Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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, 2022 and March 31, 2021 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 2021 Form 10-K.
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 $1.3 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. For more information on each of our operating segments, see Item 1. “Business” in the 2021 Form 10-K.
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, as well as 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.
29
COVID-19
To date, COVID-19 related adverse impacts such as temporarily delayed project start dates, particularly within our Remediation and Reuse segment, exiting certain service lines and employee quarantines have not had a material adverse effect on our reported results. 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, although declining, revenue stream in the three months ended March 31, 2022 and March 31, 2021, 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 months ended March 31, 2022 and March 31, 2021, primarily as a result of COVID-19 response work performed by CTEH. For additional information regarding the historical impacts of COVID-19 on our business, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Form 10-K.
COVID-19 has had an impact on our historical seasonality trends. We have not experienced a significant slowdown in cash collections, and as a result cash flow from operations has not been materially adversely impacted.
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, of which $2.5 million was repaid in December 2021 and we expect to pay the remaining $2.3 million in the fourth quarter of 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 in the United States, Canada 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, 2022 and March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(Revenues in thousands) |
|
2022 |
|
|
2021 |
|
Acquisitions completed |
|
2 |
|
|
1 |
|
Revenues attributable to acquisitions in the period |
|
|
3,333 |
|
|
|
3,981 |
|
Percentage of revenues |
|
|
2.5 |
% |
|
|
3.0 |
% |
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 months ended March 31, 2022 and March 31, 2021, was:
30
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
Amortization expense |
|
$ |
9,419 |
|
|
$ |
8,595 |
|
Acquisition-related costs |
|
|
467 |
|
|
|
237 |
|
Fair value changes in business acquisitions contingent consideration |
|
|
(21 |
) |
|
|
11,064 |
|
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 earn-out payments of $30.0 million and $50.0 million in March 2022 and April 2021, respectively, in connection with our CTEH acquisition. $25.0 million of the 2021 CTEH earn-out payment was made in the form of shares of our common stock. In connection with our Vista, Sensible, ECI and EnvStd acquisitions, we may make up to $8.7 million in aggregate earn-out payments between the years 2022 and 2025. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
Organic Growth
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 potential annual volatility in CTEH’s revenues due to the emergency response aspect of their business, we 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. 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 with U.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.
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, net loss 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 18 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 $1.1 million and $2.7 million during the three months ended March 31, 2022 and March 31, 2021, respectively.
On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under the prior 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 $4.1 million in connection with this refinancing.
Furthermore, effective January 27, 2022, we entered into an interest rate swap transaction fixing the floating component of the interest rate on $100.0 million of borrowings to 1.39% until January 27, 2025.
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 12 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
31
development, finance and information technology and other areas enable us to support continued growth. These investments have allowed us to improve our margins.
Seasonality
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 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 segment may deviate from historical trends.
Earnings Volatility
In addition to the impact of seasonality on earnings, 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. The benefit from COVID related work began in the third quarter of 2020, peaked in the first quarter of 2021 and has declined each subsequent quarter, although demand has continued through March 31, 2022. Demand for COVID-19 related or environmental emergency response services provided by CTEH remains difficult to predict and as a result, we may have experienced revenues and earnings in both the three months ended March 31, 2022 and March 31, 2021 that are not indicative of future results, making those periods particularly difficult comparisons for future periods. We do however expect that a portion of the lost COVID-19 response revenues will be offset by other CTEH service line revenues as internal resources are freed up from the COVID-19 response work. 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 yearly results.
