Ameresco Inc. Reports Strong Revenue Growth but Earnings Falter: Key Takeaways

Energy efficiency and infrastructure company Ameresco Inc. (AMRC -0.92%) reported third-quarter financial results on Nov. 5, and the good news was sales increased steadily, just as it did in the prior two quarters. The bad news was a steep drop in earnings from last year's period, like in the second quarter. 

Let's take a closer look at the company's third-quarter earnings report to get a better idea of where it appears to be headed. 

The numbers 

Revenue and operating income in millions.

Ameresco's net earnings were held back in both this quarter and last largely by a sharp increase in income tax provisions as compared to last year. Management is guiding to a 25% net income tax rate for the full year, but is accruing at a much higher rate (44% this quarter), based on the potential for several projects with tax incentives to roll into 2016, as well as some tax incentive legislation that may not be signed into law before year-end. 

The point? This is a somewhat uncontrollable aspect of the company's business. There are often tax incentives tied to the kinds of infrastructure and energy efficiency projects the company does. In an uncertain political environment, it can make for a bit of a shifting goalpost on the tax issue. 

For some added context on Ameresco's results in the quarter, we can take a closer look at Johnson Controls Inc. (JCI 0.80%), the industrial giant that operates a building efficiency segment, competing with Ameresco in North America. 

Johnson controls reported flat revenue in its building efficiency segment overall, but this was largely due to a 7% decline in Asia due to currency exchange. Revenue in North America increased 5% in the quarter, and total new orders (similar to the awarded projects metric Ameresco reports) in North America were up 4%. However, federal government orders declined 37%, and total backlog fell 1%. This is a very different North American result than Ameresco reported, which you'll see below. 

What happened in the quarter 

• 12% revenue increase, largely driven by 29% and 33% growth in U.S. federal and U.S. regions sales. 
• Canadian revenue continues to be a struggle (down 41%), largely because of the major money-losing project that was disclosed in the first quarter, and continued to weigh on last quarter's results as well.
• PV solar sales also fell 27%. This business has been relatively choppy for the company. 
• Operating income was up 5%, but net income fell by nearly half largely because of the uncertainty of the full-year tax rate, and management's decision to make provisions for a much higher rate. 
• Sales, general, and administrative expenses increased 3%, but declined as a percentage of sales to 14% from 15% last year. Sequentially, SG&A as a percentage of sales declined nearly 300 basis points. 
• Contracted project backlog declined slightly from $398 million to $379 million sequentially, but new awarded projects were $208 million, 33% more than last year's Q3 awarded projects. That puts the total backlog, including awarded but not signed projects as well as fully contracted backlog, at $1.4 billion, a 3% increase. 
• The balance sheet improved slightly, with a small sequential increase in cash on hand, and a $10 million reduction in debt that is recourse to Ameresco. 

What management said 
The impact of tax uncertainty is affecting the company's top and bottom line for the full year. CFO John Granara said the following in his prepared remarks:

We still believe that passage of the [tax] extenders before year-end is likely, so for now we are maintaining our guidance assumption of a full year tax rate of 25%. If the tax extenders are not passed before year end, our full year tax rate will approximate the 50% rate we have been accruing all year. ... As an aside, using the assumed full-year tax rate of 25%, EPS would have been $0.12 in Q3.

CEO George Sakellaris, on the long sales cycle of the company's projects, especially federal:

The growth in Federal contracted backlog demonstrates our patience and persistence in growing this business. This quarter we contracted two longer-cycle awards. It took over 2 years to move Fort Hamilton into contract, but it was worth the wait since we expect it to bring in $17 million of revenue. Similarly, the Coast Guard opportunity took over 18 months to get to contract, and while smaller at $7 million, creates potential for more repeat business.

Sakellaris, again, on operating leverage, but also the need to spend money to develop new business:

Inevitably, absolute dollar expenses will grow with the company, but we have structured ourselves to see some operating leverage as revenue ramps. Importantly, project development expenses increased 27% from the prior year. That spending reflects our efforts to build a healthy pipeline of projects, and indicates our sales and development teams are working hard pursuing new opportunities.

Looking ahead 
The great news is that, after several years of declining revenues and shrinking project backlog, the cycle seems to have turned for Ameresco. The bad news is the uncertainty around tax incentives, a prevalent part of the projects Ameresco does. That could lead to a big boost in earnings at year-end or more of the weak net income we've gotten the past two quarters.

With that said, Ameresco has made money in the past two quarters after reporting a loss in Q1, and is producing steady free cash. If the company can continue to tighten up its operating leverage and get some clarity for at least a year or so on the tax-incentive front, earnings could really jump in the quarters and years ahead.