DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 11/13/2012 16:21:22)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 28, 2012

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)

 

 

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   ¨     No   x

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 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 November 13, 2012, the registrant had 100 shares of its Class A common stock outstanding.

 

 

 


Table of Contents

Delta Tucker Holdings, Inc.

Table of Contents

 

         Page  
 

Disclosure Regarding Forward-Looking Information

     3   
 

Calendar Year

     3   
PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Unaudited Condensed Consolidated Statements of Operations - Three and Nine Months Ended September  28, 2012 and September 30, 2011

     4   
 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 28, 2012 and September 30, 2011

     5   
 

Unaudited Condensed Consolidated Balance Sheets as of September 28, 2012 and December 30, 2011

     6   
 

Unaudited Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 28, 2012 and September 30, 2011

     7   
 

Unaudited Condensed Consolidated Statements of Equity - Nine Months Ended September 28, 2012 and September 30, 2011

     8   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     9   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     65   

Item 4.

 

Controls and Procedures

     65   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     66   

Item 1A.

 

Risk Factors

     66   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     66   

Item 3.

 

Defaults Upon Senior Securities

     66   

Item 4.

 

Mine Safety Disclosures

     66   

Item 5.

 

Other Information

     67   

Item 6.

 

Exhibits

     67   

 

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Table of Contents

Disclosure Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains 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;

 

   

our dependence on customers within the defense industry and business risks related to that industry, including changing priorities or reductions in the annual United States (“U.S.”) Department of Defense (“DoD”) budgets and the outcome of potential additional reductions due to the sequestration process;

 

   

the outcome of any material litigation, government investigation, government 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 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”), International Narcotics and Law Enforcement (“INL”), Worldwide Protective Services (“WPS”), Afghanistan Ministry of Defense Program (“AMDP”), Contract Field Teams (“CFT”) and Logistics Civil Augmentation Program (“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;

 

   

statements covering our business strategy, those described in “Item 1A. Risk Factors” of this Quarterly Report and under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2011 filed with the Securities and Exchange Commission (“SEC”) on April 9, 2012 (“2011 Annual Report”) and other risks detailed from time to time in our reports filed with SEC; and

 

   

other risks detailed from time to time in our reports posted to our website or made available publicly through other means.

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.

Calendar Year

We report the results of our operations using a 52-53 week basis ending on the Friday closest to December 31. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 28, 2012 and September 30, 2011, the related statements of equity and cash flows for the nine months ended September 28, 2012 and September 30, 2011 and the unaudited condensed consolidated balance sheets as of September 28, 2012 and December 30, 2011.

 

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PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

(Amounts in thousands)    Three Months Ended
September 28, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Revenue

   $ 1,010,314      $ 935,393      $ 3,018,469      $ 2,738,441   

Cost of services

     (917,138     (845,345     (2,756,839     (2,500,412

Selling, general and administrative expenses

     (40,347     (47,644     (116,822     (117,005

Depreciation and amortization expense

     (12,375     (12,255     (37,594     (38,229

Earnings from equity method investees

     315        3,894        538        11,830   

Impairment of equity method investment

     —          (76,647     —          (76,647

Impairment of goodwill

     (30,859     —          (30,859     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     9,910        (42,604     76,893        17,978   

Interest expense

     (22,011     (22,836     (65,438     (69,537

Loss on early extinguishment of debt

     (696     —          (1,479     (2,397

Interest income

     21        29        94        168   

Other income, net

     68        685        4,768        4,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (12,708     (64,726     14,838        (48,996

(Provision) benefit for income taxes

     (1,393     23,878        (11,744     17,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (14,101     (40,848     3,094        (31,209

Noncontrolling interests

     (1,693     (780     (4,322     (2,185
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (15,794   $ (41,628   $ (1,228   $ (33,394
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 

(Amounts in thousands)    Three Months Ended
September 28, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Net (loss) income

   $ (14,101   $ (40,848   $ 3,094      $ (31,209

Other comprehensive income:

        

Currency translation adjustment

     296        (337     147        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     296        (337     147        (2

Income tax expense related to items of other comprehensive income

     (106     204        (54     2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     190        (133     93        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (13,911     (40,981     3,187        (31,209

Noncontrolling interests

     (1,693     (780     (4,322     (2,185
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

   $ (15,604   $ (41,761   $ (1,135   $ (33,394
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

     As of  
(Amounts in thousands, except share data)    September 28, 2012     December 30, 2011  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 87,391      $ 70,205   

Restricted cash

     1,659        10,773   

Accounts receivable, net of allowances of $1,683 and $1,947, respectively

     778,530        752,756   

Prepaid expenses and other current assets

     97,969        88,877   
  

 

 

   

 

 

 

Total current assets

     965,549        922,611   

Property and equipment, net

     26,338        24,084   

Goodwill

     617,782        645,603   

Tradenames, net

     43,689        43,660   

Other intangibles, net

     283,585        310,740   

Other assets, net

     52,104        67,723   
  

 

 

   

 

 

 

Total assets

   $ 1,989,047      $ 2,014,421   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 637      $ —     

Accounts payable

     279,074        275,068   

Accrued payroll and employee costs

     119,913        129,027   

Deferred income taxes

     75,278        78,912   

Accrued liabilities

     194,916        149,175   

Income taxes payable

     3,887        1,077   
  

 

 

   

 

 

 

Total current liabilities

     673,705        633,259   

Long-term debt, less current portion

     812,272        872,909   

Long-term deferred taxes

     35,212        23,136   

Other long-term liabilities

     11,397        27,632   
  

 

 

   

 

 

 

Total liabilities

     1,532,586        1,556,936   

Commitments and contingencies

    

Equity:

    

Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 28, 2012 and December 30, 2011, respectively.

     —          —     

Additional paid-in capital

     549,360        550,951   

Accumulated deficit

     (99,821     (98,593

Accumulated other comprehensive income (loss)

     34        (59
  

 

 

   

 

 

 

Total equity attributable to Delta Tucker Holdings, Inc.

     449,573        452,299   

Noncontrolling interests

     6,888        5,186   
  

 

 

   

 

 

 

Total equity

     456,461        457,485   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,989,047      $ 2,014,421   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

(Amounts in thousands)    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Cash flows from operating activities

    

Net income (loss)

   $ 3,094      $ (31,209

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

    

Depreciation and amortization

     38,785        39,486   

Loss on early extinguishment of debt

     1,479        2,397   

Amortization of deferred loan costs

     5,788        6,275   

Loss on impairment of equity method investees

     —          76,647   

Impairment of goodwill

     30,859        —     

Earnings from equity method investees

     (4,876     (15,089

Distributions from affiliates

     2,267        16,346   

Deferred income taxes

     7,139        (21,013

Other

     (4,394     883   

Changes in assets and liabilities:

    

Restricted cash

     9,114        (5,505

Accounts receivable

     (24,261     (4,422

Prepaid expenses and other current assets

     (12,537     (13,327

Accounts payable and accrued liabilities

     6,983        (35,723

Income taxes receivable

     5,808        48,618   
  

 

 

   

 

 

 

Net cash provided by operating activities

     65,248        64,364   

Cash flows from investing activities

    

Purchase of property and equipment, net

     (4,543     (1,877

Proceeds from sale of property, plant and equipment

     7        44   

Heliworks acquisition, net of cash acquired

     (11,056     —     

Purchase of software

     (2,066     (2,310

Return of capital from equity method investees

     9,154        9,147   

Contributions to equity method investees

     (1,479     —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (9,983     5,004   

Cash flows from financing activities

    

Borrowings on long-term debt

     304,200        214,300   

Payments on long-term debt

     (364,200     (266,906

Payments of deferred financing costs

     —          (3,282

Borrowings related to financed insurance

     62,581        44,252   

Payments related to financed insurance

     (38,541     (24,166

Capital contribution from noncontrolling interest

     —          500   

Payment of dividends to noncontrolling interests

     (2,119     (1,145
  

 

 

   

 

 

 

Net cash used in financing activities

     (38,079     (36,447
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     17,186        32,921   

Cash and cash equivalents, beginning of period

     70,205        52,537   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 87,391      $ 85,458   
  

 

 

   

 

 

 

Income taxes received, net of payments

   $ 1,080      $ 44,745   

Interest paid

   $ 69,017      $ 74,186   

See notes to unaudited condensed consolidated financial statements.

