UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 31, 20162017
or
| oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT |
For the Transition Period from to
Commission File Number 001-31756
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
| 13-1947195 |
(State or Other Jurisdiction of Incorporation) |
| (I.R.S. Employer Identification No.) |
One Church Street, Suite 201, Rockville, Maryland 20850
(Address of Principal Executive Offices) (Zip Code)
(301) 315-0027
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer o | Accelerated filer x | |
Non-accelerated filer o | Smaller reporting company o | |
Emerging growth company o |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common stock, $0.15 par value: 15,032,46915,543,719 shares as of September 1, 2016.5, 2017.
ARGAN, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
JulyJULY 31, 20162017
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PART I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements. |
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| Condensed Consolidated Statements of Earnings for the Three and Six Months Ended July 31, |
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| Condensed Consolidated Balance Sheets |
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| Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, |
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| Notes to Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Quantitative and Qualitative Disclosures about Market Risk. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
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Mine Safety Disclosures (not applicable to the Registrant). |
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CERTIFICATIONS |
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ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
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| Three Months Ended July 31, |
| Six Months Ended July 31, |
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| Three Months Ended July 31, |
| Six Months Ended July 31, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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REVENUES |
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| $ | 259,803 |
| $ | 162,495 |
| $ | 490,292 |
| $ | 292,843 |
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Power industry services |
| $ | 143,422 |
| $ | 93,471 |
| $ | 251,521 |
| $ | 176,355 |
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Industrial fabrication and field services |
| 17,327 |
| — |
| 37,737 |
| — |
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Telecommunications infrastructure services |
| 1,746 |
| 3,963 |
| 3,585 |
| 6,566 |
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Revenues |
| 162,495 |
| 97,434 |
| 292,843 |
| 182,921 |
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COST OF REVENUES |
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Power industry services |
| 100,035 |
| 66,136 |
| 183,733 |
| 128,515 |
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Industrial fabrication and field services |
| 17,117 |
| — |
| 34,105 |
| — |
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Telecommunications infrastructure services |
| 1,331 |
| 2,805 |
| 2,691 |
| 4,746 |
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Cost of revenues |
| 118,483 |
| 68,941 |
| 220,529 |
| 133,261 |
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| 208,396 |
| 118,483 |
| 398,789 |
| 220,529 |
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GROSS PROFIT |
| 44,012 |
| 28,493 |
| 72,314 |
| 49,660 |
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| 51,407 |
| 44,012 |
| 91,503 |
| 72,314 |
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Selling, general and administrative expenses |
| 10,799 |
| 7,534 |
| 20,289 |
| 14,581 |
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Impairment loss |
| 1,979 |
| — |
| 1,979 |
| — |
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| — |
| 1,979 |
| — |
| 1,979 |
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Selling, general and administrative expenses |
| 7,534 |
| 4,848 |
| 14,581 |
| 10,387 |
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INCOME FROM OPERATIONS |
| 34,499 |
| 23,645 |
| 55,754 |
| 39,273 |
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| 40,608 |
| 34,499 |
| 71,214 |
| 55,754 |
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Other income, net |
| 556 |
| 128 |
| 593 |
| 212 |
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| 1,311 |
| 556 |
| 2,529 |
| 593 |
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INCOME BEFORE INCOME TAXES |
| 35,055 |
| 23,773 |
| 56,347 |
| 39,485 |
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| 41,919 |
| 35,055 |
| 73,743 |
| 56,347 |
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Income tax expense |
| 11,756 |
| 7,939 |
| 18,928 |
| 12,800 |
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| 14,601 |
| 11,756 |
| 25,676 |
| 18,928 |
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NET INCOME |
| 23,299 |
| 15,834 |
| 37,419 |
| 26,685 |
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| 27,318 |
| 23,299 |
| 48,067 |
| 37,419 |
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Net income attributable to noncontrolling interests |
| 3,625 |
| 4,527 |
| 5,515 |
| 7,875 |
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Net income attributable to non-controlling interests |
| 179 |
| 3,625 |
| 303 |
| 5,515 |
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NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
| 19,674 |
| 11,307 |
| 31,904 |
| 18,810 |
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| 27,139 |
| 19,674 |
| 47,764 |
| 31,904 |
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OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX |
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Foreign currency translation adjustments, net of income tax |
| (511 | ) | (6 | ) | 134 |
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Foreign currency translation adjustments, net of tax |
| 789 |
| (511 | ) | 893 |
| 134 |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
| $ | 19,163 |
| $ | 11,301 |
| $ | 32,038 |
| $ | 18,804 |
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| $ | 27,928 |
| $ | 19,163 |
| $ | 48,657 |
