DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 08/14/2017 10:34:11)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number: 333-173746
 
 
DELTA TUCKER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)  
 
   
Delaware
27-2525959
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1700 Old Meadow Road, McLean, Virginia 22102
(571) 722-0210
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   o      No   þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    þ      No    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter).





 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 August 14, 2017 , the registrant had 100 shares of its Class A common stock outstanding.






Delta Tucker Holdings, Inc.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 

2




Disclosure Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:
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, 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 and 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" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission ("SEC") on March 29, 2017 and other risks detailed from time to time in our reports filed with SEC.
Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

3




Calendar Year
We report the results of our operations using a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2017 and June 24, 2016 , the related statements of deficit and cash flows for the six months ended June 30, 2017 and June 24, 2016 and the unaudited condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 .

4




PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Revenue
$
474,288

 
$
450,967

 
$
934,159

 
$
870,957

Cost of services
(409,652
)
 
(410,361
)
 
(809,128
)
 
(782,859
)
Selling, general and administrative expenses
(27,168
)
 
(36,959
)
 
(58,886
)
 
(71,048
)
Depreciation and amortization expense
(8,589
)
 
(8,911
)
 
(17,144
)
 
(17,203
)
Earnings from equity method investees
10

 
335

 
52

 
702

Operating income (loss)
28,889

 
(4,929
)
 
49,053

 
549

Interest expense
(17,764
)
 
(17,460
)
 
(36,479
)
 
(33,427
)
Loss on early extinguishment of debt
(24
)
 
(328
)
 
(24
)
 
(328
)
Interest income
19

 
22

 
24

 
82

Other income, net
144

 
4,611

 
1,517

 
4,963

Income (loss) before income taxes
11,264

 
(18,084
)
 
14,091

 
(28,161
)
Provision for income taxes
(5,300
)
 
(6,729
)
 
(8,339
)
 
(11,224
)
Net income (loss)
5,964

 
(24,813
)
 
5,752

 
(39,385
)
Noncontrolling interests
(288
)
 
(308
)
 
(563
)
 
(496
)
Net income (loss) attributable to Delta Tucker Holdings, Inc.
$
5,676

 
$
(25,121
)
 
$
5,189

 
$
(39,881
)
See notes to unaudited condensed consolidated financial statements

5




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

 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Net income (loss)
$
5,964

 
$
(24,813
)
 
$
5,752

 
$
(39,385
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
4

 
(1
)
 
16

 
2

Other comprehensive income (loss), before tax
4

 
(1
)
 
16

 
2

Income tax expense related to items of other comprehensive income
(2
)
 

 
(6
)
 
(1
)
Other comprehensive income (loss)
2

 
(1
)
 
10

 
1

Comprehensive income (loss)
5,966

 
(24,814
)
 
5,762

 
(39,384
)
Comprehensive loss attributable to noncontrolling interests
(288
)
 
(308
)
 
(563
)
 
(496
)
Comprehensive income (loss) attributable to Delta Tucker Holdings, Inc.
$
5,678

 
$
(25,122
)
 
$
5,199

 
$
(39,880
)

See notes to unaudited condensed consolidated financial statements

6




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
 
As Of
(Amounts in thousands, except share data)
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
98,910

 
$
118,218

Restricted cash

 
7,664

Accounts receivable, net of allowances of $16,149 and $17,189 respectively
322,920

 
300,255

Prepaid expenses and other current assets
53,771

 
65,694

Total current assets
475,601

 
491,831

Property and equipment, net
16,941

 
16,636

Goodwill
42,093

 
42,093

Tradenames, net
28,536

 
28,536

Other intangibles, net
68,345

 
84,069

Other assets, net
14,007

 
13,372

Total assets
$
645,523

 
$
676,537

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
20,950

 
$
62,843

Accounts payable
73,554

 
69,742

Accrued payroll and employee costs
81,398

 
95,580

Accrued liabilities
93,043

 
104,078

Income taxes payable
12,488

 
9,303

Total current liabilities
281,433

 
341,546

Long-term debt
553,377

 
569,613

Long-term deferred taxes
15,061

 
14,825

Other long-term liabilities
11,560

 
12,490

Total liabilities
861,431

 
938,474

DEFICIT
 
 
 
Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

Additional paid-in capital
595,974

 
555,163

Accumulated deficit
(816,856
)
 
(822,045
)
Accumulated other comprehensive loss
(500
)
 
(510
)
Total deficit attributable to Delta Tucker Holdings, Inc.
(221,382
)
 
(267,392
)
Noncontrolling interests
5,474

 
5,455

Total deficit
(215,908
)
 
(261,937
)
Total liabilities and deficit
$
645,523

 
$
676,537

See notes to unaudited condensed consolidated financial statements

7




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
Six Months Ended
(Amounts in thousands)
June 30, 2017
 
June 24, 2016
Cash flows from operating activities
 
 
 
Net income (loss)
$
5,752

 
$
(39,385
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,925

 
17,677

Loss on early extinguishment of debt
24

 
328

Amortization of deferred loan costs and original issue discount
2,695

 
3,123

Earnings from equity method investees
(52
)
 
(684
)
Distributions from equity method investees
222

 

Deferred income taxes
236

 
2,993

Other
(21
)
 
1,725

Changes in assets and liabilities:
 
 
 
Accounts receivable
(22,602
)
 
56,522

Prepaid expenses and other current assets
12,036

 
4,204

Accounts payable and accrued liabilities
(18,915
)
 
(24,852
)
Income taxes payable
2,967

 
5,972

Net cash provided by operating activities
267

 
27,623

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(2,674
)
 
(1,882
)
Proceeds from sale of property and equipment
536

 
799

Purchase of software
(400
)
 
(1,417
)
Cash restricted from Cerberus 3L Notes
7,057

 
(20,242
)
Return of capital from equity method investees
1,769

 
1,104

Contributions to equity method investees
(2,050
)
 
(4,056
)
Net cash provided by (used in) investing activities
4,238

 
(25,694
)
Cash flows from financing activities
 
 
 
Borrowings on revolving credit facilities

 
18,000

Payments on revolving credit facilities

 
(18,000
)
Payments on senior secured credit facility
(25,114
)
 
(187,272
)
Borrowing under new senior credit facility

 
192,882

Borrowing under Cerberus 3L notes

 
30,000

Payment to bondholders of senior unsecured notes
(39,319
)
 
(45,000
)
Payment of deferred financing costs

 
(4,878
)
Equity contribution from affiliates of Cerberus
40,799

 
350

Payment of dividends to noncontrolling interests
(179
)
 
(529
)
Net cash used in financing activities
(23,813
)
 
(14,447
)
Net decrease in cash and cash equivalents
(19,308
)
 
(12,518
)
Cash and cash equivalents, beginning of period
118,218

 
108,782

Cash and cash equivalents, end of period
$
98,910

 
$
96,264

 
 
 
 
Income taxes paid, net of receipts
$
5,227

 
$
2,323

Interest paid
$
31,961

 
$
30,726

See notes to unaudited condensed consolidated financial statements

8




Delta Tucker Holdings, Inc.
Unaudited Condensed Consolidated Statements of Deficit
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Deficit Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total
Deficit
Balance at December 31, 2015

 
$

 
$
554,379

 
$
(767,981
)
 
$
(360
)
 
$
(213,962
)
 
$
5,792

 
$
(208,170
)
Share based compensation, net

 

 
22

 

 

 
22

 

 
22

Comprehensive loss attributable to Delta Tucker Holdings, Inc.

