Argan, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended July 31, 2013 (the second quarter of Argan’s fiscal 2014); comparisons are with the quarter and six months ended July 31, 2012. Argan’s principal business is power generation engineering, procurement and construction through Gemma Power Systems (GPS); Southern Maryland Cable (SMC) provides telecommunications infrastructure services.
Financial performance and liquidity
| Metric | Quarter ended July 31, 2013 | Six months ended July 31, 2013 |
|---|---|---|
| Revenue | $57.9 million, down 30% year over year | $104.5 million, down 29% |
| Gross profit / margin | $21.3 million / 36.7%, versus $12.9 million / 15.6% | $34.3 million / 32.8%, versus $23.0 million / 15.7% |
| Operating income | $19.7 million, versus $9.6 million | $29.2 million, versus $16.7 million |
| Net income attributable to Argan shareholders | $12.6 million; diluted EPS $0.89, versus $6.2 million and $0.45 | $19.0 million; diluted EPS $1.35, versus $10.6 million and $0.76 |
Power industry services generated $55.5 million of quarterly revenue and $99.3 million for the six-month period. Telecommunications revenue was $2.3 million and $5.2 million, respectively. The six-month results included $2.4 million in gains from deconsolidating Moxie project entities. Operating results also benefited from a $1.3 million reversal of a legal reserve and favorable cost performance on a Southern California power plant project.
Six-month operating cash flow was negative $19.4 million, compared with positive $33.6 million in the prior-year period. The principal cash uses included a $33.3 million reduction in billings in excess of costs and a $15.3 million reduction in accounts payable and accrued expenses; lower receivables provided $9.9 million. Cash and equivalents were $152.9 million at July 31, down from $175.1 million at January 31. Working capital was $116.0 million, versus $88.6 million.
Total assets were $206.7 million and total liabilities $65.6 million. The company had no borrowings outstanding; its $4.25 million revolving facility was available through May 31, 2015, and it reported compliance with its financial covenants. The facility is secured by most company assets and permits up to $10 million in standby letters of credit.
Material changes versus the prior comparable period
- Revenue fell as construction and commissioning of the large Southern California gas-fired plant neared completion; the project accounted for about 43% of consolidated revenue in the quarter and six-month period. Management attributed the higher gross margin chiefly to favorable project execution and reduced estimated completion costs. The prior-year quarter also included a $1.6 million Altra-related cost-of-revenue charge.
- SMC revenue declined as work on the One Maryland Broadband Network wound down and equipment orders fell. Its quarterly revenue decreased 48% year over year; six-month revenue decreased 50%.
- Argan deconsolidated Moxie Liberty and Moxie Patriot after investors became the primary sources of project financing and control. It recorded gains totaling $2.444 million and reported $9.691 million of notes and accrued interest receivable from the projects at July 31.
- At July 31, backlog was $465 million, compared with $180 million at January 31, following the Liberty EPC contract award. Management said Patriot could add about $385 million when its financing and purchase transaction are completed.
Outlook, commentary, risks and unusual items
- Management expected revenue in the remaining two quarters of fiscal 2014 to be below the prior fiscal year as existing projects conclude. It expected second-half net income to benefit from project execution and development success fees tied to Moxie transactions. Management described the outlook as unusually difficult to forecast, citing weak power demand, intense construction bidding, and uncertain renewable-energy incentives; it remained cautiously optimistic over the longer term.
- In August 2013, an investor completed the purchase and permanent financing of Moxie Liberty. GPI received approximately $19.373 million: $5.128 million in repayment of notes and interest, and $14.245 million in development success fees expected to be recognized in the quarter ending October 31, 2013. GPS also received full notice to proceed on the Liberty EPC work.
- Argan’s Moxie receivable exposure was approximately $9.7 million at July 31; the company reported receiving $5.128 million in August. GPI was authorized to lend up to $10 million under the development arrangement.
- ACCO claimed approximately $7.742 million in a subcontract dispute; GPS believed about $663,000 was owed and was pursuing arbitration. Hearings were tentatively scheduled for January 2014. The company said the outcome was uncertain and that project revenue estimates included an estimate of potential resolution costs.
- Altra-related lien and other proceedings remained unresolved; management reported no additional loss provision for the six-month period and did not expect a material adverse effect, while acknowledging uncertainty. The TBN litigation against a subsidiary was dismissed with prejudice and affirmed on appeal, prompting the reserve reversal.
- Customer concentration was significant: three customers represented approximately 43%, 36% and 12% of quarterly revenue; two customers represented approximately 43% and 40% of six-month revenue. Other risks include fixed-price exposure to commodity cost increases, construction execution and bonding obligations, and dependence on major power projects.
Most important facts for investors to verify
- Whether Patriot’s investor completes the purchase and secures permanent financing, and whether the anticipated EPC contract and development fees materialize.
- Actual cash conversion as projects wind down, particularly changes in contract billings, retainage, receivables and payables.
- Whether reported margin improvement persists after the Southern California project completion and the one-time legal reserve reversal and deconsolidation gains.
- Resolution and potential financial impact of the ACCO arbitration and remaining Altra proceedings.
- Backlog conversion, customer concentration, and SMC revenue trends as broadband work and related equipment orders decline.