Argan, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2011 (the second quarter and first half of fiscal 2012). Argan provides power-generation engineering and construction services through GPS and telecommunications infrastructure services through SMC. Vitarich Laboratories (VLI) is reported as discontinued operations following its asset sale.
Financial results
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Continuing-operations revenue, 2011 | $26.342 million | $42.335 million |
| Continuing-operations revenue, 2010 | $52.320 million | $105.554 million |
| Gross profit / gross margin, 2011 | $4.647 million / 17.6% | $8.545 million / 20.2% |
| Gross profit / gross margin, 2010 | $8.780 million / 16.8% | $15.554 million / 14.7% |
| Income from continuing operations, 2011 | $1.520 million | $2.265 million |
| Net income, 2011 | $2.070 million | $2.676 million |
| Net income, 2010 | $3.301 million | $5.324 million |
| Operating cash flow from continuing operations, 2011 | — | $21.485 million |
- Revenue fell about 50% year over year in the quarter and 60% in the half year, principally because power-services revenue declined as major projects wound down. SMC revenue was broadly stable: $1.952 million for the quarter and $3.926 million for the half year.
- Despite lower gross profit dollars, gross margin improved year over year, reflecting better project profitability and, for the half year, final incentive fees on the completed Northern California project. SG&A declined 9% for both periods compared with 2010.
- Quarterly diluted EPS was $0.15 versus $0.24; first-half diluted EPS was $0.20 versus $0.39. The 2011 net-income figures include discontinued operations, including gains on VLI’s sale.
- Cash and cash equivalents were $106.890 million at July 31, up $23.598 million from January 31. Working capital was $77.1 million. Continuing operating cash flow was $21.485 million, driven substantially by a $16.206 million increase in billings in excess of costs and estimated earnings.
- Total liabilities were $45.807 million. The company reported no long-term debt outstanding; the $8 million term loan had been repaid in fiscal 2011. A $4.25 million revolver was available through May 31, 2013; the company was in compliance with its financial covenants.
Material changes, outlook and risks
- Management attributed the revenue contraction to a transition between major construction projects, particularly completion of the large Northern California gas-fired plant. Backlog was $300 million at July 31, compared with $291 million at January 31; substantially all related to two projects in early stages, an Illinois wind farm and a Southern California peaking plant.
- Management expected substantial project activity to support revenue in the latter two quarters of fiscal 2012 and said it was focused on completing projects, controlling costs, conserving cash and pursuing new work selectively. It anticipated favorable profit and cash-flow results for the rest of the year, while noting unusually limited forecasting visibility. No quantified full-year revenue or earnings guidance was provided.
- Management cited weak power demand, constrained project financing, uncertain renewable-energy incentives and intense low-margin competition as near-term headwinds. It described long-term prospects for gas-fired and renewable generation as favorable, but future project timing and financing remained uncertain.
- After quarter-end, the Connecticut plant owner approved approximately $1.74 million of previously disputed change orders. The company said the amount would be recorded as revenue in the third quarter; related direct costs had already been expensed and included in estimated contract costs.
- VLI’s March 2011 asset sale had a stated cash purchase price of up to $3.1 million, with $2.3 million placed in escrow and payments dependent primarily on collection of receivables and disposition of inventory. VLI generated $0.411 million of discontinued-operations income in the first half of 2011, including a $1.228 million pretax disposal gain.
- Two notable legal exposures remain unresolved. In the Altra project matters, a material loss is reasonably possible, but management could not estimate a loss range and recorded no provision. Tampa Bay alleges damages exceeding $42 million in litigation against VLI; management said the outcome and potential damages could not then be assessed. The filing states management intends to defend the matters.
- Customer concentration is substantial: three power-services customers represented approximately 42%, 32% and 19% of continuing revenue in the quarter, and 29%, 21% and 36% in the half year.
Important facts for investors to verify
- Whether the $300 million backlog converts to revenue and cash on schedule, and how concentrated it remains in the two major projects.
- Project-level margins, cost-to-complete estimates and collection of customer billings, including the timing and quality of the large operating cash inflow.
- Whether the remaining VLI escrow proceeds are received and how the disposal and related tax assets are ultimately settled.
- Developments in the Altra and Tampa Bay matters, including any change in loss probability, estimated exposure or recorded accruals.
- Ongoing liquidity and covenant compliance, particularly if project awards or cash requirements differ from management’s expectations.