UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Exact name of registrant as specified in its charter) 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter).

Disclosure Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Without limiting the foregoing, the words "believes," "thinks," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:

Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statements contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

We report the results of our operations using a basis where each quarterly period ends on the last Friday of the calendar quarter, except for the fourth quarter of the fiscal year, which ends on December 31. Included in this Quarterly Report are our unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016, the related statements of deficit and cash flows for the sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 and the unaudited condensed consolidated balance sheets as of June 30,September 29, 2017 and December 31, 2016.

See notes to unaudited condensed consolidated financial statements

See notes to unaudited condensed consolidated financial statements

See notes to unaudited condensed consolidated financial statements

The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These unaudited condensed consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

In the opinion of management, normal recurring adjustments necessary to fairly present our financial position as of June 30,September 29, 2017 and December 31, 2016, the results of operations and statements of comprehensive income (loss) for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 and the statements of deficit and cash flows for the sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 have been included. The results of operations and statements of comprehensive income (loss) for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 and the statements of deficit and cash flows for the sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. Our actual results may differ from these estimates.

We classify our equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our segments and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income (loss) in Earnings from equity method investees in the consolidated statement of operations. If the Company considers our involvement less significant, the share of the joint venture’s net earnings is reported in Other (expense) income, net in the consolidated statement of operations.

The preparation of the financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the consolidated statements of operations in the period that they are determined. Changes in contract estimates related to certain types of contracts accounted for using the percentage of completion method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur over the life of a contract for a variety of reasons, including changes in scope, estimated incentive or award fees, cost estimates, level of effort and/or other assumptions impacting revenue or cost to perform a contract. The gross favorable and unfavorable adjustments below reflect these changes in contract estimates during each reporting period, excluding new or completed contracts where no comparative estimates exist between reporting periods.

The following table presents the aggregate gross favorable and unfavorable adjustments to income (loss) before income taxes resulting from changes in contract estimates, for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016.

There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2016, except as described below.

and annual goodwill impairment tests performed after January 1, 2017. The Company elected to early adopt ASU 2017-04 on a prospective basis during the first quarter of calendar year 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

As the new standard will impact our business processes, systems and controls. Accordinglycontrols, we have commenced our assessment of the standard and have developed a comprehensive project plan and are designing additional internal controls, including internal controls around the adoption of ASU 2014-09 and its related disclosures, to guide the assessment, training and implementation. Our project plan evaluates our contracts across our multiple business segments, including the development of processes and tools to dual report financial results under both current GAAP and under ASU 2014-09. We planhave periodically briefed our Audit Committee on our progress made towards adoption. Based on our evaluation to adoptdate, we anticipate being able to estimate the standard asimpacts of January 1, 2018adopting ASU 2014-09 in our upcoming Form 10-K.

We anticipate the impacts of the adoption of ASU 2014-09 will primarily relate to the units of account and methods used to measure of progress toward satisfaction of a performance obligation. Certain of our U.S. federal government contracts or contract elements were combined or segmented based on profit center and the requisite revenue was recognized by profit center using primarily the percentage-of-completion method. However, we will be precluded from combining and segmenting deliverables in accordance with the existing standard. As a result, the number of our performance obligations identified under the modified retrospective approach with the cumulative effect of adoption recorded as an adjustment to the opening balance of equity as of that date without restatement of comparative periods.new standard may differ. We are in the process of assessingperforming contract reviews on our active contracts to make this determination. We anticipate that the impact to our resultsadoption of operations across our portfolioASU 2014-09 will not change the total revenue or operating earnings recognized under these contracts, only the timing of contracts.when those amounts are recognized.

Other accounting standards updates effective after June 30,September 29, 2017 are not expected to have a material effect on our consolidated financial position or results of operations and cash flows for the period ended June 30,September 29, 2017.

The following tables present financial information of certain consolidated balance sheet captions.

We value our inventoryInventory is valued at the lower of cost or net realizable value. The reduction to Inventories, net is due to the winding down of an AELS contract with a period of performance ending in calendar year 2018.

As of June 30,September 29, 2017 and December 31, 2016, Property and equipment, net, included the accrual for property additions of $0.4$2.2 million and $0.3 million, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.0$1.3 million and $2.0$3.3 million during the three and sixnine months ended June 30,September 29, 2017, respectively. Depreciation expense, including certain depreciation amounts classified as Cost of services, was $1.2$1.0 million and $2.2$3.2 million during the three and sixnine months ended June 24,September 30, 2016, respectively.

