DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-K, Received: 03/29/2017 15:20:26)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
(Mark One)
þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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
(I.R.S. Employer
incorporation or organization)
Identification No.)
1700 Old Meadow Road, McLean, Virginia 22102
(571) 722-0210
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
     
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:

None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes  o No   þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   þ      No   o
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
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
x   (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 March 29, 2017 , the registrant had 100 shares of its common stock outstanding.

 

1


DELTA TUCKER HOLDINGS, INC.
TABLE OF CONTENTS

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

1


Forward-Looking Statements
This Annual Report on Form 10-K contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:
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 refinance with subordinated indebtedness, or pay with proceeds of new equity or capital contributions, the 10.375% Senior Notes due 2017 (the "Senior Unsecured Notes") before May 8, 2017;
the ability to refinance, amend or generate sufficient cash to repay our indebtedness, including any future indebtedness, which may force us to take other actions to satisfy our obligations under our indebtedness, which may not be successful;
the future impact of mergers, acquisitions, divestitures, joint ventures or teaming agreements;
the outcome of any material litigation, government investigation, audit or other regulatory matters;
restatement of our financial statements causing credit ratings to be downgraded or covenant violations under our debt agreements;
policy and/or spending changes implemented by the Trump Administration, any subsequent administration or Congress, including any further changes to the sequestration that the United States ("U.S.") Department of Defense ("DoD") is currently operating under;
termination or modification of key U.S. government or commercial contracts, including subcontracts;
changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the Bureau for International Narcotics and Law Enforcement Affairs, Office of Aviation ("INL Air Wing") and Logistics Civil Augmentation Program IV ("LOGCAP IV") contracts;
the outcome of future extensions on awarded contracts, the outcomes of recompetes on existing programs, including but not limited to the ultimate outcome of the recompete process on the INL Air Wing program;
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 fee granted under our government contracts;
changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;
decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;
changes in underlying assumptions, circumstances or estimates that 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" of this Annual Report on Form 10-K and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission ("SEC").
Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

2


Fiscal Year     
The Company's quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. This Annual Report on Form 10-K reflects the consolidated financial results of the Company for the years ended December 31, 2016 , December 31, 2015 and December 31, 2014 .
Included in this Annual Report on Form 10-K are our audited consolidated statements of operations, comprehensive loss and the related statements of (deficit) equity and cash flows for the years ended December 31, 2016 , December 31, 2015 and December 31, 2014 . The audited consolidated balance sheets are included for the periods as of December 31, 2016 and December 31, 2015 .


3


PART I

ITEM 1. BUSINESS.
Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and its consolidated subsidiaries. The Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International Inc. ("DynCorp International") completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the "Merger"). DynCorp International wholly owns DynCorp International LLC, which functions as the operating company.
The Delta Tucker Holdings, Inc. consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP").
Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on approximately seven decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services.
Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Revenue from the U.S. government accounted for approximately 95% , 93% and 94% of total revenue for the years ended December 31, 2016 , December 31, 2015 , and December 31, 2014 , respectively. Our contracts’ revenue and percentage of total revenue from the U.S. government may fluctuate from year to year. These fluctuations can be due to contract length or contract structure, such as with IDIQ type contracts. IDIQ type contracts are often awarded to multiple contractors and provide the opportunity for awarded contractors to bid on task orders issued under the contract.


4


Contract Types
Our contracts typically have a term of three to ten years consisting of a base period with multiple option periods. Our contracts typically are awarded for an estimated dollar value based on the forecast of services to be provided under the contract over its maximum life. In addition, we have historically received additional revenue through increases in program scope beyond that of the original contract. These contract modifications typically consist of "over and above" requests derived from changes in customer requirements. The U.S. government is not obligated to exercise options under a contract after the base period. At the time of completion of the contract term of a U.S. government contract, the contract may be re-competed to the extent the service is still required.
Our contracts with the U.S. government or the government’s prime contractor (to the extent that we are a subcontractor) generally contain standard, unilateral provisions under which the customer may terminate for convenience or default. U.S. government contracts generally also contain provisions that allow the U.S. government to unilaterally suspend us from obtaining new contracts and reduce the value of existing contract spend, pending the resolution of alleged violations of laws or regulations.
Most of our contracts are to provide services, rather than products, to our customers, resulting in the majority of costs being labor related. For this reason, we staff flexibly for each contract. If we lose a contract, we terminate or reassign the employees associated with the contract, hence cutting direct cost and overhead. Generally, elimination of employees would not generate significant separation costs other than those that would be incurred in the normal course of business and would generally be recoverable under applicable contract terms.
The types of services we perform also support our scalability as our primary capital requirements are working capital, which are variable with our overall revenue stream. The nature of our contracts does not generally require investments in fixed assets, and we do not have significant fixed asset investments tied to a single contract upon which our business materially depends. Additionally, our contract mix gives us a degree of flexibility to deploy assets purchased for certain programs to other programs in cases where the scope of our deliverables changes.
Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these are described below:
Fixed-Price Type Contracts: In a fixed-price contract, the price is generally not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the contracted service. Our fixed-price contracts may include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive elements.
Time-and-Materials Type Contracts: Time-and-materials type contracts provide for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.
Cost-Reimbursement Type Contracts: Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee, incentive-fee or a combination thereof. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets. Award and incentive fees are excluded from estimated total contract revenue until a reasonably determinable estimate of award and incentive fees can be made.
A single contract may be performed under one or more of the contracts types discussed above. Any of these three types of contracts may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CFT and LOGCAP IV programs are two examples of IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.
Our historical contract mix by type, as a percentage of revenue, is indicated in the table below.
 
For the years ended
Contract Type
December 31, 2016
 
December 31, 2015
 
December 31, 2014
Fixed-Price
45
%
 
44
%
 
26
%
Time-and-Materials
4
%
 
5
%
 
12
%
Cost-Reimbursement
51
%
 
51
%
 
62
%
Totals
100
%
 
100
%
 
100
%
Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. We anticipate cost-reimbursement and fixed-price type contracts will continue to represent a majority of our business for calendar year 2017.

5


Under many of our contracts, we may rely on subcontractors to perform all or a portion of the services we are obligated to provide to our customers. We use subcontractors primarily for specialized, technical labor and certain functions such as construction and catering. We often enter into subcontract arrangements in order to meet government requirements that certain categories of services be awarded to small businesses.
The following table sets forth our historical role as a prime contractor and subcontractor, as a percentage of revenue.
 
For the years ended
Type
December 31, 2016
 
December 31, 2015
 
December 31, 2014
Prime contractor
95
%
 
93
%
 
93
%
Subcontractor
5
%
 
7
%
 
7
%
Totals
100
%
 
100
%
 
100
%


Operating and Reportable Segments
In October 2016, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company’s two operating and reporting segments, DynAviation and DynLogistics, were re-aligned into three operating and reporting segments: Aviation Engineering, Logistics, and Sustainment ("AELS"), Aviation Operations and Life Cycle Management ("AOLC") and DynLogistics. The Company's DynLogistics segment remained unchanged. Our three segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies. See Note 11 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of segments.
A description of each of our Reportable Segments is discussed further below.
AELS
The Company's AELS segment, comprised primarily of the Company's U.S. Air Force and U.S. Navy contracts within the former DynAviation segment, provides the technical information and expertise to manage large fleets and bases and delivers engineering and maintenance services to help keep operations running effectively. AELS offers a full spectrum of capabilities including training, supply chain management, aircraft modernization, platform sustainment and data optimization. The T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"), Contractor Logistics Support: T-34, T-44, T-6 ("CLS") and Naval Test Wing Patuxent River MD ("Pax River") programs are three of the most significant programs in the AELS segment. Under the T-6 COMBS contract, the U.S. Air Force contracts the Company to perform support services for the T-6A and T-6B aircraft. Our CLS and Pax River programs provide maintenance and logistics support to the U.S. Navy T-34, T-44, and T-6 aircraft and maintenance and logistic support on Naval Test Wing Atlantic aircraft, respectively.
AOLC
The Company's AOLC segment, comprised primarily of the Company's Army and INL Air Wing contracts within the former DynAviation segment, provides aircraft operations and logistics services to include modernization and refurbishments, upgrades and sustainment, and maintenance and support for key military, government and commercial customers worldwide. The INL Air Wing and Theater Aviation Sustainment Manager - OCONUS ("TASM-O") programs are two of the most significant programs in the AOLC segment. The INL Air Wing program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The TASM-O program provides aviation maintenance services under the Army Aviation Field Maintenance ("AFM") program.
DynLogistics
This segment provides best-value mission readiness to its customers through total support solutions including conventional and contingency logistics, operations and maintenance support, platform modification and upgrades, supply chain management and training, security and full spectrum intelligence mission support services. The LOGCAP IV and War Reserve Materiel II ("WRM II") contracts are the most significant contracts within this segment. Under the LOGCAP IV program, which we perform under a single IDIQ contract, the U.S. Army contracts for us to perform selected services, operations and maintenance, engineering as well as construction and logistics predominately in the Middle East Theater to augment the U.S. Army, the U.S. Marine Corps and North Atlantic Treaty Organization ("NATO") forces and to release military units from combat service support missions or to fill the U.S. military resource shortfalls. Under the WRM II contract, the U.S. Air Force contracts the Company to perform, outload,

6


and reconstitute the pre-positioned war reserve materiel in the U.S. Air Force Central Command Area of Responsibility as well as maintenance services on ground support equipment vehicles.
DynLogistics supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions. This segment also provides base operations support, engineering, supply and logistics, pre-positioned war reserve materials, facilities, marine maintenance services, program management services primarily for ground vehicles and contingency response on a worldwide basis. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.

Key Contracts
Logistics Civil Augmentation Program IV ("LOGCAP IV"): The LOGCAP IV contract was awarded to us in April 2008 and is a part of our DynLogistics segment. We were selected as one of the three prime contractors to provide logistics support under the LOGCAP IV contract. LOGCAP IV is the U.S. Army component of the DoD’s initiative to award contracts to U.S. companies with a broad range of logistics capabilities to support U.S. and allied forces during combat, peacekeeping, humanitarian and training operations. This IDIQ contract has a term of up to ten years. In December 2012, customer negotiations resulted in the elimination of the award fee component for option years beginning in 2012 and continuing for the remaining contract periods. The remaining task orders under the LOGCAP IV contract are now either firm fixed price or cost-reimbursable-plus-fixed-fee.
Bureau for International Narcotics and Law Enforcement Affairs, Office of Aviation ("INL Air Wing"): The INL Air Wing program is a part of our AOLC segment. In May 2005, the DoS awarded this contract in support of the INL Air Wing program to aid in the eradication of illegal drug operations. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The services provided under this contract are fixed-price and cost-reimbursable type services. In January 2015, the DoS issued a letter notifying us that our proposal on the recompete related to the INL Air Wing contract was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS's evaluation. We filed a protest with the U.S. Government Accountability Office (“GAO”) to challenge the decision by the DoS. In October 2015 we received notification of a new competitive range decision that reinstated our proposal back into the competitive range for the recompete regarding services after October 2016. We submitted our final proposal on May 4, 2016 and on September 1, 2016, we were notified that the DoS had awarded the re-compete of the INL Air Wing contract to another company. On September 11, 2016, we filed a protest with the GAO challenging the DoS agency’s award determination. On September 27, 2016, AOLC finalized negotiations with the DoS Office of Acquisition Management regarding an extension of services on the INL Air Wing program and definitized an agreement for a one-year extension through October 31, 2017. On December 21, 2016, we were notified that the GAO denied our protest of the DoS agency’s award determination of the INL Air Wing contract to another company. We continue to pursue legal recourse before the U.S. Court of Federal Claims regarding this matter.
Contract Field Teams ("CFT"): The CFT program is a part of our AELS segment. This program deploys highly mobile, quick-response field teams to customer locations to supplement a customer’s workforce. The services we provide under the CFT program generally include mission support to aircraft and weapons systems and depot-level repair. Our customer for the CFT program is the DoD and the majority of our current delivery orders are time-and-materials, but we also have cost-reimbursement and fixed-priced services.
T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"): The T-6 COMBS contract with the U.S. Air Force Materiel Command is a part of our AELS segment and provides support services for T-6A and T-6B aircraft at ten Air Force and Navy locations throughout the U.S. The majority of our contractual services are fixed-price. The contract began June 1, 2012 and consists of a five month base period and four one-year option years. In October 2016, we received a contract modification to extend the T-6 COMBS contract period of performance to April 2017.
Naval Test Wing Patuxent River MD ("Pax River"): The Pax River contract is a part of our AELS segment. This contract was awarded in July 2011 to provide organization level maintenance and logistic support on all aircraft and support equipment for which the Naval Test Wing Atlantic has maintenance responsibility. Labor and services will be provided to perform safety studies, off-site aircraft safety and spill containment patrols and aircraft recovery services. The cost-plus-fixed-fee contract has a base year plus four one-year option periods and ends on March 31, 2017. In December 2016, AELS was awarded the competitive follow-on contract which will commence April 1, 2017. The contract has a one-year base period and four one-year option periods and is a cost-plus-fixed-fee contract with a smaller portion of fixed-price services.
War Reserve Materiel ("WRM II"): The War Reserve Materiel contract is a part of our DynLogistics segment. Through this program, we manage the U.S. Air Force Central Command Area of Responsibility War Reserve Materiel Pre-positioning program, which includes operations in Oman, Bahrain, Qatar, Kuwait, United Arab Emirates and two locations in the United States (Yorktown, Virginia and Shaw Air Force base, South Carolina). Through this contract, we store, maintain and deploy assets such as tents,

7


generators, vehicles, kitchens and medical supplies to deployed forces. The WRM II program continues to partner with the U.S. Air Force Central Command in the development of new and innovative approaches to asset management. Our contract is primarily cost-plus-award fee with a smaller portion of fixed-price services. In January 2017, the WRM II contract period of performance was extended to September 2017. On January 23, 2017, we were awarded the follow-on contract which contains a three-month transition period, five-month base period and seven one-year options. The follow-on contract is both cost-plus-fixed-fee with a smaller portion of fixed-price services.
Contractor Logistics Support: T-34, T-44, T-6 ("CLS"): The CLS program is part of our AELS segment. This contract was awarded in November 2014 to provide maintenance and logistics support to the United States Navy T-34, T-44, and T-6 aircraft programs. The services provided under this contract are fixed-price and cost-reimbursable type services. The contract has a one year base period plus four one-year option periods.
Theater Aviation Sustainment Manager - OCONUS ("TASM-O"): The TASM-O contract is a part of our AOLC segment. This contract was awarded in September 2013 to provide aviation maintenance services under the Army Aviation Field Maintenance ("AFM") program. The hybrid firm-fixed-price, cost-plus incentive fee contract has a one year base period plus four one-year option periods.
Andrews Air Force Base ("Andrews AFB"): The Andrews AFB program is a part of our AELS segment. Under the Andrews AFB contract, we perform aviation maintenance and support services, which include full back shop support, organizational level maintenance, fleet fuel services, launch and recovery, supply and Federal Aviation Administration ("FAA") repair services. Under this program we oversee the management of the U.S. presidential air fleet (other than Air Force One). Our principal customer under this contract is the U.S. Air Force. This contract was entered into September 2011, with the majority of contractual services provided on a fixed-price basis. The contract has a one-year base period plus six one-year options and one four-month option period.
G4 Worldwide Logistics Support ("GISS") : The GISS contract is a part of our DynLogistics segment. This contract was awarded in March 2015 to establish an enterprise approach for providing multi-disciplined engineering, facilities and logistical support for current and future Army Intelligence requirements across the wide range of intelligence disciplines in support of the United States Army's Intelligence and Security Command ("INSCOM"). The contract has a one-year base period, with four one-year option periods.


