Argan, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended July 31, 2023; balance-sheet comparisons are with January 31, 2023. Dollar amounts below are in millions unless noted.
Business context
Argan provides power-generation engineering, procurement and construction (EPC) and related services, industrial construction, and telecommunications infrastructure services. The power industry segment is the largest. Its subsidiaries operate primarily in the U.S., Ireland and the U.K.
Financial performance and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $141.3; +19.7% year over year | $245.0; +12.2% |
| Gross profit / margin | $23.7 / 16.8%, versus $24.4 / 20.6% | $38.0 / 15.5%, versus $44.1 / 20.2% |
| Operating income | $13.2, down 1.2% | $16.9, down 25.2% |
| Other income, net | $4.1, versus $0.5 | $3.5, versus $1.1 |
| Net income / diluted EPS | $12.8 / $0.94, versus $4.2 / $0.30 | $14.9 / $1.10, versus $11.7 / $0.80 |
Revenue growth reflected higher activity in power and industrial construction, partly offset by lower telecom revenue. Gross profit and margins declined, which management attributed primarily to revenue mix and unfavorable profit adjustments on an APC project. SG&A declined year over year. Higher returns on cash and investments contributed to other income; the prior-year comparison also included a $6.2 million unfavorable tax adjustment tied to an IRS research-credit settlement. Thus, net income growth—particularly in the quarter—outpaced operating performance.
- Cash flow: Six-month operating cash flow was $34.6, versus cash used of $56.8 in 2022. The $20.2 increase in contract liabilities was a major source of cash, alongside collections of receivables and contract assets.
- Cash and liquidity: Cash and cash equivalents were $204.8 at July 31, up from $173.9 at January 31. Investments totaled $141.6, including $81.6 in CDs and $60.0 fair value of U.S. Treasury notes. Working capital was $239.5, up $3.3 from January 31.
- Debt and credit: No borrowings were outstanding. The revolving credit commitment is $50.0, with a conditional $10.0 accordion; $9.4 of letters of credit were outstanding. The facility expires May 31, 2024, and management said it expects to renew it. The company reported covenant compliance.
- Capital returns: The quarterly dividend was $0.25 per share. Six-month dividends totaled $6.7 and share repurchases totaled $6.7, compared with $53.2 of repurchases in the prior-year period.
Material changes and operating developments
- For the first six months, power segment revenue rose 6.2% to $175.5 and industrial construction revenue rose 38.5% to $63.1; telecom revenue fell 15.1% to $6.4.
- Backlog was approximately $0.8 billion at July 31, broadly unchanged from January 31. Separately, remaining unsatisfied performance obligations (RUPO) were $0.7 billion; management estimated 37% would be recognized as revenue during the remainder of FY2024. The measures are distinct as described in the filing.
- TRC backlog increased 135% over 12 months to approximately $140 million; APC backlog was approximately $142 million.
- Guernsey Power Station reached substantial completion in the first quarter; final completion was expected in Q3 FY2024. Maple Hill Solar completion was scheduled for Q4 FY2024. Trumbull Energy Center was scheduled for completion in late FY2026. In August 2023, GPS received limited notices to proceed for three Illinois solar and battery projects; APC received full notice to proceed for Shannonbridge, targeted for early FY2025.
Outlook, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management described continued pursuit of gas-fired, renewable-energy, storage and industrial construction work, while noting that project starts, delays and cancellations are often controlled by customers. Management expects liquidity and future operating cash flows, with available credit if needed, to meet foreseeable general business needs.
- Project execution: The Kilroot project has faced unanticipated challenges that continue to negatively affect costs and schedule; overall completion was expected early next year. Fixed-price contracts expose Argan to cost overruns, labor and materials inflation, supply disruptions, delays, liquidated damages and changes in estimated project profitability.
- Market and policy: Management cited uncertainty around energy policy, emissions rules, permitting, natural-gas economics, capacity-market design, renewable supply chains and grid constraints. These factors could delay, reduce or cancel prospective projects.
- Customer and contract exposure: Power services represented 75% of quarterly revenue. Three power customers accounted for 21%, 20% and 12% of quarterly revenue. Pending customer approval, $12.8 of unapproved change orders were included in contract transaction prices; estimates may change.
- Fraud loss: A criminal scheme involving fraudulent wire transfers caused an approximately $3.0 loss in March 2023. Including related professional fees and approximately $0.4 recovered, the net amount recorded in other income for the six months was approximately $2.8. The company said recovery efforts continue.
- Contingencies: Unsatisfied bonded performance obligations were approximately $0.5 billion; potential payments beyond estimated costs to complete were not estimable. Management said current legal claims are not expected to have a material adverse effect. A $3.6 financial guarantee supports business-development efforts, with a related estimated-loss liability established in FY2022.
- Tax matters: The IRS had not completed review of the company’s approximately $12.7 tax-refund request related to an NOL carryback. Amended FY2021 and FY2022 returns were selected for examination.
Important facts for investors to verify
- Whether gross margins recover and the APC project adjustments or Kilroot challenges require further cost or profit revisions.
- Backlog and RUPO conversion, including project timing, cancellations, scope changes and customer approvals for change orders.
- Cash-flow sustainability and the extent to which contract-liability movements reflect project timing rather than durable cash generation.
- Progress on recovering the wire-fraud loss and any further investigation, insurance or control-related disclosures.
- Renewal of the credit facility before its May 2024 expiration and continued compliance with covenants and bonding requirements.
- Resolution of the IRS refund request and examinations, and any material developments in legal or project contingencies.