PAE Reports Third-Quarter 2021 Financial Results

Highlights

  • Third-quarter revenue of $689.5 million
  • Third-quarter operating income of $26.0 million
  • Third-quarter net income of $29.8 million
  • Third-quarter adjusted EBITDA1 of $50.8 million (margin of 7.4%1 of revenue)
  • Third-quarter cash flow provided by operations of $56.3 million
  • Third-quarter net bookings of $1.1 billion (1.7x book-to-bill); $2.7 billion for the trailing 12 months (0.9x book-to-bill), excluding the de-obligations associated with the Afghanistan demobilization

FALLS CHURCH, Va., Nov. 04, 2021 (GLOBE NEWSWIRE) -- PAE Incorporated (“PAE” or the “Company”) (NASDAQ: PAE, PAEWW) today announced third-quarter 2021 financial and operating results.

CEO Commentary

PAE Interim President and CEO Charlie Peiffer said, “We demonstrated resilience, delivering strong adjusted EBITDA and margins with solid cash flow generation, despite a $69 million negative revenue impact from the Afghanistan demobilization during the quarter. Moreover, we were pleased with our contract award activity, delivering a 1.7x book-to-bill in the third quarter, excluding the backlog de-obligations associated with the Afghanistan demobilization.”

Third-Quarter 2021 Results

Revenues for the quarter of $689.5 million increased $23.3 million, or 3.5%, compared to the prior year period. The increase was attributable to recent acquisitions and a net increase in program volume and new business, partially offset by an impact of $69.1 million from the Afghanistan demobilization.

Operating income for the quarter was $26.0 million, compared with operating income of $28.5 million in the prior year period. The decrease resulted from higher selling, general and administrative expenses and increased amortization of intangible assets, which decrease was partially offset by higher revenue volume.

The net income attributed to PAE for the quarter was $29.8 million, or $0.31 per diluted share, compared with net income of approximately $15.3 million, or $0.16 per diluted share in the prior year period. The improvement in net income for the third quarter of 2021 was primarily driven by changes in fair value of the warrants, which increase was partially offset by the factors impacting operating income.
  
Adjusted EBITDA for the quarter was $50.8 million, or 7.4% of revenue, compared to $46.2 million, or 6.9% of revenue, in the prior year period. Adjusted EBITDA and margins increased due to higher revenue volume and improved program performance.

Global Mission Services
GMS revenues for the quarter of $448.1 million decreased $73.3 million, or about 14.1%, compared to the prior year period. The decrease was attributable to a $59.9 million impact from the Afghanistan demobilization and a $13.4 million reduction in contract volume, net of new business revenue.

GMS operating income for the quarter was $20.5 million, compared to $31.4 million in the prior-year period. The decrease was driven by higher selling, general and administrative expenses and lower revenue volume.

GMS adjusted operating income2 for the quarter was $28.5 million, or 6.4% of revenue, compared to $35.7 million, or an operating margin of 6.8% of revenue, in the prior year period. The reduction in GMS adjusted operating income and margins2 was driven by higher selling, general and administrative expenses and lower revenue volume.

National Security Solutions
NSS revenues for the quarter of $241.4 million increased $96.5 million, or 66.6%, compared to the prior year period. The increase was attributable to recent acquisitions and increases in contract volume on existing programs, partially offset by a $9.2 million decrease from the Afghanistan demobilization.

NSS operating income for the quarter was $13.1 million, compared to $5.7 million in the prior year period. The increase resulted from higher revenue volume and improved program performance, which increase was partially offset by higher selling, general and administrative expenses.

NSS adjusted operating income3 for the quarter was $22.3 million, or 9.2% of revenue, compared to $10.5 million, or 7.3% of revenue, in the prior year period. The variances in NSS adjusted operating income and margins3 were driven by the increase in revenue volume and program performance, which increases were partially offset by higher selling, general and administrative expenses.

Cash Flow Summary

Net cash provided by operating activities for the quarter of $56.3 million increased $19.7 million over the prior year period, driven primarily by higher cash collections and increases in customer advances and billings in excess of costs in the current period.

As of September 26, 2021, PAE had cash and cash equivalents totaling $157.3 million and had no outstanding borrowings on its senior secured revolving credit facility.

