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DELTA TUCKER HOLDINGS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the Delta Tucker Holdings, Inc. consolidated financial statements and related notes thereto and other data contained elsewhere in this Annual Report on Form 10-K. Please see "Item 1A. Risk Factors" and "Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated. All references in this Annual Report on Form 10-K to fiscal years of the United States government pertain to their fiscal year, which ends on September 30th of each year. Company Overview We are a leading global services provider offering unique, tailored solutions for an ever-changing world. Built on more than six decades of experience as a trusted partner to commercial, government and military customers, we provide sophisticated aviation solutions, law enforcement training and support, base and logistics operations, intelligence training, rule of law development, construction management, international development, ground vehicle support, counter-narcotics aviation, platform services and operations and linguist services. Through our predecessor companies, we have provided essential services to numerous U.S. government departments and agencies since 1951. Our current customers include the U.S. Department of Defense ("DoD"), the Department of State ("DoS"), U.S. Agency for International Development ("USAID"), foreign governments, commercial customers and certain other U.S. federal, state and local government departments and agencies. Delta Tucker Holdings, Inc. was formed for the purpose of acquiring DynCorp International Inc. ("DynCorp International") and had immaterial assets and virtually no operations prior to the merger on July 7, 2010, except for the costs associated with acquiring DynCorp International. Delta Tucker Holdings, Inc. remains the holding company of DynCorp International. DynCorp International wholly owns DynCorp International, LLC, which functions as the operating company. In April 2013, the Company amended its organizational structure to improve efficiencies within existing businesses, capitalize on new opportunities, continue international growth and expand commercial business. The Company's previous six operating and reporting segments, Logistics Civil Augmentation Program ("LOGCAP"), Aviation ("Aviation"), Training and Intelligence Solutions ("TIS"), Global Logistics and Development Solutions ("GLDS"), Security Services and Global Linguist Services ("GLS") were realigned into three operating and reporting segments, DynAviation, DynLogistics and DynGlobal. Additionally, as GLS no longer represents a significant portion of our business the chief operating decision maker has determined that GLS will no longer be considered an operating segment or reporting unit. The DynAviation and DynLogistics segments will continue to operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations ("FAR"), Cost Accounting Standards ("CAS") and audits by various U.S. federal agencies. As of December 31, 2013, we employed or managed approximately 20,000 personnel, including approximately 3,600 personnel from our affiliates. We operate in approximately 34 countries through approximately 79 active contracts and 118 active task orders. On January 24, 2013, the Board of Directors of Delta Tucker Holdings, Inc. and its consolidated subsidiaries (the "Company"), approved a change of the Company's fiscal year end from a 52-53 week basis ending on the Friday closest to December 31 to a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December 31. The change of fiscal year end was effective beginning with the fiscal year ended December 31, 2012. 27-------------------------------------------------------------------------------- Table of Contents Current Operating Environment and Outlook External Factors After a decade of unprecedented defense spending to support operations in Iraq and Afghanistan, our industry is adjusting to a period of reduced funding and budget uncertainty brought about by the convergence of a variety of policy, political and fiscal realities. These factors include: •the ongoing draw-down of U.S. troops in Afghanistan adhering to discretionary spending caps mandated by the Budget Control Act of 2011 ("BCA"); • implementation of automatic sequestration cuts; and •budget uncertainty driven by the current partisan political environment, resulting in the government shut-down and continuing resolutions. To mitigate the negative financial and operational readiness impacts induced by the above noted factors, Congress enacted the Bipartisan Budget Act of 2013 ("BBA") in December 2013. The budget act agreement (i) prevents the triggering of additional sequestration in fiscal year 2014, (ii) adjust upwardly BCA mandated discretionary spending caps, (iii) reduces the threat of another government shutdown and (iv) reinstates some certainty into the budgetary process. The BBA achieves these objectives by partially repealing sequestration and setting top-line spending levels for the next two fiscal years. The fiscal year 2014 budget cap for discretionary spending is $1.012 trillion which represents a $45.0 billion increase over the previous BCA mandated cap. The fiscal year 2015 budget cap will be $1.014 trillion which essentially freezes funding at fiscal year 2014 levels. With regard to defense, the BBA resets the defense discretionary spending cap for fiscal year 2014 at $520.5 billion, which is $22.0 billion above the projected fiscal year 2014 sequestered level. The fiscal year 2015 cap will be $521.3 billion or $9.3 billion above the projected fiscal year 2015 sequestered level. The BBA does not impact or resolve the caps mandated by the BCA in 2016 and beyond. In addition to setting topline numbers, the BBA enabled the House and Senate Appropriations Committees to finalize fiscal year 2014 spending bills, which were enacted in the fiscal year 2014 Consolidated Appropriations Act. Under this omnibus appropriations measure, the fiscal year 2014 funding for the DoD is $572.1 billion with $486.9 billion in the base budget and an additional $85.2 billion in the Overseas Contingency Operations ("OCO") accounts. While lower than the President's request and the final fiscal year 2013, it is important to note that the fiscal year 2014 appropriation restores $22 billion in projected additional sequestration cuts. Of particular interest to the defense services contractor community, the fiscal year 2014 appropriation for the Operations and Maintenance ("O&M") accounts is $228.3 billion with $159.9 billion in the base budget and additional $66.4 billion in the OCO accounts. The fiscal year 2014 O&M appropriation is $9.6 billion below the President's request, but also reflects only a 4% reduction versus a 8.0% reduction in fiscal year 2013. The final OCO appropriation is $6.4 billion above the President's request. This is of particular importance to the programs we execute for the Army which saw an increase of $3.1 billion and for the Air Force with an increase of $2.7 billion in OCO and O&M funds. While operational requirements and base budget spending cap limitations have led to continued robust OCO requests and appropriations, continued support for OCO at this level remains unclear. We believe the President's fiscal year 2015 defense budget request will likely include an OCO placeholder that reflects the Administration's planned trajectory in Afghanistan. We expect the first quarter will be important for resolving a Bilateral Security Agreement with Afghanistan to set the parameters for the size and scope of a U.S. presence post-2014 and related support services contracts. As outlined above and noted in previous filings, funding for our programs is dependent on annual budget and appropriation decisions, as well as geo-political and macroeconomic conditions, which are beyond our control. While there is uncertainty around these domestic and international factors, the final agreed upon appropriated funding levels for national security programs will remain historically high with plenty of opportunity to continue supporting our customers. We believe the O&M budgets will remain relatively robust. At almost 40% of all defense spending, we believe the O&M accounts are, and will continue to be, the largest category within the defense budget. The base O&M accounts have a year over year growth rate of 2.8%, when removing the conflict related to O&M spending increases and subsequent peacetime declines since World War II. While the recent enactment of the BBA and a fiscal year 2014 appropriation brought some stability and clarity to the defense budget, we anticipate the military branches under the DoD will continue to make cuts to the modernization accounts to meet fiscal realities. We believe the DoD will need to ensure existing platforms are able to meet the requirements of the mission set forth and ensure its success. While there exists potential challenges that could adversely impact our business on a short term basis, we believe the following longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide: 28-------------------------------------------------------------------------------- Table of Contents •Realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot-level maintenance; •Continued focus on smart power initiatives by the DoS USAID, the United Nations and the DoD, including development and smaller-scale stability operations; •Increased maintenance, overhaul and upgrade needs to support returning rolling stock and aging platforms; •Growth in outsourcing by foreign allies of maintenance, supply support, facilities management, infrastructure upgrades and construction management-related services; and •Further efforts by the U.S. government to move from single award to multiple award IDIQ contracts, which offer an opportunity to increase revenue by competing for task orders with the other contract awardees. While determining the size and scope of the U.S. and international presence in Afghanistan is dependent on concluding a Bilateral Security Agreement ("BSA"), we still anticipate remaining issues will be resolved and that there will be opportunities to support the enduring U.S. and NATO presence. Support opportunities include the DoS, which is expected to expand and include the U.S. embassy in Kabul and four consulates around the country. Additionally, we anticipate that there will be a continued need to advise, assist and help professionalize Afghan National Security Forces for many years, as specified in the U.S. Afghanistan Strategic Partnership Agreement. In the