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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________

FORM 10-Q
__________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 26, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 1-38643
__________________________
PAE INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware82-3173473
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

7799 Leesburg Pike, Suite 300 North, Falls Church, Virginia 22043
(Address of principal executive offices) (Zip Code)

(703) 717-6000
(Registrant’s telephone number, including area code)
__________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of each exchange on which registered
Class A Common StockPAENasdaq Stock Market
WarrantsPAEWWNasdaq Stock Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
The number of shares of the registrant’s common stock outstanding as of November 2, 2021 was 93,117,234

 




PAE Incorporated
Form 10-Q
Table of Contents

Page No.






PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

PAE Incorporated
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
Three Months EndedNine Months Ended
September 26,September 27,September 26,September 27,
2021202020212020
Revenues$689,514 $666,240 $2,185,279 $1,926,795 
Cost of revenues511,852 512,877 1,643,470 1,474,763 
Selling, general and administrative expenses140,170 119,168 428,237 361,945 
Amortization of intangible assets12,630 8,047 37,476 24,141 
Total operating expenses664,652 640,092 2,109,183 1,860,849 
Program profit 24,862 26,148 76,096 65,946 
Other operating income, net1,174 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, net16,399 5,000 17,533 15,645 
Income before income taxes
29,326 19,925 61,743 37,617 
Expense (benefit) from income taxes1,495 4,194 6,730 (1,582)
Net income27,831 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:
    Basic93,122,414 92,070,306 92,949,301 81,323,258 
    Diluted95,836,986 93,392,565 95,599,019 82,115,825 
See accompanying notes to condensed consolidated financial statements
2


PAE Incorporated
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three Months EndedNine Months Ended
September 26,September 27,September 26,September 27,
2021202020212020
Net income $27,831 $15,731 $55,013 $39,199 
Other comprehensive (loss) income:
Change in foreign currency translation adjustment, net of tax(282)780 (647)(137)
Other, net2 1 1 424 
Other comprehensive (loss) income(280)781 (646)287 
Comprehensive income 27,551 16,512 54,367 39,486 
Comprehensive (loss) income attributed to noncontrolling interests(2,050)505 (2,752)1,287 
Comprehensive income attributed to PAE Incorporated$29,601 $16,007 $57,119 $38,199 
See accompanying notes to condensed consolidated financial statements
3



PAE Incorporated
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and par value amounts)
September 26,December 31,
20212020
Assets
Current assets:
Cash and cash equivalents$157,268 $85,908 
Accounts receivable, net524,707 585,511 
Prepaid expenses and other current assets63,043 61,607 
Total current assets745,018 733,026 
Property and equipment, net36,600 27,615 
Investments15,407 18,272 
Goodwill593,171 590,668 
Intangible assets, net220,734 258,210 
Operating lease right-of-use assets, net192,638 191,370 
Other noncurrent assets14,928 10,209 
Total assets$1,818,496 $1,829,370 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$124,959 $152,962 
Accrued expenses107,446 114,222 
Customer advances and billings in excess of costs106,221 106,475 
Salaries, benefits and payroll taxes153,229 145,186 
Accrued taxes12,132 15,582 
Current portion of long-term debt, net7,036 5,961 
Operating lease liabilities, current portion47,205 46,756 
Other current liabilities38,559 45,037 
Total current liabilities596,787 632,181 
Deferred income taxes, net11,006 4,389 
Long-term debt, net865,016 860,306 
Long-term operating lease liabilities150,280 145,569 
Warrant liability32,934 50,467 
Other long-term liabilities13,509 30,273 
Total liabilities1,669,532 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 September 26, 2021 and December 31, 2020, respectively
9 9 
Additional paid-in capital171,807 188,685 
Accumulated deficit(59,098)(116,621)
Accumulated other comprehensive income1,230 1,876 
Total PAE Incorporated stockholders' equity 113,948 73,949 
Noncontrolling interests35,016 32,236 
Total liabilities and stockholders’ equity$1,818,496 $1,829,370 
See accompanying notes to condensed consolidated financial statements
4