 

 

 
(39,881
)
 
1

 
(39,880
)
 
496

 
(39,384
)
Capital contribution

 

 
350

 

 

 
350

 

 
350

Dividends declared to noncontrolling interests

 

 

 

 

 

 
(793
)
 
(793
)
Balance at June 24, 2016

 
$

 
$
554,751

 
$
(807,862
)
 
$
(359
)
 
$
(253,470
)
 
$
5,495

 
$
(247,975
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Deficit Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interest
 
Total
Deficit
Balance at December 31, 2016

 
$

 
$
555,163

 
$
(822,045
)
 
$
(510
)
 
$
(267,392
)
 
$
5,455

 
$
(261,937
)
Share based compensation, net

 

 
29

 

 

 
29

 

 
29

Comprehensive income attributable to Delta Tucker Holdings, Inc.

 

 

 
5,189

 
10

 
5,199

 
563

 
5,762

Capital contribution

 

 
40,799

 

 

 
40,799

 

 
40,799

DIFZ financing, net of tax

 

 
(17
)
 

 

 
(17
)
 

 
(17
)
Dividends declared to noncontrolling interests

 

 

 

 

 

 
(544
)
 
(544
)
Balance at June 30, 2017

 
$

 
$
595,974

 
$
(816,856
)
 
$
(500
)
 
$
(221,382
)
 
$
5,474

 
$
(215,908
)
See notes to unaudited condensed consolidated financial statements

9




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

Note 1 — Basis of Presentation and Accounting Policies
Basis of Presentation
Delta Tucker Holdings, Inc. ("Holdings"), the parent of DynCorp International Inc. ("DynCorp International"), through its subsidiaries (together, "the Company"), provides defense and technical services and government outsourced solutions primarily to U.S. government agencies domestically and internationally. The Company was incorporated in the state of Delaware on April 1, 2010. Our customers include the DoD, the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and our consolidated subsidiaries.
The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These unaudited condensed consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate and do not make the information presented misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of June 30, 2017 and December 31, 2016 , the results of operations and statements of comprehensive income (loss) for the three and six months ended June 30, 2017 and June 24, 2016 and the statements of deficit and cash flows for the six months ended June 30, 2017 and June 24, 2016 have been included. The results of operations and statements of comprehensive income (loss) for the three and six months ended June 30, 2017 and June 24, 2016 and the statements of deficit and cash flows for the six months ended June 30, 2017 and June 24, 2016 are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. Our actual results may differ from these estimates.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has investments in joint ventures that are variable interest entities ("VIEs"). The VIE investments are accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810 — Consolidation . In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, the Company consolidates the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method.
We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our segments and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income (loss) in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.
Noncontrolling Interests
We record the impact of our partners' interests in less than wholly owned consolidated joint ventures as noncontrolling interests. Currently, DynCorp International FZ-LLC ("DIFZ") is our only consolidated joint venture for which we do not own 100% of the entity. We hold a 25% ownership interest in DIFZ. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ. Noncontrolling interests is presented on the face of the statements of operations as an increase

10




or reduction in arriving at "Net income (loss) attributable to Delta Tucker Holdings, Inc." Noncontrolling interests is located in the equity section on the consolidated balance sheets. See Note 10 for further discussion regarding DIFZ.
Use of Estimates
The preparation of the financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the consolidated statements of operations in the period that they are determined. Changes in contract estimates related to certain types of contracts accounted for using the percentage of completion method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur over the life of a contract for a variety of reasons, including changes in scope, estimated incentive or award fees, cost estimates, level of effort and/or other assumptions impacting revenue or cost to perform a contract. The gross favorable and unfavorable adjustments below reflect these changes in contract estimates during each reporting period, excluding new or completed contracts where no comparative estimates exist between reporting periods.
The following table presents the aggregate gross favorable and unfavorable adjustments to income (loss) before income taxes resulting from changes in contract estimates, for the three and six months ended June 30, 2017 and June 24, 2016 .
 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Gross favorable adjustments
$
10.0

 
$
8.1

 
$
17.3

 
$
7.8

Gross unfavorable adjustments
(3.4
)
 
(13.2
)
 
(3.2
)
 
(13.5
)
Net adjustments
$
6.6

 
$
(5.1
)
 
$
14.1

 
$
(5.7
)
Accounting Policies
There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2016 , except as described below.
Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . ASU 2015-11 requires an entity who measures inventory using FIFO or average cost to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs. The update is effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2016 and applied prospectively. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2015-11 on a prospective basis during the first quarter of calendar year 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements or disclosures.
In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting . ASU 2016-07 simplifies the equity method by eliminating the requirement to apply it retrospectively to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016 and applied prospectively. Early adoption is permitted. The Company adopted ASU 2016-17 during the first quarter of calendar year 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements or disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company elected to early adopt ASU 2017-01 during the first quarter of calendar year 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements or disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 modifies the concept of goodwill impairment to represent the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for goodwill impairment testing for interim and annual periods beginning after December 15, 2019, and requires a prospective transition. Early adoption is permitted for interim

11




and annual goodwill impairment tests performed after January 1, 2017. The Company elected to early adopt ASU 2017-04 on a prospective basis during the first quarter of calendar year 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Developments
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which outlines a single set of comprehensive principles for recognizing revenue under GAAP. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which deferred the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing . ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients . ASU 2016-12 clarifies the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU 2016-20 provides clarifying guidance on a number of narrow technical aspects of Topic 606. ASU 2016-20 clarifications include, but are not limited to, technical aspects of disclosures, contract losses, and contract costs. These ASUs apply to all entities that enter into contracts with customers to transfer goods or services. These ASUs are effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The implementation of this new standard will impact our business processes, systems and controls. Accordingly we have commenced our assessment of the standard and have developed a comprehensive project plan and are designing additional internal controls, including internal controls around the adoption of ASU 2014-09 and its related disclosures, to guide the assessment, training and implementation. We plan to adopt the standard as of January 1, 2018 under the modified retrospective approach with the cumulative effect of adoption recorded as an adjustment to the opening balance of equity as of that date without restatement of comparative periods. We are in the process of assessing the impact to our results of operations across our portfolio of contracts.
In February 2016, the FASB issued ASU No. 2016-02, Leases . The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases . ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Entities are required to adopt ASU 2016-02 using a modified retrospective approach, subject to certain optional practice expedients, and apply the provisions of ASU 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the potential effects of the adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019 and applied using a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are currently evaluating the potential effects of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . ASU 2016-15 provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard is intended to reduce current diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and will require a retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential effects of the adoption of ASU 2016-15 on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-entity Asset Transfers of Assets Other than Inventory , which requires that an entity recognize the tax expense from the sale of intra-entity sales of assets, other than inventory, in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. ASU 2016-16 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017 and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to

12




retained earnings as of the beginning of the period of adoption. We are currently evaluating the potential effects of the adoption of ASU 2016-16 on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 clarifies the guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and will be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential effects of the adoption of ASU 2016-18 on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting . ASU 2017-09 clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods therein, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential effects of the adoption of ASU 2017-09 on our consolidated financial statements.
Other accounting standards updates effective after June 30, 2017 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows for the period ended June 30, 2017 .

