UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM 10-Q

__________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~June 28,~~September 27, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-38643

__________________________

PAE INCORPORATED

(Exact name of registrant as specified in its charter)

__________________________


Delaware			82-3173473
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

7799 Leesburg Pike, Suite 300 North, Falls Church, Virginia 22043

(Address of principal executive offices) (Zip Code)

(703) 717-6000

(Registrant’s telephone number, including area code)

__________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Class A Common Stock

PAE

Nasdaq Stock Market

Warrants

PAEWW

Nasdaq Stock Market

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of ~~July~~October 31, 2020 was 92,040,654.

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q (the “Form 10-Q”) contains our condensed consolidated financial statements for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020.

We were originally incorporated in Delaware on October 23, 2017 under the name “Gores Holdings III, Inc.” as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On September 11, 2018, we consummated our initial public offering (the “IPO”), following which our shares began trading on the Nasdaq Stock Market (“Nasdaq”).

On February 10, 2020 (the “Closing Date”), we consummated the previously announced business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger, dated November 1, 2019, by and among Gores Holdings III, Inc. (“Gores III”), EAP Merger Sub, Inc. (“First Merger Sub”), EAP Merger Sub II, LLC (“Second Merger Sub”), Shay Holding Corporation (“Shay”), and Platinum Equity Advisors, LLC (in its capacity as the Stockholder Representative, the “Stockholder Representative”) (the “Merger Agreement”), as more fully described in the Company’s Form 8-K filed with the Securities and Exchange Commission on February 14, 2020, and the amendment thereto filed on March 11, 2020. In connection with the closing of the Business Combination (the “Closing”), we acquired 100% of the stock of Shay (as it existed immediately prior to the Second Merger, as such term is defined in the Merger Agreement) and its subsidiaries, changed our name from “Gores Holdings III, Inc.” to “PAE Incorporated”, and changed the trading symbols of our Class A Common Stock and warrants on Nasdaq from “GRSH” and “GRSHW,” to “PAE” and “PAEWW,” respectively.

For accounting purposes, the Business Combination is treated as a reverse acquisition and recapitalization, in which Shay is considered the accounting acquirer (and legal acquiree) and Gores III is considered the accounting acquiree (and legal acquirer). Additionally, unless otherwise stated or the context indicates otherwise, with respect to the financial information contained in this Form 10-Q, including in “Part I, Item 1. Financial Statements” and the notes thereto and in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the financial information relating to the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019 are those of Shay and its subsidiaries, and for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020, the financial information includes the financial information of Shay and its subsidiaries for the period prior to the Closing and the financial information of PAE Incorporated and its subsidiaries for the period subsequent to the Closing. See Note 1 – “Description of Business” and Note 6 – “Business Combinations and Acquisitions” of the Notes to the condensed consolidated financial statements for additional information.

Unless the context indicates otherwise, the terms “PAE,” the “Company,” “we,” “us,” and “our” refer to PAE Incorporated and its consolidated subsidiaries taken as a whole.

PAE Incorporated

Form 10-Q

For the Quarterly Period Ended ~~June 28,~~September 27, 2020

Table of Contents


		Page No.

Part I Financial Information:
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income (Loss)	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of ~~Stockholders~~’Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	67
	Notes to Condensed Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2932
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5154
Item 4.	Controls and Procedures	5154
Part II Other Information:
Item 1.	Legal Proceedings	5255
Item 1A.	Risk Factors	5255
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5356
Item 3.	Defaults Upon Senior Securities	5356
Item 4.	Mine Safety Disclosures	5356
Item 5.	Other Information	5356
Item 6.	Exhibits	5458
Signatures		5559

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAE Incorporated

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 28,		June 30,		June 28,		June 30,			September 27,		September 29,		September 27,		September 29,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenues	Revenues	$	643,303	$	695,607	$	1,260,556	$	1,369,091	Revenues	$	666,240	$	697,717	$	1,926,795	$	2,066,808

Cost of revenues	Cost of revenues	496,678		540,772		961,886		1,057,931		Cost of revenues	512,877		565,703		1,474,763		1,623,634
Selling, general and administrative expenses	Selling, general and administrative expenses	105,451		126,438		242,777		261,474		Selling, general and administrative expenses	119,168		133,215		361,945		394,689
Amortization of intangible assets	Amortization of intangible assets	8,047		8,196		16,094		16,853		Amortization of intangible assets	8,047		8,176		24,141		25,029
Total operating expenses	Total operating expenses	610,176		675,406		1,220,757		1,336,258		Total operating expenses	640,092		707,094		1,860,849		2,043,352

Program profit		33,127		20,201		39,799		32,833
Other income, net		1,168		5,958		1,954		7,678
Program profit (loss)										Program profit (loss)	26,148		(9,377)		65,946		23,456
Other income (loss), net										Other income (loss), net	2,384		(1,148)		4,338		6,530

Operating income		34,295		26,159		41,753		40,511
Operating income (loss)										Operating income (loss)	28,532		(10,525)		70,284		29,986
Interest expense, net	Interest expense, net	(13,757)		(21,617)		(34,705)		(44,277)		Interest expense, net	(13,607)		(20,983)		(48,312)		(65,260)
Income (loss) before income taxes	Income (loss) before income taxes	20,538		4,542		7,048		(3,766)		Income (loss) before income taxes	14,925		(31,508)		21,972		(35,274)
Expense (benefit) from income taxes	Expense (benefit) from income taxes	3,752		1,153		(4,961)		(1,994)		Expense (benefit) from income taxes	4,194		117		(767)		(1,877)
Net income (loss)	Net income (loss)	16,786		3,389		12,009		(1,772)		Net income (loss)	10,731		(31,625)		22,739		(33,397)
Noncontrolling interest in earnings of ventures	Noncontrolling interest in earnings of ventures	765		715		931		1,274		Noncontrolling interest in earnings of ventures	413		545		1,344		1,819
Net income (loss) attributed to PAE Incorporated	Net income (loss) attributed to PAE Incorporated	$	16,021	$	2,674	$	11,078	$	(3,046)	Net income (loss) attributed to PAE Incorporated	$	10,318	$	(32,170)	$	21,395	$	(35,216)

Net income (loss) per share attributed to PAE Incorporated:	Net income (loss) per share attributed to PAE Incorporated:									Net income (loss) per share attributed to PAE Incorporated:
Basic	Basic	$	0.17	$	0.13	$	0.15	$	(0.14)	Basic	$	0.11	$	(1.52)	$	0.26	$	(1.67)
Diluted	Diluted	$	0.17	$	0.13	$	0.15	$	(0.14)	Diluted	$	0.11	$	(1.52)	$	0.26	$	(1.67)

Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	92,044,098		21,127,823		75,890,028		21,127,823		Basic	92,070,306		21,127,823		81,323,258		21,127,823
Diluted	Diluted	92,787,379		21,127,823		76,273,931		21,127,823		Diluted	93,392,565		21,127,823		82,115,825		21,127,823

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 28,		June 30,		June 28,		June 30,			September 27,		September 29,		September 27,		September 29,
		2020		2019		2020		2019			2020		2019		2020		2019

Net income (loss)	Net income (loss)	$	16,786	$	3,389	$	12,009	$	(1,772)	Net income (loss)	$	10,731	$	(31,625)	$	22,739	$	(33,397)

Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax	Change in foreign currency translation adjustment, net of tax	59		(415)		(917)		(125)		Change in foreign currency translation adjustment, net of tax	780		(432)		(137)		(557)
Other, net	Other, net	142		421		424		843		Other, net	1		422		424		1,265
Other comprehensive income (loss)	Other comprehensive income (loss)	201		6		(493)		718		Other comprehensive income (loss)	781		(10)		287		708

Comprehensive income (loss)	Comprehensive income (loss)	16,987		3,395		11,516		(1,054)		Comprehensive income (loss)	11,512		(31,635)		23,026		(32,689)
Comprehensive income attributed to noncontrolling interests	Comprehensive income attributed to noncontrolling interests	284		643		781		1,225		Comprehensive income attributed to noncontrolling interests	505		298		1,287		1,523
Comprehensive income (loss) attributed to PAE Incorporated	Comprehensive income (loss) attributed to PAE Incorporated	$	16,703	$	2,752	$	10,735	$	(2,279)	Comprehensive income (loss) attributed to PAE Incorporated	$	11,007	$	(31,933)	$	21,739	$	(34,212)

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share and par value amounts)


		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	138,469	$	68,035	Cash and cash equivalents	$	145,446	$	68,035
Accounts receivable, net	Accounts receivable, net	432,185		442,180		Accounts receivable, net	445,429		442,180
Prepaid expenses and other current assets	Prepaid expenses and other current assets	45,676		43,549		Prepaid expenses and other current assets	44,363		43,549
Total current assets	Total current assets	616,330		553,764		Total current assets	635,238		553,764

Property and equipment, net	Property and equipment, net	26,841		30,404		Property and equipment, net	25,696		30,404
Deferred income taxes, net	Deferred income taxes, net	12,017		3,212		Deferred income taxes, net	13,419		3,212
Investments	Investments	17,848		17,925		Investments	18,961		17,925
Goodwill	Goodwill	409,588		409,588		Goodwill	409,588		409,588
Intangible assets, net	Intangible assets, net	164,370		180,464		Intangible assets, net	156,323		180,464
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	154,375		162,184		Operating lease right-of-use assets, net	159,975		162,184
Other noncurrent assets	Other noncurrent assets	9,663		13,758		Other noncurrent assets	9,762		13,758
Total assets	Total assets	$	1,411,032	$	1,371,299	Total assets	$	1,428,962	$	1,371,299

Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	107,154	$	124,661	Accounts payable	$	140,515	$	124,661
Accrued expenses	Accrued expenses	128,992		102,315		Accrued expenses	103,025		102,315
Customer advances and billings in excess of costs	Customer advances and billings in excess of costs	70,695		51,439		Customer advances and billings in excess of costs	60,390		51,439
Salaries, benefits and payroll taxes	Salaries, benefits and payroll taxes	135,177		130,633		Salaries, benefits and payroll taxes	141,537		130,633
Accrued taxes	Accrued taxes	14,614		18,488		Accrued taxes	13,604		18,488
Current portion of long-term debt, net	Current portion of long-term debt, net	22,969		22,007		Current portion of long-term debt, net	23,044		22,007
Operating lease liabilities, current portion	Operating lease liabilities, current portion	38,946		36,997		Operating lease liabilities, current portion	40,979		36,997
Other current liabilities	Other current liabilities	31,457		30,893		Other current liabilities	31,528		30,893
Total current liabilities	Total current liabilities	550,004		517,433		Total current liabilities	554,622		517,433

Long-term debt, net	Long-term debt, net	589,828		727,930		Long-term debt, net	584,038		727,930
Long-term operating lease liabilities	Long-term operating lease liabilities	118,452		129,244		Long-term operating lease liabilities	120,883		129,244
Other long-term liabilities	Other long-term liabilities	7,415		8,601		Other long-term liabilities	7,410		8,601
Total liabilities	Total liabilities	1,265,699		1,383,208		Total liabilities	1,266,953		1,383,208

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; 0 shares issued and outstanding	Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; 0 shares issued and outstanding	—		—		Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 92,040,654 and 21,127,823 shares issued and outstanding as of June 28, 2020 and December 31, 2019, respectively		9		2
Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 92,040,654 and 21,127,823 shares issued and outstanding as of September 27, 2020 and December 31, 2019, respectively						Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 92,040,654 and 21,127,823 shares issued and outstanding as of September 27, 2020 and December 31, 2019, respectively	9		2
Additional paid-in capital	Additional paid-in capital	245,815		101,743		Additional paid-in capital	250,805		101,743
Accumulated deficit	Accumulated deficit	(134,293)		(145,371)		Accumulated deficit	(123,975)		(145,371)
Accumulated other comprehensive loss		(628)		(134)
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	153		(134)
Total PAE Incorporated stockholders' equity	Total PAE Incorporated stockholders' equity	110,903		(43,760)		Total PAE Incorporated stockholders' equity	126,992		(43,760)
Noncontrolling interests	Noncontrolling interests	34,430		31,851		Noncontrolling interests	35,017		31,851
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,411,032	$	1,371,299	Total liabilities and stockholders’ equity	$	1,428,962	$	1,371,299

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(In thousands, except share data)

Accumulated Total
Other PAE Incorporated Total
Common Stock Additional Accumulated Comprehensive Stockholders’ Noncontrolling Stockholders’
Shares Amount Paid-in Capital Deficit (Loss) / Income Equity Interests Equity
Balance at December 31, 2018 282,047 $ 3 $ 101,742 $ (95,562) $ (2,138) $ 4,045 $ 27,440 $ 31,485
Retrospective application of the capitalization 20,845,776 (1) 1 — — — —
Adjusted balance at December 31, 2018 21,127,823 2 101,743 (95,562) (2,138) 4,045 27,440 31,485
Net (loss) income — — — (5,719) — (5,719) 559 (5,160)
Other comprehensive income, net — — — — 712 712 — 712
Equity contributions from venture partners — — — — — — 1,350 1,350
Balance at March 31, 2019 21,127,823 2 101,743 (101,281) (1,426) (962) 29,349 28,387
Net income — — — 2,674 — 2,674 715 3,389
Other comprehensive income, net — — — — 6 6 — 6
Net contributions from noncontrolling interests — — — — — — 4,050 4,050
Distributions to venture partners and other — — — — — — (742) (742)
Balance at June 30, 2019 21,127,823 $ 2 $ 101,743 $ (98,607) $ (1,420) $ 1,718 $ 33,372 $ 35,090


								Accumulated		Total
								Other		PAE Incorporated				Total
	Common Stock			Additional		Accumulated		Comprehensive		Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Paid-in Capital		Deficit		(Loss) / Income		Equity		Interests		Equity
Balance at December 31, 2018	282,047	$	3	$	101,742	$	(95,562)	$	(2,138)	$	4,045	$	27,440	$	31,485
Retrospective application of the capitalization	20,845,776	(1)		1				—		—		—		0
Adjusted balance at December 31, 2018	21,127,823	2		101,743		(95,562)		(2,138)		4,045		27,440		31,485
Net (loss) income	—	—		—		(5,719)		—		(5,719)		559		(5,160)
Other comprehensive income, net	—	—		—		—		712		712		—		712
Equity contributions from venture partners	—	—		—		—		—		—		1,350		1,350
Balance at March 31, 2019	21,127,823	2		101,743		(101,281)		(1,426)		(962)		29,349		28,387
Net income	—	—		—		2,674		—		2,674		715		3,389
Other comprehensive income, net	—	—		—		—		6		6		—		6
Net contributions from noncontrolling interests	—	—		—		—		—		—		4,050		4,050
Distributions to venture partners and other	—	—		—		—		—		—		(742)		(742)
Balance at June 30, 2019	21,127,823	2		$	101,743	$	(98,607)	$	(1,420)	$	1,718	$	33,372	$	35,090
Net (loss) income	—	—		—		(32,170)		—		(32,170)		545		(31,625)
Other comprehensive loss, net	—	—		—		—		(10)		(10)		—		(10)


