DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-K, Received: 03/27/2013 13:33:28)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 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)

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

None

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

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

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

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

 

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

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

As of March 27, 2013 the registrant had 100 shares of its common stock outstanding.

 

 

 


Table of Contents

DELTA TUCKER HOLDINGS, INC.

TABLE OF CONTENTS

 

     Page  
PART I.   
Item 1.    Business      4   
Item 1A.    Risk Factors      11   
Item 1B.    Unresolved Staff Comments      23   
Item 2.    Properties      23   
Item 3.    Legal Proceedings      23   
Item 4.    Mine Safety Disclosures      23   
PART II.   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      23   
Item 6.    Selected Financial Data      24   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      63   
Item 8.    Financial Statements and Supplementary Data      64   
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      166   
Item 9A.    Controls and Procedures      166   
Item 9B.    Other Information      167   
PART III.   
Item 10.    Directors, Executive Officers and Corporate Governance      167   
Item 11.    Executive Compensation      171   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      184   
Item 13.    Certain Relationships and Related Transactions and Director Independence      184   
Item 14.    Principal Accountant Fees and Services      185   
PART IV.   
Item 15.    Exhibits and Financial Statement Schedules      186   

 

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Forward-Looking Statements

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

 

 

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

 

 

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

 

 

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

 

 

policy and/or spending changes implemented by the Obama Administration, any subsequent administration or Congress, including extending the Continuing Resolution (“CR”) that the U.S. Department of Defense (“DoD”) is currently working under;

 

 

termination or modification of key United States (“U.S.”) government or commercial contracts, including subcontracts;

 

 

changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the Afghanistan Ministry of Defense Program (“AMDP”) , International Narcotics and Law (“INL”) Enforcement, Worldwide Protective Services (“WPS”), Contract Field Teams (“CFT”), and Logistics Civil Augmentation Program IV (“LOGCAP IV”) contracts;

 

 

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

 

 

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

 

 

activities of competitors and the outcome of bid protests;

 

 

changes in significant operating expenses;

 

 

impact of lower than expected win rates for new business;

 

 

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

 

 

acts of war or terrorist activities;

 

 

variations in performance of financial markets;

 

 

the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity (“IDIQ”) contracts; the timing or magnitude of any award fees granted under our government contracts, including, but not limited to;

 

 

changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;

 

 

termination or modification of key subcontractor performance or delivery; and

 

 

statements covering our business strategy, those described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K and other risks detailed from time to time in our reports filed with the SEC.

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

 

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Fiscal Year

On January 24, 2013, the Board of Directors of Delta Tucker Holdings, Inc. and its consolidated subsidiaries (the “Company”), approved a change of the Company’s fiscal year end from a 52-53 week basis ending on the Friday closest to December 31 to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. This change was made to improve the comparability in our fiscal years and to better align our year-end close and contract administration, including billing and cash collection activities, with our primary customer, the U.S. federal government. The change in our fiscal year-end resulted in three additional days from the original fiscal year-end date and net cash collections of approximately $66.2 million. The financial statement impact for the additional days are included in this Annual Report on Form 10-K.

This Annual Report on Form 10-K reflects the consolidated financial results of the Company for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010 (“Inception Year”). We refer to the Inception Year period as “calendar year 2010” throughout this Annual Report on Form 10-K. Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. (“DynCorp International”) and had immaterial assets and virtually no operations, except for costs associated with acquiring DynCorp International, prior to the merger on July 7, 2010. Included in this Annual Report on Form 10-K are our audited consolidated statements of operations and the related statements of equity and cash flows for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The audited consolidated balance sheets are included for the periods as of December 31, 2012 and December 30, 2011.

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

 

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PART I

ITEM 1. BUSINESS.

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

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

The Company has restated its previously issued consolidated financial statements as of and for the year ended December 30, 2011 and as of and for the period from April 1, 2010 (inception) through December 31, 2010. See Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Overview

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

Our customers include the U.S. Department of Defense (“DoD”), the U.S. Department of State (“DoS”), the U.S. Agency for International Development (“USAID”), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Revenue from the U.S. government accounted for approximately 97%, 97% and 98% of total revenue for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010, respectively. Our contracts’ revenue and percentage of total revenue from the U.S. government fluctuates from year to year. These fluctuations can be due to contract length or contract structure, such as with Indefinite Delivery Indefinite Quantity (“IDIQ”) type contracts. IDIQ type contracts are often awarded to multiple contractors and provide the opportunity for awarded contractors to bid on task orders issued under the contract.

Contract Types

Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. Our contracts typically are awarded for an estimated dollar value based on the forecast of the work to be performed under the contract over its maximum life. In addition, we have historically received additional revenue through increases in program scope beyond that of the original contract. These contract modifications typically consist of “over and above” requests derived from changes in customer requirements. The U.S. government is not obligated to exercise options under a contract after the base period. At the time of completion of the contract term of a U.S. government contract, the contract is re-competed to the extent the service is still required.

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

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

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

 

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

 

   

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

 

   

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

 

   

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

A single contract may be performed under one or more of the contracts discussed above. Any of these three types of contracts may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CFT and LOGCAP IV programs are two examples of IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.

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

 

     Delta Tucker Holdings, Inc.         Predecessor  
     For the years ended     For the period from
April 1, 2010
(Inception) through

December 31, 2010
As Restated (1)
        For the fiscal  quarter
ended
 

Contract Type

   December 31, 2012     December 30, 2011
As Restated (1)
          July 2, 2010  

Fixed-Price

     19     17     23       24

Time-and-Materials

     10     14     14       12

Cost-Reimbursement

     71     69     63       64
  

 

 

   

 

 

   

 

 

     

 

 

 

Totals

     100     100     100       100
  

 

 

   

 

 

   

 

 

     

 

 

 

 

(1) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. Because the LOGCAP IV contract is predominantly a cost-reimbursable type contract, we anticipate that our revenue from this contract will continue to represent a large portion of our business for the remainder of 2013.

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

Operating and Reportable Segments

In January 2012, our organizational structure was amended. We re-aligned our Business Area Teams (“BATs”) into strategic business “Groups” reporting directly to the President of the Company. 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 Logistics Civil Augmentation Program (“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. Our reportable segments are consistent with our operating segments. Our operating segments provide services domestically and in foreign countries under contracts with the U.S. government and foreign customers. Our six segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies.

 

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A description of each of our Reportable Segments is discussed further below.

LOGCAP — This segment provides U.S. military operations and maintenance support. The LOGCAP segment operates under a single IDIQ contract. Under LOGCAP, the U.S. Army contracts for us to perform selected services in theater to augment U.S. Army forces and to release military units for other missions or to fill U.S. Army resource shortfalls.

Aviation — This segment provides worldwide maintenance of aircraft fleet and ground vehicles, which includes logistics support on aircraft and aerial firefighting services, weapons systems, and related support equipment to the DoD and other U.S. government agencies and direct contracts with foreign governments. This segment also provides foreign assistance programs to help foreign governments improve their ability to develop and implement national strategies and programs to prevent the production, trafficking and abuse of illicit drugs. The INL Air Wing program and the CFT program are the most significant programs in our Aviation Group. The INL Air Wing program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The CFT program deploys highly mobile and quick-response field teams to customer locations globally to supplement a customer’s workforce.

Training & Intelligence Solutions This segment provides international policing and police training, judicial support, immigration support and base operations to a variety of international and national customers. Under this segment we also provide senior advisors and mentors to foreign governmental agencies to provide leadership, operations and training, intelligence, logistics and security capabilities. This includes the services we provide under key contracts such as the AMDP, Combined Security Transition Command Afghanistan (“CSTC-A”) and Civilian Police (“CivPol”) programs. This segment also provides proprietary training courses, management consulting and discrete mission support services to the intelligence community and national security clients. As part of our proprietary training courses, we offer a highly specialized human intelligence (“HUMINT”) curriculum taught by cleared intelligence professionals to other intelligence, counterintelligence, special operations and law enforcement personnel.

Global Logistics and Development Solutions This segment supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions. This segment also provides base operations support, engineering, supply and logistics, pre-positioned war reserve materials, facilities, marine maintenance services, program management services primarily for ground vehicles and contingency response on a worldwide basis. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.

Security Services This segment manages and operates complex security services by providing static security and personal protective details for U.S. and foreign diplomats, senior governmental officials and commercial clients in hostile and austere environments. This segment’s core competencies include protective security details, static guard services, intelligence support and operating tactical operations centers, medical support, and emergency response capabilities.

Global Linguist Solutions GLS is a joint venture between DynCorp International LLC and AECOM Technology Corporation’s (“AECOM”) National Security Programs unit, in which we have a 51% ownership interest. GLS historically has had no other operations outside of performance on the Intelligence and Security Command (“INSCOM”) contract, which began services in 2008. GLS provides rapid recruitment, deployment and in-theatre management of interpreters and translators for a wide range of foreign languages in support of the U.S. Army, unified commands attached forces, combined forces, and joint elements executing the Operation Iraqi Freedom (“OIF”) mission, and other U.S. government agencies supporting the OIF mission. During the year ended December 30, 2011, GLS was selected as one of six providers to compete for task orders on the $9.7 billion Defense Language Interpretation Translation Enterprise (“DLITE”) contract and in January 2013, the U.S. INSCOM selected GLS to manage the U.S. Army Central Command (“CENTCOM”) task order under the DLITE contract. The CENTCOM task order has one base year with three one year options and a total potential value of $88.4 million. See Note 13 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion on GLS.

Key Contracts

Worldwide Protective Services (“WPS”): The WPS contract is a part of our Security segment. Under this program, we provide personal protective, static guard and emergency response team security services anywhere in the world for the DoS. Our current task provides security, logistical and support services for the DoS in Irbil and the northern provinces of Iraq. The majority of the services provided under this contract are under fixed-price arrangements.

Logistics Civil Augmentation Program IV (“LOGCAP IV”): The LOGCAP IV contract was awarded to us in 2008 and is a part of our LOGCAP segment. We were selected as one of the three prime contractors to provide logistics support under the LOGCAP IV contract. LOGCAP IV is the U.S. Army component of the DoD’s initiative to award contracts to U.S. companies with a broad range of logistics capabilities to support U.S. and allied forces during combat, peacekeeping, humanitarian and training operations. This IDIQ contract has a term of up to ten years. Previous task orders under this contract were predominantly cost-reimbursable plus an award fee. In December 2012, customer negotiations resulted in the elimination of award fee amounts beginning with option year two throughout the remaining contract periods. The agreement reached with the

 

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customer was to replace the eliminated award fee, with a base fee amount to include revenue equal to costs plus a fixed fee on all option year two costs and remaining contract periods. As such, our current task orders are primarily cost-reimbursable-plus-fixed-fee.

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

Afghanistan Ministry of Defense Program (“AMDP”): The AMDP program is a part of the TIS segment and was awarded to us by the DoD in December 2010. The program was established with the goal of assisting the government of the Islamic Republic of Afghanistan to build, develop and sustain an effective and professional law enforcement organization. Within this two year contract, we will train and mentor the Afghans to manage all aspects of their police training. This program is structured under a cost-reimbursable-plus-fixed-fee type arrangement.

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

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

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

T-6 Contractor Operated and Maintained Base Supply (“T-6 COMBS”): The T-6 COMBS contract with the U.S. Air Force Materiel Command is a part of our Aviation segment and provides support services for T-6A and T-6B aircraft at several Air Force and Navy locations throughout the U.S. The firm-fixed-price contract has a one base year and one option year.

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

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

Sheppard Air Force Base (“Sheppard AFB”): The Sheppard Air Force Base contract is a part of our Aviation segment. Under this program, we provide aircraft maintenance services for the 80th Flying Training Wing based at Sheppard Air Force Base in Wichita Falls, Texas. This contract has an initial base period of eleven months and six option years. The mission of the Air Education and Training Command’s 80th Flying Training Wing is to provide undergraduate pilot training for the U.S. and North Atlantic Treaty Organization (“NATO”) allies in the Euro NATO Joint Jet Pilot Training program. Graduates of this prestigious program are assigned to fighter pilot positions in their respective air forces. The majority of our contractual services are fixed-price.

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

 

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

Estimated Total Contract Value and Certain Other Terms

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

Key Contracts

The following table sets forth certain information for our principal contracts, including the initial start and end dates and the principal customer for each contract as of December 31, 2012:

 

Contract

  

Segment

  

Principal
Customer

  

Initial/Current
Award Date

  

Current
Contract End

Date

  

Estimated
Total Contract
Value  (1)

LOGCAP IV (2)    LOGCAP    U.S. Army    Apr-2008    Apr-2018    $5.64 billion
INL Air Wing    Aviation    DoS    Jan-2001 / May-2005    Oct-2014    $3.20 billion
AMDP    TIS    DoD    Dec-2010    Apr-2014    $1.20 billion
Contract Field Teams    Aviation    DoD    Oct-1951 / Oct-2008    Sep-2015    $1.10 billion
WPS    Security    DoS    Sep-2010    Sep-2015    $539 million
Patuxent River Naval Test Wing    Aviation    U.S. Navy    Jul-2011 / Aug-2011    Jul-2016    $493 million
War Reserve Materiel    GLDS    U.S. Air Force    May-2000 / Jun-2008    Sep-2016    $491 million
T-6 COMBS    Aviation    U.S. Air Force    Jun-2012    Oct-2016    $432 million
Andrews AFB    Aviation    U.S. Air Force    Sep-2011    Dec-2018    $401 million
California Department of Forestry    Aviation    State of California    Dec-2001 / Jul-2008    Dec-2014    $254 million
Sheppard Air Force Base    Aviation    U.S. Air Force    Sep-2009    Sep-2016    $250 million
C-21 Contractor Logistics Support    Aviation    U.S. Air Force    Jan-2005    Sep-2013    $264 million
CSTC-A    TIS    U.S. Army    Mar-2010    Oct-2013    $256 million

 

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

Competition

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

 

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Backlog

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

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

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

 

     December 31, 2012  
(Amounts in millions)    Aviation      GLDS      TIS      LOGCAP      Security      Total      GLS (1)  

Funded backlog

   $ 781       $ 174       $ 336       $ 249       $ 102       $ 1,642       $ 108   

Unfunded backlog

     1,737         569         541         449         340         3,636         224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total backlog

   $ 2,518       $ 743       $    877       $ 698       $ 442       $ 5,278       $ 332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 30, 2011  
     As Restated (2)  
(Amounts in millions)    Aviation      GLDS      TIS      LOGCAP      Security      Total      GLS (1)  

Funded backlog

   $ 640       $ 150       $ 212       $ 401       $ 80       $ 1,483       $ 22   

Unfunded backlog

     1,715         435         1,160         486         466         4,262         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total backlog

   $ 2,355       $ 585       $ 1,372       $ 887       $ 546       $ 5,745       $   45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As described in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K, GLS is not presented within the consolidated financial statements, except for within our segment disclosures, as it was deconsolidated and became an operationally integral equity method investee on July 7, 2010.
(2) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Regulatory Matters

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

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

Our U.S. Government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. Government for cost-reimbursement contracts. The purpose of a pre-award audit is to determine the basis of the bid and provide the information required for the U.S. Government to negotiate the

 

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contract effectively. In addition, the U.S. Government may perform a pre-award audit to determine our capability to perform under a contract. During the performance of a contract, the U.S. Government has the right to examine our costs incurred on the contract, including any labor charges, material purchases and overhead charges. Upon a contract’s completion, the U.S. Government performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal and FAR. The U.S. Government also may perform a post-award audit for proposals that are subject to the Truth in Negotiations Act, which are proposals in excess of $700,000, to determine if the cost proposed and negotiated was accurate, current and complete as of the time of negotiations.