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed 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 December 31, 2010

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

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

      —          (33,394     —          (33,394     —          (33,394

Noncontrolling interests

      —          —          —          —          2,185        2,185   

DIFZ financing, net of tax

      339        8        —          347        —          347   

Dividends declared to noncontrolling interests

      —          —          —          —          (1,790     (1,790
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    —        $ —        $ 550,831      $ (71,045   $ 142      $ 479,928      $ 4,746      $ 484,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(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 December 30, 2011

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

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

      —          (1,228     93        (1,135     —          (1,135

Noncontrolling interests

      —          —          —          —          4,322        4,322   

DIFZ financing, net of tax

      407        —          —          407        —          407   

Distribution to affiliates of Parent

      (1,998     —          —          (1,998     696        (1,302

Dividends declared to noncontrolling interests

    —          —          —          —          —          —          (3,316     (3,316
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 28, 2012

    —        $ —        $ 549,360      $ (99,821   $ 34      $ 449,573      $ 6,888      $ 456,461   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Delta Tucker Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Accounting Policies

Basis of Presentation

Delta Tucker Holdings, Inc. (“Holdings”), the parent of DynCorp International Inc., through its subsidiaries (together, “the Company”), provides defense and technical services and government outsourced solutions primarily to U.S. government agencies domestically and internationally. The Company was incorporated in the state of Delaware on April 1, 2010. Primary customers include the U.S. Department of Defense (“DoD”), the U.S. Department of State (“DoS”), and other government agencies, including foreign governments and commercial customers. Unless the context otherwise indicates, references herein to “we,” “our,” “us,” or “the Company” refer to Delta Tucker Holdings, Inc. and our consolidated subsidiaries.

The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These consolidated financial statements have been prepared, without audit, pursuant to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Certain information and footnote disclosures normally included in financial statements, prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s 2011 Annual Report.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to fairly present our financial position as of September 28, 2012 and December 30, 2011, the results of operations and statements of comprehensive income, for the three and nine months ended September 28, 2012 and September 30, 2011 and the statement of cash flows and equity for the nine months ended September 28, 2012 and September 30, 2011 have been included. The results of operations and statements of comprehensive income (loss) for the three and nine months ended September 28, 2012 and September 30, 2011, and the cash flows for the nine months ended September 28, 2012 and September 30, 2011, are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. However, actual results could differ from the estimates.

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 (“FASB”) and the Accounting Standard Codification (“ASC”) 810 — Consolidation . In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses 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.

We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our strategic business Groups 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, our share of the joint venture’s net earnings is reported in “Other income, net” in the consolidated statement of operations.

Noncontrolling interests

We record the impact of our partners’ interest in less than wholly owned consolidated joint ventures as noncontrolling interests. Currently DynCorp International FZ-LLC (“DIFZ”) is our only consolidated joint venture for which we do not own 100% of the entity. On March 15, 2012, we entered into a non-cash dividend distribution transaction with Cerberus Series Four Holdings, LLC and Cerberus Partners II, L.P., in which we distributed half of our 50% ownership in DIFZ. We now hold 25% ownership interest in DIFZ. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ. Noncontrolling interests is presented on the face of the statement of operations as an increase or reduction in arriving at “Net income attributable to Delta Tucker Holdings, Inc.” Noncontrolling interests on the balance sheet is located in the equity section. See Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information regarding DIFZ.

 

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Accounting Policies

There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our 2011 Annual Report, except for the adoption of Accounting Standards Update (“ASU”) No. 2011-04 - Fair Value Measurements and ASU No. 2011-05 - Presentation of Comprehensive Income as discussed in “Accounting Developments” below.

Accounting Developments

Pronouncements Implemented

On May 12, 2011, the FASB issued ASU No. 2011-04 - Fair Value Measurements . The ASU was issued as a joint effort by the FASB and the International Accounting Standards Board (“IASB”) to develop a single converged fair value framework. The ASU provides guidance on how and when to measure fair value and the required disclosures. There are few differences between the ASU and the international counterpart. While the ASU is largely consistent with existing fair value measurement principles under GAAP, it expands the existing disclosure requirements for fair value measurements and makes other amendments to ASC 820 - Fair Value Measurement . Many of these amendments are being made to eliminate unnecessary wording differences between GAAP and IFRS. However, some could change how the fair value measurement guidance in ASC 820 is applied. The ASU is effective for interim and annual periods beginning after December 15, 2011, for public entities. We adopted ASU No. 2011-04 during the quarter ended March 30, 2012. The adoption of this ASU did not have a material effect on our consolidated financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05 - Presentation of Comprehensive Income . The ASU amends ASC 220 - Comprehensive Income , to eliminate the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity, require presentation of each component of net income and each component of OCI (and their respective totals) either in a single continuous statement or in two separate statements, and require presentation of reclassification adjustments on the face of the statement. The amendments do not change the option to present components of OCI either before or after related income tax effects; they do not change the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share. On October 21, 2011, the FASB issued a deferral of the new requirement to present reclassifications of OCI on the face of the income statement. Companies were still required to adopt the other requirements contained in the new accounting standard for the presentation of comprehensive income. The amendments made are applied retrospectively and are effective for SEC registrants for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. We adopted ASU No. 2011-05 during the quarter ended March 30, 2012 and chose to present comprehensive income (loss) as two separate but consecutive statements. See the Statements of Operations and Statements of Comprehensive Income.

Pronouncements Not Yet Implemented

On July 27, 2012, the FASB issued ASU No. 2012-02 - Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The ASU was issued to amend the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. This ASU permits an entity the option to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. The results of the qualitative assessment would be used as a basis in determining whether it is necessary to perform the two-step quantitative impairment test. If the qualitative assessment supports the conclusion that it is more-likely-than-not that the fair value of the asset exceeds its carrying amount, the entity would not need to perform the two-step quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We do not believe that the adoption of this ASU will have a material effect on our consolidated financial position and results of operations.

 

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Note 2 — Composition of Certain Financial Statement Captions

The following tables present financial information of certain consolidated balance sheet captions.

Prepaid expenses and other current assets — Prepaid expenses and other current assets were:

 

     As Of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

Prepaid expenses

   $ 59,915       $ 38,092   

Income tax refunds receivable

     943         2,236   

Inventories

     8,245         7,005   

Assets held for sale

     10,902         11,084   

Work-in-process

     7,244         10,223   

Joint venture receivables

     1,372         3,959   

Favorable contracts

     1,101         4,825   

Other current assets

     8,247         11,453   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 97,969       $ 88,877   
  

 

 

    

 

 

 

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. Income tax refunds receivable represents refunds expected through the next year. We value our inventory at lower of cost or market. Other current assets primarily includes miscellaneous accounts receivable.

Assets held for sale are made up of seven helicopters, valued at $8.2 million, that were not deployed on existing programs as of September 28, 2012, as well as aircraft parts inventory related to our former Life Cycle Support Services (“LCCS”) Navy contract. Assets held for sale are valued at lower of cost or market, less cost to sell.

Property and equipment, net — Property and equipment, net were:

 

     As Of  
(Amounts in thousands)    September 28, 2012     December 30, 2011  

Helicopters

   $ 10,932      $ 8,087   

Computers and other equipment

     12,475        9,524   

Leasehold improvements

     10,009        9,367   

Office furniture and fixtures

     4,749        4,738   
  

 

 

   

 

 

 

Gross property and equipment

     38,165        31,716   

Less accumulated depreciation

     (11,827     (7,632
  

 

 

   

 

 

 

Total property and equipment, net

   $ 26,338      $ 24,084   
  

 

 

   

 

 

 

Depreciation expense was $1.4 million and $4.3 million during the three and nine months ended September 28, 2012, respectively, including certain depreciation amounts classified as Cost of services. Depreciation expense was $1.3 million and $4.0 million during the three and nine months ended September 30, 2011, respectively, including certain depreciation amounts classified as Cost of services.

 

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Other assets, net — Other assets, net were:

 

     As Of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

Deferred financing costs, net

   $ 25,444       $ 32,710   

Investment in affiliates

     21,648         27,700   

Palm promissory notes, long-term portion

     4,150         5,307   

Other

     862         2,006   
  

 

 

    

 

 

 

Total other assets, net

   $ 52,104       $ 67,723   
  

 

 

    

 

 

 

Deferred financing cost is amortized through interest expense. Amortization related to deferred financing costs was $1.9 million and $5.8 million during the three and nine months ended September 28, 2012, respectively. Amortization related to deferred financing costs was $2.1 million and $6.3 million for the three and nine months ended September 30, 2011, respectively. Deferred financing costs were reduced during the nine months ended September 28, 2012 and September 30, 2011 by $1.5 million and $2.4 million, respectively, related to the pro rata write–off of financing costs to loss on early extinguishment of debt as a result of prepayments on the term loan. We made principal prepayments of $60.0 million during the nine months ended September 28, 2012 and $48.6 million during the nine months ended September 30, 2011, respectively. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.

