Argan, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2015. The quarter was the second quarter of fiscal 2016. Comparative periods ended July 31, 2014.
Business context
Argan provides engineering, procurement, construction and related services, primarily to the power-generation industry through Gemma Power Systems (GPS) and, following its May 2015 acquisition, Atlantic Projects Company (APC). Telecommunications infrastructure services are provided through Southern Maryland Cable. Power services generated 96% of revenue in both the quarter and first half.
Financial results
| Metric | Three months 2015 | Three months 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $97.4 million | $102.0 million | $182.9 million | $153.2 million |
| Gross profit / margin | $28.5 million / 29.2% | $21.6 million / 21.1% | $49.7 million / 27.1% | $31.6 million / 20.6% |
| Operating income | $23.6 million | $17.1 million | $39.3 million | $23.8 million |
| Net income | $15.8 million | $12.0 million | $26.7 million | $16.8 million |
| Net income attributable to Argan shareholders | $11.3 million | $8.6 million | $18.8 million | $12.0 million |
| Diluted EPS attributable to Argan shareholders | $0.75 | $0.58 | $1.26 | $0.82 |
First-half revenue rose 19.4%, while second-quarter revenue declined 4.5%. First-half gross margin expanded to 27.1%, and shareholder-attributable net income increased 56%. Management attributed margin gains principally to improved estimated profitability on the two large Pennsylvania power-plant projects as work progressed and expected completion costs declined. Management cautioned that margins may return to lower levels as new projects ramp up.
Cash flow, balance sheet and debt
- Operating cash flow was negative $28.6 million in the first half, versus positive $70.6 million a year earlier. The largest stated use was a $47.0 million reduction in billings in excess of costs and estimated earnings as construction progressed; receivables and payables/accruals also affected cash flow.
- Cash and cash equivalents were $182.1 million at July 31, down from $333.7 million at January 31. The company also held $117.1 million of short-term investments, mainly bank certificates of deposit. Management said $55.9 million of cash and $40.0 million of short-term investments were held in consolidated construction joint ventures for future project costs.
- Working capital was $178.5 million, up from $148.9 million at January 31. Total liabilities were $172.5 million and total equity was $207.6 million.
- No bank borrowings were outstanding. A replacement revolving credit facility provides up to $10 million through May 31, 2018, at LIBOR plus 2%; $1.35 million of availability was designated for letters of credit. Most company assets are pledged as collateral. Management reported covenant compliance and expected continued compliance.
- Investing cash outflow was $124.3 million, primarily reflecting $117.0 million of net short-term investment purchases. APC acquisition cash outflow, net of cash acquired, was $4.2 million; capital expenditures were $2.5 million.
Material changes and notable items
- Argan acquired all of APC on May 29 for consideration valued at $11.1 million, including cash, approximately 99,000 shares and an escrow liability. APC contributed $3.4 million of revenue and recorded a $150,000 pretax loss in the period included in Argan’s results. Purchase accounting was preliminary.
- Reported contract backlog was approximately $660 million at July 31, compared with $423 million at January 31 and $643 million a year earlier. Management said three subsequently announced power-plant contracts would bring backlog to approximately $1.2 billion, if their values are included.
- Argan received $1.6 million in May from settlement of the Altra bankruptcy-related lien matter; the receipt was recorded as first-quarter revenue. The matter was dismissed following settlement.
- Moxie Freedom was deconsolidated after Argan was no longer considered its primary beneficiary. The change added approximately $4.2 million of notes receivable and accrued interest to the balance sheet and generated a $264,000 gain. The loans bear 20% interest, are secured, and may yield a development success fee of up to $6 million if project financing or sale conditions are met; an equipment supplier is entitled to 40% of applicable funding economics and success fees.
Outlook, commentary and risks
Management expected current projects to support a stable base of activity for most of the fiscal year, with steady gross margins. Revenue from the two Pennsylvania projects was expected to decline as they approached completion in the first half of fiscal 2017, with new project starts and APC expected to offset that decline. The company cited favorable long-term prospects for natural-gas-fired and renewable power construction, but noted that power demand growth, fuel prices, regulation, project economics and timing remain uncertain. No numerical earnings or revenue guidance was provided.
Key disclosed risks include dependence on a small number of power customers and projects, fixed-price contract execution and cost-estimate risk, competition, commodity-price exposure without general hedging, acquisition integration, development-loan recoverability, and the availability and terms of future financing. Two customers represented approximately 46% and 44% of second-quarter revenue; together they also represented 83% of accounts receivable at July 31. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether projected cost-to-complete improvements on the Pennsylvania projects are achieved, and how they affect margins as new work ramps up.
- Execution, start dates, funding and backlog conversion for the new power-plant contracts; distinguish the reported $660 million backlog from management’s approximately $1.2 billion figure including later announcements.
- Collection timing and credit quality of retainage and developer notes receivable, including the Moxie Freedom loans and any success fee assumptions.
- Cash-flow trends and the portion of cash and short-term investments held in joint ventures for project construction.
- Customer concentration, commodity and fixed-price contract exposure, APC integration and final purchase-price allocation.
- Potential effects of the new revenue-recognition standard; the company had not yet assessed its full impact.