The Defense Contract Audit Agency (“DCAA”) performs these audits on behalf of the U.S. Government. The DCAA also reviews and opines on the adequacy of, and our compliance with, our internal control systems and policies, including Accounting, Estimating, Earned Value Management and Material Management Accounting System. The DCAA has the right to perform audits on our incurred costs on all flexibly priced contracts on an annual basis. We have DCAA auditors on-site to monitor our billing and back office operations. An adverse finding under a DCAA audit could result in a recommendation of disallowed costs under a U.S. Government contract, termination of U.S. Government contracts, forfeiture of profits, suspension of payments, fines and suspension and prohibition from doing business with the U.S. Government. In the event that an audit by the DCAA recommends disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted annual incurred costs claims can take many years. All of our incurred costs claims for U.S. Government contracts completed through fiscal year 2004 have been audited by the DCAA and negotiated by the Defense Contract Management Agency (“DCMA”). Incurred cost claim audits for subsequent periods are ongoing. See “Risk Factors—A negative audit or other actions by the U.S. government could adversely affect our operating performance.”

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

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

Sales and Marketing

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

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

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

Our business development and marketing professionals maintain close relationships with all existing customers while continuing to aggressively pursue adjacent markets to maximize growth opportunities. These activities support our objective to be the leading global government services provider in support of U.S. national security and foreign policy objectives.

Intellectual Property

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

Environmental Matters

Our operations include the use, generation and disposal of petroleum products and other hazardous materials. We are subject to various U.S. federal, state, local and foreign laws and regulations relating to the protection of the environment,

 

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including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe and healthy workplace for our employees, contractors and visitors. We have written procedures in place and believe we have been and are in substantial compliance with environmental laws and regulations, and we have no liabilities under environmental requirements that would have a material adverse effect on our business, results of operations or financial condition. We have not incurred, nor do we expect to incur, material costs relating to environmental compliance.

Employees

As of December 31, 2012, we had approximately 29,000 personnel located in approximately 35 countries in which we have operations, of which approximately 5,900 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,900. We believe the working relations with our employees and our unions are in good standing.

ITEM 1A. RISK FACTORS.

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

curtailment of the U.S. government’s outsourcing of services to private contractors including the expansion of insourcing; changes in the political climate, including with regard to the funding or operation of the services we provide; and

 

   

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

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

 

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

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

 

   

terminate or modify existing contracts;

 

   

reduce the value of existing contracts through partial termination;

 

   

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

 

   

audit our contract-related costs and fees; and

 

   

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

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

The nature of our business sometimes requires us to begin new work or extend work under an existing contract at the request of our customer before a formal contract or contract modification has been executed. In such situations, we have a long history of successfully obtaining a formal contract or contract modification from our customer; however, work performed in such situations involves some risk that we may be unsuccessful in reaching final agreement with our customer. In the event we are unsuccessful in reaching an agreement with our customer, we may be required to submit a request for equitable adjustment or a formal claim. This process can take substantial time and may ultimately be unsuccessful in allowing us to bill and collect any associated fees earned on work performed in such situations, including base fees or award fees, which could result in lower revenue and could have a material effect on our financial condition and results of operations.

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

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

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

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

 

   

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

 

   

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

 

   

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

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

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

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

 

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Economic conditions could impact our business.

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

In particular, if the U.S. Government, due to budgetary considerations, fails to sustain the troops in Afghanistan, reduces the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, our business, financial condition and results of operations could be adversely affected. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. Government. Examples include the Budget Control Act of 2011 (“BCA”) and its sequestration provisions which will, unless amended, significantly reduce appropriations below currently forecasted levels for most federal agencies, including the DoD, and legislation to raise the debt ceiling for the U.S. Government.

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

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

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

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

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

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

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

In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt or substantially reduce our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all or substantially reduce U.S. government activities, including our operations under U.S.

 

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government contracts in a particular location, country or region and to withdraw all or a substantial number of military personnel. Congressional pressure to reduce, if not eliminate, the number of U.S. troops in Iraq or Afghanistan may also lead to U.S. government procurement actions that reduce or terminate the services and support we provide in that theater of conflict. Any of the foregoing could adversely affect our operating performance and may result in additional costs and loss of revenue.

We are exposed to risks associated with operating internationally.

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

 

   

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

 

   

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

 

   

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

 

   

contract award and funding delays;

 

   

potential restrictions on transfers of funds;

 

   

foreign currency fluctuations;

 

   

foreign adjustments associated with uncertain tax benefits;

 

   

import and export duties and value added taxes;

 

   

transportation delays and interruptions;

 

   

uncertainties arising from foreign local business practices and cultural considerations;

 

   

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

 

   

potential military conflicts, civil strife and political risks.

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

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

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

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

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

 

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

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

The government agencies also review the adequacy of, and our compliance with, our internal control systems and policies, including our Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management System.

Given the continued oversight by the U.S. government, we could be subjected to additional regulatory requirements which could require additional audits at various points within our contracting process. An adverse finding under an audit could result in a recommendation of disallowed costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments which could negatively impact our liquidity position and affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. These adverse outcomes could also occur if the DCAA cannot complete timely periodic reviews of our control systems, which could then render the status of these systems as “not current” and result in an adverse audit. See Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

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

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

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

New government withholding regulations could adversely affect our operating performance.

In February 2012, the DoD issued the final DFARS rule which allows withholding of a percentage of payments when a contractor’s business system has one or more significant deficiencies. The DFARS rule applies to Cost Accounting Standards (“CAS”) covered contracts that have the DFARS clause in the contract terms and conditions. The final rule represents a significant change in the contracting environment for companies performing work for the DoD. Contracting officers may withhold 5% of contract payments for one or more significant deficiencies in any single contractor business system or up 10% of contract payments for significant deficiencies in multiple contractor business systems. A significant deficiency is defined as a “shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes.” The final rule is applicable to new DoD contracts awarded after February 2012.

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

As of December 31, 2012, we had approximately 29,000 personnel, of which approximately 5,900 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,900. As of December 31, 2012, we had

 

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approximately 21 collective bargaining agreements with these unions. The length of these agreements varies, with the longest expiring in March 2014. There can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

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

We are involved in various domestic and foreign claims and lawsuits from time to time. For example, we are a defendant in two consolidated lawsuits seeking unspecified damages brought by citizens and certain provinces of Ecuador. The basis for the actions was pending in the U.S. District Court for the District of Columbia; however, on March 18, 2013 the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. The basis for the actions, arises from our performance of a DoS contract for the eradication of narcotic plant crops in Colombia. The lawsuits allege personal injury, property damage and wrongful death as a consequence of the spraying of narcotic crops along the Colombian border adjacent to Ecuador. In the event that a court decides against us, in these lawsuits, and we are unable to obtain indemnification from the U.S. Government, or contributions from the other defendants, we may incur substantial costs, which could have a material adverse effect on our results. An adverse ruling in these cases could also adversely affect our reputation and have a material adverse effect on our ability to win future government contracts.

Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for breach of contract actions, and we bear all costs associated with such litigation and claims. See Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

 

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violations of, or liabilities under, environmental laws. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

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

 

   

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

 

   

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

 

   

we may not realize anticipated synergies or financial growth;

 

   

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

 

   

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

 

   

the potential loss of key employees of acquired companies;

 

   

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

 

   

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

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

If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and future  prospects could be harmed.

In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions, divestitures, joint ventures, and equity investments. We seek to identify acquisition or investment opportunities that will expand or complement our existing services, or customer base, at attractive valuations. We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions, and manage post-closing matters (e.g., integrate acquired companies and employees, realize anticipated operating synergies, and improve margins) efficiently and effectively. Acquisition, divestiture, joint venture, and investment transactions often require substantial management resources and could have the potential to divert our attention from our existing business. Additionally, unidentified pre-closing liabilities could affect our future financial results.

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

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

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

A disruption, infiltration or failure of network, application systems or third-party hosted services in the event of a major earthquake, hurricane, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our ability to provide service to our customers, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers’ orders, which could result in reduced revenue.

Our business could be negatively impacted by security threats, including physical and cyber security threats, and other disruptions.

As a defense contractor, we face both physical and cyber security threats to our sensitive systems and information. Although we utilize a variety of technical and administrative controls to mitigate and detect threats, there can be no assurance that these controls will be sufficient to prevent a threat from materializing.

Threats to our physical security, were they to manifest, could result in degradation or disruption of business operations. These effects could be attributed to, although not exclusively, loss of staff, reduction in staff productivity, and/or loss or damage to facilities.

 

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Cyber security threats are constantly evolving, and our industry is frequently targeted by cyber security threats. We utilize a variety of mechanisms and controls to adapt to potential threats; however, the variety and constant change of these threats leaves the impact unpredictable.

Were an incident to occur, it could lead to loss of confidentiality, integrity, and/or availability of information or systems, harm to personnel or infrastructure, and/or damage to our reputation. Such an incident could result in material adverse effect on our business operations and strategies, current or future financial position, and/or cash flows.

Goodwill represents a significant asset on our balance sheet and may become impaired.

Goodwill is a significant asset on our balance sheet, with an aggregate balance of $604.1 million as of December 31, 2012. 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. The annual impairment test requires us to determine the fair value of our reporting units in comparison to their carrying values. A decline in the estimated fair value of a reporting unit could result in a goodwill impairment, and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill.

During the year ended December 31, 2012, we determined that the carrying values of the goodwill associated with the Security reporting unit within the Security segment and the Training and Mentoring (“TM”) reporting unit within the TIS segment exceeded the fair values due to a decline in the projected future cash flows resulting in a non-cash impairment charge of $13.7 million and $30.9 million, respectively. Additionally, we determined that the carrying value of certain intangibles within the TIS segment exceeded the fair value due to a change in the business model during the fourth quarter of the year ended December 31, 2012. As such, we recorded a non-cash impairment charge of $6.1 million. As the defense industry is currently in a volatile state and faces many uncertainties in the upcoming year, we could see a further decline in the estimated fair values of one or more of our reporting units which could result in a material adverse effect on our financial condition and results of operations. See Critical Accounting Policies within “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

Restatement of our financial statements could adversely affect our business.

Restatement of our financial statements could have adverse consequences on our business, financial condition, cash flows and results of operations, including the triggering of an event of default under our senior credit facility and the indentures governing our senior unsecured notes. Restatements could cause our credit rating to be downgraded, which could result in an increase in our borrowing costs and make it more difficult to borrow funds on reasonable terms or at all. In addition, restatements could result in key executives departing and SEC enforcement action.

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

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

We plan to sell the remaining seven Huey helicopters or utilize them on existing programs. As of December 31, 2012, these helicopters are classified as inventory within our financial statements as we work to finalize the certification status with the FAA. We have no guarantee that we will be able to successfully sell these assets or if we are unable to sell them or deploy them on other programs. The inability to sell or deploy the remaining helicopters could lead to a material impairment charge in the future.

We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial  position.

When agreeing to contractual terms, we make assumptions and projections about future conditions and events, many of which extend over a period of time. These assumptions and projections assess the cost, productivity and availability of labor, future levels of business base, complexity of the work to be performed, cost and availability of materials, impact of potential delays in performance and timing of product deliveries. Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is subject to many variables. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance. Suppliers’ assertions are also assessed and considered in estimating costs and profit rates.

 

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Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more of the affected contracts and our performance. See Critical Accounting Policies, Estimates, and Judgments in Part II, Item 7.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash  flow.

We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in applicable domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory tax rate currently in effect, therefore a change in the U.S. corporate tax rate would result in a remeasurement of our net deferred tax asset through the income tax provision. The final determination of any tax audits or related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the results of audits and the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures could impact our tax liabilities and significantly affect our income tax expense, profitability and cash flow.

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

As of December 31, 2012, we are highly leveraged with our total indebtedness of approximately $782.3 million. We had $111.7 million available for borrowing under our revolving credit facility, and the terms of the senior secured credit facilities permit us to increase the amount available under our term loan and/or revolving credit facilities by up to $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes.

Our high degree of leverage could have important consequences including:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Our interest expense could increase if interest rates increase above the stated LIBOR floor levels in our senior secured credit facilities because the entire amount of the indebtedness under our senior secured credit facilities bears interest at a variable rate. At December 31, 2012, we had approximately $327.3 million aggregate principal amount of variable rate indebtedness under our senior secured credit facilities. A 100 basis point increase over the LIBOR floor levels would increase our annual interest expense by approximately $3.3 million.

 

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

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

In addition to the $111.7 million which is available to us for borrowing under our revolving credit facility, the terms of our senior secured credit facilities enable us to increase the amount available under our term loan and/or revolving credit facilities by up to an aggregate of $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes. Additionally, we can take on more debt as long as we meet the covenant levels as stated per the indenture and the credit facility. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we face would increase. In addition, the agreements governing our debt obligations do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.

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

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

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

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

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

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

 

   

enter into certain transactions with our affiliates.

