DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-K, Received: 04/09/2012 17:09:09)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 30, 2011

or

 

¨ 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.)

3190 Fairview Park Drive, Suite 700,

Falls Church, Virginia 22042

(571) 722-0210

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.    Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes   ¨     No   x

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of April 9, 2012 the registrant had 100 shares of its common stock outstanding.

 

 

 


DELTA TUCKER HOLDINGS, INC.

TABLE OF CONTENTS

 

     Page  
PART I.   
Item 1.    Business      4   
Item 1A.    Risk Factors      13   
Item 1B.    Unresolved Staff Comments      23   
Item 2.    Properties      23   
Item 3.    Legal Proceedings      23   
Item 4.    Mine Safety Disclosures      23   
PART II.   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      24   
Item 6.    Selected Financial Data      25   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      56   
Item 8.    Financial Statements and Supplementary Data      57   
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      162   
Item 9A.    Controls and Procedures      162   
Item 9B.    Other Information      163   
PART III.   
Item 10.    Directors, Executive Officers and Corporate Governance      163   
Item 11.    Executive Compensation      167   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      179   
Item 13.    Certain Relationships and Related Transactions and Director Independence      180   
Item 14.    Principal Accountant Fees and Services      181   
PART IV.   
Item 15.    Exhibits and Financial Statement Schedules      182   

 

1


Forward-Looking Statements

This Annual Report on Form 10-K contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:

 

 

the future impact of mergers, acquisitions, joint ventures or teaming agreements;

 

 

our substantial level of indebtedness and changes in availability of capital and cost of capital;

 

 

the outcome of any material litigation, government investigation, audit or other regulatory matters;

 

 

policy and/or spending changes implemented by the Obama Administration, any subsequent administration or Congress;

 

 

termination or modification of key United States (“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 Civilian Police (“CivPol”), Worldwide Protective Services (“WPS”), Afghanistan Ministry of Defense Program (“AMDP”) , International Narcotics and Law (“INL”) Enforcement, Contract Field Teams (“CFT”), and Logistics Civil Augmentation Program IV (“LOGCAP IV”) contracts;

 

 

changes in the demand for services provided by our joint venture partners;

 

 

pursuit of new commercial business in the U.S. and abroad;

 

 

activities of competitors and the outcome of bid protests;

 

 

changes in significant operating expenses;

 

 

impact of lower than expected win rates for new business;

 

 

general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;

 

 

acts of war or terrorist activities;

 

 

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;

 

 

the timing or magnitude of any award fee granted under our government contracts, including, but not limited to, LOGCAP IV;

 

 

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;

 

 

termination or modification of key subcontractor performance or delivery; and

 

 

statements covering our business strategy, those described in “Item 1A. Risk Factors” of this Annual Report and under “Risk Factors” in our Registration Statement on Form S-4 (File No. 333-173746) declared effective by the Securities and Exchange Commission (“SEC”) on June 21, 2011 and other risks detailed from time to time in our reports filed with the SEC.

Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statement contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

 

2


Fiscal Year

We report the results of our operations using a 52-53 week basis ending on the Friday closest to December 31. This Annual Report on Form 10-K reflects the financial results of Delta Tucker Holdings, Inc. for the year ended December 30, 2011 (“calendar year 2011”) and for the period from April 1, 2010 (Inception) through December 31, 2010 (“Inception Year”). We refer to the Inception Year period as “calendar year 2010” throughout this Annual Report on Form 10-K. Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. (“DynCorp International”) and had immaterial assets and virtually no operations, except for costs associated with acquiring DynCorp International, prior to the merger on July 7, 2010. Included in this Annual Report on Form 10-K are our audited consolidated statements of operations for the year ended December 30, 2011 and for the period from April 1, 2010 (Inception) through December 31, 2010 and the related statements of equity and cash flows. The audited consolidated balance sheets are included for the periods as of December 30, 2011 and December 31, 2010.

Also included in this Annual Report on Form 10-K are financial statements for DynCorp International for the periods prior to the merger on July 7, 2010. These financial statements are included in order to provide a historical financial perspective. DynCorp International’s historical fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period ended July 2, 2010, which is the last quarter completed prior to the merger on July 7, 2010, is referred to as the “fiscal quarter ended July 2, 2010.” DynCorp International changed its fiscal year end at the time of the merger to coincide with that of Delta Tucker Holdings, Inc. For clarity, we refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”

 

3


PART I

ITEM 1. BUSINESS.

Unless the context otherwise indicates, references herein to “we,” “our,” “us,” or “the Company” refer to Delta Tucker Holdings, Inc. and its consolidated subsidiaries. The Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”).

The Delta Tucker Holdings, Inc. consolidated financial statements and the Predecessor DynCorp International Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K have been prepared pursuant to accounting principles generally accepted in the United States of America (“GAAP”).

Overview

We are a leading provider of specialized, mission-critical professional and support services outsourced by the U.S. military, non-military U.S. governmental agencies and foreign governments. Our specific global expertise is in law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations, linguist services and security services. We also provide logistics support for all our services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951.

Our customers include the U.S. Department of Defense (“DoD”), the U.S. Department of State (“DoS”), the U.S. Agency for International Development (“USAID”), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Revenue from the U.S. government accounted for approximately 97% and 98% of total revenue for the year ended December 30, 2011 and our Inception Year, respectively, and 98% of total DynCorp International revenue during fiscal year 2010. Our contracts’ revenue and percentage of total revenue from the U.S. government fluctuates from year to year. These fluctuations can be due to contract length or contract structure, such as with Indefinite Delivery Indefinite Quantity (“IDIQ”) type contracts. The majority of our contracts are awarded for one year base periods with subsequent option years available subject to changing governmental priorities. IDIQ type contracts are often awarded to multiple contractors and provide the opportunity for awarded contractors to bid on task orders issued under the contract.

Contract Types

Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. Our contracts typically are awarded for an estimated dollar value based on the forecast of the work to be performed under the contract over its maximum life. In addition, we have historically received additional revenue through increases in program scope beyond that of the original contract. These contract modifications typically consist of “over and above” requests derived from customer requirements changing and are reviewed by us for appropriate revenue recognition. 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 is re-competed to the extent the service is still required.

Our contracts with the U.S. government or the government’s prime contractor (to the extent that we are a subcontractor) generally contain standard, unilateral provisions under which the customer may terminate for convenience or default. U.S. government contracts generally also contain provisions that allow the U.S. government to unilaterally suspend us from obtaining new contracts and reduce the value of existing contract spending pending the resolution of alleged violations of laws or regulations.

Most of our contracts are to provide services, rather than products, to our customers, resulting in the majority of costs being labor related. For this reason, we flexibly staff for each contract. If we lose a contract, we terminate or reassign the employees associated with the contract, hence cutting direct cost and overhead. Generally elimination of employees would not generate significant separation costs other than as would be incurred in the normal course of business and would generally be recoverable under applicable contract terms. Additionally, the indirect costs that are absorbed by any one contract could be absorbed by the remaining contracts without significant long-term impact to our business or competitiveness.

The types of services we perform also support our scalability as our primary capital requirements are working capital, which are variable with our overall revenue stream. The nature of our contracts does not generally require investments in fixed assets, and we do not have significant fixed asset investments or significant agreements tied to a single contract upon which our business materially depends. Additionally, our contract mix gives us a degree of flexibility to deploy assets purchased for certain programs to other programs in cases where the scope of our deliverables changes.

Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these are described below.

 

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Fixed-Price Type Contracts: In a fixed-price contract, the price is not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the contracted service. Our fixed-price contracts include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive.

 

   

Time-and-Materials Type Contracts: Time-and-materials type contracts provide for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.

 

   

Cost-Reimbursement Type Contracts: Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee or incentive-fee. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets. Award fees are excluded from estimated total contract revenue until a reasonably determinable estimate of award fees can be made.

Any of these three types of contracts discussed above may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CivPol, CFT and LOGCAP IV programs are three examples of IDIQ contracts. For the year ended December 30, 2011 and during our Inception Year, 75% and 76%, respectively, of our revenue was attributable to IDIQ contracts. In DynCorp International’s fiscal year 2010, 76% of revenue was attributable to IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.

Our historical contract mix by type, as a percentage of revenue, is indicated in the table below.

 

     Delta Tucker Holdings, Inc.     Predecessor  

Contract Type

   For the year ended
December 30, 2011
    For the period from
April 1, 2010

(Inception)
through December

31, 2010
    Fiscal quarter
ended
July 2, 2010
    Fiscal year
ended
April 2, 2010
 

Fixed-Price

     16     27     24     26

Time-and-Materials

     15     12     12     16

Cost-Reimbursement

     69     61     64     58
  

 

 

   

 

 

   

 

 

   

 

 

 

Totals

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. Because the LOGCAP IV contract is predominantly a cost-reimbursement type contract, we anticipate that our revenue from these cost-reimbursement contracts will continue to represent a large portion of our business in future years.

Under many of our contracts, we may rely on subcontractors to perform all or a portion of the services we are obligated to provide to our customers. We use subcontractors primarily for specialized, technical labor and certain functions such as construction and catering. We often enter into subcontract arrangements in order to meet government requirements that certain categories of services be awarded to small businesses.

Business Area Team (“BAT”)

Our business is aligned into three operating segments, two of which, Global Stabilization and Development Solutions (“GSDS”) and Global Platform Support Solutions (“GPSS”), are wholly-owned. Our third segment, Global Linguist Solutions (“GLS”), is a 51% owned joint venture and accounted for as an operationally integral unconsolidated equity method investee. Our reporting segments are identical to our operating segments. Each segment, with the exception of GLS, is comprised of numerous contracts. We align our contracts into BATs to assist with the management of our contracts based on the types of services we provide. A description of each BAT by segment is discussed further below.

Global Stabilization and Development Solutions

GSDS provides a diverse collection of outsourced services primarily to government agencies worldwide. GSDS includes five BATs as described below:

Contingency Operations — This BAT provides U.S. military operations and maintenance support, including but not limited to: construction services, facilities management, electrical power, water, sewage and waste management, laundry operations, food services and transportation motor pool operations. LOGCAP IV is the most significant program in our

 

5


Contingency Operations BAT. This BAT also includes our peacekeeping logistics support and humanitarian relief; worldwide contingency planning and other rapid response services; inventory procurement, property control and tracking services; mobile repair services; facility and equipment maintenance and control; and engineering and construction management services.

Development — This BAT supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions.

Intelligence Training and Solutions — This BAT was created as a result of the acquisition of Phoenix Consulting Group, LLC (“Phoenix”) and provides proprietary training courses, management consulting and augmentation services to the intelligence community and national security clients. As part of our proprietary training courses, we offer a highly specialized human intelligence (“HUMINT”) curriculum taught by cleared intelligence professionals to other intelligence, counterintelligence, special operations and law enforcement personnel.

Training & Mentoring — This BAT provides international policing and police training, judicial support, immigration support and base operations. Under this BAT, we also provide senior advisors and mentors to foreign governmental agencies.

Security — This BAT provides security and personal protection for diplomats and senior governmental officials.

Key GSDS Contracts

Civilian Police (“CivPol”): The CivPol program is a part of our Training and Mentoring BAT, which was awarded to us by the DoS in February 2004. Through this program, we have deployed civilian police officers from the U.S. to several countries to train and offer logistics support to the local police and assist them with infrastructure reconstruction. In addition, we have been awarded multiple task orders under the CivPol program, including assignments in Iraq and Afghanistan. Our current task orders are primarily time-and-materials and cost-reimbursement.

Logistics Civil Augmentation Program IV (“LOGCAP IV”): The LOGCAP IV contract was awarded to us in 2008 and is a part of our Contingency Operations BAT. We were selected as one of the three prime contractors to provide logistics support under the LOGCAP IV contract. LOGCAP IV is the U.S. Army component of the DoD’s initiative to award contracts to U.S. companies with a broad range of logistics capabilities to support U.S. and allied forces during combat, peacekeeping, humanitarian and training operations. The IDIQ contract has a term of up to ten years. Under LOGCAP IV, the U.S. Army contracts to perform selected services in a theater of operations to augment U.S. Army forces and release military units for other missions or to fill U.S. Army resource shortfalls. Our current task orders are primarily cost-reimbursement plus an award fee.

Afghanistan Ministry of Defense Program (“AMDP”): The AMDP program is a part of the Training and Mentoring BAT and was awarded to us by the DoD in December of 2010. The program was established with the goal of assisting the Government of the Islamic Republic of Afghanistan to build, develop and sustain an effective and professional law enforcement organization. Within this two year contract, we will train and mentor the Afghans to manage all aspects of its police training. This program is primarily structured to provide cost-reimbursement type services.

Combined Security Transition Command Afghanistan (“CSTC-A”): The CSTC-A program is a part of our Training and Mentoring BAT. This program provides assistance to the CSTC-A and the North Atlantic Treaty Organization (“NATO”) training mission by providing mentors and trainers to develop the Afghanistan Ministry of Defense (“MOD”). In addition to providing training and mentoring, we also provide subject matter expertise and programmatic support to CSTC-A staff and the Afghanistan MOD. This program supports development of the organizational capacity and capability to assist Afghanistan MOD and Afghan National Army forces in assuming full responsibility for their own security needs. The services provided under this contract are cost-reimbursement type services.

Global Platform Support Solutions

GPSS provides a wide range of technical, engineering, logistics and maintenance support services primarily to government agencies worldwide. Additionally, GPSS provides services including drug eradication and host nation pilot and crew training. GPSS includes three BATs as described below:

Aviation — This BAT provides worldwide maintenance of aircraft fleet and ground vehicles, modification, repair, and logistics support on aircraft, aerial firefighting services, weapons systems, and related support equipment to the DoD and other U.S. government agencies and direct contracts with foreign governments for maintenance and technical support. Contract Field Teams (“CFT”) is the most significant program in our Aviation BAT supporting the Army, Navy and Air Force. This program deploys highly mobile, quick-response field teams to customer locations globally to supplement a customer’s workforce. Through our predecessor companies, we have provided services under this program since 1951.

Air Operations — This BAT provides foreign assistance programs to help foreign governments improve their ability to develop and implement national strategies and programs to prevent the production, trafficking, and abuse of illicit drugs. The INL Air Wing program is the most significant program in our Air Operations BAT. This program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. Also, this program provides construction and intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan.

 

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Operations and Maintenance — This BAT provides maintenance, base operations support, engineering, supply and logistics, marine maintenance services and program management services primarily for ground vehicles, support equipment, pre-positioned war reserve materials, facilities, and contingency response on a worldwide basis. This includes the services we provide under key BAT contracts such as the War Reserve Materiel (“ WRM”) contract and other services via our Land services. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.

Key GPSS Contracts

International Narcotics Law Enforcement Air Wing (“INL”): The INL Air Wing program is a part of our Air Operations BAT. In May 2005, the DoS awarded us a contract in support of the INL program to aid in the eradication of illegal drug operations. This contract expires in October 2014. A similar program in Afghanistan began in 2006. Also, this program provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The majority of our contractual services are fixed-price type services.

Contract Field Teams (“CFT”): The CFT program is a part of our Aviation BAT. This program deploys highly mobile, quick-response field teams to customer locations to supplement a customer’s workforce. The services we provide under the CFT program generally include mission support to aircraft and weapons systems and depot-level repair. The principal customer for our CFT program is the DoD. The majority of our current delivery orders are time-and-materials, but we also have cost-reimbursement and fixed-priced services.

Naval Test Wing Patuxent River MD (“Pax River”): The Pax River contract is a part of our Aviation BAT. We were awarded this contract in August of 2011, to provide organization level maintenance and logistic support on all aircraft and support equipment for which the Naval Test Wing Atlantic has maintenance responsibility. Labor and services will be provided to perform safety studies, off-site aircraft safety and spill containment patrols and aircraft recovery services. The cost-plus-fixed-fee contract has a base year plus four one year option periods.

War Reserve Materiel (“WRM”): The War Reserve Materiel contract is a part of our Operations and Maintenance BAT. Through this program, we manage the U.S. Air Force Southwest Asia War Reserve Materiel Pre-positioning program, which includes operations in Oman, Bahrain, Qatar, Kuwait and two locations in the United States (Albany, Georgia and Shaw Air Force base, South Carolina). We store, maintain and deploy assets such as tents, generators, vehicles, kitchens and medical supplies to deployed forces in the global war on terror. During Operation Enduring Freedom and Operation Iraqi Freedom, we sent teams into the field to assist in the setup of tent cities prior to the arrival of the deployed forces. The War Reserve Materiel program continues to partner with the U.S. Central Command Air Force in the development of new and innovative approaches to asset management. Our contract is primarily cost-reimbursement with a smaller portion of fixed-price services.

Andrews Air Force Base (“Andrews AFB”): The Andrews Air Force Base program is a part of our Aviation BAT. Under the Andrews Air Force Base contract, we perform aviation maintenance and support services, which include full back shop support, organizational level maintenance, fleet fuel services, launch and recovery, supply and Federal Aviation Administration (“FAA”) repair services. Under this program we oversee the management of the U.S. presidential air fleet (other than Air Force One). Our principal customer under this contract is the U.S. Air Force. We entered into this contract in September 2011. The majority of our contractual services are fixed-price.

Columbus Air Force Base (“Columbus AFB”): The Columbus AFB program is also a part of our Aviation BAT. We provide aviation and equipment maintenance and support services for T-37, T-38, T-1 and T-6 training aircraft in support of the Columbus AFB Specialized Undergraduate Pilot Training Program in Columbus, Mississippi. Our customer under this program is the U.S. Air Force—Air Education and Training Command and specifically the 14th Flying Training Wing. This contract provides for a firm fixed-price incentive fee with an incentive award fee. The performance period started October 2005 and runs through September 2012. We have completed a transition from the old T-37 primary trainer to the new T-6 turbo prop. Additionally, this 14th Flying Training Wing has one additional squadron of T-38s dedicated to fighter lead-in-training. The majority of our contractual services are fixed-price.

California Department of Forestry: The California Department of Forestry program is a part of our Aviation BAT. We have been helping to fight fires in California since December 2001. We maintain aircraft, providing nearly all types and levels of maintenance—scheduled, annual, emergency repairs and even structural depot-level repair. McClellan Field in Sacramento is home base for our program mechanics, data entry staff, and quality control inspectors. In addition, we provide pilots who operate the fixed wing aircraft. Our current task orders are primarily time-and-materials.

Sheppard Air Force Base (“Sheppard AFB”): The Sheppard Air Force Base contract is a part of our Aviation BAT. Under this program, we provide aircraft maintenance services for the 80th Flying Training Wing based at Sheppard Air Force Base in Wichita Falls, Texas. This contract has an initial base period of eleven months and six option years. The mission of the Air

 

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Education and Training Command’s 80th Flying Training Wing is to provide undergraduate pilot training for the U.S. and NATO allies in the Euro NATO Joint Jet Pilot Training program. Graduates of this prestigious program are assigned to fighter pilot positions in their respective air forces. The majority of our contractual services are fixed price.

C-21 Contractor Logistics Support (“C-21A CLS”): The C-21A CLS contract is a part of our Aviation BAT. Under the C-21A CLS we perform organizational, intermediate and depot-level maintenance together with supply chain management for C-21A CLS aircraft operated by the U.S. Air Force at seven main operating bases and one deployed location. The contract has time-and-materials and fixed-price portions.

