Argyle Security, Inc. Announces Third Quarter 2008 Financial Results

Third Quarter 2008 Adjusted Pro Forma Financial Highlights vs. Third Quarter 2007 - Revenues increased by 13% to $31.7 million. - Gross profit declined by 27% to $4.7 million. - $16.9...


Third-quarter gross margins in Argyle Corrections were negatively impacted by significant cost overruns on several very large correctional jobs within its detention contracting and security electronics businesses, as well as material cost increases at its prison furniture business. The cost overruns are primarily attributable to the Company's failure to adequately scale its project management infrastructure and management, as necessary, due to the significant revenue growth in 2008. The additional costs were primarily incurred because of our need to provide unanticipated additional training to a large number of new employees, as well as training to expand the skills of our existing employees, and the unexpected overtime required on certain jobs. These issues first became apparent in the first quarter of 2008, and were thought to largely to have been corrected in the second quarter of 2008. Argyle believes that margins will likely begin to improve during the fourth quarter, primarily due to the operational improvements that have been implemented and the cost reduction initiative undertaken during the fourth quarter.

Adjusted pro forma operating expenses were $23.4 million, up 388% from $4.8 million in the third quarter of 2007. In the third quarter of 2008, Argyle recognized a $16.9 million non-cash goodwill impairment charge related to its previous acquisitions. The Company also incurred higher-than-expected legal and accounting fees related to being a public company. Adjusted operating income in the third quarter of 2008 was ($18.7) million, or (59%) of sales, compared to $1.7 million, or 6% of sales, in the third quarter of 2007.

Pro forma adjusted EBITDA was ($18.1) million, or (57%) of adjusted pro forma revenues, which includes $16.9 million of non-cash goodwill write-down, compared to the third quarter 2007 pro forma adjusted EBITDA of $2.1 million, or 8% of revenues. In the third quarter of 2008, adjusted pro forma net income was ($17.3) million, or ($3.01) per diluted share, compared to adjusted pro forma net income of $2.2 million, or $0.33 per diluted share, in the prior- year period.

For the nine months ended September 30, 2008 , Argyle's pro forma revenues increased by 47% to $107.5 million, compared to $73.1 million in the same period of 2007. Gross profit increased by 15% to $20.1 million, or 19% of sales, compared to $17.4 million, or 24% of sales, in the nine-month period of 2007.

EBITDA decreased 397% to ($14.6) million for the nine months ended September 30, 2008 , compared to $4.9 million for the same period last year. The comparable EBITDA margin was (14%), compared to 7% last year. Net income for the nine months ended September 30, 2008 was ($17.0) million, or ($2.96) per diluted share, compared to net income of $2.4 million, or $0.38 per diluted share in the comparable period last year.

Backlog

As of September 30, 2008 , net backlog for the Company was $56.1 million, which included Argyle Corrections' backlog of $41.5 million and Argyle Commercial Security's backlog of $14.6 million. New project bookings for ISI Detention, the Company's largest business unit, exceeded $22 million in October, which was more than its bookings year to date through September.

Beginning in 2008, Argyle had opted to disclose net backlog only for Argyle Corrections (and after the elimination of intercompany revenues), and following long standing practice, such backlog had contained verbal commitments in addition to signed contracts and letters of intent. To more consistently follow industry practice whereby companies disclose contract revenue backlog for percentage-of-completion contracts, the Company has changed its policy to include backlog related to its Argyle Commercial segment and to exclude PDI's backlog because, unlike the other business units in Argyle Corrections, it does not account for its contracts on a percentage-of- completion basis. Additionally, the Company will include only those projects for which it has executed contracts and letters of intent. As a result of this new policy, a comparison of current backlog information to historical backlog information may not be useful.

Argyle Reports Material Weakness and Impairment to Goodwill

Management announced that it has identified several internal control deficiencies that resulted in a material weakness in its revenue recognition processes. The deficiency consists of inadequate levels of review of complex and judgmental accounting issues. To address the deficiency, among other things, Argyle is in the process of implementing its remediation plan for the deficiencies and material weakness, including making personnel changes, implementing additional oversight and approval processes to ensure updating of expenses and the accuracy of its results. Management does not anticipate that it will be necessary to restate any of its previously reported financial statements.