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 March 31, 2019
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
 
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
N/A.
N/A.






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 current or future levels 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") contract and any impact from the result of the LOGCAP IV re-compete ("LOGCAP V");
the outcome of future extensions on awarded contracts and the outcomes of re-competes 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, including, without limitation, the protest against awards for LOGCAP V filed by the Company on April 22, 2019;
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 or any penalty, liquidated damages or disincentive 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;
impact 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 changes in management 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, 2018 filed with the Securities and Exchange Commission ("SEC") on March 19, 2019 and other risks detailed from time to time in our reports filed with SEC.

3




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 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




PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
(Amounts in thousands)
March 31, 2019
 
March 31, 2018
Revenue
$
480,785

 
$
534,293

Cost of services
(419,467
)
 
(465,423
)
Selling, general and administrative expenses
(25,722
)
 
(25,359
)
Depreciation and amortization expense
(5,854
)
 
(6,057
)
Earnings from equity method investees

 
47

Operating income
29,742

 
37,501

Interest expense
(14,684
)
 
(16,988
)
Loss on early extinguishment of debt
(623
)
 
(239
)
Interest income
1,035

 
525

Other income, net
624

 
649

Income before income taxes
16,094

 
21,448

Provision for income taxes
(4,241
)
 
(4,744
)
Net income
11,853

 
16,704

Noncontrolling interests
(244
)
 
(296
)
Net income attributable to Delta Tucker Holdings, Inc.
$
11,609

 
$
16,408

See notes to unaudited condensed consolidated financial statements

5




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
Three Months Ended
(Amounts in thousands)
March 31, 2019
 
March 31, 2018
Net income
$
11,853

 
$
16,704

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustment
(50
)
 
1

Other comprehensive income, before tax
(50
)
 
1

Income tax benefit (expense) related to items of other comprehensive income (loss)
12

 

Other comprehensive income
(38
)
 
1

Comprehensive income
11,815

 
16,705

Comprehensive income attributable to noncontrolling interests
(244
)
 
(296
)
Comprehensive income attributable to Delta Tucker Holdings, Inc.
$
11,571

 
$
16,409


See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
189,116

 
$
203,797

Accounts receivable, net of allowances of $3,274 and $2,784 respectively
128,090

 
163,901

Contract assets
171,244

 
172,137

Prepaid expenses and other current assets
47,933

 
44,013

Total current assets
536,383

 
583,848

Property and equipment, net
21,441

 
22,058

Right-of-use assets
24,889

 

Goodwill
42,093

 
42,093

Tradenames, net
28,536

 
28,536

Other intangibles, net
27,638

 
32,867

Long-term deferred taxes
717

 
724

Other assets, net
8,665

 
8,173

Total assets
$
690,362

 
$
718,299

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

 
$
17,073

Accounts payable
94,542

 
107,221

Accrued payroll and employee costs
79,240

 
95,806

Current portion of long-term lease liabilities
9,566

 

Contract liabilities
24,588

 
37,816

Accrued liabilities
47,528

 
59,650

Income taxes payable
19,605

 
21,820

Total current liabilities
275,069

 
339,386

Long-term debt, net
478,671

 
474,660

Long-term lease liabilities
27,570

 

Other long-term liabilities
3,732

 
10,553

Total liabilities
785,042

 
824,599

DEFICIT
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

Additional paid-in capital
597,066

 
596,948

Accumulated deficit
(696,679
)
 
(708,288
)
Accumulated other comprehensive loss
(497
)
 
(459
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(100,110
)
 
(111,799
)
Noncontrolling interests
5,430

 
5,499

Total deficit
(94,680
)
 
(106,300
)
Total liabilities and deficit
$
690,362

 
$
718,299

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Three Months Ended
(Amounts in thousands)
March 31, 2019
 
March 31, 2018
Cash flows from operating activities
 
 
 
Net income
$
11,853

 
$
16,704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,786

 
6,820

Loss on early extinguishment of debt
623

 
239

Amortization of deferred loan costs and original issue discount
810

 
1,336

Allowance on accounts receivable and other noncash gains or losses
230

 
(560
)
Revenue recognized on advanced payment
(10,552
)
 

Operating lease expense
2,828

 

Other, including paid in kind interest
2,950

 
2,628

Changes in assets and liabilities:
 
 
 
Accounts receivable and contract assets
33,842

 
31,432

Prepaid expenses and other current assets
152

 
9,379

Accounts payable, accrued liabilities, lease liabilities and contract liabilities
(43,285
)
 
(60,058
)
Income taxes payable
(2,254
)
 
129

Net cash provided by operating activities
3,983

 
8,049

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(636
)
 
(4,852
)
Proceeds from sale of property and equipment

 
12

Purchase of software
(122
)
 
(32
)
Return of capital from equity method investees
1,530

 
1,450

Contributions to equity method investees
(1,530
)
 
(200
)
Net cash used in investing activities
(758
)
 
(3,622
)
Cash flows from financing activities
 
 
 
Payments on senior secured credit facility
(17,797
)
 
(54,943
)
Equity contribution from affiliates of Cerberus
100

 
100

Payment of dividends to noncontrolling interests
(209
)
 
(311
)
Net cash used in financing activities
(17,906
)
 
(55,154
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(14,681
)
 
(50,727
)
Cash, cash equivalents and restricted cash, beginning of period
203,797

 
168,250

Cash, cash equivalents and restricted cash, end of period
$
189,116

 
$
117,523

 
 
 
 
Income taxes paid, net of receipts
$
6,488

 
$
4,887

Interest paid
$
22,055

 
$
23,388

See notes to unaudited condensed consolidated financial statements

8




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, 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

 

 
56

 

 

 
56

 

 
56

Comprehensive income attributable to Delta Tucker Holdings, Inc.