| $ | 32,038 |
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EARNINGS PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
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Basic |
| $ | 1.32 |
| $ | 0.77 |
| $ | 2.14 |
| $ | 1.28 |
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| $ | 1.75 |
| $ | 1.32 |
| $ | 3.08 |
| $ | 2.14 |
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Diluted |
| $ | 1.29 |
| $ | 0.75 |
| $ | 2.09 |
| $ | 1.26 |
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| $ | 1.72 |
| $ | 1.29 |
| $ | 3.03 |
| $ | 2.09 |
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
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Basic |
| 14,939 |
| 14,747 |
| 14,899 |
| 14,693 |
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| 15,514 |
| 14,939 |
| 15,491 |
| 14,899 |
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Diluted |
| 15,278 |
| 15,003 |
| 15,231 |
| 14,952 |
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| 15,787 |
| 15,278 |
| 15,788 |
| 15,231 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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| July 31, 2016 |
| January 31, 2016 |
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| July 31, 2017 |
| January 31, 2017 |
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| (Unaudited) |
| (Note 1) |
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| (Unaudited) |
| (Note 1) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 162,855 |
| $ | 160,909 |
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| $ | 153,225 |
| $ | 167,198 |
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Short-term investments |
| 220,297 |
| 114,098 |
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| 403,925 |
| 355,796 |
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Accounts receivable, net |
| 32,706 |
| 64,185 |
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Accounts receivable |
| 72,517 |
| 54,836 |
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Costs and estimated earnings in excess of billings |
| 3,052 |
| 4,078 |
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| 8,194 |
| 3,192 |
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Prepaid expenses and other current assets |
| 5,004 |
| 7,342 |
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| 4,766 |
| 6,927 |
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TOTAL CURRENT ASSETS |
| 423,914 |
| 350,612 |
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| 642,627 |
| 587,949 |
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Property, plant and equipment, net |
| 13,122 |
| 12,308 |
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| 14,821 |
| 13,112 |
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Goodwill |
| 34,780 |
| 37,405 |
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| 34,913 |
| 34,913 |
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Intangible assets, net |
| 8,738 |
| 9,344 |
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| 7,663 |
| 8,181 |
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Deferred income taxes |
| 435 |
| — |
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Deferred taxes |
| 434 |
| 241 |
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Other assets |
| 105 |
| 122 |
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| 514 |
| 92 |
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TOTAL ASSETS |
| $ | 481,094 |
| $ | 409,791 |
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| $ | 700,972 |
| $ | 644,488 |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
| $ | 60,207 |
| $ | 46,395 |
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| $ | 131,001 |
| $ | 101,944 |
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Accrued expenses |
| 42,362 |
| 35,454 |
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| 33,116 |
| 39,539 |
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Billings in excess of costs and estimated earnings |
| 121,130 |
| 105,863 |
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| 190,581 |
| 209,241 |
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TOTAL CURRENT LIABILITIES |
| 223,699 |
| 187,712 |
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| 354,698 |
| 350,724 |
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Deferred income taxes |
| — |
| 224 |
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Deferred taxes |
| 1,206 |
| 1,195 |
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TOTAL LIABILITIES |
| 223,699 |
| 187,936 |
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| 355,904 |
| 351,919 |
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COMMITMENTS AND CONTINGENCIES (Note 11) |
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COMMITMENTS AND CONTINGENCIES (Notes 8 and 9) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, par value $0.10 per share — 500 shares authorized; no shares issued and outstanding |
| — |
| — |
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Common stock, par value $0.15 per share — 30,000 shares authorized; 15,035 and 14,840 shares issued at July 31 and January 31, 2016, respectively; 15,032 and 14,836 shares outstanding at July 31 and January 31, 2016, respectively |
| 2,255 |
| 2,226 |
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Preferred stock, par value $0.10 per share — 500,000 shares authorized; no shares issued and outstanding |
| — |
| — |
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Common stock, par value $0.15 per share — 30,000,000 shares authorized; 15,541,952 and 15,461,452 shares issued at July 31, 2017 and January 31, 2017, respectively; 15,538,719 and 15,458,219 shares outstanding at July 31, 2017 and January 31, 2017, respectively |
| 2,331 |
| 2,319 |
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Additional paid-in capital |
| 122,732 |
| 117,274 |
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| 140,182 |
| 135,426 |
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Retained earnings |
| 131,485 |
| 99,581 |
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| 202,413 |
| 154,649 |
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Accumulated other comprehensive losses |
| (431 | ) | (565 | ) | |||||||||
Accumulated other comprehensive income (loss) |
| 131 |
| (762 | ) | |||||||||
TOTAL STOCKHOLDERS’ EQUITY |
| 256,041 |
| 218,516 |