Customer liabilities represent amounts received from customers in excess of revenue recognized or for amounts due back to a customer. The increase in accrued insurance is primarily due to the timing of payments and the closing of certain insurance policies with our carriers. Contract losses represent our best estimate of forward losses using currently available information and could change in future periods as new facts and circumstances emerge. Changes to the provision for contract losses are presented in Cost of services on our Statement of Operations. Legal matters include reserves related to various lawsuits and claims. See Note 8 for further discussion. Other is comprised primarily of accrued rent and workers' compensation related claims and other balances that are not individually material to the consolidated financial statements.

As of June 30,September 29, 2017 and December 31, 2016, Other long-term liabilities were $11.6$11.3 million and $12.5 million, respectively. Other long-term liabilities are primarily due to our long-term incentive bonus plan and nonqualified unfunded deferred compensation plan of $3.9$3.0 million and $4.3 million as of June 30,September 29, 2017 and December 31, 2016, respectively, and a long-term leasehold obligation related to our Tysons Corner facility in McLean, Virginia, of $3.1$3.0 million and $3.3 million as of June 30,September 29, 2017 and December 31, 2016, respectively. Other long-term liabilities also include an uncertain tax benefit of $3.3 million and $3.3 million as of June 30,September 29, 2017 and December 31, 2016, respectively.2016. See Note 4 for further discussion.

We assess goodwill and other intangible assets with indefinite lives for impairment annually in October or when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a goodwill impairment test is performed to identify any possible impairment in the period in which the event is identified.

In connection with our annual assessment of goodwill during the fourth quarter of each year, we update our key assumptions, including our forecasts of revenue and income for each reporting unit. The projections for these reporting units include significant estimates related to new business opportunities. If we are unsuccessful in obtaining these opportunities in 2017, a triggering event could be identified and a goodwill impairment test would be performed to identify any possible goodwill impairment in the period in which the event is identified. There can be no assurance that the estimates and assumptions regarding forecasted earnings and cash flows, the period of strength of the U.S. defense spending, and other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.

During the sixnine months ended June 30,September 29, 2017, we did not have a triggering event in any of our reporting units.

The following tables provide information about changes relating to certain intangible assets:

Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $8.0 million and $16.0$24.0 million for the three and sixnine months ended June 30,September 29, 2017, respectively. Amortization expense for customer-related intangibles, other intangibles and finite-lived tradenames was $7.9$8.1 million and $15.5$23.6 million for the three and sixnine months ended June 24,September 30, 2016, respectively.

Other intangibles are primarily representative of our capitalized software which had a net carrying value of $3.2$2.9 million and $3.7 million as of June 30,September 29, 2017 and December 31, 2016, respectively.

Estimated aggregate future amortization expense for finite lived assets subject to amortization are $13.7$5.6 million for the sixthree months ending December 31, 2017, $21.8 million in 2018, $21.6 million in 2019, $11.2 million in 2020, $0.1 million in 2021 and $0.0 million thereafter.

The domestic and foreign components of Income (loss) before income taxes are as follows:

Non-current deferred tax liabilities, net, was $15.1$14.1 million and $14.8 million as of June 30,September 29, 2017 and December 31, 2016, respectively.

Our effective tax rate ("ETR") was 47.1%41.6% and 59.2%52.8% for the three and sixnine months ended June 30,September 29, 2017, respectively. Our ETR was (37.2)%33.7% and (39.9)(19.9)% for the three and sixnine months ended June 24,September 30, 2016, respectively.

For the three and sixnine months ended June 30,September 29, 2017, the change in ETR was primarily driven by an increase in the forecasted full year income before taxes and an increase in the valuation allowance related to additional foreign tax credits carrying over to future periods. Our ETR for the three and six months ended June 24,September 30, 2016 was primarily driven by an increase to the forecasted full year loss before income taxes and for the nine months ended September 30, 2016, the ETR was primarily impacted by an increase in the valuation allowance related to a deferred tax asset which was created by cancellation of debt income resulting from the effects of the refinancing transactions we completed on June 15, 2016.

Management assesses both the available positive and negative evidence to determine whether it is more likely than not that there will be sufficient sources of future taxable income to recognize deferred tax assets. We incurred cumulative losses over the three-year period ended December 31, 2016. Cumulative losses in recent years are considered significant objective negative evidence in evaluating deferred tax assets under the more likely than not criteria for recognition of deferred tax assets. As a result of additional taxable losses and the foreign taxes for which we cannot recognize a current tax benefit, we increased our valuation allowance from $88.8 million as of December 31, 2016 to $91.1$90.3 million as of June 30,September 29, 2017.

As of both June 30,September 29, 2017, andwe had $3.3 million of total unrecognized tax benefits of which $2.8 million would impact our effective tax rate if recognized. As of December 31, 2016, we had $2.6 million of total unrecognized tax benefits of which $2.3 million would impact our effective tax rate if recognized. We do not expect the unrecognized tax benefit and any related interest or penalties to be settled within the next twelve months.

