DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-K, Received: 03/14/2014 14:21:38)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 333-173746
 
 
DELTA TUCKER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
27-2525959
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
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)
     
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:

None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes   ¨        No   ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨        No   ý
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   ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x   (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of March 14, 2014 the registrant had 100 shares of its common stock outstanding.

 

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DELTA TUCKER HOLDINGS, INC.
TABLE OF CONTENTS

PART I.
Page
PART II.
 
PART III.
 
PART IV.
 

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Forward-Looking Statements
This Annual Report on Form 10-K contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:
the future impact of mergers, acquisitions, 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;
pursuit of new commercial business in the U.S. and abroad;
activities of competitors and the outcome of bid protests;
changes in significant operating expenses;
impact of lower than expected win rates for new business;
general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;
acts of war or terrorist activities, including cyber security threats;
variations in performance of financial markets;
the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity ("IDIQ") contracts;
the timing or magnitude of any award fee granted under our government contracts;
changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;
decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;
changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more contracts and our performance;
changes in our tax provisions or exposure to additional income tax liabilities that could affect our profitability and cash flows;
termination or modification of key subcontractor performance or delivery; and
statements covering our business strategy, those described in "Item 1A. Risk Factors" of this Annual Report on Form 10-K and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission ("SEC").
Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.


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Fiscal Year     
On January 24, 2013, the Board of Directors of Delta Tucker Holdings, Inc. and its consolidated subsidiaries (the "Company"), approved a change of the Company's fiscal year end from a 52-53 week basis ending on the Friday closest to December 31 to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. This change was made to improve the comparability in our fiscal years and to better align our year-end close and contract administration, including billing and cash collection activities, with our primary customer, the U.S. federal government.
This Annual Report on Form 10-K reflects the consolidated financial results of the Company for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 . Select financial data has been provided for the period from April 1, 2010 (inception) through December 31, 2010 ("Inception Year"). We refer to the Inception Year period as " calendar year 2010 " in this Annual Report on Form 10-K. Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations, except for costs associated with acquiring DynCorp International, prior to the merger on July 7, 2010. DynCorp International’s historical fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period ended July 2, 2010, which is the last quarter completed prior to the merger on July 7, 2010, is referred to as the “fiscal quarter ended July 2, 2010”. DynCorp International changed its fiscal year-end at the time of the merger to coincide with that of Delta Tucker Holdings, Inc. For clarity, we refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”
Included in this Annual Report on Form 10-K are our audited consolidated statements of operations and the related statements of equity and cash flows for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 . The audited consolidated balance sheets are included for the periods as of December 31, 2013 and December 31, 2012 .


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PART I

ITEM 1. BUSINESS.
Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and its consolidated subsidiaries. The Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the "Merger").
The Delta Tucker Holdings, Inc. consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP").
Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951.
Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Revenue from the U.S. government accounted for approximately 96% , 97% and 97% of total revenue for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 , respectively. Our contracts’ revenue and percentage of total revenue from the U.S. government may fluctuate from year to year. These fluctuations can be due to contract length or contract structure, such as with Indefinite Delivery Indefinite Quantity ("IDIQ") type contracts. IDIQ type contracts are often awarded to multiple contractors and provide the opportunity for awarded contractors to bid on task orders issued under the contract.
Contract Types
Our contracts typically have a term of three to ten years consisting of a base period with multiple option periods. Our contracts typically are awarded for an estimated dollar value based on the forecast of the work to be performed under the contract over its maximum life. In addition, we have historically received additional revenue through increases in program scope beyond that of the original contract. These contract modifications typically consist of "over and above" requests derived from changes in customer requirements. The U.S. government is not obligated to exercise options under a contract after the base period. At the time of completion of the contract term of a U.S. government contract, the contract is re-competed to the extent the service is still required.
Our contracts with the U.S. government or the government’s prime contractor (to the extent that we are a subcontractor) generally contain standard, unilateral provisions under which the customer may terminate for convenience or default. U.S. government contracts generally also contain provisions that allow the U.S. government to unilaterally suspend us from obtaining new contracts and reduce the value of existing contract spend, pending the resolution of alleged violations of laws or regulations.
Most of our contracts are to provide services, rather than products, to our customers, resulting in the majority of costs being labor related. For this reason, we flexibly staff for each contract. If we lose a contract, we terminate or reassign the employees associated with the contract, hence cutting direct cost and overhead. Generally, elimination of employees would not generate significant separation costs other than those that would be incurred in the normal course of business and would generally be recoverable under applicable contract terms. Additionally, the indirect costs that are absorbed by any one contract could be absorbed by the remaining contracts without significant long-term impact to our business or competitiveness.
The types of services we perform also support our scalability as our primary capital requirements are working capital, which are variable with our overall revenue stream. The nature of our contracts does not generally require investments in fixed assets, and we do not have significant fixed asset investments or significant agreements tied to a single contract upon which our business materially depends. Additionally, our contract mix gives us a degree of flexibility to deploy assets purchased for certain programs to other programs in cases where the scope of our deliverables changes.
Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these are described below:
Fixed-Price Type Contracts: In a fixed-price contract, the price is generally not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the

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contracted service. Our fixed-price contracts may include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive elements.
Time-and-Materials Type Contracts: Time-and-materials type contracts provide for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.
Cost-Reimbursement Type Contracts: Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee, incentive-fee or a combination thereof. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets. Award and incentive fees are excluded from estimated total contract revenue until a reasonably determinable estimate of award and incentive fees can be made.
A single contract may be performed under one or more of the contracts types discussed above. Any of these three types of contracts may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CFT and LOGCAP IV programs are two examples of IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.
Our historical contract mix by type, as a percentage of revenue, is indicated in the table below.
 
Delta Tucker Holdings, Inc.
 
 
For the years ended
Contract Type
December 31, 2013
 
December 31, 2012
 
December 31, 2011
 
Fixed-Price
23
%
 
19
%
 
17
%
 
Time-and-Materials
10
%
 
10
%
 
14
%
 
Cost-Reimbursement
67
%
 
71
%
 
69
%
 
Totals
100
%
 
100
%
 
100
%
 
Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. We anticipate cost-reimbursable type contracts will continue to represent a large portion of our business for calendar year 2014.
Under many of our contracts, we may rely on subcontractors to perform all or a portion of the services we are obligated to provide to our customers. We use subcontractors primarily for specialized, technical labor and certain functions such as construction and catering. We often enter into subcontract arrangements in order to meet government requirements that certain categories of services be awarded to small businesses.
Operating and Reportable Segments
In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s previous six operating and reporting segments, Logistics Civil Augmentation Program ("LOGCAP"), Aviation, Training and Intelligence Solutions ("TIS"), Global Logistics and Development Solutions ("GLDS"), Security Services and Global Linguist Services ("GLS") were realigned into three operating and reporting segments, DynAviation, DynLogistics and DynGlobal. Additionally, as GLS no longer represents a significant portion of our business the chief operating decision maker has determined that GLS will no longer be considered an operating segment or reporting unit. The DynAviation and DynLogistics segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies. See Note 12 for further discussion of segments.
A description of each of our Reportable Segments is discussed further below.
DynLogistics
This segment provides best-value mission readiness to its customers through total support solutions including conventional and contingency logistics, operations and maintenance support, platform modification and upgrades, supply chain management and training, security and full spectrum intelligence mission support services. The LOGCAP IV contract is the most significant contract within this segment and performs under a single IDIQ contract. Under the LOGCAP IV contract, the U.S. Army contracts for us to perform selected services, operations and maintenance, engineering and construction and logistics in theater to augment the U.S. Army, the U.S. Marines Corp and North Atlantic Treaty Organization ("NATO") forces and to release military units for other missions or to fill the U.S. military resource shortfalls.

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This segment also provides international policing and police training, judicial support, immigration support and base operations to a variety of international and national customers. We provide senior advisors and mentors to foreign governmental agencies to provide leadership, operations and training, intelligence, logistics and security capabilities. This includes the services we provide under key contracts such as the Afghanistan Ministry of Defense Program ("AMDP") and the Combined Security Transition Command Afghanistan ("CSTC-A") programs.
DynLogistics supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions. This segment also provides base operations support, engineering, supply and logistics, pre-positioned war reserve materials, facilities, marine maintenance services, program management services primarily for ground vehicles and contingency response on a worldwide basis. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.
DynAviation
This segment provides worldwide maintenance of aircraft fleet and ground vehicles, which includes logistics support on aircraft and aerial firefighting services, weapons systems, and related support equipment to the DoD, other U.S. government agencies and direct contracts with foreign governments. This segment also provides foreign assistance programs to help foreign governments improve their ability to develop and implement national strategies and programs to prevent the production, trafficking and abuse of illicit drugs. The INL Air Wing program and the CFT program are the most significant programs in the DynAviation segment. The INL Air Wing program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The CFT program deploys highly mobile and quick-response field teams to customer locations globally to supplement a customer’s workforce.
DynGlobal
This segment focuses resources and energy into the pursuit of business with governments and commercial entities around the world. Initial activities of this segment are focused on the development and growth of this business.
Key Contracts
Logistics Civil Augmentation Program IV ("LOGCAP IV"): The LOGCAP IV contract was awarded to us in 2008 and is a part of our DynLogistics segment. We were selected as one of the three prime contractors to provide logistics support under the LOGCAP IV contract. LOGCAP IV is the U.S. Army component of the DoD’s initiative to award contracts to U.S. companies with a broad range of logistics capabilities to support U.S. and allied forces during combat, peacekeeping, humanitarian and training operations. This IDIQ contract has a term of up to ten years. In December 2012, customer negotiations resulted in the elimination of award fee component for option years beginning in 2012 and continuing for the remaining contract periods. The remaining task orders under the LOGCAP IV contract are now either firm fixed price or cost-reimbursable-plus-fixed-fee.
International Narcotics Law Enforcement Air Wing ("INL"): The INL Air Wing program is a part of our DynAviation segment. In May 2005, the DoS awarded this contract in support of the INL program to aid in the eradication of illegal drug operations. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. This contract is scheduled to expire in October 2014, at which time we will re-compete for the revised contract option through 2015. The services provided under this contract are fixed-price and cost-reimbursable type services.
Contract Field Teams ("CFT"): The CFT program is a part of our DynAviation segment. This program deploys highly mobile, quick-response field teams to customer locations to supplement a customer’s workforce. The services we provide under the CFT program generally include mission support to aircraft and weapons systems and depot-level repair. Our customer for the CFT program is the DoD and the majority of our current delivery orders are time-and-materials, but we also have cost-reimbursement and fixed-priced services.
Afghanistan Ministry of Defense Program ("AMDP"): The AMDP program is a part of the DynLogistics segment and was awarded to us by the DoD in December 2010. The program was established with the goal of assisting the government of the Islamic Republic of Afghanistan to build, develop and sustain an effective and professional law enforcement organization by training and mentoring the Afghans to manage all aspects of their police training program. This program is structured under a cost-reimbursable-plus-fixed-fee type arrangement.
War Reserve Materiel ("WRM"): The War Reserve Materiel contract is a part of our DynLogistics segment. Through this program, we manage the U.S. Air Force Southwest Asia War Reserve Materiel Pre-positioning program, which includes operations in Oman, Bahrain, Qatar, Kuwait, United Arab Emirates and two locations in the United States (Yorktown, Virginia and Shaw Air Force base, South Carolina). Through this contract, we store, maintain and deploy assets such as tents, generators, vehicles, kitchens and medical supplies to deployed forces in the global war on terror. During Operation Enduring Freedom and Operation Iraqi Freedom, we sent teams into the field to assist in the setup of tent cities prior to the arrival of the deployed forces. The WRM

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program continues to partner with the U.S. Central Command Air Force in the development of new and innovative approaches to asset management. Our contract is primarily cost-plus-award fee with a smaller portion of fixed-price services.
Naval Test Wing Patuxent River MD ("Pax River"): The Pax River contract is a part of our DynAviation segment. This contract was awarded in August 2011, to provide organization level maintenance and logistic support on all aircraft and support equipment for which the Naval Test Wing Atlantic has maintenance responsibility. Labor and services will be provided to perform safety studies, off-site aircraft safety and spill containment patrols and aircraft recovery services. The cost-plus-fixed-fee contract has a base year plus four one year option periods.
T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"): The T-6 COMBS contract with the U.S. Air Force Materiel Command is a part of our DynAviation segment and provides support services for T-6A and T-6B aircraft at ten Air Force and Navy locations throughout the U.S. The majority of our contractual services are fixed-price. The contract began June 1, 2012 and consists of a five month base period and four one-year option years.
Andrews Air Force Base ("Andrews AFB"): The Andrews AFB program is a part of our DynAviation segment. Under the Andrews AFB contract, we perform aviation maintenance and support services, which include full back shop support, organizational level maintenance, fleet fuel services, launch and recovery, supply and Federal Aviation Administration ("FAA") repair services. Under this program we oversee the management of the U.S. presidential air fleet (other than Air Force One). Our principal customer under this contract is the U.S. Air Force. This contract was entered into in September 2011 with the majority of our contractual services being fixed-price.
Sheppard Air Force Base ("Sheppard AFB"): The Sheppard Air Force Base contract is a part of our DynAviation segment. Under this program, we provide aircraft maintenance services for the 80th Flying Training Wing based at Sheppard Air Force Base in Wichita Falls, Texas. This contract has an initial base period of eleven months and six option years. The mission of the Air Education and Training Command’s 80th Flying Training Wing is to provide undergraduate pilot training for the U.S. and North Atlantic Treaty Organization ("NATO") allies in the Euro NATO Joint Jet Pilot Training program. Graduates of this prestigious program are assigned to fighter pilot positions in their respective air forces. The majority of our contractual services are fixed-price.
Combined Security Transition Command Afghanistan ("CSTC-A") : The CSTC-A program is a part of our DynLogistics segment. This program provides assistance to the CSTC-A and the NATO training mission by providing mentors and trainers to develop the Afghanistan Ministry of Defense ("MOD"). In addition to providing training and mentoring, we also provide subject matter expertise and programmatic support to CSTC-A staff and the Afghanistan MOD. This program supports development of the organizational capacity and capability to assist the Afghanistan MOD and Afghan National Army forces in assuming full responsibility for their own security needs. The services provided under this contract are cost-reimbursable type services.  
California Department of Forestry: The California Department of Forestry program is a part of our DynAviation segment. We have been helping to fight fires in California since December 2001. We maintain aircraft, providing nearly all types and levels of maintenance - scheduled, annual, emergency repairs and even structural depot-level repair. McClellan Field in Sacramento is home base for our program mechanics, data entry staff, and quality control inspectors. In addition, we provide pilots who operate the fixed wing aircraft. Our current task orders are primarily time-and-materials.
Regional Aviation Sustainment Maintenance ("RASM - W"): The RASM-W program with the U.S. Army Aviation and Missile Life Cycle Management Command was awarded in February of 2013, to provide aviation field and sustainment level maintenance services. The hybrid firm-fixed-price, cost-plus-incentive-fee contract has one base year and four, one-year options.

