ATLAS TECHNICAL CONSULTANTS, INC. The following discussion and analysis should be read in conjunction with our audited financial statements and accompanying notes included herein. This discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future operating results or financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors included in this Annual Report on Form 10-K, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements.
For purposes of this section, "we," "us," "our," the "Company" and "Atlas"
refers to
This section of this Form 10-K generally discusses 2022 and 2021 items and
year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and
year-to-year comparisons between 2021 and 2020 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of the Company's Annual
Report on Form 10-K for the fiscal year ended
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OVERVIEW
On
Following the consummation of the Atlas Business Combination, we are organized in an "Up-C" structure in which the business of Atlas Intermediate and its subsidiaries is held by Holdings and continues to operate through the subsidiaries of Atlas Intermediate, and in which our only direct assets consist of common units of Holdings (the "Holdings Units"). We are the sole manager of Holdings in accordance with the terms of the Amended and Restated Limited Liability Company Agreement of Holdings entered into in connection with the consummation of the Atlas Business Combination.
Headquartered in
With approximately 126 offices located throughout
We act as a trusted advisor to our clients, helping our clients design, engineer, inspect, manage and maintain civil and commercial infrastructure, servicing existing structures as well as helping to build new structures. However, we do not perform any construction and do not take any direct construction risk.
We provide a broad range of mission-critical technical services, ranging from
providing inspection services in small projects to managing significant aspects
of large, multi-year projects. For the year ended
? performed approximately 40,500 projects; and
? delivered approximately 90% of our revenue under "time & materials" and
"cost-plus" contracts.
We have long-term relationships with a diverse set of clients, providing a base
of repeating clients, projects and revenues. Approximately 90% of our revenues
were derived from clients that have used our services at least twice in the past
three years and more than 95% of our revenues were generated from client
relationships longer than ten years, with greater than 25% of revenues generated
from relationships longer than thirty years. Examples of such
long-term customers include the
Our services require a high degree of technical expertise, as our clients rely
on us to provide testing, inspection and quality assurance services to ensure
that structures are designed, engineered, built and maintained in accordance
with building codes, regulations and the highest safety standards. As such, our
services are delivered by a highly-skilled, technical employee base that
includes engineers, inspectors, scientists and other field experts. As of
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Recent Accounting Pronouncements
See Note 2 "Summary of Significant Accounting Policies," to the Consolidated Financial Statements for a description of the recent accounting pronouncements.
HOW WE EVALUATE OUR OPERATIONS
We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with generally accepted accounting principles ("GAAP"), while other information may be financial in nature and may not be prepared in accordance with GAAP. Historical information is periodically compared to budgets, as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining management and employee compensation.
We evaluate our overall business performance based primarily on a combination of four financial metrics: revenue, backlog, adjusted EBITDA and liquidity measures. These are key measures used by our management team and Board to understand and evaluate our operational performance, to establish budgets and to develop short and long-term operational goals.
Revenue
Revenues for services are derived from billings under contracts (which are typically of short duration) that provide for specific time, material and equipment charges, or lump sum payments and are reported net of any taxes collected from customers. We recognize revenue as it is earned at estimated collectible amounts.
Revenue is recognized as services are performed and amounts are earned in accordance with the terms of a contract. We generally contract for services to customers based on either hourly rates or a fixed fee. In such contracts, our efforts, measured by time incurred, typically are provided in less than a year and represent the contractual milestones or output measure, which is the contractual earnings pattern. For contracts with fixed fees, we recognize revenues as amounts become billable in accordance with contract terms, provided the billable amounts are consistent with the services delivered and are earned. Expenses associated with performance of work may be reimbursed with a markup depending on contractual terms. Revenues include the markup, if any, earned on reimbursable expenses. Reimbursements include billings for travel and other out-of-pocket expenses and third-party costs, such as equipment rentals, materials, subcontractor costs and outside laboratories, which is included in cost of revenues in the accompanying combined statement of income.
Backlog
We define backlog to include the total estimated future revenue streams associated with fully executed contracts as well as an estimate of highly probable revenues from recurring, task order-based contracts.
We use backlog to evaluate Company revenue growth as it typically follows growth in backlog. As backlog is not a defined accounting term, our computation of backlog may not be comparable with that of our peers.
Adjusted EBITDA
We view adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of performance. We define adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization and adjustments for certain one- time or non-recurring items adjustments. For more information on adjusted EBITDA, as well as a reconciliation to the most directly comparable GAAP measure, please see "-Non-GAAP Financial Measures" below.
