Ameresco, Inc. 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency, renewable-energy, operations and maintenance, enterprise energy-management, and photovoltaic products and services in the United States, Canada, and Europe. This unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $142.6 million | $126.3 million | $243.3 million | $236.4 million |
| Gross profit / margin | $27.9 million / 19.6% | $23.4 million / 18.5% | $45.5 million / 18.7% | $44.9 million / 19.0% |
| Operating income (loss) | $3.8 million | $(1.9) million | $(3.0) million | $(4.0) million |
| Net income (loss) | $2.7 million | $(1.8) million | $(5.6) million | $(3.7) million |
| EPS, diluted | $0.06 | $(0.04) | $(0.12) | $(0.08) |
| Adjusted EBITDA | $10.3 million | $3.3 million | $9.4 million | $7.6 million |
Q2 revenue increased 12.9%, while six-month revenue increased 2.9%. Q2 net margin was 1.9%, compared with negative 1.4% in the prior-year quarter; the six-month net margin was negative 2.3%, compared with negative 1.6%. SG&A declined 4.5% in Q2 and 0.8% for the six-month period. Six-month other expenses increased to $2.5 million from $0.9 million, principally because of higher interest expense and interest-rate swap effects.
Operating activities generated $5.9 million of cash in the first six months, compared with $38.9 million used in the prior-year period. Investing activities used $13.3 million, including $11.0 million for project assets and $4.9 million for acquisitions. Financing activities provided $6.4 million. Cash and cash equivalents were $16.4 million at June 30, 2014, plus $12.5 million of restricted cash.
Adjusted free cash flow, a non-GAAP measure defined by the company, was $18.7 million versus $(27.1) million in the prior-year period. Reported operating cash flow is affected by the classification of Federal ESPC project advances as financing cash flows rather than operating cash flows.
Liquidity, Debt, and Backlog
- Total long-term debt, including current maturities, was approximately $105.2 million at June 30, 2014, compared with $116.2 million at December 31, 2013.
- The senior secured facility included a $60.0 million revolver, with no revolver balance outstanding, and a $22.9 million term-loan balance. The facility matures June 30, 2016.
- Construction and term project loans totaled $82.4 million and were generally nonrecourse to Ameresco, Inc.; Federal ESPC liabilities totaled $45.9 million.
- Management stated that available cash, revolver capacity, and access to credit markets should fund operations through 2014 and thereafter. The company was in compliance with applicable debt covenants at June 30, 2014.
- Fully contracted backlog was approximately $399.4 million, compared with $324.0 million at June 30, 2013. Awarded but unsigned projects totaled approximately $995.0 million, compared with $1.1 billion a year earlier.
Material Changes Versus the Prior Comparable Period
- Q2 performance improved materially, driven by higher Federal, Canada, Small-Scale Infrastructure, and All Other revenue, lower SG&A, and a favorable project mix.
- U.S. Federal revenue increased 94.5% in Q2 and 40.6% for six months, primarily from two large energy-efficiency projects. Small-Scale Infrastructure revenue increased 38.9% in Q2 and 23.2% for six months.
- U.S. Regions revenue declined 7.8% in Q2 and 15.5% for six months, primarily because of lower construction revenue from small-scale renewable-energy plants.
- Canada revenue increased, but its pretax loss widened to $1.7 million in Q2 and $3.1 million for six months because of budget revisions on a large project.
- Six-month results remained loss-making despite the Q2 profit. Corporate unallocated costs increased 18.8% to $15.0 million, partly because of interest-rate swap losses and first-quarter severance charges.
- Cash-flow presentation was revised for the 2013 comparison to classify certain Federal ESPC advances as financing rather than operating cash flows.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected 2014 capital expenditures of approximately $15 million to $25 million, principally for renewable-energy plants.
- Results are seasonal and affected by construction cycles, government procurement timing, weather, and project acceptance. Management noted that third-quarter revenue and operating income are typically higher and first-quarter results lower.
- The company identified a material weakness in internal control over financial reporting. Remediation efforts continued, including improvements to the close process and separation of the corporate controller and chief accounting officer roles, but additional work was required and the weakness remained in effect.
- A solar-tariff contingency could result in duties of up to approximately $3.3 million; the company had established a reserve for its current estimated exposure.
- Interest-rate swaps generated significant volatility: a $1.8 million pretax unrealized loss was reflected in accumulated other comprehensive income for the first six months, and $566,000 was reclassified to other expense in Q2 following a hedge redesignation.
- The company recorded $3.7 million of Section 1603 renewable-energy grants during the six-month period. No goodwill or intangible-asset impairment was recorded.
- FASB ASU 2014-09, the new revenue-recognition standard, was issued during the quarter. The company was assessing its impact; adoption was required for annual periods beginning after December 15, 2016.
Most Important Facts for Investors to Verify
- Whether the Federal project ramp and $399.4 million of contracted backlog convert to revenue and cash as scheduled.
- Progress and final profitability of the Canadian project subject to budget revisions.
- Compliance with the senior credit facility’s tightening EBITDA, leverage, and debt-service covenants, particularly before the facility’s 2016 maturity.
- The sustainability of positive adjusted free cash flow after considering ESPC financing structures, project investment, debt repayment, and restricted cash.
- Remediation and eventual resolution of the material weakness in internal control over financial reporting.
- Final exposure to solar tariffs, renewable-energy grant recapture obligations, interest-rate movements, and other project contingencies.