Argan, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2020; fiscal year ends January 31. Amounts are in U.S. dollars. Argan provides power-generation EPC and related services, industrial fabrication and field services, and telecommunications infrastructure services.
Financial performance and liquidity
| Metric | Three months ended July 31, 2020 | Six months ended July 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $87.5 million; up 38.7% | $147.6 million; up 31.1% | $63.1 million and $112.6 million |
| Gross profit (margin) | $15.6 million (17.9%) | $19.6 million (13.3%) | $3.0 million (4.7%) and gross loss of $18.1 million |
| Operating income (loss) | $6.5 million | $0.2 million | Losses of $7.1 million and $39.8 million |
| Net income (loss) attributable to Argan stockholders | $5.6 million; $0.36 diluted EPS | $4.8 million; $0.31 diluted EPS | $1.2 million; $0.07 diluted EPS, and loss of $28.6 million; loss of $1.84 per diluted share |
| Operating cash flow | Not separately presented | $102.9 million | Cash used of $53.2 million |
- At July 31, cash and cash equivalents were $382.4 million, short-term investments $25.2 million, working capital $270.0 million, and total liabilities $237.0 million. Cash and cash equivalents rose from $167.4 million at January 31.
- Operating cash flow benefited principally from an $83.3 million increase in contract liabilities, including advance payments associated with Guernsey and new TRC awards. Cash flow also included a $17.8 million use from increased other assets, mainly tax refund receivables.
- No borrowings were outstanding under the $50 million revolving credit facility; letters of credit under it totaled $1.7 million. The facility expires May 31, 2021. A separate $3.4 million letter of credit for a development project was cash-collateralized. The company reported compliance with covenants.
- Other income fell to $0.5 million for the quarter and $1.5 million for the half year, primarily because of lower investment yields. The company reported $298.8 million in money-market funds earning a 0.05% annual yield at July 31.
Changes versus prior periods
- Growth was driven by power-industry services, especially GPS’s Guernsey Power Station project: segment revenue rose 147.5% for the quarter and 144.6% for the half year. Power services accounted for about 79% of first-half revenue.
- TRC revenue declined 49.8% for the quarter and 56.2% for the half year; management noted a sequential quarterly recovery as customers resumed work. SMC revenue declined 9.0% for the quarter and 15.6% for the half year.
- Prior-year first-half results included a $30.9 million TeesREP project loss and a $2.1 million APC goodwill impairment, contributing to the gross loss and net loss. No impairment was recorded in the 2020 first half.
- First-half 2020 income tax benefit was $3.1 million, including an approximately $4.3 million benefit from carrying back fiscal 2020 U.S. net operating losses under the CARES Act. The quarter itself recorded $1.4 million of tax expense.
Outlook, commentary and risks
- Project pipeline: Remaining unsatisfied performance obligations were $694.1 million at July 31; management estimated about 31% would be recognized in the final two quarters of FY2021, with most of the balance expected over the following two fiscal years. The company cautioned that delays, cancellations, scope changes, cost revisions, and currency movements could reduce future revenue.
- Reported project backlog was approximately $1.2 billion, down from $1.3 billion at January 31. Management described project starts as dependent on owners’ financing and timing, and was cautiously optimistic that at least two of three recently contracted power projects could start within three to nine months, while noting timing was uncertain. No formal consolidated revenue or earnings guidance was provided.
- Management expected SG&A as a percentage of revenue to trend lower through the remainder of FY2021 and the following year, primarily if revenue increases as expected. It described long-term prospects for gas-fired power construction as generally favorable but anticipated near-term restraint and possible project-start delays.
- TeesREP: APC’s work was suspended on March 24, 2020 because of COVID-19 and resumed under a June amendment that settled past commercial differences and shifted remaining work to time-and-materials billing. The amendment produced a $4.2 million catch-up benefit, partly offset by $1.9 million of project charges; U.K. government reimbursement of $3.2 million mitigated certain labor costs. Management’s estimated total project loss remained approximately $32.3 million; the remaining loss reserve was $2.3 million. Further losses remain possible if execution, pandemic-related interruptions, or customer payments deteriorate.
- Customer and legal exposure: One power-industry customer represented 70% of quarterly revenue. A dispute with former customer Exelon concerns a nearly completed Massachusetts project; $24.5 million of billed receivables and unbilled project costs depended on resolution of the litigation. Discovery deadlines were extended to about October 2, 2020. Management stated other known claims were not expected to be material.
- COVID-19 disrupted APC work in Ireland and the U.K. and delayed customer projects at TRC and SMC. Other risks discussed include project financing and start delays, power-market and regulatory uncertainty, fixed-price contract cost overruns, commodity prices, and possible project cancellations.
- The board declared a $1.00-per-share special dividend plus a $0.25 regular dividend, both paid July 31; another $0.25 regular dividend was paid April 30. Dividends totaled $23.5 million in the first half. A share repurchase authorization of up to $25 million through June 2022 had no purchases as of the filing.
Important facts for investors to verify
- Progress, remaining costs, reserve adequacy, and customer collections on TeesREP, including whether the estimated $32.3 million total loss changes.
- Collection timing and outcome of the $24.5 million Exelon-related receivable and contract-asset exposure.
- Conversion of the $694.1 million RUPO and $1.2 billion backlog into scheduled, profitable work, especially starts of newly awarded projects.
- Sustainability of operating cash flow: the first-half result depended substantially on customer advances and contract-liability growth.
- Customer concentration, COVID-19 impacts, tax-refund timing, and the company’s liquidity and bonding needs as the credit facility approaches its May 2021 expiration.