DEFENSE LOGISTICS AGENCY TRANSACTION FUND AGENCY FINANCIAL REPORT DEFENSE LOGISTICS AGENCY Andrew T. McNamara Building 8725 John J. Kingman Road Fort Belvoir, VA 22060-6221 Defense LogisticsAgency| Transaction Fund Agency Financial Report 1|Pa ge Defense Logistics Agency Transaction Fund Fiscal Year 2017 Agency Financial Report Table of Contents Message from the Director ............................................................................................................................ 3 Management’s Discussion and Analysis ....................................................................................................... 4 Overview ................................................................................................................................................... 5 Performance Overview ........................................................................................................................... 13 Financial Overview- DLA Transaction Fund ......................................................................................... 15 Management Assurances ........................................................................................................................ 19 Financial Information .................................................................................................................................. 24 Message from the Chief Financial Officer .............................................................................................. 25 Introduction ............................................................................................................................................. 26 Financial Statements ............................................................................................................................... 27 Notes to the Unaudited Financial Statements ......................................................................................... 31 Independent Auditors’ Report ................................................................................................................. 45 Management's Response to Auditors' Report ......................................................................................... 77 OtherInformation...................................................................................................................................(cid:17)(cid:17)(cid:17)(cid:17)(cid:3)78 Summary of Financial Statement AuditandManagement Assurances...............................................(cid:17)(cid:17).79 ImproperPaymentsElimination and Recovery ImprovementAct (IPERIA).......................................(cid:17)(cid:17)87 Fraud Reduction Report ........................................................................................................................(cid:17)(cid:17)(cid:3)91 OtherKey Regulatory Requirements....................................................................................................(cid:17)(cid:17)92 AcronymList............................................................................................................................................(cid:17)(cid:17)96 Acronyms .............................................................................................................................................(cid:17)(cid:17)(cid:17)97 Defense LogisticsAgency| Transaction Fund Agency Financial Report 2|Pa ge Message from the Director Defense LogisticsAgency| Transaction Fund Agency Financial Report 3|Pa ge Management’s Discussion and Analysis The Management’s Discussion and Analysis is required supplementary information to the financial statements and provides a high-level overview of the Defense Logistics Agency. This is required per OMB Circular A-136 and Statements of Federal Financial Accounting Standards (SFFAS) No. 15. TheOverviewsectiondescribes the DLA’sorganization,itsmissionsand goals,and providesan overviewof our DLA Commands. The Performance Overview section provides a summary of each DLA mission, selected accomplishments, key performance measures, and future initiatives to strengthen the DLA’s efforts in supporting Department of Defense (DoD) objectives and missions. TheFinancialOverviewsectionprovidesasummaryof DLA’s financialdataexplainingthe majorsourcesanduses of fundsandprovidesaquicklook at our BalanceSheet,Statementof Net Cost,Statementof Changesin Net Position, StatementofBudgetaryResources,and LimitationsofFinancialStatements. The Management AssurancessectionprovidestheDirector’sAssuranceStatementrelatedto theFederalManagers’ Financial Integrity Act and the Federal Financial Management Improvement Act. This section also describes the DLA’s efforts to address our financial management systems to ensure systems comply with applicable accounting principles,standards,requirements,andwithinternalcontrolstandards. Defense LogisticsAgency| Transaction Fund Agency Financial Report 4|Pa ge Overview Our Organization Mission and Organizational Structure DLA reports to the Office of the Under Secretary of Defense (OUSD) for Acquisition, Technology and Logistics (AT&L) through the Deputy Under Secretary of Defense for Logistics and Materiel Readiness. DLA provides support around the clock and around the world to meet the needs of America’s Armed Forces and other designated customers in times of peace, national emergency, and war. America’s national defense strategy depends on DLA’s support to feed, clothe, fuel, medicate, treat, and sustain U.S. and many allied nations’ troops. DLA supportsDoDobjectives and missions with involvement in the full range of military operations from participation with multi-national forces engaged in large-scale combat