Montrose Environmental Group Inc

Previous wording

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 the SEC, including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three months ended March 31, 2024 and March 31, 2023 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 the SEC, including in Item 1A. Risk Factors in the 2023 Form 10-K.

Current wording

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 the SEC, including our unaudited condensed consolidated financial statements and the accompanying notes as of and for the three and six months ended June 30, 2024 and June 30, 2023 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 the SEC, including in Item 1A. Risk Factors in the 2023 Form 10-K.

Previous wording

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 in the United States, Canada, Europe and Australia. 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 months ended March 31, 2024 and March 31, 2023:

Current wording

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 in the United States, Canada, Europe and Australia. 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 ended June 30, 2024 and June 30, 2023:

Previous wording

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 business acquisition contingencies such as earn-outs could be significant. The amount of each for the three months ended March 31, 2024 and March 31, 2023, was:

Current wording

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 business acquisition contingencies such as earn-outs could be significant. The amount of each for the three and six months ended June 30, 2024 and June 30, 2023, was:

Previous wording

Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, net loss margin, segment adjusted EBITDA and segment adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 18 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements.”

Current wording

Our segments and our business lines within each segment generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, net loss margin, Segment Adjusted EBITDA and Segment Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 19 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 “Financial Statements.”

Previous wording

Interest expense, net was $3.3 million and $1.5 million in the three months ended March 31, 2024 and March 31, 2023, respectively. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.

Current wording

Interest expense, net was $4.0 million and $7.3 million in the three and six months ended June 30, 2024, respectively, and $1.9 million and $3.4 million in the three and six months ended June 30, 2023, respectively. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.

Previous wording

Due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results in our Measurement and Analysis segment and, following the acquisition of Matrix in Canada, the Remediation and Reuse segment, experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis and Remediation and Reuse segments may deviate from historical trends.

Current wording

Due to the field-based nature of certain of our services, weather patterns generally impact our field-based teams’ ability to operate in the winter months. As a result, our operating results could experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. As we continue to grow and expand into new geographies and service lines, quarterly variability in our Measurement and Analysis and Remediation and Reuse segments may deviate from historical trends.

Previous wording

For the three months ended March 31, 2024, we generated revenues of $155.3 million, an increase of $23.9 million, or 18.2% over the three months ended March 31, 2023. The period over period increase in revenues was primarily driven by acquisitions completed subsequent to the quarter ended March 31, 2023, which contributed revenues of $22.5 million, and strong organic growth in both our Measurement and Analysis and Assessment, Permitting and Response segments. These increases were partially offset by $7.5 million lower environmental emergency response service revenues, the exiting of the Discontinued Specialty Lab in December 2023, which generated revenues of $1.4 million in the three months ended March 31, 2023, and the shift away from lower margin revenue in our biogas business. Environmental emergency response revenues were $15.7 million in the three months ended March 31, 2024, compared to $23.2 million in the three months ended March 31, 2023.

Current wording

Revenue for the three months ended June 30, 2024 increased $14.2 million or 8.9% as compared to the three months ended June 30, 2023. The increase was primarily driven by acquisitions completed in and subsequent to the quarter ended June 30, 2023, which contributed revenues of $23.6 million, and strong organic growth of $7.7 million driven primarily by the Measurement and Analysis and Assessment, Permitting and Response segments. These increases were partially offset by $14.7 million lower environmental emergency response service revenues, the shift away from lower margin revenue in our biogas business, and prior year revenues from the Discontinued Specialty Lab of $2.4 million, which was sold in December 2023. Environmental emergency response revenues were $12.9 million in the three months ended June 30, 2024, compared to $27.6 million in the three months ended June 30, 2023.

