Ameresco, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 9, 2012. Financial statements are unaudited. Ameresco provides energy-efficiency solutions, renewable-energy generation, photovoltaic equipment, and related operations and maintenance services in the United States, Canada, and Europe.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $163.9 million | $227.8 million | $474.6 million | $539.7 million |
| Gross profit | $34.8 million | $39.9 million | $95.2 million | $100.0 million |
| Gross margin | 21.2% | 17.5% | 20.1% | 18.5% |
| Operating income | $10.7 million | $16.4 million | $22.4 million | $38.1 million |
| Net income | $6.8 million | $12.4 million | $13.4 million | $26.5 million |
| Diluted EPS | $0.15 | $0.27 | $0.29 | $0.58 |
| Operating cash flow | $3.1 million | $10.3 million | $42.6 million | $(11.8) million |
Energy-efficiency revenue declined 42.5% in Q3 and 18.4% for the nine-month period, while renewable-energy revenue increased 42.0% and 9.9%, respectively. Gross-margin expansion reflected a more favorable project mix, project closeouts, renewable-energy operations and maintenance, small-scale infrastructure, and integrated photovoltaic activity. Operating expenses increased 2.8% in Q3 and 17.6% year to date, driven primarily by personnel, public-company costs, acquisition-related expenses, and intangible-asset amortization.
At September 30, 2012, cash and cash equivalents were $26.2 million, compared with $26.3 million at December 31, 2011; restricted cash was $15.8 million. Total assets were $681.7 million and stockholders’ equity was $259.0 million. Reported current and long-term debt totaled approximately $235.3 million, including senior secured, project, and federal ESPC-related financing. The company stated that it was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Q3 revenue fell 28.0%, operating income fell 34.7%, and net income fell 45.2%. For the first nine months, revenue fell 12.1%, operating income fell 41.2%, and net income fell 49.2%.
- Revenue declines were concentrated in the U.S. federal, central U.S., other U.S., and Canada segments, reflecting longer conversion times from awarded projects to signed contracts and fewer projects entering construction.
- Q3 gross margin improved to 21.2% from 17.5%; nine-month gross margin improved to 20.1% from 18.5%.
- Operating cash flow improved substantially year to date, primarily because of collections and working-capital movements, including federal ESPC financing activity.
- The company acquired FAME Facility Software Solutions for approximately $4.5 million in July 2012, recording $2.3 million of goodwill and $1.7 million of intangible assets. FAME was considered immaterial for supplemental acquisition disclosures.
- Goodwill increased to $50.3 million from $47.9 million, and net intangible assets declined to $10.4 million from $12.7 million after acquisition additions and amortization.
Guidance, outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management stated that available cash, revolver availability, and access to credit markets should be sufficient to fund operations through 2013 and thereafter.
- Management expected the 2012 effective tax rate to be slightly above the approximately 24% rate reported for 2011; the nine-month 2012 rate was 28.2%. The Q3 2012 rate included a $1.8 million unfavorable tax adjustment related to uncertain tax positions.
- Fully contracted backlog was approximately $318 million at September 30, 2012, down from approximately $438 million a year earlier. Awarded but unsigned projects totaled approximately $1.1 billion, compared with $782 million a year earlier. Management expected lengthened conversion times to continue into 2013.
- On October 19, 2012, a subsidiary obtained a $47.2 million construction-to-term facility and initially drew $33.5 million; $13.5 million was used to reduce the revolving credit facility. On October 24, 2012, Ameresco acquired Seldera LLC.
- Solar-module imports containing Chinese cells were subject to potential anti-dumping and countervailing duties. The company ceased such imports in July 2012 and estimated possible exposure of up to approximately $3.3 million, for which it established a reserve. Subsequent action by the International Trade Commission eliminated the retroactive periods.
- A longstanding customer dispute was settled in August 2012 by changing the termination for default to termination for convenience; neither party made a payment and both waived claims.
- The company disclosed a continuing material weakness in internal control over financial reporting related to insufficient accounting personnel and review procedures. Remediation efforts included hiring accounting and reporting personnel, restructuring the accounting organization, and upgrading financial systems.
- The business is seasonal and dependent on government procurement cycles, project conversion timing, construction activity, customer financing, tax incentives, and energy-market conditions. Revenue is recognized on many projects using percentage-of-completion estimates, creating exposure to changes in estimated costs and contract profitability.
Investor verification priorities
- Verify the conversion of the $1.1 billion awarded-project pipeline into signed contracts and revenue, given the decline in fully contracted backlog and lengthened sales cycles.
- Assess liquidity, covenant compliance, revolver availability, and the effect of the October 2012 project-financing transaction on debt and interest expense.
- Evaluate the sustainability of gross-margin improvement as renewable-energy and higher-margin project activity changes.
- Review the material weakness remediation and subsequent audit conclusions regarding internal controls.
- Confirm the final amount of solar-import duties and related reserve adequacy.
- Monitor federal, Canadian, and municipal procurement uncertainty, tax incentives, project-cost estimates, and ESPC performance obligations.