Argan, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2021; Argan’s fiscal year ends January 31. Dollar figures below are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
Argan provides power-generation engineering, procurement and construction (EPC) services, industrial fabrication and field services, and telecommunications infrastructure services. Power services remain the largest business; operations span the United States, Ireland and the United Kingdom.
Financial performance
| Metric | Three months ended Oct. 31, 2021 | 2020 | Nine months ended Oct. 31, 2021 | 2020 |
|---|---|---|---|---|
| Revenue | $124.5 | $127.3 | $383.8 | $275.0 |
| Gross profit / margin | $26.1 / 21.0% | $20.3 / 16.0% | $77.5 / 20.2% | $40.0 / 14.5% |
| Operating income | $14.5 | $10.9 | $45.7 | $11.2 |
| Net income attributable to Argan shareholders | $12.4 | $9.5 | $36.0 | $14.3 |
| Diluted EPS | $0.78 | $0.60 | $2.25 | $0.91 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $41.7 | $142.6 |
Quarterly revenue declined 2.3%, while nine-month revenue rose 39.6%. Nine-month gross profit increased 93.8%; operating income increased substantially from the prior-year period. SG&A rose 10.4% for the nine months, but fell as a share of revenue to 8.3% from 10.5%. Nine-month net income in 2020 included a $4.4 million tax benefit from an NOL carryback; 2021 instead recorded $11.2 million of income tax expense.
Quarter revenue was lower primarily as Guernsey Power Station activity passed peak levels and APC completed TeesREP work; new solar and APC projects, plus a litigation settlement, partly offset the declines. TRC industrial revenue increased 36.1% for the quarter and 85.5% for the nine months. Telecom revenue also grew from a smaller base.
Cash, liquidity and debt
- At October 31, cash and cash equivalents were $391.6 million and short-term investments were $90.0 million. Current assets were $559.7 million and current liabilities $259.0 million; working capital was approximately $300.7 million.
- Cash increased $24.9 million from January 31. Nine-month operating cash flow was $41.7 million, down from $142.6 million, reflecting working-capital movements—especially the prior-year $87.9 million increase in contract liabilities, alongside this year’s reductions in payables and accrued expenses and higher receivables.
- There were no borrowings under the $50 million revolving credit facility at October 31. The facility was extended to May 31, 2024, with a borrowing rate of 30-day LIBOR plus 1.6%; the company reported covenant compliance. A $10 million accordion is available subject to conditions.
- Quarterly dividends were $0.25 per share; nine-month dividends totaled $0.75 per share versus $1.75 in 2020, which included a $1.00 special dividend.
Backlog, outlook and management commentary
- Remaining unsatisfied performance obligations (RUPO) were $491.6 million at October 31. Management estimated about 25% would be recognized in the remainder of fiscal 2022, with most of the rest expected in fiscal 2023; cancellations, delays and scope changes may reduce or defer revenue.
- Power-segment project backlog was approximately $0.8 billion, unchanged from January 31. APC backlog increased to $124.2 million from $13.8 million, including an October award for a 660 MW natural-gas plant in Northern Ireland. TRC backlog was $51.1 million, down from $54.0 million.
- Management cited Guernsey Power Station and Maple Hill Solar as significant contributors. Guernsey substantial completion was scheduled for the second half of fiscal 2023; Maple Hill Solar completion was scheduled for the second half of calendar 2022. APC’s Northern Ireland project was expected to complete in the latter half of calendar 2023.
- Outlook remains uncertain: some awarded gas-fired projects face delays or financing, regulatory and permitting hurdles. The Killingly project’s future was at risk after the grid operator sought permission to terminate its capacity contract; the Harrison Power project remained delayed. Chickahominy’s start could not be predicted, in part because fuel supply and equity financing remained unresolved.
- Management said COVID-19 variants could disrupt scheduled work and identified supply-chain disruption, material and labor cost inflation, fixed-price contract execution, project-owner delays, and changing energy policy as risks. The company is pursuing renewable projects while continuing to see potential demand for gas-fired generation and dispatchable power.
Material items, risks and contingencies
- GPS settled its Exelon litigation in September 2021 and received $27.5 million, exceeding previously recorded receivables and contract assets; the excess was recognized as revenue. This boosted reported-period results and should be distinguished from recurring project revenue.
- Other income included approximately $1.1 million of Irish COVID-19 relief and a $0.7 million UK research-and-development credit, partly offset by a $0.4 million solar-investment loss.
- Argan had $5.0 million of unrecognized tax benefits relating to disputed R&D credits. IRS examinations and appeals remained unresolved; management expected a favorable resolution, but the outcome was uncertain. Other current assets included approximately $25.9 million of tax refunds receivable and prepaid taxes.
- A consolidated power-project development VIE carried $7.5 million of development costs. Recovery depends on successful development, financing or sale; the fuel-supply source remained a significant hurdle.
- Unsatisfied bonded performance obligations were approximately $272.4 million. Potential payments beyond estimated contract-completion costs were not estimable. Management said other pending claims were not expected to have a material adverse effect.
- Customer concentration was significant: one power customer represented 56% of quarterly revenue and one power customer represented 61% of nine-month revenue. Two customers accounted for 46% of receivables at October 31.
- After quarter-end, the bank issued $19.9 million of letters of credit supporting a new APC contract. By December 7, Argan had repurchased about 70,000 shares for approximately $2.8 million under its repurchase plan.
Important facts for investors to verify
- How much of the quarter’s earnings improvement and gross margin reflects the one-time $27.5 million Exelon settlement versus underlying project economics.
- Timing, conversion and cancellation risk for the $491.6 million RUPO and approximately $0.8 billion power backlog, including delayed projects and customer financing.
- Cash-flow sustainability as Guernsey contract liabilities are expected to decline, and how working-capital movements compare with earnings.
- Resolution and potential cash impact of the IRS R&D credit disputes, tax refunds receivable, and VIE development investment.
- Exposure to customer concentration, fixed-price contract cost overruns, supply-chain delays, COVID-19 disruption, and performance bonds and guarantees.