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COMPONENTS AND FACTORS AFFECTING OUR OPERATING RESULTS
Revenue
We generate revenue primarily by providing infrastructure-based testing, inspection, certification, engineering, and compliance services to a wide range of public- and private-sector clients. Our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs.
Subcontractor Costs and Other Costs of Revenues
Total costs of revenues reflects subcontractor costs, the cost of personnel and specifically identifiable costs associated with revenue, and other direct costs.
Operating Expense
Total operating expense includes corporate expenses, including personnel, occupancy, and administrative expenses, including depreciation and amortization and changes in fair value of contingent consideration.
Interest Expense
Interest expense consists of contractual interest expense on outstanding debt obligations including amortization of deferred financing costs and other related financing expenses.
Income Tax Expense
Following the consummation of the Atlas Business Combination, we are organized in an "Up-C" structure in which the business of Atlas Intermediate and its subsidiaries is held by Holdings and will continue to operate through the subsidiaries of Atlas Intermediate, and in which our only direct assets consist of common units of Holdings. We are the sole manager of Holdings in accordance with the terms of the Holdings LLC Agreement entered into in connection with the consummation of the Atlas Business Combination.
Previously, Atlas Intermediate was treated as a partnership for federal and
state income tax purposes with all income tax liabilities and/or benefits of the
Company being passed through to the partners and members. As such, no
recognition of federal or state income taxes have been provided for in the
accompanying consolidated financial statements with the exception of income
taxes relating to the
Subsequent to the Atlas Business Combination, income taxes relating to the C-Corps owned directly by Atlas Intermediate and the State of Texas Margin tax are considered within the provision of non-controlling interest as it is generated through the results of Atlas Intermediate and its subsidiaries.
Net Income (loss)
Net income from continuing operations reflects our operating income after taking into account costs and expenses for a given period, while excluding any gain or loss from discontinued operations.
Provision for Non-controlling Interest
Our ownership and voting structure are comprised of holders of our Class A
common stock that participate 100% in the results of
Due to the participation of the holders of our Class B common stock in the results of Atlas Intermediate and subsidiaries, a non-controlling interest was deemed to exist. Consolidated net income (loss) includes earnings attributable to both the stockholders and the non-controlling interests.
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The provision for non-controlling interest relates to pre-tax income subsequent to the Atlas Business Combination and includes a pro-rata share of taxes as federal and state income taxes relating to the C-Corps directly owned by Atlas Intermediate and the State of Texas Margin tax as it is generated through the results of Atlas Intermediate and its subsidiaries.
Upon the close of the Atlas Business Combination, the holders of our Class B
common stock participated in 80.6% of the results of Atlas Intermediate and its
subsidiaries. This percentage has declined since the Atlas Business Combination
due to the exchange of Atlas Intermediate units, together with Class B common
shares, for Class A common stock as contractual lock-ups have expired and the
exchange of our public and private placement warrants for Class A common stock
during November and
Redeemable Preferred Stock Dividends
On
The GSO Placement was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and/or Regulation D promulgated thereunder.
On
On
Net Income (loss) Attributable to Class A Common Stock (Previously Members)
Net income (loss) attribution to holders of our Class A common stock represents our results after the provision for non-controlling interest, the effect of all taxes under the Up-C structure for the period subsequent to the Atlas Business Combination, and dividends due on redeemable preferred stock.
Net income (loss) for the historical results of Atlas Intermediate prior to the Atlas Business Combination are also reported within this line item.
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RESULTS OF OPERATIONS
Overview of Financial Results
During the year ended
We are focusing on providing infrastructure and environmental professional services without undertaking direct construction risk. Our environmental technical expertise continues to position us to assist our clients in addressing their ongoing Environmental, Social and Governance ("ESG") objectives and maintaining compliance with local laws and regulations.
Backlog has grown to a record
Merger Agreement
On
The Company's board of directors (the "Board") has unanimously determined that the Merger Agreement is in the best interests of the Company and its stockholders, and declared it advisable, to enter into the Merger Agreement and consummate the Merger, approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger, directed that the adoption of the Merger Agreement be submitted for consideration by the Company's stockholders at a meeting thereof and resolved to recommend that the Company's stockholders adopt the Merger Agreement.
Solicitation
From and after
Subject to certain exceptions, the Board is required to recommend that the Company's stockholders adopt the Merger Agreement and may not withhold, withdraw, amend, qualify or modify in a manner adverse to Parent such recommendation or take certain similar actions that are referred to in the Merger Agreement as a "Company Board Recommendation Change". However, the Board may, before the adoption of the Merger Agreement by the Company's stockholders, make a Company Board Recommendation Change in connection with a Superior Proposal or Intervening Event (as defined in the Merger Agreement) if the Company complies with certain notice and other requirements set forth in the Merger Agreement. Upon closing, the Company will no longer be a publicly traded company.
