Argan, Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended April 30, 2022. Argan provides power-generation engineering, procurement and construction services, industrial fabrication and field services, and telecommunications infrastructure services.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $100.3 million | $126.3 million |
| Gross profit / margin | $19.7 million / 19.7% | $23.7 million / 18.8% |
| Operating income | $9.2 million | $13.8 million |
| Net income | $7.5 million | $10.8 million |
| Diluted EPS | $0.50 | $0.67 |
| Operating cash flow | $(39.7) million | $17.3 million |
- Revenue declined 20.6% year over year. Power industry services revenue fell 23.9% to $73.9 million; industrial services fell 15.6% to $22.5 million; telecommunications revenue rose 52.4% to $3.8 million.
- Gross margin improved, but SG&A increased 6.9% to $10.6 million, rising to 10.6% of revenue from 7.8%. Operating income fell 33.7%.
- Cash and cash equivalents were $192.3 million and short-term investments were $175.2 million at April 30, for combined cash and short-term investments of $367.5 million. Working capital was $261.3 million.
- No borrowings were outstanding under the $50 million revolving credit facility. The company had $21.1 million of letters of credit under the facility and a separate, cash-collateralized $3.4 million letter of credit. It reported covenant compliance.
- Operating cash use reflected lower contract liabilities and payables/accruals, as well as increases in receivables and other assets. Investing cash use included $85.0 million net purchases of short-term investments; financing cash use included $27.1 million of share repurchases and $3.7 million of dividends.
Changes, outlook and risks
- Power revenue decreased as Guernsey Power Station activity passed peak levels, Teesside work was completed, and Maple Hill Solar construction slowed amid photovoltaic-panel supply disruption. TRC revenue also declined from a particularly strong prior-year quarter; SMC benefited from increased activity and its Lee Telecom acquisition.
- Backlog was approximately $0.7 billion, similar to January 31, 2022. Remaining unsatisfied performance obligations were $339.2 million; management estimated about 74% would be recognized in the remainder of FY2023 and most of the balance in FY2024. Delays, cancellations, scope changes and cost revisions could reduce expected revenue.
- Management described continued pursuit of gas-fired, renewable and flexible-generation work, including the Maple Hill Solar and Kilroot projects and three ESB projects in Ireland announced in May 2022. The filing provides no specific consolidated revenue or earnings guidance.
- Risks discussed include supply-chain disruption, inflation and fixed-price contract cost overruns, project delays, labor and materials availability, customer concentration, COVID-19 impacts, foreign-currency movements, and uncertainty around energy policy and power-project financing. One customer accounted for 48% of quarterly revenue.
- Subsequent event: following an IRS appeals hearing in May 2022, the company accepted a settlement of approximately $7.9 million, before interest, concerning research and development tax credits. It expects an unfavorable tax-liability adjustment of approximately $6.3 million, before interest, in Q2 FY2023.
- During the quarter Argan repurchased 710,879 shares for $27.1 million at an average $38.09 per share and paid a $0.25-per-share dividend. It repurchased another 383,177 shares for approximately $14.2 million through June 8, 2022.
Key investor verification points
- Track project execution, timing and profitability—especially Guernsey, Maple Hill, Kilroot and the newly announced Irish projects—and any backlog or RUPO revisions.
- Assess whether operating cash flow recovers as contract balances and project activity change, and monitor the mix and availability of cash, short-term investments and credit capacity.
- Confirm the timing and final cash and tax-accounting effects of the IRS settlement, including interest and related tax receivables.
- Monitor customer concentration, supply-chain and fixed-price contract exposure, and progress in winning work across conventional and renewable power markets.
- Review the pace and cost of further repurchases and dividends alongside project funding, bonding needs and liquidity.