operations, weapons and spares provisions, peacekeeping efforts, emergency support, tohumanitarian assistance. DLA sources and provides nearly allconsumable item used by American military forces worldwide. DLA manages nearly 5.1millionseparate line items of inventory for land and maritime parts for weapon systems, fuel, and critical troop–support items involving food, clothing and textiles, medical, industrial hardware, and construction equipment and materiel. Additionally, DLA provides a broad array of associated supply chain services that include storage and distribution; reutilization or disposal of surplus military assets; providing catalogs and other logistics information, services; and, document automation and production services. DLA’s Mission Vision and Values DLA employs approximately 24,700 civilian personnel, 520 active duty military personnel, and 570 reserve personnel who operate a $42.0billionglobal enterprise in 28 countries.DLAmanages nine supply chains and supports more than 2,300 weapon systems. The nine supply chains are: DLA Aviation, DLA Land, DLA Maritime, DLA Energy, Subsistence, Medical, Clothing, and Textiles, Construction and Equipment, and Industrial Hardware. Agency leaders are committed to the continuous assessment and transformation of the organizational culture, size, structure, and alignment through enterprise integration and partnering with the private sector. Organizing as a single, integrated business enterprise enables DLA to focus on supporting the DoD’s supply chains, enhancing the Armed Forces’ readiness, and providing for the Warfighter during contingency operations. This Agency Financial Report (AFR) is prepared for the DLA’s Transaction Fund (TF). Information is provided for TF, where applicable,andother information is for the DLA Enterprise-Wide. Defense LogisticsAgency| Transaction Fund Agency Financial Report 5|Pa ge Figure1, the DLA Organizational Chart DLA Major Subordinate Commands (MSCs) DLA AVIATION,headquartered in Richmond, Virginia, is the primary source for over 1.1millionrepair parts and operating supply items for more than 1,340 major weapon systems. The DLA Aviation Supply Chain provides mapping, kitting, chemical, petroleum packaging, gases,and cylinder items to the Military Services. In addition, DLA Aviation provides engineering, sustainability, ozone depleting substances reserve, and industrial plant equipment services. DLA DISPOSITION SERVICES,headquartered in Battle Creek, Michigan receivesexcess, obsolete, and unserviceable (EOU)DoDproperty, providing ultimate disposition through reutilization, transfer, donation, and sales. In FY 2017, DLA Disposition Services received an estimated $29.0billion of EOU inventory, $1.4billion was reutilized and issued back to the Military Services. The reutilization of excess property provides the Services an opportunity to get property at no cost.DLA Disposition Services sales generated approximately $119.0 millionof revenue in FY 2017, offsetting operational costs. DLA DISTRIBUTION, headquartered in New Cumberland, Pennsylvania, is responsible for the receipt, storage, issuance, packing, preservation, and transportation of more than 4million items worldwide. It operates a network of 26 distribution centers around the world that provide timely and quality support to the Warfighters. Its Global Stock Position Plan ensures rapid distribution of critical military items. DLA Distribution’s overseas distribution operations are located in Europe, Middle East, and Pacific Asia regions. Defense LogisticsAgency| Transaction Fund Agency Financial Report 6 |Pa ge DLA ENERGY,headquartered at Fort Belvoir, Virginia, serves as the DLA’s executive agent for the bulk petroleum supply chain.DLA Energy business includes sales of petroleum and aerospace fuels; arranging for petroleum support services; providing facility/equipment maintenance on fuel infrastructure; performing energy-related environmental assessment and cleanup; storage and transportationfor bulk and aerospace products; and performing quality surveillance functions for petroleum for the Military Services, as well as for the privatization of their utility systems. DLA LAND AND MARITIME,headquartered in Columbus, Ohio, is the primary source for over 420,000 repair parts and 1.5million operating supply items, for land and sea-basedweapon systems. The DLA Land and Maritime Supply Chains provide product testing, engineering, and technical support to the Military Services. In addition, the DLA Land and Maritime Supply Chains support Navy Surface and Subsurface and Army and Marine Corps customers through dedicated customer relations while working with numerous suppliers to fulfill requirements for assigned stock classes across theDoD. Furthermore, the DLALand and Maritime Supply Chains provides logistical services directly to Navy shipyards and Army/United States Marine Corps industrial sites. DLA TROOP SUPPORT, headquartered in Philadelphia, Pennsylvania, is DLA’s lead center for troop and general support. Troop Support is responsible for managing food, clothing, medical supplies, construction and equipment, and general and industrial supplies worldwide. DLA Troop Support has the following Supply Chains: Subsistence, Clothing & Textile, Construction & Equipment, Medical, and Industrial Hardware. DLA J/D Codes DLA GENERAL COUNSEL provides legal services and guidance to the DLA Director, senior leadership, and staff. DLA OFFICE OF THE INSPECTOR GENERAL leverages audit and investigative expertise to provide DLA leadership with timely facts to make informed decisions that improve efficiency, accountability and warfighter support. DLA INSTALLATION SUPPORT (DS) provides enterprise-wide