UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________.
Commission File Number: 001-34811
Ameresco, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 04-3512838 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
111 Speen Street, Suite 410 Framingham, Massachusetts | | 01701 |
(Address of Principal Executive Offices) | | (Zip Code) |
(508) 661-2200
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o | Accelerated Filer þ | Non-accelerated filer o | Smaller reporting company o |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | Shares outstanding as of November 3, 2014 |
Class A Common Stock, $0.0001 par value per share | 28,349,792 |
Class B Common Stock, $0.0001 par value per share | 18,000,000 |
AMERESCO, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMERESCO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) |
| | | | | | | |
| September 30, | | December 31, |
| 2014 | | 2013 |
| (Unaudited) | | |
ASSETS | | |
Current assets: | | | |
Cash and cash equivalents | $ | 23,486 |
| | $ | 17,171 |
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Restricted cash | 13,542 |
| | 15,497 |
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Accounts receivable, net | 92,728 |
| | 82,008 |
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Accounts receivable retainage | 14,378 |
| | 21,019 |
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Costs and estimated earnings in excess of billings | 53,318 |
| | 71,204 |
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Inventory, net | 9,050 |
| | 10,257 |
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Prepaid expenses and other current assets | 12,932 |
| | 14,177 |
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Income tax receivable | 7,516 |
| | 3,971 |
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Deferred income taxes | 6,224 |
| | 4,843 |
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Project development costs | 11,565 |
| | 9,686 |
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Total current assets | 244,739 |
| | 249,833 |
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Federal ESPC receivable | 65,335 |
| | 44,297 |
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Property and equipment, net | 7,855 |
| | 8,699 |
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Project assets, net | 216,326 |
| | 210,744 |
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Deferred financing fees, net | 4,594 |
| | 5,320 |
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Goodwill | 61,116 |
| | 53,074 |
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Intangible assets, net | 13,014 |
| | 10,253 |
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Other assets | 21,386 |
| | 22,440 |
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Total assets | $ | 634,365 |
| | $ | 604,660 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 13,623 |
| | $ | 12,974 |
|
Accounts payable | 79,787 |
| | 88,733 |
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Accrued expenses and other current liabilities | 23,501 |
| | 11,947 |
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Billings in excess of cost and estimated earnings | 18,968 |
| | 16,933 |
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Income taxes payable | — |
| | 615 |
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Total current liabilities | 135,879 |
| | 131,202 |
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Long-term debt, less current portion | 108,449 |
| | 103,222 |
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Federal ESPC liabilities | 64,833 |
| | 44,297 |
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Deferred income taxes | 15,267 |
| | 11,318 |
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Deferred grant income | 8,980 |
| | 8,163 |
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Other liabilities | 19,760 |
| | 29,652 |
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Commitments and contingencies (Note 6) |
| |
|
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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AMERESCO, INC. |
CONSOLIDATED BALANCE SHEETS — (Continued) |
(in thousands, except share and per share amounts) |
| September 30, | | December 31, |
| 2014 | | 2013 |
| (Unaudited) | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2014 and December 31, 2013 | $ | — |
| | $ | — |
|
Class A common stock, $0.0001 par value, 500,000,000 shares authorized, 28,349,792 shares issued and outstanding at September 30, 2014, 27,869,317 shares issued and outstanding at December 31, 2013 | 3 |
| | 3 |
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Class B common stock, $0.0001 par value, 144,000,000 shares authorized, 18,000,000 shares issued and outstanding at September 30, 2014 and December 31, 2013 | 2 |
| | 2 |
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Additional paid-in capital | 108,625 |
| | 102,587 |
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Retained earnings | 172,823 |
| | 171,094 |
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Accumulated other comprehensive (loss) income, net | (257 | ) | | 3,112 |
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Non-controlling interest | 1 |
| | 8 |
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Total stockholders’ equity | 281,197 |
| | 276,806 |
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Total liabilities and stockholders’ equity | $ | 634,365 |
| | $ | 604,660 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | $ | 168,891 |
| | $ | 161,648 |
| | $ | 412,180 |
| | $ | 398,037 |
|
Cost of revenues | 133,867 |
| | 131,585 |
| | 331,666 |
| | 323,072 |
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Gross profit | 35,024 |
| | 30,063 |
| | 80,514 |
| | 74,965 |
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Selling, general and administrative expenses | 25,800 |
| | 22,482 |
| | 74,293 |
| | 71,375 |
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Operating income | 9,224 |
| | 7,581 |
| | 6,221 |
| | 3,590 |
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Other expenses, net | 2,465 |
| | 1,588 |
| | 4,993 |
| | 2,502 |
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Income before (benefit) provision for income taxes | 6,759 |
| | 5,993 |
| | 1,228 |
| | 1,088 |
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Income tax (benefit) provision | (532 | ) | | 1,448 |
| | (501 | ) | | 248 |
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Net income | $ | 7,291 |
| | $ | 4,545 |
| | $ | 1,729 |
| | $ | 840 |
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Net income per share attributable to common shareholders: | |
| | | | | | |
Basic | $ | 0.16 |
| | $ | 0.10 |
| | $ | 0.04 |
| | $ | 0.02 |
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Diluted | $ | 0.16 |
| | $ | 0.10 |
| | $ | 0.04 |
| | $ | 0.02 |
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Weighted average common shares outstanding: | |
| | |
| | | | |
Basic | 46,315,968 |
| | 45,621,552 |
| | 46,098,158 |
| | 45,472,517 |
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Diluted | 46,987,522 |
| | 46,605,360 |
| | 46,636,529 |
| | 46,390,468 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
|
| | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
Net income | $ | 7,291 |
| | $ | 4,545 |
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Other comprehensive income: | | | |
Unrealized gain from interest rate hedge, net of tax of $4 and $36, respectively | 372 |
| | 90 |
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Foreign currency translation adjustments | (2,018 | ) | | 1,163 |
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Total other comprehensive (loss) income | (1,646 | ) | | 1,253 |
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Comprehensive income | $ | 5,645 |
| | $ | 5,798 |
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| | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Net income | $ | 1,729 |
| | $ | 840 |
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Other comprehensive (loss) income: | | | |
Unrealized (loss) gain from interest rate hedge, net of tax of $549 and $(720), respectively | (1,432 | ) | | 2,621 |
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Foreign currency translation adjustments | (1,937 | ) | | (384 | ) |
Total other comprehensive (loss) income | (3,369 | ) | | 2,237 |
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Comprehensive (loss) income | $ | (1,640 | ) | | $ | 3,077 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(in thousands, except share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | Additional | | | | Other | | | | Total |
| | Class A Common Stock | | Class B Common Stock | | Paid-in | | Retained | | Comprehensive | | Non-controlling | | Stockholders’ |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Interest | | Equity |
Balance, December 31, 2013 | | 27,869,317 |
| | $ | 3 |
| | 18,000,000 |
| | $ | 2 |
| | $ | 102,587 |
| | $ | 171,094 |
| | $ | 3,112 |
| | $ | 8 |
| | $ | 276,806 |
|
Exercise of stock options | | 480,475 |
| | — |
| | — |
| | — |
| | 1,434 |
| | — |
| | — |
| | — |
| | 1,434 |
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Stock-based compensation expense, including excess tax benefits of $2,496 | | — |
| | — |
| | — |
| | — |
| | 4,604 |
| | — |
| | — |
| | — |
| | 4,604 |
|
Unrealized loss from interest rate hedge, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,432 | ) | | — |
| | (1,432 | ) |
Foreign currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,937 | ) | | — |
| | (1,937 | ) |
Non-controlling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,729 |
| | — |
| | — |
| | 1,729 |
|
Balance, September 30, 2014 | | 28,349,792 |
| | $ | 3 |
| | 18,000,000 |
| | $ | 2 |
| | $ | 108,625 |
| | $ | 172,823 |
| | $ | (257 | ) |
| $ | 1 |
| | $ | 281,197 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| | | (Revised, see Note 2) |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 1,729 |
| | $ | 840 |
|
Adjustments to reconcile net income to cash flows from operating activities: | | | |
Depreciation of project assets | 11,162 |
| | 9,782 |
|
Depreciation of property and equipment | 2,495 |
| | 2,466 |
|
Amortization of deferred financing fees | 1,086 |
| | 851 |
|
Amortization of intangible assets | 3,266 |
| | 3,257 |
|
Provision for bad debts | 1,253 |
| | 509 |
|
Gain on sale of assets | — |
| | (632 | ) |
