GORES HOLDINGS III, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of our financial statements
with a narrative from the perspective of management on the Company's financial
condition, results of operations, liquidity and certain other factors that may
affect future results. The following discussion of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and related notes contained in this Annual
Report on Form 10-K/A. Certain information contained in the discussion and
analysis set forth below includes forward-looking statements. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those set forth under "Cautionary Note
Regarding Forward-Looking Statements", Item 1A - "Risk Factors" and elsewhere in
this Annual Report on Form 10-K/A. Unless otherwise noted, the MD&A compares the
year ended December 31, 2020 to the year ended December 31, 2019 .
This MD&A generally discusses 2020 and 2019 items and year-over-year comparisons
between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons
between 2019 and 2018 that are not included in this Form 10-K/A can be found in
"Management's Discussion and Analysis of Financial Condition and Results or
Operations" in the Company's Annual Report on Form 8-K/A filed with the SEC on
March 11, 2020 . As used in this MD&A, unless the context indicates otherwise,
the financial information relating to the year ended December 31, 2019 , are
those of Shay and its subsidiaries, and the financial information and data for
the year ended December 31, 2020 includes the financial information and data of
Shay and its subsidiaries for the period prior to the Closing and the financial
information and data of PAE Incorporated for the period subsequent to the
Closing. See Note 1 - "Description of Business" and Note 6 - "Business
Combinations and Acquisitions" for additional information.
Restatement of Previously Issued Consolidated Financial Statements
This Form 10-K/A reflects the restatement of our consolidated financial
statements as of and for the year ended December 31, 2020 . The restatement of
the Original Form 10-K, filed on March 16, 2021 , reflected in this amendment
corrects accounting errors related to the accounting for Warrants.
Business Overview
PAE is a leading, highly diversified, global company that provides a broad range
of operational solutions and outsourced services to meet the critical enduring
needs of the U.S. government, other allied governments, international
organizations and companies. PAE merges technology with advanced business
practices to deliver faster, smarter and more efficient managed services.
Whether clients require high-profile support to operate the largest U.S.
embassies around the world or need technical solutions for programs that monitor
bioterrorism agents, PAE delivers for its customers. PAE leverages its scale,
over 65 years of experience and talented global workforce of approximately
20,000 to provide the essential services PAE's clients need to tackle some of
the world's toughest challenges.
Basis of Presentation
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 and
Department of State , the National Aeronautics and Space Administration ,
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Department of Homeland Security , intelligence community agencies and other
civilian agencies, as well as allied foreign governments and international
organizations.
PAE's operations are currently organized into two reportable segments, Global
Mission Services ("GMS") and National Security Solutions ("NSS").
•The GMS segment generates revenues through contracts under which PAE provides
customers with logistics and stability operations, force readiness and
infrastructure management.
•The NSS segment generates revenues through contracts under which PAE provides
customers with counter-threat solutions, intelligence solutions and information
optimization.
Segment performance is based on consolidated revenues and consolidated operating
income. For additional information regarding PAE's reportable segments, refer to
Note 18 - "Segment Reporting" of the notes to PAE's consolidated financial
statements.
Factors Affecting PAE's Operating Results
Business Combinations and Acquisitions
Business Combination
Merger Consideration
As described in Note 1 - "Description of Business" and Note 6 - "Business
Combinations and Acquisitions" of the notes to the consolidated financial
statements, the Company completed the Business Combination on February 10, 2020 .
Pursuant to the terms of the Merger Agreement, the aggregate merger
consideration paid for the Business Combination was approximately $1,427.0
million . The consideration paid to the Shay Stockholders consisted of a
combination of cash and stock consideration. The aggregate cash consideration
paid to the Shay Stockholders at the Closing was approximately $424.2 million ,
consisting of (a) approximately $408.0 million of cash available to Gores III
from its trust account, after giving effect to income and franchise taxes
payable in respect of interest income earned in the trust account and
redemptions that were elected by Gores III's public stockholders, plus (b) all
of Gores III's other cash and cash equivalents, plus (c) gross proceeds of
approximately $220.0 million from a private placement offering conducted by
Gores III in which investors purchased an aggregate of 23,913,044 shares of
Class A Common Stock for $9.20 per share, less (d) certain transaction fees and
expenses, including the payment of deferred underwriting commissions agreed to
at the time of Gores III's initial public offering, less (e) certain payments to
participants in the 2016 Participation Plan, less (f) approximately $136.5
million used to repay a portion of the indebtedness of Shay immediately prior to
the Closing, less (g) approximately $33.8 million of transaction fees and
expenses of Shay. The remainder of the consideration paid to the Shay
Stockholders consisted of 21,127,823 newly issued shares of Class A Common
Stock.
