Ameresco, Inc. — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency solutions, renewable-energy project development and operations, energy-management services, and photovoltaic products in North America and Europe. This unaudited filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Management notes that the business is seasonal: first-quarter revenue and operating income are typically lower than in the third and fourth quarters because of weather, construction cycles, government procurement timing, and educational-facility schedules.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $134.6 million | $133.8 million | Up 0.6% |
| Gross profit | $25.9 million | $27.7 million | Down $1.8 million |
| Gross margin | 19.3% | 20.7% | Down 1.4 percentage points |
| Operating income (loss) | $(0.6) million | $1.8 million | Down $2.4 million |
| Net income (loss) | $(1.7) million | $0.7 million | Decline of $2.4 million |
| Net income (loss) attributable to Ameresco | $(0.6) million | $1.1 million | Decline of $1.7 million |
| Basic and diluted EPS | $(0.01) | $0.02 | Down $0.03 |
| Cash flow from operations | $(31.8) million | $(15.1) million | Use increased $16.7 million |
| Cash flow from investing | $(29.1) million | $(9.1) million | Use increased $20.0 million |
| Cash flow from financing | $64.8 million | $19.5 million | Increase of $45.3 million |
At March 31, 2017, cash and cash equivalents were $24.5 million, compared with $20.6 million at December 31, 2016. Current restricted cash was $14.8 million, and non-current restricted cash was $17.1 million. Total assets were $815.3 million.
Total debt and capital lease liabilities were $193.6 million, consisting of $20.3 million current and $173.3 million long-term. Federal ESPC liabilities were an additional $163.7 million, supported by corresponding federal ESPC receivables of $188.2 million. The senior secured facility had $33.0 million drawn on the revolver, $27.0 million outstanding under the term loan, and $23.7 million of revolver availability. The company was in compliance with its financial and operational covenants.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat overall, with U.S. Federal revenue increasing $9.3 million, offset by declines in Canada, Small-Scale Infrastructure, and All Other.
- Gross margin declined to 19.3% from 20.7%, primarily because a greater mix of larger, lower-margin projects was recognized.
- Operating results shifted to a loss, driven by lower gross profit, higher selling, general and administrative expense, and higher other expenses.
- U.S. Federal revenue rose 23.9% to $47.9 million, but pretax income fell 14.9% to $5.4 million because of lower-margin project mix and a $1.1 million favorable contract-amendment benefit recorded in the prior-year quarter.
- Canada revenue declined 35.8% to $9.5 million following completion of a significant project; the segment moved to a $0.5 million pretax loss.
- U.S. Regions pretax results declined to a $2.6 million loss, primarily due to lower-margin contracts. Small-Scale Infrastructure pretax income declined 46.2% to $1.2 million.
- Operating cash usage increased substantially. Federal ESPC receivables increased by $34.4 million and operating cash flow does not include related financing inflows, which are classified as financing activities.
- Investing cash outflows rose because project-asset purchases increased to $29.1 million from $8.6 million. Management expects additional 2017 capital expenditures of approximately $60 million to $70 million, principally for renewable-energy plants.
- Financing inflows included $35.2 million from federal ESPC projects, $18.0 million of net revolver borrowings, $12.9 million of project-financing proceeds, and $8.8 million from sale-leaseback financings.
- The company repurchased 387,814 Class A shares for $2.0 million during the quarter. Approximately $6.6 million remained available under the $15.0 million authorization at March 31, 2017.
Backlog, Outlook, Risks, and Unusual Items
As of March 31, 2017, fully contracted backlog was approximately $505.0 million, awarded but unsigned projects totaled approximately $1.14 billion, 12-month backlog was $320.8 million, and assets in development were $206.6 million. Management stated that approximately 90% of awarded projects have historically converted to signed contracts, although timing and conversion are uncertain.
The filing provides no formal earnings or revenue guidance. Management stated that available cash, revolver capacity, and access to credit markets were expected to be sufficient to fund operations through May 2, 2017 and thereafter. The company planned significant remaining-year capital investment and expected to use project financing and sale-leaseback transactions to support renewable-energy development.
- Several construction loans totaling approximately $17.9 million had maturities in May 2017, and a $9.7 million construction facility matured June 30, 2017. Management expected to refinance these obligations into term loans or sale-leaseback financings.
- Certain project loans contain subjective acceleration clauses tied to material adverse changes. The banks had not exercised those clauses as of March 31, 2017.
- Redeemable non-controlling interest allocations can create quarter-to-quarter earnings volatility. The quarter included a $1.1 million net loss allocation to redeemable non-controlling interest.
- The company acquired two solar PV projects under construction for $2.4 million of cash and assumed $5.6 million of related non-recourse financing. It also sold assets of a business for $2.8 million, reducing goodwill by $2.6 million.
- The company adopted ASU 2016-09 and recorded a $4.0 million deferred tax asset and corresponding increase to retained earnings. The adoption did not affect the reported income-tax benefit for the quarter.
- The company expected to adopt the new revenue-recognition standard in the first quarter of 2018 and did not currently expect a material impact, subject to completion of its evaluation.
- Management reported no material changes to previously disclosed risk factors and no pending legal matters expected to have a material adverse effect. Important risks include project execution, contract-margin estimates, customer and government timing, financing availability, refinancing, interest rates, foreign currency, tax credits, and renewable-energy market conditions.
Investor Verification Checklist
- Verify the conversion and timing of the $505.0 million fully contracted backlog and $1.14 billion awarded backlog.
- Monitor gross margins and project mix, particularly in U.S. Regions and U.S. Federal.
- Confirm refinancing or repayment of the construction loans maturing in May and June 2017.
- Track operating cash flow, federal ESPC receivables and liabilities, and the extent to which financing inflows fund project construction.
- Assess funding for the planned $60 million to $70 million of remaining 2017 capital expenditures.
- Review covenant compliance and revolver availability as debt balances and project investments increase.
- Evaluate the effect of redeemable non-controlling interest allocations and HLBV accounting on attributable earnings.
- Confirm the eventual impact of revenue-recognition and lease-accounting standards upon adoption.