Argan, Inc. — Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended January 31, 2019 (Fiscal 2019); the fourth quarter ended on that date. Argan provides power-plant engineering, procurement and construction services through GPS and APC, industrial fabrication and field services through TRC, and telecommunications infrastructure services through SMC. Power services remained the largest business, representing 76% of annual revenue. The filing was signed April 10, 2019.
Financial performance
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $482.2 million | $892.8 million |
| Gross profit / margin | $82.4 million / 17.1% | $149.3 million / 16.7% |
| Operating income | $40.2 million | $107.0 million |
| Net income attributable to Argan stockholders | $52.0 million | $72.0 million |
| Diluted earnings per share | $3.32 | $4.56 |
| Cash provided by (used in) operations | $(112.3) million | $(72.8) million |
| Cash and cash equivalents | $164.3 million | $122.1 million |
| Short-term investments | $132.2 million | $311.9 million |
| Working capital | $334.1 million | $301.8 million |
Argan reported no outstanding borrowings at year-end. Its revolving credit facility has a $50 million limit, matures May 31, 2021, and had $15.2 million of credit outstanding, primarily supporting APC. Total liabilities were $82.3 million and total equity was $394.4 million. The company paid $1.00 per share in dividends during Fiscal 2019.
Fourth-quarter results
For the quarter ended January 31, 2019, revenue was $87.7 million, gross profit $6.7 million, operating loss $4.3 million, and net loss attributable to stockholders $2.2 million, or $0.14 per diluted share. The comparable Fiscal 2018 quarter had revenue of $169.6 million, gross profit of $20.1 million, operating income of $8.2 million, and net income of $7.0 million, or $0.45 per diluted share. Quarterly results included uneven project activity and should be considered alongside the unusual tax-credit benefit noted below.
Material changes versus the prior comparable year
- Revenue declined 46%, primarily as four major power-plant projects moved through completion. Power-services revenue fell 55% to $367.8 million.
- TRC revenue rose 56% to $101.7 million, a record; APC also achieved record revenue, though the filing does not provide a separate APC total here. SMC revenue was $12.7 million, down 2%.
- Gross margin improved to 17.1% from 16.7%, reflecting power-project close-out adjustments, but gross profit fell 45% and operating income fell 62%.
- Net income attributable to stockholders decreased 28%; the decline was partly cushioned by tax benefits, including a prior-year research-and-development credit benefit.
- Power-services backlog increased to approximately $1.1 billion from approximately $0.4 billion at January 31, 2018. Backlog is not guaranteed and may be affected by delay, cancellation or scope changes.
Cash flow, outlook, risks and unusual items
- Cash flow and liquidity: Operating cash use was $112.3 million, largely because completed projects had passed peak milestone billings, reducing contract liabilities, and because of payments of payables and increased working-capital needs at growing subsidiaries. Net maturities of short-term investments provided $179.0 million. Management said cash, investment maturities, operating cash flows and available credit should meet foreseeable business needs.
- Management outlook: Management expected reduced consolidated revenue to continue in the first half of Fiscal 2020 while new EPC projects ramp up, and expressed optimism about renewed year-over-year growth as projects mature. No numerical full-year revenue or earnings guidance was provided. The company reported new EPC awards totaling about 4.0 GW during Fiscal 2019, but start timing and execution remain uncertain.
- Project execution and concentration: Four customers accounted for 51% of Fiscal 2019 consolidated revenue. GPS had not received full notices to proceed for the Reidsville and Guernsey projects as of year-end; Chickahominy’s 1,600 MW contract was not included in backlog and depended on permits, financing and development progress. Fixed-price contracts, cost estimates, labor, materials, weather, subcontractors and owner delays can affect margins and cash collection.
- Exelon dispute, subsequent event: GPS sued Exelon in January 2019 over alleged contract breaches, project delays, costs and unpaid amounts. On March 7, 2019, Exelon notified GPS that it was terminating the EPC contract when the project was nearly complete. Exelon asserted claims and withheld payments. Approximately $17.1 million of receivables and contract assets were exposed to delayed collection pending resolution; the outcome and recovery timing were uncertain.
- Tax benefit: Fiscal 2019 included $16.6 million of research-and-development tax credits related mainly to prior-year project costs, increasing diluted EPS by $1.06. The company also recorded a $1.7 million benefit related to acquired-company net operating losses. It had $5.1 million of identified but unrecognized R&D tax benefits and an IRS examination that could review the amended Fiscal 2016 return; reversals or audit outcomes could affect earnings.
- Other unusual items: TRC recorded a $1.5 million goodwill impairment. A subcontractor arbitration award of approximately $5.2 million plus interest and fees was substantially paid and charged to cost of revenue. A separate TRC subcontractor settlement produced a $1.4 million gain. Certain active power projects were behind schedule and had unfavorable cost adjustments; management warned they could continue to weigh on results.
- Market and contingency risks: The filing cites uncertain power demand, renewable-energy growth, permitting and pipeline delays, financing availability, UK capacity-payment suspension and Brexit, foreign exchange, skilled-labor shortages, commodity costs, bonding capacity and customer concentration. Outstanding bonds totaled approximately $147 million for risks including warranty obligations. The company reported compliance with credit covenants.
- Accounting and audit: Adoption of ASC 606 had an immaterial effect. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Progress, full notices to proceed, financing and permitting for Guernsey, Reidsville and Chickahominy, and how much of reported backlog converts to revenue and cash.
- Status and recoverability of the approximately $17.1 million of Exelon-related receivables and contract assets, including the effect of Exelon’s termination and any further claims or settlements.
- Operating cash conversion as new projects ramp up, including milestone billings, contract assets and liabilities, receivables and payables.
- Sustainability of margins and TRC’s profitability, including exposure to remaining project cost overruns and potential additional goodwill impairment.
- IRS and state review of the R&D credits, potential realization of tax refunds and the $5.1 million of unrecognized tax benefits.
- Customer concentration, bonding availability and the timing and profitability of new power-plant awards; the filing provides no quantified full-year Fiscal 2020 guidance.