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, 2025 and March 31, 2024 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 2024 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, 2025 and June 30, 2024 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 2024 Form 10-K and Part II, Item 1A. Risk Factors in the Q1 2025 Form 10-Q.

Previous wording

Although we have temporary paused 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 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, 2025 and March 31, 2024:

Current wording

Although we have temporarily paused 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 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, 2025 and June 30, 2024:

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, 2025 and March 31, 2024, was as follows:

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, 2025 and June 30, 2024, was:

Previous wording

During the three months ended March 31, 2025, we made contingent consideration payments of $6.6 million in the Company's common stock, of which $4.8 million related to deferred consideration payments for the acquisition of Epic Environmental Pty Ltd (Epic) and $1.8 million related to earn-out payments for SensibleIoT, LLC (Sensible). During the three months ended March 31, 2024, we made earn-out payments of $1.5 million in connection with our acquisition of Huco Consulting, Inc. (Huco), of which, $0.4 million was paid in cash, and the remaining $1.1 million in the Company's common stock.

Current wording

During the six months ended June 30, 2025, we made the contingent consideration payments of $10.6 million for Epic and SensibleIoT, LLC (Sensible), of which $4.0 million was paid in cash, and the remaining $6.6 million was paid in the Company's common stock. During the six months ended June 30, 2024, we made earn-out payments of $1.5 million in connection with our acquisition of Huco Consulting, Inc., of which, $0.4 million was paid in cash, and the remaining $1.1 million in the Company's common stock.

Previous wording

In connection with certain of our acquisitions, we may make up to $26.7 million in aggregate earn-out payments between the years 2025 and 2027, of which up to $12.0 million may be paid only in cash, up to $2.8 million may be paid only in common stock and up to $11.9 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 I, Item 1. “Financial Statements.”

Current wording

In connection with certain of our acquisitions, we may make up to $24.6 million in aggregate earn-out payments between the years 2025 and 2027, of which up to $11.5 million may be paid only in cash, up to $2.8 million may be paid only in common stock and up to $10.3 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 I, Item 1. “Financial Statements.”

Previous 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.”

Current wording

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

Our revenues and certain expenses, including selling, general and administrative expense, vary from period to period due primarily to changes in organic growth, the incremental contribution from recent acquisitions and strategic decisions we may make from time to time. When we refer to changes driven by organic growth, we are referring to the contribution from businesses that have been part of Montrose for more than 12 months, with certain limited exclusions as discussed in greater detail above. In a given reporting period, when we refer to revenue changes driven by acquisitions, we are referring to the revenue contribution from any acquisition from its closing date through the first 12 months of that acquisition, at which point any subsequent contribution therefrom would be organic.

Current wording

Our revenues and certain expenses, including selling, general and administrative expense, vary from period to period due primarily to changes in organic growth, the incremental contribution from recent acquisitions and strategic decisions we may make from time to time. When we refer to changes driven by organic growth, we are referring to the contribution from businesses that have been part of Montrose for more than 12 months, with certain limited exclusions as discussed in greater detail above. In a given reporting period, when we refer to revenue changes driven by acquisitions, we are referring to the revenue contribution from any acquisition from its closing date through the first 12 months of that acquisition, at which point any subsequent revenue contribution therefrom would be organic.

Previous wording

Total debt at March 31, 2025 was $241.8 million net of deferred debt issuance costs, which was an increase of $19.1 million compared to December 31, 2024. The increase is primarily driven by the refinanced term loan in connection with the 2025 Credit Facility, which increased the aggregate amount outstanding by approximately $10.8 million, and additional usage of our revolving line of credit, under which borrowings increased by $9.7 million. This increase was partially offset by repayments and amortization of the various debt noted.

