Argan, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended April 30, 2019; comparisons are with the three months ended April 30, 2018. Argan provides power-industry construction and services, industrial fabrication and field services, and telecommunications infrastructure services. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $49.5 | $141.4 |
| Gross profit (loss) | $(21.0) | $15.5 |
| Operating income (loss) | $(32.7) | $5.8 |
| Net income (loss) attributable to Argan shareholders | $(29.8) | $4.8 |
| Diluted earnings (loss) per share | $(1.91) | $0.31 |
| Cash from operating activities | $(36.4) | $(60.9) |
- Revenue fell 65.0%. Power-services revenue decreased 83.5% to $20.2 million, primarily as several projects neared or reached completion and new project starts were delayed. Industrial-services revenue rose 64.6% to $27.1 million; telecom-services revenue was $2.3 million, down 6.5%.
- Reported gross margin was approximately negative 42.4%, versus positive 10.9% a year earlier. Management said gross margin excluding the TeesREP loss was 13.8%. Industrial and telecom gross margins improved year over year to 10.3% and 22.0%, respectively.
- Operating cash use improved by $24.6 million year over year, but remained substantial. Increased receivables used $12.0 million and lower accounts payable and accrued expenses used $10.5 million; reduced net contract assets and liabilities and receipt of tax refunds provided cash.
- At April 30, cash and cash equivalents were $132.4 million and short-term investments were $123.4 million. Working capital was $302.1 million. Total liabilities were $71.7 million; the company reported no borrowings under its $50 million revolving facility.
- Quarterly cash dividend was $0.25 per share, or $3.9 million in total. The company paid the dividend despite the quarterly loss.
Material changes and unusual items
- TeesREP contract loss: APC’s revised estimate for the UK biomass project indicated remaining completion costs would exceed projected revenue by approximately $27.6 million. The full estimated loss was reflected in the quarter’s results; a $9.8 million contract-loss provision was recorded in accrued expenses. Management cited significant project challenges, including work stoppages due to labor strikes.
- Goodwill impairment: Argan recorded a $2.1 million impairment, effectively writing off APC goodwill.
- Revenue and cost estimates: Revisions to transaction prices and estimated costs on active contracts, including TeesREP, resulted in a net reversal of approximately $1.4 million of previously recorded revenue.
- Taxes: The company recorded a $5.3 million valuation allowance against a deferred tax asset associated with APC’s UK subsidiary loss and recognized no tax benefit for that European operating loss. The overall quarter included a $0.5 million income tax benefit.
- Argan adopted lease accounting standard ASC 842 on February 1, 2019. It recorded right-of-use assets of $1.2 million and lease liabilities of $1.2 million; management said the adoption did not materially affect operating results.
Outlook, liquidity and risks
- Management expects results to improve gradually over the next few quarters as new power projects ramp up, with meaningful contributions from projects proceeding fully not expected until the fourth quarter of the current fiscal year. It expects a return to year-over-year growth as projects mature, but did not provide numerical earnings or revenue guidance.
- Power-project backlog was $1.1 billion at April 30; after a subsequent Harrison County, West Virginia project award, backlog exceeded $1.4 billion. New projects had received limited notices to proceed, with construction expected to begin in summer 2019 and completion scheduled for 2022. Backlog may be reduced by cancellations, deferrals or scope changes.
- Remaining unsatisfied performance obligations were $97.9 million, most expected to be recognized during the year ending January 31, 2020; the filing cautions that cancellations, deferrals and scope adjustments may occur.
- Management believes cash, investment maturities and future operating cash flows will be adequate for foreseeable business needs. The company was compliant with credit-facility covenants at quarter-end, but said the quarter’s loss had considerably reduced covenant-compliance margins. The facility is secured by the majority of company assets and expires May 31, 2021.
- Risks include delayed power-plant awards and project starts, financing availability, regulatory and energy-market uncertainty, natural-gas pipeline delays, fixed-price contract cost overruns, commodity-price exposure, and foreign-currency fluctuations. Argan generally does not hedge commodity-price risk.
- GPS is in litigation with Exelon over a Massachusetts power-plant EPC contract. Exelon issued a notice of intent to terminate, required GPS to leave the site, asserted claims and withheld payments. Argan says the plant was nearly complete and intends to pursue amounts it believes are owed and defend against Exelon’s allegations. $19.6 million of receivables and contract assets depended on resolution of an outstanding legal dispute; the filing does not clearly identify that amount as entirely attributable to this Exelon matter.
- Argan reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Progress, remaining costs, schedule and potential recoveries or claims related to TeesREP, including whether the estimated $27.6 million loss changes.
- Whether the Exelon dispute is resolved, and the timing and collectability of disputed customer balances.
- Whether the new power projects receive full notices to proceed and convert backlog into revenue on schedule; distinguish backlog from the $97.9 million of remaining performance obligations.
- Quarterly cash burn, covenant headroom and the continued capacity to support project bonding and pay dividends.
- Whether industrial-services growth and margins persist as power-services revenue ramps up, and whether management’s expected fourth-quarter contribution materializes.
- Potential tax effects, including the UK loss-related valuation allowance and the IRS review of amended returns claiming research and development credits.