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| 345,057 |
| 291,632 |
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Noncontrolling interests |
| 1,354 |
| 3,339 |
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Non-controlling interests |
| 11 |
| 937 |
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TOTAL EQUITY |
| 257,395 |
| 221,855 |
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| 345,068 |
| 292,569 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 481,094 |
| $ | 409,791 |
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| $ | 700,972 |
| $ | 644,488 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Six Months Ended July 31, |
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| Six Months Ended July 31, |
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| 2016 |
| 2015 |
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| 2017 |
| 2016 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
| $ | 37,419 |
| $ | 26,685 |
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| $ | 48,067 |
| $ | 37,419 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities |
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Impairment loss |
| 1,979 |
| — |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Stock option compensation expense |
| 1,270 |
| 1,057 |
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| 2,315 |
| 1,270 |
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Depreciation |
| 918 |
| 258 |
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| 1,210 |
| 918 |
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Amortization of purchased intangibles |
| 521 |
| 164 |
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Amortization of purchased intangible assets |
| 518 |
| 521 |
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Deferred income tax benefit |
| (153 | ) | (11 | ) | |||||||||
Impairment loss |
| — |
| 1,979 |
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Other |
| (213 | ) | (79 | ) |
| (78 | ) | (202 | ) | ||||
Changes in operating assets and liabilities |
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Accounts receivable |
| 31,484 |
| (5,774 | ) |
| (17,726 | ) | 31,484 |
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Prepaid expenses and other assets |
| (993 | ) | (1,133 | ) |
| 2,600 |
| (993 | ) | ||||
Accounts payable and accrued expenses |
| 24,029 |
| (4,232 | ) |
| 21,485 |
| 24,029 |
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Billings in excess of costs and estimated earnings, net |
| 16,293 |
| (46,032 | ) |
| (23,662 | ) | 16,293 |
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Net cash provided by (used in) operating activities |
| 112,707 |
| (29,086 | ) | |||||||||
Net cash provided by operating activities |
| 34,576 |
| 112,707 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of short-term investments |
| (220,000 | ) | (133,000 | ) |
| (357,500 | ) | (220,000 | ) | ||||
Maturities of short-term investments |
| 114,000 |
| 16,000 |
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| 310,000 |
| 114,000 |
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Purchases of property, plant and equipment, net |
| (1,612 | ) | (2,503 | ) | |||||||||
Purchase of APC, net of cash acquired |
| — |
| (4,210 | ) | |||||||||
Increase in notes receivable |
| — |
| (605 | ) | |||||||||
Purchases of property, plant and equipment |
| (2,802 | ) | (1,612 | ) | |||||||||
Loans made under notes receivable |
| (200 | ) | — |
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Net cash used in investing activities |
| (107,612 | ) | (124,318 | ) |
| (50,502 | ) | (107,612 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from the exercise of stock options |
| 2,453 |
| 4,217 |
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Distributions to joint venture partners |
| (7,500 | ) | — |
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| (1,229 | ) | (7,500 | ) | ||||
Proceeds from the exercise of stock options |
| 4,217 |
| 1,000 |
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Excess income tax benefit on exercised stock options (Note 2) |
| — |
| 356 |
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Net cash (used in) provided by financing activities |
| (3,283 | ) | 1,356 |
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Net cash provided by (used in) financing activities |
| 1,224 |
| (3,283 | ) | |||||||||
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EFFECTS OF EXCHANGE RATE CHANGES ON CASH |
| 134 |
| 493 |
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| 729 |
| 134 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 1,946 |
| (151,555 | ) | |||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (13,973 | ) | 1,946 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 160,909 |
| 333,691 |
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| 167,198 |
| 160,909 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 162,855 |
| $ | 182,136 |
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| $ | 153,225 |
| $ | 162,855 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Cash paid for income taxes |
| $ | 13,939 |
| $ | 10,703 |
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| $ | 19,754 |
| $ | 13,939 |
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Common stock issued in connection with the acquisition of APC (noncash transaction, see Note 3) |
| $ | — |
| $ | 3,536 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
ARGAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 20162017
(Tabular dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
The condensed consolidated financial statements include the accounts of Argan, Inc. (“Argan”), its wholly owned subsidiaries and its majority-controlledfinancially controlled joint ventures and any variable interest entities for which Argan or one of its wholly-owned subsidiaries is deemed to be the primary beneficiary.ventures. Argan conducts operations through its wholly owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”), which provided 84%89% and 95%84% of consolidated revenues for the six months ended July 31, 20162017 and 2015,2016, respectively; The Roberts Company, Inc. (“TRC”); Atlantic Projects Company Limited and affiliates (“APC”) and Southern Maryland Cable, Inc. (“SMC”). Argan and these consolidated subsidiaries are hereinafter cumulatively referred to as the “Company.”
