Ameresco, Inc. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Ameresco provides energy-efficiency services, renewable-energy development and operations, photovoltaic products, and related operations and maintenance services across North America. The filing covers the fiscal year ended December 31, 2012, with restated comparative information for 2011 and 2010. Results are reported across U.S. federal, central U.S. region, other U.S. regions, Canada, and centrally managed activities.
The company served more than 1,000 customers in 2012, operated 65 offices, and employed 922 people. More than 80% of revenue historically came from federal, state, provincial, or local government entities.
Financial performance and liquidity
| Metric | 2012 | 2011, restated | Change |
|---|---|---|---|
| Revenue | $631.2 million | $728.2 million | Down 13.3% |
| Gross profit | $128.1 million | $135.0 million | Down 5.1% |
| Gross margin | 20.3% | 18.5% | Up 180 basis points |
| Operating income | $28.7 million | $50.7 million | Down 43.5% |
| Operating margin | 4.5% | 7.0% | Down approximately 250 basis points |
| Net income | $18.4 million | $33.4 million | Down 45.1% |
| Diluted EPS | $0.40 | $0.75 | Down 46.7% |
| Adjusted EBITDA | $52.4 million | $67.6 million | Down 22.5% |
Energy-efficiency revenue declined 18.6% to $449.0 million, while renewable-energy revenue increased 3.0% to $182.2 million. Revenue from operations and maintenance, energy-supply contracts, solar, and other product and service sales was $174 million, compared with $130 million in 2011.
Net cash provided by operating activities was $87.5 million, compared with $30.1 million in 2011. Investing cash outflow was $49.0 million, including $47.2 million for renewable-energy project assets and $4.0 million for the FAME acquisition. Financing cash outflow was $1.8 million. Cash and cash equivalents increased to $63.3 million from $26.3 million.
Capital expenditures were $44.9 million, and management expected approximately $25.0 million of 2013 capital expenditures, principally for new renewable-energy plants. Management stated that cash, revolving-credit availability, and access to credit markets were expected to fund operations through 2014 and thereafter.
At December 31, 2012, total debt was approximately $214.4 million, including $93.0 million of federal ESPC receivable financing, $88.6 million of construction and term loans, and $32.9 million outstanding under the senior secured term loan. The $60 million revolving facility had no balance outstanding. The company was in compliance with its financial and operating covenants.
Material changes versus the prior comparable period
- Total revenue fell primarily because awarded projects took longer to convert into signed contracts. Federal fiscal uncertainty and greater customer scrutiny of spending and project financing affected federal, municipal, commercial, and other customers.
- U.S. federal segment revenue declined 49.4% to $73.5 million, including a $42.5 million reduction related to completion of the Savannah River construction project and fewer projects entering construction.
- Canada segment revenue declined 43.1% to $60.6 million, and the segment recorded a pretax loss of $4.2 million versus pretax income of $2.0 million in 2011.
- Other U.S. regions revenue declined 2.2% to $262.2 million, while central U.S. region revenue increased 1.7% to $87.8 million.
- Gross margin improved because of higher-margin projects, project closeouts, and contributions from acquired offerings, but operating expenses increased 17.9% to $99.5 million. Salaries and benefits rose 25.9%, reflecting acquisitions, six new offices, and increased staffing.
- Backlog under signed contracts declined to approximately $367 million from $478 million. Awarded projects without signed contracts increased to approximately $1.1 billion from $741 million. Awarded projects do not generate revenue until contracts are executed.
- Ameresco acquired FAME for approximately $4.5 million in cash, expanding infrastructure asset-planning and software services in western Canada.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected the unusually prolonged sales-cycle disruption to continue into 2013. No quantitative revenue or earnings guidance was provided in the filing text.
- The filing contains a restatement arising from an incorrectly applied shortcut method for a March 2010 interest-rate swap. The adjustment affected noncash, non-operating derivative gains and losses and required restatement of 2011, 2010, and historical quarterly information. Management stated that cash flows, adjusted EBITDA, debt covenant calculations, operating income, and total stockholders’ equity were not affected.
- Management recorded a $1.0 million noncash goodwill impairment charge related to the Canada reporting unit.
- Ameresco may owe up to approximately $3.3 million in combined anti-dumping and countervailing duties on certain solar modules containing Chinese-manufactured cells, although the ultimate amount remained uncertain. The company stopped importing affected modules in July 2012.
- Federal, state, provincial, and local government demand, appropriations, procurement rules, energy-efficiency incentives, tax credits, and renewable-energy programs materially influence revenue and project economics.
- Government contracts may be terminated or modified, and awarded projects may not convert to signed contracts or may be delayed, reduced, or canceled. Long sales cycles and seasonal construction patterns can cause substantial quarterly volatility.
- Energy-efficiency contracts contain performance commitments that may require remediation, substitute measures, or customer payments if projected savings are not achieved. Historical payments and costs under these commitments totaled less than $100,000 through December 31, 2012.
- Project debt, interest-rate exposure, foreign-currency exposure, construction execution, renewable-resource availability, permitting, supplier and subcontractor performance, customer credit, and access to bonding and letters of credit are significant risks.
- The company identified two material weaknesses in internal control over financial reporting: insufficient accounting personnel and ineffective review procedures, and inadequate controls over income-tax accounting and disclosure. Management and the auditor concluded that internal controls were not effective as of December 31, 2012.
- The company had approximately $4.9 million of gross unrecognized tax benefits at year-end, and U.S. federal tax returns for 2009 through 2011 were under audit, according to the risk-factor disclosure.
- The company does not expect to pay cash dividends in the foreseeable future. Class B shares carry five votes per share, and George P. Sakellaris and affiliates controlled approximately 79% of combined voting power.
Most important facts for an investor to verify
- Whether awarded projects convert to signed contracts and whether fully contracted backlog stabilizes or continues to decline.
- Whether government fiscal uncertainty and extended approval processes continue to suppress federal, municipal, commercial, and Canadian revenue.
- Progress in remediating the two material weaknesses and whether future filings require additional restatements or control-related disclosures.
- The final amount, if any, of solar-module tariff liabilities and the company’s ability to protect solar margins.
- Compliance with the $40 million minimum rolling four-quarter EBITDA covenant and other debt restrictions as project debt increases.
- Cash conversion, restricted cash requirements, federal ESPC receivable financing, and the funding needs of renewable-energy construction.
- Performance of the Canada business, including goodwill impairment risk and the integration and contribution of FAME.
- Whether gross-margin improvement is sustainable after project closeouts and whether operating expenses can be aligned with revenue.