DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 11/10/2014 12:45:56)




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 26, 2014
or
o
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.)
1700 Old Meadow Road, McLean, Virginia 22102
(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   o      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    o
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
o
Accelerated filer
o
Non-accelerated filer
þ   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    o      No    þ
As of November 10, 2014 , 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 any further changes to the sequestration 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;
changes due to 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 and indefinite quantity contracts ("IQC");
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;
uncertainty created by management turnover;
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, 2013 filed with the Securities and Exchange Commission ("SEC") on March 14, 2014 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 26, 2014 and September 27, 2013 , the related statements of equity and cash flows for the nine months ended September 26, 2014 and September 27, 2013 and the unaudited condensed consolidated balance sheets as of September 26, 2014 and December 31, 2013 .

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 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Revenue
$
540,327

 
$
766,785

 
$
1,744,052

 
$
2,575,415

Cost of services
(510,965
)
 
(706,308
)
 
(1,606,045
)
 
(2,346,007
)
Selling, general and administrative expenses
(44,192
)
 
(34,179
)
 
(110,277
)
 
(103,871
)
Depreciation and amortization expense
(12,094
)
 
(12,046
)
 
(35,621
)
 
(36,167
)
Earnings from equity method investees
152

 
295

 
9,918

 
3,668

Impairment of goodwill, intangibles and long lived assets
(50,955
)
 
(28,824
)
 
(142,714
)
 
(28,824
)
Operating (loss) income
(77,727
)
 
(14,277
)
 
(140,687
)
 
64,214

Interest expense
(17,237
)
 
(19,720
)
 
(53,438
)
 
(58,721
)
Loss on early extinguishment of debt
(242
)
 
(230
)
 
(862
)
 
(230
)
Interest income
68

 
31

 
151

 
77

Other income (expense), net
956

 
337

 
3,314

 
(124
)
(Loss) income before income taxes
(94,182
)
 
(33,859
)
 
(191,522
)
 
5,216

Benefit (provision) for income taxes
23,160

 
1,991

 
39,028

 
(11,393
)
Net loss
(71,022
)
 
(31,868
)
 
(152,494
)
 
(6,177
)
Noncontrolling interests
(492
)
 
(1,197
)
 
(1,857
)
 
(3,546
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(71,514
)
 
$
(33,065
)
 
$
(154,351
)
 
$
(9,723
)
See notes to unaudited condensed consolidated financial statements

4




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

 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Net loss
$
(71,022
)
 
$
(31,868
)
 
$
(152,494
)
 
$
(6,177
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(42
)
 
57

 
(116
)
 
(398
)
Other comprehensive (loss) income, before tax
(42
)
 
57

 
(116
)
 
(398
)
Income tax benefit (provision) related to items of other comprehensive (loss) income
15

 
(20
)
 
42

 
143

Other comprehensive (loss) income
(27
)
 
37

 
(74
)
 
(255
)
Comprehensive loss
(71,049
)
 
(31,831
)
 
(152,568
)
 
(6,432
)
Comprehensive loss attributable to noncontrolling interests
(492
)
 
(1,197
)
 
(1,857
)
 
(3,546
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(71,541
)
 
$
(33,028
)
 
$
(154,425
)
 
$
(9,978
)

See notes to unaudited condensed consolidated financial statements

5




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
September 26, 2014
 
December 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
53,357

 
$
170,845

Restricted cash
1,659

 
1,659

Accounts receivable, net of allowances of $2,593 and $1,621 respectively
479,867

 
577,136

Prepaid expenses and other current assets
90,931

 
124,510

Total current assets
625,814

 
874,150

Property and equipment, net
24,648

 
24,120

Goodwill
152,269

 
293,767

Tradenames, net
43,331

 
43,464

Other intangibles, net
194,611

 
225,239

Other assets, net
29,669

 
39,181

Total assets
$
1,070,342

 
$
1,499,921

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Accounts payable
137,986

 
193,146

Accrued payroll and employee costs
90,206

 
114,334

Deferred income taxes
3,681

 
30,965

Accrued liabilities
136,049

 
200,533

Income taxes payable
7,577

 
14,020

Total current liabilities
375,499

 
552,998

Long-term debt
642,272

 
732,272

Long-term deferred taxes
2,554

 
17,359

Other long-term liabilities
12,137

 
7,632

Total liabilities
1,032,462

 
1,310,261

EQUITY
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 26, 2014 and December 31, 2013, respectively


 

Additional paid-in capital
552,430

 
549,581

Accumulated deficit
(519,950
)
 
(365,599
)
Accumulated other comprehensive loss
(271
)
 
(197
)
Total equity attributable to Delta Tucker Holdings, Inc.
32,209

 
183,785

Noncontrolling interests
5,671

 
5,875

Total equity
37,880

 
189,660

Total liabilities and equity
$
1,070,342

 
$
1,499,921

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(Amounts in thousands)
September 26, 2014
 
September 27, 2013
Cash flows from operating activities
 
 
 
Net loss
(152,494
)
 
(6,177
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
36,328

 
37,470

Amortization of deferred loan costs
4,487

 
5,154

Impairment of goodwill, intangibles and long-lived assets
142,714

 
28,824

Earnings from equity method investees
(11,583
)
 
(3,013
)
Distributions from equity method investees
9,588

 
5,983

Deferred income taxes
(42,197
)
 