Through GPS and APC, the Company provides a full range of engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets for a wide range of customers, including independent power project owners, public utilities, power plant equipment suppliers and global energy plant construction firms. GPS, including its consolidated joint ventures, and variable interest entities, and APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment produces, deliversprovides on-site services that support maintenance turnarounds, shutdowns and installs fabricated steel components specializing in pressure vessels, heat exchangers and piping systemsemergency mobilizations for industrial plants primarily located in the southern United States. In addition, TRC includes a plant services groupStates and that handles maintenance turnarounds, shutdownsare based on its expertise in producing, delivering and emergency mobilizations.installing fabricated steel components such as pressure vessels, heat exchangers and piping systems. Through SMC, conducting business as SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the mid-Atlantic region.
Basis of Presentation
In Note 16,14, the Company has provided certain financial information relating to the operating results and assets of its reportable segments based on the manner in which management disaggregates the Company’s financial reporting for purposes of making internal operating decisions. All significant inter-company balances and transactions have been eliminated in consolidation. The deferred tax amounts included in the comparative balance sheet were reclassified to conform to the current year presentation. The Company’s fiscal year ends on January 31 of each year.
The condensed consolidated balance sheet as of July 31, 2016, the condensed consolidated statements of earnings for the three and six months ended July 31, 2016 and 2015, and the condensed consolidated statements of cash flows for the six months ended July 31, 2016 and 2015 are unaudited. The condensed consolidated balance sheet as of January 31, 2016 has been derived from audited financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, considered necessary to present fairly the financial position of the Company as of July 31, 2016, and its earnings and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements, the notes thereto (including the summary of significant accounting policies), and the independent registered public accounting firm’s report thereon that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016.2017.
The condensed consolidated balance sheet as of July 31, 2017, the condensed consolidated statements of earnings for the three and six months ended July 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the six months ended July 31, 2017 and 2016 are unaudited. The condensed consolidated balance sheet as of January 31, 2017 has been derived from audited financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, considered necessary to present fairly the financial position of the Company as of July 31, 2017, and its earnings and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.
Revenue Recognition — Revenues are recognized primarily under various long-term construction contracts, including contracts for which revenues are based on either a fixed price, cost-plus-fee or time and materials basis, with typical durations of three monthsone month to three years. Revenues from fixed price construction contracts, including a portion of estimated profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentage of completion method. Revenues from cost-plus-fee construction contracts are recognized on the basis of costs incurred during the period plus the amount of fee earned, measured using the cost-to-cost method.earned. Revenues from time and materials contracts are recognized when the related services are provided to the customer. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.
Unapproved change orders, which represent contract variations for which the Company has project owner approvaldirective for additional work or authorization for scope changes but not for the price associated with the scope changes,corresponding change, are reflected in revenues when it is probable that the applicable costs will be recovered through a change in the contract price. The total amount ofThere were no significant unapproved change orders included in the total contract value amounts used to determine revenues as of July 31, 2016 was $4.0 million. Disputed2017. Contract results may be impacted by estimates of the amounts of change orders that we expect to receive. The effects of any resulting revisions to revenues and estimated costs can be determined at any time and they could be material. In general, claims that are unapproved in regard to both scope and price are considered claims. The Company recognizesreflected in revenues related to a claim only when an agreement on the amount has been reached with the project owner.
