Q3 2024 Argan Inc Earnings Call

Participants

Jennifer Belodeau; IR; IMS Investor Relations

David Watson; President & CEO; Argan, Inc.

Hank Deily; CFO; Argan, Inc.

Rob Brown; Analyst; Lake Street Capital Markets

Chris Moore; Analyst; CJS Securities, Inc.

Presentation

Operator

Good evening, ladies and gentlemen. And welcome to the Argan, Inc. earnings release conference call for the third quarter of fiscal 2024, which ended October 31, 2023. This call is being recorded. (Operator Instructions)
There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast.
At this time, it is my pleasure to turn the floor over to your host for today, Jennifer Belodeau of IMS Investor Relations. Please go ahead.

Jennifer Belodeau

Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the third quarter of fiscal year 2024, ended October 31, 2023. On the call today, we have David Watson, Chief Executive Officer; and Hank Deily, Chief Financial Officer. I will take a moment to read the Safe Harbor Statement.
Statements made during this conference call and presented in the presentation that are not based on historical fact are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenues and profits. These statements are subject to known and unknown factors and risks.
The company's actual results, performance, or achievements may differ materially from those expressed or implied by these forward-looking statements, and some of the factors and risks that could cause or contribute to such material differences have been described in this afternoon's press release and in our filings with the US Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements.
Earlier this afternoon, the company issued a press release announcing its third-quarter financial results and filed a third-quarter Form 10-Q with the Securities and Exchange Commission.
Okay. With that out of the way, I will now turn the call over to David Watson, CEO of Argan. Go ahead, David.