In addition to the foregoing consideration paid on the Closing Date, Shay
Stockholders are entitled to receive additional Earn-Out Shares (as both terms
are defined in Note 13 - "Stockholders' Equity - Earn Out Agreement" of the
notes to the consolidated financial statements) of up to an aggregate of four
million shares of Class A Common Stock, if the price of Class A Common Stock
trading on the Nasdaq exceeds certain thresholds during the five-year period
following the completion of the Business Combination or if there is an
Acceleration Event, as defined in Note 13 - "Stockholders' Equity - Earn-Out
Agreement" of the notes to the consolidated financial statements. For further
information, refer to Note 13 - "Stockholders' Equity - Earn-Out Agreement" of
the notes to the consolidated financial statements.
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During the third quarter, pursuant to the post-closing adjustment provisions
contained in the Merger Agreement, the Company made a post-closing adjustment
payment of $20.2 million to the Shay Stockholders. Additionally, during the
third quarter, the Company paid $1.0 million to certain members of PAE
management in connection with the post-closing adjustment, and such amount was
recorded as compensation expense.
Incentive Plan
For a discussion of the 2020 Incentive Plan, see Note 14 - "Stock-Based
Compensation" of the notes to the consolidated financial statements, which is
incorporated by reference herein.
Debt
In connection with the Business Combination, Shay was required to amend its 2016 credit agreements (comprised of (i) a first lien term loan credit agreement, as amended; (ii) a second lien term loan credit agreement, as amended; and (iii) a revolving credit facility, as amended, each dated as ofOctober 26, 2016 ) (the "2016 Credit Agreements") and reduce its outstanding indebtedness under its credit facilities such that the total indebtedness under the facilities, minus cash on hand at the consummation of the transaction would not be greater than$572.1 million . Immediately after the closing of the Business Combination, Shay reduced the outstanding balance on the 2016 Credit Agreements by approximately$136.5 million to a principal balance of$128.8 million .
OnOctober 26, 2020 ,Pacific Architects and Engineers, LLC , aDelaware limited liability company (the "PAE, LLC "), an indirect wholly owned subsidiary of the Company, entered into a stock purchase agreement (the "Stock Purchase Agreement") by and amongPAE, LLC ,CENTRA Technology, Inc. , aMaryland corporation ("CENTRA"), certain stockholders of CENTRA, andBarbara Rosenbaum as the sellers representative. CENTRA provides mission critical services to theU.S. intelligence community and otherU.S. national and homeland security customers. The Company completed the acquisition onNovember 20, 2020 . Pursuant to the Stock Purchase Agreement, the consideration paid to acquire all of the shares of CENTRA was approximately$208.0 million (net of tax benefits) in cash, subject to customary purchase price adjustments as set forth in the Stock Purchase Agreement. The Stock Purchase Agreement contains customary representations, warranties and covenants of the parties. The Stock Purchase Agreement also contains customary indemnities, andPAE, LLC has obtained representation and warranty insurance, subject to exclusions, policy limits and certain other terms and conditions, to obtain coverage for losses that may result from a breach of certain representations and warranties made by the sellers in the Stock Purchase Agreement. An aggregate of$5.0 million of the purchase price was deposited into an escrow account to satisfy purchase price adjustments, if any. CENTRA's' financial results have been included in our consolidated financial statements fromNovember 20, 2020 . The impact of the acquisition of CENTRA on PAE's results of operations is further discussed below.
Metis Solutions Corporation Business Acquisition
OnNovember 16, 2020 ,PAE, LLC entered into an Agreement and Plan of Merger (the "Metis Merger Agreement") by and amongPAE, LLC ,Metis Solutions Corporation , aDelaware corporation ("Metis"),Rising Tide Merger Sub, Inc. , aDelaware corporation, andChristopher Wynes , solely in his capacity as the representative of the sellers. Metis provides services focused on supporting intelligence community, security and defense customers. The Company 51 -------------------------------------------------------------------------------- completed the acquisition onNovember 23, 2020 . Pursuant to the Metis Merger Agreement, the consideration paid to acquire Metis was approximately$92.0 million in cash, subject to customary purchase price adjustments as set forth in the Metis Merger Agreement. The Metis Merger Agreement contains customary representations, warranties and covenants of the parties. The Metis Merger Agreement also contains customary indemnities, andPAE, LLC has obtained representation and warranty insurance, subject to exclusions, policy limits and certain other terms and conditions, to obtain coverage for losses that may result from a breach of certain representations and warranties made by the sellers in the Metis Merger Agreement. An aggregate of$2.5 million of the purchase price was deposited into an escrow account to satisfy purchase price adjustments, if any.
