Argan, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended January 31, 2014; comparisons are primarily with the year ended January 31, 2013. Argan operates through Gemma Power Systems (GPS), its power-generation engineering and construction business, and Southern Maryland Cable (SMC), its telecommunications-infrastructure business.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $227.5 million | $278.6 million |
| Gross profit / margin | $78.8 million / 34.7% | $50.1 million / 18.0% |
| Income from continuing operations | $43.3 million | $22.1 million |
| Net income attributable to Argan stockholders | $40.1 million | $23.3 million |
| Diluted EPS attributable to stockholders | $2.78 | $1.65 |
| Cash provided by operating activities | $99.0 million | $31.6 million |
- Revenue fell 18% year over year: GPS revenue declined 16% to $218.6 million, while SMC revenue fell 49% to $8.8 million. GPS accounted for approximately 96% of consolidated revenue.
- Cash and cash equivalents rose to $272.2 million from $175.1 million; working capital was $133.3 million. Current assets were $298.6 million and current liabilities $165.2 million.
- Operating cash flow benefited substantially from a $61.4 million increase in billings in excess of costs and estimated earnings, largely reflecting project billing milestones. Cash included approximately $117.7 million held in construction joint ventures for project activities and potential partner distributions.
- No borrowings were outstanding under the Bank of America facility. The revolving commitment was $4.25 million; $1.35 million was designated for letters of credit, leaving $2.9 million available. The company reported compliance with its financial covenants.
- Construction backlog was $790 million, compared with $180 million a year earlier; approximately 92% related to the two Panda power-plant projects. The balance sheet reported total assets of $323.3 million and total equity of $157.8 million.
Material changes and unusual items
- Gross profit rose despite lower revenue, primarily because GPS recognized $27.1 million of development success fees when Panda acquired the two Moxie project entities. The fees were recognized at project closings and are not presented as recurring construction revenue.
- The Panda transactions also generated a $2.4 million pretax gain on deconsolidation of the Moxie variable interest entities. GPS received approximately $10.8 million in repayment of notes and accrued interest, in addition to the development fees.
- Profitability also benefited from completion of the Sentinel peaking plant approximately three months ahead of schedule and from a $1.3 million reversal of accrued legal costs following the final resolution of the Tampa Bay Nutraceutical litigation.
- SMC’s revenue declined as the Maryland fiber-network initiative wound down and equipment-order deliveries were completed. The company also cited the expiration of certain customer arrangements, including Verizon and an EDS-related federal contract.
- Argan paid a special cash dividend of $0.75 per share, totaling $10.6 million, in November 2013.
- For the quarter ended January 31, 2014, revenue was $59.5 million, gross profit was $20.7 million, net income attributable to stockholders was $9.2 million, and diluted EPS was $0.63. The quarter included $12.8 million of Panda Patriot development success fees.
Outlook, commentary, risks, and contingencies
- Management described the power-construction market as highly competitive amid soft power demand and limited new project opportunities. It expected current projects to provide a base of activity for the next two to three years, while anticipating a return to more typical gross margins without development fees of this scale.
- Management was cautiously optimistic over the long term but said it would pursue new work rationally, control costs, and conserve cash. It cautioned that visibility was unusually limited and that SMC’s FY2015 revenue level could not be assured.
- The ETEC biomass project, with an EPC contract value of approximately $168 million, was expected to finish in December 2014; related three-year operations and maintenance contracts total approximately $28 million. The Panda Liberty and Panda Patriot plants were expected to be completed in March and June 2016, respectively.
- Key risks include customer and project concentration, delays or cancellations affecting backlog, fixed-price contract cost overruns, reliance on subcontractors and suppliers, bonding availability, commodity costs, and the possibility of project-owner financing or permitting delays. Two Panda projects constituted about 92% of backlog; GPS could be fully liable for joint-venture losses if its partner cannot pay its share.
- An unresolved Altra project matter remained: GPS was awaiting a court decision on related claims after a prior settlement was challenged. Management reported no additional loss provision at January 31, 2014, but acknowledged that an unfavorable outcome could cause additional loss. The filing does not provide a clear estimate of any potential additional loss.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Assess how much FY2014 earnings and margin depended on the $27.1 million one-time development fees, the $2.4 million deconsolidation gain, and the $1.3 million legal-accrual reversal.
- Track execution, cash requirements, margins, and billing milestones for the two Panda projects, which dominate backlog; confirm backlog conversion and watch for scope changes, delays, or cancellations.
- Reconcile operating cash flow with project working-capital movements, particularly the $61.4 million increase in advance billings and cash held in joint ventures.
- Monitor the Altra litigation, bonding capacity, joint-venture partner exposure, and any potential claims or cost overruns on fixed-price contracts.
- Verify replacement work and customer diversification for SMC after the Maryland initiative and other customer arrangements wound down.