(18,255
)
Share based compensation
2,754

 

Other
1,901

 
(1,526
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
96,231

 
49,415

Prepaid expenses and other current assets
32,011

 
5,876

Accounts payable and accrued liabilities
(132,263
)
 
(148,390
)
Income taxes (receivable) payable
(5,198
)
 
14,394

Net cash used in operating activities
(17,721
)
 
(30,245
)
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(7,129
)
 
(1,654
)
Proceeds from sale of property, plant and equipment
44

 
177

Purchase of software
(1,101
)
 
(2,681
)
Return of capital from equity method investees
2,884

 
1,549

Contributions to equity method investees

 
(30
)
Net cash used in investing activities
(5,302
)
 
(2,639
)
Cash flows from financing activities
 
 
 
Borrowings on long-term debt
40,100

 
573,200

Payments on long-term debt
(130,100
)
 
(588,837
)
Payment of deferred financing costs

 
(2,139
)
Borrowings related to financed insurance
20,214

 
5,133

Payments related to financed insurance
(23,306
)
 
(27,902
)
Payment of dividends to noncontrolling interests
(1,373
)
 
(3,584
)
Net cash used in financing activities
(94,465
)
 
(44,129
)
Net decrease in cash and cash equivalents
(117,488
)
 
(77,013
)
Cash and cash equivalents, beginning of period
170,845

 
118,775

Cash and cash equivalents, end of period
$
53,357

 
$
41,762

 
 
 
 
Income taxes paid, net
$
9,980

 
$
7,942

Interest paid
$
60,840

 
$
65,285

See notes to unaudited condensed consolidated financial statements

7




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 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 31, 2013

 
$

 
$
549,581

 
$
(365,599
)
 
$
(197
)
 
$
183,785

 
$
5,875

 
$
189,660

Share based compensation

 

 
2,754

 

 

 
2,754

 

 
2,754

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(154,351
)
 
(74
)
 
(154,425
)
 

 
(154,425
)
Noncontrolling interests

 

 

 

 

 

 
1,857

 
1,857

DIFZ financing, net of tax

 

 
95

 

 

 
95

 

 
95

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(2,061
)
 
(2,061
)
Balance at September 26, 2014

 
$

 
$
552,430

 
$
(519,950
)
 
$
(271
)
 
$
32,209

 
$
5,671

 
$
37,880

See notes to unaudited condensed consolidated financial statements

8




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. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. 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, 2013 .
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of September 26, 2014 and December 31, 2013 , the results of operations and statements of comprehensive income for the three and nine months ended September 26, 2014 and September 27, 2013 and the statements of equity and cash flows for the nine months ended September 26, 2014 and September 27, 2013 have been included. The results of operations and the statements of comprehensive income for three and nine months ended September 26, 2014 and September 27, 2013 and the statements of equity and cash flows for the nine months ended September 26, 2014 and September 27, 2013 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.
Principles of Consolidation
The unaudited condensed 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.

9




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 discussion 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 contract estimates for the three and nine months ended September 26, 2014 and September 27, 2013 .
 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Gross favorable adjustments
$
1.8

 
$
11.2

 
$
3.9

 
$
36.5

Gross unfavorable adjustments
(43.1
)
 
(16.6
)
 
(42.6
)
 
(37.5
)
Net adjustments
$
(41.3
)
 
$
(5.4
)
 
$
(38.7
)
 
$
(1.0
)
Accounting Policies
There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2013 .
Accounting Developments
On May 28, 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers . ASU 2014-09 supersedes existing revenue recognition guidance, including ASC No. 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts . ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 will be effective January 1, 2017, and may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-09 will have on our consolidated financial position, results of operations and cash flows.
On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern . ASU 2014-15 provides guidance in generally accepted accounting principles about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and for annual and interim periods thereafter (fiscal year 2016 for the Company). Early adoption is permitted. We are currently evaluating the potential effects of the adoption of ASU 2014-15 on our condensed consolidated financial statements.
Other accounting standards updates effective after September 26, 2014 are not expected to have a material effect on our consolidated financial position or annual results of operations and cash flows.