 

 

 
16,408

 
1

 
16,409

 
296

 
16,705

Capital contribution

 

 
100

 

 

 
100

 

 
100

DIFZ financing, net of tax

 

 
24

 

 

 
24

 

 
24

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(343
)
 
(343
)
Balance at March 31, 2018

 
$

 
$
596,573

 
$
(776,377
)
 
$
(403
)
 
$
(180,207
)
 
$
5,482

 
$
(174,725
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 2018

 
$

 
$
596,948

 
$
(708,288
)
 
$
(459
)
 
$
(111,799
)
 
$
5,499

 
$
(106,300
)
Share based compensation, net

 

 
(2
)
 

 

 
(2
)
 

 
(2
)
Comprehensive income attributable to Delta Tucker Holdings, Inc.

 

 

 
11,609

 
(38
)
 
11,571

 
244

 
11,815

Capital contribution

 

 
100

 

 

 
100

 

 
100

DIFZ financing, net of tax

 

 
20

 

 

 
20

 

 
20

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(313
)
 
(313
)
Balance at March 31, 2019

 
$

 
$
597,066

 
$
(696,679
)
 
$
(497
)
 
$
(100,110
)
 
$
5,430

 
$
(94,680
)
See notes to unaudited condensed consolidated financial statements

9




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

Note 1 — Basis of Presentation and Accounting Policies
Calendar Year
Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2019 and March 31, 2018, the related statements of deficit and cash flows for the three months ended March 31, 2019 and March 31, 2018 and the unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018.
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, 2018.
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of March 31, 2019 and December 31, 2018, the results of operations, and statements of comprehensive income, deficit and cash flows for the three months ended March 31, 2019 and March 31, 2018 have been included. The results of operations, and statements of comprehensive income, deficit and cash flows for the three months ended March 31, 2019 and March 31, 2018 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 performance obligation. For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set

10




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.
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. 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 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. There were no material changes in contract estimates related to past performance during the three months ended March 31, 2019 and March 31, 2018. See Note 6 for further discussion.
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, 2018, except as described below.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases ("ASC 842"), which supersedes the lease recognition requirements in ASC Topic 840, Leases ("ASC 840") and 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 disclosure. The Company adopted ASC 842 as of January 1, 2019 using the modified retrospective approach and, accordingly, periods prior to the adoption date of January 1, 2019 have not been recast for comparative purposes. The Company applied the provisions of ASC 842 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. The adoption of ASC 842 resulted in the recognition of approximately $26.2 million of right of use assets, approximately $37.8 million of lease liabilities and no impact to retained deficit as of January 1, 2019. The difference between the right of use assets and lease liabilities recognized as of January 1, 2019, was primarily due to the treatment of prepaid rent, accrued rent and tenant improvement allowances associated with our operating leases. See Note 9 for the required disclosures related to the impact of adopting this standard.
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. The Company adopted ASU 2018-02 during the first quarter of calendar year 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements or disclosures.
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 adopted the guidance on the presentation of changes in the statements of deficit during the first quarter of calendar year 2019.
Recently Issued Accounting Developments

11




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. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses which clarifies that receivables arising from operating leases are within the scope of ASC 842, Leases and not as financial instruments. This ASU has the same effective date and transition requirements as ASU 2016-13. We are currently evaluating the potential effects of the adoption of ASU 2016-13 and ASU 2018-19 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 November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. ASU 2018-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. We are currently evaluating the potential effects of the adoption of ASU 2018-18 on our consolidated financial statements.
Other accounting standards updates effective after March 31, 2019 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows for the period ended March 31, 2019.

12




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.
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) U.S. federal government contracts and (ii) other contracts.
U.S. Federal Government Contracts - Contracts with the U.S. federal government, primarily with the U.S. Department of Defense (“DoD”) and the U.S. 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 and are awarded to multiple contractors. 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. However, many IDIQ vehicles permit the customer to direct work to a particular contractor. The task orders awarded may be fixed-priced, time-and-materials, or cost-reimbursement contracts.
The Company generally performs a contract 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.
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 receives 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 whereby the Company responds to the customer’s needs on the basis of its demand.
As it relates to disclosing the remaining performance obligations, 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 second quarter of calendar year 2018, which has a 30 month term and a remaining performance obligation of $191.0 million as of March 31, 2019. We expect to recognize approximately 62% and 100% of our March 31, 2019 backlog as revenue over the next 12 and 24 months, respectively. 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 March 31, 2019.



13




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 months ended March 31, 2019 and March 31, 2018:
 
Three months ended March 31, 2019
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Headquarters / Other
 
Total
Customer
 
 
 
 
 
 
 
DOD
$
215,350

 
$
209,820

 
$

 
$
425,170

DOS
359

 
34,868

 

 
35,227

Other
8,662

 
11,831

 
(105
)
 
20,388

Total revenue
$
224,371

 
$
256,519

 
$
(105
)
 
$
480,785

 
 
 
 
 
 
 
 
Contract Type
 
 
 
 
 
 
 
Fixed-Price
$
103,469

 
$
84,996

 
$
(41
)
 
$
188,424

Time-and-Materials
20,633

 
1,850

 
(5
)
 
22,478

Cost-Reimbursement
100,269

 
169,673

 
(59
)
 
269,883

Total revenue
$
224,371

 
$
256,519

 
$
(105
)
 
$
480,785


 
Three months ended March 31, 2018
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Headquarters / Other
 
Total
Customer
 
 
 
 
 
 
 
DOD
$
241,975

 
$
183,649

 
$

 
$
425,624

DOS
58,495

 
31,914

 

 
90,409

Other
16,762

 
1,961

 
(463
)
 
18,260

Total revenue
$
317,232

 
$
217,524

 
$
(463
)
 
$
534,293

 
 
 
 
 
 
 
 
Contract Type
 
 
 
