Montrose Environmental(MEG) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Presents the unaudited condensed consolidated financial statements for Q1 2023, covering financial position, operations, and cash flows, with detailed notes Condensed Consolidated Statements of Operations (Q1 2023 vs Q1 2022) | Metric | Q1 2023 (In thousands) | Q1 2022 (In thousands) | | :--- | :--- | :--- | | Revenues | $131,428 | $134,680 | | Loss from Operations | $(9,975) | $(7,636) | | Net Loss | $(14,719) | $(7,536) | | Net Loss Attributable to Common Stockholders | $(18,819) | $(11,636) | | Net Loss Per Share (Basic and Diluted) | $(0.63) | $(0.39) | Condensed Consolidated Statements of Financial Position (As of March 31, 2023) | Metric | March 31, 2023 (In thousands) | December 31, 2022 (In thousands) | | :--- | :--- | :--- | | Total Current Assets | $231,007 | $247,928 | | Total Assets | $783,177 | $791,914 | | Total Current Liabilities | $102,331 | $111,442 | | Total Liabilities | $320,144 | $325,799 | | Total Stockholders' Equity | $310,105 | $313,187 | Condensed Consolidated Statements of Cash Flows (Q1 2023 vs Q1 2022) | Metric | Q1 2023 (In thousands) | Q1 2022 (In thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $3,029 | $(18,328) | | Net cash used in investing activities | $(11,727) | $(15,005) | | Net cash used in financing activities | $(4,654) | $(19,715) | | Change in Cash and Cash Equivalents | $(13,352) | $(53,048) | Note 1: Business Description and Basis of Presentation Montrose Environmental Group, Inc. operates through three segments: Assessment, Measurement, and Remediation, serving diverse clients - The company operates through three primary segments: Assessment, Permitting and Response (consulting and emergency response), Measurement and Analysis (testing of air, water, soil), and Remediation and Reuse (engineering and implementation of treatment solutions)[15][16][17] Note 3: Revenues and Accounts Receivable Details revenue streams, contract assets and liabilities, and remaining unsatisfied performance obligations, totaling approximately $98.2 million as of March 31, 2023 - As of March 31, 2023, the company had approximately $98.2 million in remaining unsatisfied performance obligations, with $79.1 million expected to be recognized as revenue within a year[30] Contract Balances | Balance | March 31, 2023 (In thousands) | December 31, 2022 (In thousands) | | :--- | :--- | :--- | | Contract assets | $53,563 | $52,403 | | Contract liabilities | $10,932 | $18,549 | Note 7: Business Acquisitions Details strategic acquisitions in Q1 2023, including Frontier Analytical Laboratories and EAI for $6.2 million, and outlines potential future earn-out payments - In Q1 2023, the company acquired Frontier Analytical Laboratories and Environmental Alliance, Inc. (EAI) for a total purchase price of $6.2 million, funded through cash on hand[52][53][54] - The company may be required to make up to $9.5 million in aggregate earn-out payments between 2023 and 2026 related to various business acquisitions[50] - Transaction costs related to business combinations totaled $0.8 million for the three months ended March 31, 2023[51] Note 12: Debt Details total debt of $162.5 million as of March 31, 2023, primarily from the 2021 Credit Facility, with a 1.4x leverage ratio and covenant compliance Debt Composition (As of March 31, 2023) | Component | Amount (In thousands) | | :--- | :--- | | Term loan facility | $164,062 | | Less deferred debt issuance costs | $(1,595) | | Total debt | $162,467 | - The weighted average interest rate on the 2021 Credit Facility was 6.1% for Q1 2023, up from 1.8% in Q1 2022[86] - As of March 31, 2023, the company's consolidated total leverage ratio was 1.4 times, and it was in compliance with all covenants under the 2021 Credit Facility[84] Note 15: Convertible and Redeemable Series A-2 Preferred Stock Details 17,500 shares of Series A-2 Preferred Stock with a 9.0% dividend rate, $4.1 million paid in Q1 2023, convertible from April 2024 - The company paid dividends of $4.1 million on its Series A-2 Preferred Stock during the three months ended March 31, 2023[100] - The preferred stock becomes convertible into common stock starting on the fourth anniversary of issuance at a 15.0% discount to the market price, with