10-K 1 dth12311410-k.htm FORM 10-K DTH 12.31.14 10-K

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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 333-173746
 
 
DELTA TUCKER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
27-2525959
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1700 Old Meadow Road, McLean, Virginia 22102
(571) 722-0210
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
     
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:

None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes o No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  þ    No  o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
As of March 31, 2015 the registrant had 100 shares of its common stock outstanding.

 


DELTA TUCKER HOLDINGS, INC.
TABLE OF CONTENTS

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

1

Forward-Looking Statements
This Annual Report on Form 10-K contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:
•
the future impact of mergers, acquisitions, divestitures, joint ventures or teaming agreements;
•
our substantial level of indebtedness, our ability to refinance or amend the terms of that indebtedness, and changes in availability of capital and cost of capital;
•
the outcome of any material litigation, government investigation, audit or other regulatory matters;
•
restatement of our financial statements causing credit ratings to be downgraded or covenant violations under our debt agreements;
•
policy and/or spending changes implemented by the Obama Administration, any subsequent administration or Congress, including any further changes to the sequestration that the United States ("U.S.") Department of Defense ("DoD") is currently operating under;
•
termination or modification of key U.S. government or commercial contracts, including subcontracts;
•
changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the International Narcotics and Law ("INL") Enforcement, Contract Field Teams ("CFT") and Logistics Civil Augmentation Program ("LOGCAP IV") contracts;
•
changes in the demand for services provided by our joint venture partners;
•
changes due to pursuit of new commercial business in the U.S. and abroad;
•
activities of competitors and the outcome of bid protests;
•
changes in significant operating expenses;
•
impact of lower than expected win rates for new business;
•
general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;
•
acts of war or terrorist activities, including cyber security threats;
•
variations in performance of financial markets;
•
the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity ("IDIQ") contracts and indefinite quantity contracts ("IQC");
•
the timing or magnitude of any award fee granted under our government contracts;
•
changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;
•
decline in the estimated fair value of a reporting unit resulting in a goodwill impairment and a related non-cash impairment charged against earnings;
•
changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more contracts and our performance;
•
changes in our tax provisions or exposure to additional income tax liabilities that could affect our profitability and cash flows;
•
uncertainty created by management turnover;
•
termination or modification of key subcontractor performance or delivery;
•
the ability to receive timely payments from prime contractors where we act as a subcontractor; and
•
statements covering our business strategy, those described in "Item 1A. Risk Factors" of this Annual Report on Form 10-K and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission ("SEC").
Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.


2

Fiscal Year     
The Company's quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. This Annual Report on Form 10-K reflects the consolidated financial results of the Company for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. Select financial data has been provided for the period from April 1, 2010 (inception) through December 31, 2010 ("Inception Year"). We refer to the Inception Year period as "calendar year 2010" in this Annual Report on Form 10-K. Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations, except for costs associated with acquiring DynCorp International, prior to the merger on July 7, 2010. DynCorp International’s historical fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (“fiscal year 2010”). The three month period ended July 2, 2010, which was the last quarter completed prior to the merger on July 7, 2010, is referred to as the “fiscal quarter ended July 2, 2010”. DynCorp International changed its fiscal year-end at the time of the merger to coincide with that of Delta Tucker Holdings, Inc. For clarity, we refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the “Predecessor.”
Included in this Annual Report on Form 10-K are our audited consolidated statements of operations and the related statements of equity (deficit) and cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. The audited consolidated balance sheets are included for the periods as of December 31, 2014 and December 31, 2013.


3

PART I

ITEM 1. BUSINESS.
Unless the context otherwise indicates, references herein to "we," "our," "us," or "the Company" refer to Delta Tucker Holdings, Inc. and its consolidated subsidiaries. The Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the "Merger").
The Delta Tucker Holdings, Inc. consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP").
Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951.
Our customers include the U.S. Department of Defense ("DoD"), the U.S. Department of State ("DoS"), the U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Revenue from the U.S. government accounted for approximately 94%, 96% and 97% of total revenue for the years ended December 31, 2014, December 31, 2013, and December 31, 2012, respectively. Our contracts’ revenue and percentage of total revenue from the U.S. government may fluctuate from year to year. These fluctuations can be due to contract length or contract structure, such as with IDIQ type contracts. IDIQ type contracts are often awarded to multiple contractors and provide the opportunity for awarded contractors to bid on task orders issued under the contract.
Contract Types
Our contracts typically have a term of three to ten years consisting of a base period with multiple option periods. Our contracts typically are awarded for an estimated dollar value based on the forecast of the work to be performed under the contract over its maximum life. In addition, we have historically received additional revenue through increases in program scope beyond that of the original contract. These contract modifications typically consist of "over and above" requests derived from changes in customer requirements. The U.S. government is not obligated to exercise options under a contract after the base period. At the time of completion of the contract term of a U.S. government contract, the contract is re-competed to the extent the service is still required.
Our contracts with the U.S. government or the government’s prime contractor (to the extent that we are a subcontractor) generally contain standard, unilateral provisions under which the customer may terminate for convenience or default. U.S. government contracts generally also contain provisions that allow the U.S. government to unilaterally suspend us from obtaining new contracts and reduce the value of existing contract spend, pending the resolution of alleged violations of laws or regulations.
Most of our contracts are to provide services, rather than products, to our customers, resulting in the majority of costs being labor related. For this reason, we staff flexibly for each contract. If we lose a contract, we terminate or reassign the employees associated with the contract, hence cutting direct cost and overhead. Generally, elimination of employees would not generate significant separation costs other than those that would be incurred in the normal course of business and would generally be recoverable under applicable contract terms.
The types of services we perform also support our scalability as our primary capital requirements are working capital, which are variable with our overall revenue stream. The nature of our contracts does not generally require investments in fixed assets, and we do not have significant fixed asset investments tied to a single contract upon which our business materially depends. Additionally, our contract mix gives us a degree of flexibility to deploy assets purchased for certain programs to other programs in cases where the scope of our deliverables changes.
Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these are described below:
•
Fixed-Price Type Contracts: In a fixed-price contract, the price is generally not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the contracted service. Our fixed-price contracts may include firm fixed-price, fixed-price with economic adjustment, and fixed-price incentive elements.

4

•
Time-and-Materials Type Contracts: Time-and-materials type contracts provide for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.
•
Cost-Reimbursement Type Contracts: Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee, incentive-fee or a combination thereof. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets. Award and incentive fees are excluded from estimated total contract revenue until a reasonably determinable estimate of award and incentive fees can be made.
A single contract may be performed under one or more of the contracts types discussed above. Any of these three types of contracts may be executed under an IDIQ contract, which are often awarded to multiple contractors. An IDIQ contract does not represent a firm order for services. Our CFT and LOGCAP IV programs are two examples of IDIQ contracts. When a customer wishes to order services under an IDIQ contract, the customer issues a task order request for proposal to the contractor awardees. The contract awardees then submit proposals to the customer and task orders are typically awarded under a best-value approach. However, many IDIQ contracts permit the customer to direct work to a particular contractor.
Our historical contract mix by type, as a percentage of revenue, is indicated in the table below.
 
Delta Tucker Holdings, Inc.
 
For the years ended
Contract Type
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Fixed-Price
26
%
 
23
%
 
19
%
Time-and-Materials
12
%
 
10
%
 
10
%
Cost-Reimbursement
62
%
 
67
%
 
71
%
Totals
100
%
 
100
%
 
100
%
Cost-reimbursement type contracts typically perform at lower margins than other contract types but carry lower risk of loss. We anticipate cost-reimbursable type contracts will continue to represent a large portion of our business for calendar year 2015.
Under many of our contracts, we may rely on subcontractors to perform all or a portion of the services we are obligated to provide to our customers. We use subcontractors primarily for specialized, technical labor and certain functions such as construction and catering. We often enter into subcontract arrangements in order to meet government requirements that certain categories of services be awarded to small businesses.
Operating and Reportable Segments
In August 2014, we amended our operating structure by realigning our DynGlobal segment to a business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue international and commercial business. As a result, DynGlobal resources were redeployed into business development efforts for our two remaining operating and reporting segments, DynAviation and DynLogistics. This helps to identify our highest priority opportunities and work to capture those opportunities for operational execution by the two remaining segments. The DynAviation and DynLogistics segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies. See Note 11 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of segments.
A description of each of our Reportable Segments is discussed further below.
DynAviation
This segment provides worldwide maintenance of aircraft fleet and ground vehicles, which includes logistics support on aircraft and aerial firefighting services, weapons systems, and related support equipment to the DoD, other U.S. government agencies and direct contracts with foreign governments. This segment also provides foreign assistance programs to help foreign governments improve their ability to develop and implement national strategies and programs to prevent the production, trafficking and abuse of illicit drugs. The INL Air Wing program is one of the most significant programs in the DynAviation segment. The INL Air Wing program supports governments in multiple Latin American countries and provides support and assistance with interdiction services in Afghanistan. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. In January, 2015 the DoS issued a letter notifying us that our proposal on the recompete related to the INL Air Wing program was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS' evaluation. We filed a protest with the U.S. Government Accountability Office ("GAO") to challenge the decision by the DoS. In response to our protest, the DoS notified the GAO that it will take corrective action, which will include a reconsideration of its evaluations of the recompete proposals, and a determination of whether discussions are

5

necessary and, if so, it will make a new competitive range decision. The evaluation process is still underway and DoS has yet to award any part of the contract recompete. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
DynLogistics
This segment provides best-value mission readiness to its customers through total support solutions including conventional and contingency logistics, operations and maintenance support, platform modification and upgrades, supply chain management and training, security and full spectrum intelligence mission support services. The LOGCAP IV and War Reserve Materiel ("WRM II") contracts are the most significant contracts within this segment. Under the LOGCAP IV contract which performs under a single IDIQ contract, the U.S. Army contracts for us to perform selected services, operations and maintenance, engineering as well as construction and logistics predominately in the Middle East Theater to augment the U.S. Army, the U.S. Marine Corps and North Atlantic Treaty Organization ("NATO") forces and to release military units from combat service support missions or to fill the U.S. military resource shortfalls. Under the WRM II contract, the U.S. Air Force contracts the Company to perform, out-load, and reconstitute the pre-positioned war reserve materiel in the U.S. Air Force Central Area of Responsibility as well as maintenance services on ground support equipment vehicles.
This segment also provides international policing and police training, immigration support and base operations to a variety of international and national customers. We provide senior advisors and mentors to foreign governmental agencies to provide leadership, operations and training, intelligence, logistics and security capabilities. This includes the services we provide under key contracts such as the Afghanistan Ministry of Defense Program ("AMDP") and the Combined Security Transition Command Afghanistan ("CSTC-A") programs.
DynLogistics supports U.S. foreign policy and international development priorities by assisting in the development of stable and democratic governments, implementing anti-corruption initiatives and aiding the growth of democratic public and civil institutions. This segment also provides base operations support, engineering, supply and logistics, pre-positioned war reserve materials, facilities, marine maintenance services, program management services primarily for ground vehicles and contingency response on a worldwide basis. These services are provided to U.S. government agencies in both domestic and foreign locations, foreign government entities and commercial customers.
Key Contracts
Logistics Civil Augmentation Program IV ("LOGCAP IV"): The LOGCAP IV contract was awarded to us in 2008 and is a part of our DynLogistics segment. We were selected as one of the three prime contractors to provide logistics support under the LOGCAP IV contract. LOGCAP IV is the U.S. Army component of the DoD’s initiative to award contracts to U.S. companies with a broad range of logistics capabilities to support U.S. and allied forces during combat, peacekeeping, humanitarian and training operations. This IDIQ contract has a term of up to ten years. In December 2012, customer negotiations resulted in the elimination of award fee component for option years beginning in 2012 and continuing for the remaining contract periods. The remaining task orders under the LOGCAP IV contract are now either firm fixed price or cost-reimbursable-plus-fixed-fee.
International Narcotics Law Enforcement Air Wing ("INL"): The INL Air Wing program is a part of our DynAviation segment. In May 2005, the DoS awarded this contract in support of the INL program to aid in the eradication of illegal drug operations. This program also provides intra-theater transportation services for DoS personnel throughout Iraq and Afghanistan. The services provided under this contract are fixed-price and cost-reimbursable type services. In January 2015, the DoS issued a letter notifying us that our proposal on the recompete related to the INL contract within the Air Wing reporting unit was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS' evaluation. We filed a protest with the GAO to challenge the decision by the DoS. In response to our protest, the DoS notified the GAO that it will take correction action, which will include a reconsideration of its evaluations of the recompete proposals, and a determination of whether discussions are necessary and, if so, it will make a new competitive range decision. The evaluation process is still underway and DoS has yet to award any part of the contract recompete. Pre-award protests occur within our industry frequently and during this process we are committed to continue to support and serve the DoS through our current contract which we believe will be extended during this procurement process.
Afghanistan Ministry of Defense Program ("AMDP"): The AMDP program is a part of the DynLogistics segment and was awarded to us by the DoD in December 2010. The program was established with the goal of assisting the government of the Islamic Republic of Afghanistan to build, develop and sustain an effective and professional law enforcement organization by training and mentoring the Afghans to manage all aspects of their police training program. This program is structured under a cost-reimbursable-plus-fixed-fee type arrangement.
T-6 Contractor Operated and Maintained Base Supply ("T-6 COMBS"): The T-6 COMBS contract with the U.S. Air Force Materiel Command is a part of our DynAviation segment and provides support services for T-6A and T-6B aircraft at ten Air Force and Navy locations throughout the U.S. The majority of our contractual services are fixed-price. The contract began June 1, 2012 and consists of a five month base period and four one-year option years.

6

War Reserve Materiel ("WRM II"): The War Reserve Materiel contract is a part of our DynLogistics segment. Through this program, we manage the U.S. Air Force Southwest Asia War Reserve Materiel Pre-positioning program, which includes operations in Oman, Bahrain, Qatar, Kuwait, United Arab Emirates and two locations in the United States (Yorktown, Virginia and Shaw Air Force base, South Carolina). Through this contract, we store, maintain and deploy assets such as tents, generators, vehicles, kitchens and medical supplies to deployed forces in the global war on terror. During Operation Enduring Freedom and Operation Iraqi Freedom, we sent teams into the field to assist in the setup of tent cities prior to the arrival of the deployed forces. The WRM II program continues to partner with the U.S. Central Command Air Force in the development of new and innovative approaches to asset management. Our contract is primarily cost-plus-award fee with a smaller portion of fixed-price services.
Naval Test Wing Patuxent River MD ("Pax River"): The Pax River contract is a part of our DynAviation segment. This contract was awarded in August 2011 to provide organization level maintenance and logistic support on all aircraft and support equipment for which the Naval Test Wing Atlantic has maintenance responsibility. Labor and services will be provided to perform safety studies, off-site aircraft safety and spill containment patrols and aircraft recovery services. The cost-plus-fixed-fee contract has a base year plus four one-year option periods.
Contractor Logistics Support: T-34, T-44, T-6 ("CLS"): The CLS program is part of our DynAviation segment. This contract was awarded in October 2014 to provide maintenance and logistics support to the United States Navy T-34, T-44, and T-6 aircraft programs. The services provided under this contract are fixed-price and cost-reimbursable type services. The contract has a one year base period plus four one-year option periods.
Andrews Air Force Base ("Andrews AFB"): The Andrews AFB program is a part of our DynAviation segment. Under the Andrews AFB contract, we perform aviation maintenance and support services, which include full back shop support, organizational level maintenance, fleet fuel services, launch and recovery, supply and Federal Aviation Administration ("FAA") repair services. Under this program we oversee the management of the U.S. presidential air fleet (other than Air Force One). Our principal customer under this contract is the U.S. Air Force. This contract was entered into in September 2011 with the majority of our contractual services being fixed-price.
Combined Security Transition Command Afghanistan ("CSTC-A"): The CSTC-A program is a part of our DynLogistics segment. This program provides assistance to the CSTC-A and the NATO training mission by providing mentors and trainers to develop the Afghanistan Ministry of Defense ("MOD"). In addition to providing training and mentoring, we also provide subject matter expertise and programmatic support to CSTC-A staff and the Afghanistan MOD. This program supports development of the organizational capacity and capability to assist the Afghanistan MOD and Afghan National Army forces in assuming full responsibility for their own security needs. The services provided under this contract are cost-reimbursable type services.  
Sheppard Air Force Base ("Sheppard AFB"): The Sheppard Air Force Base contract is a part of our DynAviation segment. Under this program, we provide aircraft maintenance services for the 80th Flying Training Wing based at Sheppard Air Force Base in Wichita Falls, Texas. This contract has an initial base period of eleven months and six option years. The mission of the Air Education and Training Command’s 80th Flying Training Wing is to provide undergraduate pilot training for the U.S. and North Atlantic Treaty Organization ("NATO") allies in the Euro NATO Joint Jet Pilot Training program. Graduates of this prestigious program are assigned to fighter pilot positions in their respective air forces. The majority of our contractual services are fixed-price.

Estimated Total Contract Value and Certain Other Terms
The estimated total contract value represents amounts expected to be realized from the initial award date to the current contract end date (i.e., revenue recognized to date plus backlog). For the reasons stated under the captions "Risk Factors" and "Business - Key Contracts," the estimated total contract value or ceiling value specified under a government contract or task order is not necessarily indicative of the revenue that we will realize under that contract.
Key Contracts
The following table sets forth certain information for our principal contracts, including the initial start and end dates and the principal customer for each contract as of December 31, 2014:  

7

Contract 
Segment  
Principal 
Customer 
Initial/Current
Award Date 
Current
Contract End Date 
Estimated
Total Contract
Value (1) 
LOGCAP IV (2)
DynLogistics
U.S. Army
Apr-2008
Apr-2018
$5.41 billion
INL Air Wing
DynAviation
DoS
Jan-2001 / May-2005
Oct-2015
$3.21 billion
AMDP
DynLogistics
DoD
Dec-2010
Apr-2016
$1.77 billion
T-6 COMBS
DynAviation
U.S. Air Force
Jun-2012
Oct-2016
$579 million
War Reserve Materiel
DynLogistics
U.S. Air Force
May-2000 / Jun-2008
Sep-2016
$559 million
Pax River
DynAviation
U.S. Navy
Jul-2011 / Aug-2011
Jul-2016
$497 million
CLS
DynAviation
U.S. Navy
Nov-2014
Dec-2019
$443 million
Andrews AFB
DynAviation
U.S. Air Force
Sep-2011
Dec-2018
$436 million
CSTC-A
DynLogistics
U.S. Army
Mar-2010
Apr-2016
$370 million
Sheppard AFB
DynAviation
U.S. Air Force
Sep-2009
Sep-2016
$276 million
(1)
Estimated total contract value represents the initial start and end date of the contracts presented and is not necessarily representative of the amount of work we will actually be awarded under the contract. Contract value can grow over time based on IDIQ task orders and/or contract extensions.
(2)
LOGCAP IV has a $5 billion ceiling per year per contractor over 10 years.
Competition
We compete with various entities across geographic and business lines based on a number of factors, including services offered, experience, price, geographic reach and mobility. Most activities in which we engage are highly competitive and require that we have highly skilled and experienced technical personnel to compete. Some of our competitors may possess greater financial and other resources or may be better positioned to compete for certain contract opportunities. We believe that our principal competitors include Civilian Police International, Science Applications International Corporation, Exelis, Inc., KBR, Inc., IAP Worldwide Services, ACADEMI, Triple Canopy Inc., Fluor Corporation, Lockheed Martin Corporation, AECOM Technology Corporation, United Technologies Corporation, L-3 Communications Holdings, Inc., Aerospace Industrial Development Corporation, Al Salam Aircraft Company Ltd., Mission Essential Personnel, Northrop Grumman Corporation, Computer Sciences Corporation, Lear Siegler, AAR Corp and Serco Group plc. We believe that the primary competitive factors for our services include reputation, technical skills, past contract performance, experience in the industry, cost competitiveness and customer relationships.
Backlog
We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised, priced contract options and the unfunded portion of exercised contract options. These priced options may or may not be exercised at the sole discretion of the customer.
Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years.

8

The following table sets forth our approximate backlog as of the dates indicated:
 
December 31, 2014
 
 
 
 
 
 
(Amounts in millions)
DynAviation (1)
 
DynLogistics (1)
 
Total
Funded backlog
$
725

 
$
446

 
$
1,171

Unfunded backlog
1,561

 
599

 
2,160

Total backlog
$
2,286

 
$
1,045

 
$
3,331

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
(Amounts in millions)
DynAviation (1)
 
DynLogistics (1)
 
Total
Funded backlog
$
564

 
$
977

 
$
1,541

Unfunded backlog
1,761

 
678

 
2,439

Total backlog
$
2,325

 
$
1,655

 
$
3,980

(1)
DynGlobal backlog for the years ended December 31, 2014 and December 31, 2013 is included within DynAviation and DynLogistics due to the amended organizational structure. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our organizational structure.
Regulatory Matters
Contracts with the U.S. government are subject to a multitude of regulatory requirements, including but not limited to the Federal Acquisition Regulation ("FAR") and the Defense Federal Acquisition Regulation Supplement ("DFARS"), which set forth policies, procedures and requirements for the acquisition of goods and services by the U.S. Government. Under U.S. Government regulations certain costs, including certain financing costs, lobbying expenses, certain types of legal expenses and certain marketing expenses related to the preparation of bids and proposals are not allowed for pricing purposes and calculation of contract reimbursement rates under cost-reimbursement contracts. The U.S. Government also regulates the methods by which allowable costs may be allocated to U.S. Government contracts.
Our international operations and investments are subject to U.S. Government laws, regulations and policies, including the International Traffic in Arms Regulations, the Export Administration Act, the Foreign Corrupt Practices Act, the False Claims Act and other export laws and regulations. We must also comply with foreign government laws, regulations and procurement policies and practices, which may differ from U.S. Government regulation, including import-export control, investments, exchange controls, repatriation of earnings, the UK Bribery Act and requirements to expend a portion of program funds in-country. In addition, embargoes, international hostilities and changes in currency values can also impact our international operations.
Our U.S. Government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. Government for cost-reimbursement contracts. The purpose of a pre-award audit is to determine the basis of the bid and provide the information required for the U.S. Government to negotiate the contract effectively. In addition, the U.S. Government may perform a pre-award audit to determine our capability to perform under a contract. During the performance of a contract, the U.S. Government has the right to examine our costs incurred on the contract, including labor charges, material purchases and overhead charges. Upon a contract's completion, the U.S. Government performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal and FAR. The U.S. Government also may perform a post-award audit for proposals that are subject to the Truth in Negotiations Act, which are proposals in excess of $700,000, to determine if the cost proposed and negotiated was accurate, current and complete as of the time of negotiations.
The Defense Contract Audit Agency ("DCAA") performs these audits on behalf of the U.S. Government. The DCAA also reviews and opines on the adequacy of, and our compliance with, our internal control systems and policies, including Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management Systems. The DCAA has the right to perform audits on our incurred costs on all flexibly priced contracts on an annual basis. We have DCAA auditors on-site to monitor our billing and back office operations. An adverse finding under a DCAA audit could result in a recommendation of disallowed costs under a U.S. Government contract, termination of U.S. Government contracts, forfeiture of profits, a withhold of payments, fines, suspension or prohibition from doing business with the U.S. Government. In the event that an audit by the DCAA recommends disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted annual incurred costs claims can take many years. All of our incurred costs claims for U.S. Government contracts completed through fiscal year 2008 have been audited by the DCAA and negotiated by the Defense Contract Management Agency ("DCMA"). Incurred cost claim audits for subsequent periods are ongoing. See "Risk Factors - A negative audit or other actions by the U.S. government could adversely affect our operating performance."

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At any given time, many of our contracts are under review by the DCAA and other government agencies. We cannot predict the outcome of such ongoing audits and what, if any, impact such audits may have on our future operating performance.
Over the last few years, U.S. Government contractors, including our Company, have seen a trend of increased oversight by the DCAA and other U.S. Government agencies. If any of our internal control systems are determined to be non-compliant or inadequate, payments may be suspended under our contracts or we may be subjected to increased government oversight that could delay or adversely affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. Government.
Sales and Marketing
We provide our service solutions to a wide array of customers which include multiple departments and agencies within the U.S. government, select international customers and commercial customers. We also provide our services to other prime contractors who have contracts with the U.S. government and other international customers where our capabilities help to deliver comprehensive solutions. We position our business development and marketing professionals to cover key accounts such as the DoS and the DoD, as well as other international and commercial market segments which hold the most promise for aggressive growth and profitability.
We participate in national and international tradeshows, particularly as they apply to aviation services, logistics, contingency support, defense, diplomacy and development markets. We are also an active member in several organizations related to services contracting, such as the Professional Services Council.
As a global service solutions provider, we have unique experience and capability in providing value-added and full spectrum services to government agencies and selected partners worldwide.
Our business development and marketing professionals maintain close relationships with all existing customers while continuing to aggressively pursue adjacent markets to maximize growth opportunities.
Intellectual Property
We hold an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid license to use the "Dyn International" and "DynCorp International" names in connection with aviation services, security services, technical services and marine services. We also own various licenses for names associated with Phoenix, Casals and Heliworks. Additionally, we own various registered domain names, patents, trademarks and copyrights. Since most of our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright, patents, or trademark protections, although our operations make use of such protections and benefit from them.
Environmental Matters
Our operations include the use, generation and disposal of petroleum products and other hazardous materials, including services such as painting aircraft and handling substances that may qualify as hazardous waste, such as used batteries and petroleum products. We are subject to various U.S. federal, state, local and foreign laws and regulations by which we must abide. These regulations relate to the protection of the environment, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe and healthy workplace for our employees, contractors and visitors. We have written procedures in place and believe we have been and are in substantial compliance with environmental laws and regulations, and we have no liabilities under environmental requirements that would have a material adverse effect on our business, results of operations or financial condition. We have not incurred, nor do we expect to incur, material costs relating to environmental compliance.
Employees
As of December 31, 2014, we had approximately 13,700 personnel located in approximately 36 countries in which we have operations, of which approximately 7,800 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,200. We believe the working relations with our employees and our unions are in good standing.

ITEM 1A. RISK FACTORS.
The risks described below should be carefully considered, together with all of the other information contained in this Annual Report on Form 10-K, including Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any of the following risks could materially and adversely affect our financial condition, results of operations or cash flows.
We rely on sales to U.S. government entities. A loss of contracts, a failure to obtain new contracts or a reduction of sales or award fees under existing contracts with the U.S. government could adversely affect our operating performance and our ability to generate cash flow to fund our operations.

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

The U.S. government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination could expose us to liability and adversely affect our operating performance and lead to an unexpected loss of revenue.
The nature of our business sometimes requires us to begin new work or extend work under an existing contract at the request of our customer before a formal contract or contract modification has been executed. It is common for our customers to issue change orders or modifications on our contingency operations based contracts because of the dynamic nature of the work performed on these contracts. These change orders or modifications can be more at risk for disagreements or delays that may lead to claims being filed as they take longer to definitize by their very nature. In such situations, we have a long history of successfully obtaining a formal contract or contract modification from our customer; however, work performed in such situations involves some risk that we may be unsuccessful in reaching a final agreement with our customer. In the event we are unsuccessful in reaching an agreement with our customer, we may be required to submit a request for equitable adjustment or a formal claim. These processes can take

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substantial time and may ultimately be unsuccessful in allowing us to bill and collect any associated fees earned on work performed in such situations, including base fees or award fees, which could result in lower revenue and could have a material effect on our financial condition and results of operations.
Our U.S. government contracts typically have an initial term of one year with multiple option periods, exercisable at the discretion of the U.S. government at previously negotiated prices. The U.S. government is not obligated to exercise any option period under a contract. The U.S. government can unilaterally exercise these option periods even if the terms are unfavorable to us. Furthermore, the U.S. government is typically required to recompete all programs and, therefore, may not automatically renew a contract. In addition, at the time of completion of any of our U.S. government contracts, the contract is frequently required to be re-competed if the U.S. government still requires the services covered by the contract.
If the U.S. government terminates and/or materially modifies any of our contracts or if option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenue and backlog. In addition, if we are unsuccessful in obtaining contract modifications to remove unfavorable terms, the U.S. government could exercise option periods that extend such unfavorable contract terms, which could then result in additional declines in our earnings or contract losses. Any of these occurrences could adversely affect our earnings and have a material effect on our financial condition and results of operations.
Our U.S. government contracts are subject to competitive bidding, both upon initial issuance and re-competition. If we are unable to successfully compete in the bidding process or if we fail to win re-competitions, it could adversely affect our operating performance and lead to an unexpected loss of revenue.
Substantially all of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:
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we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;
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we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns;
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we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending; and
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if we are not given the opportunity to re-compete for U.S. government contracts previously awarded to us, we may incur expenses to protect such decision and ultimately may not succeed in competing for or winning such contract renewal.
The U.S. government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.
Because of the nature of our business, it is not unusual for us to lose contracts to competitors or to gain contracts once held by competitors during re-compete periods.  
Additionally, some contracts simply end as projects are completed or funding is terminated. We have included our most significant contracts by reportable segment in our key contract table under the heading "Business." Contract end dates are included within the tables to better inform interested parties, security analysts and institutional investors in reviewing the potential impact on our most significant contracts for this risk.
Economic conditions could impact our business.
Our business may be adversely affected by factors in the U.S. and other countries that are beyond our control, such as disruptions in the financial markets or downturns in the economic activity in specific countries or regions, or in the various industries in which we operate. These factors could have an adverse impact in the availability of capital and cost of capital, interest rates, tax rates, or regulations in certain jurisdictions. If for any reason we lose access to our currently available lines of credit, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms. Adverse changes to financial conditions could jeopardize certain counterparty obligations, including those of our insurers and financial institutions.
In particular, if the U.S. government, due to budgetary considerations, fails to sustain the troops in Afghanistan, continues to reduce the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, our business,

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financial condition and results of operations could be adversely affected. Appropriations can also be affected by legislation that addresses larger budgetary issues of the U.S. government. The Budget Control Act of 2011 ("BCA") and its sequestration provisions, have been amended and the appropriations forecasted levels for most federal agencies, including the DoD have increased for fiscal years 2014 and 2015, however, much is still unknown for subsequent years. We anticipate the military branches under the DoD will continue to make cuts to meet the fiscal realities.
While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends will result in continued demand in our target markets for the types of services we provide. We believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business, though we cannot ensure that will be the case. A credit crisis could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion regarding liquidity.
Our operations involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, could adversely affect our results of operations and financial condition.
We are exposed to liabilities that arise from the services we provide. Such liabilities may relate to an accident or incident involving our employees or third parties, particularly where we are deployed on-site at active military installations or in locations experiencing political or civil unrest, or they may relate to an accident or incident involving aircraft or other equipment we have serviced or used in the course of our business. Any of these types of accidents or incidents could involve significant potential claims of injured employees and other third parties and claims relating to loss of or damage to government or third-party property.
We maintain insurance policies that mitigate risk and potential liabilities related to our operations. Our insurance coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. Substantial claims in excess of our related insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Furthermore, any accident or incident for which we are liable, even if fully insured, may result in negative publicity which could adversely affect our reputation among our customers, including our government customers, and the public, which could result in the loss of existing and future contracts or make it more difficult to compete effectively for future contracts. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.  
Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.
Certain regions in which we operate are highly unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. Insurgents in Iraq and Afghanistan have targeted installations where we have personnel, and these insurgents have contributed to instability in these countries. This could impair our ability to attract and deploy personnel to perform services in either or both locations. In addition, we may be required to increase compensation to our personnel as an incentive to deploy them to these regions. Historically we have been able to recover this added cost under our contracts, but there is no guarantee that future increases, if required, will be able to be transferred to our customers through our contracts. To the extent that we are unable to transfer such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance.
In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt or substantially reduce our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all or substantially reduce U.S. government activities, including our operations under U.S. government contracts in a particular location, country or region and to withdraw all or a substantial number of military personnel. Congressional pressure to reduce, if not eliminate, the number of U.S. troops in Afghanistan may also lead to U.S. government procurement actions that reduce or terminate the services and support we provide in that theater of conflict. Any of the foregoing could adversely affect our operating performance and may result in additional costs and loss of revenue.
We are exposed to risks associated with operating internationally.
A large portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:
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export controls regulations that could erode profit margins or restrict exports;

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compliance with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act; and other international anti-corruption laws
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the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;
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contract award and funding delays;
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potential restrictions on transfers of funds;
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foreign currency fluctuations;
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potential claims filed in foreign courts and judicial systems;
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foreign adjustments associated with uncertain tax benefits;
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import and export duties and value added taxes;
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transportation delays and interruptions;
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uncertainties arising from foreign local business practices and cultural considerations;
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requirements by foreign governments that we locally invest a minimum level as part of our contracts with them, which may not yield any return; and
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potential military conflicts, civil strife and political risks.
We cannot ensure our current adopted measures will reduce the potential impact of losses resulting from the risks of our foreign business.  
Our IDIQ contracts are not firm orders for services, and we may never receive revenue from these contracts, which could adversely affect our operating performance.
Many of our government contracts are IDIQ contracts, which are often awarded to multiple contractors. The award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under an IDIQ contract, the customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best-value approach. However, many contracts also permit the government customer to direct work to a specific contractor. We may not win new task orders under these contracts for various reasons, such as failing to rapidly deploy personnel or high prices, which would have an adverse effect on our operating performance and may result in additional expenses and loss of revenue. There can be no assurance that our existing IDIQ contracts will result in actual revenue during any particular period or at all.
Our cost of performing under time-and-materials and fixed-price contracts may exceed our revenue, which would result in a recorded loss on the contracts.
Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price. With cost-reimbursement contracts, so long as actual costs incurred are within the contract funding and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated fixed-fee and, in some cases, an incentive-based award fee. We assume additional financial risk on time-and-materials and fixed-price contracts, because of the stipulated prices or negotiated hourly/daily rates. As such, if we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins. Also, we assume the risk of damage or loss to government property, and we are responsible for third-party claims under fixed-price contracts. The failure to meet contractually defined performance standards may result in a loss of a particular contract or lower-than-anticipated margins. This could adversely affect our operating performance and may result in additional costs and possible loss of revenue.
A negative audit or other actions by the U.S. government could adversely affect our operating performance
At any given time, many of our contracts are under review by the DCAA, the DCMA and other government agencies. These agencies review our contract performance, cost structure, and/or compliance with applicable laws, regulations and standards. Such agency audits may include contracts under which we have performed services in Iraq and Afghanistan under especially demanding circumstances.
The government agencies also review the adequacy of, and our compliance with, our internal control systems and policies, including our Accounting, Purchasing, Property, Estimating, Earned Value Management and Material Management System.
Given the continued oversight by the U.S. government, we could be subjected to additional regulatory requirements which could require additional audits at various points within our contracting process. An adverse finding under an audit could result in a recommendation of disallowed costs under a U.S. contract, termination of a U.S. government contract, forfeiture of profits, suspension or a withhold of payments which could negatively impact our liquidity position and affect our ability to invoice and

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receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
We are subject to investigation by government agencies, which could result in our inability to receive government contracts and could adversely affect our future operating performance.
As a U.S. government contractor operating domestically and internationally, we must comply with laws and regulations relating to U.S. government contracting, as well as domestic and international laws. From time to time, we are investigated by government agencies with respect to our compliance with these laws and regulations. If we are found to be in violation of the law, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or prohibition from doing business with U.S. government agencies. For example, many of the contracts we perform in the U.S. are subject to the Service Contract Act, which requires hourly employees to be paid certain specified wages and benefits. If the U.S. Department of Labor determines that we violated the Service Contract Act or its implemented regulations, we could be suspended from being awarded new government contracts or renewals of existing contracts for a period of time, which could adversely affect our future operating performance. We are subject to a greater risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than companies with solely commercial customers. In addition, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.
Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we were suspended or prohibited from contracting with the U.S. government, or any significant U.S. government agency, if our reputation or relationship with U.S. government agencies was impaired or if the U.S. government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, it could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
U.S. government contractors like us that provide support services in theaters of conflict such as Iraq and Afghanistan have come under increased oversight by the agency of inspectors general, government auditors and congressional committees. Investigations pursued by any or all of these groups may result in adverse publicity for us and consequent reputational harm, regardless of the underlying merit of the allegations being investigated. As a matter of general policy, we have cooperated and expect to continue to cooperate with government inquiries of this nature.
Government withholding regulations could adversely affect our operating performance.
The DoD issued the final DFARS rule in 2012 which allows withholding of a percentage of payments when a contractor's business system has one or more significant deficiencies. The DFARS rule applies to Cost Accounting Standards ("CAS") covered contracts that have the DFARS clause in the contract terms and conditions. The final rule represents a significant change in the contracting environment for companies performing work for the DoD. Contracting officers may withhold 5% of contract payments for one or more significant deficiencies in any single contractor business system or up 10% of contract payments for significant deficiencies in multiple contractor business systems. A significant deficiency is defined as a "shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes." The final rule was applicable to new DoD contracts awarded after February 2012.
The expiration of our collective bargaining agreements could result in increased operating costs or work disruptions, which could potentially affect our operating performance.
As of December 31, 2014, we had approximately 13,700 personnel, of which approximately 7,800 are employees of our affiliates. Employees represented by labor unions totaled approximately 2,200. As of December 31, 2014, we had approximately 26 collective bargaining agreements with these unions. The length of these agreements varies, with the longest expiring in March 2018. There can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Proceedings against us in domestic and foreign courts could result in legal costs and adverse monetary judgments, adversely affecting our operating performance and causing harm to our reputation.
We are involved in various domestic and foreign claims and lawsuits from time to time. In the event that a court decides against us, in these lawsuits, and we are unable to obtain indemnification from the U.S. government, or contributions from the other defendants, we may incur substantial costs, which could have a significant impact on our results of operations. Many uncertainties exist surrounding foreign litigations and claims. We continue to assess such claims as they are made, however, it is not possible to determine the ultimate outcome. An adverse ruling in these cases could also adversely affect our reputation and have a material adverse effect on our ability to win future government contracts.

