Ameresco, Inc. quarterly report, Q3 FY2014

Ameresco, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2014. The interim financial statements are unaudited. Ameresco provides energy-efficiency, renewable-energy, operations and maintenance, enterprise energy-management, consulting and photovoltaic solutions across the United States, Canada and Europe.

Financial performance and position

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Revenue	$168.9 million	$161.6 million	$412.2 million	$398.0 million
Gross profit	$35.0 million	$30.1 million	$80.5 million	$75.0 million
Gross margin	20.7%	18.6%	19.5%	18.8%
Operating income	$9.2 million	$7.6 million	$6.2 million	$3.6 million
Net income	$7.3 million	$4.5 million	$1.7 million	$0.8 million
Net margin	4.3%	2.8%	0.4%	0.2%
Diluted EPS	$0.16	$0.10	$0.04	$0.02
Adjusted EBITDA	$15.8 million	$13.6 million	$25.3 million	$21.2 million

Q3 revenue increased 4.5%; nine-month revenue increased 3.6%.
Q3 net income increased 60.4%, while nine-month net income increased 105.8%, although absolute nine-month profitability remained low.
Reported operating income benefited from improved gross margins, partly offset by higher selling, general and administrative expenses and other expenses.
Cash and cash equivalents were $23.5 million at September 30, 2014, versus $17.2 million at December 31, 2013. Restricted cash was $13.5 million.
Total assets were $634.4 million, compared with $604.7 million at year-end 2013. Stockholders’ equity was $281.2 million.
Accounts receivable increased to $92.7 million from $82.0 million, while the Federal ESPC receivable increased to $65.3 million from $44.3 million.

Cash flow, debt and liquidity

Operating activities used $12.1 million in the first nine months of 2014, an improvement from $45.3 million used in the comparable 2013 period.
Investing activities used $28.3 million, including $16.5 million for project assets and $13.9 million for acquisitions.
Financing activities provided $45.3 million, including $32.9 million of proceeds related to Federal ESPC projects and $20.0 million of revolver borrowings, partially offset by $13.9 million of debt repayments.
Management’s adjusted free cash flow was $19.2 million, compared with negative $26.3 million in the prior-year period. This non-GAAP measure adds Federal ESPC project proceeds to operating cash flow and subtracts property and equipment purchases.
Long-term debt, including current maturities, was approximately $122.1 million at September 30, 2014. Federal ESPC liabilities were $64.8 million, and construction and term loans totaled approximately $80.6 million on a principal basis.
The senior secured facility included $20.0 million outstanding under the revolver and $21.4 million under the term loan. The facility matures June 30, 2016. The company was in compliance with all reported debt covenants.
Management stated that available cash, revolver availability and access to credit markets were expected to fund operations through 2014 and thereafter.

Material changes versus the prior comparable period

Revenue growth was driven by the U.S. Federal, Canada, Small-Scale Infrastructure and acquisition-related businesses, while U.S. Regions revenue declined.
U.S. Federal revenue rose 39.1% for the nine-month period, principally because two large energy-efficiency projects began generating revenue in the second quarter.
U.S. Regions revenue declined 13.9% for nine months because of project timing and lower construction revenue from small-scale renewable-energy plants.
Canada revenue increased 16.4%, but its pretax loss widened to $3.4 million from $2.1 million because of an unfavorable mix of lower-margin projects.
Small-Scale Infrastructure revenue increased 29.6% and pretax income increased 91.8%, primarily because more plants were fully operational.
Gross margin improved 70 basis points for the nine-month period, partly due to favorable project mix and a $1.0 million recovery related to a customer warranty issue. First-quarter weather-related fuel and operating costs at the Savannah River Site partially offset the improvement.
SG&A increased 4.1% for nine months, including acquisition-related expenses and first-quarter severance charges. Unallocated corporate costs increased 20.5%.
Other expenses increased $2.5 million for nine months, primarily due to foreign-exchange losses and higher net interest expense.
The effective tax rate was unusually favorable: negative 40.8% for nine months, compared with 22.8% in the prior-year period, primarily reflecting investment and production tax credits.
In August 2014, Ameresco acquired substantially all assets of UK-based Energyexcel LLP for $9.1 million. The preliminary allocation included $5.2 million of goodwill and $4.8 million of intangible assets.
Fully contracted backlog increased to approximately $400.6 million from $366.0 million at September 30, 2013. Awarded but unsigned projects totaled approximately $1.04 billion, slightly below the prior-year level.

Outlook, risks and unusual items

Management expected 2014 capital expenditures of $20 million to $25 million, principally for renewable-energy plants.
The business is seasonal: third-quarter revenue and operating income are typically stronger, while the first quarter is typically weaker. Government procurement cycles and construction timing can materially affect results.
Federal ESPC financing materially affects reported cash flow. Advances are presented as financing cash inflows, while related project expenditures are reflected in operating cash flow; therefore reported operating cash flow may not reflect the associated project revenue inflows.
Ameresco remained subject to fixed-price contract, project execution, subcontractor, customer acceptance, financing, interest-rate, foreign-currency and government procurement risks. Contract estimates, project development costs, tax positions, derivatives and impairment assessments require significant judgment.
The company may owe additional consideration of up to £4.5 million to former EEX owners if performance milestones are met through December 31, 2018; the amount is treated as compensation for post-combination services.
A solar-module tariff contingency could result in additional anti-dumping duties of up to approximately $2.9 million. The company had established a reserve for its current estimate of exposure.
Gross unrecognized tax benefits declined to $5.1 million from $9.2 million after $4.1 million of settlements with tax authorities.
The company disclosed that its disclosure controls and procedures were not effective because a previously identified material weakness in internal control over financial reporting remained. Remediation continued, but additional work was required.
No material changes were reported to the risk factors in the 2013 Form 10-K, and management did not identify a material adverse effect from pending legal proceedings.
New revenue-recognition guidance under ASU 2014-09 was scheduled to become effective for public-company annual periods beginning after December 15, 2016; the company was assessing its impact.

Most important facts for investors to verify

Whether U.S. Regions weakness and Canada losses improve as project timing and project mix normalize.
Conversion of the $400.6 million fully contracted backlog and the likelihood that the $1.04 billion awarded backlog becomes signed contracts.
Liquidity, revolver availability and compliance with the $24.0 million minimum EBITDA covenant for the September 2014 quarter and the $27.0 million requirement thereafter.
Cash conversion after considering Federal ESPC financing presentation, Federal ESPC receivable growth and the $64.8 million ESPC liability.
Actual 2014 capital expenditures and the performance of renewable-energy projects supporting project-level debt.
Resolution of the solar tariff exposure and potential EEX contingent consideration.
Progress and eventual remediation of the material weakness in internal control over financial reporting.
Sustainability of the unusually favorable effective tax rate and the contribution of tax credits to earnings.