Middle East, we expect instability and challenges to our regional relationships will persist. However, we believe U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and our allies. We believe that base operations and support and maintenance capacity will be key enablers in this environment and we are especially well positioned to provide these services to both U.S. forces and Allied nations. Finally, the re-balance to Asia reflects the increased importance of the Asia-Pacific regions, in both security and economic terms for the U.S. As the U.S. revitalizes and reinforces its presence in this vital region, we expect to see increased demand for base operations support, logistics support and capacity building, all of which we provide best in class. The investments and acquisitions we have made over the past several years have been focused on aligning our business to address areas that have high growth potential, including intelligence training and rule of law development, as well as parallel and evolving customer requirements. Current Business Environment We believe that our industry and customer base are less likely to be affected by many of the factors generally negatively affecting business and consumer spending. Our contracts typically have a term of three to ten years consisting of a base period of one year with multiple one-year options. We also have a strong history of being awarded a majority of the contract options. Additionally, since our primary customer is the U.S. federal government, we have not historically had significant issues with bad debt. However, given the continued scrutiny by the U.S. government, we could be subjected to regulatory requirements that could require audits at various points within our contracting process. An adverse finding under an audit could result in the disallowance of costs under a U.S. government contract, termination of a U.S. government contract, forfeiture of profits or suspension of payments, which could prove to be impactful to our liquidity, affect our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government. If the DCAA cannot complete timely periodic reviews of our control systems, they could render the status of these systems as "non-current" resulting in an adverse outcome. We cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity, such as customer collections and the Senior Credit Facility (as defined below), will enable us to continue to perform under our existing contracts and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness at acceptable terms or at all. See "Risk Factors - Economic conditions could impact our business" for a discussion of the risks associated with current economic conditions. Notable events for the year ended December 31, 2013 • In January 2013, GLS, our equity method investee, was awarded a task order under the Defense Language Interpretation Translation Enterprise ("DLITE") contract with the U.S. Army Intelligence and Security Command to provide linguists to support the U.S. Army Central Command ("CENTCOM") operations at several locations in the Middle East. The task order has one base year and three, one-year options and a total potential value of $88.4 million. • In February 2013, DynAviation was awarded a contract with the U.S. Army Aviation and Missile Life Cycle Management Command to provide aviation field and sustainment level maintenance services under the Army Field Maintenance contract throughout the Regional Aviation Sustainment Maintenance - West Region ("RASM-W). The hybrid firm-fixed- 29-------------------------------------------------------------------------------- Table of Contents price, cost-plus-incentive-fee contract has one base year and four, one-year options and a total potential contract value of $388.5 million. • In March 2013, DynLogistics was awarded a contract with the U.S. Army to provide training, de-processing, fielding, general maintenance support and other services to military units in the U.S. and abroad. The fixed-price level of effort contract has one base year and two, one-year options and a total potential contract value of $35.3 million. • In April 2013, DynLogistics was awarded a task order with the U.S. DoS Bureau of International Narcotics and Law Enforcement Affairs under the Criminal Justice Program Support Contract ("CJPS") to recruit and support the U.S. contingent to the United Nations Police in Haiti and provide logistics support to the Haitian National Police. The hybrid firm-fixed price, labor hour, and cost-reimbursable task order has one base year and three, one-year options and a total potential contract value of $48.6 million. • In June 2013, DynLogistics was awarded a contract with the Defense Logistics Agency to provide logistics support for the agency's equipment in Afghanistan. The fixed-price task order has one base year and two, one-year options and a total potential contract value of $11.2 million. • In June 2013, the Company entered into an amendment (the "Amendment") to the Credit Agreement dated as of July 7, 2010, among DynCorp International, the Company, the other Guarantors party thereto, several banks and other financial institutions or entities from time to time parties thereto and Bank of America, N.A., as administrative agent and collateral agent. The Amendment amended the Credit Agreement to extend the maturity date with respect to the revolving credit facility to July 7, 2016 and increased the amount of the revolving credit commitment to $181.0 million. The Amendment also amended the Credit Agreement to, among other things, modify certain of the covenants, including the leverage ratio. • In June 2013, DynLogistics was awarded a position on a multiple award IDIQ contract under which work will be awarded through separately issued task orders to provide supplies and support services to the U.S. Marine Corps. The multiple award IDIQ has a one base year and four, one-year options and a total potential contract value of $854.6 million. • In August 2013, DynLogistics was awarded a task order with the U.S. Air Force through the Air Force Contract Augmentation Program III ("AFCAP") to provide installation services at Al Udeid Air Base, Qatar. This one year base contract has two, one-year options and a total contract value of $20.4 million, if all options are exercised. • In September 2013, DynLogistics was awarded a new task order with the U.S. Army under the Enhanced Army Global Logistics Enterprise ("EAGLE") Basic Ordering Agreement to provide support to the Directorate of Logistics at Fort Campbell, Ky. The fixed-fee task order has a nine month base period with four, one-year options and a total contract value of $122.0 million, if all options are exercised. • In September 2013, DynAviation was awarded a subcontract to provide contractor logistics support in Kandahar, Afghanistan as part of the Multi Sensor Aerial Intelligence Surveillance and Reconnaissance ("MAISR") Operations and Sustainment program. The Company will serve as a subcontractor to AASKI Technologies. The sub contract has a one-year option, with a total contract value of up to $86.6 million. • In September 2013, DynLogistics won a task order on the Africa Peacekeeping Program ("AFRICAP") to provide training for personnel in Mali. The task order, awarded by the U.S. Department of State's Bureau of African Affairs, has one base year with a total potential value of $42.4 million. • In September 2013, we made principal prepayments of $15.0 million, on our Term Loan. The payment caused the acceleration of unamortized deferred financing fees of $0.2 million, which were recorded as a Loss on extinguishment of debt within our Statement of Operations. • In November 2013, the Company was awarded a task order under the Contract Field Teams ("CFT") program to support the U.S. Navy Fleet Readiness Center Aviation Support Equipment ("FRC-ASE") headquartered at Solomons, M.D. The DynAviation task order, awarded by the U.S. Air Force, has one base year with a total potential value of $27.0 million. • In December 2013, we made principal prepayments of $35.0 million, on our Term Loan. The payment caused the acceleration of unamortized deferred financing fees of $0.5 million, which were recorded as Loss on extinguishment of debt within our Statement of Operations. • In December 2013, the Company ceased use of its previous headquarters located in Falls Church, Virginia and relocated to new headquarters in Tysons Corner, in McLean, Virginia. The Company restructured its facilities footprint in Virginia to better position the Company operationally for the future. • In December 2013, certain members of management and outside directors were awarded Class B interests in DynCorp Management LLC ("DynCorp Management"). DynCorp Management LLC conducts no operations and was established for the purpose of holding equity in our Company. DynCorp Management LLC authorized 100,000 Class B shares as available for issuance and approved 7,246 Class B-1 Interests and 380 Class B-2 Interests to certain members of 30-------------------------------------------------------------------------------- Table of Contents management and outside directors of Defco Holdings Inc. ("Holdings"), and its subsidiaries, including Delta Tucker Holdings, Inc. All of DynCorp International Inc.'s issued and outstanding stock is owned by the Company, and all of the Company's issued and outstanding common stock is owned by our Parent, Holdings. Additionally, in December the Company approved a long-term cash incentive bonus for certain members of management and outside directors, where in the event of a change in control, subject to the various members of management continued employment with the Company through such a change in control and execution of a restrictive covenant agreement, the various members of management shall be eligible to receive a cash incentive bonus. Results of Operations The results of operations presented are for the years ended December 31, 2013, December 31, 2012 and December 30, 2011. Delta Tucker Holdings, Inc. Results of Operations - for the years ended December 31, 2013, December 31, 2012 and December 30, 2011 The following table sets forth our consolidated statements of operations, both in dollars and as a percentage of revenue, for the years ended December 31, 2013, December 31, 2012 and December 30, 2011: For the years ended (Amounts in thousands) December 31, 2013 December 31, 2012 December 30, 2011 Revenue $ 3,287,184 100.0 % $ 4,044,275 100.0 % $ 3,719,152 100.0 % Cost of services (2,987,253 ) (90.9 )% (3,698,932 ) (91.5 )% (3,408,842 ) (91.7 )% Selling, general