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Montrose Expects More Acquisitions to Come

5 min read

A big acquisition lured Montrose Environmental to North Little Rock in 2021, but the deal was just one of 70 the global environmental services company has completed in 10 years.

Chief Financial Officer Allan Dicks expects acquisitions to continue, along with organic growth, though bottom-line profits could be years out.

“We did our first acquisition in 2013, and we’ve done 70 acquisitions since,” Dicks told Arkansas Business. “We’ve grown the top line on average 25% every single year. About a third of that growth has been organic, and about two-thirds through acquisitions.”

In April 2020, Montrose acquired CTEH of North Little Rock for an undisclosed sum, and in August 2021 announced it was moving its headquarters and about 90 employees from Irvine, California, to Arkansas. It relocated top executives in an expansion of CTEH’s offices in NorthShore Business Park off Interstate 430’s Crystal Hill Road exchange.

In the aftermath of the move, Montrose made headlines by buying air-testing competitor AirKinetics Inc. of Anaheim, California; environmental firm Huco Consulting Inc. of Houston; Frontier Analytical Laboratories of El Dorado Hills, California; Environmental Alliances Inc. of Wilmington, Delaware; Matrix Solutions Inc. of Canada; and GreenPath Energy Ltd., another Canadian firm.

Earlier this month, Montrose was revealed to be one of the lead investors in the first funding round for a Swiss waste management startup, TreaTech.

TreaTech developed technology to turn waste into methane-rich renewable gas, clean water and minerals. It raised $10.2 million in Series A funding.

Montrose made all those deals to expand its geographic scope and capabilities, Dicks said. CEO Vijay Manthripragada said in May that Montrose remains “forward leaning on strategic acquisitions and technology investments.”

All that growth left the company with about 3,000 employees worldwide. It has also been a hurdle for profitability. Annual net income was a negative $48 million in 2022, a negative $42 million in 2021 and a negative $107 million in 2020. But Dicks said that is all by design, and noted revenue has been climbing.

“Our latest guidance is about $600 million of revenue this year, yet even at that size, we are 0.1% of the global environmental services market,” he said. “There’s a lot of white space for us to continue to grow into. The industry just in the United States is made up of thousands of environmental service companies, so we can continue to acquire. We don’t really see any end in sight.”

What sets Montrose apart, Dicks said, is that it’s vertically integrated, diverse in its consulting, engineering and emergency response services, and on the ground in so many places.

“Most companies in the industry are either much smaller, single-service-line focused and very geographically constricted, because regulations differ by state,” he said. Larger companies consult or specialize in air or soil testing, or engineering services beyond the environment, he said. “We are now global, we have a portfolio of service lines, and we stick to the environment.”

History of Compliance

Historically, environment services were compliance-driven, helping companies follow the rules of the Clean Air Act of 1970 and the Clean Water Act of 1972.

“Businesses sprung up to help companies comply with the rules, but in the last four or five years, particularly, boards of directors and the C-suite are becoming a lot more sensitive to their environmental footprint and their greenhouse gas emissions,” Dicks said. “It’s moved away from purely a compliance, check-the-box industry into a much more complex suite of issues.”

Another factor is lawsuits like the one settled in June when 3M agreed to pay up to $10.3 billion after claims that the company contaminated U.S. water supplies with polyfluoroalkyl and perfluoroalkyl substances (PFAS), known as “forever chemicals.”

“It’s a very big issue that’s pulled us into Europe,” Dicks said. “We have a proprietary set of patents around being able to extract PFAS from water that’s been discharged out of industrial facilities to non-detectable levels. So that’s an exciting business for us.”

Emergency Response

Anytime there’s an environmental emergency, a train derailment, hurricane, flood, chemical fire — anything that releases toxins into the environment — CTEH springs into action, Dicks said.

CTEH responded to the February derailment of a Norfolk Southern freight train in East Palestine, Ohio, near the Pennsylvania state line. Twenty of the derailed cars contained hazardous materials, according to the U.S. Environmental Protection Agency.

CTEH teams continue to work in the cleanup and remediation efforts.

“CTEH was also involved in work on the Deepwater Horizon oil spill back in 2010,” Dicks said. “That was another very high-profile case, though a lot of what we do is not really high-profile.”

A more ordinary business line is measurement and analysis. “So that’s testing. We have field-based teams that are out collecting samples” of water, air or soil, he said. Those samples are tested for a wide range of contaminants at several labs across the country.

The final business segment is remediation and reuse. “We have a soil remediation business that’s advisory,” said Dicks, a native of South Africa who has been in the United States for 25 years. “We don’t operate heavy equipment, but we oversee and project-manage the cleaning of sites. It also includes our water treatment business,” a 10-person enterprise in Scandinavia.

“We have 700 employees in Canada now and a presence in Australia,” Dicks said. “We’re growing rapidly.”

Montrose looks at geographic opportunities in making acquisitions. “Obviously it gives us access to new clients in new geographies, and the ability to cross-sell other services in those areas,” Dicks said. “Increasingly, acquisitions of intellectual property and proprietary software have been a big driver.”

And what about bottom-line profits?

Income Can Wait

“We incur very large what’s called amortization expenses on the intangibles that come with these acquisitions,” Dicks said. “It’s one of the largest expenses outside of labor that flows through our [profit and loss statements]. So we don’t view net income as a good proxy for profitability or how the company is performing.”

He said the company’s cash flow ultimately drives value creation, and that adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) “is a really good proxy for cash flow generation, and we track this very closely.”

Montrose had annual revenue of $544 million in 2022, $546 million in 2021 and $328 million in 2020. Its EBITDA was $29 million in 2022 and $44 million in 2021.

Montrose and CTEH are also still healing from a disaster of their own, an airplane crash near the Little Rock airport in February that killed five employees.

The crash of the twin-engine Beech B200 on Feb. 22 came shortly after takeoff as gusting winds moved into the area. CTEH identified the dead as pilot Sean Sweeney, 64; production safety data manager Gunter Beaty, 23; staffing and logistics manager Kyle Bennett, 36; safety supervisor Micah Kendrick, 41; and environmental specialist and consultant Glenmarkus Walker, 32.

“Not a day goes by when we don’t think of our lost colleagues,” Marketing Director Abby Townsend told Arkansas Business by email. “Our prayers and thoughts remain with the families.”

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