Unrealized gain on interest rate swaps | (983 | ) | | (1,378 | ) |
Stock-based compensation expense | 2,108 |
| | 2,125 |
|
Deferred income taxes | 3,343 |
| | (3,554 | ) |
Excess tax benefits from stock-based compensation arrangements | (2,496 | ) | | (418 | ) |
Changes in operating assets and liabilities: | | | |
Restricted cash | (182 | ) | | (1,182 | ) |
Accounts receivable | (11,282 | ) | | 4,749 |
|
Accounts receivable retainage | 6,392 |
| | (1,610 | ) |
Federal ESPC receivable | (33,388 | ) | | (24,318 | ) |
Inventory | 1,172 |
| | 754 |
|
Costs and estimated earnings in excess of billings | 17,768 |
| | (1,421 | ) |
Prepaid expenses and other current assets | 1,266 |
| | (595 | ) |
Project development costs | (812 | ) | | (2,843 | ) |
Other assets | (3,676 | ) | | (2,598 | ) |
Accounts payable, accrued expenses and other current liabilities | (3,754 | ) | | (25,354 | ) |
Billings in excess of cost and estimated earnings | 1,403 |
| | (6,704 | ) |
Other liabilities | (5,815 | ) | | 2,378 |
|
Income taxes payable | (4,148 | ) | | (417 | ) |
Cash flows from operating activities | (12,093 | ) | | (45,313 | ) |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (1,553 | ) | | (2,331 | ) |
Purchases of project assets | (16,530 | ) | | (35,755 | ) |
Grant awards received on project assets | 3,727 |
| | 1,580 |
|
Proceeds from sale of assets | — |
| | 3,510 |
|
Acquisitions, net of cash received | (13,903 | ) | | (9,945 | ) |
Cash flows from investing activities | $ | (28,259 | ) | | $ | (42,941 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
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AMERESCO, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) |
(in thousands) |
(Unaudited) |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| | | (Revised, see Note 2) |
Cash flows from financing activities: | |
| | |
|
Excess tax benefits from stock-based compensation arrangements | $ | 2,496 |
| | $ | 418 |
|
Payments of financing fees | (368 | ) | | (505 | ) |
Proceeds from exercises of options | 1,435 |
| | 1,676 |
|
Proceeds from senior secured credit facility | 20,000 |
| | 18,000 |
|
Proceeds from long-term debt financing | — |
| | 9,434 |
|
Proceeds from Federal ESPC projects | 32,886 |
| | 21,383 |
|
Non-controlling interest | (7 | ) | | 31 |
|
Restricted cash | 2,758 |
| | 1,270 |
|
Payments on long-term debt | (13,881 | ) | | (8,385 | ) |
Cash flows from financing activities | 45,319 |
| | 43,322 |
|
Effect of exchange rate changes on cash | 1,348 |
| | 374 |
|
Net increase (decrease) in cash and cash equivalents | 6,315 |
| | (44,558 | ) |
Cash and cash equivalents, beginning of period | 17,171 |
| | 63,348 |
|
Cash and cash equivalents, end of period | $ | 23,486 |
| | $ | 18,790 |
|
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 4,999 |
| | $ | 4,881 |
|
Cash paid for income taxes | $ | 2,650 |
| | $ | 3,350 |
|
Non-cash Federal ESPC settlement | $ | 12,350 |
| | $ | 88,556 |
|
Accrued purchases of project assets | $ | 7,319 |
| | $ | 2,952 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
Ameresco, Inc. (including its subsidiaries, the “Company”) was organized as a Delaware corporation on April 25, 2000. The Company is a provider of energy efficiency solutions for facilities throughout North America. The Company provides solutions, both products and services, that enable customers to reduce their energy consumption, lower their operating and maintenance costs and realize environmental benefits. The Company’s comprehensive set of services includes upgrades to a facility’s energy infrastructure and the construction and operation of small-scale renewable energy plants. It also sells certain photovoltaic (“PV”) equipment worldwide. The Company operates in the United States, Canada and Europe.
The Company is compensated through a variety of methods, including: 1) direct payments based on fee-for-services contracts (utilizing lump-sum or cost-plus pricing methodologies); 2) the sale of energy from the Company’s generating assets; and 3) direct payment for photovoltaic equipment and systems.
The condensed consolidated financial statements as of September 30, 2014, and for the nine months ended September 30, 2014 and 2013, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. The interim condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 17, 2014. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts have been reclassified in the prior year financial statements to conform to the current year presentation.
During the fourth quarter of 2013, the Company changed the manner in which advances received from third-party investors under agreements to finance certain energy savings performance contract (“ESPC”) projects with various Federal Government agencies were classified in the consolidated statements of cash flows. The Company concluded that as the transfers of receivables under these agreements do not qualify for sales accounting under accounting standards codification (“ASC”) 860, Transfers and Servicing, until final customer acceptance of the work, the advances from the investors would be better classified as financing cash flows rather than operating cash flows where they had been previously presented. The use of the cash received under these arrangements to pay project costs will continue to be classified as operating cash flows. Due to the manner in which the energy savings performance contracts with the investors are structured, operating cash flows now only reflect the ESPC contract expenditure outflows and do not reflect any inflows from the corresponding contract revenues. Upon acceptance of the project by the Federal customer the ESPC receivable and corresponding ESPC liability are removed from the Company’s consolidated balance sheet as a non-cash settlement.
The following is a summary of the impact of the change on the previously reported amounts in the consolidated statements of cash flows:
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| | | | | | | | | | | |
| Nine Months Ended September 30, 2013 |
| As Reported | | Adjustment | | Revised |
Cash flows from operating activities | $ | (15,112 | ) | | $ | (30,201 | ) | | $ | (45,313 | ) |
Cash flows from investing activities | $ | (42,941 | ) | | $ | — |
| | $ | (42,941 | ) |
Cash flows from financing activities | $ | 13,121 |
| | $ | 30,201 |
| | $ | 43,322 |
|
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Ameresco, Inc., its wholly owned subsidiaries and one subsidiary for which there is a minority shareholder. All significant intercompany accounts and transactions have been eliminated. Gains and losses from the translation of all foreign currency financial statements are recorded in accumulated other comprehensive income within stockholders’ equity. The Company prepares its financial statements in conformity with GAAP.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions used in these condensed consolidated financial statements relate to management’s estimates of final construction contract profit in accordance with accounting for long-term contracts, allowance for doubtful accounts, inventory reserves, project development costs, fair value of derivative financial instruments and stock-based awards, impairment of long-lived assets, income taxes, self insurance reserves and potential liability in conjunction with certain commitments and contingencies. Actual results could differ from those estimates.
The Company is self-insured for employee health insurance. The maximum exposure in fiscal year 2014 under the plan is $75 per covered participant, after which reinsurance takes effect. The liability for unpaid claims and associated expenses, including incurred but not reported claims, is determined by management and reflected in the Company’s consolidated balance sheets in accrued expenses and other current liabilities. The liability is calculated based on historical data, which considers both the frequency and settlement amount of claims. The Company’s estimated accrual for this liability could be different than its ultimate obligation if variables such as the frequency or amount of future claims differ significantly from management’s assumptions.
Cash and Cash Equivalents
Cash includes cash on deposit, overnight repurchase agreements and amounts invested in highly liquid money market funds. Cash equivalents consist of short term investments with original maturities of three months or less. The Company maintains accounts with financial institutions and the balances in such accounts, at times, exceed Federally insured limits. This credit risk is divided among a number of financial institutions that management believes to be of high quality. The carrying amount of cash and cash equivalents approximates their fair value.
Restricted Cash
Restricted cash consists of cash held in an escrow account in association with construction draws for ESPCs, construction of project assets, operating and maintenance reserve accounts and cash collateralized letters of credit as well as cash required under term loans to be maintained in debt service reserve accounts until all obligations have been indefeasibly paid in full. Restricted cash also includes funds held for clients, which represent assets that, based upon the Company’s intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds to third parties, primarily utility service providers, relating to the Company’s enterprise energy management services.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the period. Bad debts are written off against the allowance when identified.
Changes in the allowance for doubtful accounts are as follows:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 |
| 2013 |
Allowance for doubtful accounts, beginning of period | $ | 1,519 |
| | $ | 1,174 |
|
Charges to costs and expenses | 1,253 |
| | 509 |
|
Account write-offs and other | (674 | ) | | (63 | ) |
Allowance for doubtful accounts, end of period | $ | 2,098 |
| | $ | 1,620 |
|
Accounts Receivable Retainage
Accounts receivable retainage represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
Inventory
Inventories, which consist primarily of PV solar panels, batteries and related accessories, are stated at the lower of cost (“first-in, first-out” method) or market (determined on the basis of estimated net realizable values). Provisions have been made to reduce the carrying value of inventory to the net realizable value.
Prepaid Expenses
Prepaid expenses consist primarily of short-term prepaid expenditures that will amortize within one year.