and administrative expenses (149,925 ) (4.6 )% (149,362 ) (3.7 )% (149,551 ) (4.0 )% Depreciation and amortization expense (48,628 ) (1.5 )% (50,260 ) (1.2 )% (50,773 ) (1.4 )% Earnings from equity method investees 4,570 0.1 % 825 0.1 % 12,800 0.3 % Impairment of equity method investment - - % - - % (76,647 ) (2.0 )% Impairment of goodwill, intangibles and long lived assets (312,728 ) (9.5 )% (50,663 ) (1.3 )% (33,768 ) (0.9 )% Operating (loss) income (206,780 ) (6.3 )% 95,883 2.4 % 12,371 0.3 % Interest expense (78,826 ) (2.4 )% (86,272 ) (2.1 )% (91,752 ) (2.5 )% Loss on early extinguishment of debt (703 ) - % (2,094 ) (0.1 )% (7,267 ) (0.2 )% Interest income 157 - % 117 - % 205 - % Other (loss) income, net (810 ) - % 4,672 0.1 % 6,071 0.2 % (Loss) income before income taxes (286,962 ) (8.7 )% 12,306 0.3 % (80,372 ) (2.2 )% Benefit (provision) for income taxes 37,461 1.1 % (15,598 ) (0.4 )% 20,941 0.6 % Net loss (249,501 ) (7.6 )% (3,292 ) (0.1 )% (59,431 ) (1.6 )% Noncontrolling interests (4,235 ) (0.1 )% (5,645 ) (0.1 )% (2,625 ) (0.1 )% Net loss attributable to Delta Tucker Holdings, Inc. $ (253,736 ) (7.7 )% $ (8,937 ) (0.2 )% $ (62,056 ) (1.7 )% Results of Operations 2013 vs 2012 Revenue - Revenue for the year ended December 31, 2013 was $3,287.2 million, a decrease of $757.1 million, or 18.7%, compared to the year ended December 31, 2012. The decrease was primarily driven by reduced service needs in Iraq for the DoS, affecting both the INL Air Wing and WPS contracts; the accelerated pace of the drawdown in Afghanistan, which impacted the demand for services under the Company's LOGCAP IV contract and caused reduced training needs under the AMDP contract; fewer new contract wins and the delay in business awards caused by the U.S. budget uncertainty and sequestration. See further discussion of our revenue results in the "Results by Segment" section below. Cost of services - Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2013 was $2,987.3 million, a decrease of $711.7 million, or 19.2%, compared to the year ended December 31, 2012. The decrease in Cost of services was primarily driven by the reduction in volume, consistent with the decline in revenue, as discussed above. As a percentage of revenue, Cost of services was 90.9% compared to 91.5% for the year ended December 31, 2013 and December 31, 2012, respectively. The reduction in Cost of services as a percentage of revenue was driven by the LOGCAP IV and AMDP contracts which generally carry lower margins and was partially offset by a customer contract dispute within our DynAviation segment. See further discussion of the impact of program margins in the "Results by Segment" section below. 31-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses - SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A increased by $0.6 million, or 0.4%, to $149.9 million during the year ended December 31, 2013 primarily as a result of relocation expenses associated with the change of our facilities footprint in Virginia to better position the Company operationally and our executive presence in our Texas facilities coupled with the increase in severance expense. The increase in the SG&A expense was offset by (i) reductions in legal fees associated with ongoing litigation, (ii) the decrease in costs incurred for contract labor and (iii) the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The items discussed above drove an increase in SG&A as a percentage of revenue to 4.6% for the year ended December 31, 2013 compared to 3.7% for the year ended December 31, 2012. Depreciation and amortization - Depreciation and amortization during the year ended December 31, 2013 was $48.6 million, a decrease of $1.6 million, or 3.2%, compared to the year ended December 31, 2012. The decrease was primarily the result of certain internally developed software becoming fully amortized and the impairment of certain intangible assets during the fourth quarter of the year ended December 31, 2012 partially offset by additional depreciation expense on fixed assets, including those acquired in conjunction with the acquisition of Heliworks, Inc. during the third quarter of the year ended December 31, 2012. Earnings from equity method investees - Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as Partnership for Temporary Housing LLC ("PaTH"), Contingency Response Services LLC ("CRS"), Global Response Services LLC ("GRS") and Global Linguist Solutions ("GLS"). Earnings from operationally integral unconsolidated affiliates for the year ended December 31, 2013 was $4.6 million, an increase of $3.7 million compared to the year ended December 31, 2012. The increase was primarily the result of equity method income recognized upon the receipt of $3.1 million in dividend distributions from GLS during the year ended December 31, 2013. Because of the impairment of our investment in GLS recorded during the year ended December 30, 2011, earnings related to GLS is recognized when cash is received through dividend distributions. Impairment of goodwill, intangibles and long lived assets - Impairment for the years ended December 31, 2013 and December 31, 2012 was $312.7 million and $50.7 million, respectively and was mainly attributable to goodwill. During the year ended December 31, 2013 we recognized non-cash impairment charges on reporting units associated with our DynAviation and DynLogistics segment. During the year ended December 31, 2012, we recognized non-cash impairment charges on goodwill associated with our DynLogistics segment. See Note 3 for further discussion. Interest expense - Interest expense for the year ended December 31, 2013 was $78.8 million, a decrease of $7.4 million, or 8.6%, compared to the year ended December 31, 2012. The decrease is the result of the continual reduction of the principal balance of our Term Loan as a result of principal prepayments of $50.0 million during the year ended December 31, 2013 and $90.0 million during the year ended December 31, 2012. Loss on early extinguishment of debt - Loss on early extinguishment of debt of $0.7 million and $2.1 million for the years ended December 31, 2013 and December 31, 2012, respectively, was attributable to principal prepayments on our Term Loan totaling $50.0 million and $90.0 million, respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt. Other (expense) income, net - Other (expense) income, net consists primarily of our share of earnings from Babcock DynCorp Limited ("Babcock"), as well as gains/losses from foreign currency and asset sales. The $5.5 million year-over-year decrease was primarily the result of a reduction in earnings from Babcock our unconsolidated joint venture of approximately $4.8M during the year ended December 31, 2013. Income taxes - Our effective tax rate consists of federal and state statutory rates, certain permanent differences and discreet items. The effective tax rate for the year ended December 31, 2013 was 13.1%, as compared to 126.75% for the year ended December 31, 2012. The effective tax rate for the year ended December 31, 2013 was driven primarily by the impact of the goodwill impairment as it relates to the pretax book loss compared to pretax book income in the prior year. See Note 5- Taxes for further discussion of income taxes. Results of Operations 2012 vs 2011 Revenue - Revenue for the year ended December 31, 2012 was $4,044.3 million, an increase of $325.1 million, or 8.7%, compared to the year ended December 30, 2011. The increase was primarily driven by the increase in revenue earned under our LOGCAP IV program, INL-Air Wing program, and AMDP program which together comprised approximately 67% of total consolidated revenue. See further discussion in the "Results by Segment" section below. Cost of services - Cost of services are comprised of direct labor, direct material, overhead, subcontractors, travel, supplies and other miscellaneous costs. Cost of services for the year ended December 31, 2012 was $3,698.9 million, an increase of $290.1 million, or 8.5%, compared to December 30, 2011. The increase in Cost of services was due to the growth in our business consistent with the increase in revenue discussed above. As a percentage of revenue, Cost of services was 91.5% and 91.7% for the years ended December 31, 2012 and December 30, 2011, respectively. The reduction as a percentage of revenue was primarily driven 32-------------------------------------------------------------------------------- Table of Contents by the change in our overall contract mix. Specifically, operations under LOGCAP IV task orders which changed from an award-fee contract arrangement to a fixed-fee contract. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than previously earned with award fees. See further discussion of the impact of program margins in the "Results by Segment". Selling, general and administrative expenses ("SG&A") - SG&A primarily relates to functions such as management, legal, financial accounting, contracts and administration, human resources, management information systems, purchasing, and business development. SG&A decreased by $0.2 million, or 0.1%, to $149.4 million for the year ended December 31, 2012 compared to December 30, 2011 primarily as a result of (i) non-routine severance costs incurred during the year ended December 30, 2011 associated with the corporate realignment, (ii) the acceleration of the Phoenix and Casals retention bonuses during the year ended December 30, 2011 (iii) and the reduction of bonuses accrued under the Management Incentive Plan for the year ended December 31, 2012 as compared to the year ended December 30, 2011 partially offset by legal costs associated with ongoing litigation incurred during the year ended December 31, 2012. These items also drove the reduction in SG&A as a percentage of revenue to 3.7% for the year ended December 31, 2012 compared to 4.0% for the year ended December 30, 2011. Depreciation and amortization - Depreciation and amortization for the year ended December 31, 2012 was $50.3 million, a decrease of $0.5 million, or 1.0%, as compared to depreciation and amortization for the year ended December 30, 2011. The decrease was primarily the result of non-compete agreements becoming fully amortized during the second half of the year ended December 30, 2011 partially offset by additional depreciation expense on fixed asset additions, including fixed assets acquired in conjunction with the acquisition of Heliworks, during the year ended December 31, 2012. Earnings from equity method investees - Earnings from equity method investees include our proportionate