During the sixnine months ended June 30,September 29, 2017, we made no estimated federal income tax payments. All of our income taxes paid or refunds received during the sixnine months ended June 30,September 29, 2017 were related to state or foreign jurisdictions.

As described further in Note 7 and Note 10, on April 21, 2017, the Company received the Capital Contribution of $40.6 million from Holdings. Holdings received the proceeds from DefCo Holdings, Inc. (“DefCo”("DefCo"). DefCo is the parent of a consolidated group of companies and files a consolidated U.S. income tax return with the Company. DefCo received the proceeds by way of a loan from its owners, affiliates of Cerberus Capital Management, L.P. We calculate the provision for income taxes by using a “separate return”"separate return" method consistent with ASC 740. DefCo will treat the transaction as a loan on the consolidated tax return and the Company has treated the transaction as a capital contribution. 

Accounts receivable, net consisted of the following:

As of June 30,September 29, 2017 and December 31, 2016, we had two and three contract claims outstanding totaling $2.7 million and $2.4 million, net of reserves, respectively. The balance of unbilled receivables consists of costs and fees that are: (i) billable immediately; (ii) billable on contract completion; or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment or formal claim. We expect substantially all unbilled receivables to be billed and collected within one year, except items that may result in or that are currently involved in a request for equitable adjustment or formal claim.

We do not believe we have significant exposure to credit risk as our receivables are primarily with the U.S. government. Our allowance for doubtful accounts was $16.1$10.4 million as of June 30,September 29, 2017 compared to $17.2 million as of December 31, 2016, and is primarily due to outstanding receivables of approximately $26.0 million, net of reserves, for which we have yet to be paid where we operated under a subcontract for a prime contractor on a U.S. government program that ended December 31, 2014. We are currently seeking payment through legal action to resolveDuring the matter.quarter ended September 29, 2017, we adjusted our allowance for doubtful accounts based on subsequent collections in October 2017 against a portion of these outstanding amounts. See Note 8 for further discussion.

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and borrowings. Because of the short-term nature of cash and cash equivalents, accounts receivable, and accounts payable, the fair value of these instruments approximates the carrying value.

Our estimate of the fair value of our Senior Unsecured Notes, 11.875% senior secured second lien notes (the "New Notes"), and New Senior Credit Facility (as defined in Note 7) is based on Level 1 and Level 2 inputs, as defined above. Our estimate of the fair value of our Cerberus 3L Notes (as defined in Note 7) is based on Level 3 inputs, as defined above. We used the following techniques in determining the fair value disclosed for the Cerberus 3L Notes classified as Level 3. The fair value as of June 30,September 29, 2017 has been calculated by discounting the expected cash flows using a discount rate of 10.4%. This discount rate is determined using the Moody's credit rating for the New Notes and reducing the rating one level lower for the Cerberus 3L Notes as they are subordinated to the New Notes.

Debt consisted of the following:

The original issue discount on the Term Loan facility (the "Term Loan") and deferred financing costs are amortized through interest expense. Amortization related to the original issue discount was $0.9 million and $1.8$2.7 million during the three and sixnine months ended June 30,September 29, 2017, respectively, and was $0.1$1.0 million and $1.1 million during the three and sixnine months ended June 24,September 30, 2016. Amortization related to deferred financing costs was $0.5 million and $0.9$1.4 million during the three and sixnine months ended June 30,September 29, 2017, respectively, and was $1.5$0.5 million and $3.0$3.5 million during the three and sixnine months ended June 24,September 30, 2016, respectively.

Deferred financing costs for the three and sixnine months ended June 30,September 29, 2017 were reduced by an immaterial amount related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $25.1 million Excess Cash Flow principal payment made on the Term Loan under the New Senior Credit Facility on April 4, 2017. Deferred financing costs for the three and sixnine months ended June 24,September 30, 2016 were reduced $0.3 million related to the pro rata write-off of deferred financing costs to loss on early extinguishment of debt as a result of the $4.6 million in principal prepayment made on the term loan facility under the Senior Credit Facility.

New Senior Credit Facility

On July 7, 2010, we entered into a senior secured credit facility (the "Senior Credit Facility"), with a banking syndicate and Bank of America, N.A. as Administrative Agent (the "Agent"). On April 30, 2016, we entered into Amendment No. 5 ("Amendment No. 5") to the Senior Credit Facility which provided for a new senior secured credit facility (the "New Senior Credit Facility") upon the satisfaction of certain conditions. On June 15, 2016, we satisfied the conditions set forth in Amendment No. 5 and the New Senior Credit Facility became effective. The New Senior Credit Facility is secured by substantially all of our assets and guaranteed by substantially all of our subsidiaries.

