ARGAN INC quarterly report, Q3 FY2013

Argan, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended October 31, 2012 (Argan fiscal 2013 third quarter). Unaudited results compare with the periods ended October 31, 2011; balance sheet comparisons are with January 31, 2012.

Business context

Argan provides power generation and renewable-energy engineering, procurement, construction, commissioning and related services through Gemma Power Systems (GPS), and telecommunications infrastructure services through Southern Maryland Cable (SMC). Power services generated over 90% of revenue. The company also consolidates two gas-fired power projects under development through Moxie Energy as variable interest entities.

Financial performance

Metric	Three months ended Oct. 31, 2012	Three months ended Oct. 31, 2011	Nine months ended Oct. 31, 2012	Nine months ended Oct. 31, 2011
Revenue	$74.5 million	$43.6 million	$220.8 million	$85.9 million
Gross profit / margin	$13.1 million / 17.6%	$6.5 million / 14.8%	$36.1 million / 16.4%	$15.0 million / 17.5%
Operating income	$9.4 million	$3.7 million	$26.0 million	$7.1 million
Net income attributable to Argan stockholders	$6.1 million; $0.43 diluted EPS	$2.0 million; $0.15 diluted EPS	$16.7 million; $1.19 diluted EPS	$4.7 million; $0.34 diluted EPS

Revenue growth was driven principally by increased construction activity, particularly the Sentinel gas-fired power plant project. Power services revenue was $70.5 million for the quarter and $206.4 million for the nine months. Telecom revenue was $4.0 million and $14.4 million, respectively.
Quarterly gross margin improved year over year, while nine-month margin declined from 17.5% to 16.4%. Management cited prior-year incentive fees from completed projects and a current-year $1.6 million Altra-related cost-of-revenue charge as factors.
Nine-month cash from continuing operating activities was $43.3 million, versus $52.4 million a year earlier. Working-capital movements included a $14.6 million increase in billings in excess of costs and a $9.7 million increase in receivables. Cash increased $39.5 million during the period.

Liquidity, debt and capital

Cash and cash equivalents were $196.1 million at October 31, 2012, up from $156.5 million at January 31, 2012. Working capital was $82.7 million, versus approximately $76.3 million.
No bank borrowings were outstanding. The company had a $4.25 million revolving credit facility available through May 31, 2013, and could obtain up to $10 million in standby letters of credit. The facility is secured by most company assets; Argan reported compliance with its covenants.
Investing activities used $5.9 million, including purchase of an office property and $3.3 million of Moxie project spending. Financing activities provided $2.3 million, primarily from option and warrant exercises.
The board declared a special cash dividend of $0.60 per share in September, paid November 7, 2012. A $8.4 million dividend payable was recorded at October 31.

Changes, outlook and key risks

Construction backlog fell to $236 million at October 31 from $415 million at January 31. About 90% related to two power projects; the Sentinel project was approximately 70% complete. Backlog excludes the Moxie projects.
Management expected fiscal 2013 revenue and profit to exceed fiscal 2012, focusing on completing existing projects, controlling costs and conserving cash. It also warned that weak power demand and intense bidding competition could limit new opportunities through fiscal 2014; forecasting visibility was unusually limited. No quantified forward guidance was provided.
Argan had advanced approximately $4.8 million to Moxie projects, with authority for loans up to $9 million (potentially $10 million with board approval). Permitting, project financing, customer agreements and ownership transfers remained uncertain. Failure to develop the projects could put approximately $4.7 million of capitalized project costs at risk of write-off.
Customer and project concentration is significant: three power customers accounted for approximately 57%, 15% and 7% of nine-month continuing revenue. Management noted that three projects accounted for approximately 93% of revenue. A $2.1 million solar-project receivable depended, according to the owner, on receipt of a federal grant; management considered it collectible and recorded no reserve.
Altra litigation remains unresolved after settlements and dismissals were challenged; Argan had paid $1.875 million, net of a $275,000 recovery, and recorded a $1.6 million charge. The separate TBN appeal concerns a lawsuit alleging damages over $42 million; the company said an unfavorable outcome could materially affect future results, but the likelihood and amount could not be estimated.
Other risks include project delays or cost overruns, customers’ access to financing, regulatory and permitting outcomes, surety and guarantee obligations, and dependence on a small number of large projects. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Most important facts for investors to verify

Progress, completion timing, costs and remaining backlog for the Sentinel and biomass projects, and whether new contracts replenish declining backlog.
Moxie financing, permits, project-sale or operator arrangements, EPC awards, and recoverability of the approximately $4.7 million in capitalized project costs.
Collection of the $2.1 million solar receivable and the timing and collectability of construction retainages; receivables included approximately $17.2 million of retainage.
Developments in the Altra and TBN matters, including any additional liability, recovery, or reversal of accrued legal fees.
Cash conversion and working-capital trends, particularly customer billings, receivables, and the extent to which operating cash flow depends on project billing milestones.
Customer concentration, surety and guarantee exposure, and the status of the credit facility, covenant compliance and special dividend payment.