13




Note 2 — Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions.
Prepaid expenses and other current assets
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Prepaid expenses
$
29,393

 
$
39,895

Income tax refunds receivable
228

 

Inventories
20,503

 
18,451

Work-in-process inventory
523

 
164

Joint venture receivables
31

 
84

Other current assets
3,093

 
7,100

Total prepaid expenses and other current assets
$
53,771

 
$
65,694

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. The decrease in prepaid expenses is primarily due to the timing of payments.
We value our inventory at lower of cost or net realizable value.
Property and equipment, net
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Aircraft
$
3,672

 
$
2,997

Computers and related equipment
7,902

 
7,161

Leasehold improvements
21,577

 
20,934

Office furniture and fixtures
5,490

 
5,499

Vehicles
3,344

 
3,430

Gross property and equipment
41,985

 
40,021

Less accumulated depreciation
(25,044
)
 
(23,385
)
Total property and equipment, net
$
16,941

 
$
16,636

As of June 30, 2017 and December 31, 2016 , Property and equipment, net, included the accrual for property additions of $0.4 million and $0.3 million , respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.0 million and $2.0 million during the three and six months ended June 30, 2017 , respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.2 million and $2.2 million during the three and six months ended June 24, 2016 , respectively.
Other assets, net
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Investment in affiliates
$
7,937

 
$
7,825

Palm promissory note, long-term portion
1,961

 
2,034

Other
4,109

 
3,513

Total other assets, net
$
14,007

 
$
13,372

Accrued payroll and employee costs
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Wages, compensation and other benefits
$
65,712

 
$
82,062

Accrued vacation
14,530

 
12,462

Accrued contributions to employee benefit plans
1,156

 
1,056

Total accrued payroll and employee costs
$
81,398

 
$
95,580


14




Accrued liabilities
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Customer liabilities
$
20,222

 
$
20,762

Accrued insurance
27,465

 
26,201

Accrued interest
23,972

 
25,807

Contract losses
4,348

 
10,912

Legal reserves
4,335

 
4,597

Subcontractor retention

 
250

Other
12,701

 
15,549

Total accrued liabilities
$
93,043

 
$
104,078

Customer liabilities represent amounts received from customers in excess of revenue recognized or for amounts due back to a customer. The increase in accrued insurance is primarily due to the timing of payments and the closing of certain insurance policies with our carriers. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Changes to the provision for contract losses are presented in Cost of services on our Statement of Operations. Legal matters include reserves related to various lawsuits and claims. See Note 8 for further discussion. Other is comprised primarily of accrued rent and workers' compensation related claims and other balances that are not individually material to the consolidated financial statements.
Other long-term liabilities
As of June 30, 2017 and December 31, 2016 , Other long-term liabilities were $11.6 million and $12.5 million , respectively. Other long-term liabilities are primarily due to our long-term incentive bonus plan and nonqualified unfunded deferred compensation plan of $3.9 million and $4.3 million as of June 30, 2017 and December 31, 2016 , respectively, and a long-term leasehold obligation related to our Tysons Corner facility in McLean, Virginia, of $3.1 million and $3.3 million as of June 30, 2017 and December 31, 2016 , respectively. Other long-term liabilities also include an uncertain tax benefit of $3.3 million and $3.3 million as of June 30, 2017 and December 31, 2016 , respectively. See Note 4 for further discussion.

15




Note 3 — Goodwill and Other Intangible Assets
We have three operating and reporting segments, which provide services domestically and in foreign countries primarily under contracts with the U.S. government: Aviation Engineering, Logistics, and Sustainment ("AELS"), Aviation Operations and Life Cycle Management ("AOLC") and DynLogistics. Each operating and reportable segment is its own reporting unit. Of our three reporting units, only the DynLogistics reporting unit had a goodwill balance as of June 30, 2017 which we assess for potential goodwill impairment. The carrying amount of goodwill for DynLogistics was $42.1 million as of June 30, 2017 and December 31, 2016 , respectively.
We assess goodwill and other intangible assets with indefinite lives for impairment annually in October or when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a goodwill impairment test is performed to identify any possible impairment in the period in which the event is identified.
In connection with our annual assessment of goodwill during the fourth quarter of each year, we update our key assumptions, including our forecasts of revenue and income for each reporting unit. The projections for these reporting units include significant estimates related to new business opportunities. If we are unsuccessful in obtaining these opportunities in 2017, a triggering event could be identified and a goodwill impairment test would be performed to identify any possible goodwill impairment in the period in which the event is identified. There can be no assurance that the estimates and assumptions regarding forecasted earnings and cash flows, the period of strength of the U.S. defense spending, and other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
During the six months ended June 30, 2017 , we did not have a triggering event in any of our reporting units.
The following tables provide information about changes relating to certain intangible assets:
 
As of June 30, 2017
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Other intangible assets:
 
 
 
 
 
 
 
Customer-related intangible assets
2.5
 
$
252,615

 
$
(187,510
)
 
$
65,105

Other
 
 
 
 
 
 
 
Finite-lived
1.0
 
14,205

 
(10,965
)
 
3,240

Total other intangibles
 
 
$
266,820

 
$
(198,475
)
 
$
68,345

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
0.0
 
$
869

 
$
(869
)
 
$

Indefinite-lived
 
 
28,536

 

 
28,536

Total tradenames
 
 
$
29,405

 
$
(869
)
 
$
28,536


16




 
As of December 31, 2016
(Amounts in thousands, except years)
Weighted
Average
Remaining
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Other intangible assets:
 
 
 
 
 
 
 
Customer-related intangible assets
3.0
 
$
252,615

 
$
(172,242
)
 
$
80,373

Other
 
 
 
 
 
 
 
Finite-lived
1.0
 
14,238

 
(10,542
)
 
3,696

Total other intangibles
 
 
$
266,853

 
$
(182,784
)
 
$
84,069

 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
Finite-lived
0.0
 
$
869

 
$
(869
)
 
$

Indefinite-lived
 
 
28,536

 

 
28,536

Total tradenames
 
 
$
29,405

 
$
(869
)
 
$
28,536

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $8.0 million and $16.0 million for the three and six months ended June 30, 2017 , respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $7.9 million and $15.5 million for the three and six months ended June 24, 2016 , respectively.
Other intangibles are primarily representative of our capitalized software which had a net carrying value of $3.2 million and $3.7 million as of June 30, 2017 and December 31, 2016 , respectively.
Estimated aggregate future amortization expense for finite lived assets subject to amortization are $13.7 million for the six months ending December 31, 2017 , $21.8 million in 2018, $21.6 million in 2019, $11.2 million in 2020, $0.1 million in 2021 and $0.0 million thereafter.


