Argan, Inc. — Form 10-Q summary
Business context and period. Argan provides power-industry engineering and construction services, industrial fabrication and field services, and telecommunications infrastructure services. This report covers the three and six months ended July 31, 2019; amounts below are in millions of dollars unless noted. Comparisons are with the periods ended July 31, 2018.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $63.1, down 53.9% | $112.6, down 59.5% |
| Gross profit (loss) | $3.0; 4.7% margin | $(18.1); negative margin |
| Operating income (loss) | $(7.1) | $(39.8) |
| Net income (loss) attributable to Argan shareholders | $1.2; diluted EPS $0.07 | $(28.6); diluted EPS $(1.84) |
- Six-month gross results include the $30.9 million estimated total loss on APC’s TeesREP project. Excluding TeesREP revenue and costs, management reported a 13.4% gross margin for the six-month period.
- Power-services revenue fell 73% for the quarter and 79% for six months, reflecting completion of prior projects, delayed starts on new work and TeesREP. Industrial-services revenue grew 19% and 36%, respectively; telecommunications revenue declined 46% and 30%.
- Six-month operating cash flow was negative $53.2 million, compared with negative $58.5 million a year earlier. Investing activities provided $66.0 million, primarily from net maturities of short-term investments; dividends used $7.8 million.
- At July 31, cash and cash equivalents were $170.7 million and short-term investments were $62.9 million. Working capital was $294.4 million, down from $335.0 million at January 31. Total liabilities were $60.7 million; the company had no borrowings under its $50 million revolving facility.
- Quarterly dividends remained $0.25 per share. Six-month capital expenditures were $3.0 million.
Material changes and unusual items
- TeesREP loss: APC’s revised forecast indicated contract costs would exceed revenue by approximately $30.9 million; the full estimated loss was recognized in the six months. The quarter included $3.4 million of additional loss. A $7.3 million contract-loss reserve was included in accrued expenses. APC and its EPC contractor continued negotiations over completion terms and prior commercial differences.
- Impairment: Argan recorded a $2.1 million impairment of APC goodwill in the first quarter.
- Tax effects: A six-month income-tax benefit of $6.9 million partly offset the pretax loss, primarily reflecting an estimated tax benefit from loans to APC deemed uncollectible. The company established a $6.1 million valuation allowance against a UK deferred tax asset. The reported tax benefit is not equivalent to operating profitability.
- Customer dispute: GPS sued Exelon over alleged breach of contract and wrongful termination of a Massachusetts power-plant EPC contract. Exelon withheld payments; $19.6 million of receivables and contract assets at July 31 depended on resolution of the dispute. GPS said it would pursue amounts owed and defend against Exelon’s claims.
Outlook, liquidity and risks
- Management expected results to improve slowly over the remaining two quarters as new power projects ramped up, and expressed optimism about a return to year-over-year growth as projects mature. No quantified earnings or revenue guidance was provided.
- Project backlog was approximately $1.4 billion at July 31, versus $1.1 billion at January 31. Separately, remaining unsatisfied performance obligations were $57.5 million, most expected to be recognized in the fiscal year ending January 31, 2020. Backlog and obligations may be affected by cancellations, deferrals or scope changes.
- GPS received full notice to proceed after quarter-end for a 1,875 MW Ohio gas-fired plant, with completion scheduled in 2022. The contract value was already included in backlog. Other project start dates had been delayed; timing remained uncertain.
- Management said available cash, investment maturities and expected operating cash should cover foreseeable business needs. However, the TeesREP loss materially reduced financial-covenant compliance margins, although the company remained compliant at July 31. The facility had $12.3 million in outstanding letters of credit, substantially related to TeesREP.
- Risks include further TeesREP cost or negotiation developments; project start delays or cancellations; customer concentration; fixed-price contract estimates and liquidated damages; commodity-price exposure without hedging; and potential litigation outcomes. The company also reported approximately $158 million of performance bonds outstanding, including warranty-related coverage.
Important facts for investors to verify
- Subsequent TeesREP cost-to-complete estimates, loss reserve adequacy, negotiations and exposure under the parent guarantee and letters of credit.
- Progress and cash collection in the Exelon dispute, including the $19.6 million of disputed receivables and contract assets.
- Timing of delayed project starts and actual revenue ramp-up against the $1.4 billion backlog; backlog is not guaranteed revenue.
- Operating cash flow, covenant headroom and liquidity as project activity and working-capital needs change.
- Resolution of IRS examinations and uncertain research-and-development tax-credit positions.