10




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 26, 2014
 
December 31, 2013
Prepaid expenses
$
30,700

 
$
29,611

Income tax refunds receivable
7,679

 
7,334

Inventories
24,678

 
27,008

Aircraft parts inventory held on consignment
2,307

 
2,404

Work-in-process inventory
11,139

 
28,444

Joint venture receivables
1,319

 
2,251

Assets held for sale
2,000

 
3,017

Other current assets
11,109

 
24,441

Total prepaid expenses and other current assets
$
90,931

 
$
124,510

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.
We value our inventory at lower of cost or market. Included in inventory as of September 26, 2014 are four helicopters, valued at $2.5 million that are currently not deployed on any existing programs. During the three months ended September 26, 2014, we modified two helicopters previously included within our inventory and deployed these two helicopters on one of our existing programs. The two deployed helicopters are included within our Property and equipment, net, and the change in helicopter classification was a non-cash investing activity within our Condensed Consolidated Statements of Cash Flows. During the nine months ended September 26, 2014 , we sold one helicopter previously included within our inventory. We also have six helicopters classified as held for sale as of September 26, 2014 and December 31, 2013 that were previously deployed on an existing program. During the second quarter of 2014, we executed a sales agreement to sell these six helicopters for a total of $2.0 million , resulting in an impairment expense of $1.0 million , included within the Impairment of goodwill, intangibles and long-lived assets within our consolidated statement of operations. Subsequent to September 26, 2014 , we completed the sale of these six helicopters and transferred title.
The aircraft parts inventory held on consignment represents $2.3 million and $2.4 million in inventory related to our former Life Cycle Support Services ("LCCS") Navy contract as of September 26, 2014 and December 31, 2013 , respectively. Work-in-process inventory includes equipment for vehicle modifications for specific customers and other deferred costs related to certain contracts. Included in Other current assets as of December 31, 2013 was an insurance receivable related to a settlement of a certain legal matter. This matter was settled and the insurance company paid out the settlement amount during the second quarter of 2014. See Note 8 for further legal discussion.
Property and equipment, net — Property and equipment, net were:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Helicopters
$
6,005

 
$
4,007

Computers and other equipment
15,109

 
14,258

Leasehold improvements
18,214

 
17,585

Office furniture and fixtures
4,194

 
3,006

Gross property and equipment
43,522

 
38,856

Less accumulated depreciation
(18,874
)
 
(14,736
)
Total property and equipment, net
$
24,648

 
$
24,120


11




Property and equipment, net includes two helicopters valued at $2.0 million previously included within our inventory that were deployed on one of our programs during the third quarter of 2014. Included in Property and equipment, net as of December 31, 2013 was $3.8 million related to the accrual for property additions. Accrued property additions were immaterial as of September 26, 2014 . Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $ 4.2 million during the three and nine months ended September 26, 2014 , respectively. 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.
Other assets, net — Other assets, net were:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Deferred financing costs, net
$
12,177

 
$
17,526

Investment in affiliates
10,924

 
13,477

Palm promissory note, long-term portion
2,104

 
2,731

Other
4,464

 
5,447

Total other assets, net
$
29,669

 
$
39,181

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $1.5 million and $ 4.5 million during the three and nine months ended September 26, 2014 , respectively. Amortization related to deferred financing cost was $1.6 million and $5.2 million during the three and nine months ended September 27, 2013 , respectively. Deferred financing costs for the three and nine months ended September 26, 2014 were reduced $0.2 million and $0.8 million , related to the pro rata write–off of deferred financing costs to loss on early extinguishment of debt as a result of the $90.0 million in principal prepayment made on the term loan facility under the Senior Credit Facility ("Term Loan") during the nine months ended September 26, 2014 . See Note 7 for further discussion.
Accrued payroll and employee costs — Accrued payroll and employee costs were:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Wages, compensation and other benefits
$
68,347

 
$
93,007

Accrued vacation
20,886

 
20,383

Accrued contributions to employee benefit plans
973

 
944

Total accrued payroll and employee costs
$
90,206

 
$
114,334

Accrued liabilities — Accrued liabilities were:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Customer liabilities
$
33,859

 
$
61,856

Accrued insurance
19,898

 
40,120

Accrued interest
12,567

 
24,641

Unrecognized tax benefit
8,110

 
10,132

Contract losses
26,726

 
13,738

Legal reserves
8,671

 
14,147

Subcontractor retention
2,819

 
4,300

Financed insurance
3,070

 
6,162

Other
20,329

 
25,437

Total accrued liabilities
$
136,049

 
$
200,533


12




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. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Contract losses as of September 26, 2014 included an additional contract loss recorded on a U.S. Air Force contract as we continue to see delays in resolving a contract dispute. 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
As of September 26, 2014 and December 31, 2013 , Other long-term liabilities were $12.1 million and $7.6 million , respectively. Other long-term liabilities are primarily due to our long-term postemployment benefit obligation of $5.2 million and obligations in connection with the restructuring plan entered into in 2013 including a long-term leasehold obligation related to our new Tysons Corner facility in McLean, Virginia, of $4.4 million and $4.7 million as of September 26, 2014 and December 31, 2013 , respectively.
During the fourth quarter of calendar year 2013, the Company vacated the previously occupied properties at various locations and consolidated to the new Tysons Corner location. Additionally, in April of 2014 we entered into an agreement to buy out our previous headquarter facility lease. Accrued costs associated with vacating these properties, such as lease vacancy obligations, net of estimated sublease rental assumptions as well as the buyout were approximately $5.2 million and $7.8 million as of September 26, 2014 and December 31, 2013 , respectively, and were included within Other accrued liabilities above.
We recorded a postemployment benefit expense of $12.8 million and $15.7 million for the three and nine months ended September 26, 2014 , respectively, related to severance in accordance with ASC 712 - Compensation which was included in Selling, general and administrative expenses in the statements of operations. As of September 26, 2014 , we had approximately $12.9 million in accrued postemployment benefit expense for estimated future payments in accordance with ASC 712.


Note 3 — Goodwill and Other Intangible Assets
During the second quarter of 2014, we amended our organizational structure within the DynLogistics segment to improve efficiencies within existing businesses, resulting in the combination of two reporting units within our DynLogistics segment. Our DynLogistics segment now includes three reporting units.

