MONTROSE ENVIRONMENTAL GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical audited and unaudited consolidated financial statements and related notes and other information included elsewhere in this filing and our other filings with theSEC , including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three and six months endedJune 30, 2021 and 2020 included in Part I, Item 1. "Financial Statements" in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled "Forward-Looking Statements", and elsewhere in this filing and our other filings with theSEC .
Overview
Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. Today, we have emerged as one of the fastest growing companies in a highly fragmented and growing$1.25 trillion global environmental industry.
Our Segments
We provide environmental services to our clients through three business segments-Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse.
Assessment, Permitting and Response
Through our Assessment, Permitting and Response segment, we provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, and given our expertise in helping businesses plan for and respond to disruptions, our scientists and response teams have helped clients navigate their preparation for and response to the COVID-19 pandemic.
Measurement and Analysis
Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants, including emerging contaminants such as PFAS, as well as determine the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis. Remediation and Reuse Through our Remediation and Reuse segment, we provide clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects; instead, we assist our clients in designing solutions, managing projects and mitigating their environmental risks and liabilities. These operating segments have been structured and organized to align with how we view and manage the business with the full lifecycle of our clients' targeted environmental concerns and needs in mind. Within each segment, we cover similar service offerings, regulatory frameworks, internal operating structures and client types. Corporate activities not directly related to segment performance, including general corporate expenses, interest and taxes, are reported separately. For more information on each of our operating segments, see Item 1. "Business" in the 2020 Form 10-K.
COVID-19
We are closely monitoring the impact of the COVID-19 pandemic on our business,
including the impact on our customers, employees and suppliers. While COVID-19
has not had a material adverse effect on our reported results, we have
experienced some changes to our business operations. The changes were primarily
composed of client postponement of on-site environmental
33
--------------------------------------------------------------------------------
compliance testing, delays in project start dates particularly within our
Remediation and Reuse segment, and postponement or reformatting of scientific
presentations and sales visits. We have also had small numbers of employees
either exposed to or contract COVID-19. Exposed employees have been asked to
quarantine per Company protocols. To date, COVID-19 related quarantines have not
had a material adverse effect on our reported results. In the second quarter of
2020 we instituted temporary cost mitigation measures such as reducing
non-billable time for a subset of our impacted workforce. Some of these cost
mitigation measures were reversed during the first quarter of 2021, with the
remaining measures reversed in the second quarter of 2021. Our businesses
exposed to commercial food waste and non-specialized municipal water engineering
projects also saw more significant disruptions and, as a result, in the first
quarter of 2020 we exited those service lines as described further below. On the
other hand, we have seen benefits from COVID-19 given client demand for CTEH's
toxicology and response services, which represented a meaningful revenue stream
in the three and six months ended June 30, 2021 and the three months ended June
30, 2020 , and that, once the pandemic subsides, we may not be able to replace in
future periods. Although many parts of our business saw some impact from
COVID-19, in the aggregate, our overall business benefitted from COVID-19 during
the three and six months ended June 30, 2021 and the three months ended June 30,
2020 , primarily as a result of COVID-19 response work performed by CTEH.
COVID-19 has had an impact on our historical seasonality trends given the
various government stay at home or business closure orders staring in the second
quarter of 2020. We have not experienced a significant slowdown in cash
collections, and as a result cash flow from operations has not been materially
adversely impacted. In addition, in the second quarter of 2021 we entered into a
2021 Credit Facility, replacing our 2020 Credit Facility, and as a result,
increased borrowing capacity. We expect our sources of liquidity to be
sufficient for our operating needs for the next twelve months. See "-Liquidity
and Capital Resources."
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act, or
the CARES Act, was enacted. The CARES Act includes several significant
provisions for corporations, including those pertaining to net operating losses,
interest deductions and payroll tax benefits. We utilized certain of these
provisions in 2020, including the deferral of the employer side social security
payments for payroll for the eligible portion of the year. In total, we deferred
approximately $5.0 million of 2020 payments to 2021 and 2022.
It is difficult to predict the future impact COVID-19 may have on our business,
results of operations, financial position, or cash flows. The extent to which we
may be impacted will depend largely on future and rapidly evolving developments,
including new information on the severity of new strains, the roll-out and
long-term efficacy of vaccines, and actions by various government authorities to
contain the pandemic and mitigate its impact. We intend to closely monitor the
impact of COVID-19 on our business and will respond as we believe is
appropriate.
Key Factors that Affect Our Business and Our Results
Our operating results and financial performance are influenced by a variety of internal and external trends and other factors. Some of the more important factors are discussed briefly below.
