Argan, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended April 30, 2013. Comparatives are the three months ended April 30, 2012; balance-sheet comparisons are with January 31, 2013. Argan provides power-industry engineering and construction services through GPS and telecommunications infrastructure services through SMC.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $46.65 million | $63.69 million | Down 26.7% |
| Gross profit / margin | $13.03 million / 27.9% | $10.10 million / 15.9% | Margin up 12.0 percentage points |
| Operating income | $9.59 million | $7.07 million | Up 35.5% |
| Income from continuing operations | $6.94 million | $4.55 million | Up 52.6% |
| Net income attributable to Argan stockholders | $6.41 million | $4.44 million | Up 44.4% |
| Diluted EPS | $0.45 | $0.32 | Up $0.13 |
| Continuing operating cash flow | $(3.55) million | $19.90 million | Cash use versus cash generation |
- Power-industry revenue was $43.77 million, down 24%; telecommunications revenue was $2.88 million, down 52%. Power services generated about 94% of revenue.
- Management attributed stronger gross margin to favorable project cost and profitability estimate revisions, particularly on projects nearing completion. SG&A rose 13.7% to $3.44 million, primarily reflecting higher stock-option compensation and GPS salaries and benefits.
- Q1 included a $1.12 million gain from deconsolidating Moxie Liberty. It was a noncash gain and should be distinguished from operating performance. Adjusted EBITDA, as defined by the company, was $11.06 million versus $7.25 million.
Liquidity, balance sheet and cash flow
- At April 30, cash and equivalents were $169.39 million, down $5.76 million from January 31. Working capital was approximately $98.0 million, up from $88.6 million.
- Total assets were $225.59 million; total liabilities were $99.04 million. The company reported no bank borrowings or senior debt. Its $4.25 million revolving facility was available through May 31, 2015; standby letters of credit of up to $10 million are permitted. The company was in compliance with its financial covenants.
- Operating cash use reflected an $11.87 million reduction in billings in excess of costs and estimated earnings and a $4.32 million reduction in accounts payable and accrued expenses, partly offset by $5.59 million collected through lower receivables. Capital expenditures were $0.68 million.
- Management said cash, future operating cash generation and the available credit line should meet foreseeable general business needs, including planned final-stage Moxie development funding. Significant unplanned needs or acquisitions could require additional financing.
Material changes and business developments
- Revenue fell mainly because a large gas-fired power plant project was nearing completion; management expected substantial completion in Q2 FY2014. The project represented approximately 44% of consolidated Q1 revenue.
- Construction backlog was reported at $517 million at April 30, versus $180 million at January 31. The increase included the Liberty Generating Station EPC contract; its total price would become fixed if full notice to proceed was received by July 1, 2013.
- In April, an outside investor gained direction over Moxie Liberty’s significant economic activities, and Argan stopped consolidating it. Argan retained a $4.70 million note and accrued-interest exposure, expected to be paid at closing of the membership-interest purchase, along with any applicable development success fees. The purchase remained contingent on permanent financing by August 2, 2013.
- In May, the same investor agreed to purchase Moxie Patriot, subject to permanent financing. GPI had advanced approximately $3.7 million to Patriot by April 30. The company said the events could lead to deconsolidation in a future period; GPS could perform the project’s EPC work if the transaction closes.
Outlook, risks and contingencies
- Management expected revenue in the remaining three quarters of FY2014 to be below FY2013 levels as existing construction projects finish and the Moxie Liberty work remains in pre-construction. It said FY2014 net income could benefit from project execution and development success fees if the Moxie purchases close.
- Management described power construction demand as soft and bidding as highly competitive, and said renewable project bookings were uncertain. It planned to focus on completing current projects, controlling costs and conserving cash, while remaining cautiously optimistic about long-term power-market prospects.
- Two power-industry customers each accounted for approximately 45% and 44% of Q1 revenue, respectively, creating significant customer concentration. Construction revenue, project margins and cash flow may fluctuate with milestones, completion timing and estimates of costs to complete.
- Legal matters include the Altra project lien and related claims, for which a trial was held in April 2013 and post-trial briefing was scheduled through August. Management recorded no additional loss provision for the quarter but could not assure success. A separate TBN lawsuit seeking alleged damages exceeding $42 million had been dismissed with prejudice, but an appeal was pending; the company said an unfavorable outcome could materially affect a future period and that likelihood and potential damages could not be estimated.
- Other exposures include fixed-price contract input-cost changes, surety and performance obligations, and the risk that Moxie project financing or purchases do not close. The company disclosed no material change to its risk factors.
Key facts for investors to verify
- Whether Moxie Liberty and Moxie Patriot purchases secured permanent financing and closed, and the resulting treatment of loans, fees and consolidation.
- Whether the Liberty project received full notice to proceed by the stated deadline and how the $517 million backlog converts into revenue, cash flow and margin.
- Whether the major plant project achieved expected Q2 completion and whether project cost estimate revisions supporting the unusually high gross margin prove sustainable.
- Progress in converting concentrated customer revenue and billings into cash, especially as project billings and payables decline.
- Updates on the Altra proceedings and TBN appeal, including any change in the company’s assessment, accrued liabilities or potential exposure.