PAE Incorporated
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands, except share data)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) / IncomeTotal PAE Incorporated Stockholders’ EquityNoncontrolling InterestsTotal Stockholders’ Equity
SharesAmount
Balance at December 31, 2019282,047 $3 $101,742 $(145,371)$(134)$(43,760)$31,851 $(11,909)
Retrospective application of the Recapitalization20,845,776 (1)1 — — —  
Adjusted balance at December 31, 201921,127,823 2 101,743 (145,371)(134)(43,760)31,851 (11,909)
Net income— — — 25,984 — 25,984 166 26,150 
Other comprehensive loss, net— — — — (695)(695)— (695)
Equity contributions from venture partners— — 13 — — 13 152 165 
Equity infusion from Gores46,999,787 5 307,936 — — 307,941 — 307,941 
Private placement23,913,044 2 212,908 — — 212,910 — 212,910 
Payment to Shay stockholders— — (424,243)— — (424,243)— (424,243)
Balance at March 29, 202092,040,654 $9 $198,357 $(119,387)$(829)$78,150 $32,169 $110,319 
Net (loss) income— — — (3,446)— (3,446)765 (2,681)
Other comprehensive income, net— — — — 201 201 — 201 
Distributions to venture partners and other— — — — — — (443)(443)
Equity contributions from venture partners— — — — — — 1,939 1,939 
Payment to Shay stockholders— — (20,169)— — (20,169)— (20,169)
Stock-based Compensation— — 3,700 — — 3,700 — 3,700 
Balance at June 28, 202092,040,654 $9 $181,888 $(122,833)$(628)$58,436 $34,430 $92,866 
Net income— — $— $15,318 $— $15,318 $413 $15,731 
Other comprehensive income, net— — — — 781 781 — 781 
Distributions to venture partners and other— — — — — — 174 174 
Equity contributions from venture partners— — (146)— — (146)— (146)
Payment to Shay stockholders— — 818 — — 818 — 818 
Stock-based Compensation— — 4,318 — — 4,318 — 4,318 
Balance at September 27, 202092,040,654 $9 $186,878 $(107,515)$153 $79,525 $35,017 $114,542 
5



PAE Incorporated
 Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands, except share data)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive (Loss) / IncomeTotal PAE Incorporated Stockholders’ EquityNoncontrolling InterestsTotal Stockholders’ Equity
SharesAmount
Balance at December 31, 202092,040,654 $9 $188,685 $(116,621)$1,876 $73,949 $32,236 $106,185 
Net income (loss)— — — 13,384 — 13,384 (1,111)12,273 
Other comprehensive loss, net— — — — (995)(995)— (995)
Equity contributions from venture partners— — — — — — 467 467 
Deconsolidation of venture— — — — — — 188 188 
Purchase of noncontrolling interest— — (17,398)— — (17,398)2,224 (15,174)
Stock-based compensation tax withholding obligation— — (5,659)— — (5,659)(5,659)
Stock-based compensation— — 2,270 — — 2,270 — 2,270 
Balance at March 28, 202192,040,654 $9 $167,898 $(103,237)$881 $65,551 $34,004 $99,555 
Net income — — — 14,350 — 14,350 559 14,909 
Other comprehensive income, net— — — — 629 629 — 629 
Distributions to venture partners— — — — — — (850)(850)
Purchase of noncontrolling interest— — (8)— — (8)— (8)
Stock-based compensation— — 2,355 — — 2,355 — 2,355 
Balance at June 27, 202192,040,654 $9 $170,245 $(88,887)$1,510 $82,877 $33,713 $116,590 
Net income (loss)— $— $— $29,789 $— $29,789 $(1,958)$27,831 
Other comprehensive loss, net— — — — (280)(280)— (280)
Distributions to venture partners— — — — — — (500)(500)
Equity contributions from venture partners— — — — — — 3,761 3,761 
Stock-based compensation tax withholding obligation— — (160)— — (160)— (160)
Stock-based compensation— — 1,722 — — 1,722 — 1,722 
Balance at September 26, 202192,040,654 $9 $171,807 $(59,098)$1,230 $113,948 $35,016 $148,964 
See accompanying notes to condensed consolidated financial statements
6