Balance at September 29, 2019	21,127,823	2		$	101,743	$	(130,777)	$	(1,430)	$	(30,462)	$	33,917	$	3,455

PAE Incorporated

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Continued)

(In thousands, except share data)


									Accumulated		Total															Accumulated		Total
									Other		PAE Incorporated				Total											Other		PAE Incorporated				Total
		Common Stock					Additional		Accumulated		Comprehensive		Stockholders’		Noncontrolling			Stockholders’		Common Stock				Additional		Accumulated		Comprehensive		Stockholders’		Noncontrolling		Stockholders’
		Shares	Amount		Paid-in Capital		Deficit		(Loss) / Income		Equity		Interests		Equity				Shares	Amount		Paid-in Capital		Deficit		(Loss) / Income		Equity		Interests		Equity
Balance at December 31, 2019	Balance at December 31, 2019	282,047	$	3	$	101,742	$	(145,371)	$	(134)	$	(43,760)	$	31,851	$	(11,909)	Balance at December 31, 2019		282,047	$	3	$	101,742	$	(145,371)	$	(134)	$	(43,760)	$	31,851	$	(11,909)
Retrospective application of the capitalization	Retrospective application of the capitalization	20,845,776	(1)		1						—		—		—		Retrospective application of the capitalization		20,845,776	(1)		1						—		—		0
Adjusted balance at December 31, 2019	Adjusted balance at December 31, 2019	21,127,823	2		101,743		(145,371)		(134)		(43,760)		31,851		(11,909)		Adjusted balance at December 31, 2019		21,127,823	2		101,743		(145,371)		(134)		(43,760)		31,851		(11,909)
Net (loss) income	Net (loss) income	—	—		—		(4,943)		—		(4,943)		166		(4,777)		Net (loss) income		—	—		—		(4,943)		—		(4,943)		166		(4,777)
Other comprehensive loss, net	Other comprehensive loss, net	—	—		—		—		(695)		(695)				(695)		Other comprehensive loss, net		—	—		—		—		(695)		(695)				(695)
Distributions to venture partners and other	Distributions to venture partners and other	—	—		—		—		—		—		152		152		Distributions to venture partners and other		—	—		—		—		—		—		152		152
Equity contributions from venture partners	Equity contributions from venture partners	—	—		13		—		—		13		—		13		Equity contributions from venture partners		—	—		13		—		—		13		—		13
Equity infusion from Gores III	Equity infusion from Gores III	46,999,787	5		364,773		—		—		364,778		—		364,778		Equity infusion from Gores III		46,999,787	5		364,773		—		—		364,778		—		364,778
Private placement	Private placement	23,913,044	2		219,998		—		—		220,000		—		220,000		Private placement		23,913,044	2		219,998		—		—		220,000		—		220,000
Payment to Shay Stockholders	Payment to Shay Stockholders	—	—		(424,243)		—		—		(424,243)		—		(424,243)		Payment to Shay Stockholders		—	—		(424,243)		—		—		(424,243)		—		(424,243)
Balance at Balance at March 29, 2020	Balance at Balance at March 29, 2020	92,040,654	9		262,284		(150,314)		(829)		111,150		32,169		143,319		Balance at Balance at March 29, 2020		92,040,654	9		262,284		(150,314)		(829)		111,150		32,169		143,319
Net income	Net income	—	—		—		16,021		—		16,021		765		16,786		Net income		—	—		—		16,021		—		16,021		765		16,786
Other comprehensive income, net	Other comprehensive income, net	—	—		—		—		201		201		—		201		Other comprehensive income, net		—	—		—		—		201		201		—		201
Distributions to venture partners and other	Distributions to venture partners and other	—	—		—		—		—		—		(443)		(443)		Distributions to venture partners and other		—	—		—		—		—		—		(443)		(443)
Equity contributions from venture partners	Equity contributions from venture partners	—	—		—		—		—		—		1,939		1,939		Equity contributions from venture partners		—	—		—		—		—		—		1,939		1,939
Equity infusion from Gores III		—	—		—		—		—		—		—		—
Private placement		—	—		—		—		—		—		—		—
Working capital adjustment to Shay Stockholders		—	—		(20,169)		—		—		(20,169)		—		(20,169)
Stock-based Compensation		—	—		3,700		—		—		3,700		—		3,700

Post-closing adjustment to Shay Stockholders																	Post-closing adjustment to Shay Stockholders		—	—		(20,169)		—		—		(20,169)		—		(20,169)
Stock-based compensation																	Stock-based compensation		—	—		3,700		—		—		3,700		—		3,700
Balance at June 28, 2020	Balance at June 28, 2020	92,040,654	$	9	$	245,815	$	(134,293)	$	(628)	$	110,903	$	34,430	$	145,333	Balance at June 28, 2020		92,040,654	9		$	245,815	$	(134,293)	$	(628)	$	110,903	$	34,430	$	145,333
Net income																	Net income		—	—		—		10,318		—		10,318		413		10,731
Other comprehensive income, net																	Other comprehensive income, net		—	—		—		—		781		781		—		781

Equity contributions from venture partners																	Equity contributions from venture partners		—	—		(146)		—		—		(146)		174		28


Post-closing adjustment to Shay Stockholders	—	—	818		—		—		818		—		818
Stock-based compensation	—	—	4,318		—		—		4,318		—		4,318
Balance at September 27, 2020	92,040,654	9	$	250,805	$	(123,975)	$	153	$	126,992	$	35,017	$	162,009

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


		Six Months Ended							Nine Months Ended
		June 28,		June 30,			September 27,		September 29,
		2020		2019			2020		2019
Operating activities	Operating activities					Operating activities
Net income (loss)	Net income (loss)	$	12,009	$	(1,772)	Net income (loss)	$	22,739	$	(33,397)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	Adjustments to reconcile net income (loss) to net cash provided by operating activities:					Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment	Depreciation of property and equipment	5,072		6,301		Depreciation of property and equipment	7,263		9,468
Amortization of intangible assets	Amortization of intangible assets	16,094		16,853		Amortization of intangible assets	24,141		25,029
Amortization of debt issuance cost	Amortization of debt issuance cost	7,821		4,082		Amortization of debt issuance cost	9,560		6,096
Stock-based compensation	Stock-based compensation	3,700		—		Stock-based compensation	8,018		0
Net undistributed income from unconsolidated ventures	Net undistributed income from unconsolidated ventures	(1,739)		(2,184)		Net undistributed income from unconsolidated ventures	(3,533)		(2,253)
Deferred income taxes, net	Deferred income taxes, net	(13,295)		(372)		Deferred income taxes, net	(11,229)		(1,872)
Other non-cash activities, net	Other non-cash activities, net	404		3,324		Other non-cash activities, net	382		35,598
Changes in operating assets and liabilities, net:	Changes in operating assets and liabilities, net:					Changes in operating assets and liabilities, net:
Accounts receivable, net	Accounts receivable, net	9,607		28,396		Accounts receivable, net	(3,477)		65,752
Accounts payable	Accounts payable	(17,547)		11,278		Accounts payable	15,852		1,310
Accrued expenses	Accrued expenses	6,358		(5,166)		Accrued expenses	765		12,217
Customer advances and billings in excess of costs	Customer advances and billings in excess of costs	19,282		26,297		Customer advances and billings in excess of costs	8,923		34,179
Salaries, benefits and payroll taxes	Salaries, benefits and payroll taxes	4,310		9,845		Salaries, benefits and payroll taxes	10,975		1,569

Inventories, net	Inventories, net	2,415		(2,051)		Inventories, net	2,291		(2,195)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(3,256)		(545)		Prepaid expenses and other current assets	(4,409)		1,050
Other current and noncurrent liabilities	Other current and noncurrent liabilities	(5,101)		(9,580)		Other current and noncurrent liabilities	71		(17,172)
Investments	Investments	1,701		1,769		Investments	2,793		3,314
Other noncurrent assets	Other noncurrent assets	11,600		(9,951)		Other noncurrent assets	5,903		(6,289)
Accrued taxes	Accrued taxes	(3,847)		(4,601)		Accrued taxes	(4,904)		(3,527)
Net cash provided by operating activities	Net cash provided by operating activities	55,588		71,923		Net cash provided by operating activities	92,124		128,877
Investing activities	Investing activities					Investing activities
Expenditures for property and equipment	Expenditures for property and equipment	(1,597)		(5,633)		Expenditures for property and equipment	(2,628)		(8,421)
Other investing activities, net	Other investing activities, net	37		2,042		Other investing activities, net	(72)		2,221
Net cash used in investing activities	Net cash used in investing activities	(1,560)		(3,591)		Net cash used in investing activities	(2,700)		(6,200)
Financing activities	Financing activities					Financing activities
Net contributions from noncontrolling interests	Net contributions from noncontrolling interests	1,950		5,400		Net contributions from noncontrolling interests	2,095		5,400
Borrowings on long-term debt	Borrowings on long-term debt	60,468		69,319		Borrowings on long-term debt	60,734		161,409
Repayments on long-term debt	Repayments on long-term debt	(204,464)		(136,821)		Repayments on long-term debt	(212,184)		(246,411)
Payments of debt issuance costs	Payments of debt issuance costs	(964)		—		Payments of debt issuance costs	(964)		0
Recapitalization from merger with Gores III	Recapitalization from merger with Gores III	605,713		—		Recapitalization from merger with Gores III	605,713		0
Payment of underwriting and transaction costs	Payment of underwriting and transaction costs	(27,267)		—		Payment of underwriting and transaction costs	(27,267)		0
Distribution to selling stockholders	Distribution to selling stockholders	(419,548)		—		Distribution to selling stockholders	(439,719)		0
Other financing activities, net	Other financing activities, net	(292)		(742)		Other financing activities, net	(292)		(742)
Net cash provided by (used in) financing activities		15,596		(62,844)
Net cash used in financing activities						Net cash used in financing activities	(11,884)		(80,344)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	810		(1,205)		Effect of exchange rate changes on cash and cash equivalents	(129)		(1,486)
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	70,434		4,283		Net increase in cash and cash equivalents	77,411		40,847
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	68,035		50,954		Cash and cash equivalents at beginning of period	68,035		51,097
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	138,469	$	55,237	Cash and cash equivalents at end of period	$	145,446	$	91,944

Supplemental cash flow information	Supplemental cash flow information					Supplemental cash flow information
Cash paid for interest	Cash paid for interest	$	23,278	$	39,538	Cash paid for interest	$	35,085	$	40,628
Cash paid for taxes	Cash paid for taxes	$	2,796	$	4,897	Cash paid for taxes	$	5,304	$	6,936
Supplemental non-cash financing activities
Working capital adjustment payable to Shay Stockholders		$	20,169	$	—

See accompanying notes to condensed consolidated financial statements

PAE Incorporated

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business

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

On February 10, 2020 (the “Closing Date”), the Company completed the previously announced business combination (the “Business Combination”) in which Shay Holding Corporation (“Shay”) was acquired by Gores III. The transaction was completed in a multi-step process pursuant to which Shay ultimately merged with and into a wholly-owned subsidiary of Gores III, with the Gores III subsidiary continuing as the surviving company. As a result of the Business Combination, each share of common stock of Shay was cancelled and converted into the right to receive a portion of the consideration payable in connection with the transaction and Gores III acquired Shay (as it existed immediately prior to the Second Merger, as such term is defined in the Merger Agreement) and its subsidiaries. Additionally, the stockholders of Shay as of immediately prior to the transaction hold a portion of the common stock of the Company.

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

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

The Company’s operations are organized into the following 2 reportable segments:

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

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

The Company separately presents the costs associated with certain corporate functions as “Corporate”, which primarily include costs that are not reimbursed by the Company’s U.S. Government customers.

2. Significant Accounting Principles and Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In management’s opinion, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which are filed as Exhibit 99.3 to the Company’s Form 8-K/A filed with the SEC on March 11, 2020.

The Company closes its books and records on the last Sunday of the calendar quarter to align its financial closing with its business processes,and therefore the closing of books and records for the ~~second~~third quarter was on ~~June 28,~~September 27, 2020 and ~~June 30,~~September 29, 2019, respectively. The condensed consolidated financial statements and disclosures included herein are labeled based on that convention. This practice only affects interim periods, as the Company’s fiscal year ends on December 31.

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

Use of Estimates

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

Update to Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies described in the Company’s Form 8-K/A filed with the SEC on March 11, 2020, other than Accounts Receivable, net and Net Income (Loss) Per Share as described below.

Accounts Receivable, net

Amounts billed and due from customers are recorded as billed receivables within accounts receivable, net on the condensed consolidated balance sheets. Generally, customer accounts are due within 30 to 45 days of billings. The Company recognizes an allowance for credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The Company assesses its overall allowance for credit losses at least on a quarterly basis. Prior to the implementation of ~~the allowance for credit losses~~ASU 2016-13 “Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, the Company recorded adjustments to an allowance for doubtful accounts when collectability was uncertain.

Net Income (Loss) Per Share

Basic net income (loss) per common share is determined by dividing the net income (loss) allocable to stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per share is computed by dividing the net income (loss) allocable to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding for the period.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants at the measurement date. The valuation techniques the Company utilized to measure the fair value of financial instruments are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.

These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Significant inputs to the valuation model are unobservable.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts.

The carrying value of the Company’s outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates ~~available for debt with terms and maturities similar to the Company’s existing debt arrangements.~~

910

available for debt with terms and maturities similar to the Company’s existing debt arrangements.

3. Recent Accounting Pronouncements

Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“~~FASB��~~FASB”) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for financial instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, replacing the existing incurred loss impairment model. The new standard is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2020 under the modified retrospective method and such adoption did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which requires the tracking and recognition of costs that will be capitalized as an asset and amortized over the assets useful life. The new standard is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2020 prospectively and the standard did not have a material impact on the Company’s financial statements.