Global Linguist Solutions

GLS is a joint venture between DynCorp International and McNeil Technologies (“McNeil”), in which we have a 51% ownership interest. GLS historically has had no other operations outside of performance on the Intelligence and Security Command (“INSCOM”) contract, which began services in 2008. During the year ended December 30, 2011, GLS was selected as one of six providers that will compete for task orders on the $9.7 billion Defense Language Interpretation Translation Enterprise (“DLITE”) contract. As of December 30, 2011, we had submitted a bid on one of the task orders related to the DLITE contract. Final decision on this task order is not expected until the latter part of the first quarter of calendar year 2012. All of our current INSCOM task orders are cost-reimbursement with an award fee. Our GLS operating segment is comprised of a single BAT, Linguistics & Translation. In October of 2011, President Obama made an announcement ending the war in Iraq. All of the troops have returned home and as such, funding related to the mission has decreased. We performed an assessment of the GLS investment in October 2011, and concluded that the carrying value of the GLS investment had sustained a loss that was other than temporary. We recorded an impairment of our investment of $76.6 million. See Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements and the “Current Operating Conditions and Outlook” within Part II—Item 7 Management Discussion and Analysis included elsewhere in this Annual Report on Form 10-K for further discussion.

Linguistics & Translation : This BAT provides rapid recruitment, deployment and on-site management of interpreters and translators in-theatre for a wide range of foreign languages in support of the U.S. Army, unified commands attached forces, combined forces, and joint elements executing the Operation Iraqi Freedom (“OIF”) mission, and other U.S. government agencies supporting the OIF mission.

Business Area Teams in 2012

In January 2012, our organizational structure was amended to align our BATs in strategic business “Groups” reporting directly to the President of the Company. Under the new alignment, the Training and Intelligence Group will consist of the Training and Mentoring and Intelligence Training and Solutions BATs, the Security Services Group will consist of the Security BAT, the Logistics and Development Solutions Group will consist of the Development, Operations and Maintenance, and Contingency Operations (excluding the LOGCAP IV program) BATs, the Aviation Group will consist of the Aviation and Air Operations BATs, and the LOGCAP program will be removed from the Contingency Operations BAT and will operate as a standalone Group.

Estimated Total Contract Value and Certain Other Terms

The estimated total contract value represents amounts expected to be realized from the initial award date to the current contract end date (i.e., revenue recognized to date plus backlog). For the reasons stated under the captions “Risk Factors” and “Business—Key Contracts,” the estimated total contract value or ceiling value specified under a government contract or task order is not necessarily indicative of the revenue that we will realize under that contract.

 

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Key Contracts

The following table sets forth certain information for our principal contracts, including the initial start and end dates and the principal customer for each contract as of December 30, 2011:

 

Contract

  

Segment

  

Principal
Customer

  

Initial/Current
Award Date

  

Current
Contract End
Date

  

Estimated
Total Contract
Value  (1)

CivPol Program    GSDS    DoS    Feb-1994 / Dec-2010    Jan-2013    $4.72 billion
LOGCAP IV (2)    GSDS    U.S. Army    Apr-2008    Apr-2018    $4.05 billion
INSCOM (3)    GLS    U.S. Army    Dec-2006    Apr-2013    $3.13 billion
INL Air Wing    GPSS    DoS    Jan-2001 / May-2005    Oct-2014    $2.80 billion
AMDP    GSDS    DoD    Dec-2010    Apr-2014    $1.20 billion
Contract Field Teams    GPSS    DoD    Oct-1951 / Jul-2008    Sep-2015    $684 million
Patuxent River Naval Test Wing    GPSS    U.S. Navy    Jul-2011 / Aug-2011    Jul-2016    $493 million
War Reserve Materiel    GPSS    U.S. Air Force    May-2000 / May-2008    Sep-2016    $476 million
Andrews Air Force Base    GPSS    U.S. Air Force    Sep-2011    Aug-2018    $401 million
Columbus Air Force Base    GPSS    U.S. Air Force    Oct-1998 / Oct-2005    Sep-2012    $296 million
California Department of Forestry    GPSS    State of California    Dec-2001 / Jul-2008    Dec-2014    $254 million
Sheppard Air Force Base    GPSS    U.S. Air Force    Sep-2009    Sep-2016    $250 million
C-21 Contractor Logistics Support    GPSS    U.S. Air Force    Sep-2006    Sep-2013    $249 million
CSTC-A    GSDS    U.S. Army    Feb-2010    Oct-2013    $248 million

 

(1) Estimated total contract value represents the initial start and end date of the contracts presented and is not necessarily representative of the amount of work we will actually be awarded under the contract. Contract value can grow over time based on IDIQ task orders and/or contract extensions.
(2) LOGCAP IV has a $5 billion ceiling per year per contractor over 10 years.
(3) Awarded to GLS, our 51% majority interest joint venture.

Competition

We compete with various entities across geographic and business lines based on a number of factors, including services offered, experience, price, geographic reach and mobility. Most activities in which we engage are highly competitive and require that we have highly skilled and experienced technical personnel to compete. Some of our competitors may possess greater financial and other resources or may be better positioned to compete for certain contract opportunities. We believe that our principal competitors include Civilian Police International, Science Applications International Corporation, Exelis, Inc., KBR, Inc., IAP Worldwide Services, ACADEMI, Triple Canopy Inc., Fluor Corporation, Lockheed Martin Corporation, AECOM, United Technologies Corporation, L-3 Holdings, Aerospace Industrial Development Corporation, Al Salam Aircraft Company Ltd., Mission Essential Personnel, Northrop Grumman, Computer Sciences Corporation, Lear Siegler, and Serco Group Plc. We believe that the primary competitive factors for our services include reputation, technical skills, past contract performance, experience in the industry, cost competitiveness and customer relationships.

 

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Backlog

We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised, priced contract options and the unfunded portion of exercised contract options. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years. These priced options may or may not be exercised at the sole discretion of the customer. Historically, it has been our experience that the customer has typically exercised contract options.

Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. The U.S. government is legally prohibited from ordering work under a contract in the absence of funding. Our historical experience has been that the government has typically funded the option periods of our contracts.

The following table sets forth our approximate backlog as of the dates indicated:

 

       Delta Tucker Holdings, Inc.  
(Amounts in millions)    December 30,
2011
     December 31,
2010
 

GSDS:

     

Funded backlog

   $ 735       $ 1,164   

Unfunded backlog

     2,205         1,592   
  

 

 

    

 

 

 

Total GSDS backlog

   $ 2,940       $ 2,756   
  

 

 

    

 

 

 

GPSS:

     

Funded backlog

   $ 745       $ 659   

Unfunded backlog

     2,056         1,367   
  

 

 

    

 

 

 

Total GPSS backlog

   $ 2,801       $ 2,026   
  

 

 

    

 

 

 

CONSOLIDATED:

     

Funded backlog

   $ 1,480       $ 1,823   

Unfunded backlog

     4,261         2,959   
  

 

 

    

 

 

 

Total consolidated backlog

   $ 5,741       $ 4,782   
  

 

 

    

 

 

 

GLS: (1)

     

Funded backlog

   $ 22       $ 180   

Unfunded backlog

     23         1,718   
  

 

 

    

 

 

 

Total GLS backlog

   $ 45       $ 1,898   
  

 

 

    

 

 

 

 

(1) As described in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K, GLS is not presented within the consolidated financial statements, except for segment disclosure, as it was deconsolidated and became an operationally integral equity method investee on July 7, 2010.

 

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Regulatory Matters

Contracts with the U.S. government are subject to a multitude of regulatory requirements, including but not limited to the Federal Acquisition Regulation (“FAR”), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government and the Defense Federal Acquisition Regulation supplement (“DFARs”). Under U.S. government regulations, certain costs, including certain financing costs, portions of research and development costs, lobbying expenses, certain types of legal expenses and certain marketing expenses related to the preparation of bids and proposals, are not allowed for pricing purposes and calculation of contract reimbursement rates under cost-reimbursement contracts. The U.S. government also regulates the methods by which allowable costs may be allocated under U.S. government contracts.

Our international operations and investments are subject to U.S. government laws, regulations and policies, including the International Traffic in Arms Regulations, Export Administration Act, the Foreign Corrupt Practices Act, the UK Bribery Act, the False Claims Act and other export laws and regulations. We must also comply with foreign government laws, regulations and procurement policies and practices, which may differ from U.S. government regulation, including import-export control, investments, exchange controls, repatriation of earnings and requirements to expend a portion of program funds in-country. In addition, embargoes, international hostilities and changes in currency values can also impact our international operations.

Our government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. government for cost-reimbursement contracts. The purpose of a pre-award audit is to determine the basis of the bid and provide the information required for the U.S. government to negotiate the contract effectively. In addition, the U.S. government may perform a pre-award audit to determine our capability to perform under a contract. During the performance of a contract, the U.S. government has the right to examine our costs incurred on the contract, including any labor charges, material purchases and overhead charges. Upon a contract’s completion, the U.S. government performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal and FAR. The government also may perform a post-award audit for proposals that are subject to the Truth in Negotiations Act, which are proposals in excess of $650,000 to determine if the cost proposed and negotiated was accurate, current and complete as of the time of negotiations.

The Defense Contract Audit Agency (“DCAA”) performs these audits on behalf of the U.S. government. The DCAA also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our labor, billing, accounting, purchasing, property, estimating, budgeting & planning, indirect and direct costs, compensation, and information technology. The DCAA has the right to perform audits on our incurred costs on all flexibly priced contracts on an annual basis. We have DCAA auditors on-site to monitor our billing and back office operations. An adverse finding under a DCAA audit could result in the disallowance of costs under a U.S. government contract, termination of U.S. government contracts, forfeiture of profits, suspension of payments, fines and suspension and prohibition from doing business with the U.S. government. In the event that an audit by the DCAA recommends disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted annual incurred costs claims can take many years. All of our incurred costs claims for U.S. government contracts completed through fiscal year 2004 have been audited by the DCAA and negotiated by the Defense Contract Management Agency. The audits, for which such costs were incurred during subsequent periods, are continuing. See “Risk Factors—A negative audit or other actions by the U.S. government could adversely affect our operating performance.”

At any given time, many of our contracts are under review by the DCAA and other government agencies. We cannot predict the outcome of such ongoing audits and what, if any, impact such audits may have on our future operating performance.

Over the last few years, U.S. government contractors, including our Company, have seen a trend of increased scrutiny by the DCAA and other U.S. government agencies. If any of our internal control systems or policies are determined to be non-compliant or inadequate, payments may be suspended under our contracts or we may be subjected to increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. These adverse outcomes could also occur if the DCAA cannot complete timely periodic reviews of our control systems, which could then render the status of these systems as “not reviewed.”

Sales and Marketing

We provide our service solutions to a wide array of customers which include multiple departments within the U.S. government, select international clients and commercial customers. We also provide our services to other prime contractors who have contracts with the U.S. government and other international customers where our capabilities help to deliver comprehensive solutions. We position our business development and marketing professionals to cover key accounts such as the DoS and the DoD, as well as other international and commercial market segments which hold the most promise for aggressive growth and profitability.

We participate in national and international tradeshows, particularly as they apply to aviation services, logistics, contingency support, defense, diplomacy and development markets. We are also an active member in several organizations related to services contracting, such as the Professional Services Council.

As a global service solutions provider, we have unique experience and capability in providing value added and full spectrum services to government agencies and selected partners worldwide.

 

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Our business development and marketing professionals maintain a close relationship with our current customers even as they aggressively pursue select markets that hold the most promise for significant growth. These activities support our objective to be the leading global government services provider in support of U.S. national security and foreign policy objectives.

Intellectual Property

We hold an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid license to use the “Dyn International” and “DynCorp International” names in connection with aviation services, security services, technical services and marine services. We also own various licenses for names associated with Phoenix and Casals. Additionally, we own various registered domain names, patents, trademarks and copyrights. Because most of our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright, patents, or trademark protections, although our operations make use of such protections and benefit from them.

Environmental Matters

Our operations include the use, generation and disposal of petroleum products and other hazardous materials. We are subject to various U.S. federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe and healthy workplace for our employees, contractors and visitors. We have written procedures in place and believe we have been and are in substantial compliance with environmental laws and regulations, and we have no liabilities under environmental requirements that would have a material adverse effect on our business, results of operations or financial condition. We have not incurred, nor do we expect to incur, material costs relating to environmental compliance.

Employees

As of December 30, 2011, we had approximately 29,000 personnel in the 36 countries we have operations, of which approximately 7,200 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,700. We believe the working relations with our employees and our unions are in good standing.

 

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ITEM 1A. RISK FACTORS.

The risks described below should be carefully considered, together with all of the other information contained in this Form 10-K including Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any of the following risks could materially and adversely affect our financial condition or results of operations.

We rely on sales to U.S. government entities. A loss of contracts, a failure to obtain new contracts or a reduction of sales or award fees under existing contracts with the U.S. government could adversely affect our operating performance and our ability to generate cash flow to fund our operations.

We derive substantially all of our revenue from contracts and subcontracts with the U.S. government and its agencies, primarily the DoD and the DoS. The remainder of our revenue is derived from commercial contracts and contracts with foreign governments. We expect that U.S. government contracts, particularly with the DoD and the DoS, will continue to be our primary source of revenue for the foreseeable future. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the DoD and the DoS. Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. The loss or significant reduction in government funding of a large program in which we participate could also result in a material decrease to our future sales, earnings and cash flows. U.S. government contracts are also conditioned upon the continuing approval by Congress of the amount of necessary spending. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. Among the factors that could impact U.S. government spending and reduce our U.S. Government contracting business include:

 

   

policy and/or spending changes implemented by the Obama administration;

 

   

continued budget reductions in military spending imposed by Congress and the Super Committee;

 

   

a continual decline in, or reapportioning of, spending by the U.S. government, in general, or by the DoD or the DoS, in particular;

 

   

changes, delays or cancellations of U.S. government programs, requirements or policies;

 

   

the adoption of new laws or regulations that affect companies that provide services to the U.S. government;

 

   

U.S. government shutdowns or other delays in the government appropriations process;

 

   

curtailment of the U.S. government’s outsourcing of services to private contractors including the expansion of insourcing;

 

   

changes in the political climate, including with regard to the funding or operation of the services we provide; and

 

   

general economic conditions, including the continual slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate.

These or other factors could cause U.S. government agencies to reduce their purchases under our contracts, to exercise their right to terminate our contracts in whole or in part, to issue temporary stop-work orders or to decline to exercise options to renew our contracts. The loss or significant curtailment of our material government contracts, or our failure to renew existing contracts or enter into new contracts, could adversely affect our operating performance and lead to an unexpected loss of revenue.

Our U.S. government contracts may be terminated by the U.S. government at any time prior to their completion and contain other unfavorable provisions, which could lead to an unexpected loss of revenue and a reduction in backlog.

Under the terms of our contracts, the U.S. government may unilaterally:

 

   

terminate or modify existing contracts;

 

   

reduce the value of existing contracts through partial termination;

 

   

delay or withhold the payment of our invoices by government payment offices;

 

   

audit our contract-related costs and fees; and

 

   

suspend us from receiving new contracts, pending the resolution of alleged violations of procurement laws or regulations.

 

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The U.S. government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and adversely affect our operating performance and lead to an unexpected loss of revenue.

Our U.S. government contracts typically have an initial term of one year with multiple option periods, exercisable at the discretion of the government at previously negotiated prices. The government is not obligated to exercise any option under a contract. Furthermore, the government is typically required to compete all programs and, therefore, may not automatically renew a contract. In addition, at the time of completion of any of our government contracts, the contract is frequently required to be re-competed if the government still requires the services covered by the contract.

If the U.S. government terminates and/or materially modifies any of our contracts or if option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenue and would likely adversely affect our earnings, which could have a material effect on our financial condition and results of operations.

Our U.S. government contracts are subject to competitive bidding, both upon initial issuance and re-competition. If we are unable to successfully compete in the bidding process or if we fail to win re-competitions, it could adversely affect our operating performance and lead to an unexpected loss of revenue.

Substantially all of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:

 

   

we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;

 

   

we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns; and

 

   

we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending.

The government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.

Because of the nature of our business, it is not unusual for us to lose contracts to competitors or to gain contracts once held by competitors during re-compete periods.

Additionally, some contracts simply end as projects are completed or funding is terminated. We have included our most significant contracts by reportable segment in our key contract table under the heading “Business.” Contract end dates are included within the tables to better inform interested parties, security analysts and institutional investors in reviewing the potential impact on our most significant contracts for this risk.

Economic conditions could impact our business.

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

In particular, if the U.S. Government, due to budgetary considerations, fails to sustain the troops in Afghanistan, reduces the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, our business, financial condition and results of operations could be adversely affected.

Furthermore, although we believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business, we cannot ensure that will be the case. A longer term credit crisis could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional discussion regarding liquidity.

 

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Our operations involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, could adversely affect our results of operations and financial condition.

We are exposed to liabilities that arise from the services we provide. Such liabilities may relate to an accident or incident involving our employees or third parties, particularly where we are deployed on-site at active military installations or in locations experiencing political or civil unrest, or they may relate to an accident or incident involving aircraft or other equipment we have serviced or used in the course of our business. Any of these types of accidents or incidents could involve significant potential claims of injured employees and other third parties and claims relating to loss of or damage to government or third-party property.

We maintain insurance policies that mitigate risk and potential liabilities related to our operations. Our insurance coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. Substantial claims in excess of our related insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

Furthermore, any accident or incident for which we are liable, even if fully insured, may result in negative publicity which could adversely affect our reputation among our customers, including our government customers, and the public, which could result in the loss of existing and future contracts or make it more difficult to compete effectively for future contracts. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.

Certain regions in which we operate are highly unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. Insurgents in Iraq and Afghanistan have targeted installations where we have personnel, and these insurgents have contributed to instability in these countries. This could impair our ability to attract and deploy personnel to perform services in either or both locations. In addition, we may be required to increase compensation to our personnel as an incentive to deploy them to these regions. Historically we have been able to recover this added cost under our contracts, but there is no guarantee that future increases, if required, will be able to be transferred to our customers through our contracts. To the extent that we are unable to transfer such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance.

In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt or substantially reduce our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all or substantially reduce U.S. government activities, including our operations under U.S. government contracts in a particular location, country or region and to withdraw all or a substantial number of military personnel. Congressional pressure to reduce, if not eliminate, the number of U.S. troops in Iraq or Afghanistan may also lead to U.S. government procurement actions that reduce or terminate the services and support we provide in that theater of conflict. Any of the foregoing could adversely affect our operating performance and may result in additional costs and loss of revenue.

We are exposed to risks associated with operating internationally.

A large portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:

 

   

export controls regulations that could erode profit margins or restrict exports;

 

   

compliance with the U.S. Foreign Corrupt Practices Act and the UK Bribery Act;

 

   

the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;

 

   

contract award and funding delays;

 

   

potential restrictions on transfers of funds;

 

   

foreign currency fluctuations;

 

   

import and export duties and value added taxes;

 

15


   

transportation delays and interruptions;

 

   

uncertainties arising from foreign local business practices and cultural considerations;

 

   

requirements by foreign governments that we locally invest a minimum level as part of our contracts with them, which may not yield any return; and

 

   

potential military conflicts, civil strife and political risks.