agency policy, program, and worldwide operational support in environmental management; safety and occupational health; installation management; public safety; forms and policy management; and morale, welfare, and recreation for DLA. DLA TRANSFORMATION (DT) manages the Agency’s strategic plan, executive governance forums, and the agency-wide deployment of Enterprise Process Management, Continuous Process Improvement (CPI), Enterprise Organizational Alignment, and Enterprise Policy Management programs. DLA HUMAN RESOURCES (J1) provides the full range of human resources services, both policy and operational, for DLA's civilian and active duty military employees. DLA Human Resources (HR) recruits, hires, trains, and sustains a mission-ready workforce for DLA and our HR customers, using world class policies, processes, programs, and tools. DLA LOGISTICS OPERATIONS (J3) manages DLA’s supply chains by providing logistics and materiel management policy, guidance, oversight, and monitoring of supply chain performance. DLA INFORMATION OPERATIONS (J6)asDLA’s knowledge broker, provides comprehensive,best practice technological support to the DoD/DLAlogisticscommunity forinformationsystems;efficientand economical computing; data management; electronic commerce; telecommunication services; and transaction services. The Director of Information Operations also serves as DLA’s Chief Information Officer.J6 manages DLA’s Research and Development program. Defense LogisticsAgency| Transaction Fund Agency Financial Report 7 |Pa ge DLA ACQUISITION (J7) is responsible for planning, organizing, directing, and managing the procurement and contract administration functions for DLA acquisition in support of both internal operations and other supported activities. The Director of DLA Acquisition, also serves as the Agency’s Component Acquisition Executive. DLA Acquisition provides oversight of DLA Contracting Services Office. Additionally, J7 providestheoversight of DLAStrategicMaterials. DLA FINANCE (J8) is responsible for obtaining and allocating resources, analyzing execution, providing fiscal guidance and advice to support the Agency, its business areas, and its MSCsin accomplishing DLA's mission. DLA Finance prepares the DLA financial statements and guides DLA in its Audit Advancement efforts. DLA Finance established Accounting Cycle Offices to support DLA’s business processes. The Director of Finance also serves as DLA’s Chief Financial Officer. DLA JOINT RESERVE FORCE (J9) provides DLA with trained, ready, and available reservists from all Service components for worldwide contingency operations and support of peacetime operations, wartime surge requirements, and logistics planning. Figure 2, the locations of the major DLA offices Defense LogisticsAgency| Transaction Fund Agency Financial Report 8 |Pa ge Our Strategic Framework Agency Goals and Objectives DLA is committed to achieving significant savings for its customers. In April 2015, the former DLA Director, Lieutenant General Andrew Busch, refreshed the Agency’s long-term strategy to concentrate on attaining savings while continuing to identify new opportunities to reduce cost. Our current Director, Lieutenant General Darrell Williams, is updating the Agency’s strategic plan to reflect the current environment and anticipates publishing the updated plan near the beginning of FY2018.DLA’sDirector’s annual guidance is derived from the Agency’s long-term strategy and serves to align DLA’s support to DLA’sgoals and objectives.DLA continues to provide world-class support to the Warfighter –delivering the right solution on time, every time – through pursuit of the five goals described in Figure 3: Agency Goals and Objectives, which support the Agency’s strategic plan.This report is based on Lieutenant General Busch’s strategic plan for the Agency. Warfighter First: Deliver innovative and responsive solutions to Warfighters first, DoD components and our other valued customers. DLA’s top priority is Warfighter support. The current threat environment is complex, and we must be a trusted and responsive partner to the Warfighter as well as one that is able to anticipate changing andfuture needs. We ensure our organization’s goals, processes, and performance are innovative, responsive, and synchronized with the current and future needs of the Warfighters, DoD components, other mission partners, and stakeholders. People and Culture:Hire, develop, and retain a high-performing, valued, resilient, and accountable workforce that delivers sustained mission excellence. DLA has always been a high-performing organization, and our workforce is our greatest asset. To further increase performance, we use innovative approaches to attract and retain mission-focused people. We foster an environment that unlocks the full potential of our workforce, enabling them to achieve peak performance and meet future challenges. To accomplish this, we continue to attract and hire highly-talented individuals, develop their competencies, and cultivate and retain the next generation of the DLA workforce. The key to mission success is to continue our focus on people and culture. Our success depends on the readiness of our workforce to Figure 3, the Agency Goals and Objectives meet changing mission requirements in an evolving technological environment. Partnering with our labor unions to communicate and implement positive change tomaintain our standing as an employer of choice is vital to an invigorated, sustained, and resilient workforce. Strategic Engagement: Engage industry and other partners in the delivery of effective and affordable solutions. Defense LogisticsAgency| Transaction Fund Agency Financial Report 9|Pa ge