Estimated Total Contract Value and Certain Other Terms
The estimated total contract value represents amounts expected to be realized from the initial award date to the current contract end date (i.e., revenue recognized to date plus backlog). For the reasons stated under the captions "Risk Factors" and "Business - Key Contracts," the estimated total contract value or ceiling value specified under a government contract or task order is not necessarily indicative of the revenue that we will realize under that contract.
Key Contracts
The following table sets forth certain information for our principal contracts, including the initial start and end dates and the principal customer for each contract as of December 31, 2013 :  

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Contract  
Segment   
Principal  
Customer  
Initial/Current
Award Date
 
Current
Contract End Date
 
Estimated
Total Contract
Value 
(1)  
LOGCAP IV (2)
DynLogistics
U.S. Army
Apr-2008
Apr-2018
$6.84 billion
INL Air Wing
DynAviation
DoS
Jan-2001 / May-2005
Oct-2014
$3.65 billion
Contract Field Teams
DynAviation
DoD
Oct-1951 / Oct-2008
Sep-2015
$1.10 billion
AMDP
DynLogistics
DoD
Dec-2010
Apr-2014
$836 million
War Reserve Materiel
DynLogistics
U.S. Air Force
May-2000 / Jun-2008
Sep-2016
$503 million
Patuxent River Naval Test Wing
DynAviation
U.S. Navy
Jul-2011 / Aug-2011
Jul-2016
$479 million
T-6 COMBS
DynAviation
U.S. Air Force
Jun-2012
Oct-2016
$407 million
Andrews AFB
DynAviation
U.S. Air Force
Sep-2011
Dec-2018
$420 million
Sheppard Air Force Base
DynAviation
U.S. Air Force
Sep-2009
Sep-2016
$270 million
CSTC-A
DynLogistics
U.S. Army
Mar-2010
Dec-2014
$261 million
California Department of Forestry (3)
DynAviation
State of California
Dec-2001 / Jul-2008
Dec-2014
$254 million
RASM-W
DynAviation
U.S. Army
Jul-2013
Jun-2018
$243 million
(1)
Estimated total contract value represents the initial start and end date of the contracts presented and is not necessarily representative of the amount of work we will actually be awarded under the contract. Contract value can grow over time based on IDIQ task orders and/or contract extensions.
(2)
LOGCAP IV has a $5 billion ceiling per year per contractor over 10 years.
(3)
Commercial contract.
Competition
We compete with various entities across geographic and business lines based on a number of factors, including services offered, experience, price, geographic reach and mobility. Most activities in which we engage are highly competitive and require that we have highly skilled and experienced technical personnel to compete. Some of our competitors may possess greater financial and other resources or may be better positioned to compete for certain contract opportunities. We believe that our principal competitors include Civilian Police International, Science Applications International Corporation, Exelis, Inc., KBR, Inc., IAP Worldwide Services, ACADEMI, Triple Canopy Inc., Fluor Corporation, Lockheed Martin Corporation, AECOM Technology Corporation, United Technologies Corporation, L-3 Communications Holdings, Inc., Aerospace Industrial Development Corporation, Al Salam Aircraft Company Ltd., Mission Essential Personnel, Northrop Grumman Corporation, Computer Sciences Corporation, Lear Siegler, and Serco Group plc. We believe that the primary competitive factors for our services include reputation, technical skills, past contract performance, experience in the industry, cost competitiveness and customer relationships.

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Backlog
We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised, priced contract options and the unfunded portion of exercised contract options. These priced options may or may not be exercised at the sole discretion of the customer. Historically, it has been our experience that the customer has typically exercised contract options.
Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years. The U.S. government is legally prohibited from ordering work under a contract in the absence of funding.
The initial focus of DynGlobal is on the pursuit and growth of international and commercial business.
The following table sets forth our approximate backlog as of the dates indicated:
 
December 31, 2013
 
 
 
 
 
 
 
 
(Amounts in millions)
DynAviation
 
DynLogistics
 
DynGlobal
 
Total
Funded backlog
$
564

 
$
977

 
$

 
$
1,541

Unfunded backlog
1,761

 
678

 

 
2,439

Total backlog
$
2,325

 
$
1,655

 
$

 
$
3,980

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
(Amounts in millions)
DynAviation
 
DynLogistics
 
DynGlobal
 
Total
Funded backlog
$
781

 
$
861

 
$

 
$
1,642

Unfunded backlog
1,737

 
1,899

 

 
3,636

Total backlog
$
2,518

 
$
2,760

 
$

 
$
5,278

 
Regulatory Matters
Contracts with the U.S. government are subject to a multitude of regulatory requirements, including but not limited to the Federal Acquisition Regulation ("FAR") and the Defense Federal Acquisition Regulation Supplement ("DFARS"), which set forth policies, procedures and requirements for the acquisition of goods and services by the U.S. Government. Under U.S. Government regulations certain costs, including certain financing costs, lobbying expenses, certain types of legal expenses and certain marketing expenses related to the preparation of bids and proposals are not allowed for pricing purposes and calculation of contract reimbursement rates under cost-reimbursement contracts. The U.S. Government also regulates the methods by which allowable costs may be allocated to U.S. Government contracts.
Our international operations and investments are subject to U.S. Government laws, regulations and policies, including the International Traffic in Arms Regulations, the Export Administration Act, the Foreign Corrupt Practices Act, the False Claims Act and other export laws and regulations. We must also comply with foreign government laws, regulations and procurement policies and practices, which may differ from U.S. Government regulation, including import-export control, investments, exchange controls, repatriation of earnings, the UK Bribery Act and requirements to expend a portion of program funds in-country. In addition, embargoes, international hostilities and changes in currency values can also impact our international operations .
Our U.S. Government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. Government for cost-reimbursement contracts. The purpose of a pre-award audit is to determine the basis of the bid and provide the information required for the U.S. Government to negotiate the contract effectively. In addition, the U.S. Government may perform a pre-award audit to determine our capability to perform under a contract. During the performance of a contract, the U.S. Government has the right to examine our costs incurred on the contract, including labor charges, material purchases and overhead charges. Upon a contract's completion, the U.S. Government performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal and FAR. The U.S. Government also may perform a post-award audit for proposals that are subject to the Truth in Negotiations Act, which are proposals in excess of $700,000, to determine if the cost proposed and negotiated was accurate, current and complete as of the time of negotiations.

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The Defense Contract Audit Agency ("DCAA") performs these audits on behalf of the U.S. Government. The DCAA also reviews and opines on the adequacy of, and our compliance with, our internal control systems and policies, including Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management Systems. The DCAA has the right to perform audits on our incurred costs on all flexibly priced contracts on an annual basis. We have DCAA auditors on-site to monitor our billing and back office operations. An adverse finding under a DCAA audit could result in a recommendation of disallowed costs under a U.S. Government contract, termination of U.S. Government contracts, forfeiture of profits, a withhold of payments, fines, suspension or prohibition from doing business with the U.S. Government. In the event that an audit by the DCAA recommends disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted annual incurred costs claims can take many years. All of our incurred costs claims for U.S. Government contracts completed through fiscal year 2007 have been audited by the DCAA and negotiated by the Defense Contract Management Agency ("DCMA"). Incurred cost claim audits for subsequent periods are ongoing. See "Risk Factors - A negative audit or other actions by the U.S. government could adversely affect our operating performance."
At any given time, many of our contracts are under review by the DCAA and other government agencies. We cannot predict the outcome of such ongoing audits and what, if any, impact such audits may have on our future operating performance.
Over the last few years, U.S. Government contractors, including our Company, have seen a trend of increased oversight by the DCAA and other U.S. Government agencies. If any of our internal control systems are determined to be non-compliant or inadequate, payments may be suspended under our contracts or we may be subjected to increased government oversight that could delay or adversely affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. Government.
Sales and Marketing
We provide our service solutions to a wide array of customers which include multiple departments and agencies within the U.S. government, select international customers and commercial customers. We also provide our services to other prime contractors who have contracts with the U.S. government and other international customers where our capabilities help to deliver comprehensive solutions. We position our business development and marketing professionals to cover key accounts such as the DoS and the DoD, as well as other international and commercial market segments which hold the most promise for aggressive growth and profitability.
We participate in national and international tradeshows, particularly as they apply to aviation services, logistics, contingency support, defense, diplomacy and development markets. We are also an active member in several organizations related to services contracting, such as the Professional Services Council.
As a global service solutions provider, we have unique experience and capability in providing value-added and full spectrum services to government agencies and selected partners worldwide.
Our business development and marketing professionals maintain close relationships with all existing customers while continuing to aggressively pursue adjacent markets to maximize growth opportunities.
Intellectual Property
We hold an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid license to use the "Dyn International" and "DynCorp International" names in connection with aviation services, security services, technical services and marine services. We also own various licenses for names associated with Phoenix, Casals and Heliworks. Additionally, we own various registered domain names, patents, trademarks and copyrights. Because most of our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright, patents, or trademark protections, although our operations make use of such protections and benefit from them.
Environmental Matters
Our operations include the use, generation and disposal of petroleum products and other hazardous materials, including services such as painting aircraft and handling substances that may qualify as hazardous waste, such as used batteries and petroleum products. We are subject to various U.S. federal, state, local and foreign laws and regulations by which we must abide. These regulations relate to the protection of the environment, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe and healthy workplace for our employees, contractors and visitors. We have written procedures in place and believe we have been and are in substantial compliance with environmental laws and regulations, and we have no liabilities under environmental requirements that would have a material adverse effect on our business, results of operations or financial condition. We have not incurred, nor do we expect to incur, material costs relating to environmental compliance.




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Employees
As of December 31, 2013 , we had approximately 20,000 personnel located in approximately 34 countries in which we have operations, of which approximately 3,600 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,100 . We believe the working relations with our employees and our unions are in good standing.
ITEM 1A. RISK FACTORS.
The risks described below should be carefully considered, together with all of the other information contained in this Annual Report on Form 10-K including Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any of the following risks could materially and adversely affect our financial condition, results of operations or cash flows.
We rely on sales to U.S. government entities. A loss of contracts, a failure to obtain new contracts or a reduction of sales or award fees under existing contracts with the U.S. government could adversely affect our operating performance and our ability to generate cash flow to fund our operations.
We derive substantially all of our revenue from contracts and subcontracts with the U.S. government and its agencies, primarily the DoD and the DoS. The remainder of our revenue is derived from commercial contracts and contracts with foreign governments. We expect that U.S. government contracts, particularly with the DoD and the DoS, will continue to be our primary source of revenue for the foreseeable future. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the DoD and the DoS. Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. The loss or significant reduction in government funding of a large program in which we participate could also result in a material decrease to our future projections of revenue, earnings and cash flows. U.S. government contracts are also conditioned upon the continuing approval by Congress of the amount of necessary spending. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. Among the factors that could impact U.S. government spending and reduce our U.S. Government contracting business include:
policy and/or spending changes implemented by the Obama administration, any subsequent administration or Congress;
continued budget reductions in military spending imposed by Congress;
a continual decline in, or reapportioning of, spending by the U.S. government, in general, or by the DoD or the DoS, in particular;
changes, delays or cancellations of U.S. government programs, requirements or policies;
the adoption of new laws or regulations that affect companies that provide services to the U.S. government;
U.S. government shutdowns or other delays in the government appropriations process;
curtailment of the U.S. government's outsourcing of services to private contractors including the expansion of insourcing; changes in the political climate, including with regard to the funding or operation of the services we provide; and
general economic conditions, including the continual slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate.
These or other factors could cause U.S. government agencies to reduce their purchases under our contracts, to exercise their right to terminate our contracts in whole or in part, to issue temporary stop-work orders or to decline to exercise options to renew our contracts. The loss or significant curtailment of our material government contracts, or our failure to renew existing contracts or enter into new contracts, could adversely affect our operating performance and lead to an unexpected loss of revenue.

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Our U.S. government contracts may be terminated by the U.S. government at any time prior to their completion and contain other unfavorable provisions, which could lead to an unexpected loss of revenue and a reduction in backlog.
Under the terms of our contracts, the U.S. government may unilaterally:
terminate or modify existing contracts;
reduce the value of existing contracts through partial termination;
delay or withhold the payment of our invoices by government payment offices;
audit our contract-related costs and fees; and
suspend us from receiving new contracts, pending the resolution of alleged violations of procurement laws or regulations.
The U.S. government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and adversely affect our operating performance and lead to an unexpected loss of revenue.
The nature of our business sometimes requires us to begin new work or extend work under an existing contract at the request of our customer before a formal contract or contract modification has been executed. In such situations, we have a long history of successfully obtaining a formal contract or contract modification from our customer; however, work performed in such situations involves some risk that we may be unsuccessful in reaching final agreement with our customer. In the event we are unsuccessful in reaching an agreement with our customer, we may be required to submit a request for equitable adjustment or a formal claim.  These processes can take substantial time and may ultimately be unsuccessful in allowing us to bill and collect any associated fees earned on work performed in such situations, including base fees or award fees, which could result in lower revenue and could have a material effect on our financial condition and results of operations.
Our U.S. government contracts typically have an initial term of one year with multiple option periods, exercisable at the discretion of the government at previously negotiated prices. The government is not obligated to exercise any option under a contract. Furthermore, the government is typically required to re-compete all programs and, therefore, may not automatically renew a contract. In addition, at the time of completion of any of our government contracts, the contract is frequently required to be re-competed if the government still requires the services covered by the contract.
If the U.S. government terminates and/or materially modifies any of our contracts or if option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenue and backlog which could adversely affect our earnings and have a material effect on our financial condition and results of operations.
Our U.S. government contracts are subject to competitive bidding, both upon initial issuance and re-competition. If we are unable to successfully compete in the bidding process or if we fail to win re-competitions, it could adversely affect our operating performance and lead to an unexpected loss of revenue.
Substantially all of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:
we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;
we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns; and
we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending.
The U.S. government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.
Because of the nature of our business, it is not unusual for us to lose contracts to competitors or to gain contracts once held by competitors during re-compete periods.  
Additionally, some contracts simply end as projects are completed or funding is terminated. We have included our most significant contracts by reportable segment in our key contract table under the heading "Business." Contract end dates are included

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within the tables to better inform interested parties, security analysts and institutional investors in reviewing the potential impact on our most significant contracts for this risk.
Economic conditions could impact our business.
Our business may be adversely affected by factors in the U.S. and other countries that are beyond our control, such as disruptions in the financial markets or downturns in the economic activity in specific countries or regions, or in the various industries in which we operate. These factors could have an adverse impact in the availability of capital and cost of capital, interest rates, tax rates, or regulations in certain jurisdictions. If for any reason we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms. Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of our insurers and financial institutions.
In particular, if the U.S. Government, due to budgetary considerations, fails to sustain the troops in Afghanistan, continues to reduce the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, our business, financial condition and results of operations could be adversely affected. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. Government. The Budget Control Act of 2011 ("BCA") and its sequestration provisions, have been amended and the appropriations forecasted levels for most federal agencies, including the DoD will increase for the fiscal year 2014, however, much is still unknown for subsequent years. We anticipate the military branches under the DoD will continue to make cuts to meet the fiscal realities. We believe the DoD will need to ensure existing platforms are able to meet the requirements of the mission set forth and ensure its success. 
While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide. We believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business, we cannot ensure that will be the case. A credit crisis could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion regarding liquidity.
Our operations involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, could adversely affect our results of operations and financial condition.
We are exposed to liabilities that arise from the services we provide. Such liabilities may relate to an accident or incident involving our employees or third parties, particularly where we are deployed on-site at active military installations or in locations experiencing political or civil unrest, or they may relate to an accident or incident involving aircraft or other equipment we have serviced or used in the course of our business. Any of these types of accidents or incidents could involve significant potential claims of injured employees and other third parties and claims relating to loss of or damage to government or third-party property.
We maintain insurance policies that mitigate risk and potential liabilities related to our operations. Our insurance coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. Substantial claims in excess of our related insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Furthermore, any accident or incident for which we are liable, even if fully insured, may result in negative publicity which could adversely affect our reputation among our customers, including our government customers, and the public, which could result in the loss of existing and future contracts or make it more difficult to compete effectively for future contracts. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.  
Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.
Certain regions in which we operate are highly unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. Insurgents in Iraq and Afghanistan have targeted installations where we have personnel, and these insurgents have contributed to instability in these countries. This could impair our ability to attract and deploy personnel to perform services in either or both locations. In addition, we may be required to increase compensation to our personnel as an incentive to deploy them to these regions. Historically we have been able to recover this added cost under our contracts, but there is no guarantee that future increases, if required, will be able to be transferred to our customers through our contracts. To the extent that we are unable to transfer such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance.