8


Estimated Total Contract Value and Certain Other Terms
The estimated total contract value represents amounts expected to be realized from the initial award date to the current contract end date (i.e., revenue recognized to date plus backlog). For the reasons stated under the captions "Risk Factors" and "Business - Key Contracts," the estimated total contract value or ceiling value specified under a government contract or task order is not necessarily indicative of the revenue that we will realize under that contract.
Key Contracts
The following table sets forth certain information for our principal contracts, including the initial start and end dates and the principal customer for each contract as of December 31, 2016 :  
Contract  
Segment   
Principal  
Customer  
Initial/Current
Award Date
 
Contract End Date  
Estimated
Total Contract
Value 
(1)  
LOGCAP IV (2)
DynLogistics
U.S. Army
Apr-2008
Apr-2018
$6.56 billion  (3)
INL Air Wing
AOLC
DoS
Jan-2001 / May-2005
Oct-2017
$4.69 billion
Contract Field Teams (4)
AELS
U.S. Air Force
Oct-1951 / Oct 2008
Mar-2017
$1.42 billion
TASM-O
AOLC
U.S. Army
Sep-2013
Dec-2018
$632 million
WRM II (5)
DynLogistics
U.S. Air Force
May-2000 / Jun-2008
Sep-2017
$613 million
T-6 COMBS
AELS
U.S. Air Force
Jun-2012
Apr-2017
$599 million
Pax River (6)
AELS
U.S. Navy
Jul-2011 / Aug-2011
Mar-2017
$596 million
CLS
AELS
U.S. Navy
Nov-2014
Sep-2019
$591 million
Andrews AFB
AELS
U.S. Air Force
Sep-2011
Dec-2018
$451 million
GISS
DynLogistics
U.S. Army
Mar-2015
Nov-2021
$321 million
(1)
Estimated total contract value represents the start and end date of the contracts as modified and is not necessarily representative of the amount of work we will actually experience under the contract. With the exception of contract ceiling maximums, contract values can continue to increase or decrease over time based on contract modifications, extensions or placement of orders under IDIQ contracts.
(2)
LOGCAP IV has a $5 billion ceiling per year per contractor over 10 years.
(3)
As of December 31, 2016 , the LOGCAP IV estimated total contract value was impacted by the execution of a global settlement to finalize via a formal modification a number of outstanding contract actions and change orders.
(4)
Contract Field Teams has a $10 billion ceiling maximum total for the IDIQ multiple award contract.
(5)
In January 2017, DynLogistics was awarded the follow on contract, War Reserve Materiel III, which will commence September 2017. The contract has a three-month transition, five-month base period and seven one-year option periods with a total potential contract value of $412 million. The follow on contract is not reflected in the table above as the initial start date is subsequent to December 31, 2016 .
(6)
In December 2016, AELS was awarded the follow on contract, the Naval Test Wing Atlantic contract, which will commence April 1, 2017. The contract has a one-year base period and four one-year option periods with a total potential contract value of $546 million. The follow on contract is not reflected in the table above as the initial start date is subsequent to December 31, 2016 .


Competition
We compete with various entities across geographic and business lines based on a number of factors, including services offered, experience, price, geographic reach and mobility. Most activities in which we engage are highly competitive and require that we have highly skilled and experienced technical personnel to compete. Some of our competitors may possess greater financial and other resources or may be better positioned to compete for certain contract opportunities.
We believe that our principal competitors include AAR Corp, ACADEMI, AECOM Technology Corporation, Aerospace Industrial Development Corporation, Al Salam Aircraft Company Ltd., Bell Helicopter, Boeing Corporation, Constellis Holdings, LLC, DRS Technologies, Inc., Elbit Systems Ltd., Engility Holdings, Inc., Fluor Corporation, IAP Worldwide Services, KBR, Inc., L3 Technologies, Inc., Lear Siegler, Pacific Architects and Engineers Incorporated, Lockheed Martin Corporation, M1 Support Services, L.P., ManTech International Corporation, Mission Essential Personnel, Northrop Grumman Corporation, Raytheon Company, Science Applications International Corporation, Serco Group plc, Textron Inc. and Vectrus, Inc. We believe that the primary competitive factors for our services include reputation, technical skills, past contract performance, experience in the industry (including our aircraft platform experience), cost competitiveness and customer relationships.

Backlog
We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog

9


is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised, priced contract options and the unfunded portion of exercised contract options. These priced options may or may not be exercised at the sole discretion of the customer. Unfunded backlog does not include future potential task orders expected to be awarded under IDIQ or other master agreement contract vehicles.
Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years.
The following table sets forth our approximate backlog as of the dates indicated:
 
December 31, 2016
(Amounts in millions)
AELS
 
AOLC
 
DynLogistics
 
Total
Funded backlog
$
291

 
$
789

 
$
323

 
$
1,403

Unfunded backlog
1,133

 
263

 
917

 
2,313

Total backlog
$
1,424

 
$
1,052

 
$
1,240

 
$
3,716

 
 
 
 
 
 
 
 
 
December 31, 2015
(Amounts in millions)
AELS
 
AOLC
 
DynLogistics
 
Total
Funded backlog
$
241

 
$
556

 
$
386

 
$
1,183

Unfunded backlog
865

 
520

 
474

 
1,859

Total backlog
$
1,106

 
$
1,076

 
$
860

 
$
3,042

The increase in backlog as of December 31, 2016 was primarily due to new contract wins within the AELS and DynLogistics segments, partially offset by revenue recognized on current programs during the year ended December 31, 2016 .
We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel certain contracts through a termination for the convenience of the U.S. Government. Certain commercial or non-U.S. Government contracts may include provisions that allow the customer to cancel prior the completion of the contract, however, most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed.

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

10


subject to the Truth in Negotiations Act to determine if the cost proposed and negotiated was accurate, current and complete as of the time of negotiations.
The Defense Contract Audit Agency ("DCAA") performs these audits on behalf of the U.S. government. The DCAA also reviews and opines on the adequacy of, and our compliance with, our internal control systems and policies, including Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management Systems. The DCAA has the right to perform audits on our incurred costs on all flexibly-priced contracts on an annual basis. We have DCAA auditors on-site to monitor our billing and back office operations. An adverse finding under a DCAA audit could result in a recommendation of disallowed costs under a U.S. government contract, termination of U.S. government contracts, forfeiture of profits, withholding of payments, fines, suspension or prohibition from doing business with the U.S. government. In the event that an audit by the DCAA recommends disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted annual incurred costs claims can take many years. All of our incurred costs claims for U.S. government contracts completed through fiscal year 2011 have been audited by the DCAA and negotiated by the Defense Contract Management Agency ("DCMA"). Incurred cost claim audits for subsequent periods are ongoing. See "Item 1A. Risk Factors - A negative audit or other actions by the U.S. government could adversely affect our operating performance."
At any given time, many of our contracts are under review by the DCAA and other government agencies. We cannot predict the outcome of such ongoing audits and what, if any, impact such audits may have on our future operating performance.
Over the last few years, U.S. government contractors, including our Company, have seen a trend of increased oversight by the DCAA and other U.S. government agencies. If any of our internal control systems are determined to be non-compliant or inadequate, payments may be suspended under our contracts or we may be subjected to increased government oversight that could delay or adversely affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government.
Sales and Marketing
We provide our service solutions to a wide array of customers, primarily multiple departments and agencies within the U.S. government, as well as select international customers and commercial customers. We also provide our services to other prime contractors who have contracts with the U.S. government and other international customers where our capabilities help to deliver comprehensive solutions. We position our business development and marketing professionals to cover key accounts such as the DoS and the DoD, as well as other international and commercial market segments which hold the most promise for aggressive growth and profitability.
In order to sell our services in new geographic markets and diversify our customer base beyond our traditional customers, we have formed a Global Advisory Group to locate new business opportunities (the “Global Advisory Group”). The Global Advisory Group focuses on expanding beyond our traditional base to develop new business contracts with foreign governments and commercial customers (which accounted for approximately 5% of our revenues in 2016). We have expanded our team of internal advisors to include persons with the additional skills and experience that will better position us to take advantage of these new business opportunities.
We participate in national and international tradeshows, particularly as they apply to aviation services, logistics, contingency support, defense, diplomacy and development markets. We are also an active member in several organizations related to services contracting, such as the Professional Services Council.
As a global service solutions provider, we have unique experience and capability in providing value-added and full spectrum services to government agencies and selected partners worldwide.
Our business development and marketing professionals maintain close relationships with all existing customers while continuing to aggressively pursue adjacent markets to maximize growth opportunities.
Intellectual Property
We hold an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid license to use the "Dyn International" and "DynCorp International" names in connection with aviation services, security services, technical services and marine services. We also own various licenses for names associated with Phoenix, Casals and Heliworks. Additionally, we own various registered domain names, patents, trademarks and copyrights. Since most of our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright, patents, or trademark protections, although our operations make use of such protections and benefit from them.
Environmental Matters
Our operations include the use, generation and disposal of petroleum products and other hazardous materials, including services such as painting aircraft and handling substances that may qualify as hazardous waste, such as used batteries and petroleum products. We are subject to various U.S. federal, state, local and foreign laws and regulations by which we must abide. These

11


regulations relate to the protection of the environment, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe and healthy workplace for our employees, contractors and visitors. We have written procedures in place and compliance programs related to environmental matters.

Employees
As of December 31, 2016 , we had approximately 10,700 personnel located in approximately 31 countries in which we have operations, of which approximately 4,200 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,600 . We believe the working relations with our employees and our unions are in good standing.
ITEM 1A. RISK FACTORS.
The risks described below should be carefully considered, together with all of the other information contained in this Annual Report on Form 10-K, including Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any of the following risks could materially and adversely affect our financial condition, results of operations or cash flows.
We may not be able to generate sufficient cash to service all of our indebtedness, including the New Senior Credit Facility and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our New Senior Credit Facility requires us to use a portion of our Excess Cash Flow to make additional principal payments. Based on our annual financial results for the year ended December 31, 2016 we are required to make an additional principal payment of $25.1 million under the Excess Cash Flow requirement by April 5, 2017 .
Our New Senior Credit Facility also requires us to make a $22.5 million principal payment on the New Term Loan no later than June 15, 2017 , and a $22.5 million principal payment on the New Term Loan no later than June 15, 2018 , which amounts may be reduced as a result of the application of certain repayments, including our Excess Cash Flow payment. As a result of the additional principal payment of $25.1 million under the Excess Cash Flow requirement, we will not be required to make any additional principal payment on the New Term Loan for the June 15, 2017 $22.5 million principal payment requirement.
Our ability to make the $25.1 million Excess Cash Flow payment by April 5, 2017 and $22.5 million principal payment no later than June 15, 2018 depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to repay the New Senior Credit Facility by the principal due dates or to pay principal or interest on our other outstanding indebtedness.
If our cash flows and capital resources are insufficient to repay our New Senior Credit Facility by the principal due dates or to pay the principal and interest on our other outstanding indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the Indenture governing the New Notes and the credit agreements governing the New Senior Credit Facility and the Cerberus 3L Notes, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our debt agreements contain, and the agreements governing any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things:
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
make certain investments;
sell certain assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the covenants in our New Senior Credit

12


Facility require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our Indenture and, in the case of our revolving credit facility, permit the Agent to cease making loans to us.
Upon the occurrence of an event of default under our New Senior Credit Facility that is not waived by the requisite lenders (including a failure to comply with our financial maintenance covenants) the lenders could elect to declare all amounts outstanding under the New Senior Credit Facility to be immediately due and payable and terminate all commitments to extend further credit, including issuing new letters of credit. This outcome would result in doubt in the Company’s ability to continue as a going concern. If such actions were taken by the lenders under our New Senior Credit Facility, it would also cause an event of default under our New Notes and the Cerberus 3L Notes.
If we were unable to repay those amounts, the Agent under our New Senior Credit Facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our New Senior Credit Facility. If the Agent or lenders under the New Senior Credit Facility accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our New Senior Credit Facility, and we may not have sufficient assets to repay our secured and unsecured indebtedness thereafter, including our Senior Unsecured Notes, New Notes and the Cerberus 3L Notes.
Repayment of our debt, including the New Senior Credit Facility, New Notes and Cerberus 3L Notes, is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness, including the New Senior Credit Facility, New Notes and Cerberus 3L Notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the New Senior Credit Facility, New Notes or the Cerberus 3L Notes, our subsidiaries do not have any obligation to pay amounts due on the New Senior Credit Facility, New Notes and the Cerberus 3L Notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable DynCorp International Inc. to make payments in respect of its indebtedness, including the New Senior Credit Facility, New Notes and the Cerberus 3L Notes. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from DynCorp International Inc.'s subsidiaries. While the Indenture governing the New Notes and the credit agreements governing the New Senior Credit Facility and the Cerberus 3L Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that DynCorp International Inc. does not receive distributions from its subsidiaries, DynCorp International Inc. may be unable to make required principal and interest payments on its indebtedness, including the New Senior Credit Facility, New Notes and the Cerberus 3L Notes.
Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our debt obligations contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
In addition to the $48.0 million which is available to us for borrowing under our revolving credit facility, the terms of our New Senior Credit Facility permit us to increase the amount available under our revolving credit facilities by up to an aggregate of $15 million if we are able to obtain loan commitments from a non-debt fund affiliate of Cerberus and satisfy certain other conditions, including our having capacity to incur such indebtedness under the Indenture governing our New Notes and the credit agreements governing the New Senior Credit Facility and the Cerberus 3L Notes. Additionally, we can take on more debt as long as we comply with the covenants in the Indenture governing the New Notes and the credit agreements governing the New Senior Credit Facility and the Cerberus 3L Notes. If new debt is added to our and our subsidiaries' existing debt levels, the related risks that we face would increase. In addition, the agreements governing our debt obligations do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our debt obligations.
As of December 31, 2016 , we are highly leveraged with our total carrying amount of indebtedness of approximately $650.9 million . We had $48.0 million available for borrowing under our revolving credit facility, and the terms of the New Senior Credit Facility permit us to increase the amount available under our revolving credit facilities by up to $15 million if we are able to obtain loan commitments from a non-debt fund affiliate of Cerberus and satisfy certain other conditions, including our having capacity

13


to incur such indebtedness under the Indenture governing the New Notes and the credit agreement governing the Cerberus 3L Notes.
Our high degree of leverage could have important consequences including:
increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow for other purposes, including for our operations, capital expenditures and future business opportunities;
exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our New Senior Credit Facility, are at variable rates of interest;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
Our interest expense could increase if interest rates increase above the stated LIBOR floor levels in our New Senior Credit Facility because the entire amount of the indebtedness under our New Senior Credit Facility bears interest at a variable rate. At December 31, 2016 , we had approximately $207.4 million aggregate principal amount of variable rate indebtedness under our New Senior Credit Facility. A 100 basis point increase over the LIBOR floor levels would increase our annual interest expense by approximately $2.1 million .  
Although we have received a commitment from Cerberus to fund the redemption of our $39.3 million principal amount of Senior Unsecured Notes on or before May 5, 2017, it is possible that we will not receive these funds.
The Company has received a support letter from Cerberus (the “Support Letter”) committing to fund the redemption of all outstanding Senior Unsecured Notes on or before May 5, 2017 with the proceeds of new equity or capital contributions (the “New Cerberus Financing”). The Support Letter is irrevocable and unconditional, except in the limited circumstances of a material adverse change in the operations, liabilities or financial condition of DynCorp International and its subsidiaries, taken as a whole, as a result of pending or threatened claims, litigation or judgments between the date of the Support Letter and May 5, 2017 in excess of any accruals or reserves reflected in the Company’s audited financial statements as of December 31, 2016 (the “Material Adverse Change Condition”). We have therefore sent a notice of redemption to the holders of the Senior Unsecured Notes for a redemption of all of the remaining Senior Unsecured Notes on April 24, 2017, conditioned on the receipt of the proceeds of the New Cerberus Financing or other equity and/or debt financings and/or capital contributions.
We agreed in the credit agreement governing the New Senior Credit Facility, the Indenture governing the New Notes and the Third Lien Credit Agreement that the $39.3 million principal amount to be repaid on the remaining Senior Unsecured Notes may only be paid with the proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility, the New Notes and the Cerberus 3L Notes (and we may not exchange any such remaining Senior Unsecured Notes into secured obligations of any kind). In addition, under the New Senior Credit Facility, any such new debt must mature after the maturity date of the New Term Loan, and under the Indenture and the Third Lien Credit Agreement, any such new debt must mature after the maturity date of the New Notes. In the event that we do not receive the New Cerberus Financing, we may not have the ability to obtain such new equity, capital contributions or new unsecured subordinated debt financing on terms that are acceptable to us, or at all. Accordingly, we may not be able to satisfy our obligations to repay amounts owed under the remaining Senior Unsecured Notes at their maturity unless we obtain new equity, capital contributions or subordinated debt financing or we are able to obtain waivers from the required lenders under the New Senior Credit Facility, majority holders of the New Notes and the lender under the Third Lien Credit Agreement.
On May 8, 2017, our New Senior Credit Facility will become due and payable unless the maturity date of all of the remaining Senior Unsecured Notes has been extended to a date on or after October 6, 2020 or the remaining Senior Unsecured Notes have been paid in full with the proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility. In the event that we do not either refinance or receive outside contributions, we may be unable to make required scheduled debt service obligations. Since Cerberus has agreed to provide the New Cerberus Financing irrevocably and unconditionally except in limited circumstances, the Company expects to complete the redemption before May 8, 2017, in which case the New Senior Credit Facility will not become due and payable on May 8, 2017. However, it is possible that the Company will not receive the New Cerberus Financing, such as if the Material Adverse Change Condition is triggered.

