DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 11/12/2013 13:07:29)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 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   þ
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    þ      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
þ   (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    þ
As of November 12, 2013 , the registrant had 100 shares of its Class A common stock outstanding.






Delta Tucker Holdings, Inc.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 

2




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


3




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 and comprehensive income for the three and nine months ended September 27, 2013 and September 28, 2012 , the related statements of equity and cash flows for the nine months ended September 27, 2013 and September 28, 2012 and the unaudited condensed consolidated balance sheets as of September 27, 2013 and December 31, 2012 .


4




PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Revenue
$
766,785

 
$
1,010,314

 
$
2,575,415

 
$
3,018,469

Cost of services
(706,308
)
 
(917,138
)
 
(2,346,007
)
 
(2,756,839
)
Selling, general and administrative expenses
(34,179
)
 
(40,347
)
 
(103,871
)
 
(116,822
)
Depreciation and amortization expense
(12,046
)
 
(12,375
)
 
(36,167
)
 
(37,594
)
Earnings from equity method investees
295

 
315

 
3,668

 
538

Impairment of goodwill
(28,824
)
 
(30,859
)
 
(28,824
)
 
(30,859
)
Operating (loss) income
(14,277
)
 
9,910

 
64,214

 
76,893

Interest expense
(19,720
)
 
(22,011
)
 
(58,721
)
 
(65,438
)
Loss on early extinguishment of debt
(230
)
 
(696
)
 
(230
)
 
(1,479
)
Interest income
31

 
21

 
77

 
94

Other income (expense), net
337

 
68

 
(124
)
 
4,768

(Loss) income before income taxes
(33,859
)
 
(12,708
)
 
5,216

 
14,838

Benefit (provision) for income taxes
1,991

 
(1,393
)
 
(11,393
)
 
(11,744
)
Net (loss) income
(31,868
)
 
(14,101
)
 
(6,177
)
 
3,094

Noncontrolling interests
(1,197
)
 
(1,693
)
 
(3,546
)
 
(4,322
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(33,065
)
 
$
(15,794
)
 
$
(9,723
)
 
$
(1,228
)
See notes to unaudited condensed consolidated financial statements

5




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Net (loss) income
$
(31,868
)
 
$
(14,101
)
 
$
(6,177
)
 
$
3,094

Other comprehensive loss:
 
 
 
 
 
 
 
Currency translation adjustment
57

 
296

 
(398
)
 
147

Other comprehensive income (loss), before tax
57

 
296

 
(398
)
 
147

Income tax (provision) benefit related to items of other comprehensive (loss) income
(20
)
 
(106
)
 
143

 
(54
)
Other comprehensive income (loss)
37

 
190

 
(255
)
 
93

Comprehensive (loss) income
(31,831
)
 
(13,911
)
 
(6,432
)
 
3,187

Comprehensive loss attributable to noncontrolling interests
(1,197
)
 
(1,693
)
 
(3,546
)
 
(4,322
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(33,028
)
 
$
(15,604
)
 
$
(9,978
)
 
$
(1,135
)

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As of
(Amounts in thousands, except share data)
September 27, 2013
 
December 31, 2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
41,762

 
$
118,775

Restricted cash
1,659

 
1,659

Accounts receivable, net of allowances of $2,401 and $1,481 respectively
729,944

 
780,613

Prepaid expenses and other current assets
71,682

 
79,223

Total current assets
845,047

 
980,270

Property and equipment, net
23,189

 
26,207

Goodwill
575,228

 
604,052

Tradenames, net
43,510

 
43,643

Other intangibles, net
236,286

 
266,534

Other assets, net
41,123

 
50,010

Total assets
$
1,764,383

 
$
1,970,716

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

 
$
637

Accounts payable
191,800

 
287,350

Accrued payroll and employee costs
112,183

 
127,811

Deferred tax liabilities, net
30,143

 
59,032

Accrued liabilities
144,115

 
202,463

Income taxes payable
17,845

 
4,071

Total current liabilities
496,086

 
681,364

Long-term debt, less current portion
767,272

 
782,272

Long-term deferred taxes, net
60,935

 
50,303

Other long-term liabilities
5,918

 
11,023

Total liabilities
1,330,211

 
1,524,962

EQUITY
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 27, 2013 and December 31, 2012, respectively.