David Watson

Thanks, Jen. And thank you, everybody, for joining today. I'll start by reviewing some of the highlights of our operations and activities. And Hank Deily, our CFO, will go through or will go over our financial results for the third quarter of fiscal 2024, ended October 31, 2023. Then we'll open up the call for a brief Q&A.
During the third quarter, we saw revenues grow by 39% to $164 million, reflecting improvements from both our power industry services and our industrial construction services businesses. We delivered solid profitability outside the Kilroot job, which I will cover later in detail, and we saw continued strength in our balance sheet.
Our backlog at October 31, 2023, was a healthy $730 million, and we closed the third quarter of fiscal 2024 with almost $400 million of cash and investments and net liquidity of $240 million. Additionally, we continue to carry no debt. During the third quarter, we repurchased approximately 43,000 shares of our common stock pursuant to our stock repurchase program for a total spend of approximately $1.7 million or $40.54 per share. And we were also pleased to increase our cash dividend payout 20% to $0.3 per quarter, reflecting our confidence in our businesses.
On slide 4, you see our three reportable business segments. Power and industry services is comprised of our Gemma Power Systems in Atlantic Projects Company operating units, which focused on the construction of multiple types of power facilities, including efficient gas-fired power plants, solar energy fields, biomass facilities, and wind farms. Power industry services revenues increased 34% to $121.3 million, as compared to $90.7 million for the third quarter of fiscal 2023. The segment represented 74% of our third-quarter revenues and reported pre-tax book income of $11 million.
Industrial construction services, which is represented by The Roberts Company had a strong quarter and contributed 23.5% of our third-quarter consolidated revenues and a reported pre-tax book income of $2.9 million. Revenues and pre-tax book income both increased for the segment during the third quarter by 74% and 84% respectively, as compared to the amounts reported for the comparable quarter last year. TRC provides solutions to mostly industrial and manufacturing clients with a focus on agriculture, petrochemical, pulp and paper, water and power industries, as well as other newer industries adding to or expanding the number of production facilities in the Southeast.
The segment focuses on industrial construction projects, but provides other field services like plant maintenance turnarounds, shutdowns, and emergency mobilizations, as well as pipe and pressure vessel fabrication.
Lastly, we have our telecommunications infrastructure services group, our smallest segment, which contributed 2.5% of our third-quarter revenues. SMC Infrastructure Solutions is our operating brand in the segment, providing outside construction services for the utility and telecommunications sectors; as well as inside the premises, wiring services, primarily for the federal government locations and military installations requiring high level of security clearance.
While our ability to drive substantial growth in revenues for the third quarter shows the underlying strength of our core businesses, during the third quarter, our international subsidiary, APC encountered significant and escalating operational and contractual challenges associated with the Kilroot project in Northern Ireland.
By way of quick background, Kilroot is at 660-megawatt gas-fired power plant being built just outside of Belfast. Kilroot is a brownfield project in an existing structure that was first built in the 80s to house coal-fired power generation assets.
Last quarter, we discussed the challenges that have impacted our ability to execute as expected on the Kilroot project, including weather-related work interruptions, COVID variance sidelining the workforce, material changes to the project, the war in Ukraine, and global supply chain delays among others. In addition, unresolved variances and claims have disrupted our progress. And unresolved project related matters continue to meaningfully impact the contract, our cost, in the project schedule negatively.
At October 31, 2023, APC's estimates of the unfavorable financial impacts related to the difficulties on the Kilroot project escalated substantially. Accordingly, an estimated loss at completion of approximately $7.9 million was recognized during the quarter ended October 31, 2023. The loss recorded for the three-month period ended October 31, 2023 in the amount of approximately $10.7 million includes an unfavorable adjustment of estimated gross profit of approximately $2.8 million that was recorded in previous periods.
As an organization, we are intently focused on efficient execution and project success in the impact of the unanticipated challenges that have resulted in the Kilroot loss is extremely disappointing to us as we know it is to our fellow shareholders. APC is continuing all efforts to resolve open variations, claims, and appropriate extension of time to mitigate these losses and to improve the final financial results for this project. We estimate that we are over 95% complete with design and construction and currently commissioning the facility and expect to be ready for the first fire of both gas turbines by early 2024.
Excluding Kilroot, execution has generally been strong across all the businesses during the third quarter. And we remain committed to driving execution excellence and strong margin performance. Importantly, we continue to see tremendous opportunity for Argan moving forward, as the energy landscape continues its transitions from fossil fuel to cleaner alternatives, like natural gas and renewables.
Coal-fired power generation in the US is expected to drop by an additional 70% to represent only 5% of net electrical generation by 2050. While the demand for stable grids and reliable power generation will only continue to grow.
Argan has earned a solid reputation as a proven design and construction partner for the power industry. And we are energized by the pipeline of opportunities we're seeing to work with both new and repeat customers, as they build facilities designed to provide cleaner energy sources to meet growing power consumption practices.
Last quarter, we announced our limited notices to proceed on a project with Vistra Energy .The project is well underway with Gemma working with Vistra to complete three facilities located in Illinois to provide 160 megawatts of solar power, plus 22 megawatts of battery storage capability. This is an exciting and substantial opportunity for us to continue to demonstrate our capabilities in the renewable energy space, supporting the adoption of solar power as a reliable energy source.
Sorry, on slide 8, we highlight the Shannonbridge Power Project in Ireland and APC project pursuit in which it is providing EPC services for a 264-megawatt thermal power plants. This is another large project of ours that has been performing well. APC and Gemma have combined their skills and experience to complete the Shannonbridge project from start to finish, a timeline which includes design, procurement, construction, and commissioning. This project demonstrates our ability to execute a major project on an extremely short timeline.
We began work on this project in the first half of 2023. And it has a targeted completion date of early 2024. Shannonbridge is being built to bolster the region's power infrastructure and support the electrical grid during emergencies or high usage periods.
As the industry shifts to new power generation technologies, it's important to note that 82% of our current backlog of over $0.7 billion represents projects that support low carbon emissions, demonstrating our commitment and our leadership role in the transition to cleaner power generation.
So again, before I hand the call over to Hank Deily to go over our financial performance in detail, I want to reiterate that while the latest developments with the Kilroot project are disappointing, we are generally seeing strong execution on all of our other major projects. And we remain optimistic that our results over the long term will be strong. Hank?