 
 
 
 
Fixed-Price
$
143,407

 
$
80,766

 
$
(194
)
 
$
223,979

Time-and-Materials
20,487

 
1,157

 
(19
)
 
21,625

Cost-Reimbursement
153,338

 
135,601

 
(250
)
 
288,689

Total revenue
$
317,232

 
$
217,524

 
$
(463
)
 
$
534,293



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)
March 31, 2019
 
December 31, 2018
Prepaid expenses
$
35,163

 
$
40,446

Inventories, net
1,184

 
1,051

Joint venture receivables
34

 
31

Other current assets
11,552

 
2,485

Total prepaid expenses and other current assets
$
47,933

 
$
44,013

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

14




at the lower of cost or net realizable value. The change in other current assets is primarily due to a tenant improvement allowance receivable.
Property and equipment, net
 
As Of
(Amounts in thousands)
March 31, 2019
 
December 31, 2018
Aircraft
$
4,096

 
$
4,126

Computers and related equipment
10,326

 
9,952

Leasehold improvements
17,322

 
16,982

Office furniture and fixtures
3,394

 
3,375

Vehicles
14,829

 
14,700

Gross property and equipment
49,967

 
49,135

Less accumulated depreciation
(28,526
)
 
(27,077
)
Total property and equipment, net
$
21,441

 
$
22,058

As of March 31, 2019 and December 31, 2018, Property and equipment, net, included the accrual for property additions of $0.5 million and $0.2 million, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $1.7 million during the three months ended March 31, 2019 and March 31, 2018, respectively.
Other assets, net
 
As Of
(Amounts in thousands)
March 31, 2019
 
December 31, 2018
Investment in affiliates
$
1,349

 
$
1,349

Palm promissory note, long-term portion
1,489

 
1,568

Other
5,827

 
5,256

Total other assets, net
$
8,665

 
$
8,173

Accrued payroll and employee costs
 
As Of
(Amounts in thousands)
March 31, 2019
 
December 31, 2018
Wages, compensation and other benefits
$
59,587

 
$
79,349

Accrued vacation
18,299

 
15,302

Accrued contributions to employee benefit plans
1,354

 
1,155

Total accrued payroll and employee costs
$
79,240

 
$
95,806

Accrued liabilities
 
As Of
(Amounts in thousands)
March 31, 2019
 
December 31, 2018
Customer liabilities
$
8,895

 
$
9,435

Accrued insurance
12,334

 
11,424

Accrued interest
11,938

 
23,471

Unrecognized tax position
3,293

 

Contract losses
1,263

 
1,608

Legal reserves
4,850

 
4,743

Other
4,955

 
8,969

Total accrued liabilities
$
47,528

 
$
59,650

Customer liabilities represent amounts due back to a customer. 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 10 for further discussion. Other is comprised primarily of

15




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 March 31, 2019 and December 31, 2018, Other long-term liabilities were $3.7 million and $10.6 million, respectively. Other long-term liabilities are primarily due to our long-term incentive bonus plan and nonqualified unfunded deferred compensation plan of $2.1 million and $3.0 million as of March 31, 2019 and December 31, 2018, respectively. Other long-term liabilities included an uncertain tax benefit of $3.5 million as of December 31, 2018 that is presented as a current liability within Accrued liabilities as of March 31, 2019. See Note 5 for further discussion.

16




Note 4 — Goodwill and Other Intangible Assets
We have two operating and reporting segments which provide services domestically and in foreign countries primarily under contracts with the U.S. government: DynAviation and DynLogistics. Each operating and reportable segment is its own reporting unit and only the DynLogistics reporting unit had a goodwill balance as of March 31, 2019, which we assess for potential goodwill impairment. The carrying amount of goodwill for DynLogistics was $42.1 million as of both March 31, 2019 and December 31, 2018.
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 2019, 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 three months ended March 31, 2019, we did not have a triggering event in any of our reporting units. Subsequent to the three months ended March 31, 2019, the Company learned that its pursuit of the LOGCAP IV re-compete ("LOGCAP V") within the DynLogistics reporting unit and segment was unsuccessful. The reporting unit, which has total goodwill of $42.1 million, considered projected revenue and gross margin estimates related to the renewal of this contract, known cash flows from awarded contracts and the cushion between the fair value and carrying value of the reporting unit as of December 31, 2018. Based on the factors above, there is no expectation of impairment.
Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $5.3 million and $5.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $1.4 million and $1.5 million as of March 31, 2019 and December 31, 2018, respectively.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $16.1 million for the nine months ending December 31, 2019, $11.3 million in 2020, $0.2 million in 2021 and $0.0 million in 2022, 2023 and thereafter.


17




Note 5 — Income Taxes
In 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Act") which 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. 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. 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
(Amounts in thousands)
March 31, 2019
 
March 31, 2018
Domestic
$
13,198

 
$
21,433

Foreign
2,896

 
15

Income before income taxes
$
16,094

 
$
21,448

Non-current deferred tax assets, net, was $0.7 million as of March 31, 2019 and December 31, 2018.
Our effective tax rate ("ETR") was 26.4% and 22.1% for the three months ended March 31, 2019 and March 31, 2018, respectively. For the three months ended March 31, 2019, the ETR was primarily driven by a fluctuation in the valuation allowance and the mix of income earned in foreign jurisdictions.
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 March 31, 2019 but will assess the need for valuation allowance each period. As of March 31, 2019 and December 31, 2018, our valuation allowance was $58.0 million.
As of March 31, 2019 and December 31, 2018, we had $4.2 million of total unrecognized tax benefits of which $2.7 million would impact our effective tax rate if recognized. We expect the unrecognized tax benefit and any related interest or penalties to be settled within the next twelve months.
During the three months ended March 31, 2019, we made no estimated federal income tax payments. All of our income taxes paid or refunds received during the three months ended March 31, 2019 were related to state or foreign jurisdictions.
During the year ended December 31, 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.