 

Additional paid-in capital
549,547

 
549,322

Accumulated deficit
(121,586
)
 
(111,863
)
Accumulated other comprehensive (loss) income
(172
)
 
83

Total equity attributable to Delta Tucker Holdings, Inc.
427,789

 
437,542

Noncontrolling interests
6,383

 
8,212

Total equity
434,172

 
445,754

Total liabilities and equity
$
1,764,383

 
$
1,970,716

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
Cash flows from operating activities
 
 
 
Net (loss) income
$
(6,177
)
 
$
3,094

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37,470

 
38,785

Loss on early extinguishment of debt
230

 
1,479

Amortization of deferred loan costs
5,154

 
5,788

Impairment of goodwill
28,824

 
30,859

Earnings from equity method investees
(3,013
)
 
(4,876
)
Distributions from affiliates
5,983

 
2,267

Deferred income taxes
(18,255
)
 
7,139

Other
(1,756
)
 
(4,394
)
Changes in assets and liabilities:
 
 
 
Restricted cash

 
9,114

Accounts receivable
49,415

 
(24,261
)
Prepaid expenses and other current assets
5,876

 
(12,537
)
Accounts payable and accrued liabilities
(148,390
)
 
6,983

Income taxes payable
14,394

 
5,808

Net cash (used in) provided by operating activities
(30,245
)
 
65,248

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(1,654
)
 
(4,543
)
Proceeds from sale of property, plant and equipment
177

 
7

Heliworks acquisition, net of cash acquired

 
(11,056
)
Purchase of software
(2,681
)
 
(2,066
)
Return of capital from equity method investees
1,549

 
9,154

Contributions to equity method investees
(30
)
 
(1,479
)
Net cash (used in) investing activities
(2,639
)
 
(9,983
)
Cash flows from financing activities
 
 
 
Borrowings on long-term debt
573,200

 
304,200

Payments on long-term debt
(588,837
)
 
(364,200
)
Payment of deferred financing costs
(2,139
)
 

Borrowings related to financed insurance
5,133

 
62,581

Payments related to financed insurance
(27,902
)
 
(38,541
)
Payment of dividends to noncontrolling interests
(3,584
)
 
(2,119
)
Net cash used in financing activities
(44,129
)
 
(38,079
)
Net (decrease) increase in cash and cash equivalents
(77,013
)
 
17,186

Cash and cash equivalents, beginning of period
118,775

 
70,205

Cash and cash equivalents, end of period
$
41,762

 
$
87,391

 
 
 
 
Income tax paid/(refund received), net
$
7,942

 
$
(1,080
)
Interest paid
$
65,285

 
$
69,017

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Equity
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive (Loss)
 
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 (loss) income attributable to Delta Tucker Holdings, Inc.

 

 

 
(1,228
)
 
93

 
(1,135
)
 

 
(1,135
)
Noncontrolling interests

 

 

 

 

 

 
4,322

 
4,322

DIFZ financing, net of tax

 

 
407

 

 

 
407

 

 
407

Distribution to affiliates of Parent

 

 
(1,998
)
 

 

 
(1,998
)
 
696

 
(1,302
)
Dividends declared to noncontrolling interests

 

 

 

 

 

 
(3,316
)
 
(3,316
)
Balance at September 28, 2012

 
$

 
$
549,360

 
$
(104,154
)
 
$
34

 
$
445,240

 
$
6,888

 
$
452,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
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 (loss) attributable to Delta Tucker Holdings, Inc.

 

 

 
(9,723
)
 
(255
)
 
(9,978
)
 

 
(9,978
)
Noncontrolling interests

 

 

 

 

 

 
3,546

 
3,546

DIFZ financing, net of tax

 

 
225

 

 

 
225

 

 
225

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(5,375
)
 
(5,375
)
Balance at September 27, 2013

 
$

 
$
549,547

 
$
(121,586
)
 
$
(172
)
 
$
427,789

 
$
6,383

 
$
434,172

See notes to unaudited condensed consolidated financial statements




9




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

Note 1 — Basis of Presentation and Accounting Policies
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 unaudited condensed consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate and do not make the information presented misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 .
In the opinion of management, all adjustments necessary to fairly present our financial position as of September 27, 2013 and December 31, 2012 , the results of operations and statements of comprehensive income for the three and nine months ended September 27, 2013 and September 28, 2012 and the statements of equity and cash flows for the nine months ended September 27, 2013 and September 28, 2012 have been included. The results of operations and the statements of comprehensive income for the three and nine months ended September 27, 2013 and September 28, 2012 and the statements of equity and cash flows for the nine months ended September 27, 2013 and September 28, 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 Company's Annual Report on Form 10-K for the year ended December 31, 2012 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 segments 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.

