Argan, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2019 (fiscal 2020). Argan provides power-industry engineering and construction, industrial fabrication and field services, and telecommunications infrastructure services. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $58.4 | $116.5 | $171.0 | $394.5 |
| Gross profit (loss) | $6.0 | $29.5 | $(12.1) | $75.7 |
| Gross margin | 10.3% | 25.4% | (7.1%) | 19.2% |
| Operating income (loss) | $(6.1) | $18.4 | $(45.9) | $44.5 |
| Net income (loss) attributable to Argan shareholders | $(6.9) | $32.4 | $(35.5) | $54.2 |
| Diluted earnings (loss) per share | $(0.44) | $2.07 | $(2.27) | $3.46 |
- Revenue fell 49.8% in the quarter and 56.7% year to date. Power-services revenue declined 59.6% and 73.5%, respectively, mainly reflecting completion of several large power projects and delayed project starts. Industrial-services revenue declined 16.4% in the quarter but increased 17.3% for nine months. Telecom revenue declined 33.7% and 31.4%.
- The nine-month gross loss principally reflects a forecast $31.2 million loss on APC’s TeesREP project in England, recognized during the period, mostly in the first quarter. The company recorded an additional $2.1 million impairment to write off APC goodwill. Excluding TeesREP, management said nine-month gross margin would have been 13.3%.
- Third-quarter other income included a $2.2 million gain recorded by a consolidated project-development entity for a utility easement. The 2018 comparison included a $16.5 million benefit from prior-year research and development tax credits in the quarter; 2019’s nine-month $4.9 million tax benefit primarily reflected the estimated tax effect of bad debt on loans to APC.
- Cash from operations was $15.9 million for the nine months, versus cash used of $99.1 million in 2018. A $50.1 million rise in contract liabilities, largely initial billings on EPC work, was a major cash source.
Liquidity, balance sheet and debt
- At October 31, cash and cash equivalents were $252.5 million and short-term investments were $42.1 million; combined, $294.6 million. Working capital was $286.9 million, down from $335.0 million at January 31, 2019.
- Total liabilities were $121.3 million and equity was $351.4 million. The company had no revolver borrowings; its $50 million credit facility expires May 31, 2021. About $10.0 million of letters of credit were outstanding, mostly related to TeesREP, and the company reported compliance with credit covenants. Management cautioned that covenant compliance margins had narrowed considerably following the losses.
- Operating cash flow, investment maturities and cash on hand support liquidity; management believes resources will meet foreseeable business needs. The company paid $11.7 million in dividends and spent $6.3 million on capital expenditures during the nine months.
Outlook, risks and contingencies
- Management expects quarterly revenue to increase sequentially as construction ramps up on the 1,875 MW Guernsey County, Ohio power plant, with activity expected to peak in fiscal 2022. The company received full notice to proceed in August 2019. A West Virginia project had a limited notice to proceed; construction starts for that and a North Carolina project were delayed, and management said starts were probable next year but not certain.
- Project backlog was approximately $1.4 billion at October 31, compared with $1.1 billion at January 31. Remaining unsatisfied performance obligations were $817.8 million; management estimated 9% would be recognized in the quarter ending January 31, 2020 and 31% in fiscal 2021. Backlog and obligations may be reduced by cancellations, deferrals or scope changes.
- After quarter-end, APC and TeesREP’s EPC contractor agreed on a framework for project completion, including a target for APC’s substantial completion by mid-2020. Significant past commercial disputes remain unresolved; their outcome, timing and recovery are uncertain. An $8.6 million contract-loss reserve was included in accrued expenses. Argan also provided a parent-company performance guarantee and letters of credit for the project.
- GPS is pursuing litigation against Exelon over alleged contract breaches, termination and unpaid invoices. $19.6 million of receivables and contract assets were subject to collection depending on resolution of the dispute at October 31. The company’s recovery is uncertain.
- Management identified delays in gas-plant awards and starts amid regulatory uncertainty, renewable-energy growth, financing challenges, environmental opposition and pipeline approval delays. Fixed-price contracts also expose results to cost overruns, commodity-price changes, schedule delays, liquidated damages and revisions to cost or revenue estimates.
- Argan reported no material changes to risk factors in its latest annual report. Other notable exposures include customer concentration, foreign currency translation, tax-credit examinations and performance bonds; potential payments above estimated costs to complete were not estimable.
Investor verification priorities
- Track TeesREP cost-to-complete estimates, execution against the mid-2020 target, reserve adequacy, and resolution of outstanding commercial disputes.
- Assess Exelon litigation progress and collectability of the related $19.6 million balance.
- Monitor Guernsey ramp-up and delayed West Virginia and North Carolina project starts against management’s revenue outlook.
- Review working-capital movements, cash conversion, credit-covenant headroom and the effect of letters of credit and guarantees.
- Verify backlog conversion and customer/project concentration, alongside the status of IRS reviews of amended returns claiming research and development credits.