14


We rely on sales to U.S. government entities. A loss of contracts, a failure to obtain new contracts, a reduction of sales or award fees under existing contracts with the U.S. government or a decline or reprioritization of funding in the U.S. defense budget or delays in the budget process could adversely affect our operating performance and our ability to generate cash flow to fund our operations.
Our revenue is predominantly from contracts and subcontracts with the U.S. government and its agencies, primarily the DoD and the DoS. The remainder of our revenue is derived from commercial contracts, certain other U.S. federal, state and local government departments and agencies and contracts with foreign governments. We expect that U.S. government contracts, particularly with the DoD and the DoS, will continue to be our primary source of revenue for the foreseeable future. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the DoD and the DoS. Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. The loss or significant reduction in government funding of a large program in which we participate could also result in a material decrease to our future projections of revenue, earnings and cash flows. U.S. government contracts are also conditioned upon the continuing approval by Congress of the amount of necessary spending. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. U.S. government defense spending levels are difficult to predict. Among the factors that could impact U.S. government spending and reduce our U.S. government contracting business include:
policy and/or spending changes implemented by the Trump administration, any subsequent administration or Congress;
continued budget reductions in military spending imposed by Congress including sequestration;
a continual decline in, or reapportioning of, spending by the U.S. government, in general, or by the DoD or the DoS, in particular;
changes, delays or cancellations of U.S. government programs, requirements or policies;
the adoption of new laws or regulations that affect companies that provide services to the U.S. government;
U.S. government shutdowns or other delays in the government appropriations process, including any delays resulting from election cycles and changes in the administration or Congress;
curtailment of the U.S. government's outsourcing of services to private contractors including the expansion of insourcing;
changes in the political climate, including with regard to the funding or operation of the services we provide; and
general economic conditions, including an economic slowdown or unstable economic conditions in the United States or in the countries in which we operate.
These or other factors could cause U.S. government agencies to reduce their purchases under our contracts, to exercise their right to terminate our contracts in whole or in part, to issue temporary stop-work orders or to decline to exercise options to renew our contracts. The loss or significant curtailment of our material government contracts, or our failure to renew existing contracts or enter into new contracts, could adversely affect our operating performance, lead to an unexpected loss of revenue and have a material adverse effect on our results of operations, financial condition or liquidity. Additionally, our ability to receive timely payments from prime contractors where we act as a subcontractor could affect our operating performance.
Our U.S. government contracts may be terminated by the U.S. government at any time prior to their completion and contain other unfavorable provisions, which could lead to an unexpected loss of revenue and a reduction in backlog.
Under the terms of our contracts, the U.S. government may unilaterally:
terminate or modify existing contracts;
reduce the value of existing contracts through partial termination;
exercise their option periods and extend contracts that have unfavorable terms for us;
delay or withhold the payment of our invoices by government payment offices;
audit our contract-related costs and fees; and
suspend us from receiving new contracts, pending the resolution of alleged violations of procurement laws or regulations.

The U.S. government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination could expose us to liability and adversely affect our operating performance and lead to an unexpected loss of revenue.
The nature of our business sometimes requires us to begin new work or extend work under an existing contract at the request of our customer before a formal contract or contract modification has been executed. It is common for our customers to issue change orders or modifications on our contingency operations based contracts because of the dynamic nature of the work performed on these contracts. These change orders or modifications can be more at risk for disagreements or delays that may lead to claims

15


being filed as they take longer to definitize by their very nature. In such situations, we have a long history of successfully obtaining a formal contract or contract modification from our customer; however, work performed in such situations involves some risk that we may be unsuccessful in reaching a final agreement with our customer. In the event we are unsuccessful in reaching an agreement with our customer, we may be required to submit a request for equitable adjustment or a formal claim. These processes can take substantial time and may ultimately be unsuccessful in allowing us to bill and collect any associated fees earned on work performed in such situations, including base fees or award fees, which could result in lower revenue and could have a material effect on our financial condition and results of operations.
Our U.S. government contracts typically have an initial term of one year with multiple option periods, exercisable at the discretion of the U.S. government at previously negotiated prices. The U.S. government is not obligated to exercise any option period under a contract. The U.S. government can unilaterally exercise these option periods even if the terms are unfavorable to us. Furthermore, the U.S. government is typically required to recompete all programs and, therefore, may not automatically renew a contract. In addition, at the time of completion of any of our U.S. government contracts, the contract is frequently required to be re-competed if the U.S. government still requires the services covered by the contract.
If the U.S. government terminates and/or materially modifies any of our contracts or if option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenue and backlog. In addition, if we are unsuccessful in obtaining contract modifications to remove unfavorable terms, the U.S. government could exercise option periods that extend such unfavorable contract terms, which could then result in declines in our earnings or contract losses. Any of these occurrences could adversely affect our earnings and have a material effect on our financial condition and results of operations.
Changes to our contracts could impact our future profitability.
Our consolidated operating income (loss) margin for the years ended December 31, 2016 and December 31, 2015 were 1.4% and (3.8)% , respectively. Within our portfolio of contracts, certain contracts vary from the consolidated operating income margin. For example, our loss contracts diminish our consolidated operating margin while other contracts have margins that are significantly higher than the consolidated operating income margin.
The significance of any one contract can change as our business expands or contracts. As contract modifications, contract extensions or other contract actions occur, the profitability of any one contract can significantly change and as a result, become more or less significant to the Company. As contracts are recompeted, the scope, scale or profitability or other contract elements of the new contract could materially differ from the original contract. Any such changes or the addition of new loss contracts or negative changes to profitable contracts could adversely affect our operating performance and may result in additional expenses or loss of revenue.
Our U.S. government contracts are subject to competitive bidding, both upon initial issuance and re-competition. If we are unable to successfully compete in the bidding process or if we fail to win re-competitions, it could adversely affect our operating performance and lead to an unexpected loss of revenue.
Substantially all of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:
we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;
we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns;
we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending; and
if we are not given the opportunity to re-compete for U.S. government contracts previously awarded to us, we may incur expenses to protect such decision and ultimately may not succeed in competing for or winning such contract renewal.
The U.S. government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.
Because of the nature of our business, it is not unusual for us to lose contracts to competitors or to gain contracts once held by competitors during re-compete periods. For a discussion of the recent events related to the recompete for the INL Air Wing

16


contract, see “Item 1. Business-Key Contracts -- Bureau for International Narcotics and Law Enforcement Affairs, Office of Aviation ("INL Air Wing").”
Additionally, some contracts simply end as projects are completed or funding is terminated. We have included our most significant contracts by reportable segment in our key contract table under the heading "Business." Contract end dates are included within the tables to better inform interested parties, security analysts and institutional investors in reviewing the potential impact on our most significant contracts for this risk.
Our IDIQ contracts are not firm orders for services, and we may never receive revenue from these contracts, which could adversely affect our operating performance.
Many of our government contracts are IDIQ contracts, which are often awarded to multiple contractors. The award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under an IDIQ contract, the customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best-value approach. However, many contracts also permit the government customer to direct work to a specific contractor. We may not win new task orders under these contracts for various reasons, such as failing to rapidly deploy personnel or high prices, which would have an adverse effect on our operating performance and may result in additional expenses and loss of revenue. There can be no assurance that our existing IDIQ contracts will result in actual revenue during any particular period or at all.
Our cost of performing under time-and-materials and fixed-price contracts may exceed our revenue, which would result in a recorded loss on the contracts.
Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price. With cost-reimbursement contracts, so long as actual costs incurred are within the contract funding and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated fixed-fee and, in some cases, an incentive-based award fee. We assume additional financial risk on time-and-materials and fixed-price contracts, because of the stipulated prices or negotiated hourly/daily rates. As such, if we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins. Also, we assume the risk of damage or loss to government property, and we are responsible for third-party claims under fixed-price contracts. The failure to meet contractually defined performance standards may result in a loss of a particular contract or lower-than-anticipated margins. This could adversely affect our operating performance and may result in additional costs and possible loss of revenue.
We are subject to investigation by government agencies, which could result in our inability to receive government contracts and could adversely affect our future operating performance.
As a U.S. government contractor operating domestically and internationally, we must comply with laws and regulations relating to U.S. government contracting, as well as domestic and international laws. From time to time, we are investigated by government agencies with respect to our compliance with these laws and regulations. If we are found to be in violation of the law, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or prohibition from doing business with U.S. government agencies. For example, many of the contracts we perform in the U.S. are subject to the Service Contract Act, which requires hourly employees to be paid certain specified wages and benefits. If the U.S. Department of Labor determines that we violated the Service Contract Act or its implemented regulations, we could be suspended from being awarded new government contracts or renewals of existing contracts for a period of time, which could adversely affect our future operating performance. We are subject to a greater risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than companies with solely commercial customers. In addition, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.
Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we were suspended or prohibited from contracting with the U.S. government, or any significant U.S. government agency, if our reputation or relationship with U.S. government agencies was impaired or if the U.S. government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, it could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
U.S. government contractors like us that provide support services in theaters of conflict such as Iraq and Afghanistan have come under increased oversight by the agency of inspectors general, government auditors and congressional committees. Investigations pursued by any or all of these groups may result in adverse publicity for us and consequent reputational harm, regardless of the underlying merit of the allegations being investigated. As a matter of general policy, we have cooperated and expect to continue to cooperate with government inquiries of this nature.

17


A negative audit or other actions by the U.S. government could adversely affect our operating performance.
At any given time, many of our contracts are under review by the DCAA, the DCMA and other government agencies. These agencies review our contract performance, cost structure, and/or compliance with applicable laws, regulations and standards. Such agency audits may include contracts under which we have performed services in Iraq and Afghanistan under especially demanding circumstances.
The government agencies also review the adequacy of, and our compliance with, our internal control systems and policies, including our Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management System.
Given the continued oversight by the U.S. government, we could be subjected to additional regulatory requirements which could require additional audits at various points within our contracting process. An adverse finding under an audit could result in a recommendation of disallowed costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits, suspension or a withhold of payments which could negatively impact our liquidity position and affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
Economic conditions could impact our business.
Our business may be adversely affected by factors in the U.S. and other countries that are beyond our control, such as disruptions in the financial markets or downturns in the economic activity in specific countries or regions, or in the various industries in which we operate. These factors could have an adverse impact in the availability of capital and cost of capital, interest rates, tax rates, or regulations in certain jurisdictions. If for any reason we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms. Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of our insurers and financial institutions.
In particular, if the U.S. government, due to budgetary considerations, fails to sustain the troops in Afghanistan, continues to reduce the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, or if a government shutdown occurs, our business, financial condition and results of operations could be adversely affected. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. government, including sequestration.
A credit crisis, further tightening of credit or our lenders' views concerning the outlook of our business could adversely affect our ability to obtain additional liquidity or refinance existing or future indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion regarding liquidity.
Our operations involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, could adversely affect our results of operations and financial condition.
We are exposed to liabilities that arise from the services we provide. Such liabilities may relate to an accident or incident involving our employees or third parties, particularly where we are deployed on-site at active military installations or in locations experiencing political or civil unrest, or they may relate to an accident or incident involving aircraft or other equipment we have serviced or used in the course of our business. Any of these types of accidents or incidents could involve significant potential claims of injured employees and other third parties and claims relating to loss of or damage to government or third-party property.
We maintain insurance policies that mitigate risk and potential liabilities related to our operations. Our insurance coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. Substantial claims in excess of our related insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Furthermore, any accident or incident for which we are liable, even if fully insured, may result in negative publicity which could adversely affect our reputation among our customers, including our government customers, and the public, which could result in the loss of existing and future contracts or make it more difficult to compete effectively for future contracts. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.  
Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.
Certain regions in which we operate are highly unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. Insurgents in Iraq and Afghanistan have targeted installations where we have personnel, and these insurgents have contributed to instability in these countries. This could impair our ability to attract and deploy

18


personnel to perform services in either or both locations. In addition, we may be required to increase compensation to our personnel as an incentive to deploy them to these regions. Historically we have been able to recover this added cost under our contracts, but there is no guarantee that future increases, if required, will be able to be transferred to our customers through our contracts. To the extent that we are unable to transfer such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance.
In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt or substantially reduce our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all or substantially reduce U.S. government activities, including our operations under U.S. government contracts in a particular location, country or region and to withdraw all or a substantial number of military personnel. Congressional pressure to reduce, if not eliminate, the number of U.S. troops in Afghanistan may also lead to U.S. government procurement actions that reduce or terminate the services and support we provide in that theater of conflict. Any of the foregoing could adversely affect our operating performance and may result in additional costs and loss of revenue.
We are exposed to risks associated with operating internationally.
A large portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:
export controls regulations that could erode profit margins or restrict exports;
compliance with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act; and other international anti-corruption laws
the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;
contract award and funding delays;
potential restrictions on transfers of funds;
foreign currency fluctuations;
potential claims filed in foreign courts and judicial systems;
foreign adjustments associated with uncertain tax benefits;
import and export duties and value added taxes;
transportation delays and interruptions;
uncertainties arising from foreign local business practices and cultural considerations;
requirements by foreign governments that we locally invest a minimum level as part of our contracts with them, which may not yield any return;
potential military conflicts, civil strife and political risks; and
embargoes.
We cannot ensure our current adopted measures will reduce the potential impact of losses resulting from the risks of our foreign business.  
Catastrophic events may disrupt our business and have an adverse effect on our results of operations.
A disruption, infiltration or failure of network, application systems or third-party hosted services in the event of a major earthquake, hurricane, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our ability to provide service to our customers, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers' orders, which could result in reduced revenue.
Our business could be negatively impacted by security threats, including physical and cyber security threats, and other disruptions.
As a defense contractor, we face both physical and cyber security threats to our sensitive systems and information. Although we utilize a variety of technical and administrative controls to mitigate and detect threats, there can be no assurance that these controls will be sufficient to prevent a threat from materializing. Threats to our physical security, were they to manifest, could result in degradation or disruption of business operations. These effects could be attributed to, although not exclusively, loss of staff, reduction in staff productivity, and/or loss or damage to facilities. Cyber security threats are constantly evolving, and our industry is frequently targeted by cyber security threats. We utilize a variety of mechanisms and controls to adapt to potential threats; however, the variety and constant change of these threats leaves the impact unpredictable.    Were a significant incident to occur, it could lead to loss of confidentiality, integrity, and/or availability of information or systems, harm to personnel or infrastructure, and/or damage to our reputation. Such an incident could result in material impact on our business operations and strategies, current or future financial position, and/or cash flows.

19


Government withholding regulations could adversely affect our operating performance.
The DoD issued the final DFARS rule in 2012 which allows withholding of a percentage of payments when a contractor's business system has one or more significant deficiencies. The DFARS rule applies to Cost Accounting Standards ("CAS") covered contracts that have the DFARS clause in the contract terms and conditions. Contracting officers may withhold 5% of contract payments for one or more significant deficiencies in any single contractor business system or up 10% of contract payments for significant deficiencies in multiple contractor business systems. A significant deficiency is defined as a "shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes." The final rule was applicable to new DoD contracts awarded after February 2012.
Proceedings against us in domestic and foreign courts could result in legal costs and adverse monetary judgments, adversely affecting our operating performance and causing harm to our reputation.
We are involved in various domestic and foreign claims and lawsuits from time to time. In the event that a court decides against us, in these lawsuits, and we are unable to obtain indemnification from the U.S. government, or contributions from the other defendants, we may incur substantial costs, which could have a significant impact on our results of operations. Many uncertainties exist surrounding foreign litigations and claims. We continue to assess such claims as they are made, however, it is not possible to determine the ultimate outcome. An adverse ruling in these cases could also adversely affect our reputation and have a material adverse effect on our ability to win future government contracts.
Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for breach of contract actions, and we bear all costs associated with such litigation and claims. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government; our noncompliance with such laws and regulations could adversely affect our future operating performance.
We may be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could significantly reduce our future revenue and profits.
To the extent that we export products, technical data and services outside the United States, we are subject to U.S. laws and regulations governing international trade and exports, including but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. Failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.
We do business in certain parts of the world that have experienced, or may be susceptible to, governmental corruption. Our corporate policy requires strict compliance with the U.S. Foreign Corrupt Practices Act, UK Bribery Act and with local laws prohibiting payments to government officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Improper actions by our employees or agents could subject us to civil or criminal penalties, including substantial monetary fines, as well as disgorgement, and could damage our reputation and, therefore, our ability to do business.
Environmental laws and regulations may subject us to significant costs and liabilities that could adversely affect our operating performance.
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S., these laws and regulations include those governing the management and disposal of hazardous substances and wastes, the maintenance of a safe workplace and painting aircraft and handling substances such as used batteries and petroleum products. In addition to U.S. federal laws and regulations, states and other countries where we do business have numerous environmental, legal and regulatory requirements by which we must abide. We could incur substantial costs, including clean-up costs, as a result of violations of, or liabilities under, environmental laws.
Our business and results of operations could be adversely affected by the passage of U.S. health care reform and other environmental legislation and regulations. We are continually assessing the impact that health care reform could have on our employer-sponsored medical plans. Growing concerns about climate change may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions could

20


increase the costs of projects for our customers or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services.
All of these factors could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
The expiration of our collective bargaining agreements could result in increased operating costs or work disruptions, which could potentially affect our operating performance.
As of December 31, 2016 , we had approximately 10,700 personnel, of which approximately 4,200 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,600 . As of December 31, 2016 , we had approximately 28 collective bargaining agreements with these unions. The length of these agreements varies, with the longest expiring in September 2021 . There can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
If we experience loss of our skilled personnel, including members of senior management, it may have an adverse effect on our operations and/or our operating performance.
Our continued success depends in large part on our ability to recruit and retain the skilled personnel necessary to serve our customers effectively, including personnel with extensive military and law enforcement training and backgrounds. The proper execution of our contract objectives depends upon the availability of quality resources, especially qualified personnel. Given the nature of our business, we have substantial need for personnel who are willing to work overseas, frequently in locations experiencing political or civil unrest, for extended periods of time and often on short notice. We may not be able to meet the need for qualified personnel as such need arises.
We have experienced, and may experience in the future, changes in our management team. We have also taken measures to reduce our cost structure, including the elimination of a number of executive levels and other management positions throughout the Company. Our senior management changes, cost containment measures, as well as the potential for additional changes or activities in the future, may result in disruption of our business or our customer relationships, distract our employees, decrease employee morale and result in failure in meeting operational targets due to the loss of employees. These changes could also make it difficult to retain and hire new talent, increase our expenses in terms of severance payments and facility exit costs, both of which could be significant, expose us to increased risk of legal claims by terminated employees, and harm our reputation. If we are unable to mitigate these or other similar risks, our business, results of operations, and financial condition may be adversely affected.
In addition, we must comply with provisions in U.S. government contracts that require employment of persons with specified work experience and security clearances. An inability to maintain employees with the required security clearances could have a significant impact on our ability to win new business and satisfy our existing contractual obligations, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
If our subcontractors or joint venture partners fail to perform their contractual obligations, then our performance as the prime contractor and our ability to obtain future business could be materially and adversely impacted.
Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. These subcontractors generally perform niche or specialty services for which they have more direct experience, such as construction, catering services or specialized technical services. These subcontractors have local knowledge of the region in which we will be performing along with the ability to communicate with local nationals and assist in making arrangements for commencement of performance. Often, we enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Such subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
We often enter into joint ventures so that we can jointly bid and perform on a particular project. The success of these and other joint ventures depends, in large part, on the satisfactory performance of the contractual obligations by our joint venture partners. If our partners do not meet their obligations, the joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services or we may be subject to other liabilities. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.