share of the income of our equity method investees deemed to be operationally integral to our business, such as PaTH, CRS, GRS and GLS. Earnings from equity method investees for the year ended December 31, 2012 decreased $12.0 million, or 93.6%, to $0.8 million primarily as a result of the reduction in earnings recognized from GLS. As a result of the impairment of our investment in GLS recorded during the year ended December 30, 2011, earnings related to GLS is recognized when cash is received through dividend distributions. Impairment of equity method investment - During the year ended December 30, 2011, we recorded a $76.6 million impairment of our investment in GLS as we concluded it had an other than temporary loss in value during the period. As a result, we no longer recognize any earnings until cash is received through dividend distributions. Impairment of goodwill, intangibles and long lived assets- Impairment for the years ended December 31, 2012 and December 30, 2011 was $50.7 million and $33.8 million, respectively primarily related to goodwill. During the year ended December 31, 2012, we recognized non-cash impairment charges on the goodwill associated with our DynLogistics segment. See Note 3 for further discussion. Interest expense - Interest expense for the year ended December 31, 2012 was $86.3 million, a decrease of $5.5 million, or 6.0%, compared to the year ended December 30, 2011. The decrease was due to the reduction of the principal balance of our Term Loan as a result of principal prepayments of $90.0 million and $147.3 million during the years ended December 31, 2012 and December 30, 2011, respectively. Loss on early extinguishment of debt - Loss on early extinguishment of debt of $2.1 million and $7.3 million for the years ended December 31, 2012 and December 30, 2011, respectively, was attributable to principal prepayments on our Term Loan totaling $90.0 million and $147.3 million, respectively. Deferred financing costs associated with the additional prepayment were expensed and recorded to Loss on early extinguishment of debt. Other income, net - Other income, net consists primarily of our share of earnings from Babcock, our unconsolidated joint venture that is not operationally integral to our business as well as gains/losses from foreign currency and asset sales. Other income, net decreased $1.4 million, or 23.0%, to $4.7 million for the year ended December 31, 2012 compared to the year ended December 30, 2011. The decrease was primarily due to the $0.5 million decrease in earnings from Babcock. Income taxes - Our effective tax rate consists of federal and state statutory rates and certain permanent differences. The effective tax rate for the year ended December 31, 2012 was 126.8%, as compared to 26.1% for the year ended December 30, 2011. The effective tax rate for the year ended December 31, 2012 was driven primarily by the impact of the goodwill impairment recognized during the year ended December 31, 2012. 33-------------------------------------------------------------------------------- Table of Contents Results by Segment The following tables sets forth the revenue, both in dollars and as a percentage of our consolidated revenue, operating income and operating margin for our operating segments for the years ended December 31, 2013, December 31, 2012 and December 30, 2011. Amounts agree to our segment disclosures. See Note 12 for further discussion. For the years ended December 31, 2013 December 31, 2012 December 30, 2011 (Amounts in % of Total % of Total thousands) Revenue % of Total Revenue Revenue Revenue Revenue Revenue DynLogistics $ 1,920,715 58.4 % $ 2,709,469 67.0 % $ 2,610,448 70.2 % DynAviation 1,371,928 41.7 % 1,338,514 33.1 % 1,101,218 29.6 % Headquarters / Other (1) (5,459 ) (0.2 )% (3,708 ) (0.1 )% 7,486 0.2 % Consolidated revenue $ 3,287,184 100.0 % $ 4,044,275 100.0 % $ 3,719,152 100.0 % Operating Operating Operating Income (Loss) Profit Margin Income(Loss) Profit Margin Income (Loss) Profit Margin DynLogistics $ 36,243 1.9 % $ 48,941 1.8 % $ 51,316 2.0 % DynAviation (194,866 ) (14.2 )% 105,327 7.9 % 71,912 6.5 % Headquarters / Other (2) (48,157 ) 882.2 % (58,385 ) 1,574.6 % (110,857 ) (1,480.9 )% Consolidated operating (loss) / income $ (206,780 ) (6.3 )% $ 95,883 2.4 % $ 12,371 0.3 % (1) Headquarters revenue primarily represents revenue earned on shared service arrangements for general and administrative services provided to unconsolidated joint ventures. The DynGlobal associated revenue for the year ended December 31, 2013 is also included in Headquarters/Other. The amount of revenue for DynGlobal represented less than 1% of total revenue for the period. (2) Headquarters operating expenses primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers, partially offset by equity method investee income. The DynGlobal associated costs for the year ended December 31, 2013 are also included in Headquarters/Other. The amount of cost for DynGlobal represented less than 1% of total cost for the period. Results by Segment 2013 vs 2012 DynLogistics Revenue of $1,920.7 million decreased $788.8 million, or 29.1%, for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of reductions in manning, materials and other direct costs under the Afghan Area of Responsibility ("AOR") task order under the LOGCAP IV program consistent with our expectation of reduced volume resulting from the continued drawdown of troops in Afghanistan. Additionally, revenue for the year ended December 31, 2013 was impacted by lower volume under the AMDP contract, the completion of the CivPol task order in Iraq, a reduction in the level of effort on our Navistar and Oshkosh Defense programs and the wind down of the Worldwide Protective Services ("WPS") task order in Iraq. The decline in revenue was partially offset by revenue from new programs including the Egyptian Personnel Support Services ("EPSS") program, the Medium Tactical Vehicles ("MTV") program, the Evergreen program and the new task order for the Criminal Justice Program Support ("CJPS") in Haiti. As efforts in Afghanistan and Iraq come to end and with the continued pressure on U.S. defense budgets, we expect our revenue for the DynLogistics segment to continue to decline in 2014. Operating income of $36.2 million decreased $12.7 million, or 25.9%, for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of the decline in revenue discussed above. The decline in operating income was partially offset by an increase in vehicle deliveries under the Palestinian Security Sector task order under the CivPol contract coupled with operations under the EPSS contract performing at higher margins than the overall contract mix in the prior year. Operating income was impacted in both comparable periods by goodwill impairments recorded for the Intelligence & Security and the Training & Mentoring reporting units, respectively. See Note 3 further discussion of these impairments. DynAviation Revenue of $1,371.9 million increased $33.4 million, or 2.5%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The change was primarily the result of operations under new programs, including the National Aeronautics and Space Administration ("NASA") AMOS and T-6 COMBS contracts, as well as operations under new task orders awarded under the CFT program, including the 160th SOAR-A task order. Additionally, an increase in manning levels under the Theater Aviation Sustainment Management - Europe ("TASM-E") CFT task order, as well as increased demand under 34-------------------------------------------------------------------------------- Table of Contents our Saudi Arabia programs contributed to the overall increase in revenue. These increases were partially offset by the reduction in demand under the INL-Air Wing program in Iraq and the decrease in volume as well as the cancellation or completion of certain other contracts. Operating loss of $194.9 million for the year ended December 31, 2013 compared to the operating income of $105.3 million for the year ended December 31, 2012 was primarily the result of the impact of a goodwill impairment charge to the Air Operations reporting unit for the year ended December 31, 2013 as a result of declines in projected revenues for future years. See Note 3 for further discussion of the impairment. Additionally, we incurred cost to expand Heliworks, Inc. and recorded an unfavorable adjustment related to a customer contract dispute. Operating loss as a percentage of revenue decreased to 14.2% for the year ended December 31, 2013 as compared to 7.9% for the year ended December 31, 2012. Results by Segment 2012 vs 2011 DynLogistics Revenue of $2,709.5 million increased $99.0 million, or 3.8%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 primarily as a result of a $206.6 million increase from higher volumes of work under the LOGCAP IV Afghanistan AOR partially offset by a decrease in volume under the Kuwait AOR resulting from manning reductions from the 2011 troop drawdown in Iraq as Operation Iraqi Freedom ("OIF") ended. In the aggregate, we recorded a favorable adjustment of $18.7 million for the year ended December 31, 2012 primarily due to the actual award fee determination being higher than our previous estimates of the LOGCAP IV award fee scores. During the fourth quarter of 2012, the Afghanistan and Kuwait task orders were converted from a cost-plus-award-fee contract vehicle to a cost-plus-fixed-fee arrangement, resulting in retrospective application of the fee arrangement to the open periods of performance on each task order. Under the new arrangements, the fixed-fee portion of the contract is at a higher rate than we were previously earning in award fees. Additionally, we saw increases in revenue as a result of increased volume under AMDP and the replacement of the Worldwide Personal protection Program ("WPPS") with the higher volume WPS program. These increases were partially offset with the ramp-downs in our CivPol program and the conclusion of the Multi-National Security Transition Command-Iraq ("MNSTC-I") program in early 2012 as well as reductions related to the completion of certain task orders under the AFCAP contract Operating income of $48.9 million decreased $2.4 million, or 4.6%, for the year ended December 31, 2012 compared to operating income of $51.3 million for the year ended December 30, 2011 primarily as a result of the $44.6 million goodwill impairment charge recorded in 2012 compared to a $33.8 million goodwill impairment charge in 2011 on reporting units within the segment. This decline was partially offset by margin improvements in the