Argan, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended April 30, 2012, the first quarter of fiscal 2013; comparisons are with the three months ended April 30, 2011. Argan provides power generation and renewable energy services through Gemma Power Systems and telecommunications infrastructure services through Southern Maryland Cable. Results include two gas-fired power plant development entities consolidated as variable interest entities (VIEs).
Financial results and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue from continuing operations | $63.7 million | $16.0 million |
| Gross profit; gross margin | $10.1 million; 15.9% | $3.9 million; 24.4% |
| Income from continuing operations | $4.5 million | $0.7 million |
| Net income attributable to Argan stockholders | $4.44 million; $0.32 diluted EPS | $0.61 million; $0.04 diluted EPS |
| Cash provided by continuing operating activities | $19.9 million | Cash used: $5.5 million |
- Power services revenue was $57.7 million, up from $14.0 million; telecommunications revenue was $6.0 million, up from $2.0 million. The respective segments generated $7.2 million and $0.9 million of pretax income.
- Operating cash flow benefited from an $18.0 million increase in billings in excess of costs, reflecting project billing milestones. Receivables used $2.5 million of cash; payables and accrued liabilities used $3.4 million.
- Cash and cash equivalents were $175.3 million at April 30, versus $156.5 million at January 31, 2012. Working capital was $80.1 million, up from $76.3 million.
- No bank borrowings were outstanding. The company had a $4.25 million revolving credit facility available through May 2013 and reported compliance with its financial covenants. Most assets are pledged as collateral.
- Total assets were $224.7 million and total liabilities $119.1 million. The filing reports no material long-term debt balance.
Material changes versus the prior comparable period
- Revenue and earnings rose sharply as activity increased across both business segments. Management attributed the power segment’s improvement primarily to construction on five energy projects; the prior-year quarter was a low-activity transition period after major projects were completed.
- Gross margin fell to 15.9% from 24.4%. The prior-year margin benefited from final incentive fees on a completed project.
- Backlog declined to $358 million at April 30 from $415 million at January 31, 2012. More than 92% related to two power projects.
- Net cash increased $18.8 million during the quarter, compared with a $4.4 million decrease in the prior-year quarter.
- Discontinued operations, principally legal costs associated with former nutritional-products subsidiary VLI, recorded a $0.285 million loss versus a $0.139 million loss.
Outlook, management commentary and risks
- Management expected fiscal 2013 revenue and profit to exceed fiscal 2012 results, while noting unusually limited forecasting visibility. It anticipated a difficult energy construction market, fierce bidding competition and potentially lower new bookings while pursuing projects selectively.
- Management cited long-term potential in gas-fired and renewable generation, supported by expected electricity demand and replacement of older plants. No specific financial guidance was provided.
- The Moxie projects remain in development, with permitting, financing, power-sale arrangements and potential project sales still to be completed. After quarter-end, GPI agreed to provide interest-bearing development loans of up to $9 million, potentially $10 million with company approval. Failure of the projects could prevent repayment and lead to a potentially significant write-off.
- Power-sector and customer concentration are substantial: three customers represented approximately 47%, 19% and 14% of continuing revenue. More than 92% of backlog related to two projects.
- Legal matters include Altra project disputes and a Tampa Bay Nutraceutical lawsuit alleging damages exceeding $42 million. The company said losses were reasonably possible in these matters, but could not estimate potential loss; no provision for loss was recorded. Management also noted a quarterly increase of more than $0.3 million in estimated legal defense costs.
- Other post-quarter event: GPS entered a conditional agreement to purchase an office building; purchase, build-out and furnishings were expected to cost approximately $2.5 million.
- Management identified weak economic conditions, constrained customer financing, competitive pricing, project execution and estimation risks, and uncertainty about future energy-project demand. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether the $358 million backlog converts to revenue on schedule, especially given its concentration in two projects.
- Whether project margins recover after the decline from 24.4% to 15.9%, and whether management’s fiscal 2013 outlook is achieved.
- Milestones in Moxie permitting and financing, the additional loan exposure, and prospects for repayment or EPC contract awards.
- Developments and potential financial exposure in the Altra and Tampa Bay litigation; the filing does not provide a clear estimate of possible losses.
- Customer concentration, retainage collection (approximately $15.6 million at April 30), and the sustainability of operating cash flow given its reliance on billing timing.
- Execution of the office-building purchase and its expected approximately $2.5 million total cost.