18




Note 6 — Contract Balances
Our contract balances consist of accounts receivable, contract assets and contract liabilities.
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 March 31, 2019 and December 31, 2018 include $39.1 million and $25.9 million, respectively, 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 March 31, 2019 and December 31, 2018, we had one contract claim outstanding totaling $2.8 million, net of reserves. We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government.
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)
March 31, 2019
 
December 31, 2018
 
$ Change
Accounts receivable, net of allowances
$
128,090

 
$
163,901

 
$
(35,811
)
Contract assets
171,244

 
172,137

 
(893
)
Contract liabilities
24,588

 
37,816

 
(13,228
)
During the three months ended March 31, 2019:
we increased Contract assets by $465.6 million due to the recognition of revenue in the first quarter of calendar year 2019, 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 $466.7 million of Contract assets to Accounts receivable when the right to consideration became unconditional;
we recognized revenue of $15.1 million related to our Contract liabilities as of December 31, 2018.
During the three months ended March 31, 2018:
we increased Contract assets by $534.3 million due to the recognition of revenue in the first quarter of 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 $527.0 million of Contract assets to Accounts receivable when the right to consideration became unconditional;
we recognized revenue of $0.2 million related to our Contract liabilities as of January 1, 2018 (the date of adoption of ASC 606).
Our allowance for doubtful accounts was $3.3 million as of March 31, 2019 compared to $2.8 million as of December 31, 2018, an increase primarily due to an additional reserve on a DynAviation contract.

19




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, contract assets, accounts payable, contract liabilities and borrowings. Because of the short-term nature of cash and cash equivalents, accounts receivable, contract assets, accounts payable and contract liabilities, 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 March 31, 2019 has been calculated by discounting the expected cash flows using a discount rate of 9.7%. 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
 
March 31, 2019
 
December 31, 2018
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
11.875% senior secured second lien notes
$
387,598

 
$
394,866

 
$
384,713

 
$
398,178

Term loan
59,546

 
58,950

 
77,343

 
76,569

Cerberus 3L notes
34,521

 
24,650

 
34,104

 
24,352

Total indebtedness
481,665

 
478,466

 
496,160

 
499,099

Less current portion of long-term debt

 

 
(17,797
)
 
(12,616
)
Total long-term debt
$
481,665

 
$
478,466

 
$
478,363

 
$
486,483



20




Note 8 — Debt
Debt consisted of the following:
 
As of March 31, 2019
(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
$
387,598

 
$

 
$
(674
)
 
$
386,924

Term loan
59,546

 
(1,743
)
 
(516
)
 
57,287

Cerberus 3L notes
34,521

 

 
(61
)
 
34,460

Total indebtedness
481,665

 
(1,743
)
 
(1,251
)
 
478,671

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

 

 

 

Total long-term debt, net
$
481,665

 
$
(1,743
)
 
$
(1,251
)
 
$
478,671

(1)
The carrying amount of the current portion of long-term debt as of March 31, 2019 includes the Revolver (as defined below). As of March 31, 2019, there were no amounts borrowed under the Revolver.
 
As of December 31, 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

 
$

 
$
(774
)
 
$
383,939

Term loan
77,343

 
(2,704
)
 
(886
)
 
73,753

Cerberus 3L notes
34,104

 

 
(63
)
 
34,041

Total indebtedness
496,160

 
(2,704
)
 
(1,723
)
 
491,733

Less current portion of long-term debt, net (2)
(17,797
)
 
622

 
102

 
(17,073
)
Total long-term debt, net
$
478,363

 
$
(2,082
)
 
$
(1,621
)
 
$
474,660

(2)
The carrying amount of the current portion of long-term debt as of December 31, 2018 includes the Revolver. As of December 31, 2018, there were no amounts borrowed under the Revolver. The carrying amount of the current portion of long-term debt as of December 31, 2018 includes our Excess Cash Flow (as defined in Amendment No. 5 (as defined below)) payment of $17.8 million, which was paid on March 19, 2019.
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 $0.4 million and $0.9 million during the three months ended March 31, 2019 and March 31, 2018, respectively. Amortization related to deferred financing costs was $0.4 million and $0.5 million during the three months ended March 31, 2019 and March 31, 2018.
The original issue discount on the Term Loan and deferred financing costs for the three months ended March 31, 2019 were reduced by $0.6 million related to the pro rata write-off of the original issue discount on the Term Loan and deferred financing costs to loss on early extinguishment of debt as a result of the $17.8 million Excess Cash Flow principal payment on March 19, 2019. Deferred financing costs for the three months ended March 31, 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.
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.

21




As of March 31, 2019, the New Senior Credit Facility provided for the following:
a $59.5 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 March 31, 2019 and December 31, 2018, the available borrowing capacity under the New Senior Credit Facility was approximately $66.5 million and included $19.3 million in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of March 31, 2019 and December 31, 2018 there were no amounts borrowed under the Revolver. The Term Loan matures on July 7, 2020.
Our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable and access to our Revolver, which is dependent upon our meeting financial and non-financial covenants. The Revolver matures on July 7, 2019, so our cash flows from operations is also dependent on our ability to refinance or obtain a new revolving facility and our future financial strength. The Company is in the process of evaluating its refinancing and new credit facility opportunities.
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 March 31, 2019 and December 31, 2018, the applicable interest rate on the Term Loan was 8.48% and 8.47%, 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 March 31, 2019 and December 31, 2018, respectively. The applicable interest rate for our unused commitment fees was 0.50% as of March 31, 2019 and December 31, 2018.
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, 2018 and 2017, we made additional principal payments as required under the Excess Cash Flow provisions of the New Senior Credit Facility of $17.8 million on March 19, 2019 and $54.9 million on March 21, 2018. 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 three months ended March 31, 2019 or March 31, 2018.
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).

