Argan, Inc. — Form 10-Q Summary
Business context and period: Quarterly report for the three and six months ended July 31, 2017 (Argan fiscal Q2 and first half). Argan provides power-generation engineering, procurement and construction (EPC) services, industrial fabrication and field services, and telecommunications infrastructure services. The power industry services segment generated 92% of revenue in both periods.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $259.8 million, up 59.9% | $490.3 million, up 67.4% |
| Gross profit / margin | $51.4 million / 19.8%; prior year 27.1% | $91.5 million / 18.7%; prior year 24.7% |
| Operating income | $40.6 million, up 17.7% | $71.2 million, up 27.7% |
| Net income attributable to Argan shareholders | $27.1 million, up 37.9%; diluted EPS $1.72 | $47.8 million, up 49.7%; diluted EPS $3.03 |
| Operating cash flow | Not presented as a quarterly figure | $34.6 million, versus $112.7 million |
Revenue growth was led by four large natural-gas power plant EPC projects. Their combined contribution was approximately 88% of quarterly revenue and 89% of first-half revenue. Management attributed lower year-over-year gross margins mainly to the prior-year substantial completion of two power projects, which had lifted prior-period margins.
At July 31, cash and cash equivalents were $153.2 million and short-term investments, consisting of certificates of deposit, were $403.9 million. Working capital was $287.9 million, up from $237.2 million at January 31. Total liabilities were $355.9 million; the balance sheet reported no conventional long-term debt. The company had a $50 million revolving credit facility, maturing May 31, 2021, at 30-day LIBOR plus 2.00%, and reported compliance with its covenants. It also reported approximately $6.0 million of credit outstanding under the agreement, while the market-risk discussion says there were no outstanding borrowings; the filing does not clearly reconcile these descriptions.
Changes, outlook and risks
- First-half operating cash flow fell year over year, principally as accounts receivable increased by $17.7 million and net billings in excess of costs declined by $23.7 million. The company said it expects this unfavorable project cash-flow trend to continue until the major EPC projects are completed and new projects enter backlog.
- Contract backlog was approximately $0.7 billion at July 31. Four major projects were 61%–77% complete and scheduled for completion during fiscal 2019; management expects their revenues to decline as they move beyond peak construction. Management said current projects should provide a stable activity base through the next fiscal year while it pursues new work.
- Management considers long-term opportunities in natural-gas-fired and renewable generation favorable, but noted that delayed power-plant planning and project starts may slow near-term opportunities. No specific financial guidance was provided.
- Revenue and profit depend heavily on a few power projects and customers; four customers each contributed 13% or more of quarterly revenue. Fixed-price contract estimates, schedule and cost overruns, commodity-price increases, and delayed collections or retainage present risks.
- A subcontractor dispute involving TRC concerns $2.3 million of invoices and a $2.5 million bond claim. TRC has accrued the disputed invoices, asserts approximately $2.2 million in claims against the subcontractor, and has not recorded a receivable for those asserted claims. Management does not expect a material additional loss, but outcome is uncertain.
- Argan recorded no impairment in the current period; the prior-year comparison included a $2.0 million goodwill impairment at APC. The company expects to adopt the new revenue standard on February 1, 2018 and preliminarily does not expect a significant change to fixed-price EPC revenue patterns, subject to unresolved implementation issues.
Key facts for investors to verify
- Progress, remaining costs, schedule, and expected margins on the four major EPC projects, and the pace at which replacement backlog is secured.
- Cash conversion, especially collection of project retainage (including $57.0 million included in receivables) and the expected duration of the cash-flow pressure.
- The nature of the approximately $6.0 million of reported credit outstanding and its consistency with the statement that there were no borrowings.
- Customer concentration, fixed-price contract exposures, and the outcome or any change in the TRC–PPS dispute.
- Actual effects of the new revenue-recognition standard and any changes to management’s preliminary assessment.