April 30, 2016, we entered into Amendment No. 5 ("Amendment No. 5") to the Senior Credit Facility which provided for a new senior secured credit facility (the "New Senior Credit Facility") upon the satisfaction of certain conditions. On June 15, 2016, we satisfied the conditions set forth in Amendment No. 5 and the New Senior Credit Facility became effective. The New Senior Credit Facility is secured by substantially all of our assets and guaranteed by substantially all of our subsidiaries.

30




As of September 30, 2018, the New Senior Credit Facility provided for the following:
a $127.3 million Term Loan;
a $85.8 million class B revolving facility (the "Revolver"); and
up to $15.0 million in incremental revolving facilities provided by and at the discretion of certain non-debt fund affiliates that are controlled by Cerberus (as defined herein), which shall rank pari passu with, and be on the same terms as, the Revolver.
As of September 30, 2018 and December 31, 2017, the available borrowing capacity under the New Senior Credit Facility was approximately $66.5 million and $65.5 million, respectively, and included $19.3 million and $20.3 million, respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of September 30, 2018 and December 31, 2017 there were no amounts borrowed under the Revolver. The Revolver and the Term Loan mature on July 7, 2019 and July 7, 2020, respectively.
Interest Rates on Term Loan & Revolver
The interest rate per annum applicable to the Term Loan is, at our option, equal to either the Base Rate or the Eurocurrency Rate, in each case, plus (i) 5.00% in the case of Base Rate loans and (ii) 6.00% in the case of Eurocurrency Rate loans. The interest rate per annum applicable to the Revolver is, at our option, equal to either a Base Rate or a Eurocurrency Rate plus (i) a range of 4.50% to 5.00% based on the First Lien Secured Leverage Ratio in the case of Base Rate loans and (ii) a range of 5.50% to 6.00% based on the First Lien Secured Leverage Ratio in the case of Eurocurrency Rate loans. The First Lien Secured Leverage Ratio is the ratio of total first lien secured consolidated debt (net of up to $75 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the New Senior Credit Facility. The variable Base Rate has a floor of 2.75% and the variable Eurocurrency Rate has a floor of 1.75%. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the New Senior Credit Facility, but not less than quarterly.
As of September 30, 2018 and December 31, 2017, the applicable interest rate on the Term Loan was 8.08% and 7.75%, respectively.
Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
All of our letters of credit under the New Senior Credit Facility are subject to a 0.25% fronting fee. The letter of credit subfacility bears interest at an applicable rate that ranges from 5.50% to 6.00% with respect to the Revolver commitments. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% on the undrawn amount of the facility depending on the First Lien Secured Leverage Ratio. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. We will also pay customary letter of credit and agency fees.
The applicable interest rate for our letter of credit subfacility was 5.50% as of September 30, 2018 and December 31, 2017, respectively. The applicable interest rate for our unused commitment fees was 0.50% as of September 30, 2018 and December 31, 2017.
Principal Payments
The credit agreement governing the New Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the credit agreement, within five business days of filing annual financial statements, as additional principal payments. Based on our annual financial results for the years ended December 31, 2017 and 2016, we made additional principal payments as required under the Excess Cash Flow provisions of the New Senior Credit Facility of $54.9 million on March 21, 2018 and $25.1 million on April 4, 2017. 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 30, 2018 or September 30, 2017.
The New Senior Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:
100% of excess cash flow (as defined in Amendment No. 5) less the amount of certain voluntary prepayments as described in Amendment No. 5; and
100% of the net cash proceeds of all non-ordinary course asset sales and casualty and condemnation events, if we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make certain other permitted investments within nine months (and, if committed to be so reinvested, actually reinvested within twelve months).
We are permitted to voluntarily repay outstanding loans under the New Senior Credit Facility at any time without premium or penalty, other than customary "breakage" costs with respect to Eurocurrency Rate Loans.

31




Maturity and Principal Amortization
We were required to make principal amortization payments with respect to the Term Loan of $22.5 million on or prior to June 15, 2017 and $22.5 million on or prior to June 15, 2018, which amounts were fully satisfied as a result of the additional principal payments of $54.9 million and $25.1 million made on March 21, 2018 and April 4, 2017, respectively, under the Excess Cash Flow requirement discussed above. The principal amount of the Term Loan may be reduced as a result of prepayments, with the remaining amount payable on July 7, 2020.
Guarantee and Security
The guarantors of the obligations under the New Senior Credit Facility are identical to those under the Second Lien Notes and the Cerberus 3L Notes. See Note 12. The New Senior Credit Facility is secured on a first lien basis by the same collateral that secures the Second Lien Notes on a second lien basis and the Cerberus 3L Notes on a third lien basis.
Covenants and Other Terms
The New Senior Credit Facility contains a number of financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. Among other things, the New Senior Credit Facility requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The total leverage ratio is the ratio of Consolidated Total Debt, as defined in Amendment No. 5 (which definition excludes debt under the Cerberus 3L Notes), less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated EBITDA, as defined in Amendment No. 5, for the applicable period. The maximum total leverage ratio was 4.75 to 1.0 for the period ended September 30, 2018. The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in Amendment No. 5 (which provides that interest expense with respect to the Cerberus 3L Notes is excluded). The minimum interest coverage ratio was 1.70 to 1.0 for the period ended September 30, 2018.
The New Senior Credit Facility requires, solely for the benefit of the lenders under the Revolver, for us to maintain minimum liquidity (based on availability of revolving credit commitments plus unrestricted cash and cash equivalents) as of the end of each fiscal quarter ending after December 31, 2017 of not less than $50 million. The credit agreement governing the New Senior Credit Facility also contains customary representations and warranties and events of default.
As of September 30, 2018 and December 31, 2017, we were in compliance with our financial maintenance covenants under the New Senior Credit Facility. We expect, based on current projections and estimates, to be in compliance with our covenants in the New Senior Credit Facility (including our financial maintenance covenants), and the covenants in the Second Lien Notes and the Cerberus 3L notes, further discussed below, for the next twelve months.
Second Lien Notes
On June 15, 2016, $415.7 million principal amount of the 10.375% Senior Notes due 2017 (the "Senior Unsecured Notes") were exchanged for $45.0 million cash and $370.6 million aggregate principal amount of newly issued Second Lien Notes due