32
Results of Operations
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands, except per share and percentage data) |
|
2022 |
|
|
2021 |
|
Statements of operations data: |
|
|
|
|
|
|
Revenues |
|
$ |
134,680 |
|
|
$ |
133,817 |
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
88,386 |
|
|
|
95,316 |
|
Selling, general and administrative expense |
|
|
41,807 |
|
|
|
25,000 |
|
Fair value changes in business acquisitions contingent consideration |
|
|
(21 |
) |
|
|
11,064 |
|
Depreciation and amortization |
|
|
12,144 |
|
|
|
11,796 |
|
Loss from operations |
|
$ |
(7,636 |
) |
|
$ |
(9,359 |
) |
Other income (expense) |
|
|
2,461 |
|
|
|
(882 |
) |
Interest expense, net |
|
|
(1,092 |
) |
|
|
(2,688 |
) |
Loss before income taxes |
|
|
(6,267 |
) |
|
|
(12,929 |
) |
Income tax expense |
|
|
1,269 |
|
|
|
2 |
|
Net loss |
|
$ |
(7,536 |
) |
|
$ |
(12,931 |
) |
Series A-2 dividend payment |
|
|
(4,100 |
) |
|
|
(4,100 |
) |
Net loss attributable to common stockholders |
|
$ |
(11,636 |
) |
|
$ |
(17,031 |
) |
Weighted average number of shares — basic and diluted |
|
|
29,662 |
|
|
|
25,117 |
|
Loss per share — basic and diluted |
|
$ |
(0.39 |
) |
|
$ |
(0.68 |
) |
Other financial data: |
|
|
|
|
|
|
Net loss margin(1) |
|
|
(5.6 |
)% |
|
|
(9.7 |
)% |
Adjusted EBITDA (2) |
|
$ |
16,451 |
|
|
$ |
16,800 |
|
Adjusted EBITDA margin (2) |
|
|
12.2 |
% |
|
|
12.6 |
% |
(1)Net loss margin represents net loss as a percentage of revenues.
(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 three months ended March 31, 2022, we had revenues of $134.7 million, an increase of $0.9 million, or 0.6% over the three months ended March 31, 2021. The period over period increase in revenues was driven by organic growth in our Measurement and Analysis and Remediation and Reuse segments, and acquisitions completed subsequent to the quarter ended March 31, 2021, which contributed revenues of $13.6 million. These increases were partially offset by significantly lower COVID-19 related services provided by CTEH. Revenue from CTEH was $29.9 million in the three months ended March 31, 2022 compared to $70.4 million in the three months ended March 31, 2021. Revenue by segment and as a percentage of total revenues was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2022 |
|
2021 |
(Revenues in thousands) |
|
Revenues |
|
|
% of Total Revenues |
|
Revenues |
|
|
% of Total Revenues |
Assessment, Permitting and Response |
|
$ |
|
45,600 |
|
|
|
33.9 |
|
% |
|
$ |
|
75,262 |
|
|
|
56.2 |
|
% |
Measurement and Analysis |
|
|
|
39,761 |
|
|
|
29.5 |
|
|
|
|
|
33,440 |
|
|
|
25.0 |
|
|
Remediation and Reuse |
|
|
|
49,319 |
|
|
|
36.6 |
|
|
|
|
|
25,115 |
|
|
|
18.8 |
|
|
|
|
$ |
|
134,680 |
|
|
|
|
|
|
$ |
|
133,817 |
|
|
|
|
|
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 trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.
For the three months ended March 31, 2022, cost of revenues was $88.4 million or 65.6% of revenues, and was comprised of direct labor of $38.8 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services)
33
of $19.1 million, field supplies, testing supplies and equipment rental of $21.8 million, project-related travel expenses of $4.0 million and other direct costs of $4.7 million.
For the three months ended March 31, 2021, cost of revenues was $95.3 million or 71.2% of revenues, and was comprised of direct labor of $36.1 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $41.0 million, field supplies, testing supplies and equipment rental of $11.1 million, project-related travel expenses of $5.1 million and other direct costs of $2.0 million.
For the three months ended March 31, 2022, cost of revenues as a percentage of revenue decreased 5.6% from the three months ended March 31, 2021, as a result of significantly lower outside service costs in 2022 when compared to 2021 driven primarily by a decrease in external lab expenses needed to support CTEH’s COVID-19 response work during 2022.
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 ended March 31, 2022, selling, general and administrative expense was $41.8 million, an increase of $16.8 million or 67.2% versus the three months ended March 31, 2021, of which $8.9 was related to an increase in stock compensation expense, $2.6 million was from selling, general and administrative expense pertaining to companies we acquired subsequent to the first quarter of 2021, an increase in the defined contribution plan employer contributions of $1.7 million, an increase in acquisition costs of $0.2 million, as well as the impact of an increase in investments in corporate infrastructure (primarily administrative, sales and marketing, finance, IT, legal and human resources).