Financing
Funds advised by
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Consolidated Results of Operations
The following table represents our selected results of operations for the periods indicated (in thousands, except per share data).
For the Year Ended
December 30, December 31,
2022 2021
Revenues $ 604,765 $ 538,799
Subcontractor costs (127,691 ) (102,035 )
Other costs of revenues (198,332 ) (181,967 )
Gross Profit 278,742 254,797
Operating expenses:
Personnel costs and benefits (137,130 ) (128,612 )
Selling, general and administrative (70,912 ) (72,026 )
Change in fair value of earnouts 1,518 (2,823 )
Depreciation and amortization (32,177 ) (23,700 )
Total Operating expenses (238,701 ) (227,161 )
Operating income (loss) 40,041 27,636
Interest expense (46,363 ) (54,817 )
Loss before income taxes (6,322 ) (27,181 )
Income tax expense (1,748 ) (2,524 )
Net loss (8,070 ) (29,705 )
Provision for non-controlling interest 565 13,216
Redeemable preferred stock dividends - (5,899 )
Net loss attributable to Class A common stock
shareholders/members $ (7,505 ) $ (22,388 )
(Loss) Per Class A common share $ (0.21 ) $ (0.81 )
Weighted average of shares outstanding:
Class A common shares (basic and diluted) 36,308,926 27,799,511
39
Comparison of the Year Ended
Revenue
Revenue for the year ended
Subcontractor Costs
Subcontractor costs for the year ended
Other Costs of Revenues and Gross Profit
Other costs of revenue for the year ended
Operating Expense
Operating expense for the year ended
Interest Expense
Interest expense for the year ended
40
Income Tax Expense
Income tax expense for the year ended
Provision for Non-controlling Interest
The provision for non-controlling interest for the year ended
Redeemable Preferred Stock Dividends
We redeemed the Preferred Units in
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We view adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of performance. We define adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation, and amortization, further adjusted to reflect non-cash equity compensation as well as certain one-time or non-recurring items.
We believe adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income determined in accordance with GAAP. Certain items excluded from adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from adjusted EBITDA. Our computations of adjusted EBITDA may not be identical to other similarly titled measures of other companies.
41
The following table presents reconciliations of adjusted EBITDA to net income,
our most directly comparable financial measure calculated and presented in
accordance with GAAP.
For the Year Ended
December 30, December 31,
2022 2021
(in millions)
Net (loss) income $ (8.1 ) $ (29.7 )
Interest(1) 46.4 54.8
Taxes 1.7 2.5
Depreciation and amortization 33.0 23.7
EBITDA 73.0 51.3
One time legal/transaction costs and other non-recurring charges(2)
4.2 10.3
Non-cash change in fair value of contingent consideration 1.5 5.8
Non-cash equity compensation(3) 8.5 5.8
Adjusted EBITDA $ 87.2 $ 73.2
(1) Includes
the year ended December 31, 2021 .
(2) Includes costs associated with lease accruals related to moving to a hybrid
workforce, employee separation charges, professional service-related fees
such as legal, accounting, tax, valuation and other consulting as well as
other M&A activity. Additionally, it includes costs related to the COVID-19
pandemic and other non-recurring expenses.
(3) Includes the amortization of unvested restricted share units, performance
share units and stock options granted in 2020, 2021 and 2022 to key
management personnel and our compensation to our Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources are our cash and cash equivalents balances, cash flow from operations, borrowings under the Credit Agreements (as defined below), and access to financial markets. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt and acquisition expenditures. We believe our sources of liquidity, including cash flow from operations, existing cash and cash equivalents and borrowing capacity under the Credit Agreements will be sufficient to meet projected cash requirements for at least the next twelve months.
As of
The Company has experienced increased working capital outflows relating to the increase in interest charges and from overall growth in operations.
On
On
Cash Flows
The following table sets forth our cash flows for the periods indicated.
For the Year Ended
December 30 , December 31,
2022 2021
(in thousands)
Net cash provided by operating activities
(38,120 ) (36,547 )
Net cash provided by financing activities 31,024 4,078
Net decrease in cash and cash equivalents
42
Comparison of the Year Ended
Cash and Cash Equivalents.
At
Operating Activities
Cash flow from operating activities is primarily generated from operating income from our professional and technical testing, inspection, engineering and consulting services.
Net cash provided by operating activities was
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was
Working Capital
Working capital, or current assets less current liabilities, increased by
Debt Arrangements
On
The Term Loan Agreement and ABL Revolver Agreement are collectively referred to as the "Credit Agreements" by the Company.