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Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for breach of contract actions, and we bear all costs associated with such litigation and claims. See Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
We are subject to certain U.S. laws and regulations, which are the subject of rigorous enforcement by the U.S. government; our noncompliance with such laws and regulations could adversely affect our future operating performance.
We may be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could significantly reduce our future revenue and profits.
To the extent that we export products, technical data and services outside the United States, we are subject to U.S. laws and regulations governing international trade and exports, including but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury. Failure to comply with these laws and regulations could result in civil and/or criminal sanctions, including the imposition of fines upon us as well as the denial of export privileges and debarment from participation in U.S. government contracts.
We do business in certain parts of the world that have experienced, or may be susceptible to, governmental corruption. Our corporate policy requires strict compliance with the U.S. Foreign Corrupt Practices Act, UK Bribery Act and with local laws prohibiting payments to government officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Improper actions by our employees or agents could subject us to civil or criminal penalties, including substantial monetary fines, as well as disgorgement, and could damage our reputation and, therefore, our ability to do business.
Competition in our industry could limit our ability to attract and retain customers or employees, which could result in a loss of revenue and/or a reduction in margins, which could adversely affect our operating performance.
We compete with various entities across geographic and business lines. Competitors of our operating segments are typically various solution providers that compete in any one of the service areas provided by those business units. Additionally, competitors of our operating segments are typically large defense service contractors that offer services associated with maintenance, training and other activities.
We compete based on a number of factors, including our broad range of services, geographic reach, mobility and response time. Foreign competitors may obtain an advantage over us in competing for U.S. government contracts and attracting employees. We are required by U.S. laws and regulations to remit to the U.S. government statutory payroll withholding amounts for U.S. nationals working on U.S. government contracts while employed by our majority-owned foreign subsidiaries. Foreign competitors may not be similarly obligated by their governments.
Some of our competitors may have greater resources or are otherwise better positioned to compete for contract opportunities. For example, original equipment manufacturers that also provide aftermarket support services have a distinct advantage in obtaining service contracts for aircraft they have manufactured, as they frequently have better access to replacement and service parts, as well as an existing technical understanding of the platform they have manufactured. In addition, we are at a disadvantage when bidding for contracts up for re-competition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.
In addition to the competition we face in bidding for contracts and task orders, we must also compete to attract the skilled and experienced personnel integral to our continued operations. We hire from a limited pool of potential employees as military and law enforcement experience, specialized technical skill sets and security clearances are prerequisites for many positions. Our failure to compete effectively for employees, or excessive attrition among our skilled personnel, could reduce our ability to satisfy our customers' needs and increase the costs and time required to perform our contractual obligations. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
We have recently experienced a high level of senior management turnover. If we experience loss of our skilled personnel, including members of senior management, it may have an adverse effect on our operations and/or our operating performance.
Our continued success depends in large part on our ability to recruit and retain the skilled personnel necessary to serve our customers effectively, including personnel with extensive military and law enforcement training and backgrounds. The proper execution of our contract objectives depends upon the availability of quality resources, especially qualified personnel. Given the nature of our business, we have substantial need for personnel who are willing to work overseas, frequently in locations experiencing

16

political or civil unrest, for extended periods of time and often on short notice. We may not be able to meet the need for qualified personnel as such need arises.
We have experienced, and may experience in the future, changes in our management team. We have also taken measures to reduce our cost structure, including the elimination of a number of executive level and other management positions throughout the Company. Our senior management changes, cost containment measures, as well as the potential for additional changes or activities in the future, may result in disruption of our business or our customer relationships, distract our employees, decrease employee morale and result in failure in meeting operational targets due to the loss of employees. These changes could also make it difficult to retain and hire new talent, increase our expenses in terms of severance payments and facility exit costs, both of which could be significant, expose us to increased risk of legal claims by terminated employees, and harm our reputation. If we are unable to mitigate these or other similar risks, our business, results of operations, and financial condition may be adversely affected.
In addition, we must comply with provisions in U.S. government contracts that require employment of persons with specified work experience and security clearances. An inability to maintain employees with the required security clearances could have a significant impact on our ability to win new business and satisfy our existing contractual obligations, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
If our subcontractors or joint venture partners fail to perform their contractual obligations, then our performance as the prime contractor and our ability to obtain future business could be materially and adversely impacted.
Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. These subcontractors generally perform niche or specialty services for which they have more direct experience, such as construction, catering services or specialized technical services. These subcontractors have local knowledge of the region in which we will be performing along with the ability to communicate with local nationals and assist in making arrangements for commencement of performance. Often, we enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Such subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
We often enter into joint ventures so that we can jointly bid and perform on a particular project. The success of these and other joint ventures depends, in large part, on the satisfactory performance of the contractual obligations by our joint venture partners. If our partners do not meet their obligations, the joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.
Environmental laws and regulations may subject us to significant costs and liabilities that could adversely affect our operating performance.
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S., these laws and regulations include those governing the management and disposal of hazardous substances and wastes, the maintenance of a safe workplace and painting aircraft and handling substances such as used batteries and petroleum products. In addition to U.S. federal laws and regulations, states and other countries where we do business have numerous environmental, legal and regulatory requirements by which we must abide. We could incur substantial costs, including clean-up costs, as a result of violations of, or liabilities under, environmental laws.
Our business and results of operations could be adversely affected by the passage of U.S. health care reform and other environmental legislation and regulations. We are continually assessing the impact that health care reform could have on our employer-sponsored medical plans. Growing concerns about climate change may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions could increase the costs of projects for our customers or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services.
All of these factors could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.
Acquisition and divestiture related transactions require substantial management resources and may disrupt our business and divert our management from other responsibilities. Acquisitions and divestitures are accompanied by other risks, including:
•
the difficulty of integrating or disaggregating the operations and personnel of the acquired or divested companies;

17

•
the inability of our management to maximize our financial and strategic position by the successful incorporation or dissolution of acquired or divested personnel into our programs;
•
we may not realize anticipated synergies or financial growth;
•
we may assume material liabilities that were not identified during due diligence, including potential regulatory penalties resulting from the acquisition or divested target's previous activities;
•
difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;
•
the potential loss or retention of key employees of acquired or divested companies;
•
the impairment of relationships with employees and customers as a result of changes in management and operational structure; and
•
acquisitions or divestitures may require us to invest significant amounts of cash resulting in dilution of stockholder value.
Any inability to successfully integrate or disaggregate the operations and personnel associated with an acquired or divested business and/or service line may harm our business and results of operations.  
If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and future prospects could be harmed.
In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions, divestitures, joint ventures, and equity investments. We seek to identify acquisition or investment opportunities that will expand or complement our existing services, or customer base, at attractive valuations. We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions, and manage post-closing matters (e.g., integrate acquired companies and employees, realize anticipated operating synergies, and improve margins) efficiently and effectively. Acquisition, divestiture, joint venture, and investment transactions often require substantial management resources and could have the potential to divert our attention from our existing business. Additionally, unidentified pre-closing liabilities could affect our future financial results.
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Catastrophic events may disrupt our business and have an adverse effect on our results of operations.
A disruption, infiltration or failure of network, application systems or third-party hosted services in the event of a major earthquake, hurricane, fire, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our ability to provide service to our customers, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers' orders, which could result in reduced revenue.
Our business could be negatively impacted by security threats, including physical and cyber security threats, and other disruptions.
As a defense contractor, we face both physical and cyber security threats to our sensitive systems and information.  Although we utilize a variety of technical and administrative controls to mitigate and detect threats, there can be no assurance that these controls will be sufficient to prevent a threat from materializing.
 Threats to our physical security, were they to manifest, could result in degradation or disruption of business operations.  These effects could be attributed to, although not exclusively, loss of staff, reduction in staff productivity, and/or loss or damage to facilities.
 Cyber security threats are constantly evolving, and our industry is frequently targeted by cyber security threats. We utilize a variety of mechanisms and controls to adapt to potential threats; however, the variety and constant change of these threats leaves the impact unpredictable.
     Were an incident to occur, it could lead to loss of confidentiality, integrity, and/or availability of information or systems, harm to personnel or infrastructure, and/or damage to our reputation.  Such an incident could result in material impact on our business operations and strategies, current or future financial position, and/or cash flows.

18

Goodwill and other intangible assets represent significant assets on our balance sheet and have been significantly impaired and may continue to be impaired.
Goodwill and other intangible assets are significant assets on our balance sheet, with an aggregate balance of $128.9 million and $149.5 million, respectively, as of December 31, 2014. We assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified. The annual impairment test requires us to determine the fair value of our reporting units in comparison to their carrying values. A decline in the estimated fair value of a reporting unit or asset group could result in a goodwill impairment, and a related non-cash impairment charge against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit.
As we continue to face challenges within the defense industry and declines in our business in the upcoming year, we could experience unforeseen issues which adversely affect the value of our goodwill or intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  
Future restatement of our financial statements could adversely affect our business.
Restatement of our financial statements could have adverse consequences on our business, financial condition, cash flows and results of operations, including the triggering of an event of default under our senior credit facility and the indentures governing our senior unsecured notes. Restatements could cause our credit rating to be downgraded, which could result in an increase in our borrowing costs and make it more difficult to borrow funds on reasonable terms or at all. In addition, restatements could result in key executives departing and SEC enforcement action.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial position.
When agreeing to contractual terms, we make assumptions and projections about future conditions and events, many of which extend over a period of time. These assumptions and projections assess the cost, productivity and availability of labor, future levels of business base, complexity of the work to be performed, cost and availability of materials, impact of potential delays in performance and timing of product deliveries. Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is subject to many variables. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated performance. Suppliers' assertions are also assessed and considered in estimating costs and profit rates.
Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material impact on the profitability of one or more of the affected contracts and our performance. See Critical Accounting Policies within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
The adoption of the Long-Term Cash Incentive Bonus Plan could substantially increase the cost to acquire the Company or prevent or delay a change in control.
     On December 17, 2013, DynCorp International, LLC approved a long-term cash incentive plan for certain executives, where in the event of a change in control, subject to the executives’ continued employment with DynCorp International, LLC through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of such agreement, the executive shall be eligible to receive a cash incentive bonus.
A change in control, as defined in the long-term cash incentive plan, would occur if a person who is not Cerberus or an affiliate of Cerberus becomes beneficial owner, directly or indirectly, of more than 50% of the combined voting power of issued and outstanding securities of DynCorp International, LLC or if there is a reduction in Cerberus’s beneficial ownership to less than 30% of the combined voting power. There are other conditions that could result in a change in control event such as a sale or transfer or other disposition of all or substantially all of the business and assets of DynCorp International, LLC. The long-term cash incentive bonus plan could increase the cost to acquire the Company and prevent or delay a change in control.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash flow.
We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where

19

the ultimate tax determination is uncertain. Furthermore, changes in applicable domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Deferred tax assets are required to be measured at the statutory tax rate currently in effect, therefore a change in the U.S. corporate tax rate would result in a remeasurement of our net deferred tax asset through the income tax provision. The final determination of any tax audits or related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the results of audits and the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures could impact our tax liabilities and significantly affect our income tax expense, profitability and cash flow.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our debt obligations.
As of December 31, 2014, we are highly leveraged with our total indebtedness of approximately $642.3 million. We had $108.1 million available for borrowing under our revolving credit facility, and the terms of the senior secured credit facilities permit us to increase the amount available under our term loan and/or revolving credit facilities by up to $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes.
Our high degree of leverage could have important consequences including:
•
increasing our vulnerability to adverse economic, industry or competitive developments;
•
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow for other purposes, including for our operations, capital expenditures and future business opportunities;
•
exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest;
•
making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;
•
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes; and
•
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
Our interest expense could increase if interest rates increase above the stated LIBOR floor levels in our senior secured credit facilities because the entire amount of the indebtedness under our senior secured credit facilities bears interest at a variable rate. At December 31, 2014, we had approximately $187.3 million aggregate principal amount of variable rate indebtedness under our senior secured credit facilities. A 100 basis point increase over the LIBOR floor levels would increase our annual interest expense by approximately $1.9 million.  
Despite our high indebtedness level, we and our subsidiaries still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our debt obligations contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
In addition to the $108.1 million which is available to us for borrowing under our revolving credit facility, the terms of our senior secured credit facilities enable us to increase the amount available under our term loan and/or revolving credit facilities by up to an aggregate of $275 million if we are able to obtain loan commitments from banks and satisfy certain other conditions, including our having capacity to incur such indebtedness under the indenture governing our notes. Additionally, we can take on more debt as long as we meet the covenant levels as stated per the indenture and the credit facility. If new debt is added to our and

20

our subsidiaries' existing debt levels, the related risks that we face would increase. In addition, the agreements governing our debt obligations do not prevent us from incurring obligations that do not constitute indebtedness under those agreements.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our debt agreements contain, and the agreements governing any future indebtedness we incur may contain, various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things:
•
incur additional indebtedness or issue certain preferred shares;
•
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
•
make certain investments;
•
sell certain assets;
•
create liens;
•
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
•
enter into certain transactions with our affiliates.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the covenants in our senior secured credit facilities require us to maintain a leverage ratio below the maximum total leverage ratio and interest coverage above a minimum interest coverage ratio, and limit our capital expenditures. A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions under our indenture and, in the case of our revolving credit facility, permit the Agent to cease making loans to us.
Upon the occurrence of an event of default under our senior secured credit facilities that is not waived by the requisite lenders (including a failure to comply with our financial maintenance covenants) the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit, including issuing new letters of credit. This outcome would result in doubt in the Company’s ability to continue as a going concern. If such actions were taken by the lenders under our senior secured credit facilities, it would also cause an event of default under our senior unsecured notes.
If we were unable to repay those amounts, the Agent under our senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit facilities. If the Agent or lenders under the senior secured credit facilities accelerate the repayment of borrowings, the proceeds from the sale or foreclosure upon such assets will first be used to repay debt under our senior secured credit facilities, and we may not have sufficient assets to repay our unsecured indebtedness thereafter, including our notes.

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Repayment of our debt, including the notes, is dependent on cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness, including the notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable DynCorp International Inc. to make payments in respect of its indebtedness, including the notes. Each subsidiary is a distinct legal entity and, under certain

21

circumstances, legal and contractual restrictions may limit our ability to obtain cash from the DynCorp International Inc.'s subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that DynCorp International Inc. does not receive distributions from its subsidiaries, DynCorp International Inc. may be unable to make required principal and interest payments on its indebtedness, including the notes.
We are controlled by Cerberus, who will be able to make important decisions affecting our business.
All of our common stock is indirectly owned by funds and/or managed accounts that are affiliates of Cerberus. As a result, Cerberus is entitled to elect all of our directors, to appoint new management and to approve actions requiring the approval of the holders of our capital stock, including adopting amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets. We have three executives who are Cerberus Operations and Advisory Company, LLC (“COAC”) employees, who are seconded to us: James E. Geisler, our Interim Chief Executive Officer, Gregory S. Nixon, our Senior Vice President, Chief Administrative Officer and Chief Legal Officer, and George C. Krivo, our Senior Vice President of Business Development.
The interests of Cerberus and its affiliates may differ from those of our other investors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Cerberus and its affiliates, as equity holders, may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks. Additionally, our debt agreements permits us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and Cerberus may have an interest in our doing so.
We may compete with, or enter into transactions with, entities in which our controlling stockholder may hold a substantial interest.
Cerberus is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly and indirectly with us. Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to us as well as to Cerberus or its affiliates, including through potential acquisitions of competing businesses. Competition may intensify if an affiliate or subsidiary of Cerberus were to enter into or possibly acquire a business similar to ours. In the event that such a transaction happens, Cerberus is under no obligation to communicate or offer such corporate opportunity to us, even if such opportunity might reasonably have been expected to be of interest to us or our subsidiaries.
We may make future investments, which would include co-investment or joint venture arrangements with our affiliates. We may also enter into business combinations and/or collaborate with and invest in other firms or entities, including Cerberus. You should consider that the interests of Cerberus may differ from yours in material respects.
A decline or reprioritization of funding in the U.S. defense budget or delays in the budget process could adversely affect our operating performance and our ability to generate cash flow to fund our operations.
Our government contracts and sales are highly correlated and dependent upon the U.S. defense budget which is subject to the congressional budget authorization and appropriations process. Defense budgets are a function of several factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, changing national security and defense requirements, geo-political developments and actual fiscal year congressional appropriations for defense budgets. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.
While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends will result in continued demand in our target markets for the types of services we provide. However, U.S. government defense spending levels are difficult to predict. Significant changes in defense spending, changes in U.S. government priorities, policies and requirements, could have a material adverse effect on our results of operations, financial condition or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.


22

ITEM 2. PROPERTIES.
We are headquartered in McLean, Virginia with major administrative offices in Fort Worth, Texas. As of December 31, 2014, we leased approximately 31 commercial facilities in 20 countries used in connection with the various services rendered to our customers. Lease expirations range from month-to-month to over ten years. Upon expiration of our leases, we do not anticipate any difficulty in obtaining renewals or alternative space. Many of our current leases are non-cancelable. We do not own any real property.
The following locations represent our primary leased properties as of December 31, 2014:
Location
Description
Segment
Size (sq ft)

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

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

McLean, VA
Executive offices - Headquarters
Headquarters
79,035

Coppell, TX
Warehouse - Logistics
Headquarters
64,000

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

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

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

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

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

We believe that substantially all of our property and equipment is in good condition, subject to normal use, and that our facilities have sufficient capacity to meet the current and projected needs of our business through calendar year 2015.

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

ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.

PART II

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


23

ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial data for the years ended December 31, 2014, December 31, 2013, December 31, 2012 , December 30, 2011 and for the period from April 1, 2010 (inception) through December 31, 2010 and for the Predecessor's fiscal quarter ended July 2, 2010 and the fiscal year ended April 2, 2010 is presented in the table below.
This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K.

24

 
Delta Tucker Holdings, Inc.
 
 
Predecessor (1)  
 
For the years ended
 
For the period from April 1, 2010 (inception) through December 31, 2010
 
 
For the fiscal quarter ended
 
For the fiscal year ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
December 30, 2011
 
 
 
July 2, 2010
 
April 2, 2010
(Amounts in thousands)
 
 
 
 
 
Results of operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
2,252,309

 
$
3,287,184

 
$
4,044,275

 
$
3,719,152

 
$
1,696,415

 
 
$
944,713

 
$
3,572,459

Cost of services
(2,072,865
)
 
(2,987,253
)
 
(3,698,932
)
 
(3,408,842
)
 
(1,547,919
)
 
 
(856,974
)
 
(3,225,250
)
Selling, general and administrative expenses
(146,881
)
 
(149,925
)
 
(149,362
)
 
(149,551
)
 
(78,024
)
 
 
(38,513
)
 
(106,401
)
Merger expenses incurred by Delta Tucker Holdings, Inc.
—

 
—

 
—

 
—

 
(51,722
)
 
 
—

 
—

Depreciation and amortization
(48,582
)
 
(48,628
)
 
(50,260
)
 
(50,773
)
 
(25,776
)
 
 
(10,263
)
 
(41,639
)
Earnings from equity method investees
10,077

 
4,570

 
825

 
12,800

 
10,337

 
 
—

 
—

Impairment of equity method investment (2)
—

 
—

 
—

 
(76,647
)
 
—

 
 
—

 
—

Impairment of goodwill, intangibles and long lived assets (3)
(214,004
)
 
(312,728
)
 
(50,663
)
 
(33,768
)
 
—

 
 
—

 
—

Operating (loss) income
(219,946
)
 
(206,780
)
 
95,883

 
12,371

 
3,311

 
 
38,963

 
199,169

Interest expense
(70,783
)
 
(78,826
)
 
(86,272
)
 
(91,752
)
 
(46,845
)
 
 
(12,585
)
 
(55,650
)
Bridge commitment fee incurred by Delta Tucker Holdings, Inc.
—

 
—

 
—

 
—

 
(7,963
)
 
 
—

 
—

Loss on early extinguishment of debt, net
(1,362
)
 
(703
)
 
(2,094
)
 
(7,267
)
 
—

 
 
—

 
(146
)
Interest income
221

 
157

 
117

 
205

 
420

 
 
51

 
542

Other income (expense), net
3,680

 
(810
)
 
4,672

 
6,071

 
1,872

 
 
658

 
5,194

Benefit (Provision) for income taxes
20,570

 
37,461

 
(15,598
)
 
20,941

 
9,690

 
 
(9,279
)
 
(47,035
)
Net (loss) income
(267,620
)
 
(249,501
)
 
(3,292
)
 
(59,431
)
 
(39,515
)
 
 
17,808

 
102,074

Noncontrolling interests
(2,160
)
 
(4,235
)
 
(5,645
)
 
(2,625
)
 
(1,361
)
 
 
(5,004
)
 
(24,631
)
Net (loss) income attributable to Delta Tucker Holdings, Inc./Predecessor
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
 
$
(62,056
)
 
$
(40,876
)
 
 
$
12,804

 
$
77,443

Cash flow data:
 
 
 
 
 
 
 
 
 

 
 
 

 
 

Net cash provided by (used in) operating activities
25,377

 
137,502

 
$
144,190

 
$
167,986

 
$
(27,089
)
 
 
$
21,723

 
$
90,473

Net cash (used in) provided by investing activities
(4,674
)
 
(7,971
)
 
(12,163
)
 
(3,003
)
 
(878,218
)
 
 
(2,874
)
 
(88,875
)
Net cash (used in) provided by financing activities
(97,544
)
 
(77,461
)
 
(83,457
)
 
(147,315
)
 
957,844

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

 
 
 

 
 

Cash and cash equivalents
94,004

 
170,845

 
118,775

 
70,205

 
52,537

 
 
135,849

 
122,433

Total assets
982,487

 
1,499,921

 
1,970,716

 
2,014,421

 
2,263,355

 
 
1,785,899

 
1,780,894

Total debt
642,272

 
732,272

 
782,909

 
872,909

 
1,024,212

 
 
552,209

 
552,147

Total (deficit) equity attributable to Delta Tucker Holdings, Inc. / Predecessor
(82,766
)
 
183,785

 
437,542

 
447,966

 
509,758

 
 
591,417

 
577,702

Total (deficit) equity
(77,277
)
 
189,660

 
445,754

 
453,152

 
514,109

 
 
596,359

 
583,524

Other financial data:
 
 
 
 
 
 
 
 
 

 
 
 

 
 

Purchases of property and equipment and software (4)
10,343

 
10,346

 
8,118

 
4,887

 
8,323

 
 
2,874

 
46,046

Backlog (5)
3,331,000

 
3,980,000

 
5,278,000

 
5,745,000

 
4,782,000

 
 
5,171,000

 
5,571,000


25

(1)
DynCorp International’s fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each year. DynCorp International’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 ("fiscal year 2010"). The three month period, prior to the merger on July 7, 2010, ended July 2, 2010 and is referred to as the "fiscal quarter ended July 2, 2010". We refer to these fiscal periods of DynCorp International that ended prior to the merger as those of the "Predecessor."
(2)
The Company recorded an impairment of our investment in GLS during the year ended December 30, 2011 in the amount of $76.6 million as a result of a loss in carrying value that was other than temporary.
(3)
The Company recorded impairment charges of $214.0 million, $312.7 million, $50.7 million and $33.8 million for the years ended December 31, 2014, December 31, 2013, December 31, 2012 and December 30, 2011 respectively. Of the $214.0 million recorded in 2014, $141.5 million was related to goodwill, $1.0 million related to helicopters and $0.2 million related to software. Of the $312.7 million recorded in 2013, $310.3 million was related to goodwill and $2.4 million was related to helicopters. The Company also recorded an impairment charge of $6.1 million for the year ended December 31, 2012 to reduce the value of certain intangibles related to our DynLogistics segment. See Note 3 to Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
(4)
The fiscal year ended April 2, 2010 includes approximately $39.7 million of costs associated with helicopters purchased in anticipation of use under our INL Air Wing program.
(5)
Backlog data is as of the end of the applicable period. See "Business" for further details concerning backlog.

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

Company Overview
We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951. Our current customers include the U.S. Department of Defense ("DoD"), the Department of State ("DoS"), U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies.
Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations prior to the merger on July 7, 2010, except for the costs associated with acquiring DynCorp International. Delta Tucker Holdings, Inc. remains the holding company of DynCorp International. DynCorp International wholly owns DynCorp International, LLC, which functions as the operating company.
In August 2014, we amended our operating structure by realigning our DynGlobal segment to a business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue international and commercial business. As a result, DynGlobal resources were redeployed into business development efforts for our two remaining operating and reporting segments: DynAviation and DynLogistics, to identify the highest priority opportunities of the Company, and work to capture those opportunities for operational execution by the two remaining segments. The DynAviation and DynLogistics segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations (“FAR”), Cost Accounting Standards (“CAS”) and audits by various U.S. federal agencies.
As of December 31, 2014, we employed or managed approximately 13,700 personnel, including approximately 7,800 personnel from our affiliates. We operate in approximately 36 countries through approximately 79 active contracts and 118 active task orders.

Current Operating Environment and Outlook
External Factors
After over a decade of unprecedented defense spending to support operations in Iraq and Afghanistan, our industry continues to adapt to a period of reduced funding and budget uncertainty brought about by the convergence of a variety of policy, political and fiscal realities. These budgetary challenges and policy decisions have not occurred in a geopolitical vacuum; instability and on-going and potential conflicts around the globe are driving adjustments to U.S. national security and foreign policy objectives, as well as the funding levels and mechanisms to support necessary policy shifts. External factors influencing the industry include:
•
Adhering to discretionary spending caps mandated by the Budget Control Act of 2011 ("BCA");

26

•
The ongoing draw-down of U.S. troops in Afghanistan; and
•
Increased instability and challenges to the existing international framework.
While the BCA-mandated spending caps and related sequestration remains in effect, enactment of the Bipartisan Budget Act of 2013 ("BBA") in December 2013 adjusted the caps upward for fiscal years 2014 and 2015. The BBA ensures there will be no sequestration in fiscal year 2015, and while Congress exercised its prerogative to alter and prioritize the President’s budget requests, the topline numbers were well defined and adhered to by the President and Congress. It is important to note, the BBA does not impact or resolve the caps mandated by the BCA in 2016 and beyond.
Specifically, the fiscal year 2015 enacted budget for the Department of Defense ("DoD") is $560.0 billion. The enacted allocations consist of $496.0 billion for the base budget, which is essentially consistent with fiscal year 2014, and $64.0 billion for Overseas Contingency Operations ("OCO") request, which represents a 25% decrease from FY14.
The fiscal year 2015 enacted base budget for Operations and Maintenance ("O&M") accounts for a total of $195.0 billion, with all services noting an increase in O&M funding. We believe the continued focus on O&M activities reflects DoD’s ongoing effort to recapture lost readiness and returning the force to the highest possible levels of preparedness. With regard to fiscal year 2015 OCO O&M, the enacted budget is $51 billion, for a total O&M budget of $246 billion.
As stated above, the reduction in the President’s OCO request was anticipated by us based on the drawdown of troops in Afghanistan. Specifically, the fiscal year 2015 OCO reflects the Administration’s plans to shrink U.S. troops from 37,000 in 2014 to an average of 11,700 in 2015, with a goal of 9,800 by the end of 2015.
However, because of the continued operations in Afghanistan, the increasing intensity of Operation Inherent Resolve in Iraq and Syria, as well as the deployment of U.S. troops to West Africa in response to the Ebola crisis, we believe the Administration has shown that it is willing to use OCO funds for varied missions from airstrikes to disease control, and long-term capacity building of regional security forces.
The fiscal year 2015 OCO budget reflects how the external drivers of the Afghanistan troop drawdown and increased global instability are influencing U.S. national security and national security objectives, as well as the allocation of limited resources to support shifts in policy and priorities. Consequently, senior analysts are predicting that the OCO budget will continue to be robust into the future.
The U.S. and its allies are confronted with a complex, challenging and often violent world. Whether it is on our own Southwest border, Afghanistan, Iraq and Syria, Ukraine, the South China Sea, Africa or any number of other locations, U.S. leadership is still required. This leadership includes assisting in the development of and equipping of allied security forces and related civil institutions to bolster international stability and security.
While potential challenges exist that could adversely impact our business on a short-term basis, we believe the following longer-term industry trends demonstrate the continued demand for the types of services we provide:
•
Realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life cycle;
•
Asset management of equipment ranging from organizational to depot-level maintenance;
•
Requirement to maintain, overhaul and upgrade for returning rolling stocks and aging platforms;
•
Sustain and support forward-deployed rotational troops and equipment;
•
Growth in outsourcing by foreign allies of maintenance, supply-support, facilities management, infrastructure upgrades, and construction management-related services;
•
Continued focus on smart power initiatives by the DoS, USAID, the United Nations ("UN"), and the DoD, including development and smaller-scale stability operations; and
•
Further efforts by the U.S. government to move from single-award to multiple-award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees.
With regard to the greater Middle East, we expect instability and challenges to our regional relationships will persist. However, as acknowledged in the OCO request, U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and our allies. We believe that base operations and support and maintenance capacity will be key enablers in this environment and we are especially well positioned to provide these services to both U.S. forces and allied nations.

27

Current Business Environment
Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. We also have a strong history of being awarded a majority of the contract options. Additionally, since our primary customer is the U.S. federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements that could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. government contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity, affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. If the DCAA cannot complete timely periodic reviews of our control systems, they could render the status of these systems as "non-current" resulting in an adverse outcome.
We cannot be certain that the economic environment or other factors will not continue to adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections and the Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all. See "Item 1A - Risk Factors - Economic conditions could impact our business" for a discussion of the risks associated with current economic conditions.

Notable events for the year ended December 31, 2014 and to date
•
In January 2014, DynLogistics announced the award of a subcontract to provide training assistance in support of the Afghan Engineer Training Security Assistance Team. DynCorp will perform as a subcontractor to GovSource, Inc., a provider of professional and training services to the U.S. Government, on the U.S. Army Security Assistance Training Management Organization ("USASATMO") task order under the SATMO indefinite delivery, indefinite quantity contract. The firm fixed-price subcontract has a one year period of performance and a total value of $4.0 million.
•
In January 2014, DynLogistics announced the award of a new task order under the Air Force Contract Augmentation Program III ("AFCAP") to provide engineering design and support services in the United Arab Emirates ("UAE"). The competitively-awarded task order has a one-year base period with two, one-year options and a total contract value of $4.4 million, if all options are exercised.
•
In February 2014, DynLogistics announced the award of a contract by the Naval Facilities Engineering Command-Pacific ("NAVFAC Pacific") to provide operations support services in Cambodia. The contract has a one-year base period with four, one-year options for a total contract value of $8.5 million, if all options are exercised.
•
In March 2014, DynAviation announced the award of a contract to provide aviation maintenance services throughout the Theater Aviation Sustainment Manager - OCONUS ("TASM-O") region under the Army Aviation Field Maintenance ("AFM") contract. The hybrid firm fixed price, cost-plus incentive fee contract has a one year base with four, one year options and a total potential contract value of $307.1 million.
•
In March 2014, we made a principal prepayment of $15.0 million on our Term Loan. This payment caused the acceleration of unamortized deferred financing fees of $0.2 million, which was recorded as a Loss on extinguishment of debt within our Statement of Operations.
•
In April 2014, DynAviation announced the award of a task order under the Contract Field Teams ("CFT") contract to provide aviation maintenance support to the 512th Airlift Wing at Dover Air Force Base. The task order has a one year base and one, one-year option and a potential total value of $8.5 million.
•
In April 2014, the Company announced that DynAviation was awarded a task order under the Logistics Worldwide multiple award contract from the General Services Administration to provide engineering support services. The competitively-awarded task order has one base year with four, one-year options, and a total potential value of $5.0 million.
•
In June 2014, we made a principal prepayment of $45.0 million, on our Term Loan. This payment caused the acceleration of unamortized deferred financing fees of $0.4 million, which was recorded as a Loss on extinguishment of debt within our Statement of Operations.
•
In September 2014, the Company was selected to bid for task orders under a U.S. Intelligence and Security Command ("INSCOM") contract to provide global intelligence support services. The contract is a five-year, IDIQ vehicle with a potential total value of $5.0 billion.

28

•
In September 2014, we made a principal prepayment of $30.0 million on our Term Loan. This payment caused the acceleration of unamortized deferred financing fees of $0.2 million, which was recorded as a Loss on extinguishment of debt within our Statement of Operations.
•
In October 2014, DynLogistics announced the award of a contract modification on its War Reserve Materiel contract to provide asset management services. The contract modification is valued at $76.4 million. The award is the sixth option year exercised out of eight initially awarded in 2008, with a total contract value of $540.7 million if all options are exercised.
•
In October 2014, DynAviation announced the award of a contract modification on its aircraft maintenance support program to provide aircraft maintenance services at Sheppard Air Force Base, Texas. The award is the fifth option year on a contract initially awarded in 2009, with the modification valued at $42.5 million.
•
In October 2014, DynAviation announced the award of the Contractor Logistics Support contract ("CLS") to provide maintenance and logistics support to the United States Navy T-34, T-44, and T-6 aircraft programs. The contract has a one year base period with four, one-year options with a total potential contract value of $443.3 million.
•
On November 5, 2014, we entered into a fourth amendment and waiver (the "Fourth Amendment") to the Senior Credit Facility. See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
•
In December 2014, DynAviation was awarded a subcontract to Lockheed Martin to support the United States Air Force Future Flexible Acquisition and Sustainment Tool ("F2AST") contract. The award has a ten-month phase-in and base period of performance plus two additional option years and a total potential contract value of $73 million.
•
In January 2015, DynLogistics announced the award of a contract from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Interior. The contract has a nine-month base period with two, three-month options and a total potential contract value of $52.1 million.
•
In January 2015, DynLogistics announced the award of a contract from the United States Army Contracting Command to provide advisory, training and mentoring services to the Afghanistan Ministry of Defense. The contract has a nine-month base period with two, three-month options and a total potential contract value of $48.6 million.
•
In January 2015, DynAviation announced the award of a task order on a contract from the Naval Air Systems Command to provide aircraft maintenance and logistics support for aircraft assigned to the Naval Strike and Air Warfare Center. The task order has a one-year period of performance and is valued up to $44.5 million. The contract vehicle has a five-year period of performance, cumulatively, with a total potential value of $93.3 million.
•
In January 2015, DynLogistics was awarded a contract from the U.S. Department of State to provide life support services on the Afghanistan Life Support Services ("ALiSS") contract. DI is one of two awardees on the IDIQ contract which has one base year with four, one-year options with a total potential contract value of $540 million.
•
In February 2015, DynAviation announced the award of a contract extension from the California Department of Forestry and Fire Protection ("CAL FIRE") to continue support of its aviation program to help suppress and control wildfires. The contract has a one-year period of performance with a total potential value of $27.8 million.
•
In February 2015, DynAviation was awarded a contract from the United States Army to provide integrated maintenance support services for the Saudi Arabian National Guard ("SANG") Aviation Brigade. The contract has a three-year base period, with two one-year options and a total potential contract value of $127.2 million.
•
In March 2015, DynAviation announced the award of a contract modification to provide aviation maintenance services throughout the TASM-O region under the Army AFM contract. The contract modification has a one-year period of performance for a total value of $56.0 million.

Results of Operations
The results of operations presented are for the years ended December 31, 2014, December 31, 2013, and December 31, 2012.

Delta Tucker Holdings, Inc. Results of Operations for the years ended December 31, 2014, December 31, 2013, and December 31, 2012
The following table sets forth our consolidated statements of operations, both in dollars and as a percentage of revenue, for the years ended December 31, 2014, December 31, 2013, and December 31, 2012:

29

 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
Revenue
$
2,252,309

 
100.0
 %
 
$
3,287,184

 
100.0
 %
 
$
4,044,275

 
100.0
 %
Cost of services
(2,072,865
)
 
(92.0
)%
 
(2,987,253
)
 
(90.9
)%
 
(3,698,932
)
 
(91.5
)%
Selling, general and administrative expenses
(146,881
)
 
(6.5
)%
 
(149,925
)
 
(4.6
)%
 
(149,362
)
 
(3.7
)%
Depreciation and amortization expense
(48,582
)
 
(2.2
)%
 
(48,628
)
 
(1.5
)%
 
(50,260
)
 
(1.2
)%
Earnings from equity method investees
10,077

 
0.4
 %
 
4,570

 
0.1
 %
 
825

 
0.1
 %
Impairment of goodwill, intangibles and long lived assets
(214,004
)
 
(9.5
)%
 
(312,728
)
 
(9.5
)%
 
(50,663
)
 
(1.3
)%
Operating (loss) income
(219,946
)
 
(9.8
)%
 
(206,780
)
 
(6.3
)%
 
95,883

 
2.4
 %
Interest expense
(70,783
)
 
(3.1
)%
 
(78,826
)
 
(2.4
)%
 
(86,272
)
 
(2.1
)%
Loss on early extinguishment of debt
(1,362
)
 
(0.1
)%
 
(703
)
 
—
 %
 
(2,094
)
 
(0.1
)%
Interest income
221

 
—
 %
 
157

 
—
 %
 
117

 
—
 %
Other income (expense), net
3,680

 
0.2
 %
 
(810
)
 
—
 %
 
4,672

 
0.1
 %
(Loss) income before income taxes
(288,190
)
 
(12.8
)%
 
(286,962
)
 
(8.7
)%
 
12,306

 
0.3
 %
Benefit (provision) for income taxes
20,570

 
0.9
 %
 
37,461

 
1.1
 %
 
(15,598
)
 
(0.4
)%
Net loss
(267,620
)
 
(11.9
)%
 
(249,501
)
 
(7.6
)%
 
(3,292
)
 
(0.1
)%
Noncontrolling interests
(2,160
)
 
(0.1
)%
 
(4,235
)
 
(0.1
)%
 
(5,645
)
 
(0.1
)%
Net loss attributable to Delta Tucker Holdings, Inc.
$
(269,780
)
 
(12.0
)%
 
$
(253,736
)
 
(7.7
)%
 
$
(8,937
)
 
(0.2
)%
Results of Operations 2014 vs 2013
Revenue — Revenue for the year ended December 31, 2014 was $2,252.3 million, a decrease of $1,034.9 million, or 31.5%, compared to the year ended December 31, 2013. The decrease was primarily driven by the accelerated pace of the drawdown in Afghanistan, which impacted the demand for services under our LOGCAP IV contract and caused reduced training needs under the AMDP and CSTC-A contract; reduced service needs in Iraq for DoS, affecting the INL Air Wing contract as well as the completion of the Worldwide Protective Services ("WPS") contract, and delays in new business awards. See further discussion of our revenue results in the "Results by Segment" section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2014 was $2,072.9 million, a decrease of $914.4 million, or 30.6%, compared to the year ended December 31, 2013. The decrease in Cost of services was primarily driven by a reduction in demand for services, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services was consistent for the years ended December 31, 2014 and December 31, 2013.
Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $3.0 million, or 2.0%, to $146.9 million during the year ended December 31, 2014 primarily as a result of our continued cost reduction initiatives, partially offset by the costs association with executing these initiatives. SG&A as a percentage of revenue was 6.5% for the year ended December 31, 2014 compared to 4.6% for the year ended December 31, 2013 as a result of the decline in revenue out pacing general and administrative reductions.
Depreciation and amortization — Depreciation and amortization during the year ended December 31, 2014 was $48.6 million, which remained consistent compared to the year ended December 31, 2013.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC ("PaTH"), Contingency Response Services LLC ("CRS"), Global Response Services LLC ("GRS") and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2014 was $10.1 million, an increase of $5.5 million compared to the year ended December 31, 2013. The increase was primarily as a result of equity method income recognized upon the receipt of a $9.6 million distribution from GLS related to the finalization of Form 1s in February 2014 allowing GLS to submit previous invoices for recovery.
Impairment of goodwill, intangibles and long lived assets — Impairment for the years ended December 31, 2014 and December 31, 2013 was $214.0 million and $312.7 million, respectively primarily due to the $164.9 million impairment of goodwill, $33.4 million impairment of customer-relationship intangibles and $14.5 million impairment of indefinite-lived tradename. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

30

Interest expense — Interest expense for the year ended December 31, 2014 was $70.8 million, a decrease of $8.0 million, or 10.2%, compared to the year ended December 31, 2013. The decrease is the result of the continual reduction of the principal balance of our Term Loan as a result of principal prepayments of $90.0 million during the year ended December 31, 2014 and $50.0 million during the year ended December 31, 2013.
Loss on early extinguishment of debt — Loss on early extinguishment of debt of $1.4 million and $0.7 million for the years ended December 31, 2014 and December 31, 2013, respectively, was attributable to principal prepayments on our Term Loan totaling $90.0 million and $50.0 million, respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.
Other income (expense), net — Other income (expense) for the year ended December 31, 2014 was $3.7 million, an increase of $4.5 million compared to the year ended December 31, 2013, primarily as a result of income recognized upon the sale of a helicopter as well as earnings recognized from Babcock DynCorp Limited ("Babcock") and gains/losses from foreign currency and asset sales.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discrete items. The effective tax rate for the year ended December 31, 2014 was 7.1%, as compared to 13.1% for the year ended December 31, 2013. The effective tax rate for the year ended December 31, 2014 was driven primarily by the impact of the goodwill impairment and our valuation allowance taken during the year ended December 31, 2014. See Note 4 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of income taxes.
Results of Operations 2013 vs 2012
Revenue — Revenue for the year ended December 31, 2013 was $3,287.2 million, a decrease of $757.1 million, or 18.7%, compared to the year ended December 31, 2012. The decrease was primarily driven by reduced service needs in Iraq for the DoS, affecting both the INL Air Wing and WPS contracts; the accelerated pace of the drawdown in Afghanistan, which impacted the demand for services under the Company's LOGCAP IV contract and caused reduced training needs under the AMDP contract; fewer new contract wins and the delay in business awards caused by the U.S. budget uncertainty and sequestration. See further discussion of our revenue results in the "Results by Segment" section below.
Cost of services — Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2013 was $2,987.3 million, a decrease of $711.7 million, or 19.2%, compared to the year ended December 31, 2012. The decrease in Cost of services was primarily driven by the reduction in volume, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services was 90.9% compared to 91.5% for the year ended December 31, 2013 and December 31, 2012, respectively. The reduction in Cost of services as a percentage of revenue was driven by the LOGCAP IV and AMDP contracts which generally carry lower margins and was partially offset by a customer contract dispute within our DynAviation segment. See further discussion of the impact of program margins in the "Results by Segment" section below.
Selling, general and administrative expenses — SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A increased by $0.6 million, or 0.4%, to $149.9 million during the year ended December 31, 2013 primarily as a result of relocation expenses associated with the change of our facilities footprint in Virginia to better position the Company operationally and our executive presence in our Texas facilities coupled with the increase in severance expense. The increase in the SG&A expense was offset by (i) reductions in legal fees associated with ongoing litigation, (ii) the decrease in costs incurred for contract labor and (iii) the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The items discussed above drove an increase in SG&A as a percentage of revenue to 4.6% for the year ended December 31, 2013 compared to 3.7% for the year ended December 31, 2012.
Depreciation and amortization — Depreciation and amortization during the year ended December 31, 2013 was $48.6 million, a decrease of $1.6 million, or 3.2%, compared to the year ended December 31, 2012. The decrease was primarily the result of certain internally developed software becoming fully amortized and the impairment of certain intangible assets during the fourth quarter of the year ended December 31, 2012 partially offset by additional depreciation expense on fixed assets, including those acquired in conjunction with the acquisition of Heliworks, Inc. during the third quarter of the year ended December 31, 2012.
Earnings from equity method investees — Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as PaTH, CRS, GRS and GLS. Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2013 was $4.6 million, an increase of $3.7 million compared to the year ended December 31, 2012. The increase was primarily the result of equity method income recognized upon the receipt of $3.1 million in dividend distributions from GLS during the year ended December 31, 2013. Because of the impairment of our investment in GLS recorded during the year ended December 30, 2011, earnings related to GLS is recognized when cash is received through dividend distributions.