Oshkosh Defense program as well as the recognition of $5.5 million of income resulting from the REA received on the Africa Peacekeeping Security Sector Transformation ("APK-SST") task order that had no associated cost. Operating income as a percentage of revenue decreased to 1.8% for the year ended December 31, 2012 compared to 2.0% for the year ended December 30, 2011 primarily as a result of the impact of the goodwill impairment charge as noted above. See Note 3 further discussion of the impairment. DynAviation Revenue of $1,338.5 million increased $237.3 million, or 21.5%, for the year ended December 31, 2012 compared to the year ended December 30, 2011. The change was primarily the result of (i) increased demand under the INL-Air Wing program, (ii) performance under new CFT task orders, (iii) revenue from the T6-COMBS, NASA-AMOS and G222 new contracts, and (iv) other existing Aviation contracts. These increases were partially offset by a reduction in volume under the TASM-E CFT task order due to the completion of certain delivery orders, and the completion of the Life Cycle Contract Support Services ("LCCS") contract in late 2011 and early 2012. We continue to pursue opportunities within the INL Air wing program as we continue to expand our aircraft and personnel requirements in supporting the DoS. Operating income of $105.3 million increased $33.4 million, or 46.5%, for the year ended December 31, 2012 compared to the year ended December 30, 2011 as a result of the increased demand discussed above and better margins on our new contracts and task orders as compared to our historical contract mix partially offset by startup costs associated with Heliworks, which we acquired during the year ended December 31, 2012. Additionally, certain non-recurring charges in the prior year related to program specific severance costs and a write-down of inventory on the LCCS program contributed to the increase in operating income. High margins on new contracts and task orders and the absence of the non-recurring charges incurred during the year ended December 30, 2011 drove the improvement in operating income as a percentage of revenue to 7.9% for the year ended December 31, 2012 compared to 6.5% for the year ended December 30, 2011. 35-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash generated by operations and borrowings available under our senior secured credit facility ("Senior Credit Facility") are our primary sources of short-term liquidity (refer to Note 8 for more detail). We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. However, access to our Revolver is dependent upon our meeting financial and non-financial covenants, summarized below, and our cash flow from operations is heavily dependent upon billing and collection of our accounts receivable. At different periods throughout 2013, we have seen delays and other disruptions in the ability of our customers to make timely payments on our accounts receivable. Significant changes, such as a future government shutdown, further cuts mandated by sequestration or any other limitations in collections or loss of our ability to access our revolver, could materially impact liquidity and our ability to fund our working capital needs. Our primary use of short-term liquidity includes debt service and working capital needs sufficient to pay for materials, labor, services or subcontractors prior to receiving payments from our customers. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available at terms acceptable to us. Failure to meet covenant obligations could result in elimination of access to our Senior Credit Facility, which would materially affect our future expansion strategies and our ability to meet our operational obligations. Although we operate internationally, virtually all of our cash is held by either U.S. entities or by foreign entities which are structured as pass through entities. As a result, we do not have significant risk associated with our ability to repatriate cash. Management believes Days Sales Outstanding ("DSO") is an appropriate way to measure our billing and collections effectiveness. DSO measures the efficiency in collecting our receivables as of the period end date and is calculated based on average daily revenue for the most recent quarter and accounts receivable, net of customer advances, as of the balance sheet date. As of December 31, 2013 and December 31, 2012, DSO was 69 days compared to 68 days, respectively. In 2014, we will continue to focus on working capital management and growth in our business. We expect cash to continue to be impacted by operational working capital needs, potential acquisitions and interest payments on the Senior Credit Facility and the Senior Unsecured Notes. Interest payments are expected to be lower during calendar year 2014 as a result of the $50.0 million and $90.0 million in principal prepayments made during the years ended December 31, 2013 and December 31, 2012, respectively. Cash Flow Analysis The following table sets forth cash flow data for the periods indicated therein: For the years ended (Amounts in thousands) December 31, 2013 December 31, 2012 December 30, 2011 Net cash provided by $ 137,502 $ 144,190 $ 167,986 operating activities Net cash used in investing (7,971 ) (12,163 ) (3,003 ) activities Net cash used in financing (77,461 ) (83,457 ) (147,315 ) activities Cash Flows - December 31, 2013 vs December 31, 2012 Operating Activities Cash provided by operating activities during the year ended December 31, 2013 was $137.5 million as compared to cash provided by operating activities of $144.2 million during the year ended December 31, 2012. Cash provided by operations for the year ended December 31, 2013 was the result of positive earnings before interest, taxes and depreciation & amortization ("EBITDA"), excluding the impact of the impairment, coupled with working capital improvements resulting from the collection of accounts receivable partially offset by the utilization of prepaid expenses and cash expended to reduce accounts payable. Cash provided by operating activities during the year ended December 31, 2012 was primarily the result of growth in EBITDA, excluding the impact of impairment. In addition, working capital improvements and the release of restricted cash also benefited cash provided by operating activities. 36-------------------------------------------------------------------------------- Table of Contents Investing Activities Cash used in investing activities during the year ended December 31, 2013 was $8.0 million as compared to cash used in investing activities during the year ended December 31, 2012 of $12.2 million. Cash used in investing activities during the year ended December 31, 2013 was primarily due to the purchase of fixed assets and the investment in software partially offset by the return of capital from our Babcock and CRS joint ventures. Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our Partnership for Temporary Housing ("PaTH") joint venture. Financing Activities Cash used in financing activities during the year ended December 31, 2013 was $77.5 million compared to $83.5 million of cash used in financing activities during the year ended December 31, 2012. Cash used in financing activities during the year ended December 31, 2013 was primarily the result of payments related to financed insurance and a $50.0 million prepayment on the Term Loan. Cash used in financing activities during the year ended December 31, 2012 was primarily the result of a $90.0 million prepayment on our Term Loan partially offset by borrowings related to financed insurance. Cash Flows - December 31, 2012 vs December 30, 2011 Operating Activities Cash provided by operations for the year ended December 31, 2012 was $144.2 million as compared to cash provided by operations of $168.0 million for the year ended December 30, 2011. Cash provided by operations during the year ended December 31, 2012 was primarily the result of growth in earnings before interest, taxes, and depreciation & amortization ("EBITDA"), working capital improvements, including net cash received of approximately $66.2 million on December 31, 2012, and the release of restricted cash. Cash provided by operations for the year ended December 31, 2012, compared to Cash provided by operations for the year ended December 30, 2011 was negatively impacted by a $46.0 million tax refund resulting from the approved Change in Accounting Methodology ("CIAM") with the IRS that occurred in 2011 and did not recur in 2012. Investing Activities Cash used in investing activities for the year ended December 31, 2012 was $12.2 million as compared to cash used in investing activities of $3.0 million for the year ended December 30, 2011. Cash used in investing activities during the year ended December 31, 2012 was primarily the result of the acquisition of Heliworks, Inc. and investments in fixed assets partially offset by the return of capital from our PaTH and CRS joint ventures. Cash used in investing activities during the year ended December 30, 2011 was driven by contributions to PaTH, our 30% owned joint venture, as well as purchases of property and equipment and software, partially offset by the return of capital from our GLS and CRS joint ventures. Financing Activities Cash used in financing activities for the year ended December 31, 2012 was $83.5 million as compared to cash used in financing activities of $147.3 million for the year ended December 30, 2011. Cash used in financing activities during the year ended December 31, 2012 was primarily the result of $90.0 million in prepayments on our Term Loan partially offset by borrowings related to financed insurance. Cash used in financing activities during the year ended December 30, 2011 was primarily driven by three significant prepayments on our Term Loan, in addition to our quarterly principal payments during the year, partially offset by net borrowings related to financed insurance. 