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Edited Transcript of Dyncorp International Inc earnings conference call or presentation 29-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Dyncorp International Inc Earnings Call

FALLS CHURCH Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Dyncorp International Inc earnings conference call or presentation Wednesday, March 29, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Burke

* George C. Krivo

Delta Tucker Holdings, Inc. - COO and COO of Dyncorp International, Inc.

* Lewis F. Von Thaer

Delta Tucker Holdings, Inc. - CEO

* William T. Kansky

Delta Tucker Holdings, Inc. - CFO and SVP

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Conference Call Participants

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* Alex Zuckerman

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Presentation

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Operator [1]

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Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Delta Tucker Holdings, Inc., parent of DynCorp International Inc., Fourth Quarter and Year-End 2016 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Brendan Burke, Vice President and Treasurer. Please go ahead, Mr. Burke.

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Brendan Burke, [2]

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Thank you, Stephanie, and good morning, everyone. Today, we're reporting earnings for the fourth quarter and year-end of 2016 on behalf of DynCorp International's parent, Delta Tucker Holdings, Inc. With me today are the company's Chief Executive Officer, Lou Von Thaer; Chief Financial Officer, Bill Kansky; and Chief Operating Officer, George Krivo. After we've made our formal remarks, we'll open the phone lines for any questions. A slide presentation for today's call is posted on our website under the Investor Relations section.

Before turning the call over to Lou, I'd like to remind our audience that today's call will include forward-looking statements reflecting the company's views about future events and the potential impact on performance. The forward-looking statements are based on management's current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties related to the forward-looking statements in this presentation include those described under the caption Risk Factors and Forward-looking Statements in the earnings release, which was posted to our website this morning and at Delta Tucker Holdings, Inc.'s Form 10-K, which will be filed later today. The company undertakes no obligation to update any forward-looking statement.

Also, this call will include statements regarding certain financial measures that have not been calculated in accordance with accounting principles generally accepted in the United States. Such non-GAAP financial measures include, but are not limited to, EBITDA and adjusted EBITDA. We will provide additional information regarding such non-GAAP financial measures at the end of the presentation.

So with that, I'll turn the call over to Lou. Lou?

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Lewis F. Von Thaer, Delta Tucker Holdings, Inc. - CEO [3]

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Thank you, Brendan, and thanks, everyone, for joining us today. I'd like to begin today's call by congratulating the entire DynCorp International team. When I started working with this management team, and updating all of you, 2 years ago come this July, we had decided to focus on 3 primary areas to drive the business. First, fix our loss programs. Our chairman of the board and my predecessor in this role, Jim Geisler, and the team were already well down the road reforming those contracts when I started. Today, I'm very happy to report that our final significant loss program, T-6 COMBS ends next month. The other loss contracts have been reformed or ended and operate today at breakeven or better.

The second focus area was to delight our customers through stellar program performance. We've deployed lean Six Sigma teams, developed and begun to bring our program manager community together and reaffirmed our long-standing company ethics and values program. As I discussed in the last call, George Krivo, our COO, led us through our fourth quarter restructuring, geared to delayer the organization, speed decision making and reduce overhead and SG&A costs. We removed approximately $20 million of costs, and the team continues to find more efficiencies. We continue to see improved execution across the business as measured by our customer CPAR scores, including several perfect scores, which is an exceptional rating in each category, and a near-perfect CPAR, most recently on LOGCAP.

And our third area was our focus on business development. The business development focus that I've discussed with some emphasis on each of these calls has been a priority for us. Joe Ford took over the lead position in late 2015. Joe and his team have been focused on improving our capability and execution for program capture. We've added talent and updated our processes and training. We have started captures earlier and adding focus on customer intimacy to ensure we are developing the best solution for each opportunity. We also had the full engagement of the entire DI leadership team to support these activities. It's the lifeblood of the company.

As we know, defense is a long-cycle business, typically involved in a couple of years from the development of the customer requirement through post award protest and finally, program start. I believe we are starting to see the early signs of success from our hard work.

