Business context and reporting period
Argan, Inc. filed this unaudited Form 10-Q for the three months ended April 30, 2016, the first quarter of fiscal 2017. Argan provides engineering, procurement and construction and related services to power markets, industrial fabrication and field services through TRC, and telecommunications infrastructure services through SMC. TRC and APC were acquired in December and May 2015, respectively; both contributed to the current-quarter results.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Quarter ended Apr. 30, 2016 | Quarter ended Apr. 30, 2015 | Change |
|---|---|---|---|
| Revenue | $130.3 | $85.5 | +52.5% |
| Gross profit / margin | $28.3 / 21.7% | $21.2 / 24.8% | +33.7% gross profit |
| Operating income | $21.3 | $15.6 | +36.0% |
| Net income | $14.1 | $10.9 | +30.1% |
| Net income attributable to Argan stockholders | $12.2 | $7.5 | +63.0% |
| Diluted EPS | $0.81 | $0.50 | +62.0% |
| Cash from operating activities | $43.7 | $(2.3) | Improved |
Revenue growth reflected higher power-services revenue ($108.1 million, up 30.4%) and $20.4 million from TRC; telecommunications revenue declined 29.4% to $1.8 million. The new power projects and acquired businesses contributed lower gross-profit percentages than the prior-year mix. SG&A rose 27.2% to $7.0 million, but declined as a share of revenue to 5.4% from 6.5%. Lower income allocated to noncontrolling interests—$1.9 million versus $3.3 million—also contributed to the increase in Argan-attributable earnings.
Liquidity, cash flow and debt
- At April 30, cash and cash equivalents were $191.4 million, short-term investments were $128.2 million, and working capital was $182.8 million. Cash increased $30.5 million during the quarter.
- Operating cash flow of $43.7 million was supported chiefly by a $28.8 million increase in billings in excess of contract costs and earnings; accounts receivable growth used $6.7 million of cash. Investing activities used $14.2 million, primarily for net purchases of short-term investments.
- No borrowings were outstanding under the $10 million revolving credit facility, available through May 31, 2018. About $4.4 million of capacity was designated for letters of credit, leaving approximately $5.6 million available. The company reported compliance with its financial covenants.
- Current liabilities were $218.4 million, including $134.6 million of billings in excess of costs and estimated earnings. Management said existing cash, investment maturities and expected operating cash flows should meet foreseeable needs; acquisitions or significant unplanned cash needs could require additional financing.
Material changes, outlook and risks
- Contract backlog was approximately $1.5 billion at April 30, versus $1.1 billion at January 31, 2016 and $347 million a year earlier. Management views backlog as an indicator of future business, but notes that projects may be canceled or reduced.
- Five newer large power projects represented approximately 53% of current-quarter consolidated revenue. Panda Liberty and Panda Patriot together represented 26%, compared with 93% in the prior-year quarter; both were scheduled for completion in 2016, and Panda Liberty reached substantial completion in April. Management expects their revenue contribution to decline, with new projects and APC expected to more than offset the decline.
- Management said current projects, including the five newer EPC projects, should provide a base of activity for the next few fiscal years and described long-term prospects for natural-gas-fired and renewable power construction as favorable. No specific revenue or earnings guidance was provided. The outlook is subject to a slow and uncertain power-market recovery, regulatory and fuel-market changes, competition and project execution.
- One project may be subject to up to $12.9 million in liquidated damages for delays, though substantial completion was achieved in April. Management considered potential damages and mitigating factors in estimating costs to complete; the filing does not quantify any final liability.
- TRC is defending a subcontractor lawsuit claiming approximately $0.7 million and a related $1.6 million bond claim. TRC accrued the subcontractor’s invoiced amounts in accounts payable, disputes payment pending deliverables, and asserts a separate $2.5 million claim that it has not recorded as a receivable. Management did not expect a material additional loss, but acknowledged the outcome is uncertain.
- Customer concentration remains significant: five customers accounted for approximately 18%, 15%, 15%, 12% and 10% of quarterly revenue; two customers each represented 26% of accounts receivable at quarter-end. The company also cited exposure to fixed-price contract cost overruns and unhedged commodity prices, foreign currency movements, and the integration and profitability of acquisitions. It reported no material revisions to risk factors from its latest Form 10-K.
Important facts for investors to verify
- Progress, remaining costs, schedule and potential liquidated damages on Panda Liberty and other major EPC projects.
- Whether backlog converts to revenue and profit as scheduled, including the pending regulatory approval and undetermined completion date for Exelon West Medway II.
- TRC’s completion of legacy loss-making contracts and its return to sustained profitability; management said those contracts were expected to be completed in the quarter ending July 31, 2016.
- Collection timing for customer retainage, which totaled $48.6 million, and exposure to the two customers representing 52% of receivables.
- Outcome of the PPS dispute and the company’s ability to manage acquired-company integration, project risks and working-capital swings.