22




The principal amount of the Term Loan may be reduced as a result of prepayments, with the remaining amount payable on July 7, 2020. 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.
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 13. 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 March 31, 2019. 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 March 31, 2019.
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 March 31, 2019 and December 31, 2018, 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 November 30, 2020, which are governed by the terms of the indenture (the "Indenture"), among DynCorp International, Holdings, as parent guarantor, DynCorp International’s subsidiaries that currently guarantee the New Senior Credit Facility, as subsidiary guarantors (the "Subsidiary Guarantors"), and Wilmington Trust, National Association, as trustee and collateral agent.
Interest on the Second Lien Notes accrues at the rate of 11.875% per annum, comprised of 10.375% per annum in cash and 1.500% per annum payable in kind ("PIK," and such interest "PIK Interest"). The cash portion of the interest on the Second Lien Notes is payable in cash and the PIK Interest on the Second Lien Notes is payable in kind, each semi-annually in arrears on January 1 and July 1.
PIK Interest converted into the carrying amount of the Second Lien Notes during the three months ended March 31, 2019 and March 31, 2018 was $2.9 million and $2.8 million, respectively. PIK Interest accrued on the Second Lien Notes was $1.4 million and $2.9 million as of March 31, 2019 and December 31, 2018, respectively.
Covenants and Events of Default
The Indenture contains a number of non-financial affirmative and negative covenants we believe are usual and customary. These covenants are subject to a number of important exceptions and qualifications as set forth in the Indenture. The Indenture contains customary events of default, including for failure to pay other indebtedness in a total amount exceeding $10.0 million after final maturity of such indebtedness.
Optional Redemption
The Second Lien Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days’ prior notice, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid cash interest, if any, together with an amount of cash equal to all accrued and unpaid PIK Interest to but excluding the redemption date:

23




Period
 
Redemption Price

July 1, 2018 through June 30, 2019
 
103.00
%
July 1, 2019 and thereafter
 
100.00
%
Cerberus 3L Notes
On June 15, 2016, DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P. ("Cerberus"), entered into a Third Lien Credit Agreement (the "Third Lien Credit Agreement") with us. Under the Third Lien Credit Agreement, DynCorp Funding LLC has made a $30.0 million term loan to us (the "Cerberus 3L Notes"). The proceeds of the Cerberus 3L Notes were fully utilized and were restricted to pay fees and expenses (including reimbursement of out-of-pocket expenses) in support of or related to the Company’s Global Advisory Group.
 
Interest Rate and Fees
The interest rate per annum applicable to the Cerberus 3L Notes is 5.00%, payable in kind on a quarterly basis. During both the three months ended March 31, 2019 and March 31, 2018, PIK Interest converted into the carrying amount of the Cerberus 3L Notes was $0.4 million.

Prepayments
The Cerberus 3L Notes do not require any mandatory prepayments, and, subject to the terms of the Intercreditor Agreement (as defined below), we are permitted to voluntarily repay outstanding loans under the Cerberus 3L Notes without premium or penalty. The New Senior Credit Facility and the Indenture governing the Second Lien Notes restrict us from making any principal payments on the Cerberus 3L Notes.

Maturity and Amortization
The Cerberus 3L Notes do not require any mandatory amortization payments prior to maturity and the outstanding principal amounts shall be payable on June 15, 2026.

Covenants and Events of Default
The Cerberus 3L Notes include non-financial affirmative and negative covenants consistent with the covenants set forth in the Second Lien Notes; provided that each "basket" or "cushion" set forth in the covenants is at least 25% less restrictive than the corresponding provision set forth in the Second Lien Notes. The Third Lien Credit Agreement contains customary events of default, including for failure to pay other debt in a total amount exceeding $12.5 million after final maturity or acceleration of such indebtedness.

Intercreditor Agreement

The collateral granted to secure the indebtedness under the New Senior Credit Facility, on a first-priority basis, has also been granted to secure (a) the Second Lien Notes and the guarantees under the Indenture on a second-priority basis and (b) the Cerberus 3L Notes and the guarantees under the Third Lien Credit Agreement on a third-priority basis. The relative priority of the liens afforded to the New Senior Credit Facility, Second Lien Notes and Cerberus 3L Notes and the subordination in right of payment of the Cerberus 3L Notes to the New Senior Credit Facility and the Second Lien Notes are set forth in the Intercreditor Agreement (the "Intercreditor Agreement"), dated as of June 15, 2016, by and among the administrative agent under the New Senior Credit Facility, the collateral agent under the Indenture, and the collateral agent under the Third Lien Credit Agreement.

Debt Maturity Schedule

The following table represents our contractual maturity schedule associated with our debt as of March 31, 2019:
 
Calendar Years (1)
(Amounts in thousands)
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
11.875% senior secured second lien notes
$

 
$
387,598

 
$

 
$

 
$

 
$

 
$
387,598

Term loan 

 
59,546

 

 

 

 

 
59,546

Cerberus 3L notes 

 

 

 

 

 
34,521

 
34,521

Total debt
$

 
$
447,144

 
$

 
$

 
$

 
$
34,521

 
$
481,665


24




(1)
As of March 31, 2019, there were no amounts outstanding under the Revolver.