Acquisitions
We have been, and expect to continue to be, an acquisitive company. Acquisitions have expanded our environmental service capabilities across all three segments, our access to technology, as well as our geographic reach inthe United States ,Canada andAustralia . The table below sets forth the number of acquisitions completed, revenues generated by and the percentage of total revenues attributable to those acquisitions completed during the three and six months endedJune 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Acquisitions completed 1 1 2 1 Revenues attributable to 14,631 14,631 acquisitions 457 7,831 Percentage of revenues 0.3 % 19.8 % 2.9 % 10.9 %
Revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments, as these are eliminated at the consolidated segment and Company level. We expect our revenue growth to continue to be driven in significant part by acquisitions.
As a result of our acquisitions, goodwill and other intangible assets represent a significant proportion of our total assets, and amortization of intangible assets has historically been a significant expense. Our historical financial statements also include other acquisition-related costs, including costs relating to external legal support, diligence and valuation services and other transaction and integration-related matters. In addition, in any year gains and losses from changes in the fair value of earn-out related contingent consideration related to acquisitions could be significant. The amount of each for the three and six months endedJune 30 , was: 34 --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2021 2020 2021 2020
Amortization expense $ 8,407 $ 7,717 $ 17,002 $ 13,326
Acquisition-related costs 506 2,454 743 3,761
Fair value changes in business
acquisitions 12,971 3,983 24,035 3,983
contingent consideration
We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.
Additionally, we made a$50.0 million earn-out payment inApril 2021 (50.0% of which was paid in the form of shares of our common stock) and may make a future payment of up to$30.0 million in earn-out payments in 2022 in connection with our CTEH acquisition. In connection with our MSE and Vista acquisitions, we may make up to$7.2 million in aggregate purchase price true up and earn-out payments in 2022 and 2023. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements."
Organic Growth
We have grown organically and expect to continue to do so. We define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses disposed of or discontinued. As a result of the significance of the CTEH acquisition to Montrose, and the potential annual volatility in CTEH's revenues, we may also disclose organic growth without the annual organic revenue growth of CTEH. We expect to continue to disclose organic revenue growth with and without CTEH, typically on an annual basis. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance withU.S. generally accepted accounting principles, or GAAP, and should be considered in conjunction with revenue growth calculated in accordance with GAAP. We have grown organically and expect to continue to do so.
Discontinued Service Lines
Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations. During the first quarter of 2020, as part of this evaluation, we determined to scale back operations of our environmental lab inBerkeley, California , and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line, collectively, the Discontinued Service Lines. The factors underlying these decisions were accelerated and amplified by the COVID-19 pandemic, which for example, has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding. As a part of discontinuing these service lines, a process which was completed in the second quarter of 2020, we eliminated select personnel and, in the first quarter of 2020, booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines. Revenues from our non-specialized municipal water engineering service line and our food-waste biogas engineering, which are included in the results of our Remediation and Reuse segment, were zero in the three and six months endedJune 30, 2021 and$0.4 million and$1.3 million in the three and six months endedJune 30, 2020 , respectively. Revenues from ourBerkeley lab, which are included in the results of our Measurement and Analysis segment, were zero during the three and six months endedJune 30, 2021 and$0.9 million and$2.5 million in the three and six months endedJune 30, 2020 , respectively. We no longer generate any revenues from the Discontinued Service Lines. Revenue Mix Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, operating margin, Adjusted EBITDA and Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 20 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 "Financial Statements."
Financing Costs
Financing costs, relating primarily to interest expense on our debt, continue to be a significant component of our results of operations. We incurred interest expense of$6.8 million and$9.5 million during the three and six months endedJune 30, 2021 , respectively, and$5.3 million and$7.9 million during the three and six months endedJune 30, 2020 , respectively. 35 -------------------------------------------------------------------------------- OnApril 13, 2020 , we entered into the 2020 Credit Facility providing for a$225.0 million credit facility comprised of a$175.0 million term loan and a$50.0 million revolving credit facility, and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility. We incurred debt extinguishment costs of$1.4 million in connection with this refinancing transaction. EffectiveOctober 6, 2020 , the Company amended its 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged. OnApril 27, 2021 , we entered into the 2021 Credit Facility and repaid all amounts outstanding under the 2020 Credit Facility. The 2021 Credit Facility consists of a$175.0 million term loan and a$125.0 million revolving credit facility. The interest rate on the 2021 Credit Facility varies depending on leverage, with a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. We incurred debt extinguishment costs of$3.9 million in connection with this refinancing transaction.
As a result of the lower interest rates under the 2021 Credit Facility, we expect interest expense to be lower for the remainder of 2021 as compared to 2020 periods despite higher outstanding debt balances. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.
See Note 13 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 "Financial Statements" and "Liquidity and Capital Resources."