37-------------------------------------------------------------------------------- Table of Contents Financing Long-term debt consisted of the following: Delta Tucker Holdings, Inc. (Amounts in thousands) December 31, 2013 December 31, 2012 December 30, 2011 Pre-merger 9.5% senior subordinated notes - 637 637 Term loan 277,272 327,272 417,272 10.375% senior unsecured notes 455,000 455,000 455,000 Total indebtedness 732,272 782,909 872,909 Less current portion of long-term debt - (637 ) - Total long-term debt $ 732,272 $ 782,272 $ 872,909 In connection with the Merger on July 7, 2010, substantially all of DynCorp International's debt outstanding as of April 2, 2010 was repaid and replaced with new debt described below. The pre-Merger 9.5% Senior subordinated notes of $0.6 million matured and were paid in full on February 15, 2013. Due to principal prepayments made on our Term Loan during the year ended December 31, 2012, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. The weighted-average interest rate as of December 31, 2013 and December 31, 2012 for our debt was 8.8% and 8.7%, respectively, excluding the impact of deferred financing fees. There were no interest rate hedges in place during the years ended December 31, 2013 and December 31, 2012. Senior Credit Facility In connection with the Merger, DynCorp International entered into a senior secured credit facility on July 7, 2010 (the "Senior Credit Facility"), with a banking syndicate and Bank of America, NA as Agent. On June 19, 2013, we entered into a third amendment (the "Amendment") to the Senior Credit Facility. The Amendment, among other things, amended the Senior Credit Facility to extend the maturity date of the revolving credit facility (the "Revolver") to July 7, 2016, increased the amount of the Revolver to $181.0 million and modified the maximum total leverage threshold test and certain other covenants. The Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. As of December 31, 2013, the Senior Credit Facility provided for a $277.3 million term loan facility ("Term Loan") and a $181.0 million Revolver, which includes a $100.0 million letter of credit subfacility. As of December 31, 2013 and December 31, 2012, the available borrowing capacity under the Senior Credit Facility was approximately $144.6 million and $111.7 million, respectively, which allows for up to $36.4 million and $38.3 million in additional letters of credit, respectively. The maturity date on the Term Loan and Revolver is July 7, 2016. Amounts borrowed under our Revolver were used to fund operations. Refer to Note 8 further discussion of the Senior Credit Facility. Interest Rates on Term Loan & Revolver Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate ("Base Rate") plus an applicable margin or the (ii) London Interbank Offered Rate ("Eurocurrency Rate") plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option or 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency option based on our outstanding Secured Leverage Ratio at the end of each quarter. The Secured Leverage Ratio is the ratio of total secured consolidated debt (net of up to $75.0 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization ("Consolidated EBITDA"), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly. The Base Rate is equal to the higher of (a) the Federal Funds Rate plus one half of one percent and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%. 38-------------------------------------------------------------------------------- Table of Contents The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of December 31, 2013 and December 31, 2012, the applicable interest rates for outstanding balances under our Term Loan were 6.25% and 6.25%, respectively. Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of December 31, 2013 and December 31, 2012 the applicable interest rates for our letter of credit subfacility and our interest rates for our unused commitment fees were 4.25% and 4.50% and 0.50% and 0.75%, respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee. Principal Payments Our Credit Facility contains an annual requirement to use a portion of our Excess Cash Flow, as defined in the Credit Facility, to make additional principal payments. The first requirement was in 2012 based on annual financial results for the year ended December 31, 2012. Based on the principal payments we made during the years ended December 31, 2012 and December 31, 2013 we did not meet the threshold for an additional Excess Cash Flow payment. Additional principal payments could be required in future years based on net proceeds received from items such as tax refunds or disposition of assets or lines of business. During the years ended December 31, 2013 and December 31, 2012, we made principal payments of $50.0 million and 90.0 million, respectively on the Term Loan facility. Pursuant to our Term Loan facility quarterly principal payments are required, however, the principal prepayments made in 2011 were applied to the future scheduled maturities and satisfied our responsibility to make quarterly principal payments through July 7, 2016. Deferred financing costs of $0.7 million and $2.1 million, related to the various principal payments, were expensed and included in Loss on early extinguishment of debt in our consolidated statement of operations for the years ended December 31, 2013 and December 31, 2012, respectively. There were no penalties associated with the prepayments. Covenants The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants. The negative covenants in the Senior Credit Facility include, among other things, limits on our ability to: •declare dividends and make other distributions; •redeem or repurchase our capital stock; •prepay, redeem or repurchase certain of our indebtedness; •grant liens; •make loans or investments (including acquisitions); •incur additional indebtedness; •modify the terms of certain debt; •restrict dividends from our subsidiaries; •change our business or business of our subsidiaries; •merge or enter into acquisitions; •sell our assets; •enter into transactions with our affiliates; and •make capital expenditures. In addition, the Senior Credit Facility stipulates a maximum total leverage ratio and a minimum interest coverage ratio that must be maintained. 39-------------------------------------------------------------------------------- Table of Contents The total leverage ratio is the Consolidated Total Debt as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $75 million) to Consolidated EBITDA as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio cannot be greater than 4.50 to 1.0 for the period ending March 27, 2015, after which, the maximum total leverage diminishes quarterly or semi-annually to a maximum of 3.75 to 1.00 beginning September 26, 2015. The Amendment made adjustments to the levels at which the maximum total leverage diminishes over the remainder of the facility. The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 2.0 to 1.0 through the period ending June 27, 2014, after which, the minimum total interest coverage ratio increases to 2.05 to 1.00 through March 27, 2015 and 2.25 to 1.00 thereafter. The fair value of our borrowings under our Senior Credit Facility approximates 100.5% and 100.5% of the carrying amount based on quoted values as of December 31, 2013 and December 31, 2012, respectively. In the event we fail to comply with the covenants specified in the Senior Credit Facility and the Indenture governing our Senior Unsecured Notes, we may be in default. Senior Unsecured Notes On July 7, 2010, DynCorp International completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes (the "Senior Unsecured Notes"). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the "Indenture"), by and among us, the guarantors party thereto (the "Guarantors"), including DynCorp International, and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes commenced on January 1, 2011 and is payable on January 1 and July 1 of each year. The balance of our Senior Unsecured Notes was $455.0 million as of both December 31, 2013 and December 31, 2012. The Senior Unsecured Notes contain various covenants that restrict our ability to: •incur additional indebtedness; •make certain payments including declaring or paying certain dividends; •purchase or retire certain equity interests; •retire subordinated indebtedness; •make certain investments; •sell assets; •engage in certain transactions with affiliates; •create liens on assets; •make acquisitions; and •engage in mergers or consolidations. The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings from both Moody's Investor Service, Inc. as well as Standard Poor's Rating Service. We can redeem the new Senior Unsecured Notes, in whole or in part, at defined call prices, plus accrued interest through the redemption date. The Indenture requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain specified triggering events, including certain asset sales and change of control events. We or our affiliates may, from time to time, purchase our Senior Unsecured Notes. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine. 40-------------------------------------------------------------------------------- Table of Contents Contractual Commitments The following table represents our contractual commitments associated with our debt and other obligations as of December 31, 2013: Calendar Years (1) (Amounts in thousands) 2014 2015 2016 2017 2018 Thereafter Total Term Loan (2) $ - $ - $ 277,272 $ - $ - $ - $ 277,272 Senior Unsecured Notes - - - 455,000 - - 455,000 Interest on indebtedness (3) 67,945 67,945 57,944 23,603 - - 217,437 Operating leases (4) 34,254 15,092 11,203 10,277 8,926 18,863 98,615 Liability on uncertain tax positions(5) 4,320 - - - - - 4,320Total contractual obligations $ 106,519 $ 83,037 $ 346,419 $ 488,880 $ 8,926 $ 18,863 $ 1,052,644 (1) As of December 31, 2013, there were no amounts outstanding under our Revolver. (2) Due to principal prepayments made on our Term Loan during the year ended December 30, 2011, we have satisfied our responsibility to make quarterly principal payments through July 7, 2016. Amounts above excludes such future mandatory principal payments due to excess cash flow requirements. See Note 8 further discussion of the payments. (3) Represents interest expense calculated using interest rates of: (i) 10.375% for our Senior Unsecured Notes, (ii) 6.25% for our Term Loan, (iii) 4.25% for our Letters of Credit currently outstanding and (iv) 0.75% for the unused borrowing capacity available under our Revolver. (4) For additional information about our operating leases, see Note 9 for further discussion. (5) Represents the estimated payments related to the unrecognized tax benefits for the respective year. See Note 5 for further discussion. Non-GAAP Measures We define EBITDA as GAAP net (loss) income attributable to Delta Tucker Holdings, Inc. adjusted for interest expense, taxes and depreciation and amortization. Adjusted EBITDA is calculated by adjusting EBITDA for the items described in the table below. We use EBITDA and Adjusted EBITDA as supplemental measures in the evaluation of our business and believe that EBITDA and Adjusted