As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the covenants in our senior secured credit facilities require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our indenture and, in the case of our revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities, and we may not have sufficient assets to repay our unsecured indebtedness thereafter, including our notes.

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

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

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

 

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

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

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

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

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

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

Cerberus is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. In particular, IAP Worldwide Services, Inc. (“IAP”), an entity in which Cerberus holds a controlling equity interest, may compete with us for certain contracts and other opportunities. Further, Steven F. Gaffney, the Chairman of our Board of Directors and our Chief Executive Officer, also serves as the Chairman of the Board of IAP. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to Cerberus or IAP or their respective affiliates, including through potential acquisitions of competing businesses. Competition may intensify if an affiliate or subsidiary of Cerberus, including IAP, were to enter into or possibly acquire a business similar to ours. In the event that such a transaction happens, Cerberus is under no obligation to communicate or offer such corporate opportunity to us, even if such opportunity might reasonably have been expected to be of interest to us or our subsidiaries.

We may make future investments, which would include co-investment or joint venture arrangements with our affiliates. We may also enter into business combinations and/or collaborate with and invest in other firms or entities, including Cerberus or IAP. You should consider that the interests of Cerberus may differ from yours in material respects.

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

Our government contracts and sales are highly correlated and dependent upon the U.S. defense budget which is subject to the congressional budget authorization and appropriations process. Defense budgets are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, changing national security and defense requirements, geo-political developments and actual fiscal year congressional appropriations for defense budgets. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.

In August 2011, Congress enacted the Budget Control Act of 2011 (“the Act”). The Act specified an immediate $917 billion of cuts over ten years, including $487 billion from defense spending. The Joint Select Committee, (“Super Committee”), established for deficit reduction purposes, failed in producing measures to reduce the deficit by at least $1.5 trillion, resulting in “sequestration of appropriations” being set into motion to be equally split between security and non-security programs. Our funding for programs is dependent upon the annual budget and appropriation decisions, as well as other geo-political and macroeconomic conditions, which are beyond our control.

 

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On March 21, 2013, Congress passed a modified CR which includes a number of the negotiated fiscal year 2013 spending bills, including defense. The CR for the fiscal year 2013 defense appropriations bill will fund O&M accounts at nearly the budgeted request. Over the longer-term, recent statements by Congress and the Administration have generated some optimism that there is a renewed focus on addressing the underlying structural budget issues. Final negotiations related to the budget are expected by mid year 2013. If the final budget does not conclude sequestration, the defense industry will remain unstable.

The Administration’s proposed DoD fiscal year 2014 budget or plan, which was scheduled for release in February 2013, has been delayed due to the ongoing debate between the Administration and Congress. The declining DoD budgets could reduce funding for some of our revenue arrangements and could have a negative impact on our sales.

These or other factors could result in a significant decline in, or redirection of, current and future budgets and could adversely affect our operating performance, including the possible loss of revenue and reduction in our operating cash flow.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

We are headquartered in Falls Church, Virginia with major administrative offices in Fort Worth, Texas. As of December 31, 2012, we lease 37 commercial facilities in 19 countries used in connection with the various services rendered to our customers. Lease expirations range from month-to-month to ten years. Upon expiration of our leases, we do not anticipate any difficulty in obtaining renewals or alternative space. Many of our current leases are non-cancelable. We do not own any real property.

The following locations represent our primary leased properties as of December 31, 2012:

 

Location

  

Description

   Segment    Size (sq ft)  

Fort Worth, TX

  

Executive offices - Finance and Administration

   Headquarters      218,925   

Salalah Port, Oman

  

Warehouse and storage - WRM Program

   GLDS      125,000   

Falls Church, VA

  

Executive offices - Headquarters

   Headquarters      105,814   

Coppell, TX

  

Warehouse - Logistics

   Headquarters      96,000   

Alexandria, VA

  

Executive offices - ITS Business Area

   TIS      54,712   

Kabul, Afghanistan

  

Offices and residence - LOGCAP IV Program

   LOGCAP      42,008   

Palm Shores, FL

  

Offices - INL Air Wing Program

   Aviation      27,215   

McClellan, CA

  

Warehouse - California Fire Program

   Aviation      18,800   

Dubai, UAE

  

Executive offices - DIFZ Finance and Administration

   Headquarters      18,021   

Alexandria, VA

  

Executive offices - Casals Program

   GLDS      14,174   

Huntsville, AL

  

Business office - Aviation Headquarters

   Aviation      13,850   

We believe that substantially all of our property and equipment is in good condition, subject to normal use, and that our facilities have sufficient capacity to meet the current and projected needs of our business through calendar year 2013.

ITEM 3. LEGAL PROCEEDINGS.

Information required with respect to this item is set forth in Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Not applicable .

 

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ITEM 6. SELECTED FINANCIAL DATA.

The selected historical consolidated financial data for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010 and for the Predecessor’s fiscal quarter ended July 2, 2010 and fiscal years ended April 2, 2010, April 3, 2009 and March 28, 2008 is presented in the table below. The Company has restated its previously issued consolidated financial statements for the year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010, respectively. See Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

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

 

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    Delta Tucker Holdings, Inc.          Predecessor (2)  
    For the years ended     For the period from
April 1, 2010
(Inception) through
December 31, 2010

As Restated (1)
         For the fiscal
quarter ended
    For the fiscal years ended  
    December 31, 2012     December 30,  2011
As Restated (1)
         July 2, 2010     April 2, 2010     April 3, 2009     March  28,
2008
 
(Amounts in thousands)                 

Results of operations:

                  

Revenue

  $ 4,044,275      $ 3,719,152      $ 1,696,415         $ 944,713      $ 3,572,459      $ 3,092,974      $ 2,140,231   

Cost of services

    (3,698,932     (3,408,842     (1,547,919        (856,974     (3,225,250     (2,766,969     (1,860,419

Selling, general and administrative expenses

    (149,362     (149,551     (78,024        (38,513     (106,401     (103,277     (118,567

Merger expenses incurred by Delta Tucker Holdings, Inc.

    —          —          (51,722        —          —          —          —     

Depreciation and amortization

    (50,260     (50,773     (25,776        (10,263     (41,639     (40,557     (42,173

Earnings from equity method investees

    825        12,800        10,337           —          —          —          —     

Impairment of equity method investment (3)

    —          (76,647     —             —          —          —          —     

Impairment of goodwill (4)

    (44,594     (33,768     —             —          —          —          —     

Impairment of intangibles (5)

    (6,069     —          —             —          —          —          —     
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    95,883        12,371        3,311           38,963        199,169        182,171        119,072   

Interest expense

    (86,272     (91,752     (46,845        (12,585     (55,650     (58,782     (54,894

Bridge commitment fee incurred by Delta Tucker Holdings, Inc.

    —          —          (7,963        —          —          —          —     

Loss on early extinguishment of debt, net

    (2,094     (7,267     —             —          (146     (4,131     —     

Interest income

    117        205        420           51        542        2,195        3,062   

Other income, net

    4,672        6,071        1,872           658        5,194        4,997        6,610   

(Provision) benefit for income taxes

    (15,598     20,941        9,690           (9,279     (47,035     (39,756     (28,434
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (3,292     (59,431     (39,515        17,808        102,074        86,694        45,416   

Noncontrolling interests

    (5,645     (2,625     (1,361        (5,004     (24,631     (20,876     3,306   
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (8,937   $ (62,056   $ (40,876      $ 12,804      $ 77,443      $ 65,818      $ 48,722   
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow data:

                  

Net cash provided by (used in) operating activities

  $ 144,190      $ 167,986      $ (27,089      $ 21,723      $ 90,473      $ 140,871      $ 42,361   

Net cash used in investing activities

    (12,163     (3,003     (878,218        (2,874     (88,875     (9,148     (11,306

Net cash (used in) provided by financing activities

    (83,457     (147,315     957,844           (5,433     (79,387     (16,880     (48,131

Balance sheet data (end of period):

                  

Cash and cash equivalents

    118,775        70,205        52,537           135,849        122,433        200,222        85,379   

Total assets

    1,970,716        2,014,421        2,263,355           1,785,899        1,780,894        1,545,446        1,411,885   

Total debt

    782,909        872,909        1,024,212           552,209        552,147        599,912        593,162   

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

    437,542        447,966        509,758           591,417        577,702        496,413        427,129   

Total equity

    445,754        453,152        514,109           596,359        583,524        507,149        423,823   

Other financial data:

                  

Purchases of property and equipment and software (6)

    8,118        4,887        8,323           2,874        46,046        7,280        7.738   

Backlog (7)

    5,278        5,745        4,782           5,171        5,571        6,298        6,132   

 

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(1) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(2) DynCorp International’s fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period, prior to the merger on July 7, 2010, ended July 2, 2010 and is referred to as the “fiscal quarter ended July 2, 2010”. We refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”
(3) The Company recorded an impairment of our investment in GLS during the year ended December 30, 2011 in the amount of $76.6 million as a result of a loss in carrying value that was other than temporary. See Note 13 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(4) The Company recorded goodwill impairment charges of $44.6 million and $33.8 million for the years ended December 31, 2012 and December 30, 2011, respectively. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(5) The Company recorded an impairment charge of $6.1 million for the year ended December 31, 2012 to reduce the value of certain intangibles related to our TIS segment. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(6) The fiscal year ended April 2, 2010 includes approximately $39.7 million of costs associated with helicopters purchased in anticipation of use under our INL Air Wing program.
(7) Backlog data is as of the end of the applicable period. See “Business” for further details concerning backlog.

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

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto, the Predecessor DynCorp International Inc. consolidated financial statements and related notes thereto and other data contained elsewhere in this Annual Report on Form 10-K. Please see “Item 1A. Risk Factors” and “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated. All references in this Annual Report on Form 10-K to fiscal years of the United States (“U.S.”) government pertain to their fiscal year, which ends on September 30th of each year.

Company Overview

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

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

In January 2012, our organizational structure was amended. 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 Logistics Civil Augmentation Program (“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. Our operating segments provide services domestically and in foreign countries under contracts with the U.S. government and foreign customers. Our six segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.

As of December 31, 2012, we employed or managed approximately 29,000 personnel, including approximately 5,900 personnel from our affiliates. We operate in 35 countries through approximately 66 active contracts and 75 active task orders.

On January 24, 2013, the Board of Directors of Delta Tucker Holdings, Inc. and its consolidated subsidiaries (the “Company”), approved a change of the Company’s fiscal year end from a 52-53 week basis ending on the Friday closest to December 31 to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December 31. This change was made to improve the comparability of our fiscal years and to better align our year-end close and contract administration, including billing and cash collection activities, with our primary customer, the U.S. federal government. The change of fiscal year end is effective beginning with the fiscal year ended

 

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December 31, 2012. The change in our fiscal-year end resulted in three additional days from the original fiscal year-end date. The financial statement impact for the additional days are included in this Annual Report on Form 10-K. This Annual Report on Form 10-K reflects the financial results of the Company for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010 (“Inception Year”).

The Company has restated its previously issued consolidated financial statements for the year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. This correction was primarily a result of certain potential obligations and other accrued liabilities related to prior periods in connection with certain contracts. All financial information included in Item 7. Management’s Discussion and Analysis, impacted by the restatement adjustments have been revised as applicable. See Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

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

Current Operating Environment and Outlook

External Factors

Since 2001, the overall level of U.S. defense spending has doubled. These historically high defense expenditures were driven in part to support operations in Iraq and Afghanistan and were funded through an account supplemental to the base defense budget called Overseas Contingency Operations (“OCO”). As a result of the U.S. military withdrawal from Iraq in December of 2011, and the drawdown of forces in Afghanistan, there has been a proportional and expected decline in the OCO account.

In August 2011, Congress enacted the Budget Control Act of 2011 (“BCA”). The BCA specified an immediate $917 billion of cuts over ten years, including $487 billion from defense spending. Additionally, the BCA established the Joint Select Committee on Deficit Reduction, or the “super committee,” to produce an additional deficit reduction of at least $1.5 trillion over the coming 10 years that was to be passed by December 23, 2011. If Congress failed to produce such a bill with at least $1.2 trillion in cuts, then this would trigger across-the-board cuts, through a “sequestration of appropriations” equally split between security and non-security programs.

Sequestration was scheduled to be triggered on January 2, 2013, but its implementation was delayed to March 1, 2013, by a provision in the American Taxpayer Relief Act of 2012 (“ATRA”) which was enacted into law on January 2, 2013. In addition to averting the pending combination of tax increases and spending cuts, commonly referred to as the “fiscal cliff”, the ATRA cut the amount of funds to be sequestered from the $105 billion in fiscal year 2013 to $85 billion. Because no additional actions were taken by Congress prior to March 1, 2013, sequestration was triggered. While the depth and scope of sequestration impacts are still not clear, it is just one of several challenges creating budget uncertainty for the DoD. As a result of the triggering of sequestration, defense funding was operating under a CR that authorized the government to continue to operate at essentially fiscal year 2012 spending levels and did not allow for new spending. On March 21, 2013, Congress passed a modified CR which includes a number of the negotiated fiscal year 2013 spending bills, including defense. The modified CR for the fiscal year 2013 defense appropriations bill will fund O&M accounts at nearly the President’s budget request, or about $230 billion in the base and OCO, which will allow the military and the contractors and subcontractor community to continue their vital work in a timely manner. In addition, the bill provides the DoD with more flexibility, especially within the O&M accounts, and will assist with a better mandate of cuts. The new bill allows funding and priorities within the fiscal year 2013 defense appropriations to abate the negative impacts of the forethought $1.5 trillion reduction and the challenges around the budget uncertainty may start to be mitigated over the next few months. Over the longer-term, recent statements by Congress and the Administration have generated some optimism that there is a renewed focus on addressing the underlying structural budget issues. Final negotiations related to the budget are expected by mid year 2013. We anticipate the final budget will conclude sequestration and provide clarity and stability to defense funding.