10




Noncontrolling interests
We record the impact of our partners' interest in less than wholly owned consolidated VIEs as noncontrolling interests. Currently, DynCorp International FZ-LLC ("DIFZ") is our only consolidated VIE for which we do not own 100% of the entity. We 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 and nine months ended September 27, 2013 and September 28, 2012 .
 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Gross favorable adjustments
$
11.2

 
$
14.4

 
$
36.5

 
$
29.4

Gross unfavorable adjustments
(16.6
)
 
(2.1
)
 
(37.5
)
 
(7.7
)
Net adjustments
$
(5.4
)
 
$
12.3

 
$
(1.0
)
 
$
21.7

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 has not had any impact on the Company's financial statements as the Company has not had any reclassifications from accumulated other comprehensive income to net income. Other comprehensive income in each period is comprised solely of foreign currency translation adjustments.


11




Note 2 — Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions.
Prepaid expenses and other current assets — Prepaid expenses and other current assets were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Prepaid expenses
$
27,389

 
$
40,474

Prepaid income taxes
525

 
376

Inventories
25,706

 
16,330

Aircraft parts inventory held on consignment
2,430

 
2,676

Work-in-process inventory
3,311

 
9,371

Joint venture receivables
2,172

 
1,248

Other current assets
10,149

 
8,748

Total prepaid expenses and other current assets
$
71,682

 
$
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 September 27, 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 represents $2.4 million and $2.7 million in inventory related to our former Life Cycle Support Services ("LCCS") Navy contract as of September 27, 2013 and December 31, 2012 , respectively. Work-in-process inventory includes equipment for vehicle modifications and other deferred costs related to certain contracts. We value our inventory at lower of cost or market.
Property and equipment, net — Property and equipment, net were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Helicopters
$
11,509

 
$
11,497

Computers and other equipment
13,309

 
13,045

Leasehold improvements
10,863

 
10,026

Office furniture and fixtures
4,935

 
4,877

Gross property and equipment
40,616

 
39,445

Less accumulated depreciation
(17,427
)
 
(13,238
)
Total property and equipment, net
$
23,189

 
$
26,207

Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $4.4 million during the three and nine months ended September 27, 2013 , respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.4 million and $4.3 million during the three and nine months ended September 28, 2012 , respectively.
Other assets, net — Other assets, net were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Deferred financing costs, net
$
19,673

 
$
22,918

Investment in affiliates
14,835

 
20,348

Palm promissory note, long-term portion
2,988

 
4,037

Other
3,627

 
2,707

Total other assets, net
$
41,123

 
$
50,010

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $1.6 million and $5.2 million during the three and nine months ended September 27, 2013 , respectively. Amortization related to deferred financing costs was $1.9 million and $5.8 million during the three and nine months ended September 28, 2012 , respectively. Deferred financing costs for the nine months ended September 27, 2013 and September 28, 2012 were reduced by $0.2 million and $1.5 million , related to the pro rata write–off of deferred financing costs to loss on early extinguishment of debt as a result of

12




the $15.0 million and $60.0 million in principal prepayments made on the term loan facility during the nine months ended September 27, 2013 and September 28, 2012 , respectively. See Note 7 for further discussion of our debt.
Accrued payroll and employee costs — Accrued payroll and employee costs were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Wages, compensation and other benefits
$
88,758

 
$
105,293

Accrued vacation
22,354

 
21,484

Accrued contributions to employee benefit plans
1,071

 
1,034

Total accrued payroll and employee costs
$
112,183

 
$
127,811

Accrued liabilities — Accrued liabilities were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Customer liabilities
$
30,355

 
$
39,954

Accrued insurance
49,748

 
62,670

Accrued interest
12,838

 
24,847

Unrecognized tax benefit
8,868

 

Unfavorable contract liability
1,143

 
4,572

Contract losses
11,130

 
9,948

Legal matters
4,622

 
12,772

Subcontractor retention
5,851

 
8,448

Financed insurance
3,697

 
26,466

Other
15,863

 
12,786

Total accrued liabilities
$
144,115

 
$
202,463

Customer liabilities are primarily due to amounts received from customers in excess of revenue recognized. Other is comprised primarily 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.
Other long-term liabilities — Other long-term liabilities were:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Unrecognized tax benefit, net
$