31

Impairment of goodwill, intangibles and long lived assets — Impairment for the years ended December 31, 2013 and December 31, 2012 was $312.7 million and $50.7 million, respectively and was mainly attributable to goodwill. During the year ended December 31, 2013 we recognized non-cash impairment charges on reporting units associated with our DynAviation and DynLogistics segment. During the year ended December 31, 2012, we recognized non-cash impairment charges on goodwill associated with our DynLogistics segment. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
Interest expense — Interest expense for the year ended December 31, 2013 was $78.8 million, a decrease of $7.4 million, or 8.6%, compared to the year ended December 31, 2012. The decrease is the result of the continual reduction of the principal balance of our Term Loan as a result of principal prepayments of $50.0 million during the year ended December 31, 2013 and $90.0 million during the year ended December 31, 2012.
Loss on early extinguishment of debt — Loss on early extinguishment of debt of $0.7 million and $2.1 million for the years ended December 31, 2013 and December 31, 2012, respectively, was attributable to principal prepayments on our Term Loan totaling $50.0 million and $90.0 million, respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt.
Other (expense) income, net — Other (expense) income, net consists primarily of our share of earnings from Babcock, as well as gains/losses from foreign currency and asset sales. The $5.5 million year-over-year decrease was primarily the result of a reduction in earnings from Babcock our unconsolidated joint venture of approximately $4.8M during the year ended December 31, 2013.
Income taxes — Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discrete items. The effective tax rate for the year ended December 31, 2013 was 13.1%, as compared to 126.75% for the year ended December 31, 2012. The effective tax rate for the year ended December 31, 2013 was driven primarily by the impact of the goodwill impairment as it relates to the pretax book loss compared to pretax book income in the prior year. See Note 4 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of income taxes.




32

Results by Segment
The following tables set forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the years ended December 31, 2014, December 31, 2013, and December 31, 2012. See Note 11 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
 
 
(Amounts in thousands)
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
 
Revenue
 
% of Total Revenue
DynAviation (1)
$
1,204,417

 
53.5
 %
 
$
1,373,635

 
41.8
 %
 
$
1,338,514

 
33.1
 %
DynLogistics (1)
1,045,200

 
46.4
 %
 
1,920,715

 
58.4
 %
 
2,709,469

 
67.0
 %
Headquarters / Other (2)
2,692

 
0.1
 %
 
(7,166
)
 
(0.2
)%
 
(3,708
)
 
(0.1
)%
Consolidated revenue
$
2,252,309

 
100.0
 %
 
$
3,287,184

 
100.0
 %
 
$
4,044,275

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Loss
 
Loss
Margin
 
Operating Income (Loss)
 
Profit (Loss) Margin
 
Operating Income (Loss)
 
Profit
Margin
DynAviation (1)
$
(61,501
)
 
(5.1
)%
 
$
(194,701
)
 
(14.2
)%
 
$
105,327

 
7.9
 %
DynLogistics (1)
(67,097
)
 
(6.4
)%
 
36,243

 
1.9
 %
 
48,941

 
1.8
 %
Headquarters / Other (3)
(91,348
)
 
 
 
(48,322
)
 
 
 
(58,385
)
 
 
Consolidated operating (loss) / income
$
(219,946
)
 
 
 
$
(206,780
)
 
 
 
$
95,883

 
 
(1)
DynGlobal revenue and operating loss for the years ended December 31, 2014 and December 31, 2013 is included within DynAviation and DynLogistics due to the amended organizational structure. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our organizational structure.
(2)
Represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(3)
Headquarters operating loss primarily relates to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income.
Results by Segment 2014 vs 2013
DynAviation
Revenue of $1,204.4 million decreased $169.2 million, or 12.3%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The change was primarily as a result of the decrease in demand resulting from the de-scoping of the INL-Air Wing program in Iraq in addition to a reduction in volume of certain task orders under the CFT and CNTPO programs, and the completion of the G222 and Columbus Support Division contracts. The decrease in revenue was partially offset by the MAISR program. Challenges to future revenue growth as a result of an increasingly competitive environment and delays in the government procurement environment could result in continued declines within the DynAviation segment.
Operating loss of $61.5 million for the year ended December 31, 2014 compared to the operating loss of $194.7 million for the year ended December 31, 2013 was primarily as a result of the goodwill impairment charge of $74.1 million on our goodwill associated with our Aviation and Air Wing reporting units, decrease in revenue discussed above, additional contract loss recorded during the third quarter of 2014 on a U.S. Air Force contract as we continue to see delays in resolving the contract dispute, and a change in contract mix on the TASM task order, moving under the AFM contract vehicle. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the impairment. Operating loss as a percentage of revenue decreased to 5.1% for the year ended December 31, 2014 as compared to 14.2% for the year ended December 31, 2013.
In January 2015, the DoS issued a letter notifying us that our proposal on the recompete related to the INL Air Wing program was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS' evaluation. We filed a protest with the U.S. Government Accountability Office (the "GAO") to challenge the decision by the DoS. In response to our protest, the DoS notified the GAO that is will take corrective action which will include a reconsideration of its evaluations of the recompete proposals, and a determination of whether discussions are necessary and, if so, it will make a new competitive range decision. The evaluation process is still underway and DoS has yet to award any part of the contract recompete. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.


33

DynLogistics
Revenue of $1,045.2 million decreased $875.5 million, or 45.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 primarily as a result of reductions in manning, materials and other direct costs under the AOR task order under the LOGCAP IV program. We are currently in negotiations with the LOGCAP IV customer to finalize our fee related to undefinitized work performed on LOGCAP IV. We are working with our customer to complete the contract actions that will allow us to bill and collect our receivables. If we cannot reach an agreement with the customer, we believe we have other avenues to pursue resolution, including the claims process. Additionally, revenue was impacted by de-scoping on the AMDP and CSTC-A contracts, lower volume on the CivPol task orders, as well as, the completion of the WPS program in Iraq. This decline was partially offset by revenue from programs including AFRICAP, the WRM II program, and the new task order for the Criminal Justice Program Support ("CJPS") in Haiti. As efforts in Afghanistan continue to decline and with the continued pressure on U.S. defense budgets, we expect our revenue for the DynLogistics segment to continue to decline in 2015.
Operating loss for the year ended December 31, 2014 was $67.1 million compared to operating income for the year ended December 31, 2013 of $36.2 million primarily due to the impairment charge of $90.7 million on our goodwill associated with our LSS reporting unit and declines in revenue as discussed above. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K further discussion of these impairments.
Results by Segment 2013 vs 2012
DynAviation
Revenue of $1,373.6 million increased $35.1 million, or 2.6%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The change was primarily the result of operations under new programs, including the National Aeronautics and Space Administration ("NASA") AMOS and T-6 COMBS contracts, as well as operations under new task orders awarded under the CFT program, including the 160th SOAR-A task order. Additionally, an increase in manning levels under the Theater Aviation Sustainment Management - Europe ("TASM-E") CFT task order, as well as increased demand under our Saudi Arabia programs contributed to the overall increase in revenue. These increases were partially offset by the reduction in demand under the INL-Air Wing program in Iraq and the decrease in volume as well as the cancellation or completion of certain other contracts.
Operating loss of $194.7 million for the year ended December 31, 2013 compared to the operating income of $105.3 million for the year ended December 31, 2012 was primarily the result of the impact of a goodwill impairment charge to the Air Operations reporting unit for the year ended December 31, 2013 as a result of declines in projected revenues for future years. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the impairment. Additionally, we incurred cost to expand Heliworks, Inc. and recorded an unfavorable adjustment related to a customer contract dispute. Operating loss as a percentage of revenue decreased to 14.2% for the year ended December 31, 2013 as compared to 7.9% for the year ended December 31, 2012.
DynLogistics
Revenue of $1,920.7 million decreased $788.8 million, or 29.1%, for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of reductions in manning, materials and other direct costs under the Afghan Area of Responsibility ("AOR") task order under the LOGCAP IV program consistent with our expectation of reduced volume resulting from the continued drawdown of troops in Afghanistan. Additionally, revenue for the year ended December 31, 2013 was impacted by lower volume under the AMDP contract, the completion of the CivPol task order in Iraq, a reduction in the level of effort on our Navistar and Oshkosh Defense programs and the wind down of the Worldwide Protective Services ("WPS") task order in Iraq. The decline in revenue was partially offset by revenue from new programs including the Egyptian Personnel Support Services (“EPSS”) program, the Medium Tactical Vehicles ("MTV") program, the Evergreen program and the new task order for the Criminal Justice Program Support ("CJPS") in Haiti.
Operating income of $36.2 million decreased $12.7 million, or 25.9%, for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of the decline in revenue discussed above. The decline in operating income was partially offset by an increase in vehicle deliveries under the Palestinian Security Sector task order under the CivPol contract coupled with operations under the EPSS contract performing at higher margins than the overall contract mix in the prior year. Operating income was impacted in both comparable periods by goodwill impairments recorded for the Intelligence & Security and the Training & Mentoring reporting units, respectively. See Note 3 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of these impairments.

LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations and borrowings available under our Senior Secured Credit Facility ("Senior Credit Facility") are our primary sources of short-term liquidity (refer to Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements

34

included elsewhere in this Annual Report on Form 10-K for more detail). We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable and access to our Revolver is dependent upon our meeting financial and non-financial covenants. At different periods throughout 2014, we have seen delays and other disruptions in the ability of our customers to make timely payments on our accounts receivable. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections, significant future losses on any of our contracts or loss of our ability to access our Revolver, could materially impact liquidity and our ability to fund our working capital needs. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility or other remedies by our Agent, such as the acceleration of our debt, which would materially affect our future expansion strategies and our ability to meet our operational obligations. See further discussion of our covenants in the Financing section below.
Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services and subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that we will be able to refinance our Senior Credit Facility at terms acceptable to us prior to its maturity in 2016. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash.
Management believes Days Sales Outstanding ("DSO") is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. As of December 31, 2014 and December 31, 2013, DSO was 80 days compared to 69 days, primarily due to decline in revenue as well as timing of payment cycles relative to our year end by certain customers, including one prime contractor which has yet to pay the Company a portion of the receivable on a recently ended contract as well as fee receivable on undefinitized work related to our LOGCAP IV contract.
We will continue to focus on working capital management and growth in our business as we approach the maturity of our Senior Credit Facility on July 7, 2016. We expect cash to continue to be impacted by operational working capital needs, potential acquisitions and interest payments on the Senior Credit Facility and the Senior Unsecured Notes. Interest payments on the Senior Credit Facility are expected to be lower during calendar year 2015 as a result of the $90.0 million and $50.0 million in principal prepayments made during the years ended December 31, 2014 and December 31, 2013, respectively.

Cash Flow Analysis
The following table sets forth cash flow data for the periods indicated therein:
 
For the years ended
(Amounts in thousands)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Net cash provided by operating activities
$
25,377

 
$
137,502

 
$
144,190

Net cash used in investing activities
(4,674
)
 
(7,971
)
 
(12,163
)
Net cash used in financing activities
(97,544
)
 
(77,461
)
 
(83,457
)
Cash Flows - December 31, 2014 vs December 31, 2013
Operating Activities
Cash provided by operating activities during the year ended December 31, 2014 was $25.4 million as compared to cash provided by operating activities of $137.5 million during the year ended December 31, 2013. Cash provided by operations for the year ended December 31, 2014 was impacted by our net loss position excluding the impact of impairments, our change in working capital and by dividends received from equity method investees. Cash provided by operations for the year ended December 31, 2013 was the result of positive earnings before interest, taxes and depreciation & amortization ("EBITDA"), excluding the impact of impairment, coupled with working capital improvements resulting from the collection of accounts receivable partially offset by the utilization of prepaid expenses and cash expended to reduce accounts payable.
 Investing Activities    
Cash used in investing activities during the year ended December 31, 2014 was $4.7 million as compared to cash used in investing activities during the year ended December 31, 2013 of $8.0 million. Cash used in investing activities during the year

35

ended December 31, 2014 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock joint venture. Cash used in investing activities during the year ended December 31, 2013 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock and CRS joint ventures.

36

Financing Activities
Cash used in financing activities during the year ended December 31, 2014 was $97.5 million compared to $77.5 million of cash used in financing activities during the year ended December 31, 2013. Cash used in financing activities during the year ended December 31, 2014 was primarily the result the $90.0 million prepayment on the Term Loan as well as payments related to financed insurance. Cash used in financing activities during the year ended December 31, 2013 was primarily the result of payments related to financed insurance and a $50.0 million prepayment on the Term Loan.
Cash Flows - December 31, 2013 vs December 31, 2012
Operating Activities
Cash provided by operating activities during the year ended December 31, 2013 was $137.5 million as compared to cash provided by operating activities of $144.2 million during the year ended December 31, 2012. Cash provided by operations for the year ended December 31, 2013 was the result of positive earnings before interest, taxes and depreciation & amortization ("EBITDA"), excluding the impact of the impairment, coupled with working capital improvements resulting from the collection of accounts receivable partially offset by the utilization of prepaid expenses and cash expended to reduce accounts payable. Cash provided by operating activities during the year ended December 31, 2012 was primarily the result of growth in EBITDA, excluding the impact of impairment. In addition, working capital improvements and the release of restricted cash also benefited cash provided by operating activities.
 Investing Activities
Cash used in investing activities during the year ended December 31, 2013 was $8.0 million as compared to cash used in investing activities during the year ended December 31, 2012 of $12.2 million. Cash used in investing activities during the year ended December 31, 2013 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock and CRS joint ventures. Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our Partnership for Temporary Housing ("PaTH") joint venture.
Financing Activities
Cash used in financing activities during the year ended December 31, 2013 was $77.5 million compared to $83.5 million of cash used in financing activities during the year ended December 31, 2012. Cash used in financing activities during the year ended December 31, 2013 was primarily the result of payments related to financed insurance and a $50.0 million prepayment on the Term Loan. Cash used in financing activities during the year ended December 31, 2012 was primarily the result of a $90.0 million prepayment on our Term Loan partially offset by borrowings related to financed insurance.


37

Financing
Long-term debt consisted of the following:
 
Delta Tucker Holdings, Inc. 
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Term loan
$
187,272

 
$
277,272

10.375% senior unsecured notes
455,000

 
455,000

Total long-term debt
$
642,272

 
$
732,272

In connection with the Merger on July 7, 2010, substantially all of DynCorp International's debt outstanding as of April 2, 2010 was repaid and replaced with new debt described below. The pre-Merger 9.5% Senior subordinated notes of $0.6 million matured and were paid in full on February 15, 2013. Due to principal prepayments made on our Term Loan in 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016.
The weighted-average interest rate as of December 31, 2014 and December 31, 2013 for our debt was 9.2% and 8.8%, respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 31, 2014 and December 31, 2013.
Senior Credit Facility
In connection with the Merger, DynCorp International entered into a senior secured credit facility on July 7, 2010 (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Agent.
On June 19, 2013, we entered into a third amendment (the “Amendment”) to the Senior Credit Facility. The Amendment, among other things, amended the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016, increased the amount of the Revolver to $181.0 million and modified the maximum total leverage threshold test and certain other covenants.
On November 5, 2014, we entered into a Fourth Amendment to the Senior Credit Facility. The Fourth Amendment, among other things, (i) amended the Senior Credit Facility by modifying the financial maintenance covenants; (ii) reduced the amount of the Revolver credit commitments of the lenders consenting to the Fourth Amendment by 20%, which represented a reduction of approximately $36.2 million; (iii) amended the definition of Consolidated Net Income, as defined in the Senior Credit Facility, to exclude up to $35 million for a one-time charge during the three month period ended September 26, 2014 related to a certain U.S. Air Force contract; and (iv) waived compliance with the financial maintenance covenants with respect to the three month period ended September 26, 2014.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of December 31, 2014, the Senior Credit Facility provided for a $187.3 million term loan facility ("Term Loan") and a $144.8 million Revolver, which includes a $100.0 million letter of credit subfacility. As of December 31, 2014 and December 31, 2013, the available borrowing capacity under the Senior Credit Facility was approximately $108.1 million and $144.6 million, respectively, which allows for up to $36.7 million and $36.4 million in additional letters of credit, respectively. The maturity date on the Term Loan and Revolver is July 7, 2016. Amounts borrowed under our Revolver were used to fund operations. Refer to Note 7 further discussion of the Senior Credit Facility.
Interest Rates on Term Loan & Revolver
Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") plus an applicable margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option or 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency option based on our outstanding Secured Leverage Ratio at the end of each quarter. The Secured Leverage Ratio is the ratio of total secured consolidated debt (net of up to $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall

38

the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%.
The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%.
As of December 31, 2014 and December 31, 2013, the applicable interest rates for outstanding balances under our Term Loan were 6.25% and 6.25%, respectively.
Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of December 31, 2014 and December 31, 2013 the applicable interest rates for our letter of credit subfacility and our interest rates for our unused commitment fees were 4.00% and 4.25% and 0.50% and 0.50%, respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee.
Principal Payments
Our Credit Facility contains an annual requirement to use a portion of our Excess Cash Flow, as defined in the Credit Facility, to make additional principal payments. The first requirement was in 2012 based on annual financial results for the year ended December 31, 2012. Based on the principal payments we made during the years ended December 31, 2012 and December 31, 2013 we did not meet the threshold for an additional Excess Cash Flow payment. Additional principal payments could be required in future years based on net proceeds received from items such as tax refunds or disposition of assets or lines of business.
During the years ended December 31, 2014 and December 31, 2013, we made principal payments of $90.0 million and $50.0 million, respectively on the Term Loan facility. Pursuant to our Term Loan facility quarterly principal payments are required, however, the principal prepayments made in 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.
Deferred financing costs of $1.4 million and $0.7 million, related to the various principal payments, were expensed and included in Loss on early extinguishment of debt in our consolidated statement of operations for the years ended December 31, 2014 and December 31, 2013, respectively. There were no penalties associated with the prepayments.
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants. These covenants can, among other things, limit our ability to:
•
declare dividends and make other distributions;
•
redeem or repurchase our capital stock;
•
prepay, redeem or repurchase certain of our indebtedness;
•
grant liens;
•
make loans or investments (including acquisitions);
•
incur additional indebtedness;
•
modify the terms of certain debt;
•
restrict dividends from our subsidiaries;
•
change our business or business of our subsidiaries;
•
merge or enter into acquisitions;
•
sell our assets;
•
enter into transactions with our affiliates; and
•
make capital expenditures.
In addition, the Senior Credit Facility stipulates a maximum total leverage ratio, as defined in the Senior Credit Facility, and a minimum interest coverage ratio, as defined in the Senior Credit Facility, that must be maintained. The total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period.

39

Effective with the Fourth Amendment, the maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
December 31, 2014
5.55 to 1.0
March 27, 2015
6.65 to 1.0
June 26, 2015
7.70 to 1.0
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
June 25, 2016 and thereafter
6.60 to 1.0
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. Effective with the Fourth Amendment, the interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
December 31, 2014
1.05 to 1.0
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
June 25, 2016 and thereafter
1.30 to 1.0

For the years ended December 31, 2014 and December 31, 2013 we were in compliance with our financial maintenance covenants. Our requirement to be in compliance with the financial maintenance covenants for the three month period ended September 26, 2014 was waived per the Fourth Amendment and as such we are in compliance with the terms of our Senior Credit Facility.
The fair value of our borrowings under our Senior Credit Facility approximates 99.3% and 100.5% of the carrying amount based on quoted values as of December 31, 2014 and December 31, 2013, respectively.     
In the event we fail to comply with the covenants specified in the Senior Credit Facility and the Indenture governing our Senior Unsecured Notes, we may be in default.
Senior Unsecured Notes
On July 7, 2010, DynCorp International completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International, and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes commenced on January 1, 2011 and is payable on January 1 and July 1 of each year. The balance of our Senior Unsecured Notes was $455.0 million as of both December 31, 2014 and December 31, 2013.
The Senior Unsecured Notes contain various covenants that restrict our ability to:
•
incur additional indebtedness;
•
make certain payments, including declaring or paying certain dividends;  
•
purchase or retire certain equity interests;
•
retire subordinated indebtedness;
•
make certain investments;
•
sell assets;
•
engage in certain transactions with affiliates;
•
create liens on assets;
•
make acquisitions; and
•
engage in mergers or consolidations.
The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings from both Moody's Investor Service, Inc. as well as Standard Poor's Rating Service.

40

We can redeem the Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain specified triggering events, including certain asset sales and change of control events. The fair value of the Senior Unsecured Notes is based on their quoted market value. As of December 31, 2014 and December 31, 2013, the quoted market value of the Senior Unsecured Notes was approximately 82.0% and 103.0%, respectively, of stated value.
We or our affiliates may, from time to time, purchase our Senior Unsecured Notes. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.

41

Contractual Commitments
The following table represents our contractual commitments associated with our debt and other obligations as of December 31, 2014:
 
Calendar Years (1)  
(Amounts in thousands)
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter  
 
Total  
Term Loan (2)
$
—

 
$
187,272

 
$
—

 
$
—

 
$
—

 
$
—

 
$
187,272

Senior Unsecured Notes
—

 
—

 
455,000

 
—

 
—

 
—

 
455,000

Interest on indebtedness (3)
59,073

 
53,351

 
23,603

 
—

 
—

 
—

 
136,027

Operating leases (4)
30,515

 
15,225

 
12,474

 
9,060

 
4,225

 
13,911

 
85,410

Liability on uncertain tax positions(5)
7,999

 
—

 
—

 
—

 
—

 
—

 
7,999

Total contractual obligations
$
97,587

 
$
255,848

 
$
491,077

 
$
9,060

 
$
4,225

 
$
13,911

 
$
871,708

(1)
As of December 31, 2014, there were no amounts outstanding under our Revolver.
(2)
Due to principal prepayments made on our Term Loan during the year ended December 30, 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. Amounts above exclude such future mandatory principal payments due to excess cash flow requirements. See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of the payments.
(3)
Represents interest expense calculated using interest rates of: (i) 10.375% for our Senior Unsecured Notes, (ii) 6.25% for our Term Loan, (iii) 4.00% for our Letters of Credit currently outstanding and (iv) 0.75% for the unused borrowing capacity available under our Revolver.
(4)
For additional information about our operating leases, see Note 8 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(5)
Represents the estimated payments related to the unrecognized tax benefits for the respective year. See Note 4 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

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

42

 
Delta Tucker Holdings, Inc.
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
 
 
(Amount in thousands)
(unaudited) 
Net loss attributable to Delta Tucker Holdings, Inc.
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
(Benefit) Provision for income tax
(20,570
)
 
(37,461
)
 
15,598

Interest expense, net of interest income
70,562

 
78,669

 
86,155

Depreciation and amortization(1)
49,707

 
50,279

 
51,814

EBITDA
(170,081
)
 
(162,249
)
 
144,630

Non-recurring or unusual gains or losses or income or expenses and non-cash impairments (2)
255,613

 
323,930

 
54,354

Employee non-cash compensation, severance, and retention expense (3)
9,531

 
6,444

 
1,381

Management fees (4)
2,415

 
1,899

 
1,075

Acquisition accounting items (5)
2,263

 
(4,146
)
 
(4,195
)
Annualized operational efficiencies (6)
8,828

 
11,798

 
—

Other (7)
447

 
2,779

 
(975
)
Adjusted EBITDA
$
109,016

 
$
180,455

 
$
196,270

(1)
Amount includes certain depreciation and amortization amounts which are classified as Cost of services in the consolidated statements of operations of Delta Tucker Holdings, Inc. included elsewhere in this Annual Report on Form 10-K.
(2)
Includes the impairment of goodwill within the LSS, Aviation and Air Wing reporting units, the impairment of customer-relationship intangibles and indefinite-lived tradename, a one-time charge related to a certain contract of $35 million as defined in the Fourth Amendment to the Senior Credit Facility, as well as certain unusual income and expense items, as defined in the Indenture and Senior Credit Facility. See Note 3 and Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(3)
Includes post-employment benefit expense related to severance in accordance with ASC 712 - Compensation, relocation expenses and share based compensation expense.
(4)
Amount includes Cerberus Operations and Advisory Company management fees.
(5)
Includes costs incurred pursuant to ASC 805 - Business Combination.
(6)
Represents a defined EBITDA adjustment under our debt agreements for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period.
(7)
Includes changes due to fluctuations in foreign exchange rates, earnings from affiliates not received in cash and other immaterial items.

Off-Balance Sheet Arrangements
As of December 31, 2014, we did not have any material off-balance sheet arrangements as defined under SEC rules.
Effects of Inflation
We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer term fixed-price and time-and-materials type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the periods of performance. The majority of our contracts are cost-reimbursable type contracts, which consequently, eliminate the impact of inflation. Costs and revenue include an inflationary increase that commensurates with the general economy in which we operate. As such, Net (loss) income attributable to Delta Tucker Holdings, Inc. or our Predecessor has not been materially impacted by inflation.
Critical Accounting Policies and Estimates
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based on information available at the time of the estimates or assumptions, including our historical experience, where relevant. Significant estimates and assumptions are reviewed quarterly by management. The evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may materially differ from the estimates.

43

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

44

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

45

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

46

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk is primarily related to losses that could potentially arise as a result of adverse changes in interest and foreign currency exchange rates. See "Item 1A. Risk Factors" for further discussion of the market risks we may encounter.
Interest Rate Risk
We have interest rate risk primarily related to changes in interest rates on our variable rate debt. We manage our exposure to movements in interest rates through the use of a combination of fixed and variable rate debt. As of December 31, 2014, we had 70.8% of our debt at a fixed rate and 29.2% at a variable rate. Our 10.375% senior notes represent our fixed rate debt, which totaled $455 million as of December 31, 2014. Our Term Loan and Revolver represent our variable rate debt. As of December 31, 2014, the balance of our Term Loan was $187.3 million and we had no borrowings under the Revolver. Borrowings under our variable rate debt bear interest, based on our option, at a rate per annum equal to LIBOR, plus the applicable rate or the Base Rate plus the applicable rate. Both the Term Loan and the Revolver have an interest rate floor of 1.75% for LIBOR borrowings and 2.75% for Base Rate borrowings. The Term Loan interest rate at December 31, 2014 was made up of a 4.50% fixed applicable rate plus a 1.75% floor totaling 6.25%. If LIBOR increases over 1.75% and we continue to have no outstanding Revolver borrowings, each 25 basis point increase would result in $0.5 million in additional interest expense annually. See Note 7 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Foreign Currency Exchange Rate Risk
We are exposed to changes in foreign currency rates. At present, we do not utilize any derivative instruments to manage risk associated with foreign currency exchange rate fluctuations. The functional currency of certain foreign operations is the local currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates, while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded in Accumulated other comprehensive (loss) income. Our foreign currency transactions were not material for the years ended December 31, 2014 and December 31, 2013, respectively.


47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


48


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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


We have audited the accompanying consolidated balance sheets of Delta Tucker Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2014 and December 31, 2013, and the related consolidated statements of operations, comprehensive loss, cash flows, and equity (deficit) for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Delta Tucker Holdings, Inc. and subsidiaries as of December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Fort Worth, Texas
March 31, 2015

49

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

 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
 
Revenue
 
$
2,252,309

 
$
3,287,184

 
$
4,044,275

Cost of services
 
(2,072,865
)
 
(2,987,253
)
 
(3,698,932
)
Selling, general and administrative expenses
 
(146,881
)
 
(149,925
)
 
(149,362
)
Depreciation and amortization expense
 
(48,582
)
 
(48,628
)
 
(50,260
)
Earnings from equity method investees
 
10,077

 
4,570

 
825

Impairment of goodwill, intangibles and long lived assets
 
(214,004
)
 
(312,728
)
 
(50,663
)
Operating (loss) income
 
(219,946
)
 
(206,780
)
 
95,883

Interest expense
 
(70,783
)
 
(78,826
)
 
(86,272
)
Loss on early extinguishment of debt
 
(1,362
)
 
(703
)
 
(2,094
)
Interest income
 
221

 
157

 
117

Other income (expense), net
 
3,680

 
(810
)
 
4,672

(Loss) income before income taxes
 
(288,190
)
 
(286,962
)
 
12,306

Benefit (provision) for income taxes
 
20,570

 
37,461

 
(15,598
)
Net loss
 
(267,620
)
 
(249,501
)
 
(3,292
)
Noncontrolling interests
 
(2,160
)
 
(4,235
)
 
(5,645
)
Net loss attributable to Delta Tucker Holdings, Inc.
 
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
See notes to consolidated financial statements

50

DELTA TUCKER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Net loss
$
(267,620
)
 
$
(249,501
)
 
$
(3,292
)
Other comprehensive (loss), net of tax:

 

 
 
Foreign currency translation adjustment
(131
)
 
(437
)
 
225

Other comprehensive (loss) income , before tax
(131
)
 
(437
)
 
225

Income tax (expense) benefit related to items of other comprehensive income
47

 
157

 
(83
)
Other comprehensive (loss) income
(84
)
 
(280
)
 
142

Comprehensive loss
(267,704
)
 
(249,781
)
 
(3,150
)
Comprehensive loss attributable to noncontrolling interests
(2,160
)
 
(4,235
)
 
(5,645
)
Comprehensive loss attributable to Delta Tucker Holdings, Inc.
$
(269,864
)
 
$
(254,016
)
 
$
(8,795
)
See notes to consolidated financial statements

51


DELTA TUCKER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
 
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands, except share data)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,004

 
$
170,845

Restricted cash
707

 
1,659

Accounts receivable, net of allowances of $4,736 and $1,621, respectively
448,496

 
577,136

Prepaid expenses and other current assets
74,200

 
124,510

Total current assets
617,407

 
874,150

Long-term restricted cash
952

 
—

Property and equipment, net
23,786

 
24,120

Goodwill
128,888

 
293,767

Tradenames, net
28,762

 
43,464

Other intangibles, net
149,480

 
225,239

Long-term deferred taxes
5,696

 
—

Other assets, net
27,516

 
39,181

Total assets
$
982,487

 
$
1,499,921

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
146,546

 
$
193,146

Accrued payroll and employee costs
93,707

 
114,334

Deferred income taxes
31,477

 
30,965

Accrued liabilities
130,026

 
200,533

Income taxes payable
4,424

 
14,020

Total current liabilities
406,180

 
552,998

Long-term debt
642,272

 
732,272

Long-term deferred taxes
—

 
17,359

Other long-term liabilities
11,312

 
7,632

Total liabilities
1,059,764

 
1,310,261

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

 
—

Additional paid-in capital
552,894

 
549,581

Accumulated deficit
(635,379
)
 
(365,599
)
Accumulated other comprehensive loss
(281
)
 
(197
)
Total (deficit) equity attributable to Delta Tucker Holdings, Inc.
(82,766
)
 
183,785

Noncontrolling interests
5,489

 
5,875

Total (deficit) equity
(77,277
)
 
189,660

 
 
 
 
Total liabilities and (deficit) equity
$
982,487

 
$
1,499,921

See notes to consolidated financial statements

52

DELTA TUCKER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Cash flows from operating activities
 
 
 
 
 
Net loss
$
(267,620
)
 
$
(249,501
)
 
$
(3,292
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
49,707

 
50,279

 
51,814

Amortization of deferred loan costs
6,129

 
6,827

 
7,698

Allowance for losses on accounts receivable
3,182

 
465

 
(112
)
Loss on early extinguishment of debt, net
1,362

 
703

 
2,094

Loss on impairment of goodwill, intangibles and long-lived assets
214,004

 
312,728

 
50,663

Earnings from equity method investees
(12,368
)
 
(3,737
)
 
(4,767
)
Distributions from equity method investees
9,739

 
7,569

 
3,438

Deferred income taxes
(22,650
)
 
(61,538
)
 
8,611

Stock based compensation
3,184

 
490

 
—

Other
275

 
(368
)
 
(4,583
)
Changes in assets and liabilities:
 
 
 
 
 
Restricted cash
—

 
—

 
9,114

Accounts receivable
125,458

 
203,012

 
(26,143
)
Prepaid expenses and other current assets
40,650

 
(41,656
)
 
2,826

Accounts payable and accrued liabilities
(124,964
)
 
(91,328
)
 
40,201

Income taxes payable
(711
)
 
3,557

 
6,628

Net cash provided by operating activities
25,377

 
137,502

 
144,190

Cash flows from investing activities
 
 
 
 
 
Purchase of property and equipment, net
(8,712
)
 
(7,628
)
 
(5,528
)
Proceeds from sale of property, plant, and equipment
44

 
182

 
25

Heliworks acquisition, net of cash acquired
—

 
—

 
(11,746
)
Purchase of software
(1,631
)
 
(2,718
)
 
(2,590
)
Return of capital from equity method investees
5,625

 
2,223

 
9,154

Contributions to equity method investees
—

 
(30
)
 
(1,478
)
Net cash used in investing activities
(4,674
)
 
(7,971
)
 
(12,163
)
Cash flows from financing activities
 
 
 
 
 
Borrowings on long-term debt
118,000

 
745,900

 
325,000

Payments on long-term debt
(208,000
)
 
(796,537
)
 
(415,000
)
Payments of deferred financing cost
(1,740
)
 
(2,139
)
 
—

Borrowings under other financing arrangements
20,214

 
9,431

 
62,580

Payments under other financing arrangements
(24,321
)
 
(29,734
)
 
(53,918
)
Payment of dividends to noncontrolling interests
(1,697
)
 
(4,382
)
 
(2,119
)
Net cash used in financing activities
(97,544
)
 
(77,461
)
 
(83,457
)
Net (decrease) increase in cash and cash equivalents
(76,841
)
 
52,070

 
48,570

Cash and cash equivalents, beginning of period
170,845

 
118,775

 
70,205

Cash and cash equivalents, end of period
$
94,004

 
$
170,845

 
$
118,775

Income taxes paid, net of receipts
$
(4,601
)
 
$
(13,874
)
 
$
(1,316
)
Interest paid
$
(65,045
)
 
$
(71,875
)
 
$
(75,196
)
See notes to consolidated financial statements

53

DELTA TUCKER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(Amounts in thousands)
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income
 
Total Equity (Deficit) Attributable to Delta Tucker Holdings, Inc.
 
Noncontrolling
Interests
 
Total
Equity (Deficit)
Balance at December 30, 2011
—

 
$
—

 
$
550,951

 
$
(102,926
)
 
$
(59
)
 
$
447,966

 
$
5,186

 
$
453,152

Comprehensive loss attributable to Delta Tucker Holdings, Inc.
 
 
 
 
—

 
(8,937
)
 
142

 
(8,795
)
 
5,645

 
(3,150
)
Distribution to affiliates of Parent
 
 
 
 
(1,998
)
 
—

 
—

 
(1,998
)
 
696

 
(1,302
)
DIFZ financing, net of tax
 
 
 
 
369

 
—

 
—

 
369

 
—

 
369

Dividends declared to noncontrolling interests
 
 
 
 
—

 
—

 
—

 
—

 
(3,315
)
 
(3,315
)
Balance at December 31, 2012
—

 
$
—

 
$
549,322

 
$
(111,863
)
 
$
83

 
$
437,542

 
$
8,212

 
$
445,754

Stock compensation
 
 
 
 
490

 
—

 
—

 
490

 
—

 
490

Comprehensive loss attributable to Delta Tucker Holdings, Inc.
 