Hank Deily

Thanks, David. And good afternoon, everyone. On slide 10, we present our consolidated statements of earnings for the third quarter and the first nine months of fiscal 2024. Third-quarter revenues increased 39% to $164 million, reflecting an increase in revenues from both our power services and industrial services segments, as compared to the third quarter of fiscal 2023.
In the third quarter, we achieved a 34% increase in revenues in our power industry services segment, primarily related to projects who work construction overseas and the Trumbull Energy Center, partially offset by decreased revenues associated with the Guernsey Power Station and the Maple Hill Solar facility, as those projects reach the final completion stage.
In our industrial construction services segment, the company achieved revenue growth of 74%, driven by a substantial increase in field services and supporting steel fabrication work. That said, as David previously mentioned, APC has been contending with significant and escalating operational in contractual challenges associated with the Kilroot Power Station project in Northern Ireland.
For the three months ended October 31, 2023, Argan reported consolidated gross profit of approximately $19.2 million, which represented a gross profit percentage of approximately 11.7% and reflected positive contributions from all three reportable business segments. However, these results were adversely impacted by the recorded loss of $10.7 million related to the Kilroot project, an amount representing approximately 6.5% of consolidated revenues for the quarter. Consolidated gross profit for the quarter ended October 31, 2022 was $22.2 million, representing a gross profit percentage of 18.8%.
Selling, general and administrative expenses of $11.4 million for the third quarter of fiscal 2024 decreased, as compared to SG&A of $12.7 million in the third quarter of fiscal 2023.
Net income for the third quarter of fiscal 2024 as adversely affected by the Kilroot loss was $5.5 million or $0.40 per diluted share, compared to $7.8 million or $0.56 per diluted share for last year's comparable quarter.
EBITDA, which represents earnings before interest, taxes, depreciation, and amortization for the quarter ended October 31, 2023 was $12.2 million, compared to $11.3 million in the same period of last year.
Looking at our year-to-date performance, revenues for the first nine months of fiscal 2024 increased by 22% to $409 million, as compared to revenues of $336 million for the comparable prior-year period. Revenues in our power industry services segment increased by $40.9 million or 16% to $296.8 million for the nine months ended October 31, 2023, compared with revenues of $256 million for the comparable period last year.
Construction activities have increased in the current year for the Irish Shannonbridge Project, the Trumbull Energy Center and the ESB FlexGen peaker plants. The increased revenues were partially offset by the effects of decreased activities at the Guernsey Power Station project and the Maple Hill Solar energy facility, as those EPC projects wind down.
Our consolidated gross profit of 14% for the first nine months of fiscal 2024 decreased, as compared to gross margin of 19.7% in the first nine months of fiscal 2023, primarily due to $11.5 million of loss that was recorded in the first nine months of 2024 related to the Kilroot project.
Gross margins in our power industry services, our industrial services and our telecommunications infrastructure services segments were 14%, 12.8%, and 25.1%, respectively for the first nine months of fiscal 2024, as compared to 20.7%, 15.8% and 21.1%, respectively for the first nine months of fiscal 2023.
SG&A expenses decreased to $32.5 million for the first nine months of fiscal 2024, as compared to $34.2 million for the first nine months of fiscal 2023.
Net income for the first nine months of fiscal 2024 was $20.3 million or $1.50 per diluted share compared to $19.5 million or $1.36 per diluted share for the first nine months of last fiscal year.
EBITDA was $33.8 million compared with EBITDA of $36.9 million in the first nine months of fiscal 2023. Most notably, these consolidated results were tempered by the reduction in consolidated gross profit between periods related to the loss recorded on the Kilroot contract as discussed earlier.
Our income tax reporting for the periods ended October 31, 2023, is also negatively impacted by the Kilroot loss, as we did not apply any income-tax tax benefit to the resulting net operating loss incurred by APC in the UK. Excluding this adverse tax impact, our underlying estimated annual effective income tax rate for fiscal 2024 is slightly over 23%.
Before turning the call back to David, I would like to touch on the favorable returns we are experiencing in the current year related to our cash, cash equivalents, and investments that are invested as described in our condensed consolidated financial statements. Other income for the three and nine months ended October 31, 2023, included investment income and the approximate pretax amounts of $4 million and $9.7 million respectively. Based on our current amounts of investments and a weighted average annual interest rate on those investments of 5.1%, our current run rate equates to more than $15 million in annual investment income.
With that, I'll turn the call back to David think-tank.