Federal ESPC Receivable
Federal ESPC receivable represents the amount to be paid by various Federal Government agencies for work performed and earned by the Company under specific ESPCs. The Company assigns certain of its rights to receive those payments to third-party investors that provide construction and permanent financing for such contracts. The receivable is recognized as revenue as each project is constructed. Upon completion and acceptance of the project by the Government, typically within 24 months of construction commencement, the assigned ESPC receivable from the Government and corresponding ESPC liability are eliminated from the Company’s condensed consolidated financial statements.
Project Development Costs
The Company capitalizes as project development costs only those costs incurred in connection with the development of energy projects, primarily direct labor, interest costs, outside contractor services, consulting fees, legal fees and travel, if incurred after a point in time where the realization of related revenue becomes probable. Project development costs incurred prior to the probable realization of revenue are expensed as incurred. The Company classifies as a current asset those project development efforts that are expected to proceed to construction activity in the twelve months that follow. The Company periodically reviews these balances and writes off any amounts where the realization of the related revenue is no longer probable.
Property and Equipment
Property and equipment consists primarily of office and computer equipment, and is recorded at cost. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation and amortization of property and equipment are computed on a straight-line basis over the following estimated useful lives:
|
| | |
Asset Classification | | Estimated Useful Life |
Furniture and office equipment | | Five years |
Computer equipment and software costs | | Three to five years |
Leasehold improvements | | Lesser of term of lease or five years |
Automobiles | | Five years |
Land | | Unlimited |
Project Assets
Project assets consist of costs of materials, direct labor, interest costs, outside contract services and project development costs incurred in connection with the construction of small-scale renewable energy plants that the Company owns and the implementation of energy savings contracts. These amounts are capitalized and amortized over the lives of the related assets or the terms of the related contracts.
The Company capitalizes interest costs relating to construction financing during the period of construction. The interest capitalized is included in the total cost of the project at completion. There was no interest capitalized for the three months ended September 30, 2014. There was $596 of interest capitalized for the three months ended September 30, 2013. The amount of interest capitalized for the nine months ended September 30, 2014 and 2013 was $395 and $1,311, respectively.
Routine maintenance costs are expensed in the current year’s consolidated statements of income (loss) to the extent that they do not extend the life of the asset. Major maintenance, upgrades and overhauls are required for certain components of the Company’s assets. In these instances, the costs associated with these upgrades are capitalized and are depreciated over the shorter of the remaining life of the asset or the period until the next required major maintenance or overhaul. Gains or losses on
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
disposal of property and equipment are reflected in selling, general and administrative expenses in the consolidated statements of income (loss).
The Company evaluates its long-lived assets for impairment as events or changes in circumstances indicate the carrying value of these assets may not be fully recoverable. The Company evaluates recoverability of long-lived assets to be held and used by estimating the undiscounted future cash flows before interest associated with the expected uses and eventual disposition of those assets. When these comparisons indicate that the carrying value of those assets is greater than the undiscounted cash flows, the Company recognizes an impairment loss for the amount that the carrying value exceeds the fair value.
From time to time, the Company applies for and receives cash grant awards from the U.S. Treasury Department (the “Treasury”) under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the “Act”). The Act authorized the Treasury to make payments to eligible persons who place in service qualifying renewable energy projects. The grants are paid in lieu of investment tax credits. All of the cash proceeds from the grants were used and recorded as a reduction in the cost basis of the applicable project assets. If the Company disposes of the property, or the property ceases to qualify as specified energy property, within five years from the date the property is placed in service, then a prorated portion of the Section 1603 payment must be repaid.
The Company did not receive any Section 1603 grants during the three months ended September 30, 2014 and 2013. The Company received $3,727 and $1,580 in Section 1603 grants during the nine months ended September 30, 2014 and 2013, respectively.
For tax purposes, the Section 1603 payments are not included in Federal and certain state taxable income and the basis of the property is reduced by 50% of the payment received. Deferred grant income of $8,980 and $8,163 recorded in the accompanying consolidated balance sheets as of September 30, 2014 and December 31, 2013, respectively, represents the benefit of the basis difference to be amortized to income tax expense over the life of the related property.
Deferred Financing Fees
Deferred financing fees relate to the external costs incurred to obtain financing for the Company. Deferred financing fees are amortized over the respective term of the financing using the effective interest method, with the exception of the Company’s revolving credit facility, as discussed in Note 10, for which deferred financing fees are amortized on a straight line basis over the term of the agreement.
Goodwill and Intangible Assets
The Company has classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. The Company has recorded intangible assets related to customer contracts, customer relationships, non-compete agreements, trade names and technology, each with defined useful lives. The Company assesses the impairment of goodwill and intangible assets that have indefinite lives on an annual basis (December 31st) and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company would record an impairment charge if such an assessment were to indicate that the fair value of such assets was less than their carrying values. Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible assets.
Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in the base price of the Company’s publicly traded stock for a sustained period of time. Although the Company believes goodwill and intangible assets are appropriately stated in the accompanying condensed consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance.
Other Assets
Other assets consist primarily of notes and contracts receivable due to the Company from various customers and non-current restricted cash. Other assets also include the fair value of interest rate swaps and the non-current portion of project development costs.
Asset Retirement Obligations
The Company recognizes a liability for the fair value of required asset retirement obligations (“AROs”) when such obligations are incurred. The liability is estimated on a number of assumptions requiring management’s judgment, including
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
equipment removal costs, site restoration costs, salvage costs, cost inflation rates and discount rates and is credited to its projected future value over time. The capitalized asset is depreciated using the convention of depreciation of plant assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement cost incurred is recognized as an operating gain or loss in the consolidated statements of income (loss). As of September 30, 2014 and December 31, 2013, the Company had no AROs.
Federal ESPC Liabilities
Federal ESPC liabilities represent the advances received from third-party investors under agreements to finance certain energy savings performance contract projects with various Federal Government agencies. Upon completion and acceptance of the project by the Government, typically within 24 months of construction commencement, the ESPC receivable from the Government and corresponding ESPC liability is eliminated from the Company’s consolidated balance sheet. Until recourse to the Company ceases for the ESPC receivables transferred to the investor, upon final acceptance of the work by the Government customer, the Company remains the primary obligor for financing received.
Other Liabilities
Other liabilities consist primarily of deferred revenue related to multi-year operation and maintenance contracts which expire as late as 2031. Other liabilities also include the fair value of interest rate swaps. See Note 8 for additional disclosures.
Revenue Recognition
The Company derives revenues from energy efficiency and renewable energy products and services. Energy efficiency products and services 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 include the construction of small-scale plants that produce electricity, gas, heat or cooling from renewable sources of energy, the sale of such electricity, gas, heat or cooling from plants that the Company owns, and the sale and installation of solar energy products and systems.
Revenue from the installation or construction of projects is recognized on a percentage-of-completion basis. The percentage-of-completion for each project is determined on an actual cost-to-estimated final cost basis. Maintenance revenue is recognized as related services are performed. In accordance with industry practice, the Company includes in current assets and liabilities the amounts of receivables related to construction projects realizable and payable over a period in excess of one year. The revenue associated with contract change orders is recognized only when the authorization for the change order has been properly executed and the work has been performed.
When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire expected loss immediately, regardless of the percentage of completion.
Billings in excess of cost and estimated earnings represents advanced billings on certain construction contracts. Costs and estimated earnings in excess of billings represent certain amounts under customer contracts that were earned and billable but not invoiced.
The Company sells certain products and services in bundled arrangements, where multiple products and/or services are involved. The Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price. The relative selling price is determined using third party evidence or management’s best estimate of selling price.
The Company recognizes revenue from the sale and delivery of products, including the output from renewable energy plants, when produced and delivered to the customer, in accordance with specific contract terms, provided that persuasive evidence of an arrangement exists, the Company’s price to the customer is fixed or determinable and collectability is reasonably assured.
The Company recognizes revenue from operations and maintenance (“O&M”) contracts, consulting services and enterprise energy management services as the related services are performed.
For a limited number of contracts under which the Company receives additional revenue based on a share of energy savings, such additional revenue is recognized as energy savings are generated.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
Cost of Revenues
Cost of revenues include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the development and installation of projects, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges, amortization of intangible assets related to customer contracts and, if applicable, costs of procuring financing. A majority of the Company’s contracts have fixed price terms; however, in some cases the Company negotiates protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.
Cost of revenues also include the costs of maintaining and operating the small-scale renewable energy plants that the Company owns, including the cost of fuel (if any) and depreciation charges.
Income Taxes
The Company provides for income taxes based on the liability method. The Company provides for deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using the enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions.
The Company’s liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process.
The Company considers matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; the Company has no plans to appeal or litigate any aspect of the tax position; and the Company believes that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. The Company also accrues for potential interest and penalties, related to unrecognized tax benefits in income tax expense. See Note 5 for additional information on the Company’s income taxes.