 

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Funding for our programs is dependent on the annual budget and appropriation decisions, as well as geo-political and macroeconomic conditions, which are beyond our control. While there is uncertainty around these domestic and international factors, the final agreed upon appropriated funding levels for national security programs will remain historically high with plenty of opportunity to continue supporting our customers. In recent memos and guidance related to potential further reductions, Pentagon leadership has stated that it will protect programs and funding for warfighter related activities (i.e. OCO accounts). In addition to guidance protecting OCO activities, the President’s fiscal year 2013 defense budget request indicates that the weapon system acquisition and modernization programs will be most negatively impacted by budget reductions. We believe the Operations and Maintenance (“O&M”) budgets will remain relatively robust; however, the risk remains that O&M funds could be temporarily delayed as a first response by our customers in an effort to absorb sequestration. While this could adversely impact our business on a short term basis, we believe the following longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide:

 

   

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

 

   

Continued focus on smart power initiatives by DoS, U.S. Agency for International Development (“USAID”), the United Nations, and even the DoD, to include development and smaller-scale stability operations;

 

   

Increased maintenance, overhaul and upgrade needs to support returning rolling stock and aging military platforms;

 

   

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

 

   

Further efforts by the U.S. government to move from single award to multiple award indefinite delivery, indefinite quantity (“IDIQ”) contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.

As the North Atlantic Treaty Organization (“NATO”) combat mission in Afghanistan comes to its conclusion in 2014, we anticipate significant opportunities to support not only the enduring U.S. and NATO presence, but also expanded opportunities to support the DoS presence, which is expected to expand and include the U.S. embassy in Kabul and four consulates around the country. Additionally, we anticipate that there will be a continued need to advise, assist and help professionalize Afghan National Security Forces for many years, as specified in the U.S. Afghanistan Strategic Partnership Agreement.

In the Persian Gulf, Iran’s continued nuclear ambitions have resulted in an unprecedented international sanctions against the regime and the bolstering of U.S. defense ties and presence throughout the region. We believe that base operations and support and maintenance capacity will be key enablers in this environment, and we are especially well positioned to provide these services to both U.S. forces and Allied nations. Finally, the re-balance to Asia reflects the increased importance of the Asia-Pacific regions, in both security and economic terms for the U.S. As the U.S. revitalizes and reinforces its presence in this vital region, we expect to see increased demand for base operations support, logistics support and capacity building, all of which we provide best in class.

The investments and acquisitions we have made over the past several years have been focused on aligning our business to address areas that have high growth potential, including intelligence training and rule of law development, as well as parallel and evolving customer requirements.

Current Business Environment

We believe that our industry and customer base are less likely to be affected by many of the factors generally negatively affecting business and consumer spending. Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options and we have a strong history of being awarded a majority of the contract options. Additionally, since our primary customer is the federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements that could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity, affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. If the Defense Contract Audit Agency (“DCAA”) cannot complete timely periodic reviews of our control systems, they could render the status of these systems as “non-current” resulting in an adverse outcome.

We cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections

 

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and the Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all. See “Risk Factors—Economic conditions could impact our business” for a discussion of the risks associated with current economic conditions.

Notable events for the year ended December 31, 2012

 

   

In January 2012, we were awarded a contract within our GLDS segment with the U.S. Air Force to provide support services and contractor personnel for the DoD in Egypt. The fixed-price contract has one base year and four, one-year options and a total potential contract value of $95.0 million.

 

   

In March 2012, we were awarded a contract within our Aviation segment with the U.S. Army to provide a Maintenance Augmentation Team for the Kuwait Air Force AH-64D Apache helicopter maintenance program. The fixed-price contract has one year base and four, one-year options and a total potential contract value of $25.4 million.

 

   

In March 2012, we were awarded a contract with the U.S. Navy to provide facility support services for personnel from the Naval Mobile Construction Battalion unit in Dili, Timor-Leste. The fixed-price, IDIQ contract has one base year with four one-year options and will operate under our Aviation segment.

 

   

In April 2012, we were awarded a contract within our Aviation segment with the National Aeronautics and Space Administration (“NASA”) to provide aircraft maintenance and operational support services at various locations. The contract operates under multiple pricing mechanisms, including fixed-price-plus-award-fee and cost-plus-award-fee, and has a base period of one year and four months base and two, two-year options and a total potential value of $176.9 million.

 

   

In May 2012, we were awarded a task order within our Aviation segment with the U.S. Air Force under the Contract Field Teams (“CFT”) contract to provide aircraft maintenance support at Robins Air Force Base in Georgia. We were the sole awardee of this IDIQ task order which has one base year and one option year and a total potential contract value of $92.6 million.

 

   

In June 2012, we were awarded a contract within our GLDS segment with the Naval Facilities Engineering Command-Pacific to provide operations support services within the joint operation area and Manila, Republic of the Philippines. The cost-plus-award-fee contract has one base year and four, one-year options and a total potential contract value of $198.0 million.

 

   

In June 2012, we were awarded a contract with the U.S. Air Force Materiel Command to provide support services for T-6A and T-6B aircraft at several Air Force and Navy locations throughout the U.S. The firm-fixed-price contract has one base year and one option year and a total potential contract value of $432.0 million and will operate under our Aviation segment.

 

   

In June 2012, we were awarded a task order with the U.S. Army Special Operations Command under the CFT contract to provide aviation support to the 160th Special Operations Aviation Regiment—Airborne at Fort Campbell, Kentucky. The IDIQ contract has an eight month base period and two one-year options and a total potential contract value of $54.5 million and will operate under our Aviation segment.

 

   

In July 2012, we were awarded multiple task orders within our GLDS segment with the U.S. Air Force under the Air Force Contract Augmentation Program (“AFCAP”) program to provide various services at multiple locations including Colorado, the United Arab Emirates and Afghanistan. Collectively, these task orders have one base year and two, one-year options and a total potential contract value of $13.2 million.

 

   

In July 2012, we acquired 100% of Heliworks, Inc. (“Heliworks”), an aviation service provider based in Pensacola, Florida for $11.1 million, net of cash acquired. Heliworks services include aircraft maintenance and major repairs, avionics upgrades, component overhauls, charter flights and painting and refurbishment. Heliworks has been integrated within our Aviation segment.

 

   

In August 2012, we were awarded multiple task orders within our GLDS segment with the U.S. Air Force under the AFCAP program to provide monitor support for the Expeditionary Civil Engineer Squadrons in multiple locations in Afghanistan and to provide maintenance support services to vehicles and equipment at multiple locations in Afghanistan and Qatar. Collectively, these task orders have one base year and two, one-year options and a total potential value of $27.3 million.

 

   

In September 2012, we were awarded a contract within our Aviation segment with the U.S. Air Force Air Education and Training Command to provide jet engine maintenance for J-85 aircraft at Laughlin Air Force Base in Del Rio, Texas in support of the Engine Regional Repair Center. The firm-fixed-price contract has an 11-month base period and five, one-year options and a total potential contract value of $36.0 million.

 

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In October 2012, we were amongst the prime contractors selected to bid for task orders under the U.S. Army’s Enhancement Army Global Logistics Enterprise (“EAGLE”) contract, managed by the U.S. Army Materiel Command, to provide multi-faceted supply, maintenance and transportation support to assist in preparing forces for deployment, sustainment and redeployment. EAGLE is a five-year IDIQ contract and has a total potential value of $23.5 billion and will operate under our GLDS segment.

 

   

In December 2012, customer negotiations on the LOGCAP IV contract resulted in the elimination of award fee amounts beginning with option year two throughout the remaining contract periods. The agreement reached with the customer was to replace the eliminated award fee with a base fee amount to include revenue equal to costs plus a fixed fee on all option year two costs and remaining contract periods.

 

   

During the year ended December 31, 2012, we made three separate principal payments, each for $30.0 million, on our Term Loan. These payments caused the acceleration of unamortized deferred financing fees of $2.1 million, which were recorded as a Loss on extinguishment of debt within our Statement of Operations.

 

   

In December 2012, we were awarded a contract within our GLDS segment with the U.S. Army to provide base operation support services at Soto Cano Air Base in Honduras. The fixed-price contract has one base year and four, one-year options and a total potential contract value of $22.0 million.

 

   

In January 2013, the Company’s Board of Directors approved a change in the Company’s fiscal year end from a 52-53 week basis to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December 31. This change is effective for the fiscal year ended December 31, 2012 and was made to improve the comparability in our fiscal years and to better align our year-end close and contract administration, including billing and cash collection activities, with our primary customer, the U.S. federal government.

Results of Operations

As a result of the Merger discussed above, the results of operations presented are for the years ended December 31, 2012 and December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010, which is a shorter operating period. As such, the results of operations for the period from April 1, 2010 (inception) through December 31, 2010 are not comparable and have been presented separately.

Additionally, the Company has restated its previously issued consolidated financial statements for the year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. This correction was primarily a result of potential obligations and other accrued liabilities related to prior periods in connection with certain contracts. All financial information impacted by the restatement adjustments has been revised as applicable and the results of operations include all revisions. See Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Included also as a supplement to the results of operations are our pro forma consolidated results of operations for the twelve months ended December 31, 2010 as well as supplemental discussion of the pro forma information compared to the results of operations for the year ended December 30, 2011.

 

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Delta Tucker Holdings, Inc. Results of Operations—the year ended December 31, 2012 compared to the year ended December 30, 2011

Consolidated Results

The Company has restated its previously issued consolidated financial statements for the year ended December 30, 2011. See Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included in this Annual Report on Form 10-K for further discussion. The following table sets forth our consolidated results of operations, both in dollars and as a percentage of revenue, for the years ended December 31, 2012 and December 30, 2011:

 

     For the years ended  
(Amounts in thousands)    December 31, 2012     December 30, 2011
As Restated
 

Revenue

   $ 4,044,275        100.0   $ 3,719,152        100.0

Cost of services

     (3,698,932     (91.5 )%      (3,408,842     (91.7 )% 

Selling, general and administrative expenses

     (149,362     (3.7 )%      (149,551     (4.0 )% 

Depreciation and amortization expense

     (50,260     (1.2 )%      (50,773     (1.4 )% 

Earnings from equity method investees

     825        0.1     12,800        0.3

Impairment of equity method investment

     —          —          (76,647     (2.0 )% 

Impairment of goodwill

     (44,594     (1.1 )%      (33,768     (0.9 )% 

Impairment of intangibles

     (6,069     (0.2 )%      —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     95,883        2.4     12,371        0.3

Interest expense

     (86,272     (2.1 )%      (91,752     (2.5 )% 

Loss on early extinguishment of debt

     (2,094     (0.1 )%      (7,267     (0.2 )% 

Interest income

     117        —          205        —     

Other income, net

     4,672        0.1     6,071        0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     12,306        0.3     (80,372     (2.2 )% 

(Provision) benefit for income taxes

     (15,598     (0.4 )%      20,941        0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,292     (0.1 )%      (59,431     (1.6 )% 

Noncontrolling interests

     (5,645     (0.1 )%      (2,625     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (8,937     (0.2 )%    $ (62,056     (1.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue — Revenue for the year ended December 31, 2012 was $4,044.3 million, an increase of $325.1 million, or 8.7%, compared to the year ended December 30, 2011. The increase was primarily driven by the increase in revenue earned under our LOGCAP and Aviation segments, which together comprised approximately 77% of total consolidated revenue. See further discussion in the “ Results by Segment ” section below.

Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2012 was $3,698.9 million, an increase of $290.1 million, or 8.5%, compared to December 30, 2011. The increase in Cost of services was due to the growth in our business and was relatively consistent with the increase in revenue. As a percentage of revenue, Cost of services was 91.5% and 91.7% for the years ended December 31, 2012 and December 30, 2011, respectively. The reduction as a percentage of revenue was primarily driven by the change in our overall contract mix. Specifically, operations under certain task orders under our LOGCAP segment changed from an award-fee contract arrangement to a fixed-fee contract. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than previously earned with award fees. See further discussion of the impact of program margins in the “ Results by Segment ”.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $0.2 million, or 0.1%, to $149.4 million for the year ended December 31, 2012 compared to December 30, 2011 primarily as a result of (i) non-routine severance costs incurred during the year ended December 30, 2011 associated with the corporate realignment, (ii) the acceleration of the Phoenix and Casals retention bonuses during the year ended December 30, 2011 (iii) and the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2012 as compared to the year ended December 30, 2011 partially offset by legal costs associated with ongoing litigation incurred during the year ended December 31, 2012. These items also drove the reduction in SG&A as a percentage of revenue to 3.7% for the year ended December 31, 2012 compared to 4.0% for the year ended December 30, 2011.

 

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Depreciation and amortization — Depreciation and amortization for the year ended December 31, 2012 was $50.3 million, a decrease of $0.5 million, or 1.0%, as compared to depreciation and amortization for the year ended December 30, 2011. The decrease was primarily the result of non-compete agreements becoming fully amortized during the second half of the year ended December 30, 2011 partially offset by additional depreciation expense on fixed asset additions, including fixed assets acquired in conjunction with the purchase of Heliworks, for the year ended December 31, 2012.

Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC (“PaTH”), Contingency Response Services LLC (“CRS”), Global Response Services LLC (“GRS”) and GLS. Earnings from equity method investees for the year ended December 31, 2012 decreased $12.0 million, or 93.6%, to $0.8 million primarily as a result of the reduction in earnings recognized from GLS. As a result of impairment of our investment in GLS recorded during the year ended December 30, 2011, we no longer recognize any earnings related GLS until we receive cash through dividend distributions.

Impairment of equity method investment —  During the year ended December 30, 2011, we recorded a $76.6 million impairment of our investment in GLS as we concluded it had an other than temporary loss in value during the period. As a result, we are no longer recognizing any earnings until we receive cash through a dividend distributions.

Impairment of goodwill —  Impairment of goodwill for the years ended December 31, 2012 and December 30, 2011 was $44.6 million and $33.8 million, respectively. During the year ended December 31, 2012, we recognized non-cash impairment charges on the goodwill associated with our TIS and Security segments. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Interest expense — Interest expense for the year ended December 31, 2012 was $86.3 million, a decrease of $5.5 million, or 6.0%, compared to the year ended December 30, 2011. The decrease was due to the reduction of the principal balance of our Term Loan as a result of principal prepayments of $90.0 million and $147.3 million during the years ended December 31, 2012 and December 30, 2011, respectively.

Loss on early extinguishment of debt —  Loss on early extinguishment of debt of $2.1 million and $7.3 million for the years ended December 31, 2012 and December 30, 2011, respectively, was attributable to principal prepayments on our Term Loan totaling $90.0 million and $147.3 million, respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.

