Argan, Inc. — Q3 Fiscal 2024 Form 10-Q
Reporting period: Three and nine months ended October 31, 2023; the company’s fiscal year ends January 31. Argan provides power-generation engineering, procurement and construction services, industrial construction, and telecommunications infrastructure services.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $163.8 million, up 38.9% | $408.8 million, up 21.6% |
| Gross profit / margin | $19.2 million / 11.7%; prior year 18.8% | $57.2 million / 14.0%; prior year 19.7% |
| Operating income | $7.9 million, down 17.6% | $24.7 million, down 23.0% |
| Net income | $5.5 million, down 29.6%; diluted EPS $0.40 | $20.3 million, up 4.5%; diluted EPS $1.50 |
| Operating cash flow | Not presented for the quarter | $92.3 million, versus cash used of $73.0 million |
Quarterly revenue growth reflected higher activity in power and industrial construction. Nine-month revenue growth was led by those same segments; telecommunications revenue declined. Other income was $3.7 million for the quarter and $7.2 million year to date, principally reflecting investment returns. SG&A declined in absolute dollars and as a share of revenue.
Liquidity, debt and capital allocation
- At October 31, cash and cash equivalents were $185.6 million and investments were $211.9 million. Current assets were $514.1 million and current liabilities $273.9 million; reported net liquidity (working capital) was $240.2 million.
- No borrowings were outstanding. The company had a $50 million revolving credit commitment, with an additional $10 million accordion feature subject to conditions; it planned to renew the facility before its May 31, 2024 expiration. Outstanding letters of credit totaled $13.2 million.
- For the nine months, investing activities used $61.9 million, including purchases of available-for-sale securities; financing activities used $18.0 million, including $8.5 million of share repurchases and $10.7 million of dividends.
- The quarterly dividend increased 20%, from $0.25 to $0.30 per share. Nine-month dividends were $0.80 per share.
Changes, unusual items and outlook
- Kilroot project loss: APC recorded a $10.7 million loss in the quarter on its Northern Ireland gas-plant project; the nine-month recorded loss was $11.5 million. The company estimates a $7.9 million loss at completion and says the project was approximately 95% complete. Management cited supply-chain delays, project changes, weather and unresolved claims and variations; completion was expected early in 2024. Further cost overruns remain possible.
- Fraud loss: A criminal scheme involving outbound wire transfers resulted in approximately $2.8 million of net loss and professional fees after recoveries, included in nine-month other income. The company continued efforts to recover additional funds.
- Tax: The effective tax rate was 52.9% for the quarter and 36.3% year to date. Argan recorded no tax benefit for the U.K. subsidiary’s loss, contributing to the high rates. IRS reviews of amended returns and a tax refund request remained pending.
- Backlog and projects: Project backlog was approximately $0.7 billion at October 31, versus $0.8 billion at January 31. Management estimated about 21% of remaining unsatisfied performance obligations would be recognized in the remainder of fiscal 2024; timing, cancellations and scope changes could affect conversion. The filing provides no formal earnings or revenue guidance.
- Management described opportunities in gas-fired generation, renewables, energy storage and industrial construction, while noting risks from energy policy, permitting and capacity-market uncertainty, project delays, supply-chain constraints, inflation, labor availability and fixed-price contract costs.
Key investor checks
- Track Kilroot completion costs, schedule, claims and any further revisions to estimated contract profitability.
- Assess whether backlog converts to revenue as expected, including the effects of project timing, customer cancellations and scope changes.
- Monitor the customer concentration in power services and the concentration of receivables among major customers.
- Follow recovery efforts and any further financial impact from the wire-transfer fraud, along with IRS examinations and tax refunds.
- Review the status of the credit-facility renewal and the company’s exposure under performance bonds, guarantees and letters of credit.