As of June 30,September 29, 2017, the New Senior Credit Facility provided for the following:

As of June 30,September 29, 2017 and December 31, 2016, the available borrowing capacity under the New Senior Credit Facility was approximately $48.9$49.4 million and $48.0 million, respectively, and included $36.9$36.5 million and $37.8 million, respectively, in issued letters of credit. Amounts borrowed under the Revolver are used to fund operations. As of June 30,September 29, 2017 and December 31, 2016 there were no amounts borrowed under the Revolver. The Revolver and the Term Loan mature on July 7, 2019 and July 7, 2020, respectively.

Interest Rates on Term Loan & Revolver

The interest rate per annum applicable to the Term Loan is, at our option, equal to either the Base Rate or the Eurocurrency Rate, in each case, plus (i) 5.00% in the case of Base Rate loans and (ii) 6.00% in the case of Eurocurrency Rate loans. The interest rate per annum applicable to the Revolver is, at our option, equal to either a Base Rate or a Eurocurrency Rate plus (i) a range of 4.50% to 5.00% based on the First Lien Secured Leverage Ratio in the case of Base Rate loans and (ii) a range of 5.50% to 6.00% based on the First Lien Secured Leverage Ratio in the case of Eurocurrency Rate loans. The First Lien Secured Leverage Ratio is the ratio of total first lien secured consolidated debt (net of up to $75 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the New Senior Credit Facility. The variable Base Rate has a floor of 2.75% and the variable Eurocurrency Rate has a floor of 1.75%. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period, but not less than quarterly.

As of June 30,September 29, 2017 and December 31, 2016, the applicable interest rate on the Term Loan was 7.75%.

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

All of our letters of credit under the New Senior Credit Facility are subject to a 0.25% fronting fee. The letter of credit subfacility bears interest at an applicable rate that ranges from 5.5%5.50% to 6.0%6.00% with respect to the Revolver commitments. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% on the undrawn amount of the facility depending on the First Lien Secured Leverage Ratio. Interest payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. We will also pay customary letter of credit and agency fees.

The applicable interest rate for our letter of credit subfacility was 5.50% and 5.75% as of June 30,September 29, 2017 and December 31, 2016.2016, respectively. The applicable interest rate for our unused commitment fees was 0.50% as of June 30,September 29, 2017 and December 31, 2016.

The credit agreement governing the New Senior Credit Facility contains an annual requirement to submit a portion of our Excess Cash Flow, as defined in the credit agreement, as additional principal payments. Based on our annual financial results for the years ended December 31, 2016 and 2015, we made additional principal payments as required under the Excess Cash Flow provisions of the New Senior Credit Facility and the Senior Credit Facility of $25.1 million on April 4, 2017 and $4.6 million on April 6, 2016. Certain other transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of our business or a significant asset sale. We had no such transactions during the sixnine months ended June 30,September 29, 2017 or June 24,September 30, 2016.

The New Senior Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with:

We are permitted to voluntarily repay outstanding loans under the New Senior Credit Facility at any time without premium or penalty, other than customary “breakage”"breakage" costs with respect to Eurocurrency Rate Loans.

We arewere required to make a principal amortization paymentspayment with respect to the Term Loan of $22.5 million on or prior to June 15, 2017, and $22.5 million on or prior to June 15, 2018, which amountsamount may be reduced as a result of the application of certain prepayments, including our Excess Cash Flow payment. The June 15, 2017 principal amortization payment was fully satisfied as a result of the additional principal payment

of $25.1 million made under the Excess Cash Flow requirement discussed above. We are required to make a principal amortization payment with respect to the Term Loan of $22.5 million on or prior to June 15, 2018, which amount may be reduced as a result of the application of certain prepayments, including our Excess Cash Flow payment. The principal amount of the Term Loan may be reduced as a result of prepayments, with the remaining amount payable on July 7, 2020.

The credit agreement governing the New Senior Credit Facility contains a provision that would have resulted in all outstanding principal under the Term Loan and the Revolver maturing on May 8, 2017 if by May 8, 2017, all of the outstanding principal of the 10.375% Senior Notes due 2017 (the "Senior Unsecured Notes") had not been extended to a date that is on or after October 6, 2020, or all of the outstanding principal and accrued and unpaid interest of the Senior Unsecured Notes had not been paid in full with proceeds of new equity, capital contributions or new unsecured debt that is expressly subordinated to the New Senior Credit Facility.

On March 24, 2017, the Company received a support letter from Cerberus (the “Support Letter”"Support Letter") committing to fund the redemption of all then-outstanding Senior Unsecured Notes on or before May 5, 2017 with the proceeds of new equity or capital contributions. On April 21, 2017, the Company received the proceeds of a $40.6 million capital contribution (the “Capital Contribution”) from Holdings’ direct parent company, DefCo Holdings, Inc. On April 24, 2017, DynCorp International completed the redemption of all of the Senior Unsecured Notes using the proceeds of the Capital Contribution, and therefore, the maturity dates of the Term Loan and the Revolver remain at July 7, 2020 and July 7, 2019, respectively.

