Ameresco, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Revenue from Contracts with Customers

Revenue from Contracts with Customers

9 Months Ended

Sep. 30, 2018

Revenue from Contract with Customer [Abstract]

Revenue from Contracts with Customers

REVENUE FROM CONTRACTS WITH CUSTOMERS

Adoption

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, (Topic 606) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net decrease to beginning retained earnings of $4,454 on January 1, 2018 due to the cumulative impact of adopting Topic 606, as detailed below.



	January 1, 2018
	As Reported			606 Adjustments				Adjusted Balances
Assets:
Costs and estimated earnings in excess of billings		$	104,852		$	(9,194	)		$	95,658
Prepaid expenses and other current assets		14,037			4,343				18,380
Deferred income taxes, net		—			1,003				1,003
Liabilities:
Accrued expenses and other current liabilities		23,260			1,190				24,450
Deferred income taxes, net		584			(584		)		—
Shareholders' Equity:
Retained earnings		235,844			(4,454		)		231,390

In accordance with Topic 606, the disclosure of the impact of adoption to the Company’s condensed consolidated statements of income (loss) and balance sheets was as follows:



	Impact of changes in accounting policies
	Three Months Ended September 30, 2018							Nine Months Ended September 30, 2018
	As Reported		Balances without adoption of Topic 606		Effect of Change Higher/(Lower)			As Reported			Balances without adoption of Topic 606			Effect of Change Higher/(Lower)
Revenues	$	205,375	$	206,048	$	(673	)	$	569,767		$	568,985		$	782
Cost of revenues	159,213		157,476		1,737			445,356			441,973			3,383
Gross profit	46,162		48,572		(2,410		)	124,411			127,012			(2,601		)
Operating expenses:
Selling, general and administrative expenses	28,866		28,866		—			84,871			84,871			—
Operating income	17,296		19,706		(2,410		)	39,540			42,141			(2,601		)
Other expenses, net	3,244		3,244		—			10,754			10,754			—
Income before provision for income taxes	14,052		16,462		(2,410		)	28,786			31,387			(2,601		)
Income tax provision	3,351		3,493		(142		)	1,879			2,040			(161		)
Net income	10,701		12,969		(2,268		)	26,907			29,347			(2,440		)
Net income attributable to redeemable non-controlling interests	—		—		—			(516		)	(516		)	—
Net income attributable to common shareholders	$	10,701	$	12,969	$	(2,268	)	$	26,391		$	28,831		$	(2,440	)
Basic income per share	$	0.23	$	0.28	$	(0.05	)	$	0.58		$	0.63		$	(0.05	)
Diluted income per share	$	0.23	$	0.28	$	(0.05	)	$	0.57		$	0.62		$	(0.05	)



	September 30, 2018
		As Reported		Balances without adoption of Topic 606		Effect of Change Higher/(Lower)
Assets:
Costs and estimated earnings in excess of billings		$	66,471	$	74,886	$	(8,415	)
Prepaid expenses and other current assets		13,123		12,196		927
Liabilities:
Accrued expenses and other current liabilities		28,067		26,910		1,157
Deferred income taxes, net		3,453		5,202		(1,749		)
Shareholders' Equity:
Retained earnings		258,213		265,110		(6,897		)

The impact in revenue recognition due to the adoption of Topic 606 is primarily from the timing of revenue recognition for uninstalled materials, amortization of contract acquisition costs over the contract term, and timing of revenue recognition from renewable energy credits. See Note 2 for a summary of the Company’s significant policies for revenue recognition.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by line of business, reportable segments, and geographical region for the three and nine months ended September 30, 2018.



	US Regions		U.S. Federal		Canada		Non-Solar DG		All Other		Total
Line of Business
Three Months Ended September 30, 2018
Project revenue	$	77,345	$	49,762	$	9,206	$	1,268	$	4,074	$	141,655
O&M revenue	4,432		10,733		15		2,006		—		17,186
Energy assets	4,064		1,507		921		18,790		222		25,504
Other	561		376		1,462		74		18,557		21,030
Total revenues	$	86,402	$	62,378	$	11,604	$	22,138	$	22,853	$	205,375
Nine months ended September 30, 2018
Project revenue	$	223,662	$	135,037	$	21,459	$	3,368	$	8,844	$	392,370
O&M revenue	12,396		29,477		34		6,260		—		48,167
Energy assets	12,844		3,416		2,304		50,405		821		69,790
Other	969		447		4,669		143		53,212		59,440
Total revenues	$	249,871	$	168,377	$	28,466	$	60,176	$	62,877	$	569,767

