Argan, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2017, including the quarter ended that date. Amounts are U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and reporting period
Argan is a holding company operating through power services businesses Gemma Power Systems (GPS) and Atlantic Projects Company (APC), industrial fabricator The Roberts Company (TRC), and telecommunications contractor Southern Maryland Cable (SMC). Power services remain the core business, accounting for 87% of fiscal 2017 revenue. Results include a full year of TRC and APC operations following their acquisitions in fiscal 2016.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $675.0 | $413.3 |
| Gross profit / margin | $146.7 / 21.7% | $99.5 / 24.1% |
| Operating income | $112.3 | $74.4 |
| Net income attributable to Argan stockholders | $70.3 | $36.3 |
| Diluted EPS | $4.50 | $2.42 |
| Cash from operating activities | $259.0 | $(33.0) |
| Cash and cash equivalents | $167.2 | $160.9 |
| Short-term investments | $355.8 | $114.1 |
| Working capital | $237.2 | $162.9 |
| Contract backlog | $1,010.8 | $1,162.6 |
Operating cash flow improved sharply, principally due to increased billings ahead of related costs and increased accounts payable and accrued expenses; these working-capital movements are important when assessing cash-flow sustainability. The company had no borrowings outstanding under its $10 million revolving credit facility and reported compliance with its covenants. The facility had $3 million designated for a letter of credit. Fiscal 2017 dividends totaled $1.00 per share.
Fourth-quarter revenue was $206.8 million, gross profit $37.8 million, operating income $29.8 million, and net income attributable to Argan stockholders $20.4 million. The filing reports quarterly results as unaudited.
Material changes versus the prior comparable period
- Revenue rose 63.3%, largely as four GPS power plant projects ramped up and TRC contributed its first full fiscal year. Power services revenue increased 51.3%; TRC revenue was $79.0 million, compared with $15.3 million for less than two months of ownership in FY2016.
- Argan stockholder net income increased 93.5% and diluted EPS rose from $2.42 to $4.50. Gross margin declined from 24.1% to 21.7%, which management attributed mainly to the mix of newer GPS work and the acquired businesses.
- The two Panda power projects reached contractual final completion during FY2017. Their combined share of consolidated revenue fell to about 14%, from 73% in FY2016; completion also reduced project risks and estimated costs, supporting margins.
- Backlog fell to approximately $1.01 billion from $1.16 billion. APC recorded a $2.0 million goodwill impairment and a $0.8 million receivable write-off after its largest project was suspended; APC reported a $3.6 million pretax loss. TRC generated $4.4 million of pretax income after completing major loss-making pre-acquisition contracts.
Outlook, commentary, risks, and unusual items
- Management expects current project work to support business activity for the next two fiscal years and expects four active GPS power plant projects to complete during the fiscal year ending January 31, 2019. It provided no specific revenue or earnings guidance.
- Management views long-term prospects for natural gas and renewable generation construction favorably, but noted that higher gas prices, policy changes, slow electricity-demand growth, financing constraints, and delayed project planning may slow new awards. GPS had obtained no additional EPC contracts since the CPV Towantic award in March 2016.
- Exelon West Medway II had not received full notice to proceed and new activity was temporarily suspended pending regulatory approvals. APC’s largest project was suspended indefinitely after its owner could not secure financing; that project was removed from backlog.
- Execution risks include fixed-price cost overruns, schedule delays, liquidated damages, subcontractor and supplier performance, skilled-labor availability, bonding capacity, customer payment delays, and foreign currency exposure. Five power projects represented 97% of power-segment backlog. Five customers together generated 79% of consolidated FY2017 revenue.
- TRC is defending a subcontractor lawsuit seeking about $0.9 million and a related bond claim of about $2.5 million; TRC disputes the claims and asserts that approximately $2.2 million is owed to it. The company accrued the subcontractor invoices and had not recorded its asserted receivable. Management did not expect a material additional loss, but outcomes remain uncertain.
- The company recorded a $1.2 million provision for uncollectible accounts, primarily related to project-development loans, and a $2.0 million APC goodwill impairment. It also negotiated close-out of a contract involving $12.9 million of potential liquidated damages; the filing does not characterize this amount as a cash payment or a realized loss.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the suspended West Medway project receives approvals and proceeds, and whether remaining backlog converts to revenue and profit on schedule.
- How much of the unusually strong FY2017 operating cash flow reflects timing-related project billings and payables, and how retainages and project-owner collections develop.
- Whether GPS wins replacement EPC awards as completed projects roll off, given customer and project concentration and the decline in backlog.
- Whether APC returns to profitability and whether TRC sustains its recovery; review the assumptions behind goodwill valuations and TRC’s forecast.
- The eventual outcome of the PPS dispute, the collectability of project-development loans, and any other project claims, warranty obligations, or bonding exposures.