DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 11/06/2015 12:22:27)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number: 333-173746
 
 
DELTA TUCKER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)  
 
   
Delaware
27-2525959
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1700 Old Meadow Road, McLean, Virginia 22102
(571) 722-0210
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   o      No   þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    þ      No    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    o      No    þ
As of November 6, 2015 , the registrant had 100 shares of its Class A common stock outstanding.






Delta Tucker Holdings, Inc.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 

2




Disclosure Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:
the future impact of mergers, acquisitions, divestitures, joint ventures or teaming agreements;
our substantial level of indebtedness, our ability to refinance or amend the terms of that indebtedness, and changes in availability of capital and cost of capital;
the ability to generate sufficient cash to repay our Senior Credit Facility, consisting of our Term Loan and Revolver, maturing on July 7, 2016, or to repay our other indebtedness which may force us to take other actions to satisfy our obligations under our indebtedness, which may not be successful;
the outcome of any material litigation, government investigation, audit or other regulatory matters;
the 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;
the inability of Congress to pass appropriations bills in a timely manner, and any resulting government shutdown;
termination or modification of key U.S. government or commercial contracts, including subcontracts;
changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the International Narcotics and Law ("INL") Enforcement, Contract Field Teams ("CFT") and Logistics Civil Augmentation Program ("LOGCAP IV") contracts;
changes in the demand for services provided by our joint venture partners;
changes due to pursuit of new commercial business in the U.S. and abroad;
activities of competitors and the outcome of bid protests;
changes in significant operating expenses;
impact of lower than expected win rates for new business;
general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;
acts of war or terrorist activities, including cyber security threats;
variations in performance of financial markets;
the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity ("IDIQ") contracts and indefinite quantity contracts ("IQC");
the timing or magnitude of any award, performance or incentive fees 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;
further declines in the estimated fair value of a reporting unit resulting in additional goodwill impairments and a related non-cash impairment charged against earnings;
changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more contracts and our performance;
changes in our tax provisions or exposure to additional income tax liabilities that could affect our profitability and cash flows;
uncertainty created by management turnover;
termination or modification of key subcontractor performance or delivery;
the ability to receive timely payments from prime contractors where we act as a subcontractor; and
statements covering our business strategy, those described in "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission ("SEC") on March 31, 2015 and other risks detailed from time to time in our reports filed with SEC.
Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.


3




Calendar Year
We report the results of our operations using a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 , the related statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 and the unaudited condensed consolidated balance sheets as of September 25, 2015 and December 31, 2014 .

4




PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
479,808

 
$
540,327

 
$
1,437,000

 
$
1,744,052

Cost of services
(427,529
)
 
(510,965
)
 
(1,290,880
)
 
(1,606,045
)
Selling, general and administrative expenses
(35,237
)
 
(44,192
)
 
(107,920
)
 
(110,277
)
Depreciation and amortization expense
(9,039
)
 
(12,094
)
 
(25,587
)
 
(35,621
)
Earnings from equity method investees
6

 
152

 
131

 
9,918

Impairment of goodwill, intangibles and long lived assets
(6,690
)
 
(50,955
)
 
(93,485
)
 
(142,714
)
Operating income (loss)
1,319

 
(77,727
)
 
(80,741
)
 
(140,687
)
Interest expense
(17,201
)
 
(17,237
)
 
(50,429
)
 
(53,438
)
Loss on early extinguishment of debt

 
(242
)
 

 
(862
)
Interest income
19

 
68

 
61

 
151

Other income, net
73

 
956

 
1,675

 
3,314

Loss before income taxes
(15,790
)
 
(94,182
)
 
(129,434
)
 
(191,522
)
Benefit for income taxes
540

 
23,160

 
10,025

 
39,028

Net loss
(15,250
)
 
(71,022
)
 
(119,409
)
 
(152,494
)
Noncontrolling interests
(499
)
 
(492
)
 
(1,227
)
 
(1,857
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(71,514
)
 
$
(120,636
)
 
$
(154,351
)
See notes to unaudited condensed consolidated financial statements

5




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

 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Net loss
$
(15,250
)
 
$
(71,022
)
 
$
(119,409
)
 
$
(152,494
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment

 
(42
)
 
(101
)
 
(116
)
Other comprehensive income (loss), before tax

 
(42
)
 
(101
)
 
(116
)
Income tax (expense) benefit related to items of other comprehensive loss

 
15

 
36

 
42

Other comprehensive income (loss)

 
(27
)
 
(65
)
 
(74
)
Comprehensive loss
(15,250
)
 
(71,049
)
 
(119,474
)
 
(152,568
)
Comprehensive loss attributable to noncontrolling interests
(499
)
 
(492
)
 
(1,227
)
 
(1,857
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(15,749
)
 
$
(71,541
)
 
$
(120,701
)
 
$
(154,425
)

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
September 25, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
65,549

 
$
94,004

Restricted cash
1,673

 
707

Accounts receivable, net of allowances of $16,466 and $4,736 respectively
423,791

 
448,496

Prepaid expenses and other current assets
53,262

 
74,200

Assets held for sale
12,385

 

Total current assets
556,660

 
617,407

Long-term restricted cash

 
952

Property and equipment, net
16,341

 
23,786

Goodwill
42,093

 
128,888

Tradenames, net
28,536

 
28,762

Other intangibles, net
122,678

 
149,480

Long-term deferred taxes
13,860

 
5,696

Other assets, net
16,062

 
27,516

Total assets
$
796,230

 
$
982,487

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
187,272

 
$

Accounts payable
107,601

 
146,546

Accrued payroll and employee costs
95,732

 
93,707

Deferred income taxes
29,195

 
31,477

Accrued liabilities
110,012

 
130,026

Income taxes payable
202

 
4,424

Total current liabilities
530,014

 
406,180

Long-term debt, less current portion
455,000

 
642,272

Other long-term liabilities
7,838

 
11,312

Total liabilities
992,852

 
1,059,764

EQUITY
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 25, 2015 and December 31, 2014, respectively

 

Additional paid-in capital
554,055

 
552,894

Accumulated deficit
(756,015
)
 
(635,379
)
Accumulated other comprehensive loss
(346
)
 
(281
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(202,306
)
 
(82,766
)
Noncontrolling interests
5,684

 
5,489

Total deficit
(196,622
)
 
(77,277
)
Total liabilities and deficit
$
796,230

 
$
982,487

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
Cash flows from operating activities
 
 
 
Net loss
$
(119,409
)
 
$
(152,494
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
27,626

 
36,328

Amortization of deferred loan costs
4,798

 
4,487

Impairment of goodwill, intangibles and long-lived assets
93,485

 
142,714

Earnings from equity method investees
(1,328
)
 
(11,583
)
Distributions from equity method investees
150

 
9,588

Deferred income taxes
(10,446
)
 
(42,197
)
Share based compensation
364

 
2,754

Other
144

 
1,901

Changes in assets and liabilities:
 
 
 
Restricted cash
(14
)
 

Accounts receivable
23,416

 
96,231

Prepaid expenses and other current assets
16,690

 
32,011

Accounts payable and accrued liabilities
(58,358
)
 
(132,263
)
Income taxes payable
(2,636
)
 
