Argan, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2017, compared with the three months ended April 30, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and performance
Argan provides power-plant engineering, procurement and construction (EPC) services, industrial fabrication and field services, and telecommunications infrastructure services. Power industry services generated 91% of quarterly revenue, up from 83% a year earlier; GPS alone contributed 90% of consolidated revenue.
- Revenue was $230.5 million, up 76.8%. Power services revenue rose 95.0% to $210.8 million; industrial services revenue declined 18.8% to $16.6 million; telecommunications revenue increased 70.1% to $3.1 million.
- Gross profit increased 41.7% to $40.1 million, but gross margin fell to 17.4% from 21.7%. Operating income increased 44.0% to $30.6 million.
- Net income was $20.7 million, compared with $14.1 million. Net income attributable to Argan stockholders rose 68.6% to $20.6 million; diluted EPS increased to $1.31 from $0.81.
- SG&A increased 34.7% to $9.5 million, although it declined to 4.1% of revenue from 5.4%. Income tax expense was $11.1 million; the estimated annual effective tax rate was approximately 36.4% before discrete items.
- Management-reported EBITDA attributable to Argan stockholders, a non-GAAP measure, was $32.5 million, up from $20.2 million.
Cash flow, liquidity and debt
- Cash from operations was $41.0 million, versus $43.7 million. Operating cash benefited from $23.9 million of increased net billings in excess of costs and $12.7 million from accounts payable and accrued expenses; higher receivables used $16.4 million, primarily reflecting project-owner retainage.
- Investing cash outflow was $41.9 million, mainly from net purchases of short-term investments of $40.0 million and capital expenditures of $1.9 million. Financing provided $0.9 million from stock-option exercises. Cash increased by $0.1 million.
- At April 30, cash and cash equivalents were $167.3 million and short-term investments were $396.1 million. Working capital was $259.0 million, up from $237.2 million at January 31. Current assets were $643.7 million and current liabilities $384.7 million.
- The filing reports no outstanding borrowings at April 30 in its market-risk discussion. It also refers to $5.9 million of credit outstanding under the predecessor arrangement; the text does not clearly distinguish whether this was borrowing or other credit issued. A May 15 replacement facility provides a $50 million revolving commitment, with a conditional additional $10 million accordion, at 30-day LIBOR plus 2.00%, maturing May 31, 2021. The company pledged most assets and reported covenant compliance.
Material changes and operating developments
- Quarterly growth was led by four gas-fired EPC projects, which together represented approximately 89% of consolidated revenue. Their completion levels were 42%–66% at April 30, with completion scheduled during the fiscal year ending January 31, 2019.
- Backlog was approximately $0.9 billion at April 30, down from approximately $1.0 billion at January 31. The filing cautions that awarded work can be cancelled or reduced.
- Four power customers accounted for approximately 29%, 21%, 21% and 18% of quarterly revenue, respectively, indicating substantial customer and project concentration.
- In April, Argan received full notice to proceed, subject to restrictions, for the 200 MW Exelon West Medway II project. In May, APC received a contract to erect a 299 MW biomass boiler in England, with work anticipated to begin in summer 2017 and completion scheduled for 2019.
- Gross margin was lower mainly because the prior-year comparison included two gas-fired plants completed in 2016, while the current quarter reflected construction on newer projects. Non-controlling-interest earnings declined to $0.1 million from $1.9 million, primarily as two joint-venture projects reached contractual completion in 2016.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said current projects should provide a stable base of activity for the next two fiscal years and expects natural-gas and renewable power construction to offer longer-term opportunities, while acknowledging that new project activity may slow in the near term.
- Management cited uncertainty around U.S. energy policy, coal’s role, natural-gas prices and disappointing energy auctions as factors that may delay new power-plant planning and starts. It also noted slow expected growth in U.S. electricity generation.
- Fixed-price contracts expose results to increases in commodity costs, including steel, copper, concrete and fuel; the company generally does not hedge these exposures. Other risks include project execution, competition, customer concentration, acquisitions and foreign-currency translation; APC’s results are affected by euro-dollar movements, and the company generally does not hedge translation exposure.
- TRC is defending a subcontractor lawsuit seeking $2.3 million and a related $2.5 million bond claim. TRC disputes performance and asserts approximately $2.2 million in claims against the subcontractor, which it has not recorded as a receivable. The disputed invoices are accrued as a liability. Management does not expect a material additional loss, but the outcome is uncertain.
- Management said it had sufficient liquidity for foreseeable general business needs. Future acquisitions or significant unplanned needs could require additional financing, which may not be available on acceptable terms.
- ASU 2014-09 revenue guidance was expected to be adopted February 1, 2018 using the modified retrospective method. Management’s preliminary assessment anticipated no significant change to fixed-price contract revenue patterns, subject to unresolved implementation issues. New lease accounting was expected to be adopted February 1, 2019; its full impact had not been determined.
Important facts for investors to verify
- Progress, cost estimates, margins and schedule performance on the four EPC projects that drove approximately 89% of quarterly revenue.
- How backlog develops, including conversion of new awards into firm work and the effects of cancellations, delays or customer concentration.
- Whether the reduced gross margin reflects project mix and timing or signals changes in expected contract profitability.
- The composition of the reported $5.9 million of outstanding credit, given the filing’s separate statement that there were no outstanding borrowings.
- Resolution and potential financial effects of the PPS litigation and bond claim.
- Impacts of revenue and lease accounting standards as implementation assessments progress.