21


We are controlled by Cerberus Capital Management, L.P. and affiliates ("Cerberus"), who will be able to make important decisions affecting our business.
All of our common stock is indirectly owned by funds and/or managed accounts that are affiliates of Cerberus. As a result, Cerberus is entitled to elect all of our directors, to appoint new management and to approve actions requiring the approval of the holders of our capital stock, including adopting amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets. Several members of our Board of Directors are affiliated with Cerberus or are Cerberus Operations and Advisory Company, LLC (“COAC”) employees. We also have two executives who are COAC employees, who are seconded to us: Gregory S. Nixon, our Senior Vice President, Chief Administrative Officer, Chief Legal Officer and Corporate Secretary, and George C. Krivo, our Senior Vice President and Chief Operating Officer.
The interests of Cerberus and its affiliates may differ from those of our other investors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Cerberus and its affiliates, as equity holders, may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks. Additionally, our debt agreements permits us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and Cerberus may have an interest in our doing so.
We may compete with, or enter into transactions with, entities in which our controlling stockholder may hold a substantial interest.
Cerberus is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to Cerberus or its affiliates, including through potential acquisitions of competing businesses. Competition may intensify if an affiliate or subsidiary of Cerberus were to enter into or possibly acquire a business similar to ours. In the event that such a transaction happens, Cerberus is under no obligation to communicate or offer such corporate opportunity to us, even if such opportunity might reasonably have been expected to be of interest to us or our subsidiaries.
We may make future investments, which would include co-investment or joint venture arrangements with our affiliates. We may also enter into business combinations and/or collaborate with and invest in other firms or entities, including Cerberus. You should consider that the interests of Cerberus may differ from yours in material respects.
Our Global Advisory Group may not succeed in helping us sell services in new markets and diversify our customer base.
In order to sell our services in new geographic markets and diversify our customer base beyond our traditional customers, we formed the Global Advisory Group to locate new business opportunities. There can be no assurance we will realize the expected benefits of the Global Advisory Group or be successful in new markets in the near-term or at all. Difficulties concentrating on new markets could limit our growth and could harm our results of operations. See “Item 1. Business-Sales and Marketing.” In addition, the focus of the Global Advisory Group on services for foreign governments and commercial customers could further expose us to international risks. See “-We are exposed to risks associated with operating internationally” and “-We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government; our noncompliance with such laws and regulations could adversely affect our future operating performance.”
Competition in our industry could limit our ability to attract and retain customers or employees, which could result in a loss of revenue and/or a reduction in margins, which could adversely affect our operating performance.
We compete with various entities across geographic and business lines. Competitors of our operating segments are typically various solution providers that compete in any one of the service areas provided by those business units. Additionally, competitors of our operating segments are typically large defense service contractors that offer services associated with maintenance, training and other activities.
We compete based on a number of factors, including our broad range of services, geographic reach, mobility and response time. Foreign competitors may obtain an advantage over us in competing for U.S. government contracts and attracting employees. We are required by U.S. laws and regulations to remit to the U.S. government statutory payroll withholding amounts for U.S. nationals working on U.S. government contracts while employed by our majority-owned foreign subsidiaries. Foreign competitors may not be similarly obligated by their governments.
Some of our competitors may have greater resources or are otherwise better positioned to compete for contract opportunities. For example, original equipment manufacturers that also provide aftermarket support services have a distinct advantage in obtaining service contracts for aircraft they have manufactured, as they frequently have better access to replacement and service parts, as well as an existing technical understanding of the platform they have manufactured. In addition, we are at a disadvantage when bidding for contracts up for re-competition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.

22


In addition to the competition we face in bidding for contracts and task orders, we must also compete to attract the skilled and experienced personnel integral to our continued operations. We hire from a limited pool of potential employees as military and law enforcement experience, specialized technical skill sets and security clearances are prerequisites for many positions. Our failure to compete effectively for employees, or excessive attrition among our skilled personnel, could reduce our ability to satisfy our customers' needs and increase the costs and time required to perform our contractual obligations. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Future restatement of our financial statements could adversely affect our business.
Restatement of our financial statements could have adverse consequences on our business, financial condition, cash flows and results of operations, including the triggering of an event of default under the credit agreements governing the New Senior Credit Facility and the Cerberus 3L Notes and the indenture governing our New Notes. Restatements could cause our credit rating to be downgraded, which could result in an increase in our borrowing costs and make it more difficult to borrow funds on reasonable terms or at all. In addition, restatements could result in key executives departing and SEC enforcement action.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial position.
When agreeing to contractual terms, we make assumptions and projections about future conditions and events, many of which extend over a period of time. These assumptions and projections assess the cost, productivity and availability of labor, future levels of business base, complexity of the work to be performed, cost and availability of materials, impact of potential delays in performance and timing of product deliveries. Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is subject to many variables. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance. Suppliers' assertions are also assessed and considered in estimating costs and profit rates.
Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material impact on the profitability of one or more of the affected contracts and our performance. See Critical Accounting Policies within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
Goodwill and other intangible assets represent significant assets on our balance sheet and have been significantly impaired and may continue to be impaired.
Goodwill and other intangible assets are significant assets on our balance sheet, with an aggregate balance of $42.1 million and $84.1 million , respectively, as of December 31, 2016 . We assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible impairment in the period in which the event is identified. The annual impairment test requires us to determine the fair value of our reporting units in comparison to their carrying values. A decline in the estimated fair value of a reporting unit or asset group could result in an impairment, and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit.
As we continue to face challenges within the defense industry, we could experience unforeseen issues which adversely affect the value of our goodwill or intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  

23


Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash flow.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in applicable domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory tax rate currently in effect, therefore a change in the U.S. corporate tax rate would result in a remeasurement of our net deferred tax asset through the income tax provision. The final determination of any tax audits or related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the results of audits and the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures could impact our tax liabilities and significantly affect our income tax expense, profitability and cash flow.
Acquisition and divestiture related transactions require substantial management resources and may disrupt our business and divert our management from other responsibilities. Acquisitions and divestitures are accompanied by other risks, including:
the difficulty of integrating or disaggregating the operations and personnel of the acquired or divested companies;
the inability of our management to maximize our financial and strategic position by the successful incorporation or dissolution of acquired or divested personnel into our programs;
we may not realize anticipated synergies or financial growth;
we may assume material liabilities that were not identified during due diligence, including potential regulatory penalties resulting from the acquisition or divested target's previous activities;
difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;
the potential loss or retention of key employees of acquired or divested companies;
the impairment of relationships with employees and customers as a result of changes in management and operational structure; and
acquisitions or divestitures may require us to invest significant amounts of cash resulting in dilution of stockholder value.
Any inability to successfully integrate or disaggregate the operations and personnel associated with an acquired or divested business and/or service line may harm our business and results of operations.  
If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and future prospects could be harmed.
In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions, divestitures, joint ventures, and equity investments. We seek to identify acquisition or investment opportunities that will expand or complement our existing services, or customer base, at attractive valuations. We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions, and manage post-closing matters (e.g., integrate acquired companies and employees, realize anticipated operating synergies, and improve margins) efficiently and effectively. Acquisition, divestiture, joint venture, and investment transactions often require substantial management resources and could have the potential to divert our attention from our existing business. Additionally, unidentified pre-closing liabilities could affect our future financial results.
The adoption of the Long-Term Cash Incentive Bonus Plan could substantially increase the cost to acquire the Company or prevent or delay a change in control.
     On December 17, 2013, DynCorp International LLC approved a long-term cash incentive plan for certain executives, where in the event of a change in control, subject to the executives’ continued employment with DynCorp International LLC through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of such agreement, the executive shall be eligible to receive a cash incentive bonus.
A change in control, as defined in the long-term cash incentive plan, would occur if a person who is not Cerberus or an affiliate of Cerberus becomes beneficial owner, directly or indirectly, of more than 50% of the combined voting power of issued and outstanding securities of DynCorp International LLC or if there is a reduction in Cerberus’s beneficial ownership to less than 30% of the combined voting power. There are other conditions that could result in a change in control event such as a sale or transfer or other disposition of all or substantially all of the business and assets of DynCorp International LLC. The long-term cash incentive bonus plan could increase the cost to acquire the Company and prevent or delay a change in control.

24


ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
We are headquartered in McLean, Virginia with major administrative offices in Fort Worth, Texas. As of December 31, 2016 , we leased approximately 35 commercial facilities in 15 countries used in connection with the various services rendered to our customers. Lease expirations range from month-to-month to eight years. Upon expiration of our leases, we do not anticipate any difficulty in obtaining renewals or alternative space. Many of our current leases are non-cancelable. We do not own any real property.
The following locations represent our primary leased properties as of December 31, 2016 :
Location
Description
Segment
Size (sq ft) 1

Fort Worth, TX (2)
Executive offices - Finance and Administration, AELS Headquarters
Headquarters & AELS
218,925

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

McLean, VA
Executive offices - Headquarters
Headquarters
79,035

Lorton, VA
Warehouse and offices - Global IT Modernization ("GITM") Program
DynLogistics
30,560

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

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

Dubai, UAE
Executive offices - DIFZ Finance and Administration
Headquarters
17,698

Huntsville, AL
Business office - AOLC Headquarters
AOLC
17,074

Bangalore, India
Business office - Finance and Administration
Headquarters
16,467

(1)
Includes total square footage leased per agreements between the Company and lessors.
(2)
Includes 153,475 square feet utilized for Executive Offices and 65,450 square feet which we have subleased or are in the process of subleasing.
We believe that substantially all of our property and equipment is in good condition, subject to normal use, and that our facilities have sufficient capacity to meet the current and projected needs of our business through calendar year 2017 .

ITEM 3. LEGAL PROCEEDINGS.
Information required with respect to this item is set forth in Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.

PART II

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


25


ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial data for the years ended December 31, 2016 , December 31, 2015 , December 31, 2014 , December 31, 2013 and December 31, 2012 is presented in the table below.
This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K.

26


 
Delta Tucker Holdings, Inc.
 
For the years ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Results of operations:
 
 
 
 
 
 
 
 
 
Revenue
$
1,836,154

 
$
1,923,177

 
$
2,252,309

 
$
3,287,184

 
$
4,044,275

Cost of services
(1,636,331
)
 
(1,721,679
)
 
(2,072,865
)
 
(2,987,253
)
 
(3,698,932
)
Selling, general and administrative expenses
(139,531
)
 
(144,675
)
 
(146,881
)
 
(149,925
)
 
(149,362
)
Depreciation and amortization
(34,889
)
 
(34,986
)
 
(48,582
)
 
(48,628
)
 
(50,260
)
Earnings from equity method investees
1,066

 
140

 
10,077

 
4,570

 
825

Impairment of goodwill, intangibles and long lived assets (1)
(1,782
)
 
(96,696
)
 
(214,004
)
 
(312,728
)
 
(50,663
)
Operating income (loss)
24,687

 
(74,719
)
 
(219,946
)
 
(206,780
)
 
95,883

Interest expense
(72,361
)
 
(68,824
)
 
(70,783
)
 
(78,826
)
 
(86,272
)
Loss on early extinguishment of debt, net
(328
)
 

 
(1,362
)
 
(703
)
 
(2,094
)
Interest income
212

 
110

 
221

 
157

 
117

Other income (expense), net
4,935

 
3,968

 
3,680

 
(810
)
 
4,672

(Provision) benefit for income taxes
(10,138
)
 
8,672

 
20,570

 
37,461

 
(15,598
)
Net loss
(52,993
)
 
(130,793
)
 
(267,620
)
 
(249,501
)
 
(3,292
)
Noncontrolling interests
(1,071
)
 
(1,809
)
 
(2,160
)
 
(4,235
)
 
(5,645
)
Net loss attributable to Delta Tucker Holdings, Inc.
$
(54,064
)
 
$
(132,602
)
 
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
Cash flow data:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
41,153

 
19,572

 
25,377

 
137,502

 
144,190

Net cash used in investing activities
(16,940
)
 
(2,735
)
 
(4,674
)
 
(7,971
)
 
(12,163
)
Net cash used in financing activities
(14,777
)
 
(2,059
)
 
(97,544
)
 
(77,461
)
 
(83,457
)
Balance sheet data (end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
118,218

 
108,782

 
94,004

 
170,845

 
118,775

Total assets
676,537

 
784,689

 
982,487

 
1,499,921

 
1,970,716

Total indebtedness
632,456

 
637,031

 
642,272

 
732,272

 
782,909

Total (deficit) equity attributable to Delta Tucker Holdings, Inc.
(267,392
)
 
(213,962
)
 
(82,766
)
 
183,785

 
437,542

Total (deficit) equity
(261,937
)
 
(208,170
)
 
(77,277
)
 
189,660

 
445,754

Other financial data:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment and software
7,980

 
4,734

 
10,343

 
10,346

 
8,118

Backlog  (2)
3,716,000

 
3,042,000

 
3,331,000

 
3,980,000

 
5,278,000


27


(1)
The Company recorded impairment charges of $1.8 million , $96.7 million , $214.0 million , $312.7 million and $50.7 million for the years ended December 31, 2016 , December 31, 2015 , December 31, 2014 , December 31, 2013 , and December 31, 2012 , respectively. The impairment charge for the year ended December 31, 2016 related to our investment in affiliates. Of the $96.7 million recorded in 2015, $86.8 million related to goodwill, $5.2 million related to certain intangibles and indefinite-lived tradename and $4.7 million related to assets held for sale. Of the $214.0 million recorded in 2014, $164.9 million related to goodwill, $33.4 million related to customer-relationship intangibles, $14.5 million related to indefinite-lived tradename, $1.0 million related to helicopters and $0.2 million related to software. Of the $312.7 million recorded in 2013, $310.3 million was related to goodwill and $2.4 million was related to helicopters. The impairment charges for the year ended December 31, 2012 primarily related to goodwill. See Note 3 to Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(2)
Backlog data is as of the end of the applicable period. See "Item 1. Business" for further details concerning backlog.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto and other data contained elsewhere in this Annual Report on Form 10-K. Please see "Item 1A. Risk Factors" and "Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated. All references in this Annual Report on Form 10-K to fiscal years of the United States government pertain to their fiscal year, which ends on September 30th of each year.
Company Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on approximately seven decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Our current customers include the U.S. Department of Defense ("DoD"), the 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.
Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations prior to the merger on July 7, 2010, except for the costs associated with acquiring DynCorp International. Delta Tucker Holdings, Inc. remains the holding company of DynCorp International. DynCorp International wholly owns DynCorp International LLC, which functions as the operating company.
In October 2016, the Company amended its organizational structure. The Company’s previous two operating and reporting segments, DynAviation and DynLogistics, were re-aligned into three operating and reporting segments: Aviation Engineering, Logistics, and Sustainment ("AELS"), Aviation Operations and Life Cycle Management ("AOLC") and DynLogistics. AELS, AOLC and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations ("FAR"), Cost Accounting Standards ("CAS") and audits by various U.S. federal agencies.
As of December 31, 2016 , we employed or managed approximately 10,700 personnel, including approximately 4,200 personnel from our affiliates. We operate in approximately 31 countries through approximately 58 active contracts and 74 active task orders.
Current Operating Environment and Outlook
External Factors
While political challenges remain, we have seen improvements on the policy and budgetary fronts. In contrast, the international environment continues to be driven by instability, with ongoing and potential conflicts around the globe. Global events are driving adjustments to U.S. national security and foreign policy objectives, as well as the funding levels and mechanisms to support these shifts. External factors influencing the industry continue to include:
Adhering to discretionary spending caps mandated by the Budget Control Act of 2011 ("BCA");
Troop levels and tempo of operations in Afghanistan;
Conflicts in Iraq, Syria and the wider Middle East;
Russian aggression in Europe and the Middle East; and
Increased instability and challenges to the existing international framework.
Considering these complex issues, the defense services sector believes there will be growth in the defense topline this year and over the next few fiscal years. The new President consistently pledged to rebuild the military and buy back lost readiness so our men and women in uniform receive the best training and equipment possible to meet an array of global threats. These commitments are upheld in the fiscal year 2018 Department of Defense budget blueprint released on March 16, 2017, which is discussed below.


