Ameresco, Inc. quarterly report, Q1 FY2013

Ameresco, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Ameresco provides energy-efficiency solutions, renewable-energy construction and operations, photovoltaic products, and related maintenance services in the United States, Canada, and Europe. This unaudited filing covers the three months ended March 31, 2013, with comparisons to the restated three months ended March 31, 2012.

Results are subject to seasonal and construction-cycle fluctuations; the company stated that first-quarter revenue and operating income are typically lower than in other quarters.

Financial Results and Key Metrics

Metric	Q1 2013	Q1 2012	Change
Revenue	$110.1 million	$146.6 million	Down 24.9%
Gross profit	$21.5 million	$29.2 million	Down 26.4%
Gross margin	19.5%	19.9%	Down 0.4 percentage points
Operating income (loss)	$(2.1) million	$3.4 million	Down $5.5 million
Pre-tax income (loss)	$(2.5) million	$2.3 million	Down $4.9 million
Net income (loss)	$(1.9) million	$1.7 million	Down $3.7 million
Basic and diluted EPS	$(0.04)	$0.04	Down $0.08

Energy-efficiency revenue declined 38.4% to $69.8 million, while renewable-energy revenue increased 21.5% to $40.3 million.
Energy-efficiency gross margin decreased to 20.6% from 21.0%; renewable-energy gross margin increased to 17.7% from 16.5%, primarily due to a project closeout.
Operating expenses declined 8.5% to $23.6 million, but increased to 21.4% of revenue from 17.6% because of the lower revenue base. General, administrative and other expenses increased 15.2% to $8.3 million.
The income-tax benefit was $0.6 million versus a $0.6 million provision in the prior-year quarter. The estimated annual effective tax rate was 24.5%.

Cash Flow, Balance Sheet, Debt and Liquidity

Operating activities used $25.7 million of cash, compared with $33.2 million provided in Q1 2012. The 2012 period benefited from approximately $21.2 million of Savannah River project retainage collections.
Investing activities used $14.5 million, including $12.9 million for renewable-energy project assets, $1.1 million for property and equipment, and $1.8 million for the Ennovate acquisition.
Financing activities used $3.6 million, primarily for $3.8 million of long-term debt payments.
Cash and cash equivalents were $21.0 million at March 31, 2013, down from $63.3 million at December 31, 2012. Restricted cash was $25.7 million.
Total assets were $630.9 million and stockholders’ equity was $261.5 million at March 31, 2013.
Current liabilities were $109.9 million, and long-term debt, including the current portion, totaled approximately $208.4 million based on the balance sheet.
The $100 million senior secured credit facility had $30.0 million outstanding under the term loan and no revolver borrowings. The facility matures June 30, 2016, and requires quarterly principal payments of approximately $1.4 million.
Construction and term project loans totaled approximately $87.6 million, while federal ESPC receivable financing totaled approximately $90.8 million. The company stated that some project financing is generally nonrecourse, but certain arrangements require performance, completion, or grant-recapture assurances.
The minimum EBITDA covenant under the senior secured facility was suspended for interim periods during 2013. Ameresco stated that it was in compliance with all financial and operational covenants at March 31, 2013.
Management stated that available cash, revolver availability, and access to credit markets were expected to be sufficient to fund operations through 2013 and thereafter.

Material Changes Versus the Prior Comparable Period

Revenue declined $36.4 million, primarily because awarded projects took longer to convert into signed contracts and construction activity.
Management attributed slower conversion to U.S. federal fiscal uncertainty, greater customer scrutiny of spending and debt financing, additional approval steps, and broader municipal and commercial uncertainty.
Revenue decreased across all reported operating segments: U.S. Federal down 39.7%, Central U.S. Region down 29.4%, Other U.S. Regions down 28.6%, and Canada down 22.5%.
Renewable-energy revenue growth partly offset the energy-efficiency decline, but was insufficient to prevent an operating and net loss.
The company acquired substantially all assets of Ennovate Corporation for approximately $1.8 million in cash, recording $0.9 million of goodwill and $0.6 million of intangible assets. The purchase-price allocation was preliminary.
Cash conversion deteriorated materially, with operating cash flow shifting from a $33.2 million inflow to a $25.7 million outflow.
Fully contracted backlog decreased to approximately $344 million from $413 million at March 31, 2012. Awarded but unsigned projects increased to approximately $1.165 billion from $872 million.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide a specific numerical revenue or earnings forecast. Management expected extended sales-cycle conversion times to continue into 2013 and stated that results would remain subject to seasonality and project timing.
The company’s 2012 historical financial statements and prior quarterly information were restated because a March 2010 interest-rate swap had been incorrectly accounted for as qualifying for hedge accounting. The restatement affected earnings and related disclosures but had no effect on cash flows or debt covenant calculations. The March 2010 swap was designated using the long-haul method effective March 29, 2013.
Interest-rate swap liabilities had a fair value of $7.5 million at March 31, 2013. The company recognized a $0.4 million unrealized derivative gain in other expenses, net.
Ameresco may be liable for up to approximately $3.3 million in combined anti-dumping and countervailing duties on certain imported solar modules containing Chinese cells. The company had established a reserve for its current estimate of exposure.
Former FAME stockholders could receive up to an estimated $0.9 million of additional consideration based on performance milestones; no accrual had been recorded at March 31, 2013. Potential additional consideration related to AEG was up to $5.0 million, with $1.1 million accrued.
The company reported no material adverse legal proceedings, no asset-retirement obligations, and no subsequent events requiring reporting.
Disclosure controls and procedures were not effective because two material weaknesses in internal control over financial reporting remained: insufficient personnel and ineffective review procedures for timely and accurate financial reporting, and inadequate controls over quarterly and annual tax provision calculations. Remediation efforts were expected to continue throughout 2013.
Key operating risks include project execution and performance commitments under energy-savings contracts, fixed-price project cost overruns, lengthy and uncertain sales cycles, customer financing availability, government procurement and incentive changes, interest-rate exposure, foreign-currency exposure, and reliance on estimates for percentage-of-completion accounting.

Important Facts for Investors to Verify

Whether awarded projects convert to signed contracts and whether fully contracted backlog stabilizes or resumes growth.
Whether energy-efficiency revenue and operating margins recover after the prolonged sales-cycle delays.
The pace of operating cash-flow recovery and the effect of project-asset investment on liquidity.
Compliance with debt covenants after the temporary suspension of the minimum EBITDA covenant and the company’s ability to refinance or repay maturities.
The final purchase-price allocation and operating contribution of Ennovate.
The final resolution and reserve adequacy for solar-module tariff exposure and acquisition-related contingent consideration.
Progress in remediating the material weaknesses in financial reporting and tax controls.
The impact of the derivative accounting restatement and future interest-rate movements on earnings, equity, and debt costs.