Ameresco, Inc. 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
Ameresco provides energy-efficiency solutions, renewable-energy project construction and operations, energy-management services, and photovoltaic equipment in North America and Europe. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Results are seasonal, with revenue and operating income generally stronger in the third and fourth quarters.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $204.7 million, up 13.4% | $506.0 million, up 6.1% |
| Gross profit | $41.4 million | $102.7 million |
| Gross margin | 20.2%, versus 21.5% | 20.3%, versus 20.6% |
| Operating income | $14.3 million, versus $9.9 million | $22.5 million, versus $16.4 million |
| Net income | $8.8 million, versus $5.8 million | $13.0 million, versus $8.6 million |
| Net income attributable to common shareholders | $8.5 million | $13.7 million |
| Diluted EPS | $0.19, versus $0.12 | $0.30, versus $0.19 |
Operating margin improved to 7.0% for the quarter from 5.5% and to 4.5% for the nine-month period from 3.4%. Net margin attributable to common shareholders was 4.1% for the quarter and 2.7% for the nine-month period. The nine-month effective tax rate was 24.8%, broadly consistent with 25.0% in 2016; the quarterly rate increased to 30.6% from 24.3%.
Cash and cash equivalents were $29.6 million at September 30, 2017, compared with $20.6 million at December 31, 2016. Restricted cash was $15.8 million. Total assets increased to $903.6 million from $797.3 million, driven partly by higher energy assets and Federal ESPC receivables.
Operating activities used $90.8 million during the first nine months, compared with $47.4 million used in 2016. Investing activities used $70.3 million, including $68.7 million for energy assets. Financing activities provided $170.2 million, including $122.3 million from Federal ESPC projects, $48.9 million from long-term project financings, $30.6 million from sale-leaseback financings, and $12.8 million of net senior-facility borrowings. Net cash increased $9.0 million.
Debt and capital lease liabilities totaled approximately $202.3 million excluding Federal ESPC liabilities, while Federal ESPC liabilities were $188.4 million. The senior secured facility included $27.9 million drawn on the revolver, $24.0 million outstanding under the term loan, and $25.0 million of revolver availability. The company was in compliance with its debt covenants, including total funded debt to EBITDA below 2.75 to 1.0 and debt-service coverage of at least 1.5 to 1.0.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by the U.S. Federal segment, which increased 37.4% for the quarter and 33.2% for the nine months. U.S. Regions revenue declined 6.5% and 7.7%, respectively.
- U.S. Regions profitability weakened materially, with pretax income down 44.3% for the quarter and 66.7% for the nine months, primarily from fewer active projects and lower-margin project mix.
- Small-Scale Infrastructure revenue increased, but pretax income declined 28.1% for the quarter and 29.7% for the nine months because a significant higher-margin project had been completed in 2016.
- Canada returned to pretax profitability, compared with a loss in the prior-year periods. The comparison benefited from the absence of 2016 restructuring and bad-debt charges and favorable foreign-exchange effects.
- Gross margin contracted despite higher revenue, primarily because of project mix and increased lower-margin U.S. Regions activity.
- SG&A decreased 6.3% for the quarter and 2.1% for the nine months, partly because 2016 included customer-bankruptcy write-downs and Canada restructuring charges.
- Fully contracted backlog increased to approximately $627.5 million from $443.8 million at September 30, 2016. Twelve-month backlog increased to $411.9 million from $285.9 million, and awarded but unsigned projects increased to $1.097 billion from $1.055 billion.
- The company repurchased 529,795 Class A shares for $3.0 million during the first nine months, including 108,971 shares for $0.8 million during the third quarter. Approximately $5.7 million remained available under the $15.0 million authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash, revolving-credit availability, and access to credit markets were expected to fund operations through November 6, 2018 and thereafter. The company planned an additional $5 million to $10 million of capital expenditures, principally for renewable-energy plants, during the remainder of 2017.
Operating cash flow was substantially negative because Federal ESPC receivables increased by $119.1 million. Under the financing structure, related customer cash proceeds are presented as financing inflows, while project expenditures reduce operating cash flow. This presentation makes operating cash flow less representative of underlying project economics.
The company formed an additional investment fund in 2017 and consolidated the related variable-interest entities. Redeemable non-controlling interests were $7.5 million. Management cautioned that HLBV allocations to these investors can create quarter-to-quarter volatility in income attributable to common shareholders.
Revenue recognition under ASC 606 was scheduled for adoption beginning January 1, 2018 using the modified retrospective method. Management had not quantified the impact and identified potentially material changes involving uninstalled materials, commissions, and the timing of renewable-energy incentive revenue. The company was also evaluating the future effects of the lease, restricted-cash, goodwill, stock-compensation, cash-flow, and hedging standards.
Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The filing reported no material change to previously disclosed risk factors. Key risks include project execution and cost estimates, seasonal and government procurement cycles, long sales cycles, customer and contract collectability, dependence on financing, covenant compliance, interest-rate and foreign-currency exposure, renewable-energy incentives, and the conversion of backlog and awarded projects into signed contracts and revenue.
Important Facts for Investors to Verify
- Whether the substantial increase in backlog converts to revenue and cash flow within expected construction periods.
- The sustainability of improved U.S. Federal and Canada performance and the timing of recovery in U.S. Regions margins.
- The effect of ASC 606 adoption on revenue timing, retained earnings, margins, and backlog conversion.
- Operating cash flow and working-capital needs, particularly growth in Federal ESPC receivables and project costs in excess of billings.
- Availability and terms of refinancing for project loans and the company’s ability to maintain senior-facility and project-financing covenants.
- Exposure to interest-rate changes, foreign-currency movements, renewable-energy incentives, and project-level guarantees or recapture obligations.
- The remaining share-repurchase authorization and its effect on share count, liquidity, and capital allocation.