Business Development Highlights and Contract Awards

Net bookings totaled $1.1 billion in the third quarter and $2.7 billion over the trailing 12 months, representing a book to bill ratio of 1.7x and 0.9x for the third quarter and trailing 12 months, respectively, excluding the backlog de-obligations associated with the Afghanistan demobilization.

Notable third quarter awards received include:

Notable New Business Awards:

  • Kirtland Air Force Base: GMS was awarded a task order valued at approximately $84 million to support helicopter maintenance for training missions with the Air Education and Training Command at Kirtland Air Force Base in Albuquerque, New Mexico.
  • DIA SIA 3 SB: DRI Predictive Analysis: NSS was awarded an approximate $16 million contract providing analytic teams with cross-functional expertise including all-source intelligence analysis.

Notable Recompete Awards:

  • NASA Johnson Space Center: GMS was awarded a contract by the National Aeronautics and Space Administration, valued at $402 million if all options are exercised, to provide a wide range of facility support services at Lyndon B. Johnson Space Center.
  • USAID Bureau for Humanitarian Assistance: GMS was awarded a task order, valued at approximately $178 million, to provide comprehensive support services including the administration of grants, cooperative and interagency agreements, the recruitment and administration of U.S. Personal Services Contracts, field and information support services, staff training and support for capacity-building activities.
  • USPS Los Angeles Mail Transport Equipment Service Center: NSS was awarded a contract, valued at approximately $64 million, to include the processing and management of mail transport equipment used to enclose and transport mail. MTESCs throughout the United States manage and ship transport equipment to USPS and USPS customer facilities.

Notable IDIQ Awards:

  • USAID Global Architect-Engineer Services III: GMS won a seat on the 7-year, $800 million Global Architect-Engineer Services III contract by the United States Agency for International Development to support infrastructure activities for the agency’s Bureau for Development, Democracy and Innovation.

The Company’s backlog at the end of the quarter was $7.5 billion, which reflects approximately $0.4 billion of de-obligations associated with the Afghanistan demobilization. Approximately $801 million of the Company’s backlog was funded at the end of the quarter.

Subsequent Events

On October 25, 2021, PAE Incorporated (the “Company”) entered into an Agreement and Plan of Merger (the “Amentum Merger Agreement”) with Amentum Government Services Holdings LLC (“Parent” or “Amentum”) and Pinnacle Virginia Merger Sub Inc. and an indirect wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company continuing as the surviving company of the Merger and an indirect wholly-owned subsidiary of Parent (the “Surviving Corporation”). Pursuant to the terms and conditions set forth in the Amentum Merger Agreement, at the effective time of the merger (the “Effective Time”), each share of Class A common stock par value $0.0001 of the Company outstanding as of immediately prior to the Effective Time will automatically be canceled, extinguished and converted into the right to receive an amount equal to $10.05 in cash per share, net any applicable withholding and without interest. The Amentum Merger Agreement prohibits the Company and its advisors and representatives from soliciting, encouraging, providing information or entering into discussions concerning proposals relating to alternative business combination transactions, subject to certain limited exceptions. However, during the period beginning on October 25, 2021 and continuing until November 29, 2021 (the “Go-Shop Period”), the Company is permitted to take such actions with respect to certain competing acquisition proposals. At the end of the Go-Shop Period, the Company will cease such activities and will be subject to customary “no shop” restrictions on its ability to solicit third party proposals relating to competing acquisition proposals or to provide information to and engage in discussions with certain third parties. In the event the Amentum Merger Agreement is terminated by the Company in certain circumstances, the Company may be required to pay a termination fee of either $15.0 million or $30.0 million (including in order to enter into a definitive agreement with respect to a Company Superior Proposal) to the Parent. The termination rights of the parties to the Amentum Merger Agreement are subject to certain notice, cure and other rights.

Cancellation of Earnings Conference Call and Suspension of Guidance

As a result of the announced transaction with Amentum, PAE has cancelled its earnings conference call previously scheduled for today, November 4, 2021. In addition, the Company is suspending its financial guidance for the full year 2021 as a result of the pending transaction.