In the quarter, we booked $1.5 billion in new orders, including the INSCOM G5 -- or GIS win, finally getting through the protest process. That program began transition in the fourth quarter and is now fully operational. We also won the recompete of our incumbent position at the Naval test ring at Patuxent River Naval Air Station and are very humbled to continue to serve the Navy in that role for the next 5 years. Our orders were larger than sales, i.e. a book to build greater than 1, for the first time in my tenure in the third quarter of 2016. We did it again in fourth quarter, and I expect that trend to hold for the first quarter of this year. I'll be watching 2017 very carefully. We presently have more than $10 billion in bids out for customer evaluation. If successful, we have the opportunity to gain significant market share. Our focus remains to return the company to a consistent grower, and I believe we are making significant progress toward that goal.

Now a quick look at the numbers. DynCorp International delivered $462 million in sales in the fourth quarter, capping a good 2016. For the year, revenue was $1.8 billion. The adjusted EBITDA was $101 million, and we had margins of 5.5%. I mentioned the strong orders quarter of $1.5 million which drove our backlog up $1 billion for the quarter and $700 million for the year to $3.7 billion, a 3-year high. As we discussed in the past call, Bill Kansky led our refinancing activities that completed on June 15, moving the maturity of most of our debt out to 2020. On March 24, we launched redemption activities related to the remaining piece of the debt that is due this year.

Now let's move to the next slide and talk about budgets. Congress is working through a complicated funding process, but on the defense front, the budgets look favorable. After a series of compelling congressional hearings, where our defense leaders describe the significant readiness challenges facing our military, the Department of Defense submitted a budget to begin addressing those shortfalls. The House of Representatives passed an FY '17 defense appropriations bill on March 8. We hope the Senate will pass a bill soon. The bill that passed in the house has a top line of $578 billion. If passed in the Senate and signed into law, this would be a $5 billion increase to the top line compared to FY '16. In addition to the pending FY '17 defense spending bill, President Trump submitted a $30 billion defense budget amendment. On the chart, that's the green bar. The additional request is, again, focused on operations and buying back readiness shortfalls. The request adds $7 billion to the O&M base accounts to accelerate force readiness and another $5 billion to the overseas contingency account, including $1 billion to sustain a larger and sustaining presence in Afghanistan.

Moving to FY '18. On March 16, the administration submitted a skinny budget request, meaning they've reviewed just the top lines. The full budget will be released in May, but we now have a framework for the administration's overarching goals and policy priorities. The FY '18 defense budget will request the top line of $688 billion, which is $54 billion or almost 10% increase over FY '16. To offset the defense increase, other agencies were cut to include the State Department, which was reduced by 28%. The FY '18 State Department budget requests is for $37 billion. According to the documents, the DoS budget will still provide funds for robust core diplomatic activities, such as operations, maintenance, logistics, security, transportation and IT support. Therefore, we don't see our role to State Department being significantly impacted by the proposed budget.

We'll all have to stay tuned to see what comes out of Congress, but we welcome this focus of increasing defense readiness by the administration. That's much of what we do at DI.

So with that, let me turn it over to our COO for some operational highlights. George?

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George C. Krivo, Delta Tucker Holdings, Inc. - COO and COO of Dyncorp International, Inc. [4]

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Thanks, Lou. We kicked off the quarter with a $29 million extension of our Naval Test Wing Atlantic program at Pax River Naval Air Station, and then closed the quarter and the year, as Lou mentioned, with a great win, a 5-year, $546 million contract at Pax River. The contract provides organizational level maintenance and logistics support to all aircraft and support equipment for which the Naval Test Wing Atlantic has maintenance responsibility. That includes all rotary, fixed wing, lighter than air and unmanned aircraft assigned to the Naval Air Warfare Center in Pax River, Maryland. It's a franchised contract and a remarkable operation, so maintaining this more than 40-year incumbency is especially meaningful to the company. And we are honored to continue providing our Navy customer with uncompromised support on this critical mission.

Speaking of legacies, in December, we were awarded the Contract Field Teams multiple award contract by the U.S. Air Force. CFT, as it is known, is our oldest, continuously held contract since 1951. Clearly a franchise position, this indefinite delivery, indefinite quantity contract, or IDIQ, has a total contract value of $11.4 billion. Under CFT, we do modification, maintenance, inspection and repair of aircraft, vehicles, missile systems, engines, communications and cryptologic equipment as well as ground support equipment. And in the quarter, we have already started winning task orders on this IDIQ. We won the Davis-Monthan CFT task order with a contract value of $23 million. At Davis-Monthan, we maintained the Air Force's A-10 fighters, so that the active duty maintainers can transition to the F-35. Along the same lines, we won the Little Rock task order worth $11.2 million. At Little Rock, we maintain the Air Force's C-130Js, while maintenance crews, again, transition to the F-35.

