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 MD&A
and the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended December 31,
2020 , which was filed with the Securities and Exchange Commission (the "SEC") on
May 7, 2021 and the unaudited condensed consolidated financial statements and
related notes contained in this Quarterly Report on Form 10-Q. Certain
information contained in the discussion and analysis set forth below includes
forward-looking statements. Unless otherwise noted, the MD&A compares the three
months ended March 28, 2021 to the three months ended March 29, 2020 .
This Quarterly Report on Form 10-Q contains 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"). These forward-looking statements include
information concerning the Company's plans, objectives, goals, strategies,
future events, future revenues, performance, capital expenditures, financing
needs and other information that is not historical information. Many of these
statements appear, in particular, in the MD&A. When used in this Quarterly
Report on Form 10-Q, the words "anticipates,"
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"assumes," "believes," "estimates," "expects," "intends," "may," "plans,"
"projects," "seeks," "should," and variations of such words or similar
expressions, or the negatives thereof, are intended to identify forward-looking
statements. All forward-looking statements, including, without limitation, those
based on the Company's examination of historical operating trends, are based
upon the Company's current expectations and various assumptions. The Company
believes there is a reasonable basis for its expectations and assumptions, but
there can be no assurance that the Company will realize its expectations or that
the Company's assumptions will prove correct.
There are a number of risks and uncertainties that could cause the Company's
actual results to differ materially from the forward-looking statements
contained in this Quarterly Report. Important factors that could cause the
Company's actual results to differ materially from those expressed as
forward-looking statements are set forth in the Company's 2020 Annual Report on
Form 10-K/A in Part I, Item 1A under the heading Risk Factors. Such risks,
uncertainties and other important factors include, among others, risks related
to:
•a loss of contracts with the U.S. Government or its agencies or other state,
local or foreign governments or agencies, including as a result of a reduction
in government spending or changes 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;
•failure 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 acquisitions, including our ability to realize the benefits of
acquisitions in a manner consistent with our expectations and integration risks;
•risks from operating internationally;
•the effects of the COVID-19 outbreak 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;
•disruptions caused by social unrest, including related protests or
disturbances;
•issues arising from cybersecurity threats or intellectual property infringement
claims;
•the loss of members of senior management;
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•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;
•legislative or regulatory changes or changes in accounting principles, policies
or guidelines; and
•other risks and uncertainties described in this Form 10-Q and our 2020 Annual
Report on Form 10-K/A, including under the section entitled "Risk Factors," and
described in our other reports filed with the SEC .
There may be other factors that may cause the Company's actual results to differ
materially from those expressed in these forward-looking statements. Except as
may be required by law, the Company undertakes no obligation to publicly update
or revise forward-looking statements that may be made to reflect events or
circumstances after the date made or to reflect the occurrence of unanticipated
events.
Stockholders of the Company should read the following discussion and analysis of
our financial condition and results of operations together with the condensed
consolidated financial statements and related notes that are included elsewhere
in this Quarterly Report on Form 10-Q.
This MD&A generally discusses 2021 and 2020 items and year-over-year comparisons
between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons
between 2020 and 2019 that are not included in this Form 10-Q can be found in
"Management's Discussion and Analysis of Financial Condition and Results or
Operations" in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 2020 . As used in this MD&A, unless the context indicates otherwise,
the financial information relating to the three months ended March 29, 2020 , are
those of Shay and its subsidiaries for the period prior to the Closing and the
financial information and data of PAE Incorporated and its subsidiaries for the
period subsequent to the Closing, and the financial information and data for the
three months ended March 28, 2021 includes the financial information and data of
PAE Incorporated and its subsidiaries. See Note 1 - "Description of Business"
and Note 6 - "Business Combinations and Acquisitions" for additional
information.
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 ("DoD") and
Department of State ("DoS"), the National Aeronautics and Space Administration
("NASA"), Department of Homeland Security , intelligence community agencies
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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 16 - "Segment Reporting" of the notes to PAE's condensed 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 11 - "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 11 - "Stockholders' Equity - Earn-Out
Agreement" of the notes to the consolidated financial statements. For further
information, refer to Note 11 - "Stockholders' Equity - Earn-Out Agreement" of
the notes to the consolidated financial statements.