Forward-Looking Statements

This press release may contain a number of “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to management’s assumptions, expectations, projections, intentions and/or beliefs about future events or occurrences, and include, but are not limited to, statements about PAE’s possible or assumed future results of operations and cash flows, financial results, business strategies, debt levels, competitive position, industry environment, potential growth opportunities, potential impact of COVID-19, effects of regulation, backlog, estimation of resources for contracts, risks related to IDIQ contracts, risks related to integration of acquisitions, strategy for and management of growth, needs for additional capital, risks related to U.S. government contracting generally, including congressional approval of appropriations, and bid protests. These forward-looking statements are based on PAE’s management’s current expectations, estimates, projections and beliefs, as well as a number of assumptions concerning future events. When used in this press release, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside PAE’s management’s control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some factors that could cause actual results to differ include a loss of contracts with the U.S. federal government or its agencies or other state, local or foreign governments or agencies, including as a result of a reduction in government spending; service failures or failures to properly manage projects; issues that damage our professional reputation; disruptions in or changes to prices relating to our supply chain, including as a result of difficulties in the supplier qualification process; failures on the part of our subcontractors or joint venture partners to perform their contractual obligations; failures to maintain strong relationships with other contractors; the impact of a negative audit or other investigation; failure to comply with numerous laws and regulations regarding procurement, anti-bribery and organizational conflicts of interest; inability to comply with the laws and other security requirements governing access to classified information; inability to share information from classified contracts with investors; impact of implementing various data privacy and cybersecurity laws; costs and liabilities arising under various environmental laws and regulations; various claims, litigation and other disputes that could be resolved against PAE; delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us; risks related to mergers and acquisitions, including our ability to realize the benefits of any such transactions in a manner consistent with our expectations and integration risks; risks from operating internationally; the effects of COVID-19 and other pandemics or health epidemics, including disruptions to our workforce and the impact on government spending; disruptions caused by natural or environmental disasters, terrorist activities or other events outside our control; issues arising from cybersecurity threats or intellectual property infringement claims; the loss of members of senior management; the inability to attract, train or retain employees with the requisite skills, experience and security clearances; the impact of the expiration of our collective bargaining agreements; the announced transaction with Amentum; and other risks and uncertainties described under the heading “Risk Factors” and elsewhere in our reports filed with the Securities and Exchange Commission (“SEC”).

Forward-looking statements included in this release speak only as of the date of this release. PAE does not undertake any obligation to update its forward-looking statements to reflect events or circumstances after the date of this release except as may be required by the federal securities laws.

About PAE

For more than 66 years, PAE has tackled the world’s toughest challenges to deliver agile and steadfast solutions to the U.S. government and its allies. With a global workforce of approximately 20,000 on all seven continents and in approximately 60 countries, PAE delivers a broad range of operational support services to meet the critical needs of our clients. Our headquarters is in Falls Church, Virginia. Find us online at pae.com, on Facebook, Twitter and LinkedIn.

For investor inquiries regarding PAE:

Mark Zindler
Vice President Investor Relations
PAE
703-717-6017
mark.zindler@pae.com

For media inquiries regarding PAE:

Terrence Nowlin
Senior Communications Manager
PAE
703-656-7423
terrence.nowlin@pae.com

 

PAE Incorporated
Condensed Consolidated Statement of Operations (Unaudited)
(In thousands, except share and per share data)

  Three Months Ended   Nine Months Ended
  September 26,   September 27,   September 26,   September 27,
  2021   2020   2021   2020
Revenues $ 689,514       $ 666,240       $ 2,185,279       $ 1,926,795    
Cost of revenues 511,852       512,877       1,643,470       1,474,763    
Selling, general and administrative expenses 140,170       119,168       428,237       361,945    
Amortization of intangible assets 12,630       8,047       37,476       24,141    
Total operating expenses 664,652       640,092       2,109,183       1,860,849    
Program profit 24,862       26,148       76,096       65,946    
Other operating income net 1,174       2,384       6,897       4,338    
Operating income 26,036       28,532       82,993       70,284    
Interest expense, net (13,109 )     (13,607 )     (38,783 )     (48,312 )  
Other income, net 16,399       5,000       17,533       15,645    
Income before income taxes 29,326       19,925       61,743       37,617    
Expense (benefit) from income taxes 1,495       4,194       6,730       (1,582 )  
Net income 27,831       15,731       55,013       39,199    
Noncontrolling interest in earnings of ventures (1,958 )     413       (2,510 )     1,344    
Net income attributed to PAE Incorporated $ 29,789       $ 15,318       $ 57,523       $ 37,855    
               
Net income per share attributed to PAE Incorporated:              
Basic $ 0.32       $ 0.17       $ 0.62       $ 0.47    
Diluted $ 0.31       $ 0.16       $ 0.60       $ 0.46    
               
