Business Context and Reporting Period
Ameresco, Inc. provides energy-efficiency solutions, renewable-energy plant construction and operations, photovoltaic equipment, and related operations and maintenance services in the United States, Canada, and Europe. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparisons to the same periods in 2010.
Revenue is recognized across four operating segments: U.S. federal, central U.S. region, other U.S. regions, and Canada. Results are affected by construction cycles, government procurement timing, weather, and seasonality; management states that the third quarter is typically stronger and the first quarter weaker.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $165.5 million, up 17.1% | $311.9 million, up 26.3% |
| Gross profit | $32.2 million, up 22.9% | $60.1 million, up 35.0% |
| Gross margin | 19.4%, versus 18.5% | 19.3%, versus 18.0% |
| Operating income | $13.4 million, up 11.2% | $21.7 million, up 48.6% |
| Operating margin | 8.1%, versus 8.5% | 6.9%, versus 5.9% |
| Net income | $8.8 million, up 14.6% | $14.1 million, up 57.1% |
| Diluted EPS | $0.19, versus $0.21 | $0.31, versus $0.24 |
Energy-efficiency revenue increased 22.8% in the second quarter and 30.9% for the first six months, driven by higher installation activity, including the Quantum acquisition completed in 2010. Renewable-energy revenue increased 2.9% in the quarter and 15.0% year to date. Renewable-energy gross margin improved to 25.5% in the quarter and 22.9% year to date, reflecting a greater contribution from small-scale infrastructure, integrated photovoltaic projects, and operations and maintenance.
Operating expenses increased 32.9% in the second quarter and 28.3% year to date. Salaries and benefits and project development costs rose substantially to support expansion and proposal activity. General and administrative expense benefited from the absence of a $2.1 million long-term-receivable write-down recorded in the 2010 periods.
The effective tax rate was 28.6% for both second quarters and 28.6% for the first six months of 2011, compared with 28.1% for the first six months of 2010. The filing attributes the lower-than-statutory rate primarily to energy-efficiency deductions and production tax credits.
Cash Flow and Liquidity
- Cash and cash equivalents were $59.8 million at June 30, 2011, compared with $44.7 million at December 31, 2010. Restricted cash was $9.5 million.
- Operating activities provided $1.6 million in the second quarter but used $24.0 million for the first six months, compared with $2.5 million provided in the second quarter and $15.5 million used in the first six months of 2010.
- Year-to-date operating cash usage was primarily associated with increases in accounts receivable, unbilled contract assets, inventory, and reductions in accounts payable and accrued expenses.
- Investing activities used $9.0 million in the second quarter and $9.8 million year to date, including project-asset investment, partially offset by $6.7 million of Section 1603 Treasury grants.
- Financing activities provided $37.9 million in the second quarter and $48.6 million year to date, primarily from the new term loan and other debt financing, as well as stock-option exercises.
Debt and Balance Sheet
Total assets increased to $660.6 million at June 30, 2011 from $584.4 million at December 31, 2010. Total stockholders’ equity increased to $219.3 million from $195.1 million.
Current and long-term debt totaled approximately $274.5 million at June 30, 2011, compared with approximately $207.1 million at year-end 2010. The increase primarily reflects the new $40.0 million term loan under the amended senior secured credit facility and a new $5.5 million project-related term loan.
On June 30, 2011, Ameresco amended and restated its senior secured credit facility. The facility includes a $60.0 million revolving facility, with a potential additional $25.0 million subject to lender approval, and a $40.0 million term loan. No revolving balance was outstanding at quarter end. The facility matures June 30, 2016 and requires a minimum rolling four-quarter EBITDA of $40.0 million. Management reported compliance with all financial and operational covenants.
Federal ESPC receivable financing totaled $183.4 million at June 30, 2011. This financing generally remains on the balance sheet until the related projects are completed and accepted by government customers. Construction and term loans totaled $51.1 million, generally bearing interest at rates from 3.5% to 8.7%.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, led by energy-efficiency projects and increased activity in other U.S. regions, including the contribution from Quantum.
- Gross margin improved in both the quarter and year-to-date period, particularly because of higher-margin renewable-energy activities and improved energy-efficiency installation margins.
- Operating expense growth outpaced quarterly revenue growth, primarily because of higher staffing and project-development spending.
- Year-to-date net income rose 57.1%, while diluted EPS rose to $0.31 from $0.24. Quarterly basic EPS declined to $0.21 from $0.56 because the comparable-period share counts were affected by the 2010 initial public offering, preferred-stock conversion, and option and warrant exercises.
- Operating cash flow remained negative year to date and deteriorated from the prior-year period despite higher earnings.
- Fully contracted backlog declined to approximately $507 million from $668 million at June 30, 2010, while awarded projects not yet under signed contracts increased to approximately $648 million from $465 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that available cash, revolver availability, and access to credit markets were expected to fund operations through 2012 and thereafter.
- Management expected renewable-energy installation revenue to continue declining through the second half of 2011 and possibly into the first quarter of 2012 as certain projects approached completion.
- Backlog conversion depends on construction timing, customer acceptance, government procurement cycles, and execution of contracts for awarded projects. Awarded projects do not generate revenue until customer contracts are signed.
- The company is exposed to fixed-price contract risk, project-cost estimates, customer acceptance, performance guarantees, subcontractor performance, interest-rate changes, and Canadian foreign-currency fluctuations.
- An ongoing customer dispute involves a 2009 default termination of a construction contract. Ameresco had approximately $4.0 million of claims outstanding at June 30, 2011, had recognized no revenue or profit on those claims, and recorded no additional accrual because management considered additional liability unlikely. A hearing was scheduled for July 1, 2012.
- Section 1603 Treasury grants totaled $6.7 million during the first six months. A prorated repayment may be required if qualifying properties are disposed of or cease to qualify within five years of being placed in service.
- Interest-rate swaps had a fair-value liability of approximately $4.0 million at June 30, 2011. The filing reports a $0.2 million year-to-date unrealized loss in accumulated other comprehensive income, net of tax.
- Ameresco acquired Applied Energy Group, Inc. on July 14, 2011. The filing does not provide purchase-price allocation or pro forma financial results for the acquisition.
- Management concluded that disclosure controls and procedures were not effective because of a continuing material weakness in internal control over financial reporting involving GAAP expertise, income-tax accounting, SEC reporting, staffing, and review procedures.
Important Facts for Investors to Verify
- Whether negative year-to-date operating cash flow improves as receivables, unbilled contract assets, and payables normalize.
- The timing and profitability of converting the $648 million of awarded projects into signed contracts and the sustainability of the $507 million contracted backlog.
- Compliance with the amended credit facility’s $40 million minimum rolling four-quarter EBITDA covenant and the company’s ability to service increased debt.
- Project completion and customer-acceptance timing for federal ESPC projects, which affects both revenue recognition and removal of related financing liabilities.
- The potential financial impact of the unresolved customer dispute and the terms and integration effects of the Applied Energy Group acquisition.
- Remediation of the material weakness in internal control and whether future filings contain accounting or reporting adjustments.