Previous wording

The increases in depreciation of property and equipment and the amortization of finance leases were primarily a result of higher property and equipment and right of use assets outstanding during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

Current wording

The increase in depreciation of property and equipment and the amortization of intangible assets and finance leases were primarily driven by an increase of $1.5 million and $2.2 million in depreciation of property and equipment during the three and six months ended June 30, 2024 compared to the prior year periods, respectively, as a result of higher property and equipment outstanding during the applicable period. See Notes 5 and 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Previous wording

Assessment, Permitting and Response segment revenues for the three months ended March 31, 2024 were $58.6 million, an increase of $6.4 million or 12.2% compared to $52.2 million for the three months ended March 31, 2023. The increase was driven by strong organic growth, partially offset by a decline in revenues from environmental emergency response services of $7.5 million.

Current wording

Assessment, Permitting and Response segment revenues for the three and six months ended June 30, 2024 decreased compared to the three and six months ended June 30, 2023 due to a decline in revenues from environmental emergency responses of $14.7 million and $22.2 million, respectively, partially offset by strong organic growth within our non-response consulting and advisory services.

Previous wording

Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2024 was $5.0 million, a decrease of $0.3 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2023 of $5.3 million, and Segment Adjusted EBITDA margin was 9.8% and 14.4%, respectively. The decrease in Segment Adjusted EBITDA was a result of lower revenues from certain biogas and water projects when compared to the 2023 period. Segment Adjusted EBITDA margins were impacted by the acquisition of Matrix in June 2023, which had margins of 0.3% in the current year.

Current wording

Remediation and Reuse Segment Adjusted EBITDA for the three and six months ended June 30, 2024 increased compared the three and six months ended June 30, 2023 due to higher revenues. Segment Adjusted EBITDA in the three months ended June 30, 2024 also benefited from higher Segment Adjusted EBITDA margin, driven by acquisitions and improved Matrix margins. Adjusted EBITDA growth in the six months ended June 30, 2023 was partially offset by lower year-to-date Segment Adjusted EBITDA margin primarily attributable to the acquisition of Matrix in June 2023, which was break-even in the first quarter of 2024 and lower revenues from certain renewable and water projects compared to the 2023 period.

Previous wording

Corporate and other costs were $10.9 million for the three months ended March 31, 2024 compared to $9.3 million for the three months ended March 31, 2023. Corporate costs as a percentage of revenues were 7.0% for the three months ended March 31, 2024 compared to 7.1% in the three months ended March 31, 2023.

Current wording

Corporate and other costs for the three and six months ended June 30, 2024 when compared the three and six months ended June 30, 2023 increased primarily due to higher investments in IT support and information security. Corporate costs as a percentage of revenues were flat year-over-year in both the three and six months ended June 30, 2024.

Previous wording

Our principal sources of liquidity have been cash generated by operating activities, borrowings under our credit facilities, other borrowing arrangements, and proceeds from the issuance of common and preferred stock. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, 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, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. For example, an acquisition agreement might include an earn-out provision that provided for the payment of contingent consideration based on results in excess of a specified target. If the acquiree achieves the target within a specified timeline, the earn-out is (fully or partially) earned and paid in accordance with the agreement. In certain instances, as was the case with our acquisition of CTEH, the amount of earn-out payments can be significant. In connection with certain of our acquisitions, we may make up to $40.4 million in aggregate earn-out payments between the years 2025 and 2026, of which up to $14.2 million may be paid only in cash, up to $13.1 million may be paid only in common stock and up to $13.1 million may be paid, at our option, in cash or common stock. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Current wording

Our principal sources of liquidity have been borrowings under our credit facilities, other borrowing arrangements, proceeds from the issuance of common and preferred stock and cash generated by operating activities. Historically, we have financed our operations and acquisitions from a combination of cash generated from operations, periodic borrowings under senior secured credit facilities, 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, in connection with certain acquisitions, we agree to earn-out provisions and other purchase price adjustments that may require future payments. We may make up to $40.4 million in aggregate earn-out payments between the years 2024 and 2026 in connection with the acquisitions of Sensible, Vandrensning, EPIC, and 2DOT, of which up to $14.2 million may be paid only in cash, up to $13.1 million may be paid only in common stock and up to $13.1 million may be paid in cash or, at our option, in common stock. See Note 7 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Previous wording

We expect to continue to finance 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 short- and long-term.

