PAE Reports Third-Quarter 2021 Financial Results

Falls Church, Virginia, UNITED STATES


Highlights

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

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

CEO Commentary

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

Third-Quarter 2021 Results

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

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

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

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

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

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

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

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

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

Cash Flow Summary

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

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

Business Development Highlights and Contract Awards

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

Notable third quarter awards received include:

Notable New Business Awards:

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

Notable Recompete Awards:

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

Notable IDIQ Awards:

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

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

Subsequent Events

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

Cancellation of Earnings Conference Call and Suspension of Guidance

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

Forward-Looking Statements

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

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

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

About PAE

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

For investor inquiries regarding PAE:

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

For media inquiries regarding PAE:

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


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

 Three Months Ended Nine Months Ended
 September 26, September 27, September 26, September 27,
 2021 2020 2021 2020
Revenues$689,514   $666,240   $2,185,279   $1,926,795  
Cost of revenues511,852   512,877   1,643,470   1,474,763  
Selling, general and administrative expenses140,170   119,168   428,237   361,945  
Amortization of intangible assets12,630   8,047   37,476   24,141  
Total operating expenses664,652   640,092   2,109,183   1,860,849  
Program profit24,862   26,148   76,096   65,946  
Other operating income net1,174   2,384   6,897   4,338  
Operating income26,036   28,532   82,993   70,284  
Interest expense, net(13,109)  (13,607)  (38,783)  (48,312) 
Other income, net16,399   5,000   17,533   15,645  
Income before income taxes29,326   19,925   61,743   37,617  
Expense (benefit) from income taxes1,495   4,194   6,730   (1,582) 
Net income27,831   15,731   55,013   39,199  
Noncontrolling interest in earnings of ventures(1,958)  413   (2,510)  1,344  
Net income attributed to PAE Incorporated$29,789   $15,318   $57,523   $37,855  
        
Net income per share attributed to PAE Incorporated:       
Basic$0.32   $0.17   $0.62   $0.47  
Diluted$0.31   $0.16   $0.60   $0.46  
        
Weighted average shares outstanding       
Basic93,122,414   92,070,306    92,949,301    81,323,258  
Diluted95,836,986   93,392,565    95,599,019    82,115,825  



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

 September 26, December 31,
 2021 2020
    
Assets   
Current assets:   
Cash and cash equivalents$157,268   $85,908  
Accounts receivable, net524,707   585,511  
Prepaid expenses and other current assets63,043   61,607  
Total current assets745,018   733,026  
Property and equipment, net36,600   27,615  
Investments15,407   18,272  
Goodwill593,171   590,668  
Intangible assets, net220,734   258,210  
Operating lease right-of-use assets, net192,638   191,370  
Other noncurrent assets14,928   10,209  
Total assets$1,818,496   $1,829,370  
Liabilities and stockholders' equity   
Current liabilities:   
Accounts payable$124,959   $152,962  
Accrued expenses107,446   114,222  
Customer advances and billings in excess of costs106,221   106,475  
Salaries, benefits and payroll taxes153,229   145,186  
Accrued taxes12,132   15,582  
Current portion of long-term debt, net7,036   5,961  
Operating lease liabilities, current portion47,205   46,756  
Other current liabilities38,559   45,037  
Total current liabilities596,787   632,181  
Deferred income taxes, net11,006   4,389  
Long-term debt, net865,016   860,306  
Long-term operating lease liabilities150,280   145,569  
Warrant liability32,934   50,467  
Other long-term liabilities13,509   30,273  
Total liabilities1,669,532   1,723,185  
Stockholders' equity:   
Preferred stock, $0.0001 par value per share, 1,000,000 shares authorized; no shares issued and outstanding     
Common stock, $0.0001 par value per share: 210,000,000 shares authorized; 93,115,801 and 92,040,654 shares issued and outstanding as of June 27, 2021 and December 31, 2020, respectively9   9  
Additional paid-in capital171,807   188,685  
Accumulated deficit(59,098)  (116,621) 
Accumulated other comprehensive loss1,230   1,876  
Total PAE Incorporated stockholders' equity113,948   73,949  
Noncontrolling interests35,016   32,236  
Total liabilities and stockholders' equity$1,818,496   $1,829,370  



