Ameresco, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Ameresco provides energy-efficiency solutions, renewable-energy project construction and operation, photovoltaic equipment, and related operations and maintenance services in the United States, Canada and Europe. This unaudited quarterly report covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Results are seasonal, with revenue and operating income typically stronger in the third quarter and weaker in the first quarter.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $161.6 million | $163.9 million | $398.0 million | $474.6 million |
| Gross profit | $30.1 million | $34.8 million | $75.0 million | $95.2 million |
| Gross margin | 18.6% | 21.2% | 18.8% | 20.1% |
| Operating income | $7.6 million | $10.7 million | $3.6 million | $22.4 million |
| Operating margin | 4.7% | 6.5% | 0.9% | 4.7% |
| Net income | $4.5 million | $6.7 million | $0.8 million | $13.3 million |
| Diluted EPS | $0.10 | $0.15 | $0.02 | $0.29 |
| Cash flow from operations | $3.7 million | $3.1 million | $(15.1) million | $42.6 million |
- Q3 revenue declined 1.4%; energy-efficiency revenue increased 0.4%, while renewable-energy revenue declined 4.9%.
- Q3 gross profit fell 13.6%, primarily because renewable-energy gross margin declined to 18.4% from 25.7%, reflecting project costs above budget and lower revenue.
- Q3 operating expenses decreased 6.7% to $22.5 million, largely due to lower salaries and benefits and project-development costs.
- For the first nine months, energy-efficiency revenue decreased 22.7%, while renewable-energy revenue increased 0.9%. Total revenue declined 16.1%.
- Cash and cash equivalents were $18.8 million at September 30, 2013, compared with $63.3 million at December 31, 2012. Restricted cash was $25.8 million.
- Total debt included $15.7 million of current debt and $150.5 million of long-term debt. The company had $18.0 million drawn on its revolving facility and $28.6 million outstanding under its senior secured term loan.
- At September 30, 2013, the company reported total assets of $597.2 million and stockholders’ equity of $269.1 million.
Material changes versus the prior comparable period
- Nine-month operating income declined 84.0% and net income declined 93.7%, driven primarily by lower energy-efficiency revenue, reduced operating leverage, and weaker project margins.
- Nine-month gross margin declined to 18.8% from 20.1%. Renewable-energy gross margin fell to 18.4% from 21.8%; energy-efficiency gross margin fell to 19.0% from 19.4%.
- U.S. federal, central U.S. and other U.S. regions revenue decreased 23.9%, 18.6% and 24.9%, respectively. Canada revenue increased 12.2%.
- Nine-month operating cash flow changed from $42.6 million provided to $15.1 million used, reflecting working-capital needs, including federal ESPC receivables, project-development costs, and reductions in accounts payable and accrued liabilities.
- The company invested $42.9 million in investing activities during the first nine months, including $35.8 million for renewable-energy project assets and $9.9 million for acquisitions.
- Ameresco acquired Ennovate in the first quarter and the U.K.-based ESP businesses in the second quarter, recording approximately $6.0 million of acquisition-related goodwill during the first nine months.
Guidance, outlook, risks and unusual items
- The filing does not provide specific earnings or revenue guidance. Management stated that available cash, revolver availability and access to credit markets were expected to fund operations through 2014 and thereafter.
- Fully contracted backlog was approximately $366 million at September 30, 2013, compared with approximately $318 million a year earlier. Awarded but unsigned projects totaled approximately $1.042 billion, down from $1.143 billion.
- The conversion time for awarded projects to signed contracts was unusually prolonged; the weighted-average conversion time for contracts signed in Q3 was 18 months. Management attributed delays to federal fiscal uncertainty, customer spending scrutiny, additional approvals and difficulty arranging project debt financing.
- The company faces seasonal and project-timing variability. Revenue is recognized using percentage-of-completion accounting, requiring estimates of final project costs and margins. Additional project costs above budget reduced renewable-energy margins in Q3.
- The company restated prior-period results because a March 2010 interest-rate swap had initially been inappropriately accounted for under hedge accounting. The restatement affected earnings and other expenses but did not affect cash flows or debt covenant calculations.
- Solar import duties could result in exposure of up to approximately $3.3 million; the company recorded a reserve for its current estimate of the obligation.
- Potential acquisition-related contingent consideration included up to $865,000 for FAME and up to $5.0 million for AEG; $1.1 million was recorded as a liability for the AEG obligation, while no FAME accrual had been recorded at September 30.
- The company remained in compliance with its financial and operational covenants. On November 6, 2013, after quarter-end, it amended its senior credit facility to reduce the trailing-four-quarter minimum EBITDA requirement from $40 million to $30 million.
- Disclosure controls were not effective because two material weaknesses in internal control over financial reporting remained: insufficient personnel and review procedures for timely, accurate reporting, and inadequate controls over income-tax provision calculations. Remediation efforts were ongoing.
Most important facts for investors to verify
- Whether awarded backlog converts to signed contracts and revenue at a faster pace, particularly in U.S. federal and other U.S. markets.
- Whether renewable-energy project cost overruns are contained and gross margins recover toward prior levels.
- Liquidity after the $15.1 million nine-month operating cash outflow, continued project investment and scheduled debt payments.
- Compliance with the revised $30 million EBITDA covenant and availability under the senior secured revolving facility.
- Progress in remediating the material weaknesses and whether future filings require additional accounting or tax adjustments.
- Ultimate exposure from solar tariffs, acquisition-related contingent consideration, ESPC performance obligations and other contractual contingencies.
- The effect of the interest-rate swap portfolio, variable-rate debt and foreign-currency movements on earnings, cash flow and accumulated other comprehensive income.