Weighted average shares outstanding              
Basic 93,122,414       92,070,306        92,949,301        81,323,258    
Diluted 95,836,986       93,392,565        95,599,019        82,115,825    

 


PAE Incorporated
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and par value amounts)

  September 26,   December 31,
  2021   2020
       
Assets      
Current assets:      
Cash and cash equivalents $ 157,268       $ 85,908    
Accounts receivable, net 524,707       585,511    
Prepaid expenses and other current assets 63,043       61,607    
Total current assets 745,018       733,026    
Property and equipment, net 36,600       27,615    
Investments 15,407       18,272    
Goodwill 593,171       590,668    
Intangible assets, net 220,734       258,210    
Operating lease right-of-use assets, net 192,638       191,370    
Other noncurrent assets 14,928       10,209    
Total assets $ 1,818,496       $ 1,829,370    
Liabilities and stockholders' equity      
Current liabilities:      
Accounts payable $ 124,959       $ 152,962    
Accrued expenses 107,446       114,222    
Customer advances and billings in excess of costs 106,221       106,475    
Salaries, benefits and payroll taxes 153,229       145,186    
Accrued taxes 12,132       15,582    
Current portion of long-term debt, net 7,036       5,961    
Operating lease liabilities, current portion 47,205       46,756    
Other current liabilities 38,559       45,037    
Total current liabilities 596,787       632,181    
Deferred income taxes, net 11,006       4,389    
Long-term debt, net 865,016       860,306    
Long-term operating lease liabilities 150,280       145,569    
Warrant liability 32,934       50,467    
Other long-term liabilities 13,509       30,273    
Total liabilities 1,669,532       1,723,185    
Stockholders' equity:      
Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; no shares issued and outstanding          
Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 93,115,801 and 92,040,654 shares issued and outstanding as of June 27, 2021 and December 31, 2020, respectively 9       9    
Additional paid-in capital 171,807       188,685    
Accumulated deficit (59,098 )     (116,621 )  
Accumulated other comprehensive loss 1,230       1,876    
Total PAE Incorporated stockholders' equity 113,948       73,949    
Noncontrolling interests 35,016       32,236    
Total liabilities and stockholders' equity $ 1,818,496       $ 1,829,370    

 


PAE Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

  Three Months Ended
  September 26,   September 27,
  2021   2020
Operating activities      
Net income $ 27,831       $ 15,731    
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation of property and equipment 3,021       2,191    
Amortization of intangible assets 12,630       8,047    
Amortization of debt issuance cost 815       1,739    
Stock-based compensation 1,722       4,318    
Net undistributed income from unconsolidated ventures (2,057 )     (1,794 )  
Deferred income taxes, net 692       2,066    
Change in fair value of warranty liability (16,400 )     (5,000 )  
Other non-cash activities, net (1,904 )     (22 )  
Changes in operating assets and liabilities, net:      
Accounts receivable, net 81,375       (13,084 )  
Accounts payable (50,033 )     33,399    
Accrued expenses (12,107 )     (5,593 )  
Customer advances and billings in excess of costs 17,315       (10,359 )  
Salaries, benefits and payroll taxes 6,488       6,665    
Prepaid expenses and other current assets 786       (1,277 )  
Other current and noncurrent liabilities (20,148 )     5,171    
Investments 5,149       1,092    
Other noncurrent assets 661       (5,697 )  
Accrued taxes 431       (1,057 )  
Net cash provided by operating activities 56,267       36,536    
Investing activities      
Expenditures for property and equipment (5,177 )     (1,031 )  
Proceeds from sales of property 4,964          
Other investing activities, net 2,403       (109 )  
Net cash provided by (used in) investing activities 2,190       (1,140 )  
Financing activities      
Net contributions from noncontrolling interests 2,437       145    
Borrowings on long-term debt 111,627       266    
Repayments on long-term debt (110,825 )     (7,720 )  
Recapitalization from merger with Gores Holdings III, Inc.          
Payment of underwriting and transaction costs          
Stock-based compensation tax withholding obligation (159 )        
Other financing activities, net 825          
Net cash provided by (used in) financing activities 3,905       (27,480 )  
Effect of exchange rate changes on cash and cash equivalents 196       (939 )  
Net increase in cash and cash equivalents 62,558       6,977    
Cash and cash equivalents at beginning of period 94,710       138,469    
Cash and cash equivalents at end of period $ 157,268       $ 145,446    
       
