Argan, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2017; filed December 6, 2017. Argan provides power-generation and renewable-energy engineering and construction services, industrial fabrication and field services, and telecommunications infrastructure services. Power services generated 92% of nine-month revenue.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $232.9 million | $175.4 million | $723.2 million | $468.3 million |
| Gross profit | $37.7 million | $36.6 million | $129.2 million | $108.9 million |
| Gross margin | 16.2% | 20.8% | 17.9% | 23.3% |
| Net income attributable to Argan shareholders | $17.2 million | $18.1 million | $65.0 million | $50.0 million |
| Diluted EPS | $1.09 | $1.16 | $4.11 | $3.23 |
Nine-month revenue rose 54%, pre-tax income rose 23%, and shareholder net income rose 30%. Q3 revenue increased 33%, but shareholder net income declined 4.7%; higher estimated labor and subcontractor costs on certain fixed-price power projects reduced margins. Nine-month EBITDA attributable to shareholders, a non-GAAP measure, was $105.4 million versus $79.3 million.
At October 31, cash and cash equivalents were $149.7 million and short-term investments were $334.0 million. Working capital was $291.5 million, up from $237.2 million at January 31. Total liabilities were $294.1 million and equity was $348.2 million. The company had no revolver borrowings; approximately $14.9 million of credit was outstanding under its $50 million facility, which matures May 31, 2021. The company reported compliance with financial covenants.
Nine-month operating cash flow was negative $22.7 million, versus positive $185.3 million in the prior-year period. The main cash uses were a $69.4 million decline in billings in excess of costs and a $31.5 million increase in accounts receivable, including higher project retainage. Investing activities provided $18.3 million, primarily from net maturities of short-term investments; financing activities used $14.0 million, including $15.5 million of dividends. Capital expenditures were $4.0 million.
Material changes and business developments
- Power-services revenue rose 65% for the nine months, driven by four large gas-fired power projects. Industrial-services revenue fell 15%; telecommunications revenue increased 71%.
- The four largest EPC projects generated approximately 87% of nine-month consolidated revenue. They were 76%–87% complete at quarter-end, with completion scheduled during fiscal 2019; revenue from them is expected to decline as they progress beyond peak construction.
- Contract backlog was $509 million, down by about half during the current fiscal year, substantially reflecting revenue earned on the major GPS projects. APC won two UK power-construction contracts with combined stated value above $109 million.
- Q3 income tax expense was $12.1 million, with a 41.0% reported effective rate, versus $8.2 million and 29.9% in the prior-year quarter. Management cited unfavorable discrete items and a reduced tax benefit from joint-venture earnings.
Outlook, risks and contingencies
- Management expects current projects to provide a base of activity through the next fiscal year, while pursuing new work. It cautioned that near-term opportunities may slow and that large-project revenue will decline as current EPC projects approach completion.
- Management cited uncertainty around regulatory support for coal, renewable-energy growth and storage, modest electricity-demand growth, delayed gas-plant development, pipeline approvals, public opposition, and competitive bidding as risks to new power-project awards. Fixed-price contracts also expose results to labor, subcontractor and commodity-cost increases.
- TRC’s less favorable forecast raised the possibility of a fourth-quarter goodwill impairment ranging from immaterial to $5.5 million; the valuation was not complete at filing.
- A subcontractor dispute involving $2.3 million of invoices and a $2.5 million bond claim remains unresolved. TRC has accrued the disputed invoices but has not recorded its approximately $2.2 million asserted counterclaim as a receivable. Management did not expect a material additional loss, but acknowledged uncertainty.
- Management said liquidity should meet foreseeable needs and that it maintains liquid capital partly to support project bonding. Future acquisitions or unplanned cash needs could require additional financing.
- Argan expected to adopt the new revenue-recognition standard on February 1, 2018, preliminarily anticipating no significant change to recognition patterns, subject to unresolved implementation issues. Management also noted that proposed U.S. tax-law changes were uncertain, though expected to be favorable if enacted.
- The board paid a $1.00-per-share dividend in October. The filing gives inconsistent timing for the intended $0.25 quarterly dividend: Note 11 says it would start in fiscal 2019, while MD&A says the first quarter ending April 30, 2018.
Important facts for investors to verify
- Whether the TRC goodwill review results in an impairment, and the final amount.
- Progress, cost estimates, margins and completion timing for the four major EPC projects, along with replacement backlog and new awards.
- Whether operating cash flow improves as project billing and retainage patterns change; most quarter-end retainage was expected to be collected after October 31, 2017, with much of it not expected until fiscal 2019.
- The timing and sustainability of the announced quarterly dividend, given the filing’s conflicting start dates.
- Developments in the PPS dispute and the degree of customer and project concentration: three customers represented 73% of Q3 revenue.