We cannot ensure our current adopted measures will reduce the potential impact of losses resulting from the risks of our foreign business.

Our IDIQ contracts are not firm orders for services, and we may never receive revenue from these contracts, which could adversely affect our operating performance.

Many of our government contracts are IDIQ contracts, which are often awarded to multiple contractors. The award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under an IDIQ contract, the customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best-value approach. However, many contracts also permit the government customer to direct work to a specific contractor. We may not win new task orders under these contracts for various reasons, such as failing to rapidly deploy personnel or high prices, which would have an adverse effect on our operating performance and may result in additional expenses and loss of revenue. There can be no assurance that our existing IDIQ contracts will result in actual revenue during any particular period or at all.

Our cost of performing under time-and-materials and fixed-price contracts may exceed our revenue, which would result in a recorded loss on the contracts.

Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price. With cost-reimbursement contracts, so long as actual costs incurred are within the contract funding and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated fixed-fee and, in some cases, an incentive-based award fee. We assume additional financial risk on time-and-materials and fixed-price contracts, because of the stipulated prices or negotiated hourly/daily rates. As such, if we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins. Also, we assume the risk of damage or loss to government property, and we are responsible for third-party claims under fixed-price contracts. The failure to meet contractually defined performance standards may result in a loss of a particular contract or lower-than-anticipated margins. This could adversely affect our operating performance and may result in additional costs and possible loss of revenue.

A negative audit or other actions by the U.S. government could adversely affect our operating performance.

At any given time, many of our contracts are under review by the DCAA, the DCMA and other government agencies. These agencies review our contract performance, cost structure, and/or compliance with applicable laws, regulations and standards. Such agency audits may include contracts under which we have performed services in Iraq and Afghanistan under especially demanding circumstances.

The government agencies also review the adequacy of, and our compliance with, our internal control systems and policies, including our labor, billing, accounting, purchasing, property, estimating, billing, compensation, information technology and indirect and other direct costs.

Given the continued scrutiny by the U.S. government, we could be subjected to additional regulatory requirements which could require additional audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments which could negatively impact our liquidity position and affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. These adverse outcomes could also occur if the DCAA cannot complete timely periodic reviews of our control systems, which could then render the status of these systems as “not current” and resulting in an adverse audit. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report.

We are subject to investigation by government agencies, which could result in our inability to receive government contracts and could adversely affect our future operating performance.

As a U.S. government contractor operating domestically and internationally, we must comply with laws and regulations relating to U.S. government contracting, as well as domestic and international laws. From time to time, we are investigated by

 

16


government agencies with respect to our compliance with these laws and regulations. If we are found to be in violation of the law, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or prohibition from doing business with U.S. government agencies. For example, many of the contracts we perform in the U.S. are subject to the Service Contract Act, which requires hourly employees to be paid certain specified wages and benefits. If the U.S. Department of Labor determines that we violated the Service Contract Act or its implemented regulations, we could be suspended from being awarded new government contracts or renewals of existing contracts for a period of time, which could adversely affect our future operating performance. We are subject to a greater risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than companies with solely commercial customers. In addition, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.

Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we were suspended or prohibited from contracting with the U.S. government, or any significant U.S. government agency, if our reputation or relationship with U.S. government agencies was impaired or if the U.S. government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, it could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

U.S. government contractors like us that provide support services in theaters of conflict such as Iraq and Afghanistan have come under increased scrutiny by the agency of inspectors general, government auditors and congressional committees. Investigations pursued by any or all of these groups may result in adverse publicity for us and consequent reputational harm, regardless of the underlying merit of the allegations being investigated. As a matter of general policy, we have cooperated and expect to continue to cooperate with government inquiries of this nature.

New government withholding regulations could adversely affect our operating performance.

In February 2012, the DoD issued the final Department of Defense Federal Acquisition Regulation Supplement (“DFARS”) rule which allows withholding of a percentage of payments when a contractor’s business system has one or more significant deficiencies. The DFARS rule applies to Cost Accounting Standards (“CAS”) covered contracts. The final rule represents a significant change in the contracting environment for companies performing work for the DoD. Contracting officers may withhold 5% for one or more significant deficiencies in any single contractor business system or up 10% for significant deficiencies in multiple contractor business systems. A significant deficiency is defined as a “shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes.” The final rule is applicable to new contracts on a prospective basis. The DFARS rule may impose new compliance requirements that potentially could cause the Company to incur substantial compliance costs in addition to monetary penalties for noncompliance which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

The expiration of our collective bargaining agreements could result in increased operating costs or work disruptions, which could potentially affect our operating performance.

As of December 30, 2011, we had approximately 29,000 personnel, of which approximately 7,200 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,700. As of December 30, 2011, we had approximately 15 collective bargaining agreements with these unions. The length of these agreements varies, with the longest expiring in March 2014. There can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

Proceedings against us in domestic and foreign courts could result in legal costs and adverse monetary judgments, adversely affecting our operating performance and causing harm to our reputation.

We are involved in various claims and lawsuits from time to time. For example, we are a defendant in two consolidated lawsuits seeking unspecified damages brought by citizens and certain provinces of Ecuador. The basis for the actions, both pending in the U.S. District Court for the District of Columbia, arises from our performance of a DoS contract for the eradication of narcotic plant crops in Colombia. The lawsuits allege personal injury, property damage and wrongful death as a consequence of the spraying of narcotic crops along the Colombian border adjacent to Ecuador. In the event that a court decides against us, in these lawsuits, and we are unable to obtain indemnification from the U.S. Government, or contributions from the other defendants, we may incur substantial costs, which could have a material adverse effect on our results. An adverse ruling in these cases could also adversely affect our reputation and have a material adverse effect on our ability to win future government contracts.

 

17


Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for breach of contract actions, and we bear all costs associated with such litigation and claims.

We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government; our noncompliance with such laws and regulations could adversely affect our future operating performance.

We may be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could significantly reduce our future revenue and profits.

To the extent that we export products, technical data and services outside the United States, we are subject to U.S. laws and regulations governing international trade and exports, including but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. Failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.

We do business in certain parts of the world that have experienced, or may be susceptible to, governmental corruption. Our corporate policy requires strict compliance with the U.S. Foreign Corrupt Practices Act, UK Bribery Act and with local laws prohibiting payments to government officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Improper actions by our employees or agents could subject us to civil or criminal penalties, including substantial monetary fines, as well as disgorgement, and could damage our reputation and, therefore, our ability to do business.

Competition in our industry could limit our ability to attract and retain customers or employees, which could result in a loss of revenue and/or a reduction in margins, which could adversely affect our operating performance.

We compete with various entities across geographic and business lines. Competitors of our GSDS operating segment are typically various solution providers that compete in any one of the service areas provided by those business units. Competitors of our GPSS operating segment are typically large defense services contractors that offer services associated with maintenance, training and other activities. Competitors of our GLS operating segment are typically contractors that provide services in Iraq and Afghanistan or companies that provide language interpretation and translation services both domestically and internationally.

We compete based on a number of factors, including our broad range of services, geographic reach, mobility and response time. Foreign competitors may obtain an advantage over us in competing for U.S. government contracts and attracting employees to the extent we are required by U.S. laws and regulations to remit to the U.S. government statutory payroll withholding amounts for U.S. nationals working on U.S. government contracts while employed by our majority-owned foreign subsidiaries, since foreign competitors may not be similarly obligated by their governments.

Some of our competitors may have greater resources or are otherwise better positioned to compete for contract opportunities. For example, original equipment manufacturers that also provide aftermarket support services have a distinct advantage in obtaining service contracts for aircraft they have manufactured, as they frequently have better access to replacement and service parts, as well as an existing technical understanding of the platform they have manufactured. In addition, we are at a disadvantage when bidding for contracts up for re-competition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.

In addition to the competition we face in bidding for contracts and task orders, we must also compete to attract the skilled and experienced personnel integral to our continued operations. We hire from a limited pool of potential employees as military and law enforcement experience, specialized technical skill sets and security clearances are prerequisites for many positions. Our failure to compete effectively for employees, or excessive attrition among our skilled personnel, could reduce our ability to satisfy our customers’ needs and increase the costs and time required to perform our contractual obligations. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

18


Loss of our skilled personnel, including members of senior management, may have an adverse effect on our operations and/or our operating performance.

Our continued success depends in large part on our ability to recruit and retain the skilled personnel necessary to serve our customers effectively, including personnel with extensive military and law enforcement training and backgrounds. The proper execution of our contract objectives depends upon the availability of quality resources, especially qualified personnel. Given the nature of our business, we have substantial need for personnel who are willing to work overseas, frequently in locations experiencing political or civil unrest, for extended periods of time and often on short notice. We may not be able to meet the need for qualified personnel as such need arises.

In addition, we must comply with provisions in U.S. government contracts that require employment of persons with specified work experience and security clearances. An inability to maintain employees with the required security clearances could have a material adverse effect on our ability to win new business and satisfy our existing contractual obligations, could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

The loss of services of any of the members of our senior management could adversely affect our business until a suitable replacement can be found. There may be a limited number of personnel with the requisite skills to serve in these positions, and we may be unable to locate and employ such qualified personnel on acceptable terms.

If our subcontractors or joint venture partners fail to perform their contractual obligations, then our performance as the prime contractor and our ability to obtain future business could be materially and adversely impacted.

Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. These subcontractors generally perform niche or specialty services for which they have more direct experience, such as construction, catering services or specialized technical services, or they have local knowledge of the region in which we will be performing and the ability to communicate with local nationals and assist in making arrangements for commencement of performance. Often, we enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Such subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

We often enter into joint ventures so that we can jointly bid and perform on a particular project. The success of these and other joint ventures depends, in large part, on the satisfactory performance of the contractual obligations by our joint venture partners. If our partners do not meet their obligations, the joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.

Environmental laws and regulations may subject us to significant costs and liabilities that could adversely affect our operating performance.

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S., these laws and regulations include those governing the management and disposal of hazardous substances and wastes and the maintenance of a safe workplace, primarily associated with our aviation services activities, including painting aircraft and handling substances that may qualify as hazardous waste, such as used batteries and petroleum products. In addition to U.S. federal laws and regulations, states and other countries where we do business have numerous environmental, legal and regulatory requirements by which we must abide. We could incur substantial costs, including clean-up costs, as a result of violations of, or liabilities under, environmental laws. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

Acquisition transactions require substantial management resources and may disrupt our business and divert our management from other responsibilities. Acquisitions are accompanied by other risks, including:

 

   

the difficulty of integrating the operations and personnel of the acquired companies;

 

   

the inability of our management to maximize our financial and strategic position by the successful incorporation of acquired personnel into our programs;

 

   

we may not realize anticipated synergies or financial growth;

 

   

we may assume material liabilities that were not identified during due diligence, including potential regulatory penalties resulting from the acquisition target’s previous activities;

 

19


   

difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;

 

   

the potential loss of key employees of acquired companies;

 

   

the impairment of relationships with employees and customers as a result of changes in management and operational structure; and

 

   

acquisitions may require us to invest significant amounts of cash resulting in dilution of stockholder value.

Any inability to successfully integrate the operations and personnel associated with an acquired business and/or service line may harm our business and results of operations.

We may not be able to continue to deploy or sell our helicopter assets.

We have approximately $8.2 million in helicopter assets comprised of seven UH-1HP “Huey” helicopters that are not deployed on existing programs. Due to the past military history of these helicopters and the associated restricted certification status with the Federal Aviation Administration (“FAA”), the helicopters are limited to Public Use applications (police, fire or movement of our personnel and supplies on programs). We had 13 Huey helicopters as of December 31, 2010 and deployed six of them, with a carrying value of $8.1 million, on the LOGCAP IV program in January 2011.

We plan to sell the remaining seven Huey helicopters or utilize them on existing programs. As of December 30, 2011, these helicopter assets were classified as assets held for sale. We have no guarantee that we will be able to successfully sell these assets or if we are unable to sell them, deploy them on other programs. The inability to sell or deploy the remaining helicopters could lead to a material impairment charge in the future.

Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.

Catastrophic events may disrupt our business and have an adverse effect on our results of operations.

A disruption, infiltration or failure of network, application systems or third-party hosted services in the event of a major earthquake, hurricane, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our ability to provide service to our customers, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers’ orders, which could result in reduced revenue. Maintaining the security of computers and computer networks is a critical issue for us and our customers. Hackers continuously develop and deploy malicious software designed to attack information systems, and may use this malicious software against our systems. Despite our implementation of network security controls, our servers are vulnerable to computer viruses and break-ins. Similar disruptions from unauthorized tampering with our computer systems in any such event could have a material effect on our reputation, business, operating results and financial condition.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our debt obligations.

We are highly leveraged. As of December 30, 2011, our total indebtedness was approximately $873 million. We had $109.6 million available for borrowing under our revolving credit facility, and the terms of the senior secured credit facilities permit us to increase the amount available under our term loan and/or revolving credit facilities by up to $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes.

Our high degree of leverage could have important consequences including:

 

   

increasing our vulnerability to adverse economic, industry or competitive developments;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow for other purposes, including for our operations, capital expenditures and future business opportunities;

 

20


   

exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest;

 

   

making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Our interest expense could increase if interest rates increase above the stated LIBOR floor levels in our senior secured credit facilities because the entire amount of the indebtedness under our senior secured credit facilities bears interest at a variable rate. At December 30, 2011, we had approximately $417.3 million aggregate principal amount of variable rate indebtedness under our senior secured credit facilities. A 100 basis point increase over the LIBOR floor levels would increase our annual interest expense by approximately $4.2 million.

Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our debt obligations contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.

In addition to the $109.6 million which is available to us for borrowing under our revolving credit facility, the terms of our senior secured credit facilities enable us to increase the amount available under our term loan and/or revolving credit facilities by up to an aggregate of $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes. Additionally, we can take on more debt as long as we meet the covenant levels as stated per the indenture and the credit facility. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we face would increase. In addition, the agreements governing our debt obligations do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our debt agreements contain, and the agreements governing any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the covenants in our senior secured credit facilities require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our indenture and, in the case of our revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by

 

21


those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities, and we may not have sufficient assets to repay our unsecured indebtedness thereafter, including our notes.

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.

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

Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries.

Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable DynCorp International to make payments in respect of its indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from DynCorp International’s subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that DynCorp International does not receive distributions from its subsidiaries, DynCorp International may be unable to make required principal and interest payments on its indebtedness, including the notes.

We are controlled by Cerberus, who will be able to make important decisions affecting our business.

All of our common stock is indirectly owned by funds and/or managed accounts that are affiliates of Cerberus. As a result, Cerberus is entitled to elect all of our directors, to appoint new management and to approve actions requiring the approval of the holders of our capital stock, including adopting amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets.

The interests of Cerberus and its affiliates may differ from those of our other investors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Cerberus and its affiliates, as equity holders, may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks. Additionally, our debt agreements permits us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and Cerberus may have an interest in our doing so.

We may compete with, or enter into transactions with, entities in which our controlling stockholder holds a substantial interest.

Cerberus is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. In particular, IAP Worldwide Services, Inc. (“IAP”), an entity in which Cerberus holds a controlling equity interest, may compete with us for certain contracts and other opportunities. Further, Steven F. Gaffney, the Chairman of our Board of Directors and our Chief Executive Officer, also serves as the Chairman of the Board of IAP. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to Cerberus or IAP or their respective affiliates, including through potential acquisitions of competing businesses.

 

22


Competition may intensify if an affiliate or subsidiary of Cerberus, including IAP, were to enter into or possibly acquire a business similar to ours. In the event that such a transaction happens, Cerberus is under no obligation to communicate or offer such corporate opportunity to us, even if such opportunity might reasonably have been expected to be of interest to us or our subsidiaries.

In addition, we may in the future make investments in, enter into co-investment or joint venture arrangements with, enter into business combinations with or otherwise collaborate with and invest in other firms or entities, such as our affiliates, including Cerberus or IAP. You should consider that the interests of Cerberus may differ from yours in material respects.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

We are headquartered in Falls Church, Virginia with major administrative offices in Fort Worth, Texas. As of December 30, 2011, we lease 28 commercial facilities in 11 countries used in connection with the various services rendered to our customers. Lease expirations range from month-to-month to ten years. Upon expiration of our leases, we do not anticipate any difficulty in obtaining renewals or alternative space. Many of our current leases are non-cancelable. We do not own any real property.

The following locations represent our primary leased properties as of December 30, 2011:

 

Location

  

Description

   Business Segment    Size (sq ft)  

Fort Worth, TX

   Executive offices - Finance and administration    Headquarters      218,925   

Salalah Port, Oman

   Warehouse and storage - WRM contract    GSDS      125,000   

Falls Church, VA

   Executive offices - Headquarters    Headquarters      105,814   

Coppell, TX

   Warehouse- Logistics    Headquarters      96,000   

Alexandria, VA

   Executive offices - ITS Business Area    GSDS      54,712   

Kabul, Afghanistan

   Offices and residence - Contingency Operations BAT    GSDS      42,008   

Palm Shores, FL

   Offices-INL Airwing contract    GPSS      27,215   

McClellan, CA

   Warehouse - California Fire Program    GPSS      18,800   

Dubai, UAE

   Executive offices - Finance and administration    Headquarters      18,021   

Alexandria, VA

   Executive offices - Casals division    GSDS      14,174   

Huntsville, AL

   Business office - Aviation headquarters    GPSS      13,850   

We believe that substantially all of our property and equipment is in good condition, subject to normal use, and that our facilities have sufficient capacity to meet the current and projected needs of our business through calendar year 2012.

ITEM 3. LEGAL PROCEEDINGS.

Information required with respect to this item is set forth in Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements, in “Item 8. Financial Statements and Supplementary Data” of this Annual Report and is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

23


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Not applicable .

 

24


ITEM 6. SELECTED FINANCIAL DATA.

The selected historical consolidated financial data for the year ended December 30, 2011, our Inception Year ended December 31, 2010, and the Predecessor’s fiscal quarter ended July 2, 2010 and fiscal years ended April 2, 2010, April 3, 2009 and March 28, 2008 is presented in the table below. These amounts have been revised for the effects of the restatement described in Notes 18 and 19 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto and the Predecessor consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K.

 

     Delta Tucker Holdings, Inc.     Predecessor (1)  
(Amounts in thousands)          For the period from
April 1, 2010
(Inception)
    Fiscal Quarter
Ended
    Fiscal Year Ended  
   For the year ended
December 30, 2011
    through December
31, 2010
    July 2, 2010     April 2, 2010     April 3, 2009     March 28,
2008
 

Results of operations:

              

Revenue

   $ 3,721,465      $ 1,697,706      $ 944,713      $ 3,572,459      $ 3,092,974      $ 2,140,231   

Cost of services

     (3,409,222     (1,544,184     (856,974     (3,225,250     (2,766,969     (1,860,419

Selling, general and administrative expenses

     (149,551     (78,024     (38,513     (106,401     (103,277     (118,567

Merger expenses incurred by Delta Tucker Holdings, Inc.