Guarantee and Security

The guarantors of the obligations under the New Senior Credit Facility are identical to those under the New Notes and the Cerberus 3L Notes. See Note 11. The New Senior Credit Facility is secured on a first lien basis by the same collateral that secures the New Notes on a second lien basis and the Cerberus 3L Notes on a third lien basis.

The New Senior Credit Facility contains a number of financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. Among other things, the New Senior Credit Facility requires us to maintain a maximum total leverage ratio and a minimum interest coverage ratio. The total leverage ratio is the ratio of Consolidated Total Debt, as defined in Amendment No. 5 (which definition excludes debt under the Cerberus 3L Notes), less unrestricted cash and cash equivalents (up to $75.0 million) to Consolidated EBITDA, as defined in Amendment No. 5, for the applicable period. The maximum total leverage ratio was 6.756.50 to 1.0 for the period ended June 30,September 29, 2017. The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in Amendment No. 5 (which provides that interest expense with respect to the Cerberus 3L Notes is excluded). The minimum interest coverage ratio was 1.201.30 to 1.0 for the period ended June 30,September 29, 2017.

The New Senior Credit Facility requires, solely for the benefit of the lenders under the Revolver, for us to maintain minimum liquidity (based on availability of revolving credit commitments plus unrestricted cash and cash equivalents) as of the end of each fiscal quarter of not less than $60 million through the fiscal quarter ending December 31, 2017, and of not less than $50 million thereafter. The credit agreement governing the New Senior Credit Facility also contains customary representations and warranties and events of default.

As of June 30,September 29, 2017 and December 31, 2016, we were in compliance with our financial maintenance covenants under the New Senior Credit Facility. We expect, based on current projections and estimates, to be in compliance with our covenants in the New Senior Credit Facility (including our financial maintenance covenants), and the covenants in the New Notes and the Cerberus 3L notes, further discussed below, for the next twelve months.

On June 15, 2016, $415.7 million principal amount of the Senior Unsecured Notes were exchanged for $45.0 million cash and $370.6 million aggregate principal amount of newly issued New Notes due November 30, 2020, which are governed by the terms of the indenture (the “Indenture”"Indenture"), among DynCorp International, Holdings, as parent guarantor, DynCorp International’s subsidiaries that currently guarantee the New Senior Credit Facility, as subsidiary guarantors (the “Subsidiary"Subsidiary Guarantors"), and Wilmington Trust, National Association, as trustee and collateral agent.

Interest on the New Notes accrues at the rate of 11.875% per annum, comprised of 10.375% per annum in cash and 1.500% per annum payable in kind (“("PIK,”" and such interest “PIK Interest”"PIK Interest"). The cash portion of the interest on the New Notes is payable in cash and the PIK Interest on the New Notes is payable in kind, each semi-annually in arrears on January 1 and July 1, commencing on July 1, 2016. PIK interest converted into the carrying amount of the New Notes during the three and nine months ended September 29, 2017 was $2.8 million and $5.6 million, respectively, and was $2.8 million for the three and nine months ended September 30, 2016. PIK interest accrued on the New Notes was $1.4 million and $2.8 million as of September 29, 2017 and December 31, 2016, respectively.

Covenants and Events of Default

The Indenture contains a number of non-financial affirmative and negative covenants we believe are usual and customary. These covenants are subject to a number of important exceptions and qualifications as set forth in the Indenture.

In addition, the Indenture requiresrequired DynCorp International to make amortization payments of (x) $22.5 million principal amount of the Term Loan under the New Senior Credit Facility no later than June 15, 2017, and (y)which amount was fully satisfied as a result of the Company’s $25.1 million excess cash flow payment discussed above. The Indenture requires an additional $22.5 million principal amount of the Term Loan no later than June 15, 2018, which amountsamount may be reduced as a result of the application of certain prepayments, including excess cash flow payments.

The Indenture contains customary events of default, including for failure to pay other indebtedness in a total amount exceeding $10.0 million after final maturity of such indebtedness.

Optional Redemption

On and after July 1, 2017, the New Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, upon not less than 30 nor more than 60 days’ prior notice, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid cash interest, if any, together with an amount of cash equal to all accrued and unpaid PIK Interest to but excluding the redemption date:

On July 7, 2010, DynCorp International completed an offering of $455.0 million in aggregate principal of the Senior Unsecured Notes. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010, by and among us, the guarantors party thereto, including DynCorp International and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB) as Trustee.

