Ameresco, Inc. 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency services, renewable-energy project development and operation, operations and maintenance services, consulting, enterprise energy management and photovoltaic products in the United States, Canada and Europe. The filing covers the unaudited three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
The company reports U.S. Regions, U.S. Federal, Canada and Non-Solar Distributed Generation segments, with additional activities classified as All Other. Results are affected by construction cycles, government procurement timing and seasonality; third- and fourth-quarter revenue and operating income are typically stronger than first-quarter results.
Key Financial Metrics
| Metric | Three Months 2018 | Three Months 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Revenue | $205.4 million | $204.7 million | $569.8 million | $506.0 million |
| Gross profit | $46.2 million | $41.4 million | $124.4 million | $102.7 million |
| Gross margin | 22.5% | 20.2% | 21.8% | 20.3% |
| Operating income | $17.3 million | $14.3 million | $39.5 million | $22.5 million |
| Operating margin | 8.4% | 7.0% | 6.9% | 4.5% |
| Net income | $10.7 million | $8.8 million | $26.9 million | $13.0 million |
| Net income attributable to common shareholders | $10.7 million | $8.5 million | $26.4 million | $13.7 million |
| Diluted EPS | $0.23 | $0.19 | $0.57 | $0.30 |
- Revenue was essentially flat year over year in the quarter, but increased 12.6% year to date.
- Gross profit increased 11.6% in the quarter and 21.1% year to date. Management attributed margin improvement primarily to higher-margin energy and incentive revenue from renewable natural gas assets.
- SG&A increased 6.8% in the quarter and 5.9% year to date, principally because of higher salaries, benefits and headcount.
- Other expenses increased to $3.2 million in the quarter and $10.8 million year to date, primarily because of higher interest expense and unfavorable foreign-exchange effects.
- The nine-month effective tax rate was 6.5%, including a $5.9 million benefit related to the retroactively extended Section 179D deduction and investment tax credits. The filing states that these benefits can fluctuate by year.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating activities used $32.0 million during the first nine months of 2018, an improvement from $90.4 million used in the prior-year period. Federal ESPC receivable growth used $112.0 million of operating cash.
- Investing activities used $109.7 million, including $44.1 million for energy assets, $62.7 million for acquisitions and $3.0 million for property and equipment.
- Financing activities provided $178.8 million, including $113.6 million from Federal ESPC projects, $78.9 million from long-term debt financings, $5.1 million from sale-leaseback financings and $3.7 million of net contributions from redeemable non-controlling interests.
- Cash, cash equivalents and restricted cash increased to $97.0 million at September 30, 2018, from $60.1 million at December 31, 2017. Cash and cash equivalents alone were $64.5 million.
- Total debt and capital lease liabilities were $258.8 million, compared with $202.2 million at December 31, 2017; long-term debt, net of current maturities and deferred financing fees, was $226.3 million.
- The amended senior secured credit facility had total commitments of $136.0 million, including $85.0 million of revolving commitments, and $72.3 million remained available at September 30, 2018. The company was in compliance with all financial and operational covenants.
- Management stated that cash, revolving-credit availability and access to credit markets should be sufficient to fund operations for the next twelve months and thereafter.
Material Changes Versus the Prior Comparable Period
- Year-to-date revenue growth was driven primarily by a $57.9 million increase in U.S. Regions revenue, a $6.5 million increase in Non-Solar DG and a $6.6 million increase in All Other revenue. These increases were partly offset by declines in Canada and U.S. Federal revenue.
- U.S. Regions nine-month revenue increased 30.2% and segment income before taxes increased 97.7%, primarily due to larger average project size.
- U.S. Federal revenue declined 1.5% year to date, while segment income before taxes increased 16.4% because of a favorable mix of higher-margin projects.
- Canada revenue declined 14.3% year to date and the segment moved to a $2.0 million pretax loss, compared with $1.6 million of pretax income in 2017, due to slower project progression, higher project development costs and unfavorable foreign exchange.
- Non-Solar DG pretax income increased 130.0% year to date, reflecting higher-margin energy and incentive revenue.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption reduced beginning retained earnings by $4.5 million. For the first nine months, reported revenue was $0.8 million higher but gross profit was $2.6 million lower than it would have been under the prior accounting model.
- The company acquired five solar projects and certain assets of two engineering and consulting businesses. Total acquisition consideration reported for 2018 acquisitions was $67.7 million, including contingent consideration.
Guidance, Outlook, Commentary and Risks
- Management planned approximately $30.0 million of additional capital expenditures, principally for energy-asset acquisitions and construction, during the remainder of 2018, and approximately $20.0 million of additional project financings.
- Backlog at September 30, 2018 was approximately $1.757 billion, including approximately $819.4 million of fully contracted backlog and $1.215 billion of awarded but not yet contracted projects. Approximately 26% of total backlog was expected to be recognized as revenue within twelve months.
- Reported backlog and revenue timing remain subject to customer contract termination or deferral rights, long sales cycles, project execution, government procurement cycles, construction timing and currency movements.
- Federal ESPC financing materially affects reported cash-flow classification: related advances are recorded as financing inflows while project expenditures are reflected in operating cash flows. This contributes to negative reported operating cash flow despite growth in earnings.
- Redeemable non-controlling interests and the HLBV allocation method can create quarter-to-quarter volatility in income attributable to common shareholders.
- The company entered into two sale-leaseback transactions during the quarter, generating $5.1 million of financing proceeds, and entered into a new sale-leaseback arrangement permitting up to $100.0 million of funding through August 2019.
- The company expects to adopt the new lease standard in the first quarter of 2019 using the modified retrospective approach; the financial statement impact had not been finalized.
- Management reported no material changes to previously disclosed risk factors, no material adverse legal proceedings and no off-balance-sheet arrangements as defined by SEC rules.
Important Facts for Investors to Verify
- Reconcile the improvement in earnings with the continued use of operating cash, particularly the $112.0 million increase in Federal ESPC receivables.
- Assess debt growth, maturity dates, variable interest-rate exposure, covenant compliance and the availability of the revolving facility.
- Evaluate the sustainability of gross-margin gains from renewable natural gas energy and incentive revenue.
- Review the impact of ASC 606 on contract assets, contract liabilities, retained earnings and future revenue timing.
- Monitor Canada’s project execution and profitability, as well as the timing and conversion of awarded backlog into signed contracts.
- Consider the nonrecurring or potentially variable effects of the $5.9 million Section 179D tax benefit, investment tax credits and other energy-related incentives.
- Review contingent consideration of up to $4.0 million for acquired solar projects, additional acquisition earn-outs and future put or call rights associated with redeemable non-controlling interests.