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In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt or substantially reduce our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all or substantially reduce U.S. government activities, including our operations under U.S. government contracts in a particular location, country or region and to withdraw all or a substantial number of military personnel. Congressional pressure to reduce, if not eliminate, the number of U.S. troops in Afghanistan may also lead to U.S. government procurement actions that reduce or terminate the services and support we provide in that theater of conflict. Any of the foregoing could adversely affect our operating performance and may result in additional costs and loss of revenue.
We are exposed to risks associated with operating internationally.
A large portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:
export controls regulations that could erode profit margins or restrict exports;
compliance with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act; and other international anti-corruption laws
the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;
contract award and funding delays;
potential restrictions on transfers of funds;
foreign currency fluctuations;
potential claims filed in foreign courts and judicial systems;
foreign adjustments associated with uncertain tax benefits;
import and export duties and value added taxes;
transportation delays and interruptions;
uncertainties arising from foreign local business practices and cultural considerations;
requirements by foreign governments that we locally invest a minimum level as part of our contracts with them, which may not yield any return; and
potential military conflicts, civil strife and political risks.
We cannot ensure our current adopted measures will reduce the potential impact of losses resulting from the risks of our foreign business.  
Our IDIQ contracts are not firm orders for services, and we may never receive revenue from these contracts, which could adversely affect our operating performance.
Many of our government contracts are IDIQ contracts, which are often awarded to multiple contractors. The award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under an IDIQ contract, the customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best-value approach. However, many contracts also permit the government customer to direct work to a specific contractor. We may not win new task orders under these contracts for various reasons, such as failing to rapidly deploy personnel or high prices, which would have an adverse effect on our operating performance and may result in additional expenses and loss of revenue. There can be no assurance that our existing IDIQ contracts will result in actual revenue during any particular period or at all.
Our cost of performing under time-and-materials and fixed-price contracts may exceed our revenue, which would result in a recorded loss on the contracts.
Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price. With cost-reimbursement contracts, so long as actual costs incurred are within the contract funding and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated fixed-fee and, in some cases, an incentive-based award fee. We assume additional financial risk on time-and-materials and fixed-price contracts, because of the stipulated prices or negotiated hourly/daily rates. As such, if we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins. Also, we assume the risk of damage or loss to government property, and we are responsible for third-party claims under fixed-price contracts. The failure to

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meet contractually defined performance standards may result in a loss of a particular contract or lower-than-anticipated margins. This could adversely affect our operating performance and may result in additional costs and possible loss of revenue.
A negative audit or other actions by the U.S. government could adversely affect our operating performance
At any given time, many of our contracts are under review by the DCAA, the DCMA and other government agencies. These agencies review our contract performance, cost structure, and/or compliance with applicable laws, regulations and standards. Such agency audits may include contracts under which we have performed services in Iraq and Afghanistan under especially demanding circumstances.
The government agencies also review the adequacy of, and our compliance with, our internal control systems and policies, including our Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management System.
Given the continued oversight by the U.S. government, we could be subjected to additional regulatory requirements which could require additional audits at various points within our contracting process. An adverse finding under an audit could result in a recommendation of disallowed costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits, suspension or a withhold of payments which could negatively impact our liquidity position and affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. See Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
We are subject to investigation by government agencies, which could result in our inability to receive government contracts and could adversely affect our future operating performance.
As a U.S. government contractor operating domestically and internationally, we must comply with laws and regulations relating to U.S. government contracting, as well as domestic and international laws. From time to time, we are investigated by government agencies with respect to our compliance with these laws and regulations. If we are found to be in violation of the law, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or prohibition from doing business with U.S. government agencies. For example, many of the contracts we perform in the U.S. are subject to the Service Contract Act, which requires hourly employees to be paid certain specified wages and benefits. If the U.S. Department of Labor determines that we violated the Service Contract Act or its implemented regulations, we could be suspended from being awarded new government contracts or renewals of existing contracts for a period of time, which could adversely affect our future operating performance. We are subject to a greater risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than companies with solely commercial customers. In addition, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.
Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we were suspended or prohibited from contracting with the U.S. government, or any significant U.S. government agency, if our reputation or relationship with U.S. government agencies was impaired or if the U.S. government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, it could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
U.S. government contractors like us that provide support services in theaters of conflict such as Iraq and Afghanistan have come under increased oversight by the agency of inspectors general, government auditors and congressional committees. Investigations pursued by any or all of these groups may result in adverse publicity for us and consequent reputational harm, regardless of the underlying merit of the allegations being investigated. As a matter of general policy, we have cooperated and expect to continue to cooperate with government inquiries of this nature.
Government withholding regulations could adversely affect our operating performance.
The DoD issued the final DFARS rule in 2012 which allows withholding of a percentage of payments when a contractor's business system has one or more significant deficiencies. The DFARS rule applies to Cost Accounting Standards ("CAS") covered contracts that have the DFARS clause in the contract terms and conditions. The final rule represents a significant change in the contracting environment for companies performing work for the DoD. Contracting officers may withhold 5% of contract payments for one or more significant deficiencies in any single contractor business system or up 10% of contract payments for significant deficiencies in multiple contractor business systems. A significant deficiency is defined as a "shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes." The final rule was applicable to new DoD contracts awarded after February 2012.
The expiration of our collective bargaining agreements could result in increased operating costs or work disruptions, which could potentially affect our operating performance.
As of December 31, 2013 , we had approximately 20,000 personnel, of which approximately 3,600 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,100 . As of December 31, 2013 , we had approximately

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13 collective bargaining agreements with these unions. The length of these agreements varies, with the longest expiring in September 2016. There can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Proceedings against us in domestic and foreign courts could result in legal costs and adverse monetary judgments, adversely affecting our operating performance and causing harm to our reputation.
We are involved in various domestic and foreign claims and lawsuits from time to time. For example, we are a defendant in two consolidated lawsuits seeking unspecified damages brought by citizens and certain provinces of Ecuador. The basis for the actions was pending in the U.S. District Court for the District of Columbia; however, on March 18, 2013 the plaintiffs filed a notice of appeal with the U.S. Court of Appeal for the District of Columbia. The basis for the action arises from our performance of a DoS contract for the eradication of narcotic plant crops in Colombia. The lawsuits allege personal injury, property damage and wrongful death as a consequence of the spraying of narcotic crops along the Colombian border adjacent to Ecuador. In the event that a court decides against us, in these lawsuits, and we are unable to obtain indemnification from the U.S. Government, or contributions from the other defendants, we may incur substantial costs, which could have a significant impact on our results of operations. Many uncertainties exist surrounding foreign litigations and claims. We continue to assess such claims as they are made, however, it is not possible to determine the ultimate outcome. An adverse ruling in these cases could also adversely affect our reputation and have a material adverse effect on our ability to win future government contracts.
Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for breach of contract actions, and we bear all costs associated with such litigation and claims. See Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government; our noncompliance with such laws and regulations could adversely affect our future operating performance.
We may be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could significantly reduce our future revenue and profits.
To the extent that we export products, technical data and services outside the United States, we are subject to U.S. laws and regulations governing international trade and exports, including but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. Failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.
We do business in certain parts of the world that have experienced, or may be susceptible to, governmental corruption. Our corporate policy requires strict compliance with the U.S. Foreign Corrupt Practices Act, UK Bribery Act and with local laws prohibiting payments to government officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Improper actions by our employees or agents could subject us to civil or criminal penalties, including substantial monetary fines, as well as disgorgement, and could damage our reputation and, therefore, our ability to do business.
Competition in our industry could limit our ability to attract and retain customers or employees, which could result in a loss of revenue and/or a reduction in margins, which could adversely affect our operating performance.
We compete with various entities across geographic and business lines. Competitors of our operating segments are typically various solution providers that compete in any one of the service areas provided by those business units. Additionally, competitors of our operating segments are typically large defense service contractors that offer services associated with maintenance, training and other activities.
We compete based on a number of factors, including our broad range of services, geographic reach, mobility and response time. Foreign competitors may obtain an advantage over us in competing for U.S. government contracts and attracting employees. We are required by U.S. laws and regulations to remit to the U.S. government statutory payroll withholding amounts for U.S. nationals working on U.S. government contracts while employed by our majority-owned foreign subsidiaries. Foreign competitors may not be similarly obligated by their governments.

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Some of our competitors may have greater resources or are otherwise better positioned to compete for contract opportunities. For example, original equipment manufacturers that also provide aftermarket support services have a distinct advantage in obtaining service contracts for aircraft they have manufactured, as they frequently have better access to replacement and service parts, as well as an existing technical understanding of the platform they have manufactured. In addition, we are at a disadvantage when bidding for contracts up for re-competition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.
In addition to the competition we face in bidding for contracts and task orders, we must also compete to attract the skilled and experienced personnel integral to our continued operations. We hire from a limited pool of potential employees as military and law enforcement experience, specialized technical skill sets and security clearances are prerequisites for many positions. Our failure to compete effectively for employees, or excessive attrition among our skilled personnel, could reduce our ability to satisfy our customers' needs and increase the costs and time required to perform our contractual obligations. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Loss of our skilled personnel, including members of senior management, may have an adverse effect on our operations and/or our operating performance.
Our continued success depends in large part on our ability to recruit and retain the skilled personnel necessary to serve our customers effectively, including personnel with extensive military and law enforcement training and backgrounds. The proper execution of our contract objectives depends upon the availability of quality resources, especially qualified personnel. Given the nature of our business, we have substantial need for personnel who are willing to work overseas, frequently in locations experiencing political or civil unrest, for extended periods of time and often on short notice. We may not be able to meet the need for qualified personnel as such need arises.
In addition, we must comply with provisions in U.S. government contracts that require employment of persons with specified work experience and security clearances. An inability to maintain employees with the required security clearances could have a significant impact on our ability to win new business and satisfy our existing contractual obligations, could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
The loss of services of any of the members of our senior management could adversely affect our business until a suitable replacement can be found. There may be a limited number of personnel with the requisite skills to serve in these positions, and we may be unable to locate and employ such qualified personnel on acceptable terms.
If our subcontractors or joint venture partners fail to perform their contractual obligations, then our performance as the prime contractor and our ability to obtain future business could be materially and adversely impacted.
Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. These subcontractors generally perform niche or specialty services for which they have more direct experience, such as construction, catering services or specialized technical services. These subcontractors have local knowledge of the region in which we will be performing along with the ability to communicate with local nationals and assist in making arrangements for commencement of performance. Often, we enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Such subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
We often enter into joint ventures so that we can jointly bid and perform on a particular project. The success of these and other joint ventures depends, in large part, on the satisfactory performance of the contractual obligations by our joint venture partners. If our partners do not meet their obligations, the joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.
Environmental laws and regulations may subject us to significant costs and liabilities that could adversely affect our operating performance.
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S., these laws and regulations include those governing the management and disposal of hazardous substances and wastes, the maintenance of a safe workplace and painting aircraft and handling substances such as used batteries and petroleum products. In addition to U.S. federal laws and regulations, states and other countries where we do business have numerous environmental, legal and regulatory requirements by which we must abide. We could incur substantial costs, including clean-up costs, as a result of violations of, or liabilities under, environmental laws.

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Our business and results of operations could be adversely affected by the passage of U.S. health care reform and other environmental legislation and regulations. We are continually assessing the impact that health care reform could have on our employer-sponsored medical plans. Growing concerns about climate change may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions could increase the costs of projects for our customers or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services.
All of these factors could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Acquisition and divestiture related transactions require substantial management resources and may disrupt our business and divert our management from other responsibilities. Acquisitions and divestitures are accompanied by other risks, including:
the difficulty of integrating or disaggregating the operations and personnel of the acquired or divested companies;
the inability of our management to maximize our financial and strategic position by the successful incorporation or dissolution of acquired or divested personnel into our programs;
we may not realize anticipated synergies or financial growth;
we may assume material liabilities that were not identified during due diligence, including potential regulatory penalties resulting from the acquisition or divested target's previous activities;
difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;
the potential loss or retention of key employees of acquired or divested companies;
the impairment of relationships with employees and customers as a result of changes in management and operational structure; and
acquisitions or divestitures may require us to invest significant amounts of cash resulting in dilution of stockholder value.
Any inability to successfully integrate or disaggregate the operations and personnel associated with an acquired or divested business and/or service line may harm our business and results of operations.  
If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and future prospects could be harmed.
In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions, divestitures, joint ventures, and equity investments. We seek to identify acquisition or investment opportunities that will expand or complement our existing services, or customer base, at attractive valuations. We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions, and manage post-closing matters (e.g., integrate acquired companies and employees, realize anticipated operating synergies, and improve margins) efficiently and effectively. Acquisition, divestiture, joint venture, and investment transactions often require substantial management resources and could have the potential to divert our attention from our existing business. Additionally, unidentified pre-closing liabilities could affect our future financial results.
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Catastrophic events may disrupt our business and have an adverse effect on our results of operations.
A disruption, infiltration or failure of network, application systems or third-party hosted services in the event of a major earthquake, hurricane, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our ability to provide service to our customers, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers' orders, which could result in reduced revenue.
Our business could be negatively impacted by security threats, including physical and cyber security threats, and other disruptions.