28


On services specifically, addressing current readiness will require increased resources for training, maintenance and sustainment. Companies like DynCorp International are well positioned to support efforts to restore military readiness to necessary standards. Recent actions by the Administration reaffirm readiness is a top priority, including a January 27, 2017 Presidential Memorandum on Rebuilding the U.S. Armed Forces that instructed DOD to undertake several efforts to identify and to begin mitigating readiness shortfalls.
Legislatively, Congress negotiated and agreed upon a final fiscal year 2017 Defense Appropriations bill that was passed by the House of Representatives and is awaiting action in the Senate. The bill funds the topline at $578 billion, which is $5 billion above fiscal year 2016, and consists of $516 billion in the base budget and $62 billion in Overseas Contingency Operations funding ("OCO"). On Operations and Maintenance ("O&M") activities, fiscal year 2017 is funded at $216 billion with $168 billion base and $48 billion OCO, which is $2.0 billion above fiscal year 2016. Lastly, and importantly, on fiscal year 2017, an additional Department of Defense Budget amendment was transmitted to Congress on March 16, 2017. The amendment requests $30 billion supplemental funding to further address readiness, unfunded requirements (i.e. end strength and modernization), and ongoing operational requirements.
With regard to the fiscal year 2018 defense budget, the official budget will not be released until May. However, the March 2016 budget blueprint calls for a topline of $639 billion with $574 billion in the base budget and $65 billion in OCO funding. This would represent a $54 billion increase over fiscal year 2017, which represents 10% growth. Regardless of proposed increases, the BCA is the law of the land, barring repeal or modification by Congress. Any increases above the mandated caps will retrigger sequestration. On Capitol Hill, Senate Armed Services Committee Chairman John McCain and House Armed Services Committee Chairman Mac Thornberry are both advocating for a base budget of $640 billion. The President’s proposed $54 billion was criticized by defense hawks as too small. Additionally, a bipartisan consensus has emerged against the Administration’s plan to increase defense by reducing budgets of other agencies, such as the State Department (-29%) and the Environmental Protection Agency (-31%). In short, there is a lot of work to be done with regard to a fiscal year 2018 budget, but the Administration and Congressional leaders are publicly committed to trying to eliminate the BCA and grow defense.
For the Department of State, the fiscal year 2018 request will be $37.6 billion with $25.6 billion in base and $12 billion in OCO which is roughly 29% below fiscal year 2016. The State Department’s role in executing the nation’s foreign policy and protecting our national security is vital. Importantly, in reviewing the documents released so far, the request will provide funds for robust core diplomatic activities, such as operations, maintenance, logistics, security, transportation and IT support. These are the services DynCorp International provides to the State Department and, per the currently available data, we do not foresee dramatic cuts to these areas.
Internationally, we believe the decision to increase U.S. troop deployment to Iraq and delay further troop reductions in Afghanistan, the decision to send U.S. Special Forces advisors into Syria while increasing operational tempo in Iraq and Syria, as well as continued conflict and instability in Yemen, Ukraine and others, argues for continued robust OCO funding.
The international environment will continue to be marked by instability for the foreseeable future. Meeting these leadership commitments requires human and financial resources. U.S. defense leaders are currently conducting strategy reviews for operations around the globe. As an example of possible changes to come, on February 9, 2017, General John Nicholson, Commander of U.S. and NATO forces in Afghanistan, testified before the Senate Armed Services Committee. In the hearing, General Nicholson stated that he has a shortfall of “a few thousand people” to support the train and equip portion of the mission and would be requesting additional personnel.
Challenges exist that could adversely impact the services sector on a short-term basis, including the continued usage of Low Price Technically Acceptable and other solely cost focused contracting mechanisms, as well as delays by the U.S. government for contract competes and awards. However, we believe the following longer-term industry trends demonstrate the continued demand for the types of services we provide:
Realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life cycle;
Asset management of equipment ranging from organizational to depot-level maintenance;
Requirement to maintain, overhaul and upgrade for returning rolling stocks and aging platforms;
Sustain and support forward-deployed rotational troops and equipment;
Growth in outsourcing by foreign allies of maintenance, supply-support, facilities management, infrastructure upgrades, and construction management related services;
Continued focus on smart power initiatives by the DoS, USAID, the United Nations ("UN"), and the DoD, including development and smaller-scale stability operations; and
Further efforts by the U.S. government to move from single-award to multiple-award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.

29


We expect international instability to persist, especially in the Middle East. We also believe U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and our allies. Base operations, logistics support and maintenance capacity will be key enablers in this environment and we are especially well-positioned to provide these services to both U.S. forces and allied nations.
Current Business Environment
Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. We also have a strong history of being awarded a majority of the contract options. Furthermore, the significance of any one contract can change as our business expands or contracts. Additionally, as contract modifications, contract extensions or other contract actions occur, the profitability of any one contract can become more or less significant to the Company. As contracts are recompeted, there is the potential for the size, contract type, contract structure or other contract elements to materially change from the original contract resulting in significant changes to the scope, scale, profitability or magnitude of accounts receivable of the new recompeted contract as compared to the original contract. See “Item 1A. Risk Factors - Changes to our contracts could impact our future profitability.”
Since our primary customer is the U.S. federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements that could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. government contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity, affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. Disapproval of our control systems could result in an adverse outcome.
We cannot be certain that the economic environment or other factors will not continue to adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections and the New Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all. As described further in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the New Senior Credit Facility contains a provision that would result in all outstanding principal under the New Term Loan and the class B revolving facility maturing on May 8, 2017 if by May 8, 2017, all of the outstanding Senior Unsecured Notes have not been extended to a date that is on or after October 6, 2020, or paid in full with the proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility. We received the Support Letter from Cerberus committing to fund the redemption of all outstanding Senior Unsecured Notes on or before May 5, 2017 with the proceeds of new equity or capital contributions. We have therefore sent a notice of redemption to the holders of the Senior Unsecured Notes for a redemption of all of the remaining Senior Unsecured Notes on April 24, 2017, conditioned on the receipt of the proceeds of the New Cerberus Financing or other equity and/or debt financings and/or capital contributions. Since Cerberus has agreed to provide the New Cerberus Financing irrevocably and unconditionally except in the limited circumstances of the Material Adverse Change Condition, the Company expects to complete the redemption before May 8, 2017. See "Item 1A. Risk Factors - Economic conditions could impact our business" for a discussion of the risks associated with current economic conditions.
Notable events for the year ended December 31, 2016 and to date
In March 2016, DynLogistics was awarded the G4 Worldwide Logistics Support contract from the United States Army's Intelligence and Security Command to provide multi-disciplined engineering, facilities and logistical support. The contract has a one-year base period, with four one-year options and a total potential contract value of $320.5 million.
On April 30, 2016, the Company entered into Amendment No. 5 to the Senior Credit Facility, which became effective on June 15, 2016, and on May 2, 2016, the Company launched the Exchange Offer and Consent Solicitation, as further described in Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In May 2016, AELS announced the award of a contract in support of the Advanced Military Maintenance and Repair Overhaul Center ("AMMROC") and the United Arab Emirates ("UAE") military to provide support to the military aircraft and facilities of the UAE. The contract has a one-year base period with two, one-year options with a total potential value of $102 million.
On May 26, 2016, we were notified that the Company’s claim before the Armed Services Board of Contract Appeals seeking contractual reinterpretation and restructure on a specific U.S. Air Force contract was denied. Based on the outcome, the customer is now requiring the Company to process additional engines. We reached an agreement with the U.S. Air Force related to performance requirements on this contract and we recorded a charge associated with this matter in the second quarter of 2016.

30


In June 2016, DynLogistics announced the award of the Al Udeid Civil Engineer ("CE") Base Operation Support ("BOS") Services task order on the Air Force Augmentation Program ("AFCAP IV") from the U.S. Air Force to provide engineering support, fire support, pavement sweeping, facility management, Industrial Chilled Water Systems ("ICWS") and Industrial Controls Systems ("ICS") training, and electrical power production and distribution at the Al Udeid Air Base in Qatar. The task order has a one-year base period, with four one-year options and a total potential task order value of $42.3 million.
In June 2016, DynLogistics announced the award of the Al Dhafra CE Support Services task order on AFCAP IV from the U.S. Air Force to provide all personnel, labor, vehicles, supervision, training, design, equipment, safety equipment and other items necessary to perform security barriers maintenance and repair, fire alarm and fire suppression system maintenance and repair, and engineering and design support services at Al Dhafra Air Base in the UAE. The task order has a one-year base period, with two one-year options and one six-month option period and a total potential task order value of $8.6 million.
In June 2016, DynLogistics announced the award of the Southwest Asia ("SWA") Transient Aircraft Services ("TAS") task order on AFCAP IV from the U.S. Air Force to provide personnel, supervision and other services as necessary to operate fixed and rotary wing aircraft. The task order has a one-year base period, with four one-year options and one six-month option period and a total potential task order value of $29.0 million.
On June 3, 2016 the DoS Office of Acquisition Management posted a J&A for other than full and open competition detailing its intent to extend the INL Air Wing contract for a period of 12 months.
On June 15, 2016, in connection with the consummation of the Exchange Offer and Consent Solicitation, $415.7 million principal amount of our Senior Unsecured Notes were exchanged for $45.0 million cash and $370.6 million aggregate principal amount of newly issued New Notes, and the amendments to the Senior Unsecured Notes Indenture that were the subject of the Consent Solicitation became effective, as further described in Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
On June 15, 2016, DynCorp Funding LLC, a limited liability company managed by Cerberus, entered into the Cerberus 3L Notes, in which $30 million was provided to us, as further described in Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In September 2016, DynLogistics announced the award of an 11-month task order contract modification valued at $111 million that began August 1, 2016, to continue providing base life support and maintenance services in Afghanistan under the LOGCAP IV contract. Immediately following this modification, we were awarded several additional LOGCAP IV contract modifications valued at approximately $50 million annually, beginning October 1, 2016, which will add over 100 new services and require more than 900 additional personnel across four locations.
In September 2016, DynLogistics announced the award of the Egyptian Personnel Support Services ("EPSS") contract to provide support for daily living in the Arab Republic of Egypt. The contract, which started March 25, 2016, has a two-year base period and a one year option period and a total potential contract value of $22.5 million.
In September 2016, AELS announced the award of a contract modification for the second option period on the Contractor Logistics Support contract to provide maintenance and logistics support to the United States Navy T-34, T-44, and T-6 aircraft programs. The modification has a total potential value of $107.2 million.
In September 2016, DynLogistics announced the award of the Saudi Foreign Military Sales ("FMS") BOS task order on AFCAP IV from the U.S. Air Force to provide transportation, personnel, supervision, lodging, labor, training, tools, materials, vehicles, safety equipment and other items and services necessary to support the Kingdom of Saudi Arabia FMS program and personnel. The task order has a total potential value of $4.1 million.
In September 2016, INL Air Wing received the Large Aviation Program Award for 2015 at the Annual Federal Aviation Awards sponsored by the GSA and the Interagency Committee for Aviation Policy. The award is presented annually to the most outstanding non-military federal aviation program with more than 20 aircraft. In deciding the recipient of the award, the GSA considers aviation management, administration, operations, maintenance, training, and safety. This is the fourth time INL Air Wing has won the Large Aviation Program Award.
In September 2016, DynLogistics announced the award of the SWA Fire Emergency Service ("FES") task order on AFCAP IV from the U.S. Air Force to provide all management, labor, tools, and equipment for inspection, testing, maintenance, repair, and certification of FES equipment in accordance with manufacturer’s instructions, the Air Force Office of Safety and Health, National Fire Protection Association, Occupational Safety and Health Administration, and National Institute for Occupational Safety and Health codes and standards. The task order has a total potential value of $6.2 million.
On September 1, 2016, we were notified that the DoS had awarded the re-compete of the INL Air Wing contract to another company. On September 11, 2016, we filed a protest with the GAO challenging the DoS agency’s award determination.

31


On September 27, 2016, AOLC finalized negotiations with the DoS Office of Acquisition Management regarding an extension of services on the INL Air Wing program and definitized an agreement for a one-year extension through October 31, 2017. The extension has a total potential value of $292.8 million.
In October 2016, AELS announced the award of a contract modification for a six month contract extension on the T6 COMBS contract to provide support services for T-6A and T-6B aircraft at ten Air Force and Navy locations throughout the U.S. The modification has a total potential value of $30.3 million.
In October 2016, DynLogistics announced the award of the Warm BOS Thumrait Air Base ("TRAB") and Al Mussanah Air Base ("AMAB") task order on AFCAP IV from the U.S. Air Force to provide maintenance and repair for TRAB and AMAB in Oman. The task order has a total potential value of $2.9 million.
In October 2016, the Company announced that it would change from its two operating and reportable segments, DynAviation and DynLogistics, to three operating and reportable segments: DynLogistics, AELS and AOLC.
In October 2016, the Company announced that George C. Krivo, Senior Vice President, DynGlobal, has been appointed as the Chief Operating Officer of the Company. As previously disclosed, Mr. Krivo is COAC employee who has been seconded to the Company.
In November 2016, AELS announced the development of a General Terms Agreement with Global Aerospace Logistics and has been awarded an Apache Services task order to maintain aircraft for the Joint Aviation Command of the UAE Armed Forces. The task order, which started September 1, 2016, has a two-year base period and a one-year option period and a total potential task order value of $61 million.
On November 22, 2016, the Company announced an appeal decision by the United States Court of Appeals for the Eleventh Circuit which agreed with the Company and reinstated claims by the Company against AAR Airlift Group, Inc. under Florida's Uniform Trade Secrets Act.
In December 2016, AELS announced the award of the Contract Field Teams ("CFT") task order at the Davis-Monthan Air Force Base in Tucson, Arizona to provide maintenance on the 357th Aircraft Maintenance Unit's A-10 Thunderbolt aircraft. The task order, which started November 1, 2016 and ends March 2018, has a total potential task order value of $23 million.
In December 2016, AOLC announced the award of the U.S. General Services Administration ("GSA") Storage, Analysis, Failure Evaluation and Reclamation ("SAFR") and SAFR Satellite ("SAFR LITE") task order under the GSA Schedule for Logistics Worldwide ("LOGWORLD") contract at Corpus Christi Army Depot in Texas to inspect, repair and verify components used on aircraft with a total potential value of $5.1 million.
In December 2016, AELS announced the award of the CFT Multiple Award Contract ("MAC") by the U.S. Air Force to perform modification, maintenance, inspection and repair of active systems in the U.S. government inventory. The IDIQ contract has a two-year base period and two two-year option periods and a total potential contract value of $11.4 billion.
In December 2016, DynLogistics announced the award of a contract in South and Southeast Asia and Oceania by the U.S. Navy to support various DoD missions, including humanitarian aid, civic assistance, military construction and contingency services. The contract has a one-year base period, with seven one-year options and one six-month option period and a total potential contract value of $93.8 million.
In December 2016, AELS announced the award of a contract by the U.S. Navy to maintain and provide logistics services for aircraft and support for equipment for the Naval Test Wing Atlantic on behalf of the Naval Warfare Center Aircraft Division in Patuxent River, Maryland. The contract has a one-year base period, with four one-year options and a total potential contract value of $546 million.
In December 2016, AOLC announced the award by the U.S. Army for the TASM-O contract Option Year 3 to provide aviation maintenance services under the AFM program. The one year contract modification has a total potential value of $125.5 million.
In December 2016, DynLogistics announced the award of a contract extension from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Defense. The one year contract extension has a total potential value of $54.2 million.
In December 2016, DynLogistics announced the award of a contract extension from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Interior. The one year contract extension has a total potential value of $67.2 million.

32


On December 21, 2016, we were notified that the GAO denied our protest of the DoS agency’s award determination of the INL Air Wing contract to another company. We continue to pursue legal recourse before the U.S. Court of Federal Claims regarding this matter.
In January 2017, DynLogistics announced the award of a contract extension for the War Reserve Materiel II contract through September 30, 2017. The contract extension has a total potential value of $22.7 million.
On January 23, 2017, DynLogistics announced the award of the War Reserve Materiel III contract to manage the U.S. Air Force Central Command Area of Responsibility War Reserve Materiel Pre-positioning program, which includes operations in Oman, Bahrain, Qatar, Kuwait, United Arab Emirates and two locations in the United States. The contract has a three-month transition period, five-month base period and seven one-year options and a total potential contract value of $412 million.
On March 24, 2017, we received the Support Letter from Cerberus committing to fund the New Cerberus Financing, and we sent a notice of redemption to the holders of the Senior Unsecured Notes for a redemption of all of the remaining Senior Unsecured Notes on April 24, 2017, conditioned on the receipt of the proceeds of the New Cerberus Financing or other equity and/or debt financings and/or capital contributions.
Results of Operations
The results of operations presented are for the years ended December 31, 2016 , December 31, 2015 , and December 31, 2014 .