Metis' financial results have been included in our consolidated financial
statements from
DZSP 21 LLC Minority Interest Acquisition
OnJanuary 31, 2021 ,PAE Aviation and Technical Services LLC , aDelaware limited liability company, an indirect wholly owned subsidiary of the Company, acquired the 49% minority interest ofParsons Government Services, Inc. in theDZSP 21 LLC joint venture. See Note 23 - "Subsequent Events" of the notes to the consolidated financial statements for more details on this transaction. Financial and Other Highlights As ofDecember 31, 2020 , PAE had a contract base of more than 679 active contracts and task orders. PAE served as the prime contractor on approximately 96.0% of its contracts. TheDoD and DoS are PAE's largest customers and accounted for 36.0% and 19.0% of its revenue during the year endedDecember 31, 2020 , respectively and 39.0% and 24.0% of its revenue during the year endedDecember 31, 2019 , respectively. International Logistics and Stabilization, Infrastructure and Logistics, Readiness and Sustainment, and Business Process Solutions were PAE's largest contributors by service area, representing 37.0%, 26.0%, 14.0%, and 10.0% of its revenue, respectively during the year endedDecember 31, 2020 , and representing 35.0%, 26.0%, 15.0%, and 15.0% of its revenue, respectively during the year endedDecember 31, 2019 . FromDecember 31, 2019 toDecember 31, 2020 , PAE's overall contract backlog increased by 24.6% from$6,351.8 million to$7,915.4 million , of which$1,423.3 million was funded as ofDecember 31, 2020 . This increase was primarily due to the acquisitions of CENTRA and Metis, which added$1,150.5 million of acquired backlog at year endDecember 31, 2020 . Backlog is an operational measure representing PAE's estimate of the amount of revenue that it expects to realize over the remaining life of awarded contracts and task orders; the 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. The total backlog consists of remaining performance obligations plus unexercised options. PAE believes backlog is a useful metric for investors because it is an important measure of business development performance and revenue growth. This metric is used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. See Note 4 - "Revenues" of the notes to the consolidated financial statements for more information. The estimated value of PAE's total backlog was as follows (in thousands): 52 --------------------------------------------------------------------------------
As of As of
December 31, December 31,
2020 2019
Global Mission Services:
Funded GMS backlog $ 946,711 $ 1,173,196
Unfunded GMS backlog 4,445,442 3,393,081
Total GMS backlog $ 5,392,153 $ 4,566,277
National Security Solutions:
Funded NSS backlog $ 476,618 $ 311,214
Unfunded NSS backlog 2,046,634 1,474,309
Total NSS backlog $ 2,523,252 $ 1,785,523
Total:
Funded backlog $ 1,423,329 $ 1,484,410
Unfunded backlog 6,492,076 4,867,390
Total backlog $ 7,915,405 $ 6,351,800
Trends and Factors Affecting PAE's Future Performance
External Factors
PAE's business primarily focuses on providing services to the U.S. Government
and allied nations and organizations; PAE's performance is inherently linked to
governmental missions and goals. We have concentrated our business efforts on
those missions and goals that are enduring and that have limited exposure to
abrupt policy changes. For example, PAE has supported U.S. embassies since the
1970s. We are also trusted by our customers to support them on major policy
initiatives that require immediate response to solve an acute crisis. Examples
of this work include our rapid establishment and operation of Ebola treatment
units in Liberia in 2015 and our work beginning in 2020 supporting COVID-19
testing and care, including on behalf of the state of Georgia converting a
convention center to a COVID-19 treatment center in less than one week,
mobilizing trained-and-ready test teams to conduct COVID-19 testing for the
Southeastern Conference of the National Collegiate Athletic Association , and
serving as the joint logistics and medical integrator for the Navajo Nation
Department of Health's COVID-19 response.
Over most of the last two decades, the U.S. Government has increased its
reliance on the private sector for a wide range of professional and support
services. This development has been driven by a variety of factors, including
lean-government initiatives launched in the 1990s, surges in demand during times
of national crisis, the increased complexity of missions conducted by the U.S.
military and the DoS, increased focus of the U.S. military on war-fighting
efforts and loss of skills within the government caused by workforce reductions
and retirements.
Although the size of future U.S. Government department and agency budgets
remains subject to change, current indications are that overall U.S. Government
spending will remain largely consistent with current spending levels. PAE
believes the following industry trends will result in continued strong demand in
the target markets for the types of services it provides:
•new U.S. Government policies and program, both within the United States and
overseas, to provide services to address health and other social issues;
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•the continued transformation of military forces, leading to continued
performance of non-combat functions by government contractors, including
life-cycle asset management functions ranging from organizational to depot level
maintenance;
•an increased level of coordination between the DoS and DoD on key national
security initiatives and foreign policies;
•increased maintenance, overhaul and upgrade needs to support aging military
platforms; and
•the on-going evolution of international relations that may require enhanced or
new policy initiatives.
Current Economic Conditions
PAE believes that its industry and customer base are less likely to be affected
by many of the factors generally affecting business and consumer spending. PAE's
contract awards typically extend to five years, including options, and it has a
strong history of being awarded a majority of these contract options.
