Ameresco, Inc. 2020 First-Quarter Form 10-Q Summary
Business context and reporting period
Ameresco provides energy-efficiency solutions, renewable-energy project development and construction, energy-asset ownership and operation, and operations and maintenance services across North America and Europe. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Results are seasonal, with first-quarter revenue and operating income typically lower than in later quarters.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $212.4 million | $150.1 million | Up 41.5% |
| Gross profit | $38.4 million | $32.6 million | Up 17.8% |
| Gross margin | 18.1% | 21.7% | Down 3.6 percentage points |
| Operating income | $9.5 million | $6.5 million | Up 45.4% |
| Operating margin | 4.5% | 4.4% | Up 0.1 percentage point |
| Income before taxes | $4.1 million | $3.1 million | Up 32.1% |
| Net income | $6.6 million | $2.9 million | Up 131.1% |
| Net income attributable to common shareholders | $6.2 million | $4.1 million | Up 49.5% |
| Diluted EPS | $0.13 | $0.09 | Up $0.04 |
| Cash flow from operations | $(51.6) million | $(58.1) million | Improved by $6.5 million |
| Cash flow from investing | $(29.3) million | $(26.1) million | Higher use of $3.3 million |
| Cash flow from financing | $83.9 million | $47.5 million | Up $36.4 million |
The Q1 2020 income tax benefit was $2.5 million, compared with a $0.3 million tax provision in Q1 2019. The benefit reflected solar investment tax credits, Section 179D deductions, partnership tax-basis adjustments, and CARES Act net operating loss carryback benefits. This benefit materially increased net income and is not necessarily indicative of the recurring tax rate.
Liquidity, debt and capital resources
- Cash and cash equivalents were $40.4 million at March 31, 2020; total cash, cash equivalents and restricted cash were $79.7 million.
- Total debt and financing lease liabilities were $361.4 million, including $69.3 million of current maturities. Long-term debt and financing lease liabilities, net of current portions and deferred financing fees, were $285.6 million.
- The amended senior secured credit facility retained total commitments of $185.0 million, with $20.7 million available for borrowing at March 31, 2020. The maximum funded-debt-to-EBITDA covenant ratio was increased from 3.25 to 3.75 for 2020.
- Management stated that cash, revolving-credit availability and access to credit markets should be sufficient to fund operations for at least the next twelve months, while noting actions to preserve liquidity during the pandemic.
- Operating cash flow remained negative, primarily because of increases in accounts receivable, retainage, federal ESPC receivables, project development costs and reductions in payables and accrued liabilities. Federal ESPC financing inflows are classified as financing cash flows rather than operating cash flows.
- Q1 capital expenditures included $28.5 million for energy assets. Management planned approximately $160 million to $210 million of additional capital expenditures for the remainder of 2020 and approximately $150 million to $200 million of additional project financings.
Material changes versus the prior comparable period
- Revenue growth was led by U.S. Regions, up $29.1 million or 52.4%, and U.S. Federal, up $25.7 million or 59.7%, primarily from the timing and progression of active projects.
- Cost of revenues increased 48.1%, faster than revenue, causing gross margin to decline from 21.7% to 18.1%. Management attributed the reduction to a mix of lower-margin projects and lower-margin energy and incentive revenue.
- SG&A increased 10.9% to $28.9 million. The prior-year period included a $2.2 million gain from deconsolidation of a variable-interest entity, which contributed to the year-over-year comparison.
- Other expenses increased to $5.4 million from $3.4 million, principally due to higher interest expense and unfavorable foreign-exchange fluctuations.
- Fully contracted backlog increased to approximately $1.05 billion from $753.6 million; 12-month backlog increased to $514.4 million from $389.3 million. Awarded but not yet contracted backlog was $1.13 billion, compared with $1.28 billion in the prior-year period.
- Operations and maintenance backlog increased to approximately $1.13 billion from $917.9 million. Assets in development increased to $658.6 million from $549.3 million.
Guidance, outlook, commentary and risks
- Management reported no material COVID-19 impact on Q1 results, but expected delays in project-award conversions, potential construction slowdowns, lengthening sales cycles, supply-chain disruption and delayed customer payments as the pandemic continued.
- The company considered COVID-19 a significant uncertainty that could adversely affect revenue timing, liquidity, receivables collection, project execution, demand and personnel availability. The filing does not provide formal full-year revenue or earnings guidance.
- The CARES Act was expected to defer approximately $5.0 million of 2020 employer payroll taxes, with 50% payable by December 31, 2021 and the remainder by December 31, 2022. The company estimated approximately $2.0 million of tax benefit from net operating loss provisions and a tax refund of approximately $1.3 million.
- Key operating risks include project delays or cost overruns, availability and pricing of equipment and labor, permitting, customer acceptance and payment, long sales cycles, government procurement timing, seasonality, interest-rate and foreign-exchange exposure, and changes in renewable-energy tax incentives.
- Ameresco noted volatility and price reductions in certain renewable-energy certificate and other environmental-attribute markets during the pandemic. Its earnings are materially dependent on the ability to sell these attributes.
- No material goodwill or long-lived-asset impairment trigger was identified at March 31, 2020. Pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether COVID-19 caused subsequent delays in project awards, construction schedules, customer collections or supply chains.
- Whether the lower 18.1% gross margin was temporary project mix or indicative of sustained margin pressure.
- Cash conversion and working-capital requirements, particularly the $189.6 million of unbilled contract assets and $239.2 million of federal ESPC receivables.
- Compliance with debt covenants, refinancing of near-term maturities, and continued availability under the $185.0 million credit facility.
- Execution of planned 2020 capital expenditures and project financings, and the effect on leverage and liquidity.
- Sustainability of the Q1 tax benefit, including renewable-energy credits, Section 179D deductions and CARES Act carrybacks.
- Realization and timing of the $1.05 billion fully contracted backlog and $1.13 billion awarded backlog that remained unsigned.