For the three months ended March 31, 2022, selling, general and administrative expense was comprised of indirect labor of $19.5 million, stock-based compensation of $10.1 million, facilities costs of $4.4 million, acquisition-related costs of $0.5 million, a bad debt credit of $0.5 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $7.8 million.
For the three months ended March 31, 2021, selling, general and administrative expense was $25.0 million, and was comprised of indirect labor of $13.9 million, facilities costs of $3.5 million, stock-based compensation of $1.2 million, acquisition-related costs of $0.2 million, bad debt expense of $0.5 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $5.7 million.
Fair Value Changes in Business Acquisitions Contingent Consideration
For the three months ended March 31, 2022, fair value changes in business acquisitions contingent consideration were not material when compared to $11.1 million for the three months ended March 31, 2021. The majority of the change in value in the three months ended March 31, 2021 period was attributable to the CTEH earn-outs. See “—Key Factors that Affect Our Business and Our Results—Acquisitions” and Note 7 and 13 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 ended March 31, 2022, was $12.1 million and was comprised of amortization of finite lived intangibles of $9.4 million, arising as a result of our acquisition activity, depreciation of property and equipment of $1.8 million and finance leases right-of-use asset amortization of $0.9 million.
Depreciation and amortization expense for the three months ended March 31, 2021, was $11.8 million and was comprised of amortization of finite lived intangibles of $8.6 million, depreciation of property and equipment of $2.4 million and finance leases right-of-use asset amortization of $0.8 million.
The increase in amortization for the three months ended March 31, 2022 versus the three months ended March 31, 2021, was primarily a result of acquisitions. The change in depreciation of property and equipment, and the amortization of finance leases
34
right-of-use asset, is primarily a result of the adoption of ASC 842, partially offset by the impact of acquisitions on depreciation. See Notes 5 and 6 to our unaudited condensed consolidated financial statements included in Part 1, Item 1. “Financial Statements.”
Other Income (Expense)
Other income for the three months ended March 31, 2022 of $2.5 million was driven by a gain related to the fair value adjustment on our interest rate swap of $3.0 million, which was partially offset by an expense of $0.6 million related to the fair value adjustment of the Series A-2 preferred stock conversion option. Other expense of $0.9 million for the three months ended March 31, 2021 was driven by fair value adjustments related to the Series A-2 preferred stock conversion option. See Note 12 and 15 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 ended March 31, 2022, was $1.1 million, compared to $2.7 million for the three months ended March 31, 2021. The decrease in interest expense was driven by lower average interest rates under the 2021 Credit Facility as compared to the prior facility which was still in place in the first quarter of 2021. See “—Key Factors that Affect Our Business and Our Results—Financing Costs” and Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
Income Tax Expense
Income tax expense was $1.3 million during the three months ended March 31, 2022. Income tax expense was immaterial for the three months ended March 31, 2021.
Segment Results of Operations
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2022 |
|
|
|
2021 |
|
|
(in thousands) |
|
Segment Revenues |
|
|
Segment Adjusted EBITDA (1) |
|
|
Segment Adjusted EBITDA Margin(2) |
|
|
|
Segment Revenues |
|
|
Segment Adjusted EBITDA(1) |
|
|
Segment Adjusted EBITDA Margin(2) |
|
|
Assessment, Permitting and Response |
|
$ |
45,600 |
|
|
$ |
9,623 |
|
|
|
21.1 |
|
% |
|
$ |
75,262 |
|
|
$ |
15,804 |
|
|
|
21.0 |
|
% |
Measurement and Analysis |
|
|
39,761 |
|
|
|
6,322 |
|
|
|
15.9 |
|
|
|
|
33,440 |
|
|
|
4,860 |
|
|
|
14.5 |
|
|
Remediation and Reuse |
|
|
49,319 |
|
|
|
7,993 |
|
|
|
16.2 |
|
|
|
|
25,115 |
|
|
|
2,481 |
|
|
|
9.9 |
|
|
Total Operating Segments |
|
$ |
134,680 |
|
|
$ |
23,938 |
|
|
|
17.8 |
|
% |
|
$ |
133,817 |
|
|
$ |
23,145 |
|
|
|
17.3 |
|
% |
Corporate and Other |
|
|
— |
|
|
|
(7,487 |
) |
|
n/a |
|
|
|
|
— |
|
|
|
(6,345 |
) |
|
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 18 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
(2)Represents Segment Adjusted EBITDA as a percentage of segment revenues.
