DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 05/13/2013 17:21:53)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 29, 2013

or

 

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

For the transition period from                    to                    

Commission File Number: 333-173746

 

 

DELTA TUCKER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-2525959

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3190 Fairview Park Drive, Suite 700, Falls Church, Virginia 22042

(571) 722-0210

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

 

 

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

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

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

 

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

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

As of May 13, 2013, the registrant had 100 shares of its Class A common stock outstanding.

 

 

 


Table of Contents

Delta Tucker Holdings, Inc.

Table of Contents

 

     Page  

Disclosure Regarding Forward-Looking Information

     3   

Calendar Year

     4   

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     5   

Unaudited Condensed Consolidated Statements of Operations—Three Months Ended March 29, 2013 and March 30, 2012

     5   

Unaudited Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 29, 2013 and March 30, 2012

     6   

Unaudited Condensed Consolidated Balance Sheets as of March 29, 2013 and December 31, 2012

     7   

Unaudited Condensed Consolidated Statements of Cash Flows—Three Months Ended March 29, 2013 and March 30, 2012

     8   

Unaudited Condensed Consolidated Statements of Equity—Three Months Ended March 29, 2013 and March 30, 2012

     9   

Notes to Unaudited Condensed Consolidated Financial Statements

     10   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4. Controls and Procedures

     53   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     54   

Item 1A. Risk Factors

     54   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     54   

Item 3. Defaults Upon Senior Securities

     55   

Item 4. Mine Safety Disclosures

     55   

Item 5. Other Information

     56   

Item 6. Exhibits

     56   

 

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Disclosure Regarding Forward-Looking Information

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

 

   

the future impact of mergers, acquisitions, divestitures, 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;

 

   

restatement of our financial statements causing credit ratings to be downgraded;

 

   

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

 

   

termination or modification of key U.S. government or commercial contracts, including subcontracts;

 

   

changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the 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 (“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, including cyber security threats;

 

   

variations in performance of financial markets;

 

   

the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity (“IDIQ”) contracts;

 

   

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

 

   

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

 

   

decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;

 

   

changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more contracts and our performance;

 

   

changes in our tax provisions or exposure to additional income tax liabilities that could affect our profitability and cash flows;

 

   

termination or modification of key subcontractor performance or delivery; and

 

   

statements covering our business strategy, those described in “Item 1A. Risk Factors” of this Quarterly Report and under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (“SEC”) on March 27, 2013 and other risks detailed from time to time in our reports filed with SEC.

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

 

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Calendar Year

We report the results of our operations using 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. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations, comprehensive income, cash flows and equity for the three months ended March 29, 2013 and March 30, 2012 and the unaudited condensed consolidated balance sheets as of March 29, 2013 and December 31, 2012.

 

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PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Revenue

   $ 932,108      $ 1,047,066   

Cost of services

     (845,125     (966,610

Selling, general and administrative expenses

     (35,544     (38,151

Depreciation and amortization expense

     (11,848     (12,560

Earnings from equity method investees

     2,446        210   
  

 

 

   

 

 

 

Operating income

     42,037        29,955   

Interest expense

     (19,163     (21,690

Interest income

     18        38   

Other income, net

     2,098        3,373   
  

 

 

   

 

 

 

Income before income taxes

     24,990        11,676   

Provision for income taxes

     (8,795     (4,797
  

 

 

   

 

 

 

Net income

     16,195        6,879   

Noncontrolling interests

     (1,192     (1,304
  

 

 

   

 

 

 

Net income attributable to Delta Tucker Holdings, Inc.

   $ 15,003      $ 5,575   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Net income

   $ 16,195      $ 6,879   

Other comprehensive income:

    

Currency translation adjustment

     (411     196   
  

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

     (411     196   

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

     148        (61
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (263     135   
  

 

 

   

 

 

 

Comprehensive income

     15,932        7,014   

Comprehensive income attributable to noncontrolling interests

     (1,192     (1,304
  

 

 

   

 

 

 

Comprehensive income attributable to Delta Tucker Holdings, Inc.

   $ 14,740      $ 5,710   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

     As of  
(Amounts in thousands, except share data)    March 29, 2013     December 31, 2012  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 67,629      $ 118,775   

Restricted cash

     1,659        1,659   

Accounts receivable, net of allowances of $2,331 and $1,481, respectively

     868,175        780,613   

Prepaid expenses and other current assets

     61,387        79,223   
  

 

 

   

 

 

 

Total current assets

     998,850        980,270   

Property and equipment, net

     25,226        26,207   

Goodwill

     604,052        604,052   

Tradenames, net

     43,600        43,643   

Other intangibles, net

     257,969        266,534   

Other assets, net

     48,409        50,010   
  

 

 

   

 

 

 

Total assets

   $ 1,978,106      $ 1,970,716   
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Current portion of long-term debt

   $ —        $ 637   

Accounts payable

     263,493        287,350   

Accrued payroll and employee costs

     146,108        127,811   

Deferred income taxes

     56,520        59,032   

Accrued liabilities

     152,587        202,463   

Income taxes payable

     5,532        4,071   
  

 

 

   

 

 

 

Total current liabilities

     624,240        681,364   

Long-term debt, less current portion

     823,472        782,272   

Long-term deferred taxes

     59,868        50,303   

Other long-term liabilities

     10,542        11,023   
  

 

 

   

 

 

 

Total liabilities

     1,518,122        1,524,962   
  

 

 

   

 

 

 
EQUITY     

Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at March 29, 2013 and December 31, 2012, respectively

     —          —     

Additional paid-in capital

     549,402        549,322   

Accumulated deficit

     (96,860     (111,863

Accumulated other comprehensive (loss) income

     (180     83   
  

 

 

   

 

 

 

Total equity attributable to Delta Tucker Holdings, Inc.

     452,362        437,542   

Noncontrolling interests

     7,622        8,212   
  

 

 

   

 

 

 

Total equity

     459,984        445,754   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,978,106      $ 1,970,716   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Cash flows from operating activities

    

Net income

   $ 16,195      $ 6,879   

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

    

Depreciation and amortization

     12,289        12,956   

Amortization of deferred loan costs

     1,748        1,945   

Earnings from equity method investees

     (4,340     (3,519

Distributions from affiliates

     2,637        418   

Deferred income taxes

     7,053        3,337   

Other

     205        (2,041

Changes in assets and liabilities:

    

Restricted cash

     —          9,114   

Accounts receivable

     (88,634     (46,434

Prepaid expenses and other current assets

     17,881        15,309   

Accounts payable and accrued liabilities

     (40,445     (11,142

Income taxes payable

     1,920        3,226   
  

 

 

   

 

 

 

Net cash used in operating activities

     (73,491     (9,952
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property and equipment

     (514     (1,784

Proceeds from sale of property, plant and equipment

     —          7   

Purchase of software

     (1,119     —     

Contributions to equity method investees

     —          (818
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,633     (2,595
  

 

 

   

 

 

 

Cash flows from financing activities

    

Borrowings on long-term debt

     149,800        285,700   

Payments on long-term debt

     (109,237     (195,700

Borrowings related to financed insurance

     —          5,041   

Payments related to financed insurance

     (15,398     (13,860

Payment of dividends to noncontrolling interests

     (1,187     (274
  

 

 

   

 

 

 

Net cash provided by financing activities

     23,978        80,907   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (51,146     68,360   

Cash and cash equivalents, beginning of period

     118,775        70,205   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 67,629      $ 138,565   
  

 

 

   

 

 

 

Income tax refund, net of payments

   $ 1,178      $ 1,475   

Interest paid

   $ 29,703      $ 31,235   

See notes to unaudited condensed consolidated financial statements

 

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Delta Tucker Holdings, Inc.