During the third quarter of 2014, we amended our operating structure by realigning our existing DynGlobal segment to better reflect its true nature as a pure business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue international and commercial business. As a result, we eliminated the DynGlobal segment. DynGlobal resources were redeployed into the remaining two operating and reporting segments: DynAviation and DynLogistics. The reporting units within DynAviation, which has two reporting units and DynLogistics which has three reporting units, remain unchanged. The amendment in our organizational structure did not result in any reallocation of goodwill.
We assess goodwill and other intangible assets with indefinite lives for impairment annually in October or 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 our annual goodwill impairment test performed during the fourth quarter of 2013, we noted significant changes to our assumptions and projections for the Air Wing reporting unit that resulted in a non-cash impairment charge of $281.5 million for the year ended December 31, 2013 . Any further negative changes to this contract, such as the loss of the contract during re-compete or additional de-scope notifications from the customer, could yield operating results that differ from our projected forecasts and further result in a triggering event and an additional impairment.
During the second quarter of 2014, we performed a re-assessment of our projections due to continued challenges in our industry and declines in our business through the first half of the year. As a result of the re-assessment, we noted significant declines in future projections and assumptions with respect to new business opportunities within the Logistics Sustainment Services (“LSS”) reporting unit within the DynLogistics segment, which represented a carrying value of $120.6 million in goodwill as of December 31, 2013 . We concluded that the change in circumstances represented a triggering event and an interim step one assessment was performed to identify any possible goodwill impairment. The first step of the impairment test indicated the carrying value of the LSS reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the LSS reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $90.7 million was recorded during the three months ended June 27, 2014 to impair the carrying value of the LSS reporting unit goodwill.

13




The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations. Any further declines in performance within this reporting unit in the future could result in a new triggering event and an additional goodwill impairment.
Further, in light of the re-assessment of our future projections performed during the three months ended June 27, 2014, we also determined that it was appropriate for us to perform a step one interim goodwill impairment test on the Aviation reporting unit within the DynAviation segment. The step one results indicated that the fair value of the goodwill exceeded its carrying value by approximately 17% .
During the third quarter of 2014, we recorded a significant loss on a U.S. Air Force contract as we continued to see delays in resolving the ongoing dispute on the contract and saw a reduction in our overall Aviation reporting unit forecast. We concluded that the decline in performance represented a triggering event within the Aviation reporting unit in DynAviation and a step one assessment was performed to identify any potential goodwill impairment. The results of the step one test indicated the carrying value of the Aviation reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the Aviation reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $50.8 million was recorded during the three months ended September 26, 2014. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations. We continue to monitor the performance of this reporting unit and any further declines in performance within this reporting unit in the future could result in a new triggering event and an additional goodwill impairment.
Other than those discussed above, no triggering events were identified in our remaining reporting units and the estimated fair values of each of our remaining reporting units exceed their respective carrying values as of September 26, 2014 and December 31, 2013 .
The carrying amounts of goodwill for each of our segments as of September 26, 2014 were as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Goodwill balance as of December 31, 2013
$
160,932

 
$
132,835

 
$
293,767

Changes between January 1, 2014 and September 26, 2014
(50,756
)
 
(90,742
)
 
(141,498
)
Goodwill balance as of September 26, 2014
$
110,176

 
$
42,093

 
$
152,269


14




The following tables provide information about changes relating to certain intangible assets:
 
As of September 26, 2014
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Other intangible assets:
 
 
 
 
 
 
 
Customer-related intangible assets
4.8
 
$
350,912

 
$
(167,736
)
 
$
183,176

Other
 
 
 
 
 
 
 
Finite-lived
7.0
 
21,185

 
(14,809
)
 
6,376

Indefinite-lived
 
 
$
5,059

 
$

 
$
5,059

Total other intangibles
 
 
$
377,156

 
$
(182,545
)
 
$
194,611

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
0.6
 
$
869

 
$
(760
)
 
$
109

Indefinite-lived
 
 
43,222

 

 
43,222

Total tradenames
 
 
$
44,091

 
$
(760
)
 
$
43,331

 
 
 
 
 
 
 
 
 
As of December 31, 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
5.6

$
350,912

 
$
(138,623
)
 
$
212,289

Other
 
 
 
 
 
 
 
Finite-lived
6.3
 
22,042

 
(14,151
)
 
7,891

Indefinite-lived
 
 
5,059

 

 
5,059

Total other intangibles
 
 
$
378,013

 
$
(152,774
)
 
$
225,239

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
1.4
 
$
869

 
$
(627
)
 
$
242

Indefinite-lived
 
 
43,222

 

 
43,222

Total tradenames
 
 
$
44,091

 
$
(627
)
 
$
43,464

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $10.9 million and $32.1 million for the three and nine months ended September 26, 2014 , respectively. 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. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $6.4 million and $7.9 million as of September 26, 2014 and December 31, 2013 , respectively.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $11.5 million for the three months ending December 31, 2014, $42.4 million in 2015, $38.8 million in 2016, $36.3 million in 2017, $28.8 million in 2018 and $31.9 million thereafter.