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As a defense contractor, we face both physical and cyber security threats to our sensitive systems and information.  Although we utilize a variety of technical and administrative controls to mitigate and detect threats, there can be no assurance that these controls will be sufficient to prevent a threat from materializing.
 Threats to our physical security, were they to manifest, could result in degradation or disruption of business operations.  These effects could be attributed to, although not exclusively, loss of staff, reduction in staff productivity, and/or loss or damage to facilities.
 Cyber security threats are constantly evolving, and our industry is frequently targeted by cyber security threats.  We utilize a variety of mechanisms and controls to adapt to potential threats; however, the variety and constant change of these threats leaves the impact unpredictable.
     Were an incident to occur, it could lead to loss of confidentiality, integrity, and/or availability of information or systems, harm to personnel or infrastructure, and/or damage to our reputation.  Such an incident could result in material impact on our business operations and strategies, current or future financial position, and/or cash flows.
Goodwill represents a significant asset on our balance sheet and has been significantly impaired and may continue to be impaired.
Goodwill is a significant asset on our balance sheet, with an aggregate balance of $294 million as of December 31, 2013 . We assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified. The annual impairment test requires us to determine the fair value of our reporting units in comparison to their carrying values. A decline in the estimated fair value of a reporting unit could result in a goodwill impairment, and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit.
During the year ended December 31, 2013 , we determined that the carrying values of the goodwill associated with the Intelligence & Security ("IS") reporting unit within the DynLogistics segment and the Air Operations ("AO") reporting unit within the DynAviation segment exceeded their fair values. The Company learned during the third quarter of calendar year 2013, that the pursuit of a significant business opportunity within the IS reporting unit was unsuccessful due to competitor protests and other factors. This reporting unit's projections included significant estimates related to the new business opportunity. The Company concluded the change in circumstances represented a triggering event and a step one assessment was performed to identify any possible goodwill impairment. Additionally, during the annual impairment assessment of the AO reporting unit, the current projections for which are dependent upon a single contract, the Company received clarification from the customer regarding the upcoming re-compete of the contract. This resulted in a decline in our projections for future years and resulted in a goodwill impairment. As a result of the events discussed above, non-cash impairment charges of approximately $ 28.8 million and $281.5 million were recorded for the year ended December 31, 2013 to impair the carrying values of the IS and AO reporting units' goodwill, respectively.
As the defense industry is currently in a volatile state and faces many uncertainties in the upcoming year, we could see a further decline in the estimated fair values of one or more of our reporting units which could result in a material impact on our financial condition and results of operations. See Critical Accounting Policies within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
Future restatement of our financial statements could adversely affect our business.
Restatement of our financial statements could have adverse consequences on our business, financial condition, cash flows and results of operations, including the triggering of an event of default under our senior credit facility and the indentures governing our senior unsecured notes. Restatements could cause our credit rating to be downgraded, which could result in an increase in our borrowing costs and make it more difficult to borrow funds on reasonable terms or at all. In addition, restatements could result in key executives departing and SEC enforcement action.
We may not be able to continue to deploy or sell our helicopter assets.
We have thirteen Huey helicopters we plan to sell or utilize on our programs. The Company was successful in selling one of the UH-1H helicopters subsequent to the year ended December 31, 2013 , however, we are not certain that we will be able to successfully sell all of the remaining helicopters or utilize them on our programs. The inability to sell or deploy the helicopters could lead to an impairment charge in the future.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial position.
When agreeing to contractual terms, we make assumptions and projections about future conditions and events, many of which extend over a period of time. These assumptions and projections assess the cost, productivity and availability of labor, future levels

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of business base, complexity of the work to be performed, cost and availability of materials, impact of potential delays in performance and timing of product deliveries. Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is subject to many variables. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance. Suppliers' assertions are also assessed and considered in estimating costs and profit rates.
Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material impact on the profitability of one or more of the affected contracts and our performance. See Critical Accounting Policies within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
The adoption of the Long-Term Cash Incentive Bonus Plan could substantially increase the cost to acquire the Company or prevent or delay a change in control.
     On December 17, 2013, DynCorp International, LLC approved a long-term cash incentive plan for certain executives, where in the event of a change in control, subject to the executives’ continued employment with DynCorp International, LLC through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of such agreement, the executive shall be eligible to receive a cash incentive bonus.
A change in control, as defined in the long-term cash incentive plan, would occur if a person who is not Cerberus or an affiliate of Cerberus becomes beneficial owner, directly or indirectly, of more than 50% of the combined voting power of issued and outstanding securities of DynCorp International, LLC or if there is a reduction in Cerberus’s beneficial ownership to less than 30% of the combined voting power. There are other conditions that could result in a change in control event such as a sale or transfer or other disposition of all or substantially all of the business and assets of DynCorp International, LLC. The long-term cash incentive bonus plan could increase the cost to acquire the Company and prevent or delay a change in control.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash flow.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in applicable domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory tax rate currently in effect, therefore a change in the U.S. corporate tax rate would result in a remeasurement of our net deferred tax asset through the income tax provision. The final determination of any tax audits or related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the results of audits and the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures could impact our tax liabilities and significantly affect our income tax expense, profitability and cash flow.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our debt obligations.
As of December 31, 2013 , we are highly leveraged with our total indebtedness of approximately $732.3 million . We had $144.6 million available for borrowing under our revolving credit facility, and the terms of the senior secured credit facilities permit us to increase the amount available under our term loan and/or revolving credit facilities by up to $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes.
Our high degree of leverage could have important consequences including:
increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow for other purposes, including for our operations, capital expenditures and future business opportunities;
exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest;

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making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
Our interest expense could increase if interest rates increase above the stated LIBOR floor levels in our senior secured credit facilities because the entire amount of the indebtedness under our senior secured credit facilities bears interest at a variable rate. At December 31, 2013 , we had approximately $277.3 million aggregate principal amount of variable rate indebtedness under our senior secured credit facilities. A 100 basis point increase over the LIBOR floor levels would increase our annual interest expense by approximately $2.8 million .  
Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our debt obligations contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
In addition to the $144.6 million which is available to us for borrowing under our revolving credit facility, the terms of our senior secured credit facilities enable us to increase the amount available under our term loan and/or revolving credit facilities by up to an aggregate of $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes. Additionally, we can take on more debt as long as we meet the covenant levels as stated per the indenture and the credit facility. If new debt is added to our and our subsidiaries' existing debt levels, the related risks that we face would increase. In addition, the agreements governing our debt obligations do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our debt agreements contain, and the agreements governing any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things:
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
make certain investments;
sell certain assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the covenants in our senior secured credit facilities require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our indenture and, in the case of our revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment

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of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities, and we may not have sufficient assets to repay our unsecured indebtedness thereafter, including our notes.  
We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable DynCorp International Inc. to make payments in respect of its indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from the DynCorp International Inc.'s subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that DynCorp International Inc. does not receive distributions from its subsidiaries, DynCorp International Inc. may be unable to make required principal and interest payments on its indebtedness, including the notes.
We are controlled by Cerberus, who will be able to make important decisions affecting our business.
All of our common stock is indirectly owned by funds and/or managed accounts that are affiliates of Cerberus. As a result, Cerberus is entitled to elect all of our directors, to appoint new management and to approve actions requiring the approval of the holders of our capital stock, including adopting amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets.
The interests of Cerberus and its affiliates may differ from those of our other investors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Cerberus and its affiliates, as equity holders, may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks. Additionally, our debt agreements permits us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and Cerberus may have an interest in our doing so.
We may compete with, or enter into transactions with, entities in which our controlling stockholder holds a substantial interest.
Cerberus is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. In particular, IAP Worldwide Services, Inc. ("IAP"), an entity in which Cerberus holds a controlling equity interest, may compete with us for certain contracts and other opportunities. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to Cerberus or IAP or their respective affiliates, including through potential acquisitions of competing businesses. Competition may intensify if an affiliate or subsidiary of Cerberus, including IAP, were to enter into or possibly acquire a business similar to ours. In the event that such a transaction happens, Cerberus is under no obligation to communicate or offer such corporate opportunity to us, even if such opportunity might reasonably have been expected to be of interest to us or our subsidiaries.
We may make future investments, which would include co-investment or joint venture arrangements with our affiliates. We may also enter into business combinations and/or collaborate with and invest in other firms or entities, including Cerberus or IAP. You should consider that the interests of Cerberus may differ from yours in material respects.
A decline or reprioritization of funding in the U.S. defense budget or delays in the budget process could adversely affect our operating performance and our ability to generate cash flow to fund our operations.

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Our government contracts and sales are highly correlated and dependent upon the U.S. defense budget which is subject to the congressional budget authorization and appropriations process. Defense budgets are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, changing national security and defense requirements, geo-political developments and actual fiscal year congressional appropriations for defense budgets. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.
While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide. We believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business; however, we cannot ensure that will be the case.     

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
During the third quarter of 2013, the Company restructured its facilities footprint in Virginia to better position the Company operationally for the future.  The Company entered into a rental agreement to lease property in McLean, Virginia relocating the headquarters from Falls Church, Virginia. The major administrative offices will remain in Fort Worth, Texas.
As of December 31, 2013 , we leased approximately 35 commercial facilities in 21 countries used in connection with the various services rendered to our customers. Lease expirations range from month-to-month to over ten years. Upon expiration of our leases, we do not anticipate any difficulty in obtaining renewals or alternative space. Many of our current leases are non-cancelable. We do not own any real property.
The following locations represent our primary leased properties as of December 31, 2013 :
Location
Description
Segment
Size (sq ft)

Fort Worth, TX
Executive offices - Finance and Administration
Headquarters
218,925

Salalah Port, Oman
Warehouse and storage - WRM Program
DynLogistics
125,000

Coppell, TX
Warehouse - Logistics
Headquarters
96,000

McLean, VA
Executive offices - Headquarters
Headquarters
79,035

Kabul, Afghanistan
Offices and residence - LOGCAP IV Program
DynLogistics
42,008

Palm Shores, FL
Offices - INL Air Wing Program
DynAviation
27,215

McClellan, CA
Warehouse - California Fire Program
DynAviation
18,800

Dubai, UAE
Executive offices - DIFZ Finance and Administration
Headquarters
18,021

Huntsville, AL
Business office - Aviation Headquarters
DynAviation
13,850

We believe that substantially all of our property and equipment is in good condition, subject to normal use, and that our facilities have sufficient capacity to meet the current and projected needs of our business through calendar year 2014.

ITEM 3. LEGAL PROCEEDINGS.
Information required with respect to this item is set forth in Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Not applicable .


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ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial data for the years ended December 31, 2013 , December 31, 2012 , December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010 and for the Predecessor's fiscal quarter ended July 2, 2010 and fiscal years ended April 2, 2010 and April 3, 2009 is presented in the table below.
This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K.



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Delta Tucker Holdings, Inc.
 
 
Predecessor (1)   
 
 
For the years ended
 
For the period from April 1, 2010 (inception) through December 31, 2010
 
 
For the fiscal quarter ended
 
For the fiscal years ended
 
December 31, 2013
December 31, 2012
 
December 30, 2011
 
 
 
July 2, 2010
 
April 2, 2010
 
April 3, 2009
(Amounts in thousands)
 
 
 
 
 
 
Results of operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
3,287,184

$
4,044,275

 
$
3,719,152

 
$
1,696,415

 
 
$
944,713

 
$
3,572,459

 
$
3,092,974

Cost of services
(2,987,253
)
(3,698,932
)
 
(3,408,842
)
 
(1,547,919
)
 
 
(856,974
)
 
(3,225,250
)
 
(2,766,969
)
Selling, general and administrative expenses
(149,925
)
(149,362
)
 
(149,551
)
 
(78,024
)
 
 
(38,513
)
 
(106,401
)
 
(103,277
)
Merger expenses incurred by Delta Tucker Holdings, Inc.


 

 
(51,722
)
 
 

 

 

Depreciation and amortization
(48,628
)
(50,260
)
 
(50,773
)
 
(25,776
)
 
 
(10,263
)
 
(41,639
)
 
(40,557
)
Earnings from equity method investees
4,570

825

 
12,800

 
10,337

 
 

 

 

Impairment of equity method investment (2)


 
(76,647
)
 

 
 

 

 

Impairment of goodwill, intangibles and long lived assets (3)
(312,728
)
(50,663
)
 
(33,768
)
 

 
 

 

 

Operating (loss) income
(206,780
)
95,883

 
12,371

 
3,311

 
 
38,963

 
199,169

 
182,171

Interest expense
(78,826
)
(86,272
)
 
(91,752
)
 
(46,845
)
 
 
(12,585
)
 
(55,650
)
 
(58,782
)
Bridge commitment fee incurred by Delta Tucker Holdings, Inc.


 

 
(7,963
)
 
 

 

 

Loss on early extinguishment of debt, net
(703
)
(2,094
)
 
(7,267
)
 

 
 

 
(146
)
 
(4,131
)
Interest income
157

117

 
205

 
420

 
 
51

 
542

 
2,195

Other income (expense), net
(810
)
4,672

 
6,071

 
1,872

 
 
658

 
5,194

 
4,997

Benefit (Provision) for income taxes
37,461

(15,598
)
 
20,941

 
9,690

 
 
(9,279
)
 
(47,035
)
 
(39,756
)
Net (loss) income
(249,501
)
(3,292
)
 
(59,431
)
 
(39,515
)
 
 
17,808

 
102,074

 
86,694

Noncontrolling interests
(4,235
)
(5,645
)
 
(2,625
)
 
(1,361
)
 
 
(5,004
)
 
(24,631
)
 
(20,876
)
Net (loss) income attributable to Delta Tucker Holdings, Inc./Predecessor
$
(253,736
)
$
(8,937
)
 
$
(62,056
)
 
$
(40,876
)
 
 
$
12,804

 
$
77,443

 
$
65,818

Cash flow data:
 
 
 
 
 
 

 
 
 

 
 

 
 

Net cash provided by (used in) operating activities
137,502

$
144,190

 
$
167,986

 
$
(27,089
)
 
 
$
21,723

 
$
90,473

 
$
140,871

Net cash (used in) provided by investing activities
(7,971
)
(12,163
)
 
(3,003
)
 
(878,218
)
 
 
(2,874
)
 
(88,875
)
 
(9,148
)
Net cash (used in) provided by financing activities
(77,461
)
(83,457
)
 
(147,315
)
 
957,844

 
 
(5,433
)
 
(79,387
)
 
(16,880
)
Balance sheet data (end of period):
 
 
 
 
 
 

 
 
 

 
 

 
 

Cash and cash equivalents
170,845

118,775

 
70,205

 
52,537

 
 
135,849

 
122,433

 
200,222

Total assets
1,499,921

1,970,716

 
2,014,421

 
2,263,355

 
 
1,785,899

 
1,780,894

 
1,545,446

Total debt
732,272

782,909

 
872,909

 
1,024,212

 
 
552,209

 
552,147

 
599,912

Total equity attributable to Delta Tucker Holdings, Inc. / Predecessor
183,785

437,542

 
447,966

 
509,758

 
 
591,417

 
577,702

 
496,413

Total equity
189,660

445,754

 
453,152

 
514,109

 
 
596,359

 
583,524

 
507,149

Other financial data:

 
 
 
 
 

 
 
 

 
 

 
 

Purchases of property and equipment and software (4)
10,346

8,118

 
4,887

 
8,323

 
 
2,874

 
46,046

 
7,280

Backlog  (5)
3,980

5,278

 
5,745

 
4,782

 
 
5,171

 
5,571

 
6,298


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(1)
DynCorp International’s fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (" fiscal year 2010 "). The three month period, prior to the merger on July 7, 2010, ended July 2, 2010 and is referred to as the " fiscal quarter ended July 2, 2010 ". We refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the "Predecessor."
(2)
The Company recorded an impairment of our investment in GLS during the year ended December 30, 2011 in the amount of $76.6 million as a result of a loss in carrying value that was other than temporary. See Note 13 for further discussion.
(3)
The Company recorded impairment charges of $312.7 million , $50.7 million and $33.8 million for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 respectively. Of the $312.7 million recorded in 2013, $310.3 million was related to goodwill and $2.4 million was related to helicopters. The Company also recorded an impairment charge of $6.1 million for the year ended December 31, 2012 to reduce the value of certain intangibles related to our Dynlogistics segment.See Note 3 for further discussion.
(4)
The fiscal year ended April 2, 2010 includes approximately $39.7 million of costs associated with helicopters purchased in anticipation of use under our INL Air Wing program.
(5)
Backlog data is as of the end of the applicable period. See "Business" for further details concerning backlog.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto and other data contained elsewhere in this Annual Report on Form 10-K. Please see "Item 1A. Risk Factors" and "Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated. All references in this Annual Report on Form 10-K to fiscal years of the United States government pertain to their fiscal year, which ends on September 30th of each year.