Unaudited Condensed Consolidated Statements of Equity

 

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

Balance at December 30, 2011 As Restated

     —         $ —         $ 550,951      $ (102,926   $ (59   $ 447,966      $ 5,186      $ 453,152   

Comprehensive income attributable to Delta Tucker Holdings, Inc.

           —          5,575        135        5,710        —          5,710   

Noncontrolling interests

           —          —          —          —          1,304        1,304   

DIFZ financing, net of tax

           103        —          —          103        —          103   

Distribution to affiliates of Parent

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

Dividends declared to noncontrolling interests

           —          —          —          —          (548     (548
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 30, 2012

     —         $ —         $ 549,056      $ (97,351   $ 76      $ 451,781      $ 6,638      $ 458,419   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Balance at December 31, 2012

     —         $ —         $ 549,322      $ (111,863   $ 83      $ 437,542      $ 8,212      $ 445,754   

Comprehensive income attributable to Delta Tucker Holdings, Inc.

           —          15,003        (263     14,740        —          14,740   

Noncontrolling interests

           —          —          —          —          1,192        1,192   

DIFZ financing, net of tax

           80        —          —          80        —          80   

Dividends declared to noncontrolling interests

     —           —           —          —          —          —          (1,782     (1,782
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 29, 2013

     —         $ —         $ 549,402      $ (96,860   $ (180   $ 452,362      $ 7,622      $ 459,984   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

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Delta Tucker Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Accounting Policies

Basis of Presentation

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

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to fairly present our financial position as of March 29, 2013 and December 31, 2012, the results of operations and statements of comprehensive income, cash flows and equity for the three months ended March 29, 2013 and March 30, 2012 have been included. The results of operations and the statements of comprehensive income and cash flows for the three months ended March 29, 2013 and March 30, 2012 are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. Our actual results may differ from these estimates.

Restatement

As disclosed in Note 1, Significant Accounting Policies and Accounting Developments in our Annual Report on Form 10-K for the year ended December 31, 2012, the Company 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 balances presented in the accompanying unaudited condensed consolidated statement of equity as of December 30, 2011 have been restated. Refer to the Annual Report filed with the Securities and Exchange Commission (“SEC”) on March 27, 2013 for further discussion.

Principles of Consolidation

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

We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our Groups and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.

 

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Noncontrolling interests

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

Use of Estimates

We prepare our financial statements in conformity with GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the unaudited condensed consolidated statements of operations in the period that they are determined.

The following table presents the aggregate gross favorable and unfavorable adjustments to income before income taxes resulting from changes in estimates for the three months ended March 29, 2013 and March 30, 2012.

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Gross favorable adjustments

   $ 12.3      $ 8.2   

Gross unfavorable adjustments

     (9.1     (2.2
  

 

 

   

 

 

 

Net adjustments

   $ 3.2      $ 6.0   
  

 

 

   

 

 

 

Accounting Policies

There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2012 except for the adoption of ASU No. 2013-02— Comprehensive Income as discussed below.

Accounting Developments

Pronouncements Implemented

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02— Comprehensive Income that requires new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”), including: (i) changes in AOCI balances by component and (ii) significant items reclassified out of AOCI. The new disclosure requirements are effective for fiscal years and interim periods beginning after December 15, 2012. We adopted ASU No. 2013-02 as of March 29, 2013. The adoption of this ASU did not have a material effect on our consolidated financial position or results of operations.

 

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Note 2 — Composition of Certain Financial Statement Captions

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

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

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Prepaid expenses

   $ 26,385       $ 40,474   

Income tax refunds receivable

     374         376   

Inventories

     22,694         16,330   

Aircraft parts inventory held on consignment

     2,605         2,676   

Work-in-process inventory

     2,800         9,371   

Joint venture receivables

     1,549         1,248   

Favorable contracts

     152         426   

Other current assets

     4,828         8,322   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 61,387       $ 79,223   
  

 

 

    

 

 

 

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.

Included in inventory as of March 29, 2013 and December 31, 2012, are seven helicopters, valued at $8.2 million, which were not deployed on existing programs. Aircraft parts inventory held on consignment includes $2.6 million and $2.7 million in inventory, currently held on consignment, related to our former Life Cycle Support Services (“LCCS”) Navy contract as of March 29, 2013 and December 31, 2012, respectively. Work-in-process inventory includes equipment for vehicle modifications and other deferred costs related to certain contracts.

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

 

     As Of  
(Amounts in thousands)    March 29, 2013     December 31, 2012  

Helicopters

   $ 11,527      $ 11,497   

Computers and other equipment

     13,198        13,045   

Leasehold improvements

     10,373        10,026   

Office furniture and fixtures

     4,876        4,877   
  

 

 

   

 

 

 

Gross property and equipment

     39,974        39,445   

Less accumulated depreciation

     (14,748     (13,238
  

 

 

   

 

 

 

Total property and equipment, net

   $ 25,226      $ 26,207   
  

 

 

   

 

 

 

Depreciation expense was $1.5 million and $1.4 million during the three months ended March 29, 2013 and March 30, 2012, respectively, including certain depreciation amounts classified as Cost of services.

 

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Other assets, net — Other assets, net were:

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Deferred financing costs, net

   $ 21,170       $ 22,918   

Investment in affiliates

     21,329         20,348   

Palm promissory notes, long-term portion

     3,355         4,037   

Other

     2,555         2,707   
  

 

 

    

 

 

 

Total other assets, net

   $ 48,409       $ 50,010   
  

 

 

    

 

 

 

Deferred financing cost is amortized through interest expense. Amortization related to deferred financing costs was $1.7 million and $1.9 million during the three months ended March 29, 2013 and March 30, 2012, respectively.

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

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Wages, compensation and other benefits

   $ 120,768       $ 105,293   

Accrued vacation

     24,169         21,484   

Accrued contributions to employee benefit plans

     1,171         1,034   
  

 

 

    

 

 

 

Total accrued payroll and employee costs

   $ 146,108       $ 127,811   
  

 

 

    

 

 

 

Accrued liabilities — Accrued liabilities were:

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Customer advances

   $ 32,495       $ 39,954   

Accrued insurance

     51,921         62,670   

Accrued interest

     12,436         24,847   

Unfavorable contract liability

     3,429         4,572   

Contract losses

     9,699         9,948   

Legal matters

     12,772         12,772   

Subcontractor retention

     6,304         8,448   

Financed insurance

     11,068         26,466   

Other

     12,463         12,786   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 152,587       $ 202,463   
  

 

 

    

 

 

 

Customer advances is primarily due to amounts received from customers in excess of revenue recognized. Other is comprised of Accrued rent and Workers compensation related claims and other balances that are not individually material to the consolidated financial statements. Legal matters include reserves related to various lawsuits and claims that arise in the normal course of business. See Note 8 for further discussion.

 

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

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Unrecognized tax benefit

     3,293         3,293   

Unfavorable lease accrual

     3,636         4,504   

Other

     3,613         3,226   
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 10,542       $ 11,023   
  

 

 

    

 

 

 

Note 3 — Goodwill and Other Intangible Assets

Our six operating segments include nine reporting units for which we assess goodwill for potential impairment. Our Aviation segment includes three reporting units and the TIS segment includes two reporting units while the remaining segments each operate under one reporting unit. GLS is a 51% owned unconsolidated joint venture. We do not have control over the operational performance of GLS, however, our senior management, including our chief executive officer, who is our chief operating decision maker, regularly reviews GLS operating results and metrics to make decisions about resources to be allocated to the segment and assess performance; thus GLS is classified as an operating segment. Our reporting segments are the same as our operating segments.