Corporate and Operational Infrastructure Investments
Our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth. We have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth. Investments in logistics, quality, risk management, sales and marketing, safety, human resources, research and development, finance and information technology and other areas enable us to support continued growth. These investments have allowed us to improve our operating margins.
Seasonality
Because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on yearly results. In addition, our operating results experience some quarterly variability. Excluding the impact of revenues and earnings from new acquisitions, and the temporary impact of COVID, we typically generate slightly lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. Historically, quarterly variability has been driven by weather patterns, which generally impact our field-based teams' ability to operate in the winter months. As we continue to grow and expand into new geographies and service lines, quarterly variability may deviate from historical trends.
Earnings Volatility
The acquisition of CTEH exposes us to potentially significant revenue and
earnings fluctuations tied both to the timing of large environmental emergency
response projects following an incident or natural disaster, and more recently,
the benefit from COVID related work. We expect change in demand for COVID-19
related response services provided by CTEH towards the end of 2021 and into
2022. As a result, we may have experienced revenues and earnings in the second
half of 2020 and the first half of 2021 that are not indicative of future
results.
36
--------------------------------------------------------------------------------Results of Operations
Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 For the Three Months EndedJune 30 , (in thousands, except per share and percentage data) 2021
2020
Statements of operations data: Revenues$ 136,224 $ 73,766 Cost of revenues (exclusive of depreciation and amortization) 92,104
45,889
Selling, general and administrative expense 27,366
19,318
Initial public offering expense -
-
Fair value changes in business acquisitions
contingent consideration 12,971
3,983
Depreciation and amortization 10,905 9,784 Loss from operations$ (7,122 ) $ (5,208 ) Other (expense) income (819 ) 21,933 Interest expense, net (6,798 ) (5,260 ) (Loss) income before income taxes (14,739 ) 11,465 Income tax expense (benefit) (256 ) (1,759 ) Net (loss) income$ (14,483 ) $ 13,224 Accretion of Series A-1 redeemable preferred stock - (5,644 ) Series A-2 dividend payment (4,100 )
-
Net (loss) income attributable to common stockholders
26,056 10,649
(Loss) income per share - basic$ (0.71 ) $ 0.71 Weighted average number of shares - diluted 26,056
19,139
(Loss) income per share - diluted$ (0.71 ) $ 0.40 Other financial data: Operating margin(1) (5.2 )% (7.1 )% Adjusted EBITDA(2)$ 20,963 $ 13,895 Adjusted EBITDA margin(2) 15.4 % 18.8 % (4) Operating margin represents loss from operations as a percentage of revenues.
(5) Non-GAAP measure. See "-Non-GAAP Financial Information" for a discussion
of non-GAAP measures and a reconciliation thereof to the most directly
comparable GAAP measure.
Revenues
For the three months ended June 30, 2021 , we had revenues of $136.2 million , an
increase of $62.4 million , or 84.6% over the three months ended June 30, 2020 .
Excluding revenues from Discontinued Service Lines of zero and $1.3 million in
the three months ended June 30, 2021 and June 30, 2020 , respectively, revenues
increased $63.7 million or 87.9%. The period over period increase in revenues
was driven by a full three-month period including the results of CTEH, which was
acquired in the second quarter of 2020, organic growth in all three of our
segments, and acquisitions completed subsequent to the quarter ended June
30,2020 , which contributed $3.9 million . As was the case in the prior year, all
segments continue to be impacted by COVID-19 in 2021, however, in the current
year, COVID-19 related project delays and other impacts were more than offset by
COVID-19 response work in our Assessment, Permitting and Response segment from
the acquisition of CTEH. Revenue from CTEH was $65.9 million in the three months
ended June 30, 2021 compared to $14.6 million in the three months ended June 30,
2020 . Revenue by segment and as a percentage of total revenues was as follows:
Three Months Ended
June 30,
2021 2020
(revenue in thousands) Revenues % of Total Revenues Revenues % of Total Revenues
Assessment, Permitting and $ 70,705 51.9 % $ 18,631 25.3 %
Response
Measurement and Analysis 39,117 28.7 37,036 50.2
Remediation and Reuse 26,402 19.4 18,099 24.5
37
--------------------------------------------------------------------------------
See "-Segment Results of Operations" below.
Cost of Revenues
Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment rental and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same seasonality trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.