Additionally, since PAE's primary customers are departments and agencies within
the U.S. Government , it has not historically had significant issues collecting
its receivables. However, PAE cannot be certain that the economic environment,
government debt levels, or other factors will not adversely impact its business,
financial condition or results of operations in the future. The government has
taken several financial precautions and measures to combat the current financial
market conditions, including in response to the COVID-19 pandemic.
Impact of COVID-19
We continue to work with our stakeholders (including customers, employees,
suppliers and local communities) to address this global pandemic. Specifically,
we are working closely with our customers, including those within the U.S.
Government , to permit continued contract performance and to mitigate the impact
of the current COVID-19 pandemic on our operations and personnel. We continue to
review our contractual provisions, hold discussions with customers regarding the
pandemic's potential impact on contract operations, and take actions to reduce
the impact of COVID-19 on our business, workforce, supply chain, revenues, and
results of operations. We are continuing to monitor the impact of the pandemic
and other related uncertainties on financial markets, which previously caused us
to delay undertaking certain actions in support of our strategic plans. In
response to COVID-19, we have taken a number of steps to ensure the protection
of employees and customers, as well as to mitigate any operational and financial
impacts. In particular, we are:
•Implementing enhanced health and safety protocols, including at customer sites,
in order to protect our employees and customers and to maintain continuity of
operations;
•Actively monitoring the COVID-19 status of employees and independent
contractors;
•Reviewing on an ongoing basis the impact of COVID-19 on programs, facilities
and contracts with customers;
•Reducing overhead costs by among other things delaying planned hiring and by
cancelling travel that is not directly related to program requirements;
•Developing contingency and business continuity plans in case COVID-19
disruptions increase or key personnel become incapacitated;
•Identifying new business opportunities related to COVID-19, including expanded
service offerings for existing customers;
•Entering into contract modifications and advance agreements where applicable to
permit recovery of costs relating to COVID-19; and
•Engaging in frequent and ongoing dialogue and contract negotiations with
customers to either:
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•Permit PAE employees to continue to work safely (including remotely); or,
•Permit PAE to be reimbursed the costs of paid leave for employees who are
unable to work (as provided by Section 3610 of the Coronavirus Aid, Relief and
Economic Security Act (as amended, the "CARES Act").
COVID-19 has had a marginally unfavorable impact on the Company's results of
operations for the year ended December 31, 2020 . Although our operations have
been disrupted by the COVID-19 pandemic, the impact has been mitigated due to
the nature of our business. In particular, our U.S. Government customers have
taken steps to ensure the continuance of many of the services provided by us and
other contractors, including, but not limited to, designating certain PAE
contracts as essential for continued performance and authorizing remote work for
contractor personnel that cannot access worksites. In addition, the impact may
be further mitigated by Section 3610 of the CARES Act, which allows U.S.
government agencies to reimburse contractors such as us at the minimum
applicable contract billing rate for costs of certain paid leave for employees
who cannot access work sites or telework through September 30, 2021 . However,
some U.S. Government customers have suspended or reduced work under certain of
our contracts.
COVID-19 related costs for us and our subcontractors could be significant, and
we are seeking reimbursement of such costs under our U.S. Government contracts
through a combination of contract actions and reimbursement of costs under
Section 3610 of the CARES Act. Reimbursement of any costs under Section 3610 is
not expected to include profit or fee. Costs for employees whose jobs cannot be
performed remotely may not be fully recoverable under our contracts. We also
have no assurance that Congress will appropriate funds to cover the
reimbursement of contractors authorized by the CARES Act.
Management expects that the impact of COVID-19 will be marginally unfavorable on
our full year results based on information known to us at this time. Since our
primary customers are departments and agencies within the U.S. Government , we
have not historically had significant issues collecting our receivables and do
not foresee issues collecting our receivables in the foreseeable future. In
addition, our contract awards typically extend to at least five years, including
options, and we have a strong history of being awarded a majority of these
contract options; we do not anticipate that the pandemic will have a materially
adverse impact on such awards.
Our liquidity position has not been materially impacted, and we continue to
believe that we have adequate liquidity to fund our operations and meet our debt
service obligations for the foreseeable future. However, we cannot predict the
impact of the COVID-19 pandemic, and the longer the duration of the event and
the more widespread in geographic locations where we and our suppliers operate,
the more likely it is that it could have an adverse impact on our financial
condition, results of operations, and/or cash flows in the future.
Inflation and Pricing
Most of PAE's contracts provide for estimates of future labor costs to be
escalated for any option periods, while the non-labor costs in its contracts are
normally considered reimbursable at cost. PAE's property and equipment consists
principally of computer systems equipment, machinery and transportation
equipment, leasehold improvements, and furniture and fixtures. PAE does not
expect the overall impact of inflation on replacement costs of its property and
equipment to be material to its future results of operations or financial
condition.
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Primary Components of Operating Results
Revenues
The majority of PAE's revenues are generated from contracts with the U.S.
Government and its agencies. PAE enters into a variety of contract types,
including fixed price, cost reimbursable, and time and materials contracts.