 
$
3,293

Unfavorable lease accrual
1,839

 
4,504

Other
4,079

 
3,226

Total other long-term liabilities
$
5,918

 
$
11,023

During the quarter ended September 27, 2013, we restructured our facilities footprint in Virginia to better position the Company operationally for the future.  In connection with this restructuring plan, the Company entered into a rental agreement to lease property in Tysons Corner, Virginia. 
During the fourth quarter of calendar year 2013, the Company plans to vacate the properties currently occupied at various locations and will consolidate to the new Tysons Corner location. We expect the costs associated with vacating these properties, such as lease vacancy obligations, net of estimated sublease rental assumptions, to be approximately $7.5 million .
As a result of the restructuring plan, we paid $3.2 million in relocation expenses in order to better position our executive presence in our Texas facilities.  We also recorded a postemployment benefit expense of $4.2 million related to severance in accordance with ASC 712 - Compensation . These charges were primarily related to the workforce reduction initiatives implemented during the year. Both charges were included in Selling, general and administrative expenses in the statements of operations.

13




Note 3 — Goodwill and Other Intangible Assets
In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities and continue international growth while expanding the commercial business. The Company's previous operating and reporting segments were re-aligned into three reporting and operating segments DynAviation, DynLogistics and DynGlobal. DynAviation and DynLogistics provide services domestically and in foreign countries primarily under contracts with the U.S. government. The initial focus of DynGlobal is the pursuit and growth of international and commercial business.
Our current structure now includes six reporting units for which we assess goodwill for potential impairment. Our DynAviation segment includes two reporting units, our DynLogistics segment includes four reporting units and there is no goodwill recorded at the DynGlobal segment. The amendment in the Company's organizational structure did not result in any reallocation of goodwill.
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 nine months ended September 27, 2013 , with the US government fiscal year 2014 beginning, Congress reached an impasse in its efforts to bring resolution to the larger budgetary issues related to the debt and deficit that would undo sequestration and provide the desired clarity on defense spending. Congress was only able to agree to a short-term continuing resolution (CR) funding the government at the fiscal year 2013 sequester level through January 15, 2014 and suspended the statutory limit on the amount of permissible federal debt through February 7, 2014. It is unclear when or if annual appropriations bills will be enacted for the fiscal year 2014. The U.S. government may operate under a CR for all of 2014, restricting the start of new contracts or programs that year. Congressional appropriation and authorization of the fiscal year 2014 spending, including defense spending, and the application of sequestration remain marked by significant debate and an uncertain schedule. Congress and the Administration also continue to debate the debt ceiling, among other fiscal issues, as they negotiate plans for long-term national fiscal policy. The outcome of these debates could have a significant impact on future defense spending broadly and the Company's programs and could potentially result in an impairment of our goodwill.
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.
In accordance with ASC 350 - Intangibles-Goodwill and Other , we assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified.
During the three months ended September 27, 2013 , the Company learned that its pursuit of a significant business opportunity within the Intelligence & Security ("IS") reporting unit of the DynLogistics segment was unsuccessful. This reporting unit's projections included significant estimates related to the new business opportunity. Additionally, other significant new business pursuits became less probable due to competitor protest and other factors. The Company concluded the change in circumstances represented a triggering event and a step one assessment was performed to identify any possible goodwill impairment.
The first step of the impairment test indicated the carrying value of the IS reporting unit was less than the fair value. We performed step two of the impairment test and determined that the goodwill at the IS reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $ 28.8 million was recorded during the three months ended September 27,

14




2013 to impair the carrying value of the IS reporting unit goodwill. The impairment charge has been presented separately in the unaudited condensed consolidated statement of operations.
Further, the current projections for one of the reporting units within the DynAviation segment, with $293.4 million in goodwill as of September 27, 2013 , are 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. Besides the IS reporting unit discussed above, there were no indicators of goodwill impairment in the remaining reporting units as of September 27, 2013 .
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 as well as the uncertainty around the CR or other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
The carrying amount of goodwill for each of our segments as of September 27, 2013 was as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Goodwill balance as of December 31, 2012
$
442,393

 
$
161,659

 
$
604,052

Changes between January 1, 2013 and September 27, 2013

 
(28,824
)
 
(28,824
)
Goodwill balance as of September 27, 2013
$
442,393

 
$
132,835

 
$
575,228


15




The following tables provide information about changes relating to certain intangible assets:
 
As of September 27, 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
5.8
 
$
350,912

 
$
(128,341
)
 
$
222,571

Other
 
 
 
 
 
 
 
Finite-lived
6.3
 
21,823

 
(13,167
)
 
8,656

Indefinite-lived
 
 
$
5,059

 
$

 
$
5,059

Total other intangibles
 
 
$
377,794

 
$
(141,508
)
 
$
236,286

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
1.6
 
$
869

 
$
(580
)
 