We estimate the fair value of our reporting units using a combination of the income approach and the market approach. Under the income approach, we utilize 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. Under the market approach, we utilize comparative market multiples in the valuation estimate. 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. The estimates and assumptions used in assessing the fair value of our reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties.

We derive substantially all of our revenue from contracts and subcontracts with the U.S. government and its agencies. Funding for our programs is dependent upon the annual budget and the appropriation decisions assessed by Congress, which are beyond our control. Estimates and judgments made by management, as it relates to the fair value of our reporting units or indefinite-lived intangible assets, could be impacted by the continued uncertainty over the defense industry. As of the three months ended March 29, 2013, the logistics of the modified Continuing Resolution, resulting from the sequestration imposed by Congress, are still unknown. While each of our segments and reporting units could be impacted differently, such circumstances could result in an impairment of our goodwill or other assets.

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. As of March 29, 2013, there were no indicators of goodwill impairment of any of the Company’s reporting units. In connection with our annual assessment of goodwill during the fourth quarter of calendar year 2013, we will update our key assumptions, including our forecasts of revenue and income for each reporting unit. There can be no assurance that the Revenue estimates and assumptions regarding forecasted cash flows, the period or strength of the U.S. defense spending, including the impact of sequestration, or other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.

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. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also requires judgment. All of these factors are subject to change with a change in the defense industry or larger macroeconomic environment. The estimated fair values of each of our remaining reporting units substantially exceed their respective carrying values with the exception of one of our reporting units within the TIS segment which represents a carrying value of $41.0 million in goodwill as of December 31, 2012. The estimated fair value of goodwill for this reporting unit exceeded its carrying value by approximately 14%. The TIS projections include significant estimates related to new business opportunities which are the basis for the discount rate assumptions currently applied and the Company has assessed this risk as

 

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one of the variables in establishing the discount rate. If the Company is unsuccessful in obtaining these opportunities in 2013, a triggering event could be identified and a step one assessment would be performed to identify any possible goodwill impairment in the period in which the event is identified. Additionally, the projections of the Air Operations reporting unit within our Aviation segment, which represents $293.4 million in goodwill, is currently dependent upon a single contract. Any negative changes to this contract, such as the loss of the contract during re-compete or notification from the customer of de-scoping of work to be performed under the contract, could result in operating results that differ from our projected forecasts, resulting in a triggering event and possible subsequent impairment of the reporting unit. We continue to monitor our reporting units. As of March 29, 2013, there were no indicators of goodwill impairment of any of the Company’s reporting units.

 

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The carrying amount of goodwill for each of our segments as of March 29, 2013 was as follows:

 

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

Goodwill balance as of December 31, 2012

   $ 442,393       $ 120,636       $ 41,023       $ —         $ —         $ —         $ 604,052   

Changes between December 31, 2012 and March 29, 2013

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill balance as of March 29, 2013

   $ 442,393       $ 120,636       $ 41,023       $ —         $ —         $ —         $ 604,052   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     As of March 29, 2013  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

  

Customer-related intangible assets

     6.3       $ 350,912       $ (108,643   $ 242,269   

Other

  

Finite-lived

     6.3         21,370         (10,729     10,641   

Indefinite-lived

      $ 5,059       $ —        $ 5,059   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 377,341       $ (119,372   $ 257,969   
     

 

 

    

 

 

   

 

 

 

Tradenames:

  

Finite-lived

     2.1       $ 869       $ (490   $ 379   

Indefinite-lived

        43,221         —          43,221   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 44,090       $ (490   $ 43,600   
     

 

 

    

 

 

   

 

 

 
     As of December 31, 2012  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

  

Customer-related intangible assets

     6.6       $ 350,912       $ (99,119   $ 251,793   

Other

  

Finite-lived

     5.5         24,856         (15,174     9,682   

Indefinite-lived

        5,059         —          5,059   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 380,827       $ (114,293   $ 266,534   
     

 

 

    

 

 

   

 

 

 

Tradenames:

  

Finite-lived

     2.4       $ 869       $ (447   $ 422   

Indefinite-lived

        43,221         —          43,221   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 44,090       $ (447   $ 43,643   
     

 

 

    

 

 

   

 

 

 

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $10.8 million and $11.5 million for the three months ended March 29, 2013 and March 30, 2012, respectively. Other intangibles is primarily representative of our capitalized software which had a net carrying value of $10.6 million and $9.6 million as of March 29, 2013 and December 31, 2012, respectively.

 

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The following table outlines an estimate of future amortization based upon the finite-lived intangible assets owned and the finite-lived tradenames as of March 29, 2013:

 

(Amounts in thousands)    Amortization
Expense
 

Estimate for nine month period ending December 31, 2013

   $ 34,031   

Estimate for calendar year 2014

     43,237   

Estimate for calendar year 2015

     41,153   

Estimate for calendar year 2016

     38,151   

Estimate for calendar year 2017

     36,033   

Thereafter

     60,684   

 

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Note 4 — Income Taxes

The domestic and foreign components of Income before income taxes are as follows:

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Domestic

   $ 26,421      $ 9,887   

Foreign

     (1,431     1,789   
  

 

 

   

 

 

 

Income before income taxes

   $ 24,990      $ 11,676   
  

 

 

   

 

 

 

The provision for income taxes consists of the following:

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Current portion:

    

Federal

   $ —        $ —     

State

     228        135   

Foreign

     1,367        1,055   
  

 

 

   

 

 

 
   $ 1,595      $ 1,190   

Deferred portion :

    

Federal

   $ 7,090      $ 3,569   

State

     114        43   

Foreign

     (4     (5
  

 

 

   

 

 

 
     7,200        3,607   
  

 

 

   

 

 

 

Provision for income taxes

   $ 8,795      $ 4,797   
  

 

 

   

 

 

 

Deferred tax liabilities, net consist of the following:

 

     As Of  
(Amounts in thousands)    March 29, 2013     December 31, 2012  

Current deferred tax liabilities

   $ (56,520   $ (59,032

Non-current deferred tax liabilities

     (59,868     (50,303
  

 

 

   

 

 

 

Deferred tax liabilities, net

   $ (116,388   $ (109,335
  

 

 

   

 

 

 

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

 

     Three Months Ended  
     March 29, 2013     March 30, 2012  

Statutory rate

     35.0     35.0

State income tax, less effect of federal deduction

     1.4     1.5

Noncontrolling interests

     (2.3 )%      (2.3 )% 

Nondeductible expenses

     1.5     1.5

Other

     (0.4 )%      5.4
  

 

 

   

 

 

 

Effective tax rate

     35.2     41.1
  

 

 

   

 

 

 

During the year ended December 31, 2012, we fully utilized our U.S. federal net operating losses. As of March 29, 2013 and December 31, 2012, we had state net operating losses of approximately $168.5 million and $123.7 million, respectively, which will begin to expire in 2015. The remainder will not begin to expire until 2020 or later. Additionally, as of March 29, 2013 and December 31, 2012, we had foreign tax credit carry forwards of approximately $10.7 million and $9.3 million,

 

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respectively, which will begin to expire in 2018. We expect to fully utilize our state net operating losses and our foreign tax credit carry forwards during the year ending December 31, 2013. During the three months ended March 29, 2013, we received income tax refunds from certain state and foreign jurisdictions. Subsequent to the three months ended March 29, 2013, we made an estimated federal income tax payment of $3.8 million.