Cost of revenues
Cost of revenues includes costs related to labor, material, subcontract labor
and other costs that are allowable and allocable to contracts under federal
procurement standards.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of (i) fringe
benefits related to the contract costs; (ii) salaries and wages plus associated
fringe benefits and occupancy costs related to executive and senior management,
business development, bid and proposal, contracts administration, finance and
accounting, human resources, recruiting, information systems support, legal and
corporate governance; and (iii) unallowable costs under applicable procurement
standards that are not allocable to contracts for billing purposes. Unallowable
costs do not generate revenue but are necessary for business operations.
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Results of Operations
Comparison of Results for the Year Ended December 31, 2020 and December 31, 2019
(in thousands):
Year Ended December 31,
2020 2019 Dollar Change Percent Change
(Restated)
Revenues $ 2,714,628 $ 2,763,893 $ (49,265) (1.8) %
Cost of revenues 2,098,153 2,183,574 (85,421) (3.9)
Selling, general and administrative expenses 498,827 530,080 (31,253) (5.9)
Amortization of intangible assets 34,154 33,205 949 2.9
Total operating expenses 2,631,134 2,746,859 (115,725) (4.2)
Program profit 83,494 17,034 66,460 390.2
Other operating income, net 7,272 9,785 (2,513) (25.7)
Operating income 90,766 26,819 63,947 238.4
Interest expense, net (73,857) (86,011) 12,154 (14.1)
Other income, net 12,645 - 12,645 (100.0)
Income (loss) before income taxes 29,554 (59,192) 88,746 (128.6)
Expense (benefit) from income taxes 2,268 (9,131) 11,399 (133.8)
Net income (loss) 27,286 (50,061) 77,347 (127.6)
Noncontrolling interest in earnings of (1,464) (252) (1,212) 481.0
ventures
Net income (loss) income attributed to PAE
(130.7) %
Incorporated
Revenues
Revenues for the year endedDecember 31, 2020 , decreased by approximately$49.3 million , or 1.8%, from the comparable period in 2019. The decrease was primarily attributable to a$187.4 million impact from COVID-19, of which approximately$124.5 million was non-labor and$62.9 million was labor, partially offset by$39.2 million of revenue from recent acquisitions, and by a net increase of$98.9 million from net change in contract volume, new business and COVID-19 relief opportunities. 57 -------------------------------------------------------------------------------- Cost of revenues Cost of revenues for the year endedDecember 31, 2020 , decreased by approximately$85.4 million , or 3.9%, from the comparable period in 2019. The decrease in cost of revenues was primarily driven by lower revenue volume in the current period and the loss on disposal ofPAE ISR LLC ("PAE ISR") in 2019. Selling, general and administrative expenses Selling, general and administrative expenses for the year endedDecember 31, 2020 , decreased by approximately$31.3 million , or 5.9%, from the comparable period in 2019. The decrease in selling, general and administrative expenses was primarily driven by PAE ISR discontinued operations, lower revenue volume and favorable program performance. Amortization of intangible assets Amortization of intangible assets for the year endedDecember 31, 2020 , increased by approximately$0.9 million , or 2.9%, from the comparable period in 2019. The increase was associated with amortizing certain customer relationships, development technologies, and trade names related to the Metis and CENTRA acquisitions in the fourth quarter of 2020. Other operating income, net Other income, net for the year endedDecember 31, 2020 , decreased by approximately$2.5 million , or 25.7%, from the comparable period in 2019. This decrease was driven by a one-time contract reserve write-off in the prior year period. Operating income Operating income for the year endedDecember 31, 2020 , increased by approximately$63.9 million , or 238.4%, from the comparable period in 2019. The increase resulted from the loss on disposal of PAE ISR assets in 2019 and improved program performance in the current period, which increase was partially offset by lower revenue volume and other operating income. Interest expense, net Interest expense, net for the year endedDecember 31, 2020 , decreased by approximately$12.2 million , or 14.1%, from the comparable period in 2019. This decrease was primarily driven by reduction in average debt balances year over year and lower interest rates. Other income, net Other income, net for the year endedDecember 31, 2020 , increased by approximately$12.6 million driven by changes in fair value of the Warrants. Net income (loss) Net income attributed to PAE for the year endedDecember 31, 2020 was$28.8 million compared with a net loss attributed to PAE of approximately$49.8 million in the comparable period in 2019. The increase in net income for the year endedDecember 31, 2020 , was 58 --------------------------------------------------------------------------------
primarily driven by factors impacting operating income and changes in fair value of the Warrants.