Accrued payroll and employee costs — Accrued payroll and employee costs were:

 

     As Of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

Wages, compensation and other benefits

   $ 96,571       $ 102,427   

Accrued vacation

     22,546         26,077   

Accrued contributions to employee benefit plans

     796         523   
  

 

 

    

 

 

 

Total accrued payroll and employee costs

   $ 119,913       $ 129,027   
  

 

 

    

 

 

 

Accrued liabilities — Accrued liabilities were:

 

     As Of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

Deferred revenue and customer liability

   $ 33,085       $ 12,084   

Insurance expense

     56,464         48,715   

Interest expense

     13,027         24,480   

Unfavorable contract liability

     3,445         6,867   

Contract losses

     9,899         6,456   

Legal matters

     12,732         4,782   

Subcontractor retention

     11,354         5,927   

Financed insurance

     41,843         17,804   

Other

     13,067         22,060   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 194,916       $ 149,175   
  

 

 

    

 

 

 

Deferred revenue is primarily due to payments in excess of revenue recognized related to customer advances. Subcontractor retention is related to the retention primarily under the LOGCAP IV and INL programs. Other is comprised of Accrued Rent and Workers Compensation related claims and other individual balances that are not individually material to the consolidated financial statements. Legal matters includes reserves related to various lawsuits and claims that arise in the normal course of business. See Note 8 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

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Other long-term liabilities — Other long-term liabilities were:

 

    As Of  
(Amounts in thousands)   September 28, 2012     December 30, 2011  

Unfavorable contract liability

  $ 1,889      $ 6,761   

Unrecognized tax benefit

    1,621        2,614   

Unfavorable lease accrual

    5,123        14,631   

Other

    2,764        3,626   
 

 

 

   

 

 

 

Total other long-term liabilities

  $ 11,397      $ 27,632   
 

 

 

   

 

 

 

 

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Note 3 — Goodwill and Other Intangible Assets

In January 2012, our organizational structure was amended. As part of these changes, we re-aligned our Business Area Teams (“BATs”) into strategic business “Groups” reporting directly to the President of the Company. The prior three operating segments, Global Stabilization and Development Solutions (“GSDS”), Global Platform Support Solutions (“GPSS”) and Global Linguist Solutions (“GLS”) were re-aligned into six operating segments which include the LOGCAP (“LOGCAP”) Group, Aviation (“Aviation”) Group, Training and Intelligence Solutions (“TIS”) Group, Global Logistics & Development Solutions (“GLDS”) Group, Security Services (“Security”) Group and the GLS Group. GLS is a 51% owned unconsolidated joint venture. We do not have control over the operational performance of GLS, however, 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 a reporting segment. Our reporting segments are the same as our operating segments.

The change in our goodwill balance by operating segment from December 30, 2011 to September 28, 2012 includes additional goodwill obtained as a result of the acquisition of Heliworks, Inc. See Note 13 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of the acquisition.

We assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified. During the three months ended September 28, 2012, we noted certain indicators relating to our Training and Mentoring (“TM”) reporting unit that were significant enough to conclude a triggering event had occurred. Specifically, we noted a decline in revenue and operating income, in excess of projected forecasts. The TM reporting unit has been subject to uncertain market trends and shifts in program priorities and funding requirements which have resulted in lower margins during the quarter. The first step of the impairment test indicated the carrying value of goodwill with respect to the TM reporting unit was less than the fair value. We performed step two of the impairment test and determined that the implied goodwill for the reporting unit was lower than the carrying amount. As a result, a non-cash impairment charge of $30.9 million was recorded during the three months ended September 28, 2012 to impair the carrying value of the TM reporting unit within the TIS segment. The impairment charge has been presented separately in the consolidated statement of operations and as mentioned above, relates solely to the TIS segment and fully impairs the carrying amount of goodwill related to the TM reporting unit.

The fair value of the TM reporting unit and the assets and liabilities identified in the step two impairment test were determined using the combination of the income approach and the market approach, which are Level 3 and Level 2 inputs, respectively. See Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of fair value. In calculating the fair value of the TM reporting unit, we used unobservable inputs and management judgment. We used the following estimates and assumptions in the discounted cash flow analysis:

 

   

terminal value growth rates based on real rates of growth and inflationary growth;

 

   

terminal EBITDA margins, as a percentage of revenue reflecting forecasted EBITDA margins;

 

   

discount rates based on weighted-average cost of capital; and

 

   

assumptions regarding future capital expenditures.

The market approach analysis utilized observable inputs as it considered the inputs of other comparable companies.

As of September 28, 2012, there were no indicators of goodwill impairment for the Company’s remaining reporting units. In connection with our annual assessment of goodwill during the fourth quarter of calendar year 2012, we will update our key assumptions, including revenue and income forecasts, for each of our reporting units. There can be no assurance that the Cost of sales estimates and assumptions regarding forecasted cash flows of certain reporting units, the period or strength of the U.S. defense spending, including the sequestration of appropriation in fiscal year 2013 under the Budget Act, or other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.

 

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The carrying amount of goodwill, by segment, was as follows:

 

(Amounts in thousands)    Aviation      GLDS      TIS     LOGCAP      Security      GLS      Total  

Goodwill balance as of December 30, 2011

   $ 439,350       $ 120,636       $ 71,882      $ —         $ 13,735       $ —         $ 645,603   

Heliworks acquisition

     3,038         —           —          —           —           —           3,038   

Impairment of goodwill (1)

     —           —           (30,859     —           —           —           (30,859
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill balance as of September 28, 2012

   $ 442,388       $ 120,636       $ 41,023      $ —         $ 13,735       $ —         $ 617,782   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the impairment of goodwill on the TM reporting unit recorded as of September 28, 2012.

 

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The following tables provide information about changes relating to certain intangible assets:

 

     As of September 28, 2012  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

  

Customer-related intangible assets

     6.8       $ 350,912       $ (88,946   $ 261,966   

Other

  

Finite-lived

     4.7         32,636         (16,076     16,560   

Indefinite-lived

      $ 5,059       $ —        $ 5,059   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 388,607       $ (105,022   $ 283,585   
     

 

 

    

 

 

   

 

 

 

Tradenames:

  

Finite-lived

     2.6       $ 869       $ (401   $ 468   

Indefinite-lived

        43,221         —          43,221   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 44,090       $ (401   $ 43,689   
     

 

 

    

 

 

   

 

 

 
     As of December 30, 2011  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

  

Customer-related intangible assets

     7.6       $ 350,912       $ (59,399   $ 291,513   

Other

     5.0         30,500         (11,273     19,227   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 381,412       $ (70,672   $ 310,740   
     

 

 

    

 

 

   

 

 

 

Tradenames:

  

Finite-lived

     3.4       $ 869       $ (267   $ 602   

Indefinite-lived

        43,058         —          43,058   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 43,927       $ (267   $ 43,660   
     

 

 

    

 

 

   

 

 

 

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $11.3 million and $34.5 million for the three and nine months ended September 28, 2012, respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $11.4 million and $35.5 million for the three and nine months ended September 30, 2011, respectively. Other intangibles is primarily representative of our capitalized software which had a net value of $10.1 million and $11.2 million as of September 28, 2012 and December 30, 2011, respectively.

The following table outlines an estimate of future amortization based upon the finite-lived intangible assets owned and the finite-lived tradenames as of September 28, 2012:

 

(Amounts in thousands)    Amortization Expense  

Estimate for three month period ending December 28, 2012

   $ 11,697   

Estimate for calendar year 2013

     44,173   

Estimate for calendar year 2014

     43,495   

Estimate for calendar year 2015

     41,417   

Estimate for calendar year 2016

     38,987   

Thereafter

     99,225   

 

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Note 4 — Income Taxes

The provision (benefit) for income taxes consists of the following:

 

(Amounts in thousands)   Three Months Ended
September 28, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Current portion:

       

Federal

  $ —        $ (461   $ —        $ (461

State

    (22     166        204        522   

Foreign

    2,297        615        3,911        2,094   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,275      $ 320      $ 4,115      $ 2,155   

Deferred portion :

       

Federal

  $ (972   $ (23,531   $ 7,433      $ (19,339

State

    42        (656     175        (539

Foreign

    48        (11     21        (64
 

 

 

   

 

 

   

 

 

   

 

 

 
    (882     (24,198     7,629        (19,942
 

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

  $ 1,393      $ (23,878   $ 11,744      $ (17,787
 

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax liabilities, net consist of the following:

 

     As Of  
(Amounts in thousands)    September 28, 2012     December 30, 2011  

Current deferred tax liabilities

   $ (75,278   $ (78,912

Non-current deferred tax liabilities

     (35,212     (23,136
  

 

 

   

 

 

 

Deferred tax liabilities, net

   $ (110,490   $ (102,048
  

 

 

   

 

 

 

A reconciliation of the statutory federal income tax rate to our effective rate is provided below:

 

    Three Months Ended
September 28, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Statutory rate

    35.0     35.0     35.0     35.0

State income tax, less effect of federal deduction

    (0.2 )%      0.8     2.6     0.3

Goodwill impairment

    (47.6 )%      —          40.6     —     

Noncontrolling interests

    1.3     1.0     (6.0 )%      2.1

Other

    0.5     0.1     6.9     (1.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

    (11.0 )%      36.9     79.1     36.3
 

 

 

   

 

 

   

 

 

   

 

 

 

As of September 28, 2012, we had U.S. federal and state net operating losses of approximately $16.8 million and $160.1 million, respectively. As of December 30, 2011 we had approximately $60.8 million and $197.4 million in U.S. federal and state net operating losses, respectively. Our federal net operating losses will begin to expire in 2030, and our state net operating losses will begin to expire in 2015 but the majority will not begin to expire until 2020 or later. Additionally, at September 28, 2012 and December 30, 2011, we had foreign tax credit carry forwards of approximately $25.0 million and $20.9 million, respectively, which will begin to expire in 2017. We expect to fully utilize our federal and state net operating losses as well as our foreign tax credit carry forwards prior to their expiration. We do not expect to make any federal income tax payments for calendar year 2012; however, we do believe we will return to paying federal income taxes in calendar year 2013, as we anticipate our net operating losses (“NOLs”) and foreign tax credits will be exhausted during the next calendar year.

