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AMRC > SEC Filings for AMRC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for AMERESCO, INC.

Form 10-Q for AMERESCO, INC.


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 17, 2014 with the U.S. Securities and Exchange Commission ("SEC"). This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, including statements that refer to projections regarding our future financial performance, our anticipated growth and trends in our businesses, our future capital needs and capital expenditures; our future market position and competitive changes in the marketplace for our services; our ability to integrate new technologies into our services; our ability to access credit or capital markets; our reliance on subcontractors; potential acquisitions or divestitures; the continued availability of key personnel; and other characterizations of future events or circumstances are forward-looking statements. These statements are often, but not exclusively, identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," "target," "project," "predict" or "continue," and similar expressions or variations. These forward-looking statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Risks, uncertainties and factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and elsewhere in this Report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to do so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Ameresco is a leading provider of energy efficiency solutions for facilities throughout North America. We provide solutions that enable customers to reduce their energy consumption, lower their operating and maintenance costs and realize environmental benefits. Our comprehensive set of services includes upgrades to a facility's energy infrastructure and the construction and operation of small-scale renewable energy plants.
In addition to organic growth, strategic acquisitions of complementary businesses and assets have been an important part of our historical development. Since inception, we have completed numerous acquisitions, which have enabled us to broaden our service offerings and expand our geographical reach. Our acquisition of the energy services business of Duke Energy in 2002 expanded our geographical reach into Canada and the southeastern United States and enabled us to penetrate the Federal Government market for energy efficiency projects. The acquisition of the energy services business of Exelon in 2004 expanded our geographical reach into the Midwest. Our acquisition of the energy services business of Northeast Utilities in 2006 substantially grew our capability to provide services for the Federal market and in Europe. Our acquisition of Southwestern Photovoltaic in 2007 significantly expanded our offering of solar energy products and services. Our acquisition of energy services company Quantum in 2010 expanded our geographical reach into the northwest U.S.
We made three acquisitions in 2011. Our acquisition of energy efficiency and demand side management consulting services provider Applied Energy Group, Inc. ("AEG"), expanded our service offering to utility customers. Our acquisition of APS Energy Services Company, Inc., which we renamed Ameresco Southwest, a company that provides a full range of integrated energy efficiency and renewable energy solutions, strengthened our geographical position in the southwest U.S. Our acquisition of the xChangePoint® and energy projects businesses from Energy and Power Solutions, Inc. ("EPS"), which we operate as Ameresco Intelligent Systems ("AIS"), expanded our service offerings to private sector commercial and industrial customers. AIS offers energy efficiency solutions to customers across North America encompassing the food and beverage, meat, dairy, paper, aerospace, oil and gas and REIT industries.
Our acquisition of infrastructure asset management solutions provider FAME Facility Software Solutions Inc. ("FAME") in 2012 expanded our asset planning consulting and software services offerings and our geographical position in western Canada.


