(EDGAR Online via COMTEX) -- 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 and six months ended June 30, 2021 and 2020 included in Part I, Item 1. "Financial Statements" in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled "Forward-Looking Statements", and elsewhere in this filing and our other filings with the SEC.
Since our inception in 2012, our mission has been to help clients and communities meet their environmental goals and needs. Today, we have emerged as one of the fastest growing companies in a highly fragmented and growing $1.25 trillion global environmental industry.
We provide environmental services to our clients through three business segments-Assessment, Permitting and Response, Measurement and Analysis and Remediation and Reuse.
Assessment, Permitting and Response
Through our Assessment, Permitting and Response segment, we provide scientific advisory and consulting services to support environmental assessments, environmental emergency response, and environmental audits and permits for current operations, facility upgrades, new projects, decommissioning projects and development projects. Our technical advisory and consulting offerings include regulatory compliance support and planning, environmental, ecosystem and toxicological assessments and support during responses to environmental disruption. We help clients navigate regulations at the local, state, provincial and federal levels. In addition to environmental toxicology, and given our expertise in helping businesses plan for and respond to disruptions, our scientists and response teams have helped clients navigate their preparation for and response to the COVID-19 pandemic.
Measurement and Analysis
Through our Measurement and Analysis segment, our highly credentialed teams test and analyze air, water and soil to determine concentrations of contaminants, including emerging contaminants such as PFAS, as well as determine the toxicological impact of contaminants on flora, fauna and human health. Our offerings include source and ambient air testing and monitoring, leak detection and advanced analytical laboratory services such as air, storm water, wastewater and drinking water analysis.
Remediation and Reuse
Through our Remediation and Reuse segment, we provide clients with engineering, design, implementation and operations and maintenance services, primarily to treat contaminated water, remove contaminants from soil or create biogas from waste. We do not own the properties or facilities at which we implement these projects or the underlying liabilities, nor do we own material amounts of the equipment used in projects; instead, we assist our clients in designing solutions, managing projects and mitigating their environmental risks and liabilities.
These operating segments have been structured and organized to align with how we view and manage the business with the full lifecycle of our clients' targeted environmental concerns and needs in mind. Within each segment, we cover similar service offerings, regulatory frameworks, internal operating structures and client types. Corporate activities not directly related to segment performance, including general corporate expenses, interest and taxes, are reported separately. For more information on each of our operating segments, see Item 1. "Business" in the 2020 Form 10-K.
We are closely monitoring the impact of the COVID-19 pandemic on our business, including the impact on our customers, employees and suppliers. While COVID-19 has not had a material adverse effect on our reported results, we have experienced some changes to our business operations. The changes were primarily composed of client postponement of on-site environmental
compliance testing, delays in project start dates particularly within our Remediation and Reuse segment, and postponement or reformatting of scientific presentations and sales visits. We have also had small numbers of employees either exposed to or contract COVID-19. Exposed employees have been asked to quarantine per Company protocols. To date, COVID-19 related quarantines have not had a material adverse effect on our reported results. In the second quarter of 2020 we instituted temporary cost mitigation measures such as reducing non-billable time for a subset of our impacted workforce. Some of these cost mitigation measures were reversed during the first quarter of 2021, with the remaining measures reversed in the second quarter of 2021. Our businesses exposed to commercial food waste and non-specialized municipal water engineering projects also saw more significant disruptions and, as a result, in the first quarter of 2020 we exited those service lines as described further below. On the other hand, we have seen benefits from COVID-19 given client demand for CTEH's toxicology and response services, which represented a meaningful revenue stream in the three and six months ended June 30, 2021 and the three months ended June 30, 2020, and that, once the pandemic subsides, we may not be able to replace in future periods. Although many parts of our business saw some impact from COVID-19, in the aggregate, our overall business benefitted from COVID-19 during the three and six months ended June 30, 2021 and the three months ended June 30, 2020, primarily as a result of COVID-19 response work performed by CTEH.
COVID-19 has had an impact on our historical seasonality trends given the various government stay at home or business closure orders staring in the second quarter of 2020. We have not experienced a significant slowdown in cash collections, and as a result cash flow from operations has not been materially adversely impacted. In addition, in the second quarter of 2021 we entered into a 2021 Credit Facility, replacing our 2020 Credit Facility, and as a result, increased borrowing capacity. We expect our sources of liquidity to be sufficient for our operating needs for the next twelve months. See "-Liquidity and Capital Resources."