Current wording

Total debt at June 30, 2025 was $273.2 million net of deferred debt issuance costs, which was an increase of $50.6 million compared to December 31, 2024. The increase is primarily driven by the additional usage of our revolving line of credit, under which borrowings increased by $41.4 million, including in connection with the $60.0 million partial redemption of the series A-2 preferred stock in April 2025, which was partially funded by incremental borrowings under our revolving credit facility, and the refinanced term loan in connection with the 2025 Credit Facility, which increased the aggregate amount outstanding by approximately $10.8 million.

Previous wording

Interest expense, net was $5.1 million in the three months ended March 31, 2025 and $3.3 million in the three months ended March 31, 2024. 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 $4.8 million and $9.8 million in the three and six months ended June 30, 2025, respectively, and $4.0 million and $7.3 million in the three and six months ended June 30, 2024, 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

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 annual results. Additionally, 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 our Remediation and Reuse segment, experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and typically we experience 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

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 annual results. Additionally, 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 our Remediation and Reuse segment, experience some quarterly variability with generally lower revenues and lower earnings in the first and fourth quarters and typically 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

In addition to the impact of seasonality on earnings, our emergency response business exposes us to potentially significant revenue and earnings fluctuations tied to large environmental emergency response projects following an incident or natural disaster or more broad scale events. Total revenue from emergency response related services was $13.9 million and $15.7 million for the three months ended March 31, 2025 and 2024, respectively. Demand for environmental emergency response services remains difficult to predict and as a result, we may have experienced revenues and earnings in prior years that are not indicative of future results, making those periods particularly difficult comparisons for future periods. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and 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 annual results.

Current wording

In addition to the impact of seasonality on earnings, our emergency response business exposes us to potentially significant revenue and earnings fluctuations tied to large environmental emergency response projects following an incident or natural disaster or more broad scale events. Total revenue from emergency response related services was $48.5 million and $12.9 million for the three months ended June 30, 2025 and 2024, respectively, and $62.4 million and $28.6 million for the six months ended June 30, 2025 and 2024, respectively. The higher than normal emergency response revenue in the second quarter of 2025 was primarily driven by one large emergency response project. Demand for environmental emergency response services remains difficult to predict and as a result, revenues and earnings in the current and prior years may not be indicative of future results, making those periods particularly difficult comparisons for future periods. Earnings volatility is also driven by the timing of large projects, particularly in our Remediation and Reuse segment, and the impact of acquisitions. As a result of these factors, and 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 annual results.

Previous wording

Revenue for the three months ended March 31, 2025 increased $22.5 million or 14.5% as compared to the three months ended March 31, 2024. The increase was primarily comprised of organic growth in the Remediation and Reuse and Measurement and Analysis segments of $17.8 million, and contribution from acquisitions of $13.5 million, partially offset by $5.8 million reduction in the Assessment, Permitting and Response segment revenue, due to several larger projects that were performed in the prior year quarter that did not repeat in the current year, and a $1.8 million reduction in environmental emergency response service revenues. Environmental emergency response revenues were $13.9 million and $15.7 million in the three months ended March 31, 2025 and 2024, respectively.

Current wording

Revenue for the three months ended June 30, 2025 increased $61.2 million or 35.3% as compared to the three months ended June 30, 2024. The increase was primarily driven by $35.6 million higher emergency response revenue, strong organic growth of $17.1 million driven primarily by the Assessment, Permitting and Response and Measurement and Analysis segments, and $9.1 million of additional revenue from acquisitions. Environmental emergency response revenues were $48.5 million in the three months ended June 30, 2025, compared to $12.9 million in the three months ended June 30, 2024.

Previous wording

Cost of revenues for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 increased primarily due to the increase in revenues. Cost of revenues as a percentage of revenue for the three months ended March 31, 2025 was 61.0%, compared to 62.2% for the three months ended March 31, 2024. This percentage decrease was driven primarily by operating leverage across all business lines within our Measurement and Analysis businesses, and improved margins in our treatment technology business.

