Argan, Inc. Reports Third Quarter Results

December 6, 2018 - 8:00 AM EST

Argan, Inc. Reports Third Quarter Results

ROCKVILLE, Md.

Argan, Inc. (NYSE: AGX) (“Argan” or the “Company”) today announced financial results for its third quarter ended October 31, 2018. For additional information, please read the Company’s Quarterly Report on Form 10-Q, which the Company intends to file today with the U.S. Securities and Exchange Commission (the “SEC”). The Quarterly Report can be retrieved from the SEC’s website at www.sec.gov or from the Company's website at www.arganinc.com.

Summary Information: (dollars in thousands, except per share data (unaudited)):


	October 31,
	2018			2017			Change			% Change
For the Quarter Ended:
Revenues	$	116,459		$	232,945		$	(116,486	)	(50	)%
Gross profit		29,532			37,718			(8,186	)	(22	)
Gross margins		25.4	%		16.2	%		9.2	%	57
Net income attributable to the stockholders of the Company	$	32,434		$	17,229		$	15,205		88
Diluted per share		2.07			1.09			0.98		90
EBITDA attributable to the stockholders of the Company		21,025			30,275			(9,250	)	(31	)
Diluted per share		1.34			1.92			(0.58	)	(30	)

As of:	October 31, 2018			January 31, 2018			Change			% Change
Cash, cash equivalents and short-term investments	$	314,787		$	434,015		$	(119,228	)	(27	) %
Net liquidity ⁽¹⁾		339,616			301,817			37,799		13
Project backlog		365,000			379,000			(14,000	)	(4	)

⁽¹⁾ We define net liquidity, or working capital, as our total current assets less our total current liabilities.

As successful execution by Gemma Power Systems (“GPS”) on four large gas-fired power plant projects has reached the final stages, revenues saw a decline during the current quarter to $116.5 million compared to $232.9 million in the prior year quarter. Construction activities for these projects have matured from peak levels which the Company experienced during the prior fiscal year, to the commissioning, start up and final activities. The decline in revenues at GPS was partially offset by increased revenues at Atlantic Projects Company, as it reached peak construction activities on two power plant projects, and The Roberts Company during the third quarter. Gross profits decreased by 22% to $29.5 million from $37.7 million for the prior year, reflecting primarily the reduction in consolidated revenues between periods. Our gross margin percentage increased to 25.4% from 16.2% for the prior year quarter, reflecting favorable project close-out adjustments to the gross profits of certain projects that have reached substantial completion.

The levels of selling, general and administrative expenses rose by $1.0 million, or 10%, as compared to the prior year period due primarily to increased non-chargeable staff costs.

During the current quarter, the Company completed a year-long detailed review of the work performed by its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development (“R&D”) credits that may be available to reduce current and prior year income taxes. Based on this review, the resulting income tax benefits, associated with R&D activities conducted in prior years, in the total amount of $16.5 million, or $1.05 per diluted share, have been recognized in income taxes in the current quarter. Also, the Tax Cuts and Jobs Act had a favorable impact on our tax rate, resulting in an estimated annual effective income tax rate of 28% (before the effects of R&D credits) for the current quarter, compared to an estimated effective income tax rate of 37% for the third quarter last year.

These factors resulted in net income attributable to our stockholders increasing 88% to $32.4 million for the current quarter, or $2.07 per diluted share, from $17.2 million, or $1.09 per diluted share, for the prior year quarter. EBITDA attributable to our stockholders for three months ended October 31, 2018 decreased 31% to $21.0 million, or $1.34 per diluted share, from $30.3 million, or $1.92 per diluted share, for the prior year quarter. We paid our third regular quarterly cash dividend of $0.25 per share in October.

As of October 31, 2018, our cash, cash equivalents and short-term investments totaled $315 million and net liquidity was $340 million; plus, we had no bank debt. Our project backlog was $365 million as of October 31, 2018, slightly down from $379 million at the end of the prior year, mostly due to year-to-date work on existing backlog partially offset by the value of an EPC contract entered into by GPS during the first quarter. As previously reported, we remain encouraged about our project pipeline as GPS has been selected to perform the EPC work for several new power generation facilities with a collective potential project value over $1.5 billion with projected start dates extending through 2019.

About Argan, Inc.

Argan’s primary business is providing a full range of services to the power industry, including the engineering, procurement and construction of natural gas-fired power plants, along with related commissioning, operations management, maintenance, project development and consulting services, through its Gemma Power Systems and Atlantic Projects Company operations. Argan also owns SMC Infrastructure Solutions, which provides telecommunications infrastructure services, and The Roberts Company, which is a fully integrated fabrication, construction and industrial plant services company.

Certain matters discussed in this press release may constitute forward-looking statements within the meaning of the federal securities laws and are subject to risks and uncertainties including but not limited to: (1) the continued strong operational performance of our power industry services business; (2) the Company’s successful addition of new contracts to backlog and the Company’s receipt of notices to proceed with the corresponding contract activities; and (3) the Company’s ability to execute on its business strategy while effectively managing costs and expenses. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors described from time to time in Argan’s filings with the SEC. In addition, reference is hereby made to the cautionary statements made by us with respect to risk factors set forth in the Company’s most recent reports on Form 10-Q and 10-K, and other SEC filings.


ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended October 31,						Nine Months Ended October 31,
	2018			2017			2018			2017

REVENUES	$	116,459		$	232,945		$	394,495		$	723,237
Cost of revenues		86,927			195,227			318,803			594,016
GROSS PROFIT		29,532			37,718			75,692			129,221
Selling, general and administrative expenses		11,147			10,119			31,162			30,408
INCOME FROM OPERATIONS		18,385			27,599			44,530			98,813
Other income, net		1,429			1,692			5,121			4,221
INCOME BEFORE INCOME TAXES		19,814			29,291			49,651			103,034
Income tax benefit (expense)		12,560			(12,062	)		4,509			(37,738	)
NET INCOME		32,374			17,229			54,160			65,296
Net (loss) income attributable to non-controlling interests		(60	)		—			(83	)		303
NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.		32,434			17,229			54,243			64,993

Foreign currency translation adjustments		(1,092	)		(139	)		(2,364	)		754
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.	$	31,342		$	17,090		$	51,879		$	65,747

EARNINGS PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.
Basic	$	2.08		$	1.11		$	3.48		$	4.19
Diluted	$	2.07		$	1.09		$	3.46		$	4.11

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic		15,569			15,545			15,568			15,509
Diluted		15,702			15,793			15,685			15,796

CASH DIVIDENDS PER SHARE	$	0.25		$	1.00		$	0.75		$	1.00


ARGAN, INC. AND SUBSIDIARIES
Reconciliations to EBITDA
(In thousands) (Unaudited)

	Three Months Ended October 31,
	2018			2017
Net income	$	32,374		$	17,229
Less EBITDA attributable to noncontrolling interests		60			—
Interest expense		—			—
Income tax (benefit) expense		(12,560	)		12,062
Depreciation		898			726
Amortization of purchased intangible assets		253			258
EBITDA attributable to the stockholders of the Company	$	21,025		$	30,275

	Nine Months Ended October 31,
	2018			2017
Net income	$	54,160		$	65,296
Less EBITDA attributable to noncontrolling interests		83			(303	)
Interest expense		659			—
Income tax (benefit) expense		(4,509	)		37,738
Depreciation		2,465			1,936
Amortization of purchased intangible assets		759			776
EBITDA attributable to the stockholders of the Company	$	53,617		$	105,443

Management uses EBITDA, a non-GAAP financial measure, for planning purposes, including the preparation of operating budgets and the determination of appropriate levels of operating and capital investments. Management believes that EBITDA provides additional insight for analysts and investors in evaluating the Company’s financial and operational performance and in assisting investors in comparing the Company’s financial performance to those of other companies in the Company’s industry. However, EBITDA is not intended to be an alternative to financial measures prepared in accordance with GAAP and should not be considered in isolation from the Company’s GAAP results of operations. Consistent with the requirements of SEC Regulation G, reconciliations of the Company’s non-GAAP financial results from net income are included in the presentations above and investors are advised to carefully review and consider this information as well as the GAAP financial results that are presented in the Company’s SEC filings.


ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

	October 31, 2018			January 31, 2018
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	155,791		$	122,107
Short-term investments		158,996			311,908
Accounts receivable, net		43,612			24,756
Contract assets		55,628			13,847
Other current assets		25,465			12,410
TOTAL CURRENT ASSETS		439,492			485,028
Property, plant and equipment, net		19,866			15,299
Goodwill		34,329			34,329
Other purchased intangible assets, net		6,390			7,149
Deferred taxes		315			439
Other assets		377			426
TOTAL ASSETS	$	500,769		$	542,670
LIABILITIES AND EQUITY CURRENT LIABILITIES
Accounts payable	$	64,987		$	100,238
Accrued expenses		25,111			35,360
Contract liabilities		9,778			47,613
TOTAL CURRENT LIABILITIES		99,876			183,211
Deferred taxes		1,388			1,293
TOTAL LIABILITIES		101,264			184,504

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.10 per share – 500,000 shares authorized; no shares issued and outstanding		—			—
Common stock, par value $0.15 per share – 30,000,000 shares authorized; 15,573,952 and 15,570,952 shares issued at October 31 and January 31, 2018, respectively; 15,570,719 and 15,567,719 shares outstanding at October 31 and January 31, 2018, respectively		2,336			2,336
Additional paid-in capital		144,507			143,215
Retained earnings		253,716			211,150
Accumulated other comprehensive (loss) income		(942	)		1,422
TOTAL STOCKHOLDERS’ EQUITY		399,617			358,123
Non-controlling interests		(112	)		43
TOTAL EQUITY		399,505			358,166
TOTAL LIABILITIES AND EQUITY	$	500,769		$	542,670