On June 15, 2016, $415.7 million principal amount of the Senior Unsecured Notes were exchanged for $45.0 million cash and $370.6 million principal amount of newly issued New Notes. The remaining $39.3 million principal amount of 10.375% Senior Unsecured Notes were redeemed on April 24, 2017 using the proceeds received from the Capital Contribution on April 21, 2017.

On June 15, 2016, DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P. ("Cerberus"), entered into a Third Lien Credit Agreement (the “Third"Third Lien Credit Agreement”Agreement") with us. Under the Third Lien Credit Agreement, DynCorp Funding LLC has made a $30 million term loan to us (the "Cerberus 3L Notes"). The proceeds of the Cerberus 3L Notes are restricted to pay fees and expenses (including reimbursement of out-of-pocket expenses) in support of or related to the Company’s Global Advisory Group until June 15, 2018 and, thereafter, for working capital and general corporate purposes. As of June 30,the second quarter of calendar year 2017, we have fully utilized these funds for fees and expenses related to the Company's Global Advisory Group.

The interest rate per annum applicable to the Cerberus 3L Notes is 5.00%, payable in kind on a quarterly basis. PIK interest converted into the carrying amount of the Cerberus 3L Notes during the three and nine months ended September 29, 2017 was $0.4 million and $1.2 million, respectively, and was $0.4 million for the three and nine months ended September 30, 2016.

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

The Cerberus 3L Notes do not require any mandatory amortization payments prior to maturity and the outstanding principal amounts shall be payable on June 15, 2026.

The Cerberus 3L Notes include non-financial affirmative and negative covenants consistent with the covenants set forth in the New Notes; provided that each “basket”"basket" or “cushion”"cushion" set forth in the covenants is at least 25% less restrictive than the corresponding provision set forth in the New Notes. The Third Lien Credit Agreement contains customary events of default, including for failure to pay other debt in a total amount exceeding $12.5 million after final maturity or acceleration of such indebtedness.

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

We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable, cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain real estate leases are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $11.4$10.5 million and $21.2$31.7 million for the three and sixnine months ended June 30,September 29, 2017, respectively. Lease rental expense was $10.4$10.8 million and $18.6$29.4 million for the three and sixnine months ended June 24,September 30, 2016, respectively. We have no significant long-term purchase agreements with service providers.

We are involved in various lawsuits and claims that arise in the normal course of business. We have established reserves for matters in which it is believed that losses are probable and can be reasonably estimated. Reserves related to these matters have been recorded in Other accrued liabilities totaling approximately $4.3$8.5 million and $4.6 million as of June 30,September 29, 2017 and December 31, 2016, respectively. We believe that appropriate accruals have been established for such matters based on information currently available; however, some of the matters may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at June 30,September 29, 2017. These accrued reserves represent the best estimate of amounts believed to be our liability in a range of expected losses. In addition to matters that are considered probable and that can be reasonably estimated, we also have certain matters considered reasonably possible. Other than matters disclosed below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of June 30,September 29, 2017. Litigation is inherently unpredictable and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could (i) exceed the amounts accrued for probable matters; or (ii) require a reserve for a matter we did not originally believe to be probable or could be reasonably estimated. Such changes could be material to our financial condition, results of operations and cash flows in any particular reporting period. Our view of the matters not specifically disclosed could possibly change in future periods as events thereto unfold.

On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of

negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of international law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated

A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of 26 residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. As of January 12, 2010, 15 of the plaintiffs have been dismissed by court order. We filed multiple motions for summary judgment and, on February 15, 2013, the court granted summary judgment and dismissed all claims. On March 18, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia. On May 30, 2014, the U.S. Court of Appeals for the District of Columbia affirmed the dismissal of the majority of the case, but remanded the case to the trial court concerning a few remaining tort claims. On September 23, 2016, the District Court granted in part renewed motions for summary judgment. On April 3, 2017, the claims for six plaintiffs proceeded to trial. On April 20, 2017, the jury found in our favor on all claims brought by all six plaintiffs involved in that trial. Further proceedings involving other plaintiffs may take place. At this time, we believe the likelihood of an unfavorable outcome in this case is remote.

The above cases now are fully defended and indemnified by the Company’s previous owner, Computer Sciences Corporation and also by its spin-off company, CSRA Inc. The insurance litigation arising out of the above cases that was described in prior filings has now been fully resolved and settled.

In October 2007, we entered into a subcontract with Northrop Grumman Technical Services, Inc. (“Northrop”) to support Northrop’s prime contract with the DoD Counter Narcotics Terrorism Program Office ("CNTPO"). We performed the services requested by Northrop, the government determined that it received “intended quality and skills of personnel,” and Northrop paid our invoices until July 2014. Subsequent to July 2014, Northrop stopped paying our periodic invoices. The contract operations ended on December 31, 2014. In March 2015, Northrop filed a civil action against us to obtain documents regarding our invoices and now asserts approximately $5.0 million in damages. We believe the damages asserted by Northrop represent a loss contingency that is remote. In September 2015, we filed an Answer and Counterclaim seeking approximately $41.0 million for unpaid invoices. Subsequent to September 29, 2017, we collected a portion of these funds and we continue to seek payment on the remaining balance. An unfavorable judgment which denies us a substantial amount of the full amount owed to us could have a material effect on our performance.results of operations.