In evaluating our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. We assess such factors as the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and available tax planning strategies in determining the need for or sufficiency of a valuation allowance. Based on this assessment, we concluded that no valuation allowance was necessary as of March 29, 2013.

As of March 29, 2013 and December 31, 2012, we had $8.8 million and $8.9 million of total unrecognized tax benefits, respectively, of which $2.4 million and $2.4 million, respectively, would impact our effective tax rate if recognized. It is expected that of the $8.8 million of unrecognized tax benefits, $0.5 million will change in the next twelve months. As of March 29, 2013 and December 31, 2012 we recorded a reserve for uncertain tax positions in the deferred tax accounts, offsetting our net operating losses and foreign tax credit carry forwards, in the amount of $5.5 million and $5.6 million.

Note 5 — Accounts Receivable

Accounts receivable, net consisted of the following:

 

     As Of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

Billed

   $ 308,997       $ 245,678   

Unbilled

     559,178         534,935   
  

 

 

    

 

 

 

Total accounts receivable

   $ 868,175       $ 780,613   
  

 

 

    

 

 

 

Unbilled receivables as of March 29, 2013 and December 31, 2012 include $27.3 million and $36.2 million, respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work under a new contract or extend work under an existing contract and for which formal contracts or contract modifications have not been executed at the end of the respective periods. As of March 29, 2013 we had no contract claims outstanding. As of December 31, 2012, we had one contract claim totaling $12.1 million for which our customer subsequently paid during the three months March 29, 2013. The balance of unbilled receivables consists of costs and fees billable immediately on contract completion or other specified events, all of which are expected to be billed and collected within one year, except items that may result in a request for equitable adjustment or formal claim.

Note 6 — Fair Value of Financial Assets and Liabilities

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

 

   

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

 

   

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

 

   

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

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts and notes receivable and accounts payable, the fair value of these instruments approximates the carrying value. Our estimate of the fair value of our long-term debt is based on Level 1 and Level 2 inputs, as defined above.

 

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     March 29, 2013      December 31, 2012  
(Amounts in thousands)    Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

10.375% senior unsecured notes

   $ 455,000       $ 448,175       $ 455,000       $ 416,325   

Senior secured credit facility

     327,272         332,181         327,272         328,908   

Outstanding revolver borrowings

     41,200         41,200         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 823,472       $ 821,556       $ 782,272       $ 745,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 7 — Long-Term Debt

Long-term debt consisted of the following:

 

     As of  
(Amounts in thousands)    March 29, 2013      December 31, 2012  

9.5% senior subordinated notes

   $ —         $ 637   

10.375% senior unsecured notes

     455,000         455,000   

Term loan

     327,272         327,272   

Senior secured credit facility revolver borrowings

     41,200         —     
  

 

 

    

 

 

 

Total indebtedness

     823,472         782,909   

Less current portion of long-term debt

     —           (637
  

 

 

    

 

 

 

Total long-term debt

   $ 823,472       $ 782,272   
  

 

 

    

 

 

 

The current portion of long-term debt as of December 31, 2012 consisted of our 9.5% senior subordinated notes that matured and were paid in full on February 15, 2013. The total due on the Term Loan is included in Long-term debt in our consolidated balance sheet as of March 29, 2013 and December 31, 2012.

Senior Credit Facility

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

Our Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. It provides for a six year, $570 million term loan facility (“Term Loan”) and a four year, $150 million revolving credit facility (“Revolver”), including a $100 million letter of credit subfacility. As of March 29, 2013 and December 31, 2012, the additional available borrowing capacity under the Senior Credit Facility was approximately $70.9 million and $111.7 million, respectively, which gives effect to $41.2 million in outstanding revolver borrowing and $37.9 million in letters of credit as of March 29, 2013 and $38.3 million in letters of credit as of December 31, 2012. The maturity date on the Term Loan is July 7, 2016 and the maturity date on the Revolver is July 7, 2014. Amounts borrowed under our Revolver are used to fund operations.

Interest Rates on Term Loan & Revolver

Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate (“Base Rate”) as defined in the Senior Credit Facility plus an applicable margin or the (ii) London Interbank Offered Rate (“Eurocurrency Rate”) as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency Rate option based on our outstanding Secured Leverage Ratio at the end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $50 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization (“Consolidated EBITDA”), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.

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

The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of March 29, 2013 and December 31, 2012, the applicable interest rate for our Term Loan was 6.25%.

 

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Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate Loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of March 29, 2013 and December 31, 2012, the applicable interest rate for our letter of credit subfacility was 4.25% and 4.50%, respectively. As of March 29, 2013 and December 31, 2012, the applicable interest rate for our unused commitment fees was 0.50% and 0.75%, respectively. All of our letters of credit are also subject to a 0.25% fronting fee.

Principal Payments

We made no principal prepayments or quarterly principal payments on the Term Loan facility during the three months ended March 29, 2013 and March 30, 2012. Pursuant to our Term Loan facility, quarterly principal payments are required. However, certain principal prepayments made during the year ended December 30, 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.

Our Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the Senior Credit Facility, as additional principal payments. Based on our annual financial results for the year ended December 31, 2012, we are not required to make any additional principal payments under the Excess Cash Flow requirement during 2013. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of the business or a significant asset sale. We had no such transactions during the three months ended March 29, 2013.

Covenants

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

 

   

declare dividends and make other distributions;

 

   

redeem or repurchase our capital stock;

 

   

prepay, redeem or repurchase certain of our indebtedness;

 

   

grant liens;

 

   

make loans or investments (including acquisitions);

 

   

incur additional indebtedness;

 

   

modify the terms of certain debt;

 

   

restrict dividends from our subsidiaries;

 

   

change our business or business of our subsidiaries;

 

   

merge or enter into acquisitions;

 

   

sell our assets;

 

   

enter into transactions with our affiliates; and

 

   

make capital expenditures.

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

The total leverage ratio is the Consolidated Total Debt as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $50 million) to Consolidated EBITDA as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot not be greater than 5.0 to 1.0 through the period ending June 28, 2013, after which, the maximum total leverage diminishes quarterly or semi-annually.

The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 2.0 to 1.0 through the period ending June 27, 2014, 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. As of March 29, 2013, we were in compliance with our financial covenants.

Senior Unsecured Notes

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

 

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

 

   

incur additional indebtedness;

 

   

make certain payments, including declaring or paying certain dividends;

 

   

purchase or retire certain equity interests;

 

   

retire subordinated indebtedness;

 

   

make certain investments;

 

   

sell assets;

 

   

engage in certain transactions with affiliates;

 

   

create liens on assets;

 

   

make acquisitions; and

 

   

engage in mergers or consolidations.

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

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

Call and Put Options

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

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

Note 8 — Commitments and Contingencies

Commitments

We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable or cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $46.5 million and $66.7 million during the three months ended March 29, 2013 and March 30, 2012, respectively. We have no significant long-term purchase agreements with service providers.

Contingencies

General Legal Matters

We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in “Other accrued liabilities” totaling approximately $12.8 million as of both March 29, 2013 and December 31, 2012. Except as disclosed below, none of our reserves as of March 29, 2013 were individually material. We believe that appropriate accruals have been established for such matters based on information currently available; however,

 

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some of the matters may involve compensatory, punitive, or other claims or sanctions that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at March 29, 2013. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of March 29, 2013. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.