 
 
 
—

 
(253,736
)
 
(280
)
 
(254,016
)
 
4,235

 
(249,781
)
DIFZ financing, net of tax
 
 
 
 
(231
)
 
—

 
—

 
(231
)
 
—

 
(231
)
Dividends declared to noncontrolling interest
 
 
 
 
—

 
—

 
—

 
—

 
(6,572
)
 
(6,572
)
Balance at December 31, 2013
—

 
$
—

 
$
549,581

 
$
(365,599
)
 
$
(197
)
 
$
183,785

 
$
5,875

 
$
189,660

Stock compensation
 
 
 
 
3,184

 
—

 
—

 
3,184

 
—

 
3,184

Comprehensive loss attributable to Delta Tucker Holdings, Inc.
 
 
 
 
—

 
(269,780
)
 
(84
)
 
(269,864
)
 
2,160

 
(267,704
)
DIFZ financing, net of tax
 
 
 
 
129

 
—

 
—

 
129

 
—

 
129

Dividends declared to noncontrolling interest
 
 
 
 
—

 
—

 
—

 
—

 
(2,546
)
 
(2,546
)
Balance at December 31, 2014
—

 
$
—

 
$
552,894

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

 
$
(77,277
)
See notes to consolidated financial statements

54

DELTA TUCKER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014, December 31, 2013 and December 31, 2012

Note 1 — Significant Accounting Policies and Accounting Developments
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 Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International Inc. ("DynCorp International") completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the "Merger"). Holders of DynCorp International’s stock received $17.55 in cash for each outstanding share and since Cerberus indirectly owns all of our outstanding equity, DynCorp International’s stock is no longer publicly traded as of the Merger.
These consolidated financial statements have been prepared, pursuant to accounting principles generally accepted in the United States of America ("GAAP").
Fiscal Year
The Company's quarterly periods end on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. These financial statements reflect our financial results for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
Principles of Consolidation
The 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.
The Company classifies its equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our segments and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other income, net in the consolidated statement of operations.  
Economic rights in active joint ventures that are operationally integral are indicated by the ownership percentages in the table listed below.
Partnership for Temporary Housing LLC ("PaTH")
30
%
Contingency Response Services LLC ("CRS")
45
%
Global Response Services LLC ("GRS")
51
%
Global Linguist Solutions LLC ("GLS")
51
%
Economic rights in an active joint venture that the Company does not consider operationally integral are indicated by the ownership percentage in the table listed below.
Babcock DynCorp Limited ("Babcock")
44
%

55

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. In March 2012, we entered into a non-cash dividend distribution transaction with Cerberus Series Four Holdings, LLC and Cerberus Partners II, L.P., in which we distributed half of our 50% ownership in DIFZ. We now hold 25% ownership interest in DIFZ. We continue to consolidate DIFZ as we still exercise power over activities that significantly impact DIFZ’s economic performance and have the obligation to absorb losses or receive benefits of DIFZ that could potentially be significant to DIFZ. Noncontrolling interests is presented on the face of the consolidated statements of operations as an increase or reduction in arriving at "Net (loss) income attributable to Delta Tucker Holdings, Inc." Noncontrolling interests is located in the equity section on the consolidated balance sheets. See Note 12 for further information regarding DIFZ.
Revenue Recognition and Cost Estimation on Long-Term Contracts
General - We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement. As such, systems, equipment or materials are not generally separable from the services we provide. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the customer, the sales price is fixed or determinable (for non-U.S. government contracts) or costs are identifiable, determinable, reasonable and allowable (for our U.S. government contracts), and collectability is reasonably assured (for non-U.S. government contracts) or a reasonable contractual basis for recovery exists (for U.S. government contracts). Our contracts typically fall into the following two categories with the first representing substantially all of our revenue: (i) federal government contracts and (ii) other contracts. We apply the appropriate guidance consistently to all contracts.
Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other special contract provisions are evaluated throughout the life of our contracts when estimating total contract revenue under the percentage-of-completion or proportional methods of accounting. We inherently have risks related to our estimates with long-term contracts. Actual amounts could materially differ from these estimates. We believe the following are the risks associated with our estimation process: (i) assumptions are uncertain and inherently judgmental at the time of the estimate; (ii) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues, costs and recoverability of assets, and (iii) changes in estimates could have material effects on our financial condition or results of operations. The impact of any one of these factors could contribute to a material cumulative adjustment.
Some of our contracts with the U.S. government contain award or incentive fees. We recognize award or incentive fee revenue when we can make reasonably determinable estimates of award or incentive fees to consider them in determining total estimated contract revenue. We do not consider the mere existence of potential award or incentive fees as presumptive evidence that award or incentive fees are to be included in determining total estimated revenue. In some cases, we may not be able to accurately predict whether performance targets will be met, and as such, we exclude the award or incentive fees from the determination of total revenue in such instances. Our accrual of award or incentive fees may require adjustments from time to time.         
We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project's contractual requirements and management's assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our consolidated results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. We believe long-term contracts, contracts in a loss position and contracts with material award fees drive the significant changes in estimates in our contracts.
The following table presents the aggregate gross favorable and unfavorable adjustments to income before taxes resulting from changes in contract estimates, including the exercise of additional option years, for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.

56

 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in millions)
 
 
Gross favorable adjustments
$
7.4

 
$
45.8

 
$
29.3

Gross unfavorable adjustments
(53.9
)
 
(20.7
)
 
(9.7
)
Net adjustments
$
(46.5
)
 
$
25.1

 
$
19.6

Federal Government Contracts — For all non-construction and non-software U.S. federal government contracts or contract elements, we apply the guidance in ASC 912 - Contractors - Federal Government. We apply the combination and segmentation guidance in ASC 605-35 Revenue - Construction-Type and Production-Type Contracts under the guidance of ASC 912 in analyzing the deliverables contained in the applicable contract to determine appropriate profit centers. Revenue is recognized by profit center using the percentage-of-completion method or completed-contract method. The completed-contract method is used when reliable estimates cannot be supported for percentage-of-completion method recognition or for short duration projects when the results of operations would not vary materially from those resulting from use of the percentage-of-completion method. Until complete, project costs may be maintained in work-in-progress, a component of inventory.
Revenue is recognized based on progress towards completion over the contract period, measured by either output or input methods appropriate to the services or products provided. For example, "output measures" can include units delivered or produced, such as aircraft for which modification has been completed. "Input measures" can include a cost-to-cost method, such as for procurement-related services.
Other Contracts or Contract Elements — Our contracts with non-federal government customers are predominantly service arrangements. Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. Arrangement consideration is allocated among the separate units of accounting based on the guidance applicable for the multiple-element arrangements. Arrangements that are entered into or materially modified after January 1, 2011, are allocated to those identified as multiple-element arrangement based on their relative selling price which is established through vendor specific objective evidence (“VSOE”), third party evidence, or management’s best estimate. Due to the customized nature of our arrangements, VSOE and third party evidence is generally not available. Therefore, our post-January 1, 2011 arrangements allocate the relative selling price to multiple-element arrangements utilizing management’s best estimate of selling price.
Cash and Cash Equivalents
For purposes of reporting cash and cash equivalents, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash restricted by certain contracts and available for use to pay specified costs and vendors on work performed on specific contracts. On some contracts, advance payments are not available for use and cash is to be disbursed for specified costs for work performed on the specific contract. Changes in restricted cash related to our contracts are included as operating activities within our consolidated statement of cash flows.
The Company classifies the long-term portion of restricted cash related to a legal matter in long term assets in our consolidated balance sheets as these amounts are restricted for periods that exceed one year from the balance sheet date.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management evaluates these estimates and assumptions on an ongoing basis, including but not limited to, those relating to allowances for doubtful accounts, fair value and impairment of intangible assets and goodwill, income taxes, stock based compensation, profitability on contracts, anticipated contract modifications, contingencies and litigation. Actual results could differ from those estimates.

57

Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts against specific billed receivables based upon the latest information available to determine whether invoices are ultimately collectible. Such information includes the historical trends of write-offs and recovery of previously written-off accounts, the financial strength of the respective customer and projected economic and market conditions. The evaluation of these factors involves subjective judgments and changes in these factors may cause an increase to our estimated allowance for doubtful accounts, which could impact our consolidated financial statements by incurring bad debt expense. Given that we primarily serve the U.S. government, we believe the risk is low that changes in our allowance for doubtful accounts would result in a material impact on our financial results.
Property and Equipment
The cost of property and equipment, less applicable residual values, is depreciated using the straight-line method. Depreciation commences when the specific asset is complete, installed and ready for normal use. Depreciation related to equipment purchased for specific contracts is typically included within Cost of services, as this depreciation is directly attributable to project costs. We evaluate property and equipment for impairment quarterly by examining factors such as existence, functionality, obsolescence and physical condition. In the event we experience impairment, we revise the useful life estimate and record the impairment to arrive at a revised net book value. Our standard depreciation and amortization policies are as follows:
Computer and related equipment
3 to 5 years
Equipment and Other
2 to 10 years
Leasehold improvements
Shorter of lease term or useful life
Customer Related Intangible Assets
The initial values assigned to customer-related intangibles were the result of fair value calculations associated with business combinations. The values were determined based on estimates and judgments regarding expectations for the estimated future after-tax cash flows from those assets over their lives, including the probability of expected future contract renewals and sales, less a cost-of-capital charge, all of which was discounted to present value. We evaluate the carrying value of our customer-related intangibles within the asset group representing the lowest level of identifiable cash flows whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The customer related intangible carrying value is considered impaired when the anticipated undiscounted cash flows from such asset group is less than its carrying value. In that case, a loss is recognized based on the amount by which the carrying value exceeds the fair value.
Indefinite-Lived Assets and Goodwill
Indefinite-lived assets, including goodwill and indefinite-lived tradename, are not amortized but are subject to an annual impairment test. We evaluate goodwill and indefinite lived tradename for impairment annually in the first month of the fourth quarter of each fiscal year and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. The first step of the goodwill impairment test compares the fair value of each of our reporting units with its carrying amount, including indefinite-lived assets. If the fair value of a reporting unit exceeds its carrying amount, the indefinite-lived assets of the reporting unit are not considered impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any.
Income Taxes
We file income, franchise, gross receipts and similar tax returns in many jurisdictions. Our tax returns are subject to audit by the Internal Revenue Service, within most states in the U.S., and by various government agencies representing several jurisdictions outside the U.S.
We use the asset and liability approach for financial accounting and reporting for income taxes in accordance with the FASB. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is made up of current expense which includes both permanent and temporary differences and deferred expense which only includes temporary differences. Income tax expense is the amount of tax payable for the period plus or minus the change in deferred tax assets and liabilities during the period.
We perform a comprehensive review of our portfolio of uncertain tax positions regularly. The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken

58

or expected to be taken in a tax return. A liability is recorded when a benefit is recognized for a tax position and it is not more-likely-than-not that the position will be sustained on its technical merits or where the position is more-likely-than-not that it will be sustained on its technical merits, but the largest amount to be realized upon settlement is less than 100% of the position.
To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Tax-related interest is included within interest expense and tax-related penalties are included within income tax expense in our consolidated statements of operations. See Note 4 regarding income taxes.
Share Based Compensation
We recognize compensation expense in the financial statements for all share based arrangements. Share based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized over the employee's requisite service period. See Note 9 for further discussion on share based compensation.
Currency Translation
The assets and liabilities of our subsidiaries outside the U.S. that have a currency other than the U.S. dollar are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Results of operations and cash flow items for these subsidiaries are translated at the average exchange rates prevailing during the period. Gains and losses resulting from currency transactions and the re-measurement of the financial statements of U.S. functional currency foreign subsidiaries are recognized currently in Cost of services and Other income, net, respectively and those resulting from translation of financial statements are included in accumulated other comprehensive income. Our foreign currency transactions were not material for the calendar years ended December 31, 2014, December 31, 2013 and December 31, 2012.
Operating Segments
Our business is aligned into two operating and reporting segments, DynAviation and DynLogistics. Our chief operating decision maker assesses performance and allocates resources based upon the separate financial information around the Company’s operating segments, which is comprised of numerous contracts.
Accounting Developments
Pronouncements Issued
On May 28, 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including ASC No. 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 will be effective January 1, 2017, and may be applied either retrospectively or through the use of a modified-retrospective method. We are currently evaluating both methods of adoption as well as the effect ASU 2014-09 will have on our consolidated financial position, results of operations and cash flows.
On August 27, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern. ASU 2014-15 provides guidance in generally accepted accounting principles about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and for annual and interim periods thereafter (fiscal year 2016 for the Company). Early adoption is permitted. We do not expect the new guidance to have an impact on our consolidated financial statements.
Other accounting standards updates effective after December 31, 2014 are not expected to have a material effect on our consolidated financial position or annual results of operations and cash flows.


59

Note 2 — Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions.
Prepaid expenses and other current assets — Prepaid expenses and other current assets were:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Prepaid expenses
$
30,821

 
$
29,611

Income tax refunds receivable
655

 
7,334

Inventories
25,198

 
27,008

Aircraft parts inventory held on consignment
2,278

 
2,404

Work-in-process inventory, net
5,772

 
28,444

Joint venture receivables
1,497

 
2,251

Assets held for sale
—

 
3,017

Other current assets
7,979

 
24,441

Total prepaid expenses and other current assets
$
74,200

 
$
124,510

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets.
We value our inventory at lower of cost or market. Included in inventory as of December 31, 2013 were seven helicopters, valued at $5.6 million that were not deployed on any existing programs. During the year ended 2014, we modified two helicopters previously included within our inventory and deployed these two helicopters on one of our existing programs. The two deployed helicopters are included within our Property and equipment, net, and the change in helicopter classification was a non-cash investing activity within our Consolidated Statements of Cash Flows. During the year ended December 31, 2014, we sold one helicopter previously included within our inventory as of December 31, 2013 and we disassembled the remaining four helicopters into parts, which are included within our Inventory.
We also had six helicopters classified as held for sale as of December 31, 2013 that were previously deployed on an existing program. During the year ended 2014, we completed the sale of these six helicopters for a total of $2.0 million, resulting in an impairment expense of $1.0 million, included within the Impairment of goodwill, intangibles and long-lived assets within our consolidated statement of operations.
The Aircraft parts included in inventory held on consignment represents $2.3 million and $2.4 million in inventory, related to our former Life Cycle Support Services ("LCCS") Navy contract as of December 31, 2014 and December 31, 2013, respectively. Work-in-process inventory includes equipment for vehicle modifications for specific customers, a significant portion of which were completed and delivered as of December 31, 2014 and other deferred costs related to certain contracts.
Other current assets decreased during the year ended December 31, 2014 primarily as a result of a reduction to our sales and use tax refund and the receipt of a lease incentive. Included in Other current assets as of December 31, 2013 was a $9.8 million insurance receivable related to a settlement of a certain legal matter. This matter was settled and paid during the year ended 2014. See Note 8 for further discussion.

60

Property and equipment, net — Property and equipment, net were:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Helicopters
$
7,108

 
$
4,007

Computers and other equipment
11,061

 
14,258

Leasehold improvements
19,055

 
17,585

Office furniture and fixtures
4,203

 
3,006

Gross property and equipment
41,427

 
38,856

Less accumulated depreciation
(17,641
)
 
(14,736
)
Total property and equipment, net
$
23,786

 
$
24,120

Property and equipment, net includes two helicopters valued at $2.0 million previously included within our inventory that were deployed on one of our programs during the year ended 2014. As of December 31, 2014 and December 31, 2013, Property and equipment, net also included the accrual for property additions of $0.8 million and $3.8 million, respectively. Depreciation expense was $5.7 million, $5.9 million and $5.7 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively, including certain depreciation amounts classified as Cost of services. See Note 11 for additional discussion.
Other assets, net — Other assets, net were:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Deferred financing costs, net
$
11,775

 
$
17,526

Investment in affiliates
8,191

 
13,477

Palm promissory notes, long-term portion
2,853

 
2,731

Other
4,697

 
5,447

Total other assets, net
$
27,516

 
$
39,181

Deferred financing costs are amortized through interest expense. Amortization related to deferred financing costs was $6.1 million, $6.8 million, and $7.7 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Deferred financing costs were reduced during the years ended December 31, 2014 and December 31, 2013 by $1.4 million and $0.7 million, respectively, related to the pro rata write–off of financing costs to loss on early extinguishment of debt, partially offset by the fees incurred related to our fourth amendment and waiver to the Senior Credit Facility. See Note 7 for further discussion of our debt. The reduction in Investment in affiliates is the result of return of capital of $5.6 million and $2.2 million for the years ended December 31, 2014 and December 31, 2013, respectively.
Accrued payroll and employee costs — Accrued payroll and employee costs were:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Wages, compensation and other benefits
$
74,416

 
$
93,007

Accrued vacation
18,889

 
20,383

Accrued contributions to employee benefit plans
402

 
944

Total accrued payroll and employee costs
$
93,707

 
$
114,334


61

Accrued liabilities — Accrued liabilities were:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Customer liability
$
22,635

 
$
61,856

Accrued insurance
20,551

 
40,120

Accrued interest
24,250

 
24,641

Unrecognized tax benefit
7,999

 
10,132

Contract losses
27,864

 
13,738

Legal reserves
8,657

 
14,147

Subcontractor retention
1,761

 
4,300

Financed insurance
2,055

 
6,162

Other
14,254

 
25,437

Total accrued liabilities
$
130,026

 
$
200,533

The reduction to customer liabilities is primarily due to the completion of vehicle modifications for specific customers which were delivered as of December 31, 2014 and other amounts received from customers in excess of revenue recognized. Other is comprised of accrued rent, workers compensation related claims and other balances that are not individually material to the consolidated financial statements. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Contract losses as of December 31, 2014 included an additional contract loss recorded on a U.S. Air Force contract as we continue to see delays in resolving a contract dispute. Legal matters include reserves related to various other lawsuits and claims that arise in the normal course of business. See Note 8 for further discussion.
Other long-term liabilities
Other long-term liabilities as of December 31, 2014 and December 31, 2013 were $11.3 million and $7.6 million, respectively. Other long-term liabilities are primarily due to our long-term postemployment benefit obligation of $3.9 million and obligations in connection with the restructuring plan entered into in 2013 including a long-term leasehold obligation related to our new Tysons Corner facility in McLean, Virginia, of $4.3 million and $4.7 million as of December 31, 2014 and December 31, 2013, respectively.
During the fourth quarter of calendar year 2013, the Company vacated the previously occupied properties at various locations and consolidated to the new Tysons Corner location in McLean, Virginia.  Additionally, during the year ended 2014 we entered into an agreement to buy out our previous headquarter facility lease. Accrued costs associated with vacating these properties, such as lease vacancy obligations, net of estimated sublease rental assumptions as well as the buyout were approximately $1.7 million and $7.8 million as of December 31, 2014 and December 31, 2013, respectively and are included within Other accrued liabilities above.
As a result of the restructuring plan, we paid $0.6 million and $3.9 million in relocation expenses during the year ended December 31, 2014 and December 31, 2013, respectively, in order to better position our executive presence in our Texas facilities.  We also recorded a post-employment benefit expense of $15.5 million and $7.3 million during the year ended December 31, 2014 and December 31, 2013, respectively, related to severance in accordance with ASC 712 - Compensation. These charges were primarily related to the workforce reduction initiatives implemented during the year. Both charges were included in Selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2014 and December 31, 2013, we had approximately $10.6 million and $0.9 million, respectively, in accrued post-employment benefit expense for estimated future payments in accordance with ASC 712. We do not anticipate any further costs related to the restructuring plan.

Note 3 — Goodwill, Other Intangible Assets and Long-Lived Assets
During the second quarter of 2014, we amended our organizational structure within the DynLogistics segment to improve efficiencies within existing businesses, resulting in the combination of two reporting units within our DynLogistics segment. Our DynLogistics segment now includes three reporting units.
During the third quarter of 2014, we amended our operating structure by realigning our existing DynGlobal segment as a pure business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue international and commercial business. As a result, we eliminated the DynGlobal segment. DynGlobal resources were redeployed into the remaining two operating and reporting segments DynAviation and DynLogistics. The reporting

62

units within DynAviation, which has two reporting units and DynLogistics which has three reporting units, remain unchanged. The amendment in our organizational structure did not result in any reallocation of goodwill.
We assess goodwill and other intangible assets with indefinite lives for impairment annually in October and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible impairment in the period in which the event is identified.
We estimate the fair value of our reporting units using a combination of the income approach and the market approach. Under the income approach, we utilize a discounted cash flow model based on several factors including balance sheet carrying values, historical results, our most recent forecasts, and other relevant quantitative and qualitative information. We discount the related cash flow forecasts using the weighted-average cost of capital at the date of evaluation. Under the market approach, we utilize comparative market multiples in the valuation estimate. While the income approach has the advantage of utilizing more company specific information, the market approach has the advantage of capturing market based transaction pricing. The estimates and assumptions used in assessing the fair value of our reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties.
Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units or indefinite-lived intangible assets and could result in an impairment charge in a future period. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units or asset groups when determining the carrying value of each reporting unit or indefinite-lived intangible assets also requires judgment. All of these factors are subject to change with a change in the defense industry or larger macroeconomic environment.
Our revenue is predominantly from contracts and subcontracts with the U.S. government and its agencies. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the Department of Defense ("DoD") and the Department of State ("DoS"). Funding for our programs is dependent upon the annual budget and the appropriation decisions assessed by Congress, which are beyond our control. Estimates and judgments made by management, as it relates to the fair value of our reporting units or indefinite-lived intangible assets, could be impacted by the continued uncertainty over the defense industry.
During the second quarter of 2014, we performed a re-assessment of our projections due to continued challenges in our industry and declines in our business through the first half of the year. As a result of the re-assessment, we noted significant declines in future projections and assumptions with respect to new business opportunities within the Logistics Sustainment Services (“LSS”) reporting unit within the DynLogistics segment, which represented a carrying value of $120.6 million in goodwill as of December 31, 2013. We concluded that the change in circumstances represented a triggering event and an interim step one assessment was performed to identify any possible goodwill impairment. The first step of the impairment test indicated the carrying value of the LSS reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the LSS reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $90.7 million was recorded during the three months ended June 27, 2014 to impair the carrying value of the LSS reporting unit goodwill. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the consolidated statement of operations. Any further declines in performance within this reporting unit in the future could result in a new triggering event and an additional goodwill impairment.
Further, in light of the re-assessment of our future projections performed during the three months ended June 27, 2014, we also determined that it was appropriate for us to perform a step one interim goodwill impairment test on the Aviation reporting unit within the DynAviation segment. The step one results indicated that the fair value of the reporting unit exceeded its carrying value by approximately 15%.
During the third quarter of 2014, we recorded a significant loss on a U.S. Air Force contract as we continued to see delays in resolving the ongoing dispute on the contract and saw a reduction in our overall Aviation reporting unit forecast. We concluded that the decline in performance represented a triggering event within the Aviation reporting unit in DynAviation and a step one assessment was performed to identify any potential goodwill impairment. The results of the step one test indicated the carrying value of the Aviation reporting unit was greater than the fair value. We performed step two of the impairment test and determined that the goodwill at the Aviation reporting unit was partially impaired. As a result, a non-cash impairment charge of approximately $50.8 million was recorded during the three months ended September 26, 2014. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the consolidated statement of operations. We continue to monitor

63

the performance of this reporting unit and any further declines in performance within this reporting unit in the future could result in a new triggering event and an additional goodwill impairment.
During our annual goodwill impairment test as of October of 2014, and as a result of continued declines in performance we noted further changes to our assumptions and projections for the Aviation reporting unit. This reporting unit failed the step one of our annual goodwill impairment test. We performed a step two impairment test and determined the implied fair value of the reporting unit was lower than the carrying value, resulting in a non-cash impairment charge of $11.4 million. The impairment charge has been presented within the Impairment of goodwill, intangibles and other long lived assets in the consolidated statement of operations. We continue to monitor the performance of this reporting unit and any further declines in performance within this reporting unit in the future could result in a new triggering event and an additional goodwill impairment.
In January 2015, the DoS issued a letter notifying us that our proposal on the recompete related to the INL contract within the Air Wing reporting unit was outside of the competitive range and would not be considered further for award. We requested and received a pre-award debriefing of the DoS' evaluation. We filed a protest with the U.S. Government Accountability Office ("GAO") to challenge the decision by the DoS. In response to our protest, the DoS notified the GAO that it will take corrective action which will include a reconsideration of its proposal evaluations, and a determination of whether discussions are necessary and, if so, it will make a new competitive range decision. The evaluation process is still underway and DoS has yet to award any part of the contract recompete. Pre-award protests occur within our industry frequently and during this process we are committed to continue to support and serve the DoS through our current contract which we believe will be extended during this procurement process. As a result of events described above, our annual goodwill impairment test for the Air Wing reporting unit failed step one of the impairment test indicating the carrying value of the reporting unit was more than the fair value. We performed step two of the impairment test (including an assessment of our customer related intangibles further discussed below) and determined that the goodwill at the reporting unit was impaired. As a result, a non-cash impairment charge of $12.0 million was recorded during the fourth quarter of 2014 to fully impair the carrying value of the Air Wing reporting unit goodwill. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the consolidated statement of operations.
Our annual goodwill impairment test concluded that the estimated fair values of each of our remaining reporting units substantially exceeded their respective carrying values. The projections for these reporting units include significant estimates related to new business opportunities which are the basis for the discount rate assumptions currently applied and we have assessed this risk as one of the variables in establishing the discount rate. If we are unsuccessful in obtaining these opportunities in 2015, a triggering event could be identified and a step one assessment would be performed to identify any possible goodwill impairment in the period in which the event is identified.
The fair value of the reporting units and the assets and liabilities identified in the impairment test were determined using the combination of the income approach and the market approach, which are Level 3 and Level 2 inputs, respectively. See Note 10 for further discussion of fair value. In calculating the fair value of the NSS, LSS, Air Wing and Aviation reporting units, we used unobservable inputs and management judgment which are Level 3 fair value measurements. We used the following estimates and assumptions in the discounted cash flow analysis:
•
terminal value growth rates based on real rates of growth and inflationary growth;
•
terminal earnings before interest, taxes, depreciation and amortization ("EBITDA") margins, as a percentage of revenue reflecting forecasted EBITDA margins;
•
discount rates based on weighted-average cost of capital; and
•
assumptions regarding future capital expenditures.
The market approach analysis utilized observable level 2 inputs as it considered the inputs of other comparable companies.
The carrying amount of goodwill, by segment, was as follows:
(Amounts in thousands)
DynAviation
 
DynLogistics
 
Total
Balance as of December 31, 2012
$
442,393

 
$
161,659

 
$
604,052

Impairment of goodwill
(281,461
)
 
(28,824
)
 
(310,285
)
Balance as of December 31, 2013
160,932

 
132,835

 
293,767

Impairment of goodwill
(74,137
)
 
(90,742
)
 
(164,879
)
Balance as of December 31, 2014
$
86,795

 
$
42,093

 
$
128,888


As a result of the triggering event identified within the DoS contract subsequent to year end, we also identified a triggering event with respect to the DoS customer-relationship intangibles (“CRI”). We performed an impairment test at the individual asset level and noted that the carrying amount of the CRI exceeded the anticipated undiscounted cash flows associated with the use

64

and/or disposition of the asset. As a result, we recorded a non-cash impairment charge of $33.4 million during the fourth quarter of 2014 to partially impair the carrying value of the DoS CRI. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the consolidated statement of operations. The CRI impairment amount was factored into the step two goodwill impairment tests discussed above. The new cost basis of the CRI will be amortized over the remaining useful life of the asset.
Further, as a part of our annual impairment test of indefinite-lived intangible assets, we noted that the estimated fair value of the indefinite-lived tradename was less than the carrying value. As a result, a $14.5 million non-cash impairment charge was recorded during the fourth quarter of 2014 to partially impair the carrying value of the indefinite-lived tradename. The impairment charge has been presented within the Impairment of goodwill, intangibles and long lived assets in the consolidated statement of operations. Fair values are calculated for trademarks using a "relief from royalty" method, which estimates the fair value of a trademark by determining the present value of estimated royalty payments that are avoided as a result of owning the trademark. This method includes judgmental assumptions about revenue growth, an appropriate royalty rate, and discount rates that have a significant impact on the fair value and are substantially consistent with the assumptions used to determine the fair value of our reporting units discussed above.


65

The following tables provide information about changes relating to certain intangible assets:
 
December 31, 2014
(Amounts in thousands, except years)
Weighted
Average
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
4.6
 
$
350,912

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

Other
 
 
 
 
 
 
 
 
 
Finite-lived
4.8
 
15,418

 
(10,395
)
 
—

 
5,023

Indefinite-lived
 
 
5,059

 
—

 
—

 
5,059

Total other intangibles
 
 
$
371,389

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

 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
Finite-lived
0.4
 
$
869

 
$
(807
)
 
$
—

 
$
62

Indefinite-lived
 
 
43,222

 
—

 
(14,522
)
 
28,700

Total tradenames
 
 
$
44,091

 
$
(807
)
 
$
(14,522
)
 
$
28,762


 
December 31, 2013
(Amounts in thousands, except years)
Weighted
Average
Useful Life
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Impairment
 
Net
Other intangible assets:
 
 
 
 
 
 
 
 
 
Customer-related intangible assets
5.6
 
$
350,912

 
$
(138,623
)
 
$
—

 
$
212,289

Other
 
 
 
 
 
 
 
 
 
     Finite-lived
6.3
 
22,042

 
(14,151
)
 
—

 
7,891

     Indefinite-lived
 
 
5,059

 
—

 
—

 
5,059

Total other intangibles
 
 
$
378,013

 
$
(152,774
)
 
$
—

 
$
225,239

 
 
 
 
 
 
 
 
 
 
Tradenames:
 
 
 
 
 
 
 
 
 
Finite-lived
1.4
 
$
869

 
$
(627
)
 
$
—

 
$
242

Indefinite-lived
 
 
43,222

 
—

 
—

 
43,222

Total tradenames
 
 
$
44,091

 
$
(627
)
 
$
—

 
$
43,464

Amortization expense for customer-related and other intangibles was $44.0 million, $44.3 million and $46.1 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Other intangibles is primarily representative of our capitalized software which had a net carrying value of $5.0 million and $7.9 million as of December 31, 2014 and December 31, 2013, respectively.
The following table outlines an estimate of future amortization based upon the finite-lived intangible assets owned at December 31, 2014:
 
Amortization
Expense (1)  
Estimate for calendar year 2015
32,264

Estimate for calendar year 2016
29,465

Estimate for calendar year 2017
26,880

Estimate for calendar year 2018
23,908

Estimate for calendar year 2019
21,463

Thereafter
10,503

(1)The future amortization is inclusive of the finite lived intangible-assets and finite-lived tradename.


66

Note 4 — Income Taxes
The domestic and foreign components of (Loss) income before income taxes are as follows:
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Domestic
$
(286,799
)
 
$
(286,989
)
 
$
6,567

Foreign
(1,391
)
 
27

 
5,739

(Loss) income before income taxes
$
(288,190
)
 
$
(286,962
)
 
$
12,306

The Benefit (provision) from income taxes consists of the following:
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Current portion:
 
 
 
 
 
Federal
$
311

 
$
—

 
$
—

State
(800
)
 
(784
)
 
(500
)
Foreign
(3,363
)
 
(16,045
)
 
(4,342
)
 
(3,852
)
 
(16,829
)
 
(4,842
)
Deferred portion:
 
 
 
 
 
Federal
23,001

 
52,574

 
(9,996
)
State
739

 
1,086

 
(101
)
Foreign
682

 
630

 
(659
)
 
24,422

 
54,290

 
(10,756
)
Benefit (provision) from income taxes
$
20,570

 
$
37,461

 
$
(15,598
)

67

Temporary differences, which give rise to deferred tax assets and liabilities, were as follows:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Deferred tax assets related to:
 
 
 
Workers' compensation accrual
$
5,046

 
$
10,788

Accrued vacation
4,734

 
5,055

Completion bonus allowance
6,001

 
3,539

Accrued severance
3,751

 
193

Accrued executive incentives
2,151

 
4,538

Legal reserve
3,099

 
1,559

Accrued health costs
799

 
1,704

Suspended loss from consolidated partnership
—

 
5,421

Contract loss reserve
11,684

 
8,877

Other accrued liabilities and reserves
26,261

 
18,539

Partnership / joint venture basis differences
3,072

 
—

Foreign tax credit carryforward
16,336

 
17,880

Net operating loss carryforward
979

 
1,096

Other carryforwards
704

 
656

Uncertain tax positions
5,649

 
7,471

Goodwill and other intangible assets
44,201

 
—

Valuation allowance
(47,808
)
 
—

Total deferred tax assets
86,659

 
87,316

Deferred tax liabilities related to:
 
 
 
Partnership / joint venture basis differences
—

 
(150
)
Prepaid insurance
(5,242
)
 
(6,976
)
Indefinite lived intangibles
(31,806
)
 
—

Goodwill and other intangible assets
—

 
(25,101
)
Unbilled receivables
(75,392
)
 
(103,413
)
Total deferred tax liabilities
(112,440
)
 
(135,640
)
 
 
 
 
Total deferred tax liabilities, net
$
(25,781
)
 
$
(48,324
)

68

Deferred tax assets and liabilities are reported as:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Current deferred tax liabilities, net
$
(31,477
)
 
$
(30,965
)
Non-current deferred tax assets (liabilities), net
5,696

 
(17,359
)
Deferred tax liabilities, net
$
(25,781
)
 
$
(48,324
)
Management assesses both the available positive and negative evidence to determine whether it is more likely than not that there will be sufficient sources of future taxable income to recognize deferred tax assets. We incurred cumulative losses over the three-year period ended December 31, 2014. Cumulative losses in recent years are considered significant objective negative evidence in evaluating deferred tax assets under the more likely than not criteria for recognition of deferred tax assets. On the basis of this evaluation, we recorded a valuation allowance of $47.8 million as of December 31, 2014.
As of December 31, 2014 and December 31, 2013, we had no U.S. federal net operating losses available for use. As of December 31, 2014 and December 31, 2013, we had state net operating losses ("NOLs") of approximately $123.6 million and $138.3 million, respectively, most of which will begin to expire in 2020 or later. We had approximately $16.3 million and $17.9 million as of December 31, 2014 and December 31, 2013, respectively, in foreign tax credit carryforwards ("FTCs"). Additionally, we made no estimated federal income tax payments for the year ended December 31, 2014 and $6.9 million for the year ended December 31, 2013.
A reconciliation of the statutory federal income tax rate to our effective rate is provided below:
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
 
 
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax, less effect of federal deduction
—
 %
 
0.1
 %
 
4.9
 %
Noncontrolling interests
0.3
 %
 
0.5
 %
 
(16.1
)%
Goodwill impairment (1)
(11.2
)%
 
(22.6
)%
 
70.6
 %
Uncertain tax positions
0.1
 %
 
(0.1
)%
 
13.7
 %
Nondeductible expenses
(0.8
)%
 
(0.4
)%
 
9.0
 %
Penalties
—
 %
 
—
 %
 
5.8
 %
Valuation allowance
(16.2
)%
 
—
 %
 
—
 %
Other
(0.1
)%
 
0.6
 %
 
3.8
 %
Effective tax rate
7.1
 %
 
13.1
 %
 
126.7
 %
(1)
Includes non-cash impairment charges to goodwill associated with our DynAviation and DynLogistics segments for years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. See Note 3 for further discussion.
Due to the nature of our business, as a provider of professional and technical government services to the U.S. government, foreign earnings are generally exempt from foreign tax due to various bi-lateral agreements often referred to as Status of Forces Agreements ("SOFA") and Status of Mission Agreements ("SOMA") or their equivalents. We repatriate and provide U.S. income taxes on virtually all income we earn outside of the United States.
Uncertain Tax Positions
We account for uncertain tax positions in accordance with ASC 740 - Income Taxes, which prescribes the more likely than not threshold for recognition of a tax position in the financial statements. The amount of unrecognized tax benefits at December 31, 2014 and December 31, 2013 was $7.3 million and $9.5 million, respectively, of which $2.3 million and $2.7 million, respectively, would impact our effective tax rate if recognized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

69

(Amounts in thousands)
Unrecognized Tax Benefits
Balance at December 31, 2012
$
8,234

Additions for tax positions related to prior years
1,686

Reductions for tax positions of prior years
(447
)
Settlements
—

Remeasurements
—

Net releases
—

Lapse of statute of limitations
—

Balance at December 31, 2013
$
9,473

Additions for tax positions related to prior years
—

Reductions for tax positions of prior years
(447
)
Settlements
(1,375
)
Remeasurements
(311
)
Net releases
—

Lapse of statute of limitations
—

Balance at December 31, 2014
$
7,340

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet. For the years ended December 31, 2014 and December 31, 2013, there was no accrued interest related to unrecognized tax benefits in interest expense and no penalties recognized in the provision for income taxes within our consolidated statements of operations. We expect the unrecognized tax benefit of $8.0 million, inclusive of penalties, as of December 31, 2014 to be settled within the next twelve months. For the year ended December 31, 2012, we had a net decrease of approximately $0.1 million of interest expense and recorded $0.7 million increase in cumulative penalties recognized in the provision for income taxes within our consolidated statements of operations.
We file income tax returns in U.S. federal and state jurisdictions and in various foreign jurisdictions which are subject to examinations by the IRS and other taxing authorities. These audits can result in adjustments of taxes due. Our estimate of the potential outcome of any uncertain tax issue prior to audit is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. An unfavorable result under audit may reduce the amount of state net operating losses we have available for carryforward to offset future taxable income, or may increase the amount of tax due for the period under audit, resulting in an increase to the effective rate in the year of resolution. The statute of limitations is open for U.S. federal income tax returns for our fiscal year 2009 forward. The statute of limitations for state income tax returns is open for our fiscal year 2010 and forward, with few exceptions, and foreign income tax examinations for the calendar year 2009 forward, with few exceptions.  
On January 22, 2014, a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance was received, seeking $64.2 million in taxes and penalties specific to one of our business licenses in Afghanistan for periods 2009 through 2012. The majority of this assessment was income tax related; however, approximately $10.2 million of the assessed amount is non-income tax related and is discussed further in Note 8. We filed our initial appeal of the assessment on February 19, 2014. In May 2014, the MOF ruled in our favor for the income tax related issue which totaled approximately $54.0 million. We reversed the uncertain tax position related to the dividend withholding issue during the quarter ended June 27, 2014. See further discussion in Note 8.