Next, in December, we were awarded the Navy Expeditionary Force regional contract Pacific, a contract we have maintained for more than 10 years. This 8-year contract has a total value of 98 -- or $93.8 million, and it provides all manner of support services to the United States Navy Seabees, including humanitarian assistance, civil assistance, minor military construction projects, contingency efforts and supporting various exercises and other projects located in remote areas in the Philippines and other countries in South Asia, Southeast Asia and Oceania. There is huge potential for growth on this contract and throughout this region.

We were also awarded a $125.5 million option year in support of the Army Aviation and Missile Command's aviation field maintenance division. The theater aviation mission support contract, or TASM, provides aviation maintenance support in Afghanistan, Iraq, Kuwait, Germany and Tunisia.

Lou talked about Q1 momentum, so I'd like to spend some time on a couple of programs that are especially noteworthy. On our last call, I mentioned that our LOGCAP IV task order in Southern Afghanistan was realizing substantial scope growth from hundreds of services being transferred from other contracts. That trend continued throughout the fourth quarter and now into the first quarter. Additionally, while also a first quarter activity under LOGCAP IV, a NORTHCOM task order, where we have been asked to provide a full suite of maintenance, warehousing and management services in support of the U.S. Army's national training center at Fort Irwin was received. Fort Irwin is located in the Mojave Desert, halfway between Las Vegas and Los Angeles, and is home to approximately 14,000 soldiers, family members, contractors and civilians. Brigade-sized combat teams from across the globe, ranging from 4,000 to 8,000 soldiers, rotate into the replicated theater of operations at the NTC to take part in tough, realistic and challenging full-spectrum operations and live fire training. As you can imagine, this is an extremely high-profile and prestigious program, and we are honored to have the opportunity to execute the mission. The transition begins next week and is valued at $28 million. I look forward to announcing the total task order value on our next call.

Lastly, we were exceptionally pleased to learn that we won the War Reserve Materiel III recompete to kick off the new year. This 7-year, $412 million award provides storage, maintenance, out load, exercise and contingency logistics support to U.S. forces throughout the Middle East. This is another franchise position that we have held since the year 2000.

Let's move to the next slide. We have over 100 programs, and as Lou noted, those supporting the United States government all received grades, called contractor performance assessment rating, or CPARs. As part of our productivity improvement actions, we have made getting good grades a top priority. Lean program tools, Six Sigma, quality experts, program management training and weekly productivity-focused meetings with the business unit leads and me are just some of the tools we are constantly utilizing to improve our performance. This all means we get better grades from our customers, and the proof is everywhere. In fact, as Lou noted on one of our most complex programs, LOGCAP IV in Southern Afghanistan, where we provide literally hundreds of diverse services, we were recently awarded a near-perfect score. On the Kuwait AH-64D maintenance augmentation team, where we performed organizational intermediate and limited depot repairs as well as on-the-job training in support of the Kuwait Air Force, Apache helicopter fleet, we received the highest achievable score. And I can go on and on. Better CPARs means better past performance, which improves the likelihood of being selected again for more work. Additionally, leaner, more productive programs are simply more financially rewarding.

I am also pleased for any chance to recognize our team for excellence. In 2016, we received Federal Aviation Administration diamond awards for excellence in aviation maintenance training for 4 programs. They are: for the 13th straight time, the DI team at Joint Base Andrews, where we provide maintenance and operational support for the aircraft flying our all of our nation's leaders; the California Department of Forestry and Fire Protection program, or CAL FIRE, which provide life and property-saving fire protection support to the people of California for the fifth time; the U.S. Forest Service FireWatch program, where DI maintains and operates Cobra helicopters that literally see through smoke so that they can guide firefighters on the ground received its first award; and for the fourth time, the U.S. Air Force Materiel Command T-6 program, which provides spare parts and equipment in support of Navy and Air Force training aircraft.

Finally, we keep mentioning the incentive awards we are winning on a Navy contract. This announcement represents the seventh consecutive award. What makes this incentive award so remarkable is, prior to DI assuming the contract, no one had ever received the award even once.

With that, let me turn it over to Bill Kansky for a look at the financial results. Bill?

