Argan, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended January 31, 2021. This is an annual report, not a standalone fourth-quarter filing. Argan provides power-generation engineering and construction, industrial fabrication and field services, and telecommunications infrastructure services.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $392.2 million | $239.0 million |
| Gross profit (loss) | $62.1 million; 15.8% margin | $(6.8) million |
| Operating income (loss) | $23.0 million | $(55.8) million |
| Net income (loss) attributable to Argan shareholders | $23.9 million; $1.51 diluted EPS | $(42.7) million; $(2.73) diluted EPS |
| Cash from operating activities | $174.7 million | $53.6 million |
| Cash and cash equivalents | $366.7 million | $167.4 million |
| Short-term investments | $90.1 million | $160.5 million |
| Working capital | $270.1 million | $277.7 million |
- Power industry services revenue rose 135% to $319.4 million, principally as work ramped up on the Guernsey Power Station. It represented 81% of consolidated revenue; that customer alone contributed 67%.
- Industrial fabrication and field services revenue fell 31% to $65.3 million. Telecommunications revenue declined 12% to $7.6 million.
- Power segment operating income was $30.6 million, compared with an operating loss of $46.0 million in FY2020. FY2021 gross margins were 16.4% for power, 12.3% for industrial services and 22.4% for telecommunications.
- Operating cash flow included a $99.4 million increase in contract liabilities, primarily from project billing and payment timing. Cash flow therefore benefited materially from working-capital movements, not earnings alone.
- Argan reported no bank borrowings at year-end. Its revolving facility allowed up to $50 million and was due to expire May 31, 2021; $1.8 million of letters of credit was outstanding under it. A separate $3.4 million letter of credit was cash-collateralized.
- The company paid $3.00 per share in regular and special cash dividends during FY2021, totaling approximately $47.0 million. It also authorized up to $25 million of share repurchases; none had been made by year-end.
Material changes and significant items
- Results rebounded from FY2020, when the Teesside Renewable Energy Plant (TeesREP) fixed-price subcontract loss drove a consolidated gross loss and net loss. Contract amendments reduced the final estimated loss from $33.6 million to $29.5 million. Remaining TeesREP work under time-and-materials terms was reported as profitable.
- TeesREP work was suspended in March 2020 due to COVID-19 and later resumed under revised commercial terms. APC’s work was expected to end in FY2022; overall plant substantial completion was then expected in summer 2021.
- Power-segment backlog fell to approximately $0.8 billion from $1.3 billion, partly reflecting project progress and removal of the delayed NTE Reidsville project. Total company backlog was $0.9 billion at year-end. RUPO, a separate accounting measure of active-contract revenue not yet recognized, was $552.5 million; management estimated about 64% would be recognized in FY2022.
- TRC backlog increased to $54 million from $14 million, although its FY2021 revenue declined amid delayed customer awards and project starts. No FY2021 goodwill impairment was recorded; its $9.5 million goodwill valuation depended on forecast recovery and growth assumptions.
Outlook, risks and contingencies
- Management was cautiously optimistic that construction could start within the next twelve months on the Harrison Power and Killingly Energy Center projects, but emphasized that timing depends on project owners and financing. It could not predict when the projects would commence. GPS had begun exclusive negotiations on several renewable projects for potential FY2022 activity.
- Guernsey was the principal revenue driver, with substantial completion expected in the second half of FY2023. Dependence on a single major project and customer creates exposure to schedule changes, cost overruns and payment timing.
- Several awarded gas-fired plant projects had not received full notice to proceed. Project financing, delayed PJM capacity auctions, permitting, political opposition to fossil fuels, demand and fuel-price changes, and growth in renewable generation could delay or prevent starts. Backlog and RUPO may be reduced by cancellations, deferrals or scope changes.
- COVID-19 could disrupt job-site labor, productivity and equipment supply chains. The filing states that the ultimate operational and financial effects were not quantifiable. Fixed-price contracts expose the company to cost escalation, productivity shortfalls, schedule delays and liquidated damages.
- GPS’s Exelon West Medway dispute remained unresolved. Argan reported $24.5 million of receivables and contract assets tied to that customer; collection timing likely depends on litigation. Exelon had terminated the contract and withheld payments, while GPS disputes Exelon’s allegations.
- The IRS disputed significant portions of Argan’s research-and-development tax credit claims for FY2016 and FY2017, and planned to examine FY2018. The company was appealing and maintained a $5.0 million liability for uncertain tax positions. The filing also reported $12.7 million expected from an NOL carryback refund.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted fixed-price contract revenue estimates and TRC goodwill valuation as critical audit matters.
Important facts for investors to verify
- Progress, cost-to-complete estimates, customer concentration and cash collections on Guernsey, including whether project milestones remain on schedule.
- Whether the $174.7 million operating cash flow level is repeatable, given the large contract-liability contribution and timing-sensitive project billings.
- Current status and expected recovery of the $24.5 million Exelon-related balance, litigation milestones and any potential impact on liquidity or earnings.
- Construction start, financing and notice-to-proceed status for Harrison Power, Killingly and other backlog projects; reconcile backlog with RUPO and subsequent awards or cancellations.
- Final TeesREP closeout costs and the continuation and profitability of work under time-and-materials terms.
- IRS appeals and examination outcomes, including possible effects on the $5.0 million uncertain-tax liability and expected tax refunds.
- Renewal or replacement of the revolving credit facility, which was scheduled to expire shortly after year-end.