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

 Three Months Ended
 September 26, September 27,
 2021 2020
Operating activities   
Net income$27,831   $15,731  
Adjustments to reconcile net loss to net cash provided by operating activities:   
Depreciation of property and equipment3,021   2,191  
Amortization of intangible assets12,630   8,047  
Amortization of debt issuance cost815   1,739  
Stock-based compensation1,722   4,318  
Net undistributed income from unconsolidated ventures(2,057)  (1,794) 
Deferred income taxes, net692   2,066  
Change in fair value of warranty liability(16,400)  (5,000) 
Other non-cash activities, net(1,904)  (22) 
Changes in operating assets and liabilities, net:   
Accounts receivable, net81,375   (13,084) 
Accounts payable(50,033)  33,399  
Accrued expenses(12,107)  (5,593) 
Customer advances and billings in excess of costs17,315   (10,359) 
Salaries, benefits and payroll taxes6,488   6,665  
Prepaid expenses and other current assets786   (1,277) 
Other current and noncurrent liabilities(20,148)  5,171  
Investments5,149   1,092  
Other noncurrent assets661   (5,697) 
Accrued taxes431   (1,057) 
Net cash provided by operating activities56,267   36,536  
Investing activities   
Expenditures for property and equipment(5,177)  (1,031) 
Proceeds from sales of property4,964     
Other investing activities, net2,403   (109) 
Net cash provided by (used in) investing activities2,190   (1,140) 
Financing activities   
Net contributions from noncontrolling interests2,437   145  
Borrowings on long-term debt111,627   266  
Repayments on long-term debt(110,825)  (7,720) 
Recapitalization from merger with Gores Holdings III, Inc.     
Payment of underwriting and transaction costs     
Stock-based compensation tax withholding obligation(159)    
Other financing activities, net825     
Net cash provided by (used in) financing activities3,905   (27,480) 
Effect of exchange rate changes on cash and cash equivalents196   (939) 
Net increase in cash and cash equivalents62,558   6,977  
Cash and cash equivalents at beginning of period94,710   138,469  
Cash and cash equivalents at end of period$157,268   $145,446  
    
Supplemental cash flow information   
Cash paid for interest$12,202   $11,807  
Cash paid for taxes$2,070   $2,508  



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

 Nine Months Ended
 September 26, September 27,
 2021 2020
Operating activities   
Net income$55,013   $39,199  
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation of property and equipment7,768   7,263  
Amortization of intangible assets37,476   24,141  
Amortization of debt issuance cost2,387   9,560  
Stock-based compensation6,347   8,018  
Net undistributed income from unconsolidated ventures(8,625)  (3,533) 
Deferred income taxes, net7,249   (12,044) 
Change in fair value of Warrant liability(17,533)  (19,132) 
Other non-cash activities, net(2,714)  382  
Changes in operating assets and liabilities, net of acquisitions:   
Accounts receivable, net61,375   (3,477) 
Accounts payable(28,195)  15,852  
Accrued expenses(7,105)  4,252  
Customer advances and billings in excess of costs(256)  8,923  
Salaries, benefits and payroll taxes7,488   10,975  
Prepaid expenses and other current assets(2,124)  (2,118) 
Other current and noncurrent liabilities(19,620)  71  
Investments9,907   2,793  
Other noncurrent assets(5,576)  5,903  
Accrued taxes(3,458)  (4,904) 
Net cash provided by operating activities99,804   92,124  
Investing activities   
Expenditures for property and equipment(19,577)  (2,628) 
Proceeds from sales of property5,195     
Acquisition of Metis Solutions Corporation, net of acquired cash(521)    
Acquisition of CENTRA Technology Inc, net of acquired cash(1,441)    
Acquisition of noncontrolling interest(14,308)    
Other investing activities, net2,030   (72) 
Net cash used in investing activities(28,622)  (2,700) 
Financing activities   
Net contributions from noncontrolling interests2,927   2,095  
Borrowings on long-term debt237,010   60,734  
Repayments on long-term debt(233,409)  (212,184) 
Payment of debt issuance costs   (964) 
Recapitalization from merger with Gores Holdings III, Inc.   605,713  
Payment of underwriting and transaction costs   (27,267) 
Distribution to selling stockholders   (439,719) 
Stock-based compensation tax withholding obligation(5,818)    
    (292) 
Net cash provided by (used in) financing activities710   (11,884) 
Effect of exchange rate changes on cash and cash equivalents(532)  (129) 
Net increase in cash and cash equivalents71,360   77,411  
Cash and cash equivalents at beginning of period85,908   68,035  
Cash and cash equivalents at end of period$157,268   $145,446  
Supplemental cash flow information   
Cash paid for interest$40,048   $35,085  
Cash paid for taxes$9,343   $5,304  



PAE INCORPORATED
SEGMENT DATA
(in thousands)

 Three Months Ended Nine Months Ended
 September
26,
 September
27,
 September
26,
 September
27,
 2021 2020 2021 2020
Revenues       
GMS$448,078   $521,346   $1,480,982   $1,486,643  
NSS241,436   144,894   704,297   440,152  
Consolidated revenues$689,514   $666,240   $2,185,279   $1,926,795  
        
Operating income       
GMS$20,459   $31,401   $73,673   $75,541  
NSS13,091   5,679   33,729   17,770  
Corporate(7,514)  (8,548)  (24,409)  (23,027) 
Consolidated operating income$26,036    $28,532   $82,993   $70,284  
        