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During the third quarter of 2020, 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. In addition, 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
Prior to the closing of the Business Combination, the Gores III Board of
Directors and stockholders approved the PAE Incorporated 2020 Equity Incentive
Plan (the "2020 Incentive Plan"). The 2020 Incentive Plan provides for the grant
of stock options, stock appreciation rights, restricted stock units (RSUs) and
other stock or cash-based awards.
Debt
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, 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 ("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 andhomeland 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 condensed consolidated
financial statements commencing on
OnApril 16, 2021 ,PAE LLC made a payment of$1.4 million related to the purchase price adjustment and the purchase price adjustment escrow funds were released to the sellers onApril 23, 2021 as the result of the final closing statement, pursuant to the Stock Purchase Agreement.
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 32 -------------------------------------------------------------------------------- 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 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 condensed consolidated
financial statements commencing on
OnMarch 30, 2021 , pursuant to the purchase price adjustment provisions of the Metis Merger Agreement,$2.5 million of the purchase price that was in an escrow account was released in accordance with the directions specified by the representative of the sellers for distribution to the sellers. In addition, the Company made a payment of$0.5 million to the option holders as a result of a closing underpayment adjustment.
DZSP 21 LLC Minority Interest Acquisition
OnJanuary 31, 2021 ,PAE Aviation and Technical Services LLC , aDelaware limited liability company ("PAE AvTech"), an indirect wholly owned subsidiary of the Company, acquired fromParsons Government Services, Inc. its 49% minority interest in theDZSP 21 LLC joint venture for a purchase price of$15.8 million . Following the completion of this transaction, the Company owns 100% ofDZSP 21 LLC and all the rights, duties and obligations under theDZSP 21 LLC operating agreement and theGuam contracts, all as set forth in the purchase agreement. Financial and Other Highlights FromDecember 31, 2020 toMarch 28, 2021 , PAE's overall contract backlog decreased by (5.8)% from$7,915.4 million to$7,458.9 million , of which$1,284.1 million was funded as ofMarch 28, 2021 . 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 condensed consolidated financial statements for more information. The estimated value of PAE's total backlog was as follows (in thousands): 33 --------------------------------------------------------------------------------
As of As of
March 28, December 31,
2021 2020
Global Mission Services:
Funded GMS backlog $ 832,553 $ 946,711
Unfunded GMS backlog 4,234,540 4,445,442
Total GMS backlog $ 5,067,093 $ 5,392,153
National Security Solutions:
Funded NSS backlog $ 451,574 $ 476,618
Unfunded NSS backlog 1,940,234 2,046,634
Total NSS backlog $ 2,391,808 $ 2,523,252
Total:
Funded backlog $ 1,284,127 $ 1,423,329
Unfunded backlog 6,174,774 6,492,076
Total backlog $ 7,458,901 $ 7,915,405
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 such as the U.S. Government's recent
decision to withdraw U.S. troops from Afghanistan 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 the CARES Act).
COVID-19 has had a marginally unfavorable impact on the Company's results of
operations for the three months ended March 28, 2021 . 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.
36-------------------------------------------------------------------------------- Primary Components of Operating Results Revenues The majority of PAE's revenues are generated from contracts with theU.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. 37 -------------------------------------------------------------------------------- Results of Operations Comparison of Results for the Three Months EndedMarch 28, 2021 andMarch 29, 2020 (in thousands): Three Months Ended March 28, March 29, Dollar Change Percent Change 2021 2020 Revenues$ 748,567 $ 617,253 $ 131,314 21.3 % Cost of revenues 566,666 465,208 101,458 21.8 Selling, general and administrative expenses 145,291 137,326 7,965 5.8 Amortization of intangible assets 12,215 8,047 4,168 51.8 Total operating expenses 724,172 610,581 113,591 18.6 Program profit 24,395 6,672 17,723 265.6 Other operating income, net 1,801 785 1,016 129.4 Operating income 26,196 7,457 18,739 251.3 Interest expense, net (12,514) (20,948) 8,434 (40.3) Other income, net 1,200 30,112 (28,912) (96.0) Income (loss) before income taxes 14,882 16,621 (1,739) (10.5) Expense (benefit) from income taxes 2,609 (9,529) 12,138 (127.4) Net income 12,273 26,150 (13,877) (53.1) Noncontrolling interest in earnings of (1,111) 166 (1,277) (769.3)
ventures
Net income income attributed to PAE