Company Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951. Our current customers include the U.S. Department of Defense ("DoD"), the Department of State ("DoS"), U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies.
Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations prior to the merger on July 7, 2010, except for the costs associated with acquiring DynCorp International. Delta Tucker Holdings, Inc. remains the holding company of DynCorp International. DynCorp International wholly owns DynCorp International, LLC, which functions as the operating company.
In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s previous six operating and reporting segments, Logistics Civil Augmentation Program ("LOGCAP"), Aviation ("Aviation"), Training and Intelligence Solutions ("TIS"), Global Logistics and Development Solutions ("GLDS"), Security Services and Global Linguist Services ("GLS") were realigned into three operating and reporting segments, DynAviation, DynLogistics and DynGlobal. Additionally, as GLS no longer represents a significant portion of our business the chief operating decision maker has determined that GLS will no longer be considered an operating segment or reporting unit. The DynAviation and DynLogistics segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies.
As of December 31, 2013 , we employed or managed approximately 20,000 personnel, including approximately 3,600 personnel from our affiliates. We operate in approximately 34 countries through approximately 79 active contracts and 118 active task orders.
On January 24, 2013, the Board of Directors of Delta Tucker Holdings, Inc. and its consolidated subsidiaries (the "Company"), approved a change of the Company's fiscal year end from a 52-53 week basis ending on the Friday closest to December 31 to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December 31. The change of fiscal year end was effective beginning with the fiscal year ended December 31, 2012.



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Current Operating Environment and Outlook
External Factors
After a decade of unprecedented defense spending to support operations in Iraq and Afghanistan, our industry is adjusting to a period of reduced funding and budget uncertainty brought about by the convergence of a variety of policy, political and fiscal realities. These factors include:
the ongoing draw-down of U.S. troops in Afghanistan adhering to discretionary spending caps mandated by the Budget Control Act of 2011 ("BCA");
implementation of automatic sequestration cuts; and
budget uncertainty driven by the current partisan political environment, resulting in the government shut-down and continuing resolutions.
To mitigate the negative financial and operational readiness impacts induced by the above noted factors, Congress enacted the Bipartisan Budget Act of 2013 ("BBA") in December 2013. The budget act agreement (i) prevents the triggering of additional sequestration in fiscal year 2014, (ii) adjust upwardly BCA mandated discretionary spending caps, (iii) reduces the threat of another government shutdown and (iv) reinstates some certainty into the budgetary process. The BBA achieves these objectives by partially repealing sequestration and setting top-line spending levels for the next two fiscal years. The fiscal year 2014 budget cap for discretionary spending is $1.012 trillion which represents a $45.0 billion increase over the previous BCA mandated cap. The fiscal year 2015 budget cap will be $1.014 trillion which essentially freezes funding at fiscal year 2014 levels. With regard to defense, the BBA resets the defense discretionary spending cap for fiscal year 2014 at $520.5 billion, which is $22.0 billion above the projected fiscal year 2014 sequestered level. The fiscal year 2015 cap will be $521.3 billion or $9.3 billion above the projected fiscal year 2015 sequestered level. The BBA does not impact or resolve the caps mandated by the BCA in 2016 and beyond.
In addition to setting topline numbers, the BBA enabled the House and Senate Appropriations Committees to finalize fiscal year 2014 spending bills, which were enacted in the fiscal year 2014 Consolidated Appropriations Act. Under this omnibus appropriations measure, the fiscal year 2014 funding for the DoD is $572.1 billion with $486.9 billion in the base budget and an additional $85.2 billion in the Overseas Contingency Operations ("OCO") accounts. While lower than the President’s request and the final fiscal year 2013, it is important to note that the fiscal year 2014 appropriation restores $22 billion in projected additional sequestration cuts.
Of particular interest to the defense services contractor community, the fiscal year 2014 appropriation for the Operations and Maintenance ("O&M") accounts is $228.3 billion with $159.9 billion in the base budget and additional $66.4 billion in the OCO accounts. The fiscal year 2014 O&M appropriation is $9.6 billion below the President’s request, but also reflects only a 4% reduction versus a 8.0% reduction in fiscal year 2013. The final OCO appropriation is $6.4 billion above the President’s request. This is of particular importance to the programs we execute for the Army which saw an increase of $3.1 billion and for the Air Force with an increase of $2.7 billion in OCO and O&M funds.
While operational requirements and base budget spending cap limitations have led to continued robust OCO requests and appropriations, continued support for OCO at this level remains unclear. We believe the President’s fiscal year 2015 defense budget request will likely include an OCO placeholder that reflects the Administration’s planned trajectory in Afghanistan. We expect the first quarter will be important for resolving a Bilateral Security Agreement with Afghanistan to set the parameters for the size and scope of a U.S. presence post-2014 and related support services contracts.
As outlined above and noted in previous filings, funding for our programs is dependent on annual budget and appropriation decisions, as well as geo-political and macroeconomic conditions, which are beyond our control. While there is uncertainty around these domestic and international factors, the final agreed upon appropriated funding levels for national security programs will remain historically high with plenty of opportunity to continue supporting our customers. We believe the O&M budgets will remain relatively robust. At almost 40% of all defense spending, we believe the O&M accounts are, and will continue to be, the largest category within the defense budget.  The base O&M accounts have a year over year growth rate of 2.8%, when removing the conflict related to O&M spending increases and subsequent peacetime declines since World War II. 
While the recent enactment of the BBA and a fiscal year 2014 appropriation brought some stability and clarity to the defense budget, we anticipate the military branches under the DoD will continue to make cuts to the modernization accounts to meet fiscal realities. We believe the DoD will need to ensure existing platforms are able to meet the requirements of the mission set forth and ensure its success. 
While there exists potential challenges that could adversely impact our business on a short term basis, we believe the following longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide:

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Realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot-level maintenance;
Continued focus on smart power initiatives by the DoS USAID, the United Nations and the DoD, including development and smaller-scale stability operations;
Increased maintenance, overhaul and upgrade needs to support returning rolling stock and aging platforms;
Growth in outsourcing by foreign allies of maintenance, supply support, facilities management, infrastructure upgrades and construction management-related services; and
Further efforts by the U.S. government to move from single award to multiple award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.
While determining the size and scope of the U.S. and international presence in Afghanistan is dependent on concluding a Bilateral Security Agreement ("BSA"), we still anticipate remaining issues will be resolved and that there will be opportunities to support the enduring U.S. and NATO presence. Support opportunities include the DoS, which is expected to expand and include the U.S. embassy in Kabul and four consulates around the country. Additionally, we anticipate that there will be a continued need to advise, assist and help professionalize Afghan National Security Forces for many years, as specified in the U.S. Afghanistan Strategic Partnership Agreement.
In the Middle East, we expect instability and challenges to our regional relationships will persist. However, we believe U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and our allies. We believe that base operations and support and maintenance capacity will be key enablers in this environment and we are especially well positioned to provide these services to both U.S. forces and Allied nations. Finally, the re-balance to Asia reflects the increased importance of the Asia-Pacific regions, in both security and economic terms for the U.S. As the U.S. revitalizes and reinforces its presence in this vital region, we expect to see increased demand for base operations support, logistics support and capacity building, all of which we provide best in class.
The investments and acquisitions we have made over the past several years have been focused on aligning our business to address areas that have high growth potential, including intelligence training and rule of law development, as well as parallel and evolving customer requirements.
Current Business Environment
We believe that our industry and customer base are less likely to be affected by many of the factors generally negatively affecting business and consumer spending. Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. We also have a strong history of being awarded a majority of the contract options. Additionally, since our primary customer is the U.S. federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements that could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. government contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity, affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. If the DCAA cannot complete timely periodic reviews of our control systems, they could render the status of these systems as "non-current" resulting in an adverse outcome.
We cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections and the Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all. See "Risk Factors - Economic conditions could impact our business" for a discussion of the risks associated with current economic conditions.

Notable events for the year ended December 31, 2013
In January 2013, GLS, our equity method investee, was awarded a task order under the Defense Language Interpretation Translation Enterprise ("DLITE") contract with the U.S. Army Intelligence and Security Command to provide linguists to support the U.S. Army Central Command ("CENTCOM") operations at several locations in the Middle East. The task order has one base year and three, one-year options and a total potential value of $88.4 million.
In February 2013, DynAviation was awarded a contract with the U.S. Army Aviation and Missile Life Cycle Management Command to provide aviation field and sustainment level maintenance services under the Army Field Maintenance contract throughout the Regional Aviation Sustainment Maintenance - West Region ("RASM-W). The hybrid firm-fixed-

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price, cost-plus-incentive-fee contract has one base year and four, one-year options and a total potential contract value of $388.5 million.
In March 2013, DynLogistics was awarded a contract with the U.S. Army to provide training, de-processing, fielding, general maintenance support and other services to military units in the U.S. and abroad. The fixed-price level of effort contract has one base year and two, one-year options and a total potential contract value of $35.3 million.
In April 2013, DynLogistics was awarded a task order with the U.S. DoS Bureau of International Narcotics and Law Enforcement Affairs under the Criminal Justice Program Support Contract ("CJPS") to recruit and support the U.S. contingent to the United Nations Police in Haiti and provide logistics support to the Haitian National Police. The hybrid firm-fixed price, labor hour, and cost-reimbursable task order has one base year and three, one-year options and a total potential contract value of $48.6 million.
In June 2013, DynLogistics was awarded a contract with the Defense Logistics Agency to provide logistics support for the agency's equipment in Afghanistan. The fixed-price task order has one base year and two, one-year options and a total potential contract value of $11.2 million.
In June 2013, the Company entered into an amendment (the “Amendment”) to the Credit Agreement dated as of July 7, 2010, among DynCorp International, the Company, the other Guarantors party thereto, several banks and other financial institutions or entities from time to time parties thereto and Bank of America, N.A., as administrative agent and collateral agent. The Amendment amended the Credit Agreement to extend the maturity date with respect to the revolving credit facility to July 7, 2016 and increased the amount of the revolving credit commitment to $181.0 million. The Amendment also amended the Credit Agreement to, among other things, modify certain of the covenants, including the leverage ratio.
In June 2013, DynLogistics was awarded a position on a multiple award IDIQ contract under which work will be awarded through separately issued task orders to provide supplies and support services to the U.S. Marine Corps. The multiple award IDIQ has a one base year and four, one-year options and a total potential contract value of $854.6 million.
In August 2013, DynLogistics was awarded a task order with the U.S. Air Force through the Air Force Contract Augmentation Program III ("AFCAP") to provide installation services at Al Udeid Air Base, Qatar. This one year base contract has two, one-year options and a total contract value of $20.4 million, if all options are exercised.
In September 2013, DynLogistics was awarded a new task order with the U.S. Army under the Enhanced Army Global Logistics Enterprise ("EAGLE") Basic Ordering Agreement to provide support to the Directorate of Logistics at Fort Campbell, Ky. The fixed-fee task order has a nine month base period with four, one-year options and a total contract value of $122.0 million, if all options are exercised.
In September 2013, DynAviation was awarded a subcontract to provide contractor logistics support in Kandahar, Afghanistan as part of the Multi Sensor Aerial Intelligence Surveillance and Reconnaissance ("MAISR") Operations and Sustainment program. The Company will serve as a subcontractor to AASKI Technologies. The sub contract has a one-year option, with a total contract value of up to $86.6 million.
In September 2013, DynLogistics won a task order on the Africa Peacekeeping Program ("AFRICAP") to provide training for personnel in Mali. The task order, awarded by the U.S. Department of State’s Bureau of African Affairs, has one base year with a total potential value of $42.4 million.
In September 2013, we made principal prepayments of $15.0 million, on our Term Loan. The payment caused the acceleration of unamortized deferred financing fees of $0.2 million , which were recorded as a Loss on extinguishment of debt within our Statement of Operations.
In November 2013, the Company was awarded a task order under the Contract Field Teams ("CFT") program to support the U.S. Navy Fleet Readiness Center Aviation Support Equipment ("FRC-ASE") headquartered at Solomons, M.D. The DynAviation task order, awarded by the U.S. Air Force, has one base year with a total potential value of $27.0 million.
In December 2013, we made principal prepayments of $35.0 million, on our Term Loan. The payment caused the acceleration of unamortized deferred financing fees of $0.5 million , which were recorded as Loss on extinguishment of debt within our Statement of Operations.
In December 2013, the Company ceased use of its previous headquarters located in Falls Church, Virginia and relocated to new headquarters in Tysons Corner, in McLean, Virginia. The Company restructured its facilities footprint in Virginia to better position the Company operationally for the future. 
In December 2013, certain members of management and outside directors were awarded Class B interests in DynCorp Management LLC (“DynCorp Management”). DynCorp Management LLC conducts no operations and was established for the purpose of holding equity in our Company. DynCorp Management LLC authorized 100,000 Class B shares as available for issuance and approved 7,246 Class B-1 Interests and 380 Class B-2 Interests to certain members of

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Table of Contents


management and outside directors of Defco Holdings Inc. (“Holdings”), and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our Parent, Holdings. Additionally, in December the Company approved a long-term cash incentive bonus for certain members of management and outside directors, where in the event of a change in control, subject to the various members of management continued employment with the Company through such a change in control and execution of a restrictive covenant agreement, the various members of management shall be eligible to receive a cash incentive bonus.
Results of Operations
The results of operations presented are for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 .

