Ameresco, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Ameresco provides energy-efficiency solutions, renewable-energy projects, operations and maintenance services, energy-asset power sales, and photovoltaic equipment in the United States, Canada, and Europe. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Results are seasonally weaker in the first quarter because of weather, construction cycles, educational-facility schedules, and government procurement timing.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $150.1 million | $167.4 million | Down 10.3% |
| Gross profit | $32.6 million | $35.5 million | Down 8.0% |
| Gross margin | 21.7% | 21.2% | Up 0.5 percentage points |
| Operating income | $6.5 million | $8.3 million | Down 20.8% |
| Operating margin | 4.4% | 4.9% | Down 0.5 percentage points |
| Net income | $2.9 million | $7.5 million | Down 61.7% |
| Net income attributable to common shareholders | $4.1 million | $7.0 million | Down 40.6% |
| Diluted EPS | $0.09 | $0.15 | Down $0.06 |
| Operating cash flow | $(58.1) million | $(37.1) million | Greater use of cash |
| Investing cash flow | $(26.1) million | $(35.2) million | Lower use of cash |
| Financing cash flow | $47.5 million | $84.1 million | Lower inflow |
Cash, cash equivalents, and restricted cash totaled $61.4 million at March 31, 2019, compared with $97.9 million at December 31, 2018. Cash and cash equivalents were $25.5 million, with $35.9 million of restricted cash. Operating cash flow was affected by a $27.0 million increase in Federal ESPC receivables, working-capital investment, and a $41.0 million reduction in accounts payable and accrued liabilities. Management stated that cash on hand, revolving-credit availability, and access to credit markets are expected to fund operations for the next twelve months and thereafter.
Total debt and financing lease liabilities were $259.9 million at March 31, 2019, including $55.7 million classified as current. Long-term debt and financing lease liabilities, net of current maturities and deferred financing fees, were $197.0 million. The senior secured credit facility balance was $53.0 million and had a June 2020 maturity. Federal ESPC liabilities were $322.0 million, supported by a corresponding Federal ESPC receivable of $310.9 million.
Material changes versus the prior comparable period
- Revenue declined $17.3 million, primarily from lower U.S. Regions revenue of $19.1 million, lower U.S. Federal revenue of $4.7 million, and lower Canada revenue of $1.8 million. These declines were partly offset by higher Non-Solar DG revenue of $3.1 million and All Other revenue of $5.2 million.
- Gross margin improved because of project timing in the U.S. Federal segment and higher-margin renewable-gas energy and incentive revenue in Non-Solar DG.
- U.S. Regions moved from $4.6 million of pretax income to a $0.3 million pretax loss, primarily because of lower project revenue recognized during the quarter.
- Net income declined partly because Q1 2018 included a substantial tax benefit related to the 2017 Section 179D deduction. The Q1 2019 tax provision was $0.3 million versus a $2.8 million tax benefit in Q1 2018.
- A $2.2 million gain from deconsolidating a variable-interest entity benefited Q1 2019 operating results and All Other segment pretax income.
- The company adopted the new lease standard on January 1, 2019, recording $31.6 million of operating lease right-of-use assets and $33.6 million of operating lease liabilities, with no income-statement or retained-earnings impact at adoption.
- The company completed a $1.3 million acquisition of a Massachusetts solar operations and maintenance firm and acquired three solar projects for $2.5 million. It also had a definitive agreement to acquire four additional solar projects for $4.6 million.
Backlog, outlook, risks, and unusual items
- Total backlog was approximately $1.675 billion at March 31, 2019. Fully contracted backlog was $753.6 million, awarded but not yet contracted projects were $1.283 billion, and 12-month fully contracted backlog was $389.3 million. Approximately 27% of total remaining performance obligations was expected to be recognized within twelve months.
- Assets in development increased to $549.3 million from $221.4 million at March 31, 2018.
- Management planned approximately $130 million to $180 million of 2019 capital expenditures, principally for renewable-energy plants, and approximately $100 million to $110 million of additional project financings during the remainder of 2019.
- Operating cash flow is not directly comparable with earnings because Federal ESPC financing advances are reported as financing inflows while related project expenditures are reported in operating cash flow. This accounting presentation contributed materially to the reported operating cash outflow.
- Key risks include seasonality; delays or cancellations in government procurement and customer projects; the long sales cycle for awarded projects; contract-cost and project-estimate risk; reliance on financing availability; fluctuations in renewable-energy incentives and tax credits; interest-rate, commodity-price, and foreign-currency exposure; and potential volatility from redeemable non-controlling interests accounted for under the HLBV method.
- The company reported no material changes to the risk factors in its 2018 Form 10-K, no material adverse legal proceedings, and no off-balance-sheet arrangements as defined by SEC rules.
- Contingent consideration liabilities totaled approximately $1.0 million, and unrecognized tax benefits totaled approximately $1.6 million at March 31, 2019.
Important facts for investors to verify
- Whether project timing in U.S. Regions and U.S. Federal reverses in subsequent quarters and whether backlog converts as expected.
- The sustainability of improved gross margins, particularly the contribution from renewable-gas assets and incentive revenue.
- Cash conversion, working-capital requirements, and the effect of Federal ESPC receivables on operating cash flow.
- Funding for the planned $130 million to $180 million of capital expenditures and the availability and terms of additional project financing.
- Debt maturities, revolving-credit availability, variable-rate exposure, and compliance with applicable financing covenants.
- The timing and economics of the four additional solar-project acquisitions and the company’s ability to place new energy assets into service.
- The effect of renewable-energy tax credits, production levels, and other government incentives on the effective tax rate and earnings.