4. Revenues

Disaggregated Revenues

Disaggregated revenues by customer type were as follows (in thousands):


		Three Months Ended June 28, 2020											Three Months Ended September 27, 2020
		GMS		NSS		Total			GMS		NSS		Total
DoD	DoD	$	204,634	$	62,096	$	266,730	DoD	$	203,693	$	65,354	$	269,047
Other U.S. government agencies	Other U.S. government agencies	260,714		49,434		310,148		Other U.S. government agencies	270,344		57,379		327,723
Commercial and non-U.S. customers	Commercial and non-U.S. customers	42,506		23,919		66,425		Commercial and non-U.S. customers	47,309		22,161		69,470
Total	Total	$	507,854	$	135,449	$	643,303	Total	$	521,346	$	144,894	$	666,240


		Six Months Ended June 28, 2020											Nine Months Ended September 27, 2020
		GMS		NSS		Total			GMS		NSS		Total
DoD	DoD	$	392,240	$	129,275	$	521,515	DoD	$	595,933	$	194,629	$	790,562
Other U.S. government agencies	Other U.S. government agencies	510,660		120,156		630,816		Other U.S. government agencies	781,004		177,535		958,539
Commercial and non-U.S. customers	Commercial and non-U.S. customers	62,398		45,827		108,225		Commercial and non-U.S. customers	109,706		67,988		177,694
Total	Total	$	965,298	$	295,258	$	1,260,556	Total	$	1,486,643	$	440,152	$	1,926,795

Three Months Ended June 30, 2019
GMS NSS Total
DoD $ 214,657 $ 56,713 $ 271,370
Other U.S. government agencies 281,154 93,742 374,896
Commercial and non-U.S. customers 30,214 19,127 49,341
Total $ 526,025 $ 169,582 $ 695,607

Six Months Ended June 30, 2019
GMS NSS Total
DoD $ 415,059 $ 115,464 $ 530,523
Other U.S. government agencies 555,266 182,952 738,218
Commercial and non-U.S. customers 60,179 40,171 100,350
Total $ 1,030,504 $ 338,587 $ 1,369,091

~~Disaggregated revenues by contract type were as follows (in thousands~~):

Three Months Ended June 28, 2020
GMS NSS Total
Cost-reimbursable $ 299,906 $ 34,288 $ 334,194
Fixed-price 158,247 53,693 211,940
Time and materials 49,701 47,468 97,169
Total $ 507,854 $ 135,449 $ 643,303

Six Months Ended June 28, 2020
GMS NSS Total
Cost-reimbursable $ 565,986 $ 71,192 $ 637,178
Fixed-price 320,285 122,650 442,935
Time and materials 79,027 101,416 180,443
Total $ 965,298 $ 295,258 $ 1,260,556

Three Months Ended June 30, 2019
GMS NSS Total
Cost-reimbursable $ 304,688 $ 23,481 $ 328,169
Fixed-price 175,592 72,080 247,672
Time and materials 45,745 74,021 119,766
Total $ 526,025 $ 169,582 $ 695,607


	Three Months Ended September 29, 2019
	GMS		NSS		Total
DoD	$	220,480	$	46,941	$	267,421
Other U.S. government agencies	284,218		94,105		378,323
Commercial and non-U.S. customers	30,937		21,036		51,973
Total	$	535,635	$	162,082	$	697,717

Six Months Ended June 30, 2019
GMS NSS Total
Cost-reimbursable $ 595,379 $ 45,703 $ 641,082
Fixed-price 350,991 148,594 499,585
Time and materials 84,134 144,290 228,424
Total $ 1,030,504 $ 338,587 $ 1,369,091


	Nine Months Ended September 29, 2019
	GMS		NSS		Total
DoD	$	635,531	$	162,409	$	797,940
Other U.S. government agencies	839,680		277,008		1,116,688
Commercial and non-U.S. customers	90,927		61,253		152,180
Total	$	1,566,138	$	500,670	$	2,066,808

Disaggregated revenues by contract type were as follows (in thousands):


	Three Months Ended September 27, 2020
	GMS		NSS		Total
Cost-reimbursable	$	302,795	$	35,656	$	338,451
Fixed-price	161,024		62,568		223,592
Time and materials	57,527		46,670		104,197
Total	$	521,346	$	144,894	$	666,240


	Nine Months Ended September 27, 2020
	GMS		NSS		Total
Cost-reimbursable	$	868,780	$	106,848	$	975,628
Fixed-price	481,309		185,218		666,527
Time and materials	136,554		148,086		284,640
Total	$	1,486,643	$	440,152	$	1,926,795


	Three Months Ended September 29, 2019
	GMS		NSS		Total
Cost-reimbursable	$	274,776	$	26,864	$	301,640
Fixed-price	220,142		66,548		286,690
Time and materials	40,717		68,670		109,387
Total	$	535,635	$	162,082	$	697,717


	Nine Months Ended September 29, 2019
	GMS		NSS		Total
Cost-reimbursable	$	870,155	$	72,566	$	942,721
Fixed-price	571,132		215,143		786,275
Time and materials	124,851		212,961		337,812
Total	$	1,566,138	$	500,670	$	2,066,808

Disaggregated revenues by geographic location were as follows (in thousands):


		Three Months Ended June 28, 2020											Three Months Ended September 27, 2020
		GMS		NSS		Total			GMS		NSS		Total
United States	United States	$	277,536	$	133,875	$	411,411	United States	$	275,785	$	142,890	$	418,675
International	International	230,318		1,574		231,892		International	245,561		2,004		247,565
Total	Total	$	507,854	$	135,449	$	643,303	Total	$	521,346	$	144,894	$	666,240


		Six Months Ended June 28, 2020											Nine Months Ended September 27, 2020
		GMS		NSS		Total			GMS		NSS		Total
United States	United States	$	526,446	$	292,014	$	818,460	United States	$	802,230	$	434,904	$	1,237,134
International	International	438,852		3,244		442,096		International	684,413		5,248		689,661
Total	Total	$	965,298	$	295,258	$	1,260,556	Total	$	1,486,643	$	440,152	$	1,926,795


		Three Months Ended June 30, 2019											Three Months Ended September 29, 2019
		GMS		NSS		Total			GMS		NSS		Total
United States	United States	$	261,413	$	167,923	$	429,336	United States	$	299,306	$	160,412	$	459,718
International	International	264,612		1,659		266,271		International	236,329		1,670		237,999
Total	Total	$	526,025	$	169,582	$	695,607	Total	$	535,635	$	162,082	$	697,717


		Six Months Ended June 30, 2019											Nine Months Ended September 29, 2019
		GMS		NSS		Total			GMS		NSS		Total
United States	United States	$	521,501	$	335,707	$	857,208	United States	$	817,437	$	496,220	$	1,313,657
International	International	509,003		2,880		511,883		International	748,701		4,450		753,151
Total	Total	$	1,030,504	$	338,587	$	1,369,091	Total	$	1,566,138	$	500,670	$	2,066,808

1213

Remaining Performance Obligations

The Company’s remaining performance obligations balance represents the expected revenue to be recognized for the satisfaction of remaining performance obligations on existing contracts. This balance excludes unexercised contract option years and task orders that may be issued underneath an indefinite delivery, indefinite quantity contract. The remaining performance obligations balance as of ~~June 28,~~September 27, 2020 and December 31, 2019 was ~~$1,260.0~~$1,527.0 million and $1,640.0 million, respectively.

The Company expects to recognize approximately ~~95.2%~~96.4% and ~~4.8%~~3.6% of the remaining performance obligations balance as revenue over the next year and thereafter, respectively.

5. Contract Assets and Contract Liabilities

Contract assets consist of unbilled receivables which represent rights to payment for work or services completed but not billed as of the reporting date. Contract assets are recorded as unbilled receivables within accounts receivable, net on the condensed consolidated balance sheets.

Contract liabilities are advances and milestone payments from customers on certain contracts that exceed revenue earned to date. Contract liabilities are recorded as customer advances and billings in excess of costs on the condensed consolidated balance sheets.

Contract assets and contract liabilities consisted of the following as of the dates presented (in thousands):


		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
Contract assets	Contract assets	$	297,146	$	295,103	Contract assets	$	263,085	$	295,103
Contract liabilities	Contract liabilities	$	70,695	$	51,439	Contract liabilities	$	60,390	$	51,439

The ~~increase~~decrease in contract assets of ~~$2.0~~$(32.0) million during the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 was primarily due to the timing of billings, partially offset by revenue recognized related to the satisfaction of performance obligations.

The increase in contract liabilities of ~~$19.3~~$9.0 million during the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 was primarily due to the timing of advance payments from customers partially offset by revenue recognized during the period.

During the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020, the Company recognized ~~$1.1~~$1.2 million and ~~$33.4~~$34.6 million, respectively, relating to amounts that were included in the beginning balance of contract liabilities. During the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019, the Company recognized ~~$4.5~~$1.5 million and ~~$16.6~~$21.2 million, respectively, relating to amounts that were included in the beginning balance of contract liabilities.

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6. Business Combinations and Acquisitions

As described in Note 1- “Description of Business”, the Business Combination was consummated on February 10, 2020. For financial accounting and reporting purposes under U.S. GAAP, the Business Combination was accounted for as a reverse acquisition and recapitalization, with no goodwill or other intangible asset recorded. Under this method of accounting, Gores III ~~(“legal acquirer”)~~(legal acquirer) is treated as the acquired entity and Shay (legal acquiree) is deemed to have issued common stock for the net assets and equity of Gores III consisting of mainly cash, accompanied by simultaneous equity recapitalization of Shay (“Recapitalization”). The net assets of Gores III are stated at historical cost, and accordingly the equity and net assets of Shay have not been adjusted to fair value. Consequently, the consolidated assets, liabilities and results of operations of Shay are the historical financial statements of PAE Incorporated and the Gores III assets, liabilities and results of operations are consolidated with the assets, liabilities and results of operations of Shay beginning on the Closing Date. Shares and earnings per share information prior to the Business Combination have been retroactively restated to reflect the exchange ratio established in the Recapitalization.

Other than professional fees paid to consummate the transaction, the Business Combination primarily involved the exchange of cash and equity between Gores III, Shay and the stockholders of the respective companies. The aggregate proceeds paid to the Shay Stockholders on the Closing Date was approximately $424.2 million. The remainder of the consideration paid to the Shay Stockholders consisted of 21,127,823 newly issued shares of Class A Common Stock of PAE Incorporated, par value $0.0001 per share (“Class A Common Stock”).

In addition to the foregoing consideration paid on the Closing Date, former stockholders of Shay are entitled to receive additional Earn-Out Shares from PAE of up to an aggregate of 4,000,000 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. See Note 11 - “Stockholders’ Equity - Earn-Out Agreement” for additional information.

The Company also has certain warrants issued by Gores III that remain outstanding after the Business Combination. See Note 11 - “Stockholders’ Equity - Warrants” for further information about the warrants.

In connection with the Business Combination, the Company recorded $20.9 million, net of tax as a reduction to additional paid in capital related to the transaction costs. These costs were directly attributable to the Recapitalization.

Post-Closing Adjustment

During the ~~second~~third quarter, pursuant to the post-closing adjustment provisions contained in the Merger Agreement, the Company ~~determined that~~made a post-closing adjustment payment ~~was due~~of $20.2 million to the Shay Stockholders. ~~As a result of such determination,~~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 ~~a $20.2 million liability and an adjustment to additional paid-in capital in the Company’s condensed consolidated balance sheets~~ as ~~of June 28, 2020.~~compensation expense.

7. Accounts Receivable, net

The components of Accounts receivable, net consisted of the following as of the dates presented (in thousands):

June 28, December 31,
2020 2019
Billed receivables $ 136,904 $ 148,747
Unbilled receivables 297,146 295,103
Less allowance for credit losses (1,865) (1,670)
Total accounts receivables, net $ 432,185 $ 442,180


	September 27,		December 31,
	2020		2019
Billed receivables	$	184,700	$	148,747
Unbilled receivables	263,085		295,103
Less allowance for credit losses	(2,356)		(1,670)
Total accounts receivables, net	$	445,429	$	442,180

As of ~~June 28,~~September 27, 2020 approximately ~~91.7%~~90.7% of the Company’s accounts receivable are with the U.S. government.

8. Goodwill and Intangible Assets, net

Goodwill

Based on management’s assessment of goodwill, there was 0 impairment or change for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020.

The Company considered the implications of COVID-19 as it relates to goodwill and indefinite-lived assets fair value. COVID-19 has had a marginally unfavorable impact on the Company’s results of operations for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020. Since the Company’s primary customers are departments and agencies within the U.S. Government, it has not historically had significant issues collecting its receivables and management does not foresee issues collecting receivables in the foreseeable future. In addition, the Company’s contract awards typically extend to at least five years, including options, and it has a strong history of being awarded a majority of these contract options. Management does not anticipate that the pandemic will have a materially adverse impact on such options. The Company’s liquidity position has not been materially impacted, and management continues to believe that the Company has adequate liquidity to fund its operations and meet its debt service obligations for the foreseeable future. Based on management’s assessment there has been no material impact to goodwill and indefinite-lived assets fair value due to the implications of COVID-19.

1516

Intangible Assets, net

The components of intangible assets, net consisted of the following as of the dates presented (in thousands):


		June 28, 2020																		September 27, 2020
		Gross Carrying Amount				Accumulated Amortization		Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
																			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount

Customer relationships	Customer relationships			$	286,900					$	(132,107)			$	154,793	Customer relationships		$		286,900			$	(139,699)		$	147,201
Technology	Technology	1,700				(1,700)		—			Technology	1,700				(1,700)				0
Trade name	Trade name	16,900				(7,323)		9,577			Trade name	16,900				(7,778)				9,122
Total	Total	$	305,500			$	(141,130)	$	164,370		Total	$	305,500			$	(149,177)			$	156,323

		December 31, 2019																		December 31, 2019
		Gross Carrying Amount				Accumulated Amortization		Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
																			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount

Customer relationships	Customer relationships			$	286,900					$	(116,923)			$	169,977	Customer relationships		$		286,900			$	(116,923)		$	169,977
Technology	Technology	1,700				(1,700)		—			Technology	1,700				(1,700)				0
Trade name	Trade name	16,900				(6,413)		10,487			Trade name	16,900				(6,413)				10,487
Total	Total	$	305,500			$	(125,036)	$	180,464		Total	$	305,500			$	(125,036)			$	180,464

As of the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, customer relationships and trade name intangibles had weighted average remaining useful lives of ~~7.2~~7.0 and ~~5.5~~5.3 years, respectively. As of the year-ended December 31, 2019, customer relationships and trade name intangibles had weighted average remaining useful lives of 7.9 and 6.0 years, respectively.

During the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020 amortization expense was approximately $8.0 million and ~~$16.1~~$24.1 million, respectively. During the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019, amortization expense was approximately $8.2 million and ~~$16.9~~$25.0 million, respectively.