Other income, net — Other income, net consists primarily of our share of earnings from Babcock, DynCorp Limited (“Babcock”) our unconsolidated joint ventures that is not operationally integral to our business as well as gains/losses from foreign currency. Other income, net decreased $1.4 million, or 23.0%, to $4.7 million for the year ended December 31, 2012 compared to the year ended December 30, 2011. The decrease was primarily due to the $0.5 million decrease in earnings from Babcock.

Income taxes — Our effective tax rate consists of federal and state statutory rates and certain permanent differences. The effective tax rate for the year ended December 31, 2012 was 126.8%, as compared to 26.1% for the year ended December 30, 2011. The effective tax rate for the year ended December 31, 2012 was driven primarily by the impact of the goodwill impairment recognized during the year ended December 31, 2012.

 

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Results by Segment

The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the year ended December 31, 2012 compared to the year ended December 30, 2011. Amounts agree to our segment disclosures in Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

     For the years ended  
(Amounts in thousands)    December 31, 2012     December 30, 2011
As Restated (4)
 

Revenue

        

LOGCAP

   $ 1,771,945        43.1   $ 1,596,444        39.2

Aviation

     1,338,514        32.6     1,101,218        27.1

Training & Intelligence Solutions

     535,354        13.0     637,808        15.7

Global Logistics & Development Solutions

     294,106        7.2     307,200        7.5

Security Services

     108,064        2.6     68,996        1.7

GLS

     61,111        1.5     359,568        8.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

     4,109,094        100.0     4,071,234        100.0

GLS deconsolidation (1)

     (61,111       (359,568  

Headquarters (2)

     (3,708       7,486     
  

 

 

     

 

 

   

Total revenue

   $ 4,044,275        $ 3,719,152     
  

 

 

     

 

 

   

Operating Income

        

LOGCAP

   $ 64,131        3.6   $ 27,280        1.7

Aviation

     105,327        7.9     71,912        6.5

Training & Intelligence Solutions

     (19,868     (3.7 )%      31,875        5.0

Global Logistics & Development Solutions

     26,774        9.1     20,642        6.7

Security Services

     (22,096     (20.4 )%      5,287        7.7

GLS

     3,297        5.4     26,661        7.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

     157,565        3.8     183,657        4.5

GLS deconsolidation

     (3,297       (26,661  

Headquarters (3)

     (58,385       (144,625  
  

 

 

     

 

 

   

Total operating income

   $ 95,883        $ 12,371     
  

 

 

     

 

 

   

 

(1) The Company deconsolidated GLS effective July 7, 2010. See Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(2) Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures.
(3) 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 year ended December 30, 2011, we recognized an impairment on our equity method investment in GLS. See Note 13 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(4) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

LOGCAP

Revenue of $1,771.9 million increased $175.5 million, or 11.0%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of a $206.6 million increase from higher volumes of work under the Afghanistan Area of Responsibility (“AOR”) partially offset by a decrease in volume under the Kuwait AOR resulting from manning reductions from the 2011 troop drawdown in Iraq as Operation Iraqi Freedom (“OIF”) ended. In the aggregate, we recorded a favorable adjustment of $18.7 million for the year ended December 31, 2012 primarily due to the actual award fee determination being higher than our previous estimates of the LOGCAP IV award fee scores. During the fourth quarter of 2012, the Afghanistan and Kuwait task orders were converted from a cost-plus-award-fee contract vehicle to a cost-plus-fixed-fee arrangement, resulting in retrospective application of the fee arrangement to the open periods of performance on each task order. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than we were previously earning in

 

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award fees. Given the recent announcement made by the Obama Administration of troop drawdown in Afghanistan and the uncertainty surrounding the defense and government contracting industry, including sequestration and other looming budget cuts, we expect our revenue to decline during the year ending December 31, 2013.

Operating income of $64.1 million increased $36.9 million, or 135.1%, for the year ended December 31, 2012 compared to operating income of $27.3 million for the year ended December 30, 2011 primarily as a result of the increase in volume and the change in the contract vehicle discussed above. Operating income as a percentage of revenue increased to 3.6% for the year ended December 31, 2012 compared to 1.7% for the year ended December 30, 2011 primarily as a result of higher award fee scores received during the year ended December 31, 2012 relative to prior year pertaining to periods of performance that were completed prior to the change to a fixed-fee contract vehicle as well as the impact of the contract vehicle change on open periods of performance resulting in a net increase in margin as the fixed-fee is higher than previous award fee earnings.

Aviation

Revenue of $1,338.5 million increased $237.3 million, or 21.5%, for the year ended December 31, 2012 compared to the year ended December 30, 2011. The change was primarily the result of increased demand under the INL-Air Wing program; performance under new CFT task orders and other existing Aviation contracts; and revenue from the T6-COMBS, NASA-AMOS and G222 new contracts. These increases were partially offset by a reduction in volume under the Theater Aviation Sustainment Management—Europe (“TASM-E”) CFT task order due to the completion of certain delivery orders, and the completion of the Life Cycle Contract Support Services (“LCCS”) contract in late 2011 and early 2012. Due to the uncertainty surrounding the defense and government contracting industry, including sequestration and other looming budget cuts, our aviation contracts with the DoD may experience short term declines in the near future. We will continue to pursue opportunities within the INL Air wing program as we continue to expand our aircraft and personnel requirements in supporting the DoS.

Operating income of $105.3 million increased $33.4 million, or 46.5%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 as a result of the increased demand discussed above and better margins on our new contracts and task orders as compared to our historical contract mix partially offset by startup costs associated with Heliworks, which we acquired during the year ended December 31, 2012. Additionally, certain non-recurring charges in the prior year related to program specific severance costs and a write-down of inventory on the LCCS program contributed to the increase in operating income. High margins on new contracts and task orders and the absence of the non-recurring charges incurred during the year ended December 30, 2011 drove the improvement in operating income as a percentage of revenue to 7.9% for the year ended December 31, 2012 compared to 6.5% for the year ended December 30, 2011.

Training & Intelligence Solutions

Revenue of $535.4 million decreased $102.5 million, or 16.1%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of the ramp-down of operations under the Civilian Police (“CivPol”) program resulting in a decline in revenue of $192.9 million and the conclusion of the Multi-National Security Transition Command-Iraq (“MNSTC-I”) program in early 2012 partially offset by revenue growth as a result of increased volume under our Afghanistan Ministry of Defense Program (“AMDP”) program. We expect revenue to decline in 2013 as CivPol winds down and the scope of the AMDP program declines as DoD priorities in Afghanistan shift consistent with the announced troop drawdown by President Obama. We expect these declines to be partially offset by new training opportunities in the intelligence and special operations community. Actuals could differ from our expectations, which include significant estimates related to new business opportunities depending on the impact of sequestration or other government spending cuts. We continue to pursue new training opportunities within this segment in addition to expanding global mission to the intelligence and special operations community.

The recognition of an operating loss of $19.9 million for the year ended December 31, 2012 was primarily the result of the $30.9 million goodwill impairment charge recorded to the Training and Mentoring reporting unit within this segment as a result of the decline in revenue and forecasted operating income. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Additionally, operating income earned under the CivPol program declined as a result of the reduction in volume discussed above. Excluding the impact of the goodwill impairment charge, operating income as a percentage of revenue decreased to 2.1% primarily as a result of the overall contract mix containing comparatively more contracts operating at lower margins.

Global Logistics & Development Solutions

Revenue of $294.1 million decreased $13.1 million, or 4.3%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of declines in revenue of $29.3 million resulting from the completion of certain task orders under the AFCAP contract and by our subsidiary Casals & Associates, Inc. partially offset by revenue growth under the Oshkosh Defense and War Reserve Materiel (“WRM”) programs. Additionally, during the year ended December 31, 2012, the DoS accepted our Request for Equitable Adjustment (“REA”) related to the Africa Peacekeeping Security Sector Transformation (“APK-SST”) task order in Sudan which resulted in a positive $5.5 million adjustment to revenue. In 2013, one of our core strategies for GLDS is to increase our direct commercial business with U.S. Allies; however, operations under this segment are subject to the uncertainty surrounding the U.S. defense and government contracting industry, including sequestration and looming budget cuts, which could materially impact the results of operations of this segment during the year ending December 31, 2013.

 

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Operating income of $26.8 million increased $6.1 million, or 29.7%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of margin improvements on the Oshkosh Defense contract as well as the recognition of $5.5 million of income resulting the REA received on the APK-SST task order discussed above that had no associated costs in the current period. These increases were partially offset by the reductions in volume discussed above. These changes drove the increase in operating income as a percentage of revenue to 9.1% for the year ended December 31, 2012 from 6.7% for the year ended December 30, 2011.

Security Services

Revenue of $108.1 million increased $39.1 million, or 56.6%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of the replacement of the Worldwide Personal Protection Program (“WPPS”) with the higher volume Worldwide Protective Services (“WPS”) program during the year ended December 31, 2012. WPS was awarded in September 2011 and became fully operational in 2012. In addition to the WPS program, the Chemonics and Bondsteel contracts began operations during the year ended December 31, 2012.

The recognition of an operating loss of $22.1 million during the year ended December 31, 2012 was primarily the result of the $13.7 million goodwill impairment charge recorded to the Security Services reporting unit within this segment as a result of continued under performance of operations under this segment as well as a decline in projected revenue resulting from customer driven de-scoping. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Additionally, performance challenges, such as fill rates, transition costs and customer process impediments on the WPS and Bondsteel contracts resulted in loss contract reserves being recorded during the year ended December 31, 2012. However, during the year ended December 31, 2012, we reached a final resolution with our customer minimizing future losses on the WPS contract. Additionally, we completed the transition period, and we do not anticipate material incremental losses on the Bondsteel contract.

GLS

Revenue of $61.1 million decreased $298.5 million, or 83.0%, during the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of the reduction in deployed linguists under the Intelligence and Security Command (“INSCOM”) contract in support of U.S. troop levels in Iraq as the war came to an end in December 2011. During the year ended December 30, 2011, GLS was selected as one of six providers that will compete for task orders on the $9.7 billion Defense Language Interpretation Translation Enterprise (“DLITE”) contract and in January 2013, the U.S. Army Intelligence and Security Command selected GLS to manage the U.S. Army Central Command (“CENTCOM”) task order under the DLITE contract. The CENTCOM task order has one base year and one option year and a total potential value of $88.4 million.

Operating income of $3.3 million decreased $23.4 million, or 87.6%, during the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of the reduction in volume under the INSCOM contract as discussed above. We do not anticipate any further work under the INSCOM contract after the completion of these task orders.

 

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

Consolidated Results

The following table sets forth our consolidated results of operations, both in dollars and as a percentage of revenue, for the period from April 1, 2010 (inception) through December 31, 2010:

 

     For the period  from
April 1, 2010 (Inception)
through December 31, 2010
 
(Amounts in thousands)    As Restated (1)  

Revenue

   $ 1,696,415                    100.0

Cost of services

     (1,547,919     (91.2 )% 

Selling, general and administrative expenses

     (78,024     (4.6 )% 

Merger expenses incurred by Delta Tucker Holdings, Inc.

     (51,722     (3.1 )% 

Depreciation and amortization expense

     (25,776     (1.5 )% 

Earnings from equity method investees

     10,337        0.6
  

 

 

   

 

 

 

Operating income

     3,311        0.2

Interest expense

     (46,845     (2.8 )% 

Bridge commitment fee

     (7,963     (0.5 )% 

Interest income

     420        0.1

Other income, net

     1,872        0.1
  

 

 

   

 

 

 

Loss before income taxes

     (49,205     (2.9 )% 

Benefit for income taxes

     9,690        0.6
  

 

 

   

 

 

 

Net loss

     (39,515     (2.3 )% 

Noncontrolling interests

     (1,361     (0.1 )% 
  

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (40,876     (2.4 )% 
  

 

 

   

 

 

 

 

(1) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective periods. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Revenue — Revenue was $1,696.4 million for the period from April 1, 2010 (inception) through December 31, 2010. Revenue was primarily driven by operations under our LOGCAP program, which yielded a fully ramped-up LOGCAP IV Afghanistan task order and award fee recognition on the LOGCAP IV program. See further discussion in the “ Results by Segment ” section below.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services was $1,547.9 million for the period from April 1, 2010 (inception) through December 31, 2010. As a percentage of revenue, Cost of services was 91.2% and was primarily driven by the contribution of relatively lower margin operations under our LOGCAP IV program.

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

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

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

Earnings from equity method investees — Earnings from unconsolidated affiliates of $10.3 million includes our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as GLS. The majority of earnings from unconsolidated affiliates are attributable to GLS.

 

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

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

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

Benefit for income taxes — Benefit for income taxes was a net benefit of $9.7 million primarily due to the pre-tax loss driven by the Merger expenses and bridge commitment fees incurred by Delta Tucker Holdings, Inc.

Results by Segment

The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the period from April 1, 2010 (inception) through December 31, 2010. Amounts agree to our segment disclosures in Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

     For the period from
April 1, 2010 (Inception)
through December  31, 2010
 
(Amounts in thousands)    As Restated (4)  

Revenue

    

LOGCAP

   $ 695,644                    35.0

Aviation

     536,070        27.0

Training & Intelligence Solutions

     268,087        13.5

Global Logistics & Development Solutions

     171,479        8.7

Security Services

     28,387        1.4

GLS

     285,820        14.4
  

 

 

   

 

 

 

Total reportable segments

     1,985,487        100.0

GLS deconsolidation (1)

     (285,820  

Headquarters (2)

     (3,252  
  

 

 

   

Total revenue

   $ 1,696,415     
  

 

 

   

Operating Income

    

LOGCAP

   $ 14,705        2.1

Aviation

     29,897        5.6

Training & Intelligence Solutions

     20,211        7.5

Global Logistics & Development Solutions

     4,281        2.5

Security Services

     2,674        9.4

GLS

     19,287        6.7
  

 

 

   

 

 

 

Total reportable segments

     91,055        4.6

GLS deconsolidation

     (19,287  

Headquarters (3)

     (68,457  
  

 

 

   

Total operating income

   $ 3,311     
  

 

 

   

 

(1) The Company 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) 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. In addition, Merger expenses incurred by Delta Tucker Holdings, Inc. are included in Headquarters.
(4) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective periods. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

 

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LOGCAP

Revenue of $695.6 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of operations under our LOGCAP IV program in Afghanistan as well as the recognition of award fee revenue during the period as we received notification from our customer on our award fee performance on several task orders.