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Our acquisition of the business of Ennovate Corporation in the first quarter of 2013 increased our footprint and penetration in the Rocky Mountain area. Our acquisition of energy management consulting companies The Energy Services Partnership Limited and ESP Response Limited (together "ESP") in the second quarter of 2013 added a local presence in the United Kingdom, expertise and seasoned energy industry professionals to support multi-national customers of our enterprise energy management service offerings. Effects of Seasonality
We are subject to seasonal fluctuations and construction cycles, particularly in climates that experience colder weather during the winter months, such as the northern United States and Canada, or at educational institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. In addition, government customers, many of which have fiscal years that do not coincide with ours, typically follow annual procurement cycles and appropriate funds on a fiscal-year basis even though contract performance may take more than one year. Further, government contracting cycles can be affected by the timing of, and delays in, the legislative process related to government programs and incentives that help drive demand for energy efficiency and renewable energy projects. As a result, our revenue and operating income in the third quarter are typically higher, and our revenue and operating income in the first quarter are typically lower, than in other quarters of the year. As a result of such fluctuations, we may occasionally experience declines in revenue or earnings as compared to the immediately preceding quarter, and comparisons of our operating results on a period-to-period basis may not be meaningful. Our annual and quarterly financial results are also subject to significant fluctuations as a result of other factors, many of which are outside our control. See "Our business is affected by seasonal trends and construction cycles, and these trends and cycles could have an adverse effect on our operating results" in Item 1A, Risk Factors in our Annual Report on Form 10-K. Backlog and Awarded Projects
Total construction backlog represents projects that are active within our ESPC sales cycle. Our sales cycle begins with the initial contact with the customer and ends, when successful, with a signed contract, also referred to as fully-contracted backlog. Our sales cycle recently has been averaging 18 to 40 months. Awarded backlog is created when a potential customer awards a project to Ameresco following a request for proposal. Once a project is awarded but not yet contracted, we typically conduct a detailed energy audit to determine the scope of the project as well as identify the savings that may be expected to be generated from upgrading the customer's energy infrastructure. At this point, we also determine the sub-contractor, what equipment will be used, and assist in arranging for third party financing, as applicable. Recently, awarded projects have been taking 12 to 16 months to result in a signed contract and thus convert to fully-contracted backlog. It may take longer, however, depending upon the size and complexity of the project. Historically, approximately 90% of our awarded projects ultimately have resulted in a signed contract. After the customer and Ameresco agree to the terms of the contract and the contract becomes executed, the project moves to fully-contracted backlog. The contracts reflected in our fully-contracted backlog typically have a construction period of 12 to 24 months and we typically expect to recognize revenues for such contracts over the same period. Fully-contracted backlog begins converting into revenues generated from backlog on a percentage-of-completion basis once construction has commenced. See "We may not recognize all revenues from our backlog or receive all payments anticipated under awarded projects and customer contracts" and "In order to secure contracts for new projects, we typically face a long and variable selling cycle that requires significant resource commitments and requires a long lead time before we realize revenues" in Item 1A, Risk Factors in our Annual Report on Form 10-K.
As of March 31, 2014, we had backlog of approximately $395.1 million in expected future revenues under signed customer contracts for the installation or construction of projects, which we sometimes refer to as fully-contracted backlog; and we also had been awarded projects for which we do not yet have signed customer contracts with estimated total future revenues of an additional $963.6 million. As of March 31, 2013, we had fully-contracted backlog of approximately $343.8 million in expected future revenues under signed customer contracts for the installation or construction of projects; and we also had been awarded projects for which we had not yet signed customer contracts with estimated total future revenues of an additional $1.2 billion. Critical Accounting Policies and Estimates This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. The most significant estimates with regard to these condensed consolidated financial statements relate to estimates of final contract


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profit in accordance with long-term contracts, project development costs, project assets, impairment of goodwill, impairment of long-lived assets, fair value of derivative financial instruments, income taxes and stock-based compensation expense.
Such estimates and assumptions are based on historical experience and on various other factors that management believes to be reasonable under the circumstances. Estimates and assumptions are made on an ongoing basis, and accordingly, the actual results may differ from these estimates.
The following, in no particular order, are certain critical accounting policies that among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
• Revenue Recognition;

• Project Assets;

• Derivative Financial Instruments; and

• Variable Interest Entities.

Further details regarding our critical accounting policies and estimates can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K. In addition, please refer to Note 2, "Summary of Significant Accounting Policies," of our Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q. Management has determined that no material changes concerning our critical accounting policies have occurred since December 31, 2013.
Non-GAAP Financial Measures
We use the non-GAAP financial measures defined and discussed below to provide investors and others with useful supplemental information to our financial results prepared in accordance with GAAP. These non-GAAP financial measures should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. The tables below provide a reconciliation of these non-GAAP measures to the most directly comparable financial measures prepared in accordance with GAAP. We understand that, although measures similar to these non-GAAP financial measures are frequently used by investors and securities analysts in their evaluation of companies, they have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for the most directly comparable GAAP financial measures or an analysis of our results of operations as reported under GAAP. To properly and prudently evaluate our business, we encourage investors to review our GAAP financial statements included above, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
We define adjusted EBITDA as operating income (loss) before depreciation, amortization of intangible assets, impairment of goodwill and stock-based compensation expense. We believe adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons: adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, capital structures and the methods by which assets were acquired; securities analysts often use adjusted EBITDA and similar non-GAAP measures as supplemental measures to evaluate the overall operating performance of companies; and by comparing our adjusted EBITDA in different historical periods, investors can evaluate our operating results without the additional variations of depreciation and amortization expense, goodwill impairment and stock-based compensation expense.
Our management uses adjusted EBITDA: as a measure of operating performance, because it does not include the impact of items that we do not consider indicative of our core operating performance; for planning purposes, including the preparation of our annual operating budget; to allocate resources to enhance the financial performance of the business; to evaluate the effectiveness of our business strategies; and in communications with the board of directors and investors concerning our financial performance. Adjusted Free Cash Flow
We define adjusted free cash flow as cash flows from operating activities, less purchases of property and equipment, plus proceeds from Federal ESPC projects. Cash received in payment of Federal ESPC projects is treated as a financing cash flow under GAAP due to the unusual financing structure for these projects. These cash flows, however, correspond to the revenues