17




Note 4 — Income Taxes
The domestic and foreign components of Income (loss) before income taxes are as follows:
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Domestic
$
9,442

 
$
(19,469
)
 
$
12,226

 
$
(30,061
)
Foreign
1,822

 
1,385

 
1,865

 
1,900

Income (loss) before income taxes
$
11,264

 
$
(18,084
)
 
$
14,091

 
$
(28,161
)
Non-current deferred tax liabilities, net, was $15.1 million and $14.8 million as of June 30, 2017 and December 31, 2016 , respectively.
Our effective tax rate ("ETR") was 47.1% and 59.2% for the three and six months ended June 30, 2017 , respectively. Our ETR was (37.2)% and (39.9)% for the three and six months ended June 24, 2016 , respectively.
For the three and six months ended June 30, 2017 , the change in ETR was primarily driven by an increase in the forecasted full year income before taxes and an increase in the valuation allowance related to additional foreign tax credits carrying over to future periods. Our ETR for the three and six months ended June 24, 2016 was primarily impacted by an increase in the valuation allowance related to a deferred tax asset which was created by cancellation of debt income resulting from the effects of the refinancing transactions we completed on June 15, 2016.
Management assesses both the available positive and negative evidence to determine whether it is more likely than not that there will be sufficient sources of future taxable income to recognize deferred tax assets. We incurred cumulative losses over the three -year period ended December 31, 2016 . Cumulative losses in recent years are considered significant objective negative evidence in evaluating deferred tax assets under the more likely than not criteria for recognition of deferred tax assets. As a result of additional taxable losses and the foreign taxes for which we cannot recognize a current tax benefit, we increased our valuation allowance from $88.8 million as of December 31, 2016 to $91.1 million as of June 30, 2017 .
As of both June 30, 2017 and December 31, 2016 , we had $2.6 million of total unrecognized tax benefits of which $2.3 million would impact our effective tax rate if recognized. We do not expect the unrecognized tax benefit and any related interest or penalties to be settled within the next twelve months.
During the six months ended June 30, 2017 , we made no estimated federal income tax payments. All of our income taxes paid or refunds received during the six months ended June 30, 2017 were related to state or foreign jurisdictions.
As described further in Note 7 and Note 10, on April 21, 2017 , the Company received the Capital Contribution of $40.6 million from Holdings. Holdings received the proceeds from DefCo Holdings, Inc. (“DefCo”). DefCo is the parent of a consolidated group of companies and files a consolidated U.S. income tax return with the Company. DefCo received the proceeds by way of a loan from its owners, Cerberus Capital Management, L.P. We calculate the provision for income taxes by using a “separate return” method consistent with ASC 740. DefCo will treat the transaction as a loan on the consolidated tax return and the Company has treated the transaction as a capital contribution. 

18




Note 5 — Accounts Receivable
Accounts receivable, net consisted of the following:
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Billed
$
121,135

 
$
93,409

Unbilled
201,785

 
206,846

Total accounts receivable, net
$
322,920

 
$
300,255

Unbilled receivables as of June 30, 2017 and December 31, 2016 include $30.2 million and $26.7 million , respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed as of the end of the respective periods.
As of June 30, 2017 and December 31, 2016 , we had two and three contract claims outstanding totaling $2.7 million and $2.4 million , net of reserves, respectively. The balance of unbilled receivables consists of costs and fees that are: (i) billable immediately; (ii) billable on contract completion; or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment or formal claim. We expect substantially all unbilled receivables to be billed and collected within one year, except items that may result in or that are currently involved in a request for equitable adjustment or formal claim.
We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government. Our allowance for doubtful accounts was $16.1 million as of June 30, 2017 compared to $17.2 million as of December 31, 2016 , and is primarily due to outstanding receivables of approximately $26.0 million , net of reserves, for which we have yet to be paid where we operated under a subcontract for a prime contractor on a U.S. government program that ended December 31, 2014 . We are currently seeking payment through legal action to resolve the matter. See Note 8 for further discussion.

19




Note 6 — Fair Value of Financial Assets and Liabilities
ASC 820 – Fair Value Measurements and Disclosures establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts receivable, and accounts payable, the fair value of these instruments approximates the carrying value.
Our estimate of the fair value of our Senior Unsecured Notes, 11.875% senior secured second lien notes (the "New Notes"), and New Senior Credit Facility (as defined in Note 7) is based on Level 1 and Level 2 inputs, as defined above. Our estimate of the fair value of our Cerberus 3L Notes (as defined in Note 7) is based on Level 3 inputs, as defined above. We used the following techniques in determining the fair value disclosed for the Cerberus 3L Notes classified as Level 3. The fair value as of June 30, 2017 has been calculated by discounting the expected cash flows using a discount rate of 10.4% . This discount rate is determined using the Moody's credit rating for the New Notes and reducing the rating one level lower for the Cerberus 3L Notes as they are subordinated to the New Notes.
 
As Of
 
June 30, 2017
 
December 31, 2016
(Amounts in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
10.375% senior unsecured notes
$

 
$

 
$
39,319

 
$
37,132

11.875% senior secured second lien notes
376,185

 
390,292

 
373,385

 
343,282

Term loan
182,286

 
182,286

 
207,400

 
200,141

Cerberus 3L notes
31,616

 
19,844

 
30,831

 
9,624

Total indebtedness
590,087

 
592,422

 
650,935

 
590,179

Less current portion of long-term debt
(22,500
)
 
(22,500
)
 
(64,433
)
 
(61,367
)
Total long-term debt
$
567,587

 
$
569,922

 
$
586,502

 
$
528,812


20




Note 7 — Debt
Debt consisted of the following:
 
As of June 30, 2017
(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
11.875% senior secured second lien notes
$
376,185

 
$

 
$
(1,380
)
 
$
374,805

Term loan
182,286

 
(10,798
)
 
(3,506
)
 
167,982

Cerberus 3L notes
31,616

 

 
(76
)
 
31,540

Total indebtedness
590,087

 
(10,798
)
 
(4,962
)
 