Delta Tucker Holdings, Inc. Results of Operations - for t he years ended December 31, 2013 , December 31, 2012 and December 30, 2011
The following table sets forth our consolidated statements of operations, both in dollars and as a percentage of revenue, for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 :
 
For the years ended
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
(Amounts in thousands)
 
 
Revenue
$
3,287,184

 
100.0
 %
 
$
4,044,275

 
100.0
 %
 
$
3,719,152

 
100.0
 %
Cost of services
(2,987,253
)
 
(90.9
)%
 
(3,698,932
)
 
(91.5
)%
 
(3,408,842
)
 
(91.7
)%
Selling, general and administrative expenses
(149,925
)
 
(4.6
)%
 
(149,362
)
 
(3.7
)%
 
(149,551
)
 
(4.0
)%
Depreciation and amortization expense
(48,628
)
 
(1.5
)%
 
(50,260
)
 
(1.2
)%
 
(50,773
)
 
(1.4
)%
Earnings from equity method investees
4,570

 
0.1
 %
 
825

 
0.1
 %
 
12,800

 
0.3
 %
Impairment of equity method investment

 
 %
 

 
 %
 
(76,647
)
 
(2.0
)%
Impairment of goodwill, intangibles and long lived assets
(312,728
)
 
(9.5
)%
 
(50,663
)
 
(1.3
)%
 
(33,768
)
 
(0.9
)%
Operating (loss) income
(206,780
)
 
(6.3
)%
 
95,883

 
2.4
 %
 
12,371

 
0.3
 %
Interest expense
(78,826
)
 
(2.4
)%
 
(86,272
)
 
(2.1
)%
 
(91,752
)
 
(2.5
)%
Loss on early extinguishment of debt
(703
)
 
 %
 
(2,094
)
 
(0.1
)%
 
(7,267
)
 
(0.2
)%
Interest income
157

 
 %
 
117

 
 %
 
205

 
 %
Other (loss) income, net
(810
)
 
 %
 
4,672

 
0.1
 %
 
6,071

 
0.2
 %
(Loss) income before income taxes
(286,962
)
 
(8.7
)%
 
12,306

 
0.3
 %
 
(80,372
)
 
(2.2
)%
Benefit (provision) for income taxes
37,461

 
1.1
 %
 
(15,598
)
 
(0.4
)%
 
20,941

 
0.6
 %
Net loss
(249,501
)
 
(7.6
)%
 
(3,292
)
 
(0.1
)%
 
(59,431
)
 
(1.6
)%
Noncontrolling interests
(4,235
)
 
(0.1
)%
 
(5,645
)
 
(0.1
)%
 
(2,625
)
 
(0.1
)%
Net loss attributable to Delta Tucker Holdings, Inc.
$
(253,736
)
 
(7.7
)%
 
$
(8,937
)
 
(0.2
)%
 
$
(62,056
)
 
(1.7
)%
Results of Operations 2013 vs 2012
Revenue — Revenue for the year ended December 31, 2013 was $3,287.2 million , a decrease of $757.1 million , or 18.7% , compared to the year ended December 31, 2012 . The decrease was primarily driven by reduced service needs in Iraq for the DoS, affecting both the INL Air Wing and WPS contracts; the accelerated pace of the drawdown in Afghanistan, which impacted the demand for services under the Company's LOGCAP IV contract and caused reduced training needs under the AMDP contract; fewer new contract wins and the delay in business awards caused by the U.S. budget uncertainty and sequestration. See further discussion of our revenue results in the " Results by Segment " section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2013 was $2,987.3 million , a decrease of $711.7 million , or 19.2% , compared to the year ended December 31, 2012 . The decrease in Cost of services was primarily driven by the reduction in volume, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services was 90.9% compared to 91.5% for the year ended December 31, 2013 and December 31, 2012 , respectively. The reduction in Cost of services as a percentage of revenue was driven by the LOGCAP IV and AMDP contracts which generally carry lower margins and was partially offset by a customer contract dispute within our DynAviation segment. See further discussion of the impact of program margins in the " Results by Segment " section below.

31



Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A increased by $0.6 million , or 0.4% , to $149.9 million during the year ended December 31, 2013 primarily as a result of relocation expenses associated with the change of our facilities footprint in Virginia to better position the Company operationally and our executive presence in our Texas facilities coupled with the increase in severance expense. The increase in the SG&A expense was offset by (i) reductions in legal fees associated with ongoing litigation, (ii) the decrease in costs incurred for contract labor and (iii) the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2013 as compared to the year ended December 31, 2012 . The items discussed above drove an increase in SG&A as a percentage of revenue to 4.6% for the year ended December 31, 2013 compared to 3.7% for the year ended December 31, 2012 .
Depreciation and amortization — Depreciation and amortization during the year ended December 31, 2013 was $48.6 million , a decrease of $1.6 million , or 3.2% , compared to the year ended December 31, 2012 . The decrease was primarily the result of certain internally developed software becoming fully amortized and the impairment of certain intangible assets during the fourth quarter of the year ended December 31, 2012 partially offset by additional depreciation expense on fixed assets, including those acquired in conjunction with the acquisition of Heliworks, Inc. during the third quarter of the year ended December 31, 2012.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC ("PaTH"), Contingency Response Services LLC ("CRS"), Global Response Services LLC ("GRS") and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2013 was $4.6 million , an increase of $3.7 million compared to the year ended December 31, 2012 . The increase was primarily the result of equity method income recognized upon the receipt of $3.1 million in dividend distributions from GLS during the year ended December 31, 2013 . Because of the impairment of our investment in GLS recorded during the year ended December 30, 2011 , earnings related to GLS is recognized when cash is received through dividend distributions.
Impairment of goodwill, intangibles and long lived assets — Impairment for the years ended December 31, 2013 and December 31, 2012 was $312.7 million and $50.7 million , respectively and was mainly attributable to goodwill. During the year ended December 31, 2013 we recognized non-cash impairment charges on reporting units associated with our DynAviation and DynLogistics segment. During the year ended December 31, 2012 , we recognized non-cash impairment charges on goodwill associated with our DynLogistics segment. See Note 3 for further discussion.
Interest expense — Interest expense for the year ended December 31, 2013 was $78.8 million , a decrease of $7.4 million , or 8.6% , compared to the year ended December 31, 2012 . The decrease is the result of the continual reduction of the principal balance of our Term Loan as a result of principal prepayments of $ 50.0 million during the year ended December 31, 2013 and $ 90.0 million during the year ended December 31, 2012 .
Loss on early extinguishment of debt —  Loss on early extinguishment of debt of $0.7 million and $2.1 million for the years ended December 31, 2013 and December 31, 2012 , respectively, was attributable to principal prepayments on our Term Loan totaling $50.0 million and $90.0 million , respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.
Other (expense) income, net — Other (expense) income, net consists primarily of our share of earnings from Babcock DynCorp Limited ("Babcock"), as well as gains/losses from foreign currency and asset sales. The $5.5 million year-over-year decrease was primarily the result of a reduction in earnings from Babcock our unconsolidated joint venture of approximately $4.8M during the year ended December 31, 2013 .
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discreet items. The effective tax rate for the year ended December 31, 2013 was 13.1% , as compared to 126.75% for the year ended December 31, 2012 . The effective tax rate for the year ended December 31, 2013 was driven primarily by the impact of the goodwill impairment as it relates to the pretax book loss compared to pretax book income in the prior year. See Note 5 - Taxes for further discussion of income taxes.
Results of Operations 2012 vs 2011
Revenue — Revenue for the year ended December 31, 2012 was $4,044.3 million , an increase of $325.1 million , or 8.7% , compared to the year ended December 30, 2011 . The increase was primarily driven by the increase in revenue earned under our LOGCAP IV program, INL-Air Wing program, and AMDP program which together comprised approximately 67% of total consolidated revenue. See further discussion in the " Results by Segment " section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2012 was $3,698.9 million , an increase of $290.1 million , or 8.5% , compared to December 30, 2011 . The increase in Cost of services was due to the growth in our business consistent with the increase in revenue discussed above. As a percentage of revenue, Cost of services was 91.5% and 91.7% for the years ended December 31, 2012 and December 30, 2011 , respectively. The reduction as a percentage of revenue was primarily driven

32



by the change in our overall contract mix. Specifically, operations under LOGCAP IV task orders which changed from an award-fee contract arrangement to a fixed-fee contract. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than previously earned with award fees. See further discussion of the impact of program margins in the " Results by Segment ".
Selling, general and administrative expenses ("SG&A") — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $0.2 million , or 0.1% , to $149.4 million for the year ended December 31, 2012 compared to December 30, 2011 primarily as a result of (i) non-routine severance costs incurred during the year ended December 30, 2011 associated with the corporate realignment, (ii) the acceleration of the Phoenix and Casals retention bonuses during the year ended December 30, 2011 (iii) and the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2012 as compared to the year ended December 30, 2011 partially offset by legal costs associated with ongoing litigation incurred during the year ended December 31, 2012. These items also drove the reduction in SG&A as a percentage of revenue to 3.7% for the year ended December 31, 2012 compared to 4.0% for the year ended December 30, 2011 .
Depreciation and amortization — Depreciation and amortization for the year ended December 31, 2012 was $50.3 million , a decrease of $0.5 million , or 1.0% , as compared to depreciation and amortization for the year ended December 30, 2011 . The decrease was primarily the result of non-compete agreements becoming fully amortized during the second half of the year ended December 30, 2011 partially offset by additional depreciation expense on fixed asset additions, including fixed assets acquired in conjunction with the acquisition of Heliworks, during the year ended December 31, 2012 .
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as PaTH, CRS, GRS and GLS. Earnings from equity method investees for the year ended December 31, 2012 decreased $12.0 million , or 93.6% , to $0.8 million primarily as a result of the reduction in earnings recognized from GLS. As a result of the impairment of our investment in GLS recorded during the year ended December 30, 2011 , earnings related to GLS is recognized when cash is received through dividend distributions.
Impairment of equity method investment —  During the year ended December 30, 2011 , we recorded a $76.6 million impairment of our investment in GLS as we concluded it had an other than temporary loss in value during the period. As a result, we no longer recognize any earnings until cash is received through dividend distributions.
Impairment of goodwill, intangibles and long lived assets—  Impairment for the years ended December 31, 2012 and December 30, 2011 was $50.7 million and $33.8 million , respectively primarily related to goodwill. During the year ended December 31, 2012, we recognized non-cash impairment charges on the goodwill associated with our DynLogistics segment. See Note 3 for further discussion.
Interest expense — Interest expense for the year ended December 31, 2012 was $86.3 million , a decrease of $5.5 million , or 6.0% , compared to the year ended December 30, 2011 . The decrease was due to the reduction of the principal balance of our Term Loan as a result of principal prepayments of $90.0 million and $147.3 million during the years ended December 31, 2012 and December 30, 2011 , respectively.
Loss on early extinguishment of debt —  Loss on early extinguishment of debt of $2.1 million and $7.3 million for the years ended December 31, 2012 and December 30, 2011 , respectively, was attributable to principal prepayments on our Term Loan totaling $90.0 million and $147.3 million , respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.
Other income, net — Other income, net consists primarily of our share of earnings from Babcock, our unconsolidated joint venture that is not operationally integral to our business as well as gains/losses from foreign currency and asset sales. Other income, net decreased $1.4 million , or 23.0% , to $4.7 million for the year ended December 31, 2012 compared to the year ended December 30, 2011 . The decrease was primarily due to the $0.5 million decrease in earnings from Babcock.
Income taxes — Our effective tax rate consists of federal and state statutory rates and certain permanent differences. The effective tax rate for the year ended December 31, 2012 was 126.8% , as compared to 26.1% for the year ended December 30, 2011 . The effective tax rate for the year ended December 31, 2012 was driven primarily by the impact of the goodwill impairment recognized during the year ended December 31, 2012 .

33



Results by Segment
The following tables sets forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the years ended December 31, 2013 , December 31, 2012 and December 30, 2011 . Amounts agree to our segment disclosures. See Note 12 for further discussion.
 
For the years ended
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
 
 
 
(Amounts in thousands)
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
DynLogistics
$
1,920,715

 
58.4
 %
 
$
2,709,469

 
67.0
 %
 
$
2,610,448

 
70.2
 %
DynAviation
1,371,928

 
41.7
 %
 
1,338,514

 
33.1
 %
 
1,101,218

 
29.6
 %
Headquarters / Other (1)
(5,459
)
 
(0.2
)%
 
(3,708
)
 
(0.1
)%
 
7,486

 
0.2
 %
Consolidated revenue
$
3,287,184

 
100.0
 %
 
$
4,044,275

 
100.0
 %
 
$
3,719,152

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
Profit Margin
 
Operating Income (Loss)
 
Profit Margin
 
Operating Income (Loss)
 
Profit Margin
DynLogistics
$
36,243

 
1.9
 %
 
$
48,941

 
1.8
 %
 
$
51,316

 
2.0
 %
DynAviation
(194,866
)
 
(14.2
)%
 
105,327

 
7.9
 %
 
71,912

 
6.5
 %
Headquarters / Other (2)
(48,157
)
 
882.2
 %
 
(58,385
)
 
1,574.6
 %
 
(110,857
)
 
(1,480.9
)%
Consolidated operating (loss) / income
$
(206,780
)
 
(6.3
)%
 
$
95,883

 
2.4
 %
 
$
12,371

 
0.3
 %
(1)
Headquarters revenue primarily represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures. The DynGlobal associated revenue for the year ended December 31, 2013 is also included in Headquarters/Other. The amount of revenue for DynGlobal represented less than 1% of total revenue for the period.
(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. The DynGlobal associated costs for the year ended December 31, 2013 are also included in Headquarters/Other. The amount of cost for DynGlobal represented less than 1% of total cost for the period.
Results by Segment 2013 vs 2012
DynLogistics
Revenue of $1,920.7 million decreased $788.8 million , or 29.1% , for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of reductions in manning, materials and other direct costs under the Afghan Area of Responsibility ("AOR") task order under the LOGCAP IV program consistent with our expectation of reduced volume resulting from the continued drawdown of troops in Afghanistan. Additionally, revenue for the year ended December 31, 2013 was impacted by lower volume under the AMDP contract, the completion of the CivPol task order in Iraq, a reduction in the level of effort on our Navistar and Oshkosh Defense programs and the wind down of the Worldwide Protective Services ("WPS") task order in Iraq. The decline in revenue was partially offset by revenue from new programs including the Egyptian Personnel Support Services (“EPSS”) program, the Medium Tactical Vehicles ("MTV") program, the Evergreen program and the new task order for the Criminal Justice Program Support ("CJPS") in Haiti. As efforts in Afghanistan and Iraq come to end and with the continued pressure on U.S. defense budgets, we expect our revenue for the DynLogistics segment to continue to decline in 2014.
Operating income of $36.2 million decreased $12.7 million , or 25.9% , for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of the decline in revenue discussed above. The decline in operating income was partially offset by an increase in vehicle deliveries under the Palestinian Security Sector task order under the CivPol contract coupled with operations under the EPSS contract performing at higher margins than the overall contract mix in the prior year. Operating income was impacted in both comparable periods by goodwill impairments recorded for the Intelligence & Security and the Training & Mentoring reporting units, respectively. See Note 3 further discussion of these impairments.
DynAviation
Revenue of $1,371.9 million increased $33.4 million , or 2.5% , for the year ended December 31, 2013 compared to the year ended December 31, 2012 . The change was primarily the result of operations under new programs, including the National Aeronautics and Space Administration ("NASA") AMOS and T-6 COMBS contracts, as well as operations under new task orders awarded under the CFT program, including the 160th SOAR-A task order. Additionally, an increase in manning levels under the Theater Aviation Sustainment Management - Europe ("TASM-E") CFT task order, as well as increased demand under