David Watson

Turning to slide 11. Our consolidated project backlog remains solid at over $0.7 billion as of October 31, 2023. I think it's important to note that as expected and mentioned on our last call, we did not add any major projects in the quarter. However, we were pleased to add $70 million to miscellaneous backlog during the quarter, which partially offset $164 million of backlog that was converted to revenues.
While this is a decline from the backlog level of $0.8 billion we maintained through the first half of fiscal 2024, we continued to see a strong pipeline of opportunities. And our backlog continues to reflect longer-term fully committed projects in both the power industry and industrial services segments.
On slide 12, we present certain major projects currently included in our backlog. We have two projects currently winding down the Guernsey Power Station, which is the largest single-phase gas-fired power plant project in the US, and the Maple Hill Solar facility. Both are substantially complete and are expected to reach final completion in Q4.
The three ESB FlexGen peaker plants in the Shannonbridge thermal plants are both in the final stages of construction and several of the power units have either started commissioning or getting close to starting commissioning. The Vistra solar plus battery projects in Illinois are relatively new to list for which we expect to receive full notices to proceed in Q4. We also include two separate water treatment plant projects that are being performed by TRC.
Our backlog remains very healthy with a variety of projects that demonstrate the range of our capabilities and our recognition in the power industry as the effective industry partner, not only in the US, but also in Ireland and the UK.
Our balance sheet remains strong. As of October 31, 2023, cash, cash equivalents and investments totaled almost $400 million, generating a meaningful investment yields. And net liquidity was $240 million with no debt. Stockholders' equity was $285 million at October 31, 2023.
As you can see from this liquidity bridge, our business model ordinarily requires a very low level of capital expenditure. Our net liquidity of $240.2 million at October 31, 2023 was slightly elevated compared with year in fiscal 2023.
Since November 2021, we have returned a total of approximately $97 million to shareholders, as we've repurchased approximately 2.6 million shares of our common stock or approximately 16% of shares outstanding at the beginning of the program, which equates to an average price of $37.38 per share. Additionally, since fiscal 2017, we have paid $1 per share annually through quarterly cash dividends.
Importantly, as I mentioned at the start of this call, in September, Argan's Board increased the company's quarterly dividend by 20% from $0.25 to $0.30 per share, reflecting the strength of our business and our confidence in Argan's growth potential moving forward. Argan has always been very focused on long-term value creation for shareholders. While our operating results can vary from quarter to quarter related to the timing of contracts. We remain focused on delivering long-term value to shareholders. Since 2008, we have increased our tangible book value and cumulative dividends per share considerably.
Our project backlog is a solid $0.7 billion as of October 31, 2023. The electrification of the economy is driving the need for dependable power grids and reliable energy sources, from standard and emergency power usage to increased EV adoption and the accompanying charging requirements. To enhance demand for data centers, more people are using more power for much longer periods of time than ever before.
With our capabilities and proven track record as a full-service construction and project management partner or multiple types of power facilities, we are seeing heightened interest for our services and our pipeline is strong. Importantly, our facility, design, and construction capabilities are energy agnostic, positioning REN as an ideal partner as the demand for level power grids and enhanced emerging power resources is growing.
We're excited about the opportunities we see to help the energy industry as it transitions to meeting this increased demand through the establishment of both low emissions and renewable sources of power.
Looking forward, during the fourth quarter, we expect to receive full notice to proceed on several new renewable projects, while working hard to mitigate risk and complete the Kilroot project early in calendar 2024. And our execution remains solid across our other projects, including the full close-outs of both Guernsey and Maple Hill, which is expected in the fourth quarter.
To close, we remain focused on our long-term growth strategy; leverage our core competencies to capitalize on existing and emerging market opportunities; maintain disciplined risk management with the goal of improving our project management effectiveness, and minimizing costly project overruns; strengthen our position as a partner of choice in the construction of new low and net-zero emission power generation facilities, as the industry transitions to cleaner energy alternatives while maintaining grid reliability.
And last but not least, drive organic growth while also being mindful of acquisition opportunities that make sense for our business through thoughtful capital allocation. I like to thank our shareholders for their continued support and our employees for their dedication and hard work in building our end to our position as a valued power industry partner.
With that, operator, let's open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Rob Brown, Lake Street Capital.

Rob Brown

Good afternoon.

David Watson

Good afternoon, Rob.

Rob Brown

First question touching on Kilroot and some of the challenges there. I guess, the question is how certain are you at this point that the charges you've taken are it, or how much is left to go, and how much is uncertain at this point?

David Watson

Yeah, Rob, we're doing everything we can to mitigate these losses. We have a challenging customer on a challenging project at the end of the day. We are continuing all efforts to resolve open variations, claims, and appropriate extensions of time to mitigate these losses and improve the final results at this project. I mean, we plan to vigorously pursue all of our rights under the contract, including through legal means, if necessary.
I mean, the good news is, and we are currently estimating, that it is approximately 95% complete with design and construction. We have started commissioning on the facility and we expect to be ready for the first fire of both gas turbines by early 2024.
The determination, the amount of the loss recorded in Q3 which was a lot includes our estimates of the realistic level of effort and the associated costs required for us to complete the project. And however, there can be no assurances that our overcoming the risks associated with this project won't cause us to incur unplanned future costs or to suffer unfavorable contract variations.
December, January, and February are going to be important months for us on the project, both operationally and contractually. And we have some of our best team members throughout the Argan organization focused on this. Again, we have substantial number of valid claims over $20 million that we will be pursuing and hope to mitigate and improve current forecast when successfully resolved.
So yes, to answer your question, there possible downside, but there's also a possibility of upside.

Rob Brown

Okay. Okay. Got it. And then I guess, in general, some of these challenges in the European market changed your strategy there, or is this a one-off situation?

David Watson

Well, I mean, we believe we have a strong core business at APC. They do great with shutdowns, outages, and maintenance works and they're currently executing well on all our other larger projects with the exception of Kilroot. I know you're kind of alluding to T side and we've gone through both a leadership change since then and significant growth. Our revenues are up over 350% in two years.
So while we are still working to improve the process disciplines within APC, we are optimistic about the future of the subsidiary. Due to our work to improve process and discipline in a difficult market environment, which has been for this, we do expect reduced revenues next fiscal year, as we solidify the business and modify our risk profile for market conditions now and into the future.