     —          (51,722     —          —          —          —     

Depreciation and amortization

     (50,773     (25,776     (10,263     (41,639     (40,557     (42,173

Earnings from equity method investees

     12,800        10,337        —          —          —          —     

Impairment of equity method investment (5)

     (76,647     —          —          —          —          —     

Impairment of goodwill (6)

     (33,768     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     14,304        8,337        38,963        199,169        182,171        119,072   

Interest expense

     (91,752     (46,845     (12,585     (55,650     (58,782     (54,894

Bridge commitment fee incurred by Delta Tucker Holdings, Inc.

     —          (7,963     —          —          —          —     

Loss on early extinguishment of debt, net

     (7,267     —          —          (146     (4,131     —     

Interest income

     205        420        51        542        2,195        3,062   

Other income, net

     6,071        1,872        658        5,194        4,997        6,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit/(provision) for income taxes

     20,122        7,881        (9,279     (47,035     (39,756     (28,434

Net (loss)/income

     (58,317     (36,298     17,808        102,074        86,694        45,416   

Noncontrolling interests

     (2,625     (1,361     (5,004     (24,631     (20,876     3,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to Delta Tucker Holdings, Inc./Predecessor

   $ (60,942   $ (37,659   $ 12,804      $ 77,443      $ 65,818      $ 48,722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow data:

              

Net cash provided by (used in) operating activities

   $ 167,986      $ (27,089   $ 21,723      $ 90,473      $ 140,871      $ 42,361   

Net cash used in investing activities

     (3,003     (878,218     (2,874     (88,875     (9,148     (11,306

Net cash (used in) provided by financing activities

     (147,315     957,844        (5,433     (79,387     (16,880     (48,131

Balance sheet data (end of period):

              

Cash and cash equivalents

     70,205        52,537        135,849        122,433        200,222        85,379   

Total assets

     2,014,421        2,263,355        1,785,899        1,780,894        1,545,446        1,411,885   

Total debt (including Series A Preferred Stock of Predecessor)

     872,909        1,024,212        552,209        552,147        599,912        593,162   

Total equity attributable to Delta Tucker Holdings, Inc./Predecessor

     452,299        512,975        591,417        577,702        496,413        427,129   

Total equity

     457,485        517,326        596,359        583,524        507,149        423,823   

 

25


     Delta Tucker Holdings, Inc.      Predecessor (1)  
(Amounts in thousands)           For the period from
April 1, 2010
(Inception)
     Fiscal Quarter
Ended
     Fiscal Year Ended  
   For the year ended
December 30, 2011
     through December
31, 2010
     July 2, 2010      April 2,
2010
     April 3,
2009
     March 28,
2008
 

Other financial data:

                   

Working capital (2)

     289,352         349,715         468,828         408,232         431,381         353,325   

Purchases of property and equipment and software (3)

     4,887         8,323         2,874         46,046         7,280         7,738   

Backlog (4)

     5,741         4,782         5,171         5,571         6,298         6,132   

 

(1) DynCorp International’s fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period, prior to the merger on July 7, 2010, ended July 2, 2010, is referred to as the “first quarter of fiscal year 2011.” We refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”
(2) Working capital is defined as current assets, net of current liabilities.
(3) Fiscal year 2010 includes approximately $39.7 million of costs associated with helicopters purchased in anticipation of use under our INL Air Wing program.
(4) Backlog data is as of the end of the applicable period. See “Business” for further details concerning backlog.
(5) The Company recorded an impairment of our investment in GLS as of September 30, 2011, in the amount of $76.6 million as a result of the loss in carrying value, that was other than temporary. See Note 12—Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.
(6) The Company recorded a goodwill impairment charge of $33.8 million for the year ended December 30, 2011. See Note 3— Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto, the Predecessor DynCorp International Inc. consolidated financial statements and related notes thereto and other data contained elsewhere in this Annual Report. Please see “Item 1A. Risk Factors” and “Forward- Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated. All references in this Annual Report to fiscal years of the United States (“U.S.”) government pertain to the fiscal year, which ends on September 30th of each year.

 

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Company Overview

We are a leading provider of specialized mission-critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments. Our specific global expertise is in law enforcement training and support, security services, base and logistics operations, intelligence training, rule of law development, construction management, platform services and operations and linguist services. We also provide logistics support for all our services. Through our Predecessor entities, we have provided essential services to numerous U.S. government departments and agencies since 1951. Our current customers include the U.S. Department of Defense (“DoD”), the Department of State (“DoS”), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies.

Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. (“DynCorp International”) and had immaterial assets and virtually no operations, except for costs associated with acquiring DynCorp International, prior to the merger on July 7, 2010. Delta Tucker Holdings, Inc. remains the holding company of DynCorp International. DynCorp International wholly owns DynCorp International, LLC, which functions as the operating company.

Our business is aligned into three operating segments, two of which, Global Stabilization and Development Solutions (“GSDS”) and Global Platform Support Solutions (“GPSS”), are wholly-owned. Our third segment, GLS, is a 51% owned joint venture and accounted for as an operationally integral unconsolidated equity method investee. Our reporting segments are identical to our operating segments. Each segment, with the exception of GLS, is comprised of numerous contracts. We align our contracts into Business Area Teams (“BATs”) to assist with the management of our contracts based on the types of services we provide.

As of December 30, 2011, we employed or managed approximately 29,000 personnel, including approximately 7,200 personnel from our GLS segment and other affiliates. We operate in 36 countries through approximately 86 active contracts and approximately 116 active task orders.

We report the results of our operations using a 52-53 week year ending on the Friday closest to December 31. This Annual Report on Form 10-K reflects our financial results for the year ended December 30, 2011 (“calendar year 2011”) and for the period from April 1, 2010 (Inception) through December 31, 2010 (“inception year”). We refer to the Inception Year period as “calendar year 2010” throughout this Annual Report on Form 10-K.

Also included in this Annual Report on Form 10-K are financial statements for DynCorp International, which we acquired by merger on July 7, 2010. DynCorp International’s historical fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period ended July 2, 2010, which is the last quarter completed prior to the merger on July 7, 2010, is referred to as the “fiscal quarter ended July 2, 2010.” For clarity in this Annual Report on Form 10-K, we refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”

 

27


Current Operating Environment and Outlook

External Factors

Since 2001 the overall level of U.S. defense spending has doubled. These historically high defense expenditures were driven by funding operations in Iraq and Afghanistan, which have been appropriated separate and apart from the Department of defense’s base budgeting process. As a result of the U.S. military withdrawal from Iraq in December of 2011, there has been a proportional and expected decline in operational costs. Further downward pressure on the defense budget is being guided by projected draw-downs in Afghanistan and domestic fiscal challenges.

Last August, in reaction to the continued growing budget deficit, Congress enacted the Budget Control Act of 2011 (“the Act”). In addition to setting topline budget authority for fiscal years 2012-2022, the Act directed Congress to create the Joint Select Committee on Deficit Reduction (the “Super Committee”). The Super Committee consisted of six Republicans and six Democrats appointed by the party leadership of the House and Senate. The Super Committee’s mandate was to submit a package of proposals to achieve $1.2 trillion in additional deficit reduction over a ten year period. This would have been the second installment of deficit reduction measures in addition to the nearly $1.0 trillion already identified in the Act. The Super Committee was unable to reach an agreement by the November 23, 2011 deadline. As a result, beginning in January 2013, $1.0 trillion in automatic spending cuts, called sequestration, is set to be triggered, falling evenly on security and non-security programs. Both Congress and the Administration have suggested sequestration is bad policy that would significantly harm our national security and have both pledged to eliminate the threat of the automatic cuts. However, no solution has yet been identified. Budgets are therefore uncertain for the future with these looming cuts to military spending, until an agreed upon solution is enacted.

Funding for our programs is dependent upon the annual budget and the appropriation decisions, as well as geo-political and macroeconomic conditions, which are beyond our control. While these dynamics could place pressure across defense spending, the President’s fiscal year 2013 defense budget request validates that the weapon system acquisition and modernization programs will be most negatively impacted by budget reductions. Operations and Maintenance budgets will remain relatively robust, influenced by (i) the need to reset equipment coming out of Iraq, (ii) the logistics and support chain associated with repositioning of forces and drawdown in Iraq and (iii) further deployments to Afghanistan. Furthermore, we believe the following industry trends will result in continued strong demand in our target markets for the types of services we provide:

 

   

realignment in military force structure, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot-level maintenance;

 

   

continued focus on smart power initiatives by DOS, USAID, the United Nations, and even the DOD, to include development and smaller-scale stability operations;

 

   

increased maintenance, overhaul and upgrade needs to support aging military platforms;

 

   

growth in outsourcing by foreign governments of maintenance, supply support, facilities management, infrastructure upgrades and construction management-related services; and

 

   

further effort by the U.S. government to move from single award to multiple award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.

We believe that there will be opportunities to win new Iraq based business over the next three to five years for logistics, equipment reset, training and mentoring of Iraqi forces and government agencies and translation services to support security and peacekeeping activities.

We believe that we are well positioned in Afghanistan to capitalize on the U.S. government focus, including security forces training and mentoring, aircraft logistics and operations, infrastructure development and logistics services under LOGCAP IV through calendar year 2012. Additionally, as the President’s budget notes, as the U.S. military draws-down, the Department of State will increase their diplomatic activities in Afghanistan. Similar to the situation in Iraq, we believe this situation could create opportunities for us. However, recent comments pointing towards accelerating the transition from a combat to train and advise mission could lead to a shift in program priorities and funding requirements. The investments and acquisitions we have made over the past three years have been focused on aligning our business to address areas that have high growth potential, including intelligence training and rule of law development, as well as parallel evolving customer requirements. Nevertheless, the possibility remains that one or more of our programs could be reduced, postponed, or terminated as a result of the Obama administration’s assessment of priorities in the next year and following.

Current Economic Conditions

We believe that our industry and customer base are less likely to be affected by many of the factors generally affecting business and consumer spending. Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options, and we have a strong history of being awarded a majority of the contract options.

 

28


Additionally, since our primary customer is the federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements, which could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity position and affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. If the DCAA cannot complete timely periodic reviews of our control systems, they could render the status of these systems as “non-current” resulting in an adverse outcome.

We cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections and the Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See “Risk Factors—Economic conditions could impact our business” for a discussion of the risks associated with current economic conditions.

 

29


Notable Events for the year ended December 30, 2011

 

   

In January 2011, we received a $46.0 million tax refund from the Internal Revenue Service (“IRS”). We had previously received a $34.1 million tax refund from the IRS in December 2010. The combined $80.1 million refund related to an approved change in accounting method (“CIAM”).

 

   

In January 2011, we were awarded a task order under our CFT program with the U.S. Air Force. The one year base and one option year contract is estimated to generate revenue of up to $105.0 million.

 

   

In January 2011, we terminated certain legacy Phoenix employees. This accelerated certain retention bonus expenses previously being amortized over thirty-six months, resulting in $3.1 million in unallowable retention bonus expenses incurred during the three months ended April 1, 2011. This was a non-cash expense funded through a Phoenix acquisition related escrow account.

 

   

In February 2011, we sent termination notices to approximately 36 employees working in Germany on the CFT program. This resulted in us incurring approximately $2.2 million of allowable severance costs, which was recorded in Cost of services within our Statement of Operations.

 

   

In February 2011, we were notified that the Iraqi based portion of the CivPol contract was extended until March 2012.

 

   

In February 2011, we were awarded a contract through our subsidiary, Casals, in Timor Leste to support anti-corruption efforts. The 36 month contract has an estimated revenue value of up to $6.9 million.

 

   

In March 2011, we realigned and eliminated certain positions in order to improve the structure of our company. This triggered severance expense of $1.7 million, which was allowable and allocated to our operating segments and resulted in lower consolidated labor related to Selling, general and administrative (“SG&A”) expenses over the remainder of calendar year 2011.

 

   

In March 2011, we were notified that we lost the Life Cycle Support Services (“LCCS”) Navy contract. This caused us to revalue certain inventory at its market value, which resulted in a $1.9 million write down of inventory in Cost of services within our Statement of Operations. We also reclassified the remaining carrying value of $2.8 million of assets as held for sale.

 

   

In March 2011, we made a $50.0 million payment on our term loan. This included the scheduled quarterly $1.4 million payment as well as $48.6 million of additional principal. This caused the acceleration of unamortized deferred financing fees of $2.4 million, which were recorded as Loss on extinguishment of debt within our Statement of Operations.

 

   

In March 2011, we entered into an agreement to sell two MD 530F Helicopters totaling $1.6 million. We also wrote down the remaining value of the helicopter inventory by $0.6 million in line with the pending sales price during the first quarter of calendar year 2011. This sale closed in May 2011.

 

   

In March 2011, we received our second LOGCAP IV Award Fee determination related to the Afghanistan operations. This award fee covered definitized costs from August 1, 2010 through January 31, 2011 and the determination was higher than our estimated award fee scores resulting in the recognition of total revenue of $29.4 million for the three months ended July 1, 2011.

 

   

In May 2011, we were selected by the DoS Bureau of International Narcotics and Law Enforcement Affairs as one of five providers on the Criminal Justice Program Support (“CJPS”) contract. The contract is an IDIQ contract with a one year base and four option years with a total potential value of $10.0 billion across all providers.

 

   

In May and June 2011, we were awarded four new task orders by the U.S. Air Force under the Air Force Contract Augmentation Program III (“AFCAP III”). The task orders, with a one year base and one option year, have a revenue potential of $48.5 million.

 

   

In July 2011, GLS was awarded, by the Department of the Army, a multiple-award IDIQ contract. GLS will be one of six providers that will compete for task orders on the $9.7 billion DLITE contract providing translation and interpretation services worldwide for Army personnel, among other services.

 

   

In July 2011, we were awarded two new task orders under the CFT contract vehicle for aviation maintenance work. The task orders have a combined potential value of $244.8 million.

 

   

In August 2011, we were awarded a contract with the U.S. Naval Air Systems to provide aviation maintenance and logistic support. The total value of the cost-plus-fixed fee contract is $490.0 million, with four option years and a base year valued at $92.8 million.

 

30


   

In August 2011, we were awarded a contract with the U.S. Air Force to provide aircraft maintenance and other services. The total value of the firm-fixed price contract is $400.9 million with six option years and a base year value at $54.4 million.

 

   

In September 2011, we were awarded a contract with the U.S. Navy to provide operations and maintenance services. The total value of the fixed price contract is $20.9 million with four option years and one base year.

 

   

In September 2011, Global Response Services (“GRS”), our 51% owned joint venture, was one of four contractors awarded an IDIQ contract by the Department of the Navy. The total potential value of the contract is $900.0 million over five years.

 

   

In September 2011, we were awarded two new task orders under the Worldwide Protective Services (“WPS”) contract within our Security BAT.

 

   

In October 2011, we were awarded a task order under the CFT contract with the U.S. Army to provide aviation maintenance, modifications and logistics support for the Army rotary wing aircraft. The task order is for one base year and one option year and has a potential value of approximately $80.0 million, if all options are exercised.

 

   

In October and December 2011, we made two separate principal payments, each for $48.7 million and $50.0 million, respectively, on our term loan. The October payment eliminated all future quarterly amortization payments until maturity. These payments caused the acceleration of unamortized deferred financing fees of $4.9 million, which were recorded as a Loss on extinguishment of debt within our Statement of Operations during the fourth quarter of calendar year 2011.

 

   

In November and December 2011, we received our third LOGCAP IV Award Fee determination related to Afghanistan and Kuwait operations, respectively. These award fee determinations covered definitized costs from February 1, 2011 through July 31, 2011 and in total were lower than our estimated award fee scores.

 

31


Delta Tucker Holdings, Inc. Results of Operations—Fiscal Year Ended December 30, 2011

As a result of the Merger discussed above, our results of operations presented are for the year ended December 30, 2011 and for the period from April 1, 2010 (Inception) through December 31, 2010, which is a shorter operating period. As such, the results of operations for the two periods are not comparable and have been presented separately.

Consolidated Results

 

     Delta Tucker Holdings, Inc.  
(Amounts in thousands)    For the year ended
December 30, 2011
 

Revenue

   $ 3,721,465                  100.0

Cost of services

     (3,409,222     (91.6 )% 

Selling, general and administrative expenses

     (149,551     (4.0 )% 

Depreciation and amortization expense

     (50,773     (1.4 )% 

Earnings from equity method investees

     12,800        0.3

Impairment of equity method investment

     (76,647     (2.0 )% 

Impairment of goodwill

     (33,768)        (0.9 )% 
  

 

 

   

 

 

 

Operating income

     14,304        0.4

Interest expense

     (91,752     (2.5 )% 

Loss on early extinguishment of debt

     (7,267     (0.2 )% 

Interest income

     205        —  

Other income, net

     6,071        0.2
  

 

 

   

 

 

 

Loss before income taxes

     (78,439     (2.1 )% 

Benefit for income taxes

     20,122        0.5
  

 

 

   

 

 

 

Net loss

     (58,317     (1.6 )% 

Noncontrolling interests

     (2,625     (0.1 )% 
  

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (60,942     (1.7 )% 
  

 

 

   

 

 

 

Revenue — Revenue of $3,721.5 million for the year ended December 30, 2011 was primarily driven by revenue earned under the Contingency Operations, Training and Mentoring, Aviation and Air Operations BATs, which comprised over 90% of total consolidated revenue. See further discussion of our revenue results in the “ Results by Segment ” below.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 30, 2011 totaled $3,409.2 million, or 91.6% of revenue. As a percentage of revenue, cost of services was primarily driven by our overall contract mix from all of our programs. In 2011, a significant amount of our contracts were cost reimbursable, which tends to carry lower margins and risk compared to fixed price contracts. See further discussion of the impact of program margins in the “ Results by Segment ” below.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A of $149.6 million for the year ended December 30, 2011 was 4.0% of revenue and was primarily comprised of (i) consulting and other professional services that became necessary to assist in completing business systems improvements (ii) labor and contract labor costs and (iii) severance costs.

Depreciation and amortization — Depreciation and amortization for the year ended December 30, 2011 was $50.8 million and consisted primarily of unallowable monthly amortization expenses recognized since the Merger date on the carrying values of intangibles valued at fair value and the associated depreciation on property and equipment purchases.

Earnings from equity method investees — Earnings from equity method investees for the year ended December 30, 2011 was $12.8 million. This amount includes our proportionate share of equity method investees deemed to be an extension of our BATs and operationally integral to our business, such as GLS. As a result of the impairment recorded in September 2011, we no longer recognized any earnings related to our equity method investee, GLS, until we receive cash through dividend distributions.

 

32


Impairment of equity method investment —  Impairment of equity method investment for the year ended December 30, 2011 was $76.6 million. We recognized an impairment charge on our investment in GLS as we concluded it had an other than temporary loss in value during the period. See Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.

Impairment of goodwill —  Impairment of goodwill for the year ended December 30, 2011 was $33.8 million. We recognized an impairment charge on our goodwill associated with two reporting units within the GSDS reporting segment as a result of our annual goodwill impairment test. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.