(5,198
)
Net cash used in operating activities
(25,518
)
 
(17,721
)
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(2,680
)
 
(7,129
)
Proceeds from sale of property, plant and equipment
478

 
44

Purchase of software
(998
)
 
(1,101
)
Return of capital from equity method investees
3,683

 
2,884

Contributions to equity method investees
(1,427
)
 

Net cash used in investing activities
(944
)
 
(5,302
)
Cash flows from financing activities
 
 
 
Borrowings on debt
139,600

 
40,100

Payments on debt
(139,600
)
 
(130,100
)
Borrowings under other financing arrangements

 
20,214

Payments under other financing arrangements
(2,055
)
 
(23,306
)
Equity contribution from affiliates of Cerberus
750

 

Payment of dividends to noncontrolling interests
(688
)
 
(1,373
)
Net cash used in financing activities
(1,993
)
 
(94,465
)
Net decrease in cash and cash equivalents
(28,455
)
 
(117,488
)
Cash and cash equivalents, beginning of period
94,004

 
170,845

Cash and cash equivalents, end of period
$
65,549

 
$
53,357

 
 
 
 
Income taxes paid, net
$
8,108

 
$
9,980

Interest paid
$
57,882

 
$
60,840

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Equity (Deficit)
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Equity Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total
Equity
Balance at December 31, 2013

 
$

 
$
549,581

 
$
(365,599
)
 
$
(197
)
 
$
183,785

 
$
5,875

 
$
189,660

Share based compensation

 

 
2,754

 

 

 
2,754

 

 
2,754

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(154,351
)
 
(74
)
 
(154,425
)
 
1,857

 
(152,568
)
DIFZ financing, net of tax

 

 
95

 

 

 
95

 

 
95

Dividends declared to noncontrolling interests

 

 

 

 

 

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

 
$

 
$
552,430

 
$
(519,950
)
 
$
(271
)
 
$
32,209

 
$
5,671

 
$
37,880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Deficit Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total Deficit
Balance at December 31, 2014

 
$

 
$
552,894

 
$
(635,379
)
 
$
(281
)
 
$
(82,766
)
 
$
5,489

 
$
(77,277
)
Share based compensation, net

 

 
364

 

 

 
364

 

 
364

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(120,636
)
 
(65
)
 
(120,701
)
 
1,227

 
(119,474
)
Capital contribution

 

 
750

 

 

 
750

 

 
750

DIFZ financing, net of tax

 

 
47

 

 

 
47

 

 
47

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(1,032
)
 
(1,032
)
Balance at September 25, 2015

 
$

 
$
554,055

 
$
(756,015
)
 
$
(346
)
 
$
(202,306
)
 
$
5,684

 
$
(196,622
)
See notes to unaudited condensed consolidated financial statements

9




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

Note 1 — Basis of Presentation and Accounting Policies
Basis of Presentation
Delta Tucker Holdings, Inc. ("Holdings"), the parent of DynCorp International Inc., through its subsidiaries (together, "the Company"), provides defense and technical services and government outsourced solutions primarily to U.S. government agencies domestically and internationally. The Company was incorporated in the state of Delaware on April 1, 2010. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and our consolidated subsidiaries.
The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These unaudited condensed consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate and do not make the information presented misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 .
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of September 25, 2015 and December 31, 2014 , the results of operations and statements of comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 and the statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 have been included. The results of operations and statements of comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 and the statements of equity and cash flows for the nine months ended September 25, 2015 and September 26, 2014 are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. Our actual results may differ from these estimates.
As described in Note 7, our Senior Credit Facility matures on July 7, 2016. We intend to address our upcoming maturity under the Senior Credit Facility before the filing of our Annual Report on Form 10-K for the year ending December 31, 2015 (the "2015 Form 10-K"). However, there can be no assurances that we will be able to do so with terms that are favorable to us or at all. If we are unable to enter into an amendment to extend the maturity or otherwise refinance the Senior Credit Facility prior to its scheduled maturity date or prior to an event which could result in an acceleration of the maturity date, then the failure to pay all amounts due under the Senior Credit Facility at maturity would be an event of default under the Senior Credit Facility. This potential outcome results in significant doubt in the Company’s ability to continue as a going concern. Such an event of default to pay principal due at scheduled maturity under the Senior Credit Facility would also cause an event of default under our Senior Unsecured Notes (as defined below). The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. The Senior Credit Facility has been classified as short-term debt as the maturity date is less than one year from the balance sheet date.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has investments in joint ventures that are variable interest entities ("VIEs"). The VIE investments are accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810 — Consolidation . In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, the Company consolidates the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method.

10




We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our segments and operationally integral to the business, our share of the joint venture’s earnings is reported within operating loss in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.
Noncontrolling Interests
We record the impact of our partners' interests in less than wholly owned consolidated joint ventures as noncontrolling interests. Currently, DynCorp International FZ-LLC ("DIFZ") is our only consolidated joint venture for which we do not own 100% of the entity. We hold 25% ownership interest in DIFZ. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ. Noncontrolling interests is presented on the face of the statements of operations as an increase or reduction in arriving at "Net loss attributable to Delta Tucker Holdings, Inc." Noncontrolling interests is located in the equity section on the consolidated balance sheets. See Note 10 for further discussion regarding DIFZ.
Use of Estimates
The preparation of the financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the unaudited condensed consolidated statements of operations in the period that they are determined. Changes in contract estimates are the result of changes in assumptions of cost and/or level of effort expected to perform our contracts. Changes resulting from contract options, extensions, or other contract modifications are deemed contract changes, the effects of which are excluded from the gross favorable and unfavorable adjustments below. 
The following table presents the aggregate gross favorable and unfavorable adjustments to income before income taxes resulting from changes in contract estimates for the three and nine months ended September 25, 2015 and September 26, 2014 .
 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Gross favorable adjustments
$
2.8

 
$
1.8

 
$
8.9

 
$
3.9

Gross unfavorable adjustments
(5.7
)
 
(43.1
)
 
(10.1
)
 
(42.6
)
Net adjustments
$
(2.9
)
 
$
(41.3
)
 
$
(1.2
)
 
$
(38.7
)
Accounting Policies
There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2014 .
Accounting Developments
In January 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 changes the consolidation guidance to address concerns of stakeholders that current accounting for certain legal entities might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. ASU 2015-02 will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently evaluating both methods of adoption as well as the effect ASU 2015-02 will have on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the

11




carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update is effective for fiscal years beginning after December 15, 2015, and required retrospective application. Early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the potential effects of the adoption of ASU 2015-03 on our consolidated financial position.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires an entity to who measures inventory using FIFO or average cost to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs. The update is effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017 and applied prospectively. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential effects of the adoption of ASU 2015-11 on our consolidated financial position.
There have been no material changes to our accounting developments from those described in our Annual Report on Form 10-K for the year ended December 31, 2014 with the exception of ASU No. 2014-09, Revenue from Contracts with Customers , issued by the FASB in May 2014, which outlines a single set of comprehensive principles for recognizing revenue under GAAP. In August 2015, the FASB deferred the effective date of the new standard to after December 15, 2018. The standard permits the use of either the retrospective or modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-14 will have on our consolidated financial position, results of operations and cash flows.
Other accounting standards updates effective after September 25, 2015 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows.


