Argan, Inc. (AGX) — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended July 31, 2022; Argan’s fiscal year ends January 31. Amounts below are in U.S. dollars unless noted.
Business context
Argan provides engineering, procurement and construction services for power projects, industrial fabrication and field services, and telecommunications infrastructure services. Power industry services generated about 76% of first-half revenue. The statements are unaudited.
Financial performance and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $118.1m | $133.0m | $218.4m | $259.3m |
| Gross profit / margin | $24.4m / 20.6% | $27.7m / 20.8% | $44.1m / 20.2% | $51.4m / 19.8% |
| Operating income | $13.4m | $17.3m | $22.6m | $31.1m |
| Net income | $4.2m | $12.9m | $11.7m | $23.6m |
| Diluted EPS | $0.30 | $0.81 | $0.80 | $1.48 |
| Operating cash flow | Not separately provided for the quarter | $(56.8)m | $47.2m |
- At July 31, cash and equivalents were $143.3m and short-term investments were $175.6m, totaling $319.0m; working capital was $236.2m. Total liabilities were $146.0m.
- No borrowings were outstanding under the $50m revolving credit facility (with a conditional $10m accordion); $15.1m of facility letters of credit were outstanding. The company reported covenant compliance.
- First-half operating cash use primarily reflected a $63.9m decline in contract liabilities and a $16.1m decline in accounts payable and accrued expenses. Investing cash use was $85.6m, including net purchases of short-term investments; financing cash use was $60.3m.
- First-half dividends were $7.2m. Argan repurchased 1.41m shares for $53.2m, reducing shares outstanding to 13.88m from 15.26m at January 31.
Changes versus prior comparable periods
- Q2 revenue declined 11.2% and first-half revenue declined 15.8%. Lower activity on the Guernsey Power Station as construction passed peak levels contributed to the power-segment decline; industrial services revenue also fell. Telecom revenue increased 19.3% for the first half, partly reflecting the Lee Telecom acquisition.
- Gross margin was broadly steady in Q2 and improved modestly for the first half, but lower revenue and higher SG&A reduced operating income.
- Net income fell 67.2% in Q2 and 50.5% for the first half. Results included a $6.2m unfavorable IRS research-and-development-credit settlement adjustment, which reduced diluted EPS by approximately $0.43 for Q2 and $0.42 for the first half.
- Operating cash flow swung from $47.2m provided to $56.8m used, substantially reflecting lower customer advances and project-related payables as Guernsey activity declined.
Outlook, risks and unusual items
- Management reported approximately $0.7bn of project backlog at July 31, similar to January 31. Remaining unsatisfied performance obligations were $372.0m; about 51% was expected to be recognized during the remainder of FY2023, subject to project changes and cancellations.
- Management expected to announce the commencement of a meaningful new EPC contract in Q3. Active work includes the Guernsey project, the Maple Hill solar facility, the Kilroot power station and three ESB flexible-generation plants in Ireland. No numerical revenue or earnings guidance was provided.
- Management described longer-term opportunities in gas-fired, renewable and other power projects, while noting risks from supply-chain disruption, labor and material costs, fixed-price contract overruns, project-owner delays, cancellations, regulatory and energy-policy shifts, and foreign exchange movements.
- Revenue and customer concentration are notable: one customer accounted for 47% of first-half revenue. The company also identified risks from energy-market transitions and uncertainty around new power-project financing and development.
- Performance bonds covered approximately $139.6m of unsatisfied obligations; potential payments beyond estimated contract completion costs were not estimable. Management did not expect pending legal matters to materially affect the statements.
- In May 2022, the company accepted an IRS settlement of approximately $7.9m before interest concerning research and development credits, recording the $6.2m unfavorable adjustment in Q2. A separate approximately $12.7m CARES Act NOL carryback refund request remained under IRS processing.
- After quarter-end, David H. Watson became CEO and a director, replacing retiring CEO and chairman Rainer H. Bosselmann; Richard H. Deily became CFO. Bosselmann’s retirement agreement provides $225,000 annually plus benefits for three years.
Investor verification priorities
- Track project execution, margins and timing of new awards, particularly the Guernsey, Kilroot and ESB projects, and compare reported backlog with RUPO.
- Assess working-capital and cash-flow trends as customer advances and project payables fluctuate; distinguish cash from short-term investments and consider the share-repurchase and dividend outflows.
- Verify resolution and collection timing for the IRS carryback refund and any remaining federal or state tax-credit disputes.
- Monitor customer concentration, fixed-price cost exposure, supply-chain constraints, performance-bond obligations and project delays or cancellations.
- Review post-quarter leadership transition and the company’s capital-allocation plans, including remaining authorization under the share repurchase plan.