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 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Domestic
$
(93,861
)
 
$
(34,525
)
 
$
(188,962
)
 
$
5,845

Foreign
(321
)
 
666

 
(2,560
)
 
(629
)
(Loss) income before income taxes
$
(94,182
)
 
$
(33,859
)
 
$
(191,522
)
 
$
5,216


15




The Benefit (provision) for income taxes consists of the following:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Current portion:
 
 
 
 
 
 
 
Federal
$
(311
)
 
$
9,171

 
$
(311
)
 
$
9,171

State
292

 
213

 
674

 
588

Foreign
1,383

 
9,172

 
4,441

 
14,230

 
$
1,364

 
$
18,556

 
$
4,804

 
$
23,989

Deferred portion :
 
 
 
 
 
 
 
Federal
$
(23,369
)
 
$
(20,429
)
 
$
(42,245
)
 
$
(12,656
)
State
(612
)
 
(113
)
 
(1,103
)
 
62

Foreign
(543
)
 
(5
)
 
(484
)
 
(2
)
 
(24,524
)
 
(20,547
)
 
(43,832
)
 
(12,596
)
(Benefit) provision from income taxes
$
(23,160
)
 
$
(1,991
)
 
$
(39,028
)
 
$
11,393

Deferred tax liabilities, net consist of the following:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Current deferred tax liabilities, net
$
(3,681
)
 
$
(30,965
)
Non-current deferred tax liabilities, net
(2,554
)
 
(17,359
)
Deferred tax liabilities, net
$
(6,235
)
 
$
(48,324
)
A reconciliation of the statutory federal income tax rate to our effective rate is provided below:  
 
Three Months Ended
 
Nine Months Ended
 
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax, less effect of federal deduction
0.3
 %
 
(0.3
)%
 
0.2
 %
 
12.4
 %
Goodwill Impairment
(10.5
)%
 
(29.8
)%
 
(14.4
)%
 
193.4
 %
Noncontrolling interests
0.3
 %
 
1.1
 %
 
0.4
 %
 
(23.1
)%
Other
(0.5
)%
 
(0.1
)%
 
(0.8
)%
 
0.7
 %
Effective tax rate
24.6
 %
 
5.9
 %
 
20.4
 %
 
218.4
 %
During the nine months ended September 26, 2014 ,we made no estimated federal income tax payments. All of our income taxes paid during the nine months ended September 26, 2014 were to state or foreign jurisdictions.
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 26, 2014 .
As of September 26, 2014 and December 31, 2013 , we had $7.5 million and $9.5 million of total unrecognized tax benefits, respectively, of which $2.3 million would impact our effective tax rate if recognized. We anticipate that all $7.5 million of unrecognized tax benefits will be settled in the next twelve months.
On January 22, 2014 , a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance ("MOF") was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 to 2012. The majority of this assessment was income tax related; however, approximately $10.2 million of the assessed amount is non-income tax related and is discussed further in Note 8 . We filed our initial appeal of the assessment on February 19, 2014 . In May 2014 , the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million . We reversed the uncertain tax position related to the dividend withholding issue during the quarter ended June 27, 2014.


16




Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
Billed
$
157,984

 
$
179,586

Unbilled
321,883

 
397,550

Total accounts receivable, net
$
479,867

 
$
577,136

Unbilled receivables as of September 26, 2014 and December 31, 2013 include $68.4 million and $41.6 million , respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed as of the end of the respective periods. Our largest contract, LOGCAP IV, accounted for approximately 70% and 84% of these amounts as of September 26, 2014 and December 31, 2013 , respectively.
The balance of unbilled receivables consists of costs and fees billable immediately upon 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. LOGCAP IV accounted for approximately 26% and 34% of total unbilled receivables as of September 26, 2014 and December 31, 2013 , 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 receivable, and accounts payable, the fair value of these instruments approximates the carrying value. Our estimate of the fair value of our long-term debt is based on Level 1 and Level 2 inputs, as defined above.  
 
As Of
 
September 26, 2014
 
December 31, 2013
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$
455,000

 
$
404,950

 
$
455,000

 
$
468,650

Term Loan
187,272

 
185,868

 
277,272

 
278,658

Total long-term debt
$
642,272

 
$
590,818

 
$
732,272

 
$
747,308


Note 7 — Long-Term Debt
Long-term debt consisted of the following:
 
As Of
(Amounts in thousands)
September 26, 2014
 
December 31, 2013
10.375% senior unsecured notes
$
455,000

 
$
455,000

Term loan
187,272

 
277,272

Total long-term debt
$
642,272

 
$
732,272



17




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 " 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 “Third Amendment”) to the Senior Credit Facility. The Third Amendment, among other things, amended the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016 , increased the amount of the Revolver to $181.0 million and modified the maximum total leverage threshold test and certain other covenants.
On November 5, 2014 , we entered into a fourth amendment and waiver (the "Fourth Amendment") to the Senior Credit Facility. The Fourth Amendment, among other things, (i) amended the Senior Credit Facility by modifying financial maintenance covenants; (ii) reduced the amount of the Revolver credit commitments of the lenders consenting to the Fourth Amendment by 20% , which represented a reduction of approximately $36.2 million ; (iii) amended the definition of Consolidated Net Income as defined in the Senior Credit Facility to exclude up to $35 million for a one-time charge during the three month period ended September 26, 2014 related to a certain U.S. Air Force contract; and (iv) waived compliance with the financial maintenance covenants with respect to the three month period ended September 26, 2014 .
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of September 26, 2014 , the Senior Credit Facility provided for a $187.3 million Term Loan and the $181.0 million Revolver, which includes a $100.0 million letter of credit subfacility. As of September 26, 2014 and December 31, 2013 , the available borrowing capacity under the Senior Credit Facility was approximately $146.3 million and $144.6 million , respectively, which includes $34.7 million and $36.4 million , respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of September 26, 2014 and December 31, 2013 there were no amounts borrowed under the Revolver. 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 rate or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") as defined in the Senior Credit Facility plus an applicable rate. The applicable rate for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable rate 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 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, Depreciation and 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 26, 2014 and December 31, 2013 , the interest rate on the Term Loan was 6.25% .