Operations under our LOGCAP segment are primarily cost-reimbursable. As a result, the drivers of revenue directly impact operating income. In addition to the increase in volume discussed above, operating income of $14.7 million for the period from April 1, 2010 (inception) through December 31, 2010 was impacted by the recognition of award fee revenue that had no corresponding costs during the period.

Aviation

Revenue of $536.1 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of revenue earned on the INL Air Wing program providing transportation services in Iraq, Afghanistan and Colombia as well as operations under our CFT programs partially offset by the impact of the loss of our LCCS Army program that transitioned to a new awardee in November 2010.

Operating income of $29.9 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of low margins on the CFT program as a result of a reduction in rates as well as the impact of a settlement of a claim on the LCCS program.

Training & Intelligence Solutions

Revenue of $268.1 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of operations under our CivPol program. During the period, we experienced reductions in personnel levels on CivPol as a result of a shift in strategy by our customer to focus on more highly skilled training and mentoring services while reducing the overall number of deployed trainers and mentors in Iraq and a temporary decline in personnel during the transition period between the DoS and DoD in Afghanistan. We were awarded a new contract by the U.S. Army in December 2010, however, given the nature of the new contract, we could experience lower profit margins than those originally experienced with the CivPol Afghanistan contract. The base period of performance runs for twenty-four months with one twelve month option period. The total contract value for the thirty-six months is approximately $1.0 billion.

Operating income of $20.2 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of operations under the Iraq II task order under our CivPol program. During the period from April 1, 2010 (inception) through December 31, 2010, personnel reductions on our CivPol program resulting from a shift in customer focus also impacted operating income.

Global Logistics & Development Solutions

Revenue of $171.5 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of Africa Peacekeeping operations in Somalia and operations under our Mine Resistant Ambush Protected Vehicles (“MRAP”) and AFCAP programs.

Operating income of $4.3 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of high margin operations under the MRAP program. We expect a shift on the MRAP program from acquisition funding to sustainment funding which is anticipated to produce lower profit levels going forward.

Security Services

Revenue of $28.4 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily the result of operations in Qatar and Northern Iraq under the Security Guard Forces and WPPS II programs, respectively.

Operating income of $2.7 million for the period from April 1, 2010 (inception) through December 31, 2010 was primarily driven by high margin operations under the Northern Iraq WPPS II task order as well as operations under the Security Guard Forces program, though at comparatively lower margins.

GLS

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

 

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

 

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

Consolidated Results

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

 

(Amounts in thousands)    For the fiscal quarter ended
July 2, 2010
 

Revenue

   $ 944,713        100.0

Cost of services

     (856,974     (90.7 )% 

Selling, general and administrative expenses

     (38,513     (4.1 )% 

Depreciation and amortization expense

     (10,263     (1.1 )% 
  

 

 

   

 

 

 

Operating income

     38,963        4.1

Interest expense

     (12,585     (1.3 )% 

Interest income

     51        —     

Other income, net

     658        0.1
  

 

 

   

 

 

 

Income before income taxes

     27,087        2.9

Provision for income taxes

     (9,279     (1.0 )% 
  

 

 

   

 

 

 

Net income

     17,808        1.9

Noncontrolling interests

     (5,004     (0.5 )% 
  

 

 

   

 

 

 

Net income attributable to DynCorp International Inc.

   $ 12,804        1.4
  

 

 

   

 

 

 

Revenue — Revenue for the fiscal quarter ended July 2, 2010 was $944.7 million, which is more fully described in the results by segment below, included a full quarter of revenue from the LOGCAP IV Afghanistan task, which began ramping up in the second quarter of fiscal year 2010.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Costs of services for the fiscal quarter ended July 2, 2010 totaled $857.0 million, or 90.7% of revenue. Cost of services was largely driven by operations under LOGCAP IV, a change in overall contract mix and cost increases on our CFT programs.

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

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

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

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

Noncontrolling interests — Noncontrolling interests reflect the impact of our equity partners’ interest in our consolidated joint ventures, GLS and DIFZ. For the fiscal quarter ended July 2, 2010, noncontrolling interests for GLS and DIFZ were $4.2 million and $0.8 million, respectively.

 

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Results by Segment

The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the fiscal quarter ended July 2, 2010. Amounts agree to our segment disclosures in Note 16 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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

Revenue

    

Global Stabilization and Development Solutions

   $ 478,239        50.6

Global Platform Support Solutions

     317,471        33.6

GLS

     149,254        15.8
  

 

 

   

 

 

 

Total Segments

     944,964        100.0

Headquarters (1)

     (251  
  

 

 

   

Consolidated revenue

   $ 944,713     
  

 

 

   

Operating Income

    

Global Stabilization and Development Solutions

   $ 22,170        4.6

Global Platform Support Solutions

     21,290        6.7

GLS

     9,073        6.1
  

 

 

   

 

 

 

Total Segments

     52,533        5.6

Headquarters (2)

     (13,570  
  

 

 

   

Consolidated operating income

   $ 38,963     
  

 

 

   

 

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

Global Stabilization and Development Solutions

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

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

Global Platform Support Solutions

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

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

Global Linguist Solutions

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

 

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

 

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Predecessor Results of Operations—Fiscal Year Ended December 31, 2010

We have restated the DynCorp International consolidated statements of operations, equity, and cash flows for the fiscal year ended December 31, 2010 and the consolidated balance sheet as of December 31, 2010 to correct errors in such consolidated financial statements. See Note 19 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding the impact of the restatement. The amounts presented below are reflective of this restatement.

Consolidated Results

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

 

     For the fiscal year ended  
(Amounts in thousands)    April 2, 2010  

Revenue

   $     3,572,459          100.0

Cost of services

     (3,225,250     (90.3 )% 

Selling, general and administrative expenses

     (106,401     (3.0 )% 

Depreciation and amortization expense

     (41,639     (1.1 )% 
  

 

 

   

 

 

 

Operating income

     199,169        5.6

Interest expense

     (55,650     (1.6 )% 

Loss on early extinguishment of debt, net

     (146     —     

Interest income

     542        —     

Other income, net

     5,194        0.2
  

 

 

   

 

 

 

Income before income taxes

     149,109        4.2

Provision for income taxes

     (47,035     (1.3 )% 
  

 

 

   

 

 

 

Net income

     102,074        2.9

Noncontrolling interests

     (24,631     (0.7 )% 
  

 

 

   

 

 

 

Net income attributable to DynCorp International Inc.

   $ 77,443        2.2
  

 

 

   

 

 

 

Revenue — Revenue of $3,572.5 million for the fiscal year ended April 2, 2010 was primarily due to the ramp up of the LOGCAP IV and INSCOM programs. Additionally, revenue was also driven by our acquisitions of Phoenix and Casals. See further discussion in the “ Results by Segment ” section below.

Cost of services — Costs of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services for the fiscal year ended April 2, 2010 totaled $3,225.3 million, or 90.3% of revenue. As a percentage of revenue, cost of services was primarily due to low margins on our CFT and CivPol programs and our fee sharing arrangement with our collaborative partners on the LOGCAP IV program partially offset by higher award fees on the INSCOM contract that had no corresponding costs and lower losses associated with our Afghanistan Construction program.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A of $106.4 million or 3.0% of revenue, for the fiscal year ended April 2, 2010 was primarily comprised of severance charges related to our former Chief Executive Officer (“CEO”), Herb Lanese, former GPSS president Natale DiGesualdo and former Senior Vice President and Chief Compliance Officer as well as increases in business development costs in support of our growth. These amounts were partially offset by the reversal of a $10.0 million legal reserve related to a favorable appellate court decision on the Worldwide Network Services (“WWNS”) case.

Depreciation and amortization — Depreciation and amortization for the fiscal year ended April 2, 2010 was $41.6 million and consisted primarily of monthly amortization expenses related to intangible assets acquired in our purchase of Phoenix and Casals.

Interest expense — Interest expense for the fiscal year ended April 2, 2010 was $55.7 million and was primarily due to interest incurred on our pre-Merger credit facility and repurchase of 9.5% senior subordinated notes.

Income tax expense —  Our effective tax rate for the fiscal year ended April 2, 2010 was 31.5% as a result of the difference in financial reporting and tax treatment of GLS and DIFZ, which were consolidated for financial reporting purposes but treated as partnerships for tax purposes.

 

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Noncontrolling interests — Noncontrolling interests reflect the impact of our equity partners’ interest in DIFZ and GLS, which were consolidated during the fiscal year ended April 2, 2010. For the fiscal year ended April 2, 2010, noncontrolling interests for GLS and DIFZ were $21.5 million and $3.1 million, respectively.

Results by Segment

The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the fiscal year ended April 2, 2010. Amounts agree to our segment disclosures in Note 16 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

     Predecessor
Fiscal Year 2010
 
(Amounts in thousands)    Reportable Segments  

Revenue

  

Global Stabilization and Development Solutions

   $ 1,512,103            42.3

Global Platform Support Solutions

     1,325,076        37.1

GLS

     734,012        20.6
  

 

 

   

 

 

 

Total Segments

     3,571,191        100.0

Headquarters/eliminations(1)

     1,268     
  

 

 

   

Consolidated revenue

   $ 3,572,459     
  

 

 

   

Operating Income

    

Global Stabilization and Development Solutions

   $ 86,707        5.7

Global Platform Support Solutions

     110,801        8.4

GLS

     46,389        6.3
  

 

 

   

 

 

 

Total Segments

     243,897        6.8

Headquarters(2)

     (44,728  
  

 

 

   

Consolidated operating income

   $ 199,169     
  

 

 

   

 

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

Global Stabilization & Development Solutions

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

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

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

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

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

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

Global Platform Support Solutions

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

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

 

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

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

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

Global Linguist Solutions

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

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

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial statements have been derived from or developed by applying pro forma adjustments to the combined historical information from Delta Tucker Holdings, Inc. for the period from April 1, 2010 (inception) through December 31, 2010 and DynCorp International’s historical information for the period from January 2, 2010 through July 2, 2010. The combination involves presenting the Predecessor’s results for periods prior to the Merger, of which a portion of the results was prior to the inception of Delta Tucker Holdings, Inc. We believe that this approach is beneficial to the reader as it provides more insight into our results of operations and provides the reader with information from which to analyze our financial results on a twelve months basis that is consistent with the manner that management reviews and analyzes the results of operations.

The historical financial statements of Delta Tucker Holdings, Inc. do not include the consolidated results of GLS. Although our economic and voting interests in GLS did not change, there was a change in our related party relationship resulting from the Merger. The adoption of ASU No. 2009-17 required us to account for our interests in GLS under the equity method of accounting and resulted in the deconsolidation of GLS at the Merger. The unaudited pro forma consolidated financial statements have been adjusted to reflect the deconsolidation of GLS as if it had occurred on January 2, 2010.

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma consolidated financial information is presented for informational purposes only. The unaudited pro forma consolidated financial information does not purport to represent what our results of operations would have been had the Merger actually occurred on the date indicated. The unaudited pro forma consolidated financial statements should be read in conjunction with the information contained in “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

The Merger was accounted for using acquisition accounting. The pro forma information presented, including the allocation of purchase price, is based on the fair values of assets acquired and liabilities assumed, information and assumptions available at the time of the Merger. The final purchase price allocation was dependent on, among other things, the finalization of asset and liability valuations. As of the date of this Annual Report on Form 10-K, the final valuation prepared by third-party appraisers was complete and was used to determine the fair values of the assets acquired, the liabilities assumed and the related allocation of purchase price.

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

 

     Historical     Adjustments     Pro Forma  
(Amounts in thousands)    As Restated  (6)      

Revenue

   $ 1,696,415      $ 1,689,443  (1)     $ 3,385,858   

Cost of services

     (1,547,919     (1,545,585 )  (1)       (3,093,504

Selling, general and administrative

     (78,024     (53,852 )  (1)(2)       (131,876

Merger expenses

     (51,722     —          (51,722

Depreciation and amortization expense

     (25,776     (25,389 )  (1)(3)       (51,165

Earnings from equity method investees

     10,337        9,407  (1)       19,744   
  

 

 

   

 

 

   

 

 

 

Operating income

     3,311        74,024        77,335   

Interest expense

     (46,845     (46,845 )  (1)(4)       (93,690

Bridge commitment fee

     (7,963     —          (7,963

Interest income

     420        84  (1)       504   

Other income, net

     1,872        3,384  (1)       5,256   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (49,205     30,647        (18,558

Benefit (provision) for income taxes

     9,690        (3,013 )  (1)(5)       6,677   
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (39,515     27,634        (11,881

Noncontrolling interests

     (1,361     (1,434 )  (1)       (2,795
  

 

 

   

 

 

   

 

 

 

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

   $ (40,876   $ 26,200      $ (14,676
  

 

 

   

 

 

   

 

 

 

 

(1) Represents the elimination of GLS results of operations for the six months ended July 2, 2010 and the addition of DynCorp International Inc’s results of operations for the six months ended July 2, 2010. Our portion of GLS earnings is reflected in earnings from equity method investees. See summary below:

 

(Amounts in thousands)    DynCorp International Inc.
Six Months Ended
July 2, 2010
    Global Linguist Solutions
Six Months Ended
July 2, 2010
 

Revenues

   $ 1,998,504      $ (309,061 )* 

Cost of services

     (1,830,793     285,208   

Selling, general and administrative

     (57,822     4,470   

Depreciation and amortization expense

     (20,989     —     

Earnings from equity method investees

     —          9,407   
  

 

 

   

 

 

 

Operating income

     88,900        (9,976

Interest expense

     (26,279     —     

Interest income

     84        —     

Other income, net

     2,445        939   
  

 

 

   

 

 

 

Income before income taxes

     65,150        (9,037

Provision from income taxes

     (21,946     —     
  

 

 

   

 

 

 

Net income

     43,204        (9,037

Noncontrolling interests

     (10,932     9,498   
  

 

 

   

 

 

 

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

   $ 32,272      $ 461   
  

 

 

   

 

 

 

 

* Adjustments to remove Global Linguist Solutions
(2) Represents the elimination of Veritas Capital LLP’s management fee of $0.3 million and the addition of the Cerberus Capital Management, L.P. management fee of $0.7 million.