In evaluating our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. We assess such factors as the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and available tax planning strategies in determining the need for or sufficiency of a valuation allowance. Based on this assessment, we concluded that no valuation allowance was necessary as of September 28, 2012.

 

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As of September 28, 2012 and December 30, 2011, we had $9.9 million and $11.2 million of total unrecognized tax benefits, respectively, of which $4.1 million and $6.1 million, respectively, would impact our effective tax rate if recognized. It is expected that of the $9.9 million of unrecognized tax benefits, $1.2 million will change in the next twelve months. As of December 30, 2011 we recorded a reserve for uncertain tax positions in the deferred tax accounts, offsetting the NOLs, and FTCs in the amount of $8.6 million.

Note 5 — Accounts Receivable

Accounts receivable, net consisted of the following:

 

     As Of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

Billed

   $ 254,373       $ 291,780   

Unbilled

     524,157         460,976   
  

 

 

    

 

 

 

Total accounts receivable

   $ 778,530       $ 752,756   
  

 

 

    

 

 

 

Unbilled receivables as of September 28, 2012 and December 30, 2011 include $21.2 million and $25.8 million, respectively, related to costs incurred on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract and for which formal contracts or contract modifications have not been executed at the end of the respective periods. The unbilled receivables balance consists of costs and fees billable immediately, upon contract completion or other specified events. Our unbilled accounts receivable balance as of September 28, 2012 and December 30, 2011 includes $5.7 million that was formally submitted as a claim during the three months ended September 28, 2012. We believe we have legal entitlement to recover the costs from the customer under the terms of the specified contract. All of the unbilled receivables are expected to be billed and collected within one year, except items that have resulted in a request for equitable adjustment or a formal claim.

Note 6 — Fair Value of Financial Assets and Liabilities

ASC 820 – Fair Value Measurements and Disclosures establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

   

Level 1, defined as observable inputs such as quoted prices in active markets;

 

   

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

   

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts and notes receivable and accounts payable, the fair value of these instruments approximates the carrying value. Our estimate of the fair value of our long-term debt is based on quoted prices in active markets which are Level 1 inputs as defined above.

 

     September 28, 2012      December 30, 2011  
(Amounts in thousands)    Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

10.375% senior unsecured notes

   $ 455,000       $ 392,438       $ 455,000       $ 395,850   

Senior secured credit facility

     357,272         357,719         417,272         408,927   

9.5% senior subordinated notes

     —           —           637         622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 812,272       $ 750,157       $ 872,909       $ 805,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 7 — Long-Term Debt

Long-term debt consisted of the following:

 

     As of  
(Amounts in thousands)    September 28, 2012      December 30, 2011  

9.5% senior subordinated notes

   $ 637       $ 637   

Senior secured credit facility

     357,272         417,272   

10.375% senior unsecured notes

     455,000         455,000   
  

 

 

    

 

 

 

Total indebtedness

     812,909         872,909   

Less current portion of long-term debt

     637         —     
  

 

 

    

 

 

 

Total long-term debt

   $ 812,272       $ 872,909   
  

 

 

    

 

 

 

The current portion of long-term debt as of September 28, 2012 was $0.6 million, which consists of our 9.5% senior subordinated notes that mature on February 15, 2013. The total due on the Term Loan is included in Long-term debt, in our consolidated balance sheet as of September 28, 2012 and December 30, 2011.

Senior Credit Facility

On July 7, 2010, we entered into a senior secured credit facility (the “Original Senior Credit Facility”), with a banking syndicate and Bank of America, NA as Agent. On August 10, 2011, DynCorp International Inc. entered into an amendment to the Senior Credit Facility (the “Amendment” and, together with the Original Senior Credit Facility, the “Senior Credit Facility”).

Our Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. It provides for a six year, $570 million term loan facility (“Term Loan”) and a four year, $150 million revolving credit facility (“Revolver”), including a $100 million letter of credit subfacility. As of September 28, 2012 and December 30, 2011, the additional available borrowing capacity under the Senior Credit Facility was approximately $111.2 million and $109.6 million, respectively, which gives effect to $38.8 million and $40.4 million, respectively, in letters of credit. The maturity date on the Term Loan is July 7, 2016 and the maturity date on the Revolver is July 7, 2014. Amounts borrowed under our Revolver are used to fund operations. We had no Revolver borrowings as of September 28, 2012. As of March 30, 2012 we were in default under our Revolver for failing to deliver annual financial statements and other related documents by March 29, 2012. Because of the default we did not have access to borrow additional funds under the Revolver. We filed our annual financial statements on April 9, 2012 curing the default and restoring full access to the Revolver. As of September 28, 2012, we were in compliance with our financial covenants.

Interest Rates on Term Loan & Revolver

Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate (“Base Rate”) as defined in the Senior Credit Facility plus an applicable margin or the (ii) London Interbank Offered Rate (“Eurocurrency Rate”) as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency Rate option based on our outstanding Secured Leverage Ratio at the end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $50 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%.

The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of September 28, 2012 and December 30, 2011, the applicable interest rate for our Term Loan was 6.25%.

 

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Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate Loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of September 28, 2012 and December 30, 2011, the applicable interest rate for our letter of credit subfacility was 4.5%. As of September 28, 2012 and December 30, 2011, the applicable interest rate for our unused commitment fees was 0.75%. All of our letters of credit are also subject to a 0.25% fronting fee.

Principal Payments

There is an annual excess cash flow requirement, which is defined in the Senior Credit Facility. This excess cash flow requirement began in 2012, based on our annual financial results from 2011. We are not required in 2012, to make an additional principal payment related to this excess cash flow requirement. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of the business or a significant asset sale. We had no such transactions for the quarter ended September 28, 2012.

During the nine months ended September 28, 2012, we made $60.0 million in principal prepayments on our Term Loan facility. Deferred financing costs associated with the prepayment totaling $1.5 million and $2.4 million were expensed and are included in Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 28, 2012 and September 30, 2011, respectively.

During the nine months ended September 30, 2011, we made a $48.6 million principal prepayment on our Term Loan facility, and $4.0 million in quarterly principal payments. Our Term Loan facility provided for quarterly principal payments of $1.4 million that began in December 2010. In October 2011, the principal prepayment of $48.7 million made on our Term Loan was applied to all future schedule maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.

Covenants

The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. 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 and a minimum interest coverage ratio that must be maintained.

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 could not be greater than 5.5 to 1.0 for the period of April 3, 2011 to June 29, 2012. As of June 29, 2012, the maximum total leverage ratio diminishes quarterly or semi-annually. The maximum leverage ratio for the third quarter 2012 was 5.25 to 1.0 and decreases to 5.0 to 1.0 beginning the fourth quarter of 2012 and will remain at this level through June 28, 2013.

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 of April 3, 2011 to June 29, 2012. The minimum interest ratio increases quarterly or semi-annually as of June 29, 2012. The minimum interest coverage ratio for the third quarter 2012 was 1.85 to 1.0 and will remain at this level through December 28, 2012.

 

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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. On March 30, 2012, we notified Bank of America N.A. (the “Administrative Agent”) of a default in connection with the failure to deliver to the Administrative Agent the financial statements, reports and other documents under the Senior Credit Facility with respect to the fiscal year ended December 30, 2011. The default was cured with the filing of the 2011 Annual Report to the SEC on April 9, 2012.

Senior Unsecured Notes

On July 7, 2010, DynCorp International Inc. completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes due 2017 (the “Senior Unsecured Notes”). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the “Indenture”), by and among us, the guarantors party thereto (the “Guarantors”), including DynCorp International Inc., and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes is payable on January 1 and July 1 of each year, and commenced on January 1, 2011.

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

 

   

incur additional indebtedness;

 

   

make certain payments, including declaring or paying certain dividends;

 

   

purchase or retire certain equity interests;

 

   

retire subordinated indebtedness;

 

   

make certain investments;

 

   

sell assets;

 

   

engage in certain transactions with affiliates;

 

   

create liens on assets;

 

   

make acquisitions; and

 

   

engage in mergers or consolidations.

The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings by both Moody’s Investor Services and Standard and Poor’s.

We can redeem the Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture requires us to offer to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events. In the case of Asset Sales (as defined in the Indenture), we are required under the Indenture to use the proceeds from such asset sales to either (i) prepay secured debt or nonguarantor debt, (ii) reinvest in our business or (iii) to the extent asset sale proceeds not applied in accordance with clause (i) or (ii) exceed $15 million, make an offer to repurchase the Senior Unsecured Notes at 100% of the principal amount thereof.

