Argan, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2014 (the second quarter and first half of fiscal 2015). Unaudited interim financial statements. Argan operates primarily through Gemma Power Systems (power services) and Southern Maryland Cable (telecommunications infrastructure).
Financial performance
| Metric | Three months ended July 31, 2014 | Six months ended July 31, 2014 |
|---|---|---|
| Revenue | $102.0 million, versus $57.9 million | $153.2 million, versus $104.5 million |
| Gross profit / margin | $21.6 million / 21.1%, versus $21.3 million / 36.7% | $31.6 million / 20.6%, versus $34.3 million / 32.8% |
| Operating income | $17.1 million, versus $19.7 million | $23.8 million, versus $29.2 million |
| Net income attributable to Argan shareholders | $8.6 million; diluted EPS $0.58 | $12.0 million; diluted EPS $0.82 |
| Operating cash flow | $71.2 million for the six months, versus cash used of $19.4 million in the prior-year period |
- Power services generated about 98% of revenue in both current periods. The increase reflected construction activity on two large gas-fired power plants; telecom revenue declined.
- Cash and cash equivalents were $345.2 million at July 31, up from $272.2 million at January 31. Working capital was $154.3 million.
- No borrowings were outstanding under the Bank of America facility. The filing reports $2.9 million available under the revolving line, with $1.35 million designated for letters of credit. The facility expires May 31, 2015.
- Total liabilities were $229.8 million, largely current liabilities including $181.6 million of billings in excess of costs and estimated earnings. The company reported no senior debt outstanding and was in compliance with its financial covenants.
Changes versus the prior-year period
- Revenue rose substantially, but gross margin fell sharply; first-half gross profit and shareholder earnings also declined despite higher revenue.
- Management attributed much of the prior-year comparison to unusually favorable cost-estimate reductions on a power project completed ahead of schedule, Moxie-related deconsolidation gains, and a $1.3 million reversal of a legal-cost reserve. These items did not recur in 2014.
- Current-period earnings attributable to noncontrolling interests increased to $3.5 million for the quarter and $4.8 million for the half year, from $1.3 million and $1.8 million, respectively.
- Operating cash flow improved primarily because billings in excess of costs and estimated earnings increased $46.8 million and accounts payable and accrued expenses increased $18.0 million. These project-related timing movements are significant to the cash-flow comparison.
- Backlog was $643 million at July 31, down from $790 million at January 31.
Outlook, risks and unusual items
- Management said current projects should provide a stable base of activity for about two years and expected a return to more typical gross margins, noting that prior-year development success fees were not expected to recur. No numerical earnings or revenue guidance was provided.
- Management described the power-construction market as competitive, with soft power demand limiting new opportunities. It expects long-term opportunities from natural-gas and renewable generation, while emphasizing disciplined bidding, project execution, cost control and cash conservation.
- In August 2014, a subsidiary agreed to lend up to $6 million to develop the Moxie Freedom natural-gas plant, at 20% annual interest, with maturity no later than December 31, 2017. The agreement includes first-priority security interests, monthly support-cost payments, an expected development success fee of about $6 million upon successful financing and repayment, and exclusive EPC rights. The project’s planned financing close is mid-to-late 2016.
- Customer and project concentration is material: three customers represented 51%, 33% and 14% of quarterly revenue, respectively. Two gas-plant projects together generated 82% of first-half power-services revenue.
- Argan disclosed exposure to fixed-price contract cost overruns from copper, concrete, steel and fuel price changes; it generally does not hedge these commodities.
- The Altra project legal matters remain unresolved, including claims concerning lien proceeds and former counsel/subcontractor proceedings. Management reported no additional loss provision and did not expect a material adverse effect, but said outcomes remain uncertain. About $5.5 million of related receivables remains fully reserved.
- Approximately $32.8 million of accounts receivable was retainage at July 31; material amounts were expected to be collected over the following two years. Most cash was held in a money market fund invested primarily in U.S. Treasury obligations and related repurchase agreements; about $203.6 million was held in consolidated joint ventures for project costs and potential partner distributions.
Important facts for investors to verify
- Progress, cost estimates and expected margins on the two major gas-fired projects, and the timing of backlog conversion.
- Whether project cash and billings-related working-capital movements convert into sustainable operating cash flow as construction advances.
- Customer concentration, backlog replenishment and the effect of lower telecom activity on diversification.
- Terms, funding, repayment prospects and EPC award conditions for the Moxie Freedom development loan.
- Resolution of the Altra litigation and collection timing for retainage and other project receivables.