Ameresco, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Ameresco is a clean technology integrator providing energy-efficiency, renewable-energy, energy-storage, operations and maintenance, alternative-fuel, integrated-PV and consulting solutions. The filing covers the three and six months ended June 30, 2022, compared primarily with the corresponding 2021 periods. The financial statements are unaudited.
Reportable segments were U.S. Regions, U.S. Federal, Canada, Alternative Fuels and All Other. Effective January 1, 2022, the company changed its internal organization and reclassified prior-period segment information.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Year-over-year change | Six months ended June 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $577.4 million | +110.8% | $1,051.4 million | +99.8% |
| Gross profit | $81.3 million | +52.5% | $149.7 million | +49.3% |
| Gross margin | 14.1% | Down from 19.5% | 14.2% | Down from 19.1% |
| Operating income | $43.1 million | +100.8% | $71.7 million | +80.5% |
| Operating margin | 7.5% | Down from 7.8% | 6.8% | Down from 7.6% |
| Net income attributable to common shareholders | $32.2 million | +135.9% | $49.6 million | +99.8% |
| Diluted EPS | $0.61 | Up from $0.26 | $0.93 | Up from $0.48 |
Project revenue increased $292.9 million, or 149%, in the second quarter and $505.6 million, or 149%, for the first six months, primarily reflecting project timing and activity on the Southern California Edison battery energy storage system project. The lower gross margin reflected the larger contribution from this lower-margin project.
SG&A was $38.2 million in the second quarter and $77.9 million for the first six months, increasing 20.0% and 28.9%, respectively. Increases reflected higher headcount, salaries and benefits, stock-based compensation and insurance costs. Stock-based compensation expense was $7.2 million for the six months, compared with $2.1 million in 2021.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was negative $307.8 million for the six months ended June 30, 2022, compared with negative $96.5 million in 2021. The decline was driven primarily by a $358.6 million increase in costs and estimated earnings in excess of billings, including the SCE project, and higher accounts receivable.
- Investing cash flow was negative $132.3 million, including $124.9 million of capital investment in new energy assets and $4.8 million for major maintenance.
- Financing cash flow was $465.7 million, including $307.9 million of long-term debt proceeds, $120.0 million of net borrowings under the senior secured revolving facility and $121.7 million of proceeds from Federal ESPC projects.
- Cash, cash equivalents and restricted cash totaled $111.3 million at June 30, 2022, compared with $87.1 million at December 31, 2021. Cash and cash equivalents alone were $67.6 million.
- Total debt and financing lease liabilities were $798.0 million, compared with $471.5 million at year-end 2021. Senior secured revolving debt was $165.0 million, senior secured term loans were $275.0 million and non-recourse debt was included within the remaining balance.
- Only $19.6 million was available under the senior secured revolving facility at June 30, 2022. The amended credit facility increased total commitments to $495.0 million, extended certain maturities to March 2025 and added a delayed-draw term loan of up to $220.0 million.
- Management stated that cash, working capital, revolver availability, potential incremental revolver capacity, and access to debt and equity markets should be sufficient to fund operations through at least August 2023.
- Contract assets, consisting primarily of costs and estimated earnings in excess of billings, increased to $663.8 million from $306.2 million at December 31, 2021. Accounts receivable increased to $208.0 million from $162.0 million.
Material changes versus the prior comparable period
- Revenue nearly doubled for the first six months, driven primarily by project revenue and the SCE battery-storage contract.
- Profitability increased substantially in dollars, but gross and operating margins declined because of the mix of lower-margin SCE project revenue.
- Operating cash use increased materially as revenue recognized exceeded billings on major projects and receivables expanded.
- Debt increased by approximately $326.5 million from December 31, 2021, supporting project investment and working-capital needs.
- U.S. Regions revenue increased 243.5% for the first six months, while U.S. Federal revenue declined 8.0%, primarily because of project timing and supply-chain delays.
- Backlog at June 30, 2022 included $1.0 billion of fully contracted project backlog, $1.8 billion of awarded but unsigned projects and $1.2 billion of fully contracted O&M backlog. The company reported contracted backlog of $2.2 billion in its contract-balances disclosure, reflecting a different backlog presentation.
Guidance, outlook, risks and unusual items
The SCE agreement covers three battery-storage systems with aggregate capacity of 537.5 MW and an engineering, procurement and construction price of approximately $892 million, including two years of O&M revenue. Because of COVID-related supplier disruptions, transportation constraints, supply-chain issues and permitting challenges, Ameresco expected 200 to 300 MW to be in service in September 2022 and substantial completion of all projects by the end of 2022, rather than by the contractual August 1, 2022 guaranteed completion date.
Failure to meet contractual milestones could result in liquidated damages of up to $89 million and, under certain circumstances, termination rights for SCE. Ameresco submitted a force majeure notice and continued discussions with SCE regarding deadline extensions, price adjustments and relief from liquidated damages.
Management expected supply-chain challenges to continue through the remainder of 2022. The company planned approximately $90 million to $140 million of additional capital expenditures during the remainder of 2022 and approximately $140 million to $190 million of additional project financings.
Other risks include COVID-19 effects, component shortages, inflation, higher interest rates, foreign-exchange exposure, seasonality, government procurement and incentive changes, solar-panel trade investigations, project execution, customer payment timing and the ability to convert awarded backlog into signed contracts.
At June 30, 2022, the company was in default on one non-recourse term loan with a $3.7 million balance because of a debt-service-coverage-ratio failure; a waiver was received in July 2022. A customer legal proceeding was settled during the first six months, with the net settlement paid during the period. Management did not expect other existing legal matters to have a material adverse effect.
The company implemented a new enterprise resource planning system during the first six months and stated that disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether the SCE battery-storage projects achieved substantial completion by year-end 2022 and the final treatment of force majeure claims, liquidated damages and contract-price adjustments.
- The collectability and timing of the $663.8 million of contract assets and the $208.0 million of accounts receivable.
- Whether operating cash flow improves as major projects are billed and completed.
- Compliance with credit-facility covenants, available borrowing capacity and refinancing or renewal of non-recourse facilities that matured or expired after June 30, 2022.
- The effect of higher debt, interest rates, inflation and supply-chain costs on margins and liquidity.
- The conversion rate and timing of the $1.8 billion of awarded but unsigned project backlog.
- Potential obligations related to the SCE agreement, legal proceedings, contingent consideration and other commitments.