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

6 Months Ended

Jun. 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
(in thousands)	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 June 30, 2018							Six Months Ended June 30, 2018
(in thousands, except per share amounts)	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	$	196,982	$	194,698	$	2,284		$	364,392		$	362,937		$	1,455
Cost of revenues	154,206		150,336		3,870			286,143			284,497			1,646
Gross profit	42,776		44,362		(1,586		)	78,249			78,440			(191		)
Operating expenses:
Selling, general and administrative expenses	28,801		28,801		—			56,005			56,005			—
Operating income	13,975		15,561		(1,586		)	22,244			22,435			(191		)
Other expenses, net	3,966		3,966		—			7,510			7,510			—
Income before benefit for income taxes	10,009		11,595		(1,586		)	14,734			14,925			(191		)
Income tax (benefit) provision	1,307		1,641		(334		)	(1,472		)	(1,453		)	(19		)
Net income	8,702		9,954		(1,252		)	16,206			16,378			(172		)
Net (income) attributable to redeemable non-controlling interests	—		—		—			(516		)	(516		)	—
Net income attributable to common shareholders	$	8,702	$	9,954	$	(1,252	)	$	15,690		$	15,862		$	(172	)
Basic income per share	$	0.19	$	0.22	$	(0.03	)	$	0.35		$	0.35		$	—
Diluted income per share	$	0.19	$	0.21	$	(0.02	)	$	0.34		$	0.34		$	—



	June 30, 2018
(in thousands)		As Reported		Balances without adoption of Topic 606		Effect of Change Higher/(Lower)
Assets:
Costs and estimated earnings in excess of billings		$	64,656	$	72,397	$	(7,741	)
Prepaid expenses and other current assets		14,853		11,798		3,055
Liabilities:
Accrued expenses and other current liabilities		22,800		21,252		1,548
Deferred income taxes, net		8,505		10,112		(1,607		)
Shareholders' Equity:
Retained earnings		247,080		251,707		(4,627		)

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. Refer to Note 2 Summary of Significant Accounting Policies 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 six months ended June 30, 2018.



	US Regions		U.S. Federal		Canada		Non-Solar DG			All Other		Total
Line of Business
Three Months Ended June 30, 2018
Project revenue	$	80,877	$	47,437	$	5,317	$	1,201		$	4,200	$	139,032
O&M revenue	4,069		9,566		—		2,258			—		15,893
Energy assets	3,799		1,140		1,017		16,501			335		22,792
Other	33		71		1,624		(39		)	17,576		19,265
Total revenues	$	88,778	$	58,214	$	7,958	$	19,921		$	22,111	$	196,982
Six months ended June 30, 2018
Project revenue	$	146,317	$	85,275	$	12,253	$	2,100		$	4,770	$	250,715
O&M revenue	7,964		18,744		19		4,254			—		30,981
Energy assets	8,780		1,909		1,383		31,615			599		44,286
Other	408		71		3,207		69			34,655		38,410
Total revenues	$	163,469	$	105,999	$	16,862	$	38,038		$	40,024	$	364,392

Geographical Regions
Three Months Ended June 30, 2018
United States	$	88,778	$	58,214	$	648	$	19,921		$	17,543	$	185,104
Canada	—		—		7,310		—			173		7,483
Other	—		—		—		—			4,395		4,395
Total revenues	$	88,778	$	58,214	$	7,958	$	19,921		$	22,111	$	196,982
Six months ended June 30, 2018
United States	$	163,469	$	105,999	$	1,168	$	38,038		$	33,891	$	342,565
Canada	—		—		15,694		—			228		15,922
Other	—		—		—		—			5,905		5,905
Total revenues	$	163,469	$	105,999	$	16,862	$	38,038		$	40,024	$	364,392

Contract Balances

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



	January 1, 2018		June 30, 2018
Accounts receivable, net	$	85,121	$	115,596
Accounts receivable retainage, net	17,484		14,669
Contract Assets:
Costs and estimated earnings in excess of billings	95,658		64,656
Contract Liabilities:
Billings in excess of cost and estimated earnings	27,248		27,254

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 June 30, 2018, the Company classified $7,347 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 six months ended June 30, 2018 was primarily due to billings of approximately $285,321, offset in part by revenue recognized of $236,327. 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 six months ended June 30, 2018, the Company recognized revenue of $60,492, and billed customers $50,119, 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 June 30, 2018, the Company had backlog of approximately $1,575,000. Approximately 26%, of our June 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 six months ended June 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 June 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 six months ended June 30, 2018, $3,570 and $6,010, respectively, of project development costs were recognized in the consolidated statement of income (loss) on projects that converted to customer contracts.