For the three months endedJune 30, 2021 , cost of revenues was$92.1 million or 67.6% of revenues, and was comprised of direct labor of$36.2 million , outside services (including contracted labor, laboratory, shipping and freight and other outside services) of$41.9 million , field supplies, testing supplies and equipment rental of$7.1 million , project-related travel expenses of$3.7 million and other direct costs of$3.2 million . For the three months endedJune 30, 2020 , cost of revenues was$45.9 million or 62.2% of revenues, and was comprised of direct labor of$30.2 million , outside services (including construction, laboratory, shipping and freight and other outside services) of$6.5 million , field supplies, testing supplies and equipment rental of$5.1 million , project-related travel expenses of$2.2 million and other direct costs of$1.9 million . For the three months endedJune 30, 2021 , cost of revenues as a percentage of revenue increased 5.4% from the three months endedJune 30, 2020 , as a result of significantly higher outside service costs driven by external lab expenses to support the increase in CTEH's COVID-19 revenues. The increase was partially offset by lower labor as a percentage of revenue primarily attributable to a shift in roles and responsibilities of certain employees from providing direct field support to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) as result of acquisitions and growth in our business. These changes in employee roles resulted in a decrease in labor costs recorded as cost of revenues and a corresponding increase in labor costs recorded as selling, general and administrative expense in the current quarter.
Selling, General and Administrative Expense
Selling, general and administrative expense consists of general corporate overhead, including executive, legal, finance, safety, risk management, human resource, marketing and information technology related costs, as well as indirect operational costs of labor, rent, insurance and stock-based compensation.
For the three months endedJune 30, 2021 , selling, general and administrative expense was$27.4 million , an increase of$8.1 million or 41.7% versus the three months endedJune 30, 2020 , of which$1.4 million was from selling, general and administrative expense pertaining to companies we acquired subsequent to the second quarter of 2020, an increase in public company related costs of$0.7 million , as well as the impact of the shift of employee roles and responsibilities as described above, and an increase in investments in corporate infrastructure (primarily sales and marketing, finance, administrative, IT, legal and human resources). For the three months endedJune 30, 2021 , selling, general and administrative expense was comprised of indirect labor of$13.3 million , facilities costs of$3.5 million , stock-based compensation of$2.1 million , acquisition-related costs of$1.0 million , bad debt expense of$0.1 million , and other costs (including software, travel, insurance, legal, consulting and audit services) of$7.4 million . For the three months endedJune 30, 2020 , selling, general and administrative expense was$19.3 million , and was comprised of indirect labor of$9.0 million , facilities costs of$2.9 million , stock-based compensation of$0.7 million , acquisition-related costs of$2.5 million , bad debt expense of$0.1 million , and other costs (including software, travel, insurance, legal, consulting and audit services) of$4.1 million .
Fair Value Changes in Business Acquisitions Contingent Consideration
For the three months endedJune 30, 2021 , fair value changes in business acquisitions contingent consideration were$13.0 million versus$4.0 million for the three months endedJune 30, 2020 . The increase was primarily driven by fair value adjustments to contingent consideration associated with making payments in respect of the 2020 period for CTEH's earn-out. See "Key Factors that Affect Our Business and Our Results-Acquisitions" and Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements.".
Depreciation and Amortization
Depreciation and amortization expense for the three months endedJune 30, 2021 , was$10.9 million and was comprised of amortization of finite lived intangibles of$8.4 million , arising as a result of our acquisition activity, and depreciation of property and equipment of$2.5 million . 38 -------------------------------------------------------------------------------- Depreciation and amortization expense for the three months endedJune 30, 2020 , was$9.8 million and was comprised of amortization of finite lived intangibles of$7.8 million and depreciation of property and equipment of$2.0 million .
The increase in both depreciation and amortization for the three months ended
Other (Expense) Income
Other expense for the three months endedJune 30, 2021 of$0.8 million was driven by fair value adjustments related to the Series A-2 preferred stock conversion option. Other income of$21.9 million for the three months endedJune 30, 2020 was driven primarily by fair value adjustments related to the Series A-1 preferred stock contingent put option. See Notes 16 and 17 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. "Financial Statements."
Interest Expense, Net
Interest expense, net incurred in the three months endedJune 30, 2021 , was$6.8 million , compared to$5.3 million for the three months endedJune 30, 2020 . The increase in interest expense was driven by an increase in the write off of deferred debt issuance costs and higher outstanding debt balances, partially offset by lower average interest rates under the 2021 Credit Facility. Interest expense in the three months endedJune 30, 2021 includes$3.1 million from the write off of deferred debt issuance costs related to the repayment of our 2020 Credit Facility, whereas interest expense in the three months endedJune 30, 2020 includes$1.4 million expense from both payments made and the write off of deferred debt issuance costs, related to the repayment of the Prior Credit Facility. See "Key Factors that Affect Our Business and Our Results-Financing Costs" and Note 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements."