Interest expense — Interest expense for the year ended December 30, 2011 was $91.8 million. Interest expense was impacted by the financing costs of our senior unsecured notes and our senior credit facility, including the amortization of deferred financing costs, interest related to financed insurance, interest on certain taxes and other miscellaneous interest expense.

Loss on early extinguishment of debt —  Loss on the early extinguishment of debt of $7.3 million for the year ended December 30, 2011 was attributable to principal prepayments on the term loan totaling $147.3 million made during calendar year 2011. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.

Other income, net — Other income, net for the year ended December 30, 2011 was $6.1 million. Other income was primarily related to our earnings from our unconsolidated joint venture that is not considered integral to our business.

Income taxes — Our effective tax rate for the year ended December 30, 2011 was 25.7% primarily as a result of our combined federal and state statutory rates and certain permanent differences, primarily resulting from the Merger. Additionally, for the year ended December 30, 2011 we reversed approximately $1.0 million in reserves on uncertain tax positions in conjunction with new IRS guidance.

Results by Segment

The following table sets forth the revenue for our GSDS, GPSS and GLS operating segments, both in dollars and as a percentage of our segment revenue as well as operating income for the year ended December 30, 2011.

 

     Delta Tucker Holdings, Inc.  
     For the year ended
December 30, 2011
 
(Amounts in thousands)    Reportable Segments  

Revenue

    

Global Stabilization and Development Solutions

   $ 2,402,092                    59.0

Global Platform Support Solutions

     1,313,628        32.2

Global Linguist Solutions

     359,568        8.8
  

 

 

   

 

 

 

Total Segments

     4,075,288        100.0

GLS deconsolidation (3)

     (359,568  

Headquarters/eliminations (1)

     5,745     
  

 

 

   

Consolidated revenue

   $ 3,721,465     
  

 

 

   

Operating Income

    

Global Stabilization and Development Solutions (4)

   $ 24,147        1.0

Global Platform Support Solutions

     111,252        8.5

Global Linguist Solutions

     26,661        7.4
  

 

 

   

 

 

 

Total Segments

     162,060        4.0

GLS deconsolidation (3)

     (26,661  

Headquarters (2)

     (121,095  
  

 

 

   

Consolidated operating income

   $ 14,304     
  

 

 

   

 

(1) Headquarters/eliminations primarily represents revenue earned between segments on shared service arrangements for general and administrative services provided to unconsolidated joint ventures at zero profit.

 

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(2) Headquarters operating income primarily relates to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income. In the third quarter of calendar year 2011, we recognized an impairment on our equity method investment in GLS. See Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.
(3) The Company deconsolidated GLS effective July 7, 2010.
(4) GSDS operating income includes the impairment of goodwill recognized for the year ended December 30, 2011 of $33.8 million. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion.

Global Stabilization and Development Solutions

Revenue — Revenue of $2,402.1 million for the year ended December 30, 2011 was primarily driven by LOGCAP IV operations within the Contingency Operations BAT and our Training and Mentoring BAT. These two BATs comprised over 90% of the GSDS revenue. This and other sources of revenue for the year ended December 30, 2011 are discussed below.

Contingency Operations — Revenue of $1,656.7 million for the year ended December 30, 2011 was primarily driven by revenue earned for LOGCAP IV operations in Afghanistan, including award fee revenue. The LOGCAP IV contract is a primarily cost-reimbursable contract providing for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed base fee and an award fee. In addition to the revenue received thus far for allowable costs and fixed based fee, we have been impacted by the additional revenue recorded for our related award-fees earned in the current year. We accrue award fees when we can make reasonable estimates for determining the total estimated contract revenue. In the aggregate, we recorded an unfavorable adjustment of $1.8 million as our actual award fee determination was lower than our estimate of the LOGCAP IV award fee scores.

Development —  Revenue of $26.1 million for the year ended December 30, 2011 was primarily attributable to the management consulting services we provide assisting with the development of stable and democratic governments and aiding the growth of democratic public and civil institutions.

Intelligence Training and Solutions — Revenue of $29.0 million for the year ended December 30, 2011 primarily consisted of collection and analysis services performed by our subsidiary Phoenix Consulting Group, LLC (“Phoenix”). Historically, revenue related to this BAT primarily consisted of training services provided through Phoenix; however, we are expanding our core competency in collection and analysis to deliver global mission support to the intelligence and special operations community. Through Phoenix, we provide proprietary training courses, management consulting and augmentation services to the intelligence community and national security clients. We continue to pursue new training opportunities within this BAT in addition to expanding global mission to the intelligence and special operations community.

Training & Mentoring — Revenue of $620.9 million for the year ended December 30, 2011 was primarily driven by our CivPol, AMDP and CSTC-A programs. The AMDP program, which we were awarded in December 2010, was in full operation by the beginning of the third quarter. The AMDP program substantially replaced the CivPol Afghanistan program, although at lower margins. Also contributing to our Training & Mentoring revenue was our CSTC-A program. We expect our Training & Mentoring revenue to increase through calendar year 2012 as a result of the anticipated growth in our AMDP and CSTC-A programs, although at lower margins than historically received on the CivPol Afghanistan program.

Security — Revenue of $69.0 million for the year ended December 30, 2011 was primarily attributable to both Worldwide Protective Services (“WPS”) and World Wide Personal Protection Program (“WPPS”). Operations under the WPPS program ended during calendar year 2011; however, we expect revenue within this BAT to trend upward as we obtained the WPS contract in September of 2011, replacing the WPPS program. The WPS program is fully operational and we continue to pursue new business opportunities providing security and personal protection within this BAT.

Operating income —  Operating income of $24.1 million for the year ended December 30, 2011, was primarily due to revenue contributions on such programs as LOGCAP IV, AMDP and CivPol. The LOGCAP IV program provided for additional operating income through the related award fees and base fees earned during the year. Operating income was offset by non-routine severance costs within the Intelligence Training and Solutions (“ITS”) and Development BATs incurred in the first quarter of calendar year 2011 and a contract loss of $5.0 million related to an investment in our Contingency Operations BAT incurred to strategically enter into additional service areas in Afghanistan. Additionally, we incurred an impairment charge of $33.8 million related to the ITS and Training and Mentoring reporting units as a result of our annual goodwill impairment test. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion. Aggregate total adjustments to operating income, resulting from changes to contract estimates for this segment, amounted to $5.0 million for the year ended December 30, 2011 primarily due to award fee revenue earned under the LOGCAP IV program discussed above. As a percentage of revenue, operating income was 1.0% of revenue primarily due to LOGCAP IV, AMDP and CivPol carrying lower margins than our firm fixed price contracts. Lower margins are anticipated going forward as the CivPol programs have been substantially replaced in Afghanistan by the AMDP program.

 

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Global Platform Support Solutions

Revenue — Revenue of $1,313.6 million for the year ended December 30, 2011 was attributable to our operations under the Aviation and Air Operations BATs.

Aviation —  Revenue of $638.3 million for the year ended December 30, 2011 was primarily driven by operations under our CFT, Counter Narcoterrorism Technology Program Officer (“CNTPO”) programs and international contracts that continue to show strong revenue performance. Most recently we secured the Pax River contract that has yielded positive revenue performance for the quarter. While this BAT has shown positive results, it was also negatively impacted during the year by the loss of the LCCS contract, which effectively ended November 2010. We believe this BAT will continue to show growth in calendar year 2012 as we believe we will obtain a competitive advantage in winning new contracts with our customers refocusing on the best value rather than just low cost. We recently benefited from a win of the Fort Campbell contract, which is another CFT contract.

Air Operations —  Revenue of $465.3 million for the year ended December 30, 2011 was primarily attributable to our INL Air Wing program, providing aircraft maintenance, intra-theater transportation and construction services for DoS personnel throughout Iraq and Afghanistan. We expect continued growth within the INL Air wing program as we continue to expand our aircraft and personnel requirements in support of the DoS in Iraq and Afghanistan.

Operations & Maintenance — Revenue of $208.7 million for the year ended December 30, 2011 was primarily driven by operations under our WRM, Philippines Operations Support and Navistar Defense programs. Operations under the Navistar program include operations that were previously included under our Mine Resistant Ambush Protected Vehicles (“MRAP”) program. We anticipate steady growth from the Navistar program through calendar year 2012, as we are optimistic of obtaining extensions on the order for another year. Additionally, operations under our WRM and Philippines Operations Support programs are expected to continue at the current pace for calendar year 2012.

Operating income — Operating income of $111.3 million for the year ended December 30, 2011 was primarily attributable to income produced by our INL Air Wing program from operations in Iraq, Afghanistan and other countries. Operating income was also impacted by better than expected profitability of our Aviation BAT, partially offset by first quarter events, such as $2.2 million of severance expense related to certain German employees on the CFT program and a $1.9 million write-down of LCCS inventory. Aggregate total adjustments to operating income resulted from changes to contract estimates for this segment amounted to $3.7 million for the year ended December 30, 2011.

Global Linguist Solutions

Revenue — Revenue of $359.6 million was directly linked to the number of linguists deployed in support of U.S. troop levels in Iraq. The focus of the Obama Administration over the past year has been to ramp down the troops in Iraq which has had a direct impact on revenue. President Obama recently declared an end to the Iraq war and requested the troops be withdrawn. Due to these factors, as well as the issuance of a Form 1 by the DCAA (see Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion), we recorded an impairment of our investment in GLS in the amount of $76.6 million. We have submitted a bid on the first task order related to the DLITE contract, although no final decision on this task order is expected until the second half of calendar year 2012. As a result of the matters mentioned above, we believe revenue from this segment will continue to decline through calendar year 2012.

Operating income — Operating income of $26.7 million, or 7.4% of revenue, for the year ended December 30, 2011 was primarily driven by revenue recognized by GLS during the year, including associated award fee revenue. We believe operating income will continue to decline through calendar year 2012, given the recent developments mentioned above. Aggregate total adjustments to operating income resulting from changes to contract estimates due to positive award fee determinations for this segment amounted to $2.0 million for the year ended December 30, 2011.

 

35


Delta Tucker Holdings, Inc. Results of Operations—April 1, 2010 (Inception) Through December 31, 2010

Consolidated Results

 

     Delta Tucker Holdings, Inc.  
(Amounts in thousands)    For the period from
April 1, 2010 (Inception)
through December 31, 2010
 

Revenue

   $ 1,697,706                100.0

Cost of services

     (1,544,184     (91.0 )% 

Selling, general and administrative expenses

     (78,024     (4.6 )% 

Merger expenses incurred by Delta Tucker Holdings, Inc.

     (51,722     (3.0 )% 

Depreciation and amortization expense

     (25,776     (1.5 )% 

Earnings from equity method investees

     10,337        0.6
  

 

 

   

 

 

 

Operating income

     8,337        0.5

Interest expense

     (46,845     (2.8 )% 

Bridge commitment fee incurred by Delta Tucker Holdings, Inc

     (7,963     (0.5 )% 

Interest income

     420        —  

Other income, net

     1,872        0.2
  

 

 

   

 

 

 

Loss before income taxes

     (44,179     (2.6 )% 

Benefit for income taxes

     7,881        0.5
  

 

 

   

 

 

 

Net loss

     (36,298     (2.1 )% 

Noncontrolling interests

     (1,361     (0.1 )% 
  

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (37,659     (2.2 )% 
  

 

 

   

 

 

 

Revenue — Revenue was $1,697.7 million for the period from April 1, 2010 (Inception) through December 31, 2010. Revenue was primarily driven by revenue from our Contingency Operations BAT within our GSDS segment, which yielded a fully ramped-up LOGCAP IV Afghanistan task order and award fee recognition on the LOGCAP IV program. See further discussion in our results by segments below.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services was $1,544.2 million for the period from April 1, 2010 (Inception) through December 31, 2010. As a percentage of revenue, Cost of services was 91.0%, primarily driven by the contribution of relatively lower margin revenue from our LOGCAP IV program.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A expenses were $78.0 million for the period from April 1, 2010 (Inception) through December 31, 2010. SG&A expenses were comprised primarily of $39.4 million in labor costs and severance related costs of $7.5 million in association with our former CEO and CFO. SG&A also includes legal defense and settlement costs.

Merger expenses incurred by Delta Tucker Holdings, Inc. — Merger expenses incurred by Delta Tucker Holdings, Inc. relate to legal costs and deal fees directly associated with the Merger, other than the bridge commitment fee which is discussed separately below. These expenses are non-recurring.

Depreciation and amortization — Depreciation and amortization were $25.8 million for the period from April 1, 2010 (Inception) through December 31, 2010. The expense consist of monthly amortization expenses recognized since the Merger date based on the carrying values of customer related intangibles recorded from acquisition accounting and amortization related to the cost basis of pre-Merger assets.

Earnings from equity method investees — Earnings from unconsolidated affiliates of $10.3 million includes our proportionate share of equity method investees deemed to be an extension of our BATs and operationally integral to our business. The majority of earnings from unconsolidated affiliates are primarily attributable to GLS.

Interest expense — Interest expense was $46.8 million for the period from April 1, 2010 (Inception) through December 31, 2010. Interest expense was driven by amortization of deferred financing costs and our average outstanding debt from the new Senior Credit facility (the “Senior Credit Facility”) and the new Senior Unsecured notes (the “Senior Unsecured Notes”). Pre-Merger interest was $12.7 million.

 

36


Bridge commitment fee incurred by Delta Tucker Holdings, Inc. — Bridge commitment fees relate to costs associated with a bridge financing arrangement which expired upon issuance of the notes issued in connection with the Merger.

Other income, net — Other income, net was $1.9 million and includes our share of earnings from unconsolidated joint ventures that are not operationally integral to our business as well as gains/losses from foreign currency.

Benefit for income taxes — Benefit for income taxes was a net benefit of $7.9 million primarily due to the pre-tax loss driven by the Merger expenses and bridge commitment fees incurred by Delta Tucker Holdings, Inc.

The following table sets forth the revenue for our GSDS, GPSS and GLS operating segments, both in dollars and as a percentage of our consolidated revenue as well as operating income for the operating segments, along with segment operating margin, for the period from April 1, 2010 (Inception) through December 31, 2010. Amounts agree to our Segment disclosure in Note 11 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

     Delta Tucker Holdings, Inc.  
     For the period from
April 1, 2010 (Inception)
through December 31, 2010
 
(Amounts in thousands)    Reportable Segments  

Revenue

    

Global Stabilization and Development Solutions

   $ 1,053,841                    53.3

Global Platform Support Solutions

     638,928        32.3

Global Linguist Solutions

     285,820        14.4
  

 

 

   

 

 

 

Total Segments

     1,978,589        100.0

GLS deconsolidation

     (285,820  

Headquarters/eliminations (1)

     4,937     
  

 

 

   

Consolidated revenue

     $1,697,706     

Operating Income

    

Global Stabilization and Development Solutions

   $ 36,100        3.4

Global Platform Support Solutions

     54,691        8.6

Global Linguist Solutions

     19,287        6.7
  

 

 

   

 

 

 

Total Segments

     110,078        5.6

GLS deconsolidation

     (19,287  

Headquarters (2)

     (82,454  
  

 

 

   

Consolidated operating income

   $ 8,337     
  

 

 

   

 

(1) Headquarters/eliminations primarily represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures at zero profit and eliminations of intercompany revenue earned between segments.
(2) Headquarters operating income 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. In addition, Merger expenses incurred by Delta Tucker Holdings, Inc. are included in Headquarters.

Global Stabilization and Development Solutions

Revenue — Revenue was $1,053.8 million for the period from April 1, 2010 (Inception) through December 31, 2010.

Contingency Operations — Revenue was $722.6 million, for the period from April 1, 2010 (Inception) through December 31, 2010, primarily due to the benefit of fully ramped-up LOGCAP IV operations in Afghanistan combined with the recognition of award fee revenue during the period as we received notification from our customer on our award fee performance on several task orders.

 

37


Development — Revenue was $41.3 million, for the period from April 1, 2010 (Inception) through December 31, 2010, primarily from our Africa Peacekeeping and AFRICAP programs.

Intelligence Training and Solutions — Revenue was $16.5 million, for the period from April 1, 2010 (Inception) through December 31, 2010, consisting primarily of training services performed by our subsidiary, Phoenix Consulting Group Inc.

Training, Mentoring & Security — Revenue was $279.8 million, for the period from April 1, 2010 (Inception) through December 31, 2010, primarily driven by personnel levels on our CivPol program. During the period, we experienced reductions in personnel levels on CivPol as a result of a shift in strategy by our customer to focus on more highly skilled training and mentoring services while reducing the overall number of deployed trainers and mentors in Iraq and a temporary decline in personnel during the transition period between the DoS and DoD in Afghanistan. We were awarded a new contract by the U.S. Army in December 2010, however, given the nature of the new contract, we could experience lower profit margins than those originally experienced with the CivPol Afghanistan contract. The base period of performance runs for twenty-four months with one twelve month option period. The total contract value for the thirty-six months is approximately $1.0 billion.

Operating income — Operating income was $36.1 million for the period from April 1, 2010 (Inception) through December 31, 2010. As a percentage of revenue, operating income was 3.4%, which was driven by the high percentage of revenue coming from the LOGCAP IV program, which has had relatively low margins since the inception of the contract in fiscal year 2010.

Global Platform Support Solutions

Revenue — Revenue was $638.9 million for the period from April 1, 2010 (Inception) through December 31, 2010. Excluding the impact of segment home office, which is unallowable.

Aviation — Revenue was $354.1 million for the period from April 1, 2010 (Inception) through December 31, 2010, primarily impacted by declining work on our CFT programs as a result of decreasing rates on our CFT task orders and the impact of the loss of our LCCS Army program which transitioned to a new awardee in November 2010. In the period, we also recognized a $9.5 million settlement of a claim on the LCCS program and experienced an increase in the Sheppard Air Force Base contract, which was fully ramped-up with higher revenue in the second half of the calendar year.

Air Operations — Revenue was $183.3 million for the period from April 1, 2010 (Inception) through December 31, 2010, primarily driven by revenue on the INL Air Wing program providing transportation services in Iraq, as well as an increase in service levels in Afghanistan which started in the third quarter of fiscal year 2011. However, we experienced a decrease in INL service levels in Colombia during the period.

Operations & Maintenance — Revenue of $103.2 million for the period from April 1, 2010 (Inception) through December 31, 2010, was primarily driven by revenue earned on the MRAP program.

Operating income — Operating income of $54.7 million was primarily impacted by low margins on revenue in our Aviation and Operations & Maintenance BATs, partially offset by the recognition of $9.5 million from the settlement of a claim on the LCCS program, which directly benefited our operating margin.

Global Linguist Solutions

Revenue — Revenue was $285.8 million for the period from April 1, 2010 (Inception) through December 31, 2010, directly linked to the number of linguists deployed in support of U.S. troop levels in Iraq, which has trended lower during the period due to the troop drawdown. GLS is an operationally integral equity method investee and as such, revenue for the entity is not included in our consolidated revenue on our statement of operations.

Operating income — Operating income was $19.3 million for the period from April 1, 2010 (Inception) through December 31, 2010 which was directly impacted by revenue as discussed above and the receipt of higher than expected award fee scores on the program.