35
Revenues
Assessment, Permitting and Response segment revenues for the three months ended March 31, 2022 were $45.6 million, compared to $75.3 million for the three months ended March 31, 2021. The decrease was driven by significantly lower CTEH revenues in the first quarter of 2022 when compared to the first quarter of 2021, as a result of lower revenue from COVID-19 related services, partially offset by revenues of $11.4 million from acquisitions completed subsequent to the quarter ended March 31, 2021. CTEH revenues were $29.9 million in the three months ended March 31, 2022 compared to $70.4 million in the three months ended March 31, 2021.
Measurement and Analysis segment revenues for the three months ended March 31, 2022 were $39.8 million, an increase of $6.4 million or 18.9% compared to revenues for the three months ended March 31, 2021 of $33.4 million. The increase was driven primarily by organic growth, as well as by revenues of $2.2 million from acquisitions completed subsequent to the quarter ended March 31, 2021.
Remediation and Reuse segment revenues for the three months ended March 31, 2022 were $49.3 million, an increase of $24.2 million or 96.4% compared to revenues for the three months ended March 31, 2021 of $25.1 million. The increase was driven by organic growth. This organic revenue growth was driven by increases in demand for our water treatment technology (PFAS removal) and waste-to-resources (agricultural waste to biogas) services.
Segment Adjusted EBITDA
Assessment, Permitting and Response Segment Adjusted EBITDA was $9.6 million for the three months ended March 31, 2022, compared to $15.8 million for the three months ended March 31, 2021. For the three months ended March 31, 2022 and March 31, 2021, Segment Adjusted EBITDA margin was 21.1% and 21.0%, respectively. The decrease in Segment Adjusted EBITDA was a result of a decrease in CTEH COVID-19 related revenues during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021. Segment Adjusted EBITDA margin was flat despite the decrease in revenues primarily due to CTEH COVID-19 related services' comparatively lower margin profile.
Measurement and Analysis Segment Adjusted EBITDA for the three months ended March 31, 2022 was $6.3 million, an increase of $1.4 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2021 of $4.9 million. For the three months ended March 31, 2022 and March 31, 2021 Segment Adjusted EBITDA margin was 15.9% and 14.5%, respectively. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of higher revenues. Segment Adjusted EBITDA margins benefit from higher revenues due the benefit of operating leverage once fixed costs are covered.
Remediation and Reuse Segment Adjusted EBITDA for the three months ended March 31, 2022 was $8.0 million, an increase of $5.5 million compared to Segment Adjusted EBITDA for the three months ended March 31, 2021 of $2.5 million. For the three months ended March 31, 2022 and March 31, 2021 Segment Adjusted EBITDA margin was 16.2% and 9.9%, respectively. The increase in both Segment Adjusted EBITDA and Segment Adjusted EBITDA margin was a result of significantly higher revenues despite our continued investments in operating infrastructure in this segment which temporarily impact margins.
Corporate and other costs were $7.5 million for the three months ended March 31, 2022 compared to $6.3 million for the three months ended March 31, 2021. The cost increase was primarily driven by continued investment in corporate support functions to support anticipated future growth. Corporate and other costs were 5.6% and 4.7% of revenues for the three months ended March 31, 2022 and March 31, 2021, respectively.