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Estimated amortization expense in future years is expected to be:


		As of			As of
		June 28, 2020			September 27, 2020
Remainder of 2020	Remainder of 2020	$	16,094	Remainder of 2020	$	8,047
2021	2021	31,824		2021	31,824
2022	2022	31,775		2022	31,775
2023	2023	24,565		2023	24,565
2024	2024	20,490		2024	20,490
Thereafter	Thereafter	39,622		Thereafter	39,622
Total	Total	$	164,370	Total	$	156,323

9. Consolidated Variable Interest Entities

~~The Company has entered into ventures and investments that allow it to participate in projects in areas where it is advantageous or required by law to partner with a local organization.~~

The Company is the majority shareholder and primary beneficiary of PAE (New Zealand) Limited, ATOM Training Limited, PAE-Perini LLC, Syncom Space Services LLC, PAE-SGT Partners LLC, PAE-Parsons Global Logistics Services, LLC and accordingly, these entities are consolidated. As the primary beneficiary, the Company has a risk and obligation to absorb any losses significant to the VIE and the power, through voting rights or similar rights, to direct the activities that could impact economic performance of the VIE. The use of the assets of the VIEs to settle the Company’s obligations is subject to the approval of the managing body of each VIE.

The cash flows generated by these VIEs are included within the Company’s condensed consolidated statements of cash flows. The condensed consolidated balance sheets include the following amounts from these consolidated VIEs as of the dates presented (in thousands):


		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
Assets	Assets					Assets
Total assets	Total assets	$	132,384	$	127,742	Total assets	$	138,177	$	127,742

Liabilities and equity	Liabilities and equity					Liabilities and equity
Total liabilities	Total liabilities	$	78,327	$	80,151	Total liabilities	$	83,596	$	80,151
Total equity	Total equity	54,057		47,591		Total equity	54,581		47,591
Total liabilities and equity	Total liabilities and equity	$	132,384	$	127,742	Total liabilities and equity	$	138,177	$	127,742

The condensed consolidated statements of operations include the following amounts from consolidated VIEs for the periods presented (in thousands):

1718


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 28,		June 30,		June 28,		June 30,			September 27,		September 29,		September 27,		September 29,
		2020		2019		2020		2019			2020		2019		2020		2019
Income statements	Income statements									Income statements
Revenues	Revenues	$	94,454	$	89,789	$	181,644	$	153,049	Revenues	$	87,324	$	95,121	$	268,969	$	248,170
Cost of revenues	Cost of revenues	76,634		71,552		145,159		121,954		Cost of revenues	70,707		106,560		215,866		228,513
Selling, general and administrative expenses	Selling, general and administrative expenses	15,864		21,438		33,881		39,727		Selling, general and administrative expenses	16,595		24,100		50,477		63,828
Total operating expenses	Total operating expenses	92,498		92,990		179,040		161,681		Total operating expenses	87,302		130,660		266,343		292,341
Program income (loss)	Program income (loss)	1,956		(3,201)		2,604		(8,632)		Program income (loss)	22		(35,539)		2,626		(44,171)
Other (income) expense, net		840		(500)		(209)		(854)
Net income (loss)		$	2,796	$	(3,701)	$	2,395	$	(9,486)
Other (income), net										Other (income), net	(32)		(237)		(241)		(1,090)
Net (loss) income										Net (loss) income	$	(10)	$	(35,776)	$	2,385	$	(45,261)

10. Debt

Long-term debt consisted of the following as of the dates presented (in thousands):


		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
First Term Loan	First Term Loan	$	499,320	$	506,772	First Term Loan	$	491,867	$	506,772
Second Term Loan	Second Term Loan	128,783		265,329		Second Term Loan	128,783		265,329
Revolving Credit Facility		—		—

Total debt	Total debt	628,103		772,101		Total debt	620,650		772,101
Unamortized discount and debt issuance costs	Unamortized discount and debt issuance costs	(15,306)		(22,164)		Unamortized discount and debt issuance costs	(13,568)		(22,164)
Total debt, net of discount and debt issuance costs	Total debt, net of discount and debt issuance costs	612,797		749,937		Total debt, net of discount and debt issuance costs	607,082		749,937
Less current maturities of long-term debt	Less current maturities of long-term debt	(22,969)		(22,007)		Less current maturities of long-term debt	(23,044)		(22,007)
Total long-term debt, net of current	Total long-term debt, net of current	$	589,828	$	727,930	Total long-term debt, net of current	$	584,038	$	727,930

Credit Agreements

The Company’s borrowing arrangement provides for current borrowings ~~up to $499.3~~of $491.9 million under a first lien term loan credit agreement, dated October 26, 2016, as amended (the ~~“First~~“2016 First Term Loan”), $128.8 million under a second lien term loan credit agreement, dated October 26, 2016, as amended (the ~~“Second~~“2016 Second Term Loan”), and $150.0 million under a revolving credit facility dated October 26, 2016, as amended (the ~~“Revolving~~“2016 Revolving Credit Facility,” and together with the 2016 First Term Loan and the 2016 Second Term Loan, the ~~“Credit~~“2016 Credit Agreements”). Principal and interest are due quarterly on the 2016 First Term Loan and interest only is due quarterly on the 2016 Second Term Loan. The maturity date of the 2016 First Term Loan is October 20, 2022. For the 2016 Second Term Loan the maturity date is October 20, 2023. For the Company’s 2016 Revolving Credit Facility the maturity date is October 20, 2021.

In connection with the Business Combination, Shay was required to amend its ~~existing credit facilities~~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 ~~transaction the~~Business

1819

Combination the outstanding balance on the 2016 Second Term Loan was reduced by approximately $136.5 million to a principal balance of $128.8 million.

The 2016 Credit Agreements require the Company to comply with specified financial covenants under certain circumstances, including the maintenance of certain leverage ratios.

The 2016 Credit Agreements also contain 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.

The Company was in compliance with the financial and non-financial covenants under the 2016 Credit Agreements as of ~~June 28,~~September 27, 2020 and December 31, 2019, respectively.

Future principal maturities of the Company’s long-term debt are summarized as follows (in thousands):


		As of			As of
		June 28, 2020			September 27, 2020
Remainder of 2020	Remainder of 2020	$	22,358	Remainder of 2020	$	14,905
2021	2021	29,810		2021	29,810
2022	2022	447,152		2022	447,152
2023	2023	128,783		2023	128,783
2024	2024	—		2024	0
Thereafter	Thereafter	$	—	Thereafter	0
Total	Total	$	628,103	Total	$	620,650

As of ~~June 28,~~September 27, 2020 and December 31, 2019, the available borrowing capacity under the 2016 Revolving Credit Facility was approximately ~~$83.5~~$105.4 million and $121.8 million, respectively.

Interest Rates on Credit Agreements

The interest rate per annum applicable to amounts borrowed under the 2016 First Term Loan is equal to either the Base Rate (as defined below) or the LIBO Rate (as defined below), in either case, plus (i) 4.5% in the case of the Base Rate loans and (ii) 5.5% in the case of LIBO Rate loans.

The interest rate per annum applicable to amounts borrowed under the 2016 Second Term Loan is equal to either the Base Rate or the LIBO Rate, in either case, plus (i) 8.5% in the case of the Base Rate loans and (ii) 9.5% in the case of LIBO Rate loans.

The “Base Rate” is defined as a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus one half of one percent, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America (“BofA”) as its “prime rate,” and (c) the LIBO Rate for a LIBO Rate loan with a one month Interest Period commencing on such day plus

1.0%. The “prime rate” is a rate set by BofA based upon various factors including BofA’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. The

LIBO Rate is defined as the rate per annum equal to the London Interbank Offered Rate or a comparable or successor rate, whichever rate is approved by the Administrative Agent (as that term is defined in the Credit Agreements).

The interest rate per annum applicable to the 2016 Revolving Credit Facility is equal to either a Base Rate or a LIBO Rate plus (i) a range of 0.8% to 1.3% in the case of Base Rate loans and (ii) a range of 1.8% to 2.3% in the case of LIBO Rate loans, each based on average availability as of the first day of each quarter.

As of ~~June 28,~~September 27, 2020 and December 31, 2019, the applicable interest rate on the amounts borrowed under the 2016 First Term Loan was 6.5% and 7.4%, respectively. As of ~~June 28,~~September 27, 2020 and December 31, 2019, the applicable interest rate on amounts borrowed under the 2016 Second Term Loan was 10.5% and 11.4%, respectively.

As of ~~June 28,~~September 27, 2020 and December 31, 2019, the applicable interest rate on amounts borrowed under the 2016 Revolving Credit Facility was 4.0% and 5.8%, respectively.

In addition, the interest rate on our term loan borrowings and revolving loan borrowings is based on the London Interbank Offered Rate (“LIBOR” or “LIBO Rate”). LIBOR is the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. The consequences of the discontinuance of the LIBOR benchmark cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness.

Letters of Credit

The Company had 13 outstanding letters of credit for program and insurance requirements totaling approximately $23.9 million as of September 27, 2020 and 11 outstanding letters of credit for program and insurance requirements totaling approximately $21.2 million as of ~~both June 28, 2020 and~~ December 31, 2019.

11. Stockholders’ Equity

Authorized and Outstanding Stock

In connection with the Business Combination, the Company made changes to its capital stock. The Company’s amended and restated certificate of incorporation authorizes the issuance of 211,000,000 shares of capital stock, par value of $0.0001 per share, consisting of (a) 210,000,000 shares of Class A common stock, and (b) 1,000,000 shares of preferred stock.

As a result of the Business Combination, the shares issued to Shay Stockholders are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure.

Warrants

As of ~~June 28,~~September 27, 2020, there were warrants outstanding to acquire 19,999,985 shares of our Class A Common Stock including: (i) 13,333,319 warrants sold as part of the public units issued in our

IPO on September 11, 2018 (the “Public Warrants”), and (ii) 6,666,666 warrants issued or transferred to our former sponsor in a private placement on the IPO closing date (the “Private Placement Warrants” and, together with the Public Warrants, the “Warrants”). The Company currently has an effective registration statement on Form S-1 relating to the issuance by the Company of up to (i) 13,333,333 shares of its Class A Common Stock issuable upon the exercise of the outstanding Public Warrants, and (ii) 6,666,666 shares of its Class A Common Stock issuable upon exercise of the Private Placement Warrants.

Each whole Warrant entitles the registered holder to purchase 1 share of Class A Common Stock at a price of $11.50 per share. The Warrants became exercisable on March 11, 2020, thirty days following the completion of the Business Combination, and expire five years after that date, or upon redemption or liquidation. The Company may redeem outstanding Public Warrants and, unless held by the former sponsor or its permitted transferees, the Private Placement Warrants at a price of $0.01 per Warrant, provided the last reported sales price of the Company’s Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading-day period ending on the third business day before the Company gives proper notice of such redemption to the warrant holders.

The Private Placement Warrants are identical to the Public Warrants except that, so long as they are held by the former sponsor or its permitted transferees: (i) they will not be redeemable by the Company; (ii) they may be exercised by the holders on a cashless basis; and (iii) they are subject to registration rights.

Any transactions related to the Warrants are recorded within the stockholders’ equity section of the Company’s condensed consolidated financial statements. However, the issuance of shares pursuant to the exercise of these warrants is contingent upon the share price reaching $11.50. Therefore, share activity related to such warrants will not be recorded until such time as the contingency has been met.

Earn-Out Agreement

In connection with the Business Combination, stockholders of Shay immediately prior to the transaction (which stockholders consisted of certain affiliates of Platinum Equity, LLC and members of PAE management (the “Shay Stockholders”)) ~~will be~~are now entitled to receive up to an aggregate of 4,000,000 additional shares of Class A Common Stock (the “Earn-Out Shares”) if at any time during the five-year period following the Closing Date (the “Earn-Out Period”) the volume weighted average closing sale price of one share of Class A Common Stock on the Nasdaq (or the exchange which shares of Class A Common Stock are then listed) for a period of at least 10 days out of 20 consecutive trading days (the “Common Share Price”) exceeds certain thresholds, described below.

The thresholds (each a “Triggering Event”) causing the Earn-Out Shares to be issued by the Company to the Shay Stockholders is any such event that occurs within the Earn-Out period ~~are:~~as follow: (i) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $13.00; (ii) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $15.50; (iii) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $18.00; and (iv) a one-time issuance of 1,000,000 shares if the Common Share Price is greater than $20.50.

Further, if during the Earn-Out Period there is a change in control (as defined in the Merger Agreement) that results in the holders of Class A Common Stock receiving a per share price in

respect of their Class A Common Stock that is equal to or greater than the applicable Common Share Price required in connection with any Triggering Event (an “Acceleration Event”), then any such Triggering Event that has not previously occurred will be deemed to have occurred, and the Company must issue Earn-Out Shares accordingly.

If no Triggering Event is achieved within the Earn-Out Period, the Company will not be required to issue the Earn-Out Shares. No Triggering Event was achieved during the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020.

Any transactions related to Earn-Out Shares are recorded within the stockholders’ equity section of the Company’s condensed consolidated financial statements. Earn-Out Shares will be recognized as stock dividends and recorded at fair value as an increase in accumulated deficit (or reduction of retained earnings) and as an increase in Common Stock and Additional Paid-in Capital when they are effectively declared by virtue of a Triggering Event being achieved.

12. Stock-Based Compensation

2016 Participation Plan

On May 23, 2016, the Company adopted the Pacific Architects and Engineers Incorporated 2016 Participation Plan (the “2016 Participation Plan”). The purpose of the 2016 Participation Plan was to provide incentive compensation to key employees by granting performance units (“Units”). The Units were valued on the date of grant by the compensation committee of the pre-Business Combination company. Participants in the 2016 Participation Plan were entitled to receive compensation for their Units in the event a qualifying event occurs. In connection with the Business Combination, which was a qualifying event, the 2016 Participation Plan was terminated effective immediately prior to the Closing Date and, in exchange for a release of claims relating to the plan, plan participants received payments totaling approximately $17.4 million. The $17.4 million was paid out during the three-month ended March 29, 2020, and was recorded as compensation expense.

2020 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 units (RSUs) and other stock or cash-based awards.

Restricted Stock Units

During the three-month period ended ~~June 28,~~September 27, 2020, the Company issued ~~2,141,273~~454,709 RSUs to certain employees out of the shares approved for issuance under the 2020 Incentive Plan. ~~In addition, the Company issued 35,875 RSUs to its 3 independent directors in connection with their annual compensation as directors.~~ RSUs cliff vest in accordance with their respective service period or grade vest on an anniversary date, subject to the terms of the grant agreements and the 2020 Incentive Plan.

The Company recognized ~~$3.5~~$4.0 million and $7.5 million in share-based compensation costs related to RSUs during the three-month and ~~six-month~~nine-month periods ended ~~June 28, 2020.~~September 27, 2020, respectively. Forfeitures are recognized in compensation costs when those occur.