 

38


Predecessor Results of Operations—Fiscal Quarter Ended July 2, 2010

Consolidated Results

The following table sets forth our consolidated results of operations, both in dollars and as a percentage of revenue for the fiscal quarter ended July 2, 2010:

 

     Predecessor  
(Amounts in thousands)    Fiscal quarter ended
July 2, 2010
 

Revenue

   $ 944,713        100.0

Cost of services

     (856,974     (90.7 )% 

Selling, general and administrative expenses

     (38,513     (4.1 )% 

Depreciation and amortization expense

     (10,263     (1.1 )% 
  

 

 

   

 

 

 

Operating income

     38,963        4.1

Interest expense

     (12,585     (1.3 )% 

Interest income

     51        —  

Other income, net

     658        0.1
  

 

 

   

 

 

 

Income before income taxes

     27,087        2.9

Provision for income taxes

     (9,279     (1.0 )% 
  

 

 

   

 

 

 

Net income

     17,808        1.9

Noncontrolling interests

     (5,004     (0.5 )% 
  

 

 

   

 

 

 

Net income attributable to DynCorp International Inc.

   $ 12,804        1.4
  

 

 

   

 

 

 

Revenue — Revenue for the fiscal quarter ended July 2, 2010 was $944.7 million, which is more fully described in the results by segment, and included a full quarter of revenue from the LOGCAP IV Afghanistan task, which did not start ramping up until the end of the second quarter in fiscal year 2010.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, other direct costs and overhead. Other direct costs include travel, supplies and other miscellaneous costs. Costs of services for the fiscal quarter ended July 2, 2010 totaled $857.0 million, or 90.7% of revenue. Cost of services included a large LOGCAP IV contribution. A change in overall contract mix and cost increases on CFT programs also impacted Cost of services for the period.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A for the fiscal quarter ended July 2, 2010 was $38.5 million, or 4.1% of revenue. SG&A costs for the quarter contained bid and proposal costs to support future diversification of the Company as well as $3.4 million in Merger related costs, $2.9 million in stock-based compensation, retention bonuses, and acquisition earn-out related costs, and $3.7 million in compliance training and legal expenses.

Depreciation and amortization — Depreciation and amortization for the fiscal quarter ended July 2, 2010 was $10.3 million, or 1.1% of revenue, and was comprised primarily of amortization of customer related intangibles and the amortization of Phoenix and Casals intangibles.

Interest expense — Interest expense for the fiscal quarter ended July 2, 2010 was $12.6 million, or 1.3% of revenue. The interest expense incurred was primarily related to DynCorp International’s credit facility, 9.5% senior subordinated notes and amortization of deferred financing fees relating to these debt instruments.

Income tax expense  — Our effective tax rate was 34.3% for the fiscal quarter ended July 2, 2010. Our effective tax rate was impacted by nondeductible costs associated with the Merger as well as the difference between financial reporting and tax treatment of GLS and DynCorp International FZ-LLC (“DIFZ”), which are not consolidated for tax purposes but are instead taxed as partnerships under the Internal Revenue Code.

Noncontrolling interests — Noncontrolling interests reflect the impact of our equity partners’ interest in our consolidated joint ventures, GLS and DIFZ. For the first quarter of fiscal year 2011, noncontrolling interests for GLS and DIFZ were $4.2 million and $0.8 million, respectively.

 

39


The following table sets forth the revenue and operating income for the operating segments, for the fiscal quarter ended July 2, 2010 both in dollars and as a percentage of our segment revenue as well as operating income.

 

     Predecessor
Fiscal Quarter  Ended July 2,
2010
 
(Amounts in thousands)    Reportable  Segments (1)  

Revenue

    

Global Stabilization and Development Solutions

   $ 478,239        50.6

Global Platform Support Solutions

     317,471        33.6

Global Linguist Solutions

     149,254        15.8
  

 

 

   

 

 

 

Total Segments

     944,964        100.0

Headquarters (1)

     (251  
  

 

 

   

Consolidated revenue

   $ 944,713     
  

 

 

   

Operating Income

    

Global Stabilization and Development Solutions

   $ 22,170        4.6

Global Platform Support Solutions

     21,290        6.7

Global Linguist Solutions

     9,073        6.1
  

 

 

   

 

 

 

Total Segments

     52,533        5.6

Headquarters (2)

     (13,570  
  

 

 

   

Consolidated operating income

   $ 38,963     
  

 

 

   

 

(1) Headquarters/eliminations primarily represent eliminations of intercompany revenue earned between segments.
(2) Headquarters operating income primarily relates to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers.

Global Stabilization and Development Solutions

Revenue — Revenue of $478.2 million for the fiscal quarter ended July 2, 2010 was comprised primarily of $283.8 million of revenue on the LOGCAP IV program which benefited from a full quarter of operations in Afghanistan, revenue earned on our CivPol program for training and mentoring services in Iraq and Afghanistan and revenue of $61.8 million earned on the wind-down of the Afghanistan construction contracts.

Operating income — Operating income of $22.2 million for the fiscal quarter ended July 2, 2010, included (i) margins earned on LOGCAP IV Afghanistan revenue, although at relatively low margins as criteria for award fee recognition had not yet been met for the quarter, (ii) contributions by Intelligence and Training Solutions as a result of the Phoenix acquisition and (iii) only minimal losses on the Afghanistan construction programs.

Global Platform Support Solutions

Revenue — Revenue of $317.5 million for the fiscal quarter ended July 2, 2010 was comprised primarily of revenue from a new contract to provide aircraft maintenance support services at Sheppard Air Force Base, continuing services on the CFT program, although at lower than average margins, continuing services on the LCCS program, and continuing services on the MRAP program.

Operating income — Operating income of $21.3 million for the fiscal quarter ended July 2, 2010 was driven by: (i) low margins on the CFT program caused by than average lower time-and-materials rates and fixed price ceilings on existing work, (ii) low margins on the LCCS programs due to the lack of higher-margin engine overhaul work performed in the period and (iii) lower than average volume of higher margin work on the MRAP program.

Global Linguist Solutions

Revenue of $149.3 million was directly linked to the number of linguists deployed in support of U.S. troop levels in Iraq, which trended lower during the quarter due to troop drawdown.

 

40


Operating income of $9.1 million was directly impacted by revenue as discussed above and the receipt of higher than expected award fee scores on the program. Operating income earned by GLS benefits net income by our 51% ownership of the joint venture.

 

41


Predecessor Results of Operations—Fiscal Year Ended April 2, 2010

We have restated the DynCorp International consolidated statements of operations, equity, and cash flows for the fiscal year ended April 2, 2010 and the consolidated balance sheet as of April 2, 2010 to correct errors in such consolidated financial statements. See Note 19 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report for more information regarding the impact of the restatement. The amounts presented below are reflective of this restatement.

Consolidated Results of Operations

The following table sets forth, for the periods indicated, our consolidated results of operations, both in dollars and as a percentage of revenue:

 

     Predecessor Fiscal Year Ended  
(Amounts in thousands)    April 2, 2010  

Revenue

   $ 3,572,459        100.0

Cost of services

     (3,225,250     (90.3 )% 

Selling, general and administrative expenses

     (106,401     (3.0 )% 

Depreciation and amortization expense

     (41,639     (1.1 )% 
  

 

 

   

 

 

 

Operating income

     199,169        5.6

Interest expense

     (55,650     (1.6 )% 

Loss on early extinguishment of debt, net

     (146     —  

Interest income

     542        —  

Other income, net

     5,194        0.2
  

 

 

   

 

 

 

Income before taxes

     149,109        4.2

Provision for income taxes

     (47,035     (1.3 )% 
  

 

 

   

 

 

 

Net income

     102,074        2.9

Noncontrolling interests

     (24,631     (0.7 )% 
  

 

 

   

 

 

 

Net income attributable to DynCorp International Inc.

   $ 77,443        2.2
  

 

 

   

 

 

 

Revenue — Revenue of $3,572.5 million for fiscal year 2010 was primarily due to the ramp up of the LOGCAP IV and INSCOM programs. Additionally, revenue was also driven by our acquisitions of Phoenix and Casals. See further discussion of our revenue results in the “ Results by Segment ” section below.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services for fiscal year 2010 totaled $3,225.3 million, or 90.3% of revenue. As a percentage of revenue, cost of services was primarily due to low margins on our CFT and CivPol programs and our fee sharing arrangement with our collaborative partners on the LOGCAP IV program partially offset by higher award fees on the INSCOM contract and lower losses associated with our Afghanistan Construction program.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal , financial accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A of $106.4 million or 3.0% of revenue, for fiscal year 2010 was primarily comprised of severance charges related to our former Chief Executive Officer (“CEO”), Herb Lanese, former GPSS president Natale DiGesualdo and former Senior Vice President and Chief Compliance Officer as well as increases in business development costs in support of our growth. These amounts were partially offset by the reversal of a $10.0 million legal reserve related to a favorable appellate court decision on the WWNS case.

Depreciation and amortization — Depreciation and amortization for fiscal year 2010 was $41.6 million and consisted primarily of monthly amortization expenses related to intangible assets acquired in our purchase of Phoenix and Casals.

Interest expense — Interest expense for fiscal year 2010 was $55.7 million and was primarily due to interest incurred on our pre-Merger credit facility and repurchase of 9.5% senior subordinated notes.

Income tax expense —  Our effective tax rate for fiscal year 2010 was 31.5% as a result of the difference in financial reporting and tax treatment of GLS and DIFZ, which were consolidated for financial reporting purposes but treated as partnerships for tax purposes.

 

42


Noncontrolling interests — Noncontrolling interests reflect the impact of our equity partners’ interest in DIFZ and GLS, which were consolidated during fiscal year 2010. For fiscal year 2010, noncontrolling interests for GLS and DIFZ were $21.5 million and $3.1 million, respectively.

Results by Segment

The following table sets forth the revenue and operating income for the operating segments, for the fiscal year 2010. Amounts agree to our Segment disclosure in Note 16 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

     Predecessor
Fiscal Year 2010
 
(Amounts in thousands)    Reportable Segments  

Revenue

  

Global Stabilization and Development Solutions

   $ 1,512,103            42.3

Global Platform Support Solutions

     1,325,076        37.1

Global Linguist Solutions

     734,012        20.6
  

 

 

   

 

 

 

Total Segments

     3,571,191        100.0

Headquarters/eliminations(3)

     1,268     
  

 

 

   

Consolidated revenue

   $ 3,572,459     
  

 

 

   

Operating Income

    

Global Stabilization and Development Solutions

   $ 86,707        5.7

Global Platform Support Solutions

     110,801        8.4

Global Linguist Solutions

     46,389        6.3
  

 

 

   

 

 

 

Total Segments

     243,897        6.8

Headquarters(4)

     (44,728  
  

 

 

   

Consolidated operating income

   $ 199,169     
  

 

 

   

Global Stabilization & Development Solutions

Revenue — Revenue for fiscal year 2010 was $1,512.1 million. See further discussion of revenue by BAT below.

Contingency Operations — Revenue of $674.0 million for fiscal year 2010 was primarily due to the ramp-up of our task orders under our LOGCAP IV program.

Development — Revenue of $119.6 million for fiscal year 2010 was primarily due to the operations under our AFRICAP/Africa Peacekeeping program.

Intelligence Training and Solutions — Revenue of $13.0 million for fiscal year 2010 was attributable to training services performed by our subsidiary Phoenix.

Training, Mentoring and Security — Revenue of $705.7 million for fiscal year 2010 was primarily a result of our operations under our CivPol and WPPS programs. Additionally, our new program, MNSTC-I, was launched during the year.

Operating income — Operating income of $86.7 million for fiscal year 2010 was primarily related to an expansion of services on our LOGCAP IV, WPPS and MNSTC-I programs; the reversal of the $10.0 million WWNS legal reserve; and lower losses on our Afghanistan Construction program.

Global Platform Support Solutions

Revenue — Revenue of $1,325.1 million for fiscal year 2010 was primarily the result of the following:

Aviation — Revenue of $715.6 million for fiscal year 2010 was primarily the result of the completion of several CFT task orders for which we did not win the re-competes due to additional competitors in the service space bidding what we believe to be at zero or negative margin levels partially offset by our new contract to provide aircraft maintenance support services at Sheppard Air Force Base.

Air Operations — Revenue of $333.5 million for fiscal year 2010 was due primarily to new task orders that are to include air transportation services, in Afghanistan and Iraq under our INL program.

 

43


Operations and Maintenance — Revenue of $276.3 million for fiscal year 2010 was primarily due to operations under our GMC and MRAP programs as well as non-recurring threat systems management work.

Operating income — Operating income of $110.8 million for fiscal year 2010 was primarily attributable to the margins on the MRAP program associated with the revenues and better cost management in several key aviation programs, including LCCS and INL, partially offset by the completion of several CFT task orders for which we did not win the re-competes.

Global Linguist Solutions

Revenue — Revenue of $734.0 million for fiscal year 2010 was primarily attributable to the performance under the INSCOM contract resulting in higher award fees as well as an increase in volume, partially offset by the impact of a contract modification for Option Year 1 agreed to in the third quarter.

Operating income — Operating income of $46.4 million for fiscal year 2010 was primarily attributable to the revenue items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash generated by operations and borrowings available under our new Senior Secured Credit facility (“Senior Credit Facility”) are our primary sources of short-term liquidity (refer to Note 7 to the Delta Tucker Holdings, Inc. audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more detail). We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, access to our revolver is dependent upon our meeting financial and non-financial covenants, summarized below and our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable. Significant changes or limitations in collections or loss of our ability to access our revolver, could materially negatively impact liquidity and our ability to fund our working capital needs. Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility which would materially affect our future expansion strategies and our ability to meet our operational obligations.

Management believes Days Sales Outstanding (“DSO”) is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable net of customer advances as of the balance sheet date. DSO as of December 30, 2011, was 69 days as compared to 82 days as of December 31, 2010. The decrease in DSO is a result of continued operational focus on streamlining our collections process with our DoS receivable. The decrease in our DSO coupled with our tax refund received below has reduced working capital enabling the pay-down on our Term Loan facility in the amount of $147.3 million. As we continue to improve our processes, we expect to sustain DSO in the low 70s during calendar year 2012.

As we experienced in calendar year 2011, we also expect similar operational cash requirements for calendar year 2012 from (i) the continued expansion of the LOGCAP IV contract in Afghanistan, (ii) funding requirements from existing and new joint ventures, (iii) working capital needs of new programs and, (iv) settlements of reserved contingencies. Additionally, our cash requirements can be impacted by significant new contract wins, the win of new task orders on existing programs and delays from our customers in processing our invoices. We expect our non-operational future cash requirements to be impacted by interest and principal payments on the Senior Credit Facility and the Senior Unsecured Notes.

We continue to be audited by the DCAA. Their audits could suspend or disapprove certain costs from time to time which could cause a temporary or permanent delay in our recovery of these costs.

We received a tax refund of $34.1 million in December 2010 and another tax refund of $46.0 million in January 2011 from the IRS from an approved CIAM. The CIAM allowed us to defer revenue associated with certain unbilled receivables for tax purposes until those receivables became billable. Additionally, we have sufficient net operating losses (“NOLs”) and foreign tax credits to offset our taxable income; as such, we did not pay any federal income taxes in calendar year 2011, nor do we expect to pay any federal income taxes in calendar year 2012.

 

44


Cash Flow Analysis

The following table sets forth cash flow data for the periods indicated therein:

 

     Delta Tucker Holdings, Inc.     Predecessor  
(Amounts in thousands)    For the year ended
    For the period from
April 1, 2010
(Inception) through
    Fiscal Quarter
Ended
    Fiscal year ended
 
   December 30, 2011     December 31, 2010     July 2, 2010     April 2, 2010  

Net cash provided by (used in) operating activities

   $ 167,986      $ (27,089   $ 21,723      $ 90,473   

Net cash used in investing activities

     (3,003     (878,218     (2,874     (88,875

Net cash (used in) provided by financing activities

     (147,315     957,844        (5,433     (79,387

Delta Tucker Holdings, Inc.— For the year ended December 30, 2011

Operating Activities

Cash provided by operations of $168.0 million for the year ended December 30, 2011 benefited from strong collections of receivables during the period as well as the collection of a $46.0 million tax refund resulting from the approved CIAM with the IRS.

Investing Activities

Cash used in investing activities of $3.0 million for the year ended December 30, 2011 was driven by contributions to PaTH, our 40% owned joint venture, as well as purchases of property and equipment and software, partially offset by the return of capital from our GLS and CRS joint ventures.

Financing Activities

Cash used in financing activities of $147.3 million for the year ended December 30, 2011 was primarily driven by three significant prepayments on our Term Loan, in addition to our quarterly principal payments during the year, partially offset by net borrowings related to financed insurance.

Delta Tucker Holdings, Inc.— For the period from April 1, 2010 (inception) through December 31, 2010

Operating Activities

Cash used in operations of $27.1 million for the period from April 1, 2010 (Inception) through December 31, 2010 was impacted by $63.1 million of Merger and Merger-related costs, interest paid of $19.7 million and an increase in working capital, partially offset by $31.7 million from net tax refunds.

Investing Activities

Cash used in investing activities was $878.2 million for the period from April 1, 2010 (Inception) through December 31, 2010. The cash used in investing activities was primarily due to the payment of the Merger consideration, net of cash acquired. In addition, we invested in our technology transformation project which was completed by the end of the calendar year. We also contributed capital consistent with our ownership percentage to GLS in order to provide working capital funding sufficient to allow it to operate without any additional intercompany note funding from us. This working capital infusion by both partners allowed GLS to retire its intercompany note with us.

 

45


Financing Activities

Cash provided by financing activities was $957.8 million for the period from April 1, 2010 (Inception) through December 31, 2010. The cash provided by financing activities was primarily due to issuing new debt, net of repayment of pre-Merger debt, payment of deferred financing fees and borrowings on our revolver.

Predecessor Cash Flows— For the fiscal quarter ended July 2, 2010

Operating Activities

Cash provided by operating activities for the fiscal quarter ended July 2, 2010 was $21.7 million. Cash generated from operations for the fiscal quarter ended July 2, 2010 benefited from favorable timing on our collections and payment activity during the period offset in part by the impact of delayed award fees on the INSCOM contract through our GLS joint venture as well as certain costs paid associated with the Merger.

Investing Activities

Cash used in investing activities was $2.9 million for the fiscal quarter ended July 2, 2010. The cash used was primarily for equipment additions.

Financing Activities

Cash used in financing activities was $5.4 million for the fiscal quarter ended July 2, 2010. The cash used in financing activities during the fiscal quarter ended July 2, 2010 was primarily due to the payments of noncontrolling interests dividends.

Predecessor Cash Flows— For the fiscal year ended April 2, 2010

Operating Activities

Cash flows provided by operating activities for fiscal year ended April 2, 2010 was $90.5 million. Cash generated from operations for fiscal year 2010 benefited from the combination of our continued profitable revenue growth offset by increases in net working capital.

Investing Activities

Cash used in investing activities was $88.9 million for fiscal year ended April 2, 2010 and was primarily due to the acquisitions of Phoenix and Casals and the purchase of helicopter assets.