Supplemental cash flow information      
Cash paid for interest $ 12,202       $ 11,807    
Cash paid for taxes $ 2,070       $ 2,508    

 


PAE Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

  Nine Months Ended
  September 26,   September 27,
  2021   2020
Operating activities      
Net income $ 55,013       $ 39,199    
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation of property and equipment 7,768       7,263    
Amortization of intangible assets 37,476       24,141    
Amortization of debt issuance cost 2,387       9,560    
Stock-based compensation 6,347       8,018    
Net undistributed income from unconsolidated ventures (8,625 )     (3,533 )  
Deferred income taxes, net 7,249       (12,044 )  
Change in fair value of Warrant liability (17,533 )     (19,132 )  
Other non-cash activities, net (2,714 )     382    
Changes in operating assets and liabilities, net of acquisitions:      
Accounts receivable, net 61,375       (3,477 )  
Accounts payable (28,195 )     15,852    
Accrued expenses (7,105 )     4,252    
Customer advances and billings in excess of costs (256 )     8,923    
Salaries, benefits and payroll taxes 7,488       10,975    
Prepaid expenses and other current assets (2,124 )     (2,118 )  
Other current and noncurrent liabilities (19,620 )     71    
Investments 9,907       2,793    
Other noncurrent assets (5,576 )     5,903    
Accrued taxes (3,458 )     (4,904 )  
Net cash provided by operating activities 99,804       92,124    
Investing activities      
Expenditures for property and equipment (19,577 )     (2,628 )  
Proceeds from sales of property 5,195          
Acquisition of Metis Solutions Corporation, net of acquired cash (521 )        
Acquisition of CENTRA Technology Inc, net of acquired cash (1,441 )        
Acquisition of noncontrolling interest (14,308 )        
Other investing activities, net 2,030       (72 )  
Net cash used in investing activities (28,622 )     (2,700 )  
Financing activities      
Net contributions from noncontrolling interests 2,927       2,095    
Borrowings on long-term debt 237,010       60,734    
Repayments on long-term debt (233,409 )     (212,184 )  
Payment of debt issuance costs       (964 )  
Recapitalization from merger with Gores Holdings III, Inc.       605,713    
Payment of underwriting and transaction costs       (27,267 )  
Distribution to selling stockholders       (439,719 )  
Stock-based compensation tax withholding obligation (5,818 )        
        (292 )  
Net cash provided by (used in) financing activities 710       (11,884 )  
Effect of exchange rate changes on cash and cash equivalents (532 )     (129 )  
Net increase in cash and cash equivalents 71,360       77,411    
Cash and cash equivalents at beginning of period 85,908       68,035    
Cash and cash equivalents at end of period $ 157,268       $ 145,446    
Supplemental cash flow information      
Cash paid for interest $ 40,048       $ 35,085    
Cash paid for taxes $ 9,343       $ 5,304    

 


PAE INCORPORATED
SEGMENT DATA
(in thousands)

  Three Months Ended   Nine Months Ended
  September
26,
  September
27,
  September
26,
  September
27,
  2021   2020   2021   2020
Revenues              
GMS $ 448,078       $ 521,346       $ 1,480,982       $ 1,486,643    
NSS 241,436       144,894       704,297       440,152    
Consolidated revenues $ 689,514       $ 666,240       $ 2,185,279       $ 1,926,795    
               
Operating income              
GMS $ 20,459       $ 31,401       $ 73,673       $ 75,541    
NSS 13,091       5,679       33,729       17,770    
Corporate (7,514 )     (8,548 )     (24,409 )     (23,027 )  
Consolidated operating income $ 26,036        $ 28,532       $ 82,993       $ 70,284    
               
Amortization of intangible assets              
GMS $ 4,161       $ 4,115       $ 12,483       $ 12,346    
NSS 8,469       3,932       24,993       11,795    
Consolidated amortization of intangible assets $ 12,630       $ 8,047       $ 37,476       $ 24,141    
               
               

 


PAE INCORPORATED
BACKLOG
(in thousands)

  As of   As of
  September 26,   December 31,
  2021   2020
Global Mission Services:      
Funded backlog $ 387,927     $ 946,711  
Unfunded backlog 4,496,641     4,445,442  
Total GMS backlog $ 4,884,568     $ 5,392,153  
       
National Security Solutions:      
Funded backlog $ 412,866     $ 476,618  
Unfunded backlog 2,238,612     2,046,634  
Total NSS backlog $ 2,651,478     $ 2,523,252  
       
Total:      
Funded backlog $ 800,793     $ 1,423,329  
Unfunded backlog 6,735,253     6,492,076  
Total backlog $ 7,536,046     $ 7,915,405  

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts and task orders as work is performed and excludes contract awards which have been protested by competitors until the protest is resolved in our favor. PAE segregates backlog into two categories, funded backlog and unfunded backlog.