Activity related to RSUs during the ~~six-months~~nine-months ended ~~June 28,~~September 27, 2020 is as follows:


		As of June 28, 2020					As of September 27, 2020
			Weighted-Average				Weighted-Average
			Grant Date				Grant Date
Restricted Stock Unit	Restricted Stock Unit	Shares	Fair Value		Restricted Stock Unit	Shares	Fair Value
Balance at December 31, 2019	Balance at December 31, 2019	—	$	—	Balance at December 31, 2019	0	$	0
Granted	Granted	2,177,148	7.07		Granted	2,631,857	7.45
Vested	Vested	(26,116)	10.65		Vested	(34,366)	10.32
Forfeited	Forfeited	—	—		Forfeited	0	0
Balance at June 28, 2020		2,151,032	$	7.29
Balance at September 27, 2020					Balance at September 27, 2020	2,597,491	$	7.69

~~The~~During the three-month period ended September 27, 2020, the Company issued ~~330,303~~288,822 performance-based restricted stock units (“PSUs”) to certain employees out of the shares approved for issuance under the 2020 Incentive Plan. These PSUs earn out over a ~~3-year~~three-year performance period, subject to the terms of the grant agreements and the 2020 Incentive Plan. The vesting of PSUs is contingent on the achievement of performance goals stated in the agreement, such as revenue growth, weighted at 50%, and EBITDA margin, weighted at 50%. Compensation costs are recognized when the performance conditions are satisfied or likely to be satisfied. The Company recognized ~~$0.2~~$0.3 million and $0.5 million in PSUs compensation costs during the three-month and ~~six-month~~nine-month periods ended ~~June 28, 2020.~~September 27, 2020, respectively. Forfeitures are recognized in compensation costs ~~when those~~as they occur.

Activity related to PSUs during the ~~six~~nine months ended ~~June 28,~~September 27, 2020 is as follows:

As of June 28, 2020
Weighted-Average
Grant Date
Performance-based Restricted Stock Unit Shares Fair Value
Balance at December 31, 2019 — $ —
Granted 330,303 8.04
Vested — —
Forfeited — —
Balance at June 28, 2020
330,303 $ 8.04


	As of September 27, 2020
		Weighted-Average
		Grant Date
Performance-based Restricted Stock Unit	Shares	Fair Value
Balance at December 31, 2019	0	$	0
Granted	619,125	8.61
Vested	0	0
Forfeited	0	0
Balance at September 27, 2020	619,125	$	8.61

13. Net Income (Loss) Per Share

Basic net income (loss) per common share is determined by dividing the net income (loss) attributed to stockholders by the weighted average number of common shares outstanding during the period presented. Diluted income (loss) per share is determined by adjusting the weighted

average number of shares of common stock and common stock equivalents outstanding for the dilutive effect of common stock equivalents for the periods presented.

The following table sets forth the computation of basic and diluted loss per share attributable to the Company’s common stockholders for the periods presented (in thousands, except shares and per share amounts):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 28,		June 30,		June 28,		June 30,			September 27,		September 29,		September 27,		September 29,
		2020		2019		2020		2019			2020		2019		2020		2019

Numerator:	Numerator:									Numerator:
Net income (loss) attributed to PAE Incorporated	Net income (loss) attributed to PAE Incorporated	$	16,021	$	2,674	$	11,078	$	(3,046)	Net income (loss) attributed to PAE Incorporated	$	10,318	$	(32,170)	$	21,395	$	(35,216)

Denominator:	Denominator:									Denominator:
Basic weighted average shares	Basic weighted average shares	92,044,098		21,127,823		75,890,028		21,127,823		Basic weighted average shares	92,070,306		21,127,823		81,323,258		21,127,823
Diluted weighted average shares	Diluted weighted average shares	92,787,379		21,127,823		76,273,931		21,127,823		Diluted weighted average shares	93,392,565		21,127,823		82,115,825		21,127,823

Basic income (loss) per share	Basic income (loss) per share	$	0.17	$	0.13	$	0.15	$	(0.14)	Basic income (loss) per share	$	0.11	$	(1.52)	$	0.26	$	(1.67)
Diluted income (loss) per share	Diluted income (loss) per share	$	0.17	$	0.13	$	0.15	$	(0.14)	Diluted income (loss) per share	$	0.11	$	(1.52)	$	0.26	$	(1.67)

The Company has not included the effect of 19,999,985 shares of Common Stock issuable upon the exercise of Warrants in the calculation of diluted net income (loss) per share for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020. Warrants are excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period.

The Company has not included the effect of 4,000,000 Earn-Out Shares in the calculation of basic and diluted net (loss) income per share for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020. The condition for the issuance of these shares is based on the weighted average closing sale price of the Company’s Class A Common Stock and such condition ~~had~~has not been met as of ~~June 28,~~September 27, 2020.

Unvested RSUs and PSUs will not impact the calculation of basic earnings per share (“EPS”) until vested, in which case they would be included in the total weighted average ~~numbers~~number of shares. All potential dilutive securities, which include unvested RSUs, are included in the diluted EPS calculation. Unvested PSUs are included in the calculation of diluted EPS to the extent that the performance criteria have been achieved.

14. Leases

At ~~June 28,~~September 27, 2020, the Company had right-of-use (“ROU”) assets, net of ~~$154.4~~$160.0 million and lease liabilities of ~~$157.4~~$161.9 million recorded on the condensed consolidated balance sheet.

The Company rents certain facilities and equipment under operating leases. The Company’s total lease cost is recorded primarily within selling, general and administrative expenses on the condensed consolidated statements of operations. Rents which are directly chargeable to a project are charged to cost of revenues.

During the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020, the Company recognized operating lease costs of approximately ~~$14.3~~$13.8 million and ~~$28.4~~$42.3 million, respectively.

The Company’s future minimum operating lease payments for noncancelable operating leases were as follows (in thousands):


		As of
		June 28, 2020			September 27, 2020
Remainder of 2020	Remainder of 2020	$	20,344	Remainder of 2020	$	10,942
2021	2021	39,437		2021	41,682
2022	2022	34,047		2022	36,043
2023	2023	30,160		2023	31,331
2024	2024	22,030		2024	23,077
Thereafter	Thereafter	51,674		Thereafter	60,704
Total future minimum lease payments	Total future minimum lease payments	197,692		Total future minimum lease payments	203,779
Less imputed interest	Less imputed interest	40,294		Less imputed interest	41,917
Present value of minimum lease payments	Present value of minimum lease payments	157,398		Present value of minimum lease payments	161,862
Less current maturities of lease liabilities	Less current maturities of lease liabilities	38,946		Less current maturities of lease liabilities	40,979
Long-term lease liabilities	Long-term lease liabilities	$	118,452	Long-term lease liabilities	$	120,883

The weighted-average remaining lease term and the weighted-average discount rate for the Company’s operating leases were approximately ~~6.95~~7.1 years and ~~7.3%~~7.1%, respectively, at ~~June 28,~~September 27, 2020.

The Company made cash payments of approximately ~~$10.6~~$11.3 million and ~~$21.2~~$32.5 million for operating leases for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020, which are included in cash flows from operating activities in the condensed consolidated statement of cash flows.

15. Legal Proceedings, Commitments, and Contingencies

The Company is a party to, or has property subject to, litigation and other proceedings. Management believes the probability is remote that the outcome of the matters will have a material adverse effect on its operations as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on net earnings in a future period. The Company cannot predict the outcome of legal proceedings and loss or range of loss contingencies with certainty.

16. Segment Reporting

The Company's operations and reportable segments are organized around the nature of the services and products provided to customers. The Company defines its reportable segments based on the way the chief operating decision maker (“CODM”), currently its President and Chief Executive Officer, manages the operations of the Company for purposes of allocating resources and assessing performance.

The GMS operating segment provides support to the U.S. Government and its partners within and outside the United States providing sustainment, training and readiness support and

advancing foreign policy objectives. The NSS operating segment provides a wide-ranging portfolio of offerings that support all facets of national security, including intelligence, homeland security and civil government missions.

While the CODM uses a variety of different measures to evaluate the Company’s segments, the primary measures used to evaluate segment performance are revenues and operating income. As a result, interest expense, net and provision for income taxes as recorded on the condensed consolidated statements of operations are not allocated to the Company’s operating segments.

The following table shows information by reportable segment for the periods presented (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 28,		June 30,		June 28,		June 30,			September 27,		September 29,		September 27,		September 29,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenues	Revenues									Revenues
GMS	GMS	$	507,854	$	526,025	$	965,298	$	1,030,504	GMS	$	521,346	$	535,635	$	1,486,643	$	1,566,138
NSS	NSS	135,449		169,582		295,258		338,587		NSS	144,894		162,082		440,152		500,670
Corporate	Corporate	—		—		—		—		Corporate	0		0		0		0
Total revenues	Total revenues	$	643,303	$	695,607	$	1,260,556	$	1,369,091	Total revenues	$	666,240	$	697,717	$	1,926,795	$	2,066,808

Operating income	Operating income									Operating income
GMS	GMS	$	31,537	$	25,276	$	44,140	$	51,067	GMS	$	31,401	$	26,000	$	75,541	$	77,449
NSS	NSS	7,725		3,974		12,092		3,187		NSS	5,679		(26,402)		17,770		(23,270)
Corporate	Corporate	(4,967)		(3,091)		(14,479)		(13,743)		Corporate	(8,548)		(10,123)		(23,027)		(24,193)
Total operating income	Total operating income	$	34,295	$	26,159	$	41,753	$	40,511	Total operating income	$	28,532	$	(10,525)	$	70,284	$	29,986

Amortization of intangible assets	Amortization of intangible assets									Amortization of intangible assets
GMS	GMS	$	4,115	$	4,140	$	8,231	$	8,399	GMS	$	4,115	$	4,140	$	12,346	$	12,539
NSS	NSS	3,932		4,056		7,863		8,454		NSS	3,932		4,036		11,795		12,490
Corporate	Corporate	—		—		—		—		Corporate	0		0		0		0
Total amortization of intangible assets	Total amortization of intangible assets	$	8,047	$	8,196	$	16,094	$	16,853	Total amortization of intangible assets	$	8,047	$	8,176	$	24,141	$	25,029

Under U.S. Government cost accounting standards, indirect costs including depreciation expense are collected in numerous indirect cost pools, which are then collectively allocated to the Company’s reportable segments based on a representative causal or beneficial relationship

of the costs in the pool to the costs in the base. While depreciation expense is a component of the allocated costs, the allocation process precludes depreciation expense from being specifically identified by the Company’s individual reportable segments. For this reason, depreciation expense by reportable segment is not presented separately above.

Asset information by segment is not a key measure of performance used by the CODM and therefore segment assets are not presented.

Less than 10% of the Company’s revenues and tangible long-lived assets are generated by or owned by entities outside of the United States. Therefore, additional segment financial information by geographic location is not presented.

17. Related-Party Transactions

Tax Overpayment/Underpayment Amount

In connection with the Business Combination, the Shay Stockholders are entitled to a payment of the net cash savings in U.S. federal, state and local income tax that the post-closing company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date. The liability for this estimated payment and the corresponding charge to equity of $4.7 million are reflected in the Company’s consolidated balance sheets as of ~~June 28,~~September 27, 2020.

Advisory Services

During the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 and ~~twelve month~~twelve-month period ended December 31, 2019, the Company recognized management fees, transaction and advisory fees, and expenses of approximately $15.8 million and $5.1 million, respectively. As a result of the Business Combination $15.0 million was grouped with other similar transactional expenses and recorded as a reduction to the recapitalized equity and $0.8 million was recorded in selling, general and administrative expenses. The amount of $5.1 million was recorded in selling, general and administrative expenses for the period ended December 31, 2019.

These expenses were for services rendered by one or more affiliates of Platinum Equity, LLC.

18. Income Taxes

The Company’s provision for income tax expense (benefits) were approximately ~~$3.8~~$4.2 million and ~~$(5.0)~~$(0.8) million and its effective income tax rates were ~~18.3%~~28.1% and ~~(70.4)~~(3.5)% for the three-month and ~~six-month~~nine-month periods ended ~~June 28~~September 27, 2020, respectively. The Company’s provision for income tax expense (benefits) were approximately ~~$1.2~~$0.1 million and ~~$(2.0)~~$(1.9) million and its effective income tax rates were ~~25.4%~~(0.4)% and ~~52.9%~~5.3% for the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019 respectively.

The provision for income taxes for the period ended ~~June 28,~~September 27, 2020 differed from the U.S. federal statutory rate computed by applying the U.S. federal statutory rate to income or loss before income taxes primarily due to the benefit of Foreign Derived Intangible Income (“~~FDII’~~FDII”), increased prior year interest expense deduction under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), nontaxable income and settlement of foreign taxes offset by disallowed compensation deduction under Section 162(m) and disallowed transaction costs. The provision for income taxes for the period ended ~~June 30,~~September 29, 2019 differed from the U.S. federal statutory rate computed by applying the U.S. federal statutory rate to income or loss before income taxes primarily due to a disallowed interest deduction, non-deductible settlement

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~~income taxes primarily due to a disallowed interest deduction, non-deductible settlement~~ paid to the U.S. Government, non-deductible goodwill and the effect of foreign operations offset by a benefit from foreign derived intangible income.

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carry-back periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

In particular, under the CARES Act, for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. As of ~~June 28,~~September 27, 2020, the Company estimated that the net tax benefit ~~on increased 2019 interest expense deduction~~ related to the CARES Act is approximately ~~$3.6~~$2.7 million. The Company is expecting to defer ~~$35.0~~$36.0 million of employer share Social Security tax under the CARES Act that will be paid equally by December 31, 2021 and 2022. ~~We are in~~The Company has considered the ~~process of analyzing the different aspects~~impact of the CARES Act and continues to ~~determine whether any other specific provision may impact~~review its position as additional guidance is issued by the ~~Company.~~government.

19. Subsequent Events

Debt Refinancing

On October 19, 2020 the Company refinanced the 2016 Credit Agreements and entered into new senior secured credit facilities (the “2020 Credit Agreements”).The 2020 Credit Agreements establish a $740 million term loan facility maturing in October 2027 priced at LIBOR plus a spread of 4.50%, a $150 million delayed draw term loan facility maturing in October 2027 priced at LIBOR plus a spread of 4.50%, and a $175 million senior secured revolving credit facility maturing in October 2025 priced at LIBOR plus a spread of 1.75% to 2.25%.

The loans under the 2020 Credit Agreements are secured by a first lien over substantially all of the Company's assets as well as affirmative and negative covenants customary for transactions of this type, including limitations with respect to indebtedness, liens, investments, dividends, disposition of assets, change in business and transactions with affiliates.

The Company used the proceeds from the 2020 Credit Agreements to repay the amounts outstanding under the 2016 First Term Loan and 2016 Second Term Loan, with the remaining amounts to be used for general corporate purposes, potential mergers and acquisitions, and transaction fees and expenses.

For more information about the New Credit Agreements, see the Company’s Form 8-K filed October 22, 2020, File No. 001-38643.