Current wording

Cost of revenues for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 increased by $28.7 million or 27.6% driven primarily by the increase in revenues. Cost of revenues as a percentage of revenue for the three months ended June 30, 2025 was 56.6%, compared to 60.1% for the three months ended June 30, 2024. This improvement was driven primarily by high margin emergency response revenues in our Assessment, Permitting and Response segment and operating leverage across all business lines within our Measurement and Analysis businesses.

Previous 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 $1.0 million in amortization of intangible assets during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. See Note 8 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Current wording

The increase in depreciation of property and equipment and the amortization of intangible assets and finance leases in both the three and six months ended June 30, 2025 was primarily driven by higher property and equipment balances during the applicable periods. See Notes 5 and 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”

Previous wording

Other (expense) income, net for the three months ended March 31, 2025 was comprised of losses of $0.9 million related to a fair value adjustment on our interest rate swaps and a $0.3 million charge related to a fair value adjustment on the Series A-2 Preferred Stock conversion option, partially offset by $0.4 million of other income. Other (expense) income, net for the three months ended March 31, 2024 was mainly comprised of income of $0.3 million related to a fair value adjustment on our interest rate swaps and $0.2 million of other income.

Current wording

Other income (expense), net for the three months ended June 30, 2025 was comprised of a fair value gain of $10.0 million related to the Series A-2 preferred stock conversion option, partially offset by losses of $0.7 million related to a fair value adjustment on our interest rate swaps. Other income (expense), net for the three months ended June 30, 2024 was comprised of losses related to fair value adjustments on our interest rate swaps of $0.7 million and the Series A-2 preferred stock conversion option of $0.5 million, partially offset by $0.3 million of other non-operating income.

Previous wording

Interest expense, net for the three months ended March 31, 2025 increased primarily as a result of higher average debt balances and a loss of $0.9 million related to the write-off of unamortized debt issuance costs upon repayment of the 2021 Credit Facility in February 2025.

Current wording

Interest expense, net for the three and six months ended June 30, 2025 and 2024 increased primarily as a result of higher interest rates and higher debt balances. Interest expense in the six months ended June 30, 2025 was also impacted by the write off of deferred debt issuance costs of $0.9 million as a result of the refinancing of our senior credit facility in February 2025.

Previous wording

Weighted average interest rates as of March 31, 2025 and March 31, 2024 were 6.3% and 7.3%, respectively. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Notes 12 and 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Current wording

Weighted average interest rates as of June 30, 2025 and June 30, 2024 were 6.2% and 7.4%, respectively. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Notes 12 and 13 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”

Previous wording

Measurement and Analysis segment revenues for the three months ended March 31, 2025 increased compared to the three months ended March 31, 2024 as a result of strong organic growth of $8.5 million, and the impact of an acquisition, which contributed $5.4 million.

Current wording

Measurement and Analysis segment revenues for the three and six months ended June 30, 2025 increased compared to the three and six months ended June 30, 2024 as a result of strong organic growth of $4.9 million and $13.4 million, respectively, and additional revenue from acquisitions of $3.7 million and $9.2 million, respectively.

Previous wording

Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2025 increased compared to the three months ended March 31, 2024 primarily due to higher revenues. Segment Adjusted EBITDA margin decreased in the three months ended March 31, 2025 compared to the three months ended March 31, 2024, driven primarily by business line mix.

Current wording

Assessment, Permitting and Response Segment Adjusted EBITDA for the three and six months ended June 30, 2025 increased compared to the three and six months ended June 30, 2024 primarily as a result of higher revenues. Segment Adjusted EBITDA margin increased for the three months ended June 30, 2025 due to higher margin emergency response projects, and decreased for the six months ended June 30, 2025 due to project mix, when compared to prior year period.

