Business Context and Reporting Period
Ameresco, Inc. provides energy-efficiency solutions, renewable-energy plant construction and operations, photovoltaic equipment, and related operations and maintenance services across the United States, Canada, and Europe. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the same periods in 2011. The company reports four operating segments: U.S. federal, central U.S. region, other U.S. regions, and Canada.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $165.5 million | $164.1 million | $311.9 million | $310.7 million |
| Gross profit | $32.2 million | $31.2 million | $60.1 million | $60.4 million |
| Gross margin | 19.4% | 19.0% | 19.3% | 19.4% |
| Operating income | $13.4 million | $8.3 million | $21.7 million | $11.7 million |
| Net income | $8.8 million | $5.2 million | $14.1 million | $6.7 million |
| Diluted EPS | $0.19 | $0.11 | $0.31 | $0.14 |
| Cash provided by operating activities | $1.6 million | $6.3 million | $(24.0) million | $39.5 million |
Second-quarter energy-efficiency revenue was $119.8 million and renewable-energy revenue was $44.3 million. Six-month energy-efficiency revenue was $233.2 million and renewable-energy revenue was $77.5 million.
Operating expenses increased to $22.9 million in the second quarter and $48.7 million for the six-month period, representing 14.0% and 15.6% of revenue, respectively, versus 11.4% and 12.3% in the comparable periods. The effective tax rate was 28.2% for the quarter and 28.1% year to date.
At June 30, 2012, cash and cash equivalents were $28.9 million, restricted cash was $15.0 million, and total assets were $660.7 million. Total stockholders' equity was $248.5 million. Current assets were $263.3 million versus current liabilities of $140.4 million.
Long-term debt, including the current portion, totaled approximately $220.1 million. This included $34.3 million outstanding under the senior secured term loan, $54.1 million of construction and term loans for renewable-energy projects, and $131.7 million of federal ESPC receivable financing. No amount was outstanding under the $60.0 million revolving credit facility. The senior secured facility matures June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 0.8%; six-month revenue decreased 0.4%.
- Second-quarter operating income declined 38.2% and net income declined 41.5%. For the first six months, operating income declined 46.1% and net income declined 52.7%.
- Energy-efficiency gross margin improved to 18.3% in the quarter and 19.6% year to date, while renewable-energy gross margin declined to 20.8% and 18.9%, respectively.
- Higher salaries and benefits, public-company compliance costs, acquisition-related expenses, and amortization of acquired intangible assets materially increased operating expenses.
- U.S. federal revenue declined 44.3% in the quarter and 46.4% year to date, primarily because the Savannah River project moved to its operations and maintenance phase and fewer projects entered construction.
- Canada revenue declined 60.6% in the quarter and 45.1% year to date, producing a pretax loss of $4.0 million for the quarter and $3.9 million year to date.
- Other U.S. regions revenue increased 25.2% in the quarter and 30.0% year to date, supported substantially by the 2011 Ameresco Southwest acquisition. Central U.S. revenue also increased.
- Cash generation improved substantially year to date, from $24.0 million of operating cash use in 2011 to $39.5 million of operating cash generation in 2012, largely because of working-capital movements and federal ESPC financing activity.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific earnings or revenue guidance. Management stated that available cash, the unused revolving facility, and access to credit markets were expected to be sufficient to fund operations through 2013 and thereafter. Management also noted significant seasonality, with typically higher revenue and operating income in the third quarter and lower results in the first quarter.
- Fully contracted backlog was approximately $391 million at June 30, 2012, down from approximately $507 million a year earlier. Awarded but unsigned projects totaled approximately $909 million, up from approximately $648 million.
- Federal ESPC project conversions were delayed by new enhanced competition rules, while Canadian project activity was affected by government and municipal customer uncertainty related to election outcomes.
- The Department of Commerce imposed preliminary anti-dumping and countervailing duties on certain Chinese solar-cell imports. Depending on the final determination and applicable rate, Ameresco estimated potential duties of up to approximately $8.7 million. The company ceased importing affected modules in July 2012 and recorded a reserve for its current estimated exposure.
- A customer dispute involves approximately $6.8 million of claimed reprocurement costs related to a terminated construction contract. Ameresco filed a claim for approximately $3.9 million of outstanding pre-termination amounts and stated that it believed any additional liability was remote.
- The company had $256.1 million of scheduled contractual obligations, including debt principal, interest obligations, federal ESPC financing, and operating leases.
- Interest-rate swaps had a fair-value liability of $7.0 million at June 30, 2012. The company also had exposure to Canadian-dollar fluctuations and did not hedge its foreign-currency exposure.
- Management reported a continuing material weakness in internal control over financial reporting, relating primarily to insufficient personnel and review procedures for timely and accurate financial reporting. Remediation efforts were continuing through 2012.
- On July 31, 2012, Ameresco Canada acquired FAME Facility Software Solutions Inc.; purchase-price details were not provided in the filing.
Most Important Facts for Investors to Verify
- Whether the decline in federal and Canadian project activity reverses and whether awarded projects convert into signed backlog.
- The final determination and ultimate cash exposure related to the Chinese solar-module duties.
- Progress in remediating the material weakness in internal control over financial reporting.
- Compliance with the senior secured facility's financial and operating covenants; the filing states the company was compliant at June 30, 2012.
- Conversion and timing of federal ESPC receivables and related financing, which materially affect working capital and reported debt.
- The sustainability of operating cash flow given substantial project-asset investment and reliance on project financing.