574,327

Less current portion of long-term debt
(22,500
)
 
1,332

 
218

 
(20,950
)
Total long-term debt
$
567,587

 
$
(9,466
)
 
$
(4,744
)
 
$
553,377

 
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

The original issue discount on the Term Loan facility (the "Term Loan") and deferred financing costs are amortized through interest expense. Amortization related to the original issue discount was $0.9 million and $1.8 million during the three and six months ended June 30, 2017 , respectively, and was $0.1 million during the three and six months ended June 24, 2016 . Amortization related to deferred financing costs was $0.5 million and $0.9 million during the three and six months ended June 30, 2017 , respectively, and was $1.5 million and $3.0 million during the three and six months ended June 24, 2016 , respectively.
Deferred financing costs for the three and six months ended June 30, 2017 were reduced by an immaterial amount related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $25.1 million Excess Cash Flow principal payment made on the Term Loan under the New Senior Credit Facility on April 4, 2017 . Deferred financing costs for the three and six months ended June 24, 2016 were reduced $0.3 million related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $4.6 million in principal prepayment made on the term loan facility under the Senior Credit Facility.
New Senior Credit Facility
On July 7, 2010 , we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, N.A. as Administrative Agent (the "Agent"). On April 30, 2016 , we entered into Amendment No. 5 ("Amendment No. 5") to the Senior Credit Facility which provided for a new senior secured credit facility (the "New Senior Credit Facility") upon the satisfaction of certain conditions. On June 15, 2016 , we satisfied the conditions set forth in Amendment No. 5 and the New Senior Credit Facility became effective. The New Senior Credit Facility is secured by substantially all of our assets and guaranteed by substantially all of our subsidiaries.

21




As of June 30, 2017 , the New Senior Credit Facility provided for the following:
a $182.3 million Term Loan;
a $85.8 million class B revolving facility (or "Revolver"); 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 (as defined herein), which shall rank pari passu with, and be on the same terms as, the Revolver.
As of June 30, 2017 and December 31, 2016 , the available borrowing capacity under the New Senior Credit Facility was approximately $48.9 million and $48.0 million , respectively, and included $36.9 million and $37.8 million , respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of June 30, 2017 and December 31, 2016 there were no amounts borrowed under the Revolver. The Revolver and the Term Loan mature on July 7, 2019 and July 7, 2020 , respectively.
Interest Rates on Term Loan & Revolver
The interest rate per annum applicable to the Term Loan is, at 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 interest rate per annum applicable to the Revolver is, at 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. The First Lien Secured Leverage Ratio is the ratio of total first lien secured consolidated debt (net of up to $75 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the New Senior Credit Facility. The variable Base Rate has a floor of 2.75% and the variable Eurocurrency Rate has a floor of 1.75% . Interest payments on both the Term Loan and Revolver are payable at the end of the interest period, but not less than quarterly.
As of June 30, 2017 and December 31, 2016 , the applicable interest rate on the Term Loan was 7.75% .
Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
All of our letters of credit under the New Senior Credit Facility are subject to a 0.25% fronting fee. The letter of credit subfacility bears interest at an applicable rate that ranges from 5.5% to 6.0% with respect to the Revolver commitments. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% on the undrawn amount of the facility depending on the First Lien Secured Leverage Ratio. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. We will also pay customary letter of credit and agency fees.
The applicable interest rate for our letter of credit subfacility was 5.75% as of June 30, 2017 and December 31, 2016 . The applicable interest rate for our unused commitment fees was 0.50% as of June 30, 2017 and December 31, 2016 .
Principal Payments
The credit agreement governing the New Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the credit agreement, as additional principal payments. Based on our annual financial results for the years ended December 31, 2016 and 2015, we made additional principal payments as required under the Excess Cash Flow provisions of the New Senior Credit Facility and the Senior Credit Facility of $25.1 million on April 4, 2017 and $4.6 million on April 6, 2016 . Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the six months ended June 30, 2017 or June 24, 2016 .
The New Senior Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:
100% of excess cash flow (as defined in Amendment No. 5) less the amount of certain voluntary prepayments as described in Amendment No. 5; and
100% of the net cash proceeds of all non-ordinary course asset sales and casualty and condemnation events, if we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make certain other permitted investments within 6 months (and, if committed to be so reinvested, actually reinvested within 12 months).
We are permitted to voluntarily repay outstanding loans under the New Senior Credit Facility at any time without premium or penalty, other than customary “breakage” costs with respect to Eurocurrency Rate Loans.

22




Maturity and Principal Amortization
We are required to make principal amortization payments with respect to the Term Loan of $22.5 million on or prior to June 15, 2017 and $22.5 million on or prior to June 15, 2018 , which amounts may be reduced as a result of the application of certain prepayments, including our Excess Cash Flow payment. The June 15, 2017 principal amortization payment was fully satisfied as a result of the additional principal payment of $25.1 million made under the Excess Cash Flow requirement discussed above. The principal amount of the Term Loan may be reduced as a result of prepayments, with the remaining amount payable on July 7, 2020 .
The credit agreement governing the New Senior Credit Facility contains a provision that would have resulted in all outstanding principal under the Term Loan and the Revolver maturing on May 8, 2017 if by May 8, 2017 , all of the outstanding principal of the 10.375% Senior Notes due 2017 (the "Senior Unsecured Notes") had not been extended to a date that is on or after October 6, 2020 , or all of the outstanding principal and accrued and unpaid interest of the Senior Unsecured Notes had not been paid in full with proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility.
On March 24, 2017 , the Company received a support letter from Cerberus (the “Support Letter”) committing to fund the redemption of all then-outstanding Senior Unsecured Notes on or before May 5, 2017 with the proceeds of new equity or capital contributions. On April 21, 2017 , the Company received the proceeds of a $40.6 million capital contribution (the “Capital Contribution”) from Holdings’ direct parent company, DefCo Holdings, Inc. On April 24, 2017 , DynCorp International completed the redemption of all of the Senior Unsecured Notes using the proceeds of the Capital Contribution, and therefore, the maturity dates of the Term Loan and the Revolver remain at July 7, 2020 and July 7, 2019 , respectively.
Guarantee and Security
The guarantors of the obligations under the New Senior Credit Facility are identical to those under the New Notes and the Cerberus 3L Notes. See Note 11. The New Senior Credit Facility is secured on a first lien basis by the same collateral that secures the New Notes on a second lien basis and the Cerberus 3L Notes on a third lien basis.
Covenants and Other Terms
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. Among other things, the New Senior Credit Facility requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The total leverage ratio is the ratio of 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 ratio was 6.75 to 1.0 for the period ended June 30, 2017 . The interest coverage ratio 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 ratio was 1.20 to 1.0 for the period ended June 30, 2017 .
The New Senior Credit Facility requires, solely for the benefit of the lenders under the Revolver, for us to maintain minimum liquidity (based on availability of revolving credit commitments 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 credit agreement governing the New Senior Credit Facility also contains customary representations and warranties and events of default.
As of June 30, 2017 and December 31, 2016 , we were in compliance with our financial maintenance covenants under the New Senior Credit Facility. We expect, based on current projections and estimates, to be in compliance with our covenants in the New Senior Credit Facility (including our financial maintenance covenants), and the covenants in the New Notes and the Cerberus 3L notes, further discussed below, for the next twelve months.
New Notes
On June 15, 2016 , $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 due November 30, 2020 , which are governed by the terms of the indenture (the “Indenture”), among DynCorp International, Holdings, as parent guarantor, DynCorp International’s subsidiaries that currently guarantee the New Senior Credit Facility, as subsidiary guarantors (the “Subsidiary Guarantors"), and Wilmington Trust, National Association, as trustee and collateral agent.
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 .

