Argan, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The company provides power-plant engineering, procurement and construction services, industrial fabrication and field services, and telecommunications infrastructure services.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $239.0 million | $482.2 million |
| Gross profit (loss) / margin | $(6.8) million / (2.9)% | $82.4 million / 17.1% |
| Operating income (loss) | $(55.8) million | $40.2 million |
| Net income (loss) attributable to Argan shareholders | $(42.7) million; $(2.73) per diluted share | $52.0 million; $3.32 per diluted share |
| Cash from (used in) operating activities | $53.6 million | $(112.3) million |
| Cash and cash equivalents | $167.4 million | $164.3 million |
| Short-term investments | $160.5 million | $132.2 million |
| Working capital | $277.7 million | $335.0 million |
- Cash from operations benefited principally from a $64.3 million increase in contract liabilities and a $25.0 million reduction in contract assets. Cash used in investing activities was $36.1 million, including $7.1 million of capital expenditures; financing activities used $14.0 million, including $15.6 million of dividends.
- The company reported no borrowings under its $50 million revolving credit facility, available through May 31, 2021; $9.9 million of facility capacity supported letters of credit. A separate $3.4 million letter of credit for a development project was cash-collateralized. The company was covenant-compliant, but said its covenant headroom had narrowed following the year’s loss. It reported no long-term debt.
- Dividends were $1.00 per share for the year. Total assets were $487.5 million and total liabilities were $146.5 million at year-end.
Material changes and segment performance
- Revenue fell 50.4% year over year, principally because several large power projects completed in FY2019 and new US projects started later than expected. Power-services revenue decreased 63.1% to $135.7 million; industrial-services revenue declined 6.9% to $94.7 million; telecommunications revenue declined 32.2% to $8.6 million.
- The main exceptional charge was a $33.6 million expected loss on APC’s Tees Renewable Energy Project (TeesREP) subcontract in the UK. The full estimated loss was recorded in FY2020. Goodwill impairment charges totaled $4.9 million: $2.1 million for APC and $2.8 million for TRC.
- SG&A increased 8.4% to $44.1 million, primarily reflecting the cost of retaining core GPS operating staff. Other income included $5.0 million of investment income and a $2.2 million gain related to a utility easement at a power-project development site.
- Operating cash flow improved from a substantial outflow in FY2019, when project completions and working-capital movements consumed cash. The FY2020 increase was substantially affected by contract billing and timing and should not be read as equivalent to recurring earnings.
Backlog, outlook, risks and contingencies
- Power-services backlog was approximately $1.3 billion at January 31, 2020, compared with $1.1 billion a year earlier. Remaining unsatisfied performance obligations (RUPO) were $781.4 million; management estimated about 39% would be recognized as revenue in FY2021. Backlog and RUPO may be reduced by delays, cancellations, scope changes or revised estimates.
- GPS had received a full notice to proceed on the 1,875 MW Guernsey County, Ohio project, with completion scheduled for 2022. Other awarded projects depended on financing, permits and owner decisions before construction could begin. Subsequent to year-end, GPS announced two additional EPC awards. Management described longer-term gas-fired power prospects as favorable, but acknowledged that near-term starts and revenue depended on project financing and market conditions.
- Management warned that COVID-19 could disrupt labor, job sites and supply chains. After year-end, TeesREP work was suspended on March 24, 2020; APC had completed about 90% of its subcontracted work at suspension. The filing said the effects on future results were not then quantifiable. Guernsey work continued under safety measures, while the company monitored possible supply delays. TRC and SMC had not yet been materially affected, but management expected their revenue in the first few FY2021 quarters to be below comparable FY2020 periods.
- TeesREP’s completion framework targeted substantial completion by mid-2020 but did not settle significant past commercial differences. Management warned that further losses could arise from unresolved claims, execution issues, delays or customer financial stress.
- GPS’s lawsuit against Exelon over the nearly completed West Medway project remained unresolved. Argan reported $24.5 million of receivables, retainage and contract assets tied to Exelon, whose payment dispute was in litigation.
- Other key risks include fixed-price contract overruns, customer concentration, skilled-labor shortages, bonding capacity, project-owner financing, regulatory and permitting delays, and foreign-exchange exposure. Two power-services customers accounted for 37% of FY2020 consolidated revenue.
- The IRS was examining amended federal returns claiming research-and-development credits; the company had a $5.0 million liability for unrecognized tax benefits. The FY2019 results included $16.6 million of previously unrecognized R&D tax benefits. The filing reported unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Progress, final costs and commercial dispute resolution on TeesREP, including whether losses exceed the $33.6 million already recorded.
- Exelon litigation status, collectability of the $24.5 million balance, and any related effects on cash or earnings.
- Whether awarded power projects achieve financing, permits and full notices to proceed, and how much backlog converts to revenue and cash flow.
- COVID-19 effects on job-site access, labor productivity, supply deliveries and customer liquidity, especially for APC and the Guernsey project.
- TRC’s operating recovery and any further goodwill impairment, as well as the sustainability of liquidity, covenant headroom and the $1.00 annual dividend.