Foreign Currency
The local currency of the Company’s foreign operations is considered the functional currency of such operations. All assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders’ equity. Foreign currency translation gains and losses are reported in the consolidated statements of comprehensive income (loss). Foreign currency transaction gains and losses are reported in the consolidated statements of income (loss).
Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, accounts and notes receivable, long-term contract receivables, accounts payable, accrued expenses, equity-based liabilities, short- and long-term debt and interest rate swaps. The estimated fair value of cash and cash equivalents, restricted cash, accounts and notes receivable, long-term contract receivables, accounts payable, accrued expenses and equity-based liabilities approximates their carrying value. See below and Note 7 for additional information regarding the Company’s fair value measurements.
Fair Value Measurements
The Company follows the guidance related to fair value measurements for all of its non-financial assets and non-financial liabilities, except for those recognized at fair value in the financial statements at least annually. These assets include goodwill and long-lived assets measured at fair value for impairment assessments, and non-financial assets and liabilities initially measured at fair value in a business combination.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and short-term debt approximate fair value. The carrying value of long-term variable-rate debt approximates fair value. As of September 30, 2014, the fair value of the Company’s fixed-rate long-term debt exceeds its carrying value by approximately $48. Fair value of the Company’s debt is based on quoted market prices or on rates available to the Company for debt with similar terms and maturities.
The Company accounts for its interest rate swaps as derivative financial instruments in accordance with the related guidance. Under this guidance, derivatives are carried on the Company’s consolidated balance sheets at fair value. The fair value of the Company’s interest rate swaps are determined based on observable market data in combination with expected cash flows for each instrument.
See Note 7 for additional information related to fair value measurements.
Stock-Based Compensation Expense
Stock-based compensation expense results from the issuance of shares of restricted common stock and grants of stock options to employees, directors, outside consultants and others. The Company recognizes the costs associated with restricted stock and option grants using the fair value recognition provisions of ASC 718, Compensation - Stock Compensation on a straight-line basis over the vesting period of the awards.
Stock-based compensation expense is recognized based on the grant-date fair value. The Company estimates the fair value of the stock-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of stock-based awards requires the use of highly subjective assumptions, including the fair value of the common stock underlying the award, the expected term of the award and expected stock price volatility.
The assumptions used in determining the fair value of stock-based awards represent management’s estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change, and different assumptions are employed, the stock-based compensation could be materially different in the future. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant, with maturities approximating the expected life of the stock options.
The Company has no history of paying dividends. Additionally, as of each of the grant dates, there was no expectation that the Company would pay dividends over the expected life of the options. The expected life of the awards is estimated using historical data and management’s expectations. Because there was no public market for the Company’s common stock prior to the Company’s initial public offering, management lacked company-specific historical and implied volatility information. Therefore, estimates of expected stock volatility were based on that of publicly traded peer companies, and it is expected that the Company will continue to use this methodology until such time as there is adequate historical data regarding the volatility of the Company’s publicly traded stock price.
The Company is required to recognize compensation expense for only the portion of options that are expected to vest. Actual historical forfeiture rate of options is based on employee terminations and the number of shares forfeited. This data and other qualitative factors are considered by the Company in determining the forfeiture rate used in recognizing stock compensation expense. If the actual forfeiture rate varies from historical rates and estimates, additional adjustments to compensation expense may be required in future periods. If there are any modifications or cancellations of the underlying unvested securities or the terms of the stock option, it may be necessary to accelerate, increase or cancel any remaining unamortized stock-based compensation expense.
For the three months ended September 30, 2014 and 2013, the Company recorded stock-based compensation expense of $683 and $789, respectively, in connection with stock-based payment awards. For the nine months ended September 30, 2014 and 2013, the Company recorded stock-based compensation expense of $2,108 and $2,125, respectively, in connection with stock-based payment awards. The compensation expense is allocated between cost of revenues and selling, general and administrative expenses in the accompanying consolidated statements of income (loss) based on the salaries and work assignments of the employees holding the options. As of September 30, 2014, there was $4,166 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 2.9 years.
The Company also accounts for equity instruments issued to non-employee directors and consultants at fair value. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counterparty’s performance is complete. No awards to individuals who were not either an employee or director of the Company occurred during the nine months ended September 30, 2014 or during the year ended December 31, 2013.
Derivative Financial Instruments
In the normal course of business, the Company utilizes derivatives contracts as part of its risk management strategy to manage exposure to market fluctuations in interest rates. These instruments are subject to various credit and market risks. Controls and monitoring procedures for these instruments have been established and are routinely reevaluated. Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. The Company seeks to manage credit risk by entering into financial instrument transactions only through counterparties that the Company believes to be creditworthy.
Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates. The Company seeks to manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. As a matter of policy, the Company does not use derivatives for speculative purposes. The Company considers the use of derivatives with all financing transactions to mitigate risk.
The Company recognizes cash flows from derivative instruments as operating activities in the consolidated statements of cash flows. The effective portion of changes in fair value on interest rate swaps designated as cash flow hedges are recognized in the Company’s consolidated statements of comprehensive income (loss). The ineffective portion of changes in fair value on interest rate swaps designated as hedges and changes in fair value on interest rate swaps not designated as hedges are recognized in the Company’s consolidated statements of income (loss).
During 2007, the Company entered into two fifteen-year interest rate swap contracts under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swaps cover initial notional amounts of $13,081 and $3,256, each a variable rate note at fixed interest rates of 5.4% and 5.3%, respectively, and expire in March 2024 and February 2021, respectively. These interest rate swaps qualified, but were not designated, as cash flow hedges until April 1, 2010. Since April 2010, they have been designated as hedges.
In March 2010, the Company entered into a fourteen-year interest rate swap contract under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swap covers an initial notional amount of approximately $27,900 variable rate note at a fixed interest rate of 6.99% and expires in December 2024. This swap was designated as a hedge in March 2013. During the second quarter of 2014 this swap was de-designated and re-designated as a hedge as a result of a partial pay down of the associated hedged debt principal. As a result $566 was reclassified from accumulated other comprehensive income and recorded as a reduction to other expenses, net in the Company’s consolidated statements of income (loss) during the second quarter of 2014.
In July 2011, the Company entered into a five-year interest rate swap contract under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swap covers an initial notional amount of $38,571 variable rate note at a fixed interest rate of 1.965% and expires in June 2016. This interest rate swap has been designated as a hedge since inception.
In October 2012, the Company entered into two eight-year interest rate swap contracts under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swaps cover an initial notional amount of $16,750 variable rate note at a fixed interest rate of 1.71%. This notional amount increased to $42,247 on September 30, 2013 and expires in March 2020. These interest rate swaps have been designated as a hedge since inception.
In October 2012, the Company also entered into two eight-year forward starting interest rate swap contracts under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swaps cover an initial notional amount of $25,377 variable rate note at a fixed interest rate of 3.70%, with an effective date of March 31, 2020, and expires in June 2028. These interest rate swaps have been designated as a hedge since inception.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
See Notes 7 and 8 for additional information on the Company’s derivative instruments.
Earnings Per Share
Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares, including vested restricted shares. When the effects are not anti-dilutive, diluted earnings per share is calculated using: the weighted-average outstanding common shares; the dilutive effect of convertible preferred stock, under the “if converted” method; and the treasury stock method with regard to warrants and stock options; all as determined under the treasury stock method.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income | $ | 7,291 |
| | $ | 4,545 |
| | $ | 1,729 |
| | $ | 840 |
|
Basic weighted-average shares outstanding | 46,315,968 |
| | 45,621,552 |
| | 46,098,158 |
| | 45,472,517 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 671,554 |
| | 983,808 |
| | 538,371 |
| | 917,951 |
|
Diluted weighted-average shares outstanding | 46,987,522 |
| | 46,605,360 |
| | 46,636,529 |
| | 46,390,468 |
|
For the three months ended September 30, 2014 and 2013, the total number of shares of common stock related to stock options excluded from the calculation of dilutive shares, as the effect would be anti-dilutive, was 2,158,312 and 1,813,431, respectively. For the nine months ended September 30, 2014 and 2013, the total number of shares of common stock related to stock options excluded from the calculation of dilutive shares, as the effect would be anti-dilutive, was 2,158,312 and 1,813,431, respectively.
Variable Interest Entities
Certain contracts are executed jointly through partnership and joint venture arrangements with unrelated third parties. Generally, these arrangements are characterized by a 50 percent or less ownership interest that requires only a small initial investment. The arrangements are often formed for the single business purpose of executing a specific project and allow the Company to share risks and/or secure specialty skills required for project execution.
The Company evaluates each partnership and joint venture at inception to determine if it qualifies as a variable interest entity (“VIE”) under ASC 810, Consolidation. A variable interest entity is an entity used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors who are not required to provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. Upon the occurrence of certain events outlined in ASC 810, the Company reassesses its initial determination of whether the partnership or joint venture is a VIE.