12




Note 2 — Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions.
Prepaid expenses and other current assets
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Prepaid expenses
$
27,184

 
$
30,821

Income tax refunds receivable
199

 
655

Inventories
13,857

 
25,198

Aircraft parts inventory held on consignment

 
2,278

Work-in-process inventory
1,844

 
5,772

Joint venture receivables
487

 
1,497

Current deferred financing costs, net
3,640

 

Other current assets
6,051

 
7,979

Total prepaid expenses and other current assets
$
53,262

 
$
74,200

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.
Deferred financing costs of $3.6 million related to the Senior Credit Facility were classified as current assets due to both the Term Loan and the Revolver maturing on July 7, 2016 . See Note 7 for further discussion.
During the third quarter of 2015, we executed an agreement to expedite the sale of a portion of our inventory at an auction which was held at the end of October 2015. As a result of this strategic decision to auction these assets, we recorded an expense of approximately $3.1 million during the three months ended September 25, 2015 to increase our inventory reserve. The expense has been presented within Cost of services in the unaudited condensed consolidated statement of operations. Subsequent to September 25, 2015 , the inventory was sold at auction and title was transferred. As of November 6, 2015 , the sale is pending final funding.
Held for Sale Assets
During the third quarter of 2015, we took strategic actions to begin the sale of the remaining assets of Heliworks LLC (“Heliworks”). The assets, excluding cash and cash equivalents, of Heliworks LLC have been classified as held for sale as of September 25, 2015 . Assets held for sale of $12.4 million consists primarily of accounts receivable, inventory, property and equipment, net, and intangible assets.
We assessed the fair market value of the assets held for sale, based on independent third party evaluations. For property and equipment, the market approach was used which utilized observable level 2 inputs as it considered the inputs of other comparable property and equipment. For the remaining assets, we used unobservable inputs and management judgment which are Level 3 fair value measurements. See Note 6 for further discussion of fair value. As a result of our fair value assessment, we recognized a $2.8 million impairment expense in the third quarter of 2015, included within the impairment of goodwill, intangibles and long-lived assets within our consolidated statement of operations, to impair the assets held for sale.
Property and equipment, net
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Helicopters
$
983

 
$
7,108

Computers and other equipment
10,326

 
11,061

Leasehold improvements
19,488

 
19,055

Office furniture and fixtures
4,461

 
4,203

Gross property and equipment
35,258

 
41,427

Less accumulated depreciation
(18,917
)
 
(17,641
)
Total property and equipment, net
$
16,341

 
$
23,786

Property and equipment, net no longer includes four helicopters previously utilized on an existing program which are classified as held for sale as of September 25, 2015 . Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.3 million and $4.8 million during the three and nine months ended September 25, 2015 , respectively.

13




Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.5 million and $4.2 million during the three and nine months ended September 26, 2014 , respectively.
Other assets, net
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Deferred financing costs, net
$
3,337

 
$
11,775

Investment in affiliates
5,919

 
8,191

Palm promissory note, long-term portion
2,659

 
2,853

Other
4,147

 
4,697

Total other assets, net
$
16,062

 
$
27,516

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $1.6 million and $4.8 million during the three and nine months ended September 25, 2015 , respectively. Amortization related to deferred financing costs was $1.5 million and $4.5 million during the three and nine months ended September 26, 2014 , respectively.
Deferred financing costs of $3.6 million related to the Term Loan and Revolver were classified as current assets due to both the Term Loan and the Revolver maturing on July 7, 2016 .
Deferred financing costs for the three and nine months ended September 26, 2014 were reduced $0.2 million and $0.8 million , related to the pro rata write–off of deferred financing costs to loss on early extinguishment of debt as a result of the $90.0 million in principal prepayment made on the term loan facility under the Senior Credit Facility ("Term Loan") during the nine months ended September 26, 2014 . See Note 7 for further discussion.
Accrued payroll and employee costs
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Wages, compensation and other benefits
$
76,852

 
$
74,416

Accrued vacation
17,954

 
18,889

Accrued contributions to employee benefit plans
926

 
402

Total accrued payroll and employee costs
$
95,732

 
$
93,707

Accrued liabilities
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Customer liabilities
$
16,901

 
$
22,635

Accrued insurance
32,654

 
20,551

Accrued interest
11,892

 
24,250

Unrecognized tax benefit
3,293

 
7,999

Contract losses
20,655

 
27,864

Legal reserves
9,488

 
8,657

Subcontractor retention
2,044

 
1,761

Financed insurance

 
2,055

Other
13,085

 
14,254

Total accrued liabilities
$
110,012

 
$
130,026

Customer liabilities are primarily due to amounts received from customers in excess of revenue recognized. Other is comprised primarily of accrued rent and workers' compensation related claims and other balances that are not individually material to the consolidated financial statements. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Legal matters include reserves related to various lawsuits and claims that arise in the normal course of business. See Note 8 for further discussion.

14




Other long-term liabilities
As of September 25, 2015 and December 31, 2014 , Other long-term liabilities were $7.8 million and $11.3 million , respectively. Other long-term liabilities are primarily due to our obligations in connection with the restructuring plan entered into in 2013 including a long-term leasehold obligation related to our new Tysons Corner facility in McLean, Virginia, of $3.9 million and $4.3 million as of September 25, 2015 and December 31, 2014 , respectively.
During calendar year 2013 and 2014, we vacated previously occupied properties at various locations and consolidated to the new Tysons Corner location. Accrued costs associated with vacating these properties, such as lease vacancy obligations, net of estimated sublease rental assumptions as well as the buyout were approximately $1.4 million and $1.7 million as of September 25, 2015 and December 31, 2014 , respectively, and were included within Other long-term liabilities.
We recorded a postemployment benefit expense of $0.5 million and $3.2 million for the three and nine months ended September 25, 2015 , respectively, related to severance in accordance with ASC 712 - Compensation which was included in Selling, general and administrative expenses in the statements of operations. We recorded a postemployment benefit expense of $12.8 million and $15.7 million for the three and nine months ended September 26, 2014 , respectively, related to severance in accordance with ASC 712 - Compensation which was included in Selling, general and administrative expenses in the statements of operations. As of September 25, 2015 and December 31, 2014 , we had approximately $5.9 million and $10.6 million , respectively, in total accrued postemployment benefit expense for estimated future payments in accordance with ASC 712, of which $0.2 million and $3.9 million , respectively, relate to our long-term accrued postemployment benefit expense.