The initial Term Loan will mature on
On
43
Interest on any outstanding borrowings is payable monthly under the ABL Revolver Agreement, quarterly under the Term Loan Agreement or, in each case, at the end of the applicable interest period in arrears. The cash interest rates under the Term Loan Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined in the Term Loan Agreement), plus 5.50%, or (ii) an Alternate Base Rate (as defined in the Term Loan Agreement), plus 4.50%. In addition, the term loan requires an additional 2.0% interest that can be made at the option of the Company in cash or payment-in-kind (PIK). The interest rates under the ABL Revolver Agreement will be equal to either (i) the Adjusted LIBO Rate (as defined in the ABL Revolver Agreement), plus 2.50%, or (ii) the ABR (as defined in the ABL Revolver Agreement), plus 1.50%.
The Credit Agreements are guaranteed by Holdings and secured by (i) in the case of the ABL Revolver Agreement, a first priority security interest in the current assets, including accounts receivable, of Holdings, Intermediate and its subsidiaries and (ii) in the case of the Term Loan Agreement, a pledge of the equity interests of the subsidiaries of Holdings and Intermediate, and subject to the first lien security interest on current assets under the Revolver, a first priority lien on substantially all other assets of Holdings, Intermediate and all of their direct and indirect subsidiaries.
The Term Loan Agreement contains a financial covenant which requires Holdings,
Atlas Intermediate and all of their direct and indirect subsidiaries on a
consolidated basis to maintain a Total Net Leverage Ratio (as defined in each of
the Credit Agreements) tested on a quarterly basis that does not exceed (i) 8.25
to 1.00 with respect to the fiscal quarters ending on
The ABL Revolver Agreement contains a "springing" financial covenant which
requires Holdings, Intermediate and all their direct and indirect subsidiaries
on a consolidated basis to maintain a Fixed Charge Coverage Ratio (as defined in
the ABL Revolver Agreement) of no less than 1.10 to 1.00 when the outstanding
principal amount of loans under the Revolver exceeds
The Company has been in compliance with the terms of the Credit Agreements as of
Our debt balances are summarized as follows:
December 30, December 31,
2022 2021
(in thousands)
Credit Agreements $ 511,218 $ 473,392
Less: Loan costs, net (6,951 ) (7,593 )
Less current maturities of long-term debt (4,930 ) (3,606 )
Long-term debt $ 499,337 $ 462,193 The following table presents, in thousands, scheduled maturities of the
Company's debt as of
2023$ 4,930 2024 4,930 2025 4,930 2026 4,930 2027 4,930 Thereafter 486,568$ 511,218
The Credit Agreements require annual amortization of principal amounts of 1% or 2.5% depending on certain ratios. The Company is currently within the ratio that requires 1% annual amortization. Principal repayments commenced during the second quarter 2022.
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Effective Interest Rate
Our average effective interest rate on our total debt, exclusive of amortization
of deferred debt issuance costs, during the year ended
Interest expense, inclusive of amortization of deferred debt issuance costs, in
the consolidated statements for the year ended
Interest Rate Cap
In
Other Commitments and Contingencies
In connection with our acquisitions, we may be required to pay earnout bonuses
upon the achievement of certain performance targets. This amount may be paid in
installments over the first, second and third anniversaries of the acquisitions
and may be paid in cash or stock. We have currently accrued
As part of our self-insurance policies, we are required to furnish standby
letters of credit to our reinsurers. We had
The Company enters into operating leases relating to office space and equipment
leases in the ordinary course of business. Remaining amounts due, in thousands,
as of
2023$ 12,164 2024 8,069 2025 4,085 2026 2,654 2027 1,334 Thereafter 2,513$ 30,819
During 2020, the Company entered into an agreement with its fleet management
company pursuant to which it would receive rebates of
During the fourth quarter of the year ended
Remaining payments are as follows (in millions):
2023$ 0.7 2024 0.5$ 1.2 45
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in
Revenue Recognition
Our accounting policies establish principles for recognizing revenue upon the transfer of control of promised goods or services to customers. We generally recognize revenues over time as performance obligations are satisfied. In the course of providing these services, we may subcontract for services and incur other direct costs on behalf of our clients. These costs are passed through to clients, and in accordance with accounting rules, are included in our revenue and cost of revenue. Please refer to Note 2 "Summary of Significant Accounting Policies," to the Consolidated Financial Statements for further information.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial statements.
Off-Balance Sheet Arrangements
As of
Effects of Inflation
Based on the analysis of the periods presented, we believe that inflation has
not had a material effect on our operating results for the year ended
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