The Company also evaluates whether it is the primary beneficiary of each VIE and consolidates the VIE if the Company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining whether it qualifies as the primary beneficiary. The Company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. When the Company is determined to be the primary beneficiary, the VIE is consolidated. As required by ASC 810, management's assessment of whether the Company is the primary beneficiary of a VIE is continuously performed.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance in this ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this ASU supersedes some cost guidance included in ASC 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in this ASU. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
after December 15, 2016, including interim periods within that reporting period. Retrospective application of the amendments in this ASU are required. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption (with some limited relief provided) or a modified retrospective approach. Early application is not permitted under GAAP. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is still present, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016 and interim periods thereafter. The Company does not believe that this pronouncement will have an impact on its consolidated financial statements.
3. BUSINESS ACQUISITIONS AND RELATED TRANSACTIONS
The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The purchase price for each has been allocated to the assets based on their estimated fair values at the date of each acquisition. The excess purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. Intangible assets identified have been recorded and are being amortized over periods ranging from one to fifteen years. See Note 4 for additional information. The unaudited pro forma results of operations for the current and prior periods are not presented due to the insignificant impact of the 2014 acquisitions on the Company’s consolidated results of operations.
In August 2014, the Company acquired the energy consultancy and energy project management business of Energyexcel LLP (“EEX”), an independent energy services provider located in Central London, UK. The Company paid $9,054 to acquire substantially all of the assets of EEX. The purchase price is subject to post-closing adjustments for working capital and for certain indemnity obligations of the seller and its owners. The Company deposited approximately $834 of the initial cash payment with a third-party escrow agent as security for these matters.
A summary of the consideration paid and the preliminary allocation of the purchase price paid for EEX is as follows:
|
| | | |
| Acquisition Purchase Price Allocation |
Accounts receivable | $ | 1,432 |
|
Costs and estimated earnings in excess of billings | 186 |
|
Prepaid expenses and other current assets | 156 |
|
Property and equipment | 123 |
|
Goodwill | 5,154 |
|
Intangible assets | 4,830 |
|
Accounts payable | (1,064 | ) |
Accrued liabilities | (1,103 | ) |
Billings in excess of cost and estimated earnings | (648 | ) |
Deferred taxes and other liabilities | (12 | ) |
Purchase price | $ | 9,054 |
|
The allocation of the purchase price for current year acquisitions are preliminary, based on management’s current best estimates and subject to revision.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill attributable to each reportable segment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Regions | | U.S. Federal | | Canada | | Small-Scale Infrastructure | | Other | | Total |
Balance, December 31, 2013 | $ | 24,759 |
| | $ | 3,375 |
| | $ | 4,124 |
| | $ | — |
| | $ | 20,816 |
| | $ | 53,074 |
|
Goodwill acquired during the year | — |
| | — |
| | — |
| | — |
| | 7,729 |
| | 7,729 |
|
Fair value adjustment(1) | — |
| | — |
| | — |
| | — |
| | 641 |
| | 641 |
|
Currency effects | — |
| | — |
| | (208 | ) | | — |
| | (120 | ) | | (328 | ) |
Balance, September 30, 2014 | $ | 24,759 |
| | $ | 3,375 |
| | $ | 3,916 |
| | $ | — |
| | $ | 29,066 |
| | $ | 61,116 |
|
Accumulated Goodwill Impairment Balance, December 31, 2013 | $ | — |
| | $ | — |
| | $ | (1,016 | ) | | $ | — |
| | $ | — |
| | $ | (1,016 | ) |
Accumulated Goodwill Impairment Balance, September 30, 2014 | $ | — |
| | $ | — |
| | $ | (1,016 | ) | | $ | — |
| | $ | — |
| | $ | (1,016 | ) |
(1) Fair value adjustment represents a final purchase accounting adjustment to decrease the recorded fair value of certain acquired intangible assets totaling $801, net of a $160 deferred tax liability adjustment, related to the Company’s prior year acquisition of The Energy Services Partnership Limited (now known as Ameresco Limited) and ESP Response Limited (together “ESP”).
Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. The Company annually assesses whether a change in the life over which the Company’s assets are amortized is necessary, or more frequently if events or circumstances warrant. No changes to useful lives were made during the nine months ended September 30, 2014 or for the year ended December 31, 2013.
Acquired intangible assets other than goodwill that are subject to amortization include customer contracts, customer relationships, non-compete agreements, technology and trade names. Customer contracts are amortized ratably over the period of the acquired customer contracts ranging in periods from approximately one to five years. All other acquired intangible assets are amortized over periods ranging from approximately four to fifteen years, as defined by the nature of the respective intangible asset. Intangible assets acquired during the nine months ended September 30, 2014 consisted of customer contracts, customer relationships, non-compete assets and technology which were assigned a weighted average useful life of 8.2 years.
The gross carrying amount and accumulated amortization of intangible assets are as follows:
|
| | | | | | | |
| As of September 30, | | As of December 31, |
| 2014 | | 2013 |
Gross Carrying Amount | | | |
Customer contracts | $ | 8,220 |
| | $ | 7,684 |
|
Customer relationships | 13,045 |
| | 8,200 |
|
Non-compete agreements | 3,447 |
| | 3,230 |
|
Technology | 2,815 |
| | 2,386 |
|
Trade names | 553 |
| | 556 |
|
| 28,080 |
| | 22,056 |
|
Accumulated Amortization | | | |
Customer contracts | 6,431 |
| | 5,349 |
|
Customer relationships | 4,045 |
| | 2,923 |
|
Non-compete agreements | 2,530 |
| | 1,872 |
|
Technology | 1,640 |
| | 1,299 |
|
Trade names | 420 |
| | 360 |
|
| 15,066 |
| | 11,803 |
|
Intangible assets, net | $ | 13,014 |
| | $ | 10,253 |
|
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
Amortization expense related to customer contracts is included in cost of revenues in the consolidated statements of income (loss). Amortization expense related to all other acquired intangible assets is included in selling, general and administrative expenses in the consolidated statements of income (loss). Amortization expense for the three months ended September 30, 2014 and 2013 related to customer contracts was $513 and $499, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 related to customer contracts was $1,127 and $953, respectively. Amortization expense for the three months ended September 30, 2014 and 2013 related to all other acquired intangible assets was $875 and $969, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 related to all other acquired intangible assets was $2,139 and $2,304, respectively.
5. INCOME TAXES
The (benefit) provision for income taxes was $(532) and $1,448, for the three months ended September 30, 2014 and 2013, respectively. The (benefit) provision for income taxes was $(501) and $248, for the nine months ended September 30, 2014 and 2013, respectively. The estimated 2014 effective tax rate was (7.9)% for the three months ended September 30, 2014 compared to a 24.2% estimated annual effective tax rate for the three months ended September 30, 2013. For the nine months ended September 30, 2014 the estimated 2014 effective tax rate was (40.8)% compared to a 22.8% estimated annual effective tax rate for the nine months ended September 30, 2013.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
| | | |
| Gross Unrecognized Tax Benefits |
Balance, December 31, 2013 | $ | 9,200 |
|
Additions for prior year tax positions | — |
|
Settlements with tax authorities | (4,100 | ) |
Reductions of prior year tax positions | — |
|
Balance, September 30, 2014 | $ | 5,100 |
|
At September 30, 2014 and December 31, 2013, the Company had approximately $5,100 and $9,200, respectively, of total gross unrecognized tax benefits. Of the total gross unrecognized tax benefits as of September 30, 2014 and December 31, 2013, approximately $3,700 and $5,500, respectively, (net of the Federal benefit on state amounts) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in a variety of claims and other legal proceedings generally incidental to its normal business activities. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on its financial condition or results of operations.
Solar Tariff Contingency
In October 2012, the U.S. Department of Commerce (“Commerce”) announced its final determination in the anti-dumping and countervailing duty investigations of imports of solar cells manufactured in the People’s Republic of China (“PRC”), including solar modules containing such cells. Commerce’s final determination confirmed its previously published anti-dumping duty of 249.96%, in the case of the Company, and increased its countervailing duty from 3.61% to 15.24%; both duties are applied to the value of imports of solar modules containing PRC cells. Under Commerce’s determination, the anti-dumping and countervailing duties both were to apply retroactively 90 days from the date each preliminary decision was published to February 25, 2012 and December 21, 2011, respectively. On November 7, 2012, the International Trade Commission announced its final determination upholding the duties, but eliminating the retroactive periods. Since early 2012, the Company has been importing solar modules containing PRC cells, though it ceased doing so in July 2012 in response to these duties. In April 2014, the Company’s manufacturer filed an application for a separate and reduced anti-dumping duty. During the third quarter of 2014, the Company paid countervailing duties on all covered shipments at the 3.61% rate. Depending on whether the maximum anti-dumping duty rate of 249.96% or some lower rate applies, the Company may be liable for anti-dumping duties of up to approximately $2,900.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
The Company has established a reserve reflecting its current estimate of its ultimate exposure to these assessments.
