Ameresco, Inc. 2018 Form 10-K Summary
Business context and reporting period
Ameresco provides energy efficiency, infrastructure, energy security, operations and maintenance, and renewable energy solutions in the United States, Canada and the United Kingdom. The filing covers the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016. The fourth quarter was seasonally strong, consistent with management’s statement that revenue and operating income are typically higher in the third and fourth quarters.
Ameresco owned and operated 87 small-scale renewable energy plants and solar installations at year-end 2018, with aggregate capacity exceeding 228 megawatt equivalents. Approximately 77% of revenue historically came from government entities, and the U.S. federal government represented 31.3% of 2018 revenue.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $787.1 million | $717.2 million | Up 9.8% |
| Gross profit | $173.6 million | $144.2 million | Up 20.4% |
| Gross margin | 22.1% | 20.1% | Up 2.0 percentage points |
| Operating income | $59.1 million | $36.6 million | Up 61.5% |
| Net income | $37.6 million | $33.5 million | Up 12.1% |
| Net income attributable to common shareholders | $38.0 million | $37.5 million | Up 1.3% |
| Diluted earnings per share | $0.81 | $0.82 | Down $0.01 |
| Cash flow from operations | $(53.2) million | $(135.6) million | Improved |
| Capital expenditures | $129.6 million | $88.4 million | Up 46.6% |
Revenue growth was led by U.S. Regions, up $44.1 million, and U.S. Federal, up $17.2 million. Gross-margin expansion primarily reflected higher-margin energy and incentive revenue from renewable gas assets. SG&A increased 6.5% to $114.5 million, mainly due to higher salaries and benefits. Other expenses rose to $16.7 million from $7.9 million, principally because of higher interest expense and unfavorable foreign-exchange movements.
Fourth-quarter 2018 revenue was $217.4 million, gross profit was $49.2 million, and net income attributable to common shareholders was $11.6 million. Comparable fourth-quarter 2017 figures were $211.1 million, $41.5 million, and $23.8 million, respectively; the 2017 comparison was affected by tax benefits and other items.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $61.4 million at December 31, 2018, compared with $24.3 million a year earlier. Cash, cash equivalents and restricted cash totaled $97.9 million.
- Total assets increased to $1.16 billion from $984.0 million, including energy assets of $460.0 million versus $356.4 million.
- Long-term debt and capital lease liabilities, net of current portions and deferred financing fees, were $219.2 million; total debt and capital lease liabilities before current portions and fees were $253.9 million.
- Federal ESPC liabilities were $288.0 million, supported by $294.0 million of related federal ESPC receivables. These balances are generally eliminated when projects are completed and accepted by the government.
- The senior secured facility included an $85.0 million revolving commitment and a $46.0 million term loan, maturing June 2020. Revolver availability was $72.2 million at year-end, before considering $11.1 million of outstanding letters of credit.
- Ameresco stated that it was in compliance with its senior credit facility covenants. However, it was not in compliance with certain covenants on two project-financing facilities; one waiver was obtained, while no waiver had been obtained for a facility with $4.0 million outstanding.
Material changes versus the prior comparable period
- Revenue increased 9.8%, while operating income increased 61.5% because of revenue growth, favorable project mix and higher-margin renewable gas activity.
- Canada weakened: revenue declined 11.0% to $39.0 million and the segment moved from $1.8 million of pretax income to a $2.7 million pretax loss.
- Non-solar distributed generation pretax income increased 65.3% to $13.4 million, driven by higher-margin energy and incentive revenue.
- Fully contracted backlog increased to $726.6 million from $572.5 million. Awarded but unsigned projects increased to $1.24 billion from $1.20 billion. Twelve-month backlog was $360.5 million.
- Total backlog under the Topic 606 disclosure was approximately $1.66 billion, with approximately 25% expected to be recognized during the next twelve months.
- The company invested $125.7 million in renewable energy assets and acquired twelve solar projects for approximately $72.9 million, with six additional projects under definitive agreement at year-end.
- Ameresco adopted ASC Topic 606 using the modified retrospective method, reducing beginning retained earnings by $4.5 million. The company reported that 2018 revenue would have been $2.8 million lower without the new standard, while net income would have been $0.3 million higher.
- The company adopted several other accounting updates, including derivatives and hedging guidance and restricted-cash cash-flow presentation. ASC 842 lease adoption occurred January 1, 2019, with expected increases in net lease assets of approximately $30.6 million to $33.8 million and net lease liabilities of approximately $32.4 million to $35.7 million.
Outlook, commentary, risks and unusual items
Management planned approximately $150 million to $200 million of 2019 capital expenditures, principally for renewable energy plants, and anticipated $100 million to $110 million of additional 2019 financing. The filing does not provide a formal revenue or earnings forecast.
- Operating cash flow remained negative because federal ESPC project expenditures are reported in operating cash flow while related investor advances are reported as financing cash flow. Federal ESPC receivables used $155.5 million of operating cash in 2018, while related project proceeds provided $158.2 million of financing cash.
- Revenue and profitability depend heavily on government procurement, appropriations, tax incentives, renewable energy credits, renewable identification numbers and other environmental attributes.
- Backlog and awarded projects are subject to customer termination or deferral, financing availability, contract execution, permitting and scope changes. Historically, approximately 90% of awarded projects converted to signed contracts, but future conversion is not assured.
- Projects carry construction, fixed-price, supplier, subcontractor, performance-guarantee, permitting, environmental and energy-output risks. Failure to meet ESPC performance commitments can require additional equipment, substitute savings measures or customer payments.
- Renewable assets may experience lower-than-expected output, volatile wholesale prices or expiring offtake agreements. A significant portion of earnings depends on the sale of RECs and other environmental attributes.
- Interest-rate exposure is managed through swaps, but the company remains exposed to variable rates, LIBOR transition risk, commodity prices and foreign-currency movements.
- Government concentration is material: the U.S. federal government accounted for 31.3% of 2018 revenue, and the largest 20 customers accounted for approximately 58.5%.
- The company reported no pending legal proceeding expected to have a material adverse effect. The independent auditor issued an unqualified opinion and concluded that internal controls over financial reporting were effective.
Most important facts for investors to verify
- Reconcile reported negative operating cash flow with federal ESPC financing inflows and assess the timing of project acceptance and liability release.
- Review the unresolved project-financing covenant breach involving approximately $4.0 million of debt and determine whether a waiver or other remediation was subsequently obtained.
- Evaluate the sustainability of the 22.1% gross margin, particularly the contribution from renewable gas incentives and environmental attributes.
- Validate the conversion, timing and collectability assumptions underlying the $726.6 million of signed backlog and $1.24 billion of awarded but unsigned projects.
- Assess the funding plan for the planned $150 million to $200 million of 2019 capital expenditures and the company’s exposure to refinancing requirements at the June 2020 senior-facility maturity.
- Monitor government appropriations, tax credits, renewable-energy incentives, REC and RIN prices, and changes to federal energy-service contracting rules.
- Consider the impact of ASC 842 adoption, project debt, non-recourse subsidiary obligations, redeemable non-controlling interests and future put-option obligations on leverage and liquidity.