34



our Saudi Arabia programs contributed to the overall increase in revenue. These increases were partially offset by the reduction in demand under the INL-Air Wing program in Iraq and the decrease in volume as well as the cancellation or completion of certain other contracts.
Operating loss of $194.9 million for the year ended December 31, 2013 compared to the operating income of $105.3 million for the year ended December 31, 2012 was primarily the result of the impact of a goodwill impairment charge to the Air Operations reporting unit for the year ended December 31, 2013 as a result of declines in projected revenues for future years. See Note 3 for further discussion of the impairment. Additionally, we incurred cost to expand Heliworks, Inc. and recorded an unfavorable adjustment related to a customer contract dispute. Operating loss as a percentage of revenue decreased to 14.2% for the year ended December 31, 2013 as compared to 7.9% for the year ended December 31, 2012 .
Results by Segment 2012 vs 2011
DynLogistics
Revenue of $2,709.5 million increased $99.0 million , or 3.8% , for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of a $206.6 million increase from higher volumes of work under the LOGCAP IV Afghanistan AOR partially offset by a decrease in volume under the Kuwait AOR resulting from manning reductions from the 2011 troop drawdown in Iraq as Operation Iraqi Freedom ("OIF") ended. In the aggregate, we recorded a favorable adjustment of $18.7 million for the year ended December 31, 2012 primarily due to the actual award fee determination being higher than our previous estimates of the LOGCAP IV award fee scores. During the fourth quarter of 2012, the Afghanistan and Kuwait task orders were converted from a cost-plus-award-fee contract vehicle to a cost-plus-fixed-fee arrangement, resulting in retrospective application of the fee arrangement to the open periods of performance on each task order. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than we were previously earning in award fees. Additionally, we saw increases in revenue as a result of increased volume under AMDP and the replacement of the Worldwide Personal protection Program ("WPPS") with the higher volume WPS program. These increases were partially offset with the ramp-downs in our CivPol program and the conclusion of the Multi-National Security Transition Command-Iraq ("MNSTC-I") program in early 2012 as well as reductions related to the completion of certain task orders under the AFCAP contract
Operating income of $48.9 million decreased $2.4 million , or 4.6% , for the year ended December 31, 2012 compared to operating income of $51.3 million for the year ended December 30, 2011 primarily as a result of the $44.6 million goodwill impairment charge recorded in 2012 compared to a $33.8 million goodwill impairment charge in 2011 on reporting units within the segment. This decline was partially offset by margin improvements in the Oshkosh Defense program as well as the recognition of $5.5 million of income resulting from the REA received on the Africa Peacekeeping Security Sector Transformation ("APK-SST") task order that had no associated cost. Operating income as a percentage of revenue decreased to 1.8% for the year ended December 31, 2012 compared to 2.0% for the year ended December 30, 2011 primarily as a result of the impact of the goodwill impairment charge as noted above. See Note 3 further discussion of the impairment.
DynAviation
Revenue of $1,338.5 million increased $237.3 million , or 21.5% , for the year ended December 31, 2012 compared to the year ended December 30, 2011 . The change was primarily the result of (i) increased demand under the INL-Air Wing program, (ii) performance under new CFT task orders, (iii) revenue from the T6-COMBS, NASA-AMOS and G222 new contracts, and (iv) other existing Aviation contracts. These increases were partially offset by a reduction in volume under the TASM-E CFT task order due to the completion of certain delivery orders, and the completion of the Life Cycle Contract Support Services (“LCCS”) contract in late 2011 and early 2012. We continue to pursue opportunities within the INL Air wing program as we continue to expand our aircraft and personnel requirements in supporting the DoS.
Operating income of $105.3 million increased $33.4 million , or 46.5% , for the year ended December 31, 2012 compared to the year ended December 30, 2011 as a result of the increased demand discussed above and better margins on our new contracts and task orders as compared to our historical contract mix partially offset by startup costs associated with Heliworks, which we acquired during the year ended December 31, 2012. Additionally, certain non-recurring charges in the prior year related to program specific severance costs and a write-down of inventory on the LCCS program contributed to the increase in operating income. High margins on new contracts and task orders and the absence of the non-recurring charges incurred during the year ended December 30, 2011 drove the improvement in operating income as a percentage of revenue to 7.9% for the year ended December 31, 2012 compared to 6.5% for the year ended December 30, 2011 .

35



LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations and borrowings available under our senior secured credit facility ("Senior Credit Facility") are our primary sources of short-term liquidity (refer to Note 8 for more detail). We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, access to our Revolver is dependent upon our meeting financial and non-financial covenants, summarized below, and our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable. At different periods throughout 2013, we have seen delays and other disruptions in the ability of our customers to make timely payments on our accounts receivable. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections or loss of our ability to access our revolver, could materially impact liquidity and our ability to fund our working capital needs. Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility, which would materially affect our future expansion strategies and our ability to meet our operational obligations. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash.
Management believes Days Sales Outstanding ("DSO") is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. As of December 31, 2013 and December 31, 2012 , DSO was 69 days compared to 68 days, respectively.
In 2014, we will continue to focus on working capital management and growth in our business. We expect cash to continue to be impacted by operational working capital needs, potential acquisitions and interest payments on the Senior Credit Facility and the Senior Unsecured Notes. Interest payments are expected to be lower during calendar year 2014 as a result of the $50.0 million and $90.0 million in principal prepayments made during the years ended December 31, 2013 and December 31, 2012 , respectively.
Cash Flow Analysis
The following table sets forth cash flow data for the periods indicated therein:
 
 
 
 
 
 
 
For the years ended
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
(Amounts in thousands)
 
 
Net cash provided by operating activities
$
137,502

 
$
144,190

 
$
167,986

Net cash used in investing activities
(7,971
)
 
(12,163
)
 
(3,003
)
Net cash used in financing activities
(77,461
)
 
(83,457
)
 
(147,315
)
Cash Flows - December 31, 2013 vs December 31, 2012
Operating Activities
Cash provided by operating activities during the year ended December 31, 2013 was $137.5 million as compared to cash provided by operating activities of $144.2 million during the year ended December 31, 2012 . Cash provided by operations for the year ended December 31, 2013 was the result of positive earnings before interest, taxes and depreciation & amortization ("EBITDA"), excluding the impact of the impairment, coupled with working capital improvements resulting from the collection of accounts receivable partially offset by the utilization of prepaid expenses and cash expended to reduce accounts payable. Cash provided by operating activities during the year ended December 31, 2012 was primarily the result of growth in EBITDA, excluding the impact of impairment. In addition, working capital improvements and the release of restricted cash also benefited cash provided by operating activities.
 

36



Investing Activities
Cash used in investing activities during the year ended December 31, 2013 was $8.0 million as compared to cash used in investing activities during the year ended December 31, 2012 of $12.2 million . Cash used in investing activities during the year ended December 31, 2013 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock and CRS joint ventures. Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our Partnership for Temporary Housing ("PaTH") joint venture.
Financing Activities
Cash used in financing activities during the year ended December 31, 2013 was $77.5 million compared to $83.5 million of cash used in financing activities during the year ended December 31, 2012 . Cash used in financing activities during the year ended December 31, 2013 was primarily the result of payments related to financed insurance and a $ 50.0 million prepayment on the Term Loan. Cash used in financing activities during the year ended December 31, 2012 was primarily the result of a $ 90.0 million prepayment on our Term Loan partially offset by borrowings related to financed insurance.
Cash Flows - December 31, 2012 vs December 30, 2011
Operating Activities
Cash provided by operations for the year ended December 31, 2012 was $144.2 million as compared to cash provided by operations of $168.0 million for the year ended December 30, 2011 . Cash provided by operations during the year ended December 31, 2012 was primarily the result of growth in earnings before interest, taxes, and depreciation & amortization ("EBITDA"), working capital improvements, including net cash received of approximately $66.2 million on December 31, 2012, and the release of restricted cash. Cash provided by operations for the year ended December 31, 2012, compared to Cash provided by operations for the year ended December 30, 2011 was negatively impacted by a $46.0 million tax refund resulting from the approved Change in Accounting Methodology ("CIAM") with the IRS that occurred in 2011 and did not recur in 2012.
Investing Activities
Cash used in investing activities for the year ended December 31, 2012 was $12.2 million as compared to cash used in investing activities of $3.0 million for the year ended December 30, 2011 . Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our PaTH and CRS joint ventures. Cash used in investing activities during the year ended December 30, 2011 was driven by contributions to PaTH, our 30% owned joint venture, as well as purchases of property and equipment and software, partially offset by the return of capital from our GLS and CRS joint ventures.
Financing Activities
Cash used in financing activities for the year ended December 31, 2012 was $83.5 million as compared to cash used in financing activities of $147.3 million for the year ended December 30, 2011 . Cash used in financing activities during the year ended December 31, 2012 was primarily the result of $90.0 million in prepayments on our Term Loan partially offset by borrowings related to financed insurance. Cash used in financing activities during the year ended December 30, 2011 was primarily driven by three significant prepayments on our Term Loan, in addition to our quarterly principal payments during the year, partially offset by net borrowings related to financed insurance.



37



Financing
Long-term debt consisted of the following:
 
Delta Tucker Holdings, Inc.  
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
(Amounts in thousands)
 
 
Pre-merger 9.5% senior subordinated notes

 
637

 
637

Term loan
277,272

 
327,272

 
417,272

10.375% senior unsecured notes
455,000

 
455,000

 
455,000

Total indebtedness
732,272

 
782,909

 
872,909

Less current portion of long-term debt

 
(637
)
 

Total long-term debt
$
732,272

 
$
782,272

 
$
872,909

In connection with the Merger on July 7, 2010, substantially all of DynCorp International's debt outstanding as of April 2, 2010 was repaid and replaced with new debt described below. The pre-Merger 9.5% Senior subordinated notes of $0.6 million matured and were paid in full on February 15, 2013. Due to principal prepayments made on our Term Loan during the year ended December 31, 2012 , we have satisfied our responsibility to make quarterly principal payments through July 7, 2016 .
The weighted-average interest rate as of December 31, 2013 and December 31, 2012 for our debt was 8.8% and 8.7% , respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 31, 2013 and December 31, 2012 .
Senior Credit Facility
In connection with the Merger, DynCorp International entered into a senior secured credit facility on July 7, 2010 (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Agent.
On June 19, 2013 , we entered into a third amendment (the “Amendment”) to the Senior Credit Facility. The 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.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of December 31, 2013 , the Senior Credit Facility provided for a $277.3 million term loan facility ("Term Loan") and a $181.0 million Revolver, which includes a $100.0 million letter of credit subfacility. As of December 31, 2013 and December 31, 2012 , the available borrowing capacity under the Senior Credit Facility was approximately $144.6 million and $111.7 million , respectively, which allows for up to $36.4 million and $38.3 million in additional letters of credit, respectively. The maturity date on the Term Loan and Revolver is July 7, 2016 . Amounts borrowed under our Revolver were used to fund operations. Refer to Note 8 further discussion of the Senior Credit Facility.
Interest Rates on Term Loan & Revolver
Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") plus an applicable margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option or 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency option based on our outstanding Secured Leverage Ratio at the end of each quarter. The Secured Leverage Ratio is the ratio of total secured consolidated debt (net of up to $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75% .

38



The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75% .
As of December 31, 2013 and December 31, 2012 , the applicable interest rates for outstanding balances under our Term Loan were 6.25% and 6.25% , respectively.
Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5% . The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of December 31, 2013 and December 31, 2012 the applicable interest rates for our letter of credit subfacility and our interest rates for our unused commitment fees were 4.25% and 4.50% and 0.50% and 0.75% , respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee.
Principal Payments
Our Credit Facility contains an annual requirement to use a portion of our Excess Cash Flow, as defined in the Credit Facility, to make additional principal payments.  The first requirement was in 2012 based on annual financial results for the year ended December 31, 2012 .  Based on the principal payments we made during the years ended December 31, 2012 and December 31, 2013 we did not meet the threshold for an additional Excess Cash Flow payment.  Additional principal payments could be required in future years based on net proceeds received from items such as tax refunds or disposition of assets or lines of business.
During the years ended December 31, 2013 and December 31, 2012 , we made principal payments of $50.0 million and 90.0 million , respectively on the Term Loan facility. Pursuant to our Term Loan facility quarterly principal payments are required, however, the principal prepayments made in 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.
Deferred financing costs of $0.7 million and $2.1 million , related to the various principal payments, were expensed and included in Loss on early extinguishment of debt in our consolidated statement of operations for the years ended December 31, 2013 and December 31, 2012 , respectively. There were no penalties associated with the prepayments.
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants. The negative covenants in the Senior Credit Facility include, among other things, limits on our ability to:
declare dividends and make other distributions;
redeem or repurchase our capital stock;
prepay, redeem or repurchase certain of our indebtedness;
grant liens;
make loans or investments (including acquisitions);
incur additional indebtedness;
modify the terms of certain debt;
restrict dividends from our subsidiaries;
change our business or business of our subsidiaries;
merge or enter into acquisitions;
sell our assets;
enter into transactions with our affiliates; and
make capital expenditures.
In addition, the Senior Credit Facility stipulates a maximum total leverage ratio and a minimum interest coverage ratio that must be maintained.

39



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 million ) to Consolidated EBITDA as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot be greater than 4.50 to 1.0 for the period ending March 27, 2015, after which, the maximum total leverage diminishes quarterly or semi-annually to a maximum of 3.75 to 1.00 beginning September 26, 2015. The Amendment made adjustments to the levels at which the maximum total leverage diminishes over the remainder of the facility.
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 2.0 to 1.0 through the period ending June 27, 2014 , after which, the minimum total interest coverage ratio increases to 2.05 to 1.00 through March 27, 2015 and 2.25 to 1.00 thereafter.
The fair value of our borrowings under our Senior Credit Facility approximates 100.5% and 100.5% of the carrying amount based on quoted values as of December 31, 2013 and December 31, 2012 , respectively.     
In the event we fail to comply with the covenants specified in the Senior Credit Facility and the Indenture governing our Senior Unsecured Notes, we may be in default.
Senior Unsecured Notes
On July 7, 2010, DynCorp International completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International, and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes commenced on January 1, 2011 and is payable on January 1 and July 1 of each year. The balance of our Senior Unsecured Notes was $455.0 million as of both December 31, 2013 and December 31, 2012 .
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 from both Moody's Investor Service, Inc. as well as Standard Poor's Rating Service.
We can redeem the new Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain specified triggering events, including certain asset sales and change of control events.
We or our affiliates may, from time to time, purchase our Senior Unsecured Notes. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.

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Contractual Commitments
The following table represents our contractual commitments associated with our debt and other obligations as of December 31, 2013 :
 
Calendar Years (1)  
(Amounts in thousands)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter   
 
Total   
Term Loan  (2)
$

 
$

 
$
277,272

 
$

 
$

 
$

 
$
277,272

Senior Unsecured Notes

 

 

 
455,000

 

 

 
455,000

Interest on indebtedness  (3)
67,945

 
67,945

 
57,944

 
23,603

 

 

 
217,437

Operating leases (4)
34,254

 
15,092

 
11,203

 
10,277

 
8,926

 
18,863

 
98,615

Liability on uncertain tax positions (5)
4,320

 

 

 

 

 

 
4,320

Total contractual obligations
$
106,519

 
$
83,037

 
$
346,419

 
$
488,880

 
$
8,926

 
$
18,863

 
$
1,052,644

(1)
As of December 31, 2013 , there were no amounts outstanding under our Revolver.
(2)
Due to principal prepayments made on our Term Loan during the year ended December 30, 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. Amounts above excludes such future mandatory principal payments due to excess cash flow requirements. See Note 8 further discussion of the payments.
(3)
Represents interest expense calculated using interest rates of: (i) 10.375% for our Senior Unsecured Notes, (ii) 6.25% for our Term Loan, (iii) 4.25% for our Letters of Credit currently outstanding and (iv) 0.75% for the unused borrowing capacity available under our Revolver.
(4)
For additional information about our operating leases, see Note 9 for further discussion.
(5)
Represents the estimated payments related to the unrecognized tax benefits for the respective year. See Note 5 for further discussion.

