Business context and reporting period
Argan, Inc. filed this unaudited Form 10-Q for the three months ended April 30, 2015, the first quarter of fiscal 2016. Its power industry services business, conducted primarily through Gemma Power Systems (GPS), generated 97% of revenue; Southern Maryland Cable provides telecommunications infrastructure services. Results were driven mainly by construction progress on two large natural-gas power plants, Panda Liberty and Panda Patriot.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $85.5 million | $51.2 million |
| Gross profit / margin | $21.2 million / 24.8% | $10.1 million / 19.6% |
| Operating income | $15.6 million | $6.7 million |
| Net income | $10.9 million | $4.8 million |
| Net income attributable to Argan stockholders | $7.5 million; diluted EPS $0.50 | $3.5 million; diluted EPS $0.24 |
| Operating cash flow | $(2.3) million | $40.5 million |
At April 30, cash and cash equivalents were $274.5 million, with $56.0 million in short-term bank certificates of deposit; working capital was $159.6 million. Total assets were $399.9 million and total liabilities $212.8 million. The company reported no outstanding borrowings under its bank facilities and no senior debt; $1.35 million of facility availability was designated for letters of credit. The filing reports compliance with financial covenants.
Operating cash flow was negative despite net income, principally reflecting working-capital uses: higher receivables, lower accounts payable and accrued expenses, and higher prepaid expenses. The prior-year quarter’s operating cash flow benefited substantially from a $42.8 million increase in billings in excess of costs. The $56 million certificate-of-deposit purchases were investing cash outflows and account for much of the reported decrease in cash.
Material changes versus the prior comparable period
- Revenue increased 67%, led by a 66% rise in power services as work on the two gas-fired plants ramped up. Telecommunications revenue rose from $1.4 million to $2.6 million.
- Gross margin improved to 24.8% from 19.6%; management cited expected margins on the power projects and a $1.6 million contribution from resolution of the Altra bankruptcy matter.
- SG&A rose to $5.5 million from $3.4 million, including higher incentive compensation, salaries and benefits, and acquisition-related professional fees.
- Backlog fell to $347 million from $423 million at January 31, 2015, primarily reflecting progress on Panda Liberty and Panda Patriot.
Outlook, risks, contingencies and unusual items
Management said current projects should provide a stable base of activity for most of the fiscal year with steady gross margins, and said it was bidding on new EPC projects it hoped to begin in fiscal 2016. It described long-term prospects for natural-gas and renewable generation construction as favorable, while noting uncertainty in power-sector demand, fuel economics, regulation, and project timing. No quantified revenue or earnings guidance was provided.
- Acquisition: On May 29, 2015, after quarter-end, Argan acquired Ireland-based Atlantic Projects Company Limited for stated consideration of $10.8 million, comprising $7.6 million cash and approximately 99,000 shares. Purchase-price allocation was incomplete.
- Altra settlement: A bankruptcy-court settlement resulted in a $1.6 million payment received in May 2015; the amount was recognized as revenue in the quarter ended April 30. The matter was dismissed.
- Project development: GPS may lend Moxie Freedom up to $6 million at 20% annual interest; $2.83 million of notes and accrued interest was outstanding at April 30 before consolidation eliminations. A success fee of up to $6 million and exclusive EPC rights depend on project financing and repayment. Management estimated financial closing in mid-to-late 2016.
- Concentration and execution: Two power customers accounted for approximately 47% and 45% of quarterly revenue and 44% and 43% of period-end receivables. GPS could be liable for all joint-venture losses if its partner cannot pay its share. Fixed-price contracts expose results to unhedged commodity-cost increases.
- Other exposures: The revolving facility was due to expire July 31, 2015; management expected an extension. The company pledged most assets as collateral and the bank’s agreement requires consent for certain transactions. Management reported no other current legal matters expected to materially affect the financial statements.
- The company had not completed its assessment of the new revenue-recognition standard; the filing described a proposed effective-date deferral, not a final adoption date.
Important facts for investors to verify
- Whether the Panda projects complete on schedule and within expected margins, and how their progress affects backlog and cash conversion.
- How much of reported quarterly earnings and margin improvement reflects the one-time $1.6 million Altra revenue item.
- Customer concentration, receivable collection—particularly retainage—and the impact of working-capital movements on operating cash flow.
- Terms and integration results of the APC acquisition, including final purchase-price allocation and any effect on future results.
- Moxie Freedom financing, repayment, potential success fee, and the company’s exposure under its development commitments.
- Renewal of the bank facility and continued covenant compliance; the filing states no borrowings were outstanding at quarter-end.