 

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(3) Represents the elimination of amortization expense associated with historical customer related and other intangible assets and the addition of the amortization expense associated with the customer related and other intangible assets from the Merger of $4.4 million. The customer related intangibles and other intangibles have a weighted average useful life of 9.2 years and 6.1 years, respectively.
(4) Represents the increase in interest expense to reflect the impact of (i) interest expense resulting from the issuance of debt at the merger date and (ii) the amortization of financing costs over the terms of the corresponding debt. A summary below:

 

(Amounts in thousands)    For the twelve months ended
December 31, 2010
 

Pro forma interest expense (a)

   $ 42,684   

Pro forma amortization of deferred financing fees

     4,161   
  

 

 

 

Total pro forma interest expense and deferred financing costs

     46,845   

Historical interest expense and deferred financing fees (b)

     (26,279
  

 

 

 

Total increase

   $ 20,566   
  

 

 

 

 

(a) Represents pro forma interest expense calculated using our applicable interest rate as of year end as the utilization under the revolver was consistent for the year (i) on the $455.0 million senior unsecured notes, (ii) on the $570.0 million term loan and (iii) on the borrowings under the $150 million revolving credit facility.
(b) Note the historical interest expense line item on the pro forma income statement includes immaterial amounts of interest expense related to non debt transactions.
(5) Represents the revised estimated tax provision utilizing the statutory federal and state income tax rate of 35.98% for the calendar year ended December 31, 2010. The tax adjustment was calculated by multiplying the pro forma loss before income taxes times the statutory rate less the historical benefit from income taxes.
(6) The Company has restated its consolidated financial statements for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

 

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Pro Forma Results of Operations for the twelve months ended December 31, 2010 compared to the historical results of operations for the year ended December 30, 2011

Consolidated Results

The following table sets forth our consolidated results of operations, both in dollars and as a percentage of revenue, for the year ended December 30, 2011 and for the pro forma twelve months ended December 31, 2010:

 

(Amounts in thousands)    For the year ended
December 30, 2011
As Restated (1)
    Pro forma results for the
twelve months ended

December 31, 2010
 

Revenue

   $ 3,719,152        100.0   $ 3,385,858        100.0

Cost of services

     (3,408,842     (91.7 )%      (3,093,504     (91.4 )% 

Selling, general and administrative expenses

     (149,551     (4.0 )%      (131,876     (3.9 )% 

Merger expenses incurred by Delta Tucker Holdings, Inc.

     —          —          (51,722     (1.5 )% 

Depreciation and amortization expense

     (50,773     (1.4 )%      (51,165     (1.5 )% 

Earnings from equity method investees

     12,800        0.3     19,744        0.6

Impairment of equity method investment

     (76,647     (2.0 )%      —          —     

Impairment of goodwill

     (33,768     (0.9 )%      —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     12,371        0.3     77,335        2.3

Interest Expense

     (91,752     (2.5 )%      (93,690     (2.8 )% 

Bridge commitment fee

     —          —          (7,963     (0.2 )% 

Loss on early extinguishment of debt

     (7,267     (0.2 )%      —          —     

Interest income

     205        —          504        —     

Other income, net

     6,071        0.2     5,256        0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (80,372     (2.2 )%      (18,558     (0.5 )% 

Benefit for income taxes

     20,941        0.6     6,677        0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (59,431     (1.6 )%      (11,881     (0.3 )% 

Noncontrolling interests

     (2,625     (0.1 )%      (2,795     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Delta Tucker Holdings, Inc.

   $ (62,056     (1.7 )%    $ (14,676     (0.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company has restated its consolidated financial statements for the fiscal year ended December 30, 2011 and for the Pro Forma twelve months ended December 31, 2010. The table above presents the restated amounts for the respective period. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Revenue — Revenue for the year ended December 30, 2011 was $3,719.2 million, an increase of $333.3 million, or 9.8%, compared to the pro forma twelve months ended December 31, 2010. The increase was primarily driven by an increase in LOGCAP IV operations in Afghanistan. Revenue growth was also attributable to our INL Air Wing program as a result of expanding aircraft and personnel requirements in support of the DoS in Iraq and Afghanistan as well as continued growth under our CFT programs. These increases in revenue were partially offset by the loss of the LCCS contract during the first quarter of 2011.

Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractor, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 30, 2011 was $3,408.8 million, an increase of $315.3 million, or 10.2%, compared to the pro forma twelve months ended December 31, 2010. The increase in Cost of services was primarily due to the growth in our business consistent with the growth in revenue discussed above. As a percentage of revenue, Cost of services increased to 91.7% for the year ended December 30, 2011 from 91.4% for the pro forma twelve months ended December 31, 2010 primarily as a result the growth of our LOGCAP IV program, a cost-reimbursable contract that operates at lower margins relative to the overall contract mix, which contributed a greater share of our overall consolidated operations during the year ended December 30, 2011 relative to the pro forma twelve months ended December 31, 2010.

Selling, general and administrative expenses (“SG&A”) — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A increased by $17.7 million, or 13.4%, to $149.6 million for the year ended December 30, 2011 compared to the pro forma twelve months ended December 31, 2010 primarily as a result of non-routine severance costs incurred during the year ended December 30, 2011 associated with the corporate realignment and the acceleration of the Phoenix and Casals retention bonuses during the year ended December 30, 2011 partially offset by non-recurring severance

 

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related costs of $7.5 million associated with our former CEO and CFO during the pro forma twelve months ended December 31, 2010. These changes also drove the increase in SG&A as a percentage of revenue to 4.0% for the year ended December 30, 2011 compared to 3.9% for the pro forma twelve months ended December 31, 2010.

Merger expenses incurred by Delta Tucker Holdings, Inc. — Merger expenses of $51.7 million incurred by Delta Tucker Holdings, Inc. relate to legal costs and deal fees directly associated with the Merger, other than the bridge commitment fee which is discussed separately below. These expenses are non-recurring.

Depreciation and amortization — Depreciation and amortization for the year ended December 30, 2011 was $50.8 million, a decrease of $0.4 million, or 0.8%, compared to the pro forma twelve months ended December 31, 2010. The decrease was primarily the result of certain non-compete agreements becoming fully amortized during the second half of the year ended December 30, 2011.

Earnings from equity method investees — Earnings from equity method investees includes our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as GLS. Earnings from equity method investees for the year ended December 30, 2011 was $12.8 million, a decrease of $6.9 million, or 35.2%, compared to the pro forma twelve months ended December 31, 2010. The decrease was primarily the result of the decrease in our GLS earnings. In September 2011, we recorded an impairment of our investment in GLS resulting in us no longer recognizing any such earnings until we receive cash through dividend distribution.

Impairment of equity method investment —  During the year ended December 30, 2011, we recorded a $76.6 million impairment of our investment in GLS as we concluded it had a loss in value that was other than temporary. As such, we no longer recognize any earnings from our investment in GLS until we receive cash through a dividend distribution.

Impairment of goodwill —  During the year ended December 30, 2011 we recognized an impairment charge of $33.8 million on the goodwill associated with two reporting units within the TIS segment as a result of the decline in the projected future cash flows resulting primarily from uncertain market trends and shifts in program priorities and funding requirements which has resulted in lower margins.

Interest expense — Interest expense for the year ended December 30, 2011 was $91.8 million, a decrease of $1.9 million, or 2.1%, compared to the pro forma twelve months ended December 31, 2010. The decrease was primarily due to the reduction of the principal balance of our Term Loan. We made principal prepayments of $147.3 million during the year ended December 30, 2011.

Bridge commitment fee incurred by Delta Tucker Holdings, Inc. — Bridge commitment fees of $8.0 million relate to costs associated with a bridge financing arrangement which expired upon issuance of the notes issued in connection with the Merger.

Loss on early extinguishment of debt —  Loss on the early extinguishment of debt of $7.3 million for the year ended December 30, 2011 was attributable to principal prepayments on our Term Loan totaling $147.3 million made during the year ended December 30, 2011.

Other income, net — Other income, net includes our share of earnings from unconsolidated joint ventures that are not operationally integral to our business as well as gains/losses from foreign currency. Other income, net was $6.1 million for the year ended December 30, 2011, an increase of $0.8 million, or 15.5%, compared to the pro forma twelve months ended December 31, 2010. The increase in Other income, net was primarily due to growth of operations under our unconsolidated joint venture Babcock DynCorp Limited.

Income taxes — The effective tax rate for the year ended December 30, 2011 was 26.1% as compared to 36.0% for the pro forma twelve months ended December 31, 2010. The effective tax rate for the year ended December 30, 2011 was driven primarily by our combined federal and state statutory rates and certain permanent differences, primarily resulting from the Merger, as well as the reversal of approximately $1.0 million in reserves on uncertain tax positions in conjunction with new Internal Revenue Service (“IRS”) guidance. The effective tax rate for the pro forma twelve months ended December 31, 2010 was calculated by multiplying the pro forma loss before income taxes times the statutory rate less the historical benefit from income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Cash generated by operations and borrowings available under our senior secured credit facility (“Senior Credit Facility”) are our primary sources of short-term liquidity (refer to Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more detail). We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, access to our Revolver is dependent upon our meeting financial and non-financial covenants, summarized below, and our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable. Significant changes such as CR or any other limitations in collections or loss of our ability to access our revolver could materially negatively impact liquidity and our

 

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ability to fund our working capital needs. Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility, which would materially affect our future expansion strategies and our ability to meet our operational obligations. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash.

Management believes Days Sales Outstanding (“DSO”) is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. As of December 31, 2012 and December 30, 2011, DSO was 69 days for both periods.

We expect our cash position to remain strong throughout calendar year 2013 as we continue to focus on working capital management and growth in our business. We expect cash to continue to be impacted by interest payments on the Senior Credit Facility and the Senior Unsecured Notes. Interest payments are expected to be lower during calendar year 2013 as a result of the $90.0 million and $147.3 million in principal prepayments made during the years ended December 31, 2012 and December 30, 2011, respectively.

The federal net operating loss carry forwards (“NOLs”) were fully utilized during the year-end December 31, 2012 and our foreign tax credits will be exhausted during calendar year 2013 which will result in cash tax payments.

Cash Flow Analysis

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

 

    Delta Tucker Holdings, Inc.     Predecessor  
    For the years ended     For the period from
April 1, 2010
(Inception) through
December 31, 2010
    For the
fiscal quarter ended
    For the
fiscal year ended
 
(Amounts in thousands)   December 31, 2012     December 30, 2011        
        July 2, 2010     April 2, 2010  

Net cash provided by (used in) operating activities

  $ 144,190      $ 167,986      $ (27,089   $ 21,723      $ 90,473   

Net cash used in investing activities

    (12,163     (3,003     (878,218     (2,874     (88,875

Net cash (used in) provided by financing activities

    (83,457     (147,315     957,844        (5,433     (79,387

Delta Tucker Holdings, Inc. —The year ended December 31, 2012 compared to the year ended December 30, 2011

Operating Activities

Cash provided by operations for the year ended December 31, 2012 was $144.2 million as compared to cash provided by operations of $168.0 million for the year ended December 30, 2011. Cash provided by operations during the year ended December 31, 2012 was primarily the result of growth in earnings before interest, taxes, and depreciation & amortization (“EBITDA”), working capital improvements, including net cash received of approximately $66.2 million on December 31, 2012, and the release of restricted cash. Cash provided by operations for the year ended December 31, 2012, compared to Cash provided by operations for the year ended December 30, 2011 was negatively impacted by a $46.0 million tax refund resulting from the approved Change in Accounting Methodology (“CIAM”) with the IRS that occurred in 2011 and did not recur in 2012.

Investing Activities

Cash used in investing activities for the year ended December 31, 2012 was $12.2 million as compared to cash used in investing activities of $3.0 million for the year ended December 30, 2011. Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our PaTH and CRS joint ventures. Cash used in investing activities during the year ended December 30, 2011 was driven by contributions to PaTH, our 30% owned joint venture, as well as purchases of property and equipment and software, partially offset by the return of capital from our GLS and CRS joint ventures.

 

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Financing Activities

Cash used in financing activities for the year ended December 31, 2012 was $83.5 million as compared to cash used in financing activities of $147.3 million for the year ended December 30, 2011. Cash used in financing activities during the year ended December 31, 2012 was primarily the result of $90.0 million in prepayments on our Term Loan partially offset by borrowings related to financed insurance. Cash used in financing activities during the year ended December 30, 2011 was primarily driven by three significant prepayments on our Term Loan, in addition to our quarterly principal payments during the year, partially offset by net borrowings related to financed insurance.

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

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

Operating Activities

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

Investing Activities

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

 

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Financing Activities

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

 

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Financing

Long-term debt consisted of the following:

 

     Delta Tucker Holdings, Inc.  
(Amounts in thousands)    December 31,
2012
    December 30,
2011
     December 31,
2010
 

Pre-merger term loan

   $ —        $ —         $ —     

Pre-merger 9.5% senior subordinated notes

     637        637         637   

Term loan

     327,272        417,272         568,575   

10.375% senior unsecured notes

     455,000        455,000         455,000   
  

 

 

   

 

 

    

 

 

 

Total indebtedness

     782,909        872,909         1,024,212   

Less current portion of long-term debt

     (637     —           (5,700
  

 

 

   

 

 

    

 

 

 

Total long-term debt

   $ 782,272      $ 872,909       $ 1,018,512   
  

 

 

   

 

 

    

 

 

 

In connection with the Merger on July 7, 2010, substantially all of DynCorp International’s debt outstanding as of April 2, 2010 was repaid and replaced with new debt described below. However, $0.6 million of the pre-Merger 9.5% Senior subordinated notes due February 15, 2013, remained outstanding as of December 31, 2012, as the holders opted to retain their investment. Due to principal prepayments made on our Term Loan during the year ended December 30, 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. See Note 8 to the DynCorp International consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion related to the pre-Merger debt.

Senior Credit Facility

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

Our Senior Credit Facility is secured by substantially all of our assets, guaranteed by the Company and all of DynCorp International’s domestic subsidiaries, and provides a $570 million term loan facility (the “Term Loan”) through July 7, 2016 and a $150 million credit facility (the “Revolver”) through July 7, 2014, including a $100 million letter of credit subfacility. As of December 31, 2012 and December 30, 2011, the balance of our Term Loan was $327.3 million and $417.3 million, respectively, and we had no borrowings under our Revolver. As of December 31, 2012 and December 30, 2011, the additional available borrowing capacity under the Senior Credit Facility was approximately $111.7 million and $109.6 million, respectively, which gives effect to $38.3 million and $40.4 million in letters of credit, respectively. Refer to Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the Senior Credit Facility.

