Argan, Inc. — Q3 Fiscal 2023 Form 10-Q
Business context and period: The filing covers the three and nine months ended October 31, 2022; Argan’s fiscal year ends January 31. The company provides power-generation engineering and construction services, industrial fabrication and field services, and telecommunications infrastructure services. Its power segment remains the largest.
Financial performance
| Metric | Three months ended Oct. 31 | Nine months ended Oct. 31 |
|---|---|---|
| Revenue | $117.9 million, down 5.3% year over year | $336.3 million, down 12.4% |
| Gross profit / margin | $22.2 million / 18.8%, versus $26.1 million / 21.0% | $66.3 million / 19.7%, versus $77.5 million / 20.2% |
| Operating income | $9.5 million, down 34.4% | $32.1 million, down 29.7% |
| Net income / diluted EPS | $7.8 million / $0.56, versus $12.4 million / $0.78 | $19.5 million / $1.36, versus $36.0 million / $2.25 |
| EBITDA (non-GAAP) | $11.3 million, versus $16.7 million | $36.9 million, versus $50.5 million |
Quarterly revenue weakness primarily reflected lower activity as the Guernsey Power Station and Equinix data center projects passed peak construction levels. Year-to-date revenue also declined in power and industrial services; telecommunications revenue grew, partly due to the December 2021 acquisition of Lee Telecom. Quarterly SG&A rose 9.3% to $12.7 million, primarily due to costs associated with the former CEO’s retirement.
Cash flow and liquidity: Operating cash flow was negative $73.0 million for the nine months, compared with positive $41.7 million a year earlier. The main working-capital uses included a $78.9 million reduction in contract liabilities, plus increases in receivables and contract assets. Cash and equivalents fell to $136.1 million from $350.5 million at January 31; short-term investments, consisting of bank CDs, increased to $150.6 million from $90.0 million. Management reported net liquidity of $230.4 million, down from $284.3 million.
Investing cash flow was negative $62.3 million, including net purchases of short-term investments and $2.6 million of capital expenditures. Financing cash flow was negative $73.8 million, including $63.3 million of share repurchases and $10.6 million of dividends. The quarterly dividend remained $0.25 per share.
Debt and balance sheet: No borrowings were outstanding under the $50 million revolving credit facility, which expires May 31, 2024. The company had $8.2 million of letters of credit under the facility and a separate $3.4 million cash-collateralized letter of credit. Total liabilities were $139.2 million; current assets were $365.0 million and current liabilities were $134.5 million.
Material changes, outlook and risks
- Tax settlement: A $6.2 million unfavorable adjustment related to settlement of research-and-development tax-credit claims with the IRS increased nine-month income tax expense to $14.5 million. Excluding the adjustment, management reported a 24.5% effective tax rate; the settlement reduced nine-month diluted EPS by $0.43. A separate approximately $12.7 million NOL carryback refund request remained under IRS processing.
- Projects and backlog: Reported project backlog was approximately $0.8 billion at October 31, versus $0.7 billion at January 31. Remaining unsatisfied performance obligations were $328.1 million; management estimated approximately 30% would be recognized in the remainder of fiscal 2023, with most of the balance expected in fiscal 2024, subject to possible changes, delays or cancellations. On November 3, GPS received full notice to proceed for the 950 MW Trumbull Energy Center project in Ohio, scheduled for completion in 2026. Guernsey substantial completion was expected in early calendar 2023.
- Management and capital allocation: David H. Watson became CEO in August 2022, succeeding Rainer H. Bosselmann, who retired as CEO and chairman but remained a director. The retirement agreement provides $225,000 annually plus benefits for three years. Argan repurchased 1.72 million shares for $63.3 million during the nine months; the repurchase-plan authorization was increased to $100 million.
- Risks and management commentary: Many contracts are fixed-price, exposing margins to cost overruns, labor and commodity inflation, equipment availability and schedule delays. Management also cited supply-chain disruption, owner-controlled project starts, possible project cancellations, energy-policy uncertainty, permitting and financing challenges, and foreign-currency translation exposure. The company views longer-term power demand and gas-fired, renewable and support-generation projects as opportunities, while noting that project timing and outcomes remain uncertain.
- Contingencies: Unsatisfied bonded performance obligations were approximately $0.1 billion. Management said potential amounts payable beyond estimated costs to complete active contracts were not estimable and that pending legal matters were not expected to have a material adverse effect. The company was in compliance with credit covenants.
Important facts for investors to verify
- Whether operating cash flow recovers as contract-liability balances and project activity change, and how much cash is committed to CDs, repurchases and dividends.
- Current project status, margins and timing for Trumbull, Guernsey, Maple Hill Solar, Kilroot and the ESB plants; compare the reported backlog with remaining performance obligations and subsequent updates.
- Exposure to customer concentration: one customer accounted for 42% of nine-month revenue, and two customers represented 48% of receivables at October 31.
- Any developments in the IRS refund request and state research-and-development tax-credit disputes, and the impact of the unusual tax charge on future effective tax rates.
- Whether fixed-price contract costs, supply-chain constraints, project delays, foreign exchange and energy-market or policy changes affect expected profitability and cash needs.