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 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, 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, 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
36
payments. For example, the CTEH acquisition agreement included an earn-out provision that provided 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. CTEH fully achieved the target in 2021 and the $30.0 million payment was paid in cash in the first quarter of 2022. We may also be required to make up to $8.7 million in aggregate earn-out payments between the years 2022 and 2025 in connection with certain of our business acquisitions. 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 short- and long-term. See “—COVID-19” above for a discussion of the impact of the pandemic on our liquidity.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
Consolidated Statement of Cash Flows Data: |
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(18,328 |
) |
|
$ |
(13,913 |
) |
Net cash used in investing activities |
|
|
(15,005 |
) |
|
|
(7,398 |
) |
Net cash used in financing activities |
|
|
(19,715 |
) |
|
|
(3,087 |
) |
Change in cash, cash equivalents and restricted cash |
|
$ |
(53,048 |
) |
|
$ |
(24,398 |
) |
Operating Activities
Cash flows from operating activities can fluctuate from period-to-period as earnings, working capital needs and the timing of payments for contingent consideration, taxes, bonus payments and other operating items impact reported cash flows.
For the three months ended March 31, 2022, net cash used in operating activities was $18.3 million compared to net cash used in operating activities of $13.9 million for the three months ended March 31, 2021. Cash used in operations includes payment of contingent consideration of $19.5 million and zero in the three months ended March 31, 2022 and March 31, 2021, respectively. Excluding payment of contingent consideration, cash provided by operating activities was $1.2 million, compared to cash used in operating activities of $13.9 million in the prior year, an increase of $15.1 million. The period-over-period increase excluding the impact of contingent consideration was primarily due to an increase in working capital in the current year of $12.5 million versus an increase in working capital in the prior year of $27.1 million.
Working capital increased by $12.5 million in the three months ended March 31, 2022, primarily due to a decrease in accounts payable and other accrued liabilities of $20.7 million and an increase in prepaid expenses and other current assets of $1.8 million, partially offset by a decrease in accounts receivable and contract assets of $10.0 million (as a result of higher cash collections in the three months ended March 31, 2022 when compared to the three months ended March 31, 2021). The increase in working capital of $27.1 million in the three months ended March 31, 2021, was driven by an increase in accounts receivable and contract assets of $29.0 million, partially offset by an increase in accounts payable and accrued payroll and benefits of $1.1 million.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was $15.0 million, primarily driven by cash paid for the acquisitions of EnvStd and IAG, net of cash acquired, of $14.3 million, as well as payment of assumed purchase price obligations of $0.6 million, and purchases of property and equipment for cash consideration of $0.3 million.
For the three months ended March 31, 2021, net cash used in investing activities was $7.4 million, primarily driven by cash paid for the acquisition of MSE, net of cash acquired, of $6.3 million, as well as purchases of property and equipment for cash consideration of $0.9 million.
Financing Activities
For the three months ended March 31, 2022, net cash used in financing activities was $19.7 million. Cash used in financing activities was driven by the payment of acquisition-related contingent consideration of $10.5 million, term loan amortization payments of $4.4 million related to our 2021 Credit Facility, the payment of the quarterly dividend on the Series A-2 preferred stock of $4.1
37
million, and the repayment of finance leases of $0.9 million, partially offset by proceeds received from the exercise of stock options of $0.4 million.
For the three months ended March 31, 2021, net cash used in financing activities was $3.1 million. Cash used in financing activities was driven by the payment of the quarterly dividend on the Series A-2 preferred stock of $4.1 million, the repayment of finance leases of $0.6 million, and term loan amortization payments of $0.5 million related to our 2020 Credit Facility, partially offset by proceeds received from the exercise of stock options of $2.2 million.
Credit Facilities
2021 Credit Facility
On April 27, 2021, we entered into a Senior Secured Credit Agreement, or the 2021 Credit Facility, providing for a $300.0 million credit facility comprised of a $175.0 million term loan and a $125.0 million revolving credit facility, and used a portion of the proceeds to repay all amounts outstanding under the 2020 Credit Facility. The 2021 revolving credit facility includes a $20.0 million sublimit for the issuance of letters of credit. Subject to certain exceptions, all amounts under the 2021 Credit Facility will become due on April 27, 2026. We have the option to borrow incremental term loans or request an increase in the aggregate commitments under the revolving credit facility up to an aggregate amount of $150.0 million subject to the satisfaction of certain conditions.