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at an applicable rate as defined in the Senior Credit Facility and ranges from 4.0% to 4.5% based on our Secured Leverage Ratio at the end of the quarter. 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. The applicable interest rate for our letter of credit subfacility was 4.25% as of September 26, 2014 and December 31, 2013 , respectively. The applicable interest rate for our unused commitment fees was 0.50% as of September 26, 2014 and December 31, 2013 , respectively. All of our letters of credit are also subject to a 0.25% fronting fee.

18




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 26, 2014 and September 27, 2013 we made principal prepayments of $90.0 million and $15.0 million , respectively, on the Term Loan. Deferred financing costs associated with the prepayment totaling $0.8 million and $0.2 million were expensed and included in the Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 26, 2014 and September 27, 2013 , respectively.
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, 2013 , we were not required to make any additional principal payments under the Excess Cash Flow requirement during calendar year 2014. 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 26, 2014 .
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. These covenants, among other things, limit 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 contains two financial maintenance covenants, a maximum total leverage ratio and a minimum interest coverage ratio.
The 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.
Effective with the Fourth Amendment, the maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
December 31, 2014
5.55 to 1.0
March 27, 2015
6.65 to 1.0
June 26, 2015
7.70 to 1.0
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
September 23, 2016 and thereafter
6.60 to 1.0
 

19




The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. Effective with the Fourth Amendment, the interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
December 31, 2014
1.05 to 1.0
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
September 23, 2016 and thereafter
1.30 to 1.0
As of December 31, 2013 , we were in compliance with our financial maintenance covenants. Our requirement to be in compliance with the financial maintenance covenants for the three month period ended September 26, 2014 was waived per the Fourth Amendment and as such we are in compliance with the terms of our Senior Credit Facility.
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, National Association (as successor by merger to 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.
The fair value of the Senior Unsecured Notes is based on their quoted market value. As of September 26, 2014 and December 31, 2013 , the quoted market value of the Senior Unsecured Notes was approximately 89.0% and 103.0% , respectively, of stated value.
Call and Put Options
We can voluntarily settle all or a portion of the Senior Unsecured Notes at any time prior to maturity at an applicable redemption price plus the accrued and unpaid interest, if any, as of the applicable redemption date. The applicable redemption prices with respect to the Senior Unsecured Notes on any applicable redemption date if redeemed during the 12-month period commencing on July 1 of the years set forth below are as follows:
Year
Redemption Price
2014
105.2
%
2015
102.6
%
2016 and thereafter
100.0
%
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.

20




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

Note 8 — Commitments and Contingencies
Commitments
We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable, 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 real estate leases are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $21.2 million and $76.9 million for the three and nine months ended September 26, 2014 , respectively. Lease rental expense was $41.5 million and $129.3 million for the three and nine months ended and September 27, 2013 , respectively. We have no significant long-term purchase agreements with service providers.
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $8.7 million and $14.1 million as of September 26, 2014 and December 31, 2013 , respectively. 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 26, 2014 . 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 26, 2014 . 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 were 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. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.

21




A lawsuit filed on September 11, 2001 , and amended on March 24, 2008 , seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010 , fifteen of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013 , the court granted summary judgment and dismissed all claims. On March 18, 2013 , the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. 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 26, 2014 and December 31, 2013 , 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 calendar year 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. Although we believe the case is without merit, based on a continuing evaluation of the uncertainty of litigation in the UAE, we have established a reserve on this matter as of September 26, 2014 .
In February 2014, the Company received a judgment related to a past helicopter accident in Aviano, Italy. As of December 31, 2013 we had a recorded liability for $9.8 million related to this matter. This matter was fully insured and a corresponding receivable from the insurance company was recorded within Other current assets. In April 2014, the insurance company paid out the settlement amounts and the case is now considered closed.

22




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.
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. . In September 2014, we received notice this investigation was closed by the Department of Justice Civil Litigation Division.
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.

23




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 1s 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 Form 1's and demand letters total approximately $186.1 million . Over the past year, we have 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 $19.1 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 have responded to the Form 1s and are awaiting a contracting officer's final decision. Based on our initial assessment, we believe a substantial portion of these items represent loss contingencies that we consider remote. We believe the remaining portion of these items represent loss contingencies that we consider reasonably possible; however, a reasonable estimate of loss or range of loss cannot be made at this time as we cannot reasonably estimate the ultimate outcome related to the issues raised in the Form 1s.
Foreign Contingencies
On January 22, 2014 , a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance (“MOF”) was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 and 2012. The majority of this assessment was income tax related; however, $10.2 million of the assessed amount is non-income tax related and represents loss contingencies that we consider reasonably possible. We filed our initial appeal of the assessment with the MOF on February 19, 2014 . In May 2014 , the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million . See Note 4 for further discussion of the income tax related issue. We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of September 26, 2014 , a reasonable estimate of loss or range of loss could not be made as we could not reasonably estimate the ultimate outcome related to the issues assessed.
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 employers' 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.