15




Note 3 — Goodwill and Other Intangible Assets
We have two operating and reporting segments: DynAviation and DynLogistics. DynAviation and DynLogistics provide services domestically and in foreign countries primarily under contracts with the U.S. government. Our current structure includes five reporting units for which we assess goodwill for potential impairment; two reporting units in DynAviation and three reporting units in DynLogistics. Of our five reporting units, only two had a goodwill balance as of September 25, 2015 .
We assess goodwill and other intangible assets with indefinite lives for impairment annually in October or when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible impairment in the period in which the event is identified.
In connection with our annual assessment of goodwill during the fourth quarter of each year, we update our key assumptions, including our forecasts of revenue and income for each reporting unit. There can be no assurance that the estimates and assumptions regarding forecasted earnings and cash flows, the period of strength of the U.S. defense spending, and other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
During the second quarter of 2015, we concluded a triggering event had occurred in our Aviation reporting unit within the DynAviation segment due to lower than forecasted earnings in 2015 and declines in future projections and assumptions. We performed an interim step one assessment to identify any possible goodwill impairment. The first step of the impairment test indicated the carrying value of the Aviation reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the Aviation reporting unit was fully impaired. As a result, a non-cash impairment charge of approximately $86.8 million was recorded during the three months ended June 26, 2015 to impair the full carrying value of the Aviation reporting unit goodwill. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations.
There were no triggering events identified in our remaining reporting units and the estimated fair values of each of our remaining reporting units exceed their respective carrying values as of September 25, 2015 and December 31, 2014 .
The carrying amounts of goodwill for each of our segments as of September 25, 2015 were as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Goodwill balance as of December 31, 2014
$
86,795

 
$
42,093

 
$
128,888

Changes between January 1, 2015 and September 25, 2015
(86,795
)
 

 
(86,795
)
Goodwill balance as of September 25, 2015
$

 
$
42,093

 
$
42,093


16




The following tables provide information about changes relating to certain intangible assets:
 
As of September 25, 2015
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Transfer to Assets Held for Sale
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
4.0
 
$
317,524

 
$
(198,828
)
 
$

 
$

 
$
118,696

Other
 
 
 
 
 
 
 
 
 
 
 
Finite-lived
4.8
 
15,983

 
(11,991
)
 

 
(10
)
 
3,982

Indefinite-lived
 
 
5,059

 

 
(3,949
)
 
(1,110
)
 

Total other intangibles
 
 
$
338,566

 
$
(210,819
)
 
$
(3,949
)
 
$
(1,120
)
 
$
122,678

 
 
 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
 
 
Finite-lived
0.0
 
$
869

 
$
(869
)
 
$

 
$

 
$

Indefinite-lived
 
 
28,700

 

 

 
(164
)
 
28,536

Total tradenames
 
 
$
29,569

 
$
(869
)
 
$

 
$
(164
)
 
$
28,536

 
December 31, 2014
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
4.6
 
$
350,912

 
$
(178,126
)
 
$
(33,388
)
 
$
139,398

Other
 
 
 
 
 
 
 
 
 
Finite-lived
4.8
 
15,418

 
(10,395
)
 

 
5,023

Indefinite-lived
 
 
5,059

 

 

 
5,059

Total other intangibles
 
 
$
371,389

 
$
(188,521
)
 
$
(33,388
)
 
$
149,480

 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
Finite-lived
0.4
 
$
869

 
$
(807
)
 
$

 
$
62

Indefinite-lived
 
 
43,222

 

 
(14,522
)
 
28,700

Total tradenames
 
 
$
44,091

 
$
(807
)
 
$
(14,522
)
 
$
28,762

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $8.2 million and $22.7 million for the three and nine months ended September 25, 2015 , respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $10.9 million and $32.1 million for the three and nine months ended September 26, 2014 , respectively. Other intangibles are primarily representative of our capitalized software which had a net carrying value of $4.0 million and $5.0 million as of September 25, 2015 and December 31, 2014 , respectively.
During the third quarter of 2015, we took strategic actions to no longer utilize or maintain our FAA Part 135 certification and Commercial Aviation Review Board ("CARB") approval. As a result, a non-cash impairment charge of approximately $3.9 million was recorded during the three months ended September 25, 2015 to fully impair the carrying value of the intangible asset. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the unaudited condensed consolidated statement of operations.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $8.9 million for the three months ending December 31, 2015, $30.2 million in 2016, $27.6 million in 2017, $24.3 million in 2018, $21.1 million in 2019 and $10.7 million thereafter.



17




Note 4 — Income Taxes
The domestic and foreign components of Loss before income taxes are as follows:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Domestic
$
(17,120
)
 
$
(93,861
)
 
$
(129,375
)
 
$
(188,962
)
Foreign
1,330

 
(321
)
 
(59
)
 
(2,560
)
Loss before income taxes
$
(15,790
)
 
$
(94,182
)
 
$
(129,434
)
 
$
(191,522
)
The Benefit for income taxes consists of the following:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Current portion:
 
 
 
 
 
 
 
Federal
$

 
$
(311
)
 
$

 
$
(311
)
State
192

 
292

 
678

 
674

Foreign
1,286

 
1,383

 
4,567

 
4,441

 
$
1,478

 
$
1,364

 
$
5,245

 
$
4,804

Deferred portion :
 
 
 
 
 
 
 
Federal
$
(1,846
)
 
$
(23,369
)
 
$
(14,663
)
 
$
(42,245
)
State
(79
)
 
(612
)
 
(465
)
 
(1,103
)
Foreign
(93
)
 
(543
)
 
(142
)
 
(484
)
 
(2,018
)
 
(24,524
)
 
(15,270
)
 
(43,832
)
Benefit for income taxes
$
(540
)
 
$
(23,160
)
 
$
(10,025
)
 
$
(39,028
)
Deferred tax liabilities, net consist of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Current deferred tax liabilities, net
$
(29,195
)
 
$
(31,477
)
Non-current deferred tax assets, net
13,860

 
5,696

Deferred tax liabilities, net
$
(15,335
)
 
$
(25,781
)
Our effective tax rate ("ETR") was 3.4% and 7.7% for the three and nine months ended September 25, 2015 , respectively. Our ETR was 24.6% and 20.4% for the three and nine months ended September 26, 2014 , respectively. During the three and nine months ended September 25, 2015 , the ETR was primarily impacted by impairments of goodwill, intangibles and long lived assets and an increase in the valuation allowance. Our ETR for the three and nine months ended September 26, 2014 was primarily impacted by a goodwill impairment of our Logistics Sustainment Services reporting unit.
Management assesses both the available positive and negative evidence to determine whether it is more likely than not that there will be sufficient sources of future taxable income to recognize deferred tax assets. We incurred cumulative losses over the three-year period ended December 31, 2014 . Cumulative losses in recent years are considered significant objective negative evidence in evaluating deferred tax assets under the more likely than not criteria for recognition of deferred tax assets. As a result of additional losses for which we could not recognize a tax benefit, we increased our valuation allowance from $47.8 million as of December 31, 2014 to $66.7 million as of September 25, 2015 .
As of September 25, 2015 and December 31, 2014 , we had $2.6 million and $7.3 million of total unrecognized tax benefits, respectively, of which $2.3 million would impact our effective tax rate if recognized. During the second quarter of 2015, we decreased the balance of the liability for unrecognized tax benefits and related deferred tax assets by a net of approximately $4.7 million attributable to the expiration of statute of limitations for tax years ended March 30, 2009 , March 30, 2010 , and July 30, 2010 .
During the nine months ended September 25, 2015 , we made no estimated federal income tax payments. All of our income taxes paid during the nine months ended September 25, 2015 were to state or foreign jurisdictions.