EBITDA provide a meaningful measure of operational performance on a consolidated basis because it eliminates the effects of period to period changes in taxes, costs associated with capital investments and interest expense and is consistent with one of the measures we use to evaluate management's performance for incentive compensation. In addition, all adjustments to arrive at Adjusted EBITDA as presented in the table below correspond to the definition of Consolidated EBITDA used in the Senior Secured Credit Facilities and the definition of EBITDA used in the Indenture governing the Senior Unsecured Notes to test the permissibility of certain types of transactions, including debt incurrence. Neither EBITDA nor Adjusted EBITDA is a financial measure calculated in accordance with GAAP. Accordingly, they should not be considered in isolation or as substitutes for net (loss) income attributable to Delta Tucker Holdings, Inc./Predecessor or other financial measures prepared in accordance with GAAP. Management believes these non-GAAP financial measures are useful in evaluating operating performance and are regularly used by security analysts, institutional investors and other interested parties in reviewing the Company. Non-GAAP financial measures are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of the performance of other companies. When evaluating EBITDA and Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in EBITDA and Adjusted EBITDA, (ii) whether EBITDA and Adjusted EBITDA have remained at positive levels historically, and (iii) how EBITDA and Adjusted EBITDA compare to our debt outstanding. The non-GAAP measures of EBITDA and Adjusted EBITDA do have certain limitations. They do not include interest expense, which is a necessary and ongoing part of our cost structure resulting from the incurrence of debt. EBITDA and Adjusted EBITDA also exclude tax, depreciation and amortization expenses. Because these are material and recurring items, any measure, including EBITDA and Adjusted EBITDA, which excludes them has a material limitation. To mitigate these limitations, we have policies and procedures in place to identify expenses that qualify as interest, taxes, loss on debt extinguishments and depreciation and amortization and to approve and segregate these expenses from other expenses to ensure that EBITDA and Adjusted EBITDA are consistently reflected from period to period. Our calculation of EBITDA and Adjusted EBITDA may vary from that of other companies. Therefore, our EBITDA and Adjusted EBITDA presented may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA do not give effect to the cash we must use to service our debt or pay income taxes and thus does not reflect the funds generated from operations or actually available for capital investments. 41-------------------------------------------------------------------------------- Table of Contents Delta Tucker Holdings, Inc. For the years ended December 31, December 31, December 30, 2013 2012 2011 (Amount in thousands) (unaudited) Net loss attributable to Delta Tucker Holdings, Inc. $ (253,736 ) $ (8,937 ) $ (62,056 ) (Benefit) Provision for income tax (37,461 ) 15,598 (20,941 ) Interest expense, net of interest income 78,669 86,155 91,547 Depreciation and amortization(1) 50,279 51,814 52,494 EBITDA (162,249 ) 144,630 61,044 Non-recurring unusual gains or losses or income or expenses and non-cash impairments (2) 323,930 54,354 122,151 Changes due to fluctuation in foreign exchange rates (366 ) (226 ) (210 ) Earnings from affiliates not received in cash(3) 1,371 (699 ) (1,297 ) Employee non-cash compensation, severance, and retention expense (4) 6,444 1,381 8,483 Management fees (5) 1,899 1,075 777 Acquisition accounting and Merger-related items (6) (4,146 ) (4,195 ) (2,171 ) Annualized operational efficiencies (7) 11,798 - 855 Other 1,774 (50 ) 2,011 Adjusted EBITDA $ 180,455 $ 196,270 $ 191,643 (1) Amount includes certain depreciation and amortization amounts which are classified as Cost of services in the consolidated statements of operations of Delta Tucker Holdings, Inc. included elsewhere in this Annual Report on Form 10-K. (2) Amount includes the impairment of our investment in the GLS joint venture, impairment of goodwill and the impairment of intangibles, restructuring costs, as well as certain unusual income and expense items as defined under our debt agreements. (3) Represents the difference between trailing twelve months of income booked from unconsolidated affiliates and the cash received from the affiliates during the same period. (4) Includes post-employment benefit expense related to severance in accordance with ASC 712 - Compensation, relocation expenses and stock based compensation expense. (5) Amount includes management fees paid to Cerberus Operations and Advisory Company. (6) Includes the amortization of intangibles arising pursuant to ASC 805 - Business Combination. (7) Represents a defined EBITDA adjustment under our debt agreements for the amount of cost savings, operating expense reductions and synergies projected as a result of specified actions taken or with respect to which substantial steps have been taken during the period. Off-Balance Sheet Arrangements As of December 31, 2013, we did not have any material off-balance sheet arrangements as defined under SEC rules. Effects of Inflation We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer term fixed-price and time-and-materials type contracts typically include sufficient labor and other cost escalations in amounts expected to cover cost increases over the periods of performance. The majority of our contracts are cost-reimbursable type contracts, which consequently, eliminate the impact of inflation. Costs and revenue include an inflationary increase that commensurates with the general economy in which we operate. As such, Net (loss) income attributable to Delta Tucker Holdings, Inc. or our Predecessor has not been materially impacted by inflation. Critical Accounting Policies and Estimates The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based on information available at the time of the estimates or assumptions, including our historical experience, where relevant. Significant estimates and assumptions are reviewed quarterly by management. The evaluation process includes a thorough review of key estimates and assumptions used in preparing our financial statements. Because 42-------------------------------------------------------------------------------- Table of Contents of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may materially differ from the estimates. Our critical accounting policies and estimates are those policies and estimates that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, see Note 1. Management discusses our critical accounting policies and estimates with the Audit Committee of our Board of Directors annually. Revenue Recognition and Cost Estimation on Long-Term Contracts General - We are predominantly a services provider and only include products or systems when necessary for the execution of the service arrangement. As such, systems, equipment or materials are not generally separable from the services we provide. Revenue is recognized when persuasive evidence of an arrangement exists, services or products have been provided to the customer, the sales price is fixed or determinable (for non-U.S. government contracts) or costs are identifiable, determinable, reasonable and allowable (for our U.S. government contracts), and collectability is reasonably assured (for non-U.S. government contracts) or a reasonable contractual basis for recovery exists (for U.S. government contracts). Our contracts typically fall into the following four categories with the first representing the vast majority of our revenue: (i) federal government contracts, (ii) construction-type contracts, (iii) software contracts and (iv) other contracts. We apply the appropriate guidance consistently to similar contracts. Major factors we consider in determining total estimated revenue and cost include the base contract price, contract options, change orders (modifications of the original contract), back charges and claims, and contract provisions for penalties, award fees and performance incentives. All of these factors and other special contract provisions are evaluated throughout the life of our contracts when estimating total contract revenue under the percentage-of-completion or proportional methods of accounting. We inherently have risks related to our estimates with long-term contracts. Actual amounts could materially differ from these estimates. We believe the following are inherent to the risk of estimation: (i) assumptions are uncertain and inherently judgmental at the time of the estimate; (ii) use of reasonably different assumptions could have changed our estimates, particularly with respect to estimates of contract revenues, costs and recoverability of assets, and (iii) changes in estimates could have material effects on our financial condition or results of operations. The impact of all of these factors could contribute to a material cumulative adjustment. Some of our contracts with the U.S. government contain award or incentive fees. We recognize award or incentive fee revenue when we can make reasonably determinable estimates of award or incentive fees to consider them in determining total estimated contract revenue. We do not consider the mere existence of potential award or incentive fee as presumptive evidence that award or incentive fees are to be automatically included in determining total estimated revenue. In some cases, we may not be able to reliably predict whether performance targets will be met, and as a result, we exclude the award or incentive fees from the determination of total revenue in such instances. Our estimate of award or incentive fees may require adjustments from time to time. We expense pre-contract costs as incurred for an anticipated contract until the contract is awarded. Throughout the life of the contract, indirect costs, including general and administrative costs, are expensed as incurred. Management regularly reviews project profitability and underlying estimates, including total cost to complete a project. For each project, estimates for total project costs are based on such factors as a project's contractual requirements and management's assessment of current and future pricing, economic conditions, political conditions and site conditions. Estimates can be impacted by such factors as additional requirements from our customers, a change in labor markets