Call and Put Options

We can voluntarily settle all or a portion of the Senior Unsecured Notes at any time prior to July 1, 2014. Such a voluntary settlement would require payment of 100% of the principal amount plus the applicable premium (or make-whole premium), and accrued and unpaid interest and additional interest, if any, as of the applicable redemption date. The applicable premium with respect to the Senior Unsecured Notes on any applicable redemption date is the greater of (1) 1.0% of the then outstanding principal amount of the Senior Unsecured Notes; and (2) the excess of (a) the present value at such redemption date of (i) the redemption price of the Senior Unsecured Notes at July 1, 2014 plus (ii) all required interest payments due on the Note through July 1, 2014 (excluding accrued but unpaid interest), computed using a discount rate equal to the treasury rate, as defined in the Indenture, as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the Senior Unsecured Notes. Subsequent to July 1, 2014, we have the option to redeem the Senior Unsecured Notes at pre-defined prices.

In the event of a change in control, each holder of the Senior Unsecured Notes will have the right to require the Company to repurchase some or all of the Senior Unsecured Notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date.

 

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Note 8 — Commitments and Contingencies

Commitments

We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable or cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $48.2 million and $169.3 million during the three and nine months ended September 28, 2012, respectively. Lease rental expense was $35.8 million and $91.5 million during the three and nine months ended September 30, 2011, respectively. We have no significant long-term purchase agreements with service providers.

Contingencies

General Legal Matters

We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in “Other accrued liabilities” totaling approximately $12.7 million and $4.8 million as of September 28, 2012 and December 30, 2011, respectively. Except as disclosed below, none of our reserves as of September 28, 2012 were individually material. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at September 28, 2012. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of September 28, 2012. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.

Pending Litigation and Claims

On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of international law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010, 1,256 of the plaintiffs have been dismissed by court orders and, on September 15, 2010, the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. We have filed multiple motions for summary judgment which are pending. The amended complaint does not demand any specific monetary damages; however, a court decision against us could have a material effect on our results of operations and financial condition, if we are unable to obtain reimbursement from the DoS. The aerial spraying operations were and continue to be managed by us under a DoS contract in cooperation with the Colombian government. The DoS contract provides indemnification to us against third-party liabilities arising out of the contract, subject to available funding. At this time, we believe the likelihood of an unfavorable outcome in this case is remote; however, estimation of potential damages is not possible as there is potential apportionment of damages to multiple defendants and possible indemnification available to us from the DoS.

A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the

 

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spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010, fifteen of the plaintiffs have been dismissed by court order. We have filed multiple motions for summary judgment which are pending. The terms of the DoS contract provide that the DoS will indemnify our operating company against third-party liabilities arising out of the contract, subject to available funding. We are also entitled to indemnification by Computer Sciences Corporation, our former parent, in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote; however, estimation of potential damages is not possible as there is potential apportionment of damages to multiple defendants and indemnification available to us from multiple sources, including the DoS and Computer Sciences Corporation.

Arising out of the litigation described in the preceding two paragraphs, on September 22, 2008, we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. On November 9, 2009, the court granted our Partial Motion for Summary Judgment regarding the duty to defend, and the carriers have paid the majority of the litigation expenses. In a related action, the carriers filed a lawsuit against us on February 5, 2009, seeking rescission of certain aviation insurance policies based on an alleged misrepresentation by us concerning the existence of certain of the lawsuits relating to the eradication of narcotic plant crops. On May 19, 2010, our aviation insurance carriers filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. The Company believes that the claims asserted by the insurance carriers are without merit and unlikely to result in a material effect on our results of operations, financial condition, or cash flows.

In 2009, we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit, was challenged in certain instances. In December 2011, the customer filed arbitration alleging fraud, gross negligence, contract violations, and conversion of funds and asserted damages of approximately $150 million. We believe our right to terminate this contract was justified and permissible under the terms of the contract, and we intend to vigorously contest the claims brought against us. Additionally, we believe the contract limits any damages to a maximum of $3 million, except in situations of gross negligence and willful misconduct. We are not able to determine the likely outcome of the arbitration as the specific assertions are uncertain; thus, we cannot estimate a range of potential loss, if any.

On July 8, 2009, a lawsuit was filed in the United Arab Emirates (“UAE”) Abu Dhabi Court of First Instance, by Al Hamed ITC (hereafter “Al Hamed”) concerning an October 2002 business development contract focused upon obtaining business directly with the UAE General Military Directorate (“GMD”). Al Hamed was unsuccessful in assisting the company in soliciting business with GMD and, as such, the contract with Al Hamed was terminated in July 2006. We became a subcontractor to the successful bidder, Al Taif, in December 2006. Al Hamed filed a claim seeking $57 million in damages under the business development contract. On May 9, 2012, the court awarded Al Hamed 8.2 million in UAE Dirhams ($2.2 million U.S. dollars) plus 5% interest and expenses. The Company and Al Hamed both appealed the judgment. On September 12, 2012, the appellate court altered the judgment stating the amount should not have been in UAE Dirhams rather in U.S. dollars, which amounts to $8.2 million US dollars. As of September 28, 2012, a reserve has been established for the full amount of the judgment. We believe the judgment contains numerous legal and factual errors, and we filed an appeal with the Supreme Court in Abu Dhabi. We intend to strongly contest the court’s decision and seek reversal of the judgment.

U.S. Government Investigations

We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements, including as previously disclosed in our periodic filings, the Special Inspector General for Iraq Reconstruction report regarding certain reimbursements and the U.S. Department of State Office of Inspector General’s records subpoena with respect to Civilian Police (“CivPol”). Such investigations, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.

As previously disclosed, we identified certain payments made on our behalf by two subcontractors to expedite the issuance of a limited number of visas and licenses from a foreign government’s agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. We retained outside counsel to investigate these payments. In November 2009, we voluntarily brought this matter to the attention of the U.S. Department of Justice and the SEC. We are cooperating with the government’s review of this matter. We are also continuing our evaluation of our internal policies and procedures. Based on the facts currently known, we believe that this matter will not yield a negative outcome and will not have a material effect on our business, financial condition, results of operations or cash flow.

 

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On August 16, 2005, we were served with a Department of Justice Federal Grand Jury Subpoena seeking documents concerning work performed by a former subcontractor, Al Ghabban in 2002-2005. Specifically, during the 2002-2005 timeframe, Al Ghabban performed line haul trucking work to transport materials throughout the Middle Eastern theater on the War Reserve Materials Program. In response to the subpoena in 2005, we provided the requested documents to the Department of Justice, and the matter was subsequently closed in 2005 without any action taken. In April 2009, we received a follow up telephone call concerning this matter from the Department of Justice Civil Litigation Division. Since that time, we have had several discussions with the government regarding the civil matter. In response to requests, we provided additional information to the Department of Justice Civil Litigation Division. We are fully cooperating with the government’s review and believe that the likelihood of an unfavorable judgment resulting from this matter is reasonably possible. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. At this time, an estimate or a range of potential damages is not possible as this matter is still under review by the Department of Justice and no formal complaint has been filed.

On February 24, 2012, we were advised by the Department of Justice Civil Litigation Division that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission (“DASM”) contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. The Department of Justice Civil Litigation Division has requested information from the Company, and we are fully cooperating with the government’s review. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. At this time, an estimate or a range of potential damages is not possible as this matter is still under review by the Department of Justice and no formal complaint has been filed.

U.S. Government Audits

Our contracts are regularly audited by the Defense Contract Audit Agency (“DCAA”), the Defense Contract Management Agency (“DCMA”) and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating and accounting systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If the Company is unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations. Since we cannot reasonably estimate the results of a DCAA or other government agency audit, these items represent loss contingencies that we consider reasonably possible. Due to the nature of our business, the continual oversight of and audits by governmental agencies and the number of contracts under which we perform, we cannot, at this time, provide a reasonable estimate of the range of loss for these contingencies.

The DCMA formally notified us of non-compliance with Cost Accounting Standard 403, Allocation of Home Office Expenses to Segments, on April 11, 2007. We issued a response to the DCMA on April 26, 2007 with a proposed solution to resolve the area of non-compliance, which related to the allocation of corporate general and administrative costs between our divisions. On August 13, 2007, the DCMA notified us that additional information would be necessary to justify the proposed solution. We issued responses on September 17, 2007, April 28, 2008 and September 10, 2009. In June 2012, we reached a favorable final resolution on this matter resulting in no impact to the Company. The matter is now considered closed.