18




Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Billed
$
126,374

 
$
146,286

Unbilled
297,417

 
302,210

Total accounts receivable, net
$
423,791

 
$
448,496

Unbilled receivables as of September 25, 2015 and December 31, 2014 include $38.0 million and $50.7 million , respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed as of the end of the respective periods. Our largest contract, LOGCAP IV, accounted for approximately 54% and 59% of these amounts as of September 25, 2015 and December 31, 2014 , respectively. We believe we have legal and contractual basis for these amounts and are working with our customer to complete the contract actions that will allow us to bill and collect our receivables. If we cannot reach an agreement with the customer, we believe we have other avenues to pursue resolution, including the claims process. LOGCAP IV accounted for approximately 14% and 20% of total unbilled receivables as of September 25, 2015 and December 31, 2014 , respectively.
As of September 25, 2015 and December 31, 2014 , we had four contract claims with no associated receivable balances. The balance of unbilled receivables consists of costs and fees billable immediately upon contract completion or other specified events, all of which are expected to be billed and collected within one year, except items that may result in a request for equitable adjustment or formal claim.
We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government. However, other billed receivables include approximately $25.9 million , net of reserves, for which we have yet to be paid where we operated under a subcontract for a prime contractor on a U.S. government program that ended December 31, 2014 . We are currently seeking payment through legal action to resolve the matter. See Note 8 for further discussion.

Note 6 — Fair Value of Financial Assets and Liabilities
ASC 820 – Fair Value Measurements and Disclosures establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts receivable, and accounts payable, the fair value of these instruments approximates the carrying value. Our estimate of the fair value of our debt is based on Level 1 and Level 2 inputs, as defined above.  
 
As Of
 
September 25, 2015
 
December 31, 2014
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$
455,000

 
$
336,700

 
$
455,000

 
$
373,100

Term Loan
187,272

 
183,058

 
187,272

 
185,868

Total indebtedness
642,272

 
519,758

 
642,272

 
558,968

Less current portion of long-term debt
(187,272
)
 
(183,058
)
 

 

Total long-term debt
$
455,000

 
$
336,700

 
$
642,272

 
$
558,968



19




Note 7 — Debt
Debt consisted of the following:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
10.375% senior unsecured notes
$
455,000

 
$
455,000

Term loan
187,272

 
187,272

Total indebtedness
642,272

 
642,272

Less current portion of long-term debt
(187,272
)
 

Total long-term debt
$
455,000

 
$
642,272

Senior Credit Facility
On July 7, 2010 , we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Administrative Agent (the "Agent"). On January 21, 2011 , August 10, 2011 and June 19, 2013 , DynCorp International Inc. entered into amendments to the Senior Credit Facility.
On November 5, 2014 , we entered into a fourth amendment and waiver (the "Fourth Amendment") to the Senior Credit Facility. The Fourth Amendment, among other things, (i) amended the Senior Credit Facility by modifying financial maintenance covenants; (ii) reduced the amount of the Revolver credit commitments of the lenders consenting to the Fourth Amendment by 20% , which represented a reduction of approximately $36.2 million ; (iii) amended the definition of Consolidated Net Income as defined in the Senior Credit Facility to exclude up to $35.0 million for a one-time charge during the three month period ended September 26, 2014 related to a certain U.S. Air Force contract; and (iv) waived compliance with the financial maintenance covenants with respect to the three month period ended September 26, 2014 .
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of September 25, 2015 , the Senior Credit Facility provided for a $187.3 million Term Loan and the $144.8 million Revolver, which includes a $100.0 million letter of credit subfacility. As of September 25, 2015 and December 31, 2014 , the available borrowing capacity under the Senior Credit Facility was approximately $102.2 million and $108.1 million , respectively, and includes $42.6 million and $36.7 million , respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of September 25, 2015 and December 31, 2014 there were no amounts borrowed under the Revolver. The current portion of long-term debt as of September 25, 2015 consisted of our Term Loan and the Revolver as both have a maturity date of July 7, 2016 .
Interest Rates on Term Loan & Revolver
Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") as defined in the Senior Credit Facility plus an applicable margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency Rate option based on our Secured Leverage Ratio at the end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75% .
The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two business days prior to the commencement of such interest period. The variable Eurocurrency Rate has a floor of 1.75% . As of September 25, 2015 and December 31, 2014 , the interest rate on the Term Loan was 6.25% .


20




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. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. The applicable interest rates for our letter of credit subfacility was 4.25% as of each of September 25, 2015 and December 31, 2014 . The applicable interest rate for our unused commitment fees was 0.50% as of each of September 25, 2015 and December 31, 2014 . All of our letters of credit are also subject to a 0.25% fronting fee.
Principal Payments
Pursuant to our Term Loan, quarterly principal payments are required. However, certain principal prepayments made during the year ended December 30, 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016 .
During the nine months ended September 25, 2015 , we made no principal payments on the Term Loan. During the nine months ended September 26, 2014 , we made principal prepayments of $90.0 million on the Term Loan. Deferred financing costs associated with the prepayments totaled $0.8 million and were expensed and included in the Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 26, 2014 .
Our Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the Senior Credit Facility, as additional principal payments. Based on our annual financial results and the additional principal prepayments made during the year ended December 31, 2014 , we were not required to make any additional principal payments under the Excess Cash Flow requirement related to activity during the year ended December 31, 2014 . Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the nine months ended September 25, 2015 .
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. These covenants, among other things, limit our ability to:
declare dividends and make other distributions;
redeem or repurchase our capital stock;
prepay, redeem or repurchase certain of our indebtedness;
grant liens;
make loans or investments (including acquisitions);
incur additional indebtedness;
modify the terms of certain debt;
restrict dividends from our subsidiaries;
change our business or business of our subsidiaries;
merge or enter into acquisitions;
sell our assets;
enter into transactions with our affiliates; and
make capital expenditures.
In addition, the Senior Credit Facility contains two financial maintenance covenants, a maximum total leverage ratio and a minimum interest coverage ratio.
The total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million ) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period.
The maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
June 25, 2016 and thereafter
6.60 to 1.0
 