Financing Activities

Cash used in financing activities was $79.4 million for fiscal year ended April 2, 2010 and was primarily the result of the $23.4 million excess cash flow payment on the senior credit facility, the $24.3 million bond repurchases and $28.1 million in dividend payments to non-controlling interest holders.

 

46


Financing

Long-term debt consisted of the following:

 

     Delta Tucker Holdings, Inc.     Predecessor  
(Amounts in thousands)    December 30,
2011
     December 31,
2010
    April 2,
2010
 

Pre Merger Term loan

   $ —         $ —        $ 176,637   

Pre Merger 9.5% Senior subordinated notes

     637         637        375,510   

Senior Credit Facility Term Loan

     417,272         568,575        —     

10.375% Senior unsecured notes

     455,000         455,000        —     

Senior Credit Facility outstanding revolver borrowings

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Total indebtedness

     872,909         1,024,212        552,147   

Less current portion of long-term debt

     —           (5,700     (44,137
  

 

 

    

 

 

   

 

 

 

Total long-term debt

   $ 872,909       $ 1,018,512      $ 508,010   
  

 

 

    

 

 

   

 

 

 

In connection with the Merger on July 7, 2010, substantially all of DynCorp International’s debt outstanding as of April 2, 2010 was repaid and replaced with new debt described below. However, $0.6 million of the pre-Merger 9.5% Senior subordinated notes remained outstanding as of December 30, 2011, as the holders opted to retain their investment. Due to principal prepayments made on our Term Loan during calendar year 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. See Note 6 to the DynCorp International Inc. consolidated financial statements included elsewhere in this Annual Report for further discussion related to the pre-Merger debt.

Senior Credit Facility

In connection with the Merger, DynCorp International Inc., entered into a senior secured credit facility on July 7, 2010 (the “Senior Credit Facility”), with a banking syndicate and Bank of America, NA as Agent.

Our Senior Credit Facility is secured by substantially all of our assets, guaranteed by the Company and substantially all of DynCorp International’s subsidiaries and provides a $570 million term loan facility (“Term Loan”) through July 7, 2016 and a $150 million revolving credit facility (“Revolver”), through July 7, 2014, including a $100 million letter of credit subfacility. As of December 30, 2011 and December 31, 2010, the balance of our Term Loan was $417.3 million and $568.6 million, respectively, and we had no revolver borrowings under our Revolving Facility. As of December 30, 2011 and December 31, 2010, the additional available borrowing capacity under the Senior Credit Facility was approximately $109.6 million and $109.0 million, respectively, which gives effect to no Revolver borrowings and our $40.4 million and $41.0 million, respectively, letters of credit. Refer to Note 7 in the Delta Tucker Holdings, Inc. audited consolidated financial statements for additional information related to the Senior Unsecured Notes.

The weighted-average interest rate as of December 30, 2011 and December 31, 2010 for our debt was 8.4% and 8.1%, respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 30, 2011 and December 31, 2010.

Interest Rates on Term Loan & Revolver

Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate (“Base Rate”) plus an applicable margin or the (ii) London Interbank Offered Rate (“Eurocurrency Rate”) plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option or 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency options based on our outstanding Secured Leverage Ratio at the end of each quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $50.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization (“Consolidated EBITDA”), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.

The Base Rate is equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%.

 

47


The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%.

As of December 30, 2011 and December 31, 2010 the applicable interest rate for our Term Loan was 6.25% and 6.25%, respectively.

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Loans, which ranges from 4.0% to 4.5%. The unused commitment fee ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly. As of December 30, 2011 and December 31, 2010 the applicable interest rates for our letter of credit subfacility and unused commitment fees were 4.50% and 0.75%, respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee.

Principal Payments

Pursuant to our Term Loan facility, during the year ended December 30, 2011, we made quarterly principal payments of $4.0 million for our Senior Credit Facility. Additionally, we made three principal prepayments of $48.6 million, $48.7 million and $50.0 million. Deferred financing costs associated with the prepayments totaled $7.3 million and were expensed and included in Loss on early extinguishment of debt in Delta Tucker Holdings, Inc. audited consolidated Statement of Operations. There were no penalties associated with the prepayment and our quarterly payments. Due to principal prepayments made on our Term Loan during calendar year 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016.

There is an annual excess cash flow requirement, which is defined in the Senior Credit Facility. This excess cash flow requirement begins in calendar year 2012, based on our annual financial results in calendar year 2011, and could result in a potential additional principal payment. Furthermore, certain transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of the business or a significant asset sale.

Covenants

The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants. The negative covenants in the Senior Credit Facility include, among other things, limits on our ability to:

 

   

declare dividends and make other distributions;

 

   

redeem or repurchase our capital stock;

 

   

prepay, redeem or repurchase certain of our indebtedness;

 

   

grant liens;

 

   

make loans or investments (including acquisitions);

 

   

incur additional indebtedness;

 

   

modify the terms of certain debt;

 

   

restrict dividends from our subsidiaries;

 

   

change our business or business of our subsidiaries;

 

   

merge or enter into acquisitions;

 

   

sell our assets;

 

   

enter into transactions with our affiliates; and

 

   

make capital expenditures.

In addition, the Senior Credit Facility stipulates a maximum total leverage ratio as defined in the Senior Credit Facility, and minimum interest coverage ratio as defined in the Senior Credit Facility, that we may maintain at the end of each quarter.

 

48


The total leverage ratio is the Consolidated Total Debt as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $50 million) to Consolidated EBITDA as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot be greater than 5.5 to 1.0 for the period ending December 30, 2011. Beginning June 2012, the maximum total leverage diminishes quarterly or semi-annually.

The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 1.7 to 1.0 for the period ending December 30, 2011. Beginning June 2012 the minimum total interest coverage ratio increases quarterly or semi annually thereafter.

On August 10, 2011, DynCorp International Inc. entered into an agreement to amend the Senior Credit Facility (the “Amendment”). The Amendment re-set leverage and interest covenant levels. Under the terms of the Amendment, the maximum total leverage ratio steps up to 5.50x through the period ending June 29, 2012 and steps down to 3.25x over time, the amount of unrestricted cash permitted to be netted from the calculation of the total leverage ratio increased from $25.0 million to $50.0 million, and the minimum interest coverage ratio is 1.70x through the period ending June 29, 2012 and steps up to 2.25x over time.

In the event we fail to comply with the covenants specified in the Senior Credit Facility and the Indenture governing our Senior Unsecured Notes, we may be in default. As of December 31, 2010 and December 30, 2011, the Company was in compliance with all of its debt agreements. See Note 15—Subsequent Events included elsewhere in this Annual Report for further discussion.

Senior Unsecured Notes

In connection with the Merger, DynCorp International issued $455.0 million of Senior Unsecured Notes with a 10.375% interest rate. This indenture runs from July 7, 2010 through July 1, 2017, with the entire principal balance due on July 1, 2017. The interest payments are payable semi-annually on January 1st and July 1st. The first interest payment was made January 2011.

The new Senior Unsecured Notes contain various covenants that restrict our ability to:

 

   

incur additional indebtedness;

 

   

make certain payments including declaring or paying certain dividends;

 

   

purchase or retire certain equity interests;

 

   

retire subordinated indebtedness;

 

   

make certain investments;

 

   

sell assets;

 

   

engage in certain transactions with affiliates;

 

   

create liens on assets;

 

   

make acquisitions; and

 

   

engage in mergers or consolidations.

The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings from both Moody’s Investor Service, Inc. as well as Standard Poor’s Rating Service.

We can redeem the new Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture Agreement requires us to repurchase the new Senior Unsecured Notes at defined prices in the event of certain specified triggering events including certain asset sales and change of control events.

We or our affiliates may, from time to time, purchase our Senior Unsecured Notes. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.

In addition to the Senior Credit Facility and Senior Unsecured Notes, $0.6 million of our pre-Merger 9.5% senior subordinated notes remained outstanding as of December 30, 2011.

 

49


Contractual Commitments

The following table represents our contractual commitments associated with our debt and other obligations as of December 30, 2011:

 

     Calendar Years (1)  
(Amounts in thousands)    2012      2013      2014      2015      2016      Thereafter      Total  

Term Loan (2)

   $ —         $ —         $ —         $ —         $ 417,272       $ —         $ 417,272   

Senior subordinated notes

     —           637         —           —           —           —           637   

Senior unsecured notes

     —           —           —           —           —           455,000         455,000   

Interest on indebtedness (3)

     73,636         73,583         74,083         73,576         60,825         23,603         379,306   

Operating leases (4)

     25,871         15,923         13,165         9,694         7,892         16,062         88,607   

Liability on uncertain tax positions (5)

     994         1,621         8,565         —           —           —           11,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 100,501       $ 91,764       $ 95,813       $ 83,270       $ 485,989       $ 494,665       $ 1,352,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of December 30, 2011, there were no amounts outstanding under the revolving credit facility.
(2) Excludes the potential of future mandatory principal payments due to excess cash flow requirements, which could affect the timing of future principal payments. Additionally, due to principal prepayments made on our Term Loan during calendar year 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report for further information.
(3) Represents interest expense calculated using interest rates of: (i) 9.5% on the senior subordinated notes, (ii) 10.375% on senior unsecured debt, (iii) Term Loan Principal applied, (iv) assumes the current letter of credit level multiplied by 4.75% and (v) 0.75% interest rate applied to un-utilized revolver borrowing capacity.
(4) For additional information about our operating leases, see Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report.
(5) Represents the amount by which the unrecognized tax benefits will change in the respective year and thereafter.

Non-GAAP Measures

We define EBITDA as GAAP net income attributable to Delta Tucker Holdings, Inc./Predecessor adjusted for interest expense, taxes and depreciation and amortization. Adjusted EBITDA is calculated by adjusting EBITDA for the items described in the table below. We use EBITDA and Adjusted EBITDA as supplemental measures in the evaluation of our business and believe that EBITDA and Adjusted EBITDA provide a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense and is consistent with one of the measures we use to evaluate management’s performance for incentive compensation. We also believe that Adjusted EBITDA is useful in assessing our ability to generate cash to cover our debt obligations including interest and principal payments. As such, we add back certain non-cash items from operations and certain other items as defined in our 10.375% Senior Unsecured Notes and our Credit Facility. In addition, Adjusted EBITDA as presented in the table below corresponds to the definition of Consolidated EBITDA used in the Senior Secured Credit Facilities and the definition of EBITDA used in the Indenture governing the Senior Unsecured Notes to test the permissibility of certain types of transactions, including debt incurrence. Neither EBITDA nor Adjusted EBITDA is a financial measure calculated in accordance with GAAP. Accordingly, they should not be considered in isolation or as substitutes for net income attributable to Delta Tucker Holdings, Inc./Predecessor or other financial measures prepared in accordance with GAAP.

Management believes these non-GAAP financial measures are useful in evaluating operating performance and are regularly used by security analysts, institutional investors and other interested parties in reviewing the Company. Non-GAAP financial measures are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of the performance of other companies. When evaluating EBITDA and Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in EBITDA and Adjusted EBITDA, (ii) whether EBITDA and Adjusted EBITDA have remained at positive levels historically, and (iii) how EBITDA and Adjusted EBITDA compare to our debt outstanding. The non-GAAP measures of EBITDA and Adjusted EBITDA do have

 

50


certain limitations. They do not include interest expense, which is a necessary and ongoing part of our cost structure resulting from the incurrence of debt. EBITDA and Adjusted EBITDA also exclude tax, depreciation and amortization expenses. Because these are material and recurring items, any measure, including EBITDA and Adjusted EBITDA, which excludes them has a material limitation. To mitigate these limitations, we have policies and procedures in place to identify expenses that qualify as interest, taxes, loss on debt extinguishments, a portion of other expense related to interest rate swap losses, and depreciation and amortization and to approve and segregate these expenses from other expenses to ensure that EBITDA and Adjusted EBITDA are consistently reflected from period to period. Our calculation of EBITDA and Adjusted EBITDA may vary from that of other companies. Therefore, our EBITDA and Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not give effect to the cash we must use to service our debt or pay income taxes and thus does not reflect the funds generated from operations or actually available for capital investments.

 

     Delta Tucker Holdings, Inc.     Predecessor  
     For the year ended
December 30, 2011
    For The Period From
April 1, 2010
(Inception)

Through
December 31, 2010
    Fiscal Quarter Ended
July 2, 2010
    Fiscal Year Ended
April 2, 2010
 
(Amount in thousands)    (unaudited)     (unaudited)  

Net (loss) income attributable to Delta Tucker Holdings, Inc. / Predecessor

   $ (60,942   $ (37,659   $ 12,804      $ 77,444   

(Benefit) provision for income tax

     (20,122     (7,881     9,279        47,035   

Interest expense, net of interest income

     91,547        46,425        12,534        55,108   

Depreciation and amortization (1)

     52,494        26,225        10,525        42,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     62,977        27,110        45,142        222,165   

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

     122,151        1,717        —          17,149   

Equity-based compensation

     —          —          3,518        2,863   

Changes due to fluctuation in foreign exchange rates

     (210     (129     (26     (353

Earnings from affiliates not received in cash (3)

     (1,297     (192     (433     (1,863

Employee non-cash compensation, severance, and retention expense

     8,483        4,639        866        1,959   

Management fees (4)

     777        691        —          —     

Acquisition accounting and Merger-related items (5)

     (2,171     71,585        3,414        3,622   

Worldwide Network Services settlement

     —          —          —          (10,000

Annualized operational efficiencies (6)

     855        6,271        —          —     

Other

     2,011        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 193,576      $ 111,692      $ 52,481      $ 235,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount includes certain depreciation and amortization amounts which are classified as Cost of services in our Unaudited Condensed Consolidated Statements of Income.
(2) Amount includes the impairment of our investment in the GLS joint venture and the impairment of goodwill, as well as our unusual income and expense items, as defined in the indenture.
(3) Includes our unconsolidated affiliates.
(4) Amount presented relates to the Delta Tucker Holdings, Inc. management fees, we excluded the Predecessor management fees from the EBITDA adjustments above.
(5) The Delta Tucker Holdings, Inc. amount includes the amortization of intangibles arising pursuant to FASB ASC 805.
(6) Represents a defined EBITDA adjustment under our debt agreements for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period.

 

51


Off-Balance Sheet Arrangements

As of December 30, 2011, we did not have any material off-balance sheet arrangements as defined under SEC rules.

Effects of Inflation

We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term fixed-price and time-and-materials type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the period of performance. A significant amount of our contracts are cost reimbursable type contracts which consequently, eliminates the impact of inflation. Costs and revenue include an inflationary increase which is commensurate with the general economy in which we operate, as such net income attributable to Delta Tucker Holdings, Inc. has not been materially impacted by inflation.

Critical Accounting Policies and Estimates

The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenue and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. These significant estimates and assumptions are reviewed quarterly by management. This evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material.

Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, see Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report. Management has discussed our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition and Cost Estimation on Long-Term Contracts

General—We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement, and as such, systems, equipment or materials are not generally separable from services. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the customer, the sales price is fixed or determinable (for non-U.S. government contracts) or costs are identifiable, determinable, reasonable and allowable (for our U.S. government contracts), and collectability is reasonably assured (for non-U.S. government contracts) or a reasonable contractual basis for recovery exists (for U.S. government contracts). Our contracts typically fall into four categories with the first representing substantially all of our revenue. The categories are federal government contracts, construction-type contracts, software contracts and other contracts. We apply the appropriate guidance consistently to similar contracts.

Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other special contract provisions are evaluated throughout the life of our contracts when estimating total contract revenue under the percentage-of-completion or proportional methods of accounting. We inherently have risks as it relates to our estimates with long term contracts. Actual amounts could differ from these estimates and could differ materially. We believe the following are inherent to the risk of estimation: (a) assumptions are uncertain and inherently judgmental at the time of the estimate; (b) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues and costs, and recoverability of assets, and (c) changes in the estimate could have a material effect on our financial condition or results of operations. The impact of all of these factors could contribute to a material cumulative adjustment.

For U.S. government contracts containing award fees, we accrue these fees when we can make reasonably determinable estimates of award fees to consider them in determining total estimated contract revenue. We do not consider the mere existence of potential award fees as presumptive evidence that award fees are to be automatically included in determining total estimated revenue. In some cases, we may not be able to reliably predict whether performance targets will be met and, consequently we exclude the award fees from the determination of total revenue in such instances. Our accrual of award fees may require adjustments from time to time.

 

52


We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project’s contractual requirements and management’s assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or price of a skilled workforce, regulatory changes both domestically and internationally, political unrest, or security issues at project locations. Revisions to estimates are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management.

We believe long-term contracts, contracts in a loss position and contracts with material award fees drive the significant potential changes in estimates in our contracts. These estimates are reviewed and assessed quarterly and could result in favorable or unfavorable adjustments.

Federal Government Contracts — For all non-construction and non-software U.S. federal government contracts or contract elements, we apply the guidance in ASC 912— Contractors—Federal Government. We apply the combination and segmentation guidance in ASC 605-35 Revenue—Construction-Type and Production-Type Contracts, under the guidance of ASC 912, in analyzing the deliverables contained in the applicable contract to determine appropriate profit centers. Revenue is recognized by profit center using the percentage-of-completion method or completed contract method. The completed contract method is sometimes used when reliable estimates cannot be supported for percentage-of-completion method recognition or for short duration projects when the results of operations would not vary materially from those resulting from use of the percentage-of-completion method. Until complete, project costs may be maintained in work-in-progress, a component of inventory.

Projects under our U.S. federal government contracts typically have different pricing mechanisms that influence how revenue is earned and recognized. These pricing mechanisms are classified as cost-plus-fixed-fee, fixed-price, cost-plus-award-fee or time-and-materials (including unit-price/level-of-effort contracts). Any of these contract types can be executed under an IDIQ contract, which does not represent a firm order for services. As a result, the exact timing and quantity of delivery and pricing mechanism for IDIQ profit centers are generally not known at the time of contract award, but they can contain any type of pricing mechanism.

Revenue on projects with a fixed-price or fixed-fee, including award fees, is recognized based on progress towards completion over the contract period, measured by either output or input methods appropriate to the services or products provided. For example, “output measures” can include period of service, such as for aircraft fleet maintenance, and units delivered or produced, such as aircraft for which modification has been completed. “Input measures” can include a cost-to-cost method, such as for procurement-related services.

Revenue on time-and-materials projects is recognized at contractual billing rates for applicable units of measure (e.g. labor hours incurred, units delivered). Revenue related to our unconsolidated joint ventures, where a shared service agreement exists, is recognized equal to the costs incurred to provide these services.

Construction Contracts or Contract Elements — For all construction contracts or contract elements, revenue is recognized by profit center using the percentage-of-completion method.

Software Contracts or Contract Elements — It is our policy to review any arrangement containing software or software deliverables using applicable GAAP for software revenue recognition, as discussed further in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report . We have not historically sold software on a separate, standalone basis. As a result, software arrangements are typically accounted for as one unit of accounting and are recognized over the service period, including the period of post-contract customer support. We had no new software contracts or contracts with software elements in 2011 or 2010.