On February 24, 2012, we were advised by the Department of Justice Civil Litigation Division (“the Civil Division”) that they are conducting an investigation regarding the CivPol and Department of State Advisor Support Mission ("DASM") contracts in Iraq and Corporate Bank, a former subcontractor. The issues include allowable hours worked under a specific task order and invoices to the Department of State for certain hotel leasing, labor rates and overhead within the 2003 to 2008 timeframe. Since 2012, the Company has been in discussions with the Civil Division, and has been cooperating with the Civil Division’s requests for information. On July 19, 2016, the Civil Division filed a civil lawsuit asserting violations of underlying contract terms and also the False Claims Act. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results; however, the complaint does not include any specific monetary demand and as such we are unable to estimate a range of loss at this time. We are continuing to evaluate this lawsuit and at this time believe the potential for penalties, damages or fines resulting from this matter do not represent a probable loss contingency.

U.S. Government Investigations

We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements. Such investigations could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and may

result in adverse action against us. We believe that any adverse actions arising from such matters could have a material effect on our ability to invoice and receive timely payment on our contracts, perform contracts or compete for contracts with the U.S. government and could have a material effect on our operating performance.

Our contracts are regularly audited by the Defense Contract Audit Agency ("DCAA") and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, accounting and material management business systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If we are unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.

We have received a series of audit reports from the DCAA related to their examination of certain incurred, invoiced and reimbursed costs on the Logistics Civil Augmentation Program IV ("LOGCAP IV") for contract years 2009 to 2012. Through our negotiation efforts with the Contracting Officer the issues have been resolved, resulting in final settlements of all audited costs of approximately $0.8 million of questioned costs. The DCAA is currently auditing fiscal years 2013 to 2016 and we believe the risk of loss for those years is remote and eventual settlement amounts should be comparable to the previous outcome for fiscal years 2009 to 2012.

We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, the significance of any one contract can change as our business expands or contracts. Additionally, as contract modifications, contract extensions or other contract actions occur, the profitability of any one contract can become more or less significant to the Company. As contracts are recompeted, there is the potential for the size, contract type, contract structure or other contract elements to materially change from the original contract resulting in significant changes to the scope, scale, profitability or magnitude of accounts receivable of the new recompeted contract as compared to the original contract. We continuously review all accounts receivable and record provisions for doubtful accounts when necessary.

We have three operating and reporting segments: AELS, AOLC and DynLogistics. The AELS, AOLC and DynLogistics segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies.

The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:

The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:

DynCorp Funding LLC, a limited liability company managed by Cerberus Capital Management, L.P., entered into a Third Lien Credit Agreement, dated as of June 15, 2016 to fund the Cerberus 3L Notes, a $30 million term loan to us. The interest rate per annum applicable to the Cerberus 3L Notes is 5.00%, payable in kind on a quarterly basis. The Cerberus 3L Notes do not require any mandatory amortization payments prior to maturity and the outstanding principal amounts shall be payable on June 15, 2026. See Note 7 for further discussion.

As described further in Note 7, on March 24, 2017, the Company received the Support Letter from Cerberus committing to fund the redemption of all outstanding Senior Unsecured Notes on or before May 5, 2017 with the proceeds of new equity or capital contributions. The Company received the $40.6 million Capital Contribution on April 21, 2017, and completed the redemption of all of the remaining Senior Unsecured Notes using the proceeds of the Capital Contribution on April 24, 2017.

We have a Master Consulting and Advisory Services agreement ("COAC Agreement") with Cerberus Operations and Advisory Company, LLC ("COAC") where, pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $1.2$1.1 million and $2.5$3.6 million of consulting fees on a gross basis before considering the effect of our contract mix which provides for partial recovery in conjunction with the COAC Agreement, during the three and sixnine months ended June 30,September 29, 2017, respectively, and $1.4$1.3 million and $3.2$4.5 million during the three and sixnine months ended June 24,September 30, 2016, respectively.