The 2021 Credit Facility term loan must be repaid in quarterly installments and shall amortize at the following annualized rates that were scheduled to begin with the quarter ended December 31, 2021 and with the remaining balance due and payable in full upon the five-year anniversary from the closing date:
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|
Amortization Table |
|
Year 1 |
|
|
Year 2 |
|
|
Year 3 |
|
|
Year 4 |
|
|
Year 5 |
|
|
Term Loan |
|
5.0 |
|
% |
|
5.0 |
|
% |
|
7.5 |
|
% |
|
7.5 |
|
% |
|
10.0 |
|
% |
The first quarterly installment repayment, amounting to $2.2 million, was billed and charged by the lenders in January 2022. The second quarterly installment repayment amounting to $2.2 million was paid in March 2022.
The 2021 Credit Facility term loan and the revolver bear interest subject to the Company’s leverage ratio and LIBOR as follows:
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|
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|
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|
|
|
|
Pricing Tier |
|
Consolidated Leverage Ratio |
|
Senior Credit Facilities LIBOR |
|
|
Senior Credit Facilities Base Rate |
|
|
Commitment Fee |
|
|
Letter of Credit Fee |
|
|
1 |
|
≥ 3.75x to 1.0 |
|
|
2.50 |
|
% |
|
1.50 |
|
% |
|
0.25 |
|
% |
|
2.50 |
|
% |
2 |
|
< 3.75x to 1.0 but ≥ 3.25 to 1.0 |
|
|
2.25 |
|
|
|
1.25 |
|
|
|
0.23 |
|
|
|
2.25 |
|
|
3 |
|
<3.25x to 1.0 but ≥ 2.50 to 1.0 |
|
|
2.00 |
|
|
|
1.00 |
|
|
|
0.20 |
|
|
|
2.00 |
|
|
4 |
|
<2.50x to 1.0 but ≥ 1.75 to 1.0 |
|
|
1.75 |
|
|
|
0.75 |
|
|
|
0.15 |
|
|
|
1.75 |
|
|
5 |
|
<1.75x to 1.0 |
|
|
1.50 |
|
|
|
0.50 |
|
|
0.15 |
|
|
|
1.50 |
|
|
On January 27, 2022, we entered into an interest rate swap transaction fixing the floating component of the interest rate on $100.0 million of borrowings to 1.39% until January 27, 2025. Additionally, we may receive an interest rate adjustment of up to 0.05% under the 2021 Credit Facility based on our performance against certain defined sustainability and environmental, social and governance related objectives.
Our obligations under the 2021 Credit Facility are guaranteed by certain of our existing and future direct and indirect subsidiaries, and such obligations are secured by substantially all of our assets. The 2021 Credit Facility includes a number of covenants imposing certain restrictions on our business, including, among other things, restrictions on our ability to incur indebtedness, prepay or amend other indebtedness, create liens, make certain fundamental changes including mergers or dissolutions, pay dividends and repurchase or make other payments in respect of capital stock, make certain investments, sell assets, change our lines of business, enter into transactions with affiliates and other corporate actions. The 2021 Credit Facility also includes financial covenants requiring us to remain below a maximum total net leverage ratio of 4.25 times, which steps down to 4.00 times beginning with the quarter ending December 31, 2022 through and including the quarter ending September 30, 2023 and then to 3.75 times beginning with the quarter ending December 31, 2023 (provided that, subject to certain requirements, the maximum net leverage ratio may be increased by 0.50:1.00, not to exceed 4.25:1.00, for a period of four consecutive fiscal quarters in connection with certain permitted acquisitions), and a minimum fixed charge coverage ratio of 1.25 times. As of March 31, 2022, the Company’s consolidated total leverage ratio (as defined in the 2021 Credit Facility) was 1.1 times. The calculation of the Company’s consolidated total leverage ratio under the 2021 Credit Facility is consistent with the calculation of the consolidated total leverage ratio under the 2020 Credit Facility.