Agreement to Acquire CENTRA Technology, Inc.

On October 26, 2020, Pacific Architects and Engineers, LLC, a Delaware limited liability company (the “Purchaser”), an indirect wholly owned subsidiary of the Company, entered into a

stock purchase agreement (the “Stock Purchase Agreement”) by and among the Purchaser, CENTRA Technology, Inc., a Maryland corporation (“CENTRA”), certain stockholders of CENTRA, and Barbara Rosenbaum as the sellers representative.CENTRA provides mission critical services to the intelligence community and other U.S. national and homeland security customers.Pursuant to the Stock Purchase Agreement, the Purchaser has agreed to acquire all of the shares of CENTRA for 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 “Transaction”).

The Stock Purchase Agreement contains customary representations, warranties and covenants of the parties. The Stock Purchase Agreement also contains customary indemnities, and the Company 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 will be deposited into an escrow account to satisfy purchase price adjustments, if any.

The parties to the Stock Purchase Agreement have certain customary rights to terminate the Stock Purchase Agreement. The closing of the Transaction is subject to customary closing conditions, and the Company expects that the closing will occur in the fourth quarter of 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2020, the Company’s Current Report on Form 8-K/A filed with the SEC on March 11, 2020, ~~the Form 424B3 prospectus filed with the SEC on April 23, 2020,~~ and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q. Unless otherwise noted, the MD&A compares the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020 to the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019.

This Quarterly Report on Form 10-Q of PAE contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange ~~Act’~~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,” “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 2019 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors, the Company’s Current Report on Form 8-K/A filed on March 11, 2020 under the heading Risk Factors, and the Company’s Form 424B3 prospectus filed on April 23, 2020 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. federal government or its agencies or other state, local or foreign governments or agencies, including as a result of a reduction in government spending;

•service failures or failures to properly manage projects;

•issues that damage our professional reputation;

•disruptions in or changes to prices of our supply chain, including from difficulties in the supplier qualification process;

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•failures on the part of our subcontractors or joint venture partners to perform their contractual obligations;

•failures to maintain strong relationships with other contractors;

•the impact of a negative audit or other investigation;

•failure to comply with numerous laws and regulations regarding procurement, anti-bribery and organizational conflicts of interest;

•inability to comply with the laws and other security requirements governing access to classified information;

•inability to share information from classified contracts with investors;

•the 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;

•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;

•the impact of public health crises, such as COVID-19;

•issues arising from cybersecurity threats or intellectual property infringement claims;

•the loss of members of senior management;

•the inability to attract, train or retain employees with the requisite skills, experience and security clearances;

•the impact of the expiration of our collective bargaining agreements; and

•other risks and uncertainties described in this Form 10-Q, including under the section entitled “Risk Factors,” and described in our other filings 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 2020 and 2019 items and year-over-year comparisons between 2020 and 2019. As used in this MD&A, unless the context indicates otherwise, the financial information relating to the three-month and ~~six-month~~nine-month periods ended ~~June 30,~~September 29, 2019, are those of Shay Holdings and its subsidiaries, and the financial information and data for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020 includes the financial information and data of Shay Holdings 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.

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We are subject to the informational requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at https://investors.pae.com/financials-and-filings/sec-filings as soon as practicable after such reports are available on the SEC’s website at www.sec.gov. The SEC’s website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We periodically provide other information for investors on our corporate website, www.pae.com, and our investor relations website, https://investors.pae.com. This includes press releases and other information about financial performance, information on corporate governance and details related to our annual meeting of stockholders. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts. The information contained on the websites referenced in this Quarterly Report on Form 10-Q is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.

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, 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’s operations are 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 condensed 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 ~~will be~~are entitled to receive additional Earn-Out Shares 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. See Note 11 - “Stockholders’ Equity - Earn-Out Agreement” of the notes to the condensed consolidated financial statements for additional information.

compensation expense.

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Incentive Plan

For a discussion onof the 2020 Incentive Plan refer to Note 12 - “Stock-Based Compensation” of the notes to the condensed consolidated financial statements.

Debt

Agreement to Acquire CENTRA Technology, Inc.

On October 26, 2020, Pacific Architects and Engineers, LLC, a Delaware limited liability company (the “Purchaser”), an indirect wholly owned subsidiary of the Company, entered into a stock purchase agreement (the “Stock Purchase Agreement”) by and among the Purchaser, CENTRA Technology, Inc., a Maryland corporation (“CENTRA”), certain stockholders of CENTRA, and Barbara Rosenbaum as the sellers representative.CENTRA provides mission critical services to the intelligence community and other U.S. national and homeland security customers.Pursuant to the Stock Purchase Agreement, the Purchaser has agreed to acquire all of the shares of CENTRA for 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 “Transaction”).

Financial and Other Highlights

From December 31, 2019 to ~~June 28,~~September 27, 2020, PAE’s overall contract backlog ~~decreased~~increased by 1.4% from $6,351.8 million to ~~$6,265.6~~$6,987.9 million, of which ~~$1,240.6~~$1,650.2 million was funded. 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):


		As of		As of			As of		As of
		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
Global Mission Services:	Global Mission Services:					Global Mission Services:
Funded GMS backlog	Funded GMS backlog	$	970,554	$	1,173,196	Funded GMS backlog	$	1,297,983	$	1,173,196
Unfunded GMS backlog	Unfunded GMS backlog	3,771,073		3,393,081		Unfunded GMS backlog	4,196,193		3,393,081
Total GMS backlog	Total GMS backlog	$	4,741,627	$	4,566,277	Total GMS backlog	$	5,494,176	$	4,566,277
National Security Solutions:	National Security Solutions:					National Security Solutions:
Funded NSS backlog	Funded NSS backlog	$	270,065	$	311,214	Funded NSS backlog	$	352,257	$	311,214
Unfunded NSS backlog	Unfunded NSS backlog	1,253,905		1,474,309		Unfunded NSS backlog	1,141,423		1,474,309
Total NSS backlog	Total NSS backlog	$	1,523,970	$	1,785,523	Total NSS backlog	$	1,493,680	$	1,785,523
Total:	Total:					Total:
Funded backlog	Funded backlog	$	1,240,619	$	1,484,410	Funded backlog	$	1,650,240	$	1,484,410
Unfunded backlog	Unfunded backlog	5,024,978		4,867,390		Unfunded backlog	5,337,616		4,867,390
Total backlog	Total backlog	$	6,265,597	$	6,351,800	Total backlog	$	6,987,856	$	6,351,800

As of ~~June 28,~~September 27, 2020, PAE had a contract base of more than ~~469~~581 active contracts and task orders. PAE served as the prime contractor on approximately ~~96.3%~~96.6% of its contracts. The DoD and DoS are PAE’s largest customers and accounted for ~~37.4%~~37.0% and ~~18.4%~~18.7% of its revenue during the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, respectively and ~~36.3%~~36.1% and ~~24.7%~~24.6% of its revenue during the ~~six-month~~nine-month period ended ~~June 30,~~September 29, 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 ~~32.8%~~34.5%, ~~28.9%~~28.1%, ~~14.9%~~14.6%, and ~~11.6%~~11.2% of its revenue, respectively during the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020. International Logistics and Stabilization, Infrastructure and Logistics, Readiness and Sustainment, and Business Process Solutions were PAE’s largest contributors by service area, representing ~~34.9%~~34.8%, ~~25.1%~~26.0%, ~~15.3%~~14.9%, and ~~15.2%~~15.3% of its revenue, respectively during the ~~six-month~~nine-month period ended ~~June 30,~~September 29, 2019.

PAE’s long-tenured contracts have created a recurring base business with its top revenue-generating contracts having a weighted average contract length of greater than ~~7.72~~7.2 years, as of ~~June 28,~~September 27, 2020. We believe that revenue from these long-running contracts will continue to be secure as PAE’s contracts are predominately funded from stable portions of the U.S. Government budget with little dependence on wartime or emergency overseas contingency operations funding.

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 this year supporting COVID-19 testing and care, including on behalf of the state of Georgia in converting a convention center to a COVID-19 treatment center in less than one ~~week.~~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 increased use of outsourcing by the U.S. Government 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 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:

•the continued transformation of military forces, leading to increased outsourcing of non-combat functions, 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 ~~has~~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 ~~financials~~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;

•Monitoring on a daily basis the COVID-19 status of employees and independent contractors;

•Reviewing on ~~a daily~~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:

◦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 (“CARES Act”).

COVID-19 has had a marginally unfavorable impact on the Company’s results of operations for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 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,~~December 11, 2020. 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.

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.

Results of Operations

Comparison of Results for the Three Months Ended ~~June 28,~~September 27, 2020 (unaudited) and ~~June 30,~~September 29, 2019 (unaudited) (in thousands):

Three Months Ended Percent
June 28, June 30, Dollar Change
2020 2019 Change %
Revenues $ 643,303 $ 695,607 $ (52,304) (7.5)
Cost of revenues 496,678 540,772 (44,094) (8.2)
Selling, general and administrative expenses 105,451 126,438 (20,987) (16.6)
Amortization of intangible assets 8,047 8,196 (149) (1.8)
Total operating expenses 610,176 675,406 (65,230) (9.7)
Program profit (loss) 33,127 20,201 12,926 64.0
Other income, net 1,168 5,958 (4,790) (80.4)
Operating income 34,295 26,159 8,136 31.1
Interest expense, net (13,757) (21,617) 7,860 (36.4)
Income before income taxes 20,538 4,542 15,996 352.2
Expense from income taxes 3,752 1,153 2,599 225.4
Net income 16,786 3,389 13,397 395.3
Noncontrolling interest in earnings of ventures 765 715 50 7.0
Net income attributed to PAE Incorporated $ 16,021 $ 2,674 $ 13,347 499.1



	Three Months Ended						Percent
	September 27,		September 29,		Dollar		Change
	2020		2019		Change		%

Revenues	$	666,240	$	697,717	$	(31,477)	(4.5)

Cost of revenues	512,877		565,703		(52,826)		(9.3)
Selling, general and administrative expenses	119,168		133,215		(14,047)		(10.5)
Amortization of intangible assets	8,047		8,176		(129)		(1.6)
Total operating expenses	640,092		707,094		(67,002)		(9.5)

Program profit (loss)	26,148		(9,377)		35,525		(378.9)
Other income, net	2,384		(1,148)		3,532		(307.7)

Operating income	28,532		(10,525)		39,057		31.1
Interest expense, net	(13,607)		(20,983)		7,376		(35.2)
Income (loss) before income taxes	14,925		(31,508)		46,433		(147.4)
Expense from income taxes	4,194		117		4,077		3484.6
Net income (loss)	10,731		(31,625)		42,356		(133.9)
Noncontrolling interest in earnings of ventures	413		545		(132)		(24.2)
Net income (loss) attributed to PAE Incorporated	$	10,318	$	(32,170)	$	42,488	(132.1)

Revenues

Revenues for the three-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$52.3~~$31.5 million, or ~~7.5%~~4.5%, from the comparable period in 2019. The decrease was attributable to a ~~$58.5~~$53.3 million impact from COVID-19, of which approximately ~~$40.4~~$42.8 million was non-labor and ~~$18.1~~

$10.5 million was labor, which decrease was partially offset by a ~~$6.2~~$21.9 million net increase in contract volume and new business programs. ~~The GMS and NSS segment revenues decreased by approximately $18.2 million and $34.1 million, respectively.~~

Cost of revenues

Cost of revenues for the three-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$44.1~~$52.8 million, or ~~8.2%~~9.3%, from the comparable period in 2019. The decrease in cost of revenues was primarily driven by lower revenue volume ~~offset by lower non-labor volumes.~~and the write down of PAE ISR LLC (“PAE ISR”) assets held for sale in the prior year period.

Selling, general and administrative expenses

Selling, general and administrative expense for the three-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$21.0~~$14.0 million, or ~~16.6%~~10.5%, from the comparable period in 2019. The decrease in selling, general and administrative expenses was primarily driven by lower indirect expenses ~~and~~including savings from the sale of ~~substantially all the assets of~~ PAE ISR ~~LLC~~assets in ~~2019.~~2019 and lower revenue volume.

Amortization of intangible assets

Amortization of intangible assets for the three-month period ended ~~June 28,~~September 27, 2020, decreased by approximately $0.1 million, or ~~1.8%~~1.6%, from the comparable period in 2019. The reduction was associated with amortizing certain customer relationships, development technologies, and trade names.

Other income, net

Other income, net for the three-month period ended ~~June 28,~~September 27, 2020, ~~decreased~~increased by approximately ~~$4.8~~$3.5 million, from the comparable period in 2019. The ~~decrease is~~increase was primarily ~~due to a one-time contract reserve write-off~~driven by higher joint venture income in ~~2019.~~the current period.

Operating income

Operating income for the three-month period ended ~~June 28,~~September 27, 2020, increased by approximately ~~$8.1~~$39.1 million, from the comparable period in 2019. The increase resulted from ~~lower selling, general,~~the write down of PAE ISR assets held for sale in the prior year period and ~~administrative expenses, and increased volume on~~ higher ~~margin programs,~~other operating income in the current period, which increase was partially offset by lower revenue ~~volume.~~volume in the current period.

Interest expense, net

Interest expense, net for the three-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$7.9~~$7.4 million, or ~~36.4%~~35.2%, from the comparable period in ~~2019. This~~2019.This decrease was primarily driven by ~~the~~ reduction of debt year over year.

Net income

Net income attributed to PAE for the three-month period ended ~~June 28,~~September 27, 2020 was ~~$16.0~~$10.3 million compared with a net income attributed to PAE of approximately ~~$2.7~~$(32.2) million in the comparable period in 2019. The increase in net income for the three-month period ended ~~June 28,~~

September 27, 2020, was primarily driven by factors impacting operating income and ~~lower~~reduced interest ~~expenses, which was driven by a reduction in debt year over year.~~

expense.