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted. The CARES Act includes several significant provisions for corporations, including those pertaining to net operating losses, interest deductions and payroll tax benefits. We utilized certain of these provisions in 2020, including the deferral of the employer side social security payments for payroll for the eligible portion of the year. In total, we deferred approximately $5.0 million of 2020 payments to 2021 and 2022.
It is difficult to predict the future impact COVID-19 may have on our business, results of operations, financial position, or cash flows. The extent to which we may be impacted will depend largely on future and rapidly evolving developments, including new information on the severity of new strains, the roll-out and long-term efficacy of vaccines, and actions by various government authorities to contain the pandemic and mitigate its impact. We intend to closely monitor the impact of COVID-19 on our business and will respond as we believe is appropriate.
Key Factors that Affect Our Business and Our Results
Our operating results and financial performance are influenced by a variety of internal and external trends and other factors. Some of the more important factors are discussed briefly below.
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 and six months ended June 30, 2021 and 2020:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Acquisitions completed 1 1 2 1 Revenues attributable to 14,631 14,631 acquisitions 457 7,831 Percentage of revenues 0.3 % 19.8 % 2.9 % 10.9 %
Revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments, as these are eliminated at the consolidated segment and Company level. We expect our revenue growth to continue to be driven in significant part by acquisitions.
As a result of our acquisitions, goodwill and other intangible assets represent a significant proportion of our total assets, and amortization of intangible assets has historically been a significant expense. Our historical financial statements also include other acquisition-related costs, including costs relating to external legal support, diligence and valuation services and other transaction and integration-related matters. In addition, in any year gains and losses from changes in the fair value of earn-out related contingent consideration related to acquisitions could be significant. The amount of each for the three and six months ended June 30, was:
Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Amortization expense $ 8,407 $ 7,717 $ 17,002 $ 13,326 Acquisition-related costs 506 2,454 743 3,761 Fair value changes in business acquisitions 12,971 3,983 24,035 3,983 contingent consideration
We expect that amortization of identifiable intangible assets and other acquisition-related costs, assuming we continue to acquire, will continue to be significant.
Additionally, we made a $50.0 million earn-out payment in April 2021 (50.0% of which was paid in the form of shares of our common stock) and may make a future payment of up to $30.0 million in earn-out payments in 2022 in connection with our CTEH acquisition. In connection with our MSE and Vista acquisitions, we may make up to $7.2 million in aggregate purchase price true up and earn-out payments in 2022 and 2023. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1. "Financial Statements."
We have grown organically and expect to continue to do so. We define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses disposed of or discontinued. As a result of the significance of the CTEH acquisition to Montrose, and the potential annual volatility in CTEH's revenues, we may also disclose organic growth without the annual organic revenue growth of CTEH. We expect to continue to disclose organic revenue growth with and without CTEH, typically on an annual basis. Management uses organic growth as one of the means by which it assesses our results of operations. Organic growth is not, however, a measure of revenue growth calculated in accordance 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.
Discontinued Service Lines
Periodically, or when circumstances warrant, we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations. During the first quarter of 2020, as part of this evaluation, we determined to scale back operations of our environmental lab in Berkeley, California, and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line, collectively, the Discontinued Service Lines. The factors underlying these decisions were accelerated and amplified by the COVID-19 pandemic, which for example, has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding. As a part of discontinuing these service lines, a process which was completed in the second quarter of 2020, we eliminated select personnel and, in the first quarter of 2020, booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines. Revenues from our non-specialized municipal water engineering service line and our food-waste biogas engineering, which are included in the results of our Remediation and Reuse segment, were zero in the three and six months ended June 30, 2021 and $0.4 million and $1.3 million in the three and six months ended June 30, 2020, respectively. Revenues from our Berkeley lab, which are included in the results of our Measurement and Analysis segment, were zero during the three and six months ended June 30, 2021 and $0.9 million and $2.5 million in the three and six months ended June 30, 2020, respectively. We no longer generate any revenues from the Discontinued Service Lines.
Our segments generate different levels of profitability and, accordingly, shifts in the mix of revenues between segments can impact our consolidated reported net income, operating margin, Adjusted EBITDA and Adjusted EBITDA margin from quarter to quarter and year to year. Inter-company revenues between business lines within segments have been eliminated. See Note 20 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 "Financial Statements."
