Argan, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2016. Amounts are in U.S. dollars unless noted. The filing is an annual report, not a standalone fourth-quarter report.
Business context
Argan is a holding company whose principal business is power-plant engineering, procurement and construction (EPC), conducted mainly through Gemma Power Systems (GPS). It also provides international power-industry services through Atlantic Projects Company (APC), industrial fabrication and field services through The Roberts Company (TRC), and telecommunications infrastructure services through Southern Maryland Cable. Power services generated 94% of FY2016 revenue. Two Panda gas-fired plant projects together generated 73% of consolidated revenue.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $413.3 million | $383.1 million |
| Gross profit / margin | $99.5 million / 24.1% | $83.6 million / 21.8% |
| Operating income | $74.4 million | $64.1 million |
| Net income | $50.2 million | $43.5 million |
| Net income attributable to Argan shareholders | $36.3 million | $30.4 million |
| Diluted EPS attributable to Argan shareholders | $2.42 | $2.05 |
| Cash from operating activities | $(33.6) million | $93.3 million |
| Cash and cash equivalents | $160.9 million | $333.7 million |
| Short-term investments | $114.1 million | None reported |
| Working capital | $164.0 million | $148.9 million |
Operating cash flow turned negative despite higher earnings, principally reflecting a $64.9 million cash use from the decline in billings ahead of costs, alongside lower payables and higher receivables. Retainage in receivables was $44.6 million. The company reported no bank borrowings at year-end; its revolving facility provides up to $10 million through May 2018, with about $1.35 million reserved for letters of credit. FY2016 dividends were $0.70 per share.
Material changes versus the prior year
- Revenue rose 7.9%, while gross margin increased to 24.1%. Management attributed margin strength partly to favorable project estimate revisions and efficient execution; it cautioned that margins may decline as newly awarded work ramps up.
- Argan acquired APC in May 2015 and TRC in December 2015. APC contributed $14.2 million of power-segment revenue after acquisition; TRC contributed $15.3 million of revenue and a $1.0 million loss during its brief post-acquisition period.
- GPS year-end backlog increased to $1.1 billion from $423 million. Management said another approximately $400 million was added after year-end, including the CPV Towantic project, taking indicated backlog above $1.5 billion.
- Operating cash flow fell from $93.3 million to negative $33.6 million. Cash and cash equivalents declined, partly because $114.1 million was held in newly classified short-term investments.
Outlook, risks and unusual items
- Management viewed long-term prospects for natural-gas-fired and renewable power construction favorably, and expected current projects to support activity over the next few fiscal years. It provided no quantified revenue or earnings guidance.
- The two Panda projects were scheduled for completion in calendar 2016; revenue from them was expected to decline in FY2017 as they neared completion. New EPC projects were expected to offset that decline over time.
- Backlog and earnings remain exposed to project delays, cancellations, permitting and financing, cost overruns on predominantly fixed-price EPC contracts, subcontractor and labor availability, and customer concentration. Backlog is not a guarantee of revenue or profit.
- One active project could face up to $11.1 million in liquidated damages based on current completion estimates; further delays could add damages at up to $175,000 per day. Management included its estimate of potential damages in the project cost-to-complete assessment.
- TRC’s acquisition followed significant losses on legacy contracts. Argan advanced $22.5 million to support TRC after acquisition. A subcontractor dispute sought about $0.8 million plus a claim against a project bond of about $1.6 million; TRC asserted counterclaims of about $2.5 million. Management did not expect resolution to cause a material additional loss, but outcomes remain uncertain.
- FY2016 included a $1.6 million recovery from the resolved Altra bankruptcy matter, $4.3 million in Moxie project-development success fees, and a $0.3 million gain on deconsolidation of a variable-interest entity. These items and favorable project estimate changes affected reported results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The control audit and management assessment excluded APC and TRC, acquired during FY2016.
Important facts for investors to verify
- Conversion, timing and profitability of the reported backlog, including the post-year-end awards and the schedule for completing the Panda projects.
- Whether operating cash flow recovers as project billings, retainage collections and payment patterns normalize.
- Final exposure to liquidated damages, especially the project with the disclosed $11.1 million potential claim and daily escalation.
- TRC’s return to profitability, remaining legacy-contract exposures, working-capital needs and outcome of the PPS dispute.
- Integration and performance of APC and TRC, and any resulting changes to internal controls, goodwill or acquired-asset valuations.
- Customer and project concentration, and whether new awards can replace revenue as major projects are completed.