Delta Tucker Holdings, Inc. Results of Operations for t he years ended December 31, 2016 , December 31, 2015 , and December 31, 2014
The following table sets forth our consolidated statements of operations, both in dollars and as a percentage of revenue, for the years ended December 31, 2016 , December 31, 2015 , and December 31, 2014 :
 
For the years ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
(Amounts in thousands)
 
Revenue
$
1,836,154

 
100.0
 %
 
$
1,923,177

 
100.0
 %
 
$
2,252,309

 
100.0
 %
Cost of services
(1,636,331
)
 
(89.1
)%
 
(1,721,679
)
 
(89.5
)%
 
(2,072,865
)
 
(92.0
)%
Selling, general and administrative expenses
(139,531
)
 
(7.6
)%
 
(144,675
)
 
(7.5
)%
 
(146,881
)
 
(6.5
)%
Depreciation and amortization expense
(34,889
)
 
(1.9
)%
 
(34,986
)
 
(1.8
)%
 
(48,582
)
 
(2.2
)%
Earnings from equity method investees
1,066

 
0.1
 %
 
140

 
 %
 
10,077

 
0.4
 %
Impairment of goodwill, intangibles and long lived assets
(1,782
)
 
(0.1
)%
 
(96,696
)
 
(5.0
)%
 
(214,004
)
 
(9.5
)%
Operating income (loss)
24,687

 
1.4
 %
 
(74,719
)
 
(3.8
)%
 
(219,946
)
 
(9.8
)%
Interest expense
(72,361
)
 
(3.9
)%
 
(68,824
)
 
(3.6
)%
 
(70,783
)
 
(3.1
)%
Loss on early extinguishment of debt
(328
)
 
 %
 

 
 %
 
(1,362
)
 
(0.1
)%
Interest income
212

 
 %
 
110

 
 %
 
221

 
 %
Other income, net
4,935

 
0.3
 %
 
3,968

 
0.2
 %
 
3,680

 
0.2
 %
Loss before income taxes
(42,855
)
 
(2.2
)%
 
(139,465
)
 
(7.2
)%
 
(288,190
)
 
(12.8
)%
(Provision) benefit for income taxes
(10,138
)
 
(0.6
)%
 
8,672

 
0.5
 %
 
20,570

 
0.9
 %
Net loss
(52,993
)
 
(2.8
)%
 
(130,793
)
 
(6.7
)%
 
(267,620
)
 
(11.9
)%
Noncontrolling interests
(1,071
)
 
(0.1
)%
 
(1,809
)
 
(0.1
)%
 
(2,160
)
 
(0.1
)%
Net loss attributable to Delta Tucker Holdings, Inc.
$
(54,064
)
 
(2.9
)%
 
$
(132,602
)
 
(6.8
)%
 
$
(269,780
)
 
(12.0
)%
Results of Operations 2016 vs 2015
Revenue — Revenue for the year ended December 31, 2016 was $1,836.2 million , a decrease of $87.0 million or (4.5)% , compared to the year ended December 31, 2015 . The decrease was primarily driven by the continued drawdown of U.S. forces in Afghanistan, which impacted the demand for services under our LOGCAP IV contract and lower content on the INL Air Wing program, partially offset by new contract wins in our DynLogistics segment and increased content on contracts within our AELS segment. See further discussion of our revenue results in the " Results by Segment " section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2016 was $1,636.3 million , a decrease of $85.3 million , or (5.0)% , compared to the year ended December 31, 2015 . The decrease in Cost of services was primarily driven by a

33


reduction in demand for services, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services improved to 89.1% for the year ended December 31, 2016 compared to 89.5% for the year ended December 31, 2015 . See further discussion of the impact of program margins in the " Results by Segment " section below.
Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $5.1 million , or (3.6)% , to $139.5 million during the year ended December 31, 2016 primarily as a result of the decrease in legal costs and severance expense combined with our cost reduction initiatives, partially offset by an increase in costs by our Global Advisory Group. SG&A as a percentage of revenue for the year ended December 31, 2016 was 7.6% and remained consistent compared to 7.5% for the year ended December 31, 2015 .
Depreciation and amortization — Depreciation and amortization during the year ended December 31, 2016 was $34.9 million , a decrease of $0.1 million , or (0.3)% , which remained consistent compared to the year ended December 31, 2015 .
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC ("PaTH"), Contingency Response Services LLC ("CRS"), Global Response Services LLC ("GRS") and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2016 was $1.1 million , an increase of $0.9 million compared to the year ended December 31, 2015 , primarily as a result of activity in our PaTH joint venture.
Impairment of goodwill, intangibles and long lived assets — Impairment expense for the years ended December 31, 2016 and December 31, 2015 was $1.8 million and $96.7 million , respectively. Impairment expense for the year ended December 31, 2016 was due to a non-cash impairment charge on our investment in GLS which had a loss in value that was other than temporary. Impairment expense for the year ended December 31, 2015 was due to the $86.8 million impairment of goodwill, the $5.2 million impairment of certain intangibles and indefinite-lived tradename and the $4.7 million impairment of assets held for sale. See Note 2 and Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
Interest expense — Interest expense for the year ended December 31, 2016 was $72.4 million , an increase of $3.5 million , or 5.1% , compared to the year ended December 31, 2015 . The increase is primarily due to the PIK interest on our New Notes effective January 1, 2016.
Loss on early extinguishment of debt — Loss on early extinguishment of debt was $0.3 million as we made $4.6 million in principal prepayments on the Term Loan under the Senior Credit Facility during the year ended December 31, 2016 . Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt. Loss on early extinguishment of debt was zero as we made no principal payments on the Term Loan during the year ended December 31, 2015 .
Other income, net — Other income, net, for the year ended December 31, 2016 was $4.9 million , an increase of $1.0 million compared to the year ended December 31, 2015 , primarily due to a multi-party settlement agreement that resolves underwriters litigation in which we will recoup $5.0 million of legal expenses, partially offset by a loss on sale of helicopters.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discrete items. The effective tax rate for the year ended December 31, 2016 was 23.7% , as compared to 6.2% for the year ended December 31, 2015 . The effective tax rate for the year ended December 31, 2016 was driven primarily by an increase to the forecasted full year loss before income taxes and cancellation of debt income associated with the Refinancing Transactions both of which impacted the valuation allowance. See Note 4 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of income taxes.
Results of Operations 2015 vs 2014
Revenue — Revenue for the year ended December 31, 2015 was $1,923.2 million , a decrease of $329.1 million , or (14.6)% , compared to the year ended December 31, 2014 . The decrease was primarily driven by the continued drawdown of U.S. forces in Afghanistan, which impacted the demand for services under our LOGCAP IV contract, lower volume on the CivPol task orders, and the completion of the Afghanistan Ministry of Defense Program ("AMDP"), the Combined Security Transition Command Afghanistan ("CSTC-A"), Counter Narcotics Terrorism Program Office ("CNTPO") and certain other contracts, partially offset by new contracts, including T-34/T-44/T-6, and Future Flexible Acquisition and Sustainment Tool ("F2AST"). See further discussion of our revenue results in the " Results by Segment " section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2015 was $1,721.7 million , a decrease of $351.2 million , or (16.9)% , compared to the year ended December 31, 2014 . The decrease in Cost of services was primarily driven by a reduction in demand for services, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of

34


services improved to 89.5% for the year ended December 31, 2015 compared to 92.0% for the year ended December 31, 2014 , primarily due to a one-time $35.0 million charge during the year ended December 31, 2014 on a certain U.S. Air Force contract related to a contract dispute. See further discussion of the impact of program margins in the " Results by Segment " section below.
Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $2.2 million , or 1.5% , to $144.7 million during the year ended December 31, 2015 primarily as a result of the decrease in severance expense combined with our cost reduction initiatives, partially offset by higher legal costs during the year ended December 31, 2015 . SG&A as a percentage of revenue was 7.5% for the year ended December 31, 2015 compared to 6.5% for the year ended December 31, 2014 as a result of the decline in revenue outpacing general and administrative reductions and the higher legal costs noted above.
Depreciation and amortization — Depreciation and amortization during the year ended December 31, 2015 was $35.0 million , a decrease of $13.6 million , or 28.0% , compared to the year ended December 31, 2014 . The decrease was primarily due to the non-cash impairment charge during the fourth quarter of 2014 which provided a new cost basis of the customer-related intangible assets ("CRI") as of December 31, 2014 . The new cost basis of the CRI will be amortized over the remaining useful life of the asset.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC ("PaTH"), Contingency Response Services LLC ("CRS"), Global Response Services LLC ("GRS") and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2015 was $0.1 million , a decrease of $9.9 million compared to the year ended December 31, 2014 . The decrease was primarily as a result of equity method income recognized upon the receipt of a $9.6 million distribution from GLS related to the finalization of Form 1s in February 2014 allowing GLS to submit previous invoices for recovery.
Impairment of goodwill, intangibles and long lived assets — Impairment for the years ended December 31, 2015 and December 31, 2014 was $96.7 million and $214.0 million , respectively. Impairments in 2015 were due to the $86.8 million impairment of goodwill, the $5.2 million impairment of certain intangibles and indefinite-lived tradename and the $4.7 million impairment of assets held for sale. Of the $214.0 million recorded in 2014, $164.9 million related to goodwill, $33.4 million related to customer-relationship intangibles and $14.5 million related to indefinite-lived tradename, with the remainder related to impairments of helicopters and software.
Interest expense — Interest expense for the year ended December 31, 2015 was $68.8 million , a decrease of $2.0 million , or (2.8)% , compared to the year ended December 31, 2014 . The decrease is the result of the reduction of the principal balance of our Term Loan by $90.0 million of principal prepayments during the year ended December 31, 2014 .
Loss on early extinguishment of debt — Loss on early extinguishment of debt was zero as we made no principal payments on the Term Loan during the year ended December 31, 2015 . Loss on early extinguishment of debt of $1.4 million for the year ended December 31, 2014 was attributable to principal prepayments on our Term Loan totaling $90.0 million . Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.
Other income, net — Other income, net, for the year ended December 31, 2015 was $4.0 million , an increase of $0.3 million compared to the year ended December 31, 2014 , primarily as a result of earnings recognized from Babcock DynCorp Limited ("Babcock"), sublease income, and gains/losses from asset dispositions.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discrete items. The effective tax rate for the year ended December 31, 2015 was 6.2% , as compared to 7.1% for the year ended December 31, 2014 . The effective tax rate for the year ended December 31, 2015 was driven primarily by the impact of the goodwill impairment and our valuation allowance taken during the year ended December 31, 2015 .






35


Results by Segment
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income (loss) and operating margin for our operating segments for the years ended December 31, 2016 , December 31, 2015 , and December 31, 2014 . See Note 11 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
 
For the years ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
 
 
(Amounts in thousands)
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
AELS
$
585,200

 
31.9
 %
 
$
545,909

 
28.4
 %
 
$
431,424

 
19.2
 %
AOLC
617,282

 
33.6
 %
 
730,153

 
38.0
 %
 
772,993

 
34.3
 %
DynLogistics
633,646

 
34.5
 %
 
647,142

 
33.6
 %
 
1,045,200

 
46.4
 %
Headquarters / Other (1)
26

 
 %
 
(27
)
 
 %
 
2,692

 
0.1
 %
Consolidated revenue
$
1,836,154

 
100.0
 %
 
$
1,923,177

 
100.0
 %
 
$
2,252,309

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (Loss) Income
 
(Loss) Profit
Margin
 
Operating (Loss) Income
 
(Loss) Profit
Margin
 
Operating (Loss) Income
 
(Loss) Profit
Margin
AELS
$
(19,213
)
 
(3.3
)%
 
$
(97,400
)
 
(17.8
)%
 
$
(95,197
)
 
(22.1
)%
AOLC
49,334

 
8.0
 %
 
28,160

 
3.9
 %
 
33,696

 
4.4
 %
DynLogistics
70,402

 
11.1
 %
 
42,496

 
6.6
 %
 
(67,097
)
 
(6.4
)%
Headquarters / Other (2)
(75,836
)
 
 
 
(47,975
)
 
 
 
(91,348
)
 
 
Consolidated operating income / (loss)
$
24,687

 
 
 
$
(74,719
)
 
 
 
$
(219,946
)
 
 

(1)
Represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating loss primarily relates to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, Global Advisory Group costs and costs associated with the Refinancing Transactions, partially offset by equity method investee income.
Results by Segment 2016 vs 2015
AELS
Revenue of $585.2 million increased $39.3 million , or 7.2% , for the year ended December 31, 2016 compared to the year ended December 31, 2015 . The change was primarily as a result of increased content from T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"), T-34, T-44/T-6 ("CLS") and Naval Aviation Warfighting Development Center ("NAWDC") contracts. The increase in revenue was partially offset by the completion of the Sheppard Air Force Base ("Sheppard AFB") contract. We expect our calendar year 2017 revenue for the AELS segment to continue to hold in line with our calendar year 2016 revenue.
Operating loss of $19.2 million for the year ended December 31, 2016 as compared to $97.4 million for the year ended December 31, 2015 was primarily a result of continued awards of incentive fees on a U.S. Navy contract partially offset by additional contract loss charges on a U.S. Air Force contract. The operating loss for the year ended December 31, 2015 was primarily due to the goodwill impairment charge of $86.8 million on our goodwill, the completion of contracts that historically commanded higher margins and a contract loss accrual on a U.S. Navy program.
AOLC
Revenue of $617.3 million decreased $112.9 million , or (15.5)% , for the year ended December 31, 2016 compared to the year ended December 31, 2015 . The decrease in revenue was due to lower content on the INL Air Wing and Multi Sensor Aerial Intelligence Surveillance and Reconnaissance Operations and Sustainment programs and the completion of certain Middle East contracts. The decrease in revenue was partially offset by new business from the Saudi Arabian National Guard ("SANG") contract and increased content from the Theater Aviation Sustainment Manager - OCONUS ("TASM-O") contract. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in government procurement processes could result in continued declines in calendar year 2017 revenue for the AOLC segment.
Operating income was $49.3 million for the year ended December 31, 2016 as compared $28.2 million for the year ended December 31, 2015 . Operating income for the year ended December 31, 2016 was primarily due to the strong performance of the INL Air Wing and the Regional Aviation Sustainment Maintenance ("RASM-W") contracts, as well as the MD530 subcontract, and a multi-party settlement agreement that resolves underwriters litigation in which we will recoup $5.0 million of legal expenses.

36


Operating income for the year ended December 31, 2015 was primarily due to the performance of the INL Air Wing and F2AST contracts, partially offset by operating losses at our Heliworks subsidiary and the completion of certain higher margin contracts.
DynLogistics
Revenue of $633.6 million decreased $13.5 million , or (2.1)% , for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily as a result of reductions in manning, materials and other direct costs under the Afghan AOR task order and completion of the Kuwait task orders under the LOGCAP IV program and the completion of certain other contracts. This decline was partially offset by the new ALiSS contract and the new contract from the U.S. Army Contracting Command to provide technical support services to the Iraqi Army in Taji. We expect our calendar year 2017 revenue for the DynLogistics segment to exceed our calendar year 2016 revenue due to our recent contract awards despite the decline in the efforts in Afghanistan and the continued near term pressure on U.S. defense budgets.
Operating income of $70.4 million for the year ended December 31, 2016 as compared to $42.5 million for the year ended December 31, 2015 was primarily due to a favorable contract settlements on a legacy program, productivity gains on certain fixed-price contracts, partially offset by the decline in revenue discussed above. Operating income of $42.5 million for the year ended December 31, 2015 was primarily due to the definitization of cost and fee on certain legacy programs and the execution of an agreement to end our LOGCAP IV collaborative fee sharing arrangement.
Results by Segment 2015 vs 2014
AELS
Revenue of $545.9 million increased $114.5 million , or 26.5% , for the year ended December 31, 2015 compared to the year ended December 31, 2014 . The change was primarily as a result of increased content from T-6 COMBS and Sheppard AFB (prior to the completion of that contract), new business from NAWDC and T-34/T-44/T-6 and continued organic growth in our Advanced Military Maintenance, Repair and Overhaul Center ("AMMROC”) contract. The increase in revenue was partially offset by the completion of C20 and C21 programs and certain task orders under the Contract Field Teams ("CFT") program.
Operating loss was $97.4 million for the year ended December 31, 2015 as compared to $95.2 million for the year ended December 31, 2014 . The operating loss for the year ended December 31, 2015 was primarily due to the goodwill impairment charge of $86.8 million on our goodwill, the completion of contracts that historically commanded higher margins and contract losses on new U.S. Navy programs. The operating loss for the year ended December 31, 2014 was primarily as a result of the goodwill impairment charge of $62.2 million on our goodwill and an additional contract loss recorded on a U.S. Air Force contract related to a contract dispute.
AOLC
Revenue of $730.2 million decreased $42.8 million , or 5.5% , for the year ended December 31, 2015 compared to the year ended December 31, 2014 . The decrease in revenue was due to lower content on the INL Air Wing program and the completion of the CNTPO program. The decrease in revenue was partially offset by increased content from Theater Aviation Sustainment Manager - OCONUS ("TASM-O") and MD530 subcontracts, new business from the F2AST contract and continued organic growth in our Middle East contracts and the Saudi Arabian National Guard ("SANG") contract.
Operating income of $28.2 million for the year ended December 31, 2015 as compared to $33.7 million for the year ended December 31, 2014 was primarily due to the performance of the INL Air Wing and F2AST contracts, partially offset by operating losses at our Heliworks subsidiary and the completion of certain higher margins contracts. The operating income for the year ended December 31, 2014 was primarily due to the performance of the INL Air Wing contract, partially offset by the impairment charge of $12.0 million on our goodwill.
DynLogistics
Revenue of $647.1 million decreased $398.1 million , or 38.1% , for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily as a result of reductions in manning, materials and other direct costs under the AOR task order under the LOGCAP IV program. Additionally, revenue was impacted by descoping the Philippines Operations Support ("POS") contract, lower volume on the Civilian Police ("CivPol") task orders and the completion of AMDP, CSTC-A, and certain other contracts. This decline was partially offset by the new Afghanistan Ministry of Interior and Afghanistan Ministry of Defense task orders under the United States Army Contracting Command and growth in our national strategic programs portfolio.
Operating income of $42.5 million for the year ended December 31, 2015 as compared to an operating loss of $67.1 million for the year ended December 31, 2014 was primarily due to the goodwill impairment charge of $90.7 million during the year ended December 31, 2014 , the definitization of cost and fee on certain legacy programs in 2015 and the execution of an agreement to end our LOGCAP IV collaborative fee sharing arrangement.