$
289

Indefinite-lived
 
 
43,221

 

 
43,221

Total tradenames
 
 
$
44,090

 
$
(580
)
 
$
43,510

 
 
 
 
 
 
 
 
 
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 $11.0 million and $33.0 million for the three and nine months ended September 27, 2013 , respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $11.3 million and $34.5 million for the three and nine months ended September 28, 2012 , respectively. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $8.7 million and $9.6 million as of September 27, 2013 and December 31, 2012 , respectively.
The following table outlines an estimate of future amortization based upon the finite-lived intangible assets owned and the finite-lived tradenames as of September 27, 2013 :
(Amounts in thousands)
Amortization
Expense
Estimate for three month period ending December 31, 2013
$
11,197

Estimate for calendar year 2014
43,689

Estimate for calendar year 2015
41,615

Estimate for calendar year 2016
38,299

Estimate for calendar year 2017
36,033

Thereafter
60,683

Total
$
231,516


16





Note 4 — Income Taxes
The domestic and foreign components of (Loss) Income before income taxes are as follows:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Domestic
$
(34,525
)
 
$
(13,829
)
 
$
5,845

 
$
10,659

Foreign
666

 
1,121

 
(629
)
 
4,179

(Loss) Income before income taxes
$
(33,859
)
 
$
(12,708
)
 
$
5,216

 
$
14,838

The provision for income taxes consists of the following:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Current portion:
 
 
 
 
 
 
 
Federal
$
9,171

 
$

 
$
9,171

 
$

State
213

 
(22
)
 
588

 
204

Foreign
9,172

 
2,297

 
14,230

 
3,911

 
$
18,556

 
$
2,275

 
$
23,989

 
$
4,115

Deferred portion :
 
 
 
 
 
 
 
Federal
$
(20,429
)
 
$
(972
)
 
$
(12,656
)
 
$
7,433

State
(113
)
 
42

 
62

 
175

Foreign
(5
)
 
48

 
(2
)
 
21

 
(20,547
)
 
(882
)
 
(12,596
)
 
7,629

Provision for income taxes
$
(1,991
)
 
$
1,393

 
$
11,393

 
$
11,744

Deferred tax liabilities, net consist of the following:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Current deferred tax liabilities, net
$
(30,143
)
 
$
(59,032
)
Non-current deferred tax liabilities, net
(60,935
)
 
(50,303
)
Deferred tax liabilities, net
$
(91,078
)
 
$
(109,335
)
A reconciliation of the statutory federal income tax rate to our effective rate is provided below:  
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax, less effect of federal deduction
(0.3
)%
 
(0.2
)%
 
12.4
 %
 
2.6
 %
Goodwill Impairment
(29.8
)%
 
(47.6
)%
 
193.4
 %
 
40.6
 %
Noncontrolling interests
1.1
 %
 
1.3
 %
 
(23.1
)%
 
(6.0
)%
Nondeductible expenses
(1.0
)%
 
 %
 
19.9
 %
 
 %
Discreet items
0.7
 %
 
 %
 
(21.9
)%
 
 %
Uncertain tax positions
 %
 
 %
 
6.0
 %
 
 %
Other
0.2
 %
 
0.5
 %
 
(3.3
)%
 
6.9
 %
Effective tax rate
5.9
 %
 
(11.0
)%
 
218.4
 %
 
79.1
 %
During the year ended December 31, 2012 , we fully utilized our U.S. federal net operating losses. As of September 27, 2013 and December 31, 2012 , we had state net operating loss carryforwards of approximately $23.7 million and $123.7 million , respectively, which will begin to expire in 2015 . The remainder of our state net operating loss carryforwards will not begin to expire until 2020 or later. Additionally, as of December 31, 2012 , we had foreign tax credit carry forwards of $9.3 million which

17




we fully utilized. We expect to fully utilize our state net operating losses prior to expiration. During the nine months ended September 27, 2013 , we made estimated federal income tax payments of $6.9 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 September 27, 2013 .
As of September 27, 2013 and December 31, 2012 , we had $8.9 million of total unrecognized tax benefits, of which $2.7 million and $2.4 million , respectively, would impact our effective tax rate if recognized. We anticipate that all $8.9 million of unrecognized tax benefits will be settled in the next twelve months.
Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Billed
$
216,298

 
$
245,678

Unbilled
513,646

 
534,935

Total accounts receivable, net
$
729,944

 
$
780,613

Unbilled receivables as of September 27, 2013 and December 31, 2012 include $40.2 million and $36.2 million , respectively, related to costs incurred on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed at the end of the respective periods. As of September 27, 2013 , we had no contract claims outstanding. As of December 31, 2012 , we had one contract claim totaling $12.1 million which was subsequently paid by the customer 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. We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government. Our largest contract, LOGCAP IV, accounted for approximately 46% and 45% of total unbilled receivables as September 27, 2013 and December 31, 2012 , respectively.