Note 9 — Leases
In February 2016, the FASB issued ASC 842, which supersedes the lease recognition requirements in ASC 840. The core principle of the new standard is that a company should recognize right-of-use assets and lease liabilities arising from financing and operating leases. We adopted ASC 842 as of January 1, 2019 using the modified retrospective approach without restatement of comparative periods. The cumulative effect of applying ASC 842 to our Condensed Consolidated Balance Sheet as of January 1, 2019 was an increase to right-of use assets of $26.2 million, lease liabilities of $37.8 million and a tenant improvement allowance receivable within Other current assets of $6.8 million offset by a reduction to prepaid rent of $2.0 million, accrued rent within Accrued liabilities of $3.4 million, and tenant improvement allowances of $3.4 million. Included in the amounts above are the Fort Worth lease agreements which commenced on January 1, 2019 and consisted of $6.0 million of right-of-use assets, $6.8 million of tenant improvement allowance receivables and $12.8 million of lease liabilities. The Company does not have financing leases.
We lease certain office space, warehouses, housing, equipment and vehicles. These leases are either non-cancelable, cancelable only by the payment of penalties or cancelable upon notice provided. All lease payments are based on the lapse of time and certain leases are subject to annual escalations for increases in base rents. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have no significant long-term purchase agreements with service providers and our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Short-Term Leases
We have elected the practical expedient for short-term lease recognition exemption by class of underlying asset which results in off-balance sheet accounting for leases with an initial term of 12 months or less (“short-term leases”). We recognize those lease payments in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term. We also elected a package of practical expedients permitted under ASC 842 which allows the carry forward of historical lease classifications. The Company’s material leases previously classified as operating leases under ASC 840 are classified as short-term leases under ASC 842.
Short-term lease rental expense was $13.0 million for the three months ended March 31, 2019. Minimum fixed rental payments non-cancelable for short-term leases in effect as of March 31, 2019, are as follows:
Calendar Year 
 
Real Estate (1)
 
Equipment (2)
 
Total 
 
 
(Amounts in thousands)
2019
 
$
4,257

 
$
7,400

 
$
11,657

2020
 
11

 

 
11

Total
 
$
4,268

 
$
7,400

 
$
11,668

(1) Real estate includes office space, warehouses and housing.
(2) Equipment includes equipment and vehicles.    
Operating Leases
The Company's operating leases primarily include our material leases of buildings (consisting primarily of our corporate office lease commitments) and equipment and a limited number of embedded leases primarily associated with real estate, equipment and vehicles in certain contracts with an initial term of 12 months or longer. These leases are classified as operating leases and are recognized as right-of-use assets and lease liabilities on the balance sheet.
The following tables present selected financial information for operating leases as of March 31, 2019:

25




Operating Leases
 
 
(Amounts in thousands)
 
March 31, 2019
Assets
 
 
  Right-of-use leased assets
 
$
24,889

Total leased assets
 
$
24,889

 
 
 
Liabilities
 
 
  Current portion of long-term lease liabilities
 
$
9,566

  Long-term lease liabilities
 
27,570

Total lease liabilities
 
$
37,136


Maturity of Lease Liabilities
 
 
(Amounts in thousands)
 
Operating Leases
Remainder of 2019
 
$
8,623

2020
 
8,739

2021
 
6,749

2022
 
5,906

2023
 
5,512

Thereafter
 
15,469

Total lease payments
 
$
50,998

Less: Net present value adjustment
 
(13,862
)
Present value of lease liabilities
 
$
37,136


Lease Term and Discount Rate
 
March 31, 2019
Weighted-average remaining lease term (years)
 
4.5

Weighted-average discount rate (1)
 
10.00
%
(1) As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The following tables present selected financial information for the three months ended March 31, 2019:
Lease Cost
 
 
Three Months Ended March 31, 2019
(Amounts in thousands)
Classification
 
Real Estate
 
Equipment
 
Total
Operating lease cost
Cost of services
 
$
1,026

 
$
151

 
$
1,177

 
Selling, general and administrative expenses
 
1,272

 
21

 
1,293

Sublease income (1)
Other income, net
 
(331
)
 

 
(331
)
Net lease cost
 
 
$
1,967

 
$
172


$
2,139

(1) We sublease certain real estate to third parties.
Lease rental expense was $10.6 million for the three months ended March 31, 2018.
Other Information
 
Three Months Ended
(Amounts in thousands)
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
  Operating lease payments
 
$
(1,791
)
Leased assets obtained in exchange for new lease liability
 
224


As of December 31, 2018, the minimum fixed rental payments on non-cancelable leases totaled a cumulative $31.1 million. The Fort Worth lease agreements which commenced on January 1, 2019 were not included in this amount as of December 31, 2018.

26




Note 10 — Commitments and Contingencies
Commitments
See Note 9 for further discussion on our lease commitments.
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $4.9 million and $4.7 million as of March 31, 2019 and December 31, 2018, respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at March 31, 2019. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of March 31, 2019. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.
Pending Litigation and Claims
On February 24, 2012, we were advised by the Department of Justice Civil Litigation Division (the "Civil Division”) that they are conducting an investigation regarding the Civilian Police ("CivPol") and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. Since 2012, the Company has been in discussions with the Civil Division, and has been cooperating with the Civil Division’s requests for information. On July 19, 2016, the Civil Division filed a civil lawsuit asserting violations of underlying contract terms and also the False Claims Act. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results; however, the complaint does not include any specific monetary demand and as such we are unable to estimate a range of loss at this time. We are continuing to evaluate this lawsuit and at this time believe the potential for penalties, damages or fines resulting from this matter do not represent a probable loss contingency.
U.S. Government Investigations
We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements. Such investigations could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and may result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.
U.S. Government Audits
Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management business systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If we are unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.