37


LIQUIDITY AND CAPITAL RESOURCES
On April 30, 2016, we executed Amendment No. 5 to the Senior Credit Facility, which provided for the New Senior Credit Facility that became effective on June 15, 2016 upon the satisfaction of certain conditions, including the consummation of the Exchange Offer and the other Refinancing Transactions. Cash generated by operations and borrowings available under our New Senior Credit Facility are our primary sources of short-term liquidity. See Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our New Senior Credit Facility.
We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable and access to our Amended Revolver is dependent upon our meeting financial and non-financial covenants. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections, significant future losses on any of our contracts or loss of our ability to access our Amended Revolver, could materially impact liquidity and our ability to fund our working capital needs. Failure to meet covenant obligations prior to its scheduled maturity could result in an earlier elimination of access to our New Senior Credit Facility or other remedies by our Agent, such as the acceleration of our debt, which would materially affect our future expansion strategies and our ability to meet our operational obligations. See further discussion of our covenants in the Financing section below.
Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash.
As further described in Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the New Senior Credit Facility contains a provision that would result in all outstanding principal under the New Term Loan and the class B revolving facility maturing on May 8, 2017 if by May 8, 2017 , all of the outstanding Senior Unsecured Notes have not been extended to a date that is on or after October 6, 2020 , or paid in full with the proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility. We received the Support Letter from Cerberus committing to fund the New Cerberus Financing. We have therefore sent a notice of redemption to the holders of the Senior Unsecured Notes for a redemption of all of the remaining Senior Unsecured Notes on April 24, 2017, conditioned on the receipt of the proceeds of the New Cerberus Financing or other equity and/or debt financings and/or capital contributions. Since Cerberus has agreed to provide the New Cerberus Financing irrevocably and unconditionally except in the limited circumstances of the Material Adverse Change Condition, the Company expects to complete the redemption before May 8, 2017.
Our New Senior Credit Facility provided for a class A revolving facility which terminated on July 7, 2016 . Availability under the Amended Revolver during the two years immediately after June 15, 2016 will be subject to a condition that, if, at the time of a request for revolving loans or an issuance of a letter of credit, the aggregate principal amount of revolving loans plus the face amount of outstanding letters of credit exceeds 50% of the aggregate amount of Amended Revolver commitments at such time, the aggregate amount of unrestricted cash and cash equivalents of DynCorp International and its subsidiaries (giving pro forma effect to requested revolving loans and any application of proceeds thereof or other cash on hand) may not exceed $60 million .
Management believes Days Sales Outstanding ("DSO") is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. As of December 31, 2016 and December 31, 2015 , DSO was 56 days compared to 73 days, as we continued to focus on managing our customer payment cycles. We expect cash to continue to be impacted by operational working capital needs, potential acquisitions and interest payments on our indebtedness.
Cash Flow Analysis
The following table sets forth cash flow data for the periods indicated therein:
 
For the years ended
(Amounts in thousands)
December 31, 2016
 
December 31, 2015
 
December 31, 2014
Net cash provided by operating activities
$
41,153

 
$
19,572

 
$
25,377

Net cash used in investing activities
(16,940
)
 
(2,735
)
 
(4,674
)
Net cash used in financing activities
(14,777
)
 
(2,059
)
 
(97,544
)

38


Cash Flows - December 31, 2016 vs December 31, 2015
Operating Activities
Cash provided by operating activities during the year ended December 31, 2016 was $41.2 million as compared to $19.6 million during the year ended December 31, 2015 . Cash provided by operations for the year ended December 31, 2016 was primarily due to our net loss and changes in working capital, driven by a reduction in accounts receivable attributable to our DSO of 56 days partially offset by a reduction in accounts payable and accrued expense. Cash provided by operations for the year ended December 31, 2015 was impacted by our net loss position, excluding the impact of non-cash impairments, and our change in working capital.
  Investing Activities     
Cash used in investing activities during the year ended December 31, 2016 was $16.9 million as compared to $2.7 million during the year ended December 31, 2015 . Cash used in investing activities during the year ended December 31, 2016 was primarily due to restricted cash proceeds received from the Cerberus 3L Notes restricted to pay fees and expenses related to the Company's Global Advisory Group, purchases of capital assets and contributions to GLS. Cash used in investing activities during the year ended December 31, 2015 was primarily due to the purchases of capital assets and contributions to GLS partially offset by returns of capital from our Babcock joint venture.
Financing Activities
Cash used in financing activities during the year ended December 31, 2016 was $14.8 million compared to $2.1 million during the year ended December 31, 2015 . Cash used in financing activities during the year ended December 31, 2016 was primarily the result of the completion of the Refinancing Transactions. Cash used in financing activities during the year ended December 31, 2015 was primarily the result of payments related to financed insurance.
Cash Flows - December 31, 2015 vs December 31, 2014
Operating Activities
Cash provided by operating activities during the year ended December 31, 2015 was $19.6 million as compared to cash provided by operating activities of $25.4 million during the year ended December 31, 2014 . Cash provided by operations for the year ended December 31, 2015 was impacted by our net loss position, excluding the impact of non-cash impairments, and our change in working capital. Cash provided by operations for the year ended December 31, 2014 was impacted by our net loss position, excluding the impact of non-cash impairments, our change in working capital and by dividends received from equity method investees.
  Investing Activities     
Cash used in investing activities during the year ended December 31, 2015 was $2.7 million as compared to cash used in investing activities during the year ended December 31, 2014 of $4.7 million . Cash used in investing activities during the year ended December 31, 2015 was primarily due to the purchases of capital assets and contributions to GLS partially offset by returns of capital from our Babcock joint venture. Cash used in investing activities during the year ended December 31, 2014 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock joint venture.
Financing Activities
Cash used in financing activities during the year ended December 31, 2015 was $2.1 million compared to $97.5 million of cash used in financing activities during the year ended December 31, 2014 . Cash used in financing activities during the year ended December 31, 2015 was primarily the result of payments related to financed insurance. Cash used in financing activities during the year ended December 31, 2014 was primarily the result of the $90.0 million prepayment on our Term Loan as well as payments related to financed insurance.


39


Financing
Debt consisted of the following:
 
As of December 31, 2016
(Amounts in thousands)
Carrying Amount
 
Original Issue Discount on Term Loan
 
Deferred Financing Costs, Net
 
Carrying Amount less Original Issue Discount on Term Loan and Deferred Financing Costs, Net
10.375% senior unsecured notes
$
39,319

 
$

 
$

 
$
39,319

11.875% senior secured second lien notes
373,385

 

 
(1,581
)
 
371,804

Term loan
207,400

 
(12,570
)
 
(4,248
)
 
190,582

Cerberus 3L notes
30,831

 

 
(80
)
 
30,751

Total indebtedness
650,935

 
(12,570
)
 
(5,909
)
 
632,456

Less current portion of long-term debt
(64,433
)
 
1,364

 
226

 
(62,843
)
Total long-term debt
$
586,502

 
$
(11,206
)
 
$
(5,683
)
 
$
569,613


 
As of December 31, 2015
(Amounts in thousands)
Carrying Amount
 
Deferred Financing Costs, Net
 
Carrying Amount less Deferred Financing Costs, Net
10.375% senior unsecured notes
$
455,000

 
$
(2,835
)
 
$
452,165

Term loan
187,272

 
(2,406
)
 
184,866

Total indebtedness
642,272

 
(5,241
)
 
637,031

Less current portion of long-term debt
(187,272
)
 
2,406

 
(184,866
)
Total long-term debt
$
455,000

 
$
(2,835
)
 
$
452,165

On April 30, 2016 , we entered into the Amendment No. 5 to the Senior Credit Facility, which provided for the New Senior Credit Facility upon the satisfaction of certain conditions. On June 15, 2016 , the New Senior Credit Facility became effective. The New Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. Pursuant to the terms of the New Senior Credit Facility, among other things, the maturity of certain of the revolving credit commitments was extended into the class B revolving facility and certain lenders provided the New Term Loan, the proceeds of which were used to repay the existing term loans under the Senior Credit Facility in full. On August 22, 2016 , we entered into Amendment No. 6 to the credit agreement governing the New Senior Credit Facility, which made certain technical amendments to the reporting covenant agreed to in Amendment No. 5. As amended, the covenant permits the Company’s annual financial statements to include a report from its independent registered public accounting firm with a qualification as to the Company’s ability to continue as a going concern for the fiscal year ending December 31, 2016 that relates solely to the maturity of the Senior Unsecured Notes, the New Term Loan and/or the class B revolving facility.
As of December 31, 2016 , the New Senior Credit Facility provided for the following:
a $207.4 million New Term Loan;
the Amended Revolver, consisting of the $85.8 million class B revolving commitments; and
up to $15.0 million in incremental revolving facilities provided by and at the discretion of certain non-debt fund affiliates that are controlled by Cerberus, which shall rank pari passu with, and be on the same terms as, the class B revolving facility.
The New Term Loan under the New Senior Credit Facility was subject to a fee in the amount of 700 basis points, which is reflected as an original issue discount in the balance of the New Term Loan, and each of the lenders holding class B revolving facility commitments on June 15, 2016 were paid an upfront fee equal to 2.00% of the class B revolving facility commitment held by such lender.
Our New Senior Credit Facility provided for a $24.8 million class A revolving facility which terminated on July 7, 2016 . Availability under the Amended Revolver during the two years immediately after June 15, 2016 will be subject to a condition that, if, at the time of a request for revolving loans or an issuance of a letter of credit, the aggregate principal amount of revolving loans plus the face amount of outstanding letters of credit exceeds 50% of the aggregate amount of Amended Revolver commitments at such time, the aggregate amount of unrestricted cash and cash equivalents of DynCorp International and its subsidiaries (giving

40


pro forma effect to requested revolving loans and any application of proceeds thereof or other cash on hand) may not exceed $60 million .
As of December 31, 2016 and December 31, 2015 , the available borrowing capacity under the New Senior Credit Facility and the Senior Credit Facility was approximately $48.0 and $102.2 million , respectively, and included $37.8 million and $42.6 million , respectively, in issued letters of credit. As of December 31, 2016 and December 31, 2015 there were no amounts borrowed under the Amended Revolver and Revolver, respectively. Amounts borrowed under the Amended Revolver and Revolver are used to fund operations. The class B revolving facility and the New Term Loan mature on July 7, 2019 and July 7, 2020 , respectively. See Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of potential maturity date acceleration.
We incur quarterly interest payments on both the New Term Loan and the Amended Revolver comprised of (i) interest for New Term Loan and Amended Revolver borrowings, (ii) letter of credit commitments and (iii) unused commitment fees. See Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information related to the Senior Credit Facility and New Senior Credit Facility.
On June 15, 2016 , in connection with the consummation of the Exchange Offer, $415.7 million principal amount of the Senior Unsecured Notes were exchanged for $45.0 million cash and $370.6 million aggregate principal amount of newly issued New Notes. The remaining $39.3 million principal amount of Senior Unsecured Notes mature on July 1, 2017 . The interest payments on the Senior Unsecured Notes are payable semi-annually on January 1 st and July 1 st.
Interest on the New Notes accrues at the rate of 11.875% per annum, comprised of 10.375% per annum in cash and 1.500% per annum payable in kind (“PIK,” and such interest “PIK Interest”). The cash portion of the interest on the New Notes is payable in cash and the PIK Interest on the New Notes is payable in kind, each semi-annually in arrears on January 1 and July 1, commencing on July 1, 2016 . See Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information related to the New Notes.
The weighted-average interest rate as of December 31, 2016 and December 31, 2015 for our debt, excluding the Cerberus 3L Notes, was 10.4% and 9.2% , respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 31, 2016 and December 31, 2015 .
Based on the completion of the Exchange Offer and the satisfaction of conditions set forth in the Third Lien Credit Facility Commitment Letter, dated April 30, 2016 , DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P., entered into the Third Lien Credit Agreement with us. Under the Third Lien Credit Agreement, DynCorp Funding LLC has funded the Cerberus 3L Notes, a $30 million term loan to us. The interest rate per annum applicable to the Cerberus 3L Notes is 5.00% , payable in kind on a quarterly basis. The Cerberus 3L Notes do not require any mandatory amortization payments prior to maturity and the outstanding principal amounts shall be payable on June 15, 2026 . The proceeds of the Cerberus 3L Notes will be used by DynCorp International to pay fees and expenses (including reimbursement of out-of-pocket expenses) in support of or related to the Company’s Global Advisory Group until June 15, 2018 and, thereafter, for working capital and general corporate purposes.
Debt Covenants and Other Matters
The New Senior Credit Facility contains a number of 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:
incur additional indebtedness;
create liens on assets;
enter into sale and leaseback transactions;
make investments, loans, guarantees or advances;
make certain acquisitions;
sell assets;
engage in mergers or acquisitions;
pay dividends and make distributions or repurchase capital stock;
repay certain other indebtedness;
enter into agreements that restrict the ability of our subsidiaries to pay dividends;
engage in certain transactions with affiliates;
change the business conducted by us or our subsidiaries;
amend our organizational documents;
change our accounting policies or reporting practices or our fiscal year; and
make capital expenditures.

41


In addition, the New Senior Credit Facility requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The New Senior Credit Facility also requires, solely for the benefit of the lenders under the Amended Revolver, for us to maintain minimum liquidity (based on availability of revolving credit commitments under the New Senior Credit Facility plus unrestricted cash and cash equivalents) as of the end of each fiscal quarter of not less than $60 million through the fiscal quarter ending December 31, 2017 , and of not less than $50 million thereafter. The New Senior Credit Facility also contains customary representations and warranties, affirmative covenants and events of default.
The total leverage ratio under the New Senior Credit Facility is Consolidated Total Debt, as defined in Amendment No. 5 (which definition excludes debt under the Cerberus 3L Notes), less unrestricted cash and cash equivalents (up to $75.0 million ) to Consolidated EBITDA, as defined in Amendment No. 5, for the applicable period.
The maximum total leverage ratios under the New Senior Credit Facility are set forth below as follows:
Period Ending
Total Leverage Ratio
December 31, 2016
7.40 to 1.0
March 31, 2017
7.30 to 1.0
June 30, 2017
6.75 to 1.0
September 29, 2017
6.50 to 1.0
December 31, 2017
5.75 to 1.0
March 30, 2018
5.75 to 1.0
June 29, 2018
5.50 to 1.0
September 28, 2018
5.40 to 1.0
September 29, 2018 and thereafter
4.75 to 1.0
The interest coverage ratio under the New Senior Credit Facility is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in Amendment No. 5 (which provides that interest expense with respect to the Cerberus 3L Notes is excluded). The minimum interest coverage ratios under the New Senior Credit Facility are set forth below as follows:
Period Ending
Interest Coverage Ratio
December 31, 2016
1.15 to 1.0
March 31, 2017
1.20 to 1.0
June 30, 2017
1.20 to 1.0
September 29, 2017
1.30 to 1.0
December 31, 2017
1.40 to 1.0
March 30, 2018
1.50 to 1.0
June 29, 2018
1.60 to 1.0
June 30, 2018 and thereafter
1.70 to 1.0
The Indenture governing the New Notes contains various covenants that restrict our ability to:
incur additional indebtedness;
pay dividends on capital stock or repurchase capital stock;
make investments;
create liens or use assets as security in other transactions;
merge, consolidate or transfer or dispose of substantially all of its assets;
engage in transactions with affiliates; and
sell certain assets or merge with or into other companies.
These covenants are subject to a number of important exceptions and qualifications.
The Cerberus 3L Notes include covenants consistent with the covenants set forth in the New Notes; provided that each “basket” or “cushion” set forth in the covenants is at least 25% less restrictive than the corresponding provision set forth in the New Notes.
We closely evaluate our expected ability to remain in compliance with our financial maintenance covenants. Based on our current projections, we believe we will be compliant with our financial maintenance covenants for the next twelve months. As of December 31, 2016 and December 31, 2015 , we were in compliance with our financial maintenance covenants under the New Senior Credit Facility and the Senior Credit Facility, respectively.