Comparison of Results for the ~~Six~~Nine Months Ended ~~June 28,~~September 27, 2020 (unaudited) and ~~June 30,~~September 29, 2019 (unaudited) (in thousands):


		Six Months Ended									Percent	Nine Months Ended					Percent
		June 28,		June 30,		Dollar		Change		September 27,		September 29,		Dollar		Change
		2020		2019		Change		%		2020		2019		Change		%

Revenues	Revenues	$	1,260,556	$	1,369,091	$	(108,535)	(7.9)	Revenues	$	1,926,795	$	2,066,808	$	(140,013)	(6.8)

Cost of revenues	Cost of revenues	961,886		1,057,931		(96,045)		(9.1)	Cost of revenues	1,474,763		1,623,634		(148,871)		(9.2)
Selling, general and administrative expenses	Selling, general and administrative expenses	242,777		261,474		(18,697)		(7.2)	Selling, general and administrative expenses	361,945		394,689		(32,744)		(8.3)
Amortization of intangible assets	Amortization of intangible assets	16,094		16,853		(759)		(4.5)	Amortization of intangible assets	24,141		25,029		(888)		(3.5)
Total operating expenses	Total operating expenses	1,220,757		1,336,258		(115,501)		(8.6)	Total operating expenses	1,860,849		2,043,352		(182,503)		(8.9)

Program profit (loss)	Program profit (loss)	39,799		32,833		6,966		21.2	Program profit (loss)	65,946		23,456		42,490		181.1
Other income, net	Other income, net	1,954		7,678		(5,724)		(74.6)	Other income, net	4,338		6,530		(2,192)		(33.6)

Operating income	Operating income	41,753		40,511		1,242		3.1	Operating income	70,284		29,986		40,298		134.4
Interest expense, net	Interest expense, net	(34,705)		(44,277)		9,572		(21.6)	Interest expense, net	(48,312)		(65,260)		16,948		(26.0)
Income (loss) before income taxes	Income (loss) before income taxes	7,048		(3,766)		10,814		(287.1)	Income (loss) before income taxes	21,972		(35,274)		57,246		(162.3)
Benefit from income taxes	Benefit from income taxes	(4,961)		(1,994)		(2,967)		148.8	Benefit from income taxes	(767)		(1,877)		1,110		(59.1)
Net income (loss)	Net income (loss)	12,009		(1,772)		13,781		(777.7)	Net income (loss)	22,739		(33,397)		56,136		(168.1)
Noncontrolling interest in earnings of ventures	Noncontrolling interest in earnings of ventures	931		1,274		(343)		(26.9)	Noncontrolling interest in earnings of ventures	1,344		1,819		(475)		(26.1)
Net income (loss) income attributed to PAE Incorporated	Net income (loss) income attributed to PAE Incorporated	$	11,078	$	(3,046)	$	14,124	(463.7)	Net income (loss) income attributed to PAE Incorporated	$	21,395	$	(35,216)	$	56,611	(160.8)

Revenues

Revenues for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$108.5~~$140.0 million, or ~~7.9%~~6.8%, from the comparable period in 2019. The decrease was attributable to a ~~$72.0~~$125.4 million impact from COVID-19, of which approximately ~~$49.7~~$92.6 million was non-labor and ~~$22.3~~$32.8 million was labor, and by a ~~$36.5~~net decrease of $14.6 million ~~net decrease~~from change in contract volume and new ~~business programs. The GMS and NSS segment revenues decreased by approximately $65.2 million and $43.3 million, respectively.~~business.

Cost of revenues

Cost of revenues for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$96.0~~$148.9 million, or ~~9.1%~~9.2%, from the comparable period in 2019. ~~This~~The decrease in cost of revenues was ~~attributable to~~primarily driven by lower revenue volume and the write down of PAE ISR assets held for sale in the prior year period partially offset by higher participation of lower ~~non-labor volumes.~~cost of sales programs in the current period.

4043

Selling, general and administrative expenses

Selling, general and administrative expense for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$18.7~~$32.7 million, or ~~7.2%~~8.3%, from the comparable period in ~~2019. This~~the prior year. The decrease in selling, general and administrative expenses was primarily driven by lower revenue ~~volume.~~volume and PAE ISR discontinued operations.

Amortization of intangible assets

Amortization of intangible assets for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$0.8~~$0.9 million, or ~~4.5%~~3.5%, from the comparable period in 2019. The reduction was associated with amortizing certain customer relationships, development technologies, and trade names.

Other income, net

Other income, net for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$5.7~~$2.2 million, from the comparable period in 2019. This decrease was driven by a one-time contract reserve write-off in ~~2019.~~the prior year period.

Operating income

Operating income for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, increased by approximately ~~$1.2~~$40.3 million, from the comparable period in 2019. The increase resulted from the write down of PAE ISR assets held for sale in the prior year period, which increase was ~~driven by increased volume on higher margin programs,~~ partially offset by lower revenue volume and lower other operating income in ~~2020.~~the current period.

Interest expense, net

Interest expense, net for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by approximately ~~$9.6~~$16.9 million, or ~~21.6%~~26.0%, from the comparable period in 2019. This decrease was primarily driven by reduction of debt year over year.

Net income (loss)

Net income attributed to PAE for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 was ~~$11.1~~$21.4 million compared with a net loss attributed to PAE of approximately ~~$3.0~~$35.2 million in the comparable period in 2019. The increase in net income for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, was primarily driven by ~~the decrease in interest expense and provision for income taxes, as well as by the~~ factors impacting operating ~~income.~~income and lower interest expense.

4144

PAE’s Segments

Comparison of Results by Segments for the Three Months Ended ~~June 28,~~September 27, 2020 (Unaudited), and ~~June 30,~~September 29, 2019 (Unaudited) (in thousands):


		June 28, 2020					June 30, 2019					September 27, 2020			September 29, 2019
		Revenues		% of Total Revenues	Revenues		% of Total Revenues		Revenues		% of Total Revenues	Revenues		% of Total Revenues
GMS	GMS	$	507,854	78.9	$	526,025	75.6	GMS	$	521,346	78.3	$	535,635	76.8
NSS	NSS	135,449		21.1	169,582		24.4	NSS	144,894		21.7	162,082		23.2
Corporate	Corporate	—		—	—		—	Corporate	—		—	—		—
Consolidated revenues	Consolidated revenues	$	643,303	100.0	$	695,607	100.0	Consolidated revenues	$	666,240	100.0	$	697,717	100.0

		Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %		Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %
GMS	GMS	$	31,537	4.9	$	25,276	3.6	GMS	$	31,401	4.7	$	26,000	3.7
NSS	NSS	7,725		1.2	3,974		0.6	NSS	5,679		0.9	(26,402)		(3.8)
Corporate	Corporate	(4,967)			(3,091)			Corporate	(8,548)			(10,123)
Consolidated operating income	Consolidated operating income	$	34,295		$	26,159		Consolidated operating income	$	28,532		$	(10,525)

Global Mission Services Segment Results

Revenues

Revenues for the three-month period ended ~~June 28,~~September 27, 2020, decreased by ~~$18.2~~$14.3 million, or ~~3.5%~~2.7%, from the comparable period in 2019. The decrease was attributable to a ~~$40.7~~$38.7 million impact from COVID-19, of which approximately ~~$29.7~~$31.9 million was non-labor and ~~$11.0~~$6.9 million was labor, partially offset by ~~$22.5~~a $24.2 million net increase in contract volume and new business programs.

Operating income

Operating income for the three-month period ended ~~June 28,~~September 27, 2020 increased by ~~$6.3~~$5.4 million from the comparable period in 2019. This improvement was ~~primarily the result of~~driven by increased consolidated venture income and increased volume on higher margin programs, which increase was partially offset by lower revenue volume.

4245

National Security Solutions Segment Results

Revenues

Revenues for the three-month period ended ~~June 28,~~September 27, 2020 decreased by ~~$34.1~~$17.2 million, or ~~20.1%~~10.6%, from the comparable period in 2019. ~~This~~The decrease was attributable to a ~~$17.8~~$14.6 million impact from COVID-19, of which approximately ~~$11.0~~$9.3 million was non-labor and ~~$6.8~~$5.3 million was labor, and by a ~~$16.3~~$2.4 million ~~net~~ decrease from small business set aside re-compete losses, net of new business ~~wins .~~wins.

Operating income

Operating income for the three-month period ended ~~June 28,~~September 27, 2020 increased by ~~$3.8~~$32.1 million from the comparable period in 2019. The increase was primarily ~~driven by~~due to the write down of PAE ISR assets held for sale in the prior year period and lower selling, general and administrative expenses ~~and increased volume on higher margin programs,~~in the current period, partially offset by lower revenue ~~volume.~~volume in the current period.

Comparison of Results by Segments for the ~~Six~~Nine Months Ended ~~June 28,~~September 27, 2020 (Unaudited), and ~~June 30,~~September 29, 2019 (Unaudited) (in thousands):


		June 28, 2020					June 30, 2019					September 27, 2020			September 29, 2019
		Revenues		% of Total Revenues	Revenues		% of Total Revenues		Revenues		% of Total Revenues	Revenues		% of Total Revenues
GMS	GMS	$	965,298	76.6	$	1,030,504	75.3	GMS	$	1,486,643	77.2	$	1,566,138	75.8
NSS	NSS	295,258		23.4	338,587		24.7	NSS	440,152		22.8	500,670		24.2
Corporate	Corporate	—		—	—		—	Corporate	—		—	—		—
Consolidated revenues	Consolidated revenues	$	1,260,556	100.0	$	1,369,091	100.0	Consolidated revenues	$	1,926,795	100.0	$	2,066,808	100.0

		Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %		Operating Income (Loss)		Profit Margin %	Operating Income (Loss)		Profit Margin %
GMS	GMS	$	44,140	3.5	$	51,067	3.7	GMS	$	75,541	3.9	$	77,449	3.7
NSS	NSS	12,092		1.0	3,187		0.2	NSS	17,770		0.9	(23,270)		(1.1)
Corporate	Corporate	(14,479)			(13,743)			Corporate	(23,027)			(24,193)
Consolidated operating income	Consolidated operating income	$	41,753		$	40,511		Consolidated operating income	$	70,284		$	29,986

Global Mission Services Segment Results

Revenues

Revenues for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020, decreased by ~~$65.2~~$79.5 million, or ~~6.3%~~5.1%, from the comparable period in 2019. The decrease was attributable to a ~~$52.9~~$91.7 million

impact from COVID-19, of which approximately ~~$38.6~~$70.5 million was non-labor and ~~$14.3~~$21.2 million was labor, ~~and~~partially offset by a ~~$12.3~~$11.9 million net ~~decrease~~increase in contract volume and new ~~business programs.~~business.

Operating income

Operating income for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 decreased by ~~$6.9~~$1.9 million from the comparable period in 2019. This decrease was primarily from ~~lower revenue volume and increases in selling, general and administrative expenses.~~

~~National Security Solutions Segment Results~~

~~Revenues~~

Revenues for the six-month period ended June 28, 2020 decreased by $43.3 million, or 12.8%, from the comparable period in 2019. This decrease was attributable to a $19.1 million impact from COVID-19, of which approximately $11.8 million was non-labor, and $7.3 million was labor, and by a $24.2 million net decrease in contract volume and new business programs.

~~Operating income~~

~~Operating income for the six-month period ended June 28, 2020 increased by $8.9 million from the comparable period in 2019. The increase was primarily driven by lower~~higher selling, general and administrative expenses, partially offset by lower revenue volume.

National Security Solutions Segment Results

Revenues

Revenues for the nine-month period ended September 27, 2020 decreased by $60.5 million, or 12.1%, from the operating loss in the comparable period in 2019. The decrease was attributable to a $33.7 million impact from COVID-19, of which approximately $21.5 million was non-labor and $12.2 million was labor, and by a $26.6 million decrease from small business set aside re-compete losses, net of new business wins.

Operating income

Operating income for the nine-month period ended September 27, 2020 increased by $41.0 million from the comparable period in 2019. The increase was driven by the write down of PAE ISR assets held for sale in the prior year period and lower selling, general and administrative expenses in the current period, partially offset by lower revenue volume in the current period.

Liquidity and Capital Resources

As of ~~June 28,~~September 27, 2020, PAE had cash and cash equivalents totaling ~~$138.5~~$145.4 million and the Company had no outstanding borrowings on its asset-based revolving loan credit facility.

As of December 31, 2019, PAE had cash and cash equivalents totaling $68.0 million and the Company had no outstanding borrowings on its asset-based revolving loan credit facility.

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.

PAE expects the combination of its current cash, cash flow from operations, and the available borrowing capacity under its new 2020 Revolving Credit Facility 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 can 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.

See Note 10 - “Debt” and Note 19 - “Subsequent Events” of the notes to the condensed consolidated financial statements for further information on the terms and availability of PAE’s credit facilities.

Cash Flows Analysis

Comparison of Results for the Three Months Ended ~~June 28,~~September 27, 2020 (Unaudited), and ~~June 30,~~September 29, 2019 (Unaudited) (in thousands):


		Three Months Ended									Three Months Ended
		June 28,		June 30,		Dollar			September 27,		September 29,		Dollar
		2020		2019		Change			2020		2019		Change
Net cash provided by operating activities	Net cash provided by operating activities	44,675		32,560		$	12,115	Net cash provided by operating activities	36,536		56,954		$	(20,418)
Net cash (used in) provided by investing activities		(1,156)		23		(1,179)
Net cash used in investing activities								Net cash used in investing activities	(1,140)		(2,609)		1,469
Net cash used in financing activities	Net cash used in financing activities	(5,938)		(19,144)		13,206		Net cash used in financing activities	(27,480)		(17,500)		(9,980)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	1,098		(747)		1,845		Effect of exchange rate changes on cash and cash equivalents	(939)		(281)		(658)
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	$	38,679	$	12,692	$	25,987	Net increase in cash and cash equivalents	$	6,977	$	36,564	$	(29,587)

Net cash provided by operating activities

Net cash provided by operating activities for the quarter of ~~$44.7~~$36.5 million, ~~increased~~decreased by ~~$12.1~~$20.4 million over the prior year period, primarily as a result of ~~an increase~~lower comparable cash collections and customer advances and billings in excess of costs, partially offset by net income growth, increases in accounts payable and accrued ~~salaries, offset by reduced cash collections.~~salaries.

Net cash ~~(used in) provided by~~used in investing activities

Cash used in investing activities for the three-month period ended ~~June 28,~~September 27, 2020 ~~increased~~improved from the comparable period in 2019, primarily driven by lower ~~proceeds from sale of assets and~~expenditures in property and equipment.

Net cash used in financing activities

Cash used in financing activities for the three-month period ended ~~June 28,~~September 27, 2020 was ~~$(5.9)~~$27.5 million, ~~a decrease~~an increase of ~~$13.2~~$10.0 million from the comparable period in 2019. The ~~decrease~~increase was primarily driven by the working capital adjustment to Shay stockholders and repayment on long-term debt offset by lower long-term debt borrowings.