21




The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
June 25, 2016 and thereafter
1.30 to 1.0
We are required to comply with the financial maintenance covenants in the Senior Credit Facility, including reporting such compliance on a quarterly basis to our Agent. We closely evaluate our expected ability to remain in compliance with our financial maintenance covenants. If unforeseen events were to occur or if our estimates change that would put us in violation of the financial maintenance covenants in future periods, we would intend to seek to obtain a waiver from our lenders or to amend the terms of our Senior Credit Facility prior to there being an event of default under the Senior Credit Facility. As of September 25, 2015 and December 31, 2014 , we were in compliance with our financial maintenance covenants.
Our Senior Credit Facility matures on July 7, 2016 and as of September 25, 2015 is classified within the current portion of long-term debt. We intend to address the upcoming maturity of the Senior Credit Facility before the filing of our 2015 Form 10-K. However, there can be no assurances that we will be able to do so with terms that are favorable to us or at all. If we are unable to complete an amendment to extend the maturity or otherwise refinance the Senior Credit Facility prior to its scheduled maturity date, then the failure to pay all amounts due under the Senior Credit Facility at maturity would be an event of default under the Senior Credit Facility. In addition, the Senior Credit Facility contains customary financial as well as non-financial, affirmative and negative covenants (including, without limitation, the requirement to deliver a report on the audited financial statements that is unqualified and not subject to any “going concern” or like qualifications) that if we violate and do not cure or have waived within any applicable grace period would trigger an event of default prior to the maturity. The failure to pay principal due at scheduled maturity or an acceleration by the lenders due to a default under the Senior Credit Facility would also cause an event of default under our Senior Unsecured Notes.
Senior Unsecured Notes
On July 7, 2010 , DynCorp International Inc. completed an offering of $455.0 million in aggregate principal of 10.375% senior unsecured notes due 2017 (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International Inc., and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) as Trustee. The Senior Unsecured Notes mature on July 1, 2017 . Interest on the Senior Unsecured Notes is payable on January 1 and July 1 of each year, and commenced on January 1, 2011 .
The Senior Unsecured Notes contain various covenants that restrict our ability to:
incur additional indebtedness;
make certain payments, including declaring or paying certain dividends;  
purchase or retire certain equity interests;
retire subordinated indebtedness;
make certain investments;
sell assets;
engage in certain transactions with affiliates;
create liens on assets;
make acquisitions; and
engage in mergers or consolidations.
The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings by both Moody’s Investor Services and Standard and Poor’s.
The fair value of the Senior Unsecured Notes is based on their quoted market value. As of September 25, 2015 and December 31, 2014 , the quoted market value of the Senior Unsecured Notes was approximately 74.0% and 82.0% , respectively, of stated value.

22




Call and Put Options
We can voluntarily settle all or a portion of the Senior Unsecured Notes at any time prior to maturity at an applicable redemption price plus the accrued and unpaid interest, if any, as of the applicable redemption date. The applicable redemption prices with respect to the Senior Unsecured Notes on any applicable redemption date if redeemed during the 12-month period commencing on July 1 of the years set forth below are as follows:
Year
Redemption Price
2015
102.6
%
2016 and thereafter
100.0
%
The Indenture requires us to offer to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events. In the case of Asset Sales, as defined in the Indenture, we are required under the Indenture to use the proceeds from such asset sales to either (i) prepay secured debt or nonguarantor debt, (ii) reinvest in our business or (iii) to the extent asset sale proceeds not applied in accordance with clause (i) or (ii) exceed $15.0 million , make an offer to repurchase the Senior Unsecured Notes at 100% of the principal amount thereof.
In the event of a change in control, each holder of the Senior Unsecured Notes will have the right to require the Company to repurchase some or all of the Senior Unsecured Notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date.

Note 8 — Commitments and Contingencies
Commitments
We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable, cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain real estate leases are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $10.0 million and $39.4 million for the three and nine months ended September 25, 2015 , respectively. Lease rental expense was $21.2 million and $76.9 million for the three and nine months ended September 26, 2014 , respectively. We have no significant long-term purchase agreements with service providers.
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $9.5 million and $8.7 million as of September 25, 2015 and December 31, 2014 , respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at September 25, 2015 . These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of September 25, 2015 . Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.

23




Pending Litigation and Claims
On December 4, 2006 , December 29, 2006 , March 14, 2007 and April 24, 2007 , four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, International law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of International law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008 , a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010 , 1,256 of the plaintiffs were dismissed by court orders and, on September 15, 2010 , the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013 , the court granted summary judgment and dismissed all claims. On March 18, 2013 , the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014 , the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.
A lawsuit filed on September 11, 2001 , and amended on March 24, 2008 , seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010 , fifteen of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013 , the court granted summary judgment and dismissed all claims. On March 18, 2013 , the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. We filed another motion for summary judgment, which is fully briefed and remains pending. The terms of the DoS contract provide that the DoS will indemnify our operating company against third party liabilities arising out of the contract, subject to available funding. We are also entitled to indemnification by Computer Sciences Corporation, the Company’s previous owners, in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote.
Arising out of the litigation described in the preceding two paragraphs, on September 22, 2008 , we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. On November 9, 2009 , the court granted our Partial Motion for Summary Judgment regarding the duty to defend, and the carriers have paid the majority of the litigation expenses. In a related action, the carriers filed a lawsuit against us on February 5, 2009 , seeking rescission of certain aviation insurance policies based on an alleged misrepresentation by us concerning the existence of certain of the lawsuits relating to the eradication of narcotic plant crops. On May 19, 2010 , our aviation insurance carriers filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. We believe the claims asserted by the insurance carriers are without merit and the likelihood of an unfavorable judgment in this matter is remote.
In 2009 , we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit, was challenged in certain instances. In December 2011 , the customer filed arbitration alleging fraud, gross negligence, contract violations, and conversion of funds and asserted damages of approximately $150 million . On April 22, 2015 , the customer withdrew a substantial number of its claims and amended certain of those claims that remain in the case. We believe our actions were permissible under the terms of the contract, and we intend to vigorously contest the remaining claims against us. As of December 31, 2014 , we had recorded an immaterial liability for this matter. As of September 25, 2015 , we have recorded a liability that reflects both the remaining claims as well as the $3 million contractual limitation on damages (except in situations of gross negligence and willful misconduct).
In 2009 , a former subcontractor on a U.S. Army contract filed a lawsuit against us alleging breach of contract and good faith and fair dealing claiming we directed certain efforts to other subcontractors. The subcontractor alleged that certain efforts on a prior contract were exclusive to them and we had violated that exclusivity. In April 2015, the parties agreed to a settlement and the matter is now closed.
In 2011 , a former employee filed a lawsuit against us alleging a breach of a stock purchase agreement regarding the 2009 purchase of Phoenix Consulting Group. In 2012 , the parties settled one of the claims and we successfully compelled arbitration

24




of the claim for a contingent “earn out” payment. In May 2015, the arbitrator awarded the claimed “earn out” payment, totaling approximately $3.3 million but denied the claim for pre-award interest on that payment. We have subsequently paid the award in full and recorded the charge for the claim.
In October 2007 , we entered into a subcontract with Northrop Grumman Technical Services, Inc. (“Northrop”) to support Northrop’s prime contract with the Department of Defense Counter Narcotics Terrorism Program Office ("CNTPO"). We performed the services requested by Northrop, the government determined that it received “intended quality and skills of personnel,” and Northrop paid our invoices until July 2014 . Subsequent to July 2014 , Northrop stopped paying our periodic invoices. The contract operations ended on December 31, 2014 . In March 2015 , Northrop filed a civil action against us to obtain documents regarding our invoices and now asserts approximately $5 million in damages. We believe the damages asserted by Northrop represent a loss contingency that is remote. In September 2015 , we filed an Answer and Counterclaim seeking approximately $41 million for unpaid invoices.
U.S. Government Investigations
We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements, including, as previously disclosed in our periodic filings, the Special Inspector General for Iraq Reconstruction report regarding certain reimbursements and the U.S. Department of State Office of Inspector General's records subpoena with respect to Civilian Police ("CivPol"). Such investigations, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.
On February 24, 2012 , we were advised by the Department of Justice Civil Litigation Division that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. The Department of Justice Civil Litigation Division has requested information from the Company, and we are fully cooperating with the government's review. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. At this time, an estimate or a range of potential damages is not possible as this matter is still under review by the Department of Justice and no formal complaint has been filed.
U.S. Government Audits
Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management business systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If we are unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.
We have received a series of audit reports from the DCAA, some of which have resulted in Form 1s, related to their examination of certain incurred, invoiced and reimbursed costs on our CivPol program. The Form 1s identify several cost categories where the DCAA has asserted instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The asserted amounts are derived from extrapolation methodologies used to estimate potential exposure amounts for the cost categories. Over the past several years, we have worked with the DCAA and our customer in resolving matters inclusive in the Form 1s as well as other transmittals. We have provided responses to the DCAA and the Department of State that have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. We have also sought to obtain clarification from our customer through formal contract modifications in an attempt to assist the DCAA in closing these issues.
We believe the majority of these issues will continue to be resolved and thus represent loss contingencies that we consider remote. For the remaining issues, which total approximately $7.7 million we believe the DCAA did not consider certain contractual provisions and long standing patterns of dealing with the customer. Since we cannot reasonably estimate the DCAA's acceptance of our initial responses and the ultimate outcome related to these remaining issues we believe these items represent loss contingencies