23




Covenants and Events of Default
The Indenture contains a number of non-financial affirmative and negative covenants we believe are usual and customary. These covenants are subject to a number of important exceptions and qualifications as set forth in the Indenture.
In addition, the Indenture requires DynCorp International to make amortization payments of (x) $22.5 million principal amount of the Term Loan under the New Senior Credit Facility no later than June 15, 2017 , and (y) an additional $22.5 million principal amount of the Term Loan no later than June 15, 2018 , which amounts may be reduced as a result of the application of certain prepayments, including excess cash flow payments.
The Indenture contains customary events of default, including for failure to pay other indebtedness in a total amount exceeding $10.0 million after final maturity of such indebtedness.
Optional Redemption
On and after July 1, 2017 , the New Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days’ prior notice, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid cash interest, if any, together with an amount of cash equal to all accrued and unpaid PIK Interest to but excluding the redemption date:
Period
 
Redemption Price

July 1, 2017 through June 30, 2018
 
106.00
%
July 1, 2018 through June 30, 2019
 
103.00
%
July 1, 2019 and thereafter
 
100.00
%
Senior Unsecured Notes
On July 7, 2010 , DynCorp International completed an offering of $455.0 million in aggregate principal of the Senior Unsecured Notes. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 , by and among us, the guarantors party thereto, including DynCorp International and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) as Trustee.
On June 15, 2016 , $415.7 million principal amount of the Senior Unsecured Notes were exchanged for $45.0 million cash and $370.6 million principal amount of newly issued New Notes. The remaining $39.3 million principal amount of 10.375% Senior Unsecured Notes were redeemed on April 24, 2017 using the proceeds received from the Capital Contribution on April 21, 2017 .
Cerberus 3L Notes
On June 15, 2016 , DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P. ("Cerberus"), entered into a Third Lien Credit Agreement (the “Third Lien Credit Agreement”) with us. Under the Third Lien Credit Agreement, DynCorp Funding LLC has made a $30 million term loan to us (the "Cerberus 3L Notes"). The proceeds of the Cerberus 3L Notes are restricted 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. As of June 30, 2017 , we have fully utilized these funds for fees and expenses related to the Company's Global Advisory Group.

Interest Rate and Fees
The interest rate per annum applicable to the Cerberus 3L Notes is 5.00% , payable in kind on a quarterly basis.

Prepayments
The Cerberus 3L Notes do not require any mandatory prepayments, and, subject to the terms of the Intercreditor Agreement (as defined below), we are permitted to voluntarily repay outstanding loans under the Cerberus 3L Notes without premium or penalty. The New Senior Credit Facility and the Indenture governing the New Notes restrict us from making any principal payments on the Cerberus 3L Notes.

Maturity and Amortization
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 .


24




Covenants and Events of Default
The Cerberus 3L Notes include non-financial affirmative and negative 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. The Third Lien Credit Agreement contains customary events of default, including for failure to pay other debt in a total amount exceeding $12.5 million after final maturity or acceleration of such indebtedness.

Intercreditor Agreement

The collateral granted to secure the indebtedness under the New Senior Credit Facility, on a first-priority basis, has also been granted to secure (a) the New Notes and the guarantees under the Indenture on a second-priority basis and (b) the Cerberus 3L Notes and the guarantees under the Third Lien Credit Agreement on a third-priority basis. The relative priority of the liens afforded to the New Senior Credit Facility, New Notes and Cerberus 3L Notes and the subordination in right of payment of the Cerberus 3L Notes to the New Senior Credit Facility and the New Notes are set forth in the Intercreditor Agreement (the “Intercreditor Agreement”), dated as of June 15, 2016 , by and among the administrative agent under the New Senior Credit Facility, the collateral agent under the Indenture, and the collateral agent under the Third Lien Credit Agreement.

Note 8 — Commitments and Contingencies
Commitments
We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable, cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain real estate leases are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $11.4 million and $21.2 million for the three and six months ended June 30, 2017 , respectively. Lease rental expense was $10.4 million and $18.6 million for the three and six months ended June 24, 2016 , respectively. We have no significant long-term purchase agreements with service providers.
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $4.3 million and $4.6 million as of June 30, 2017 and December 31, 2016 , respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at June 30, 2017 . These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of June 30, 2017 . Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.
Pending Litigation and Claims
On December 4, 2006 , December 29, 2006 , March 14, 2007 and April 24, 2007 , four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of international law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008 , a First Amended Consolidated

25




Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010 , 1,256 of the plaintiffs have been dismissed by court orders and, on September 15, 2010 , the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013 , the court granted summary judgment and dismissed all claims. On March 18, 2013 , the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014 , the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. On September 23, 2016 , the District Court granted in part renewed motions for summary judgment. On April 3, 2017 , the claims for six plaintiffs proceeded to trial. On April 20, 2017 , the jury found in our favor on all claims brought by all six plaintiffs involved in that trial. Further proceedings involving other plaintiffs may take place. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.
A lawsuit filed on September 11, 2001 , and amended on March 24, 2008 , seeking unspecified damages on behalf of 26 residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010 , 15 of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013 , the court granted summary judgment and dismissed all claims. On March 18, 2013 , the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014 , the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. On September 23, 2016 , the District Court granted in part renewed motions for summary judgment. On April 3, 2017 , the claims for six plaintiffs proceeded to trial. On April 20, 2017 , the jury found in our favor on all claims brought by all six plaintiffs involved in that trial. Further proceedings involving other plaintiffs may take place. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.
The above cases now are fully defended and indemnified by the Company’s previous owner, Computer Sciences Corporation and also by its spin-off company, CSRA Inc. The insurance litigation arising out of the above cases that was described in prior filings has now been fully resolved and settled.
In October 2007 , we entered into a subcontract with Northrop Grumman Technical Services, Inc. (“Northrop”) to support Northrop’s prime contract with the DoD Counter Narcotics Terrorism Program Office ("CNTPO"). We performed the services requested by Northrop, the government determined that it received “intended quality and skills of personnel,” and Northrop paid our invoices until July 2014 . Subsequent to July 2014 , Northrop stopped paying our periodic invoices. The contract operations ended on December 31, 2014 . In March 2015 , Northrop filed a civil action against us to obtain documents regarding our invoices and now asserts approximately $5.0 million in damages. We believe the damages asserted by Northrop represent a loss contingency that is remote. In September 2015 , we filed an Answer and Counterclaim seeking approximately $41.0 million for unpaid invoices. An unfavorable judgment which denies us a substantial amount of the full amount owed to us could have a material effect on our performance.
On February 24, 2012 , we were advised by the Department of Justice Civil Litigation Division (“the Civil Division”) that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. Since 2012 , the Company has been in discussions with the Civil Division, and has been cooperating with the Civil Division’s requests for information. On July 19, 2016 , the Civil Division filed a civil lawsuit asserting violations of underlying contract terms and also the False Claims Act. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results; however, the complaint does not include any specific monetary demand and as such we are unable to estimate a range of loss at this time. We are continuing to evaluate this lawsuit and at this time believe the potential for penalties, damages or fines resulting from this matter do not represent a probable loss contingency.
U.S. Government Investigations
We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements. Such investigations could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and may result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.