4548

Comparison of Results for the ~~Six~~Nine Months Ended ~~June 28,~~September 27, 2020 (Unaudited), and ~~June 30,~~September 29, 2019 (Unaudited) (in thousands):


		Six Months Ended									Nine Months Ended
		June 28,		June 30,		Dollar			September 27,		September 29,		Dollar
		2020		2019		Change			2020		2019		Change
Net cash provided by operating activities	Net cash provided by operating activities	$	55,588	$	71,923	$	(16,335)	Net cash provided by operating activities	$	92,124	$	128,877	$	(36,753)
Net cash used in investing activities	Net cash used in investing activities	(1,560)		(3,591)		2,031		Net cash used in investing activities	(2,700)		(6,200)		3,500
Net cash provided by (used in) financing activities		15,596		(62,844)		78,440
Net cash used in financing activities								Net cash used in financing activities	(11,884)		(80,344)		68,460
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	810		(1,205)		2,015		Effect of exchange rate changes on cash and cash equivalents	(129)		(1,486)		1,357
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	$	70,434	$	4,283	$	66,151	Net increase in cash and cash equivalents	$	77,411	$	40,847	$	36,564

Net cash provided by operating activities

Net cash provided by operating activities for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 decreased by ~~$16.3~~$36.8 million, primarily as a result of ~~an increase~~lower comparable cash collections and customer advances and billings in excess of cost, partially offset by net income growth, increases in accounts payable and accrued ~~salaries, offset by reduced cash collections.~~salaries.

Net cash used in investing activities

Cash used in investing activities for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 improved by ~~$2.0~~$3.5 million from the comparable period in 2019, primarily driven by lower expenditures for net property and equipment.

Net cash ~~provided by (used in)~~used in financing activities

Cash ~~provided by~~used in financing activities for the ~~six-month~~nine-month period ended ~~June 28,~~September 27, 2020 ~~was $15.6 million, an increase of $78.4~~improved by $68.5 million from the comparable period in 2019. The increase was primarily driven by the Recapitalization in 2020 partially offset by ~~prepayment of the Second Lien Term Loan event from previous quarter.~~lower net borrowings.

4649

Financing

Long-term debt consisted of the following as of the dates presented (in thousands):


		June 28,		December 31,			September 27,		December 31,
		2020		2019			2020		2019
First Term Loan	First Term Loan	$	499,320	$	506,772	First Term Loan	$	491,867	$	506,772
Second Term Loan	Second Term Loan	128,783		265,329		Second Term Loan	128,783		265,329
Revolving Credit Facility	Revolving Credit Facility	—		—		Revolving Credit Facility	—		—
Total debt	Total debt	628,103		772,101		Total debt	620,650		772,101
Unamortized discount and debt issuance costs	Unamortized discount and debt issuance costs	(15,306)		(22,164)		Unamortized discount and debt issuance costs	(13,568)		(22,164)
Total debt, net of discount and debt issuance costs	Total debt, net of discount and debt issuance costs	612,797		749,937		Total debt, net of discount and debt issuance costs	607,082		749,937
Less current maturities of long-term debt	Less current maturities of long-term debt	(22,969)		(22,007)		Less current maturities of long-term debt	(23,044)		(22,007)
Total long-term debt, net of current	Total long-term debt, net of current	$	589,828	$	727,930	Total long-term debt, net of current	$	584,038	$	727,930

The following discusses the Company’s borrowing arrangements as of September 27, 2020. Subsequent to quarter end, the Company completed a refinancing of its existing indebtedness as further discussed below.

The Company’s borrowing arrangement provides for borrowings up to ~~$499.3~~$491.9 million under a first lien term loan credit agreement, dated October 26, 2016, as amended (the ~~“First~~“2016 First Term Loan”), $128.8 million under a second lien term loan credit agreement, dated October 26, 2016, as amended (the ~~“Second~~“2016 Second Term Loan”), and $150.0 million under a revolving credit facility dated October 26, 2016, as amended (the ~~“Revolving~~“2016 Revolving Credit Facility,” and together with the 2016 First Term Loan and the 2016 Second Term Loan, the ~~“Credit~~“2016 Credit Agreements”). Principal and interest are due quarterly on the 2016 First Term Loan and interest is due quarterly on the 2016 Second Term Loan. The maturity date of the 2016 First Term Loan is October 20, 2022. For the 2016 Second Term Loan the maturity date is October 20, 2023. For the Company’s 2016 Revolving Credit Facility the maturity date is October 20, 2021.

The 2016 Credit Agreements require the Company to comply with specified financial covenants under certain circumstances, including the maintenance of certain leverage ratios.

PAE was in compliance with the financial covenants under the 2016 Credit Agreements as of ~~June 28,~~September 27, 2020. See Note 10 - “Debt” of the notes to the condensed consolidated financial statements.

On October 19, 2020 the Company refinanced the 2016 Credit Agreements and entered into new senior secured credit facilities (the “2020 Credit Agreements”).The 2020 Credit Agreements establish a $740.0 million term loan facility maturing in October 2027 priced at LIBOR plus a spread of 4.50%, a $150.0 million delayed draw term loan facility maturing in October 2027 priced at LIBOR plus a spread of 4.50%, and a $175.0 million senior secured revolving credit facility maturing in October 2025 priced at LIBOR plus a spread of 1.75% to 2.25%.

47The loans under the 2020 Credit Agreements are secured by a first lien over substantially all of the Company's assets as well as affirmative and negative covenants customary for transactions of this type, including limitations with respect to indebtedness, liens, investments, dividends, disposition of assets, change in business and transactions with affiliates.

The Company used the proceeds from the 2020 Credit Agreements to repay the amounts outstanding under its existing first lien and second lien term loan facilities, with the remaining amounts to be used for general corporate purposes, potential mergers and acquisitions, and transaction fees and expenses.

For more information about the 2020 Credit Agreements, see the Company’s Form 8-K filed October 22, 2020, File No. 001-38643.

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.

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 are 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

PAE’s MD&A is based upon its consolidated financial statements, which are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements in accordance with 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.

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

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 where multiple distinct goods or services may be provided. In such circumstance, multiple performance obligations exist, and PAE would allocate 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.

For U.S. Government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.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 control of the good or service is transferred to the customer. Control is considered to have transferred when PAE has a right to payment and the customer has legal title.

PAE reviews the progress and execution of performance obligations under the estimate at completion process. As part of this process, PAE reviews information including, but not limited

to, key contract terms and conditions, program schedule, progress towards completion, identified risks and opportunities and the related changes in estimates of revenues and costs. 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.

Goodwill and Indefinite-Lived Intangibles

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 fair value of a reportable segment is less than its carrying amount. If, as 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 2019, PAE performed the annual qualitative impairment test for both of its reportable segments and noted that no impairment existed. There were no events or circumstances during the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 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 assets. COVID-19 has had a marginally unfavorable impact on the Company’s results of

operations for the three-month and ~~six-month~~nine-month periods ended ~~June 28,~~September 27, 2020. Management expects that such impact will similarly be marginally unfavorable to the Company’s full year results. 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 COVID-19 pandemic will have a materially adverse impact on such options. 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.

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 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. 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 for financial reporting purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

There have not been any material changes to the Company’s market risk since December 31, 2019. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.2 of the Company’s Current Report on Form 8-K/A filed with the SEC on March 11, 2020.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~June 28,~~September 27, 2020. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Internal Control over Financial Reporting

During the most recently completed fiscal quarter, the Company continued to make changes to certain internal controls to reflect the operations of PAE acquired as a result of the Business Combination.

Part II. Other Information

Item 1. Legal Proceedings

PAE is involved in various legal proceedings, government audits, investigations, claims and disputes that arise in the normal course of business, including those related to employment matters, contractual relationships and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying or unspecified amounts. In addition, awards of government contracts may be protested at the U.S. Government Accountability Office or the U.S. Court of Federal Claims; and conversely, PAE may from time to time protest awards made to other companies.

Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, PAE does not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on its financial condition or operating results. Its view of the matters not specifically disclosed could change in future periods as events unfold.

Item 1A. Risk Factors

For a discussion of risk factors that could significantly and negatively affect our business, financial condition, results of operations, cash flows and prospects, see the disclosure under the heading "Risk Factors" in our prospectus on Form 424B3, filed with the SEC on April 23, 2020, File No. 333-236468 (the “Prospectus”). There have been no material changes from the risk factors set forth in the Prospectus, other than the additional risk factor provided ~~below, which is an update to the risk factor included in Part II, item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020. .~~below.

We face various risks related to public health crises, such as the coronavirus (“COVID-19”), that could disrupt PAE’s business and result in loss of revenue or higher expenses.

Our operations face risks related to public health crises, such as the global outbreak of COVID-19 and other pandemics and epidemics. The COVID-19 virus has spread to over 100 countries, including the United States, and the World Health Organization has classified the COVID-19 outbreak as a pandemic. The ability of our personnel to work effectively and travel and the continued adequacy of our supply chains have been adversely impacted by the pandemic and responses thereto, such as the travel restrictions resulting from the COVID-19

virus. Additionally, as a result of COVID-19, we have experienced, and expect that we will experience in the future, delays, or partial reductions or full suspensions of contract work, which have caused and could result in further decreases of revenue and may have a material adverse impact on our business. We have experienced increased medical, housing, facility cleaning, and other costs due to quarantine requirements imposed by various jurisdictions and exposure of our personnel to pandemics such as the COVID-19 virus. In addition, we are permitting employees to telework who can meet our customer commitments remotely, and many of our employees are teleworking. Due to COVID-19, we are uncertain when and how many teleworking employees will return to work in person. We have not previously experienced so

many employees working remotely for such an extended period of time, so the long-term effects on our operations are unknown. Moreover, we may be subject to additional cybersecurity risks as a result of a significant portion of our workforce working remotely. In addition, the resulting volatility in the global capital markets could, among other things, restrict our access to capital and/or increase our cost of capital. At this time, we cannot predict the impact of the COVID-19 pandemic or the duration of time that the pandemic and its impacts will last, but it could have a material adverse effect on our business, financial position, results of operations and/or cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Current Economic Conditions – Impact of COVID-19” for additional discussion of management’s assessment of the COVID-19 pandemic.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

~~None.~~On February 7, 2020, Gores III held a special meeting of stockholders in lieu of its 2020 Annual Meeting (the “2020 Meeting”). The definitive proxy statement for such meeting disclosed that it was anticipated that the 2021 Annual Meeting of Stockholders of Gores III (now PAE Incorporated) would be held no later than June 2021 (the “2021 Annual Meeting”). As of the date of this filing, PAE intends to hold its 2021 Annual Meeting on or about May 28, 2021 at a time and location to be determined. Because the date of the 2021 Annual Meeting will differ by more than thirty (30) calendar days from the anniversary date of the 2020 Meeting, PAE is providing the following disclosure in accordance with Rule 14a-5(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Bylaws Advance Notice Deadline for Submission of Stockholder Proposals and Director Nominations

Pursuant to the Company’s Amended and Restated Bylaws (the “Bylaws”), since the 2021 Annual Meeting is being advanced by more than forty-five (45) calendar days from the date of the 2020 Meeting, for notice of stockholder proposals submitted outside of Rule 14a-8 of the Exchange Act and director nominations to be timely they must be so received not earlier than the opening of business on the 120th day before the 2021 Annual Meeting and not later than the later of; (A) the close of business on the 90th day before the 2021 Annual Meeting; or (B) the close of business on the 10th day following the day on which public announcement of the date of the 2021 Annual Meeting is first made by PAE. As this is PAE’s first public disclosure of the date of the 2021 Annual Meeting, to be considered timely, stockholder proposals submitted outside of Rule 14a-8 of the Exchange Act and director nominations, in each case intended to be brought before the 2021 Annual Meeting, must be received no earlier than the opening of business on Thursday, January 28, 2021 and not later than the close of business on Saturday, February 27, 2021. Any such stockholder proposals and director nominations must be directed to the Company’s Executive Vice President, General Counsel & Secretary at our corporate offices at PAE Incorporated, 7799 Leesburg Pike, Suite 300 North Falls Church, Virginia 22043. Such stockholder proposals and director nominations must also comply with the advance notice provisions contained in Sections 2.7 and 3.2 of the Company’s Bylaws.

Rule 14a-8 Deadline for the Submission of Stockholder Proposals

As noted above, the 2021 Annual Meeting date will represent a change of more than thirty (30) calendar days from the anniversary date of the 2020 Meeting. As a result, pursuant to Rule 14a-8 under the Exchange Act, a new deadline will apply for the receipt of any stockholder proposals submitted pursuant to Rule 14a-8 of the Exchange Act for inclusion in the Company’s proxy materials for the 2021 Annual Meeting. Pursuant to Rule 14a-8(e)(2) under the Exchange Act, such proposals must be received on or before the close of business on Thursday, December 17, 2020, which the Company has determined to be a reasonable time before it expects to begin to print and distribute its proxy materials for the 2021 Annual Meeting, as such date is approximately 120 calendar days prior to when the Company anticipates printing and distributing its proxy materials for the 2021 Annual Meeting. Such proposals must be directed to the Company’s Executive Vice President, General Counsel & Secretary at our corporate offices at PAE Incorporated, 7799 Leesburg Pike, Suite 300 North, Falls Church, Virginia 22043. Such proposals must also comply with Rule 14a-8 of the Exchange Act.

5357

Item 6. Exhibits

See the Exhibit Index below, which is incorporated by reference herein.

Exhibit Index


Exhibit No.


2.1*						Stock Purchase Agreement dated October 26 , 2020, by and among Pacific Architects and Engineers, LLC, CENTRA Technology, Inc., certain stockholders of CENTRA Technology, Inc., and Barbara Rosenbaum as the sellers representative

10.1*						~~Form of~~ Amended and Restated ~~Restricted Stock Unit Grant Notice~~First Lien Term Loan Credit Agreement, dated as of October 19, 2020, by and ~~Restricted Stock Unit Agreement for Directors under the~~among PAE Holding Corporation, PAE Incorporated, the subsidiary borrowers party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent

10.2						Amendment No. 3 to Revolving Credit Agreement, dated as of October 19, 2020, ~~Equity Incentive Plan~~by and among PAE Holding Corporation, PAE Incorporated, the subsidiary borrowers party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent

31.1						Certification by the Chief Executive Officer of the Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification by the Chief Financial Officer of the Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification by the Chief Executive Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification by the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*~~Management contract or compensatory plan or arrangement~~Schedules and other similar attachments to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish supplementally a copy of all omitted schedules to the Securities and Exchange Commission upon its request.

5458

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~August 6,~~November 5, 2020

PAE Incorporated

By:

/s/ Charles D. Peiffer

Name:

Charles D. Peiffer

Title:

Executive Vice President & Chief Financial Officer

5559


	Three Months Ended June 30, 2019
	GMS		NSS		Total
DoD	$	214,657	$	56,713	$	271,370
Other U.S. government agencies	281,154		93,742		374,896
Commercial and non-U.S. customers	30,214		19,127		49,341
Total	$	526,025	$	169,582	$	695,607


	Six Months Ended June 30, 2019
	GMS		NSS		Total
DoD	$	415,059	$	115,464	$	530,523
Other U.S. government agencies	555,266		182,952		738,218
Commercial and non-U.S. customers	60,179		40,171		100,350
Total	$	1,030,504	$	338,587	$	1,369,091