Non-GAAP Measures
We define EBITDA as GAAP net (loss) income attributable to Delta Tucker Holdings, Inc. adjusted for interest expense, taxes and depreciation and amortization. Adjusted EBITDA is calculated by adjusting EBITDA for the items described in the table below. We use EBITDA and Adjusted EBITDA as supplemental measures in the evaluation of our business and believe that EBITDA and Adjusted EBITDA provide a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense and is consistent with one of the measures we use to evaluate management’s performance for incentive compensation. In addition, all adjustments to arrive at Adjusted EBITDA as presented in the table below correspond to the definition of Consolidated EBITDA used in the Senior Secured Credit Facilities and the definition of EBITDA used in the Indenture governing the Senior Unsecured Notes to test the permissibility of certain types of transactions, including debt incurrence. Neither EBITDA nor Adjusted EBITDA is a financial measure calculated in accordance with GAAP. Accordingly, they should not be considered in isolation or as substitutes for net (loss) income attributable to Delta Tucker Holdings, Inc./Predecessor or other financial measures prepared in accordance with GAAP.
Management believes these non-GAAP financial measures are useful in evaluating operating performance and are regularly used by security analysts, institutional investors and other interested parties in reviewing the Company. Non-GAAP financial measures are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of the performance of other companies. When evaluating EBITDA and Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in EBITDA and Adjusted EBITDA, (ii) whether EBITDA and Adjusted EBITDA have remained at positive levels historically, and (iii) how EBITDA and Adjusted EBITDA compare to our debt outstanding. The non-GAAP measures of EBITDA and Adjusted EBITDA do have certain limitations. They do not include interest expense, which is a necessary and ongoing part of our cost structure resulting from the incurrence of debt. EBITDA and Adjusted EBITDA also exclude tax, depreciation and amortization expenses. Because these are material and recurring items, any measure, including EBITDA and Adjusted EBITDA, which excludes them has a material limitation. To mitigate these limitations, we have policies and procedures in place to identify expenses that qualify as interest, taxes, loss on debt extinguishments and depreciation and amortization and to approve and segregate these expenses from other expenses to ensure that EBITDA and Adjusted EBITDA are consistently reflected from period to period. Our calculation of EBITDA and Adjusted EBITDA may vary from that of other companies. Therefore, our EBITDA and Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not give effect to the cash we must use to service our debt or pay income taxes and thus does not reflect the funds generated from operations or actually available for capital investments.

41



 
Delta Tucker Holdings, Inc.
 
For the years ended
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
 
 
 
(Amount in thousands)
 
 
(unaudited) 
Net loss attributable to Delta Tucker Holdings, Inc.
$
(253,736
)
 
$
(8,937
)
 
$
(62,056
)
(Benefit) Provision for income tax
(37,461
)
 
15,598

 
(20,941
)
Interest expense, net of interest income
78,669

 
86,155

 
91,547

Depreciation and amortization (1)
50,279

 
51,814

 
52,494

EBITDA
(162,249
)
 
144,630

 
61,044

Non-recurring unusual gains or losses or income or expenses and non-cash impairments (2)
323,930

 
54,354

 
122,151

Changes due to fluctuation in foreign exchange rates
(366
)
 
(226
)
 
(210
)
Earnings from affiliates not received in cash (3)
1,371

 
(699
)
 
(1,297
)
Employee non-cash compensation, severance, and retention expense (4)
6,444

 
1,381

 
8,483

Management fees  (5)
1,899

 
1,075

 
777

Acquisition accounting and Merger-related items  (6)
(4,146
)
 
(4,195
)
 
(2,171
)
Annualized operational efficiencies (7)
11,798

 

 
855

Other
1,774

 
(50
)
 
2,011

Adjusted EBITDA
$
180,455

 
$
196,270

 
$
191,643

(1)
Amount includes certain depreciation and amortization amounts which are classified as Cost of services in the consolidated statements of operations of Delta Tucker Holdings, Inc. included elsewhere in this Annual Report on Form 10-K.
(2)
Amount includes the impairment of our investment in the GLS joint venture, impairment of goodwill and the impairment of intangibles, restructuring costs, as well as certain unusual income and expense items as defined under our debt agreements.
(3)
Represents the difference between trailing twelve months of income booked from unconsolidated affiliates and the cash received from the affiliates during the same period.
(4)
Includes post-employment benefit expense related to severance in accordance with ASC 712 - Compensation, relocation expenses and stock based compensation expense.
(5)
Amount includes management fees paid to Cerberus Operations and Advisory Company.
(6)
Includes the amortization of intangibles arising pursuant to ASC 805 - Business Combination .
(7)
Represents a defined EBITDA adjustment under our debt agreements for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period.

Off-Balance Sheet Arrangements
As of December 31, 2013 , we did not have any material off-balance sheet arrangements as defined under SEC rules.
Effects of Inflation
We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer term fixed-price and time-and-materials type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the periods of performance. The majority of our contracts are cost-reimbursable type contracts, which consequently, eliminate the impact of inflation. Costs and revenue include an inflationary increase that commensurates with the general economy in which we operate. As such, Net (loss) income attributable to Delta Tucker Holdings, Inc. or our Predecessor has not been materially impacted by inflation.
Critical Accounting Policies and Estimates
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based on information available at the time of the estimates or assumptions, including our historical experience, where relevant. Significant estimates and assumptions are reviewed quarterly by management. The evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because

42



of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may materially differ from the estimates.
Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, see Note 1 . Management discusses our critical accounting policies and estimates with the Audit Committee of our Board of Directors annually.
Revenue Recognition and Cost Estimation on Long-Term Contracts
General - We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement. As such, systems, equipment or materials are not generally separable from the services we provide. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the customer, the sales price is fixed or determinable (for non-U.S. government contracts) or costs are identifiable, determinable, reasonable and allowable (for our U.S. government contracts), and collectability is reasonably assured (for non-U.S. government contracts) or a reasonable contractual basis for recovery exists (for U.S. government contracts). Our contracts typically fall into the following four categories with the first representing the vast majority of our revenue: (i) federal government contracts, (ii) construction-type contracts, (iii) software contracts and (iv) other contracts. We apply the appropriate guidance consistently to similar contracts.
Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other special contract provisions are evaluated throughout the life of our contracts when estimating total contract revenue under the percentage-of-completion or proportional methods of accounting. We inherently have risks related to our estimates with long-term contracts. Actual amounts could materially differ from these estimates. We believe the following are inherent to the risk of estimation: (i) assumptions are uncertain and inherently judgmental at the time of the estimate; (ii) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues, costs and recoverability of assets, and (iii) changes in estimates could have material effects on our financial condition or results of operations. The impact of all of these factors could contribute to a material cumulative adjustment.
Some of our contracts with the U.S. government contain award or incentive fees. We recognize award or incentive fee revenue when we can make reasonably determinable estimates of award or incentive fees to consider them in determining total estimated contract revenue. We do not consider the mere existence of potential award or incentive fee as presumptive evidence that award or incentive fees are to be automatically included in determining total estimated revenue. In some cases, we may not be able to reliably predict whether performance targets will be met, and as a result, we exclude the award or incentive fees from the determination of total revenue in such instances. Our estimate of award or incentive fees may require adjustments from time to time.         
We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project's contractual requirements and management's assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. See aggregate changes in accounting estimates in Note 1 .
We believe long-term contracts, contracts in a loss position and contracts with material award or incentive fees drive the significant potential changes in estimates in our contracts. These estimates are reviewed and assessed quarterly and could result in favorable or unfavorable adjustments.
Federal Government Contracts — For all non-construction and non-software U.S. federal government contracts or contract elements, we apply the guidance in ASC 912 - Contractors - Federal Government. We apply the combination and segmentation guidance in ASC 605-35 Revenue - Construction-Type and Production-Type Contracts under the guidance of ASC 912 in analyzing the deliverables contained in the applicable contract to determine appropriate profit centers. Revenue is recognized by profit center using the percentage-of-completion method or completed-contract method. The completed-contract method is used when reliable estimates cannot be supported for percentage-of-completion method recognition or for short duration projects when the results of operations would not vary materially from those resulting from use of the percentage-of-completion method. Until complete, project costs may be maintained in work-in-progress, a component of inventory.
Revenue is recognized based on progress towards completion over the contract period, measured by either output or input methods appropriate to the services or products provided. For example, "output measures" can include units delivered or produced,

43



such as aircraft for which modification has been completed. "Input measures" can include a cost-to-cost method, such as for procurement-related services.
Construction Contracts or Contract Elements — For all construction-type contracts or contract elements, revenue is recognized by profit center using the percentage-of-completion method.  
Software Contracts or Contract Elements — It is our policy to review any arrangement containing software or software deliverables using applicable GAAP for software revenue recognition. See Note 1 for further discussion. We have not historically sold software on a separate, standalone basis. As a result, software arrangements are typically accounted for as one unit of accounting and are recognized over the service period, including the period of post-contract customer support. We did not enter into any new software contracts or contracts with software elements during the years ended December 31, 2013 , December 31, 2012 or December 30, 2011 .
Other Contracts or Contract Elements — Our contracts with non-federal government customers are predominantly service arrangements. Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. Arrangement consideration is allocated among the separate units of accounting based on the guidance applicable for the multiple-element arrangements. Many of our arrangements were entered into prior to January 1, 2011. For these arrangements, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative fair values. Fair values are established by evaluating vendor specific objective evidence ("VSOE") or third-party evidence, if available. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, which results in the arrangements being accounted for as one unit of accounting. For arrangements that are entered into or materially modified after January 1, 2011, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative selling price. Relative selling price is established through VSOE, third-party evidence, or management's best estimate of selling price. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, and therefore, relative selling price is generally allocated to multiple-element arrangements utilizing management's best estimate of selling price.
Deferred Taxes, Tax Valuation Allowances and Tax Reserves
Our income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best estimate of future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. Income tax expense is the amount of tax payable for the period net of the change in deferred tax assets and liabilities during the period.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
In evaluating the realizability of our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. Valuation allowances are recognized to reduce the carrying value of deferred tax assets to amounts that we expect are more-likely-than-not to be realized. Valuation allowances, if any, would primarily relate to the deferred tax assets established for certain tax credit carryforwards and net operating loss carryforwards for U.S. and non-U.S. subsidiaries. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the need for or sufficiency of a valuation allowance. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could also impact the need for certain valuation allowances.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in potential assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
Under ASC 740 - Income Taxes , we may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

44



ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.
Impairment of Goodwill
As a result of the Company applying acquisition accounting related to the Merger on July 7, 2010, our balance sheet included $679.4 million in goodwill as of December 31, 2010, which represented the excess of costs over the fair value of our assets. During the years ended December 31, 2013 , December 31, 2012 , and December 30, 2011 , we recorded non-cash impairment charges of $310.3 million , $44.6 million , and $33.8 million respectively. In total, the changes since the merger have reduced the goodwill balance to $293.8 million as of December 31, 2013 . See Note 3 for further discussion. The goodwill carrying value is allocated to our operating segments using a relative fair value approach based on our seven reporting units. Our reporting units have allocated goodwill based on relative fair values as required under ASC 350 - Intangibles - Goodwill and Other.
In accordance with ASC 350-20 - Intangibles - Goodwill , we evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We perform our annual goodwill impairment test each October, the first month of the fourth quarter of our calendar year. We also assess goodwill at the end of a quarter if a triggering event occurs. In determining whether an interim triggering event has occurred, management monitors (i) the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test, (ii) and significant changes to future expectations.
We estimate a portion of the fair value of our reporting units under the income approach by utilizing a discounted cash flow model based on several factors including balance sheet carrying values, historical results, our most recent forecasts, and other relevant quantitative and qualitative information. We discount the related cash flow forecasts using the weighted-average cost of capital at the date of evaluation. We also use the market approach to estimate the remaining portion of our reporting unit valuation. This technique utilizes comparative market multiples in the valuation estimate. We estimate the fair value of our reporting units using a combination of the income approach and the market approach.While the income approach has the advantage of utilizing more company specific information, the market approach has the advantage of capturing market based transaction pricing.
Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
The goodwill for each reporting unit is tested using a two-step process. A reporting unit is an operating segment or a component of an operating segment, as defined by ASC 350-20 - Intangibles - Goodwill . A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. The first step in the process of testing goodwill for potential impairment is to compare the carrying value of the reporting unit to its fair value. If upon completion of the analysis, the carrying value exceeds the fair value, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit.
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 Operations ("AO") reporting unit. The AO reporting unit is dependent upon a single contract which is soon due for re-compete with our customer. During the fourth quarter of calendar year 2013, we received clarification from the customer regarding the upcoming re-compete of the contract, which varied significantly from the long standing previous contract and yielded a decline in the projected future operating results and cash flows. As a result of the change in the forecasted operating results and cash flows, the reporting unit failed step one of our annual goodwill impairment test. We performed a step two impairment test and determined that the implied fair value of goodwill for the reporting unit was lower than the carrying amount resulting in a non-cash impairment charge of $281.5 million recorded during the year ended December 31, 2013 .
Commitments and Contingencies

45



We are involved in various lawsuits and claims that arise in the normal course of business. Amounts associated with lawsuits and claims are reserved for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to such matters have been recorded in "Other accrued liabilities." When only a range of amounts is established and no amount within the range is more probable than another, the lower end of the range is recorded. Legal fees are expensed as incurred.
Recent Accounting Pronouncements
The information regarding recent accounting pronouncements is included in Note 1 .

46



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk is primarily related to losses that could potentially arise as a result of adverse changes in interest and foreign currency exchange rates. See "Item 1A. Risk Factors" for further discussion of the market risks we may encounter.
Interest Rate Risk
We have interest rate risk primarily related to changes in interest rates on our variable rate debt. We manage our exposure to movements in interest rates through the use of a combination of fixed and variable rate debt. As of December 31, 2013 , we had 62.1% of our debt at a fixed rate and 37.9% at a variable rate. Our 10.375% senior notes represent our fixed rate debt, which totaled $455 million as of December 31, 2013 . Our Term Loan and Revolver represent our variable rate debt. As of December 31, 2013 , the balance of our Term Loan was $277.3 million and we had no borrowings under the Revolver. Borrowings under our variable rate debt bear interest, based on our option, at a rate per annum equal to LIBOR, plus the Applicable Margin or the Base Rate plus the Applicable Margin. Both the Term Loan and the Revolver have an interest rate floor of 1.75% for LIBOR borrowings and 2.75% for Base Rate borrowings. The Term Loan interest rate at December 31, 2013 was made up of a 4.50% Applicable Margin plus a 1.75% LIBOR rate totaling 6.25%. If LIBOR increases over 1.75% and we continue to have no outstanding Revolver borrowings, each 25 basis point increase would result in $0.7 million in additional interest expense annually.
Foreign Currency Exchange Rate Risk
We are exposed to changes in foreign currency rates. At present, we do not utilize any derivative instruments to manage risk associated with foreign currency exchange rate fluctuations. The functional currency of certain foreign operations is the local currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded in Accumulated other comprehensive (loss) income. Our foreign currency transactions were not material for the years ended December 31, 2013 and December 31, 2012 , respectively.



47

Table of Contents


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Delta Tucker Holdings, Inc.
 
 
 
Financial Statement Schedules
 


48

Table of Contents




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholder of
Delta Tucker Holdings, Inc.
McLean, Virginia


We have audited the accompanying consolidated balance sheets of Delta Tucker Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2013 and December 31, 2012, and the related consolidated statements of operations, comprehensive loss, cash flows, and equity for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Delta Tucker Holdings, Inc. and subsidiaries as of December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Fort Worth, Texas
March 14, 2014

49



DELTA TUCKER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
For the years ended