Note 5 — Accounts Receivable
Accounts Receivable, net consisted of the following:
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
 
Billed
$
146,286

 
$
179,586

Unbilled
302,210

 
397,550

Total
$
448,496

 
$
577,136

Unbilled receivables as of December 31, 2014 and December 31, 2013 include $50.7 million and $41.6 million respectively, related to costs incurred on projects for which we have been requested by the customer to begin new work or extend work under an existing contract and for which formal contracts, contract modifications or other contract actions have not been executed as of

70

the end of the respective periods. Our largest contract, LOGCAP IV, accounted for approximately 59% and 84% of these amounts as of December 31, 2014 and December 31, 2013, respectively. We believe we have legal and contractual basis for these amounts and are working with our customer to complete the contract actions that will allow us to bill and collect our receivables. If we cannot reach an agreement with the customer, we believe we have other avenues to pursue resolution, including the claims process. LOGCAP IV accounted for approximately 20% and 34% of total unbilled receivables as of December 31, 2014 and December 31, 2013, respectively.
As of December 31, 2014, we had four contract claims with no associated receivable balances and as of December 31, 2013, we had no contract claims outstanding with associated receivable balances. The balance of unbilled receivables above consists of costs and fees billable immediately on contract completion or other specified events, all of which are expected to be billed and collected within one year, except items that may result in a request for equitable adjustment or formal claim. We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government.

Note 6 — Retirement Plans
401(k) Savings Plans
The DynCorp International Savings Plan (the "Savings Plan") is a participant-directed, defined contribution, 401(k) plan for the benefit of employees meeting certain eligibility requirements. The Savings Plan is intended to qualify under Section 401(a) of the U.S. Internal Revenue Code (the "Code") and is subject to the provisions of the Employee Retirement Income Security Act of 1974. Under the Savings Plan, participants may contribute from 1% to 50% of their earnings. Contributions are made on a pre-tax basis, limited to annual maximums set by the Code. The current maximum contribution per employee is $17,500 per calendar year. In June 2014, the Company updated its matching contributions to an amount equal to 100% of the first 2% of employee contributions and 50% of the next 4%, up to 12,750 per calendar year are invested in various funds at the discretion of the participant. Prior to June 2014, Company matching contributions were made in an amount equal to 100% of the first 2% of employee contributions and 50% of the next 6%, up to 12,750 per calendar year are invested in various funds at the discretion of the participant. We incurred Savings Plan expense of approximately $11.9 million, $16.1 million and $18.2 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. All Savings Plan expenses are fully funded.
Nonqualified Unfunded Deferred Compensation Plan
The Company has a non-qualified unfunded and unsecured deferred compensation plan that is offered to certain members of management allowing for the deferral of salary and bonuses without the statutory limitations present in 401(k) savings plan. The elections under the savings plans must be completely separate and independent of each other. Under the deferred compensation plan, the deferral amount limitation is 50% of salary and 100% of bonuses and each participant shall be 100% vested in, at all times. The funds can be distributed the first day of the calendar month following the six-month anniversary of the participant’s separation from the Company. The participant can elect payout of the funds in a single sum or annual installments over 5 or 10 years; however, only one election can be made with respect to all of the deferrals in the respective account. If, for any reason, the participant fails to make a valid and timely election, the participant’s account shall be distributed as a single sum as of the participant’s benefit commencement date. There were no contributions made to the deferred compensation plan on behalf of the Company for years ended December 31, 2014, December 31, 2013 and December 31, 2012.
Multiemployer Pension Plans
We are subject to several collective-bargaining agreements that require contributions to a multiemployer defined benefit pension plan that covers its union-represented employees. We contribute to this plan based on specified hourly rates for eligible hours. The risks of participating in this multiemployer plan are different from single-employer plans in the following aspects:
a.
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
b.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
c.
If we stop participating in the multiemployer plan, we may be required to pay a withdrawal liability based on our portion of the unfunded status of the plan.
We are subject to 13 significant collective bargaining-agreements ("CBA") that require contributions to the International Association of Machinists National Pension Fund ("IAMNPF") with expiration dates ranging from May 15, 2015 through March 30, 2018. This is the only multiemployer plan that we contribute to. As long as we remain a contributing employer, we have no liability for any unfunded portion of this plan. However, if for any reason, we stop making contributions to the plan under any of the individual collective-bargaining agreements, we could be assessed a potential withdrawal liability based on our share of the

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unfunded vested benefits of the plan. Our share of the unfunded vested benefits is determined by the contributions required under the individual collective-bargaining agreements from which we withdraw relative to the plan as a whole.
Our participation in the IAMNPF for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 is outlined in the table below. The "EIN/PN" column provides the Employee Identification Number ("EIN") and the three-digit plan number ("PN"). The most recent Pension Protection Act ("PPA") zone status available for 2014, 2013 and 2012 is for the plan year-ends as indicated below. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are between 65 percent and 80 percent funded, and plans in the green zone are at least 80 percent funded. The "FIP/RP Status Pending/Implemented" column indicates if the plan has a financial improvement plan ("FIP") or a rehabilitation plan ("RP") which is either pending or has been implemented. In addition to regular plan contributions, we may be subject to a surcharge if the plan is in the red zone. The "Surcharge Imposed" column indicates whether a surcharge has been imposed on contributions to the plan. The last column lists the expiration date of the collective-bargaining agreements to which the plan is subject.
 
 
 
FIP / RP Status
Total Contributions of DynCorp International
 
Expiration
 
 
PPA Zone Status (2)
Pending /
(Amounts in thousands)
Surcharge
Date of
Pension Fund
EIN/PN
2014
2013
2012
Implemented
2014
2013
2012
Imposed
CBA
IAMNPF (1)
516031295 / 001
Green
Green
Green
No
$6,845
$6,062
$4,686
No
5/15/2015 through 3/30/2018
(1)
Of the 13 collective-bargaining agreements that require contributions to this plan, the agreement with International Association of Machinists ("IAM") Pilot union employees at California Department of Forestry and Fire Protection ("CAL FIRE") is the most significant as contributions under this plan for years 2015 through the expiration date of the collective-bargaining agreement will approximate $14.1 million, or 36.3% of all required contributions to the IAMNPF.
(2)
Unless otherwise noted, the most recent PPA zone status available in 2014, 2013 and 2012, is for the plan’s year-end status for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. The zone status is based on information we receive from the plan and is certified by the plan's actuary. Generally, plans in the red zone are less than 65% funded, plans in the yellow zone are between 65% and 80% funded, and plans in the green zone are at least 80% funded.

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

 
$
455,000

Term loan
187,272

 
277,272

Total long-term debt
$
642,272

 
$
732,272

Senior Credit Facility
On July 7, 2010, we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Administrative Agent (the "Agent"). On January 21, 2011 and on August 10, 2011, DynCorp International Inc. entered into amendments to the Senior Credit Facility.
On June 19, 2013, we entered into a third amendment (the “Third Amendment”) to the Senior Credit Facility. The Third Amendment, among other things, amended the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016, increased the amount of the Revolver to $181.0 million and modified the maximum total leverage threshold test and certain other covenants.
On November 5, 2014, we entered into a fourth amendment and waiver (the "Fourth Amendment") to the Senior Credit Facility. The Fourth Amendment, among other things, (i) amended the Senior Credit Facility by modifying financial maintenance covenants; (ii) reduced the amount of the Revolver credit commitments of the lenders consenting to the Fourth Amendment by 20%, which represented a reduction of approximately $36.2 million; (iii) amended the definition of Consolidated Net Income as defined in the Senior Credit Facility to exclude up to $35 million for a one-time charge during the three month period ended September 26, 2014 related to a certain U.S. Air Force contract; and (iv) waived compliance with the financial maintenance covenants with respect to the three month period ended September 26, 2014.
The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of December 31, 2014, the Senior Credit Facility provided for a $187.3 million Term Loan and the $144.8 million Revolver, which includes a $100.0 million letter of credit subfacility. As of December 31, 2014 and December 31, 2013, the available

72

borrowing capacity under the Senior Credit Facility was approximately $108.1 million and $144.6 million, respectively, which includes $36.7 million and $36.4 million, respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of December 31, 2014 and December 31, 2013 there were no amounts borrowed under the Revolver. The maturity date on both the Term Loan and the Revolver is July 7, 2016.
Interest Rates on Term Loan & Revolver
Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") as defined in the Senior Credit Facility plus an applicable margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency option based on our outstanding Secured Leverage Ratio at the end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $75 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.
The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%.
The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of December 31, 2014 and December 31, 2013, the applicable interest rate on the Term Loan was 6.25%.
Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees
The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. The applicable interest rates for our letter of credit subfacility were 4.00% and 4.25% as of December 31, 2014 and December 31, 2013, respectively. The applicable interest rate for our unused commitment fees was 0.50% as of December 31, 2014 and December 31, 2013, respectively. All of our letters of credit are also subject to a 0.25% fronting fee.
Principal Payments
Our Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the Senior Credit Facility, as additional principal payments. Based on our annual financial results and the additional principal prepayments made during the year ended December 31, 2013, we were not required to make any additional principal payments under the Excess Cash Flow requirement during the year ended December 31, 2014. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the year ended December 31, 2014.
    
During the years ended December 31, 2014 and December 31, 2013, we made principal payments of $90.0 million and $50.0 million, respectively on the Term Loan. Pursuant to our Term Loan, quarterly principal payments are required, however, the principal prepayments made in 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016.
Deferred financing costs of $1.4 million and $0.7 million, related to the various principal payments, were expensed and included in Loss on early extinguishment of debt in our consolidated statement of operations for the years ended December 31, 2014 and December 31, 2013, respectively. There were no penalties associated with the prepayments.
Covenants
The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. These covenants, among other things, limit our ability to:
•
declare dividends and make other distributions;
•
redeem or repurchase our capital stock;

73

•
prepay, redeem or repurchase certain of our indebtedness;
•
grant liens;
•
make loans or investments (including acquisitions);
•
incur additional indebtedness;
•
modify the terms of certain debt;
•
restrict dividends from our subsidiaries;
•
change our business or business of our subsidiaries;
•
merge or enter into acquisitions;
•
sell our assets;
•
enter into transactions with our affiliates; and
•
make capital expenditures.
In addition, the Senior Credit Facility contains two financial maintenance covenants, a maximum total leverage ratio and a minimum interest coverage ratio.
The total leverage ratio is the Consolidated Total Debt, as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated EBITDA, as defined in the Senior Credit Facility, for the applicable period.
Effective with the Fourth Amendment, the maximum total leverage ratios are set forth below as follows:
Period Ending
Total Leverage Ratio
December 31, 2014
5.55 to 1.0
March 27, 2015
6.65 to 1.0
June 26, 2015
7.70 to 1.0
September 25, 2015
8.10 to 1.0
December 31, 2015
7.75 to 1.0
March 25, 2016
7.60 to 1.0
June 24, 2016
6.90 to 1.0
June 25, 2016 and thereafter
6.60 to 1.0
The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. Effective with the Fourth Amendment, the interest coverage ratios are set forth below as follows:
Period Ending
Interest Coverage Ratio
December 31, 2014
1.05 to 1.0
March 25, 2016
1.15 to 1.0
June 24, 2016
1.20 to 1.0
June 25, 2016 and thereafter
1.30 to 1.0
As of December 31, 2014 and December 31, 2013, we were in compliance with our financial maintenance covenants.
Senior Unsecured Notes
On July 7, 2010, DynCorp International Inc. completed an offering of $455.0 million in aggregate principal of 10.375% senior unsecured notes due 2017 (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International Inc., and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) as Trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes is payable on January 1 and July 1 of each year, and commenced on January 1, 2011.
The Senior Unsecured Notes contain various covenants that restrict our ability to:
•
incur additional indebtedness;
•
make certain payments, including declaring or paying certain dividends;  
•
purchase or retire certain equity interests;
•
retire subordinated indebtedness;
•
make certain investments;

74

•
sell assets;
•
engage in certain transactions with affiliates;
•
create liens on assets;
•
make acquisitions; and
•
engage in mergers or consolidations.
The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings by both Moody’s Investor Services and Standard and Poors.
We can redeem the Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events.
Call and Put Options
We can voluntarily settle all or a portion of the Senior Unsecured Notes at any time prior to maturity at an applicable redemption price plus the accrued and unpaid interest, if any, as of the applicable redemption date. The applicable redemption prices with respect to the Senior Unsecured Notes on any applicable redemption date if redeemed during the 12-month period commencing on July 1 of the years set forth below are as follows:
Year
Redemption Price
2014
105.2
%
2015
102.6
%
2016 and thereafter
100.0
%
The Indenture requires us to offer to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events. In the case of Asset Sales (as defined in the Indenture), we are required under the Indenture to use the proceeds from such asset sales to either (i) prepay secured debt or nonguarantor debt, (ii) reinvest in our business or (iii) to the extent asset sale proceeds not applied in accordance with clause (i) or (ii) exceed $15.0 million, make an offer to repurchase the Senior Unsecured Notes at 100% of the principal amount thereof.
In the event of a change in control, each holder of the Senior Unsecured Notes will have the right to require the Company to repurchase some or all of the Senior Unsecured Notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date.
The fair value of the Senior Unsecured Notes is based on their quoted market value. As of December 31, 2014 and December 31, 2013, the quoted market value of the Senior Unsecured Notes was approximately 82.0% and 103.0%, respectively, of stated value.

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 leases on real estate are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $95.5 million, $167.6 million, and $217.4 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. We have no significant long-term purchase agreements with service providers.
Minimum fixed rental payments non-cancelable for the next five years and thereafter under operating leases in effect as of December 31, 2014, are as follows:

75

Calendar Year 
 
Real Estate 
 
Equipment 
 
Total 
 
 
(Amounts in thousands)
2015 (1)
 
$
24,698

 
$
5,817

 
$
30,515

2016
 
11,839

 
3,386

 
15,225

2017
 
10,041

 
2,433

 
12,474

2018
 
9,060

 
—

 
9,060

2019
 
4,225

 
—

 
4,225

Thereafter
 
13,911

 
—

 
13,911

Total
 
$
73,774

 
$
11,636

 
$
85,410

(1)
The minimum lease table above excludes agreements of one year or less in duration. These leases are accounted for in our rent expense, however, because of the short tenure of the lease, these are not reflected in the table above.
Contingencies
General Legal Matters
We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in "Other accrued liabilities" totaling approximately $8.7 million and $14.1 million as of December 31, 2014 and December 31, 2013, respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at December 31, 2014. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In accordance with ASC 450 - Contingencies, in addition to matters that are considered probable and can be reasonably estimated, we also disclose certain matters considered reasonably possible. In addition to the disclosure requirements set forth in ASC 450-20, the Company also discloses any other contingencies for which the likelihood of an unfavorable outcome is remote but for which the Company believes are of such a significant nature that disclosure would benefit a user of our financial statements. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of December 31, 2014. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.
Pending Litigation and Claims
On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, International law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of International law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. As of January 12, 2010, 1,256 of the plaintiffs 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. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.
A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of

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herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010, fifteen of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment, and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia, and the appeal is pending. The terms of the DoS contract provide that the DoS will indemnify our operating company against third-party liabilities arising out of the contract, subject to available funding. We are also entitled to indemnification by Computer Sciences Corporation, the Company's previous owners, in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote.
Arising out of the litigation described in the preceding two paragraphs, on September 22, 2008, we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. On November 9, 2009, the court granted our Partial Motion for Summary Judgment regarding the duty to defend, and the carriers have paid the majority of the litigation expenses. In a related action, the carriers filed a lawsuit against us on February 5, 2009, seeking rescission of certain aviation insurance policies based on an alleged misrepresentation by us concerning the existence of certain of the lawsuits relating to the eradication of narcotic plant crops. On May 19, 2010, our aviation insurance carriers filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. We believe the claims asserted by the insurance carriers are without merit and the likelihood of an unfavorable judgment in this matter is remote.
In 2009, we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit, was challenged in certain instances. In December 2011, the customer filed arbitration alleging fraud, gross negligence, contract violations, and conversion of funds and asserted damages of approximately $150 million. We believe our right to terminate this contract was justified and permissible under the terms of the contract, and we intend to vigorously contest the claims brought against us. Additionally, we believe the contract limits any damages to a maximum of $3 million, except in situations of gross negligence and willful misconduct. As of December 31, 2014 and December 31, 2013, we have recorded an immaterial liability for this matter and believe the likelihood of loss for amounts in excess of this accrual, up to the amount limited by the contract, is reasonably possible.
On July 8, 2009, a lawsuit was filed in the United Arab Emirates ("UAE") Abu Dhabi Court of First Instance, by Al Hamed ITC (hereafter "Al Hamed") concerning an October 2002 business development contract focused upon obtaining business directly with the UAE General Military Directorate ("GMD"). Al Hamed was unsuccessful in assisting the company in soliciting business with GMD and, as such, the contract with Al Hamed was terminated in July 2006. We became a subcontractor to the successful bidder, Al Taif, in December 2006. Al Hamed filed a claim seeking $57 million in damages under the business development contract. On May 9, 2012, the court awarded Al Hamed 8.2 million in UAE Dirhams ($2.2 million U.S. dollars) plus 5% interest and expenses. The Company and Al Hamed both appealed the judgment. On September 12, 2012, the appellate court altered the judgment stating the amount should not have been in UAE Dirhams rather in U.S. dollars, which amounts to $8.2 million US dollars. As of September 28, 2012, a reserve had been established for the full amount of the judgment. The judgment was further appealed to the Supreme Court in Abu Dhabi, and, on February 27, 2013, we were advised that our appeal was unsuccessful. On April 7, 2013, the judgment was paid and the matter is now closed. During calendar year 2013, we were made aware of a new case filed by Al Hamed in the UAE Abu Dhabi Court of First Instance seeking $23.3 million U.S. dollars in damages under the same business development contract. The case alleges we obtained additional business with Al Taif. On November 26, 2014, the UAE court entered a judgment in favor of Al Hamed in the amount of $3.75 million, which both parties appealed. As of December 31, 2014, a reserve had been established for the full amount of the settlement. In March 2015, the parties agreed to a settlement in which we paid $3.6 million and the matter is now closed.
In February 2014, we received a judgment related to a past helicopter accident in Aviano, Italy. As of December 31, 2013 we had a recorded liability for $9.8 million related to this matter. This matter was fully insured and a corresponding receivable from the insurance company was recorded within Other current assets. In April 2014, the insurance company paid out the settlement amounts and the case is now considered closed.
U.S. Government Investigations
We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements, including as previously disclosed in our periodic filings, the Special Inspector General for Iraq Reconstruction report regarding certain reimbursements and the U.S. Department of State Office of Inspector General's records subpoena with respect to Civilian Police ("CivPol"). Such investigations, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in adverse action

77

against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.
On August 16, 2005, we were served with a Department of Justice Federal Grand Jury Subpoena seeking documents concerning work performed by a former subcontractor, Al Ghabban in 2002-2005. Specifically, during the 2002-2005 timeframe, Al Ghabban performed line haul trucking work to transport materials throughout the Middle Eastern theater on the War Reserve Materials Program. In response to the subpoena in 2005, we provided the requested documents to the Department of Justice, and the matter was subsequently closed in 2005 without any action taken. In April 2009, we received a follow up telephone call concerning this matter from the Department of Justice Civil Litigation Division. Since that time, we have had several discussions with the government regarding the civil matter. In response to requests, we provided additional information to the Department of Justice Civil Litigation Division. In September 2014, we received notice this investigation was closed by the Department of Justice Civil Litigation Division.
On February 24, 2012, we were advised by the Department of Justice Civil Litigation Division that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. The Department of Justice Civil Litigation Division has requested information from the Company, and we are fully cooperating with the government’s review. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results. At this time, an estimate or a range of potential damages is not possible as this matter is still under review by the Department of Justice and no formal complaint has been filed.
U.S. Government Audits
Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management business systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If we are unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.
We have received a series of audit reports from the DCAA, some of which have resulted in Form 1s, related to their examination of certain incurred, invoiced and reimbursed costs on our CivPol program. The Form 1s identify several cost categories where the DCAA has asserted instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The asserted amounts are derived from extrapolation methodologies used to estimate potential exposure amounts for the cost categories. Over the past several years, we have worked with the DCAA and our customer in resolving matters inclusive in the Form 1s as well as other transmittals. We have provided responses to the DCAA and the Department of State that have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. We have also sought to obtain clarification from our customer through formal contract modifications in an attempt to assist the DCAA in closing these issues.
We believe the majority of these issues will continue to be resolved and thus represent loss contingencies that we consider remote. For the remaining issues, which total approximately $7.7 million, we believe the DCAA did not consider certain contractual provisions and long standing patterns of dealing with the customer. Since we cannot reasonably estimate the DCAA's acceptance of our initial responses and the ultimate outcome related to these remaining issues we believe these items represent loss contingencies that we consider reasonably possible. However, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer and the DCAA in providing clarification of the facts and circumstances surrounding the issues.
On April 30, 2013, we received several Form 1s from DCAA disapproving approximately $152.0 million of cost incurred for the periods ranging between 2000 to 2011 on the War Reserve Materiel program related to concerns on items such as the adequacy of documentation and reasonableness of costs. We are working with the Air Force to resolve these questions. Based on our recent correspondence with the customer, a substantial portion of these items represent loss contingencies are remote. The remaining portion of these items totaling $1.8 million represent loss contingencies that we consider reasonably possible; however, we do anticipate resolving these contingencies for an immaterial amount as we continue to work with the customer.
Foreign Contingencies

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As discussed in Note 4, on January 22, 2014, a tax assessment from the Large Tax Office of the Afghanistan Ministry of Finance (“MOF”) was received, seeking $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. See Note 4 for further discussion of the income tax related issue. We are still working with the MOF to remove the assessment on the remaining non-income tax related items. As of December 31, 2014, a reasonable estimate of loss or range of loss could not be made as we could not reasonably estimate the ultimate outcome related to the issues assessed.
Credit Risk
We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, we continuously review all accounts receivable and record provisions for doubtful accounts when necessary.
Risk Management Liabilities and Reserves
We are insured for domestic workers' compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period's claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic workers' compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic workers' compensation and medical costs is limited based on fixed dollar amounts. For domestic worker's compensation and employer's liability under state and federal law, the fixed-dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.75 million for total costs per covered participant per calendar year.

Note 9 — Equity
At April 1, 2010 (inception), 100 common shares were issued and, as of December 31, 2014, 100 shares remain issued and outstanding as there have been no further issuances of common shares since that date. During the period from April 1, 2010 (inception) through December 31, 2010, our equity was impacted by a capital contribution of $550.9 million in connection with the merger entered into on July 7, 2010.
Share Based Payments
On December 17, 2013, certain members of management and outside directors were awarded Class B interests in DynCorp Management LLC (“DynCorp Management”). DynCorp Management LLC conducts no operations and was established for the purpose of holding equity in our Company. DynCorp Management LLC authorized 100,000 Class B shares as available for issuance and approved 7,246 Class B-1 Interests and 380 Class B-2 Interests to certain members of management and outside directors of Defco Holdings, Inc. (“Holdings”), the non-member manager, and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. The grant and vesting of the awards is contingent upon the executives' consent to the terms and conditions set forth in the Class B-1 Interests and B-2 Interests Agreements. As of December 31, 2013 consents were received from members of management and outside directors with grants totaling 3,144 shares. Grants and the receipt of consents to the terms and conditions totaled 4,339 Class B-1 Interests during the year ended December 31, 2014.
The Class B-1 Interests are subject to (i) time-based vesting in separate tranches based on the participants’ hire date (each such date a “Vesting Date”); (ii) acceleration of vesting in certain circumstances (such as in the event of a change in control or termination of the executive without cause); and (iii) continued employment of the member of management by Holdings or its subsidiaries through the applicable vesting dates.
Class B-1 Interests held by participants hired in 2013 shall vest in 5 equal 20% installments on each of the grant dates of the Class B-1 Interests, July 15, 2014, July 15, 2015, July 15, 2016 and July 15, 2017. Class B-1 Interests Participants hired in 2012 shall vest with respect to 30% of the Class B-1 Interests on the grant date, an additional 20% on July 15, 2014, 20% on July 15, 2015 and with respect to the remaining Class B-1 Interests on July 15, 2016. Class B-1 Interests Participants hired in 2010 and 2011 shall vest with respect to 40% of the Class B-1 Interests as of the grant date, an additional 20% on July 15, 2014 and with respect to the remaining Class B-1 Interests on July 15, 2015.

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A summary of the Class B Interest plans activity for the years ended December 31, 2014 and December 31, 2013 is as follows:
 
 
Number of
Interests
Outstanding at December 31, 2012
 
—

Granted:
 

Class B-1
 
2,764

Class B-2
 
380

Exercised
 
—

Forfeited or expired
 
—

Outstanding at December 31, 2013
 
3,144

Granted:
 
 
Class B-1
 
4,339

Class B-2
 
—

Exercised
 
—

Forfeited or expired
 
(1,582
)
Outstanding at December 31, 2014
 
5,901

Awards to our management team consist of options qualifying as profits interests under Revenue Procedure 93-27, that are exercisable only upon a change in control as defined in the Plan. The awards do not expire and the awards do not have a fixed strike price. The value of the Class B Interest as of the grant date is calculated using a Monte Carlo simulation consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” and is amortized over the respective vesting period. The Monte Carlo simulation, similar to a Black-Scholes option pricing formula, requires the input of subjective assumptions, including the estimated life of the interest and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility of the market-based guideline companies as a basis for projecting the expected volatility of the underlying Class B interest and estimated the expected life of our Class B grants to be 4 years as of the grant date. The 2013 fair value utilized for determining the profits interests for Class B-1 and B-2 interests was $819.26 and $258.30, respectively. The initial fair value was utilized for all grants through the period ending March 28, 2014. After the period ending March 28, 2014, another valuation was performed to determine the fair value of future grants resulting in the 670 Class B-1 interests granted after March 28, 2014 having a fair value of $32.73.
We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of our Class B grants.
For the periods indicated, the weighted-average assumptions used were as follows:
 
 
For the years ended
 
 
December 31, 2014
 
December 31, 2013
Weighted-average assumptions used:
 
 
 


Expected volatility
 
36.0
%
 
33.5
%
Risk-free interest rate
 
1.1
%
 
1.7
%
Expected yield
 
8
%
 
8
%
Expected life (in years)
 
2.8

 
4

Forfeiture rate
 
8
%
 
8
%
The total grant date fair value of all options granted during 2014 and 2013 was $4.6 million and $1.5 million, respectively. Total compensation cost expensed for the years ended December 31, 2014 and December 31, 2013 was $3.2 million and $0.5 million, respectively.

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The following is a summary of the changes in non-vested shares for the years ended December 31, 2014 and December 31, 2013:
 
 
Number of Shares
Non-vested shares at December 31, 2012
 
—

Granted
 
3,144

Vested
 
(1,021
)
Forfeited
 
—

Non-vested shares at December 31, 2013
 
2,123

Granted
 
4,339

Vested
 
(3,646
)
Forfeited
 
(1,582
)
Non-vested shares at December 31, 2014
 
1,234


As of December 31, 2014, the total compensation cost related to the non-vested Class B awards, not yet recognized, was $0.4 million which will be recognized over a weighted average period of approximately 1.2 years.
Long-Term Incentive Bonus
On December 17, 2013 the Company approved a long-term cash incentive bonus for certain members of management and outside directors, where in the event of a change in control, subject to the various members of management continued employment with the Company through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of such agreement, the various members of management shall be eligible to receive a cash incentive bonus. As of December 31, 2014 there was no impact to the financial statements as no triggering event had occurred.

Note 10 — 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 long-term debt is based Level 1 and Level 2 inputs, as defined above.
 
As of
 
December 31, 2014
 
December 31, 2013
 
 
Carrying
 
Fair
 
Carrying
 
Fair
(Amounts in thousands)
Amount
 
Value
 
Amount
 
Value
10.375% senior unsecured notes
$
455,000

 
$
373,100

 
$
455,000

 
$
468,650

Term Loan
187,272

 
185,868

 
277,272

 
278,658

Total long-term debt
$
642,272

 
$
558,968

 
$
732,272

 
$
747,308


Note 11 — Segment and Geographic Information
In August 2014, we amended our operating structure by realigning our DynGlobal segment as a pure business development organization focused on achieving our global growth objectives. DynGlobal will continue as a brand and an initiative to pursue

81

international and commercial business. As a result, DynGlobal resources were redeployed into business development efforts for our two remaining operating and reporting segments: DynAviation and DynLogistics, to identify our highest priority opportunities, and work to capture those opportunities for operational execution by the two remaining segments. Our reporting segments continue to be the same as our operating segments. DynAviation and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the consolidated financial statements:
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Revenue
 
 
 
 
 
DynAviation (1)
$
1,204,417

 
$
1,373,635

 
$
1,338,514

DynLogistics (1)
1,045,200

 
1,920,715

 
2,709,469

Headquarters / Other (2)
2,692

 
(7,166
)
 
(3,708
)
Total revenue
$
2,252,309

 
$
3,287,184

 
$
4,044,275

 
 
 
 
 
 
Operating (loss) / income
 
 
 
 
 
DynAviation (1)
$
(61,501
)
 
$
(194,701
)
 
$
105,327

DynLogistics (1)
(67,097
)
 
36,243

 
48,941

Headquarters / Other (3)
(91,348
)
 
(48,322
)
 
(58,385
)
Total operating (loss) / income
$
(219,946
)
 
$
(206,780
)
 
$
95,883

 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
DynAviation (1)
$
1,665

 
$
1,628

 
$
685

DynLogistics (1)
55

 
543

 
1,043

Headquarters / Other
47,987

 
48,108

 
50,086

Total depreciation and amortization (4)
$
49,707

 
$
50,279

 
$
51,814

(1)
DynGlobal revenue, operating loss, and depreciation and amortization for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 is immaterial and included within DynAviation and DynLogistics due to the amended organizational structure. See Note 3 for further discussion of our organizational structure.
(2)
Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures and elimination of intercompany items between segments.
(3)
Headquarters operating loss primarily relates to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers.
(4)
Includes amounts in Cost of services of $1.1 million, $1.7 million and $1.6 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively.
 
As of
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Assets
 
 
 
 
 
DynAviation (1)
$
393,246

 
$
447,646

 
$
706,646

DynLogistics (1)
299,961

 
591,304

 
800,734

Headquarters / Other (2)
289,280

 
460,971

 
463,336

Total assets
$
982,487

 
$
1,499,921

 
$
1,970,716

(1)
DynGlobal assets for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 are included within DynAviation and DynLogistics due to the amended organizational structure. See Note 3 for further discussion of our organizational structure.
(2)
Assets primarily include cash, investments in unconsolidated subsidiaries, net deferred tax liabilities, intangible assets (excluding goodwill) and deferred debt issuance costs.

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Geographic Information — Revenue by geography is determined based on the location of services provided.
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
United States
$
612,220

 
27
%
 
$
695,772

 
21
%
 
$
635,293

 
16
%
Afghanistan
1,003,205

 
45
%
 
1,845,234

 
56
%
 
2,436,714

 
60
%
Middle East (1)
387,021

 
17
%
 
534,861

 
16
%
 
730,372

 
18
%
Other Americas
84,424

 
4
%
 
87,759

 
3
%
 
106,160

 
3
%
Europe
53,853

 
2
%
 
52,365

 
2
%
 
51,209

 
1
%
Asia-Pacific
41,953

 
2
%
 
46,170

 
1
%
 
44,000

 
1
%
Other
69,633

 
3
%
 
25,023

 
1
%
 
40,527

 
1
%
Total revenue
$
2,252,309

 
100
%
 
$
3,287,184

 
100
%
 
$
4,044,275

 
100
%
(1)
The Middle East includes but is not limited to activities in Iraq, Oman, Qatar, United Arab Emirates, Kuwait, Palestine, Sudan, Pakistan, Jordan, Lebanon, Bahrain, Saudi Arabia, Turkey and Egypt. The vast majority of all assets owned by the Company were located in the U.S. as of December 31, 2014.
Revenue from the U.S. government accounted for approximately 94%, 96% and 97% of total revenue for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. As of December 31, 2014 and December 31, 2013 accounts receivable due from the U.S. government represented over 88% and 92% of total accounts receivable, respectively.

Note 12 — Related Parties, Joint Ventures and Variable Interest Entities
Consulting Fees
We have a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC, where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $4.9 million, $4.6 million and $3.3 million of consulting fees in conjunction with the COAC Agreement during years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively.
We have three executives who are Cerberus Operations and Advisory Company, LLC (“COAC”) employees, who are seconded to us: James E. Geisler, our Interim Chief Executive Officer, Gregory S. Nixon, our Senior Vice President, Chief Administrative Officer and Chief Legal Officer, and George C. Krivo, our Senior Vice President of Business Development. Inclusive of the $4.9 million COAC consulting fees, we recognized $1.3 million of administrative expense in conjunction with these COAC individuals for the year ended December 31, 2014.
Joint Ventures and Variable Interest Entities
Our most significant joint ventures and VIEs and our associated ownership percentages are listed as follows:
Partnership for Temporary Housing LLC ("PaTH")
30
%
Contingency Response Services LLC ("CRS")
45
%
Global Response Services LLC ("GRS")
51
%
GLS
51
%
DynCorp International FZ - LLC ("DIFZ")
25
%
Babcock DynCorp Limited ("Babcock")
44
%
We account for our investments in VIEs in accordance with ASC 810 - Consolidation. In cases where we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, we consolidate the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method. As of December 31, 2014, we accounted for PaTH, CRS, Babcock, GRS and GLS as equity method investments. Alternatively, we consolidated DIFZ based on the aforementioned criteria. We present our share of the PaTH, CRS, GRS and GLS earnings in Earnings from equity method investees as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in Other income, net as it is not considered operationally integral.

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PaTH is a joint venture formed in May 2006 with two other partners for the purpose of procuring government contracts with the Federal Emergency Management Authority. On January 18, 2013, we executed an agreement with the two other partners to reduce our ownership percentage in the PaTH joint venture to 30%. The executed agreement stipulated the ownership percentage be reduced retrospectively, effective September 1, 2012.
CRS is a joint venture formed in March 2006 with two other partners for the purpose of procuring government contracts with the U.S. Navy.
The GRS joint venture was formed in August 2010 with one partner for the purpose of procuring government contracts with the U.S. Navy. During the year ended December 30, 2011, this joint venture was selected as one of four contractors for an IDIQ multiple award contract.
GLS is a joint venture formed in August 2006 between DynCorp International LLC and AECOM's National Security Programs unit for the purpose of procuring government contracts with the U.S. Army. We incur costs on behalf of GLS related to the normal operations of the venture. However, these costs typically support revenue billable to our customer.
We own 25% of DIFZ but exercise power over activities that significantly impact DIFZ's economic performance.
Babcock is a joint venture formed in January 2005 and currently provides services to the British Ministry of Defence. The economic rights in the Babcock joint venture are not considered operationally integral to the Company.
Receivables due from our unconsolidated joint ventures totaled $1.5 million and $2.3 million as of December 31, 2014, December 31, 2013, respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures totaled $3.9 million, $8.6 million, and $4.2 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Additionally, we earned $12.4 million, $3.7 million, and $4.8 million in equity method income (includes operationally integral and non-integral income) for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively.
GLS’ revenue was $20.5 million, $21.8 million and $61.1 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. GLS incurred an operating and net loss of $6.0 million and $3.6 million for the years ended December 31, 2014 and December 31, 2013, respectively, as compared to operating and net income of $3.3 million for the year ended December 31, 2012. GLS paid cash dividends of $18.8 million during the year ended December 31, 2014. Based on our 51% ownership in GLS, we recognized $9.6 million in equity method income during the year ended December 31, 2014.
In October 2011, the DCAA issued GLS a Form 1 in the amount of $95.9 million which pertained to inconsistencies of certain contractual requirements and withheld a portion of outstanding invoices until the Form 1 was resolved. In February 2012, the DCAA issued GLS a second Form 1 in the amount of $102.0 million, asserting inconsistencies with labor related costs for the fiscal year ended April 3, 2009. GLS did not agree with the DCAA's findings on either of the Form 1s and continued to work with the DCAA and the customer to provide clarification and resolve both matters. In February of 2014, final determination was received from the DCAA's Contracting Officer on the outstanding Form 1s resulting in total withholds of $0.3 million and allowing GLS to submit invoices totaling $19.1 million for recovery of previous invoices. The Form1s are now considered closed.
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 $2.9 million and $3.5 million as of December 31, 2014 and December 31, 2013, respectively, reflecting the initial value plus accrued interest, less payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.
As discussed above and in accordance with ASC 810 - Consolidation, we consolidate DIFZ. The following tables present selected financial information for DIFZ as of December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012:
 
As of
(Amounts in millions)
December 31, 2014
 
December 31, 2013
Assets
$
4.7

 
$
25.9

Liabilities
1.5

 
22.2

 
For the years ended
(Amounts in millions)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Revenue
$
297.7

 
$
414.4

 
$
510.1


84

The following tables present selected financial information for our equity method investees as of December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012:
 
As of
(Amounts in millions)
December 31, 2014
 
December 31, 2013
Current assets
$
65.8

 
$
86.3

Total assets
65.9

 
86.3

Current liabilities
44.4

 
46.4

Total liabilities
44.4

 
44.5

 
For the years ended
(Amounts in millions)
December 31, 2014
 
December 31, 2013
 
December 31, 2012
Revenue
$
233.1

 
$
203.1

 
$
234.5

Gross profit
20.7

 
15.9

 
17.1

Net income
14.4

 
10.7

 
13.4

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) $8.2 million investment in unconsolidated subsidiaries, (ii) $1.5 million in receivables from our unconsolidated joint ventures, (iii) $2.9 million of notes receivable from Palm Trading Investment Corp, and (iv) contingent liabilities that were neither probable nor reasonably estimable as of December 31, 2014.

Note 13 — Collaborative Arrangements
We participate in a collaborative arrangement with CH2M Hill on the Logistics Civil Augmentation Program IV ("LOGCAP IV") program. The arrangement sets forth the sharing of some of the risks and rewards associated with this U.S. government contract. Our current share of profits of the LOGCAP IV program is 70%.
We account for this collaborative arrangement under ASC 808 — Collaborative Arrangements and record revenue gross as the prime contractor. The cash inflows and outflows, as well as expenses incurred, are recorded in Cost of services in the period realized.
Revenue on LOGCAP IV was $561.9 million, $1,210.4 million, and $1,771.9 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Cost of services on LOGCAP IV was $526.9 million, $1,120.5 million, and $1,652.2 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Our share of the total LOGCAP IV profits was $2.1 million, $37.0 million, and $64.1 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively.