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generated by these projects. Thus we believe that adjusting operating cash flow to include the cash generated by our Federal ESPC projects and to give effect for purchases of property and equipment provides investors with a useful measure for evaluating the cash generating ability of our core operating business. Our management uses adjusted free cash flow as a measure of liquidity because it captures all sources of cash associated with our revenues generated by operations.
Reconciliations
The following table presents a reconciliation of adjusted EBITDA to operating loss, the most comparable GAAP measure (in thousands):

                                                      Three Months Ended March 31,
                                                         2014               2013
Operating loss                                     $      (6,785 )     $      (2,082 )
Depreciation and amortization of intangible assets         5,149               5,698
Stock-based compensation                                     718                 671
Adjusted EBITDA                                    $        (918 )     $       4,287

The following table presents a reconciliation of adjusted free cash flow to cash flows from operating activities, the most comparable GAAP measure (in thousands):

                                              Three Months Ended March 31,
                                               2014                2013
                                                                 (Revised)
Cash flows from operating activities      $      2,352       $       (33,620 )
Less: purchases of property and equipment         (266 )              (1,094 )
Plus: proceeds from Federal ESPC projects        3,522                 6,555
Adjusted free cash flow                   $      5,608       $       (28,159 )

Results of Operations
The following table sets forth certain financial data from the consolidated
statements of income (loss) expressed as a percentage of revenues for the
periods presented (in thousands):
                                                 Three Months Ended March 31,
                                             2014                            2013
                                    Dollar           % of           Dollar           % of
                                    Amount         Revenues         Amount         Revenues
Revenues                         $   100,731          100.0  %   $   110,136          100.0  %
Cost of revenues                      83,177           82.6  %        88,617           80.5  %
Gross profit                          17,554           17.4  %        21,519           19.5  %
Selling, general and
administrative expenses               24,339           24.2  %        23,601           21.4  %
Operating loss                        (6,785 )         (6.7 )%        (2,082 )         (1.9 )%
Other expenses, net                    1,732            1.7  %           465            0.4  %
Loss before benefit from income
taxes                                 (8,517 )         (8.5 )%        (2,547 )         (2.3 )%
Income tax benefit                      (236 )         (0.2 )%          (623 )         (0.6 )%
Net loss                         $    (8,281 )         (8.2 )%   $    (1,924 )         (1.7 )%

Revenues
The following table sets forth a comparison of our revenues for the periods presented (in thousands):
Three Months Ended March 31, Dollar Percentage 2014 2013 Change Change Revenues $ 100,731 $ 110,136 $ (9,405 ) (8.5 )%

We derive a majority of our revenue from energy efficiency products and services, which accounted for approximately 64.3% and 63.4% of revenues for the three months ended March 31, 2014 and 2013, respectively. Revenues were down $9.4 million, or 8.5%, for the three months ended March 31, 2014 compared to same period of 2013 primarily due to a decrease in


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the size and phase of completion of active projects, partially offset by an increase in revenues from Small-Scale Infrastructure, enterprise energy management services and the sale of solar PV energy products and systems ("integrated-PV").
Cost of Revenues and Gross Profit
The following table sets forth a comparison of our cost of revenues and gross profit for the periods presented (in thousands):

                    Three Months Ended March 31,         Dollar      Percentage
                       2014               2013           Change        Change
Cost of revenues $      83,177       $      88,617     $ (5,440 )      (6.1 )%
Gross margin %            17.4 %              19.5 %

The majority of our cost of revenues are incurred in connection with energy efficiency projects for which expenditures represented approximately 82.0% and 79.4% of corresponding revenue for the three months ended March 31, 2014 and 2013, respectively. Cost of revenues decreased $(5.4) million, or (6.1)%, for the three months ended March 31, 2014 compared to the same period of 2013 primarily due to the decrease in revenues described above, partially offset by an unfavorable mix of lower margin revenue sources and higher fuel and operating costs, at our Savannah River Site ("SRS"), due to weather related issues. As a result of certain acquisitions, we have intangible assets related to customer contracts; these are amortized over a period of approximately one to five years from the respective date of acquisition. This amortization is recorded as a cost of revenues in the consolidated statements of income (loss). For the three months ended March 31, 2014 and 2013, we recorded amortization expense of $0.3 million and $0.2 million, respectively, related to customer contracts.
Selling, General and Administrative Expenses The following table sets forth a comparison of our selling, general and administrative expenses for the periods presented (in thousands):