Amortization of intangible assets       
GMS$4,161   $4,115   $12,483   $12,346  
NSS8,469   3,932   24,993   11,795  
Consolidated amortization of intangible assets$12,630   $8,047   $37,476   $24,141  
        
        



PAE INCORPORATED
BACKLOG
(in thousands)

 As of As of
 September 26, December 31,
 2021 2020
Global Mission Services:   
Funded backlog$387,927  $946,711 
Unfunded backlog4,496,641  4,445,442 
Total GMS backlog$4,884,568  $5,392,153 
    
National Security Solutions:   
Funded backlog$412,866  $476,618 
Unfunded backlog2,238,612  2,046,634 
Total NSS backlog$2,651,478  $2,523,252 
    
Total:   
Funded backlog$800,793  $1,423,329 
Unfunded backlog6,735,253  6,492,076 
Total backlog$7,536,046  $7,915,405 

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

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

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

Non-GAAP Financial Measures

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

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

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

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

Reconciliation of GAAP net income to Adjusted EBITDA, a non-GAAP Measure - Company        
(in thousands)           
 Three Months Ended   Nine Months Ended  
 September
26,
 September
27,
   September
26,
 September
27,
  
 2021 2020 Change 2021 2020 Change
Net income attributed to PAE Incorporated$29,789   $15,318   $14,471  $57,523   $37,855   $19,668  
Interest expense, net13,109   13,607   (498) 38,783   48,312   (9,529) 
Provision for taxes1,495   4,194   (2,699) 6,730   (1,582)  8,312  
Depreciation and amortization15,651   10,239   5,412  45,244   31,405   13,839  
M&A and Integration costs4,416   2,642   1,774  8,864   25,870   (17,006) 
Disposal of assets                
Non-core expenses (1)768   464   304  2,302   1,917   385  
Non-cash items (2)                
Equity based compensation (3)1,194   4,039   (2,845) 6,750   7,558   (808) 
Other (4)(15,620)  (4,295)  (11,325) (15,054)  (15,083)  29  
Adjusted EBITDA$50,802   $46,208   $4,594  $151,142   $136,251   $14,890  
Adjusted EBITDA margin7.4 % 6.9 %   6.9 % 7.1 %  



Reconciliation of GAAP operating income to
adjusted operating income, a non-GAAP Measure - GMS
      
(in thousands)           
 Three Months Ended   Nine Months Ended  
 September
26,
 September
27,
   September
26,
 September
27,
  
 2021  2020  Change 2021  2020  Change
Operating income$20,459   $31,401   $(10,942)  $73,673   $75,541   $(1,868) 
Corp operating loss allocation (5)(4,883)  (6,689)  1,806   (18,176)  (17,656)  (520) 
Corp other income (loss) allocation (6)10,657   3,913   6,744   11,554   10,870   684  
Corporate NCI allocation1,958   (471)  2,429   2,391   (1,498)  3,889  
Depreciation and amortization6,291   5,880   411   18,256   18,088   168  
M&A and Integration costs2,870   1,482   1,388   6,363   17,948   (11,585) 
Disposal of assets                 
Non-core expenses (1)499   363   136   1,708   1,497   211  
Equity based compensation (3)776   3,161   (2,385)  5,136   5,937   (801) 
Other (4)(10,151)  (3,361)  (6,790)  (10,066)  (10,297)  231  
Adjusted operating income$28,476   $35,679   $(7,203)  $90,839   $100,430   $(9,591) 
Adjusted operating income margin6.4%  6.8%   6.1% 6.8%  



Reconciliation of GAAP operating income to adjusted operating
income, a non-GAAP Measure - NSS
      
(in thousands)           
 Three Months Ended   Nine Months Ended  
 September
26,
 September
27,
   September
26,
 September
27,
  
 2021  2020  Change 2021  2020  Change
Operating income$13,091   $5,678   $7,413   $33,729   $17,770   $15,959  
Corp operating loss allocation (5)(2,631)  (1,859)  (772)  (6,234)  (5,370)  (864) 
Corp other income (loss) allocation (6)5,743   1,087   4,656   5,979   4,776   1,203  
Corporate NCI allocation   58   (58)  119   154   (35) 
Depreciation and amortization9,361   4,359   5,002   26,988   13,317   13,671  
M&A and Integration costs1,546   1,160   386   2,501   7,923   (5,422) 
Disposal of assets                 
Non-core expenses (1)269   101   168   594   420   174  
Non-cash items (2)                 
Equity based compensation (3)418   878   (460)  1,614   1,621   (7) 
Other (4)(5,470)  (934)  (4,536)  (4,989)  (4,786)  (203) 
Adjusted operating income$22,327   $10,528   $11,799   $60,301   $35,825   $24,476  
Adjusted operating income margin9.2% 7.3%   8.6% 8.1%  

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

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

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

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

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

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


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