24




Note 9 — Segment Information
In August 2014, we amended our operating structure by realigning our existing DynGlobal Group to better reflect its true nature: as a pure business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue international and commercial business. As a result, DynGlobal resources were redeployed into business development efforts for our two remaining operating and reporting segments: DynAviation and DynLogistics, to identify our highest priority opportunities, and work to capture those opportunities for operational execution by the two remaining segments.
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 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Revenue
 
 
 
 
 
 
 
DynLogistics
$
247,829

 
$
451,416

 
$
855,337

 
$
1,518,992

DynAviation
293,238

 
313,189

 
889,710

 
1,061,283

Headquarters / Other (1)
(740
)
 
2,180

 
(995
)
 
(4,860
)
Total revenue
$
540,327

 
$
766,785

 
$
1,744,052

 
$
2,575,415

 
 
 
 
 
 
 
 
Operating (loss) income
 
 
 
 
 
 
 
DynLogistics
$
1,800

 
$
(12,741
)
 
$
(66,974
)
 
$
20,116

DynAviation
(65,282
)
 
11,231

 
(43,382
)
 
75,850

Headquarters / Other (2)
(14,245
)
 
(12,767
)
 
(30,331
)
 
(31,752
)
Total operating (loss) income
$
(77,727
)
 
$
(14,277
)
 
$
(140,687
)
 
$
64,214

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
DynLogistics
$
9

 
$
82

 
$
31

 
$
531

DynAviation
372

 
459

 
1,104

 
1,080

Headquarters / Other
11,947

 
11,932

 
35,193

 
35,859

Total depreciation and amortization (3)
$
12,328

 
$
12,473

 
$
36,328

 
$
37,470

(1)
Headquarters revenue primarily represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(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, partially offset by equity method investee income.
(3)
Includes amounts included in Cost of services of $0.2 million and $0.7 million and for the three and nine months ended September 26, 2014 , respectively, and $0.4 million and $1.3 million for the three and nine months ended September 27, 2013 , 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 26, 2014
 
December 31, 2013
Assets
 
 
 
DynLogistics
$
357,791

 
$
591,304

DynAviation
404,313

 
447,646

Headquarters / Other (1)
308,238

 
460,971

Total assets
$
1,070,342

 
$
1,499,921

(1)
Assets primarily include cash, investments in unconsolidated joint ventures, deferred tax liabilities, intangible assets (excluding goodwill) and deferred debt issuance costs.


25




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 $1.5 million and $3.1 million in conjunction with the COAC Agreement during the three and nine months ended September 26, 2014 , respectively, and $1.7 million and $3.8 million during the three and nine months ended September 27, 2013 , respectively.
We have three executives who are Cerberus Operations and Advisory Company, LLC (“COAC”) employees, who are seconded to us: James E. Geisler, our Interim Chief Executive Officer, Gregory S. Nixon, our Chief Administrative Officer, and George S. Krivo, our Senior Vice President of Business Development. We recognized $344,000 of administrative expense in conjunction with these COAC individuals for the three months ended September 26, 2014 .
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 26, 2014 , 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.
Receivables due from our unconsolidated joint ventures totaled $1.3 million and $2.3 million as of September 26, 2014 and December 31, 2013 , respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled $0.4 million and $3.4 million during the three and nine months ended September 26, 2014 and $1.9 million and $6.2 million during the three and nine months ended and September 27, 2013 , respectively. The related cost of services was $0.4 million and $3.4 million during the three and nine months ended September 26, 2014 and $1.9 million and $6.0 million during the three and nine months ended September 27, 2013 , respectively. Additionally, we earned $0.8 million and $11.6 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 26, 2014 , respectively, and $0.6 million and $3.0 million during the three and nine months ended September 27, 2013 , respectively.
GLS’ revenue was $5.1 million and $14.8 million during the three and nine months ended September 26, 2014 , respectively and $6.0 million and $26.5 million during the three and nine months ended September 27, 2013 , respectively. GLS’ operating income was $0.3 million and operating loss was $2.2 million during the three and nine months ended September 26, 2014 , and operating loss of $0.8 million and $0.6 million during the three and nine months ended September 27, 2013 , respectively. GLS paid cash dividends of $18.8 million during the nine months ended September 26, 2014 . Based on our 51% ownership in GLS, the Company recognized $9.6 million in equity method income during the nine months ended September 26, 2014 .
In October 2011, the DCAA issued GLS a Form 1 in the amount of $95.9 million which pertained to inconsistencies of certain contractual requirements and withheld a portion of outstanding invoices until the Form 1 was resolved. In February 2012, the DCAA issued GLS a second Form 1 in the amount of $102.0 million , asserting inconsistencies with labor related costs for the fiscal year ended April 3, 2009. GLS did not agree with the DCAA's findings on either of the Form 1s and continued to work with the DCAA and the customer to provide clarification and resolve both matters. In February 2014 , a final determination was received from the DCAA's Contracting Officer on the outstanding Form 1s resulting in total withholdings of $0.3 million and allowing GLS to submit invoices totaling $19.1 million for recovery of previous invoices. The Form 1s are now considered closed.
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 $3.0 million and $3.5 million as of September 26, 2014 and December 31, 2013 , 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.