Income Taxes Expense (Benefit)
Income tax expense was not material during the three months endedJune 30, 2021 , compared to an income tax benefit of$1.8 million for the three months endedJune 30, 2020 . Six Months EndedJune 30, 2021 Compared to the Six Months EndedJune 30, 2020 For the Six Months EndedJune 30 , (in thousands, except per share and percentage data) 2021
2020
Statements of operations data: Revenues$ 270,041 $
134,797
Cost of revenues (exclusive of depreciation and amortization) 187,420
90,287
Selling, general and administrative expense 52,366
39,837
Initial public offering expense -
531
Fair value changes in business acquisitions
contingent consideration 24,035
3,983
Depreciation and amortization 21,674 17,344 Loss from operations$ (15,454 ) $ (17,185 ) Other expense (1,393 ) (7,897 ) Interest expense, net (9,486 ) (7,853 ) Loss before income taxes (26,333 ) (32,935 ) Income tax expense (benefit) (254 ) (4,911 ) Net loss$ (26,079 ) $ (28,024 ) Accretion of Series A-1 redeemable preferred stock - (11,059 ) Series A-2 dividend payment (8,200 )
-
Net loss attributable to common stockholders$ (34,279 ) $ (39,083 ) Weighted average number of shares- basic and diluted 25,586
9,718
Loss per share- basic and diluted$ (1.34 ) $ (4.02 ) Other financial data: Operating margin(1) (5.7 )% (12.7 )% Adjusted EBITDA(2)$ 37,762 $ 19,448 Adjusted EBITDA margin(2) 14.0 % 14.4 % (1) Operating margin represents loss from operations as a percentage of revenues. 39
--------------------------------------------------------------------------------
(2) Non-GAAP measure. See "-Non-GAAP Financial Information" for a discussion
of non-GAAP measures and a reconciliation thereof to the most directly
comparable GAAP measure.
Revenues
For the six months ended June 30, 2021 , we had revenues of $270.0 million , an
increase of $135.2 million , or 100.3% over the six months ended June 30, 2020 .
Excluding revenues from Discontinued Service Lines of zero and $3.8 million in
the six months ended June 30, 2021 and June 30, 2020 , respectively, revenues
increased $139.0 million or 106.1%. The period over period increase in revenues
was driven by a full six-month period including the results of CTEH, which was
acquired in the second quarter of 2020, and acquisitions completed after the
quarter ended June 30, 2020 , which contributed $7.8 million in revenues during
the six months ended June 30, 2021 , and organic growth, including significant
organic growth from CTEH. As was the case in the prior year, all segments
continue to be impacted by COVID-19 in 2021, however, in the current year,
COVID-19 related project delays and other impacts were more than offset by
COVID-19 response work in our Assessment, Permitting and Response segment from
the acquisition of CTEH. Revenues from CTEH were $136.5 million in the six
months ended June 30, 2021 as compared to $14.6 million in the six months ended
June 30,2020 (all of which was in the second quarter of 2020). Organic growth
for the six months ended June 30, 2021 was 46.7% including CTEH, and 8.5%
excluding CTEH. Revenue by segment and as a percentage of total revenues was as
follows:
Six Months Ended June 30,
2021 2020
(revenue in thousands) Revenues % of Total Revenues Revenues % of Total Revenues
Assessment, Permitting and $ 145,967 54.1 % $ 23,161 17.2 %
Response
Measurement and Analysis 72,557 26.9 73,476 54.5
Remediation and Reuse 51,517 19.1 38,160 28.3
See "-Segment Results of Operations" below.
Cost of Revenues
For the six months endedJune 30, 2021 , cost of revenues was$187.4 million or 69.4% of revenues, and was comprised of direct labor of$72.3 million , outside services (including contracted labor, laboratory, shipping and freight and other outside services) of$82.9 million , field supplies, testing supplies and equipment rental of$18.2 million , project-related travel expenses of$8.8 million and other direct costs of$5.2 million . For the six months endedJune 30, 2020 , cost of revenues was$90.3 million or 67.0% of revenues, and was comprised of direct labor of$57.2 million , outside services (including construction, laboratory, shipping and freight and other outside services) of$15.7 million , field supplies, testing supplies and equipment rental of$9.3 million , project-related travel expenses of$3.8 million and other direct costs of$4.3 million . For the six months endedJune 30, 2021 , cost of revenues as a percentage of revenue increased 2.4% from the six months endedJune 30, 2020 , as a result of significantly higher outside service costs driven by external lab expenses to support the increase in CTEH's COVID-19 revenues. The increase was partially offset by lower labor as a percentage of revenue primarily attributable to a shift in roles and responsibilities of certain employees from providing direct field support to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) as result of acquisitions and growth in our business. These changes in employee roles resulted in a decrease in labor costs recorded as cost of revenues and a corresponding increase in labor costs recorded as selling, general and administrative expense in the current year.