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William T. Kansky, Delta Tucker Holdings, Inc. - CFO and SVP [5]

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Thanks, George. Moving to the details on Slide 9. You can see the company posted fourth quarter revenue of $461.8 million and full year revenue of $1.84 billion, which is down 4.5% from 2015 levels. Decrease is primarily driven by the drawdown of U.S. Forces in Afghanistan, which impacted our demand for services under our LOGCAP IV contract. We also saw a lower content on our INL Air Wing program. This is partially offset by new contract wins at our DynLogistics segment and increased content on contracts within our AELS segment.

Adjusted EBITDA for Q4 of 2016 came in at $32 million, which is $8.1 million higher than the comparable quarter in 2015. The company recorded full year adjusted EBITDA for 2016 of $101 million, with margins at 5.5%. The year-over-year improvement in adjusted EBITDA of $4.9 million was primarily driven by favorable settlements and productivity on our DynLogistics contracts as well as the favorable definitization of costs on certain training contracts. This is partially offset by charges the company recorded on the T-6 contract, which is in a forward loss position.

And finally, we ended the year with $3.7 billion of backlog, a 22% increase from 2015 levels, driven by recent wins as well as extensions and follow-on option awards.

Moving to Slide 10, you see the results from our AELS segment. The group posted Q4 revenue of $141.4 million, up $2.8 million from the comparable period in 2015, primarily a result of increased volume on our T-6 COMBS contract. Revenue for the year was $585.2 million, which is up $39.3 million or 7.2% from 2015 results. The increase is primarily driven by additional content on our T-6 COMBS and our T-34/44 CLS contracts and our Naval Aviation Warfighting Development Center, or Nordic contract, which also contributed to the favorable comparison. This increase is partially offset by the completion of the Sheppard Air Force Base contract.

Adjusted EBITDA for Q4 2016 came in at a loss of $3 million, which compared favorably by $2.9 million for the fourth quarter of 2015. The increase was driven by the completion of the Sheppard contract, which is in a loss position, as well as favorable performance on certain fixed-price contracts. The increase was partially offset by charges the company took in Q4 on its T-6 contract.

Adjusted EBITDA for full year 2016 was a loss of $16.8 million compared to the loss the company incurred in 2015 of $4.8 million. The negative comparison was driven entirely by the performance of the T-6 contract, which was offset in part by productivity on certain fixed-price programs, favorable contract modifications and the completion of the Sheppard contract. Backlog for the AELS group was $1.4 billion, up $318 million from December of 2015.

If we turn to Slide 11, you can see the details for the AOLC segment. The segment posted revenue of $147.5 million for Q4 of 2016, which was lower by $39.2 million as compared to Q4 of 2015. The decrease was primarily a result of lower content on the INL Air Wing program and the completion of certain Middle East contracts. Revenue for the full year was $617.3 million, down $112.9 million from 2015 levels. The annual decline in revenue was due to lower content on the INL Air Wing program and on our MAISR contract. The completion of certain Middle East contracts also contributed to the negative comparison. The decline in revenue was partially offset by new business from the Saudi Arabia National Guard, our SANG contract, and increased content on our TASM-O contract.

Adjusted EBITDA for Q4 came in at $17.1 million, with full year profitability at $56.8 million, which is an increase of $6.5 million from full year 2015 levels. The increase is driven by a favorable legal settlement as well as productivity and efficiencies on our AFM programs. These gains were partially offset by the completion of the F2AST program. Backlog of approximately $1 billion was off $24 million or 2.2% from 2015 levels.

If we turn to Slide 12, you can see the details for the DynLogistics segment. Revenue for the fourth quarter was $172.5 million, up $11.1 million or 6.9% from Q4 of 2015. The increase was driven by the growth on our Department of State ALiSS contract as well as on our LOGCAP IV contracts, specifically our Afghanistan task order. Now it's important to note that since LOGCAP revenues touched bottom in the first quarter of 2016 at $31 million, they have grown sequentially every quarter and finished the fourth quarter at approximately $54 million. Full year revenue for 2016 of $633.6 million was off $13.5 million as compared to 2015 levels. The decline was primarily driven by content -- lower content on our LOGCAP IV program, with the year-over-year decline of $58 million. But based on our experience in 2016, we believe that trend has now reversed itself. Also contributing to DynLog's 2016 revenue was new order we received under the ALiSS contract, but we also saw contributions from our new Taji contract, which provides technical support services to the Iraq Army.

