Argan, Inc. — Form 10-Q Summary
Business context and period: This filing covers the three months ended April 30, 2018, Argan’s first quarter of fiscal 2019. Argan provides power-industry engineering and construction services, industrial fabrication and field services, and telecommunications infrastructure services. The statements are unaudited. Prior-year results were not recast for the company’s adoption of ASC 606.
Financial performance
| Metric | Three months ended Apr. 30, 2018 | Prior-year period |
|---|---|---|
| Revenue | $141.4 million | $230.5 million |
| Gross profit / margin | $15.5 million / 11% | $40.1 million / 17% |
| Operating income | $5.8 million | $30.6 million |
| Net income attributable to Argan stockholders | $4.8 million | $20.6 million |
| Diluted EPS | $0.31 | $1.31 |
| Operating cash flow | $(60.9) million | $41.0 million |
- Revenue declined 38.7%; gross profit fell 61.5% and stockholder net income fell 76.5% year over year. Power-industry services revenue decreased 41.9% to $122.5 million and represented 87% of consolidated revenue.
- Management attributed lower gross margin to increased labor and subcontractor cost estimates on certain projects, the arbitration-related charge, and changes in project mix and progress. SG&A was nearly flat at $9.6 million.
- Cash and cash equivalents were $151.5 million at April 30, versus $122.1 million at January 31. Short-term investments were $214.1 million; working capital was $300.3 million, down from $301.8 million.
- Operating cash use primarily reflected a $53.9 million unfavorable change in contracts in progress and a $9.5 million increase in receivables. Investing cash flow was positive $94.5 million, primarily from net maturities of short-term investments. The company paid $3.9 million in dividends and spent $3.7 million on capital expenditures.
- No borrowings were outstanding under the $50 million revolving credit facility, available through May 31, 2021. Approximately $19.5 million of facility capacity was committed to outstanding credit instruments; the company reported covenant compliance. It also had a separate $0.4 million letter of credit for TRC.
Material changes, outlook and risks
- Project backlog increased to approximately $524 million at April 30 from $379 million at January 31. Remaining unsatisfied performance obligations were $289.5 million, with approximately 91% expected to be recognized in the nine months ending January 31, 2019. Management cautioned that backlog and obligations may be affected by cancellations, deferrals, scope changes and currency movements.
- Management expected GPS revenue to decrease significantly in fiscal 2019 as major EPC projects approach completion and new projects take time to ramp up. It described fiscal 2019 as a transition year and was cautiously optimistic about renewed growth in fiscal 2020 and later, subject to new awards and project execution.
- GPS signed an EPC contract for a 475 MW natural-gas power plant in Reidsville, North Carolina; full notice to proceed had not been received by quarter-end. GPS was also negotiating several other projects with potential aggregate value exceeding $1.5 billion, but had no limited or full notice to proceed for those projects.
- Management cited subdued electricity demand, delays in new project awards, renewable-energy growth, regulatory uncertainty, pipeline delays, protests and litigation as factors that could defer or cancel power projects. Project cost overruns, fixed-price contract exposure, commodity prices, customer concentration and foreign-currency movements are additional risks.
- On June 5, 2018, an arbitration panel awarded a former GPS subcontractor approximately $5.2 million plus interest and arbitration fees. The company said it had accrued the full amount as of April 30. A separate TRC dispute with PPS involves $2.3 million in disputed invoices and TRC counterclaims of approximately $4.9 million; the outcome remains uncertain.
- The company declared and paid its first regular quarterly dividend of $0.25 per share. Management estimated a fiscal 2019 annual effective tax rate of approximately 26%. ASC 606 adoption had an immaterial opening retained-earnings effect and minimal impact on current-period results.
- Management believed available cash, investment maturities and expected operating cash flow would meet foreseeable business needs, while noting that future acquisitions or significant unplanned requirements could require additional financing. It also warned that unfavorable cash-flow trends could continue until current projects are completed and new EPC projects begin.
Important facts for investors to verify
- Progress, final costs and completion timing for major EPC projects, and whether new projects receive notices to proceed.
- Whether contract cost estimates, change orders and claims lead to further margin reductions or revenue reversals.
- Cash conversion as contract assets, retainages and contract liabilities change during project completion and ramp-up.
- Final cash impact of the arbitration award and the status and potential exposure of the TRC/PPS dispute.
- Customer concentration, backlog conversion, and whether fiscal 2019 and fiscal 2020 results align with management’s outlook.