impacting the availability or cost of a skilled workforce, regulatory changes both domestically and internationally, political unrest or security issues at project locations. Revisions to estimates are reflected in our results of operations as changes in accounting estimates in the periods in which the facts that give rise to the revisions become known by management. See aggregate changes in accounting estimates in Note 1. We believe long-term contracts, contracts in a loss position and contracts with material award or incentive fees drive the significant potential changes in estimates in our contracts. These estimates are reviewed and assessed quarterly and could result in favorable or unfavorable adjustments. Federal Government Contracts - For all non-construction and non-software U.S. federal government contracts or contract elements, we apply the guidance in ASC 912 - Contractors - Federal Government. We apply the combination and segmentation guidance in ASC 605-35 Revenue - Construction-Type and Production-Type Contracts under the guidance of ASC 912 in analyzing the deliverables contained in the applicable contract to determine appropriate profit centers. Revenue is recognized by profit center using the percentage-of-completion method or completed-contract method. The completed-contract method is used when reliable estimates cannot be supported for percentage-of-completion method recognition or for short duration projects when the results of operations would not vary materially from those resulting from use of the percentage-of-completion method. Until complete, project costs may be maintained in work-in-progress, a component of inventory. Revenue is recognized based on progress towards completion over the contract period, measured by either output or input methods appropriate to the services or products provided. For example, "output measures" can include units delivered or produced, 43-------------------------------------------------------------------------------- Table of Contents such as aircraft for which modification has been completed. "Input measures" can include a cost-to-cost method, such as for procurement-related services. Construction Contracts or Contract Elements - For all construction-type contracts or contract elements, revenue is recognized by profit center using the percentage-of-completion method. Software Contracts or Contract Elements - It is our policy to review any arrangement containing software or software deliverables using applicable GAAP for software revenue recognition. See Note 1 for further discussion. We have not historically sold software on a separate, standalone basis. As a result, software arrangements are typically accounted for as one unit of accounting and are recognized over the service period, including the period of post-contract customer support. We did not enter into any new software contracts or contracts with software elements during the years ended December 31, 2013, December 31, 2012 or December 30, 2011. Other Contracts or Contract Elements - Our contracts with non-federal government customers are predominantly service arrangements. Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. Arrangement consideration is allocated among the separate units of accounting based on the guidance applicable for the multiple-element arrangements. Many of our arrangements were entered into prior to January 1, 2011. For these arrangements, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative fair values. Fair values are established by evaluating vendor specific objective evidence ("VSOE") or third-party evidence, if available. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, which results in the arrangements being accounted for as one unit of accounting. For arrangements that are entered into or materially modified after January 1, 2011, arrangement considerations are allocated to those identified as multiple-element arrangements based on their relative selling price. Relative selling price is established through VSOE, third-party evidence, or management's best estimate of selling price. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, and therefore, relative selling price is generally allocated to multiple-element arrangements utilizing management's best estimate of selling price. Deferred Taxes, Tax Valuation Allowances and Tax Reserves Our income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best estimate of future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. Income tax expense is the amount of tax payable for the period net of the change in deferred tax assets and liabilities during the period. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the realizability of our deferred tax assets, we assess the need for any related valuation allowances or adjust the amount of any allowances, if necessary. Valuation allowances are recognized to reduce the carrying value of deferred tax assets to amounts that we expect are more-likely-than-not to be realized. Valuation allowances, if any, would primarily relate to the deferred tax assets established for certain tax credit carryforwards and net operating loss carryforwards for U.S. and non-U.S. subsidiaries. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the need for or sufficiency of a valuation allowance. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could also impact the need for certain valuation allowances. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in potential assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. Under ASC 740 - Income Taxes, we may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. 44-------------------------------------------------------------------------------- Table of Contents ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. Impairment of Goodwill As a result of the Company applying acquisition accounting related to the Merger on July 7, 2010, our balance sheet included $679.4 million in goodwill as of December 31, 2010, which represented the excess of costs over the fair value of our assets. During the years ended December 31, 2013, December 31, 2012, and December 30, 2011, we recorded non-cash impairment charges of $310.3 million, $44.6 million, and $33.8 million respectively. In total, the changes since the merger have reduced the goodwill balance to $293.8 million as of December 31, 2013. See Note 3 for further discussion. The goodwill carrying value is allocated to our operating segments using a relative fair value approach based on our seven reporting units. Our reporting units have allocated goodwill based on relative fair values as required under ASC 350 - Intangibles - Goodwill and Other. In accordance with ASC 350-20 - Intangibles - Goodwill, we evaluate goodwill for impairment annually and when an event occurs or circumstances change to suggest that the carrying value may not be recoverable. We perform our annual goodwill impairment test each October, the first month of the fourth quarter of our calendar year. We also assess goodwill at the end of a quarter if a triggering event occurs. In determining whether an interim triggering event has occurred, management monitors (i) the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test, (ii) and significant changes to future expectations. We estimate a portion of the fair value of our reporting units under the income approach by utilizing a discounted cash flow model based on several factors including balance sheet carrying values, historical results, our most recent forecasts, and other relevant quantitative and qualitative information. We discount the related cash flow forecasts using the weighted-average cost of capital at the date of evaluation. We also use the market approach to estimate the remaining portion of our reporting unit valuation. This technique utilizes comparative market multiples in the valuation estimate. We estimate the fair value of our reporting units using a combination of the income approach and the market approach.While the income approach has the advantage of utilizing more company specific information, the market approach has the advantage of capturing market based transaction pricing. Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. The goodwill for each reporting unit is tested using a two-step process. A reporting unit is an operating segment or a component of an operating segment, as defined by ASC 350-20 - Intangibles - Goodwill. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by operating segment management. The first step in the process of testing goodwill for potential impairment is to compare the carrying value of the reporting unit to its fair value. If upon completion of the analysis, the carrying value exceeds the fair value, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. During our annual goodwill impairment test performed during the fourth quarter of 2013, we noted significant changes to our assumptions and projections for the Air Operations ("AO") reporting unit. The AO reporting unit is dependent upon a single contract which is soon due for re-compete with our customer. During the fourth quarter of calendar year 2013, we received clarification from the customer regarding the upcoming re-compete of the contract, which varied significantly from the long standing previous contract and yielded a decline in the projected future operating results and cash flows. As a result of the change in the forecasted operating results and cash flows, the reporting unit failed step one of our annual goodwill impairment test. We performed a step two impairment test and determined that the implied fair value of goodwill for the reporting unit was lower than the carrying amount resulting in a non-cash impairment charge of $281.5 million recorded during the year ended December 31, 2013. Commitments and Contingencies 45-------------------------------------------------------------------------------- Table of Contents We are involved in various lawsuits and claims that arise in the normal course of business. Amounts associated with lawsuits and claims are reserved for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to such matters have been recorded in "Other accrued liabilities." When only a range of amounts is established and no amount within the range is more probable than another, the lower end of the range is recorded. Legal fees are expensed as incurred. Recent Accounting Pronouncements The information regarding recent accounting pronouncements is included in Note 1. 46-------------------------------------------------------------------------------- Table of Contents |