Fourth quarter adjusted EBITDA came in at $22 million, which was up $6.3 million as compared to fourth quarter of 2015. The increase was driven by favorable settlements, productivity gains on certain fixed-price contracts as well as an increase in volume. For full year 2016, adjusted EBITDA was $71.5 million, which grew $15.7 million from 2015 levels. These gains were driven by favorable settlements, productivity gains on certain fixed-price contracts and the favorable definitization of costs on certain frame contracts. Backlog of approximately $1.2 billion was up $380 million or 44% from 2015 levels, and was driven by recent wins and expansions.

If we turn to Slide 13, I'd like to cover a number of miscellaneous financial items. Working capital came in at $153.5 million or by 8.4% of annual revenue. DSO finished the year at 56 days, down 15 days from 2015, the improvement is due to our continued focus on effective task management, and we're very pleased with the results. The company posted free cash flow of $34 million for 2016, driven by strong free cash flow generation throughout the year. Net debt ended the year at $514.2 million, down from $533.5 million in December of 2015, and we ended the year with $118.2 million of cash on the balance sheet, with no revolver borrowings outstanding at year-end.

On March 24, 2017, we launched a redemption for the remaining $39.3 million of senior unsecured notes that did not participate in the company's exchange offer the last year, and we expect the redemption to close on or about April 24, 2017. And finally, our financial guidance for 2017 remains unchanged.

So with that, let me hand it back over to Lou for some final comments. Lou?

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Lewis F. Von Thaer, Delta Tucker Holdings, Inc. - CEO [6]

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Thanks, Bill, and Let me close with just a few final points. Our company's emphasis remains on business development and operational excellence. As discussed, I believe our efforts are paying dividends. I'm proud of the work that has been done by the DI team in 2016. We grew our EBIT by 5% over 2015 and beat our plan. Our backlog reached a 3-year high and stands at $3.7 billion, with $10 billion of proposals submittals with our customers and evaluation today. We reorganized the company, taking costs out of our restructure and simplifying our customer alignment and operations. And I believe we are very competitive today.

We talked about the budget and how force readiness is at the top of the agenda for the administration. And while the budget process is complex, many of the administration's priorities are aligned with our capabilities, and we'll be keeping a close eye on how the Congressional deliberations proceed.

With that, operator, I believe we're ready for some Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Zuckerman with Canyon Capital.

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Alex Zuckerman, [2]

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I just had a question about the 2017 guidance. I know it's ex any contribution from INL, but obviously, that's still an open matter or being disputed. So should we assume that -- any color you can give us about what incremental EBITDA, the guidance from INL would be helpful.

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William T. Kansky, Delta Tucker Holdings, Inc. - CFO and SVP [3]

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Sure. So we know at a minimum that we'll retain the program through August, and that there'll be a transition period after that. So when you think about the last award, the total value was $292.8 million. Let's round it up to $300 million to make it easy on Bill, and you can figure that 8 months of that is about $200 million and there'll be a transition period. So at a minimum, you should think about $200 million on the top plus transition, and then we haven't talked about the margins on INL for a while, nor will we, but I think everybody has -- all the investors have a sense of what margins they like to use in their model. That's the way to probably approach it.

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Alex Zuckerman, [4]

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Okay. So if we take that $200 million, assume the margin, that will be incremental EBITDA above the guidance for 2017, just to be clear?

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William T. Kansky, Delta Tucker Holdings, Inc. - CFO and SVP [5]

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There will be -- our expectation is that we'll hold the program at a minimum at least until August and then there'll have to be an early transition thereafter.

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Alex Zuckerman, [6]

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Okay. And then on the capital structure, is there anything you can tell us beyond -- good to see the support load letter -- excuse me, from Cerberus to take out the -- that piece of bond? Anything else you can tell us about plans for the capital structure? If you plan to address this holistically? Any color there will be helpful.

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Lewis F. Von Thaer, Delta Tucker Holdings, Inc. - CEO [7]

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Yes, Alex, nothing at this time. I mean, right now, we're focused on the business. We're focused on redeeming the stub notes and looking forward to a good 2017.

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Operator [8]

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(Operator Instructions) At this time, there are no additional questions.

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Lewis F. Von Thaer, Delta Tucker Holdings, Inc. - CEO [9]

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All right. Thanks, everyone.

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Operator [10]

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Thank you. This concludes today's conference. You may now disconnect.