27




All of our incurred costs claims for U.S. government contracts completed through fiscal year 2014 have been audited by the DCAA and negotiated by the Defense Contract Management Agency ("DCMA"). Incurred cost claim audits for subsequent periods are ongoing except for fiscal years 2015 and 2016, which questioned $7.4 million of costs and resulted in a unilateral decision of our indirect rates. The largest portion of the unilateral decision has been appealed to the Armed Services Board of Contract Appeals ("ASBCA") and at this time, we believe the likelihood of an unfavorable outcome in this case is remote.
We have received a series of audit reports from the DCAA related to their examination of certain incurred, invoiced and reimbursed costs on the Logistics Civil Augmentation Program IV ("LOGCAP IV") contract for years 2009 to 2016. For contract years 2009 to 2012, through our negotiation efforts with the Contracting Officer the issues have been resolved, resulting in final settlements of all audited costs of approximately $0.8 million. For contract years 2013 and 2014, we have received DCAA’s final audit report, which questions approximately $3.9 million of costs. We are in discussions with the Contracting Officer regarding the final audit report and we believe that the settlement of the outstanding amounts will not be material to our financial statements. Additionally, the DCAA has recently completed its audit of contract years 2015 and 2016, and LOGCAP IV had no questioned contract costs.
Credit Risk
We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, the significance of any one contract can change as our business expands or contracts. Additionally, as contract modifications, contract extensions or other contract actions occur, the profitability of any one contract can become more or less significant to the Company. As contracts are recompeted, there is the potential for the size, contract type, contract structure or other contract elements to materially change from the original contract resulting in significant changes to the scope, scale, profitability or magnitude of accounts receivable of the new recompeted contract as compared to the original contract. We continuously review all accounts receivable and record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported of $6.0 million and $5.9 million as of March 31, 2019 and December 31, 2018, respectively. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic workers' compensation and employers' liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies, but is $0.25 million per occurrence on a California-based policy. For medical costs, the fixed dollar amount of stop-loss coverage is $0.4 million for total costs per covered participant per calendar year.

28




Note 11 — Segment Information
We have two operating and reporting segments: DynAviation and DynLogistics. The DynAviation and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
 
Three Months Ended
(Amounts in thousands)
 
March 31, 2019
 
March 31, 2018
Revenue
 
 
 
 
DynAviation
 
$
224,371

 
$
317,232

DynLogistics
 
256,519

 
217,524

Headquarters / Other (1)
 
(105
)
 
(463
)
Total revenue
 
$
480,785

 
$
534,293

 
 
 
 
 
Operating income (loss)
 
 
 
 
DynAviation
 
$
9,808

 
$
25,934

DynLogistics
 
27,099

 
19,306

Headquarters / Other (2)
 
(7,165
)
 
(7,739
)
Total operating income
 
$
29,742

 
$
37,501

 
 
 
 
 
Depreciation and amortization
 
 
 
 
DynAviation
 
$
301

 
$
498

DynLogistics
 
674

 
416

Headquarters / Other
 
5,811

 
5,906

Total depreciation and amortization (3)
 
$
6,786

 
$
6,820

(1)
Headquarters revenue primarily represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income.
(3)
Includes amounts included in Cost of services of $0.9 million and $0.8 million for the three months ended March 31, 2019 and March 31, 2018, respectively.
The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
As Of
(Amounts in thousands)
March 31, 2019
 
December 31, 2018
Assets
 
 
 
DynAviation
$
191,846

 
$
171,867

DynLogistics
260,130

 
291,619

Headquarters / Other (1)
238,386

 
254,813

Total assets
$
690,362

 
$
718,299

(1)
Assets primarily include cash, investments in unconsolidated subsidiaries, and intangible assets (excluding goodwill).


29




Note 12 — Related Parties, Joint Ventures and Variable Interest Entities
Consulting Fee
We have a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC ("COAC") where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $0.1 million of consulting fees on a gross basis before considering the effect of our contract mix which provides for partial recovery in conjunction with the COAC Agreement during the three months ended March 31, 2019 and March 31, 2018.
The New Senior Credit Facility permits payments under the COAC Agreement or any transaction contemplated thereby not to exceed $6.0 million per fiscal year with respect to executives seconded from COAC and personnel of COAC that provide services to us at cost on a weekly, monthly or pro-rated basis.
Certain members of executive management and board members of the Company may have agreements and conduct business with Cerberus and its affiliates for which they receive compensation. We recognize such compensation as an administrative expense in the consolidated financial statements.
Joint Ventures and Variable Interest Entities
We account for our investments in variable interest entities ("VIEs") in accordance with ASC 810 - Consolidation. In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. We consolidated DynCorp International FZ - LLC ("DIFZ") based on the aforementioned criteria. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of March 31, 2019, we accounted for Partnership for Temporary Housing LLC ("PaTH") and Global Linguist Solutions ("GLS") as equity method investments. We present our share of the PaTH and GLS earnings in (Loss) earnings from equity method investees as these joint ventures are considered operationally integral.
Receivables due from our unconsolidated joint ventures totaled $0.1 million as of both March 31, 2019 and December 31, 2018. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. We did not incur cost or earn revenue from services provided to our unconsolidated joint ventures during the three months ended March 31, 2019. Additionally, we recognized an immaterial amount in equity method income (includes operationally integral and non-integral income) during the three months ended March 31, 2019 and March 31, 2018.
GLS’ revenue was $16.3 million and $5.4 million during the three months ended March 31, 2019 and March 31, 2018, respectively. GLS’ operating and net income was $0.9 million and $0.2 million during the three months ended March 31, 2019 and March 31, 2018, respectively.
We currently hold one promissory note included in Other assets on our consolidated balance sheet from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The loan balance outstanding was $1.7 million and $1.8 million as of March 31, 2019 and December 31, 2018, respectively, reflecting the initial value plus accrued interest, less non-cash dividend payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.
As discussed above and in accordance with ASC 810 - Consolidation, we consolidate DIFZ. The following tables present selected financial information for DIFZ as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and March 31, 2018:
 
As Of
(Amounts in millions)
March 31, 2019
 
December 31, 2018
Assets
$
19.3

 
$
16.5

Liabilities
16.2

 
13.3

 
Three Months Ended
(Amounts in millions)
March 31, 2019
 
March 31, 2018
Revenue
$
42.5

 
$
42.2


30




The following tables present selected financial information for our equity method investees as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and March 31, 2018:
 
