Argan, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended January 31, 2013; filed April 12, 2013. Although the request refers to 2012 Q4, this is an annual filing, and the supplied text does not provide standalone fourth-quarter results.
Business context
Argan is a holding company operating primarily through Gemma Power Systems (GPS), which provides power plant engineering and construction services, and Southern Maryland Cable (SMC), which provides telecommunications infrastructure services. GPS generated 93.8% of consolidated revenue; SMC generated 6.2%.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $278.6 million | $141.9 million |
| Gross profit / margin | $50.1 million / 18.0% | $23.1 million / 16.3% |
| Income from continuing operations | $22.1 million | $7.4 million |
| Net income attributable to Argan stockholders | $23.3 million | $9.3 million |
| Diluted EPS, continuing operations | $1.67 | $0.56 |
| Cash from continuing operating activities | $31.6 million | $80.1 million |
- Revenue rose 96%, led by GPS, whose revenue increased 97% to $261.3 million. SMC revenue rose 85% to $17.3 million.
- SG&A increased 28% to $14.4 million, but declined as a share of revenue to 5.2% from 7.9%. FY2013 results included a $1.6 million Altra-related charge in cost of revenues.
- Cash and cash equivalents were $175.1 million at year-end, up $18.6 million; working capital was $88.6 million. Operating cash flow was lower year over year, in part because FY2012 benefited from a large temporary increase in customer billings ahead of costs.
- No borrowings were outstanding under the $4.25 million revolving facility at year-end. It was due to expire May 31, 2013; management expected to obtain an extension. The company reported compliance with its bank covenants.
- Total liabilities were $115.6 million, largely current operating liabilities. The company paid a special dividend of $0.60 per share, or $8.4 million in total.
Material changes and business developments
- FY2013 revenue growth reflected higher construction activity after a subdued FY2012 transition between major projects. The Sentinel gas-fired plant contributed about 60% of GPS revenue and was approximately 81% complete at year-end.
- Power construction backlog fell to $180 million from $415 million; just $26 million of new work was added during the year. About 92% of year-end backlog related to Sentinel and an East Texas biomass plant. SMC backlog was approximately $2.0 million, down from $8.2 million.
- Two customers accounted for approximately 56% and 18% of consolidated revenue, respectively, in FY2013, underscoring customer and project concentration.
- Discontinued nutritional-products operations generated a $0.3 million loss in FY2013, compared with $1.6 million income in FY2012, which included a gain and tax benefit related to the asset sale.
Outlook, risks, contingencies and unusual items
- Management was cautiously optimistic over the long term but expected weak power demand and intense competition to constrain new project opportunities through FY2014. It emphasized completing current work, controlling costs, conserving cash and pursuing new work selectively.
- Management expected SMC revenue from the Maryland broadband program to decline substantially in FY2014 as the program neared completion. It gave no numerical consolidated revenue or earnings guidance.
- Argan had been selected for two proposed Pennsylvania gas-fired plants, each planned at more than 800 MW, and expected EPC contracts and construction activity to begin on at least one in FY2014. Timing and execution depended on permits, project ownership and permanent financing.
- Argan consolidated the Moxie project entities as variable interest entities. At year-end, GPI had advanced approximately $5.5 million in loans, with $0.8 million of accrued interest; $5.3 million of project costs were capitalized. Failure to complete development could lead to a write-off. Potential development success fees of $14 million to $29 million were contingent, not assured.
- A subsequent March/April 2013 agreement concerning the 825 MW Bradford County project remained contingent on the investor securing permanent financing. If completed, GPS was expected to receive an EPC engagement and GPI repayment of advances and fees.
- Risks include project delays or cancellations, fixed-price cost overruns, dependence on subcontractors and bonding capacity, customer concentration, uncertain renewable-energy incentives, and possible constraints on natural-gas development. The Sentinel commissioning phase and timely collection of project receivables are also relevant execution and cash-flow risks.
- In the Altra matter, a prior settlement was challenged by related claims; a trial was scheduled for April 2013, and no additional loss provision was recorded at year-end. A separate former subsidiary litigation alleging damages above $42 million had been dismissed with prejudice, but an appeal remained pending; management said an unfavorable outcome could materially affect a future period.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective controls as of January 31, 2013.
Important facts for investors to verify
- Progress, commissioning, final costs and customer acceptance for Sentinel, and delivery and cost performance on the East Texas biomass project.
- Whether the proposed Pennsylvania projects obtained financing, permits and binding EPC contracts, and the recoverability of Moxie advances and capitalized costs.
- Backlog replenishment, customer concentration, and the expected decline in Maryland broadband work and its effect on SMC revenue.
- Cash conversion and collection of retainage and other receivables; the filing notes $20.2 million of retainage and a $2.1 million overdue solar-project receivable that was collected in FY2014’s first quarter.
- Outcomes of the Altra-related proceedings and the TBN appeal, including any resulting charges or reversals.
- Extension of the revolving credit facility after its May 2013 expiry and any subsequent dividend decisions.