The Company’s long-term contracts typically have schedule dates and other performance obligations that if not achieved could subject the Company to penalties for liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by achievement of a specified level of output or efficiency. Each contract defines the conditions under which a project owner may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the project owner, but the potential to do so is used in the negotiation or settlement of claims and the closing-out of the contract. During the three months ended July 31, 2016, the Company reached a settlement regarding $12.9 million in liquidated damages related to one project. As of July 31, 2016, it is no longer subject to these liquidated damages. In general, the Company considers potential liquidated damages, the costs of other related items and potential mitigating factors in determining the adequacy of its estimates of completed contract costs.
Fair Values — The carrying value amounts presented in the condensed consolidated balance sheets for the Company’s cash and cash equivalents, short-term investments, accounts receivable notes receivable and accounts payable are reasonable estimates of their fair values due to the short-term nature of these instruments. The fair value amounts of business segmentsreporting units (as needed for purposes of identifying indications of impairment to goodwill) are determined by averaging valuations that are calculated using several market-based and income-based approaches deemed appropriate in the circumstances (see Note 8).circumstances.
NOTE 2 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There areis no recently issued accounting pronouncementsguidance that havehas not yet been adopted that the Company considers material to its condensed consolidated financial statements except for the standards identified below relating to revenue recognition and leases.following:
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a finalnew standard on revenue recognition, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), in order to create a new, principles-based revenue recognition framework that may affect nearly every revenue-generating entity. As delayed by the FASB, ASU 2014-09 becomesand a series of related amending pronouncements issued by the FASB become effective for public companies for fiscal years beginning after December 15, 2017. As a result, the Company will be required to adopt the new standard effective February 1, 2018.
The Company is currently evaluatingcompleting its evaluation of the impactimpacts of ASU 2014-09, as amended, on its condensed consolidated financial statements including which of the alternative application approaches available under the standard will be utilized for its adoption. Entities are permittedstatements. The Company expects to applyadopt the new standard either retrospectively, subject to certain practical expedients, or through an alternative transitionusing the allowable modified retrospective method that requires the applicationwhich will result in a cumulative effect adjustment as of the guidance only to contracts that are uncompleted on the date of initial application.February 1, 2018. To date, the Company has examined aan active engineering, procurement and construction (“EPC”) contract of GPS that it believes is representative of the large fixed price EPC contracts that will be in place at the date of adoption and has come to preliminary conclusions on the impact of ASU 2014-09the new standard on revenues using the 5-step process prescribed by ASU 2014-09. It2014-09, as amended. The Company does not believe that the adoption of ASU 2014-09the standard will have a significant impact on itsthe revenue recognition patterns for its fixed price EPC contracts as compared to revenue recognitionrevenues recognized under the existing revenue guidance, assuming that contract structures similar to those in place are in effect at the time of the Company’s adoption. The Company expects that most of its future revenues will continue to be recognized over time utilizing the cost-to-cost measure of progress consistent with current practice. However, there are certain industry-specific implementation issues that are still unresolved and, depending on the resolution of these matters, conclusions on the impact on the Company’s revenue recognition patterns could change. Through the date of adoption, of ASU 2014-09. Thethe Company will continue to evaluate the impacts of ASU 2014-09, through the date of adoptionas amended, on its large EPC and its smaller long-term contracts to ensure that its preliminary conclusions continue to remain accurate.accurate for future revenues. Additionally, the Company is continuing its assessment of the impact of ASU 2014-09’s impact2014-09, as amended, on its financial statement disclosures and will provide further informationwhich are expected to be more extensive based on any required changes to disclosures as they are identified.the requirements of the new standard.