Selling, General and Administrative Expense
For the six months endedJune 30, 2021 , selling, general and administrative expense was$52.4 million , an increase of$12.6 million or 31.7% versus the six months endedJune 30, 2020 , of which$7.1 million was from selling, general and administrative expense pertaining to companies we acquired at the end of, and subsequent to the second quarter of 2020, an increase in public company related costs of$1.7 million , and increase in stock-based compensation expense of$1.8 million as well as the impact of the shift of employee roles and responsibilities as described above, and an increase in investments in corporate infrastructure (primarily sales and marketing, finance, administrative, IT, legal and human resources). These increases were partially offset by a decrease in bad debt of$5.7 million , primarily related to the Discontinued Service Lines and a decrease in acquisition related costs of$1.3 million . For the six months endedJune 30, 2021 , selling, general and administrative expense was comprised of indirect labor of$27.2 million , facilities costs of$7.0 million , stock-based compensation of$3.3 million , acquisition-related costs of$1.2 million , bad debt expense of$0.6 million , and other costs (including software, travel, insurance, legal, consulting and audit services) of$13.1 million . 40
-------------------------------------------------------------------------------- For the six months endedJune 30, 2020 , selling, general and administrative expense was$39.8 million , and was comprised of indirect labor of$15.0 million , facilities costs of$5.8 million , stock-based compensation of$1.5 million , acquisition-related costs of$2.5 million , bad debt expense of$6.3 million , and other costs (including software, travel, insurance, legal, consulting and audit services) of$8.6 million .
Initial Public Offering Expense
Initial public offering expense for the six months ended
Fair Value Changes in Business Acquisitions Contingent Consideration
For the six months endedJune 30, 2021 , fair value changes in business acquisitions contingent consideration were$24.0 million versus$4.0 million for the six months endedJune 30, 2020 . The increase was primarily driven by fair value adjustments to contingent consideration associated with making payments in respect of the 2020 period for CTEH's earn-out. See "Key Factors that Affect Our Business and Our Results-Acquisitions" and Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements.".
Depreciation and Amortization
Depreciation and amortization expense for the six months endedJune 30, 2021 , was$21.7 million and was comprised of amortization of finite lived intangibles of$17.0 million , arising as a result of our acquisition activity, and depreciation of property and equipment of$4.7 million . Depreciation and amortization expense for the six months endedJune 30, 2020 , was$17.3 million and was comprised of amortization of finite lived intangibles of$13.3 million and depreciation of property and equipment of$4.0 million . The increase in both depreciation and amortization for the six months endedJune 30, 2021 versus the six months endedJune 30, 2020 , was primarily a result of acquisitions. 41
--------------------------------------------------------------------------------
Other Expense
Other expense for the six months endedJune 30, 2021 of$1.4 million was driven by fair value adjustments related to the Series A-2 preferred stock conversion option. Other expense of$7.9 million for the six months endedJune 30, 2020 was driven primarily by fair value adjustments related to the Series A-1 preferred stock contingent put option. See Notes 16 and 17 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. "Financial Statements."
Interest Expense, Net
Interest expense, net incurred in the six months endedJune 30, 2021 , was$9.5 million , compared to$7.9 million for the six months endedJune 30, 2020 . The increase in interest expense was driven by an increase in write-off of deferred debt issuance costs and higher outstanding debt balances, partially offset by lower average interest rates under the 2021 Credit Facility. Interest expense in the six months endedJune 30, 2021 andJune 30, 2020 also includes$3.1 million from the write off of deferred debt issuance costs related to the repayment of our 2020 Credit Facility in April, 2021, whereas interest expense in the six months endedJune 30, 2020 includes$1.4 million expense from both payments made and the write off of deferred debt issuance costs related to the repayment of the Prior Credit Facility. See Note 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements."
Income Taxes Expense (Benefit)
Income tax expense was not material during the six months endedJune 30, 2021 , compared to an income tax benefit of$4.9 million for the six months endedJune 30, 2020 . Segment Results of Operations Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 Three Months Ended June 30, 2021 2020 Segment Segment Segment Adjusted Segment Adjusted Segment Adjusted EBITDA Segment Adjusted EBITDA (in thousands) Revenues EBITDA(1)
Margin(2) Revenues EBITDA(1) Margin(2)
Assessment, Permitting and Response
21.0 %$ 18,631 $ 4,989 26.8 % Measurement and Analysis 39,117 9,491 24.3 37,036 11,615 31.4 Remediation and Reuse 26,402 4,309 16.3 18,099 2,375 13.1 Total Operating Segments$ 136,224 $ 28,656 21.0 %$ 73,766 $ 18,979 25.7 % Corporate and Other (7,693 ) n/a (5,084 ) n/a
(1) For purposes of evaluating segment profit, the Company's chief operating
decision maker reviews Segment Adjusted EBITDA as a basis for making the
decisions to allocate resources and assess performance. See Note 20 to our
unaudited condensed consolidated financial statements included in Part I,
Item 1. "Financial Statements."