Commitments as a Result of Acquisitions
Related to the Company's acquisition of EEX in the second quarter of 2014 (see Note 3), the former owners of EEX, who are now employees of the Company, may be entitled to receive up to 4.5 million British pounds sterling in additional consideration, accounted for as compensation for post-combination services, if the acquired business meets certain financial performance milestones through December 31, 2018.
7. FAIR VALUE MEASUREMENT
The Company recognizes its financial assets and liabilities at fair value on a recurring basis (at least annually). Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs that may be used to measure fair value are as follows:
Level 1: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following table presents the input level used to determine the fair values of the Company’s financial instruments measured at fair value on a recurring basis:
|
| | | | | | | | | |
| | | Fair Value as of |
| | | September 30, | | December 31, |
| Level | | 2014 | | 2013 |
Assets: | | | | | |
Interest rate swap instruments | 2 | | $ | 165 |
| | $ | 1,553 |
|
Liabilities: | | | | | |
Interest rate swap instruments | 2 | | $ | 3,595 |
| | $ | 4,268 |
|
The fair value of the Company’s interest rate swaps was determined using a cash flow analysis on the expected cash flow of the contract in combination with observable market-based inputs, including interest rate curves and implied volatilities. As part of this valuation, the Company considered the credit ratings of the counterparties to the interest rate swaps to determine if a credit risk adjustment was required.
The fair value of financial instruments is determined by reference to observable market data and other valuation techniques as appropriate. The only category of financial instruments where the difference between fair value and recorded book value is notable is long-term debt. At September 30, 2014, the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on quoted market prices or on rates available to the Company for debt with similar terms and maturities, which are considered to be level two inputs. There were no transfers in or out of level two for the nine months ended September 30, 2014. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt are as follows:
|
| | | | | | | | | | | | | | | |
| As of September 30, 2014 | | As of December 31, 2013 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Long-term debt value | $ | 122,120 |
| | $ | 122,072 |
| | $ | 114,776 |
| | $ | 116,196 |
|
The Company is also required periodically to measure certain other assets at fair value on a nonrecurring basis, including long-lived assets, goodwill and other intangible assets. The Company determined the fair value used in its annual impairment analysis with its own discounted cash flow analysis. The Company has determined the inputs used in such analysis as Level 3 inputs. The Company did not record any impairment charges on goodwill or other intangible assets as no significant events
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
requiring non-financial assets and liabilities to be measured at fair value occurred for the nine months ended September 30, 2014.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Information about the fair value amounts of the Company’s derivative instruments is as follows:
|
| | | | | | | | | | | |
| Derivatives as of |
| September 30, 2014 | | December 31, 2013 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives Designated as Hedging Instruments: | | | | | | | |
Interest rate swap contracts | Other assets | | $ | 165 |
| | Other assets | | $ | 1,553 |
|
Interest rate swap contracts | Other liabilities | | $ | 3,595 |
| | Other liabilities | | $ | 4,268 |
|
The following table presents information about the effects of the Company’s derivative instruments on the consolidated statements of income (loss) and consolidated statements of comprehensive income (loss):
|
| | | | | | | | | | | | | | | | | |
| Location of (Gain) Loss Recognized in Income (Loss) | | Amount of (Gain) Loss Recognized in Income (Loss) |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
Derivatives Designated as Hedging Instruments: | | | | | | | | | |
Interest rate swap contracts | Other expenses, net | | $ | (69 | ) | | $ | (125 | ) | | $ | (1,266 | ) | | $ | (1,112 | ) |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | |
Interest rate swap contracts | Other expenses, net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (266 | ) |
|
| | | | | | | |
| Nine Months Ended September 30, 2014 |
| Loss Recognized in Accumulated Other Comprehensive (Loss) Income, Net | | Interest Expense Reclassified from Accumulated Other Comprehensive (Loss) Income, Net into Other Expenses, Net |
Derivatives Designated as Hedging Instruments: | | | |
Interest rate swap contracts | $ | 1,981 |
| | $ | 786 |
|
9. BUSINESS SEGMENT INFORMATION
The Company reports results under ASC 280, Segment Reporting. The Company’s reportable segments are U.S. Regions, U.S. Federal, Canada and Small-Scale Infrastructure. The Company’s 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. The Company’s Small-Scale Infrastructure segment sells electricity, processed LFG, heat or cooling produced from renewable sources of energy from small-scale plants that the Company owns. 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.
The reports of the Company’s chief operating decision maker do not include assets at the operating segment level.
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
An analysis of the Company’s business segment information and reconciliation to the condensed consolidated financial statements is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Regions | | U.S. Federal | | Canada | | Small-Scale Infrastructure | | All Other | | Total Consolidated |
Three Months Ended September 30, 2014 | | | | | | | | | | | |
Revenues | $ | 80,503 |
| | $ | 26,233 |
| | $ | 21,976 |
| | $ | 13,954 |
| | $ | 26,225 |
| | $ | 168,891 |
|
Interest income | — |
| | — |
| | — |
| | 11 |
| | 1 |
| | 12 |
|
Interest expense | — |
| | — |
| | 355 |
| | 1,006 |
| | — |
| | 1,361 |
|
Depreciation and amortization of intangible assets | 330 |
| | 315 |
| | 390 |
| | 3,204 |
| | 1,213 |
| | 5,452 |
|
Unallocated corporate activity | — |
| | — |
| | — |
| | — |
| | — |
| | (6,844 | ) |
Income (loss) before taxes, excluding unallocated corporate activity | 8,199 |
| | 4,222 |
| | (318 | ) | | 1,372 |
| | 128 |
| | 13,603 |
|
Three Months Ended September 30, 2013 | | | | | | | | | | | |
Revenues | 91,334 |
| | 19,118 |
| | 20,060 |
| | 9,750 |
| | 21,386 |
| | 161,648 |
|
Interest income | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Interest expense | — |
| | — |
| | 336 |
| | 1,157 |
| | — |
| | 1,493 |
|
Depreciation and amortization of intangible assets | 642 |
| | 263 |
| | 472 |
| | 2,390 |
| | 936 |
| | 4,703 |
|
Unallocated corporate activity | — |
| | — |
| | — |
| | — |
| | — |
| | (5,511 | ) |
Income (loss) before taxes, excluding unallocated corporate activity | 10,079 |
| | 1,971 |
| | (127 | ) | | 78 |
| | (497 | ) | | 11,504 |
|
Nine Months Ended September 30, 2014 | | | | | | | | | | | |
Revenues | 184,294 |
| | 62,374 |
| | 58,043 |
| | 39,309 |
| | 68,160 |
| | 412,180 |
|
Interest income | — |
| | — |
| | 1 |
| | 34 |
| | 1 |
| | 36 |
|
Interest expense | — |
| | — |
| | 1,025 |
| | 2,283 |
| | — |
| | 3,308 |
|
Depreciation and amortization of intangible assets | 977 |
| | 879 |
| | 1,210 |
| | 9,451 |
| | 2,948 |
| | 15,465 |
|
Unallocated corporate activity | — |
| | — |
| | — |
| | — |
| | — |
| | (21,847 | ) |
Income (loss) before taxes, excluding unallocated corporate activity | 14,801 |
| | 6,487 |
| | (3,387 | ) | | 5,187 |
| | (13 | ) | | 23,075 |
|
Nine Months Ended September 30, 2013 | | | | | | | | | | | |
Revenues | 214,132 |
| | 44,826 |
| | 49,845 |
| | 30,324 |
| | 58,910 |
| | 398,037 |
|
Interest income | — |
| | — |
| | 34 |
| | 1 |
| | 2 |
| | 37 |
|
Interest expense | — |
| | — |
| | 1,008 |
| | 2,016 |
| | — |
| | 3,024 |
|
Depreciation and amortization of intangible assets | 1,551 |
| | 788 |
| | 1,256 |
| | 8,284 |
| | 2,022 |
| | 13,901 |
|
Unallocated corporate activity | — |
| | — |
| | — |
| | — |
| | — |
| | (18,136 | ) |
Income (loss) before taxes, excluding unallocated corporate activity | $ | 16,870 |
| | $ | 1,851 |
| | $ | (2,061 | ) | | $ | 2,705 |
| | $ | (141 | ) | | $ | 19,224 |
|
AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except share and per share amounts)
10. LONG-TERM DEBT
Variable-Rate Construction and Term Loans
In October 2012, the Company entered into a credit and guaranty agreement with two banks for use in providing limited recourse financing for certain of its landfill gas to energy and solar PV projects. The credit and guaranty agreement provides for a $47,234 construction-to-term loan credit facility and bears interest at a variable rate. At September 30, 2014, $43,152 was outstanding under construction and term loans. The weighted average rate for these loans at September 30, 2014 was 3.240%.
