AMRC

Ameresco, Inc. 10-Q Summary: Period Ended June 30, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, for Ameresco, Inc., a Delaware corporation providing energy efficiency solutions and renewable energy services in North America. The company operates through four segments: U.S. Federal, Central U.S., Other U.S. Regions, and Canada. The financial statements are unaudited. Notably, the company completed its Initial Public Offering (IPO) on July 27, 2010, shortly after the reporting period.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 58.0% ($51.9 million) for the quarter and 51.7% ($84.1 million) for the six months compared to the prior year periods. This was driven by higher volumes in both energy efficiency and renewable energy projects.
• Profitability: Net income surged 348.0% for the quarter and 320.2% for the six months. Operating income increased significantly due to higher gross profits, partially offset by increased operating expenses.
• Unusual Items: The company recorded a $2.1 million non-cash charge in the second quarter related to the unexpected prepayment of a long-term receivable acquired in 2003. This charge was included in general, administrative, and other expenses.
• Derivatives: Unlike the prior year, which included unrealized gains on derivatives in net income, the company designated all derivative instruments as hedges as of April 1, 2010. Consequently, unrealized gains/losses are now recorded in Other Comprehensive Income (Loss), resulting in a net expense of $1.2 million for the quarter in "Other income (expense), net."

Guidance, Outlook, and Risks

• Backlog: As of June 30, 2010, the company reported a backlog of approximately $668 million under signed contracts and an additional $465 million in awarded but unsigned projects, expected to be recognized between 2010 and 2013.
• Capital Structure: Following the IPO, the company implemented a dual-class capital structure. Proceeds were used to repay $26.9 million of its revolving credit facility, $3.1 million of a subordinated note, and $5.0 million of a term loan.
• Internal Controls: Management identified a material weakness in internal control over financial reporting due to a lack of personnel with sufficient expertise in complex GAAP, income taxes, and SEC reporting requirements. Remediation plans involve hiring additional technical staff.
• Legal Proceedings: A dispute with a customer regarding a default termination and hazardous material remediation remains ongoing. The company has claims of approximately $3.0 million outstanding but has not recognized revenue or profit on these claims.
• Seasonality: The company notes that revenue and operating income are typically higher in the third quarter and lower in the first quarter due to construction cycles and government procurement timing.

Investor Verification Checklist

• Internal Control Remediation: Verify the progress of hiring and training to address the material weakness in financial reporting controls.
• Debt Covenants: Confirm compliance with financial covenants, particularly the minimum EBITDA requirement of $20 million on a rolling four-quarter basis for the revolving credit facility.
• Backlog Realization: Monitor the conversion rate of the $465 million in awarded (unsigned) projects into signed contracts.
• Customer Concentration: Note that one customer (U.S. Department of Energy, Savannah River Site) accounted for 12.6% of Q2 revenue and 13.2% of YTD revenue.
• Legal Contingency: Track the resolution of the $3.0 million claim dispute regarding the default termination and hazardous materials.