Argan, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2014, the first quarter of fiscal 2015. Argan provides power industry services through Gemma Power Systems (GPS) and telecommunications infrastructure services through Southern Maryland Cable (SMC).
Financial performance and position
| Metric | Three months ended April 30, 2014 | Prior comparable period |
|---|---|---|
| Revenue | $51.2 million | $46.6 million |
| Gross profit / margin | $10.1 million / 19.6% | $13.0 million / 27.9% |
| Operating income | $6.7 million | $9.6 million |
| Net income attributable to Argan shareholders | $3.5 million; diluted EPS $0.24 | $6.4 million; diluted EPS $0.45 |
| Net cash from operating activities | $40.8 million | $(3.6) million |
- Revenue rose 9.7%, led by power services, up to $49.8 million from $43.8 million. Telecom revenue declined to $1.4 million from $2.9 million.
- Gross profit fell about 23%; management attributed the lower margin partly to prior-year cost estimate reductions on a completed power project that had boosted the comparison period.
- Cash and cash equivalents were $313.8 million at April 30, up from $272.2 million at January 31, 2014. Working capital was $140.1 million, versus $133.3 million at fiscal year-end.
- Operating cash flow benefited principally from a $42.8 million increase in billings in excess of costs and estimated earnings. Management described the resulting cash increase as temporary and associated with anticipated construction costs.
- About $167.9 million of cash was held in consolidated construction joint ventures and was primarily for project costs and potential partner distributions.
- Total liabilities were $208.0 million, primarily current liabilities including $177.5 million of billings in excess of costs and estimated earnings. No bank borrowings were outstanding. The $4.25 million revolving facility had $2.9 million available after amounts reserved for letters of credit; it expires May 31, 2015.
- EBITDA, a non-GAAP measure, was $6.9 million, compared with $11.1 million; EBITDA attributable to Argan shareholders was $5.6 million versus $10.0 million.
Material changes and operating context
- Power services were approximately 97% of revenue. Three power customers accounted for approximately 38%, 35% and 23% of consolidated revenue, respectively.
- Power segment revenue growth reflected work on two large gas-fired plants and a biomass plant. The biomass project was scheduled for substantial completion in the fourth quarter; GPS also had a three-year operations and maintenance contract for it.
- Telecom revenue fell approximately 52%, following completion of significant Maryland fiber network work and an equipment procurement order in the prior year.
- Contract backlog was $742 million at April 30, compared with $790 million at January 31, 2014.
- Prior-year results included a $1.12 million pre-tax gain from deconsolidating Moxie Liberty and approximately $162,000 of interest income from notes receivable. Moxie Patriot also contributed a $261,000 pre-tax operating loss in the prior-year quarter.
Outlook, risks and contingencies
- Management said current project performance should provide a stable base of activity for the next two to three years and anticipated a return to more typical gross margins, partly because sizable development success fees earned in the prior year were not expected to recur.
- No numerical revenue or earnings guidance was provided. Management was cautiously optimistic long term but expected weak power-sector demand and intense competition to constrain near-term new project bookings. Renewable project awards remained uncertain.
- The company highlighted execution and competitive risks, customer concentration, fixed-price contract exposure to copper, concrete, steel and fuel costs, and uncertainty in the construction and power markets. It generally does not hedge commodity price risk.
- GPS joint ventures performing the Panda Liberty and Panda Patriot EPC contracts are consolidated. GPS has a majority interest in project results and could be fully liable for losses if its partner cannot pay its share.
- The Altra project lien and related claims remained unresolved. GPS is pursuing assigned lien claims; management stated that it could not assure success but did not consider a material additional loss likely based on information then available. No additional loss provision was recorded.
- A California income tax audit was ongoing; management did not expect a material change in tax liability and had recorded no related accrual.
- ASU 2014-09, the new revenue recognition standard, had been issued in May 2014. The company had not assessed its impact; it was effective for public entities for reporting periods beginning after December 15, 2016.
Important facts for investors to verify
- Whether lower gross margins persist as the current power projects progress, and how project cost estimates evolve.
- How much of the reported cash is available for general corporate use after accounting for construction joint venture needs and project billings.
- Whether backlog converts to revenue and cash on schedule, particularly given the $48 million decline from January 31.
- Exposure to the three major power customers and the financial, bonding and loss-sharing risks of the consolidated joint ventures.
- Developments in the Altra litigation and any potential effect on the fully reserved $5.5 million receivable balance.