Senior Secured Credit Facility - Revolver and Term Loan
On June 30, 2011, the Company entered into an amended and restated credit and security agreement with two banks consisting of a $60,000 revolving credit facility and a $40,000 term loan. The revolving credit facility may be increased up to an additional $25,000 at the Company’s option, if the lenders agree. The facility matures on June 30, 2016, and all remaining unpaid amounts outstanding under the facility will be due at that time. At September 30, 2014, $21,429 was outstanding under the term loan and $20,000 was outstanding under the revolving credit facility. Payments on the term loan are due in quarterly principal installments of $1,429 together with accrued but unpaid interest, with all remaining unpaid principal amounts due June 30, 2016. The Company is the sole borrower under the facility and its obligations are guaranteed by certain of the Company’s subsidiaries and are secured by a lien on all of the assets of the Company other than renewable energy projects that the Company owns and that are financed by others. The agreement contains certain financial covenants.
On March 12, 2014, the Company amended the senior secured credit facility as follows: (i) to increase the margins added to Bank of America’s prime rate or the one-, two- three- or six-month London interbank deposit rate, as applicable, in determining the interest rate by 25 basis points to 0.50% and 2.00%, respectively; (ii) to waive compliance with the minimum EBITDA covenant for the four consecutive fiscal quarters ended December 31, 2013; (iii) to reduce the required minimum EBITDA amount to $16,500 for the four consecutive fiscal quarters ended March 31, 2014, $22,000 for the four consecutive fiscal quarters ended June 30, 2014, $24,000 for the four consecutive fiscal quarters ended September 30, 2014, and $27,000 for the four consecutive fiscal quarters ended December 31, 2014 and thereafter; (iv) to increase the maximum ratio of total funded debt to EBITDA as of the end of each fiscal quarter to 2.5 to 1.0 for March 31, 2014 and 2.25 to 1.0 for June 30, 2014, returning to 2.0 to 1.0 for September 30, 2014 and thereafter; and (v) to reduce the minimum ratio of cash flow to debt service to 1.25 to 1.0 for the four fiscal quarters ended March 31, 2014, returning to 1.5 to 1.0 for the four fiscal quarters ended June 30, 2014 and thereafter.
For purposes of the Company’s senior secured facility: EBITDA excludes the results of certain renewable energy projects that the Company owns and for which financing from others remains outstanding; total funded debt includes amounts outstanding under both the term loan and revolver portions of the senior secured credit facility plus other indebtedness, but excludes non-recourse indebtedness of project company subsidiaries; cash flow is based on EBITDA as used in the facility, less capital expenditures (other than by project company subsidiaries that are not guarantors under the facility), certain taxes, and dividends and other distributions; and debt service includes principal and interest payments on the indebtedness included in total funded debt other than principal payments on the revolver portion of the facility.
At September 30, 2014, the Company was in compliance with all financial covenants.
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.
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 (now known as Ameresco Limited) and ESP Response Limited (together “ESP”) in the second quarter of 2013 added a local presence in the United Kingdom (“UK”), expertise and seasoned energy industry professionals to support multi-national customers of our enterprise energy management service offerings.
Our acquisition of the energy consultancy and energy project management business of Energyexcel LLP in the third quarter of 2014 added to our local presence in the UK and to our commercial and industrial customer base.
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 42 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 18 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 September 30, 2014, we had backlog of approximately $400.6 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 $1,037.1 million. As of September 30, 2013, we had fully-contracted backlog of approximately $366.0 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 $1,041.7 million.
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 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:
| |
• | 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 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 income, the most comparable GAAP measure (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Operating income | $ | 9,224 |
| | $ | 7,581 |
| | $ | 6,221 |
| | $ | 3,590 |
|
Depreciation and amortization of intangible assets | 5,938 |
| | 5,227 |
| | 16,923 |
| | 15,505 |
|
Stock-based compensation | 683 |
| | 789 |
| | 2,108 |
| | 2,125 |
|
Adjusted EBITDA | $ | 15,845 |
| | $ | 13,597 |
| | $ | 25,252 |
| | $ | 21,220 |
|
The following table presents a reconciliation of adjusted free cash flow to cash flows from operating activities, the most comparable GAAP measure (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| | | (Revised) |
Cash flows from operating activities | $ | (12,093 | ) | | $ | (45,313 | ) |
Less: purchases of property and equipment | (1,553 | ) | | (2,331 | ) |
Plus: proceeds from Federal ESPC projects | 32,886 |
| | 21,383 |
|
Adjusted free cash flow | $ | 19,240 |
| | $ | (26,261 | ) |
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance in this ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this ASU supersedes some cost guidance included in ASC 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in this ASU. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Retrospective application of the amendments in this ASU are required. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption (with some limited relief provided) or a modified retrospective approach. Early application is not permitted under GAAP. We are currently assessing the impact of this ASU on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term ‘substantial doubt”, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is still present, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for annual reporting periods ending after
December 15, 2016 and interim periods thereafter. We do not believe that this pronouncement will have an impact on our consolidated financial statements.
Results of Operations
The following tables set 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 September 30, |
| 2014 | | 2013 |
| Dollar | | % of | | Dollar | | % of |
| Amount | | Revenues | | Amount | | Revenues |
Revenues | $ | 168,891 |
| | 100.0 | % | | $ | 161,648 |
| | 100.0 | % |
Cost of revenues | 133,867 |
| | 79.3 | % | | 131,585 |
| | 81.4 | % |
Gross profit | 35,024 |
| | 20.7 | % | | 30,063 |
| | 18.6 | % |
Selling, general and administrative expenses | 25,800 |
| | 15.3 | % | | 22,482 |
| | 13.9 | % |
Operating income | 9,224 |
| | 5.5 | % | | 7,581 |
| | 4.7 | % |
Other expenses, net | 2,465 |
| | 1.5 | % | | 1,588 |
| | 1.0 | % |
Income before (benefit) provision for income taxes | 6,759 |
| | 4.0 | % | | 5,993 |
| | 3.7 | % |
Income tax (benefit) provision | (532 | ) | | (0.3 | )% | | 1,448 |
| | 0.9 | % |
Net income | $ | 7,291 |
| | 4.3 | % | | $ | 4,545 |
| | 2.8 | % |
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| Dollar | | % of | | Dollar | | % of |
| Amount | | Revenues | | Amount | | Revenues |
Revenues | $ | 412,180 |
| | 100.0 | % | | $ | 398,037 |
| | 100.0 | % |
Cost of revenues | 331,666 |
| | 80.5 | % | | 323,072 |
| | 81.2 | % |
Gross profit | 80,514 |
| | 19.5 | % | | 74,965 |
| | 18.8 | % |
Selling, general and administrative expenses | 74,293 |
| | 18.0 | % | | 71,375 |
| | 17.9 | % |
Operating income | 6,221 |
| | 1.5 | % | | 3,590 |
| | 0.9 | % |
Other expenses, net | 4,993 |
| | 1.2 | % | | 2,502 |
| | 0.6 | % |
Income before (benefit) provision for income taxes | 1,228 |
| | 0.3 | % | | 1,088 |
| | 0.3 | % |
Income tax (benefit) provision | (501 | ) | | (0.1 | )% | | 248 |
| | 0.1 | % |
Net income | $ | 1,729 |
| | 0.4 | % | | $ | 840 |
| | 0.2 | % |
Revenues
The following tables set forth a comparison of our revenues for the periods presented (in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 168,891 |
| | $ | 161,648 |
| | $ | 7,243 |
| | 4.5 | % |
| | | | | | | |
| Nine Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 412,180 |
| | $ | 398,037 |
| | $ | 14,143 |
| | 3.6 | % |
Revenues increased $7.2 million, or 4.5%, for the three months ended September 30, 2014 compared to the same period of 2013 due to a $7.1 million increase in revenues from our Federal segment, a $1.9 million increase in revenues from our Canada segment, a $4.2 million increase in revenues from our Small-Scale Infrastructure segment and $4.7 million in revenues as a result of our current year acquisitions. These increases were partially offset by a $10.8 million decrease in revenues from our U.S. Regions segment.
Revenues increased $14.1 million, or 3.6%, for the nine months ended September 30, 2014 compared to the same period of 2013 due to a $17.5 million increase in revenues from our Federal segment, an $8.2 million increase in revenues from our Canada segment, a $9.0 million increase in revenues from our Small-Scale Infrastructure segment, a $5.2 million increase in revenues from enterprise energy management services and integrated-PV sales and $5.0 million as a result of our current year acquisitions. These increases were partially offset by a $29.8 million decrease in revenues from our U.S. Regions segment.