(2) Represents Segment Adjusted EBITDA as a percentage of revenues.
42
--------------------------------------------------------------------------------Revenues Assessment, Permitting and Response segment revenues for the three months endedJune 30, 2021 were$70.7 million , compared to$18.6 million for the three months endedJune 30, 2020 . The increase was driven by the performance of CTEH in the second quarter of 2020, which benefited from greater COVID-19 related response work, as well as organic growth in our environmental advisory services. CTEH revenues were$65.9 million in the three months endedJune 30, 2021 compared to$14.6 million in the three months endedJune 30, 2020 . Measurement and Analysis segment revenues for the three months endedJune 30, 2021 were$39.1 million , an increase of$2.1 million or 5.7% compared to revenues for the three months endedJune 30, 2020 of$37.0 million , driven primarily by organic growth in all of our environmental testing services and revenues of$0.5 million from the acquisition of Vista inJune 2021 . The increase was partially offset by a decline in revenues from Discontinued Service Lines. Revenues from Discontinued Service Lines in the Measurement and Analysis segment were zero and$0.9 million for the three months endedJune 30, 2021 andJune 30, 2020 , respectively. Excluding revenues from Discontinued Service Lines, revenues increased$3.0 million or 8.3%. Remediation and Reuse segment revenues for the three months endedJune 30, 2021 were$26.4 million , an increase of$8.3 million or 45.9% compared to revenues for the three months endedJune 30, 2020 of$18.1 million , primarily driven by growing demand for PFAS, remediation and waste-to-energy services and includes$3.4 million from the acquisition of MSE, which closed onJanuary 4, 2021 . Revenues from Discontinued Service Lines were$0.4 million for the three months endedJune 30, 2020 . Excluding revenues from Discontinued Service Lines, revenues increased$8.7 million or 49.2%.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was$14.9 million for the three months endedJune 30, 2021 , compared to$5.0 million for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 andJune 30, 2020 , Segment Adjusted EBITDA margin was 21.0% and 26.8%, respectively. The increase in Segment Adjusted EBITDA was a result of increased revenues. The decline in Segment Adjusted EBITDA margin is as a result of lower margin COVID response work performed by CTEH in the current year. Measurement and Analysis Segment Adjusted EBITDA for the three months endedJune 30, 2021 was$9.5 million , a decrease of$2.1 million compared to Segment Adjusted EBITDA for the three months endedJune 30, 2020 of$11.6 million . For the three months endedJune 30, 2021 Segment Adjusted EBITDA margin was 24.3% compared to 31.4% for the three months endedJune 30, 2020 . The decline in Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily a result of business mix and the reversal of cost mitigation measures taken into the prior year in response to COVID-19. Remediation and Reuse Segment Adjusted EBITDA for the three months endedJune 30, 2021 was$4.3 million , an increase of$1.9 million compared to Segment Adjusted EBITDA for the three months endedJune 30, 2020 of$2.4 million . For the three months endedJune 30, 2021 Segment Adjusted EBITDA margin was 16.3% compared to 13.1% in the three months endedJune 30, 2020 . The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of higher revenues. Corporate and other costs were$7.7 million for the three months endedJune 30, 2021 compared to$5.1 million for the three months endedJune 30, 2020 . The cost increase was primarily driven by public company related costs, higher software costs and higher sales and marketing costs. Six Months EndedJune 30, 2021 Compared to the Six Months EndedJune 30, 2020 Six Months Ended June 30, 2021 2020 Segment Segment Segment Adjusted Segment Adjusted Segment Adjusted EBITDA Segment Adjusted EBITDA (in thousands) Revenues EBITDA(1)
Margin(2) Revenues EBITDA(1) Margin(2)
Assessment, Permitting and Response
21.0 %$ 23,161 $ 6,431 27.8 % Measurement and Analysis 72,557 14,351 19.8 73,476 19,176 26.1 Remediation and Reuse 51,517 6,790 13.2 38,160 4,481 11.7 Total Operating Segments$ 270,041 $ 51,801 19.2 %$ 134,797 $ 30,088 22.3 % Corporate and Other (14,039 ) n/a (10,640 ) n/a 43
--------------------------------------------------------------------------------
(1) For purposes of evaluating segment profit, the Company's chief operating
decision maker reviews Segment Adjusted EBITDA as a basis for making the
decisions to allocate resources and assess performance. See Note 20 to our
unaudited condensed consolidated financial statements included in Part I,
Item 1. "Financial Statements."
(2) Represents Segment Adjusted EBITDA as a percentage of revenues.