$ (12,600) (48.5) % Incorporated Revenues Revenues for the three months endedMarch 28, 2021 , increased by approximately$131.3 million , or 21.3%, from the comparable period in 2020. The increase was attributable to$88.8 million of revenue from recent acquisitions, and by a$42.5 million net increase from new business awards and other changes in contract volume. Cost of revenues Cost of revenues for the three months endedMarch 28, 2021 , increased by approximately$101.5 million , or 21.8%, from the comparable period in 2020. The increase in cost of revenues was primarily driven by higher revenue volume. 38 -------------------------------------------------------------------------------- Selling, general and administrative expenses Selling, general and administrative expenses for the three months endedMarch 28, 2021 , increased by approximately$8.0 million , or 5.8%, from the comparable period in 2020. The increase in selling, general and administrative expenses was primarily driven by higher revenue volume, partially offset by lower transaction related expenses. Amortization of intangible assets Amortization of intangible assets for the three months endedMarch 28, 2021 , increased by approximately$4.2 million , or 51.8%, from the comparable period in 2020. The increase was driven by the acquisition of CENTRA and Metis. Other operating income, net Other income, net for the three months endedMarch 28, 2021 , increased by approximately$1.0 million , or 129.4%, from the comparable period in 2020. This increase was driven by higher consolidated venture income in the current period. Operating income Operating income for the three months endedMarch 28, 2021 , increased by approximately$18.7 million , or 251.3%, from the comparable period in 2020. The increase resulted from higher revenue volume and lower selling, general and administrative expenses as a percentage of revenue. Interest expense, net Interest expense, net for the three months endedMarch 28, 2021 , decreased by approximately$8.4 million , or 40.3%, from the comparable period in 2020. This decrease was primarily driven by lower cost of debt from refinancing in the fourth quarter of 2020. Other income, net Other income, net for the three months endedMarch 28, 2021 , decreased by approximately$28.9 million driven by changes in fair value of the warrants. Net income (loss) Net income attributed to PAE for the three months endedMarch 28, 2021 was$13.4 million compared with a net income attributed to PAE of approximately$26.0 million in the comparable period in 2020. The decrease in net income for the three months endedMarch 28, 2021 , was primarily driven by changes in fair value of the warrants, which decrease was partially offset by the increase in operating income and the reduction in interest expense.. 39 -------------------------------------------------------------------------------- PAE's Segments Comparison of Results by Segments for the Three Months EndedMarch 28, 2021 , andMarch 29, 2020 (in thousands): March 28, 2021 March 29, 2020 Revenues % of Total Revenues % of Total Revenues Revenues GMS$ 521,561 69.7 %$ 457,444 74.1 % NSS 227,006 30.3 159,809 25.9 Corporate - - - - Consolidated revenues$ 748,567 100.0 %$ 617,253 100.0 % Operating Profit Margin % Operating Profit Margin % Income (Loss) Income (Loss) GMS$ 24,514 3.3 %$ 12,603 2.0 % NSS 11,390 1.5 4,367 0.7 Corporate (9,708) (9,513) Consolidated operating income$ 26,196 $ 7,457 Global Mission Services Segment Results Revenues Revenues for the three months endedMarch 28, 2021 , increased by$64.1 million , or 14.0%, from the comparable period in 2020.The increase was attributable to new business awards including COVID-19 relief opportunities, which increase was partially offset by reductions in contract volume on certain programs. Operating income Operating income for the three months endedMarch 28, 2021 increased by$11.9 million , or 94.5%, from the comparable period in 2020. The increase was driven by higher revenue volume, lower selling, general and administrative expenses as a percentage of revenue and an increase in consolidated venture income. These increases were partially offset by higher cost of sales from an increase in non-labor revenue. National Security Solutions Segment Results Revenues Revenues for the three months endedMarch 28, 2021 increased by$67.2 million , or 42.0%, from the comparable period in 2020. This increase was attributable to$88.8 million revenue from recent acquisitions, partially offset by a$23.0 million decrease from small business set aside re-compete losses and changes in contract volume, net of new business wins. 40 -------------------------------------------------------------------------------- Operating income Operating income for the three months endedMarch 28, 2021 increased by$7.0 million , or 160.8%, from the comparable period in 2020. The increase was primarily driven by higher revenue volume, improved program performance and lower selling, general and administrative expense as a percentage of revenue. Liquidity and Capital Resources 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 the 2020 Credit Agreements. The 2020 Credit Agreements provide a$740.0 million term loan facility maturing inOctober 2027 , a$150.0 million delayed draw term loan facility maturing inOctober 2027 , and a$175.0 million senior secured revolving credit facility (the "2020 ABL Credit Agreement) maturing inOctober 2025 .