25




that we consider reasonably possible. However, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer and the DCAA in providing clarification of the facts and circumstances surrounding the issues.
On April 30, 2013 , we received several Form 1s from DCAA disapproving approximately $152.0 million of cost incurred for the periods ranging between 2000 to 2011 on the War Reserve Materiel program related to concerns on items such as the adequacy of documentation and reasonableness of costs. We are working with the Air Force to resolve these questions. Based on our recent correspondence with the customer, a substantial portion of these items represent loss contingencies are remote. The remaining portion of these items totaling $1.8 million represent loss contingencies that we consider reasonably possible; however, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer.
Foreign Contingencies
On January 22, 2014 , a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance (“MOF”) was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 to 2012. The majority of this assessment was income tax related; however, $10.2 million of the assessed amount is non-income tax related and represents loss contingencies that we consider reasonably possible. We filed our initial appeal of the assessment with the MOF on February 19, 2014 . In May 2014 , the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million . We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of September 25, 2015 , a reasonable estimate of loss or range of loss could not be made as we could not reasonably estimate the ultimate outcome related to the issues assessed.
Credit Risk
We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, we continuously review all accounts receivable and record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic workers' compensation and employers' liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.75 million for total costs per covered participant per calendar year.


26




Note 9 — Segment Information
We have two operating and reporting segments: DynAviation and DynLogistics. The DynAviation and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
Three Months Ended
 
Nine Months Ended
(Amounts in thousands)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
 
 
 
 
 
 
 
DynAviation
$
316,337

 
$
293,238

 
$
950,749

 
$
889,710

DynLogistics
163,187

 
247,829

 
485,781

 
855,337

Headquarters / Other (1)
284

 
(740
)
 
470

 
(995
)
Total revenue
$
479,808

 
$
540,327

 
$
1,437,000

 
$
1,744,052

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
DynAviation
$
(4,137
)
 
$
(65,282
)
 
$
(76,509
)
 
$
(43,382
)
DynLogistics
16,800

 
1,800

 
27,807

 
(66,974
)
Headquarters / Other (2)
(11,344
)
 
(14,245
)
 
(32,039
)
 
(30,331
)
Total operating income (loss)
$
1,319

 
$
(77,727
)
 
$
(80,741
)
 
$
(140,687
)
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
DynAviation
$
491

 
$
372

 
$
2,291

 
$
1,104

DynLogistics
75

 
9

 
187

 
31

Headquarters / Other
8,913

 
11,947

 
25,148

 
35,193

Total depreciation and amortization (3)
$
9,479

 
$
12,328

 
$
27,626

 
$
36,328

(1)
Headquarters revenue primarily represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income.
(3)
Includes amounts included in Cost of services of $0.4 million and $2.0 million and for the three and nine months ended September 25, 2015 , respectively, and $0.2 million and $0.7 million for the three and nine months ended September 26, 2014 , respectively.
The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
As Of
(Amounts in thousands)
September 25, 2015
 
December 31, 2014
Assets
 
 
 
DynAviation
$
351,016

 
$
393,246

DynLogistics
217,318

 
299,961

Headquarters / Other (1)
227,896

 
289,280

Total assets
$
796,230

 
$
982,487

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


27




Note 10 — Related Parties, Joint Ventures and Variable Interest Entities
Consulting Fee
We have a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $1.9 million and $6.1 million on a gross basis before considering the effect of our contract mix which provides for partial recovery, during the three and nine months ended September 25, 2015 , respectively, and $1.5 million and $3.1 million during the three and nine months ended September 26, 2014 , respectively.
We have three executives who are Cerberus Operations and Advisory Company, LLC (“COAC”) employees, who are seconded to us: (i) our former Interim Chief Executive Officer and now non-executive chairman of our Board of Directors; (ii) our Senior Vice President, Chief Administrative Officer and Chief Legal Officer; and (iii) our Senior Vice President of Business Development. Inclusive of the $1.9 million and $6.1 million recognized during the three and nine months ended September 25, 2015 in COAC consulting fees, we recognized $1.0 million and $3.3 million of administrative expense in conjunction with these three COAC individuals for the three months and nine months ended September 25, 2015 , respectively. Inclusive of the $1.5 million and $3.1 million recognized during the three and nine months ended September 26, 2014 in COAC consulting fees, we recognized $0.3 million of administrative expense in conjunction with these COAC employees for the three and nine months ended September 26, 2014 , respectively.
Certain members of executive management and board members of the Company and seconded COAC individuals may have agreements and conduct business with Cerberus and its affiliates for which they receive compensation. We recognize such compensation as an expense in the consolidated financial statements.
Joint Ventures and Variable Interest Entities
We account for our investments in VIEs in accordance with ASC 810 - Consolidation . In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of September 25, 2015 , we accounted for PaTH, CRS, Babcock, GRS and GLS as equity method investments. Alternatively, we consolidated DIFZ based on the aforementioned criteria. We present our share of the PaTH, CRS, GRS and GLS earnings in Earnings from equity method investees as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.
Receivables due from our unconsolidated joint ventures totaled $0.5 million and $1.5 million as of September 25, 2015 and December 31, 2014 , respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled $0.0 million and $0.4 million during the three and nine months ended September 25, 2015 and $0.4 million and $3.4 million during the three and nine months ended September 26, 2014 , respectively. The related cost of services was $0.1 million and $0.5 million during the three and nine months ended September 25, 2015 and $0.4 million and $3.4 million during the three and nine months ended September 26, 2014 , respectively. Additionally, we earned $0.5 million and $1.3 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 25, 2015 and $0.8 million and $11.6 million in equity method income during the three and nine months ended September 26, 2014 , respectively.
GLS’ revenue was $6.5 million and $20.0 million during the three and nine months ended September 25, 2015 , respectively, and $5.1 million and $14.8 million during the three and nine months ended September 26, 2014 . GLS’ operating and net loss was $0.8 million and $1.4 million during the three and nine months ended September 25, 2015 , and operating income was $0.3 million and operating loss was $2.2 million during the three and nine months ended September 26, 2014 , respectively. GLS did not pay a cash dividend during the nine months ended September 25, 2015 . GLS paid cash dividends of $18.8 million during the nine months ended September 26, 2014 . Based on our 51% ownership in GLS, we recognized $9.6 million in equity method income during the nine months ended September 26, 2014 .
We currently hold one promissory note included in Other assets on our consolidated balance sheet from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million . The loan balance outstanding was $2.7 million and $2.9 million as of September 25, 2015 and December 31, 2014 , respectively, reflecting the initial value plus accrued interest, less payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.