Over the past year, we have received a series of final audit reports from the DCAA, some of which have resulted in Form 1’s, related to their examination of certain incurred, invoiced and reimbursed costs on our Civilian Police program for periods ranging from April 17, 2004 through April 2, 2010. The Form 1’s identify several cost categories where the DCAA has asserted instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The asserted amounts are derived from extrapolation methodologies used to estimate potential exposure amounts for the cost categories which when aggregated for all final audit reports and Form 1’s total approximately $141.3 million. Over the past year, the Company has worked with DCAA in resolving matters inclusive in the Form 1s. We have provided responses to the DCAA for each letter, in which we have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. We have also sought to obtain clarification from our customer through formal contract modifications in an attempt to assist the DCAA in closing these issues. We believe the majority of these issues will continue to be resolved and thus represent loss contingencies that we consider reasonably possible or remote depending on the cost category. We continue to work with the customer and the DCAA to resolve any remaining questions they may have and provide clarification of the facts and circumstances surrounding the issues.

 

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Credit and Concentration Risks

As a U.S. government contractor we are subject to certain risks not experienced by our commercial counterparts because of the unilateral contract right of the U.S. government to terminate a contract. Funding for our programs is dependent upon annual budget and appropriation decisions, as well as geo-political and macroeconomic conditions, which are beyond our control. Should Congress and the Administration fail to change or delay a pending sequestration of appropriations in fiscal year 2013 imposed by the Budget Control Act of 2011, many U.S. government agencies and departments could see their budgets dramatically reduced across the board in January 2013. While these dynamics could place pressure on DoD and DoS spending, we believe the services we provide will likely receive less pressure than asset centric programs. While we believe it is reasonably possible that we will see a material reduction in the funding available to the programs we support, we are not currently aware of any specific contingencies or changes in management estimates that would be materially impacted by sequestration. The specific contracts to be effected by sequestration, if any, are not known at this time as the U.S. government has not provided such information.

Risk Management Liabilities and Reserves

We are insured for domestic worker’s compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic worker’s compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic worker’s compensation and medical costs is limited based on fixed dollar amounts. For domestic worker’s compensation and employer’s liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.25 million for total costs per covered participant per calendar year.

Note 9 — Segment Information

As of December 30, 2011, we had three operating and reportable segments, GSDS, GPSS and GLS, two of which were wholly-owned. The third segment, GLS, is a 51% owned joint venture. In January of 2012, our organizational structure was amended to better align how the Company addresses the markets we serve, respond to changes in our customers’ strategic outlook and better reflect the current economic environment. As part of these changes, we re-aligned our BATs into strategic business “Groups.” Under the new alignment, there are six operating and reportable segments which include LOGCAP, Aviation, Training and Intelligence Solutions, Global Logistics & Development Solutions, Security Services, and GLS. Our segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies. We excluded certain costs that are not directly allocable to our segments from the segment results and included these costs in headquarters.

 

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The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:

 

(Amounts in thousands)   Three Months Ended
September 28, 2012
    Three Months Ended
September 30, 2011
    Nine Months Ended
September 28, 2012
    Nine Months Ended
September 30, 2011
 

Revenue

       

LOGCAP

  $ 438,255      $ 383,289      $ 1,333,770      $ 1,165,065   

Aviation

    348,560        283,310        968,206        813,744   

Training & Intelligence Solutions

    124,989        156,603        413,924        471,420   

Global Logistics & Development Solutions

    66,199        81,081        216,034        226,470   

Security Services

    30,058        18,154        81,358        45,494   

GLS

    13,672        89,524        43,424        314,675   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

    1,021,733        1,011,961        3,056,716        3,036,868   

GLS deconsolidation (1)

    (13,672     (89,524     (43,424     (314,675

Headquarters (2)

    2,253        12,956        5,177        16,248   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 1,010,314      $ 935,393      $ 3,018,469      $ 2,738,441   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) (3)

       

LOGCAP

  $ 17,997      $ 10,187      $ 44,939      $ 31,581   

Aviation

    30,027        24,485        80,714        54,515   

Training & Intelligence Solutions  (4)

    (26,187     5,624        (17,054     26,326   

Global Logistics & Development Solutions

    6,078        4,628        18,348        11,033   

Security Services

    1,659        1,168        (6,501     3,338   

GLS

    813        7,740        2,864        23,208   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

    30,387        53,832        123,310        150,001   

GLS deconsolidation (1)

    (813     (7,740     (2,864     (23,208

Headquarters (5)

    (19,664     (88,696     (43,553     (108,815
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

  $ 9,910      $ (42,604   $ 76,893      $ 17,978   
 

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

       

LOGCAP

  $ 197      $ 202      $ 591      $ 608   

Aviation

    138        183        495        522   

Training & Intelligence Solutions

    42        42        126        126   

Global Logistics & Development Solutions

    31        30        84        70   

Security Services

    —          —          —          —     

GLS

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

    408        457        1,296        1,326   

GLS deconsolidation (1)

    —          —          —          —     

Headquarters

    12,337        12,232        37,489        38,160   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization  (6)

  $ 12,745      $ 12,689      $ 38,785      $ 39,486   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We deconsolidated GLS effective July 7, 2010.
(2) Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures.
(3) Operating income is presented as items below operating income are primarily representative of headquarter expenses. Operating income is more representative of our reporting segment financial information.
(4) During the three months ended September 28, 2012, we recognized an impairment charge on our goodwill associated with one of the reporting units within the TIS reporting segment as a result of our assessment of a triggering event in the quarter. See Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.
(5) Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income. During the nine months ended September 30, 2011, we recognized an impairment on our equity method investment in GLS. See Note 10 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.

 

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(6) Includes amounts included in Cost of services of $0.4 million and $1.2 million for the three and nine months ended September 28, 2012, respectively and $0.4 million and $1.3 million for the three and nine months ended September 30, 2011, respectively.

The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:

 

     As Of  
(Amounts in thousands)    September 28, 2012     December 30, 2011  

Assets

    

LOGCAP

   $ 662,815      $ 606,703   

Aviation

     421,405        377,823   

Training & Intelligence Solutions

     261,721        324,020   

Global Logistics & Development Solutions

     112,326        157,367   

Security Services

     70,356        72,010   

GLS

     64,456        68,165   
  

 

 

   

 

 

 

Total reportable segments

     1,593,079        1,606,088   

GLS deconsolidation (1)

     (64,456     (68,165

Headquarters (2)

     460,424        476,498   
  

 

 

   

 

 

 

Total assets

   $ 1,989,047      $ 2,014,421   
  

 

 

   

 

 

 

 

(1) We deconsolidated GLS effective July 7, 2010.
(2) Assets primarily include cash, investments in unconsolidated subsidiaries, deferred income taxes, intangible assets (excluding goodwill) and deferred debt issuance cost.

Note 10 — Related Parties, Joint Ventures and Variable Interest Entities

Consulting Fee

The Company has a Master Consulting and Advisory Services agreement (“COAC Agreement”) with Cerberus Operations and Advisory Company, LLC, where pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $0.9 million and $2.2 million in expenses for Cerberus consulting fees during the three and nine months ended September 28, 2012, respectively, and $0.2 million and $1.4 million during the three and nine months ended September 30, 2011, respectively.

Joint Ventures and Variable Interest Entities

PaTH is a joint venture formed in May 2006 with two other partners for the purpose of procuring government contracts with the Federal Emergency Management Authority.

CRS is a joint venture formed in March 2006 with two other partners for the purpose of procuring government contracts with the U.S. Navy.

The GRS joint venture was formed in August of 2010 with one partner, for the purpose of procuring government contracts with the U.S. Navy. During the year ended December 30, 2011, this joint venture was selected as one of four contractors for an IDIQ multiple award contract.

Mission Readiness is a joint venture formed in September 2010 with three members for the purpose of procuring government contracts with the DoD. Subsequent to formation, a fourth member joined the joint venture. Mission Readiness was pursuing a significant contract for which the potential customer requested a 100% performance guarantee from one of the joint venture members. We agreed to provide this guarantee in exchange for similar guarantees from each of the joint venture members. The fair value of our guarantee to the potential customer was determined to be zero at the inception of the contract, thus the related liability was also determined to be zero. There is no value assigned to the guarantees provided to us from the other joint venture members. During the three months ended June 29, 2012, the Company learned Mission Readiness was unsuccessful in obtaining the contract the joint venture was established to pursue. As a result, the members have agreed to liquidate the joint venture. Our investment in and cost incurred associated with the Missions Readiness joint venture were not material.

 

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GLS is a joint venture formed in August 2006 with one partner, McNeil Technologies, Inc., for the purpose of procuring government contracts with the U.S. Army. We incur significant costs on behalf of GLS related to the normal operations of the venture. However, these costs typically support revenue billable to our customer. GLS is not a guarantor under our Senior Credit Facility or our Senior Unsecured Notes in accordance with the agreement.

Babcock is a joint venture formed in January 2005 and currently provides services to the British Ministry of Defence.