38
The weighted average interest rate on the 2021 Credit Facility for the three months ended March 31, 2022 was 1.8%. We were in compliance with all applicable covenants under the 2021 Credit Facility as of March 31, 2022.
The 2021 Credit Facility contains a mandatory prepayment feature upon a number of events, including with the proceeds of certain asset sales and proceeds from the issuance of any debt.
See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
2020 Credit Facility
On April 13, 2020, we entered into a Unitranche Credit Agreement, or 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 a portion of the proceeds from the 2020 Credit Facility to repay all amounts outstanding under the prior senior secured credit facility. The 2020 Credit Facility would have matured on the earliest of (a) April 13, 2025 and (b) so long as our Series A-2 preferred stock had not been redeemed in full or otherwise not converted into common stock of Montrose, the date that was 180 days before the Series A-2 preferred equity mandatory redemption date, unless prior to such date, the Series A-2 preferred equity mandatory redemption date had been extended to a date not earlier than one hundred eighty (180) days after April 13, 2025.
Initially, the term loan bore interest at a rate of LIBOR plus 5.0% (subject to a 1.0% LIBOR floor) or the base rate plus 4.0%. Effective October 6, 2020, we amended the 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 bore interest at a rate of LIBOR plus 3.5% or the base rate plus 2.5%. The revolver was also subject to an unused commitment fee of 0.35%.
The term loan began amortizing quarterly with fiscal quarter ending September 30, 2020, with a required repayment of (a) $0.5 million for fiscal quarter ending September 30, 2020 and each other fiscal quarter through and including June 30, 2021, (b) $1.1 million for fiscal quarter ending June 30, 2021 and each other fiscal quarter through and including September 30, 2022, and (c) $1.6 million for each fiscal quarter ending thereafter.
The 2020 Credit Facility also contained financial covenants requiring us to remain below a maximum consolidated total leverage ratio of 4.25 times, which stepped down to 4.00 times beginning December 31, 2021 and then to 3.75 times beginning December 31, 2022, and a minimum consolidated fixed charge coverage ratio of 1.25 times. As of March 31, 2021, the Company’s leverage ratio, which included the impact of contingent consideration payable in cash, was 3.10 times. The weighted average interest rate on the 2020 Credit Facility for the three months ended March 31, 2021 was 5.5%. We were in compliance with all applicable covenants under the 2020 Credit Facility as of March 31, 2021.
All amounts outstanding under the 2020 Credit Facility were repaid on April 27, 2021.
See Note 12 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
Series A-2 Preferred Stock
On April 13, 2020, we issued 17,500 shares of the Series A-2 preferred stock with a par value of $0.0001 per share and a warrant to purchase common stock, in exchange for $175.0 million. Prior to the completion of the IPO, each share of Series A-2 preferred stock accrued dividends at the rate of 15.0% per annum with respect to dividends that were paid in cash, and 14.2% per annum, with respect to dividends that accrued and compounded, resulting in an annual dividend rate of 15.0%. Following the completion of the IPO, the Series A-2 preferred stock does not mature or have a cash repayment obligation; however, it is redeemable at our option. The Series A-2 preferred stock becomes convertible into our common stock beginning on the four-year anniversary of the Series A-2 preferred stock issuance. Upon the four-year anniversary of the issuance, holders of Series A-2 preferred stock may convert up to $60.0 million of such shares into our common stock at a conversion rate discounted to 85.0% of the volume weighted average trading value, with the permitted amount of Series A-2 preferred stock to be converted increasing at each subsequent anniversary of the issuance until the sixth anniversary, after which all of the Series A-2 preferred stock may be converted at the holder’s option. Following the completion of the IPO on July 27, 2020, the Series A-2 preferred stock dividend rate changed to 9.0% per annum with required quarterly cash payments. If permitted under our existing debt facilities, we must pay the Series A-2 preferred stock dividend in cash each quarter.
With respect to any redemption of any share of the Series A-2 preferred stock prior to April 13, 2023, we are subject to a make whole penalty in which the holder is guaranteed at least three years of dividend payments on the redeemed amount.