85

Note 14 — Consolidating Financial Statements of Subsidiary Guarantors
The Senior Unsecured Notes issued by DynCorp International Inc. ("Subsidiary Issuer") and the Senior Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group, LLC and Casals & Associates, Inc. ("Subsidiary Guarantors"). Each of the Subsidiary Issuer and the Subsidiary Guarantors is 100% owned by the Company. Under the indenture governing the Senior Unsecured Notes, a guarantee of a Subsidiary Guarantor will terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.
Subsequent to the issuance of the Company’s consolidated financial statements on Form 10-K for the period ended December 31, 2013, management determined that within the condensed consolidating statement of cash flows for the three months ended March 29, 2013, the intercompany transfers of the Subsidiary Guarantors in the amount of $38.9 million, previously presented as financing activities, should be classified as investing activities. The classification of these intercompany transfers has been corrected in the condensed consolidating statement of cash flows for the calendar year 2012 and calendar year 2013 to be presented within investing activities. This correction has no impact on the consolidated statement of cash flows for calendar year 2014.
The following condensed consolidating financial statements present (i) condensed consolidating balance sheets as of December 31, 2014 and December 31, 2013 (ii) the condensed consolidating statement of operations and comprehensive income for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, (iii) condensed consolidating statements of cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 and (iv) elimination entries necessary to consolidate Parent and its subsidiaries.
The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.
DynCorp International, Inc. is considered the Subsidiary Issuer as it issued the Senior Unsecured Notes.


86

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations Information
For the year ended December 31, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
—

 
$
2,268,349

 
$
315,551

 
$
(331,591
)
 
$
2,252,309

Cost of services
—

 
—

 
(2,092,339
)
 
(312,110
)
 
331,584

 
(2,072,865
)
Selling, general and administrative expenses
—

 
—

 
(146,623
)
 
(265
)
 
7

 
(146,881
)
Depreciation and amortization expense
—

 
—

 
(47,979
)
 
(603
)
 
—

 
(48,582
)
Earnings from equity method investees
—

 
—

 
489

 
9,588

 
—

 
10,077

Impairment of goodwill, intangibles and long lived assets
—

 
—

 
(214,004
)
 
—

 
—

 
(214,004
)
Operating income
—

 
—

 
(232,107
)
 
12,161

 
—

 
(219,946
)
Interest expense
—

 
(68,221
)
 
(2,562
)
 
—

 
—

 
(70,783
)
Loss on early extinguishment of debt
—

 
(1,362
)
 
—

 
—

 
—

 
(1,362
)
Interest income
—

 
—

 
198

 
23

 
—

 
221

Equity in (loss) income of consolidated subsidiaries
(269,780
)
 
(224,551
)
 
10,174

 
—

 
484,157

 
—

Other income, net
—

 
—

 
3,736

 
(56
)
 
—

 
3,680

(Loss) income before income taxes
(269,780
)
 
(294,134
)
 
(220,561
)
 
12,128

 
484,157

 
(288,190
)
Benefit (provision) for income taxes
—

 
24,354

 
(3,990
)
 
206

 
—

 
20,570

Net (loss) income
(269,780
)
 
(269,780
)
 
(224,551
)
 
12,334

 
484,157

 
(267,620
)
Noncontrolling interest
—

 
—

 
—

 
(2,160
)
 
—

 
(2,160
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(269,780
)
 
$
(269,780
)
 
$
(224,551
)
 
$
10,174

 
$
484,157

 
$
(269,780
)

87

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations Information
For the year ended December 31, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
—

 
$
3,298,767

 
$
445,144

 
$
(456,727
)
 
$
3,287,184

Cost of services
—

 
—

 
(3,006,723
)
 
(437,375
)
 
456,845

 
(2,987,253
)
Selling, general and administrative expenses
—

 
—

 
(148,962
)
 
(845
)
 
(118
)
 
(149,925
)
Depreciation and amortization expense
—

 
—

 
(48,028
)
 
(600
)
 
—

 
(48,628
)
Earnings from equity method investees
—

 
—

 
1,510

 
3,060

 
—

 
4,570

Impairment of goodwill, intangibles and long lived assets
—

 
—

 
(312,728
)
 
—

 
—

 
(312,728
)
Operating (loss) income
—

 
—

 
(216,164
)
 
9,384

 
—

 
(206,780
)
Interest expense
—

 
(75,001
)
 
(3,825
)
 
—

 
—

 
(78,826
)
Loss on early extinguishment of debt
—

 
(703
)
 
—

 
—

 
—

 
(703
)
Interest income
—

 
—

 
130

 
27

 
—

 
157

Equity in (loss) income of consolidated subsidiaries
(253,736
)
 
(204,678
)
 
5,097

 
—

 
453,317

 
—

Other (loss) income, net
—

 
—

 
(998
)
 
188

 
—

 
(810
)
(Loss) income before income taxes
(253,736
)
 
(280,382
)
 
(215,760
)
 
9,599

 
453,317

 
(286,962
)
Benefit (provision) for income taxes
—

 
26,646

 
11,082

 
(267
)
 
—

 
37,461

Net (loss) income
(253,736
)
 
(253,736
)
 
(204,678
)
 
9,332

 
453,317

 
(249,501
)
Noncontrolling interest
—

 
—

 
—

 
(4,235
)
 
—

 
(4,235
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(253,736
)
 
$
(253,736
)
 
$
(204,678
)
 
$
5,097

 
$
453,317

 
$
(253,736
)


88

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations Information
For the year ended December 31, 2012
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
—

 
$
4,077,449

 
$
538,118

 
$
(571,292
)
 
$
4,044,275

Cost of services
—

 
—

 
(3,743,400
)
 
(514,653
)
 
559,121

 
(3,698,932
)
Selling, general and administrative expenses
—

 
—

 
(149,236
)
 
(12,297
)
 
12,171

 
(149,362
)
Depreciation and amortization expense
—

 
—

 
(49,658
)
 
(602
)
 
—

 
(50,260
)
Earnings from equity method investees
—

 
—

 
825

 
—

 
—

 
825

Impairment of goodwill
—

 
—

 
(44,594
)
 
—

 
—

 
(44,594
)
Impairment of intangibles
—

 
—

 
(6,069
)
 
—

 
—

 
(6,069
)
Operating income
—

 
—

 
85,317

 
10,566

 
—

 
95,883

Interest expense
—

 
(80,078
)
 
(6,194
)
 
—

 
—

 
(86,272
)
Loss on early extinguishment of debt
—

 
(2,094
)
 
—

 
—

 
—

 
(2,094
)
Interest income
—

 
—

 
108

 
9

 
—

 
117

Equity in (loss) income of consolidated subsidiaries
(8,937
)
 
(16,604
)
 
4,050

 
—

 
21,491

 
—

Other income (loss), net
—

 
—

 
4,814

 
(142
)
 
—

 
4,672

(Loss) income before income taxes
(8,937
)
 
(98,776
)
 
88,095

 
10,433

 
21,491

 
12,306

Benefit (provision) for income taxes
—

 
89,839

 
(104,699
)
 
(738
)
 
—

 
(15,598
)
Net (loss) income
(8,937
)
 
(8,937
)
 
(16,604
)
 
9,695

 
21,491

 
(3,292
)
Noncontrolling interest
—

 
—

 
—

 
(5,645
)
 
—

 
(5,645
)
Net (loss) income attributable to Delta Tucker Holdings, Inc.
$
(8,937
)
 
$
(8,937
)
 
$
(16,604
)
 
$
4,050

 
$
21,491

 
$
(8,937
)






89

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
For the year ended December 31, 2014
(Amounts in thousands)
 Parent
 
 Subsidiary Issuer
 
 Subsidiary Guarantors
 
 Subsidiary Non-Guarantors
 
 Eliminations
 
 Consolidated
Net (loss) income
$
(269,780
)
 
$
(269,780
)
 
$
(224,551
)
 
$
12,334

 
$
484,157

 
$
(267,620
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(131
)
 
(131
)
 
—

 
(131
)
 
262

 
(131
)
Other comprehensive income, before tax
(131
)
 
(131
)
 
—

 
(131
)
 
262

 
(131
)
Income tax expense related to items of other comprehensive income
47

 
47

 
—

 
47

 
(94
)
 
47

Other comprehensive loss
(84
)
 
(84
)
 
—

 
(84
)
 
168

 
(84
)
Comprehensive (loss) income
(269,864
)
 
(269,864
)
 
(224,551
)
 
12,250

 
484,325

 
(267,704
)
Noncontrolling interest
—

 
—

 
—

 
(2,160
)
 
—

 
(2,160
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(269,864
)
 
$
(269,864
)
 
$
(224,551
)
 
$
10,090

 
$
484,325

 
$
(269,864
)

90

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
For the year ended December 31, 2013
(Amounts in thousands)
 Parent
 
 Subsidiary Issuer
 
 Subsidiary Guarantors
 
 Subsidiary Non-Guarantors
 
 Eliminations
 
 Consolidated
Net (loss) income
$
(253,736
)
 
$
(253,736
)
 
$
(204,678
)
 
$
9,332

 
$
453,317

 
$
(249,501
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(437
)
 
(437
)
 
(242
)
 
(195
)
 
874

 
(437
)
Other comprehensive income, before tax
(437
)
 
(437
)
 
(242
)
 
(195
)
 
874

 
(437
)
Income tax expense related to items of other comprehensive income
157

 
157

 
86

 
70

 
(313
)
 
157

Other comprehensive income
(280
)
 
(280
)
 
(156
)
 
(125
)
 
561

 
(280
)
Comprehensive (loss) income
(254,016
)
 
(254,016
)
 
(204,834
)
 
9,207

 
453,878

 
(249,781
)
Noncontrolling interest
—

 
—

 
—

 
(4,235
)
 
—

 
(4,235
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(254,016
)
 
$
(254,016
)
 
$
(204,834
)
 
$
4,972

 
$
453,878

 
$
(254,016
)


91

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Comprehensive Income
For the year ended December 31, 2012
(Amounts in thousands)
 Parent
 
 Subsidiary Issuer
 
 Subsidiary Guarantors
 
 Subsidiary Non-Guarantors
 
 Eliminations
 
 Consolidated
Net (loss) income
$
(8,937
)
 
$
(8,937
)
 
$
(16,604
)
 
$
9,695

 
$
21,491

 
$
(3,292
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
225

 
225

 
123

 
102

 
(450
)
 
225

Other comprehensive income, before tax
225

 
225

 
123

 
102

 
(450
)
 
225

Income tax expense related to items of other comprehensive income
(83
)
 
(83
)
 
(45
)
 
(38
)
 
166

 
(83
)
Other comprehensive income
142

 
142

 
78

 
64

 
(284
)
 
142

Comprehensive (loss) income
(8,795
)
 
(8,795
)
 
(16,526
)
 
9,759

 
21,207

 
(3,150
)
Noncontrolling interest
—

 
—

 
—

 
(5,645
)
 
—

 
(5,645
)
Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.
$
(8,795
)
 
$
(8,795
)
 
$
(16,526
)
 
$
4,114

 
$
21,207

 
$
(8,795
)






92

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet Information
December 31, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
87,300

 
$
6,704

 
$
—

 
$
94,004

Restricted cash
—

 
—

 
707

 
—

 
—

 
707

Accounts receivable, net
—

 
—

 
452,938

 
719

 
(5,161
)
 
448,496

Intercompany receivables
—

 
—

 
234,109

 
28,231

 
(262,340
)
 
—

Prepaid expenses and other current assets
—

 
—

 
73,456

 
1,217

 
(473
)
 
74,200

Deferred taxes
—

 
—

 
—

 
—

 
—

 
—

Total current assets
—

 
—

 
848,510

 
36,871

 
(267,974
)
 
617,407

Long-term restricted cash
—

 
—

 
952

 
—

 
—

 
952

Property and equipment, net
—

 
—

 
23,615

 
171

 
—

 
23,786

Goodwill
—

 
—

 
96,489

 
32,399

 
—

 
128,888

Tradenames, net
—

 
—

 
28,762

 
—

 
—

 
28,762

Other intangibles, net
—

 
—

 
148,825

 
655

 
—

 
149,480

Investment in subsidiaries
—

 
805,417

 
55,087

 
—

 
(860,504
)
 
—

Long-term deferred taxes
—

 
—

 
5,696

 
—

 
—

 
5,696

Other assets, net
558

 
11,775

 
15,183

 
—

 
—

 
27,516

Total assets
$
558

 
$
817,192

 
$
1,223,119

 
$
70,096

 
$
(1,128,478
)
 
$
982,487

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
—

 
$
146,016

 
$
1,253

 
$
(723
)
 
$
146,546

Accrued payroll and employee costs
—

 
—

 
84,725

 
13,296

 
(4,314
)
 
93,707

Intercompany payables
45,643

 
188,466

 
28,231

 
—

 
(262,340
)
 
—

Deferred income taxes
—

 
—

 
31,453

 
24

 
—

 
31,477

Other accrued liabilities
37,681

 
24,135

 
105,404

 
436

 
(37,630
)
 
130,026

Income taxes payable
—

 
—

 
5,072

 
—

 
(648
)
 
4,424

Total current liabilities
83,324

 
212,601

 
400,901

 
15,009

 
(305,655
)
 
406,180

Long-term debt, less current portion
—

 
642,272

 
—

 
—

 
—

 
642,272

Long-term deferred taxes
—

 
—

 
—

 
—

 
—

 
—

Other long-term liabilities
—

 
—

 
11,312

 
—

 
—

 
11,312

Noncontrolling interests
—

 
—

 
5,489

 
—

 
—

 
5,489

(Deficit) equity
(82,766
)
 
(37,681
)
 
805,417

 
55,087

 
(822,823
)
 
(82,766
)
Total liabilities and equity
$
558

 
$
817,192

 
$
1,223,119

 
$
70,096

 
$
(1,128,478
)
 
$
982,487


93

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet Information
December 31, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
144,025

 
$
26,820

 
$
—

 
$
170,845

Restricted cash
—

 
—

 
1,659

 
—

 
—

 
1,659

Accounts receivable, net
—

 
—

 
596,901

 
1,990

 
(21,755
)
 
577,136

Intercompany receivables
—

 
—

 
173,987

 
7,857

 
(181,844
)
 
—

Prepaid expenses and other current assets
—

 
—

 
123,761

 
456

 
293

 
124,510

Total current assets
—

 
—

 
1,040,333

 
37,123

 
(203,306
)
 
874,150

Property and equipment, net
—

 
—

 
23,797

 
323

 
—

 
24,120

Goodwill
—

 
—

 
261,367

 
32,400

 
—

 
293,767

Tradenames, net
—

 
—

 
43,464

 
—

 
—

 
43,464

Other intangibles, net
—

 
—

 
224,152

 
1,087

 
—

 
225,239

Investment in subsidiaries
228,870

 
1,095,853

 
45,383

 
—

 
(1,370,106
)
 
—

Other assets, net
891

 
17,525

 
20,765

 
—

 
—

 
39,181

Total assets
$
229,761

 
$
1,113,378

 
$
1,659,261

 
$
70,933

 
$
(1,573,412
)
 
$
1,499,921

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
—

 
$
192,456

 
$
2,243

 
$
(1,553
)
 
$
193,146

Accrued payroll and employee costs
—

 
—

 
111,547

 
22,770

 
(19,983
)
 
114,334

Intercompany payables
45,976

 
128,011

 
7,857

 
—

 
(181,844
)
 
—

Deferred income taxes
—

 
—

 
30,960

 
5

 
—

 
30,965

Other accrued liabilities
—

 
24,225

 
175,796

 
438

 
74

 
200,533

Income taxes payable
—

 
—

 
13,926

 
94

 
—

 
14,020

Total current liabilities
45,976

 
152,236

 
532,542

 
25,550

 
(203,306
)
 
552,998

Long-term debt, less current portion
—

 
732,272

 
—

 
—

 
—

 
732,272

Long-term deferred taxes
—

 
—

 
17,359

 
—

 
—

 
17,359

Other long-term liabilities
—

 
—

 
7,632

 
—

 
—

 
7,632

Noncontrolling interests
—

 
—

 
5,875

 
—

 
—

 
5,875

Equity
183,785

 
228,870

 
1,095,853

 
45,383

 
(1,370,106
)
 
183,785

Total liabilities and equity
$
229,761

 
$
1,113,378

 
$
1,659,261

 
$
70,933

 
$
(1,573,412
)
 
$
1,499,921






94

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flow Information
For the year ended December 31, 2014
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
333

 
$
29,545

 
$
(6,454
)
 
$
3,650

 
$
(1,697
)
 
25,377

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net
—

 
—

 
(8,712
)
 
—

 
—

 
(8,712
)
Proceeds from sale of property and equipment
—

 
—

 
44

 
—

 
—

 
44

Purchase of software
—

 
—

 
(1,631
)
 
—

 
—

 
(1,631
)
Return of capital from equity method investees
—

 
—

 
5,625

 
—

 
—

 
5,625

Contributions to equity method investees
—

 
—

 
—

 
—

 
—

 
—

Net Transfer (to) from affiliates
—

 
—

 
(60,122
)
 
(20,372
)
 
80,494

 
—

Net cash used in investing activities
—

 
—

 
(64,796
)
 
(20,372
)
 
80,494

 
(4,674
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt
—

 
118,000

 
—

 
—

 
—

 
118,000

Payments on long-term debt
—

 
(208,000
)
 
—

 
—

 
—

 
(208,000
)
Payments of deferred financing cost
—

 
—

 
(1,740
)
 
—

 
—

 
(1,740
)
Borrowings related to financed insurance
—

 
—

 
20,214

 
—

 
—

 
20,214

Payments related to financed insurance
—

 
—

 
(24,321
)
 
—

 
—

 
(24,321
)
Payments of dividends to Parent
—

 
—

 
—

 
(3,394
)
 
1,697

 
(1,697
)
Transfers (to) from affiliates
(333
)
 
60,455

 
20,372

 
—

 
(80,494
)
 
—

Net cash (used in) provided by financing activities
(333
)
 
(29,545
)
 
14,525

 
(3,394
)
 
(78,797
)
 
(97,544
)
Net increase in cash and cash equivalents
—

 
—

 
(56,725
)
 
(20,116
)
 
—

 
(76,841
)
Cash and cash equivalents, beginning of period
—

 
—

 
144,025

 
26,820

 
—

 
170,845

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
87,300

 
$
6,704

 
$
—

 
$
94,004


95

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flow Information
For the year ended December 31, 2013
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
461

 
$
30,040

 
$
101,590

 
$
9,793

 
$
(4,382
)
 
$
137,502

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net
—

 
—

 
(7,604
)
 
(24
)
 
—

 
(7,628
)
Proceeds from sale of property and equipment
—

 
—

 
182

 
—

 
—

 
182

Purchase of software
—

 
—

 
(2,718
)
 
—

 
—

 
(2,718
)
Return of capital from equity method investees
—

 
—

 
2,223

 
—

 
—

 
2,223

Contributions to equity method investees
—

 
—

 
(30
)
 
—

 
—

 
(30
)
Net Transfer (to) from affiliates
—

 
—

 
(9,939
)
 
(7,857
)
 
17,796

 
—

Net cash used in investing activities
—

 
—

 
(17,886
)
 
(7,881
)
 
17,796

 
(7,971
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt
—

 
745,900

 
—

 
—

 
—

 
745,900

Payments on long-term debt
—

 
(796,537
)
 
—

 
—

 
—

 
(796,537
)
Payments of deferred financing cost
—

 
—

 
(2,139
)
 
—

 
—

 
(2,139
)
Borrowings related to financed insurance
—

 
—

 
9,431

 
—

 
—

 
9,431

Payments related to financed insurance
—

 
—

 
(29,734
)
 
—

 
—

 
(29,734
)
Payments of dividends to Parent
—

 
—

 
—

 
(8,764
)
 
4,382

 
(4,382
)
Transfers (to) from affiliates
(461
)
 
20,597

 
7,856

 
(10,196
)
 
(17,796
)
 
—

Net cash (used in) provided by financing activities
(461
)
 
(30,040
)
 
(14,586
)
 
(18,960
)
 
(13,414
)
 
(77,461
)
Net increase in cash and cash equivalents
—

 
—

 
69,118

 
(17,048
)
 
—

 
52,070

Cash and cash equivalents, beginning of period
—

 
—

 
74,907

 
43,868

 
—

 
118,775

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
144,025

 
$
26,820

 
$
—

 
$
170,845



96

Delta Tucker Holdings, Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flow Information
For the year ended December 31, 2012
(Amounts in thousands)
Parent
 
Subsidiary
Issuer
 
Subsidiary 
Guarantors
 
Subsidiary 
Non- 
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
664

 
$
103,223

 
$
29,660

 
$
13,309

 
$
(2,666
)
 
$
144,190

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment, net
—

 
—

 
(5,467
)
 
(61
)
 
—

 
(5,528
)
Proceeds from sale of property and equipment
—

 
—

 
25

 
—

 
—

 
25

Cash paid for acquisition, net of cash acquired
—

 
—

 
(11,746
)
 
—

 
—

 
(11,746
)
Purchase of software
—

 
—

 
(2,590
)
 
—

 
—

 
(2,590
)
Return of capital from equity method investees
—

 
—

 
9,154

 
—

 
—

 
9,154

Contributions to equity method investees
—

 
—

 
(1,478
)
 
—

 
—

 
(1,478
)
Net Transfer from (to) affiliates
—

 
—

 
12,159

 
9,196

 
(21,355
)
 
—

Net cash used in investing activities
—

 
—

 
57

 
9,135

 
(21,355
)
 
(12,163
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt
—

 
325,000

 
—

 
—

 
—

 
325,000

Payments on long-term debt
—

 
(415,000
)
 
—

 
—

 
—

 
(415,000
)
Borrowings related to financed insurance
—

 
—

 
62,580

 
—

 
—

 
62,580

Payments related to financed insurance
—

 
—

 
(53,918
)
 
—

 
—

 
(53,918
)
Payments of dividends to Parent
—

 
—

 
—

 
(4,785
)
 
2,666

 
(2,119
)
Transfers (to) from affiliates
(664
)
 
(13,223
)
 
(9,196
)
 
1,728

 
21,355

 
—

Net cash (used in) provided by financing activities
(664
)
 
(103,223
)
 
(534
)
 
(3,057
)
 
24,021

 
(83,457
)
Net increase in cash and cash equivalents
—

 
—

 
29,183

 
19,387

 
—

 
48,570

Cash and cash equivalents, beginning of period
—

 
—

 
45,724

 
24,481

 
—

 
70,205

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
74,907

 
$
43,868

 
$
—

 
$
118,775







97

Note 15— Subsequent Events
We evaluated potential subsequent events occurring after the period end date and determined no subsequent events merited disclosure for the year ended December 31, 2014, except as disclosed within the Notes to the consolidated financial statements.



98

Schedule I - Condensed Financial Information of Registrant
DELTA TUCKER HOLDINGS, INC.
CONDENSED BALANCE SHEETS
 
As of
 
December 31, 2014
 
December 31, 2013
(Amounts in thousands)
Deferred tax assets
$
558

 
$
891

Investment in subsidiaries
—

 
228,870

Total assets
$
558

 
$
229,761

 
 
 
 
Liabilities
$
83,324

 
$
45,976

Stockholders (Deficit) Equity
(82,766
)
 
183,785

Total liabilities and equity
$
558

 
$
229,761

See notes to this schedule
DELTA TUCKER HOLDINGS, INC.
CONDENSED STATEMENTS OF OPERATIONS
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
Equity in income of subsidiaries, net of tax
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
Income before income taxes
(269,780
)
 
(253,736
)
 
(8,937
)
Income tax benefit
—

 
—

 
—

Net loss
$
(269,780
)
 
$
(253,736
)
 
$
(8,937
)
See notes to this schedule
DELTA TUCKER HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
 
For the years ended
 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
(Amounts in thousands)
 
 
Net cash from operating activities
$
333

 
$
461

 
$
664

Net cash from investing activities
—

 
—

 
—

Net cash from financing activities
(333
)
 
(461
)
 
(664
)
Net change in cash and cash equivalent
—

 
—

 
—

Cash and cash equivalents, beginning of period
—

 
—

 
—

Cash and cash equivalents, end of period
$
—

 
$
—

 
$
—

See notes to this schedule

99

Schedule I - Condensed Financial Information
Delta Tucker Holdings, Inc.
Notes to Schedule
Note 1 — Basis of Presentation
Pursuant to rules and regulations of the SEC, the condensed financial statements of Delta Tucker Holdings Inc. do not reflect all of the information and notes normally included with financial statements prepared in accordance with GAAP. Therefore, these financial statements should be read in conjunction with our consolidated financial statements and related notes.
Accounting for subsidiaries — We have accounted for the income of our subsidiaries under the equity method in the condensed financial statements.
Note 2 — Dividends Received from Consolidated Subsidiaries
We have received no dividends from our consolidated subsidiaries including DynCorp International Inc. which has covenants related to its long-term debt, including restrictions on dividend payments as of December 31, 2014. As the parent guarantor to DynCorp International Inc., we are subject to certain restrictions set forth under the Senior Credit Facility, including restrictions on the payment of dividends. As we are the holding company of DynCorp International Inc. and have no independent operations apart from DynCorp International Inc. and no assets other than our investment in DynCorp International Inc. and associated deferred taxes, our retained earnings and net income are fully encumbered by these restrictions.
Note 3 — Equity
Our equity was initially comprised of a capital contribution of $550.9 million. Between our inception and December 31, 2014, our equity has been impacted by our earnings, changes in other comprehensive income and additional paid in capital.


Schedule II - Valuation and Qualifying Accounts
Delta Tucker Holdings, Inc.
For the years ended December 31, 2014, December 31, 2013 and December 31, 2012
(Amount in thousands)
Beginning of Period
 
Charged to Costs and Expense
 
Deductions from Reserve (1)
 
End of Period
Allowance for doubtful accounts:
               
 
                     
 
              
 
              
December 31, 2011 — December 31, 2012
$
1,947

 
$
722

 
$
(1,188
)
 
$
1,481

December 31, 2012 — December 31, 2013
$
1,481

 
$
1,531

 
$
(1,391
)
 
$
1,621

December 31, 2013 — December 31, 2014
$
1,621

 
$
3,269

 
$
(154
)
 
$
4,736

(1)
Deductions from reserve represents accounts written off, net of recoveries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures — We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the "Act") is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the

100

Act, for the period ended December 31, 2014. Based on the evaluation performed, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting — There have been no changes in our internal control over financial reporting (as such term is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting — Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2014.

ITEM 9B. OTHER INFORMATION.
None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following are the names, ages and a brief account of the business experience for the past five years of our directors and executive officers as of March 10, 2015. Unless the context otherwise indicates, references herein to “we,” “our,” “us,” or “the Company” refer to Delta Tucker Holdings, Inc. and its consolidated subsidiaries.
Name
Age
Position
James E. Geisler
48
Interim Chief Executive Officer and Director
Chan Galbato
52
Lead Director
General Michael Hagee (USMC Ret.)
70
Director
Brett Ingersoll
51
Director
General John Tilelli (USA Ret.)
73
Director
Michael Sanford
33
Director
William T. Kansky
53
Senior Vice President and Chief Financial Officer
Gregory S. Nixon
51
Senior Vice President, Chief Administrative Officer and Chief Legal Officer
George C. Krivo
52
Senior Vice President, Business Development
Eric Lannen
49
Senior Vice President, Human Resources
Lawrence Phillips
44
Senior Vice President, Operations
Randall Bockenstedt
60
Senior Vice President, DynLogistics
James Myles
62
Senior Vice President, DynAviation
Each of our directors brings extensive management and leadership experience gained through their service in our industry and other diverse businesses. In these roles, they have taken hands-on, day-to-day responsibility for strategy and operations. In the paragraphs below, we describe specific individual qualifications and skills of our directors that contribute to the overall effectiveness of our Board of Directors (the “Board”) and its committees. In addition, as discussed in the paragraphs below, certain of our executive officers are employees of Cerberus Operations and Advisory Company, LLC ("COAC") and seconded to us pursuant to the COAC Agreement, which is described under "Certain Relationships and Related Transactions, and Director Independence" and Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
James E. Geisler is an employee of COAC who has been seconded to us as our Interim Chief Executive Officer since he joined COAC in August 2014. Mr. Geisler is currently a director of the Company and has been a director since September 2012. He was a member of the Company's Audit Committee and Business, Ethics and Compliance Committee since September 2012, until accepting his current role as Interim Chief Executive Officer in August 2014. Prior to joining COAC, Mr. Geisler was the Chief Operating Officer and Chief Financial Officer at CreoSalus, a Kentucky-based life-science company. Before joining CreoSalus in 2010, he spent 17 years with United Technologies Corporation, a Dow Jones company with over $50 billion in revenue with operations in six industries, including the aerospace and security industries. Mr. Geisler was co-Chief Financial

101

Officer for four years with responsibilities including treasury, investor relations and financial planning. He also served as Vice President of Strategy, in charge of business development and acquisitions. Mr. Geisler's career began with General Electric's aerospace business with assignments in the U.S. and Asia. He holds a Master's in Business Administration from the University of Virginia's Darden Graduate School of Business Administration and a Bachelor of Business Administration from the University of Kentucky.
Chan Galbato currently serves as the Chief Executive Officer of COAC, a position he has held since March 2012. Mr. Galbato served as a Senior Operating Executive of Cerberus since 2009. Prior to joining Cerberus, Mr. Galbato served as the Chief Executive Officer and President of the Controls Group at Invensys plc, the President of Services for The Home Depot, and President and Chief Executive Officer of Armstrong Floor Products. He also serves as Chairman of Blue Bird Corporation and YP Holdings LLC and is a member of the board of directors of Steward Health Care LLC. From 2006 to 2013, he was also a director of the Brady Corporation, most recently as its Lead Director. He holds a Master’s degree in Business Administration from the University of Chicago and a Bachelor’s degree in economics from the State University of New York. Mr. Galbato was selected to serve as one of our directors because of his extensive experience in financing, private equity investments and board service.
General Michael Hagee (USMC Ret.) has been a director since July 2010. He is President and CEO of the Admiral Nimitz Foundation and is an independent consultant to corporate executives and business leaders. He served more than 38 years in the U.S. Marine Corps, finishing his active duty career as the 33rd Commandant of the Marine Corps and a member of the Joint Chiefs of Staff. General Hagee holds Master's degrees in electrical engineering and national security studies from the U.S. Naval Academy. He served on the U.S. Department of Defense Science Board and the National Security Advisory Council for the Center for U.S. Global Engagement and U.S. Global Leadership Campaign. General Hagee was selected to serve as one of our directors due to his extensive knowledge about our two largest clients - the Department of Defense and the Department of State, extensive board and oversight experience, which allows him to bring additional perspective to our Board of Directors.
Brett Ingersoll has been a director since July 2010. Mr. Ingersoll has served as Senior Managing Director and Co-Head of Private Equity at Cerberus since January 2002. He is also a member of the boards of directors of Grifols S.A., Steward Healthcare System, Covis Pharmaceuticals and EntreCap Financial. Mr. Ingersoll holds a Bachelor's degree in economics from Brigham Young University and a Master's degree in business administration from Harvard Business School. Mr. Ingersoll was selected to serve as one of our directors because he has extensive experience in financing, private equity investments and board service.
General John Tilelli (USA Ret.) has been a director since July 2010. General Tilelli is currently Chairman and CEO of Cypress International, Inc. He served two combat tours in Vietnam, commanded the 1st Cavalry Division during Operations Desert Shield and Desert Storm, and served four times in Germany. General Tilelli served as the Vice Chief of Staff of the Army, and concluded his active duty career as Commander in Chief of the United Nations Command, Republic of Korea, U.S. Combined Forces, and U.S. Forces Korea. He was appointed as President and CEO of the USO Worldwide Operations in March 2000. General Tilelli holds a Bachelor's degree in economics from Pennsylvania Military College, now Widener University, and was commissioned as an Armor Officer. He earned a Master's degree in administration from Lehigh University and graduated from the Army War College. General Tilelli was awarded honorary doctoral degrees by Widener University and the University of Maryland. General Tilelli was selected to serve as one of our directors due to his extensive knowledge about our two largest clients - the Department of Defense and the Department of State, and extensive board and oversight experience, which allows him to bring additional perspective to our Board of Directors.
Michael Sanford currently serves as a Managing Director of Cerberus Capital Management, L.P.’s private equity group. Mr. Sanford joined Cerberus in 2006. Prior to joining Cerberus, Mr. Sanford was at The Blackstone Group in its Restructuring and Reorganization Advisory Group. He also serves as a member of the board of directors of YP Holdings LLC, Tier 1 Group LLC and DynCorp International FZ-LLC. He holds a Bachelor’s degree with highest distinction in finance and international business from the Schreyer Honors College at the Pennsylvania State University. Mr. Sanford was selected to serve as one of our directors because he has extensive experience in financing and private equity investments.
William T. Kansky has been our Senior Vice President and Chief Financial Officer since August 2010. Previously he was Vice President and Chief Financial Officer at ITT Defense and Information Solutions, which he joined in April 2006. He has worked in the finance organizations of Westinghouse Broadcasting Company and Group W Information Services. He holds a Bachelor's degree in finance from Central Connecticut State University.
Gregory S. Nixon is a Managing Director of COAC who has been seconded to us as our Senior Vice President, Chief Administrative Officer and Chief Legal Officer where he oversees the legal, contracts and compliance affairs of the Company since he joined COAC in September 2014. From October 2013 to August 2014, Mr. Nixon served as Chief Legal Officer of CH2M HILL Companies, Ltd. Prior to CH2M Hill, Mr. Nixon served as our Senior Vice President, Corporate Secretary and General Counsel. Previously, Mr. Nixon worked for McKinsey & Company Inc., from August 2007 to September 2009. From September 2002 to August 2007, he was at Booz Allen Hamilton Incorporated as a Principal and Associate General Counsel. Mr. Nixon also practiced law at the international law firm of Howrey & Simon LLP in their Commercial Litigation Group and Intellectual Property Group. After serving as a commissioned officer in the U.S. Air Force, Mr. Nixon held senior government positions in the U.S.

102

Government Accountability Office and served as special counsel in the intelligence community. He is a retired Lieutenant Colonel in the U.S. Air Force Judge Advocate General’s Corps Reserve. Mr. Nixon is a licensed patent attorney. Mr. Nixon has a Bachelor’s of Science in mechanical engineering from Tuskegee University and a Juris Doctor degree from Georgetown University Law Center.
George C. Krivo is a COAC employee who has been seconded to us as our Senior Vice President, Business Development since he joined COAC in September 2014. From December 2010 to May 2014, Mr. Krivo was employed by us and held numerous positions, including serving as our Senior Vice President of DynLogistics from March 2013 until May 2014, our Senior Vice President of Business Development from January 2011 to March 2013 and our Vice President, Land Systems in our Global Platform Support Solutions segment from December 2010 to January 2011. Previously, Mr. Krivo served as vice president and division manager for Science Applications International Corporation (SAIC) before joining us in August 2009.  From August 2005 to December 2008, Mr. Krivo was vice president and general manager of DRS Technologies’ Engineering & Logistics Enterprise and led business development for the land vehicle electro-optical/infrared business. From 1985 to 2005, Mr. Krivo served as an active duty commissioned officer in the U.S. Army. Mr. Krivo’s military experience includes serving as policy advisor to the chairman of the Joint Chiefs of Staff; strategy advisor to the Chief of Staff of the Army, senior military spokesperson for coalition forces in Iraq, operations officer for a Patriot missile brigade in Germany and commander of an armored and mechanized Task Force in Bosnia.  Mr. Krivo holds a Master of Arts from the University of Oklahoma and a Bachelor of Arts from Cornell College.
Eric Lannen has been our Senior Vice President, Human Resources since April 2014. Previously, Mr. Lannen served as Vice President of Human Resources for McDermott International from August 2012 to March 2014. From September 2006 to July 2012 Mr. Lannen led the talent acquisition function for IBM across Asia Pacific, Africa, the Middle East & South America after being promoted from the Director, HR Outsourced Services. His most recent role in the defense industry was as Vice President, Human Resources for the government division of Kellogg Brown & Root (KBR) where he served from August 2004 to August 2006. He holds a Bachelor of Science degree from Texas A&M University and has passed the Society of HR Management (SHRM) certification credentials to be a Senior Professional of Human Resources.
Lawrence Phillips was our Senior Vice President, Operations from April 2012 to March 2015, at which time he left the Company. Before joining DI Mr. Phillips led strategic initiatives for DI on behalf of Cerberus Capital Management L.P. Mr. Phillips joined Cerberus in 2003 and has managed corporate transformation projects for other portfolio companies, most notably as Senior Vice President of Formica Corporation, a global building materials manufacturer. Before joining Cerberus he was a senior finance and marketing executive for BigMachines, Inc. Mr. Phillips began his career in management positions at GE Appliances and GE Power Systems. He was later appointed to the GE corporate audit staff and led operations-improvement projects and financial audits for GE businesses in the U.S. and in Europe.
Randall Bockenstedt has been our Senior Vice President, DynLogistics since September 2014. Mr. Bockenstedt joined the company in February 2010 and has served in several leadership roles, including leading the Operations and Maintenance Business Area Team. He also previously served as program director for the FIRST IDIQ, which includes programs at Fort Campbell, Kentucky, and Fort Bliss, Texas from April 2010 to September 2011. Mr. Bockenstedt has experience working on a number of global base operations and logistics programs which began with his service in the U.S. Army. He holds a Master’s degree in strategic studies from the Air War College as well as a Master’s degree in Public Administration from Shippensburg University of Pennsylvania.
James R. Myles has been our Senior Vice President, DynAviation since April of 2013. Prior to this role, he served as Vice President of the Company's Aviation BAT from February 2011 to March 2013. Mr. Myles joined us in February 2011, after being retired three years as the Commanding General of the U.S. Army Aviation and Missile Command ("AMCOM"). During his service in the Army General Myles led the Army Test and Evaluation Command and the Army Operational Test Command. He served in the 160th Special Operations Aviation Regiment and he led the 17th Aviation Brigade in Korea. He began his 36-year Army career as an infantry platoon leader and qualified early on in rotary and fixed-wing aircraft maintenance.
    