Financing costs, relating primarily to interest expense on our debt, continue to be a significant component of our results of operations. We incurred interest expense of $6.8 million and $9.5 million during the three and six months ended June 30, 2021, respectively, and $5.3 million and $7.9 million during the three and six months ended June 30, 2020, respectively.
On April 13, 2020, we entered into the 2020 Credit Facility providing for a $225.0 million credit facility comprised of a $175.0 million term loan and a $50.0 million revolving credit facility, and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility. We incurred debt extinguishment costs of $1.4 million in connection with this refinancing transaction. Effective October 6, 2020, the Company amended its 2020 Credit Facility to provide for a reduction on the applicable interest rate on the term loan from LIBOR plus 5.0% with a 1.0% LIBOR floor to LIBOR plus 4.5% with a 1.0% LIBOR floor. The revolver interest rate remained unchanged.
On April 27, 2021, we entered into the 2021 Credit Facility and repaid all amounts outstanding under the 2020 Credit Facility. The 2021 Credit Facility consists of a $175.0 million term loan and a $125.0 million revolving credit facility. The interest rate on the 2021 Credit Facility varies depending on leverage, with a minimum of LIBOR plus 1.5% and a maximum of LIBOR plus 2.5%. We incurred debt extinguishment costs of $3.9 million in connection with this refinancing transaction.
As a result of the lower interest rates under the 2021 Credit Facility, we expect interest expense to be lower for the remainder of 2021 as compared to 2020 periods despite higher outstanding debt balances. We expect interest expense to remain a significant cost as we continue to leverage our credit facility to support our operations and future acquisitions.
See Note 13 to our unaudited condensed consolidated financial statements included in Part 1, Item 1 "Financial Statements" and "Liquidity and Capital Resources."
Corporate and Operational Infrastructure Investments
Our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth. We have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth. Investments in logistics, quality, risk management, sales and marketing, safety, human resources, research and development, finance and information technology and other areas enable us to support continued growth. These investments have allowed us to improve our operating margins.
Because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters, our business is better assessed based on yearly results. In addition, our operating results experience some quarterly variability. Excluding the impact of revenues and earnings from new acquisitions, and the temporary impact of COVID, we typically generate slightly lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters. Historically, quarterly variability has been driven by weather patterns, which generally impact our field-based teams' ability to operate in the winter months. As we continue to grow and expand into new geographies and service lines, quarterly variability may deviate from historical trends.
The acquisition of CTEH exposes us to potentially significant revenue and earnings fluctuations tied both to the timing of large environmental emergency response projects following an incident or natural disaster, and more recently, the benefit from COVID related work. We expect change in demand for COVID-19 related response services provided by CTEH towards the end of 2021 and into 2022. As a result, we may have experienced revenues and earnings in the second half of 2020 and the first half of 2021 that are not indicative of future results.
Results of Operations Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020 For the Three Months Ended June 30, (in thousands, except per share and percentage data) 2021 2020 Statements of operations data: Revenues $ 136,224 $ 73,766 Cost of revenues (exclusive of depreciation and amortization) 92,104 45,889 Selling, general and administrative expense 27,366 19,318 Initial public offering expense - - Fair value changes in business acquisitions contingent consideration 12,971 3,983 Depreciation and amortization 10,905 9,784 Loss from operations $ (7,122 ) $ (5,208 ) Other (expense) income (819 ) 21,933 Interest expense, net (6,798 ) (5,260 ) (Loss) income before income taxes (14,739 ) 11,465 Income tax expense (benefit) (256 ) (1,759 ) Net (loss) income $ (14,483 ) $ 13,224 Accretion of Series A-1 redeemable preferred stock - (5,644 ) Series A-2 dividend payment (4,100 ) - Net (loss) income attributable to common stockholders $ (18,583 ) $ 7,580 Weighted average number of shares - basic 26,056 10,649 (Loss) income per share - basic $ (0.71 ) $ 0.71 Weighted average number of shares - diluted 26,056 19,139 (Loss) income per share - diluted $ (0.71 ) $ 0.40 Other financial data: Operating margin(1) (5.2 )% (7.1 )% Adjusted EBITDA(2) $ 20,963 $ 13,895 Adjusted EBITDA margin(2) 15.4 % 18.8 %
(4) Operating margin represents loss from operations as a percentage of revenues.
(5) Non-GAAP measure. See "-Non-GAAP Financial Information" for a discussion of non-GAAP measures and a reconciliation thereof to the most directly comparable GAAP measure.