Geographical Regions
Three Months Ended September 30, 2018
United States	$	86,402	$	62,378	$	419	$	22,138	$	17,445	$	188,782
Canada	—		—		11,185		—		33		11,218
Other	—		—		—		—		5,375		5,375
Total revenues	$	86,402	$	62,378	$	11,604	$	22,138	$	22,853	$	205,375
Nine months ended September 30, 2018
United States	$	249,871	$	168,377	$	1,587	$	60,176	$	51,336	$	531,347
Canada	—		—		26,879		—		261		27,140
Other	—		—		—		—		11,280		11,280
Total revenues	$	249,871	$	168,377	$	28,466	$	60,176	$	62,877	$	569,767

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:



	January 1, 2018		September 30, 2018
Accounts receivable, net	$	85,121	$	90,378
Accounts receivable retainage, net	17,484		14,401
Contract Assets:
Costs and estimated earnings in excess of billings	95,658		66,471
Contract Liabilities:
Billings in excess of cost and estimated earnings	27,248		39,533

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. The Company classifies as a current asset those retainages that are expected to be billed in the next twelve months. Unbilled revenue, presented as costs and estimated earnings in excess of billings, represent amounts earned and billable that were not invoiced at the end of the fiscal period.

Contract assets represent the Company’s rights to consideration in exchange for services transferred to a customer that have not been billed as of the reporting date. The Company’s rights to consideration are generally unconditional at the time its performance obligations are satisfied.

At the inception of a contract, the Company expects the period between when it satisfies its performance obligations, and when the customer pays for the services, will be one year or less. As such, the Company has elected to apply the practical expedient which allows the Company to not adjust the promised amount of consideration for the effects of a significant financing component, when a financing component is present.

When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs incurred and advance payments received on project contracts. As of September 30, 2018, the Company classified $7,017 as a non-current liability, included in other liabilities on the consolidated balance sheets, for those performance obligations expected to be completed beyond the next twelve months.

The decrease in contract assets for the nine months ended September 30, 2018 was primarily due to billings of approximately $398,917, offset in part by revenue recognized of $344,768. The change in contract liabilities was primarily driven by the receipt of advance payments from customers, and related billings, exceeding reductions from recognition of revenue as performance obligations were satisfied. For the nine months ended September 30, 2018, the Company recognized revenue of $116,892, and billed customers $119,961, that was previously included in the beginning balance of contract liabilities. Changes in contract liabilities are also driven by reclassifications to or from contract assets as a result of timing of customer payments.

Contracts are often modified for a change in scope or other requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing performance obligations. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catchup basis.

The Company elected to utilize the modified retrospective transition practical expedient which allows the Company to evaluate the impact of contract modifications as of the adoption date rather than evaluating the impact of the modifications at the time they occurred prior to the adoption date.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. Performance obligations are satisfied as of a point in time or over time and are supported by contracts with customers. For most of the Company’s contracts, there are multiple promises of goods or services. Typically, the Company provides a significant service of integrating a complex set of tasks and components such as design, engineering, construction management, and equipment procurement for a project contract. The bundle of goods and services are provided to deliver one output for which the customer has contracted. In these cases, the Company considers the bundle of goods and services to be a single performance obligation. The Company may also promise to provide distinct goods or services within a contract, such as a project contract for installation of energy conservation measures and post-installation O&M services. In these cases the Company separates the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation.

Backlog - The Company’s remaining performance obligations (hereafter referred to as “backlog”) represent the unrecognized revenue value of the Company’s contract commitments. The Company’s backlog may vary significantly each reporting period based on the timing of major new contract commitments and the backlog may fluctuate with currency movements. In addition, our customers have the right, under some circumstances, to terminate contracts or defer the timing of the Company’s services and their payments to us. At September 30, 2018, the Company had backlog of approximately $1,757,000. Approximately 26%, of our September 30, 2018 backlog is anticipated to be recognized as revenue in the next twelve months and the remaining, thereafter.

The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.

Contract acquisition costs:

In connection with the adoption of Topic 606, the Company is required to account for certain acquisition cost over the life of the contract, consisting primarily of commissions when paid. Commission costs are incurred commencing at contract signing. Commission costs are allocated across all performance obligations and deferred and amortized over the contract term on a progress towards completion basis.

As of January 1, 2018, the Company capitalized $927 in commission costs related to contracts that were not completed. For contracts that have a duration of less than one year, the Company follows a practical expedient and expenses these costs when incurred. During the three and nine months ended September 30, 2018, the amortization of commission costs related to contracts were not material and have been included in the accompanying consolidated statements of income (loss). Additionally, no impairment charges in connection with the Company’s commission costs or project development costs were recorded during the period ended September 30, 2018.

The Company analyzed the impact of adoption of Topic 606 on the Company’s project development costs and determined no change in the Company’s accounting policy was required. In the three and nine months ended September 30, 2018, $7,561 and $13,571, respectively, of project development costs were recognized in the consolidated statement of income (loss) on projects that converted to customer contracts.