26




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 26, 2014 and December 31, 2013 and for the three and nine months ended September 26, 2014 and September 27, 2013 :
 
As Of
(Amounts in millions)
September 26, 2014
 
December 31, 2013
Assets
$
4.7

 
$
25.9

Liabilities
1.3

 
22.2

 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Revenue
$
67.8

 
$
101.8

 
$
231.5

 
$
324.6

The following tables present selected financial information for our equity method investees as of September 26, 2014 and December 31, 2013 and for the three and nine months ended September 26, 2014 and September 27, 2013 :
 
As Of
(Amounts in millions)
September 26, 2014
 
December 31, 2013
Current assets
$
65.7

 
$
86.3

Total assets
66.6

 
88.2

Current liabilities
41.0

 
44.5

Total liabilities
41.0

 
44.5

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 26, 2014
 
September 27, 2013
 
September 26, 2014
 
September 27, 2013
Revenue
$
53.7

 
$
40.2

 
$
178.1

 
$
163.9

Gross profit
7.9

 
1.8

 
17.4

 
13.6

Net income
6.7

 
1.1

 
12.8

 
10.7

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)  $10.9 million investment in unconsolidated joint ventures, (ii)  $1.3 million in receivables from our unconsolidated joint ventures, (iii) $3.0 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 26, 2014 .

Note 11 — Share Based Payments
On December 17, 2013 DynCorp Management LLC authorized 100,000 Class B shares as available for issuance to certain members of management and outside directors of Defco Holdings, Inc. (“Defco Holdings”), its non-member manager, and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. The grant and vesting of the awards is contingent upon the executives' consent to the terms and conditions set forth in the Class B interests agreements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
In accordance with the provisions of ASC Topic 718, “Compensation—Stock Compensation” we estimate the grant date fair value of the Class B shares using a Monte Carlo simulation, which takes into account subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option.

27




A summary of the Class B share activity for the nine months ended September 26, 2014 is as follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value per share
 
Contractual Term (years)
 
 
 
 
 
 
 
Outstanding at December 31, 2013
 
3,144

 
594.70

 
 
Granted:
 
 
 
 
 
 
Class B-1
 
4,339

 
697.81

 
5
Class B-2
 

 

 
 
Exercised
 

 

 
 
Forfeited or expired
 
(1,298
)
 
710.19

 
 
Outstanding at September 26, 2014
 
6,185

 
720.35

 
 

The total fair value of shares granted during the nine months ended September 26, 2014 was $ 3.0 million . Total compensation cost expensed for the three and nine months ended September 26, 2014 was $ 0.7 million and $2.8 million , respectively.
The following is a summary of the changes in non-vested shares for the period ended September 26, 2014 .
 
 
Shares
 
Weighted Average Fair Value
Non-vested shares at December 31, 2013
 
2,123

 
$
603.37

Granted
 
4,339

 
$
697.81

Vested
 
(3,296
)
 
$
723.82

Forfeited
 
(1,298
)
 
$
710.19

Non-vested shares at September 26, 2014
 
1,868

 
$
723.93

As of September 26, 2014 , the total compensation cost related to the non-vested Class B awards, not yet recognized, was $ 0.7 million which will be recognized over a weighted average period of approximately 3.31 years.

Note 12 — 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 $113.5 million and $480.5 million during the three and nine months ended September 26, 2014 , respectively, and $280.5 million and $951.5 million during the three and nine months ended September 27, 2013 , respectively. Cost of services on LOGCAP IV program was $110.7 million and $451.4 million during three and nine months ended September 26, 2014 , respectively, and $260.0 million and $891.4 million during the three and nine months ended September 27, 2013 , respectively. Our share of the total LOGCAP IV loss was $2.5 million during the three months ended September 26, 2014 as compared to profits of $8.9 million during the nine months ended September 26, 2014 and 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.


28




Note 13 — 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 substantially 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.
Subsequent to the issuance of the Company’s consolidated financial statements on Form 10-K for the period ended December 31, 2013 , management determined that within the condensed consolidating statement of cash flows for the nine months ended September 27, 2013 , the intercompany transfers of the Subsidiary Guarantors and Subsidiary Non-Guarantors in the amount of $4.3 million and $12.0 million , respectively, previously presented as financing activities, should be classified as investing activities. The classification of these intercompany transfers has been corrected in the condensed consolidating statement of cash flows for the nine months ended September 27, 2013 to be presented within investing activities.  This correction has no impact on the consolidated statement of cash flows for the nine months ended September 27, 2013
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of September 26, 2014 and December 31, 2013 , (ii) unaudited condensed consolidating statements of operations and comprehensive income for the three and nine months ended September 26, 2014 and September 27, 2013 , (iii) unaudited condensed consolidating statements of cash flows for the nine months ended September 26, 2014 and September 27, 2013 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 26, 2014  
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
543,980

 
$
72,070

 
$
(75,723
)
 
$
540,327

Cost of services

 

 
(515,408
)
 
(71,280
)
 
75,723

 
(510,965
)
Selling, general and administrative expenses

 

 
(44,156
)
 
(36
)
 

 
(44,192
)
Depreciation and amortization expense

 

 
(11,943
)
 
(151
)
 

 
(12,094
)
Earnings from equity method investees

 

 
152

 

 

 
152

Impairment of goodwill, intangibles and long-lived assets

 

 
(50,955
)
 

 

 
(50,955
)
Operating (loss) income

 

 
(78,330
)
 
603