Argan, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended October 31, 2013; comparative periods ended October 31, 2012. Argan provides power-generation engineering, procurement and construction services, primarily through GPS, and telecommunications infrastructure services through SMC. Fiscal year ends January 31.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $63.5m | $74.5m | $168.0m | $220.8m |
| Gross profit | $23.9m | $13.1m | $58.2m | $36.1m |
| Gross margin | 37.6% | 17.6% | 34.6% | 16.4% |
| Operating income | $20.3m | $9.4m | $49.6m | $26.0m |
| Net income attributable to Argan shareholders | $11.9m | $6.1m | $31.0m | $16.7m |
| Diluted EPS | $0.83 | $0.43 | $2.16 | $1.19 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $28.1m | $43.3m |
Revenue fell 15% in Q3 and 24% year to date, mainly as construction and commissioning work on a large Southern California power plant wound down. Profitability rose substantially, driven by a $14.245m Moxie Liberty development success fee, favorable performance on construction work, $2.444m in VIE deconsolidation gains year to date, and a $1.304m reversal of a legal-cost reserve. The fee and other unusual items make reported margins less representative of recurring contract performance.
Power services generated 96% of Q3 revenue; telecommunications revenue declined 41% in Q3 and 48% year to date. Year-to-date operating cash flow declined despite higher earnings, reflecting, among other factors, a $12.124m reduction in accounts payable and accrued expenses. Capital spending was $0.925m for the nine months.
Balance sheet, liquidity and financing
- At October 31, cash and cash equivalents were $206.4m, versus $175.1m at January 31; working capital was approximately $121.3m, versus $88.6m.
- Total assets were $260.4m and total liabilities $114.6m. The company reported no borrowings under its bank facility and no senior debt outstanding.
- The revolving facility has a $4.25m maximum, with $2.9m available after $1.35m was set aside for letters of credit; it expires May 31, 2015. The company was in compliance with its financial covenants.
- Approximately $46.5m of cash was held in consolidated construction joint ventures for project activities, including future distributions to partners. A $0.75-per-share special dividend, declared in September, was paid November 7, 2013; $10.64m was recorded as payable at quarter end.
- Accounts receivable included $16.9m of construction retainage, with remaining collection periods of 14–28 months for material outstanding amounts.
Backlog, outlook and key risks
- Backlog rose to $832m at October 31 from $180m at January 31, chiefly following the Liberty and Patriot EPC contract awards. Management said, assuming the Patriot project sale closes, these projects could support activity for approximately 2.5–3.5 years.
- Management expected revenue in the final quarter of FY2014 to be below the prior-year level as existing projects conclude. It anticipated favorable project execution and a possible Patriot development success fee, conditional on closing; the fee was not recognized at quarter end.
- Management described near-term power construction demand as soft, with intense price competition and limited forecasting visibility. It cited long-term opportunities from natural-gas generation, plant retirements and electricity demand, while renewable incentives and new project commitments remained uncertain.
- Argan had a $5.435m note receivable and accrued interest from Moxie Patriot, described as its maximum exposure to loss on that project; repayment and any success fee depended on a successful closing. The Patriot sale and permanent financing were not yet completed.
- GPS could be responsible for all losses under the Liberty and Patriot joint ventures if the partner cannot pay its share. The company also disclosed surety-bond, contract-guarantee and legal exposures. In the Altra matter, the court had yet to rule on claims after trial; management did not expect a material additional loss, but noted the outcome was uncertain. The ACCO dispute was settled in October 2013 for substantially less than ACCO’s claimed amount.
- Customer concentration was significant: two customers represented approximately 49% and 28% of Q3 revenue. Management also highlighted exposure to construction input-price changes under fixed-price contracts.
Most important facts for investors to verify
- How much of earnings and margin improvement came from the one-time Liberty fee, VIE gains, legal-reserve reversal and favorable project performance, versus recurring work.
- Whether the Patriot project sale and financing close, and whether the $5.435m receivable and any development fee are collected.
- Backlog conversion, project timing and profitability, particularly the Liberty and Patriot EPC contracts and joint-venture partner performance.
- Cash availability after accounting for joint-venture cash needs, the declared dividend, retainage collection timing and working-capital movements.
- Progress and potential exposure in the Altra litigation, customer concentration, and surety, guarantee and commodity-cost risks.