Argan, Inc. — Form 10-Q Summary
Business context and reporting period
Argan provides power-plant engineering, procurement and construction and related services through GPS and APC; industrial fabrication and field services through TRC; and telecommunications infrastructure services through SMC. This unaudited report covers the three months ended April 30, 2020, the first quarter of fiscal 2021, compared with the three months ended April 30, 2019.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $60.1 million | $49.5 million |
| Gross profit (margin) | $4.0 million (6.7%) | $(21.0) million |
| Operating loss | $(6.3) million | $(32.7) million |
| Net loss attributable to Argan stockholders | $(0.8) million; $(0.05) per diluted share | $(29.8) million; $(1.91) per diluted share |
| Operating cash flow | $40.2 million provided | $36.4 million used |
| Cash and cash equivalents at period-end | $262.9 million | $132.4 million |
Revenue rose 21.4%, primarily from the Guernsey Power Station project. Power services revenue increased 140.6% to $48.6 million; industrial services revenue declined 64.0% to $9.7 million, and telecom services revenue declined 21.1% to $1.8 million. The prior-year gross loss primarily reflected a $27.6 million TeesREP project loss; the current quarter included a further $2.7 million TeesREP loss. SG&A increased 7.9% to $10.3 million. Other income declined 51.7% to $1.1 million, mainly because lower interest rates reduced investment returns.
Operating cash flow benefited from a $37.1 million increase in contract liabilities and a $15.0 million reduction in accounts receivable, partly offset by a $13.6 million increase in other assets, primarily tax-related. Investing cash flow was $59.3 million provided, mainly reflecting net maturities of short-term investments; financing cash flow was $3.7 million used, primarily for dividends. Cash plus short-term investments totaled $363.5 million at April 30, 2020. Working capital was $282.6 million.
Total liabilities were $176.1 million, including $173.1 million of current liabilities. The company reported no revolving-credit borrowings and was in compliance with its covenants. Its credit facility provides up to $50.0 million and expires May 31, 2021; $9.3 million of letters of credit was outstanding under it. A separate $3.4 million letter of credit was cash-collateralized.
Material changes and outlook
- The $29.0 million improvement in stockholder-attributable loss largely reflects the absence of the prior-year TeesREP loss and APC goodwill impairment, alongside higher power-services revenue. The company nevertheless remained loss-making.
- The CARES Act enabled carryback of approximately $38.5 million of fiscal 2020 net operating losses. Argan recorded an estimated $4.2 million tax benefit; a related federal refund receivable of $12.3 million was included in other current assets. The quarter’s total income tax benefit was $4.5 million.
- Remaining unsatisfied performance obligations were $761.8 million. Management estimated approximately 36% would be recognized as revenue during the remaining three quarters of fiscal 2021, with most of the balance over the following two fiscal years. These estimates may change with project delays, cancellations, scope revisions, costs or foreign exchange.
- Project backlog was approximately $1.3 billion at April 30, 2020. Two newly awarded gas-fired plant EPC contracts were expected to start after financial close; start timing was uncertain. Management cited project-financing constraints and uncertainty around PJM capacity-market rules as potential causes of delay. It also described long-term prospects for gas-fired construction as generally favorable, while noting that near-term opportunities and project starts could be restrained or delayed.
- COVID-19 disrupted operations: TeesREP work was suspended March 24, Irish maintenance projects were postponed, and TRC and SMC faced customer project delays. Guernsey work continued, but management warned that later construction phases and equipment supply could be affected. Management said cash on hand, investment maturities and future operating cash flow should meet foreseeable needs; no specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- TeesREP: Management forecast total project costs to exceed projected revenue by approximately $36.2 million; the expected total loss was reflected in the accounts. The remaining loss reserve was $4.1 million. Work was about 90% complete when suspended, but pandemic-related delays or unresolved commercial differences could cause further losses. The project also had $15.5 million of related receivables and contract assets at quarter-end.
- Exelon dispute: GPS is pursuing a contract claim against Exelon; $24.5 million of billed and unbilled amounts related to the former customer were subject to the dispute. Recovery timing depends on litigation. COVID-19-related discovery difficulties could affect the schedule.
- Customer concentration: Two power-services customers represented 61% and 17% of quarterly revenue. One major customer represented 33% of accounts receivable at quarter-end.
- Other exposures: The company disclosed approximately $152 million of bonds covering other risks, including warranties, and a $3.6 million financial guarantee supporting a GPS project. Possible payments above estimated costs to complete ongoing contracts were not estimable. Fixed-price contracts also expose the company to cost overruns and commodity-price changes.
- Argan maintained its $0.25-per-share quarterly dividend. It reported no material changes to the risk factors in its annual report and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Progress, restart timing, remaining costs and commercial dispute resolution for TeesREP, including whether the $4.1 million reserve remains adequate.
- Collection and timing of the $12.3 million tax refund and the $24.5 million Exelon-related receivable and contract-asset balance.
- Whether new power-plant projects achieve financial close and commence on schedule, and how customer concentration and project delays affect backlog conversion and cash flows.
- How COVID-19, supply-chain issues and changes in energy markets affect Guernsey and the other business segments.
- Liquidity and credit capacity as letters of credit, bonding requirements and the May 2021 credit-facility expiration approach.