We derive a majority of our revenue from energy efficiency products and services, which accounted for approximately 72.2% and 66.3% of revenues for the nine months ended September 30, 2014 and 2013, respectively.
Cost of Revenues and Gross Profit
The following tables set forth a comparison of our cost of revenues and gross profit for the periods presented (in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Cost of revenues | $ | 133,867 |
| | $ | 131,585 |
| | $ | 2,282 |
| | 1.7 | % |
Gross margin % | 20.7 | % | | 18.6 | % | | | | |
| | | | | | | |
| Nine Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Cost of revenues | $ | 331,666 |
| | $ | 323,072 |
| | $ | 8,594 |
| | 2.7 | % |
Gross margin % | 19.5 | % | | 18.8 | % | | | | |
Cost of revenues increased $2.3 million, or 1.7%, for the three months ended September 30, 2014 compared to the same period of 2013 primarily due to the increase in revenues described above, partially offset by a favorable mix of higher margin projects. Cost of revenues increased $8.6 million, or 2.7%, for the nine months ended September 30, 2014 compared to the same period of 2013 primarily due to the increase in revenues described above as well as higher fuel and operating costs, at our Savannah River Site (“SRS”), due to weather related issues during the first quarter of 2014, partially offset by a $1.0 million recovery during the second quarter of 2014 related to a customer warranty issue and a favorable mix of higher margin projects.
The majority of our cost of revenues are incurred in connection with energy efficiency projects for which expenditures represented approximately 81.3% and 81.0% of corresponding revenue for the nine months ended September 30, 2014 and 2013, respectively.
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 September 30, 2014 and 2013, we recorded amortization expense of $0.5 million and $0.5 million, respectively, related to customer contracts. For the nine months ended September 30, 2014 and 2013, we recorded amortization expense of $1.1 million and $1.0 million, respectively, related to customer contracts.
Selling, General and Administrative Expenses
The following tables set forth a comparison of our selling, general and administrative expenses for the periods presented (in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Selling, general and administrative expenses | $ | 25,800 |
| | $ | 22,482 |
| | $ | 3,318 |
| | 14.8 | % |
| | | | | | | |
| Nine Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Selling, general and administrative expenses | $ | 74,293 |
| | $ | 71,375 |
| | $ | 2,918 |
| | 4.1 | % |
Selling, general and administrative expenses increased $3.3 million, or 14.8%, for the three months ended September 30, 2014 compared to the same period of 2013 primarily due to increases in project development costs and an increase in expenses, including salaries and benefits, as a result of acquisitions. The three months ended September 30, 2013 also included a gain on a project termination, which reduced selling, general and administrative expenses for the period. Selling, general and
administrative expenses increased $2.9 million, or 4.1%, for the nine months ended September 30, 2014 compared to the same period of 2013 primarily due to the third quarter changes described above as well as severance charges recognized during the first quarter of 2014, partially offset by decreases in marketing, travel and professional fees as well as a decrease in salary and benefits, excluding acquisitions.
Amortization expense of intangible assets related to customer relationships, non-compete agreements, technology and trade names is included in selling, general and administrative expenses in the consolidated statements of income (loss). For the three months ended September 30, 2014 and 2013, we recorded amortization expense, related to these intangible assets, of $0.9 million and $1.0 million, respectively. For the nine months ended September 30, 2014 and 2013, we recorded amortization expense, related to these intangible assets, of $2.1 million and $2.3 million, respectively.
Other Expenses, Net
Other expenses, net includes 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 $0.9 million for the three months ended September 30, 2014 compared to the same period of 2013 primarily due to foreign currency exchange losses. Other expenses, net, increased $2.5 million for the nine months ended September 30, 2014 compared to the same period of 2013 primarily due to foreign currency exchange losses and a $1.2 million increase in interest expense, net of interest income. The increase in interest expense for the nine months ended September 30, 2014 was primarily due to a $0.9 million decrease in interest capitalized relating to construction financing and an increase in interest related to the conversion to term loans on our construction-to-term loan credit facility during the second half of 2013 and first half of 2014.
Income (Loss) Before Taxes
Income before taxes increased $0.8 million, or 12.8%, to $6.8 million for the three months ended September 30, 2014 from $6.0 million for the three months ended September 30, 2013 due to the reasons described above. Income before taxes increased $0.1 million, or 12.9%, to $1.2 million for the nine months ended September 30, 2014 from $1.1 million for the nine months ended September 30, 2013 due to the reasons described above.
Provision (Benefit) from Income Taxes
The benefit for income taxes was $0.5 million for the three months ended September 30, 2014, compared to a provision of $1.4 million for the three months ended September 30, 2013. The benefit for income taxes was $0.5 million for the the nine months ended September 30, 2014, compared to a provision of $0.2 million for the nine months ended September 30, 2013. The estimated annual effective tax rate applied for the three months ended September 30, 2014 was (7.9)% compared to 24.1% for the three months ended September 30, 2013 and was (40.8)% for the nine months ended September 30, 2014 compared to 22.8% for the nine months ended September 30, 2013, respectively. The decrease in the rate compared to the same periods in the prior year was 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 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 Income (Loss) and Earnings (Loss) Per Share
Net income increased $2.7 million, or 60.4%, for the three months ended September 30, 2014 to $7.3 million from $4.5 million for the three months ended September 30, 2013 due to the reasons described above. Net income increased $0.9 million, or 105.8%, for the nine months ended September 30, 2014 to $1.7 million from $0.8 million for the nine months ended September 30, 2013 due to the reasons described above.
Basic and diluted earnings per share for the three months ended September 30, 2014 were $0.16 per share, an increase of $0.06 per share, or 60.0%, compared to the same period of 2013. Basic and diluted earnings per share for the nine months ended September 30, 2014 were $0.04 per share, an increase of $0.02 per share, or 100.0%, 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 September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 80,503 |
| | $ | 91,334 |
| | $ | (10,831 | ) | | (11.9 | )% |
Income before taxes | $ | 8,199 |
| | $ | 10,079 |
| | $ | (1,880 | ) | | (18.7 | )% |
| | | | | | | |
| Nine Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 184,294 |
| | $ | 214,132 |
| | $ | (29,838 | ) | | (13.9 | )% |
Income before taxes | $ | 14,801 |
| | $ | 16,870 |
| | $ | (2,069 | ) | | (12.3 | )% |
Revenues for the U.S. Regions segment decreased for the three months ended September 30, 2014 compared to the same period of 2013 by $10.8 million, or 11.9%, to $80.5 million and decreased for the nine months ended September 30, 2014 compared to the same period of 2013 by $29.8 million, or 13.9%, to $184.3 million primarily due to a decrease in revenues from the construction of small-scale renewable energy plants for customers and the timing of revenue recognized as a result of the phase of active projects.
Income before taxes for the U.S. Regions segment decreased for the three months ended September 30, 2014 compared to the same period of 2013 by $1.9 million, or 18.7%, to $8.2 million. The decrease was primarily due to the decrease in revenues described above, partially offset by a favorable mix of higher margin projects. Income before taxes for the U.S. Regions segment decreased for the nine months ended September 30, 2014 compared to the same period of 2013 by $2.1 million, or 12.3%, to $14.8 million. The decrease was primarily due to the decrease in revenues, partially offset by the recovery on a customer warranty issue described above.
U.S. Federal
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 26,233 |
| | $ | 19,118 |
| | $ | 7,115 |
| | 37.2 | % |
Income before taxes | $ | 4,222 |
| | $ | 1,971 |
| | $ | 2,251 |
| | 114.2 | % |
| | | | | | | |
| Nine Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | 62,374 |
| | $ | 44,826 |
| | $ | 17,548 |
| | 39.1 | % |
Income before taxes | $ | 6,487 |
| | $ | 1,851 |
| | $ | 4,636 |
| | 250.5 | % |
Revenues for the U.S. Federal segment increased for the three months ended September 30, 2014 compared to the same period of 2013 by $7.1 million, or 37.2%, to $26.2 million and increased for the nine months ended September 30, 2014 compared to the same period of 2013 by $17.5 million, or 39.1%, to $62.4 million due to two large new energy efficiency projects for which revenue began to be recognized during the second quarter of 2014.
Income before taxes for the U.S. Federal segment increased for the three months ended September 30, 2014 compared to the same period of 2013 by $2.3 million to $4.2 million and increased for the nine months ended September 30, 2014 compared to the same period of 2013 by $4.6 million to $6.5 million. The increases were primarily due to the increase in revenues described above.
Canada
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar | | Percentage |
| 2014 | | 2013 | | Change | | Change |
Revenues | $ | |