For the three months ended June 30, 2021, we had revenues of $136.2 million, an increase of $62.4 million, or 84.6% over the three months ended June 30, 2020. Excluding revenues from Discontinued Service Lines of zero and $1.3 million in the three months ended June 30, 2021 and June 30, 2020, respectively, revenues increased $63.7 million or 87.9%. The period over period increase in revenues was driven by a full three-month period including the results of CTEH, which was acquired in the second quarter of 2020, organic growth in all three of our segments, and acquisitions completed subsequent to the quarter ended June 30,2020, which contributed $3.9 million. As was the case in the prior year, all segments continue to be impacted by COVID-19 in 2021, however, in the current year, COVID-19 related project delays and other impacts were more than offset by COVID-19 response work in our Assessment, Permitting and Response segment from the acquisition of CTEH. Revenue from CTEH was $65.9 million in the three months ended June 30, 2021 compared to $14.6 million in the three months ended June 30, 2020. Revenue by segment and as a percentage of total revenues was as follows:
Three Months Ended June 30, 2021 2020 (revenue in thousands) Revenues % of Total Revenues Revenues % of Total Revenues Assessment, Permitting and $ 70,705 51.9 % $ 18,631 25.3 % Response Measurement and Analysis 39,117 28.7 37,036 50.2 Remediation and Reuse 26,402 19.4 18,099 24.5
See "-Segment Results of Operations" below.
Cost of Revenues
Cost of revenues consists of all direct costs required to provide services, including fixed and variable direct labor costs, equipment rental and other outside services, field and lab supplies, vehicle costs and travel-related expenses. Variable costs of revenues generally follow the same seasonality trends as revenue, while fixed costs tend to change primarily as a result of acquisitions.
For the three months ended June 30, 2021, cost of revenues was $92.1 million or 67.6% of revenues, and was comprised of direct labor of $36.2 million, outside services (including contracted labor, laboratory, shipping and freight and other outside services) of $41.9 million, field supplies, testing supplies and equipment rental of $7.1 million, project-related travel expenses of $3.7 million and other direct costs of $3.2 million.
For the three months ended June 30, 2020, cost of revenues was $45.9 million or 62.2% of revenues, and was comprised of direct labor of $30.2 million, outside services (including construction, laboratory, shipping and freight and other outside services) of $6.5 million, field supplies, testing supplies and equipment rental of $5.1 million, project-related travel expenses of $2.2 million and other direct costs of $1.9 million.
For the three months ended June 30, 2021, cost of revenues as a percentage of revenue increased 5.4% from the three months ended June 30, 2020, as a result of significantly higher outside service costs driven by external lab expenses to support the increase in CTEH's COVID-19 revenues. The increase was partially offset by lower labor as a percentage of revenue primarily attributable to a shift in roles and responsibilities of certain employees from providing direct field support to providing more specialized, multi-location overhead support functions (such as accounting, HR and management) as result of acquisitions and growth in our business. These changes in employee roles resulted in a decrease in labor costs recorded as cost of revenues and a corresponding increase in labor costs recorded as selling, general and administrative expense in the current quarter.
Selling, General and Administrative Expense
Selling, general and administrative expense consists of general corporate overhead, including executive, legal, finance, safety, risk management, human resource, marketing and information technology related costs, as well as indirect operational costs of labor, rent, insurance and stock-based compensation.
For the three months ended June 30, 2021, selling, general and administrative expense was $27.4 million, an increase of $8.1 million or 41.7% versus the three months ended June 30, 2020, of which $1.4 million was from selling, general and administrative expense pertaining to companies we acquired subsequent to the second quarter of 2020, an increase in public company related costs of $0.7 million, as well as the impact of the shift of employee roles and responsibilities as described above, and an increase in investments in corporate infrastructure (primarily sales and marketing, finance, administrative, IT, legal and human resources).
For the three months ended June 30, 2021, selling, general and administrative expense was comprised of indirect labor of $13.3 million, facilities costs of $3.5 million, stock-based compensation of $2.1 million, acquisition-related costs of $1.0 million, bad debt expense of $0.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $7.4 million.
For the three months ended June 30, 2020, selling, general and administrative expense was $19.3 million, and was comprised of indirect labor of $9.0 million, facilities costs of $2.9 million, stock-based compensation of $0.7 million, acquisition-related costs of $2.5 million, bad debt expense of $0.1 million, and other costs (including software, travel, insurance, legal, consulting and audit services) of $4.1 million.
Fair Value Changes in Business Acquisitions Contingent Consideration
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Aug 11, 2021
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