PAE's Segments
Comparison of Results by Segments for the Year Ended
December 31, 2020 December 31, 2019
Revenues % of Total Revenues % of Total Revenues
Revenues
GMS $ 2,080,474 76.6 % $ 2,099,737 76.0 %
NSS 634,154 23.4 664,156 24.0
Corporate - - - -
Consolidated revenues $ 2,714,628 100.0 % $ 2,763,893 100.0 %
Operating Income Profit Margin % Operating Income Profit Margin %
(Loss) (Loss)
GMS $ 80,090 3.0 % $ 92,386 3.3 %
NSS 22,073 0.8 (36,940) (1.3)
Corporate (11,397) (28,627)
Consolidated operating income $ 90,766 $ 26,819
Global Mission Services Segment Results
Revenues
Revenues for the year ended December 31, 2020 , decreased by $19.3 million , or
0.9%, from the comparable period in 2019. The decrease was attributable to a
$147.1 million impact from COVID-19, of which approximately $104.6 million was
non-labor and $42.5 million was labor, partially offset by a $127.8 million net
increase in contract volume, new business and COVID-19 relief opportunities.
Operating income
Operating income for the year ended December 31, 2020 decreased by $12.3
million , or 13.3%, from the comparable period in 2019. The decrease was driven
by higher selling, general and administrative expenses and lower revenue volume,
partially offset by increased consolidated venture income.
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National Security Solutions Segment Results
Revenues
Revenues for the year ended December 31, 2020 decreased by $30.0 million , or
4.5%, from the comparable period in 2019. The decrease was attributable to a
$40.3 million impact from COVID-19, of which approximately $19.9 million was
non-labor and $20.4 million was labor, and by a $28.9 million decrease from
small business set aside recompete losses, net of new business wins, partially
offset by $39.2 million of revenue from recent acquisitions.
Operating income
Operating income for the year ended December 31, 2020 increased by $59.0
million , or 159.8%, from the comparable period in 2019. The increase was
primarily due to the loss on disposal of PAE ISR assets in 2019 as well as
improved program performance in the current period, which increase was partially
offset by lower revenue volume.
Liquidity and Capital Resources
As of December 31, 2020 , PAE had cash and cash equivalents totaling $85.9
million and the Company had no outstanding borrowings on its 2020 ABL Credit
Agreement.
As of
PAE's primary sources of liquidity are cash flow from operations and borrowings under its credit facility to provide capital necessary for financing working capital requirements, capital expenditures and making selective strategic acquisitions. OnOctober 19, 2020 the Company refinanced the 2016 Credit Agreements and entered into new senior secured credit facilities (the "2020 Credit Agreements"). PAE expects the combination of its current cash, cash flow from operations, and the available borrowing capacity under the 2020 Credit Agreements to be sufficient to continue to meet its normal working capital requirements, capital expenditures and other cash requirements. However, significant increases or decreases in revenues, accounts receivable, accounts payable, and merger and acquisition activity could affect PAE's liquidity. PAE's accounts receivable and accounts payable levels can be affected by changes in the level of contract work it performs, by the timing of large materials purchases, and subcontractor efforts used in its contracts. Government funding delays can cause delays in PAE's ability to invoice for revenues earned, presenting a potential negative impact on liquidity. In connection with the Business Combination, Shay was required to amend its 2016 Credit Agreements and reduce its outstanding indebtedness under its credit facilities such that the total indebtedness under the facilities, minus cash on hand at the consummation of the transaction would not be greater than$572.1 million . Immediately after the closing of the Business Combination the outstanding balance on the 2016 Credit Agreements was reduced by approximately$136.5 million to a principal balance of$128.8 million . OnOctober 19, 2020 the Company refinanced the 2016 Credit Agreements and entered into new senior secured credit facilities. The 2020 Credit Agreements establish a$740.0 million term loan facility maturing inOctober 2027 , a$150.0 million delayed draw term loan facility maturing inOctober 2027 , and a$175.0 million senior secured revolving credit facility maturing inOctober 2025 . 60 --------------------------------------------------------------------------------
See Note 12 - "Debt" of the notes to the consolidated financial statements for further information on the terms and availability of PAE's credit facilities.
As ofDecember 31, 2020 , the Company had commitments for capital expenditures in the amount of$4.8 million . These commitments primarily relate to software, equipment, facilities infrastructure and information technology. The Company anticipates funding such commitments through working capital or debt financing sources. Cash Flows Analysis Comparison of Results for the Year EndedDecember 31, 2020 , andDecember 31, 2019 (in thousands): Year Ended December 31, 2020 2019 (Restated) Dollar Change Net cash provided by operating activities$ 100,862 $ 116,648 $ (15,786) Net cash used in investing activities (316,213) (2,689) (313,524) Net cash provided by (used in) financing activities 231,783 (95,274) 327,057 Effect of exchange rate changes on cash and cash 3,188 equivalents 1,441
(1,747)
Net increase in cash and cash equivalents$ 17,873 $
16,938 $ 935
Net cash provided by operating activities Net cash provided by operating activities for the year endedDecember 31, 2020 decreased by$15.8 million from the comparable period in 2019, primarily as a result of lower cash collections and a decrease in accounts payable, partially offset by net income growth, and increases in customer advances and billings in excess of cost and accrued salaries. Net cash used in investing activities Cash used in investing activities for the year endedDecember 31, 2020 increased by$313.5 million from the comparable period in 2019, primarily driven by the business acquisitions of Metis and CENTRA during the fourth quarter of 2020. Net cash provided by (used in) financing activities Cash provided by financing activities for the year endedDecember 31, 2020 improved by$327.1 million from the comparable period in 2019. The increase was primarily driven by the Recapitalization in the first quarter of 2020 and refinancing of debt during the fourth quarter of 2020, which increase was partially offset by repayments on long term debt.