Revenues
Assessment, Permitting and Response segment revenues for the six months endedJune 30, 2021 were$146.0 million , compared to$23.2 million for the six months endedJune 30, 2020 . The increase was driven by the acquisition of CTEH in the second quarter of 2020, which expanded our product portfolio and our scientific and technical advisory services footprint. CTEH benefited from greater COVID-19 related response work performed in the full 2021 period as compared to only a portion of the prior year following the acquisition. Measurement and Analysis segment revenues for the six months endedJune 30, 2021 were$72.6 million , a decrease of$0.9 million or 1.2% compared to revenues for the six months endedJune 30, 2020 of$73.5 million . The decrease was driven by a decline in revenues from Discontinued Service Lines, partially offset by organic growth and revenues of$0.5 million from the acquisition of Vista. Revenues from Discontinued Service Lines in the Measurement and Analysis segment were zero and$2.5 million for the six months endedJune 30, 2021 andJune 30, 2020 , respectively. Excluding revenues from Discontinued Service Lines, revenues increased$1.6 million or 2.3%. Remediation and Reuse segment revenues for the six months endedJune 30, 2021 were$51.5 million , an increase of$13.3 million or 34.8% compared to revenues for the six months endedJune 30, 2020 of$38.2 million . This increase was primarily driven by organic growth and$7.4 million from the acquisition of MSE, which closed onJanuary 4, 2021 , partially offset by the loss of revenues from the Discontinued Service Lines. Revenues from Discontinued Service Lines were$1.3 million for the six months endedJune 30, 2020 . Excluding revenues from Discontinued Service Lines, revenues increased$14.6 million or 39.6%.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was$30.7 million for the six months endedJune 30, 2021 , compared to$6.4 million for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 andJune 30, 2020 , Segment Adjusted EBITDA margin was 21.0% and 27.8%, respectively. The increase in Segment Adjusted EBITDA was primarily a result of the acquisition of CTEH in April of 2020 and higher revenues in the second quarter of 2021. The decline in Segment Adjusted EBITDA margin is as a result of performing more lower margin COVID response work performed by CTEH. Measurement and Analysis Segment Adjusted EBITDA for the six months endedJune 30, 2021 was$14.4 million , a decrease of$4.8 million compared to Segment Adjusted EBITDA for the six months endedJune 30, 2020 of$19.2 million . For the six months endedJune 30, 2021 Segment Adjusted EBITDA margin was 19.8% compared to 26.1% for the six months endedJune 30, 2020 . The decline in Segment Adjusted EBITDA was primarily a result of business mix and the reversal of cost mitigation measures taken in the prior year in response to COVID-19. Remediation and Reuse Segment Adjusted EBITDA for the six months endedJune 30, 2021 was$6.8 million , an increase of$2.3 million compared to Segment Adjusted EBITDA for the six months endedJune 30, 2020 of$4.5 million . For the six months endedJune 30, 2021 Segment Adjusted EBITDA margin was 13.2% compared to 11.7% in the six months endedJune 30, 2020 . The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was primarily a result of higher revenues. Corporate and other costs were$14.0 million for the six months endedJune 30, 2021 compared to$10.6 million for the six months endedJune 30, 2020 . The cost increase was primarily driven by public company related costs, higher software costs, higher sales and marketing costs and continued investment in corporate support functions to support higher revenues, partially offset by a decrease in bad debt expense of$5.7 million .
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and other sources, including availability under our credit facility, and their sufficiency to fund our operating and investing activities.
Our principal sources of liquidity have been borrowings under our current and prior credit facilities, other borrowing arrangements, proceeds from the issuance of preferred stock and cash generated by operating activities. Historically, we have financed
44--------------------------------------------------------------------------------
our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, other prior secured and unsecured borrowings and proceeds from the issuance of common and preferred stock. Our primary cash needs are for day to day operations, to fund working capital requirements, to fund our acquisition strategy and any related cash earn-out obligations, to pay interest and principal on our indebtedness and dividends on our Series A-2 preferred stock, and to make capital expenditures. Additionally, the CTEH acquisition agreement includes an earn-out provision that provides for the payment of contingent consideration based on CTEH's 2021 results in an aggregate amount not to exceed$30.0 million , with the earn-out payment equal to a specified multiple of CTEH's EBITDA for 2021 in excess of a specified target. Any payment in respect of 2021 will be payable in cash. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. "Financial Statements." We expect to continue to fund our liquidity requirements, including any cash earn-out payments that may be required in connection with acquisitions, through cash generated from operations and borrowings under our credit facility. We believe these sources will be sufficient to fund our cash needs for the next twelve months. See "-COVID-19" above for a discussion of the impact of the pandemic on our liquidity.
© Edgar Online, source