42


Contractual Commitments
The following table represents our contractual commitments associated with our debt and other obligations as of December 31, 2016 :
 
Calendar Years (1)  
(Amounts in thousands)
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter   
 
Total   
10.375% senior unsecured notes  (2)
$
39,319

 
$

 
$

 
$

 
$

 
$

 
$
39,319

11.875% senior secured second lien notes  (3)

 

 

 
399,357

 

 

 
399,357

Term loan  (4)
25,114

 
22,500

 

 
159,786

 

 

 
207,400

Cerberus 3L notes  (5)

 

 

 

 

 
49,663

 
49,663

Interest on indebtedness  (6)
57,847

 
53,460

 
53,140

 
44,096

 

 

 
208,543

Operating leases (7)
17,866

 
10,329

 
5,744

 
4,636

 
2,807

 
7,489

 
48,871

Liability on uncertain tax positions (8)

 

 

 
3,293

 

 

 
3,293

Total contractual obligations
$
140,146

 
$
86,289

 
$
58,884

 
$
611,168

 
$
2,807

 
$
57,152

 
$
956,446

(1)
As of December 31, 2016 , there were no amounts outstanding under our Amended Revolver.
(2)
Under the credit agreement governing the New Senior Credit Facility, the Indenture governing the New Notes and the Third Lien Credit Agreement, the $39.3 million principal amount to be repaid on the remaining Senior Unsecured Notes may only be paid with the proceeds of new equity, capital contributions or new unsecured debt. sent a notice of redemption to the holders of the Senior Unsecured Notes for a redemption of all of the remaining Senior Unsecured Notes on April 24, 2017, conditioned on the receipt of the proceeds of the New Cerberus Financing or other equity and/or debt financings and/or capital contributions. Since Cerberus has agreed to provide the New Cerberus Financing irrevocably and unconditionally except in the limited circumstances of the Material Adverse Change Condition, the Company expects to complete the redemption before May 8, 2017.
(3)
Amount includes principal balance of $373.4 million as of December 31, 2016 and payable in kind interest to be accumulated as of maturity date.
(4)
Under the New Senior Credit Facility, we are required to make an excess cash flow payment on our Term Loan of $25.1 million on or prior to April 5, 2017 and a principal payment $22.5 million on our prior to June 15, 2018 (which amount may be reduced as a result of the application of certain prepayments, including excess cash flow payments, similar to the $22.5 million principal payment for June 15, 2017 that is not required as a result of the excess cash flow payment due on or prior to April 5, 2017 ). Amounts above for calendar years other than 2017 exclude mandatory principal payments due to excess cash flow requirements. See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the payments.
(5)
Amount includes principal balance of $30.8 million as of December 31, 2016 and payable in kind interest to be accumulated as of maturity date.
(6)
Based on our current debt structure, interest expense was calculated using interest rates of: (i) 10.375% for our Senior Unsecured Notes, (ii) 11.875% on the New Notes comprised of 10.375% per annum in cash and 1.500% per annum payable in kind, (iii) 7.75% for our New Term Loan, (iv) 5.75% for our Letters of Credit currently outstanding and (v) 0.50% for the unused borrowing capacity available under our Amended Revolver.
(7)
For additional information about our operating leases, see Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(8)
Represents the estimated payments related to the unrecognized tax benefits for the respective year. See Note 4 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.



43


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

44



 
Delta Tucker Holdings, Inc.
Credit Agreement Adjusted EBITDA Calculation
 
 
 
 
 
 
For the years ended
 
(Amount in thousands)
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
Net loss attributable to Delta Tucker Holdings, Inc.
$
(54,064
)
 
$
(132,602
)
 
$
(269,780
)
 
Provision (benefit) for income tax
10,138

 
(8,672
)
 
(20,570
)
 
Interest expense, net of interest income
72,149

 
68,714

 
70,562

 
Depreciation and amortization (1)
35,954

 
37,254

 
49,707

 
EBITDA
64,177

 
(35,306
)
 
(170,081
)
 
Certain income/expense or gain/loss adjustments per our credit agreements (2)
9,561

 
119,406

 
255,613

 
Employee share based compensation, severance, relocation and retention expense (3)
1,756

 
7,026

 
9,531

 
Cerberus fees  (4)
3,053

 
4,062

 
2,415

 
Global Advisory Group expenses  (5)
23,057

 

 

 
Annualized operational efficiencies (6)

 
2,094

 
8,828

 
Other (7)
(581
)
 
(1,139
)
 
2,710

 
Adjusted EBITDA
$
101,023

 
$
96,143

 
$
109,016

(1)
Includes certain depreciation and amortization amounts which are classified as Cost of services in the consolidated statements of operations of Delta Tucker Holdings, Inc. included elsewhere in this Annual Report on Form 10-K.
(2)
Includes the $1.8 million impairment of investment in affiliates and certain costs associated with the Refinancing Transactions in 2016, $86.8 million impairment of goodwill and the impairment of certain intangibles, indefinite-lived tradename and assets held for sale of $9.9 million in 2015, as well as certain unusual income and expense items, as defined in the Indenture and New Senior Credit Facility.
(3)
Includes post-employment benefit expense related to severance in accordance with ASC 712 - Compensation, relocation expenses, retention expense and share based compensation expense.
(4)
Includes Cerberus Operations and Advisory Company expenses, net of recovery.
(5)
Reflects Global Advisory Group cost incurred during the year ended December 31, 2016 which we are able to add back to Adjusted EBITDA under the Indenture and New Senior Credit Facility in an aggregate amount up to a total of $30 million.
(6)
Represents a defined EBITDA adjustment under the Indenture and Senior Credit Facility for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period. Per the Indenture and New Senior Credit Facility, annualized operational efficiencies are no longer defined as EBITDA adjustments as of the year ended December 31, 2016 .
(7)
Includes changes due to fluctuations in foreign exchange rates, earnings from affiliates not received in cash, costs incurred pursuant to ASC 805 - Business Combination and other immaterial items.


Off-Balance Sheet Arrangements
As of December 31, 2016 , we did not have any material off-balance sheet arrangements as defined under SEC rules.
Effects of Inflation
We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer term fixed-price and time-and-materials type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the periods of performance. The majority of our contracts are cost-reimbursable type contracts, which consequently, eliminate the impact of inflation. Costs and revenue include an inflationary increase that is commensurate with the general economy in which we operate. As such, Net loss attributable to Delta Tucker Holdings, Inc. has not been materially impacted by inflation.
Critical Accounting Policies and Estimates
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based on information available at the time of the estimates or assumptions, including our historical experience, where relevant. Significant estimates and assumptions are reviewed quarterly by management. The evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may materially differ from the estimates.

45


Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, see Note 1 . Management discusses our critical accounting policies and estimates with the Audit Committee of our Board of Directors annually.
Revenue Recognition and Cost Estimation on Long-Term Contracts
General - We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement. As such, systems, equipment or materials are not generally separable from the services we provide. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the customer, the sales price is fixed or determinable (for non-U.S. government contracts) or costs are identifiable, determinable, reasonable and allowable (for our U.S. government contracts), and collectability is reasonably assured (for non-U.S. government contracts) or a reasonable contractual basis for recovery exists (for U.S. government contracts). We apply the appropriate guidance consistently to similar contracts.
Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other special contract provisions are evaluated throughout the life of our contracts when estimating total contract revenue under the percentage-of-completion or proportional methods of accounting. We inherently have risks related to our estimates with long-term contracts. Actual amounts could materially differ from these estimates. We believe the following are inherent to the risk of estimation: (i) assumptions are uncertain and inherently judgmental at the time of the estimate; (ii) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues, costs and recoverability of assets, and (iii) changes in estimates could have material effects on our financial condition or results of operations. The impact of all of these factors could contribute to a material cumulative adjustment.
Some of our contracts with the U.S. government contain award or incentive fees. We recognize award or incentive fee revenue when we can make reasonably determinable estimates of award or incentive fees to consider them in determining total estimated contract revenue. We do not consider the mere existence of potential award or incentive fee as presumptive evidence that award or incentive fees are to be automatically included in determining total estimated revenue. In some cases, we may not be able to reliably predict whether performance targets will be met, and as a result, we exclude the award or incentive fees from the determination of total revenue in such instances. Our estimate of award or incentive fees may require adjustments from time to time.         
We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project's contractual requirements and management's assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. See aggregate changes in contract estimates in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe long-term contracts, contracts in a loss position and contracts with material award or incentive fees drive the significant potential changes in estimates in our contracts. These estimates are reviewed and assessed quarterly and could result in favorable or unfavorable adjustments.
Federal Government Contracts — For all non-construction and non-software U.S. federal government contracts or contract elements, we apply the guidance in ASC 912 - Contractors - Federal Government. We apply the combination and segmentation guidance in ASC 605-35 Revenue - Construction-Type and Production-Type Contracts under the guidance of ASC 912 in analyzing the deliverables contained in the applicable contract to determine appropriate profit centers. Revenue is recognized by profit center using the percentage-of-completion method or completed-contract method. The completed-contract method is used when reliable estimates cannot be supported for percentage-of-completion method recognition or for short duration projects when the results of operations would not vary materially from those resulting from use of the percentage-of-completion method. Until complete, project costs may be maintained in work-in-progress, a component of inventory.
Revenue is recognized based on progress towards completion over the contract period, measured by either output or input methods appropriate to the services or products provided. For example, "output measures" can include units delivered or produced, such as aircraft for which modification has been completed. "Input measures" can include a cost-to-cost method, such as for procurement-related services.

46


Other Contracts or Contract Elements — Our contracts with non-federal government customers are predominantly service arrangements. Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. Arrangement consideration is allocated among the separate units of accounting based on the guidance applicable for the multiple-element arrangements. For arrangements that are entered into or materially modified after January 1, 2011, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative selling price. Relative selling price is established through VSOE, third-party evidence, or management's best estimate of selling price. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, and therefore, relative selling price is generally allocated to multiple-element arrangements utilizing management's best estimate of selling price.
Deferred Taxes, Tax Valuation Allowances and Tax Reserves
Our income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best estimate of future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. Income tax expense is the amount of tax payable for the period net of the change in deferred tax assets and liabilities during the period.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
In evaluating the realizability of our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. Valuation allowances are recognized to reduce the carrying value of deferred tax assets to amounts that we expect are more-likely-than-not to be realized. We assess both positive and negative evidence including the existence of a three year cumulative loss, forecast of future taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the need for or sufficiency of a valuation allowance. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could also impact the need for certain valuation allowances.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in potential assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
Under ASC 740 - Income Taxes , we may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.

47


Valuation of Goodwill, Other Intangible Assets and Long-Lived Assets
In accordance with ASC 350-20 - Intangibles - Goodwill and Other , we evaluate goodwill and other intangible assets for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We perform our annual goodwill impairment test each October of our calendar year. We also assess goodwill at the end of a quarter if a triggering event occurs. In determining whether an interim triggering event has occurred, management monitors (i) the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test, (ii) and significant changes to future expectations.
We estimate a portion of the fair value of our reporting units under the income approach by utilizing a discounted cash flow model based on several factors including balance sheet carrying values, historical results, our most recent forecasts, and other relevant quantitative and qualitative information. We discount the related cash flow forecasts using the weighted-average cost of capital at the date of evaluation. We also use the market approach to estimate the remaining portion of our reporting unit valuation. This technique utilizes comparative market multiples in the valuation estimate. We estimate the fair value of our reporting units using a combination of the income approach and the market approach. While the income approach has the advantage of utilizing more company specific information, the market approach has the advantage of capturing market based transaction pricing.
Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill and other intangible assets impairment charge in a future period.
The goodwill for each reporting unit is tested using a two-step process. A reporting unit is an operating segment or a component of an operating segment, as defined by ASC 350-20 - Intangibles - Goodwill . A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. The first step in the process of testing goodwill for potential impairment is to compare the carrying value of the reporting unit to its fair value. If upon completion of the analysis, the carrying value exceeds the fair value, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit.
Impairment losses for indefinite-lived intangible assets are recognized whenever the estimated fair value is less than the carrying value. Fair values are calculated for trademarks using a "relief from royalty" method, which estimates the fair value of a trademark by determining the present value of estimated royalty payments that are avoided as a result of owning the trademark. This method includes judgmental assumptions about revenue growth, an appropriate royalty rate, and discount rates that have a significant impact on the fair value and are substantially consistent with the assumptions used to determine the fair value of our reporting units discussed above. As of December 31, 2016, the fair value of our remaining reporting units is substantially in excess of the carrying value of each of the remaining reporting units.
The recoverability of long-lived assets, including property and equipment and finite-lived intangible assets, is reviewed when indicators of potential impairments are present. The recoverable value is based upon an assessment of the estimated future cash flows related to those assets, utilizing assumptions similar to those for goodwill. Additional considerations related to our long-lived assets include expected maintenance and improvements, changes in expected uses and ongoing operating performance and utilization. An impairment loss is recognized if the asset value is not determined to be recoverable. See Note 2 and Note 3 for further discussion.
Commitments and Contingencies
We are involved in various lawsuits and claims that arise in the normal course of business. Amounts associated with lawsuits and claims are reserved for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to such matters have been recorded in "Other accrued liabilities." When only a range of amounts is established and no amount within the range is more probable than another, the lower end of the range is recorded. Legal fees are expensed as incurred.
Recent Accounting Pronouncements
The information regarding recent accounting pronouncements is included in Note 1 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

48


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk is primarily related to losses that could potentially arise as a result of adverse changes in interest and foreign currency exchange rates. See "Item 1A. Risk Factors" for further discussion of the market risks we may encounter.
Interest Rate Risk
We have interest rate risk primarily related to changes in interest rates on our variable rate debt. We manage our exposure to movements in interest rates through the use of a combination of fixed and variable rate debt.
As of December 31, 2016 , we had 68.1% of our debt at a fixed rate and 31.9% at a variable rate. Our 10.375% Senior Unsecured Notes, which had an aggregate principal amount of $39.3 million and $455 million outstanding as of December 31, 2016 and December 31, 2015 , respectively, and our 11.875% senior secured second lien New Notes and Cerberus 3L Notes, which had an aggregate principal amount of $373.4 million and $30.8 million , respectively, outstanding as of December 31, 2016 , represent our fixed rate debt.
Our New Term Loan and Amended Revolver represent our variable rate debt. As of December 31, 2016 and December 31, 2015 , the balance of our New Term Loan and Term Loan was $207.4 million and $187.3 million , respectively, and we had no borrowings under the Amended Revolver and the Revolver. Borrowings under our variable rate debt bear interest, based on our option, at a rate per annum equal to LIBOR plus the applicable rate or the Base Rate plus the applicable rate. As of December 31, 2016 , both the New Term Loan and the Amended Revolver have an interest rate floor of 1.75% for LIBOR borrowings and 2.75% for Base Rate borrowings. The New Term Loan bears interest, based on our option, equal to either the Base Rate or the Eurocurrency Rate, in each case, plus (i) 5.00% in the case of Base Rate loans and (ii) 6.00% in the case of Eurocurrency Rate loans. The New Term Loan interest rate at December 31, 2016 was made up of a 6.00% applicable rate plus a 1.75% floor totaling 7.75% . The interest rate per annum applicable to the class B revolving loans bear interest, based on our option, equal to either a Base Rate or a Eurocurrency Rate plus (i) a range of 4.50% to 5.00% based on the First Lien Secured Leverage Ratio in the case of Base Rate loans and (ii) a range of 5.50% to 6.00% based on the First Lien Secured Leverage Ratio in the case of Eurocurrency Rate loans. Under the New Senior Credit Facility, if LIBOR increases over 1.75% and we continue to have no outstanding Revolver borrowings, each 25 basis point increase would result in $0.5 million in additional interest expense annually.
As of December 31, 2015 , we had 70.8% of our debt at a fixed rate and 29.2% at a variable rate. As of December 31, 2015 , both the Term Loan and the Revolver had an interest rate floor of 1.75% for LIBOR borrowings and 2.75% for Base Rate borrowings. The Term Loan interest rate at December 31, 2015 was made up of a 4.50% applicable rate plus a 1.75% floor totaling 6.25% . See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Foreign Currency Exchange Rate Risk
We are exposed to changes in foreign currency rates. At present, we do not utilize any derivative instruments to manage risk associated with foreign currency exchange rate fluctuations. The functional currency of certain foreign operations is the local currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded in Accumulated other comprehensive loss. Our foreign currency transactional gains and losses were not material for the years ended December 31, 2016 and December 31, 2015 , respectively.


49


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


50



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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



We have audited the accompanying consolidated balance sheets of Delta Tucker Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

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