As Of
(Amounts in millions)
March 31, 2019
 
December 31, 2018
Current assets
$
17.1

 
$
16.7

Total assets
17.1

 
16.7

Current liabilities
6.1

 
5.5

Total liabilities
6.1

 
5.5

 
Three Months Ended
(Amounts in millions)
March 31, 2019
 
March 31, 2018
Revenue
$
16.3

 
$
7.3

Gross profit
0.9

 
0.5

Net income
0.9

 
0.5

Many of our joint ventures and VIEs only perform on a single contract. The modification or termination of a contract under a joint venture or VIE could trigger an impairment in the fair value of our investment in these entities. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i) $1.3 million investment in unconsolidated joint ventures, (ii) $0.1 million in receivables from our unconsolidated joint ventures, (iii) $1.7 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of March 31, 2019.

31




Note 13 — Consolidating Financial Statements of Subsidiary Guarantors
The Second Lien Notes issued by DynCorp International Inc. ("Subsidiary Issuer"), the New Senior Credit Facility and the term loan under the Third Lien Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and the following domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group, LLC, Casals & Associates, Inc., Culpeper National Security Solutions LLC, and Highground Global, Inc. ("Subsidiary Guarantors"). Each of the Subsidiary Issuer and the Subsidiary Guarantors is 100% owned by the Company. Under the Indenture governing the Second Lien Notes, a guarantee of a Subsidiary Guarantor would terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of March 31, 2019 and December 31, 2018, (ii) unaudited condensed consolidating statements of operations and comprehensive income for the three months ended March 31, 2019 and March 31, 2018, (iii) unaudited condensed consolidating statements of cash flows for the three months ended March 31, 2019 and March 31, 2018 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.
The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.
DynCorp International Inc. is considered the Subsidiary Issuer as it issued the Second Lien Notes.

32




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended March 31, 2019 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
483,731

 
$
44,023

 
$
(46,969
)
 
$
480,785

Cost of services

 

 
(422,987
)
 
(43,435
)
 
46,955

 
(419,467
)
Selling, general and administrative expenses

 

 
(25,708
)
 
(26
)
 
12

 
(25,722
)
Depreciation and amortization expense

 

 
(5,795
)
 
(61
)
 
2

 
(5,854
)
Operating income

 

 
29,241

 
501

 

 
29,742

Interest expense

 
(14,271
)
 
(413
)
 

 

 
(14,684
)
Loss on early extinguishment of debt

 
(623
)
 

 

 

 
(623
)
Interest income

 

 
1,034

 
1

 

 
1,035

Equity in income of consolidated subsidiaries
11,609

 
23,376

 
212

 

 
(35,197
)
 

Other income, net

 

 
624

 

 

 
624

Income before income taxes
11,609

 
8,482

 
30,698

 
502

 
(35,197
)
 
16,094

Benefit (provision) for income taxes

 
3,127

 
(7,322
)
 
(46
)
 

 
(4,241
)
Net income
11,609

 
11,609

 
23,376

 
456

 
(35,197
)
 
11,853

Noncontrolling interests

 

 

 
(244
)
 

 
(244
)
Net income attributable to Delta Tucker Holdings, Inc.
$
11,609

 
$
11,609

 
$
23,376

 
$
212

 
$
(35,197
)
 
$
11,609



33




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended March 31, 2018 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
537,551

 
$
46,450

 
$
(49,708
)
 
$
534,293

Cost of services

 

 
(469,319
)
 
(45,795
)
 
49,691

 
(465,423
)
Selling, general and administrative expenses

 

 
(25,168
)
 
(205
)
 
14

 
(25,359
)
Depreciation and amortization expense

 

 
(5,458
)
 
(602
)
 
3

 
(6,057
)
Earnings from equity method investees

 

 
47

 

 

 
47

Operating income (loss)

 

 
37,653

 
(152
)
 

 
37,501

Interest expense

 
(16,485
)
 
(503
)
 

 

 
(16,988
)
Loss on early extinguishment of debt

 
(239
)
 

 

 

 
(239
)
Interest income

 

 
524

 
1

 

 
525

Equity in income (loss) of consolidated subsidiaries
16,408

 
27,280

 
(388
)
 

 
(43,300
)
 

Other income, net

 

 
592

 
57

 

 
649

Income (loss) before income taxes
16,408

 
10,556

 
37,878

 
(94
)
 
(43,300
)
 
21,448

Benefit (provision) for income taxes

 
5,852

 
(10,598
)
 
2

 

 
(4,744
)
Net income (loss)
16,408

 
16,408

 
27,280

 
(92
)
 
(43,300
)
 
16,704

Noncontrolling interests

 

 

 
(296
)
 

 
(296
)
Net income (loss) attributable to Delta Tucker Holdings, Inc.
$
16,408

 
$
16,408

 
$
27,280

 
$
(388
)
 
$
(43,300
)
 
$
16,408









34




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Comprehensive Income Information
For the Three Months Ended March 31, 2019 
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Net income
$
11,609

 
$
11,609

 
$
23,376

 
$
456

 
$
(35,197
)
 
$
11,853

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(50
)
 
(50
)
 

 
(50
)
 
100

 
(50
)
Other comprehensive loss, before tax
(50
)
 
(50
)
 

 
(50
)
 
100

 
(50
)
Income tax benefit related to items of other comprehensive loss
12

 
12

 

 
12

 
(24
)
 
12

Other comprehensive loss
(38
)
 
(38
)
 

 
(38
)
 
76

 
(38
)
Comprehensive income
11,571

 
11,571

 
23,376

 
418

 
(35,121
)
 
11,815

Noncontrolling interests