Funded backlog refers to the value on contracts for which funding is appropriated less revenues previously recognized on these contracts.

Unfunded backlog represents the estimated future revenues to be earned from negotiated contracts for which funding has not been appropriated or authorized, and unexercised priced contract options. Unfunded backlog does not include any estimate of future potential task orders expected to be awarded under indefinite delivery, indefinite quantity contracts, U.S. General Services Administration schedules or other master agreement contract vehicles.

Non-GAAP Financial Measures

The Company uses EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted operating income per segment and adjusted operating income margin per segment as supplemental non-GAAP measures of performance. PAE defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes and (iii) depreciation and amortization. Adjusted EBITDA and adjusted operating income per segment exclude certain amounts included in EBITDA as provided in the reconciliations provided herein. Adjusted EBITDA is equal to the sum of adjusted operating income for each segment. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenues expressed as a percentage and adjusted operating income margin is calculated as adjusted operating income divided by revenues expressed as a percentage.

For 2021 and 2020, the Company’s net income was impacted by certain events, as described in the footnotes to the reconciliation tables, that do not reflect the cost of our operations and which may affect the period-over-period assessment of operating results. The non-GAAP financial measures demonstrate the impact of these events.

These non-GAAP measures of performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company’s board utilize these non-GAAP measures to make decisions about the use of the Company’s resources, analyze performance between periods, develop internal projections and measure management performance. PAE believes these non-GAAP measures are useful to investors in evaluating the Company’s ongoing operating and financial results and understanding how such results compare with the Company’s historical performance.

In addition to the above non-GAAP financial measures, the Company has included backlog, net bookings, and book-to-bill ratio in this release. Backlog is an operational measure representing the estimated amount of future revenues to be recognized under negotiated contracts and task orders as work is performed and excludes contract awards which have been protested by competitors until the protest is resolved in our favor. Net bookings are an operational measure representing the change in backlog between reporting periods plus reported revenue for the period and book-to-bill ratio is an operational measure representing net bookings divided by reported revenues for the same period. We believe backlog, net bookings and book-to-bill ratio are useful metrics for investors because they are an important measure of business development performance and revenue growth. These metrics are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented.

Reconciliation of GAAP net income to Adjusted EBITDA, a non-GAAP Measure - Company                
(in thousands)                      
  Three Months Ended       Nine Months Ended    
  September
26,
  September
27,
      September
26,
  September
27,
   
  2021   2020   Change   2021   2020   Change
Net income attributed to PAE Incorporated $ 29,789       $ 15,318       $ 14,471     $ 57,523       $ 37,855       $ 19,668    
Interest expense, net 13,109       13,607       (498 )   38,783       48,312       (9,529 )  
Provision for taxes 1,495       4,194       (2,699 )   6,730       (1,582 )     8,312    
Depreciation and amortization 15,651       10,239       5,412     45,244       31,405       13,839    
M&A and Integration costs 4,416       2,642       1,774     8,864       25,870       (17,006 )  
Disposal of assets                                
Non-core expenses (1) 768       464       304     2,302       1,917       385    
Non-cash items (2)                                
Equity based compensation (3) 1,194       4,039       (2,845 )   6,750       7,558       (808 )  
Other (4) (15,620 )     (4,295 )     (11,325 )   (15,054 )     (15,083 )     29    
Adjusted EBITDA $ 50,802       $ 46,208       $ 4,594     $ 151,142       $ 136,251       $ 14,890    
Adjusted EBITDA margin 7.4   %   6.9   %       6.9   %   7.1   %    

 

 

Reconciliation of GAAP operating income to
adjusted operating income, a non-GAAP Measure - GMS
           
(in thousands)                      
  Three Months Ended       Nine Months Ended    
  September
26,
  September
27,
      September
26,
  September
27,
   