Current wording

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 short- and long-term.

Previous wording

For the three months ended March 31, 2024, net cash used in operating activities was $22.0 million compared to net cash provided by operating activities of $3.0 million for the three months ended March 31, 2023. The period-over-period decrease of $25.0 million, was primarily due to a higher increase in working capital in the current period of $30.0 million versus an increase in working capital in the prior year period of $9.7 million, as well as lower earnings before non-cash items of $8.0 million.

Current wording

For the six months ended June 30, 2024, net cash used in operating activities was $21.1 million compared to net cash provided by operating activities of $24.5 million for the six months ended June 30, 2023. The period-over-period decrease of $45.6 million was primarily due to an increase in accounts receivable and contract assets of $38.0 million, as a result of temporary invoicing delays following the integration of Matrix as well as several large projects with new customers with elongated payment cycles, and a decrease in accrued payroll and benefits of $7.9 million following larger bonus payments made in March 2024 than in the prior year.

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was $65.0 million, driven by cash paid for the acquisitions of EPIC and 2DOT, net of cash acquired, of $58.1 million, as well as $6.0 million in cash consideration for purchases of property and equipment, $1.3 million in proprietary software development costs, partially offset by proceeds of assumed purchase price obligations of $0.3 million.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $87.9 million, driven by cash paid for the acquisitions of EPIC, 2DOT, ETA, and Paragon, net of cash acquired of $70.3 million, as well as $17.9 million in purchases of property and equipment, and $1.7 million in proprietary software development costs.

Previous wording

For the three months ended March 31, 2023, net cash used in investing activities was $11.7 million, primarily driven by cash paid for the acquisitions of Frontier and EAI, net of cash acquired, of $6.5 million, purchases of property and equipment for cash consideration of $4.1 million, purchases of proprietary software development of $0.7 million and payment of assumed purchase price obligations of $0.5 million.

Current wording

For the six months ended June 30, 2023, net cash used in investing activities was $87.0 million, driven by cash paid for the acquisitions of Matrix, GreenPath, Frontier and EAI, net of cash acquired of $63.1 million, as well as $21.0 million in cash consideration for purchases of property and equipment (which included the purchase of a $12.2 million replacement aircraft for use in emergency responses following a crash in February 2023), and $2.0 million in proprietary software development costs.

Previous wording

For the three months ended March 31, 2024, net cash provided by financing activities was $73.3 million. Cash provided in financing activities was driven by net borrowing of the 2021 Credit Facility of $134.7 million partially offset by the repayment on the Series A-2 preferred stock of $60.0 million.

Current wording

For the six months ended June 30, 2024, net cash provided by financing activities was $102.8 million. Cash provided by financing activities was driven by net proceeds from the issuance of common stock through a public offering of $121.8 million, proceeds from the issuance of an additional term loan of $50.0 million and proceeds from the exercise of stock options of $1.4 million, partially offset by a partial redemption of the Series A-2 preferred stock of $60.0 million, dividends on the Series A-2 preferred stock of $5.6 million, and aggregate repayments made on our term loan, finance leases and aircraft loan of $7.5 million.

Previous wording

For the three months ended March 31, 2023, net cash used in financing activities was $4.7 million. Cash used in financing activities was driven by the quarterly dividends on the Series A-2 preferred stock of $4.1 million, the term loan amortization payments of $2.2 million related to our 2021 Credit Facility, and the repayment of finance leases of $1.0 million, partially offset by proceeds received from the exercise of stock options of $2.7 million.

Current wording

For the six months ended June 30, 2023, net cash used in financing activities was $4.0 million. Cash used in financing activities was driven by the quarterly dividends on the Series A-2 preferred stock of $8.2 million, the term loan amortization payments of $6.6 million related to our 2021 Credit Facility, the repayment of finance leases of $2.2 million, and the payment of acquisition-related contingent consideration of $1.2 million, partially offset by proceeds received from the aircraft loan of $10.9 million and the exercise of stock options of $3.3 million.