Ameresco, Inc. Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency, renewable-energy, energy-management, operations and maintenance, and photovoltaic solutions in North America and Europe. The filing covers the unaudited three and six months ended June 30, 2017, compared with the same periods in 2016.
Revenue is recognized principally from percentage-of-completion construction contracts, energy-asset sales, renewable-energy output, maintenance services, consulting, and photovoltaic equipment and systems. Results are seasonal, with revenue and operating income typically higher in the third and fourth quarters.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $166.7 million | $162.6 million | $301.3 million | $296.4 million |
| Gross profit | $35.4 million | $31.9 million | $61.3 million | $59.5 million |
| Gross margin | 21.2% | 19.6% | 20.4% | 20.1% |
| Operating income | $8.8 million | $4.7 million | $8.2 million | $6.5 million |
| Net income | $6.0 million | $2.1 million | $4.2 million | $2.8 million |
| Net income attributable to common shareholders | $5.8 million | $2.0 million | $5.2 million | $3.0 million |
| Diluted EPS | $0.13 | $0.04 | $0.11 | $0.07 |
For the quarter, revenue increased 2.5% and operating margin improved to 5.3% from 2.9%. For the first six months, revenue increased 1.6% and operating margin improved to 2.7% from 2.2%. Other expenses increased year to date primarily because of higher interest expense.
Cash and cash equivalents were $27.1 million at June 30, 2017, compared with $20.6 million at December 31, 2016. Restricted cash was $16.6 million. Operating activities used $51.4 million during the first six months, while investing activities used $52.3 million, including $51.4 million for energy assets. Financing activities provided $110.4 million, resulting in a $6.5 million increase in cash.
Total assets were $875.9 million, compared with $797.3 million at year-end 2016. The federal ESPC receivable increased to $221.7 million from $158.2 million, while the corresponding federal ESPC liability increased to $197.7 million from $133.0 million.
Long-term debt and capital lease liabilities totaled $195.0 million, including $22.3 million classified as current. The senior secured facility consisted of a $75.0 million revolver and a $30.0 million term loan; $28.2 million was drawn on the revolver and $25.5 million was outstanding under the term loan. The company reported $22.9 million of revolver availability and compliance with all applicable covenants. Aggregate project-financing principal was approximately $123.7 million.
Material Changes Versus the Prior Comparable Period
- U.S. Federal revenue increased 37.1% in the quarter and 30.9% year to date, making it the primary growth driver. U.S. Federal pretax income increased 94.5% in the quarter and 30.7% year to date.
- U.S. Regions revenue declined 13.6% in the quarter and 8.6% year to date. The segment reported a six-month pretax loss of $0.2 million versus income of $4.8 million in the prior year.
- Canada revenue declined 31.9% in the quarter and 34.0% year to date following completion of a significant project, but the segment returned to pretax profitability. The prior-year quarter included $1.9 million of bad-debt expense associated with restructuring efforts.
- Gross margin improved primarily because of increased energy-asset revenue and a more favorable mix of Canadian projects.
- SG&A declined 1.8% in the quarter, partly because the prior-year period included restructuring-related charges, but was essentially flat for the six-month period.
- The estimated annual effective tax rate was 15.1% for the quarter and 9.0% year to date, compared with 26.7% and 26.4%, respectively, in the prior-year periods. The change primarily reflected investment tax credits and revisions to prior-year Section 179D tax estimates.
- Fully contracted backlog rose to approximately $631.4 million from $435.1 million, while 12-month backlog rose to $380.1 million from $283.7 million. Awarded but not yet contracted projects declined to $1.0135 billion from $1.1160 billion.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash, revolver availability, and access to credit markets are expected to fund operations through August 9, 2018 and thereafter. Management planned approximately $25 million to $30 million of additional capital expenditures, principally for renewable-energy plants, during the remainder of 2017.
In June 2017, the company formed an additional investment fund for renewable-energy projects. The fund is consolidated as a variable-interest entity, and the investor’s interest is recorded as redeemable non-controlling interest. Management cautioned that HLBV allocations can create significant quarter-to-quarter volatility in net income attributable to common shareholders. The company expected to record the redeemable non-controlling interest related to the June transaction in the third quarter.
During the quarter, the company sold four solar photovoltaic projects under sale-leaseback arrangements for $12.7 million and extended the related funding agreement through June 30, 2018. Approximately $51.0 million remained available under the commitment at quarter-end.
Operating cash flow was substantially negative because increases in federal ESPC receivables consumed $72.8 million. The company explained that related investor advances are presented as financing inflows rather than operating inflows until federal customer acceptance, which materially affects reported operating cash flow.
Key risks include project execution and cost-estimation risk, long and variable sales and government-contracting cycles, customer collectability, dependence on federal programs and incentives, seasonal revenue fluctuations, interest-rate exposure, debt covenant compliance, refinancing and sale-leaseback availability, and the potential volatility from consolidated investment funds. The company reported no material changes to the risk factors in its 2016 Form 10-K and no pending legal matter expected to have a material adverse effect.
The company adopted ASU 2016-09 in the first quarter of 2017, recording a $4.0 million deferred tax asset and corresponding increase to retained earnings. It expected to adopt the new revenue-recognition standard in the first quarter of 2018 using the modified retrospective approach and did not expect a material impact based on its preliminary evaluation.
Important Facts for Investors to Verify
- Whether the substantial backlog and awarded-project pipeline convert to signed contracts and revenue within expected periods.
- The sustainability of the U.S. Federal segment’s growth and the recovery of U.S. Regions profitability.
- The timing and collectability of the $221.7 million federal ESPC receivable and related customer acceptance milestones.
- Whether negative operating cash flow and planned capital expenditures remain adequately funded through project financing, ESPC advances, sale-leasebacks, and revolver availability.
- Debt maturities, refinancing assumptions, variable-rate exposure, and continued compliance with the 2.75-to-1.0 funded-debt-to-EBITDA and 1.5-to-1.0 debt-service-coverage covenants.
- The effect of redeemable non-controlling interest allocations and HLBV accounting on future common-shareholder earnings.
- The impact of tax credits and other energy-related incentives on the unusually low 2017 effective tax rate.
- Progress toward the planned 2018 adoption of the new revenue standard and any changes to the company’s preliminary conclusion that the impact will not be material.