Leases
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases, which amends the existing guidance and which will require recognition of operating leases with lease terms of more than twelve months on the balance sheet. For these leases, companies will record assets for the rights and liabilities for the obligations that are created by the leases. The pronouncement will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recordedpresented in the financial statements. Although the adoption of this pronouncement, which is effective for fiscal years beginning after December 15, 2018, will affect the Company’s condensed consolidated financial statements, the Company has not yet determined the complete extent or significance of the changes.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting, as part of its simplification initiative. The simplifications in this pronouncement affect several aspects of the accounting for share-based payment transactions, including the income tax consequences, the classification of awards as either equity or liabilities, and the presentation of the statement of cash flows. In the past, the Company determined for each stock option award whether the difference between the deduction for income tax reporting purposes created at the time of stock option exercise and the related compensation cost previously recorded for financial reporting purposes resulted in either an excess income tax benefit or an income tax deficiency. Excess income tax benefits were recorded as additions to the additional paid-in capital account; income tax deficiencies have not been material for the Company. Under the new guidance, all excess income tax benefits and income tax deficiencies will be recognized accordingly as income tax benefit or expense in the income statement. The income tax effects will be treated as discrete items in the quarterly reporting period in which they occur. Unlike current practice, excess tax benefits will be classified along with other income tax cash flows as an operating activity. As permitted, the Company adopted the new pronouncement in the current quarter, effective as of February 1, 2016, with the primary effects being the reductions of income tax expense for the three and six months ended in the amounts of $1.0 million and $1.1 million, respectively.
Deferred Income Taxes
Late in 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. Implementation of this new standard is required for public entities for reporting periods beginning after December 15, 2016. As permitted, the new guidance was early adopted by the Company in the current quarterly reporting period using a retrospective approach. Accordingly, deferred tax assets in the amount of $1.1 million that were previously included in current assets as of January 31, 2016 were reclassified and reflected in the net balance of deferred income tax liabilities classified as noncurrent in the condensed consolidated balance sheet as of January 31, 2016 included herein.
NOTE 3 — BUSINESS COMBINATIONS
On December 4, 2015, the Company acquired TRC, including its consolidated subsidiaries, in a business combination that was completed pursuant to the terms and conditions of a Membership Interest Purchase Agreement. TRC is principally an industrial fabricator and constructor serving both light and heavy industrial organizations primarily in the southern United States. Consideration included a $0.5 million cash payment. In addition, the Company made cash payments totaling $15.6 million on the closing date in order to retire the outstanding bank debt of TRC and certain leases.
On May 29, 2015, a wholly owned subsidiary of the Company purchased 100% of the outstanding capital of APC, a private company incorporated in the Republic of Ireland. This business combination was completed pursuant to the terms and conditions of a Share Purchase Agreement, dated May 11, 2015 (the “SPA”). Including its affiliated companies, APC provides turbine, boiler and large rotating equipment installation, commissioning and outage services to original equipment manufacturers, global construction firms and plant owners worldwide. The fair value of the consideration transferred to the former owners of APC was $11.1 million including a liability in the amount of $1.1 million representing cash held back until the expiration of the escrow period. The Company is entitled to retain an amount to cover any shortfall in the amount of the acquired net worth of APC, as defined in the SPA. During the three months ended July 31, 2016, the Company made a payment of previously escrowed funds to the former owners in the amount of $0.9 million.
Both business combinations were accounted for using the acquisition method of accounting, with Argan as the acquirer. The results of operations for APC and Roberts have been included in the condensed consolidated financial statements since the corresponding acquisition dates.
NOTE 4 — SPECIAL PURPOSE ENTITIES
Construction Joint VenturesCONSTRUCTION JOINT VENTURES
GPS assigned its EPC contracts for the engineering, procurement and construction of two natural gas-fired power plants (the “EPC Contracts”), known as Panda Liberty and Panda Patriot, to two separate joint ventures that were formed in order to perform the work for the applicable project and to spread the bonding risk of each project. The joint venture partner for both projects is a large heavy civil contracting firm. The corresponding joint venture agreements, as amended, provide that GPS has the majority interest in any profits, losses, assets and liabilities resulting from the performance of the EPC Contracts.contracts. Final contractual completion of the two projects was achieved in October 2016 and December 2016, respectively. GPS has no significant remaining commitments under these arrangements beyond those related to the completion of the EPC Contracts includingexcept for the provision of services under the related warranty obligations. Substantial completion of the two projects, as defined by each EPC Contract, was achieved in April 2016 and June 2016, respectively.
Due to the financial control ofby GPS, the accounts of the joint ventures have been included in the Company’s condensed consolidated financial statements since the commencement of contract activities near(near the end of the fiscal year ended January 31, 2014.2014). The shares of the profits of the joint ventures including the majority portion attributable to the stockholders of Argan, have been determined based on the percentages by which the Company believes profits will ultimately be shared by the joint venture partners.