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, accounts payable and a portion of our debt, 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.  
 
September 27, 2013
 
December 31, 2012
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$
455,000

 
$
468,650

 
$
455,000

 
$
416,325

Term Loan
312,272

 
313,053

 
327,272

 
328,908

Total long-term debt
$
767,272

 
$
781,703

 
$
782,272

 
$
745,233





18




Note 7 — Long-Term Debt
Long-term debt consisted of the following:
 
As of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
9.5% senior subordinated notes
$

 
$
637

10.375% senior unsecured notes
455,000

 
455,000

Term loan
312,272

 
327,272

Total indebtedness
767,272

 
782,909

Less current portion of long-term debt

 
(637
)
Total long-term debt
$
767,272

 
$
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 September 27, 2013 and December 31, 2012 .
Senior Credit Facility
On July 7, 2010 , we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Administrative Agent (the "Administrative Agent"). On January 21, 2011 and on August 10, 2011 , DynCorp International Inc. entered into amendments to the Senior Credit Facility.
On June 19, 2013 , we entered into a third amendment (the “Amendment”) to the Senior Credit Facility. The Amendment, among other things, amends the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016 , increase the amount of the Revolver to $181.0 million and to modify the maximum total leverage threshold test and certain other covenants.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of September 27, 2013, the Senior Credit Facility provided for a $312.3 million term loan facility ("Term Loan") and the $181.0 million Revolver resulting from the Amendment, which includes a $100.0 million letter of credit subfacility. As of September 27, 2013 and December 31, 2012 , the additional available borrowing capacity under the Senior Credit Facility was approximately $145.3 million and $111.7 million , respectively, which gives effect to $35.7 million and $38.3 million , respectively, in letters of credit. Amounts borrowed under the Revolver are used to fund operations. The maturity date on both the Term Loan and the Revolver is July 7, 2016 .
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 $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus 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 September 27, 2013 and December 31, 2012 , the applicable interest rate on the Term Loan was 6.25% .



19





Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5% . The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of September 27, 2013 and December 31, 2012 , the applicable interest rate for our letter of credit subfacility was 4.25% and 4.50% , respectively. As of September 27, 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
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.
During the nine months ended September 27, 2013 and September 28, 2012 we made principal prepayments of $15.0 million and $60.0 million on the Term Loan, respectively. Deferred financing costs associated with the prepayments totaling $0.2 million and $1.5 million were expensed and are included in the Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 27, 2013 and September 28, 2012 .
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 and the additional principal prepayments made during the year ended December 31, 2012 , we were not required to make any additional principal payments under the Excess Cash Flow requirement during calendar year 2013. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the nine months ended September 27, 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.
Effective with the Amendment, total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million ) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period.
As of September 27, 2013 our total leverage ratio, cannot be greater than 4.75 to 1.0 after which, the maximum total leverage diminishes quarterly or semi-annually to a maximum of 3.75 to 1.00 beginning September 26, 2015. The Amendment made adjustments to the levels at which the maximum total leverage diminishes over the remainder of the facility.
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 as of September 27, 2013 , 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 to 2.05 to 1.00 through March 27, 2015 and 2.25 to 1.00 thereafter.

20




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 September 27, 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 .
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.
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 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.
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.



21




Note 8 — Commitments and Contingencies
Commitments
We have no significant long-term purchase agreements with service providers. 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 $41.5 million and $129.3 million for the three and nine months ended September 27, 2013 , respectively. Lease rental expense was $48.2 million and $169.3 million for the three and nine months ended September 28, 2012 , respectively. During the three months ended, September 27, 2013, the Company entered into a rental agreement to lease property in Tysons Corner, Virginia. During the fourth quarter of calendar year 2013, the Company plans to vacate the properties currently occupied at various locations and will consolidate to the new Tysons Corner location.  Rent expense on the Tysons Corner property was recognized on a straight line basis over the term of the lease beginning in the third quarter of 2013. Aggregate rent expense over the 11-year, 4-month period will be approximately $25.5 million .
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $4.6 million and $12.8 million as of September 27, 2013 and December 31, 2012 , respectively. Except as disclosed below, none of our reserves as of September 27, 2013 were individually material. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at September 27, 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 that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of September 27, 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

22




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.
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 September 27, 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 on 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 $57.0 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 U.S. dollars. As of September 28, 2012 , a reserve had 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. During the three months ended September 27, 2013, the Company was made aware of a new case filed by Al Hamed in the UAE Abu Dhabi Court of First Instance seeking $23.3 million U.S. dollars in damages under the same business development contract. The case alleges we obtained additional business with Al Taif. We have not been awarded any new contracts with Al Taif and therefore believe this case is without merit.
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 on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and 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.