certain volume limitations[101] Note 18: Segment Information Provides a breakdown of revenues and Segment Adjusted EBITDA for the three reportable segments, with total operating segment revenue of $131.4 million in Q1 2023 Segment Revenues and Adjusted EBITDA (Q1 2023 vs Q1 2022) | Segment | Q1 2023 Revenues (thousands) | Q1 2023 Adj. EBITDA (thousands) | Q1 2022 Revenues (thousands) | Q1 2022 Adj. EBITDA (thousands) | | :--- | :--- | :--- | :--- | :--- | | Assessment, Permitting and Response | $52,214 | $14,266 | $45,600 | $9,623 | | Measurement and Analysis | $42,527 | $6,387 | $39,761 | $6,322 | | Remediation and Reuse | $36,687 | $5,278 | $49,319 | $7,993 | | Total Operating Segments | $131,428 | $25,931 | $134,680 | $23,938 | - During Q1 2023, the company decided to sell a non-core specialty service line within its Measurement and Analysis segment, referred to as the 'Discontinuing Specialty Lab'[130] Note 21: Subsequent Events Details post-quarter acquisitions, including GreenPath Energy LTD for CAD $20.1 million and an agreement to acquire Matrix Solutions, Inc. for CAD $65.2 million - On May 1, 2023, the company acquired GreenPath Energy LTD, a fugitive emissions management firm, for CAD $20.1 million[136][138] - The company signed an agreement to acquire Matrix Solutions, Inc., an environmental and engineering consulting company, for CAD $65.2 million, with the deal expected to close in Q2 2023[137][138] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial results, noting a 2.4% revenue decrease to $131.4 million and an increased net loss to $14.7 million, influenced by service changes and higher expenses - Revenues for Q1 2023 decreased by 2.4% to $131.4 million from $134.7 million in Q1 2022, primarily due to significantly lower revenue from COVID-19 services ($3.8 million in Q1'23 vs $21.4 million in Q1'22) and project timing in the Remediation and Reuse segment[172] - Selling, general and administrative (SG&A) expenses increased by 18.7% to $49.6 million, driven by a shift of certain employee roles from direct cost to overhead, higher labor costs, and increased stock compensation[181] - The company defines organic growth as the change in revenues excluding revenues from CTEH, acquisitions for the first twelve months, and businesses held for sale or discontinued[158] - Net cash provided by operating activities was $3.0 million in Q1 2023, a significant improvement from the $18.3 million used in Q1 2022, which included a $19.5 million contingent consideration payment[207] Segment Revenue Performance (Q1 2023 vs Q1 2022) | Segment | Q1 2023 Revenue (millions) | Q1 2022 Revenue (millions) | Change (%) | | :--- | :--- | :--- | :--- | | Assessment, Permitting and Response | $52.2 | $45.6 | +14.5% | | Measurement and Analysis | $42.5 | $39.8 | +7.0% | | Remediation and Reuse | $36.7 | $49.3 | -25.6% | Quantitative and Qualitative Disclosures About Market Risk Discusses market risks from interest rate fluctuations and inflation, noting a 1.0% interest rate change impacts pre-tax income by $0.6 million annually - A 1.0% increase or decrease in interest rates on the company's variable rate debt would impact annual income before taxes by approximately $0.6 million[222] - The company has experienced higher labor, travel, and other direct costs due to inflation but has been raising prices on contracts to offset these effects Management does not believe inflation will have a material long-term effect on the business[223] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[224] - No changes occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[225] PART II. OTHER INFORMATION Legal Proceedings The company is not party to any litigation expected to have a material adverse effect on its operations or financial position - The company states it is not party to any litigation that would be reasonably expected to have a material adverse effect on its financial results[229] Risk Factors No material changes have occurred to the company's risk factors from those disclosed in its 2022 Annual Report on Form 10-K - No material changes have occurred to the risk factors previously disclosed in the 2022 Form 10-K[230] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[231] Exhibits Lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files