Argan, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2014 (fiscal 2015); comparative periods ended October 31, 2013. Argan provides power-generation engineering, procurement and construction services primarily through GPS, and telecommunications infrastructure services through SMC.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $127.6 million, up 101% year over year | $280.8 million, up 67% |
| Gross profit / margin | $30.3 million / 23.8%; prior year $23.9 million / 37.6% | $61.9 million / 22.1%; prior year $58.2 million / 34.6% |
| Operating income | $24.8 million, versus $20.3 million | $48.6 million, versus $49.6 million |
| Net income attributable to Argan shareholders | $12.4 million; diluted EPS $0.84, versus $11.9 million and $0.83 | $24.4 million; diluted EPS $1.66, versus $31.0 million and $2.16 |
| Operating cash flow | Not presented for the quarter | $87.4 million, versus $28.1 million |
Power industry services accounted for approximately 99% of quarterly and 98% of nine-month revenue. The two Pennsylvania gas-fired projects together represented about 88% of quarterly and 84% of nine-month revenue. Telecommunications revenue declined to $1.9 million for the quarter and $4.9 million for the nine months.
Financial position and capital
- Cash and cash equivalents were $361.0 million at October 31, 2014, up from $272.2 million at January 31; working capital was $162.0 million, up from $133.3 million.
- Cash from operations of $87.4 million was supported by increases in accounts payable and accrued liabilities ($30.2 million) and billings ahead of costs ($21.4 million), as well as profitable operations.
- Cash included $209.9 million held in consolidated joint ventures, primarily for project construction costs and potential partner distributions.
- No borrowings were outstanding under the bank facility. The company reported $2.9 million of availability after amounts designated for letters of credit; the facility expires May 31, 2015. Argan was in compliance with its financial covenants and had no senior debt.
- The board declared a special dividend of $0.70 per share, paid November 6, 2014; the comparable prior-year dividend was $0.75 per share.
Changes versus prior year
- Revenue growth reflected increased construction activity on two large natural-gas power projects. Gross profit dollars rose, but margins fell substantially as the prior-year comparison included a $14.2 million Moxie Liberty development success fee and associated favorable project economics.
- Nine-month shareholder income declined despite higher revenue. The prior-year period included $2.4 million of gains from deconsolidating Moxie project entities, higher interest income, and a roughly $1.3 million reversal of a legal-cost reserve; noncontrolling interests also took a larger share of current-period earnings.
- Backlog was $520 million at October 31, down from $790 million at January 31, 2014.
Outlook, risks and unusual items
- Management gave no quantified revenue or earnings guidance. It said current projects should provide a stable base of activity for about two years and expected a return to more typical gross margins absent large development success fees. Management described its long-term outlook as cautiously optimistic, while emphasizing disciplined bidding, project execution, cost control and cash preservation.
- Management cited subdued power demand, intense competition, and uncertainty over the pace and mix of future power-plant construction. Weather in the Marcellus region may disrupt work, particularly in the first and fourth fiscal quarters. Fixed-price contracts also expose results to unhedged commodity-cost increases.
- Argan entered a development-loan agreement for Moxie Freedom, a proposed gas-fired plant exceeding 900 MW. GPI may lend up to $6 million; $1.291 million of notes and accrued interest was recorded at quarter-end, at a 20% annual interest rate. Management estimated a future success fee of about $6 million if financing closes, currently expected in mid-to-late 2016, and GPS has exclusive EPC rights under stated terms. A post-quarter supplier agreement provides 40% of development-loan funding and a corresponding share of interest and any success fee.
- Construction joint ventures create potential exposure: GPS could be responsible for all project losses if its partner cannot pay its share. A $5.5 million Altra project receivable remains fully reserved; any eventual recovery is unknown. Certain related claims against GPS and its surety were dismissed with prejudice in September 2014, while the lien proceedings remained stayed pending further action.
- The company had not completed its assessment of the new revenue-recognition standard, ASU 2014-09. Management expected percentage-of-completion treatment may remain available for substantial construction revenue, subject to the standard’s contract-control requirements.
Important facts for investors to verify
- Project progress, remaining costs and expected margins on the two highly concentrated Pennsylvania projects; compare actual completion timing with schedules.
- Backlog conversion and new awards, given the decline from $790 million to $520 million and management’s cautious approach to bidding.
- Cash availability for corporate purposes: a substantial portion of reported cash is held in consolidated joint ventures for project needs.
- Cash-flow quality and sustainability, including the contribution from higher payables and advance billings.
- Moxie Freedom loan exposure, collateral, funding commitments, financing timetable, and realization of the projected success fee and EPC opportunity.
- Commodity-price and winter-weather impacts on fixed-price contracts, plus customer concentration and joint-venture partner exposure.
- Resolution and potential recovery in the Altra matter, and the effects of adopting ASU 2014-09.