Argan, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended October 31, 2020; fiscal year ends January 31. Dollar amounts below are in millions unless otherwise noted. Argan provides power-industry EPC and related services, industrial fabrication and field services, and telecommunications infrastructure services.
Financial performance
| Metric | Three months ended Oct. 31, 2020 | Prior-year quarter | Nine months ended Oct. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $127.3 | $58.4 | $275.0 | $171.0 |
| Gross profit (loss) | $20.3 | $6.0 | $40.0 | $(12.1) |
| Gross margin | 16.0% | 10.3% | 14.5% | (7.1)% |
| Operating income (loss) | $10.9 | $(6.1) | $11.2 | $(45.9) |
| Net income (loss) attributable to Argan stockholders | $9.5 | $(6.9) | $14.3 | $(35.5) |
| Diluted EPS | $0.60 | $(0.44) | $0.91 | $(2.27) |
- Quarterly revenue rose 118.0%; nine-month revenue rose 60.8%. Growth was principally driven by GPS work on the Guernsey Power Station project.
- Power-industry services accounted for 86% of quarterly and 83% of nine-month revenue. Nine-month industrial-services revenue fell 47.6% to $42.2 million; telecom revenue fell 17.8% to $5.4 million.
- Nine-month operating improvement largely reflects higher power-segment activity and comparison with the prior-year $31.2 million TeesREP subcontract loss. Prior-year results also included a $2.1 million APC goodwill impairment.
- Other income declined to $0.2 million for the quarter and $1.7 million for the nine months, mainly because of sharply lower investment yields; prior-year periods included a $2.2 million utility-easement gain.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $142.6 million, compared with $15.9 million a year earlier. The increase included an $87.9 million rise in contract liabilities, primarily customer advances during early Guernsey project work; it also reflected higher payables and accrued expenses.
- At October 31, cash and cash equivalents were $353.2 million and short-term investments were $90.0 million, for combined cash and investments of $443.2 million. Working capital was $277.8 million; current assets were $538.8 million and current liabilities $261.0 million.
- Total liabilities were $264.8 million. The company had no borrowings under its $50 million revolving credit facility; $1.7 million of letters of credit were outstanding under it. The facility expires May 31, 2021, and management expected to negotiate an extension or replacement. The company was in covenant compliance.
- Cash dividends paid in the nine-month period totaled $27.4 million, including a $1.00-per-share special dividend. The regular quarterly dividend returned to $0.25 per share. A $25 million share-repurchase authorization was in place, but no shares had been repurchased as of the filing.
- Capital expenditures were $1.4 million, versus $6.3 million in the prior-year period. Management said available liquidity and expected operating cash flows should meet foreseeable general business needs.
Outlook, commentary and significant risks
- No formal revenue or earnings guidance was provided. Remaining unsatisfied performance obligations were $604.7 million; management estimated about 63% would be recognized over the next 12 months, with most of the balance over the following 18 months. Project delays, cancellations, scope changes and cost revisions could reduce this amount.
- Project backlog was approximately $1.2 billion at October 31, 2020, down from $1.3 billion at January 31, 2020. Management was cautiously optimistic that several contracted power projects could start within the following 12 months, but timing depends on project owners, financing and market conditions. Guernsey substantial completion was scheduled for the end of calendar 2022.
- COVID-19 restrictions and customer delays affected all businesses, including slower Irish project resumption, constraints on Guernsey progress, and delays to TRC and SMC work. TRC backlog rose to about $39.3 million from $14.0 million at the start of the fiscal year, but associated revenue ramp-up had not yet occurred.
- One power-industry customer represented 70% of quarterly revenue and 69% of nine-month revenue. Customer and project concentration makes results sensitive to timing, execution and collection risks.
- In October, APC and its TeesREP customer agreed changes that recognized completion of APC’s fixed-price performance obligation and shifted additional requested work to time-and-materials terms. The changes reduced the expected fixed-price subcontract loss to $29.5 million; the remaining loss reserve was eliminated. Final closeout adjustments could still change the recognized loss.
- GPS’s dispute with Exelon remained in litigation. Related receivables and contract assets totaled $24.5 million; mediation was expected in spring 2021, with trial anticipated in mid-to-late summer if mediation failed. Recovery depends on resolving the dispute.
- The IRS was examining research-and-development credits claimed for fiscal 2016 and 2017 and had issued a draft communication disagreeing with the company’s treatment of certain costs. The company maintained its accounting and reported $5.0 million of unrecognized tax benefits. The IRS also notified the company after quarter-end of an examination of the fiscal 2018 return.
- The CARES Act NOL carryback was expected to produce a $12.7 million federal tax refund. The filing also describes uncertainty for new gas-fired power projects from financing availability, delayed PJM capacity auctions, public and regulatory opposition, energy-transition policies and potential natural-gas infrastructure delays. Management noted that the 2020 election and proposed climate and tax policies could affect future prospects.
- Argan had $7.4 million invested in development of a power project through a consolidated VIE; recovery depends on successful development and financing. The Brooke County project was canceled by its developer. Other projects also faced uncertain financial close, permitting or start dates.
Most important facts for investors to verify
- Whether Guernsey progress and future project starts support the revenue and margin recovery, and whether RUPO and backlog convert into recognized revenue on schedule.
- Whether customer advances and other working-capital movements are sustainable; operating cash flow substantially benefited from contract-liability growth.
- Collection and legal outcomes for the $24.5 million Exelon-related balances and the IRS examinations of research-and-development credits.
- Final TeesREP closeout costs and the extent of any further changes to the $29.5 million fixed-price loss.
- Customer concentration, COVID-related execution delays, project financing, and the timing and terms of renewal or replacement of the credit facility before its May 2021 expiration.