Pending Litigation and Claims

On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, International law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of International law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010, 1,256 of the plaintiffs have been dismissed by court orders and, on September 15, 2010, the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. The appeal is currently pending. The amended complaint does not demand any specific monetary damages; however, a court decision against us could have a material effect on our results of operations and financial condition, if we are unable to obtain reimbursement from the DoS. The aerial spraying operations were and continue to be managed by us under a DoS contract in cooperation with the Colombian government. The DoS contract provides indemnification to us against third-party liabilities arising out of the contract, subject to available funding as well as potential apportionment of damages to multiple defendants. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.

A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010, fifteen of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. The appeal is currently pending. The terms of the DoS contract provide that the DoS will indemnify our operating company against third-party liabilities arising out of the contract, subject to available funding. We are also entitled to indemnification by Computer Sciences Corporation, the Company’s previous owners, in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote.

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

 

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In 2009, we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit, was challenged in certain instances. In December 2011, the customer filed arbitration alleging fraud, gross negligence, contract violations, and conversion of funds and asserted damages of approximately $150 million. We believe our right to terminate this contract was justified and permissible under the terms of the contract, and we intend to vigorously contest the claims brought against us. Additionally, we believe the contract limits any damages to a maximum of $3 million, except in situations of gross negligence and willful misconduct. As of March 29, 2013 and December 31, 2012, we have recorded an immaterial liability for this matter and believe the likelihood of loss for amounts in excess of this accrual, up to the amount limited by the contract, is reasonably possible.

On July 8, 2009, a lawsuit was filed in the United Arab Emirates (“UAE”) Abu Dhabi Court of First Instance, by Al Hamed ITC (hereafter “Al Hamed”) concerning an October 2002 business development contract focused upon obtaining business directly with the UAE General Military Directorate (“GMD”). Al Hamed was unsuccessful in assisting the company in soliciting business with GMD and, as such, the contract with Al Hamed was terminated in July 2006. We became a subcontractor to the successful bidder, Al Taif, in December 2006. Al Hamed filed a claim seeking $57 million in damages under the business development contract. On May 9, 2012, the court awarded Al Hamed 8.2 million in UAE Dirhams ($2.2 million U.S. dollars) plus 5% interest and expenses. The Company and Al Hamed both appealed the judgment. On September 12, 2012, the appellate court altered the judgment stating the amount should not have been in UAE Dirhams rather in U.S. dollars, which amounts to $8.2 million US dollars. As of September 28, 2012, a reserve has been established for the full amount of the judgment. The judgment was further appealed to the Supreme Court in Abu Dhabi, and, on February 27, 2013, we were advised that our appeal was unsuccessful. On April 7, 2013, the judgment was paid and the matter is now closed.

U.S. Government Investigations

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

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

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

U.S. Government Audits

Our contracts are regularly audited by the Defense Contract Audit Agency (“DCAA”) and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies,

 

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including our purchasing, property, estimating, accounting and material management accounting systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If the Company is unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations. Since we cannot reasonably estimate the results of a DCAA or other government entity audit, these items represent loss contingencies that we consider reasonably possible. Due to the nature of our business, the continual oversight of and audits by governmental agencies and the number of contracts under which we perform, we cannot, at this time, provide a reasonable estimate of the range of loss for these contingencies.

We have received a series of final audit reports from the DCAA, some of which have resulted in Form 1s, related to their examination of certain incurred, invoiced and reimbursed costs on our CivPol program for periods ranging from April 17, 2004 through April 2, 2010. The Form 1’s identify several cost categories where the DCAA has asserted instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The asserted amounts are derived from extrapolation methodologies used to estimate potential exposure amounts for the cost categories which when aggregated for all final audit reports and Form 1’s total approximately $141.2 million. Over the past year, the Company has worked with the DCAA in resolving matters inclusive in the Form 1s. We have provided responses to the DCAA for each letter, in which we have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. We have also sought to obtain clarification from our customer through formal contract modifications in an attempt to assist the DCAA in closing these issues. We believe the majority of these issues will continue to be resolved and thus represent loss contingencies that we consider remote. For the remaining issues, which total approximately $17.7 million, we believe the DCAA did not consider certain contractual provisions and long standing patterns of dealing with the customer. Since we cannot reasonably estimate the DCAA’s acceptance of our initial responses and the ultimate outcome related to these remaining issues we believe these items represent loss contingencies that we consider reasonably possible. We continue to work with the customer and the DCAA to resolve any remaining questions they may have and provide clarification of the facts and circumstances surrounding the issues.

On April 30, 2013, we received several demand Form 1s from DCAA disapproving approximately $152.0 million of cost incurred by the Company for the periods ranging between 2000-2011 on the War Reserve Materiel program for concerns on items such as the adequacy of documentation and reasonableness of costs. We are in the process of reviewing the basis of the Form 1s and preparing a response letter as we work with our customer to resolve these questions. Based on our initial assessment, we believe a substantial portion of these items represent loss contingencies that we consider remote. We believe the remaining portion of these items represent loss contingencies that we consider reasonably possible; however, a reasonable estimate of loss or range of loss cannot be made at this time as we cannot reasonably estimate the ultimate outcome related to the issues raised in the Form 1s.

Credit Risk

We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, we continuously review all accounts receivable and recorded provisions for doubtful accounts.

Risk Management Liabilities and Reserves

We are insured for domestic worker’s compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic worker’s compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic worker’s compensation and medical costs is limited based on fixed dollar amounts. For domestic worker’s compensation and employer’s liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.75 million for total costs per covered participant per calendar year.

Note 9 — Segment Information

As of March 29, 2013, we had six operating and reportable segments which include LOGCAP, Aviation, Training and Intelligence Solutions, Global Logistics & Development Solutions, Security Services, and GLS. Our segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies. We excluded certain costs that are not directly allocable to our segments from the segment results and included these costs in headquarters.

 

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

 

     Three Months Ended  
(Amounts in thousands)    March 29, 2013     March 30, 2012  

Revenue

    

LOGCAP

   $ 362,723      $ 478,046   

Aviation

     367,677        306,415   

Training & Intelligence Solutions

     113,071        156,598   

Global Logistics & Development Solutions

     70,899        79,143   

Security Services

     20,364        23,877   

GLS

     13,411        14,990   
  

 

 

   

 

 

 

Total reportable segments

     948,145        1,059,069   

GLS deconsolidation (1)

     (13,411     (14,990

Headquarters (2)

     (2,626     2,987   
  

 

 

   

 

 

 

Total revenue

   $ 932,108      $ 1,047,066   
  

 

 

   

 

 

 

Operating income

    

LOGCAP

   $ 10,581      $ 16,918   

Aviation

     32,761        22,506   

Training & Intelligence Solutions

     5,682        4,947   

Global Logistics & Development Solutions

     3,968        5,312   

Security Services

     (1,702     (6,634

GLS

     1,402        757   
  

 

 

   

 

 

 

Total reportable segments

     52,692        43,806   

GLS deconsolidation (1)

     (1,402     (757

Headquarters (3)

     (9,253     (13,094
  

 

 

   

 

 

 

Total operating income

   $ 42,037      $ 29,955   
  

 

 

   

 

 

 

Depreciation and amortization

    

LOGCAP

   $ 197      $ 197   

Aviation

     305        171   

Training & Intelligence Solutions

     —          72   

Global Logistics & Development Solutions

     31        21   

Security Services

     —          —     

GLS

     —          —     
  

 

 

   

 

 

 

Total reportable segments

     533        461   

GLS deconsolidation (1)

     —          —     

Headquarters

     11,756        12,495   
  

 

 

   

 

 

 

Total depreciation and amortization (4)

   $ 12,289      $ 12,956   
  

 

 

   

 

 

 

 

(1) We deconsolidated GLS effective July 7, 2010.
(2) Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(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.
(4) Includes amounts included in Cost of services of $0.4 million for the three months ended March 29, 2013 and March 30, 2012, for both periods.

