Ameresco, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
Ameresco provides energy-efficiency solutions, renewable-energy projects, energy assets, and operations and maintenance services across North America and Europe. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Reported segments are U.S. Regions, U.S. Federal, Canada, Non-Solar Distributed Generation, and All Other. Results are seasonal, with typically stronger revenue and operating income in the third and fourth quarters.
Financial performance and key metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $198.2 million | $197.0 million | $348.3 million | $364.4 million |
| Gross profit | $43.1 million | $42.8 million | $75.8 million | $78.2 million |
| Gross margin | 21.8% | 21.7% | 21.8% | 21.5% |
| Operating income | $13.1 million | $14.0 million | $19.6 million | $22.2 million |
| Net income | $8.5 million | $8.7 million | $11.4 million | $16.2 million |
| Net income attributable to common shareholders | $9.2 million | $8.7 million | $13.4 million | $15.7 million |
| Diluted EPS | $0.19 | $0.19 | $0.28 | $0.34 |
- Second-quarter revenue increased 0.6%, while six-month revenue declined 4.4% year over year.
- Second-quarter operating margin was 6.6%, compared with 7.1% in the prior-year quarter; six-month operating margin was 5.6%, compared with 6.1%.
- SG&A increased 4.4% in the quarter, primarily from higher salaries and benefits associated with increased headcount. Six-month SG&A was broadly unchanged.
- Income taxes were a $0.8 million provision in the quarter and a $1.1 million provision for the six-month period. The prior-year six-month period included a $1.5 million tax benefit, including a discrete Section 179D benefit.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was negative $109.3 million for the six months ended June 30, 2019, compared with negative $57.1 million in 2018. Working-capital investment, higher federal ESPC receivables, and contract assets were significant uses of cash.
- Investing cash flow was negative $50.7 million, including $46.5 million for energy assets, $2.8 million for property and equipment, and $1.3 million for acquisitions.
- Financing cash flow was positive $135.7 million, including $41.4 million of net senior secured credit-facility proceeds, $84.6 million of proceeds related to Federal ESPC projects and energy assets, and $19.3 million of net contributions from redeemable non-controlling interests.
- Cash, cash equivalents and restricted cash declined to $73.7 million at June 30, 2019, from $97.9 million at December 31, 2018. Cash and cash equivalents alone were $38.3 million.
- Total debt and financing lease liabilities were $285.2 million, including $54.4 million classified as current, compared with $253.9 million at December 31, 2018. Long-term debt and financing lease liabilities, net of deferred financing fees, were $224.0 million.
- The June 2019 amended credit facility increased revolving commitments from $85 million to $115 million, increased the term loan from $40 million to $65 million, extended maturity to June 2024, and increased the maximum funded-debt-to-EBITDA covenant ratio from 3.00 to 3.25. Availability under the revolving facility was $63.4 million.
- The company was not in compliance with certain financial covenants on one project-financing facility at June 30, 2019, but obtained a waiver from the lender.
- Management stated that cash, revolving-facility availability, and access to credit markets were expected to fund operations for the next twelve months and thereafter.
Material changes versus the prior comparable period
- U.S. Regions revenue declined 12.0% for the six-month period and segment income before taxes declined 76.7%, primarily because of the timing and phase of active projects.
- U.S. Federal revenue declined 7.5% for six months, while pretax income declined only 1.5% because of favorable project mix and lower operating expenses.
- Non-Solar DG revenue increased 17.0% for six months, but pretax income declined 3.3% as depreciation and interest costs increased with the growth of operating assets.
- All Other revenue increased 17.1% for six months and pretax income increased 270.4%, partly because of a $2.2 million gain from deconsolidating a variable interest entity.
- Canada’s six-month pretax loss improved to $0.05 million from $2.6 million, reflecting lower costs, lower interest expense, and favorable foreign-exchange effects.
- Backlog totaled approximately $1.695 billion at June 30, 2019, including $788.7 million of fully contracted backlog and $1.2365 billion of awarded but not yet signed projects. Approximately 29% of total backlog was expected to be recognized within twelve months. Twelve-month backlog was $431.4 million versus $354.7 million a year earlier.
- Assets in development increased to $518.0 million from $285.9 million a year earlier.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $31.6 million of operating lease right-of-use assets and $33.6 million of operating lease liabilities at adoption, with no income-statement or retained-earnings impact.
Guidance, outlook, risks and unusual items
- Management planned approximately $80 million to $100 million of additional 2019 capital expenditures, primarily for renewable-energy plants, and approximately $50 million to $60 million of additional project financings during the remainder of 2019.
- The filing does not provide a clear numerical revenue or earnings guidance range.
- Key execution risks include seasonal and construction-cycle fluctuations, lengthy sales and contracting cycles, government procurement and funding timing, customer contract termination or deferral rights, and the possibility that awarded backlog will not convert to signed contracts or revenue.
- Operating cash flow is materially affected by the structure of Federal ESPC arrangements: related project cash inflows are presented as financing cash flows while project expenditures are presented in operating cash flow.
- Contract assets increased to $120.7 million from $86.8 million at December 31, 2018, and accounts receivable increased to $109.3 million from $86.0 million, highlighting working-capital and collection exposure.
- Interest-rate swap liabilities were $6.1 million at June 30, 2019, and accumulated other comprehensive loss included a $2.8 million six-month unrealized hedge loss.
- Redeemable non-controlling interests increased to $32.0 million from $14.7 million, primarily reflecting $19.5 million of contributions during the six-month period.
- The company reported no material adverse legal proceedings and no material changes to the risk factors in its 2018 Form 10-K.
- In July 2019, the company closed on a $4.9 million solar photovoltaic project under its master lease agreement. In August 2019, the board increased the share-repurchase authorization to approximately $17.6 million; no shares were repurchased during the quarter.
Important facts for investors to verify
- Reconcile the negative operating cash flow with the company’s ESPC financing presentation, contract-asset growth, receivables, and planned capital expenditures.
- Review the waiver and ongoing compliance requirements for the project-financing covenant breach.
- Assess debt maturities, variable-rate exposure, interest-rate hedges, and available revolving-credit capacity.
- Evaluate the conversion risk and timing of the $1.2365 billion of awarded but unsigned projects within reported backlog.
- Monitor U.S. Regions project timing, U.S. Federal project mix, and the sustainability of Non-Solar DG and All Other growth.
- Consider the effect of tax credits, the prior-year Section 179D benefit, and other discrete tax items on earnings comparability.