23




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 East on the War Reserve Materiel 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, 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 $25.4 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 to 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

24




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 record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic workers' compensation and 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
In April 2013, the Company's previous operating and reporting segments were re-aligned into three reporting and operating segments, DynAviation, DynLogistics and DynGlobal. Our reporting segments will continue to be the same as our operating segments. DynAviation and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies. The initial focus of DynGlobal is on pursuit and growth of international and commercial business. The current revenue, operating income, depreciation and amortization and assets associated with this segment for the three and nine months ended September 27, 2013 were not material and are presented in Headquarters/ Other.

25




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
 
Nine Months Ended
(Amounts in thousands)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Revenue
 
 
 
 
 
 
 
DynLogistics
$
451,416

 
$
659,501

 
$
1,518,992

 
$
2,045,086

DynAviation
313,189

 
348,560

 
1,061,283

 
968,206

Headquarters / Other (1)
2,180

 
2,253

 
(4,860
)
 
5,177

Total revenue
$
766,785

 
$
1,010,314

 
$
2,575,415

 
$
3,018,469

 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
DynLogistics
$
(12,741
)
 
$
(453
)
 
$
20,116

 
$
39,732

DynAviation
11,231

 
30,027

 
75,850

 
80,714

Headquarters / Other (2)
(12,767
)
 
(19,664
)
 
(31,752
)
 
(43,553
)
Total operating (loss)/income
$
(14,277
)
 
$
9,910

 
$
64,214

 
$
76,893

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
DynLogistics
$
82

 
$
270

 
$
531

 
$
801

DynAviation
459

 
138

 
1,080

 
495

Headquarters / Other
11,932

 
12,337

 
35,859

 
37,489

Total depreciation and amortization (3)
$
12,473

 
$
12,745

 
$
37,470

 
$
38,785

(1)
Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments. Additionally, operating income for our DynGlobal segment during the three and nine months ended September 27, 2013 is currently included in Headquarter/Other.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers. Additionally, operating income for our DynGlobal segment in support of the development of this business during the three and nine months ended September 27, 2013 are currently included in Headquarters/Other.
(3)
Includes amounts included in Cost of services of $0.4 million and $1.3 million for the three and nine months ended September 27, 2013 , respectively, and $0.4 million and $1.2 million for the three and nine months ended September 28, 2012 , respectively.
The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
As Of
(Amounts in thousands)
September 27, 2013
 
December 31, 2012
Assets
 
 
 
DynLogistics
$
674,002

 
$
800,734

DynAviation
733,648

 
706,646

Headquarters / Other (1)
356,733

 
463,336

Total assets
$
1,764,383

 
$
1,970,716

(1)
Assets primarily include cash, investments in unconsolidated subsidiaries, deferred tax liabilities, intangible assets (excluding goodwill) and deferred debt issuance costs as well as immaterial assets associated with DynGlobal for the nine months ended September 27, 2013 .

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 $1.7 million and $3.8 million in conjunction with the COAC Agreement during the three and nine months ended September 27, 2013 , respectively, and $0.9 million and $2.2 million during the three and nine months ended September 28, 2012 , respectively.

26




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 September 27, 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 equity method investees 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 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 on 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.
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 Defense.
Receivables due from our unconsolidated joint ventures totaled $2.2 million and $1.2 million as of September 27, 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 $1.9 million and $6.2 million during the three and nine months ended September 27, 2013 , respectively, and $0.3 million and $3.5 million during the three and nine months ended September 28, 2012 , respectively. The related cost of services was $1.9 million and $6.0 million during the three and nine months ended September 27, 2013 , respectively, and $0.3 million and $2.8 million during the three and nine months ended September 28, 2012 , respectively. Additionally, we earned $0.6 million and $3.0 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 27, 2013 , respectively, and $0.8 million and $4.9 million during the three and nine months ended September 28, 2012 , respectively.
GLS’ revenue was $6.0 million and $26.5 million during the three and nine months ended September 27, 2013 , respectively, and $13.7 million and $43.4 million during the three and nine months ended September 28, 2012 , respectively. GLS’ operating (loss)/income was $(0.8) million and $(0.6) million during the three and nine months ended September 27, 2013 , respectively, and $0.8 million and $2.9 million during the three and nine months ended September 28, 2012 , respectively. GLS’ net (loss)/income was $(0.8) million and $(0.6) million during the three and nine months ended September 27, 2013 , respectively, and $0.8 million and $2.9 million during the three and nine months ended September 28, 2012 , respectively. GLS paid cash dividends of $5.0 million during the nine months ended September 27, 2013 . Based on our 51% ownership in GLS, the Company recognized $2.6 million in equity method income during the nine months ended September 27, 2013 .
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 $3.8 million and $5.3 million as of September 27, 2013 and December 31, 2012 , respectively, reflecting the initial value plus accrued interest, less payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.