 

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

 

     As Of  
(Amounts in thousands)    March 29, 2013     December 31, 2012  

Assets

    

LOGCAP

   $ 385,145      $ 320,249   

Aviation

     754,751        706,646   

Training & Intelligence Solutions

     200,369        224,834   

Global Logistics & Development Solutions

     182,842        203,787   

Security Services

     42,759        51,864   

GLS

     58,949        66,541   
  

 

 

   

 

 

 

Total reportable segments

     1,624,815        1,573,921   

GLS deconsolidation (1)

     (58,949     (66,541

Headquarters (2)

     412,240        463,336   
  

 

 

   

 

 

 

Total assets

   $ 1,978,106      $ 1,970,716   
  

 

 

   

 

 

 

 

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

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

Consulting Fee

The Company has a Master Consulting and Advisory Services agreement (“COAC Agreement”) with Cerberus Operations and Advisory Company, LLC, where pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $1.2 million and $0.6 million in expenses for Cerberus consulting fees during the three months ended March 29, 2013 and March 30, 2012, respectively.

Joint Ventures and Variable Interest Entities

We account for our investments in VIEs in accordance with ASC 810— Consolidation . In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of March 29, 2013, we accounted for PaTH, CRS, Babcock, GRS and GLS as equity method investments. Alternatively, we consolidated DIFZ based on the aforementioned criteria. We present our share of the PaTH, CRS, GRS and GLS earnings in Earnings from unconsolidated affiliates as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.

PaTH is a joint venture formed in May 2006 with two other partners for the purpose of procuring government contracts with the Federal Emergency Management Authority. On January 18, 2013, we executed an agreement with the two other partners to reduce our ownership percentage in the PaTH joint venture to 30%. The executed agreement stipulated the ownership percentage to be reduced retrospectively, effective September 1, 2012.

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

The GRS joint venture was formed in August 2010 with one partner, for the purpose of procuring government contracts with the U.S. Navy. This joint venture has been selected as one of four contractors for an indefinite delivery, indefinite quantity (“IDIQ”) multiple award contract.

GLS is a joint venture formed in August 2006 between DynCorp International LLC and AECOM’s National Security Programs unit for the purpose of procuring government contracts with the U.S. Army. We incur significant costs on behalf of GLS related to the normal operations of the venture. However, these costs typically support revenue billable to our customer. GLS is not a guarantor under our Senior Credit Facility or our Senior Unsecured Notes in accordance with the agreement.

 

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We own 25% of DIFZ, but exercise power over activities that significantly impact DIFZ’s economic performance. We incur significant costs on behalf of DIFZ related to our normal operations. The vast majority of these costs are considered direct contract costs and thus billable on several of our contracts supported by DIFZ services.

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

Receivables due from our unconsolidated joint ventures totaled $1.5 million and $1.2 million as of March 29, 2013 and December 31, 2012, respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled $0.6 million and $1.4 million during the three months ended March 29, 2013 and March 30, 2012, respectively. The related cost of services was $0.5 million and $1.1 million during the three months ended March 29, 2013 and March 30, 2012, respectively. Additionally, we earned $4.3 million and $3.5 million in equity method income (includes operationally integral and non-integral income) during the three months ended March 29, 2013 and March 30, 2012, respectively.

GLS’ revenue was $13.4 million and $15.0 million during the three months ended March 29, 2013 and March 30, 2012, respectively. GLS’ operating income was $1.4 million and $0.8 million during the three months ended March 29, 2013 and March 30, 2012, respectively. GLS’ net income was $1.4 million and $0.8 million during the three months ended March 29, 2013 and March 30, 2012, respectively. As a result of the impairment recorded in September 2011, we no longer recognize any earnings related to GLS until cash is received through dividend distributions. GLS paid a cash dividend of $5.0 million on March 28, 2013. Based on our 51% ownership in GLS, the Company recognized $2.6 million in equity method income during the three months ended March 29, 2013.

On October 5, 2011, the DCAA issued GLS a Form 1 in the amount of $95.9 million which pertained to inconsistencies of certain contractual requirements. As a result of the Form 1, the customer informed GLS it would withhold a portion of outstanding invoices until the Form 1 was resolved.

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

We currently hold one promissory note from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The note is included in (i) Prepaid expenses and other current assets and in (ii) Other assets on our unaudited condensed consolidated balance sheet for the short and long-term portions, respectively. The loan balance outstanding was $4.8 million and $5.3 million as of March 29, 2013 and December 31, 2012, respectively, reflecting the initial value plus accrued interest, less payments against the promissory notes. The fair value of the notes receivable is not materially different from its carrying value.

 

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As discussed above and in accordance with ASC 810— Consolidation , we consolidate DIFZ. The following tables present selected financial information for DIFZ as of March 29, 2013 and December 31, 2012 and for the three months ended March 29, 2013 and March 30, 2012:

 

     As of  
(Amounts in millions)    March 29, 2013      December 31, 2012  

Assets

   $ 39.7       $ 32.7   

Liabilities

     33.7         25.9   
     Three Months Ended  
(Amounts in millions)    March 29, 2013      March 30, 2012  

Revenue

   $ 113.8       $ 124.5   

The following tables present selected financial information for our equity method investees as of March 29, 2013 and December 31, 2012 and for the three months ended March 29, 2013 and March 30, 2012:

 

     As of  
(Amounts in millions)    March 29, 2013      December 31, 2012  

Current assets

   $ 118.9       $ 115.0   

Total assets

     119.0         115.1   

Current liabilities

     67.1         59.9   

Total liabilities

     67.1         60.4   
     Three Months Ended  
(Amounts in millions)    March 29, 2013      March 30, 2012  

Revenue

   $ 161.2       $ 90.8   

Gross profit

     14.2         6.8   

Net income

     10.9         4.6   

Many of our joint ventures and VIEs only perform on a single contract. The modification or termination of a contract under a joint venture or VIE could trigger an impairment in the fair value of our investment in these entities. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i) $21.3 million investment in unconsolidated subsidiaries, (ii) $1.5 million in receivables from our unconsolidated joint ventures, (iii) $4.8 million note receivable from Palm Trading Investment Corp. (“Palm”) and (iv) contingent liabilities that were neither probable nor reasonably estimable as of March 29, 2013.

Note 11 — Collaborative Arrangements

We participate in a collaborative arrangement with CH2M Hill on the LOGCAP IV program. This arrangement sets forth the sharing of some of the risks and rewards associated with this U.S. government contract. Our current share of profits of the LOGCAP IV program is 70%.

We account for this collaborative arrangement under ASC 808 — Collaborative Arrangements and record revenue gross as the principal participant. The cash inflows and outflows, as well as expenses incurred, are recorded in Cost of services in the period realized. Revenue on LOGCAP IV was $362.7 million and $478.0 million during the three months ended March 29, 2013 and March 30, 2012, respectively. Cost of services on LOGCAP IV program was $338.5 million and $446.8 million during the three months ended March 29, 2013 and March 30, 2012, respectively. Our share of the total LOGCAP IV profits was $10.6 million and $16.9 million during the three months ended March 29, 2013 and March 30, 2012, respectively.