For a discussion of the Recapitalization, see Note 6 - "Business Combinations and Acquisitions" of the notes to the consolidated financial statements.
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Long-term debt consisted of the following as of the dates presented (in
thousands):
December 31, December 31,
2020 2019
First Term Loan $ 890,000 $ 506,772
Second Term Loan - 265,329
2020 ABL Credit Agreement - -
Total debt 890,000 772,101
Unamortized discount and debt issuance costs (23,733) (22,164)
Total debt, net of discount and debt issuance costs 866,267
749,937
Less current maturities of long-term debt (5,961)
(22,007)
Total long-term debt, net of current$ 860,306 $
727,930
The following discusses the Company's borrowing arrangements as ofDecember 31, 2020 . During the fourth quarter, the Company completed a refinancing of its existing indebtedness as further discussed below. During the fourth quarter, the Company refinanced the 2016 Credit Agreements and entered into the 2020 Credit Agreements, which provide for borrowings up to$890.0 million . The 2020 Credit Agreements establish a$740.0 million term loan facility maturing inOctober 2027 priced at LIBOR plus a spread of 4.5%, a$150.0 million delayed draw term loan facility maturing inOctober 2027 priced at LIBOR plus a spread of 4.5%, and a$175.0 million senior secured revolving credit facility maturing inOctober 2025 priced at LIBOR plus a spread of 1.8% to 2.3%. The Company used the proceeds from the 2020 Credit Agreements to repay the amounts outstanding under its 2016 Credit Agreements, with the remaining amounts to be used for general corporate purposes, mergers and acquisitions, and transaction fees and expenses. The loans under the 2020 Credit Agreements are secured by a first lien over substantially all of the Company's assets. The 2020 Credit Agreements also contain affirmative and negative covenants customary for transactions of this type, including (i) affirmative covenants requiring the Company to comply with specified financial covenants under certain circumstances, including the maintenance of certain leverage ratios; and (ii) various non-financial covenants, including affirmative covenants with respect to reporting requirements and maintenance of business activities, and negative covenants that, among other things, may limit or impose restrictions on the Company's ability to alter the character of the business, consolidate, merge, or sell assets, incur liens or additional indebtedness, make investments, and undertake certain additional actions. PAE was in compliance with the financial covenants under the 2020 Credit Agreements as ofDecember 31, 2020 . See Note 12 - "Debt" of the notes to the consolidated financial statements. 62 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements PAE has outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of its business. PAE also has letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in Note 12 - "Debt" of the notes to the consolidated financial statements. PAE has entered into various arrangements to provide program management, construction management and operations and maintenance services. The ownership percentage of these ventures is typically representative of the work to be performed or the amount of risk assumed by each venture partner. Some of these ventures are considered variable interest entities. PAE has consolidated all ventures over which it has control. For all others, PAE's portion of the earnings is recorded in equity in earnings of ventures. See Note 10 - "Consolidated Variable Interest Entities" of the notes to the consolidated financial statements. PAE does not believe that it has any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors. Contractual Obligations
The following contractual obligations table summarizes PAE's contractual
obligations as of
Calendar Years
(in thousands) 2021 2022 2023 2024 2025 Thereafter Total
Bank loan debt $ 8,900 $ 8,900 $ 8,900 $ 8,900 $ 8,900 $ 845,500 $ 890,000
Operating leases 48,547 42,234 37,212 29,009 22,558 54,509 234,069
Total $ 57,447 $ 51,134 $ 46,112 $ 37,909 $ 31,458 $ 900,009 $ 1,124,069
The estimated cash requirement for interest on PAE's 2020 Credit Agreements is
approximately $48.4 million for 2021.
Recently Issued Accounting Pronouncements
For a description of recently announced accounting standards, including the
expected dates of adoption and estimated effects, if any, on PAE's consolidated
financial statements, see Note 3 - "Recent Accounting Pronouncements" of the
notes to the consolidated financial statements.
Critical Accounting Policies
PAE's MD&A is based upon its consolidated financial statements, which are
prepared in conformity with U.S. generally accepted accounting principles (" U.S
GAAP"). The preparation of these financial statements in accordance with U.S
GAAP requires the use of estimates and assumptions which affect the reported
amounts in the consolidated financial statements. Due to the size and nature of
many of PAE's programs, the estimation of total revenues and cost at completion
is subject to a wide range of variables, including assumptions for schedule and
technical issues. Actual results may differ from PAE's management's estimates.