Previous 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 $26.7 million in aggregate earn-out payments between the years 2025 and 2027 in connection with the acquisitions of Sensible, Vandrensning, Epic, 2DOT, Spirit and Origins, of which up to $12.0 million may be paid only in cash, up to $2.8 million may be paid only in common stock and up to $11.9 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.” As of March 31, 2025, we had $263.9 million available under the 2025 Credit Facility (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations), and $30.3 million of cash on hand. In April 2025, we redeemed $60.0 million in aggregate stated value of the outstanding Series A-2 Preferred Stock using cash and borrowings under our revolving line of credit.

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 to make capital expenditures. Historically, our cash needs also included the payment of dividends on our Series A-2 preferred stock. 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 $24.6 million in aggregate earn-out payments between the years 2025 and 2027 in connection with the acquisitions of Sensible, Vandrensning, Epic, Spirit and Origins, of which up to $11.5 million may be paid only in cash, up to $2.8 million may be paid only in common stock and up to $10.3 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.” As of June 30, 2025, we had $232.3 million available under the 2025 Credit Facility (without giving effect to any outstanding letters of credit, and subject to borrowing base limitations), and $10.5 million of cash on hand. In April and July 2025, we redeemed the remaining $122.2 million in aggregate stated value of the outstanding Series A-2 Preferred Stock using cash and borrowings under our revolving line of credit.

Previous wording

For the three months ended March 31, 2025, net cash provided by operating activities was $5.5 million compared to net cash used in operating activities of $22.0 million for the three months ended March 31, 2024. The period-over-period increase of $27.5 million was primarily due to a lower increase in working capital in the current period of $9.1 million versus $30.0 million in the prior year period.

Current wording

For the six months ended June 30, 2025, net cash provided by operating activities was $27.4 million compared to net cash used in operating activities of $21.1 million for the six months ended June 30, 2024. The period-over-period increase of $48.5 million was primarily due to an increase in cash earnings before non-cash items of $22.5 million for the six months ended June 30, 2025 compared to the same period of the prior year, and improved working capital performance, reflecting a $21.9 million lower cash outflow compared to the prior year.

Previous wording

Working capital (which excludes contingent consideration payments and changes in right-of-use assets) increased by $9.4 million in the three months ended March 31, 2025, primarily due to a decrease in accrued payroll and other benefits of $8.6 million, primarily due to the payment of annual bonuses, and a seasonal decrease in accounts payable and other accrued liabilities of $5.5 million. This increase was partially offset by an decrease in accounts receivable of $10.4 million, driven by seasonally lower quarterly revenues, as well as $5.5 million higher prepaids primarily due to the timing of insurance payments.

Current wording

Working capital (which excludes contingent consideration payments and changes in right-of-use assets) increased by $26.2 million in the six months ended June 30, 2025, primarily due to a seasonal increase in accounts receivable of $27.4 million, partially offset by a $3.1 million increase in accrued payroll.

Previous wording

For the three months ended March 31, 2025, net cash used in investing activities was $3.7 million, driven by cash paid for property and equipment and proprietary software development costs.

Current wording

For the six months ended June 30, 2025, net cash used in investing activities was $7.9 million, driven by cash paid for the purchases of property and equipment of $5.1 million, and $2.8 million in proprietary software development costs.

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, and $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, 2025, net cash provided by financing activities was $16.0 million. Cash provided by financing activities was driven by borrowing under our credit facility of $306.9 million, partially offset by repayments of borrowing of $286.7 million, dividends on the Series A-2 Preferred Stock of $2.8 million and payment of financing cost of $2.2 million.

Current wording

For the six months ended June 30, 2025, net cash used in financing activities was $21.3 million. Cash used in financing activities was driven by repayments of borrowing of $364.5 million, a partial redemption of the Series A-2 preferred stock of $60.0 million, a payment for contingent consideration of $4.4 million, repayments of finance leases of $6.1 million, dividends on the Series A-2 preferred stock of $2.8 million, and payment of financing cost of $2.0 million, partially offset by borrowing under our credit facility of $416.0 million.