  2021    2020    Change   2021    2020    Change
Operating income $ 20,459       $ 31,401       $ (10,942 )     $ 73,673       $ 75,541       $ (1,868 )  
Corp operating loss allocation (5) (4,883 )     (6,689 )     1,806       (18,176 )     (17,656 )     (520 )  
Corp other income (loss) allocation (6) 10,657       3,913       6,744       11,554       10,870       684    
Corporate NCI allocation 1,958       (471 )     2,429       2,391       (1,498 )     3,889    
Depreciation and amortization 6,291       5,880       411       18,256       18,088       168    
M&A and Integration costs 2,870       1,482       1,388       6,363       17,948       (11,585 )  
Disposal of assets                                  
Non-core expenses (1) 499       363       136       1,708       1,497       211    
Equity based compensation (3) 776       3,161       (2,385 )     5,136       5,937       (801 )  
Other (4) (10,151 )     (3,361 )     (6,790 )     (10,066 )     (10,297 )     231    
Adjusted operating income $ 28,476       $ 35,679       $ (7,203 )     $ 90,839       $ 100,430       $ (9,591 )  
Adjusted operating income margin 6.4 %     6.8 %       6.1 %   6.8 %    

 

 

Reconciliation of GAAP operating income to adjusted operating
income, a non-GAAP Measure - NSS
           
(in thousands)                      
  Three Months Ended       Nine Months Ended    
  September
26,
  September
27,
      September
26,
  September
27,
   
  2021    2020    Change   2021    2020    Change
Operating income $ 13,091       $ 5,678       $ 7,413       $ 33,729       $ 17,770       $ 15,959    
Corp operating loss allocation (5) (2,631 )     (1,859 )     (772 )     (6,234 )     (5,370 )     (864 )  
Corp other income (loss) allocation (6) 5,743       1,087       4,656       5,979       4,776       1,203    
Corporate NCI allocation       58       (58 )     119       154       (35 )  
Depreciation and amortization 9,361       4,359       5,002       26,988       13,317       13,671    
M&A and Integration costs 1,546       1,160       386       2,501       7,923       (5,422 )  
Disposal of assets                                  
Non-core expenses (1) 269       101       168       594       420       174    
Non-cash items (2)                                  
Equity based compensation (3) 418       878       (460 )     1,614       1,621       (7 )  
Other (4) (5,470 )     (934 )     (4,536 )     (4,989 )     (4,786 )     (203 )  
Adjusted operating income $ 22,327       $ 10,528       $ 11,799       $ 60,301       $ 35,825       $ 24,476    
Adjusted operating income margin 9.2 %   7.3 %       8.6 %   8.1 %    

(1) Non-core expenses include certain professional fees, gain/loss on disposal of fixed assets, settlements and certain severance costs.

(2) Non-cash items include idle facilities charges for facilities the Company no longer occupies, pension curtailment costs and unrealized FX gains/losses.

(3) Equity based compensation reflects costs associated with the issuance of restricted stock units and performance-based restricted stock units to PAE employees and independent directors.

(4) Other costs include adjustments to offset capitalized internal labor, state income taxes that were not captured in reported income tax expense and warrant-related expenses.

(5) Corporate operating loss allocation includes certain selling, general and administrative, depreciation and amortization costs that cannot be assigned to a specific segment; this cost is allocated based on proportionate segment revenues for the period in which the cost is incurred.

(6) Corporate other income (loss) allocation includes changes in the fair value of the warrants and transaction expenses allocated to the warrants.

1 Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted EBITDA margin to their most directly comparable GAAP financial measure, net income (loss), and a discussion of Adjusted EBITDA, Adjusted EBITDA margin and other non-GAAP financial measures, is contained in the “Non-GAAP Financial Measures” section of this release.
2 GMS adjusted operating income and adjusted operating income margin are non-GAAP financial measures. A reconciliation of GMS adjusted operating income and adjusted operating income margin to their most directly comparable GAAP financial measure, GMS operating income (loss), is contained in the “Non-GAAP Financial Measures” section of this release.
3 NSS adjusted operating income and adjusted operating income margin are non-GAAP financial measures. A reconciliation of NSS adjusted operating income and adjusted operating income margin to their most directly comparable GAAP financial measure, NSS operating income (loss), is contained in the “Non-GAAP Financial Measures” section of this release. 


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