Argan, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended January 31, 2018. Argan is a holding company whose principal business is power-plant engineering, procurement and construction (EPC), alongside industrial fabrication and telecommunications infrastructure services.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $892.8 million | $675.0 million | +32.3% |
| Gross profit / margin | $149.3 million / 16.7% | $146.7 million / 21.7% | Profit +1.8%; margin down 5.0 percentage points |
| Operating income | $107.0 million | $112.3 million | -4.7% |
| Net income attributable to Argan shareholders | $72.0 million; diluted EPS $4.56 | $70.3 million; diluted EPS $4.50 | +2.4% |
| Operating cash flow | $(72.8) million | $259.0 million | Changed from inflow to outflow |
| Cash and cash equivalents | $122.1 million | $167.2 million | Down $45.1 million |
| Short-term investments | $311.9 million | $355.8 million | Down $43.9 million |
| Working capital | $301.8 million | $237.2 million | Up 27.2% |
Power industry services generated $814.5 million of revenue, approximately 91% of consolidated revenue, and $115.8 million of operating income. Industrial fabrication revenue fell 17.3% to $65.3 million, and the segment recorded a $1.0 million operating loss, including a $0.6 million goodwill impairment. Telecommunications revenue rose 37.6% to $13.0 million.
Argan reported no borrowings at year-end. Its revolving credit facility provides up to $50 million through May 2021 at 30-day LIBOR plus 2%; $18.9 million of credit capacity was in use, primarily supporting APC activities. The company reported compliance with its financial covenants. Cash plus short-term investments totaled about $434.0 million.
Changes and operating drivers
- Power-segment revenue increased 38.9%, driven chiefly by peak and post-peak activity on four gas-fired plant projects. Those projects generated $747.5 million, or 84% of consolidated revenue, and were 83%–92% complete at year-end.
- Gross margin contracted as estimated labor and subcontractor costs increased on certain EPC projects. FY2017 margins had also benefited from final completion of two projects and the associated release of estimated project costs.
- Operating cash flow deteriorated largely because project billings in excess of costs declined by $102.5 million and accounts receivable increased by $39.6 million. Receivables included $70.1 million of customer retainage, most expected to be collected in FY2019.
- Consolidated project backlog fell to $379.5 million from $1.01 billion, principally as work was performed on existing projects. The power-segment backlog was separately reported at approximately $355 million.
- Argan paid $1.00 per share in dividends during FY2018. It announced an intended regular quarterly dividend of $0.25 per share beginning in FY2019; future dividends remain subject to board approval.
Outlook, risks and unusual items
- Management expected FY2019 revenue to decline significantly as several major projects approach completion, describing the year as a transition from existing work to early stages of potential new projects. It was cautiously optimistic that growth could resume in FY2020, subject to awards and project ramp-up.
- After year-end, GPS signed an approximately $250 million EPC contract for a 475 MW North Carolina gas-fired plant, expected to enter backlog in the quarter ending April 30, 2018. GPS was also negotiating potential contracts with aggregate value exceeding $1.5 billion; these were not in reported backlog and had no limited or full notice to proceed.
- Customer concentration is substantial: four power customers accounted for 84% of FY2018 revenue. Project delays, cancellations, cost overruns, payment timing and dependence on new contract awards could materially affect results.
- Other disclosed risks include weaker power demand or capacity-market economics, renewable-energy competition, permitting and pipeline delays, skilled-labor constraints, fixed-price contract exposure, foreign-exchange movements, and possible steel and aluminum tariff-related cost increases.
- GPS faces binding arbitration with a former subcontractor claiming approximately $11 million; Argan could not estimate any potential loss. TRC’s dispute with a subcontractor involves $2.3 million of invoices and a $2.5 million bond claim; the related liability was accrued, while TRC’s asserted $2.2 million counterclaim was not recorded as a receivable.
- The Tax Cuts and Jobs Act produced an approximately $0.8 million favorable deferred-tax adjustment. Management expected a lower future effective tax rate, while noting that the full effects would first be reflected in FY2019.
- Argan adopted the new revenue-recognition standard effective February 1, 2018 and expected no material transition adjustment or major change to revenue patterns. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Conversion of the sharply reduced backlog and post-year-end awards into funded work, notices to proceed, and revenue.
- FY2019 revenue decline and timing of any recovery, given project completions and construction ramp-up periods.
- Whether labor and subcontractor cost estimates stabilize and project gross margins recover.
- Collection of receivables and retainage, and the resulting operating cash flow as milestone billings run off.
- Developments in the GPS arbitration and TRC subcontractor litigation, including potential financial exposure.
- TRC’s operating performance and assumptions supporting its forecast, given the goodwill impairment and continuing operating loss.
- Dividend continuation, covenant compliance, and the extent of credit capacity available after letters of credit and other commitments.