28




As discussed above and in accordance with ASC 810 - Consolidation , we consolidate DIFZ. The following tables present selected financial information for DIFZ as of September 25, 2015 and December 31, 2014 and for the three and nine months ended September 25, 2015 and September 26, 2014 :
 
As Of
(Amounts in millions)
September 25, 2015
 
December 31, 2014
Assets
$
4.3

 
$
4.7

Liabilities
0.9

 
1.5

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
54.9

 
$
67.8

 
$
162.2

 
$
231.5

The following tables present selected financial information for our equity method investees as of September 25, 2015 and December 31, 2014 and for the three and nine months ended September 25, 2015 and September 26, 2014 :
 
As Of
(Amounts in millions)
September 25, 2015
 
December 31, 2014
Current assets
$
25.7

 
$
65.8

Total assets
25.7

 
65.9

Current liabilities
15.9

 
44.4

Total liabilities
15.9

 
44.4

 
Three Months Ended
 
Nine Months Ended
(Amounts in millions)
September 25, 2015
 
September 26, 2014
 
September 25, 2015
 
September 26, 2014
Revenue
$
19.6

 
$
53.7

 
$
87.0

 
$
178.1

Gross profit
4.5

 
7.9

 
13.2

 
17.4

Net income
3.5

 
6.7

 
10.3

 
12.8

Many of our joint ventures and VIEs only perform on a single contract. The modification or termination of a contract under a joint venture or VIE could trigger an impairment in the fair value of our investment in these entities. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i)  $5.9 million investment in unconsolidated joint ventures, (ii)  $0.5 million in receivables from our unconsolidated joint ventures, (iii) $2.7 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 25, 2015 .


29




Note 11 — Share Based Payments
On December 17, 2013 DynCorp Management LLC authorized 100,000 Class B shares as available for issuance to certain members of management and outside directors of Defco Holdings, Inc. (“Defco Holdings”), its non-member manager, and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. The grant and vesting of the awards is contingent upon the executives' consent to the terms and conditions set forth in the Class B interests agreements.
In accordance with the provisions of ASC Topic 718, “Compensation—Stock Compensation” we estimate the grant date fair value of the Class B shares using a Monte Carlo simulation, which takes into account subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option.
A summary of the Class B Interest plans activity for the nine months ended September 25, 2015 and September 26, 2014 is as follows:
 
 
Number of Interests
Outstanding at December 31, 2014
 
5,901

Granted:
 
 
Class B-1
 

Class B-2
 

Exercised
 

Forfeited or expired
 
(135
)
Outstanding at September 25, 2015
 
5,766

 
 
Number of Interests
Outstanding at December 31, 2013
 
3,144

Granted:
 
 
Class B-1
 
4,339

Class B-2
 

Exercised
 

Forfeited or expired
 
(1,298
)
Outstanding at September 26, 2014
 
6,185


Awards to our management team consist of options qualifying as profits interests under Revenue Procedure 93-27, that are exercisable only upon a change in control as defined in the Plan. The awards do not expire and the awards do not have a fixed strike price. The value of the Class B Interest as of the grant date is calculated using a Monte Carlo simulation consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” and is amortized over the respective vesting period. The Monte Carlo simulation, similar to a Black-Scholes option pricing formula, requires the input of subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility of the market-based guideline companies as a basis for projecting the expected volatility of the underlying Class B interest and estimated the expected life of our Class B grants to be 4 years as of the grant date. The 2013 fair value utilized for determining the profits interests for Class B-1 and B-2 interests was $819.26 and $258.30 , respectively. The initial fair value was utilized for all grants through the period ending March 28, 2014. After the period ending March 28, 2014, another valuation was performed to determine the fair value of future grants resulting in Class B-1 interests granted after March 28, 2014 having a fair value of $32.73 .
No shares were granted during the nine months ended September 25, 2015 . Total compensation expensed for the three and nine months ended September 25, 2015 was $0.1 million and $0.4 million , respectively. Total compensation expensed for the three and nine months ended September 26, 2014 was $0.7 million and $2.8 million , respectively.

30




A summary of the changes in non-vested shares for the period ended September 25, 2015 and September 26, 2014 is as follows:
 
 
Number of Interests
Non-vested shares at December 31, 2014
 
1,234

Granted
 

Vested
 
(893
)
Forfeited
 
(135
)
Non-vested shares at September 25, 2015
 
206

 
 
Number of Interests
Non-vested shares at December 31, 2013
 
2,123

Granted
 
4,339

Vested
 
(3,296
)
Forfeited
 
(1,298
)
Non-vested shares at September 26, 2014
 
1,868

As of September 25, 2015 , the total compensation cost related to the non-vested Class B awards, not yet recognized, was $0.1 million which will be recognized over a weighted average period of approximately 0.34 years. As of September 26, 2014 , the total compensation cost related to the non-vested Class B awards, not yet recognized, was $0.7 million which will be recognized over a weighted average period of approximately 3.3 years.

Note 12 — Collaborative Arrangements
We have historically participated in a collaborative arrangement with CH2M Hill on the LOGCAP IV program. The collaborative arrangement shared some of the risks and profit associated with this U.S. government contract and was accounted for under ASC 808 - Collaborative Arrangements where we recorded revenue gross as the principal participant. The cash inflows and outflows, as well as expenses incurred, were recorded in Cost of services in the period realized. Through August 25, 2015, our share of the profits was 70%
On August 25, 2015, we executed an agreement with CH2M Hill to end our collaborative arrangement on the LOGCAP IV contract. Subsequent to August 25, 2015, we no longer share any of the risks or profit associated with the contract.


31




Note 13 — Consolidating Financial Statements of Subsidiary Guarantors
The Senior Unsecured Notes issued by DynCorp International Inc. ("Subsidiary Issuer") and the Senior Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group LLC and Casals & Associates Inc. ("Subsidiary Guarantors"). Each of the Subsidiary Issuers and the Subsidiary Guarantors is 100% owned by the Company. Under the indenture governing the Senior Unsecured Notes, a guarantee of a Subsidiary Guarantor will terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of September 25, 2015 and December 31, 2014 , (ii) unaudited condensed consolidating statements of operations and comprehensive loss for the three and nine months ended September 25, 2015 and September 26, 2014 , (iii) unaudited condensed consolidating statements of cash flows for the nine months ended September 25, 2015 and September 26, 2014 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.
The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.
DynCorp International Inc. is considered the Subsidiary Issuer as it issued the Senior Unsecured Notes.

32




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended September 25, 2015  
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
484,403

 
$
61,093

 
$
(65,688
)
 
$
479,808

Cost of services

 

 
(432,723
)
 
(60,467
)
 
65,661

 
(427,529
)
Selling, general and administrative expenses

 

 
(35,254
)
 
(10
)
 
27

 
(35,237