We also participate in a collaborative arrangement with Logix USA Corporation on the Egypt Personnel Support Services (“EPSS”) program that began in June 2012. The purpose of the arrangement is to share risks and rewards associated with this U.S. government contract. Our share of profits is 85%, and as the principal participant, we record the revenue and expenses gross in Cost of services in the period realized. Revenue on the EPSS program was $4.1 million during the three months ended March 29, 2013. Cost of services on the EPSS program was $3.2 million during the three months ended March 29, 2013. Our share of the total EPSS program profits was $0.7 million during the three months ended March 29, 2013.

 

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Table of Contents

Note 12 — Consolidating Financial Statements of Subsidiary Guarantors

The Senior Unsecured Notes issued by DynCorp International Inc. (“Subsidiary Issuer”) and the Senior Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company (“Parent”) and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Humanitarian Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks, LLC, Phoenix Consulting Group LLC and Casals and Associates Inc. (“Subsidiary Guarantors”). Each of the Subsidiary Issuers and the Subsidiary Guarantors is 100% owned by the Company. Under the indenture governing the Senior Unsecured Notes, a guarantee of a Subsidiary Guarantor will terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.

The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of March 29, 2013 and December 31, 2012, (ii) unaudited condensed consolidating statements of operations and cash flows for the three months ended March 29, 2013 and March 30, 2012 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.

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

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

 

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Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended March 29, 2013

 

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

Revenue

   $ —         $ —        $ 935,734      $ 122,233      $ (125,859   $ 932,108   

Cost of services

     —           —          (851,002     (119,917     125,794        (845,125

Selling, general and administrative expenses

     —           —          (35,398     (211     65        (35,544

Depreciation and amortization expense

     —           —          (11,702     (146     —          (11,848

Earnings from equity method investees

     —           —          2,446        —          —          2,446   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —           —          40,078        1,959        —          42,037   

Interest expense

     —           (18,128     (1,035     —          —          (19,163

Interest income

     —           —          12        6        —          18   

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

     15,003         26,751        875        —          (42,629     —     

Other income, net

     —           —          2,022        76        —          2,098   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,003         8,623        41,952        2,041        (42,629     24,990   

Benefit (provision) for income taxes

     —           6,380        (15,201     26        —          (8,795
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     15,003         15,003        26,751        2,067        (42,629     16,195   

Noncontrolling interests

     —           —          —          (1,192     —          (1,192
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Delta Tucker Holdings, Inc.

   $ 15,003       $ 15,003      $ 26,751      $ 875      $ (42,629   $ 15,003   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended March 30, 2012

 

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

Revenue

   $ —         $ —        $ 1,051,732      $ 131,564      $ (136,230   $ 1,047,066   

Cost of services

     —           —          (973,945     (125,963     133,298        (966,610

Selling, general and administrative expenses

     —           —          (37,981     (3,102     2,932        (38,151

Depreciation and amortization expense

     —           —          (12,408     (152     —          (12,560

Earnings from equity method investees

     —           —          210        —          —          210   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —           —          27,608        2,347        —          29,955   

Interest expense

     —           (20,306     (1,384     —          —          (21,690

Interest income

     —           —          38        —          —          38   

Equity income of consolidated subsidiaries, net of tax

     5,575         17,539        820        —          (23,934     —     

Other income, net

     —           —          3,426        (53     —          3,373   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5,575         (2,767     30,508        2,294        (23,934     11,676   

Benefit (provision) for income taxes

     —           8,342        (12,969     (170     —          (4,797
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,575         5,575        17,539        2,124        (23,934     6,879   

Noncontrolling interests

     —           —          —          (1,304     —          (1,304
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Delta Tucker Holdings, Inc.

   $ 5,575       $ 5,575      $ 17,539      $ 820      $ (23,934   $ 5,575   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Three Months Ended March 29, 2013

 

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

Net income

   $ 15,003      $ 15,003      $ 26,751      $ 2,067      $ (42,629   $ 16,195   

Other comprehensive income:

            

Currency translation adjustment

     (411     (411     (279     (132     822        (411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     (411     (411     (279     (132     822        (411

Income tax expense related to items of other comprehensive income

     148        148        100        48        (296     148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     (263     (263     (179     (84     526        (263
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     14,740        14,740        26,572        1,983        (42,103     15,932   

Noncontrolling interests

     —          —          —          (1,192     —          (1,192
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Delta Tucker Holdings, Inc.

   $ 14,740      $ 14,740      $ 26,572      $ 791      $ (42,103   $ 14,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Comprehensive Income Information

For the Three Months Ended March 30, 2012

 

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

Net income

   $ 5,575      $ 5,575      $ 17,539      $ 2,124      $ (23,934   $ 6,879   

Other comprehensive income:

            

Currency translation adjustment

     196        196        123        73        (392     196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before tax

     196        196        123        73        (392     196   

Income tax expense related to items of other comprehensive income

     (61     (61     (45     (16     122        (61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     135        135        78        57        (270     135   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     5,710        5,710        17,617        2,181        (24,204     7,014   

Noncontrolling interests

     —          —          —          (1,304     —          (1,304
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Delta Tucker Holdings, Inc.

   $ 5,710      $ 5,710      $ 17,617      $ 877      $ (24,204   $ 5,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet Information

March 29, 2013

 

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

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 17,594       $ 50,035       $ —        $ 67,629   

Restricted cash

     —           —           1,659         —           —          1,659   

Accounts receivable, net

     —           —           870,486         3,375         (5,686     868,175   

Intercompany receivables

     —           —           125,154         —           (125,154     —     

Prepaid expenses and other current assets

     —           —           60,695         595         97        61,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           —           1,075,588         54,005         (130,743     998,850   

Property and equipment, net

     —           —           24,585         641         —          25,226   

Goodwill

     —           —           571,653         32,399         —          604,052   

Tradenames, net

     —           —           43,600         —           —          43,600   

Other intangibles, net

     —           —           256,554         1,415         —          257,969   

Investment in subsidiaries

     497,448         1,382,934         42,950         —           (1,923,332     —     

Other assets, net

     1,466         21,164         25,779         —           —          48,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 498,914       $ 1,404,098       $ 2,040,709       $ 88,460       $ (2,054,075   $ 1,978,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     LIABILITIES & EQUITY   

Current liabilities:

                

Accounts payable

     —           —           261,981         2,902         (1,390     263,493   

Accrued payroll and employee costs

     —           —           144,236         34,124         (32,252     146,108   

Intercompany payables

     46,552         71,128         —           7,474         (125,154     —     

Deferred income taxes

     —           —           56,515         5         —          56,520   

Accrued liabilities

     —           12,050         111,653         831         28,053        152,587   

Income taxes payable

     —           —           5,358         174         —          5,532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     46,552         83,178         579,743         45,510         (130,743     624,240   

Long-term debt, less current portion

     —           823,472         —           —           —          823,472   

Long-term deferred taxes

     —           —           59,868         —           —          59,868   

Other long-term liabilities

     —           —           10,542         —           —          10,542   

Noncontrolling interests

     —           —           7,622         —           —          7,622   

Equity

     452,362         497,448         1,382,934         42,950         (1,923,332     452,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 498,914       $ 1,404,098       $ 2,040,709       $ 88,460       $ (2,054,075   $ 1,978,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