26




U.S. Government Audits
Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management business systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If we are unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.
We have received a series of audit reports from the DCAA related to their examination of certain incurred, invoiced and reimbursed costs on the Logistics Civil Augmentation Program IV ("LOGCAP IV") for contract years 2009 to 2012. Through our negotiation efforts with the Contracting Officer the issues have been resolved, resulting in final settlements of all audited costs of approximately $0.8 million of questioned costs. The DCAA is currently auditing fiscal years 2013 to 2016 and we believe the risk of loss for those years is remote and eventual settlement amounts should be comparable to the previous outcome for fiscal years 2009 to 2012.
Foreign Contingencies
On January 22, 2014 , a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance (“MOF”) was received, seeking approximately $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods between 2009 to 2012. The majority of this assessment was income tax related; however, $10.2 million of the assessed amount is non-income tax related and represents loss contingencies that we consider reasonably possible. We filed our initial appeal of the assessment with the MOF on February 19, 2014 . In May 2014 , the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million . We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of June 30, 2017 , we are continuing to evaluate this matter and at this time believe it does not represent a probable loss contingency.
Credit Risk
We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, 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. We continuously review all accounts receivable and record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported of $10.2 million and $9.3 million as of June 30, 2017 and December 31, 2016 , respectively. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic workers' compensation and employers' liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies, but is $0.25 million per occurrence on a California-based policy. For medical costs, the fixed dollar amount of stop-loss coverage is $0.4 million for total costs per covered participant per calendar year.

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Note 9 — Segment Information
We have three operating and reporting segments: AELS, AOLC and DynLogistics. The AELS, AOLC and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
Three Months Ended
 
Six Months Ended
(Amounts in thousands)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Revenue
 
 
 
 
 
 
 
AELS
$
138,326

 
$
138,420

 
$
272,431

 
$
274,674

AOLC
151,948

 
160,227

 
305,790

 
312,482

DynLogistics
183,624

 
152,670

 
355,982

 
283,859

Headquarters / Other (1)
390

 
(350
)
 
(44
)
 
(58
)
Total revenue
$
474,288

 
$
450,967

 
$
934,159

 
$
870,957

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
AELS
$
5,991

 
$
(10,151
)
 
$
9,270

 
$
(8,400
)
AOLC
14,709

 
9,899

 
30,375

 
18,866

DynLogistics
23,799

 
15,942

 
41,299

 
25,878

Headquarters / Other (2)
(15,610
)
 
(20,619
)
 
(31,891
)
 
(35,795
)
Total operating income (loss)
$
28,889

 
$
(4,929
)
 
$
49,053

 
$
549

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
AELS
$
301

 
$
157

 
$
566

 
$
287

AOLC
24

 
364

 
48

 
398

DynLogistics
197

 
60

 
336

 
122

Headquarters / Other
8,505

 
8,580

 
16,975

 
16,870

Total depreciation and amortization (3)
$
9,027

 
$
9,161

 
$
17,925

 
$
17,677

(1)
Headquarters revenue primarily represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(2)
Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers and Global Advisory Group costs, partially offset by equity method investee income.
(3)
Includes amounts included in Cost of services of $0.4 million and $0.8 million and for the three and six months ended June 30, 2017 , respectively, and $0.3 million and $0.5 million for the three and six months ended June 24, 2016 , respectively.
The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
As Of
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Assets
 
 
 
AELS
$
130,741

 
$
140,320

AOLC
137,977

 
133,096

DynLogistics
186,720

 
168,085

Headquarters / Other (1)
190,085

 
235,036

Total assets
$
645,523

 
$
676,537

(1)
Assets primarily include cash, investments in unconsolidated subsidiaries, and intangible assets (excluding goodwill).


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Note 10 — Related Parties, Joint Ventures and Variable Interest Entities
Cerberus 3L Notes

DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P., entered into a Third Lien Credit Agreement, dated as of June 15, 2016 to fund 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 . See Note 7 for further discussion.
Capital Contribution
As described further in Note 7, on March 24, 2017 , the Company 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. The Company received the $40.6 million Capital Contribution on April 21, 2017 , and completed the redemption of all of the remaining Senior Unsecured Notes using the proceeds of the Capital Contribution on April 24, 2017 .
Consulting Fee
We have a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC ("COAC") where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $1.2 million and $2.5 million of consulting fees on a gross basis before considering the effect of our contract mix which provides for partial recovery in conjunction with the COAC Agreement, during the three and six months ended June 30, 2017 , respectively, and $1.4 million and $3.2 million during the three and six months ended June 24, 2016 , respectively.
We have two executives who are COAC employees, who are seconded to us: (i) our current Chief Executive Officer and member of the Company's board of directors (who during the period covered by this report served as our Senior Vice President and Chief Operating Officer); and (ii) our Senior Vice President, Chief Administrative Officer, Chief Legal Officer and Corporate Secretary. Included in the $1.2 million and $2.5 million recognized during the three and six months ended June 30, 2017 in COAC consulting fees, was $0.7 million and $1.5 million of administrative expense related to these two COAC individuals for the three months and six months ended June 30, 2017 , respectively. Included in the $1.4 million and $3.2 million recognized during the three and six months ended June 24, 2016 in COAC consulting fees, was $0.7 million and $1.3 million of administrative expense related to seconded COAC employees for the three and six months ended June 24, 2016 , respectively.
The New Senior Credit Facility permits payments under the COAC Agreement or any transaction contemplated thereby not to exceed $6.0 million per fiscal year with respect to executives seconded from COAC and personnel of COAC that provide services to us at cost on a weekly, monthly or pro-rated basis.
Certain members of executive management and board members of the Company and seconded COAC individuals may have agreements and conduct business with Cerberus and its affiliates for which they receive compensation. We recognize such compensation as an administrative expense in the consolidated financial statements.
Joint Ventures and Variable Interest Entities
We account for our investments in VIEs in accordance with ASC 810 - Consolidation . In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. We consolidated DIFZ based on the aforementioned criteria. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of June 30, 2017 , we accounted for Partnership for Temporary Housing LLC (“PaTH”), Babcock DynCorp Limited (“Babcock”) and Global Linguist Solutions (“GLS”) as equity method investments. We present our share of the PaTH and GLS earnings in Earnings from equity method investees as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.
Receivables due from our unconsolidated joint ventures totaled $0.1 million and $0.1 million as of June 30, 2017 and December 31, 2016 , respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest.