The weighted-average interest rate as of December 31, 2012 and December 30, 2011 for our debt was 8.7% and 8.4%, respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 31, 2012 and December 30, 2011.

Interest Rates on Term Loan & Revolver

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

The Base Rate is equal to the higher of (a) the Federal Funds Rate plus 0.5% 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%.

 

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The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of December 31, 2012 and December 30, 2011, the applicable interest rate for our Term Loan was 6.25% for both periods.

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Loans, which ranges from 4.0% to 4.5%. The unused commitment fee ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly. As of December 31, 2012 and December 30, 2011 the applicable interest rates for our letter of credit subfacility and unused commitment fees were 4.50% and 0.75%, respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee.

Principal Payments

Our Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the Credit Facility, as additional principal payments. The first requirement was in 2012 based on annual financial results for the year ended December 30, 2011. Based on the principal payments we made during the years ended December 30, 2011 and December 31, 2012 we did not meet the threshold for an additional Excess Cash Flow payment. Additional principal payments could be required based on net proceeds received from items such as tax refunds or disposition of assets or lines of business.

During the years ended December 31, 2012 and December 30, 2011, we made principal payments of $90.0 million and $151.3 million, respectively on the Term Loan facility. Pursuant to our Term Loan facility quarterly principal payments are required, however, the principal prepayments made in 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.

Deferred financing costs of $2.1 million and $7.3 million, related to the various principal payments, were expensed and included in Loss on early extinguishment of debt in our consolidated statement of operations for the years ended December 31, 2012 and December 30, 2011, respectively. There were no penalties associated with the prepayments.

Covenants

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

 

   

declare dividends and make other distributions;

 

   

redeem or repurchase our capital stock;

 

   

prepay, redeem or repurchase certain of our indebtedness;

 

   

grant liens;

 

   

make loans or investments (including acquisitions);

 

   

incur additional indebtedness;

 

   

modify the terms of certain debt;

 

   

restrict dividends from our subsidiaries;

 

   

change our business or business of our subsidiaries;

 

   

merge or enter into acquisitions;

 

   

sell our assets;

 

   

enter into transactions with our affiliates; and

 

   

make capital expenditures.

In addition, the Senior Credit Facility stipulates a maximum total leverage ratio and a minimum interest coverage ratio that must be maintained.

The total leverage ratio is the ratio of Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $50 million) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot be greater than 5.0 to 1.0 through the period ending June 27, 2014, after which, the maximum total leverage diminishes quarterly or semi-annually.

 

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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 2.0 to 1.0 through the period ending June 28, 2013, after which, the minimum total interest coverage ratio increases quarterly or semi-annually thereafter.

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 year ended December 30, 2011. The default was cured with the filing of the Company’s Annual Report on Form 10-K for the year ended December 30, 2011 with the SEC on April 9, 2012.

Senior Unsecured Notes

On July 7, 2010, DynCorp International completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes (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, and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes commenced on January 1, 2011 and is payable on January 1 and July 1 of each year. The balance of our Senior Unsecured Notes was $455.0 million as of both December 31, 2012 and December 30, 2011.

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

 

   

incur additional indebtedness;

 

   

make certain payments including declaring or paying certain dividends;

 

   

purchase or retire certain equity interests;

 

   

retire subordinated indebtedness;

 

   

make certain investments;

 

   

sell assets;

 

   

engage in certain transactions with affiliates;

 

   

create liens on assets;

 

   

make acquisitions; and

 

   

engage in mergers or consolidations.

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

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

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

In addition to the Senior Credit Facility and Senior Unsecured Notes, $0.6 million of our pre-Merger 9.5% senior subordinated notes remained outstanding as of December 31, 2012.

 

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Contractual Commitments

The following table represents our contractual commitments associated with our debt and other obligations as of December 31, 2012:

 

     Calendar Years (1)  
(Amounts in thousands)    2013      2014      2015      2016      2017      Thereafter      Total  

Term Loan (2)

   $ —         $ —         $ —         $ 327,272       $ —         $ —         $ 327,272   

Pre-merger senior subordinated notes

     637         —           —           —           —           —           637   

Senior Unsecured Notes

     —           —           —           —           455,000         —           455,000   

Interest on indebtedness (3)

     67,953         67,945         67,945         57,944         23,603         —           285,390   

Operating leases (4)

     20,253         13,845         10,519         8,559         5,535         10,926         69,637   

Liability on uncertain tax positions (5)

     —           5,600         —           3,293         —           —           8,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 88,843       $ 87,390       $ 78,464       $ 397,068       $ 484,138       $ 10,926       $ 1,146,829   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of December 31, 2012, there were no amounts outstanding under our Revolver.
(2) Excludes the potential of future mandatory principal payments due to excess cash flow requirements, which could affect the timing of future principal payments. Additionally, due to principal prepayments made on our Term Loan during the year ended December 30, 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(3) Represents interest expense calculated using interest rates of: (i) 9.5% for our pre-merger senior subordinated notes, (ii) 10.375% for our Senior Unsecured Notes, (iii) 6.25% for our Term Loan, (iv) 4.5% for our Letters of Credit currently outstanding and (v) 0.75% for the unused borrowing capacity available under our Revolver.
(4) For additional information about our operating leases, see Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(5) Represents the amount by which the unrecognized tax benefits will change in each respective year and thereafter. See Note 5 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this 10K for further discussion.

Non-GAAP Measures

We define EBITDA as Generally Accepted Accounting Principles (“GAAP”) net income attributable to Delta Tucker Holdings, Inc./Predecessor adjusted for interest expense, taxes and depreciation and amortization. Adjusted EBITDA is calculated by adjusting EBITDA for the items described in the table below. We use EBITDA and Adjusted EBITDA as supplemental measures in the evaluation of our business and believe that EBITDA and Adjusted EBITDA provide a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense and is consistent with one of the measures we use to evaluate management’s performance for incentive compensation. In addition, Adjusted EBITDA as presented in the table below corresponds to the definition of Consolidated EBITDA used in the Senior Secured Credit Facilities and the definition of EBITDA used in the Indenture governing the Senior Unsecured Notes to test the permissibility of certain types of transactions, including debt incurrence. Neither EBITDA nor Adjusted EBITDA is a financial measure calculated in accordance with GAAP. Accordingly, they should not be considered in isolation or as substitutes for net income attributable to Delta Tucker Holdings, Inc./Predecessor or other financial measures prepared in accordance with GAAP.

Management believes these non-GAAP financial measures are useful in evaluating operating performance and are regularly used by security analysts, institutional investors and other interested parties in reviewing the Company. Non-GAAP financial measures are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of the performance of other companies. When evaluating EBITDA and Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in EBITDA and Adjusted EBITDA, (ii) whether EBITDA and Adjusted EBITDA have remained at positive levels historically, and (iii) how EBITDA and Adjusted EBITDA compare to our debt outstanding. The non-GAAP measures of EBITDA and Adjusted EBITDA do have certain limitations. They do not include interest expense, which is a necessary and ongoing part of our cost structure resulting from the incurrence of debt. EBITDA and Adjusted EBITDA also exclude tax, depreciation and amortization expenses. Because these are material and recurring items, any measure, including EBITDA and Adjusted EBITDA, which excludes them has a material limitation. To mitigate these limitations, we have policies and procedures in place to identify expenses that qualify as interest, taxes, loss on debt extinguishments and depreciation and amortization and to approve and segregate these expenses from other expenses to ensure that EBITDA and Adjusted EBITDA are consistently reflected from period to period. Our calculation of EBITDA and Adjusted EBITDA may vary from that of other companies. Therefore, our EBITDA and Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not give effect to the cash we must use to service our debt or pay income taxes and thus does not reflect the funds generated from operations or actually available for capital investments.

 

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    Delta Tucker Holdings, Inc.     Predecessor  
    For the years ended     For the period from
April 1, 2010
(Inception) through

December 31, 2010
As Restated (7)
    For the
fiscal quarter  ended
    For the
fiscal year ended
 
    December 31, 2012     December 30, 2011
As Restated (7)
      July 2, 2010     April 2, 2010  
(Amount in thousands)   (unaudited)     (unaudited)  

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

  $ (8,937   $ (62,056   $ (40,876   $ 12,804      $ 77,444   

Provision (benefit) for income tax

    15,598        (20,941     (9,690     9,279        47,035   

Interest expense, net of interest income

    86,155        91,547        46,425        12,534        55,108   

Depreciation and amortization (1)

    51,814        52,494        26,225        10,525        42,578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    144,630        61,044        22,084        45,142        222,165   

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

    54,354        122,151        5,452        —          17,149   

Equity-based compensation

    —          —          —          3,518        2,863   

Changes due to fluctuation in foreign exchange rates

    (226     (210     (129     (26     (353

Earnings from affiliates not received in cash (3)

    (699     (1,297     (192     (433     (1,863

Employee non-cash compensation, severance, and retention expense

    1,381        8,483        4,639        866        1,959   

Management fees (4)

    1,075        777        691        —          —     

Acquisition accounting and Merger-related items (5)

    (4,195     (2,171     71,585        3,414        3,622   

Worldwide Network Services settlement

    —          —          —          —          (10,000

Annualized operational efficiencies (6)

    —          855        6,271        —          —     

Other

    (50     2,011        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 196,270      $ 191,643      $ 110,401      $ 52,481      $ 235,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount includes certain depreciation and amortization amounts which are classified as Cost of services in the consolidated statements of operations of Delta Tucker Holdings, Inc. and our Predecessor included elsewhere in this Annual Report on Form 10-K.
(2) Amount includes the impairment of our investment in the GLS joint venture, impairment of goodwill and the impairment of intangibles, as well as our unusual income and expense items.
(3) Includes our unconsolidated affiliates.
(4) Amount presented relates to the Delta Tucker Holdings, Inc. management fees. We excluded the Predecessor management fees from the EBITDA adjustments above.
(5) The Delta Tucker Holdings, Inc. amount includes the amortization of intangibles arising pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805— Business Combinations .
(6) Represents a defined EBITDA adjustment under our debt agreements for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period.
(7) The Company has restated its consolidated financial statements for the fiscal years ended December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010. The table above presents the restated amounts for the respective periods. Refer Note 16 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

 

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Off-Balance Sheet Arrangements

As of December 31, 2012, we did not have any material off-balance sheet arrangements as defined under SEC rules.

Effects of Inflation

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

Critical Accounting Policies and Estimates

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

Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, see Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Management discusses our critical accounting policies and estimates with the Audit Committee of our Board of Directors annually.

Revenue Recognition and Cost Estimation on Long-Term Contracts

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

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

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

We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project’s contractual requirements and management’s assessment of current and

 

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future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. See aggregate changes in accounting estimates in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

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

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

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

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

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

Software Contracts or Contract Elements — It is our policy to review any arrangement containing software or software deliverables using applicable GAAP for software revenue recognition, as discussed further in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have not historically sold software on a separate, standalone basis. As a result, software arrangements are typically accounted for as one unit of accounting and are recognized over the service period, including the period of post-contract customer support. We did not enter into any new software contracts or contracts with software elements during the years ended December 31, 2012 or December 30, 2011 or during the period from April 1, 2010 (inception) through December 31, 2010.

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

 

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Deferred Taxes, Tax Valuation Allowances and Tax Reserves

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

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

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

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

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

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

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

Impairment of Goodwill

As a result of the Company applying acquisition accounting related to the Merger on July 7, 2010, our balance sheet included $679.4 million in goodwill as of December 31, 2010, which represented the excess of costs over the fair value of our assets. During the years ended December 31, 2012 and December 30, 2011, we recorded non-cash impairment charges of $44.6 million and $33.8 million, respectively. The reduction in goodwill during the year ended December 31, 2012 was partially offset with the recognition of $3.0 million of goodwill in conjunction with the acquisition of Heliworks, Inc. In total, the changes for the years ended December 31, 2012 and December 30, 2011 have reduced the goodwill balance to $604.1 million as of December 31, 2012. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere within this Annual Report on Form 10-K for further discussion. The goodwill carrying value is allocated to our operating segments using a relative fair value approach based on our nine reporting units. Of the nine reporting units, eight are consolidated in our financial statements, while GLS was deconsolidated as of the Merger date. Our reporting units are allocated goodwill based on relative fair values as required under ASC 350— Intangibles—Goodwill and Other , all of which had estimated fair values that substantially exceeded their carrying values.

In accordance with ASC 350-20— Intangibles—Goodwill , we evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We performed our annual goodwill impairment test as of October 2012, the first month of the fourth quarter of our calendar year. We also assess goodwill at the end of a quarter if a triggering event occurs. In determining whether an interim triggering event has occurred, management monitors (i) the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test, (ii) and significant changes to future expectations.

 

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

Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.

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

We evaluate goodwill for impairment annually or when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. Our annual impairment testing date is the first month of the fourth quarter of each fiscal year. In conjunction with the test performed in October 2012, we determined that the carrying value of the goodwill associated with the Security reporting unit within the Security segment and Training and Mentoring (“TM”) reporting unit within the TIS segment unit exceeded the fair value due to a decline in the projected future cash flows. We recorded a non-cash impairment charge of $13.7 million and $30.9 million for the Security and TM segments, respectively, for the year ended December 31, 2012. Additionally, we determined that the carrying values of certain intangibles within the TIS segment exceeded the fair value due to a change in the business model during the fourth quarter of the year ended December 31, 2012. As such, we recorded a non-cash impairment charge of $6.1 million for the year ended December 31, 2012. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Commitments and Contingencies

We are involved in various lawsuits and claims that arise in the normal course of business. Amounts associated with lawsuits and claims are reserved for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to such matters have been recorded in “Other accrued liabilities.” When only a range of amounts is established and no amount within the range is more probable than another, the lower end of the range is recorded. Legal fees are expensed as incurred.

Recent Accounting Pronouncements

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

 

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

Our exposure to market risk is primarily related to losses that could potentially arise as a result of adverse changes in interest and foreign currency exchange rates. See “Item 1A. Risk Factors” for further discussion of the market risks we may encounter.

Interest Rate Risk

We have interest rate risk relating to changes in interest rates primarily on our variable rate debt. We