As of
PAE expects the combination of its current cash, cash flow from operations, and
the available borrowing capacity under the 2020 Credit Agreements to be
sufficient to continue to meet its normal working capital requirements, capital
expenditures and other cash requirements. However, significant increases or
decreases in revenues, accounts receivable, accounts payable, and merger and
acquisition activity could affect PAE's liquidity. PAE's accounts receivable and
accounts payable levels can be affected by changes in the level of contract work
it performs, by the timing of large materials purchases, and subcontractor
efforts used in its contracts. Government funding delays can cause delays in
PAE's ability to invoice for revenues earned, presenting a potential negative
impact on liquidity. PAE's ability to generate sufficient cash flows from
operations necessary to fulfill its obligations under the 2020 Credit Agreements
and any other commitments will depend on future financial performance, which
could be affected by financial market conditions.
See Note 10 - "Debt" of the notes to the condensed consolidated financial
statements for further information on the terms and availability of PAE's credit
facilities.
41-------------------------------------------------------------------------------- Cash Flows Analysis Comparison of Results for the Three Months EndedMarch 28, 2021 , andMarch 29, 2020 (in thousands): Three Months Ended March 28, March 29, 2021 2020 Dollar Change Net cash provided by operating activities$ 55,396 $ 10,913 $ 44,483 Net cash used in investing activities (16,884) (404) (16,480)
Net cash (used in) provided by financing activities (5,169)
21,534 (26,703) Effect of exchange rate changes on cash and cash (813) equivalents (1,101)
(288)
Net increase in cash and cash equivalents$ 32,242 $
31,755 $ 487
Net cash provided by operating activities Net cash provided by operating activities for the three months endedMarch 28, 2021 increased by$44.5 million from the comparable period in 2020, driven primarily by higher cash collections and increases in accounts payable and accrued expenses in the current period. Net cash used in investing activities Cash used in investing activities for the three months endedMarch 28, 2021 increased by$16.5 million from the comparable period in 2020, primarily driven by the acquisition of theDZSP 21 LLC 49% minority interest fromParsons Government Services, Inc. Net cash (used in) provided by financing activities Cash provided by financing activities for the three months endedMarch 28, 2021 decreased by$26.7 million from the comparable period in 2020. The decrease was primarily driven by the Recapitalization in the first quarter of 2020.
For a discussion of the Recapitalization, see Note 6 - "Business Combinations and Acquisitions" of the notes to the condensed consolidated financial statements.
42
--------------------------------------------------------------------------------Financing
Long-term debt consisted of the following as of the dates presented (in
thousands):
March 28, December 31,
2021 2020
First Term Loan $ 890,000 $ 890,000
Total debt 890,000 890,000
Unamortized discount and debt issuance costs (23,023) (23,733)
Total debt, net of discount and debt issuance costs 866,977
866,267
Less current maturities of long-term debt (5,920)
(5,961)
Total long-term debt, net of current$ 861,057 $
860,306
The following discusses the Company's borrowing arrangements as ofMarch 28, 2021 . During the fourth quarter of 2020, the Company completed a refinancing of its existing indebtedness as further discussed below. During the fourth quarter of 2020, 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 ofMarch 28, 2021 . See Note 10 - "Debt" of the notes to the condensed consolidated financial statements. 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 10 - "Debt" of the notes to the condensed consolidated financial statements. 43
--------------------------------------------------------------------------------
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 9 - "Consolidated Variable Interest Entities" of the notes to the condensed 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. 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 condensed consolidated financial statements, see Note 3 - "Recent Accounting Pronouncements" of the notes to the condensed consolidated financial statements. Critical Accounting Policies The preparation of condensed consolidated financial statements in accordance withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies, as well as the reported amounts of revenues, expenses, gains and losses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis. These estimates may change in the future if underlying assumptions or factors change. Actual results could differ materially from our estimates under different assumptions, judgments or conditions. We consider certain policies to be critical because of their complexity and the high degree of judgment and assumptions involved. Our critical accounting policies and estimates are discussed in Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2020 under "Critical Accounting Policies." There have been no changes to our existing critical accounting policies from those disclosed in our most recently filed Annual report on Form 10-K/A.
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