Business context and reporting period
Argan, Inc. filed this Form 10-K for the fiscal year ended January 31, 2015; it is an annual filing, not a standalone calendar-quarter report. Argan provides power-generation engineering, procurement and construction (EPC) services through Gemma Power Systems (GPS), and telecommunications infrastructure services through Southern Maryland Cable (SMC). GPS generated 98% of fiscal 2015 revenue.
For the fiscal fourth quarter ended January 31, 2015, revenue was $102.3 million, gross profit $21.7 million, operating income $15.5 million, net income attributable to Argan stockholders $6.0 million, and diluted EPS $0.40.
Financial performance and liquidity
| Metric | FY ended Jan. 31, 2015 | FY ended Jan. 31, 2014 |
|---|---|---|
| Revenue | $383.1 million | $227.5 million |
| Gross profit / margin | $83.6 million / 21.8% | $78.8 million / 34.7% |
| Operating income / margin | $64.1 million / 16.7% | $65.9 million / 29.0% |
| Net income | $43.5 million | $43.3 million |
| Net income attributable to Argan stockholders | $30.4 million | $40.1 million |
| Diluted EPS attributable to Argan stockholders | $2.05 | $2.78 |
| Operating cash flow | $93.3 million | $98.4 million |
- Cash and cash equivalents were $333.7 million at year-end, versus $272.2 million a year earlier; working capital was $149 million. Cash included $123.6 million held by consolidated joint ventures for future Panda project construction.
- No borrowings were outstanding under the $4.25 million revolving facility. The filing lists $1.017 million of long-term debt obligations, described as notes payable for a development project. The facility was due to expire May 31, 2015; management expected to extend it on favorable terms. The company was covenant-compliant and had no senior debt at year-end.
- Contract backlog was $423 million, down from $790 million, primarily as work progressed on the Panda projects. About 94% of backlog related to Panda Liberty and Panda Patriot.
- Argan paid a special dividend of $0.70 per share in November 2014. Future dividends are not assured and require bank consent.
Material changes versus the prior year
- Revenue rose 68% as construction activity increased on the Panda Liberty and Panda Patriot gas-fired plants; together they contributed approximately 86% of consolidated fiscal 2015 revenue.
- Gross profit increased, but gross margin declined to 21.8% from 34.7%. Fiscal 2014 included $27.1 million of Panda development success fees, which were not repeated in fiscal 2015.
- Operating income fell to $64.1 million from $65.9 million. Argan stockholder net income and diluted EPS also decreased, principally reflecting the absence of the prior-year development fees and a larger share of earnings allocated to noncontrolling interests: $13.0 million versus $3.2 million.
- Telecommunications revenue declined to $6.4 million from $8.8 million, partly because a Maryland statewide network project had wound down.
- Operating cash flow remained strong but decreased from $98.4 million. Fiscal 2015 cash generation benefited from higher accounts payable/accruals and billings in excess of costs, so cash flow reflects project billing and working-capital timing as well as earnings.
Outlook, commentary, risks and unusual items
- Management described the outlook as cautiously optimistic, citing long-term opportunities in natural-gas-fired and renewable power generation, but said soft power demand and intense competition constrain new project awards. Management expected current projects to provide a stable base of activity for the next year, with steady gross margins; it did not provide numerical revenue or earnings guidance.
- The Panda plants were expected to be completed in the first and second quarters of calendar 2016. The company said maintaining fiscal 2015 revenue levels in fiscal 2016 could depend on winning new contracts.
- GPS completed the approximately $169 million Woodville biomass EPC project ahead of schedule and obtained a three-year operations and maintenance contract with estimated aggregate value of approximately $32 million.
- Argan committed to lend Moxie Freedom up to $6 million at 20% annual interest to develop a planned 1,000 MW plant. At year-end, reported notes receivable and accrued interest were $2.113 million; project financing was anticipated in mid-to-late 2016. GPS received exclusive EPC rights and could earn a success fee of up to $6 million if development and financing succeed. The project is not assured, and development costs could be written off if it fails.
- Key risks include dependence on a small number of large projects and customers; backlog cancellation, delay or cost overruns; fixed-price contract, subcontractor, commodity, weather, permitting and bonding risks; and weaker demand or financing availability for new power plants. The joint-venture partner’s inability to fund its share of losses could leave GPS fully liable under the Panda EPC contracts.
- The filing describes an Altra project lien dispute. After year-end, in April 2015, parties reached a settlement memorandum under which Argan expected to receive $1.6 million from bankruptcy-court proceeds after execution of a final written agreement; receipt was not yet final in the filing.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and internal controls as of January 31, 2015.
Important facts for investors to verify
- Progress, completion timing, remaining costs and final profitability of Panda Liberty and Panda Patriot, including the concentration of backlog and revenue in these projects.
- Whether Argan secured the expected extension of its Bank of America facility after May 31, 2015, and whether its cash, covenant position and dividend capacity changed.
- Whether Moxie Freedom obtained permits, financing and a project sale or other development milestone; verify loan exposure, recovery prospects and any success fee or EPC award.
- Whether the Altra settlement was finalized and the expected $1.6 million was received.
- The sustainability of margins and operating cash flow after the prior-year development fees and as construction billing and working-capital balances normalize.