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PAE has identified the following Significant Accounting Principles and Policies
as critical because they require significant judgments and assumptions about
highly complex and inherently uncertain matters and the use of reasonably
different estimates and assumptions could have a material impact on its results
of operations or financial condition.
•Revenue Recognition
•Goodwill and Indefinite-Lived Intangibles
•Income Taxes
Revenue Recognition
The majority of PAE's revenues are generated from contracts with the
PAE accounts for a contract when it has been approved by all parties in the arrangement, the rights of the parties and payment terms are identified, and collectability of consideration is probable. At contract inception, PAE identifies distinct goods or services promised in the contract, referred to as performance obligations, and then determines the transaction price for the contract. PAE's contracts contain promises to provide distinct goods or services to its customers. These represent separate performance obligations and units of account. PAE's management evaluates whether a single contract should be accounted for as more than one performance obligation or whether two or more contracts should be combined and accounted for as one single arrangement at the outset of the contract. Most of PAE's contracts consist of providing a complex set of interrelated goods and services that together provide a single deliverable or solution to the customer, and accordingly are accounted for as a single performance obligation. PAE also may engage with a customer on a contract that contains multiple distinct goods or services. In such circumstance, multiple performance obligations exist, and PAE allocates the contract's transaction price to the individual performance obligations based on the estimated relative standalone selling price. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which PAE forecasts expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service promised. Revenue is recognized when, or as, the performance obligation is satisfied. For substantially all of PAE's contracts, PAE satisfies its performance obligations over time as its customer simultaneously receives and consumes benefits. Revenue is recognized over time when there is a continuous transfer of control to the customer. ForU.S. Government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow theU.S. Government to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Based on the nature of the products and services provided in the contract, PAE uses judgment to determine if an input measure or output measure best depicts the transfer of control over time. For service type contracts, performance obligations are typically satisfied as services are rendered and PAE uses a contract cost-based input method to measure progress. Contract costs include labor, material and allocable indirect expenses. Revenue is recognized proportionally as contract costs are incurred plus estimated fees. If a contract does not meet the criteria for recognizing revenue over time, revenue is recognized at the point in time when 64 --------------------------------------------------------------------------------
control of the good or service is transferred to the customer. Control is considered to have transferred when the customer has legal title and PAE has right to payment.
PAE reviews the progress and execution of performance obligations under the estimate at completion process to determine changes in estimated revenues and costs. As part of this process, PAE reviews information including, but not limited to, key contract terms and conditions, program schedule, progress towards completion and identified risks and opportunities. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. PAE must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of PAE's contracts.
PAE evaluates goodwill for potential impairment annually on the first day of the fourth quarter or if an event occurs or circumstances change that indicate that the fair value of a reportable segment may have fallen below its carrying value. The evaluation includes a qualitative assessment to determine if it is more likely than not that the fair value of a reportable segment is less than its carrying amount. If, as a result of the qualitative assessment, it is more likely than not that the fair value of a reportable segment is less than its carrying amount, PAE compares the fair value of each of the reportable segments using a discounted cash flow methodology, or other fair value measures as considered appropriate in the circumstances, to its net book value, including goodwill. If the net book value exceeds the fair value, PAE will measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment is recorded in the current period. During the fourth quarter of 2020, PAE performed the annual quantitative impairment test for both of its reportable segments and found that no impairment existed. There were no events or circumstances during the year endedDecember 31, 2020 indicating that the carrying amount of goodwill was impaired. The Company has considered the implications of COVID-19 as they relate to the carrying value of goodwill and indefinite-lived intangibles. COVID-19 has had a marginally unfavorable impact on the Company's results of operations for the year endedDecember 31, 2020 . However, we do not foresee issues collecting our receivables in the foreseeable future and we continue to believe that we have adequate liquidity to fund our operations and meet our debt service obligations for the foreseeable future. However, we cannot predict the impact of the COVID-19 pandemic, and the longer the duration of the event and the more widespread in geographic locations where we and our suppliers operate, the more likely it is that it could have an adverse impact on our financial condition, results of operations, and/or cash flows in the future.
Income Taxes
Income taxes are accounted for using the asset and liability method whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of assets and liabilities, and their respective tax
bases, and operating loss and tax credit carry forwards. PAE accounts for tax
contingencies in accordance with Accounting Standard Codification ("ASC")
740-10- 25, Income Taxes - Recognition (Topic 740). Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities due to a
change in tax rates is recognized in income in the period that includes the
enactment date. Estimates of the realizability of deferred tax assets are based
on the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
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PAE's effective tax rate will be higher due to establishment of valuation allowance on the disallowed interest expense. Any interest or penalties incurred in connection with income taxes are recorded as part of income tax expense (benefit) on the consolidated statements of operations for financial reporting purposes.
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