See Note 15 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
39
Critical Accounting Policies and Estimates
Our 2021 Form 10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results. There have been no material changes to those critical accounting policies and estimates as disclosed therein, other than as described in Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1. “Financial Statements.”
NON-GAAP Financial Information
In addition to our results under GAAP, we also present in this Quarterly Report on Form 10-Q other supplemental financial measures of financial performance that are not required by, or presented in accordance with, GAAP, including Adjusted EBITDA and Adjusted EBITDA margin. We calculate Adjusted EBITDA as net income (loss) before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for the impact of certain other items, including stock-based compensation expense and acquisition-related costs, as set forth in greater detail in the table below. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenues for a given period.
Adjusted EBITDA and Adjusted EBITDA margin are two of the primary metrics used by management to evaluate our financial performance and compare it to that of our peers, evaluate the effectiveness of our business strategies, make budgeting and capital allocation decisions and in connection with our executive incentive compensation. These measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe they are helpful in highlighting trends in our operating results because they allow for more consistent comparisons of financial performance between periods by excluding gains and losses that are non-operational in nature or outside the control of management, as well as items that may differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments.
These non-GAAP measures do, however, have certain limitations and should not be considered as an alternative to net income (loss) or any other performance measure derived in accordance with GAAP. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which we may make adjustments. In addition, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies in our industry or across different industries, and other companies may not present these or similar measures. Management compensates for these limitations by using these measures as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single measure and to view Adjusted EBITDA and Adjusted EBITDA margin in conjunction with the related GAAP measures.
The following is a reconciliation of our net loss to Adjusted EBITDA:
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|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
Net loss |
|
$ |
(7,536 |
) |
|
$ |
(12,931 |
) |
Interest expense |
|
|
1,092 |
|
|
|
2,688 |
|
Income tax expense |
|
|
1,269 |
|
|
|
2 |
|
Depreciation and amortization |
|
|
12,144 |
|
|
|
11,796 |
|
EBITDA |
|
$ |
6,969 |
|
|
$ |
1,555 |
|
Stock-based compensation (1) |
|
|
10,425 |
|
|
|
1,805 |
|
Start-up losses and investment in new services (2) |
|
|
786 |
|
|
|
968 |
|
Acquisition costs (3) |
|
|
467 |
|
|
|
237 |
|
Fair value changes in financial instruments (4) |
|
|
(2,449 |
) |
|
|
602 |
|
Expenses related to financing transactions (5) |
|
|
7 |
|
|
|
50 |
|
Fair value changes in business acquisitions contingent consideration (6) |
|
|
(21 |
) |
|
|
11,064 |
|
Other losses and expenses(7) |
|
|
267 |
|
|
|
519 |
|
Adjusted EBITDA |
|
$ |
16,451 |
|
|
$ |
16,800 |
|
Net loss margin |
|
|
(5.6 |
)% |
|
|
(9.7 |
)% |
Adjusted EBITDA margin |
|
|
12.2 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
(1)Represents non-cash stock-based compensation expenses related to (i) option awards issued to employees, (ii) restricted stock grants issued to directors and selected employees, (iii) and stock appreciation rights grants issued to selected employees.
(2)Represent start-up losses related to losses incurred on (i) the expansion of lab testing methods and lab capacity, including into new geographies, (ii) introduction of new software and consulting service lines (iii) expansion into Europe in advance of projects driven by new regulations.
40
(3)Includes financial and tax diligence, consulting, legal, valuation, accounting and travel costs and acquisition-related incentives related to our acquisition activity.
(4)Amounts relate to the change in fair value of the interest rate swap instrument and the embedded derivative attached to the Series A-2 preferred stock.
(5)Amounts represent non-capitalizable expenses associated with refinancing and amending our debt facilities.
(6)Reflects the difference between the expected settlement value of acquisition related earn-out payments at the time of the closing of acquisitions and the expected (or actual) value of earn-outs at the end of the relevant period.
(7)In 2022, amounts include costs associated with the closing of a lab. In 2021, amounts include non-operational charges incurred due to the remeasurement of finance leases as a result of the adoption of ASC 842 and costs related to the implementation of a new ERP.