Ameresco, Inc. 2011 Q3 Form 10-Q Summary
Business context and reporting period
Ameresco provides energy-efficiency solutions, renewable-energy systems, operations and maintenance services, and photovoltaic equipment in the United States, Canada and Europe. The filing covers the unaudited three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Results are seasonal, with revenue and operating income typically stronger in the third quarter.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $227.8 million, up 18.7% | $539.7 million, up 23.0% |
| Gross profit | $39.9 million, up 14.3% | $100.0 million, up 25.9% |
| Gross margin | 17.5%, versus 18.2% | 18.5%, versus 18.1% |
| Operating income | $16.4 million, down 13.2% | $38.1 million, up 13.7% |
| Income before taxes | $15.0 million, down 11.0% | $34.8 million, up 18.4% |
| Net income | $12.4 million, up 2.6% | $26.5 million, up 25.9% |
| Diluted EPS | $0.27, versus $0.28 | $0.58, versus $0.53 |
| Cash from operating activities | $10.3 million | $(11.8) million |
Energy-efficiency revenue increased 27.6% in the quarter and 29.4% year to date, while renewable-energy revenue decreased 11.2% in the quarter and increased 4.9% year to date. Third-quarter gross margin declined because of lower-margin project mix, unscheduled maintenance at four landfill-gas facilities, lower-margin solar installations acquired with Ameresco Southwest, and non-recurring charges.
At September 30, 2011, cash and cash equivalents were $31.7 million, restricted cash was $12.7 million, and total assets were $788.4 million. Accounts receivable were $143.9 million, costs and estimated earnings in excess of billings were $55.1 million, and the federal ESPC receivable was $236.6 million.
Current liabilities were $171.8 million. Current and long-term debt totaled approximately $337.0 million, including $43.0 million outstanding under the revolving credit facility, $38.6 million under its term loan, $49.6 million of construction and project term loans, and $205.8 million of federal ESPC receivable financing. The company reported compliance with all financial and operational covenants and stated that liquidity, revolving availability and access to credit markets should fund operations through 2012 and thereafter.
Material changes versus the prior comparable period
- Third-quarter revenue growth was concentrated in other U.S. regions, which increased 138.3% to $96.5 million. U.S. federal revenue decreased 46.5% to $28.5 million, and central U.S. revenue decreased 14.2% to $32.2 million.
- Operating expenses rose 46.8% in the quarter and 34.8% year to date. Project development costs increased 90.5% in the quarter and 88.0% year to date as the company invested in converting awarded projects to signed contracts.
- Operating margin declined to 7.2% from 9.9% in the quarter, while year-to-date operating margin declined to 7.0% from 7.6%.
- The third-quarter effective tax rate fell to 17.9% from 28.8%; the 2011 rate included a $0.9 million net tax benefit related to accrued interest on resolved tax positions. Management expects the full-year 2011 effective tax rate to be higher than the third-quarter rate.
- The company acquired Applied Energy Group in July 2011 and Ameresco Southwest in August 2011 for aggregate initial cash consideration of approximately $61.3 million. The acquisitions added $16.0 million of third-quarter revenue and increased goodwill and intangible assets.
- Year-to-date operating cash flow remained negative at $11.8 million, compared with negative $6.4 million in 2010, primarily because of increases in receivables, the federal ESPC receivable, inventory, and costs in excess of billings.
- Fully contracted backlog declined 26.1% year over year to approximately $438 million, while awarded but unsigned projects increased 47.5% to approximately $782 million. Management reported a longer sales-cycle conversion period but no unusual project cancellations or scope reductions.
Guidance, outlook, risks and unusual items
- Management expects renewable-energy installation revenue to continue declining in the fourth quarter of 2011 and possibly into the first quarter of 2012 as projects near completion.
- Project development spending is expected to remain elevated into 2012 as the company works to convert awarded projects into fully contracted backlog.
- Significant risks include dependence on government procurement and legislative funding cycles, project execution and fixed-price contract risks, energy-savings performance commitments, subcontractor performance, customer and receivable collection risk, seasonality, interest-rate exposure, foreign-currency exposure, and the ability to integrate acquisitions.
- The company has approximately $4.0 million of claims outstanding against a customer in a construction dispute and has recognized no revenue or profit on those claims. Management believes additional liability is remote, but the matter remains unresolved.
- Former AEG shareholders may receive up to $5.0 million of additional consideration tied to performance milestones. Certain Quantum-related individuals may receive up to $1.15 million of additional compensation.
- Interest-rate swap liabilities increased to $7.0 million from $3.6 million at December 31, 2010, and accumulated other comprehensive income declined substantially because of hedge losses and foreign-currency translation losses.
- Management disclosed that disclosure controls and procedures were not effective because of a continuing material weakness in internal control over financial reporting involving GAAP expertise, tax accounting, SEC reporting and review procedures.
- On October 3, 2011, after the reporting date, the company entered into a $7.4 million construction and term loan bearing interest at 6.11%.
Most important facts for investors to verify
- Whether the $438 million fully contracted backlog converts to revenue at expected margins and whether the $782 million awarded backlog converts to signed contracts within the anticipated timeframe.
- The sustainability of operating margins after the third-quarter project mix changes, maintenance costs, acquisition-related charges and higher corporate expenses.
- Working-capital requirements and the path to positive operating cash flow, particularly collections of accounts receivable and federal ESPC receivables.
- Debt covenant compliance, borrowing-base availability, refinancing requirements and the effect of variable interest rates.
- Integration, profitability and purchase-price adjustments for AEG and Ameresco Southwest, including contingent consideration.
- Remediation of the material weakness in internal control and whether future filings require adjustments or restatements.
- Resolution of the customer dispute, outstanding claims and potential liabilities under energy-savings performance commitments.