36


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet Information

December 31, 2012

 

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

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 74,907       $ 43,868       $ —        $ 118,775   

Restricted cash

     —           —           1,659         —           —          1,659   

Accounts receivable, net

     —           —           781,649         2,548         (3,584     780,613   

Intercompany receivables

     —           —           164,048         —           (164,048     —     

Prepaid expenses and other current assets

     —           —           75,874         2,485         864        79,223   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           —           1,098,137         48,901         (166,768     980,270   

Property and equipment, net

     —           —           25,494         713         —          26,207   

Goodwill

     —           —           571,653         32,399         —          604,052   

Tradenames, net

     —           —           43,643         —           —          43,643   

Other intangibles, net

     —           —           265,014         1,520         —          266,534   

Investment in subsidiaries

     482,627         1,373,820         42,749         —           (1,899,196     —     

Other assets, net

     1,353         22,911         25,746         —           —          50,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 483,980       $ 1,396,731       $ 2,072,436       $ 83,533       $ (2,065,964   $ 1,970,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     LIABILITIES & EQUITY   

Current liabilities:

                

Current portion of long-term debt

   $ —         $ —         $ 637       $ —         $ —        $ 637   

Accounts payable

     —           —           284,616         2,944         (210     287,350   

Accrued payroll and employee costs

     —           —           126,122         26,538         (24,849     127,811   

Intercompany payables

     46,438         107,414         —           10,196         (164,048     —     

Deferred income taxes

     —           —           59,027         5         —          59,032   

Accrued liabilities

     —           24,418         154,939         767         22,339        202,463   

Income taxes payable

     —           —           3,737         334         —          4,071   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     46,438         131,832         629,078         40,784         (166,768     681,364   

Long-term debt, less current portion

     —           782,272         —           —           —          782,272   

Long-term deferred taxes

     —           —           50,303         —           —          50,303   

Other long-term liabilities

     —           —           11,023         —           —          11,023   

Noncontrolling interests

     —           —           8,212         —           —          8,212   

Equity

     437,542         482,627         1,373,820         42,749         (1,899,196     437,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 483,980       $ 1,396,731       $ 2,072,436       $ 83,533       $ (2,065,964   $ 1,970,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

37


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Cash Flow Information

For the Three Months Ended March 29, 2013

 

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

Net cash (used in) provided by operating activities

   $ (114   $ (4,277   $ (79,176   $ 11,264      $ (1,188   $ (73,491
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Purchase of property and equipment, net

     —          —          (514     —          —          (514

Purchase of software

     —          —          (1,119     —          —          (1,119
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in by investing activities

     —          —          (1,633     —          —          (1,633
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Borrowings on long-term debt

     —          149,800        —          —          —          149,800   

Payments on long-term debt

     —          (109,237     —          —          —          (109,237

Payments related to financed insurance

     —          —          (15,398     —          —          (15,398

Payments of dividends to Parent

     —          —          —          (2,375     1,188        (1,187

Net transfers from (to) Parent/subsidiary

     114        (36,286     38,894        (2,722     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used in) by financing activities

     114        4,277        23,496        (5,097     1,188        23,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     —          —          (57,313     6,167        —          (51,146

Cash and cash equivalents, beginning of period

     —          —          74,907        43,868        —          118,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ —        $ 17,594      $ 50,035      $ —        $ 67,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Cash Flow Information

For The Three Months Ended March 30, 2012

 

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

Net cash (used in) provided by operating activities

   $ (134   $ (1,481   $ (23,322   $ 15,532      $ (547   $ (9,952
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

C ash flows from investing activities:

            

Purchase of property and equipment, net

     —          —          (1,784     —          —          (1,784

Proceeds from sale of property, plant and equipment

     —          —          7        —          —          7   

Purchase of software

     —          —          (818     —          —          (818
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          —          (2,595     —          —          (2,595
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Borrowings on long-term debt

     —          285,700        —          —          —          285,700   

Payments on long-term debt

     —          (195,700     —          —          —          (195,700

Borrowings related to financed insurance

     —          —          5,041        —          —          5,041   

Payments related to financed insurance

     —          —          (13,860     —          —          (13,860

Payments of dividends to Parent

     —          —          —          (821     547        (274

Net transfers from (to) Parent/subsidiary

     134        (88,519     92,069        (3,684     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used in) by financing activities

     134        1,481        83,250        (4,505     547        80,907   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          —          57,333        11,027        —          68,360   

Cash and cash equivalents, beginning of period

     —          —          45,724        24,481        —          70,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ —        $ 103,057      $ 35,508      $ —        $ 138,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 13 —   Subsequent Events

We evaluated subsequent events that occurred after the period end date and determined the following items discussed below merited disclosure.

Operating Segment Change

In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s five consolidated operating and reporting segments, LOGCAP, Aviation, TIS, GLDS and Security Services were re-aligned into three reporting and operating segments DynAviation, DynLogistics and DynGlobal. DynAviation and DynLogistics will provide services domestically and in foreign countries under contracts with the U.S. government and foreign customers. DynGlobal will initially be solely focused on the expansion of opportunities within the commercial sector. Our segments will 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. The financial results will reflect the new organizational structure beginning with second quarter 2013.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our unaudited condensed consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. unaudited condensed consolidated financial statements, and the notes thereto, and other data contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2012. References to “Delta Tucker Holdings”, the “Company”, “we”, “our” or “us” refer to Delta Tucker Holdings, Inc. and its subsidiaries unless otherwise stated or indicated by context.

Company Overview

We are a leading provider of specialized mission-critical professional and support services for the United States (“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.

Reportable Segments

We have six operating and reportable 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 Global Linguist Solutions (“GLS”) Group. Our operating segment provides services domestically and in foreign countries under contracts with the U.S. government and foreign customers. All 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. 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 Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract. Under LOGCAP, the U.S. Army contracts with 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 International Narcotics and Law Enforcement (“INL”) Air Wing program and the Contract Field Teams (“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.

 

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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 Afghanistan Ministry of Defense Program (“AMDP”), the Combined Security Transition Command Afghanistan (“CSTC-A”) and the 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 National Security Programs unit in which we have a 51% ownership interest. 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 and other U.S. government agencies. GLS is currently one of six providers under the Defense Language Interpretation Translation Enterprise (“DLITE”) contract which has an estimated contract value of $9.7 billion. In January 2013, GLS was selected 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 10 to the Delta Tucker Holdings, Inc. unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion on GLS.

In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s five consolidated operating and reporting segments, LOGCAP, Aviation, TIS, GLDS and Security Services were re-aligned into three reporting and operating segments DynAviation, DynLogistics and DynGlobal. DynAviation and DynLogistics will provide services domestically and in foreign countries under contracts with the U.S. government and foreign customers. DynGlobal will initially be solely focused on the expansion of opportunities within the commercial sector. Our segments will 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. The financial results will reflect the new organizational structure beginning with second quarter 2013.

Current Operating Environment and Outlook

The following discussion is a supplement to and should be read in conjunction with the accompanying unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2012.

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.

This sequestration of appropriations was scheduled to begin in January 2013, but was delayed by two months through the American Taxpayer Relief Act of 2012. Sequestration was ultimately triggered on March 1, 2013. On March 21, 2013, Congress passed a modified Continuing Resolution (“CR”) that included 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 Operations and

 

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Maintenance (“O&M”) at nearly the amount budgeted by the President, or