Rob Brown

Okay, thank you. And then on the new project pipeline. I think you talked about some formal proceeds in Q4. I guess, could you characterize the pipeline between the renewables and the gas plant pipeline? And then what's the pipeline of are gas plants that you're also pursuing at this point? And what's the outlook there?

David Watson

Yeah. I mean, our backlog stayed strong and we do believe our pipeline is as well. Based on our current visibility into our pipeline, we do expect some additional large projects over the next nine months, and to your point, including getting full notices to proceed on some of our renewable jobs in Q4.
The new work is going to be a mix of renewable and gas. We're primarily seeing gas-fired plant opportunities in the PJM, the MISO and ERCOT regions, which are basically the Midwest Texas to the Mid-Atlantic and Southeast. And we ultimately expect to see our backlog meaningfully exceed where we are today. But as I've said before, we got to keep in mind, the starts of future project wins are controlled by the customer which makes it difficult to forecast our backlog given the material size of certain projects.
And thermal jobs always take longer than we would like, but getting a development job, getting into development job to finish is not easy. The PJ auctions have further delayed to the summer 2024.
So we expect a number of not just renewable but gas jobs between now and through next year. But I do want to point out we added without a major new job, $70 million of miscellaneous backlog during the quarter, which offset a lot of the $164 million of backlog that we converted to revenues, which demonstrates the benefits of increasingly diversified organizations.

Rob Brown

Okay. Thank you. I'll turn it over.

David Watson

Thanks, Rob.

Operator

(Operator Instructions) Chris Moore, CJS Securities.

Chris Moore

Well, terrific. All right, guys. Thanks for taking a few questions. Maybe just stay with Kilroot for a bit. You had for a while been talking about that being a difficult project into Q2. I think you estimated it was about 80% done and now it's about 95%. I'm just still trying to understand a little bit better in terms of what incrementally happened during the Q3 that drove this charge?

David Watson

Yeah, sure, Chris. So just to be clear that the 95% complete is with the design and construction, that's not the entire job. It doesn't include commissioning that we are definitely further way north of 80% on that.
There's just been a lot of changes in the scope of this project that have just been difficult for us. And frankly, it's just been really difficult customer to work with. And we're doing our best to make it work, because we want to have a successful project. And that just really came to more of a head here during Q3, as well as you get super close to the end of the job, there are a lot of risk at the end of the job, as you know, with any of our jobs that we do. And that's when things really come to ahead.

Chris Moore

Got it. And I'll leave that one there. Maybe you could just help me with the math. Q3 gross margin, without the rate issues, would have been roughly where?

David Watson

It would have been 8.8%, something like that. It was a really strong quarter across the business with the exception of Kilroot, which is no excuse.

Chris Moore

Got it. And was there any excess Guernsey margin in Q3?

David Watson

We'll finish Guernsey in Q4. We did close out some items on Guernsey during Q3. And we also reached substantial completion on Maple Hill in Q4 here. So our expectation is that both Guernsey and Maple Hill are going to be fully finished out in Q4.
But yes, we did close out some other items in Q3 for Guernsey.

Chris Moore

Got you. And maybe, talk about Roberts. It really looks to be hitting stride at 38 plus million this quarter. Is there anything different in the strategy today versus a few years ago that's -- I think the last 10, 11 quarters have been pretty strong.

David Watson

Chris, I appreciate that question. Roberts has been a long process for me, for my years here at Argan. And I've just been really pleased to see where we are today on it. Then Roberts generated over $30 million, as you mentioned. It's generated ove$30 million for the last three straight quarters for a total of $102 million which is more than all of last year.
We strategically consolidated some of our business segments there. We consolidated two plants into one to reduce our cost. And we've been focusing on doing field services, which has been a more profitable piece of that business. We've also made a change in leadership. And we've also added to that leadership.
So we feel like we've got a really strong team in place for growth over the long run. And as you can see, $102 million two, three quarters, the run rate is north of $1.30 and the expectation is for this business to continue to grow.

Chris Moore

Got it. Very helpful. I will leave it there. I appreciate it, guys.

David Watson

Appreciate it, Chris.

Operator

We have reached the end of the question-and-answer session. I will now turn the call over to David Watson for our closing remarks.

David Watson

Thank you, all for participating in today's call. Happy holidays to each of you. And we look forward to speaking with you again when we report our Q4 fiscal 2024 earnings next year. Have a great evening.

Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.