Argan, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended October 31, 2011. The interim financial statements are unaudited. Argan’s continuing businesses provide power-generation engineering and construction services (GPS) and telecommunications infrastructure services (SMC); Vitarich Laboratories (VLI) is reported as discontinued operations.
Financial performance and position
| Metric | Three months ended Oct. 31 | Nine months ended Oct. 31 |
|---|---|---|
| Continuing revenue | $43.6 million, down 4% from $45.2 million | $85.9 million, down 43% from $150.8 million |
| Gross profit / gross margin | $6.5 million / 14.8%, versus $7.4 million / 16.3% | $15.0 million / 17.5%, versus $22.9 million / 15.2% |
| Operating income / margin | $3.7 million / 8.5%, versus $4.3 million / 9.4% | $7.1 million / 8.3%, versus $14.2 million / 9.4% |
| Continuing income | $2.3 million; diluted EPS $0.17 | $4.6 million; diluted EPS $0.33 |
| Net income | $2.0 million; diluted EPS $0.15, versus $1.5 million and $0.11 | $4.7 million; diluted EPS $0.34, versus $6.9 million and $0.50 |
| Operating cash flow | Not presented for the quarter | $52.3 million from continuing operations, versus $13.1 million |
- Power services generated 93% of nine-month continuing revenue. Its revenue fell 45%, chiefly because a major California gas-plant project neared completion; SMC revenue was approximately flat at $6.3 million.
- Nine-month SG&A declined 10% to $7.9 million. The filing attributes improved nine-month gross margin to final fees on the California project and improved SMC project profitability. Third-quarter gross margin declined year over year.
- Cash and cash equivalents were $138.0 million at October 31, up from $83.3 million at January 31. Working capital was $72.8 million, slightly below $73.2 million. The current ratio was approximately 1.8.
- Operating cash generation included substantial customer billings ahead of costs: billings in excess of costs and estimated earnings rose $43.9 million. Accounts payable and accrued expenses also provided $14.2 million; receivables and costs ahead of billings used $4.1 million and $4.2 million, respectively.
- No interest expense or term debt was reported for the current nine-month period. The company had an available $4.25 million revolving credit line through May 31, 2013 and reported compliance with its lending covenants. The bank may issue up to $10 million in standby letters of credit, subject to the agreement.
- Total assets were $189.7 million and total liabilities $93.6 million at October 31. A $0.50-per-share special dividend was declared October 17 and paid November 15; $6.8 million was recorded as payable at quarter-end.
Outlook, developments and risks
- Construction backlog was $431 million at October 31, compared with $291 million at January 31. This included a $165 million East Texas biomass project; management did not expect full notice to proceed until the first quarter of the next fiscal year. A separate $16.6 million Massachusetts solar EPC contract was announced after quarter-end, with completion expected in summer 2012.
- Management said delayed starts on new projects following completion of prior projects weighed on current-year revenue, particularly in the first two quarters. It expected the difficult, highly competitive power-construction environment to persist through at least the rest of the current year and the next year, but anticipated favorable profit and cash-flow results for the remainder of the current year. No quantified earnings or revenue guidance was provided.
- Management cited weak electricity demand, limited project financing, intense price competition, and uncertainty around renewable-energy incentives as near-term headwinds. It remained cautiously optimistic about longer-term gas-fired and renewable power opportunities, while emphasizing cost control, cash conservation, and selective bidding.
- Customer concentration is significant: three power customers accounted for approximately 46%, 40%, and 5% of third-quarter continuing revenue. Project timing and execution therefore can materially affect results.
- Legal contingencies: In the Altra project litigation, a court ruled in November 2011 that the project lender’s claim priority exceeds GPS’s lien. GPS is pursuing assigned lien rights and defending related surety litigation; a material loss is reasonably possible, but management could not estimate a loss range and recorded no provision. A separate VLI lawsuit alleges damages exceeding $42 million; management said the outcome and potential damages could not be estimated. VLI was sold in March 2011, and the suit remains a disclosed contingency.
- Additional sensitivities include percentage-of-completion estimates, contract costs and change-order approvals, customer collections, goodwill valuation, and the possibility of lower future project awards. Management stated that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether the $431 million backlog converts to revenue and profit on schedule, especially the East Texas project’s notice to proceed and the timing of other large projects.
- How much of the $52.3 million nine-month operating cash flow reflects sustainable operating earnings versus customer advances, billing timing, and changes in payables.
- Progress and potential financial exposure from the Altra and Tampa Bay/VLI litigation; the filing provides no estimable loss range.
- Customer concentration, project execution, gross-margin trends, and the availability of credit and bonding capacity under the financing agreement.
- Whether the special dividend, any further investment commitments, and future project requirements affect cash balances and liquidity.