PAE Incorporated
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 26,September 27,
20212020
Operating activities
Net income $55,013 $39,199 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment7,768 7,263 
Amortization of intangible assets37,476 24,141 
Amortization of debt issuance cost2,387 9,560 
Stock-based compensation6,347 8,018 
Net undistributed income from unconsolidated ventures(8,625)(3,533)
Deferred income taxes, net7,249 (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, net61,375 (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 taxes7,488 10,975 
Prepaid expenses and other current assets(2,124)(2,118)
Other current and noncurrent liabilities(19,620)71 
Investments9,907 2,793 
Other noncurrent assets(5,576)5,903 
Accrued taxes(3,458)(4,904)
Net cash provided by operating activities99,804 92,124 
Investing activities
Expenditures for property and equipment(19,577)(2,628)
Proceeds from sales of property5,195  
Acquisition of CENTRA Technology, Inc., net of acquired cash(1,441) 
Acquisition of Metis Solutions Corporation, net of acquired cash(521) 
Acquisition of noncontrolling interest(14,308) 
Other investing activities, net2,030 (72)
Net cash used in investing activities(28,622)(2,700)
Financing activities
Net contributions from noncontrolling interests2,927 2,095 
Borrowings on long-term debt237,010 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) 
Other financing activities, net (292)
Net cash provided by (used in) financing activities710 (11,884)
Effect of exchange rate changes on cash and cash equivalents(532)(129)
Net increase in cash and cash equivalents71,360 77,411 
Cash and cash equivalents at beginning of period85,908 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 
See accompanying notes to condensed consolidated financial statements
7


PAE Incorporated
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Description of Business
PAE Incorporated, formerly known as Gores Holdings III, Inc. (“Gores III”), was originally incorporated in Delaware on October 23, 2017 as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On September 11, 2018, Gores III consummated its initial public offering (the “IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”). Unless the context otherwise indicates, references herein to the “Company" or “PAE” refer to PAE Incorporated and its consolidated subsidiaries.

On February 10, 2020 (the “Closing Date”), the Company completed the previously announced business combination (the “Business Combination”) in which Shay Holding Corporation (“Shay”) was acquired by Gores III. The transaction was completed in a multi-step process pursuant to which Shay ultimately merged with and into a wholly-owned subsidiary of Gores III, with the Gores III subsidiary continuing as the surviving company. As a result of the Business Combination, each share of common stock of Shay was cancelled and converted into the right to receive a portion of the consideration payable in connection with the transaction and Gores III acquired Shay (as it existed immediately prior to the Second Merger, as such term is defined in that certain Agreement and Plan of Merger, dated November 1, 2019, by and among Gores III, EAP Merger Sub, Inc., EAP Merger Sub II, LLC, Shay, and Platinum Equity Advisors, LLC (in its capacity as the stockholder representative) (the “Gores Merger Agreement”)) and its subsidiaries. Additionally, the stockholders of Shay as of immediately prior to the transaction held a portion of the common stock of the Company.

For accounting purposes, the Business Combination is treated as a reverse acquisition and recapitalization (the “Recapitalization”), in which Shay is considered the accounting acquirer (and legal acquiree) and Gores III is considered the accounting acquiree (and legal acquirer).

Accordingly, as of the Closing Date, Shay’s historical results of operations replaced Gores III’s historical results of operations for periods prior to the Business Combination and the results of operations of both companies are included in the accompanying condensed consolidated financial statements for periods following the Closing Date. See Note 6 - “Business Combinations and Acquisitions” for additional information.

PAE provides a wide variety of integrated support solutions, including defense and military readiness, diplomacy, intelligence support, business process outsourcing, counter-terrorism solutions, peacekeeping, development, host nation capacity building, aircraft and ground equipment maintenance and logistics, and operations and maintenance of facilities and infrastructure. Customers include agencies of the U.S. Government, such as the Department of Defense (“DoD”) and Department of State (“DoS”), the National Aeronautics and Space Administration (“NASA”), Department of Homeland Security, intelligence community agencies and other civilian agencies, as well as allied foreign governments and international organizations.

The Company’s operations are currently organized into the following two reportable segments:

Global Mission Services (“GMS”): GMS provides infrastructure and logistics management, international logistics and stabilization support, and aircraft and vehicle readiness and sustainment support. The segment focuses on customer relationships with DoD, DoS, NASA, and other government agencies for work both in the United States and outside of the United States.
8



National Security Solutions (“NSS”): NSS provides counter-threat solutions, business process outsourcing, adjudication support services and full life cycle support for complex legal matters. NSS focuses on customer relationships in the areas of intelligence, defense and security, and with civilian agencies.

The Company separately presents the costs associated with certain corporate functions as “Corporate”, which primarily include costs that are not reimbursed by the Company’s U.S. Government customers.
2. Significant Accounting Principles and Policies
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for annual financial information. In management’s opinion, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included.