                                   Three Months Ended March 31,          Dollar         Percentage
                                       2014              2013            Change           Change
Selling, general and
administrative expenses          $        24,339     $    23,601     $        738            3.1 %

Selling, general and administrative expenses increased $0.7 million, or 3.1%, for the three months ended March 31, 2014 compared to same period of 2013 primarily due to severance charges.
Amortization expense related to customer relationships, non-compete agreements, technology and trade names intangible assets is included in selling, general and administrative expenses in the consolidated statements of income (loss). For the three months ended March 31, 2014 and 2013, we recorded amortization expense, related to these intangible assets, of $0.6 million and $0.7 million, respectively.
Other Expenses, Net
Other expenses, net includes unrealized gains and losses from derivatives, interest income and expenses, amortization of deferred financing costs, net and foreign currency transaction gains and losses. Other expenses, net, increased $1,268 for the three months ended March 31, 2014 compared to same period of 2013 primarily due to a $0.6 million increase in interest expense, net of interest income, $0.3 million related to foreign currency transaction losses and a $0.3 million decrease in unrealized gains on derivatives. Loss Before Taxes
Loss before taxes increased $6.0 million, or 234.4%, for the three months ended March 31, 2014 to a loss of $8.5 million from a loss of $2.5 million for the three months ended March 31, 2013 due to the reasons described above. Benefit from Income Taxes
The benefit for income taxes was $0.2 million for the the three months ended March 31, 2014, compared to a benefit of $0.6 million for the three months ended March 31, 2013. The estimated annual effective tax rate applied for the three months ended March 31, 2014 was 2.8%, compared to 24.5% for the three months ended March 31, 2013, due to investment tax credits on energy efficiency projects placed or expected to be placed in service in 2014 as compared to deductions allowed under Section 179D of the Internal Revenue Code in 2013. The principal reason for the difference between the statutory rate and the estimated annual effective rate for 2014 were the effects of investment tax credits and production tax credits to which we are


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entitled from plants we own. The principal reasons for the difference between the statutory rate and the estimated annual effective rate for 2013 were the effects of deductions permitted under Section 179D in 2013, which relate to the installation of certain energy efficiency equipment in Federal, state, provincial and local government-owned buildings, as well as tax credits to which we are entitled from plants we own.
Net Loss
Net loss increased for the three months ended March 31, 2014 by $(6.4) million, or 330.4%, to a loss of $8.3 million from a loss of $1.9 million for the three months ended March 31, 2013 due primarily to the decrease in revenues and unfavorable mix of lower margin projects, as explained above. Earnings per share for the three months ended March 31, 2014 was $(0.18) per basic share, representing a decrease of $0.14, or 350.0%, compared to the same period of 2013, and $(0.18) per diluted share, representing a decrease of $0.14, or 350.0%, compared to the same period of 2013. Business Segment Analysis (in thousands) Our reportable segments are U.S. Regions, U.S. Federal, Canada and Small-Scale Infrastructure. Our U.S. Regions, U.S. Federal and Canada segments offer energy efficiency products and services, which include the design, engineering and installation of equipment and other measures to improve the efficiency and control the operation of a facility's energy infrastructure; renewable energy products and services, which include the construction of small-scale plants for customers that produce electricity, gas, heat or cooling from renewable sources of energy; and O&M services. Our Small-Scale Infrastructure segment sells electricity, processed LFG, heat or cooling produced from renewable sources of energy from small-scale plants that we own. The "All Other" category offers enterprise energy management services, consulting services and the sale and installation of solar PV energy products and systems. These segments do not include results of other activities, such as corporate operating expenses not specifically allocated to the segments.

U.S. Regions
                          Three Months Ended March 31,            Dollar      Percentage
                                2014                  2013        Change        Change
Revenues            $        41,006                 $ 54,698    $ (13,692 )      (25.0 )%
Income before taxes $           284                 $  2,112    $  (1,828 )      (86.6 )%

Revenues for the U.S. Regions segment decreased for the three months ended March 31, 2014 compared to same period of 2013 by $(13.7) million, or 25.0%, to $41.0 million due to a decrease in the size and phase of completion of active projects.
Income before taxes for the U.S. Regions segment decreased for the three months ended March 31, 2014 compared to same period of 2013 by $(1.8) million, or 86.6%, to $0.3 million. The decrease was primarily due to the decrease in revenues described above and an unfavorable mix of lower margin revenue sources.

U.S. Federal
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