CORPORATE GOVERNANCE
Code of Ethics and Business Conduct
Every action or decision at the Company is based upon our values:  We Serve, We Care, We Empower, We Perform, We Do the Right Thing. Our Code of Ethics and Business Conduct (“Code”) establishes requirements and direction to translate these values into action, every day, and for everything we do. Employees, directors, officers, contractors, and agents are expected to operate in a manner consistent with these values and this Code. It is our commitment to conduct business honestly, ethically and in accordance with best practices and the applicable laws of the U.S. and other countries in which we operate.
We have a comprehensive and longstanding ethics and compliance program in support of our Code. It includes mandatory training on a wide range of topics, consistent communication, and a robust system to report concerns or potential violations. We are guided at all times by the highest standards of integrity, whether dealing with customers, co-workers, or others. By operating

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each day with this commitment in mind we can provide a solid return to our shareholders, develop meaningful work for our employees, and create something of value for our communities. The Code of Ethics and Business Conduct addresses, among other matters, the obligation of accounting and financial personnel to maintain accurate records of the Company's operations, comply with laws and report violations. Our Code of Ethics and Business Conduct is posted on our website, http://www.dyn-intl.com, under the heading “Investor Relations - Corporate Governance”.
Corporate Governance Guidelines and Information
We are committed to maintaining and practicing the highest standards of ethics and corporate governance. The Board has adopted Corporate Governance Guidelines that provide a flexible framework within which the Board and its committees oversee the governance of the Company. These guidelines are available on our website, http://www.dyn-intl.com, under the heading “Investor Relations - Corporate Governance”. The Board of Directors assesses the Corporate Governance Guidelines annually. The Corporate Governance Guidelines addresses, among other matters, the duties of the Board and its Committees, Board composition and criteria, procedures for annual evaluation of the Board and the Chief Executive Officer, executive succession planning and communications with other constituents.  
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established three standing committees: (1) Audit, (2) Business Ethics and Compliance and (3) Compensation. In addition, special committees may be established under the direction of the Board when necessary to address specific issues. As of December 31, 2014 the committees consisted of the following members of the Board:
Name
Audit
Business Ethics and Compliance
Compensation
James E. Geisler (1)
 
 
 
Chan Galbato
X
 
 
General Michael Hagee (USMC Ret.)
X
C
X
Brett Ingersoll
X
 
C
General John Tilelli (USA Ret.)
C
X
X
Michael Sanford
X
 
 
(1) Upon Mr. Geisler's employment as Interim Chief Executive Officer in July 2014, he left his positions on the Audit and Business Ethics and Compliance committees; however, he continued to serve on the Board. See "Director Compensation" under Item 11 below for further detail.
C - Committee Chairman
X - Committee Member
STANDING COMMITTEES
Audit Committee
The Audit Committee oversees risks related to the Company's financial statements, the financial reporting process, certain compliance issues and accounting matters. The Audit Committee is also responsible for the oversight of (i) management's assessment of internal controls; (ii) our internal audit function; (iii) the Company's policies and practices with respect to enterprise risk management programs and processes; and (iv) audits of the Company's financial statements on behalf of the Board. Among other duties, it is directly responsible for the selection and oversight of our independent auditors. The functions of the Audit Committee are further described in the Audit Committee's charter. The Audit Committee met four times during the year ended December 31, 2014. The Audit Committee met on March 10, 2015 in relation to the year ended December 31, 2014. The Audit Committee’s charter is available on our website, http://www.dyn-intl.com, under the heading “Investor Relations — Corporate Governance.”
Even though our stock is not publicly traded as of the Merger, in accordance with our Corporate Governance Guidelines, Members of the Audit Committee who are determined by the Board to be independent, if any, within the meaning of our Corporate Governance Guidelines must satisfy the requirements of the New York Stock Exchange (“NYSE”). The Board determined that General Hagee and General Tilleli are independent Directors. Mr. Galbato, Mr. Ingersoll and Mr. Sanford are not considered as independent Directors because of their employment with Cerberus.
The Board does not prohibit its members from serving on boards or committees of other organizations, and has not adopted any specific guidelines limiting such activities. However, the service on boards or committees should be consistent with the Company's conflict of interest policies and the terms of the charters of the various committees of the Board.

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The Board has determined that Messrs. Galbato, Ingersoll and Sanford are “audit committee financial experts” as defined by the United States Securities and Exchange Commission (“SEC”) rules. Mr. Galbato and Mr. Ingersoll currently serve on the Audit committees of other public companies in addition to our Audit Committee, and the Board has determined that their simultaneous service does not impair their ability to serve effectively on the Company's Audit Committee.
Business Ethics and Compliance Committee
The Business Ethics and Compliance Committee is responsible for (i) overseeing and monitoring the Company's conformance with good business practices, public image and Government and industry standards, (ii) assisting the Board in its general oversight of the Company's compliance with the legal and regulatory requirements of the Company's business operations and (iii) overseeing the ethics and compliance program, including the compliance with the Company's Code of Ethics and Business Conduct.

The Business Ethics and Compliance Committee's charter is available on our website, http://www.dyn-intl.com, under the heading “Investor Relations - Corporate Governance.”
Compensation Committee
Our Compensation Committee is responsible for making recommendations to the Board concerning the compensation of the CEO and other executive officers, including the appropriateness of salary, incentive compensation, equity-based compensation plans and certain other benefit plans. Our Compensation Committee evaluates the performance of the CEO and other executive officers in setting their compensation levels and considers the Company's performance, as well as other factors deemed appropriate by our Compensation Committee. Our Compensation Committee occasionally engages independent consulting firms to review and evaluate various elements of the CEO's and other executive officers' total compensation, as discussed below under “Compensation Discussion and Analysis.” Our Compensation Committee met six times during the year ended December 31, 2014. On March 10, 2015, the Compensation Committee met to approve calendar year 2015 compensation for the NEOs.
Our Compensation Committee’s charter is available on our website, http://www.dyn-intl.com, under the heading “Investor Relations — Corporate Governance.”


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ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS

Overview
This Compensation Discussion and Analysis ("CD&A") describes the policies and objectives underlying our compensation program for our Named Executive Officers (“NEOs”). Accordingly, this section addresses and analyzes each element of our NEOs' compensation program. Our NEOs were made up of our (1) current interim CEO, (2) former CEOs, (3) current CFO, (4) three most highly compensated executive officers other than the CEO and CFO who were serving as executive officers as of December 31, 2014, and (5) two former executive officers serving during the year who were not serving as executive officers as of December 31, 2014 but who would have been among the three most highly compensated executive officers other than the CEO and CFO if they were serving as executive officers as of December 31, 2014. This section also presents a series of tables containing specific information about the compensation awarded to, earned by or paid to our NEOs. For the year ended December 31, 2014, our NEOs were:
•
James E. Geisler, a COAC employee seconded to us as Interim Chief Executive Officer as of December 31, 2014, who is named executive officer by reason of his position with us;
•
S. Gordon Walsh, former Chief Executive Officer, who was a named executive officer by reason of his former position with us;
•
Steven F. Gaffney, former Chief Executive Officer, who was a named executive officer by reason of his former position with us;
•
William T. Kansky, Senior Vice President and Chief Financial Officer as of December 31, 2014; who is a named executive officer by reason of his position with us;
•
George C. Krivo, a COAC employee seconded to us as Senior Vice President, Business Development, who is a named executive officer by reason of his level of compensation as an executive officer;
•
Gregory S. Nixon, a COAC employee seconded to us as Senior Vice President, Chief Administrative Officer and Chief Legal Officer, who is a named executive officer by reason of his level of compensation as an executive officer;
•
Lawrence Phillips, Senior Vice President, Operations, who is a named executive officer by reason of his level of compensation as an executive officer;
•
Christopher C. Bernhardt, former President, who was a named executive officer by reason of his level of compensation as a former executive officer;
•
Joseph Ruffolo Jr., former Chief of Staff, who was a named executive officer by reason of his level of compensation as a former executive officer.
Executive Summary
The Compensation Committee believes that the success of the Company in achieving its strategic objectives will depend in large part on the ability to attract and retain exceptional executive talent and to align the interests of all executives with investor success. The Compensation Committee has established an approach to executive remuneration that it believes will help achieve this mission and reduce the risks surrounding executive performance.
To provide the necessary and appropriate support to achieve investor success, the Compensation Committee uses the following approach:
•
providing cash compensation opportunities, including base salary and incentive compensation, to executive officers that, in the aggregate, reflect general industry practice; requiring that in order to earn targeted cash compensation levels, executive officers must meet financial objectives approved in advance by the Compensation Committee;
•
providing equity and other long-term incentives that reward executives for successful value creation, on terms comparable to those of our investors; and
•
allowing individual pay levels to vary considerably with individual executive responsibilities, capabilities and performance.
Executive Compensation Philosophy
Our Compensation Committee believes our compensation programs must assist us in attracting and retaining superior talent, and should motivate our NEOs to achieve our business objectives. Based on this philosophy, the compensation of our NEOs

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includes a combination of salary, annual incentive (i.e., cash bonuses), long-term incentives and equity compensation, and other employment benefits. Salary and other employment benefits are intended to provide a competitive foundation for attracting and retaining executives. The annual cash bonus is intended to incentivize and reward management for achieving financial milestones. The Company maintains an equity compensation plan and a long-term incentive plan for certain executives which together with cash compensation opportunities described below will provide competitive total remuneration when, and to the extent, investor objectives are realized. The Compensation Committee maintains such plans to better align compensation with investor objectives and to cause a portion of our NEOs' compensation to be contingent upon the long-term success of the Company.
Our Compensation Committee did not establish any specific percentile pay objectives during or for calendar year 2014. The Compensation Committee operates to ensure individual NEO compensation opportunities are commensurate with executive skills, leadership and performance and role impact. In addition, our Compensation Committee ensures that the aggregate cost of executive talent is generally within the range of competitive practice.
DynCorp Management LLC (“DynCorp Management”) maintains an Equity Incentive Plan to issue authorized classes of membership interests. DynCorp Management was formed in October 2013 between Cerberus Series Four Holdings LLC (“Cerberus Series Four”), Cerberus Partners II, L.P. (“CP II”), Defco Holdings, Inc. ("Holdings"), the non-member manager and certain members of management and outside directors (“Members” or future “Members”) of the Company, solely for acquiring, managing and disposing of shares of common stock of Holdings. All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. Awards of DynCorp Management Class B-1 Interests and Class B-2 Interests are made to certain members of management and outside directors of Holdings and its subsidiaries, including Delta Tucker Holdings, Inc. The grant and vesting of the awards is contingent upon the executive’s consent to the terms and conditions set forth in the Class B-1 Interests and B-2 Interests Agreements.
The Company maintains a long-term cash incentive bonus for certain members of management and outside directors, where in the event of a change in control, subject to the various members of management continued employment with the Company through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of such agreement, the various members of management shall be eligible to receive a cash incentive bonus. As of December 31, 2014 there was no impact to the financial statements as no triggering event had occurred.
Our long term cash incentive bonus was extended to certain executives as they were deemed necessary to the ongoing performance of the Company's, and its subsidiaries, operations. As such the long term incentive bonus is intended to retain the services of the executive in the event of a change in control.
We are a party to an employment agreement with Mr. Kansky and were formerly parties to employment agreements with Messrs. Walsh, Gaffney and Bernhardt and during his 2014 service as an employee of the Company, Mr. Krivo, which establish minimum salaries, annual incentive compensation targets and also provide for termination payments under certain circumstances. We believe that securing the agreement of these key individuals provides a reasonable level of income security for the executive and covenant protections for the business.
Mr. Geisler is party to a secondment agreement with COAC and DI, given that his direct employer as of December 31, 2014 was COAC. The terms of the secondment set forth the structure of the services relationship of Mr. Geisler with the Company, and the terms concerning compensation in respect to his service. As a secondee, Mr. Geisler remains employed and compensated by COAC. The secondment agreement allows the Company to retain necessary high level talent to fulfill important roles at the Company. The material terms of his secondment agreement are discussed further below, under the headings “Employment Agreements” and “Other Potential Post-Employment Payments.” The Board of Directors retains discretion to provide employment agreements to and execute on the Company's behalf secondment agreements for our NEOs.
Executive Compensation Oversight
Our executive compensation program is administered by our Compensation Committee. As reflected in its charter, our Compensation Committee is charged with reviewing and approving executive salaries, incentive arrangements, and goals and objectives relevant to the performance of our NEOs. Furthermore, our Compensation Committee is also responsible for overseeing all other aspects of executive compensation including executive benefits and perquisites, post-employment benefits and employment agreements. In addition, no less than annually, our Compensation Committee appraises the performance of our NEOs in light of these goals and objectives and sets compensation levels based on this evaluation. For the year ended December 31, 2014, the CEO provided individual performance assessments to our Compensation Committee on performance of individual NEOs other than himself. At the March 10, 2015 Committee meeting, our Compensation Committee reviewed the performance of the CEO in an executive session, without the CEO or any member of management present.

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Secondments
For those NEOs that are secondees to the Company, no compensation is paid directly by the Company to the NEO. Rather, COAC pays the NEO directly as its employer and the Company pays COAC pursuant to the applicable secondment agreement for the services provided to the Company by the NEO. As COAC employees, Mr. Krivo and Mr. Nixon were not participating for 2014 in the Company's annual incentive, long-term incentive or equity compensation plans, and were not receiving employment benefits, including any savings plan match, directly from the Company. Mr. Geisler participates in the long-term incentive and equity compensation plans as part of his service as a director but does not participate in any incentive bonus or other employment benefits. Under Mr. Geisler's secondment agreement, there is no explicit severance, or similar termination compensation and provisions applicable. The Company is not involved with setting compensation or benefits paid by COAC to our seconded NEOs.
Use of Consultants
For the year ended December 31, 2014, the Compensation Committee retained Board Advisory, LLC as its compensation consultant to provide advice and resources regarding pay practices relevant to the Company as an employer, and to assist the Compensation Committee in the design of related executive compensation and employment programs. Board Advisory, LLC reports directly to the Compensation Committee, and the Compensation Committee has the sole power to terminate or replace and authorize payment of fees to Board Advisory, LLC. The Compensation Committee directed Board Advisory, LLC to work with members of our management to obtain information necessary for it to form its recommendations and evaluate management's recommendations. Board Advisory, LLC also met with the Compensation Committee during the Compensation Committee's regular meetings and in executive session. Board Advisory, LLC provided additional services during the year ended December 31, 2014 related to the stock based compensation and long-term incentive bonus plans. At the Compensation Committee request, the Board Advisory, LLC provided the Compensation Committee with comparative market data and general survey data with respect to executive officer positions.
Elements of our Executive Compensation Program
The primary elements of our executive compensation program, which covers our non-seconded NEOs as well as other officers and key executives of the company, for the year ended December 31, 2014 were;
•
base salary;
•
an annual incentive bonus, paid in cash;
•
equity based compensation plan;
•
long-term incentive bonus plan;
•
a tax-qualified savings plan with matching company contributions; and
•
perquisites and other personal benefits.
In setting compensation amounts for each such NEO, our Compensation Committee considers, among other factors, the responsibilities, performance and experience of the executive, as well as comparative market pay data. In setting initial target compensation levels the Compensation Committee sets both a salary and a target annual incentive amount, expressed as a percent of base salary. Subsequent increases to base salary are set based on an evaluation of individual performance, as well as responsibilities and comparative market data. Changes to the annual cash incentive target are based on individual executive responsibilities, within the general parameters of competitive practice.  
Given satisfactory performance evaluations and achievement of investor financial objectives, our goal is to manage NEO cash compensation (salary and annual cash bonus) within the range of competitive practice. The Long-term incentive plan and equity compensation plan implemented in 2013, for certain members of management and outside directors, in combination with cash compensation, is intended to provide competitive total remuneration when investor objectives are realized, subject to the executives' and directors' continued employment with the Company. The combination of compensation plan elements provides for superior pay opportunities that are externally competitive and align with the business objectives of the Company while ensuring investors' objectives are achieved.

Our seconded NEO costs are managed by the Compensation Committee which includes executive leadership of the COAC through Mr. Ingersoll's participation.
Further specifics with regard to each element of compensation are discussed in the sections below.

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Base Salary
We pay our non-seconded NEOs a base salary as fixed compensation for their time, efforts and commitments throughout the year. Salary levels are typically reviewed annually as part of our performance review process as well as upon a promotion or other change in job responsibility. Our review cycle for base salary increases for calendar year 2014 occurred from January to March. Due to competitive pressures within our industry, we froze salary increases for calendar year 2014 and in some instances requested NEOs to take a voluntary, yet temporary, pay reduction to their base salary. The Compensation Committee considers, among other performance standards, the NEO's contributions in assisting the Company in meeting its financial targets, improving operational efficiencies, creating and executing a clear strategy, leading and overseeing significant company driven projects, creating a winning culture of compliance and safety. Generalized competitive pay data in survey format is reviewed by our Compensation Committee as a reference point, but does not necessarily control the Compensation Committee's pay decisions.
Individual performance is assessed through our annual employee evaluation process, which compares performance goals established for the NEO's position within our Company to the NEO's actual performance for the year.
Base salaries are included in total salary, as reflected in column (c) of the “Summary Compensation Table” below, and further described below in the “NEOs on an Individualized Basis” section. Base salaries are also described in the table below under Incentive Bonus Compensation.

Incentive Bonus Compensation
We have established the Management Incentive Plan ("MIP") to provide additional annual cash compensation to eligible participants for their contribution to the achievement of our objectives, to encourage and stimulate superior performance and to assist in attracting and retaining highly qualified executives.
Under the MIP, target bonus amounts for the year ended December 31, 2014 were based on a percentage of base salary, according to each non-seconded NEO's level and overall job responsibilities. This method of assigning each applicable NEO a MIP target bonus percentage is consistent with our compensation philosophy, as discussed within the “Executive Compensation Philosophy” section above. Actual incentive bonus compensation paid to each executive is reflected in column (f) of the “Summary Compensation Table” below, and further described below in the “NEOs on an Individualized Basis” section.
Specific target bonus percentages are set forth in the following table:
    
Covered NEO
Calendar
Year
Annual Base Salary
Annual Target  Bonus Percentage
Annual Target Bonus Amount
Mr. Geisler (1)
2014
$
—

—%
$
—

Mr. Walsh
2014
$
950,000

100%
$
950,000

Mr. Gaffney
2014
$
1,900,000

130%
$
2,470,000

Mr. Kansky
2014
$
760,000

100%
$
760,000

Mr. Krivo (1)
2014
$
—

—%
$
—

Mr. Nixon (1)
2014
$
—

—%
$
—

Mr. Phillips
2014
$
375,000

60%
$
225,000

Mr. Bernhardt
2014
$
522,500

100%
$
522,500

Mr. Ruffolo
2014
$
352,260

50%
$
176,130

    
(1)
As seconded executives, Mr. Geisler, Mr. Krivo and Mr. Nixon do not participate in the MIP.
Bonuses are paid under the MIP based on the attainment of certain financial performance targets that were approved by our Compensation Committee, as set forth below. The MIP provides that the target bonus percentages and performance targets will be established annually during the first 90 days of the plan year.
For the year ended December 31, 2014, the financial performance metrics for our eligible NEOs included adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”), orders and free cash flow. Each eligible NEO's bonus payout formula is based on performance metrics tied to our consolidated performance. Adjusted EBITDA is calculated by adjusting EBITDA for the items described below. We use Adjusted EBITDA as it provides a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense, and adjusts for certain items as defined in our Credit Facility and indenture, see Item 7 Non-GAAP measures for additional information. We established orders as a key measure, as it measures future revenue related to new businesses and growth to existing businesses and is consistent with our long-term strategic operational growth plan. We reward effective management of free cash flow as it is reflects how well we are managing the cash flows of our operating activities.

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Based on Company performance, there was no payout for the MIP for calendar year 2014. Had bonuses been earned by our non-seconded NEOs under the MIP for performance for the year ended December 31, 2014, they would be reflected in column (f) of the “Summary Compensation Table” below. Our consolidated performance targets and actual results for the year ended December 31, 2014 were as follows:
Calendar Year Ended
Performance
Metric
Performance
Targets
 
Weighting of
Performance
Metrics
Actual Results
December 31, 2014
Adjusted EBITDA
$
150.0
 million
 
60%
$
109.0
 million
 
Orders(1)
$
3,000.0
 million
 
20%
$
2,159.3
 million
 
Free Cash Flow(2)
$
71.4
 million
 
20%
$
15.1
 million
(1)
Orders utilized for performance metric purposes are calculated as the funded and unfunded net changes to contract values, including exercised and unexercised options as of December 31, 2014. Estimated future task orders under IDIQ contracts are not considered Orders until the task orders are awarded.
(2)
Free cash flow utilized for performance metric purposes is calculated as cash flows from operating activities less property, plant and equipment and purchased software in calendar year 2014.

Calendar Year 2014 Incentive Bonus Compensation
    
As noted above, no incentive bonus compensation was approved for the year ended December 31, 2014 as the Company did not achieve its performance targets.
Long-Term Incentive Compensation Plan
The Company maintains a long-term cash incentive bonus for certain executives, where in the event of a change in control, subject to the executives’ continued employment with the Company through such a change in control and execution of a restrictive covenant agreement within fourteen days of receipt of the executed agreement, the executive shall be eligible to receive a cash incentive bonus as set forth in each respective individuals agreement.
Equity Incentive Plan
The Company maintains an Equity Incentive Plan to issue authorized classes of membership interests in DynCorp Management for the purpose of providing long-term equity compensation to certain members of management and outside directors. DynCorp Management granted Class B-1 Interests and Class B-2 Interests to certain executives employed by Holdings and its subsidiaries, including Delta Tucker Holdings, Inc. The vesting of the awards is contingent upon the NEO’s consent to the terms and conditions set forth in the Class B-1 Interests and B-2 Interests Agreements.
The Class B-1 Interests are subject to (i) time-based vesting in separate tranches based on the participants’ hire date (with each tranche subject to a specific “Vesting Date”); (ii) acceleration of vesting in certain circumstances (such as in the event of a change in control or termination of the executive without cause); and (iii) continued employment of the recipient by Holdings or its subsidiaries through the applicable Vesting Dates. Class B-1 Interests held by participants hired in 2013 shall vest in five equal 20% installments starting with the grant date, and then on July 15, 2014, July 15, 2015, July 15, 2016 and July 15, 2017. Class B-1 Interests participants hired in 2012 shall vest with respect to 30% of the Class B-1 Interests on the grant date, an additional 20% on July 15, 2014, 20% on July 15, 2015 and with respect to the remaining Class B-1 Interests on July 15, 2016. Class B-1 Interests participants hired in 2010 and 2011 shall vest with respect to 40% of the Class B-1 Interests as of the grant date, an additional 20% on July 15, 2014 and with respect to the remaining Class B-1 Interests on July 15, 2015. Time based vesting provides for ample retention incentives and economic Class B interests align investors and participants, such that participants are rewarded for successes in the business. Due to the timing of the NEO executing their initial interest agreement for shares granted in December 2013, Mr. Gaffney and Mr. Krivo were the only NEOs to vest new grants in calendar year 2014.
    
Savings Plan
Each non-seconded NEO is eligible to participate in our tax-qualified 401(k) plan on the same basis as all other eligible employees. We provide a Company matching contribution under the 401(k) plan on a non-discriminatory basis. The matching contributions paid by us on behalf of our NEOs are reflected in column (g) of the "Summary Compensation Table" presented below. Details of the plan are discussed in Note 6 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
.

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The Company has a non-qualified unfunded and unsecured deferred compensation plan that is offered to certain members of management allowing for the deferral of salary and bonuses without the statutory limitations present in 401(k) savings plan ("Savings Plan"). The elections under the savings plan must be completely separate and independent of each other. Under the saving plan, the deferral amount limitation is 50% of salary and 100% of bonuses and each participant shall be 100% vested in their accounts, at all times. The Company makes no contributions into the plan and currently the plan only includes contributions by the respective participants. The account balances are not indexed in any particular investments and do not realize earnings.
Perquisites and Other Personal Benefits
We maintain group medical and dental insurance, accidental death insurance and disability insurance programs for our employees, as well as customary vacation and other similar employee benefits. Non-seconded NEOs are eligible to participate in these programs on the same basis as our other U.S. based salaried employees.
Our Compensation Committee established an Executive Benefits Plan for designated executives including our non-seconded NEOs, under which they are reimbursed up to $15,000 per year on a pre-tax basis for annual physical examinations not covered by our group health plans, as well as personal income tax services and estate planning services. Payments under the Executive Benefits Plan are grossed up to compensate for income taxes on the payments. For the year ended December 31, 2014 payments in the aggregate tax adjusted amount of $45,492, were made to our NEOs under this plan and are reflected in column (g) of the Summary Compensation Table.
The cost we incurred in providing term life insurance benefits to each of our non-seconded NEOs is reflected in column (g) of the “Summary Compensation Table” below. This benefit is generally available to most U.S. based non-union employees.
Mr. Gaffney was provided with a special travel accident policy covering January 2014 to July 2014 with a benefit payout amount of $5,000,000 and an annual premium of $33,473. Mr. Krivo was also provided with a special travel accident policy covering his service period as an employee of the Company from January 2014 to June 2014 with a benefit payment of $3,000,000 and an annual premium of $20,084. Each NEO's respective taxable share of the premium for such insurance is reflected in column (g) of the “Summary Compensation Table” below. In addition, Mr. Gaffney had been provided with a $12,500,000 life insurance policy.
Employment Agreements and Post-Employment Benefits
Our Compensation Committee believes it generally to be in our best interests to design compensation programs that: (i) assist us in attracting and retaining qualified executive officers; (ii) provide certainty about the consequences of terminating certain executive officers’ employment; and (iii) most importantly, protect us by obtaining post-termination covenants. Mr. Kansky is the only NEO with an employment agreement as of December 31, 2014. See further discussion in the Executive Compensation section below.

NEO Compensation on an Individualized Basis
The following paragraphs describe the manner in which our Compensation Committee determined the specified amount of each element of compensation for non-seconded NEOs on an individualized basis for the year ended December 31, 2014. Actual compensation under the MIP may differ from targeted compensation based on the achievement of Company annual financial performance targets or through discretionary action by our Compensation Committee. See the “Base Salary,” “Incentive Bonus Compensation” and the "Equity Incentive Plan" for general discussion on the compensation elements discussed below. Other compensation, including 401(k) matching, professional fees reimbursement and related benefits generally available to all domestic employees, are provided to the NEOs, but are not a significant portion of their compensation. Salary levels for each NEO, including consideration of any adjustment in salary, were approved in March 2014 and reflect factors including the NEOs performance during 2013. Due to competitive pressures within our industry, we froze salary increases for calendar year 2014 and in some instances requested NEOs to take a voluntary, yet temporary, pay reduction to their base salary.
Mr. Geisler's compensation is determined by the secondment agreement executed between himself, COAC and DI. Per his secondment agreement the Company is charged $1,630,055 annually for Mr. Geisler's services to DI. As a COAC employee, Mr. Geisler was not eligible to participate in our 2014 MIP program. Mr. Geisler is eligible to receive a long-term cash incentive bonus for his service as a Director of $160,000 as set forth in the long term incentive awards presented in December of 2013, in the event of a change in control, and subject to his continued employment with the Company through such a change in control. Mr. Geisler holds Class B-1 interests through the equity incentive plan. Interests were awarded to him in 2013 for his service as a Director to the Company. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Walsh's annual base salary was $950,000, as specified in his calendar year 2014 employment agreement. Upon Mr. Walsh's departure from the Company, he received any accrued and unused vacation earnings for calendar year 2014 through his

111

termination date. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Gaffney's annual base salary decreased from $2,000,000 to $1,900,000 for the year ended December 31, 2014 as a voluntary and temporary reduction. Per the terms specified in his calendar year 2011 employment agreement, Mr. Gaffney was eligible through our 2014 MIP program to earn a target annual incentive bonus compensation equal to 130% of his salary, with the opportunity to earn up to 200% of his base salary if certain performance levels, as noted under "Incentive Bonus Compensation" above, were achieved. At the time of Mr. Gaffney's departure from the Company in July 2014, the full MIP bonus was accrued for and included in the terms of his severance. Per the terms of his employment agreement, Mr. Gaffney was entitled to severance of $9,200,000 to be paid out over two years in equal monthly installments. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Kansky's base salary decreased from $800,000 to $760,000 for the year ended December 31, 2014 as a voluntary and temporary reduction. Mr. Kansky was eligible, through our MIP program, to earn a target annual incentive bonus compensation equal to 100%, of his salary, with the opportunity to earn up to 200% of his base salary if certain performance levels, as noted under "Incentive Bonus Compensation" above, were achieved. Mr. Kansky is eligible to receive a long-term cash incentive bonus of $832,000 as set forth in the long term incentive awards presented in December of 2013 in the event of a change in control, subject to his continued employment with the Company through such a change in control. As of December 31, 2014, Mr. Kansky did not receive any long-term cash incentive bonus as no triggering event had occurred. Mr. Kansky holds Class B-2 interests through the equity incentive plan. Interests were awarded to him in 2013. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Krivo's annual base salary as an employee in 2014 was $450,000. As previously reported, Mr. Krivo resigned from employment with the Company in May 2014 and later returned in September 2014 as a seconded executive from COAC. Beginning in September 2014, Mr. Krivo began serving in the capacity as Senior Vice President of Business Development. As a seconded executive Mr. Krivo received $353,697 for services he provided to DI during the calendar year 2014. As a seconded executive, Mr. Krivo does not participate in our MIP program. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Beginning in September 2014, Mr. Nixon was seconded to the Company from COAC and began serving in the capacity as Senior Vice President, Chief Administrative Officer and Chief Legal Officer. As a seconded executive Mr. Nixon received $548,652 for services he provided to DI during the calendar year 2014. As a seconded executive, Mr. Nixon does not participate in our MIP program. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Phillips' annual base salary was $375,000 as of December 31, 2014. Mr. Phillips' salary was established upon his employment as Senior Vice President, Operations in April 2014. Mr. Phillips was eligible through our MIP program to earn target annual incentive bonus compensation of 60% of his base salary if certain performance levels, as noted under "Incentive Bonus Compensation" above, were achieved. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.
Mr. Bernhardt's base salary decreased from $550,000 to $522,500 for the year ended December 31, 2014 as a voluntary and temporary reduction. Per the terms specified in his employment agreement, Mr. Bernhardt was eligible through our 2014 MIP program to earn a target annual incentive bonus compensation equal to 100% of his base salary and a potential of up to 200% of his base salary if certain performance levels, as noted under "Incentive Bonus Compensation" above, were achieved. Upon Mr. Bernhardt's retirement from DI in October 2014, it was determined no MIP was payable for calendar year 2014 and therefore no MIP was included in the terms of his severance. Mr. Bernhardt was also previously granted 750 Class B-1 interests through the equity incentive plan. Mr. Bernhardt vested in only the first two of five equal 20% installments, given his October 2014 retirement (i.e. the tranches scheduled to vest on the grant date and July 15, 2014). Upon his retirement and consistent with Mr. Bernhardt's employment agreement, he was paid a severance of $1,100,000 equal to two times his annual salary. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.            
Mr. Ruffolo's base salary remained unchanged in 2014 from 2013 at $352,260. Upon Mr. Ruffolo's departure in October 2014, he received $370,800 of post-employment benefits, including any accrued and unused vacation earnings for calendar year 2014 through his termination date in October 2014 in consideration of Mr. Ruffolo's general release of claims, as well as executing a non-compete and non-solicitation agreement. See "Summary Compensation" and "All Other Compensation" within the Executive Compensation section below for further discussion.

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Tax Implications of Executive Compensation
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (“Section 162(m)”), limits the deduction for a publicly held corporation for otherwise deductible compensation to any “covered employee” to $1,000,000 per year. Since we are a private company and our equity is not publicly traded, Section 162(m) is not applicable to the Company.

RISK MANAGEMENT IMPLICATIONS OF EXECUTIVE COMPENSATION
In connection with its oversight of compensation related risks, our Compensation Committee and management annually evaluates whether our Company's compensation policies and practices create risks that are reasonably likely to have a material adverse effect on our Company. Our compensation (base salary or management incentive plan bonus compensation) is driven by either the passage of time (based on salaries established through market studies) or by a narrow set of performance metrics: (i) Adjusted EBITDA; (ii) orders; and (iii) free cash flow. Compensation based on the passage of time does not create risk-taking incentives. Therefore, we have focused our consideration of risk and rewards on the compensation driven by the three performance metrics.  
The structure of our incentive bonus program, which is based on three performance metrics, mitigates risks by avoiding employees placing undue emphasis on any particular performance metric at the expense of other aspects of our business. We believe our performance measures are well aligned with creating long-term value and do not create an incentive for excessive risk taking or unusual pressure on any single operating segment. Furthermore, our compensation policies and practices are consistent throughout the organization, except as it relates to seconded NEOs. With respect to seconded NEOs, the Company is closely involved in compensation decisions of COAC regarding such personnel, with the primary objective to avoid excessive risk taking. We believe that the flat rate of compensation paid to COAC for services its employees provided to us on a seconded basis eliminates any such excessive risk taking. Based on this evaluation, our Compensation Committee determined that our compensation programs do not encourage risk taking that is reasonably likely to have a material adverse effect on the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consists of General Michael Hagee (USMC Ret.), Brett Ingersoll and General John Tilelli (USA Ret.) none of whom were at any time during the year ended December 31, 2014 or at any other time, an officer or employee of the Company or any of our subsidiaries. Mr. Ingersoll is a Cerberus employee. Pursuant to the terms of the COAC Agreement, we pay Cerberus consulting fees to provide us with reasonably requested business advisory services. Consulting fees incurred for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 totaled $4.9 million, $4.6 million and $3.3 million respectively. See Note 12 for additional information on the COAC Agreement.
COMPENSATION COMMITTEE REPORT
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Disclosure and Analysis be included in this Report.
The Compensation Committee consists of:
General Michael Hagee (USMC Ret.)
Brett Ingersoll, Chairman
General John Tilelli (USA Ret.)

EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth information regarding compensation for the calendar year 2014, calendar year 2013, and calendar year 2012, awarded to, earned by or paid to our NEOs.

113

Name and Principal Position
Calendar/
Fiscal
Year (1)
 
Salary
($)(2)
 
Bonus
($)
 
Stock
(Equity)
Awards
($) (3)
 
Non-Equity
Incentive Plan
Compensation
($) (4)
All Other
Compensation
($) (5)
Total
($)
(a)
(b)
 
(c)
 
(d)
 
(e)
 
(f)
(g)
(h)
James E. Geisler Interim Chief Executive Officer
2014
 
—

 
—

 
—

 
—

436,034

436,034

 
 
 
 
 
 
 
 
 
 
 
 
S. Gordon Walsh Former Chief Executive Officer
2014
 
54,808


—


—


—

28,449

83,257

 
 
 
 
 
 
 
 
 
 
 
 
Steven F. Gaffney
Former Chief Executive Officer
2014
 
1,090,385


—


1,859,455


—

9,493,612

12,443,452

2013
 
2,000,000

 
—

 
—

 
1,534,000

1,160,462

4,694,462

2012
 
2,000,000

 
—

 
—

 
2,678,400

189,475

4,867,875

 
 
 
 
 
 
 
 
 
 
 
 
William T. Kansky 
Senior Vice President, Chief Financial Officer
2014
 
760,000


—


—


—

73,904

833,904

2013
 
800,000

 
—

 
90,204

 
472,000

42,211

1,404,415

2012
 
731,154

 
—

 
—

 
824,100

79,815

1,635,069

 
 
 
 
 
 
 
 
 
 
 
 
George C. Krivo 
Senior Vice President, Business Development
2014
 
192,115


—


13,179


—

409,169

614,463

2013
 
450,000

 
—

 
—

 
225,000

146,283

821,283

2012
 
450,000

 
—

 
—

 
463,600

86,755

1,000,355

 
 
 
 
 
 
 
 
 
 
 
 
Gregory S. Nixon 
Senior Vice President, Chief Administrative Officer and Chief Legal Officer
2014
 
—


—


—


—

548,652

548,652

2013
 















2012
 
605,389


—


—


669,600

93,626

1,368,615

 
 
 
 
 
 
 
 
 
 
 
 
Lawrence Phillips Senior Vice President, Operations
2014
 
375,000


—


—


—

46,064

421,064

 
 
 
 
 
 
 
 
 
 
 
 
Christopher Bernhardt Former President
2014
 
400,337


—


—


—

1,165,560

1,565,897

2013
 
137,716


—


471,080


94,000

133,704

836,500

 
 
 
 
 
 
 
 
 
 
 
 
Joseph Ruffolo Jr., Former Chief of Staff
2014
 
280,596


—


—


—

437,686

718,282

 
(1)
Information is not presented for Mr. Geisler, Mr. Walsh, Mr. Nixon, Mr. Phillips, Mr. Bernhardt and Mr. Ruffolo for the periods prior to the year of becoming NEOs, except for Mr. Nixon who was a NEO in calendar year 2012.
(2)
For Mr. Krivo, the Salary column for 2014 represents the amount of base compensation received by him as an employee prior to his resignation. Consulting payments paid by COAC for his service as a seconded executive are reflected under All Other Compensation.
(3)
The amounts reported in column (e) represents service-based Class B interests for the aggregate grant date fair value of awards computed in accordance with FASB Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation. The amount reported in column (e) relating to service-based Class B interests for the aggregate grant date estimate of compensation costs to be recognized over the service period, excluding the effect of forfeitures with respect to performance awards.
(4)
The amounts reported in column (f) represent cash bonuses that were earned for calendar year 2014, calendar year 2013 and in calendar year 2012 pursuant to our MIP, which is discussed above under the heading “Incentive Bonus Compensation.”
(5)
The amount of each component of All Other Compensation reported in column (g) for each NEO is set forth in the “All Other Compensation” table below. Compensation paid by COAC for the services rendered by NEOs seconded to the Company by COAC are reflected in the All Other Compensation table.

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All Other Compensation
The following table outlines perquisites and personal benefits provided to our NEOs in calendar year 2014, calendar year 2013, and calendar year 2012.
Name
 
Calendar/
Fiscal
Year
Consulting Payments Under COAC Agreement
401(k)
Matching
Contributions
($) (1)
Severance
($)
Director Fees
($)(2)
Professional 
Fees and Reimburse-ments
($)
Taxable
Relocation
($)
Cost of
Insurance
Policies
($) (3)
Total
Other
Compensation
($)
 
 
 
 
 
 
 
 
 
 
Mr. Geisler
2014
351,034

—

—

85,000

—

—

—

436,034

 
 
 
 
 
 
 
 
 
 
Mr. Walsh
2014
—

—

—

—

22,844

—

5,605

28,449

 
 
 
 
 
 
 
 
 
 
Mr. Gaffney
2014
—

—

9,200,000

—

234,803

—

58,809

9,493,612

2013
—

—

—

—

40,422

956,023

164,017

1,160,462

2012
—

—

—

—

89,848

53,596

46,031

189,475

 
 
 
 
 
 
 
 
 
 
Mr. Kansky
2014
—

769

—

—

33,923

—

39,212

73,904

2013
—

12,750

—

—

75

—

29,386

42,211

2012
—

11,000

—

—

41,014

—

27,801

79,815

 
 
 
 
 
 
 
 
 
 
Mr. Krivo
2014
353,697

8,204

—

—

29,792

—

17,476

409,169

2013
—

10,212

—

—

10,408

90,000

35,663

146,283

2012
—

11,000

—

—

47,293

—

28,462

86,755

 
 
 
 
 
 
 
 
 
 
Mr. Nixon
2014
548,652

—

—

—

—

—

—

548,652

2013
—

—

—

—

—

—

—

—

2012
—

11,000

—

—

54,164

—

28,462

93,626

 
 
 
 
 
 
 
 
 
 
Mr. Phillips
2014
—

10,288

—

—

112

—

35,664

46,064

 
 
 
 
 
 
 
 
 
 
Mr. Bernhardt
2014
—

3,173

1,100,000

—

19,445

—

42,942

1,165,560

2013
—

3,600

—

—

125,000

—

5,104

133,704

 
 
 
 
 
 
 
 
 
 
Mr. Ruffolo
2014
—

10,169

370,800

—

28,264

—

28,453

437,686

 
(1)
The Company provides a match for 401(k) in accordance with statutory limits and Company policy.
(2)
Represents the compensation received by the NEO for service on the board and service for each committee, accordingly. See "Director Compensation" below for further detail.
(3)
Represents the cost of Company-paid term-life insurance policies for our NEOs and our NEOs' share of premiums for business travel accident policies paid to our NEOs. In 2014, the total value of medical insurance premiums paid for Mr. Walsh, Mr. Gaffney and Mr. Kansky was $1,400, $11,104 and $18,203, respectively. The total value of medical premiums for Mr. Phillips, Mr. Bernhardt and Mr. Ruffolo was $18,203, $9,335 and $9,335, respectively. The total value of short term disability insurance premiums paid for Mr. Walsh, Mr. Gaffney and Mr. Kansky was $661, $10,835 and $6,951, respectively. The total value of short term disability insurance premiums paid for Mr. Krivo, Mr. Phillips, Mr. Bernhardt and Mr. Ruffolo was $1,869, $3,375, $4,186 and $2,490, respectively. The total value of executive life insurance paid for Mr. Walsh, Mr. Gaffney and Mr. Kansky, was $406, $16,933 and $8,666, respectively. The total value of executive life insurance paid for Mr. Krivo, Mr. Phillips, Mr. Bernhardt and Mr. Ruffolo was $2,304, $3,045, $6,450 and $14,356, respectively.