29




We did not earn revenue from services provided to our unconsolidated joint ventures during the three and six months ended June 30, 2017 and June 24, 2016 , respectively. The related cost of services was $0.2 million and $0.4 million during the three and six months ended June 30, 2017 and $0.1 million and $0.3 million during the three and six months ended June 24, 2016 , respectively. Additionally, we earned $0.0 million and $0.1 million in equity method income (includes operationally integral and non-integral income) during the three and six months ended June 30, 2017 and $0.3 million and $0.7 million in equity method income during the three and six months ended June 24, 2016 , respectively.
GLS’ revenue was $8.0 million and $15.9 million during the three and six months ended June 30, 2017 , respectively, and $11.2 million and $21.1 million during the three and six months ended June 24, 2016 . GLS’ operating and net loss was $1.4 million and $2.5 million during the three and six months ended June 30, 2017 , and $0.7 million and $1.5 million during the three and six months ended June 24, 2016 , respectively.
We currently hold one promissory note included in Other assets on our consolidated balance sheet from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million . The loan balance outstanding was $2.1 million and $2.2 million as of June 30, 2017 and December 31, 2016 , respectively, reflecting the initial value plus accrued interest, less non-cash dividend payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.
As discussed above and in accordance with ASC 810 - Consolidation , we consolidate DIFZ. The following tables present selected financial information for DIFZ as of June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and June 24, 2016 :
 
As Of
(Amounts in millions)
June 30, 2017
 
December 31, 2016
Assets
$
7.5

 
$
4.2

Liabilities
4.0

 
1.1

 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Revenue
$
43.6

 
$
45.9

 
$
84.5

 
$
85.7

The following tables present selected financial information for our equity method investees as of June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and June 24, 2016 :
 
As Of
(Amounts in millions)
June 30, 2017
 
December 31, 2016
Current assets
$
28.0

 
$
27.7

Total assets
28.3

 
29.3

Current liabilities
12.5

 
10.1

Total liabilities
12.5

 
10.1

 
Three Months Ended
 
Six Months Ended
(Amounts in millions)
June 30, 2017
 
June 24, 2016
 
June 30, 2017
 
June 24, 2016
Revenue
$
8.3

 
$
22.5

 
$
16.6

 
$
37.4

Gross profit
(1.2
)
 
1.0

 
(2.9
)
 
1.5

Net income
(1.2
)
 
1.0

 
(2.7
)
 
0.8

Many of our joint ventures and VIEs only perform on a single contract. The modification or termination of a contract under a joint venture or VIE could trigger an impairment in the fair value of our investment in these entities. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i)  $7.9 million investment in unconsolidated joint ventures, (ii)  $0.1 million in receivables from our unconsolidated joint ventures, (iii) $2.1 million note receivable from Palm Trading Investment Corp. and (iv) contingent liabilities that were neither probable nor reasonably estimable as of June 30, 2017 .

30




Note 11 — Consolidating Financial Statements of Subsidiary Guarantors
The New Notes issued by DynCorp International Inc. ("Subsidiary Issuer"), the New Senior Credit Facility and the term loan under the Third Lien Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and the following domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group, LLC, Casals & Associates, Inc., Culpeper National Security Solutions LLC, and Highground Global, Inc. ("Subsidiary Guarantors"). Each of the Subsidiary Issuer and the Subsidiary Guarantors is 100% owned by the Company. Under the Indenture governing the New Notes, a guarantee of a Subsidiary Guarantor would terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.
The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of June 30, 2017 and December 31, 2016 , (ii) unaudited condensed consolidating statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2017 and June 24, 2016 , (iii) unaudited condensed consolidating statements of cash flows for the six months ended June 30, 2017 and June 24, 2016 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.
The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.
DynCorp International Inc. is considered the Subsidiary Issuer as it issued the New Notes.

31




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended June 30, 2017  
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
478,247

 
$
50,193

 
$
(54,152
)
 
$
474,288

Cost of services

 

 
(414,347
)
 
(49,449
)
 
54,144

 
(409,652
)
Selling, general and administrative expenses

 

 
(27,074
)
 
(100
)
 
6

 
(27,168
)
Depreciation and amortization expense

 

 
(8,417
)
 
(175
)
 
3

 
(8,589
)
Earnings from equity method investees

 

 
10

 

 

 
10

Operating income

 

 
28,419

 
469

 
1

 
28,889

Interest expense

 
(17,058
)
 
(706
)
 

 

 
(17,764
)
Loss on early extinguishment of debt

 
(24
)
 

 

 

 
(24
)
Interest income

 

 
16

 
3

 

 
19

Equity in income of consolidated subsidiaries
5,676

 
16,779

 
190

 

 
(22,645
)
 

Other income, net

 

 
111

 
33

 

 
144

Income (loss) before income taxes
5,676

 
(303
)
 
28,030

 
505

 
(22,644
)
 
11,264

Benefit (provision) for income taxes

 
5,979

 
(11,252
)
 
(27
)
 

 
(5,300
)
Net income
5,676

 
5,676

 
16,778

 
478

 
(22,644
)
 
5,964

Noncontrolling interests

 

 

 
(288
)
 

 
(288
)
Net income attributable to Delta Tucker Holdings, Inc.
$
5,676

 
$
5,676

 
$
16,778

 
$
190

 
$
(22,644
)
 
$
5,676


32




Delta Tucker Holdings, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations Information
For the Three Months Ended June 24, 2016  
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary
Guarantors
 
Subsidiary
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$

 
$
454,412

 
$
51,980

 
$
(55,425
)
 
$
450,967

Cost of services

 

 
(414,335
)
 
(51,437
)
 
55,411

 
(410,361
)
Selling, general and administrative expenses

 

 
(36,927
)
 
(44
)
 
12

 
(36,959
)
Depreciation and amortization expense

 

 
(8,737
)
 
(176
)
 
2

 
(8,911
)
Earnings from equity method investees

 

 
335

 

 

 
335

Operating (loss) income

 

 
(5,252
)
 
323

 

 
(4,929
)
Interest expense

 
(16,762
)
 
(698
)
 

 

 
(17,460
)