We havehad two executives who arewere COAC employees who areand were seconded to us:us as of September 29, 2017: (i) our current Chief Executive Officer and member of the Company's board of directors (who during the period covered by this reportuntil July 14, 2017 served as our Senior Vice President and Chief Operating Officer); and (ii) our Senior Vice President, Chief Administrative Officer, Chief Legal Officer and Corporate Secretary. Included in the $1.2$1.1 million and $2.5$3.6 million recognized during the three and sixnine months ended June 30,September 29, 2017 in COAC consulting fees was $0.7$0.8 million and $1.5$2.3 million of administrative expense related to these two COAC individuals for the three months and sixnine months ended June 30,September 29, 2017, respectively. Included in the $1.4$1.3 million and $3.2$4.5 million recognized during the three and sixnine months ended June 24,September 30, 2016 in COAC consulting fees was $0.7$0.6 million and $1.3$1.9 million of administrative expense related to seconded COAC employees for the three and sixnine months ended June 24,September 30, 2016, respectively. Effective November 1, 2017, our two previously seconded executives became full-time employees of the Company.

The New Senior Credit Facility permits payments under the COAC Agreement or any transaction contemplated thereby not to exceed $6.0 million per fiscal year with respect to executives seconded from COAC and personnel of COAC that provide services to us at cost on a weekly, monthly or pro-rated basis.

Certain members of executive management and board members of the Company and seconded COAC individuals may have agreements and conduct business with Cerberus and its affiliates for which they receive compensation. We recognize such compensation as an administrative expense in the consolidated financial statements.

Receivables due from our unconsolidated joint ventures totaled $0.1 million and $0.1 million as of June 30,both September 29, 2017 and December 31, 2016, respectively.2016. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest.

We did not earn revenue from services provided to our unconsolidated joint ventures during the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016, respectively. The related cost of services was $0.2 million and $0.6 million during the three and nine months ended September 29, 2017 and $0.1 million and $0.4 million during the three and sixnine months ended JuneSeptember 30, 2017 and $0.1 million and $0.3 million during the three and six months ended June 24, 2016, respectively. Additionally, we earned $0.0$0.1 million and $0.1 million in equity method income (includes operationally integral and non-integral income) during the three and sixnine months ended June 30,September 29, 2017 and $0.3$0.1 million and $0.7$0.8 million in equity method income during the three and sixnine months ended June 24,September 30, 2016, respectively.

GLS’ revenue was $8.0$10.4 million and $15.9$26.3 million during the three and sixnine months ended June 30,September 29, 2017, respectively, and $11.2$10.2 million and $21.1$31.3 million during the three and sixnine months ended June 24,September 30, 2016. GLS’ operating and net income was $0.3 million and operating loss was $1.4 million and $2.5$2.1 million during the three and sixnine months ended June 30,September 29, 2017, and $0.7GLS' operating and net loss was $0.4 million and $1.5$1.9 million during the three and sixnine months ended June 24,September 30, 2016, respectively.

We currently hold one promissory note included in Other assets on our consolidated balance sheet from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The loan balance outstanding was $2.1 million and $2.2 million as of June 30,September 29, 2017 and December 31, 2016, respectively, reflecting the initial value plus accrued interest, less non-cash dividend payments against the promissory note. The fair value of the note receivable is not materially different from its carrying value.

The following tables present selected financial information for our equity method investees as of June 30,September 29, 2017 and December 31, 2016 and for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016:

The New Notes issued by DynCorp International Inc. ("Subsidiary Issuer"), the New Senior Credit Facility and the term loan under the Third Lien Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by the Company ("Parent") and the following domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, DIV Capital Corporation, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Management and Consulting Services LLC, Worldwide Recruiting and Staffing Services LLC, Heliworks LLC, Phoenix Consulting Group, LLC, Casals & Associates, Inc., Culpeper National Security Solutions LLC, and Highground Global, Inc. ("Subsidiary Guarantors"). Each of the Subsidiary Issuer and the Subsidiary Guarantors is 100% owned by the Company. Under the Indenture governing the New Notes, a guarantee of a Subsidiary Guarantor would terminate upon the following customary circumstances: (i) the sale of the capital stock of such Subsidiary Guarantor if such sale complies with the indenture; (ii) the designation of such Subsidiary Guarantor as an unrestricted subsidiary; (iii) if such Subsidiary Guarantor no longer guarantees certain other indebtedness of the Subsidiary Issuer or (iv) the defeasance or discharge of the indenture.

The following condensed consolidating financial statements present (i) unaudited condensed consolidating balance sheets as of June 30,September 29, 2017 and December 31, 2016, (ii) unaudited condensed consolidating statements of operations and comprehensive income (loss) for the three and sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016, (iii) unaudited condensed consolidating statements of cash flows for the sixnine months ended June 30,September 29, 2017 and June 24,September 30, 2016 and (iii) elimination entries necessary to consolidate Parent and its subsidiaries.

The Parent company, the Subsidiary Issuer, the combined Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of the subsidiary and its subsidiary guarantors, and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors’ column reflects the equity income of its subsidiary non-guarantors.

DynCorp International Inc. is considered the Subsidiary Issuer as it issued the New Notes.