27




As discussed above and in accordance with ASC 810 - Consolidation , we consolidate DIFZ. The following tables present selected financial information for DIFZ as of September 27, 2013 and December 31, 2012 and for the three and nine months ended September 27, 2013 and September 28, 2012 :
 
As of
(Amounts in millions)
September 27, 2013
 
December 31, 2012
Assets
$
18.4

 
$
32.7

Liabilities
14.0

 
25.9

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Revenue
$
101.8

 
$
128.6

 
$
324.6

 
$
378.0

The following tables present selected financial information for our equity method investees as of September 27, 2013 and December 31, 2012 and for the three and nine months ended September 27, 2013 and September 28, 2012 :
 
As of
(Amounts in millions)
September 27, 2013
 
December 31, 2012
Current assets
$
98.4

 
$
115.0

Total assets
98.9

 
115.1

Current liabilities
51.0

 
59.9

Total liabilities
51.0

 
60.4

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 27, 2013
 
September 28, 2012
 
September 27, 2013
 
September 28, 2012
Revenue
$
40.2

 
$
46.1

 
$
163.9

 
$
186.9

Gross profit
1.8

 
5.4

 
13.6

 
15.6

Net income
1.1

 
3.5

 
10.7

 
10.6

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)  $14.8 million investment in unconsolidated subsidiaries, (ii)  $2.2 million in receivables from our unconsolidated joint ventures, (iii) $3.8 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 27, 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 $280.5 million and $951.5 million during the three and nine months ended September 27, 2013 , respectively, and $438.3 million and $1,333.8 million during the three and nine months ended September 28, 2012 , respectively. Cost of services on LOGCAP IV program was $260.0 million and $891.4 million during the three and nine months ended September 27, 2013 , respectively, and $407.9 million and $1,244.7 million during the three and nine months ended September 28, 2012 , respectively. Our share of the total LOGCAP IV profits was $11.7 million and $29.5 million during the three and nine months ended September 27, 2013 , respectively, and $18.0 million and $44.9 million during the three and nine months ended September 28, 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, the cash inflows and outflows, as well as expenses incurred are recorded in Cost of services in the period realized. Revenue on the EPSS program was $3.2 million and $11.9 million

28




during the three and nine months ended September 27, 2013 , respectively, and $3.8 million and $6.6 million during the three and nine months ended September 28, 2012 . Cost of services on the EPSS program was $3.1 million and $9.5 million during the three and nine months ended September 27, 2013 , respectively, and $3.2 million and $5.6 million during the three and nine months ended September 28, 2012 . Our share of the total EPSS program profits was $0.02 million and $2.1 million during the three and nine months ended September 27, 2013 , respectively, and $0.5 million and $0.8 million during the three and nine months ended September 28, 2012 .

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 September 27, 2013 and December 31, 2012 , (ii) unaudited condensed consolidating statements of operations and comprehensive income for the three and nine months ended September 27, 2013 and September 28, 2012 , (iii) unaudited condensed consolidating statements of cash flows for the nine months ended September 27, 2013 and September 28, 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.




29




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended September 27, 2013  
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
767,560

 
$
110,156

 
$
(110,931
)
 
$
766,785

Cost of services

 

 
(709,793
)
 
(107,717
)
 
111,202

 
(706,308
)
Selling, general and administrative expenses

 

 
(33,664
)
 
(244
)
 
(271
)
 
(34,179
)
Depreciation and amortization expense

 

 
(11,896
)
 
(150
)
 

 
(12,046
)
Earnings from equity method investees

 

 
295

 

 

 
295

Impairment of Goodwill

 

 
(28,824
)
 

 

 
(28,824
)
Operating income

 

 
(16,322
)
 
2,045

 
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