Receivables due from our unconsolidated joint ventures, totaled $1.4 million and $3.9 million as of September 28, 2012 and December 30, 2011, respectively, which resulted in an operating cash flow impact of $2.5 million. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled $0.3 million and $3.5 million during the three and nine months ended September 28, 2012, respectively, and $3.0 million and $9.6 million during the three and nine months ended September 30, 2011, respectively. The related cost of services was $0.3 million and $2.8 million during the three and nine months ended September 28, 2012, respectively, and $0.9 million and $2.8 million during the three and nine months ended September 30, 2011, respectively. Additionally, we earned $0.8 million and $4.9 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 28, 2012, respectively, and $4.5 million and $15.1 million during the three and nine months ended September 30, 2011.

GLS’ revenue was $13.7 million and $43.4 million during the three and nine months ended September 28, 2012, respectively, and $89.5 million and $314.7 million during the three and nine months ended September 30, 2011, respectively. GLS’ operating income was $0.8 million and $2.9 million during the three and nine months ended September 28, 2012, respectively, and $7.7 million and $23.2 million during the three and nine months ended September 30, 2011, respectively. GLS’ net income was $0.8 million and $2.9 million during the three and nine months ended September 28, 2012, respectively, and $7.7 million and $23.2 million during the three and nine months ended September 30, 2011. As a result of the impairment recorded in September 2011, we no longer recognized any earnings related to GLS, until we receive cash through dividend distributions.

On February 8, 2012, the DCAA issued GLS a second Form 1 in the amount of $102.0 million, asserting inconsistencies with labor related costs for the fiscal year ended April 3, 2009. The customer has withheld $5.0 million, until this issue is resolved. GLS does not agree with the DCAA’s findings on either of the Form 1s and is currently working with the DCAA and the customer to provide clarification and resolve both matters. If the DCAA Form 1s are not overruled and subsequent appeals are unsuccessful, the decision could have a material effect on GLS’ results of operations. Additionally, in March 2012, GLS received a subpoena from the Inspector General of the U.S. Department of Defense requesting documentation related to its contract with the United States Army. GLS appeared before the Inspector General in April of 2012 with the requested information.

As of December 30, 2011, we owned 50% of DIFZ. On March 15, 2012, we entered into a non-cash dividend distribution transaction with Cerberus Series Four Holdings, LLC and Cerberus Partners II, L.P., in which we distributed half of our 50% ownership in DIFZ. As a result of the distribution we now hold 25% ownership. We recognized the distribution as an increase in noncontrolling interest and a reduction to our Additional-paid-in-capital, given our Accumulated deficit. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ as we continue to incur significant costs on behalf of DIFZ related to our normal operations. The vast majority of these costs are considered direct contract costs and thus billable on several of our contracts supported by DIFZ services.

We currently hold a promissory note from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The note is included in (i) Prepaid expenses and other current assets and in (ii) Other assets on our unaudited condensed consolidated balance sheet for the short and long-term portions, respectively. The loan balance outstanding was $5.3 million and $6.0 million as of September 28, 2012 and December 30, 2011, respectively, reflecting the initial value plus accrued interest, less payments against the promissory notes. The fair value of the notes receivable is not materially different from its carrying value.

 

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The following tables present selected financial information for DIFZ as of September 28, 2012 and December 30, 2011 and for the three and nine months ended September 28, 2012 and September 30, 2011:

 

     As of  
(Amounts in millions)    September 28, 2012      December 30, 2011  

Assets

   $ 20.7       $ 31.2   

Liabilities

     15.7         27.3   

 

(Amounts in millions)    Three Months Ended
September 28, 2012
     Three Months Ended
September 30, 2011
     Nine Months Ended
September 28, 2012
     Nine Months Ended
September 30, 2011
 

Revenue

   $ 128.6       $ 122.1       $ 378.0       $ 359.3   

We account for our investments in VIEs in accordance with ASC 810 - Consolidation . In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of September 28, 2012, we accounted for PaTH, CRS, Babcock, GRS and GLS as equity method investments. Alternatively, we consolidated DIFZ based on the aforementioned criteria. We present our share of the PaTH, CRS, GRS, Mission Readiness and GLS earnings in Earnings from unconsolidated affiliates as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.

The following tables present selected financial information for our equity method investees as of September 28, 2012 and December 30, 2011 and for the three and nine months ended September 28, 2012 and September 30, 2011:

 

     As of  
(Amounts in millions)    September 28, 2012      December 30, 2011  

Current assets

   $ 116.6       $ 146.3   

Total assets

     116.6         146.4   

Current liabilities

     61.4         76.6   

Total liabilities

     62.0         77.0   

 

(Amounts in millions)    Three Months Ended
September 28, 2012
     Three Months Ended
September 30, 2011
     Nine Months Ended
September 28, 2012
     Nine Months Ended
September 30, 2011
 

Revenue

   $ 46.1       $ 122.8       $ 186.9       $ 451.8   

Net income

     3.5         9.8         10.6         29.3   

Many of our VIEs only perform on a single contract. The modification or termination of a contract under a VIE could trigger an impairment in the fair value of our investment in unconsolidated subsidiaries. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i) $21.6 million investment in unconsolidated subsidiaries, (ii) $1.4 million in receivables from our unconsolidated joint ventures, (iii) $5.3 million note receivable from Palm Trading Investment Corp. (“Palm”) and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 28, 2012.

Note 11 — Collaborative Arrangements

We participate in a collaborative arrangement with CH2M Hill on the LOGCAP IV program. During 2008, we executed a subcontract and teaming agreement with CH2M Hill with respect to operations on the LOGCAP IV program, which is considered a collaborative arrangement under GAAP. The purpose of this arrangement is to share some of the risks and rewards associated with this U.S. government contract. Our current share of profits of the LOGCAP IV program is 70%.

We account for this collaborative arrangement under ASC 808 — Collaborative Arrangements and record revenue gross as the principal participant. The cash inflows and outflows, as well as expenses incurred, are recorded in Cost of services in the period realized. Revenue on LOGCAP IV was $438.3 million and $1,333.8 million during the three and nine months ended September 28, 2012, respectively, and $382.7 million and $1,163.3 million during the three and nine months ended

 

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September 30, 2011, respectively. Cost of services on LOGCAP IV program was $407.9 million and $1,244.7 million during the three and nine months ended September 28, 2012, respectively, and $361.2 million and $1,093.6 million during the three and nine months ended September 30, 2011, respectively. Our share of the total LOGCAP IV profits was $18.0 million and $44.9 million during the three and nine months ended September 28, 2012, respectively, and $10.0 million and $31.5 million during the three and nine months ended September 30, 2011, respectively.

In June 2012, we executed a collaborative arrangement with Logix USA Corporation on the Egypt Personnel Support Services (“EPSS”) program. The purpose of the arrangement is to share risks and rewards associated with the U.S. government contract. Our share of profits is 85%, and as the principal participant, we will record the revenue and expenses gross in Cost of services in the period realized. Revenue on the EPSS program was $3.8 million and $6.6 million during the three and nine months ended September 28, 2012. Cost of services on the EPSS program was $3.2 million and $5.6 million during the three and nine months ended September 28, 2012. Our share of the total EPSS program profits was $0.5 million and $0.8 million during the three and nine months ended September 28, 2012.

 

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Note 12 — Consolidating Financial Statements of Subsidiary Guarantors

The Senior Unsecured Notes issued by DynCorp International Inc. (“Subsidiary Issuer”) and the Senior Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company (“Parent”) and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Humanitarian Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks, Inc., Phoenix Consulting Group LLC and Casals & Associates Inc. (“Subsidiary Guarantors”). Each of the Subsidiary Issuers and the Subsidiary Guarantors is 100% owned by the Company.

Subsequent to the issuance of the Company’s consolidated financial statements on Form 10-Q for the period ended September 30, 2011, management identified certain errors in the presentation of the condensed consolidating statement of operations contained in this footnote. The errors were the result of certain adjustments being incorrectly applied to the Subsidiary Guarantors, Subsidiary Non-Guarantors and Eliminations columns within the three and nine months ended September 30, 2011 statements of operations and the nine months ended September 30, 2011 balance sheet and statement of cash flow in the condensed consolidating financial statements. The impact of the error on Revenue of $352.0 million, was fully offset by the impact of the error on Cost of sales of $352.0 million, and thus had no net impact on the operating income or net income. The condensed consolidated financial statements were not impacted by the error as the error was isolated only to the Guarantor and Non-Guarantor financial statement presented herein. Accordingly, the comparative historical condensed consolidating statements presented herein have been corrected to reclassify certain amounts between the Subsidiary Guarantors, Subsidiary Non-Guarantors and Eliminations columns. The “Parent,” “Subsidiary Issuer” and “Consolidated” columns were not impacted by these corrections.

The following condensed consolidating financial statements present (i) the unaudited condensed consolidating statements of operations for the three and nine months ended September 28, 2012 and September 30, 2011, (ii) the unaudited condensed consolidating balance sheets as of September 28, 2012 and December 30, 2011, (iii) the unaudited condensed consolidating statements of cash flows for the nine months ended September 28, 2012 and September 30, 2011 and (iv) elimination entries necessary to consolidate Parent and its subsidiaries.

