Argan, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended January 31, 2022 (filed April 13, 2022). This is an annual filing, not a quarterly report. Argan provides power-sector engineering, procurement and construction services, industrial fabrication and field services, and telecommunications infrastructure services.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $509.4 million | $392.2 million |
| Gross profit / margin | $99.7 million / 19.6% | $62.1 million / 15.8% |
| Operating income | $44.5 million | $23.0 million |
| Net income attributable to Argan stockholders | $38.2 million; $2.40 diluted EPS | $23.9 million; $1.51 diluted EPS |
| Cash flow from operations | $28.4 million | $176.0 million |
| Cash and cash equivalents | $350.5 million | $366.7 million |
| Short-term investments | $90.0 million | $90.1 million |
| Working capital | $284.3 million | $270.1 million |
Revenue rose 29.9%. Power industry services generated $398.1 million, industrial fabrication and field services $97.9 million, and telecommunications infrastructure services $13.4 million. All three segments reported higher revenue. Gross margin improved, driven by project execution and stronger segment contributions. The year included a $7.9 million impairment of Chickahominy project-development costs. Income tax expense was $11.4 million, versus $1.1 million in FY2021, which included a $4.4 million net operating loss carryback benefit.
FY2022 operating cash flow fell substantially from the prior year, when a large increase in contract liabilities provided cash. In FY2022, contract-liability balances declined by $44.2 million. Investing cash outflows included $5.0 million invested in solar projects and $1.4 million in capital expenditures. Financing outflows included $20.4 million of share repurchases and $15.7 million of dividends.
Argan reported no credit-facility borrowings at year-end. Its amended facility provides a $50 million commitment, with a conditional $10 million accordion, and expires May 31, 2024. Outstanding letters of credit under the facility totaled $21.5 million; a separate $3.4 million letter of credit was cash-collateralized. The company reported $235.1 million of unsatisfied bonded performance obligations. The filing reports total liabilities of $228.0 million and total equity of $325.6 million.
Material changes and significant items
- Power-industry revenue increased 24.7%, primarily reflecting work on the Guernsey Power Station and the new Maple Hill Solar project. TRC revenue increased 50.0%, while SMC revenue increased 76.4% from a smaller base.
- The $27.5 million settlement of GPS litigation with Exelon was received in September 2021. The amount exceeding the related receivables and contract assets was recognized in FY2022 revenue.
- Chickahominy’s fuel-pipeline and grid-interconnection issues jeopardized the project; Argan recorded a $7.9 million impairment, including $2.5 million attributable to non-controlling interests. The project owner publicly announced cancellation in March 2022.
- Argan repurchased 527,752 shares for approximately $20.4 million through year-end. The board later increased the repurchase authorization to $75 million. Quarterly cash dividends were $0.25 per share; FY2022 dividends totaled $1.00 per share.
- SMC acquired Lee Telecommunications for $0.6 million in cash, expanding its business into the Tidewater, Virginia area.
Outlook, risks and contingencies
- Management expects substantial completion of Guernsey and Maple Hill during the second half of FY2023. The Northern Ireland Kilroot gas-fired project has commenced and is expected to complete in the latter half of FY2024.
- Year-end project backlog was approximately $0.7 billion, compared with $0.8 billion a year earlier; remaining unsatisfied performance obligations were $397.0 million. Management estimates about 84% of RUPO will be recognized as revenue in FY2023. Backlog and RUPO may change because of delays, cancellations, scope revisions and other uncertainties.
- Guernsey Power Station accounted for approximately 57% of FY2022 consolidated revenue, creating significant customer and project concentration. Substantial completion is expected in FY2023, so replacement work and project timing are important to future results.
- Management described labor shortages, wage increases, inflation and supply-chain disruption as risks to schedules and fixed-price contract margins. It also cited delayed PJM capacity auctions, permitting and financing challenges, changing energy policy, commodity prices, and COVID-19 and geopolitical disruptions as factors that could defer or reduce new work.
- The company is pursuing renewable work alongside gas-fired projects. Renewable projects represented 13.4% of power-segment revenue in FY2022, up from 10.8% in FY2021. Management expects this share to become more meaningful, but gave no specific revenue or earnings guidance.
- The IRS disputes a substantial portion of Argan’s research and development tax-credit claims for FY2016–FY2018. The company had recorded $16.2 million net benefit and a $5.0 million liability for uncertain tax positions; it had formally protested the IRS findings and expected an appeals hearing in FY2023. An unfavorable resolution could materially affect results.
- Management said liquidity was adequate for foreseeable general business needs. The company was in compliance with credit covenants. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; the auditor identified fixed-price contract revenue recognition and estimated costs to complete as a critical audit matter.
Most important facts for investors to verify
- Progress, costs, timing and customer acceptance for Guernsey and Maple Hill, and the pipeline of new projects expected to replace their revenue.
- Whether backlog and RUPO convert to revenue as forecast, particularly the estimated 84% of RUPO expected in FY2023; confirm the status of delayed or at-risk projects.
- Cash conversion and working-capital trends, including the effects of contract assets, contract liabilities, retainage and the Exelon settlement.
- Fixed-price contract estimates, project contingencies and potential cost overruns, as well as the impact of labor, materials and supply-chain conditions.
- Resolution and cash consequences of the IRS tax-credit dispute, and any related changes to tax assets or liabilities.
- Capital allocation after year-end, including further share repurchases, dividends, and the company’s liquidity and bonding capacity.