Other Contracts or Contract Elements — Our contracts with non-federal government customers are predominantly service arrangements. Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting and arrangement consideration is allocated among the separate units of accounting based on the guidance applicable for the multiple-element arrangement. Many of our arrangements were entered into prior to January 1, 2011. For these arrangements, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative fair values. Fair values are established by evaluating vendor specific objective evidence (“VSOE”) or third-party evidence if available. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available resulting in applicable arrangements being accounted for as one unit of accounting. For arrangements that are entered into or materially modified after January 1, 2011, arrangement considerations are allocated to those identified as multiple-element arrangements based on relative selling price. Relative selling price is established through VSOE, third-party evidence, or management’s best estimate of selling price. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, and therefore, relative selling price is generally allocated to multiple-element arrangements utilizing management’s best estimate of selling price.

 

53


Deferred Taxes, Tax Valuation Allowances and Tax Reserves

Our income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management’s best estimate of future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. Income tax expense is the amount of tax payable for the period plus or minus the change in deferred tax assets and liabilities during the period.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

In evaluating the realizability of our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. Valuation allowances are recognized to reduce the carrying value of deferred tax assets to amounts that we expect are more-likely-than-not to be realized. Valuation allowances, if any, would primarily relate to the deferred tax assets established for certain tax credit carryforwards and net operating loss carryforwards for U.S. and non-U.S. subsidiaries. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the need for or sufficiency of a valuation allowance. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could also impact the need for certain valuation allowances.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in potential assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.

Under ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.

Impairment of Goodwill

As a result of the Company applying acquisition accounting related to the Merger on July 7, 2010, our balance sheet included $679.4 million in goodwill as of December 31, 2010, which represented the excess of costs over the fair value of our assets. As of December 30, 2011, the Company recorded a non-cash impairment charge of $33.8 million which reduced the goodwill balance to $645.6 million. The goodwill carrying value is allocated to our operating segments using a relative fair value approach based on our nine reporting units. Of the nine reporting units, eight are consolidated in our financial statements, while GLS was deconsolidated as of the Merger date. All of our reporting units were allocated goodwill based on relative fair values as required under ASC 350— Intangibles—Goodwill and Other , all of which had estimated fair values that substantially exceeded their carrying values.

In accordance with ASC 350-20— Intangibles—Goodwill , we evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We performed our annual goodwill impairment test as of October 2011, the first month of the fourth quarter of our calendar year. We also assess goodwill at the end of a quarter if a triggering event occurs. In determining whether an interim triggering event has occurred, management monitors (i) the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test, (ii) and significant changes to future expectations.

 

54


We estimate a portion of the fair value of our reporting units under the income approach by utilizing a discounted cash flow model based on several factors including balance sheet carrying values, historical results, our most recent forecasts, and other relevant quantitative and qualitative information. We discount the related cash flow forecasts using the weighted-average cost of capital at the date of evaluation. We also use the market approach to estimate the remaining portion of our reporting unit valuation. This technique utilizes comparative market multiples in the valuation estimate. We have historically applied a 50%/50% weighting to each approach. While the income approach has the advantage of utilizing more company specific information, the market approach has the advantage of capturing market based transaction pricing.

Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.

The goodwill for each reporting unit is tested using a two-step process. A reporting unit is an operating segment or a component of an operating segment, as defined by ASC 350-20— Intangibles—Goodwill . A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. The first step in the process of testing goodwill for potential impairment is to compare the carrying value of the reporting unit to its fair value. If upon completion of the analysis, the carrying value exceeds the fair value, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. Our methodology for determining the fair value of a reporting unit is estimated using the income approach and the market approach. Under the income approach, we utilize a discounted cash flow method that is dependent on estimates of future sales, operating income, depreciation and amortization, income tax payments, working capital changes and capital expenditures. Under the market approach, we utilize comparative market multiples in the valuation estimate. We weighed the estimates developed under each approach equally in determining the estimated fair value of each reporting unit. Inherent to each of these assumptions is the uncertainty of economic conditions related to the industries in which we operate (predominantly the U.S. defense industry) and conditions in the U.S. capital markets.

We apply a disclosure threshold to monitor any reporting units with a fair value within 10% of its carrying value. We evaluate goodwill for impairment annually or when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. Our annual impairment testing date is the first month of the fourth quarter of each fiscal year.

In conjunction with the test performed in October 2011, we determined that the carrying value of the goodwill associated with two reporting units within the GSDS reporting segment exceeded the fair value due to a decline in the projected future cash flows. We recorded a non-cash impairment charge of $33.8 million for the year ended December 30, 2011. See Note 3 to the Delta Tucker Holdings, Inc. audited consolidated financial statements included elsewhere in this Annual Report for further discussion.

Recent Accounting Pronouncements

The information regarding recent accounting pronouncements is included in Note 1 to the Delta Tucker Holdings, Inc. audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

55


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are subject to market risk, primarily relating to potential losses arising from adverse changes in interest rates and foreign currency exchange rates. For a further discussion of market risks we may encounter, see “Item 1A. Risk Factors.”

Interest Rate Risk

We have interest rate risk relating to changes in interest rates primarily on our variable rate debt. We manage our exposure to movements in interest rates through the use of a combination of fixed and variable rate debt. As of December 30, 2011, we had 52.2% of our debt as fixed rate and 47.8% variable. Our 10.375% senior notes and our 9.5% senior subordinated notes represented our fixed rate debt, which totaled $455.6 million as of December 30, 2011. Our Term Loan and Revolving Facility represent our variable rate debt. As of December 30, 2011, the balance of our Term Loan was $417.3 million, and we had no revolver borrowings under our Revolving Facility. Borrowings under our variable rate debt bear interest, based on our option, at a rate per annum equal to LIBOR, plus the Applicable Margin or the Base Rate plus the Applicable Margin. Both the Term Loan and the Revolving Facility have an interest rate floor of 1.75% for LIBOR borrowings and 2.75% for Base Rate borrowings. The Term Loan interest rate at December 30, 2011 was made up of a 4.50% Applicable Margin plus a 1.75% LIBOR rate totaling 6.25%. If LIBOR increases over 1.75% and we continued to have no Revolver outstanding loans, each 25 basis point increase would result in $1.0 million annually in additional interest expense.

Foreign Currency Exchange Rate Risk

We are exposed to changes in foreign currency rates. At present, we do not utilize any derivative instruments to manage risk associated with foreign currency exchange rate fluctuations. The functional currency of certain foreign operations is the local currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as accumulated other comprehensive income/(loss). Our foreign currency transactions were not material for the year ended December 30, 2011.

 

56


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Delta Tucker Holdings, Inc.

  

Report of Independent Registered Public Accounting Firm

     58   

Consolidated Statements of Operations

     59   

Consolidated Balance Sheets

     60   

Consolidated Statements of Cash Flows

     61   

Consolidated Statements of Equity

     62   

Notes to the Consolidated Financial Statements of Delta Tucker Holdings, Inc.

     63   

DynCorp International, Inc.

  

Report of Independent Registered Public Accounting Firm

     99   

Consolidated Statements of Operations

     100   

Consolidated Balance Sheet

     101   

Consolidated Statements of Cash Flows

     102   

Consolidated Statements of Equity

     103   

Notes to the Consolidated Financial Statements of DynCorp International, Inc.

     104   

Financial Statement Schedules

  

Schedule I—Condensed Financial Information of Registrant

     149   

Schedule II—Valuation and Qualifying Accounts

     151   

Global Linguist Solutions, LLC

  

Report of Independent Registered Public Accounting Firm

     153   

Statements of Operations

     154   

Balance Sheets

     155   

Statements of Cash Flows

     156   

Statements of Members’ Equity

     157   

Notes to the Financial Statements of Global Linguist Solutions, LLC

     158   

 

57


REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

To the Stockholder of

Delta Tucker Holdings, Inc.

Falls Church, Virginia

We have audited the accompanying consolidated balance sheets of Delta Tucker Holdings, Inc. and subsidiaries (the “Company”) as of December 30, 2011 and December 31, 2010, and the related consolidated statements of operations, equity, and cash flows for the year ended December 30, 2011 and the period from April 1, 2010 (date of inception) through December 31, 2010. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Delta Tucker Holdings, Inc. and subsidiaries as of December 30, 2011 and December 31, 2010, and the results of their operations and their cash flows for the year ended December 30, 2011 and the period from April 1, 2010 (date of inception) through December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Fort Worth, Texas

April 9, 2012

 

58


DELTA TUCKER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Amounts in thousands)    For the year ended
December 30, 2011
    For the period from
April 1, 2010
(Inception)

through December 31,
2010
 

Revenue

   $ 3,721,465      $ 1,697,706   

Cost of services

     (3,409,222     (1,544,184

Selling, general and administrative expenses

     (149,551     (78,024

Merger expenses incurred by Delta Tucker Holdings, Inc.

     —          (51,722

Depreciation and amortization expense

     (50,773     (25,776

Earnings from equity method investees

     12,800        10,337   

Impairment of equity method investment

     (76,647     —     

Impairment of goodwill

     (33,768     —     
  

 

 

   

 

 

 

Operating income

     14,304        8,337   

Interest Expense

     (91,752     (46,845

Bridge commitment fee

     —          (7,963

Loss on early extinguishment of debt

     (7,267     —     

Interest income

     205        420   

Other income, net

     6,071        1,872   
  

 

 

   

 

 

 

Loss before income taxes

     (78,439)        (44,179)   

Benefit for income taxes

     20,122        7,881   
  

 

 

   

 

 

 

Net loss

     (58,317     (36,298

Noncontrolling interest

     (2,625     (1,361
  

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (60,942   $ (37,659
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

59


DELTA TUCKER HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

       As of  
(Amounts in thousands, except share data)    December 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 70,205      $ 52,537   

Restricted cash

     10,773        9,342   

Accounts receivable, net of allowances of $1,947 and $558, respectively

     752,756        782,095   

Prepaid expenses and other current assets

     88,877        150,613   
  

 

 

   

 

 

 

Total current assets

     922,611        994,587   

Property and equipment, net

     24,084        26,497   

Goodwill

     645,603        679,371   

Tradenames, net

     43,660        43,839   

Other intangibles, net

     310,740        355,129   

Other assets, net

     67,723        163,932   
  

 

 

   

 

 

 

Total assets

   $ 2,014,421      $ 2,263,355   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ —        $ 5,700   

Accounts payable

     275,068        297,821   

Accrued payroll and employee costs

     129,027        99,295   

Deferred income taxes

     78,912        90,726   

Accrued liabilities

     149,175        147,859   

Income taxes payable

     1,077        3,471   
  

 

 

   

 

 

 

Total current liabilities

     633,259        644,872   

Long-term debt, less current portion

     872,909        1,018,512   

Long-term deferred taxes

     23,136        36,900   

Other long-term liabilities

     27,632        45,745   
  

 

 

   

 

 

 

Total liabilities

     1,556,936        1,746,029   

Commitments and contingencies

    

Equity:

    

Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at December 30, 2011 and December 31, 2010, respectively.

     —          —     

Additional paid-in capital

     550,951        550,492   

Accumulated deficit

     (98,593     (37,659

Accumulated other comprehensive (loss)/income

     (59     142   
  

 

 

   

 

 

 

Total equity attributable to Delta Tucker Holdings, Inc.

     452,299        512,975   

Noncontrolling interest

     5,186        4,351   
  

 

 

   

 

 

 

Total equity

     457,485        517,326   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,014,421      $ 2,263,355   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

60


DELTA TUCKER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Amounts in thousands)    For the year ended
December 30, 2011
    For the period from
April 1, 2010

(Inception)
through December 31,

2010
 

Cash flows from operating activities

    

Net loss

   $ (58,317   $ (36,298

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     52,494        26,225   

Amortization of deferred loan costs

     8,383        4,167   

Allowance for losses on accounts receivable

     2,125        43   

Loss on early extinguishment of debt, net

     7,267        —     

Loss on impairment or disposition of assets, net

     896        —     

Loss on impairment of equity method investment

     76,647        —     

Loss on impairment of goodwill

     33,768        —     

Earnings from equity method investees

     (17,367     (12,877

Distributions from affiliates

     17,040        10,963   

Deferred income taxes

     (25,579     7,033   

Other

     958        1,120   

Changes in assets and liabilities:

    

Restricted cash

     (1,431     (1,159

Accounts receivable

     27,214        (69,590

Prepaid expenses and other current assets

     (9,380     (39,635

Accounts payable and accrued liabilities

     1,813        39,497   

Income taxes receivable

     51,455        43,422   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     167,986        (27,089
  

 

 

   

 

 

 

Cash flows from investing activities

    

Merger consideration for shares, net of cash acquired

     —          (869,043

Purchase of property and equipment, net

     (2,186     (4,639

Proceeds from sale of property, plant, and equipment

     45        —     

Purchase of software

     (2,701     (3,684

Deconsolidation of GLS

     —          (938

Payments received from GLS on note receivable

     —          204,114   

Disbursements made to GLS on note receivable

     —          (183,028

Return of capital from equity method investees

     9,147        —     

Contributions to equity method investees

     (7,308     (21,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,003     (878,218
  

 

 

   

 

 

 

Cash flows from financing activities

    

Borrowings on long-term debt

     366,700        1,537,000   

Payments on long-term debt

     (518,003     (1,090,268

Payments of deferred financing cost

     (3,282     (49,092

Borrowings under other financing arrangements

     44,819        15,756   

Payments under other financing arrangements

     (36,904     (5,868

Equity contribution from Affiliates of Cerberus (Note 2)

     —          550,927   

Capital contribution from noncontrolling interest

     500        —     

Payment of dividends to noncontrolling interest

     (1,145     (611
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (147,315     957,844   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     17,668        52,537   

Cash and cash equivalents, beginning of period

     52,537        —     

Cash and cash equivalents, end of period

   $ 70,205      $ 52,537   
  

 

 

   

 

 

 

Income taxes received, net of payments

   $ 44,773      $ 31,733   
  

 

 

   

 

 

 

Interest paid

   $ (82,198   $ (19,738
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

61


DELTA TUCKER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

(Amounts in thousands)    Common
Stock
     Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Total
Equity
Attributable
to Delta
Tucker
Holdings,
Inc.
    Noncontrolling
Interest
    Total
Equity
 

Balance at April 1, 2010

     —         $ —         $ —        $ —        $ —        $ —        $ —        $ —     

Equity investment in connection with Merger (Note 2)

     —           —           550,927        —          —          550,927        —          550,927   

Acquisition accounting—fair value adjustment to noncontrolling interests

           —          —          —          —          4,216        4,216   

Comprehensive loss:

                  

Net loss

           —          (36,298     —          (36,298     —          (36,298

Currency translation adjustment, net of tax

           —          —          142        142        —          142   

Comprehensive (loss) income

           —          (36,298     142        (36,156     —          (36,156

Noncontrolling interest

           —          (1,361     —          (1,361     —          (1,361
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           —          (37,659     142        (37,517     —          (37,517

Net income and comprehensive income attributable to noncontrolling interest

           —          —          —          —          1,361        1,361   

DIFZ financing, net of tax

           (435     —          —          (435     —          (435

Dividends declared to noncontrolling interest

           —          —          —          —          (1,226     (1,226
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     —         $ —         $ 550,492      $ (37,659   $ 142      $ 512,975      $ 4,351      $ 517,326   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

                  

Net loss

           —          (58,317     —          (58,317     —          (58,317

Currency translation adjustment, net of tax

           —          —          (201     (201     —          (201

Comprehensive loss

           —          (58,317     (201     (58,518     —          (58,518

Noncontrolling interest

           —          (2,625)        —          (2,625)        —          (2,625)   
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

           —          (60,942     (201     (61,143     —          (61,143

Net income and comprehensive income attributable to noncontrolling interest

           —          —          —          —          2,625        2,625   

Issuance of shares to non-controlling interest

           —          —          —          —          500        500   

DIFZ financing, net of tax

           459        8        —          467        —          467   

Dividends declared to noncontrolling interest

           —          —          —          —          (2,290     (2,290
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 30, 2011

     —         $ —         $ 550,951      $ (98,593   $ (59   $ 452,299      $ 5,186      $ 457,485   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

62


DELTA TUCKER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 30, 2011 and For the Period From April 1, 2010 (Inception) Through December 31, 2010

Note 1 — Significant Accounting Policies and Accounting Developments

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 Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International Inc. (“DynCorp International”), completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). Holders of DynCorp International’s stock received $17.55 in cash for each outstanding share and since Cerberus indirectly owns all of our outstanding equity, DynCorp International’s stock is no longer publicly traded as of the Merger.

These consolidated financial statements have been prepared, pursuant to accounting principles generally accepted in the United States of America (“GAAP”).

Fiscal Year

We report the results of our operations using a 52-53 week basis. The Company’s fiscal year is comprised of twelve consecutive fiscal months ending on the Friday closest to December 31. These financial statements reflect our financial results for the year ended December 30, 2011, referred to as “calendar year 2011” and for the period from April 1, 2010 (Inception) through December 31, 2010, referred to as “calendar year 2010” and “inception year” throughout the financial statements.

DynCorp International’s historic fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period, prior to the merger on July 7, 2010, ended July 2, 2010 is referred to as the “first quarter of fiscal year 2011.” The financial statements of Delta Tucker Holdings, Inc. include stub period (July 3 through July 7, 2010) activity related to DynCorp International. We evaluated the transactions during the stub period and concluded that they were immaterial and did not warrant separate presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has investments in joint ventures that are variable interest entities (“VIEs”). The VIE investments are accounted for in accordance with Financial Accounting Standards Board Codification (“ASC”) ASC 810 — Consolidation . In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, the Company consolidates the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method.

The Company classifies its equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our Business Area Teams (“BATs”), and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.

Economic rights in active joint ventures that are operationally integral are indicated by the ownership percentages in the table listed below.

 

Partnership for Temporary Housing LLC (“PaTH”)

     40%   

Contingency Response Services LLC (“CRS”)

     45%   

Global Response Services LLC (“GRS”)

     51%   

Mission Readiness LLC

     36%   

Global Linguist Solutions LLC (“GLS”)

     51%   

 

63


Economic rights in an active joint venture that the Company does not consider operationally integral are indicated by the ownership percentage in the table listed below.

 

Babcock DynCorp Limited

     44 %   

Global Linguist Solutions Deconsolidation

After the implementation of Accounting Standards Update (“ASU”) 2009—17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities , through the date of the Merger, DynCorp International continued to consolidate GLS based on the related party relationship between DynCorp International and McNeil Technologies Inc. (“McNeil”), our GLS joint venture partner. Through the date of the Merger, DynCorp International’s largest stockholder, Veritas Capital LP (“Veritas”), owned McNeil. This related party relationship ended on the date of Merger resulting in the deconsolidation of GLS on that date and we now share the power with McNeil to direct the activities that most significantly impact the economic performance of GLS.

While we do not have control over the performance of GLS, our senior management, including our chief executive officer, who is our chief operating decision maker, regularly reviews GLS operating results and metrics to make decisions about resources to be allocated to the segment and assess performance, thus GLS is classified as an operating segment. See Note 11 and Note 12 for further discussion on our GLS operating segment.

Noncontrolling Interest

We record the impact of our partner’s interest in consolidated joint ventures as noncontrolling interest. Currently DynCorp International FZ-LLC (“DIFZ”) is our only consolidated joint venture. Noncontrolling interest is presented on the face of the statement of operations