Grants of Plan-Based Awards in Calendar Year 2014
In December 2013, we adopted an Equity Incentive Plan to issue authorized classes of membership interests. DynCorp Management was formed in October 2013 between Cerberus Series Four, CP II, Holdings and certain members of management and outside directors of Holdings and its subsidiaries, including Delta Tucker Holdings, Inc. DynCorp Management granted 3,040 Class B-1 Interests to certain members of management and outside directors of Holdings and its subsidiaries, including Delta Tucker Holdings, Inc. Mr. Gaffney and Mr. Krivo were granted shares as part of the original grant tranche in December 2013; however, due to the timing of the execution of their agreements, the shares were not awarded until calendar year 2014. See Note

115

9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail.
 
Grant
Date
 
All Other Stock Awards
Number of Shares
 of Stock or Units
Mr. Geisler
—

 
—

Mr. Walsh
—

 
—

Mr. Gaffney
January 7, 2014

 
2,590

Mr. Kansky
—

 
—

Mr. Krivo
April 1, 2014

 
450

Mr. Nixon
—

 
—

Mr. Phillips
—

 
—

Mr. Bernhardt
—

 
—

Mr. Ruffolo
—

 
—


Employment Agreements
As of December 31, 2014, we have an existing employment agreement with Mr. Kansky. Messrs. Gaffney, Walsh, Bernhardt and Krivo were each employed under employment agreements with the Company prior to the termination of their employment.
Mr. Kansky's employment agreement is for a two year period, after which his agreement renews automatically in one year intervals. Prior to his departure, Mr. Gaffney was in the final year of his initial four year agreement. Mr. Walsh's employment agreement did not stipulate an effective period of time. Additionally, Messrs. Bernhardt and Krivo had employment agreements that were effective for two years and were automatically renewed in one year intervals.
The employment agreements establish initial minimum salaries and annual incentive compensation targets for each of the covered NEOs. See the “Incentive Bonus Compensation” section for the calendar year 2014 base salary and target bonus amounts.
Pursuant to his employment agreement, Mr. Gaffney agreed that for a period of two years following the termination of his employment, he will not (a) solicit, for purposes of marketing, selling or providing services or products thereto, any party which was a customer of ours during the year prior to his termination or was a targeted customer at the time of termination or (b) solicit for employment any person who was an employee of ours during the year prior to his termination or directly or indirectly solicit or induce a current employee. Furthermore, during this non-compete period or one year following normal expiration of the term of his employment agreement, he will not organize, establish, own, operate, act as a consultant or advisor to, render services for or otherwise assist any person or entity that has derived 15 percent or more of its annual revenue performing services that are competitive to the Company.
Pursuant to the employment agreements of Messrs. Kansky, Bernhardt and Krivo agreed that, during the term of the employment agreement and for a period of two years following the termination of the agreement, they will not employ or solicit for employment any current or former employees of our Company. Mr. Walsh agreed to similar terms as noted above for a period of twelve (12) months following his termination.
Furthermore, NEOs may not disclose any confidential information to any person or entity, unless required by law. In addition, under the terms of the employment agreements, we have agreed to indemnify the NEOs against any claims or liabilities relating to our NEOs' services to us, to the extent permitted by applicable law, and to pay for counsel for our NEOs' defense.
The NEOs' employment agreements provide for payments in connection with certain terminations of employment. A description of the payments and benefits each NEO receives upon termination of employment is provided below in “Other Potential Post-Employment Payments.”

Equity Incentive Plan
In connection with the Equity Incentive Plan adopted in December 2013, DynCorp Management has granted 7,103 Class B-1 Interests and 380 Class B-2 Interests to certain members of management and outside directors of Holdings and its subsidiaries, including Delta Tucker Holdings, Inc. as of December 31, 2014.
The Class B-1 Interests are be subject to (i) time-based vesting in separate tranches based on the participants’ hire date (each such date a “Vesting Date”); (ii) acceleration of vesting in certain circumstances (such as in the event of a change in control or

116

termination of the executive without cause); and (iii) continued employment of the executive by Holdings or its subsidiaries through the applicable vesting dates.
In calendar year 2014, Mr. Gaffney was granted 2,590 Class B-1 interests through the equity incentive plan, of which 40% vested as of the grant date, January 7, 2014, and an additional 20% vested upon his departure from the Company in July 2014. Mr. Krivo was granted 450 Class B-1 interests through the equity incentive plan, of which 40% vested as of the grant date, April 1, 2014, and an additional 20% vested upon his departure from the Company in May 2014.
As of December 31, 2014, Messrs. Geisler, Kansky and Phillips were the only active NEOs participating in the Equity Incentive Plan. See Note 9 for further discussion to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Outstanding Equity Awards at Fiscal Year End
Outstanding Equity awards held by our named executive officers as of December 31, 2014 are as follows:
 
 
Equity Awards(1)
Name
 
Number of Securities Underlying Unexercised Awards (#) Exercisable
 
Number of Securities Underlying Unexercised Awards (#) Unexercisable
 
Equity Incentive Plan Awards:
Number of Securities 
Underlying Unexercised
Unearned Awards (#) (2)

Mr. Geisler
 
—

 
60


90

Mr. Walsh
 
—

 
—


—

Mr. Gaffney
 
—

 
1,554


—

Mr. Kansky
 
—

 
228


152

Mr. Krivo
 
—

 
270


—

Mr. Nixon
 
—

 
—


—

Mr. Phillips
 
—

 
90


60

Mr. Bernhardt
 
—

 
450


—

Mr. Ruffolo
 
—

 
—


—

(1)
Awards to our named executive officers consist of interests qualifying as profits interests under Revenue Procedure 93-27, that are exercisable only upon a change in control as defined in the Plan. The awards do not expire and the awards do not have a fixed strike price.  Additional details regarding the awards are presented under the heading of Equity Incentive Plan, above.
(2)    The remaining unvested portion of the awards to Mr. Geisler vest in equal portions on July 15, 2015, July 15, 2016 and July 15, 2017. The remaining unvested portion of the awards for Mr. Kansky and Mr. Phillips vest on July 15, 2015.    
Option Exercises and Stock Vested in Calendar Year 2014
None of the executive officers of DI exercised stock options or received vesting of restricted stock, restricted stock units or performance shares during 2014.

Pension Benefits and Nonqualified Deferred Compensation
The Company has a non-qualified unfunded and unsecured deferred compensation plan that is offered to certain members of management allowing for the deferral of salary and bonuses without the statutory limitations present in 401(k) savings plan ("Savings Plan"). The elections under the Savings Plan must be completely separate and independent of each other. Under the Savings Plan, the deferral amount limitation is 50% of salary and 100% of bonuses and each participant shall be 100% vested in his or her account, at all times. The funds can be distributed the first day of the calendar month following the six-month anniversary of the participant’s separation from the Company. The participant can elect payout of the funds in a single sum or annual installments over 5 or 10 years; however, only one election can be made with respect to all of the deferrals in the respective account. If, for any reason, the participant fails to make a valid and timely election, the participant’s account shall be distributed as a single sum as of the participant’s benefit commencement date. Any change in election resulting in a delay or change in the form of payment shall not take effect until the one-year anniversary of the date the changed election is properly made.

117

As of the year ended December 31, 2014, there were no NEO participants in the Saving Plan. Mr. Krivo was the sole NEO participant in the non-qualified unfunded deferred compensation plan as of December 31, 2013; however, his balance was distributed pursuant to Savings Plan terms in 2014.
Name
Executive Contributions in last fiscal year ($)
Company Contributions in last fiscal year ($)
Aggregate earnings in last fiscal year ($)
 Aggregate withdrawals/distributions ($)
Balance as of December 31, 2014
Mr. Krivo
—

—

7,256

129,286

—


Other Potential Post-Employment Payments
The following section describes the payments and benefits that would be provided to our NEOs in connection with any termination of employment, including resignation, involuntary termination, death, retirement, disability or a change in control to the extent occurring on December 31, 2014. The assumptions and methodologies that were used to calculate the amounts paid upon a termination of employment are set forth at the end of this section. Definitions are included below in the “Material Terms Defined.”
Payments Made Upon Certain Terminations
In the event that Mr. Kansky is terminated by the Company without Cause or if he departs the Company for Good Reason, we would provide:
•
a payment of his base salary for a period of two years following the date of termination. One year of the base salary shall be paid in lump sum within 45 days following the date of termination. The remainder shall be paid in accordance with customary payroll services;
•
an amount equal to payment of the executive bonus at target for a period of two years. One year of the bonus shall be paid within forty five days following the date of termination, the second year shall be payable in lump sum on the anniversary date of termination;
•
reimbursement on a monthly basis for the cost of continued medical coverage for the same portion of his COBRA health insurance premium beginning on the 60th day following termination and continuing for a maximum of eighteen months following the termination date to the extent Mr. Kansky elects continuation of such coverage and is eligible to receive coverage.
In the event that Mr. Kansky is terminated by the Company without Cause or if he departs the Company for Good Reason within 90 days prior or within the three years following a change in control, we would provide:
•
a prorated portion of the Bonus that would have been payable to Mr. Kansky through the termination date, based on performance through the termination date (when bonuses are otherwise paid to executives) and
•
a lump sum payment equal to two times the sum of Base Salary plus Bonus (at Target), payable on the 60th day following termination and
•
reimbursement on a monthly basis for the cost of continued medical coverage for the same portion of his COBRA health insurance premium beginning on the 60th day following termination and continuing for a maximum of eighteen months following the termination date to the extent Mr. Kansky elects continuation of such coverage and is eligible to receive coverage.
In the event that Mr. Phillips is involuntarily terminated by the Company he will be eligible to receive one year of severance consistent with the terms of his offer letter.
Mr. Walsh left his position as Chief Executive Officer in August 2014. Mr. Walsh was provided reimbursement on a monthly basis for the cost of continued medical coverage for the same portion of his COBRA health insurance premium beginning on the 30th day following termination and continuing for a maximum of eighteen months following the termination date to the extent Mr. Walsh elects continuation of such coverage and is eligible to receive coverage.
Mr. Gaffney left his position as Chief Executive Officer in July 2014. Per his employment agreement, Mr. Gaffney received post-employment benefit payments totaling $9,200,000. Mr. Gaffney also received all accrued vacation benefits earned.
Mr. Krivo left his position as an employee and as Senior Vice President, DynLogistics in May 2014. Mr. Krivo received all accrued vacation benefits earned. Mr. Krivo is a COAC employee as of September 2014, and is seconded to us as our Senior Vice President of Business Development.
Mr. Bernhardt left his position as President in October 2014. Per his employment agreement, Mr. Bernhardt received post-employment benefit payments totaling $1,100,000. Mr. Bernhardt also received all accrued vacation benefits earned.

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Mr. Ruffolo left his position as Chief of Staff in October 2014. In consideration of Mr. Ruffolo's general release of claims, as well as executing a non-compete and non-solicitation agreement, Mr. Ruffolo received post-employment benefit payments totaling $370,800 in calendar year 2014. Mr. Ruffolo also received all accrued vacation benefits earned.

Payments Made Upon Death or Complete Disability
Mr. Kansky entered into an employment agreement as of December 13, 2013. The employment agreement of Mr. Kansky provides that, if his employment is terminated by reason of death or Complete Disability, he will receive the following payments and benefits:
•
accrued employee benefits and payment equal to the pro-rated portion of the bonus that would have been payable to Mr. Kansky through the termination date; based on the Company's performance targets being met from the beginning of the fiscal year through the termination date, payable when such bonus is paid to other executives.
Mr. Phillips is not covered by an employment agreement and therefore is not entitled to any severance payments or benefits if his employment is terminated by reason of death or Complete Disability.
Payments Made Upon Involuntary Termination for Cause or Voluntary Termination without Good Cause
The NEOs are not entitled to any payments or benefits (other than accrued but unpaid compensation and benefits) in the event of an involuntary termination for Cause or voluntary termination without Good Reason.
Payment Made Upon a Change in Control
In the event of a change in control (without a qualifying termination as described above), subject to the executive's continued employment, Messrs. Geisler, Kansky and Phillips are entitled to receive $160,000, $832,000 and $320,000 respectively, in lump sum cash as part of the long term incentive plan. Messrs. Geisler, Kansky and Phillips are entitled to receive a payout for their vested Class B-1 and B-2 Interests subject to the terms defined in "Equity Incentive Plan" and "Outstanding Equity Awards" sections above.
Mr. Kansky is also eligible to terminate for Good Reason, and receive the severance noted above, in connection with a Change in Control.
The employment agreement for Mr. Kansky denotes any payments or benefits provided to him constitutes "parachute payments," within the meaning of Section 280G of the Code ("Parachute Payments") and would be subject to the excise tax imposed by Section 4999 of the Code. The executive would be entitled to receive either full amounts of the parachute payments or the maximum amount that may be provided to the executive without resulting in any portion of such parachute payments being subject to excise tax, after taking into account federal, state and local taxes, which results in the receipt by Kansky, on an after tax basis, of the greatest portion of the Parachute Payments.
Any reduction of the parachute payments would result in:
•
the cash incentive bonus or any other cash payment under any retention bonus agreement;
•
cash severance payments related to the executive's base salary and annual bonus;
•
any other cash amount payable and any benefit valued as a parachute payment; and
•
acceleration of vesting of equity awards.
Any determination of the required payments shall be made in writing by the Company's independent public accountants, whose determination shall be conclusive and binding for all purposes on behalf of the Company and the executive.
Approximation of Other Potential Post-Employment Payments
This section quantifies the potential payments and benefits that would have been paid to Mr. Kansky upon a termination of their employment occurring on December 31, 2014. If he was terminated involuntarily without Cause or voluntarily terminated for Good Reason, he would receive cash severance payments equal to $3,040,000. Mr. Phillips is not covered by an employment agreement and therefore is not entitled to receive any other potential post-employment payments upon termination.
In the event of death, or Complete Disability, Mr. Kansky would receive pro-rated bonuses based on performance through the termination date up to $760,000.
Material Terms Defined
“Cause” in Kansky’s agreement means, as determined by a majority vote of the Board, (i) willful and continued failure by the Executive to substantially perform his duties with the Company; (ii) willful conduct by the Executive that causes material

119

harm to the Company, its subsidiaries or affiliates, monetarily or otherwise; (iii) the Executive's felony conviction arising out of on or off-duty conduct occurring during his employment; (iv) willful malfeasance or willful misconduct by the Executive in connection with his duties and (v) material breach by the Executive of this Agreement and/or the Company's policies, which breach, if curable, is not cured within ten (10) days after written notice thereof by the Board.
"Good Reason" in Kansky's agreement means (i) a reduction in Executive's then current Base Salary or Bonus at Target, (ii) the Company's failure to comply with its material obligations under this Agreement, (iii) a relocation of Executive's principal place of employment to a location more than thirty-five (35) miles from Falls Church, Virginia without his consent or an adverse change in Executive's title, (iv) a substantial diminution of Executive's duties, authority or responsibilities with the Company; provided that neither the merger, sale or acquisition of business units, subsidiaries or assets, nor any similar corporate transaction, shall, by itself, constitute a diminution of duties, authority or responsibilities for purposes hereof, (v) a change in Executive's reporting relationship following which the Executive does not report to the Chairman of the Board or Chief Executive Officer or (vi) a Change in Control. Each of the foregoing events will cease to constitute Good Reason unless Executive gives the Company notice of Executive's intention to resign his position with the Company within sixty (60) days after Executive's knowledge of the occurrence of such event, and the Company shall have thirty (30) days from its receipt of such notice to cure any condition that constitutes Good Reason.
“Disability” is defined in the employment agreements as the determination by the Company, its subsidiaries or affiliates that, as a result of a permanent physical or mental injury or illness, the executive has been unable to perform the essential functions of his job with or without reasonable accommodation for (a) 90 consecutive days or (b) a period of 180 days in any 12-month period.
Material Conditions to Receipt of Post-Employment Payments
The receipt of payments and benefits (other than accrued but unpaid compensation and vacation) to the executives upon a termination of employment is conditioned on the executive furnishing to the operating company an executed copy of a waiver and release of claims.
Methodologies and Assumptions Used for Calculating Other Potential Post-Employment Payments
For purposes of calculating post-employment payments, we assume all change-of-control awards (payments under our equity plan and under our LTIP awards) are paid independent of the hypothetical termination of employment on December 31, 2014. For Messrs. Gaffney, Bernhardt, Ruffolo and Walsh, the value of accelerated vesting under our equity plan upon termination of employment by the Company without cause or by the individual for good reason, prior to a change of control, is based upon the value tendered by the Company to repurchase the rights subsequent to their separation from the Company. There is no obligation for the Company to repurchase equity in the future.

DIRECTOR COMPENSATION
General
The Company has historically used a combination of cash and equity-based compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Board considers the significant amount of time that directors expend in fulfilling their duties as well as the skill-level required. The following information relates to the compensation of the directors for calendar year 2014.
In connection with the Equity Incentive Plan adopted in December 2013, by DynCorp Management LLC, certain of the Company's Directors were granted Class B-1 interests through the equity incentive plan. As of December 31, 2014, Mr. Tilelli and Mr. Hagee were both granted 150 shares of Class B-1 interests pursuant to the terms and conditions set forth in the interests agreements. Mr. Tilleli and Mr. Hagee shares vested 40% as of their grant date with an additional 20% vesting on July 15, 2014 and the remainder of the interests are scheduled to vest on July 15, 2015. See Note 9 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.
Board Retainer and Fees
Messrs. Geisler, Hagee and Tilelli received an annual retainer of $75,000, payable quarterly in arrears, as Directors of the Company. Messrs. Galbato, Ingersoll and Sanford are not paid by the Company for their services as a director due to their affiliation with Cerberus.
Committee Fees

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The Chairman of the Audit Committee received an annual fee of $15,000, payable quarterly in arrears. The member who was not an affiliate of Cerberus received an annual fee of $10,000, payable quarterly in arrears and Mr. Geisler received $5,000 for his service on the Audit Committee prior to his appointment as Interim CEO.
The Chairman of the Business Ethics and Compliance Committee received an annual fee of $15,000, payable quarterly in arrears. The member who was not an affiliate of Cerberus received an annual fee of $10,000, payable quarterly in arrears and Mr. Geisler received $5,000 for service on the Business Ethics and Compliance Committee prior to his appointment as Interim CEO.
The two nonaffiliated members of our Compensation Committee received an annual fee of $10,000, payable quarterly in arrears.
Director Compensation in Calendar Year 2014
The following table sets forth certain information with respect to the compensation we paid to our directors during calendar year 2014.
DIRECTOR COMPENSATION TABLE
Name
(a)
Fees Earned or Paid in Cash
($)
(b)
 
Stock (Equity) Awards
($) (1)
(c)
All Other Compensation
($)
(d)
Total
($)
(e)
James Geisler (2)
—

 
—

—

—

Chan Galbato (3)
—

 
—

—

—

General Michael Hagee (USMC Ret.)
110,000

 
106,945

—

216,945

Brett Ingersoll (3)
—

 
—

—

—

General John Tilelli (USA Ret.)
110,000

 
107,690

—

217,690

Michael Sanford (3)
—

 
—

—

—

 
(1)
Amount reported is the aggregate award date fair value of the awards made in 2014 computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. Mr. Hagee and Mr. Tilelli were both granted interests as of December 31, 2014, of which 60% has vested. Mr. Hagee and Mr. Tilelli each had 60 interests outstanding as of December 31, 2014. The remaining 40% of interests will vest on July 15, 2015 subject to their continued service as a director with the Company. Mr. Geisler had 90 interests outstanding as of December 31, 2014.
(2)
Mr. Geisler who is a member of our Board, received additional compensation for his service as a director in 2014, which is set forth under All Other Compensation in our Summary Compensation Table in addition to the compensation he received as our Interim Chief Executive Officer as a seconded executive.
(3)
Mr. Galbato is Chief Executive Officer of Cerberus Operations and Advisory Company, LLC ("COAC"), and Mr. Ingersoll and Mr. Sanford are principals of Cerberus Capital Management, L.P. (“Cerberus”) which owns 100% of the Company. As Cerberus executives, Mr. Galbato, Mr. Ingersoll and Mr. Sanford are not paid by the Company for their services as a director or member of the committees.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
All of DynCorp International Inc.'s issued and outstanding common stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our parent, Holdings. The following table sets forth information regarding the beneficial ownership of Holdings' common stock as of March 10, 2015 by (i) each person known to beneficially own more than 5% of the common stock of Holdings, (ii) each of our named executive officers, (iii) each member of our Board of Directors and (iv) all of our executive officers and members of our Board of Directors as a group. At March 10, 2015, there were approximately 100 shares of common stock of Holdings outstanding.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest.

121

The persons named in the table below have sole voting and investment power with respect to all shares of common stock.
Name and Address of Beneficial Owner
Class A Common Stock
Percent of
Class
5% Beneficial Owners:
 
 
Stephen Feinberg (1)
100

100
%
 
 
 
Directors and Named Executive Officers:
 
 
James E. Geisler
—

—

Chan Galbato
—

—

General Michael Hagee (USMC Ret.)
—

—

Brett Ingersoll
—

—

General John Tilelli (USA Ret.)
—

—

Michael Sanford
—

—

William T. Kansky
—

—

Gregory S. Nixon
—

—

George C. Krivo
—

—

S. Gordon Walsh
—

—

Steven F. Gaffney
—

—

Lawrence Phillips
—

—

Christopher C. Bernhardt
—

—

Joseph Ruffolo, Jr.
—

—

 
 
 
All Directors and Executive Officers as a Group (13 persons)
—

—

 
(1)
Funds and/or managed accounts that are affiliates of Cerberus own 100% of the common stock of the Company. Cerberus owns 90% of the stock of Holdings directly and owns the other 10% of Holdings stock indirectly through DynCorp Management LLC, which Cerberus controls through its ownership of all of its class A common interests. Stephen Feinberg exercises voting and investment authority over all of such securities owned by affiliates of Cerberus. Thus, pursuant to Rule 13d-3 under the Exchange Act of 1934, as amended (the “Exchange Act”), Stephen Feinberg is deemed to beneficially own 100% of the common stock of the Company. The address for Mr. Feinberg is c/o Cerberus Capital Management, L.P., 299 Park Avenue, New York, NY 10171.

ITEM 13. CERTAIN RELATIONSHIPS AND, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
Since December 31, 2013, we have entered into certain transactions, summarized below, that exceeded $120,000 in amount and in which our related persons in general, our directors, executive officers and their immediate family members - had or would have a direct or indirect material interest.
Under the COAC Agreement between the Company and Cerberus, established at the time the Company was acquired by affiliates of Cerberus, we pay Cerberus consulting fees to provide us with reasonably requested business advisory services. We have three directors who are Cerberus employees: Messrs. Geisler, Galbato, Ingersoll and Sanford. We have three executives who are Cerberus employees, who are seconded to us: James E. Geisler, our Interim Chief Executive Officer, Gregory S. Nixon, our Senior Vice President, Chief Administrative Officer and Chief Legal Officer, and George C. Krivo, our Senior Vice President of Business Development. The Company paid a total of $4.9 million and $4.6 million, in consulting fees under the COAC Agreement for the year ended December 31, 2014 and December 31, 2013, respectively and that are described in more detail under "Executive Compensation." For additional information on the COAC Agreement, see Note 12 to the Delta Tucker Holdings, Inc. consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Our Controls for Approving Transactions with Related Persons
Any material transaction involving our directors, nominees for director, executive officers and their immediate family members (“related persons”) and the Company or an affiliate of the Company is reviewed and approved by the Interim Chief

122

Executive Officer, following consultation with the Compliance and Risk Committee, who determines whether the transaction is in the best interests of the Company.
Director Independence
Pursuant to our corporate governance guidelines, the rules of the NYSE provide that a director must have no material relationship, directly or as a partner, shareholder or officer of an organization that has a relationship with us, in order to be an “independent director.” The rules of the NYSE further require that all companies listing common equity securities must have a majority of independent directors and the members of the audit committee, compensation committee, and nominating/corporate governance committee must be independent, with certain exceptions. "Controlled Companies" is one of the exceptions in which more than 50% of the voting power of the company is held by another company. Cerberus owns more than 50% of the Company; as such, we are a “controlled company” under the NYSE rules. Therefore, under the NYSE rules, we are not subject to the requirements that a majority of the Board be composed of independent directors or that all the members of the Audit Committee, Compliance and Risk Committee and the Compensation Committee be independent. However, in accordance with our Corporate Governance Guidelines, Members of the Audit Committee who are determined by the Board to be independent, if any, within the meaning of our Corporate Governance Guidelines must satisfy the requirements of the NYSE.
The rules of the NYSE provide that a director serving on the audit committee must not have any material relationship, directly or as a partner, shareholder or officer of an organization that has a relationship with us in order to be an “independent director.” Based on written submissions by the directors, the Board has determined that the following directors do not have any material relationship with us other than their roles as directors and therefore are “independent” under the NYSE rules. Below is the listing of the independent Directors.
Independent Directors:
General John Tilelli (USA Ret.)
General Michael Hagee (USMC Ret.)

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table presents the fees billed by Deloitte & Touche LLP, our independent auditors, for calendar year 2014 and calendar year 2013 for audit, audit-related, tax and other services.
Deloitte & Touche LLP
Calendar Year 2014
Calendar Year 2013 (5)
Audit Fees (1)
$
1,465,000

$
1,773,800

Audit-Related Fees (2)
—

20,212

Tax Fees (3)
17,892

36,474

All Other Fees(4)
2,772

2,345

(1)
Audit fees principally include fees for services related to the annual audit of the consolidated financial statements, reviews of our interim quarterly financial statements and other filings.
(2)
Audit-related fees principally include those for statutory audits.
(3)
Tax fees include domestic tax advisory services related to state and local taxes and international tax advisory services principally related to international tax return preparation and employment tax matters.
(4)
All other fees consists of subscription fees billed for the Deloitte Accounting Research Tool in calendar year 2014 and 2013.
(5)
Calendar Year 2013 included engagement expenses within Audit Fees and Tax Fees of $73,800 and $668, respectively.


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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements: The following consolidated financial statements and schedules of the Company are included in this report:
Delta Tucker Holdings, Inc.
•
Report of Independent Registered Public Accounting Firm
•
Consolidated Statements of Operations for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
•
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
•
Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013.
•
Consolidated Statements of Cash Flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
•
Consolidated Statements of Equity for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
•
Notes to the Consolidated Financial Statements of Delta Tucker Holdings, Inc.
(2) Financial Statement Schedules:
•
Schedule I - Condensed Financial Information of Registrant.
•
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
(3) Exhibits: The exhibits, which are filed with this Annual Report on Form 10-K or which are incorporated herein are set forth in the Exhibit Index.
Exhibit
No.
 
Description
2.1
 
Agreement and Plan of Merger, dated as of April 11, 2010, by and among DynCorp International Inc., Delta Tucker Holdings, Inc. and Delta Tucker Sub, Inc. (incorporated by reference to Exhibit No. 2.1 to DynCorp International Inc.'s Current Report on Form 8-K filed with the SEC on April 12, 2010).
3.1
 
Certificate of Incorporation of Delta Tucker Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.2
 
By-laws of Delta Tucker Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.3
 
Certificate of Incorporation of DynCorp International, Inc. (incorporated by reference to Exhibit 3.1 to DynCorp International Inc.'s Current Report on Form 8-K filed with the SEC on July 8, 2010).
3.4
 
By-laws of DynCorp International, Inc., as amended on November 5, 2013 (incorporated by reference to Exhibit 3.26 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
3.5
 
Articles of Incorporation of Casals & Associates, Inc. (incorporated by reference to Exhibit 3.5 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.6
 
By-laws of Casals & Associates, Inc. (incorporated by reference to Exhibit 3.6 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.7
 
Certificate of Incorporation of DIV Capital Corporation (incorporated by reference to Exhibit 3.3 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.8
 
Bylaws of DIV Capital Corporation (incorporated by reference to Exhibit 3.4 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.9
 
Certificate of Formation of DTS Aviation Services LLC (incorporated by reference to Exhibit 3.11 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.10
 
Limited Liability Company Operating Agreement of DTS Aviation Services LLC (incorporated by reference to Exhibit 3.12 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).

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3.11
 
Certificate of Formation of DynCorp International LLC (incorporated by reference to Exhibit 3.1 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.12
 
Amended and Restated Operating Agreement of DynCorp International LLC (incorporated by reference to Exhibit 3.2 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.13
 
Articles of Organization of Dyn Marine Services of Virginia LLC (incorporated by reference to Exhibit 3.21 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.14
 
Limited Liability Company Agreement of Dyn Marine Services of Virginia LLC (incorporated by reference to Exhibit 3.22 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.15
 
Certificate of Formation of DynCorp Aerospace Operations LLC (incorporated by reference to Exhibit 3.13 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.16
 
Limited Liability Company Agreement of DynCorp Aerospace Operations LLC (incorporated by reference to Exhibit 3.14 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.17
 
Articles of Organization of DynCorp International Services LLC (incorporated by reference to Exhibit 3.17 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.18
 
Limited Liability Company Agreement of DynCorp International Services LLC (incorporated by reference to Exhibit 3.18 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.19
 
Articles of Formation-Conversion of Phoenix Consulting Group, LLC (incorporated by reference to Exhibit 3.19 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
3.20
 
Certificate of Formation of Services International LLC (incorporated by reference to Exhibit 3.23 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.21
 
Limited Liability Company Agreement of Services International LLC (incorporated by reference to Exhibit 3.24 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.22
 
Certificate of Formation of Worldwide Humanitarian Services LLC (incorporated by reference to Exhibit 3.25 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.23
 
Amended and Restated Limited Liability Company Agreement of Worldwide Humanitarian Services LLC (incorporated by reference to Exhibit 3.26 to DynCorp International LLC's Amendment No. 1 to Registration Statement on Form S-4/A (Reg. No. 333-127343) filed with the SEC on September 27, 2005).
3.24
 
Certificate of Formation of Worldwide Recruiting and Staffing Services LLC (incorporated by reference to Exhibit 3.28 to DynCorp International LLC's Annual Report on Form 10-K filed with the SEC on June 20, 2007).
3.25
 
Second Amended and Restated Limited Liability Company Agreement of Worldwide Recruiting and Staffing Services LLC (incorporated by reference to Exhibit 3.29 to DynCorp International LLC's Annual Report on Form 10-K filed with the SEC on June 20, 2007).
4.1
 
Indenture dated as of July 7, 2010, among DynCorp International Inc., the guarantors named therein and Wilmington Trust FSB, as trustee, relating to DynCorp International Inc.'s 10.375% Senior Notes due 2017 (incorporated by reference to Exhibit 4.1 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
4.2
 
Form of DynCorp International Inc.'s 10.375% Senior Notes due 2017 (included in the Indenture filed as Exhibit 4.1).
10.1
 
Credit Agreement, dated as of July 7, 2010, among DynCorp International Inc., as borrower, the guarantors party thereto, Bank of America, N.A., as administrative and collateral agent, and the lenders and other agents party thereto (incorporated by reference to Exhibit 10.1 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.2
 
Security Agreement, dated as of July 7, 2010, among DynCorp International Inc., the other grantors party thereto, and Bank of America, N.A., as collateral agent (incorporated by reference to Exhibit 10.2 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.3
 
Registration Rights Agreement, dated as of July 7, 2010, among DynCorp International Inc., the guarantors party thereto and the initial purchasers party thereto (incorporated by reference to Exhibit 10.3 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.4
 
Master Consulting and Advisory Services Agreement, dated as of July 7, 2010, between Cerberus Operations and Advisory Company, LLC and DynCorp International Inc. (incorporated by reference to Exhibit 10.4 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.5
 
Employment Agreement, effective as of December 22, 2010, between DynCorp International Inc. and Steven F. Gaffney (incorporated by reference to Exhibit 10.5 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).

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10.6
 
Employment Agreement, effective as of August 1, 2010, between DynCorp International Inc. and William T. Kansky (incorporated by reference to Exhibit 10.6 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.11
 
Logistics Civil Augmentation Program contract (incorporated by reference to Exhibit 10.18 to Delta Tucker Holdings, Inc. Registration Statement on Form S-4 (Reg. No. 333-173746) filed with the SEC on April 27, 2010).
10.12
 
Amendment No. 1, dated as of January 21, 2011, to the Credit Agreement, dated as of July 7, 2010, among DynCorp International Inc., Delta Tucker Holdings, Inc., The subsidiary guarantors party thereto, The lenders from time to time party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to Delta Tucker Holding's Quarterly Report on Form 10-Q filed with the SEC on August 15, 2011).
10.13
 
Amendment No. 2, dated as of August 10, 2011, to the Credit Agreement, dated as of July 7, 2010, among DynCorp International Inc., Delta Tucker Holdings, Inc., the subsidiary guarantors party thereto, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to Delta Tucker Holding’s Current Report on Form 8-K filed with the SEC on August 12, 2011.)
10.14*
 
Amendment No. 3, dated as of June 19, 2013, to the Credit Agreement, dated as of July 7, 2010, among DynCorp International, Holdings, the other Guarantors party thereto, the several banks and other financial institutions or entities from time to time parties thereto and Bank of America, N.A., as administrative agent and collateral agent.
10.15
 
Amendment No. 1, effective as of December 13, 2013, to the Employment Agreement, dated as of August 1, 2010, between DynCorp International LLC. and William T. Kansky (incorporated by reference to Exhibit 10.15 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.16
 
Executed Employment Agreement, effective as of November 7, 2013, between DynCorp International LLC and Christopher Bernhardt (incorporated by reference to Exhibit 10.16 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.17
 
Employment Agreement, effective as of March 5, 2014, between DynCorp International LLC. and George Krivo (incorporated by reference to Exhibit 10.18 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.18
 
Award Agreement, dated as of December 28, 2013, by and between DynCorp Management LLC and William T. Kansky (incorporated by reference to Exhibit 10.19 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.19
 
Award Agreement, dated as of December 26, 2013, by and between DynCorp Management LLC and Christopher Bernhardt (incorporated by reference to Exhibit 10.20 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.20
 
Award Agreement, dated as of December 20, 2013, by and between DynCorp Management LLC and James E. Geisler (incorporated by reference to Exhibit 10.22 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.21
 
Award Agreement, dated as of January 7, 2014, by and between DynCorp Management LLC and Steven F. Gaffney (incorporated by reference to Exhibit 10.23 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.22
 
Award Agreement, dated as of January 1, 2014, by and between DynCorp Management LLC and John Tilelli (incorporated by reference to Exhibit 10.24 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.23
 
Award Agreement, dated as of December 26, 2013, by and between DynCorp Management LLC and Michael Hagee (incorporated by reference to Exhibit 10.25 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.24
 
Long Term Incentive Agreement, by and between DynCorp International LLC and James E. Geisler (incorporated by reference to Exhibit 10.26 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.25
 
Long Term Incentive Agreement, by and between DynCorp International LLC and Michael Hagee (incorporated by reference to Exhibit 10.27 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.26
 
Long Term Incentive Agreement, by and between DynCorp International LLC and John Tilelli (incorporated by reference to Exhibit 10.28 to Delta Tucker Holdings, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014).
10.27
 
Award Agreement, dated as of April 1, 2014, by and between DynCorp Management LLC and George C. Krivo (incorporated by reference to Exhibit 10.29 to Delta Tucker Holdings, Inc.'s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2014).
10.28
 
Employment Agreement, effective as of July 2, 2014, by and between DynCorp International LLC and S. Gordon Walsh (incorporated by reference to Exhibit 10.30 to Delta Tucker Holdings, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2014).
10.29
 
Amendment No. 4, dated as of November 5, 2014, to the Credit Agreement, dated as of July 7, 2010, among DynCorp International, Holdings, the other Guarantors party thereto, the several banks and other financial institutions or entities from time to time parties thereto and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to Delta Tucker Holdings, Inc.'s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 2014).
10.30*
 
Secondment Agreement, effective August 8, 2014, by and among Cerberus Operations and Advisory Company, LLC, DynCorp International LLC, and James E. Geisler.

126

21.1*
 
List of subsidiaries of Delta Tucker Holdings, Inc.
31.1*
 
Certification of the Chief Executive Officer of Delta Tucker Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
 
Certification of the Chief Financial Officer of Delta Tucker Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL
 
Instance document
101.SCH XBRL
 
Taxonomy Extension Schema
101.CAL XBRL
 
Taxonomy Extension Calculation Linkbase
101.DEF XBRL
 
Taxonomy Extension Definition Linkbase
101.LAB XBRL
 
Taxonomy Extension Labels Linkbase
101.PRE XBRL
 
Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
*
 
Filed herewith.


127

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
DELTA TUCKER HOLDINGS, INC.
 
 
 
 
 
/s/ James E. Geisler
 
 
James E. Geisler
 
 
Interim Chief Executive Officer
 
 
 
Date:
March 31, 2015
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
 
 
 
/s/ James E. Geisler
Interim Chief Executive Officer
(Principal Executive Officer)
March 31, 2015
James E. Geisler
 
 
 
/s/ William T. Kansky
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
March 31, 2015
William T. Kansky
 
 
 
/s/ Chan Galbato
Lead Director
March 31, 2015
Chan Galbato
 
 
 
/s/ General Michael Hagee
Director
March 31, 2015
General Michael Hagee (USMC Ret.)
 
 
 
/s/ Brett Ingersoll
Director
March 31, 2015
Brett Ingersoll
 
 
 
/s/ General John Tilelli
Director
March 31, 2015
General John Tilelli (USA Ret.)
 
 
 
/s/ Michael Sanford
Director
March 31, 2015
Michael Sanford


128