The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.

DynCorp International Inc. is considered the Subsidiary Issuer as it issued the Senior Unsecured Notes.

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended September 28, 2012

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

  $ —        $ —        $ 1,014,838      $ 135,627      $ (140,151   $ 1,010,314   

Cost of services

    —          —          (924,602     (129,880     137,344        (917,138

Selling, general and administrative expenses

    —          —          (40,586     (2,568     2,807        (40,347

Depreciation and amortization expense

    —          —          (12,229     (146     —          (12,375

Earnings from equity method investees

    —          —          315        —          —          315   

Impairment of goodwill

    —          —          (30,859     —          —          (30,859
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    —          —          6,877        3,033        —          9,910   

Interest expense

    —          (19,844     (2,167     —          —          (22,011

Loss on early extinguishment of debt

    —          (696     —          —          —          (696

Equity in (loss) income of consolidated subsidiaries, net of tax

    (15,794     (28,662     1,008        —          43,448        —     

Other income (loss), net

    —          —          171        (82     —          89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (15,794     (49,202     5,889        2,951        43,448        (12,708

Benefit (provision) for income taxes

    —          33,408        (34,551     (250     —          (1,393
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (15,794     (15,794     (28,662     2,701        43,448        (14,101

Noncontrolling interests

    —          —          —          (1,693     —          (1,693
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (15,794   $ (15,794   $ (28,662   $ 1,008      $ 43,448      $ (15,794
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended September 30, 2011

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

  $ —        $ —        $ 944,181      $ 130,917      $ (139,705   $ 935,393   

Cost of services

    —          —          (856,417     (125,147     136,219        (845,345

Selling, general and administrative expenses

    —          —          (47,566     (3,564     3,486        (47,644

Depreciation and amortization expense

    —          —          (12,097     (158     —          (12,255

Earnings from equity method investees

    —          —          3,894        —          —          3,894   

Impairment of equity method investment

    —          —          (76,647     —          —          (76,647
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    —          —          (44,652     2,048        —          (42,604

Interest expense

    —          (22,754     (82     —          —          (22,836

Equity in (loss) income of consolidated subsidiaries, net of tax

    (41,628     (25,946     1,124        —          66,450        —     

Other income, net

    —          —          680        34        —          714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income before income taxes

    (41,628     (48,700     (42,930     2,082        66,450        (64,726

Benefit (provision) for income taxes

    —          7,072        16,984        (178     —          23,878   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (41,628     (41,628     (25,946     1,904        66,450        (40,848

Noncontrolling interests

    —          —          —          (780     —          (780
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (41,628   $ (41,628   $ (25,946   $ 1,124      $ 66,450      $ (41,628
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Nine Months Ended September 28, 2012

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

  $ —        $ —        $ 3,033,716      $ 399,553      $ (414,800   $ 3,018,469   

Cost of services

    —          —          (2,780,570     (382,272     406,003        (2,756,839

Selling, general and administrative expenses

    —          —          (116,780     (8,839     8,797        (116,822

Depreciation and amortization expense

    —          —          (37,145     (449     —          (37,594

Earnings from equity method investees

    —          —          538        —          —          538   

Impairment of goodwill

    —          —          (30,859     —          —          (30,859
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    —          —          68,900        7,993        —          76,893   

Interest expense

    —          (60,452     (4,986     —          —          (65,438

Loss on early extinguishment of debt

    —          (1,479     —          —          —          (1,479

Equity in (loss) income of consolidated subsidiaries, net of tax

    (1,228     11,740        3,041        —          (13,553     —     

Other income (loss), net

    —          —          4,927        (65     —          4,862   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (1,228     (50,191     71,882        7,928        (13,553     14,838   

Benefit (provision) for income taxes

    —          48,963        (60,142     (565     —          (11,744
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (1,228     (1,228     11,740        7,363        (13,553     3,094   

Noncontrolling interests

    —          —          —          (4,322     —          (4,322
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (1,228   $ (1,228   $ 11,740      $ 3,041      $ (13,553   $ (1,228
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Nine Months Ended September 30, 2011

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

  $ —        $ —        $ 2,750,646      $ 390,153      $ (402,358   $ 2,738,441   

Cost of services

    —          —          (2,519,513     (373,540     392,641        (2,500,412

Selling, general and administrative expenses

    —          —          (116,663     (10,059     9,717        (117,005

Depreciation and amortization expense

    —          —          (37,751     (478     —          (38,229

Earnings from equity method investees

    —          —          11,830        —          —          11,830   

Impairment of equity method investment

    —          —          (76,647     —          —          (76,647
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    —          —          11,902        6,076        —          17,978   

Interest expense

    —          (69,309     (228     —          —          (69,537

Loss on early extinguishment of debt

    —          (2,397     —          —          —          (2,397

Equity in (loss) income of consolidated subsidiaries, net of tax

    (33,394     12,283        3,190        —          17,921        —     

Other income, net

    —          —          4,958        2        —          4,960   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income before income taxes

    (33,394     (59,423     19,822        6,078        17,921        (48,996

Benefit (provision) for income taxes

    —          26,029        (7,539     (703     —          17,787   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (33,394     (33,394     12,283        5,375        17,921        (31,209

Noncontrolling interests

    —          —          —          (2,185     —          (2,185
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (33,394   $ (33,394   $ 12,283      $ 3,190      $ 17,921      $ (33,394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Three Months Ended September 28, 2012

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated  

Net (loss) income

  $ (15,794   $ (15,794   $ (28,662   $ 2,701      $ 43,448      $ (14,101

Other comprehensive income:

           

Currency translation adjustment

    296        296        171        125        (592     296   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

    296        296        171        125        (592     296   

Income tax expense related to items of other comprehensive income

    (106     (106     (61     (45     212        (106
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    190        190        110        80        (380     190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (15,604     (15,604     (28,552     2,781        43,068        (13,911

Noncontrolling interests

    —          —          —          (1,693     —          (1,693
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (15,604   $ (15,604   $ (28,552   $ 1,088      $ 43,068      $ (15,604
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Three Months Ended September 30, 2011

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated  

Net (loss) income

  $ (41,628   $ (41,628   $ (25,946   $ 1,904      $ 66,450      $ (40,848

Other comprehensive income:

           

Currency translation adjustment

    (337     (337     (45     (292     674        (337
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

    (337     (337     (45     (292     674        (337

Income tax expense related to items of other comprehensive income

    204        204        27        177        (408     204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

    (133     (133     (18     (115     266        (133
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (41,761     (41,761     (25,964     1,789        66,716        (40,981

Noncontrolling interests

    —          —          —          (780     —          (780
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (41,761   $ (41,761   $ (25,964   $ 1,009      $ 66,716      $ (41,761
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Nine Months Ended September 28, 2012

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated  

Net (loss) income

  $ (1,228   $ (1,228   $ 11,740      $ 7,363      $ (13,553   $ 3,094   

Other comprehensive income:

           

Currency translation adjustment

    147        147        144        3        (294     147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

    147        147        144        3        (294     147   

Income tax expense related to items of other comprehensive income

    (54     (54     (53     (1     108        (54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    93        93        91        2        (186     93   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (1,135     (1,135     11,831        7,365        (13,739     3,187   

Noncontrolling interests

    —          —          —          (4,322     —          (4,322
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (1,135   $ (1,135   $ 11,831      $ 3,043      $ (13,739   $ (1,135
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Nine Months Ended September 30, 2011

 

(Amounts in thousands)   Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated  

Net (loss) income

  $ (33,394   $ (33,394   $ 12,283      $ 5,375      $ 17,921      $ (31,209

Other comprehensive income:

           

Currency translation adjustment

    (2     (2     (119     117        4        (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

    (2     (2     (119     117        4        (2

Income tax expense related to items of other comprehensive income

    2        2        127        (125     (4     2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    —          —          8        (8     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (33,394     (33,394     12,291        5,367        17,921        (31,209

Noncontrolling interests

    —          —          —          (2,185     —          (2,185
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (33,394   $ (33,394   $ 12,291      $ 3,182      $ 17,921      $ (33,394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet Information

September 28, 2012

 

(Amounts in thousands)    Parent      Subsidiary
Issuer
     Subsidiary
Guarantors
     Subsidiary
Non-
Guarantors
     Eliminations     Consolidated  
ASSETS   

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 60,248       $ 27,143       $ —        $ 87,391   

Restricted cash

     —           —           1,659         —           —          1,659   

Accounts receivable, net

     —           —           776,765         1,631         134        778,530   

Intercompany receivables

     —           —           196,527         1,113         (197,640     —     

Prepaid expenses and other current assets

     —           —           94,675         2,575         719        97,969   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           —           1,129,874         32,462         (196,787     965,549   

Property and equipment, net

     —           —           25,615         723         —          26,338   

Goodwill

     —           —           585,383         32,399         —          617,782   

Tradenames, net

     —           —           43,689         —           —          43,689   

Other intangibles, net

     —           —           281,954         1,631         —          283,585