Argan, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2021. Argan’s fiscal year ends January 31, so this is fiscal 2022 Q2. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
Argan provides engineering, procurement and construction (EPC) and related services through power industry services (GPS and APC), industrial fabrication and field services (TRC), and telecommunications infrastructure services (SMC). Results were led by construction activity at the Guernsey Power Station and initial work on the Maple Hill solar project, alongside a recovery in TRC activity.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $133.0 | $87.5 | $259.3 | $147.6 |
| Gross profit / margin | $27.7 / 20.8% | $15.6 / 17.9% | $51.4 / 19.8% | $19.6 / 13.3% |
| Operating income | $17.3 | $6.5 | $31.1 | $0.2 |
| Net income attributable to Argan stockholders | $12.9 | $5.6 | $23.6 | $4.8 |
| Diluted EPS | $0.81 | $0.36 | $1.48 | $0.31 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $47.2 | $102.9 |
Q2 operating margin was approximately 13.0% versus 7.5% a year earlier; six-month operating margin was approximately 12.0% versus 0.1%. Six-month 2021 income tax expense was $8.0 million (25.2% effective rate); the prior-year period recorded a $3.1 million tax benefit, including a $4.3 million CARES Act NOL carryback benefit. Management estimated a 24.7% annual effective tax rate for fiscal 2022 before discrete items.
Cash, liquidity and debt: At July 31, cash and cash equivalents were $451.4 million and short-term investments were $40.1 million, versus $366.7 million and $90.1 million at January 31. Working capital was $290.3 million. Current assets of $597.7 million and current liabilities of $307.3 million imply current liquidity of about 1.9x. There were no borrowings; the company had a $50 million revolving facility, with a conditional $10 million accordion, extended to May 2024. The company reported covenant compliance.
Six-month operating cash flow fell to $47.2 million from $102.9 million, despite higher net income. Contract liabilities added $41.7 million of operating cash, while receivables used $14.4 million and accounts payable and accrued expenses used $8.8 million. Investing cash flow included $50.0 million of short-term investment maturities and a $4.1 million solar investment; financing cash use included $7.9 million of dividends.
Material changes and operating detail
- Q2 revenue increased 52.0% year over year; six-month revenue rose 75.7%. Power services revenue grew 43.4% in Q2 and 66.7% for six months. Industrial services revenue rose 80.7% and 114.9%, respectively; telecom services revenue also increased.
- Power services contributed 74% of Q2 revenue and 76% for six months. The Guernsey Power Station and Maple Hill solar project together represented 67.3% of Q2 revenue and 67.7% of six-month revenue.
- Q2 gross margin improved to 20.8% from 17.9%, reflecting higher activity and contributions from all three segments. Six-month SG&A was nearly flat in dollars at $20.2 million versus $19.4 million, but declined to 7.8% of revenue from 13.2%.
- Operating cash flow was lower than in the prior-year six months, when contract liabilities had provided $83.3 million of cash. The prior-year comparison also included a $12.6 million expected federal tax refund from the NOL carryback.
- Cash dividends were $0.25 per share in Q2 and $0.50 for the six months, versus $1.25 and $1.50 in the respective prior-year periods; the prior-year amounts included a $1.00-per-share special dividend.
Outlook, commentary and risks
- Work pipeline: Remaining unsatisfied performance obligations were $467.9 million; management expected about 47% to be recognized in the second half of fiscal 2022, with most of the balance in fiscal 2023. Power segment backlog was approximately $0.7 billion, down from $0.8 billion at January 31; TRC backlog was $46 million, down from $54 million. These measures differ, and cancellations, delays and scope changes could reduce expected revenue.
- Management expected TRC revenue to decline during the rest of the fiscal year after completion of several major projects. It was cautiously optimistic that construction starts for the Harrison and Killingly gas-fired projects could occur before January 31, 2022, but timing depends on project owners and financing. A separate West Virginia project may not reach financial close before January 31, 2022; the Chickahominy project’s start remains uncertain, in part because of fuel-supply and financing hurdles.
- The Guernsey project was at peak construction activity; substantial completion was scheduled for the second half of fiscal 2023. Management noted that Guernsey contract liabilities may decline as activity moves past its peak, reducing a source of operating cash.
- Management cited uncertainty from COVID-19, including the Delta variant, and possible work disruptions. Other risks to gas-fired project awards and starts include financing availability, capacity-market uncertainty, natural gas prices, opposition to fossil-fuel projects, permitting and policy shifts, and competition from renewable energy. Fixed-price contracts also expose the company to labor, material-cost, schedule and liquidated-damages risks.
- Legal and tax contingencies: GPS is pursuing litigation against Exelon over alleged breach of contract and unpaid amounts on a nearly completed power plant; Exelon disputes GPS’s performance. Mediation was scheduled for September 2021, with no trial date set. A $24.5 million combined receivable and contract-asset balance related to a former customer remained subject to this dispute. The IRS was challenging research-and-development tax credits; $5.0 million of identified but unrecognized tax benefits was accrued. Management expected a favorable resolution, but the outcome was not determined.
- The company consolidated a project-development VIE for a planned natural-gas plant. Its investment recovery depends on successful development, including establishing fuel supply and arranging financing, or selling the project. The company also had $1.8 million of past-due developer notes whose collection depends largely on project financing.
- Other notable items: the company reported a $0.7 million net UK R&D credit payment in six-month other income and recognized about $3.0 million of solar investment tax credits. Management stated cash and expected operating resources should meet foreseeable needs. A previously authorized $25 million share-repurchase plan had not been used as of the filing.
Most important facts for investors to verify
- Whether Guernsey activity, contract-liability balances and cash conversion evolve as management expects, and whether scheduled project completion remains on track.
- Actual start dates and financing progress for the Harrison, Killingly and West Virginia projects, and development and fuel-supply progress for Chickahominy.
- Recoverability and timing of the disputed $24.5 million Exelon-related balance, the $1.8 million of past-due notes, and the VIE development investment.
- Resolution of the IRS R&D-credit dispute and any effect on the accrued tax liability or tax refunds receivable.
- Whether TRC’s expected revenue decline, customer concentration, fixed-price project costs and pandemic or commodity risks affect margins and liquidity.
- Changes to backlog and RUPO, recognizing that both can be affected by project delays, cancellations, scope revisions and cost estimates.