Moxie Freedom LLC
In August 2014, Gemma Power, Inc. (“GPI”), which is included in the group of companies identified above as “GPS” and is wholly owned by Argan, entered into a Development Loan Agreement (the “DLA”) with Moxie Freedom LLC (“Moxie Freedom”), a variable interest entity (“VIE”) that was wholly owned by Moxie Energy, LLC (“Moxie”), a power facility project development firm. The financial support provided by GPI covered a significant portion of the costs for Moxie Freedom to develop a large natural gas-fired power plant.
Under the DLA, GPI made development loans to Moxie Freedom that totaled $4.3 million, including $1.7 million in loans made during the six months ended July 31, 2015; such loans earned interest based on an annual rate of 20%. In November 2015, Moxie sold a substantial portion of its ownership interest in Moxie Freedom, GPI received repayment of its development loans in full and $0.6 million in accrued interest, GPI received a development success fee in the amount of $4.3 million, and GPS received a full notice-to-proceed with activities pursuant to the corresponding EPC contract.
Pursuant to a participation agreement, an equipment supplier to Moxie Freedom provided GPI with 40% of the funding for the development loans made to Moxie Freedom that totaled $1.7 million. Under the applicable accounting guidance, the funding provided to GPI was treated as a secured borrowing including $0.7 million borrowed during the six months ended July 31, 2015. Interest payable to the supplier accrued based on an annual rate of 20% and the supplier was entitled to receive 40% of any development success fee earned by GPI in connection with the permanent financing and/or sale of the project. In November 2015, all amounts due under the participation agreement were paid by GPI including principal and interest in the total amount of $1.9 million and the supplier’s share of the development success fee in the amount of $1.7 million.
Through its arrangements with Moxie Freedom, the Company was deemed to be the primary beneficiary of this VIE entity at its inception. However, Moxie Freedom substantially completed its project development efforts during 2015 and financial support was thereafter provided substantially by the pending investor. As a result, the Company was no longer the primary beneficiary of the VIE and it was deconsolidated during the quarter ended July 31, 2015. The primary effects of the deconsolidation were the elimination of the capitalized project costs from the Company’s consolidated balance sheet ($4.9 million) and the addition to the consolidated balance sheet of the notes receivable from Moxie Freedom and related accrued interest. For reporting periods prior to the deconsolidation, the amounts of GPI’s notes receivable from Moxie Freedom and the corresponding amounts of accrued interest and interest income were eliminated in consolidation. The deconsolidation resulted in a pre-tax gain which was included in the statements of earnings for the three and six months ended July 31, 2015 in the amount of $0.3 million.
NOTE 54 — CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Short-term investments as of July 31, 2017 and January 31, 20162017 consisted solely of certificates of deposit purchased from the Bank of America (the “Bank”) with originalweighted average initial maturities greater than three months but less than twelve monthsof 252 days and 185 days, respectively (the “CDs”). The Company has the intent and ability to hold these securities until they mature, and they are carried at cost plus accrued interest which approximates fair value. The total carrying value amounts as of July 31, 2017 and January 31, 20162017 included accrued interest of $0.3$1.4 million and $0.1$0.8 million, respectively. Interest income is recorded when earned and is included in other income, net. As of July 31, 2016,2017 and January 31, 2017, the weighted average annual interest rate onrates of the Company’s short-term investment CDs was 0.81%.were 1.27% and 1.13%, respectively.
The Company has cash on deposit in excess of federally insured limits at the Bank, has purchased CDs from the Bank, and has liquid mutual fund investments atthrough an arrangement with the Bank. Management does not believe that maintaining substantially all such assets with the Bank represents a material concentration risk.
The amount of cash and cash equivalents included in the condensed consolidated balance sheet as of July 31, 2016 included $38.4 million held by the consolidated joint venture entities that are discussed in Note 4 above that will be used to cover any remaining future construction costs incurred under the corresponding EPC Contracts and the remaining earnings distributions to the joint venture partners.
