Ameresco, Inc. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency solutions, renewable-energy project development and operations, energy management services, and photovoltaic products in the United States, Canada, and Europe. The filing covers the three and six months ended June 30, 2016; interim financial statements are unaudited and should be read with the 2015 Form 10-K.
Financial Performance
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $162.6 million, up 6.6% | $296.4 million, up 10.6% |
| Gross profit | $31.9 million | $59.5 million |
| Gross margin | 19.6%, versus 20.3% | 20.1%, versus 18.9% |
| Operating income | $4.7 million, versus $5.1 million | $6.5 million, versus $0.7 million |
| Net income | $2.1 million, versus $2.0 million | $2.8 million, versus a $2.2 million loss |
| Net income attributable to Ameresco | $2.0 million | $3.0 million |
| EPS, basic and diluted | $0.04 | $0.07, versus $(0.05) |
Second-quarter revenue growth was led by the U.S. Federal and Small-Scale Infrastructure segments. Gross margin declined in the quarter primarily because of cost-budget revisions on a U.S. Federal project. Six-month gross margin improved partly because the prior-year period included a reserve and revenue reduction on a significant Canadian project.
Segment and Operating Changes
- U.S. Regions: Revenue declined 1.4% in the quarter and 4.9% year to date; pretax income declined 24.9% and 40.4%, respectively, due to fewer active projects, lower operating leverage, and higher project-development costs.
- U.S. Federal: Revenue increased 41.6% in the quarter and 49.8% year to date. Second-quarter pretax income declined 9.5% because of a cost-budget revision on a large project, while six-month pretax income increased 32.1%.
- Canada: Second-quarter pretax loss increased to $1.8 million, including $1.9 million of bad-debt expense related to restructuring and collectability concerns. The six-month pretax loss improved to $1.3 million from $5.6 million.
- Small-Scale Infrastructure: Revenue increased 16.8% in the quarter and 32.9% year to date; six-month pretax income nearly doubled to $4.6 million.
- All Other: Revenue declined 17.8% in the quarter and 14.7% year to date, primarily because of weaker integrated-PV sales to oilfield microgrid customers.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $15.3 million at June 30, 2016, compared with $21.6 million at December 31, 2015; restricted cash was $12.4 million, plus $17.9 million classified in other assets.
- Operating activities used $39.7 million in the first six months, compared with $37.0 million used in the prior-year period. The primary use was a $50.2 million increase in the Federal ESPC receivable.
- Investing activities used $23.0 million, including $20.8 million for project assets. Management expected an additional $50 million to $65 million of capital expenditures, principally for renewable-energy plants, during the remainder of 2016.
- Financing activities provided $57.2 million, including $38.8 million from Federal ESPC projects, $11.0 million from sale-leaseback financing, $6.5 million from redeemable non-controlling interests, and $2.9 million of net revolver borrowings.
- Senior secured facility borrowings included $14.2 million outstanding on the revolver and $11.4 million on the term loan, with $36.1 million available under the revolver. The revolver matures in 2020 and the term loan in 2018.
- Project financing loans totaled approximately $87.8 million, generally nonrecourse to Ameresco, and Federal ESPC liabilities totaled $121.6 million. Total long-term debt and capital lease liabilities on the balance sheet were $119.7 million, including current portions.
- The company was in compliance with its financial and operational covenants at June 30, 2016. A July 2016 amendment temporarily increased the permitted core leverage ratio to 2.75-to-1.00 for specified quarters through June 30, 2017, before returning to 2.00-to-1.00.
Backlog, Outlook, Risks and Unusual Items
- Fully contracted backlog was approximately $435.1 million at June 30, 2016, compared with $398.3 million a year earlier. Twelve-month backlog declined to $283.7 million from $344.0 million. Awarded but unsigned projects totaled an estimated $1.116 billion, compared with $944.5 million a year earlier.
- Management stated that available cash, revolver capacity, and access to credit markets were expected to fund operations through 2016 and thereafter.
- Results are seasonal: revenue and operating income are typically higher in the third and fourth quarters and lower in the first quarter. Government procurement timing and project-construction cycles may cause significant quarterly volatility.
- The company warned that revenue and profit depend on converting awarded projects into signed contracts, executing fixed-price projects, collecting receivables, obtaining financing, and meeting project schedules and cost estimates.
- Redeemable non-controlling interest increased to $6.8 million from $0.5 million at year-end. The HLBV allocation method may create quarter-to-quarter volatility in income attributable to Ameresco.
- During the quarter, Ameresco sold three solar-PV projects for $7.5 million under its sale-leaseback program and recorded a $0.1 million deferred loss. The program had $26.5 million of remaining lending capacity at June 30.
- The company repurchased 417,698 Class A shares for $1.9 million, or an average of $4.63 per share, leaving approximately $8.1 million authorized under the $10.0 million program.
- Other unusual items included $1.9 million of Canadian bad-debt expense, approximately $0.7 million of first-quarter charges related to a customer bankruptcy, and a $2.6 million year-to-date after-tax unrealized loss from interest-rate hedges in other comprehensive income.
- Management reported no material changes to previously disclosed risk factors and no pending legal proceedings expected to have a material adverse effect. The company was evaluating the effects of the new revenue-recognition, lease, and stock-compensation standards.
Investor Verification Checklist
- Verify conversion timing and collectability of the $435.1 million fully contracted backlog and the $1.116 billion awarded backlog, particularly the decline in twelve-month backlog.
- Assess U.S. Federal project cost revisions and whether the 19.6% quarterly gross margin pressure persists.
- Monitor Canadian restructuring, bad-debt reserves, and the additional $2.952 million exposure related to a bankrupt customer.
- Reconcile negative operating cash flow with Federal ESPC financing inflows and evaluate working-capital requirements as project assets expand.
- Review covenant headroom under the amended leverage ratio and the maturity profile of project, ESPC, revolver, and term-loan obligations.
- Evaluate the planned $50 million to $65 million of second-half capital expenditures and the company’s reliance on project financing and sale-leasebacks.