The Company closes its books and records on the last Sunday of the calendar quarter to align its financial closing with its business process, which were on September 26, 2021 and September 27, 2020, respectively. The condensed consolidated financial statements and disclosures included herein are labeled based on that convention. This practice only affects interim periods, as the Company’s fiscal year ends on December 31.

The condensed consolidated financial statements include the accounts of PAE Incorporated and subsidiaries and ventures in which the Company owns more than 50% or otherwise controls. All intercompany amounts have been eliminated in consolidation.

Use of Estimates

These condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates and assumptions, including assumptions to determine the fair value of acquired assets and liabilities, recoverability of long-lived assets, goodwill, valuation allowances on deferred taxes, inputs used in stock based compensation, inputs in the valuation of the warrants liability and anticipated contract costs and revenues utilized in the earnings recognition process, which affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Due to the size and nature of many of the Company’s programs, the estimation of total revenues and cost at completion is subject to a wide range of variables, including assumptions for timing and risks. Actual results may differ from management’s estimates and changes in these estimates are recorded when known.

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies described in the Company’s Form 10-K/A filed with the SEC on May 7, 2021.
9


3. Recent Accounting Pronouncements
Accounting Pronouncements Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective in 2021 and interim periods within that year and permits for an early adoption. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of the guidance did not have a material impact on its financial statements and related disclosures.
Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the reference rate reform. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements and related disclosures.
4. Revenues
Disaggregated Revenues
Disaggregated revenues by customer type were as follows (in thousands):

Three Months Ended September 26, 2021
GMSNSSTotal
DoD$129,261 $87,886 $217,147 
Other U.S. government agencies288,543 131,212 419,755 
Commercial and non-U.S. customers30,274 22,338 52,612 
Total$448,078 $241,436 $689,514 
Nine Months Ended September 26, 2021
GMSNSSTotal
DoD$486,292 $251,706 $737,998 
Other U.S. government agencies824,920 383,155 1,208,075 
Commercial and non-U.S. customers169,770 69,436 239,206 
Total$1,480,982 $704,297 $2,185,279 

10


Three Months Ended September 27, 2020
GMSNSSTotal
DoD$203,693 $65,354 $269,047 
Other U.S. government agencies270,344 57,379 327,723 
Commercial and non-U.S. customers47,309 22,161 69,470 
Total$521,346 $144,894 $666,240 

Nine Months Ended September 27, 2020
GMSNSSTotal
DoD$595,933 $194,629 $790,562 
Other U.S. government agencies781,004 177,535 958,539 
Commercial and non-U.S. customers109,706 67,988 177,694 
Total$1,486,643 $440,152 $1,926,795 

Revenues by contract type were as follows (in thousands):

Three Months Ended September 26, 2021
GMSNSSTotal
Cost-reimbursable$218,152 $89,948 $308,100 
Fixed-price191,530 85,287 276,817 
Time and materials38,396 66,201 104,597 
Total$448,078 $241,436 $689,514 
Nine Months Ended September 26, 2021
GMSNSSTotal
Cost-reimbursable$764,625 $273,695 $1,038,320 
Fixed-price532,789 246,840 779,629 
Time and materials183,568 183,762 367,330 
Total$1,480,982 $704,297 $2,185,279 

Three Months Ended September 27, 2020
GMSNSSTotal
Cost-reimbursable$302,795 $35,656 $338,451 
Fixed-price161,024 62,568 223,592 
Time and materials57,527 46,670 104,197 
Total$521,346 $144,894 $666,240 

11


Nine Months Ended September 27, 2020
GMSNSSTotal
Cost-reimbursable$868,780 $106,848 $975,628 
Fixed-price481,309 185,218 666,527 
Time and materials136,554 148,086 284,640 
Total$1,486,643 $440,152 $1,926,795 
Disaggregated revenues by geographic location were as follows (in thousands):
Three Months Ended September 26, 2021
GMSNSSTotal
United States$246,903 $239,723 $486,626 
International201,175 1,713 202,888 
Total$448,078 $241,436 $689,514 
Nine Months Ended September 26, 2021
GMSNSSTotal
United States$801,944 $700,299 $1,502,243 
International679,038 3,998 683,036 
Total$1,480,982