NOTE 65 — ACCOUNTS RECEIVABLE
Amounts retained by project owners under construction contracts and included in accounts receivable atas of July 31, 2017 and January 31, 20162017 were $17.8$57.0 million and $44.6$36.2 million, respectively. Such retainage amounts represent funds withheld by project owners until a defined phase of a contract or project has been completed and accepted by the project owner. Retention amounts and the length of retention periods may vary. Most of the amount outstanding as of July 31, 20162017, which relates substantially to active projects, and will not be collected until calendarthe fiscal year 2018.ending January 31, 2019. Retainage amounts related to active contracts are classified as current assets regardless of the term of the applicable contract and amounts are generally collected by the completion of the applicable contract.
DueThe Company monitors its exposure to credit losses and maintains an allowance for anticipated losses considered necessary under the circumstances described in Note 8 below, APC wrote-offbased on historical experience with uncollected accounts and a review of its account receivable from the project owner in thecurrently outstanding accounts and notes receivable. The amount of $0.8 million during the three-month period ended July 31, 2016. The amounts of the allowance for uncollectible accounts atas of July 31, 2017 and January 31, 2016 were2017 was approximately $2.4 million and $1.9 million, respectively, and it related primarily to project development loans made in prior years. The provision for uncollectible accounts for both the three and the six months ended July 31, 2017 was $0.3 million. The Company did not material. There were no provisionsrecord a provision for tradeuncollectible accounts receivable losses recorded duringfor the three and six months ended July 31, 2016 or 2015.2016.
NOTE 76 — COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
The table below sets forth the aggregate amounts of costs charged to and earnings accrued on uncompleted contracts compared with the billings on those contracts through July 31, 2017 and January 31, 2016.2017.
|
| July 31, |
| January 31, |
|
| July 31, |
| January 31, |
| ||||
|
| 2016 |
| 2016 |
|
| 2017 |
| 2017 |
| ||||
Costs charged to uncompleted contracts |
| $ | 888,854 |
| $ | 764,071 |
|
| $ | 879,218 |
| $ | 485,629 |
|
Estimated accrued earnings |
| 175,760 |
| 116,326 |
|
| 151,324 |
| 78,708 |
| ||||
|
| 1,064,614 |
| 880,397 |
|
| 1,030,542 |
| 564,337 |
| ||||
Less - billings to date |
| 1,182,692 |
| 982,182 |
|
| 1,212,929 |
| 770,386 |
| ||||
|
| $ | (118,078 | ) | $ | (101,785 | ) |
| $ | (182,387 | ) | $ | (206,049 | ) |
Amounts above are included in the accompanying condensed consolidated balance sheets under the following captions:
|
| July 31, |
| January 31, |
| ||
|
| 2016 |
| 2016 |
| ||
Costs and estimated earnings in excess of billings |
| $ | 3,052 |
| $ | 4,078 |
|
Billings in excess of costs and estimated earnings |
| 121,130 |
| 105,863 |
| ||
|
| $ | (118,078 | ) | $ | (101,785 | ) |
|
| July 31, |
| January 31, |
| ||
|
| 2017 |
| 2017 |
| ||
Costs and estimated earnings in excess of billings |
| $ | 8,194 |
| $ | 3,192 |
|
Billings in excess of costs and estimated earnings |
| 190,581 |
| 209,241 |
| ||
|
| $ | (182,387 | ) | $ | (206,049 | ) |
Contract costs
Costs charged as of July 31, 2016 includedto contracts include amounts billed to the Company for delivered goods and services totaling $10.9 million where payments have been retained; retained from subcontractors and suppliers. Retained amounts as of July 31, 2017 and January 31, 2017, which were included in the Company’s balance of accounts payable as of July 31, 2016. Suchthose dates, totaled $30.3 million and $17.2 million, respectively. Generally, such amounts are expected to be paid prior to the completion of the applicable project.
NOTE 87 — PURCHASED INTANGIBLE ASSETS
At July 31, 2016,2017 and January 31, 2017, the goodwill balances included in the condensed consolidated balance sheets related to the acquisitions of GPS, TRC and APC and were $18.5 million, $14.3$14.4 million and $2.0 million, respectively.
In July 2016, construction work was suspended on APC’s largest project, which reflected over 90% of its contract backlog. Additionally, APC’s primary market is the United Kingdom, which voted to leave the European Union on June 23, 2016 (“Brexit”). The resulting sterling pound drop, financial market uncertainty and recessionary pressures will likely impact the availability of financing for future power plant developments in the United Kingdom. APC’s second largest market is the Middle East, which has experienced decreased project activity due to capital constraints, resulting from decreased oil revenues. APC reported a loss for the quarter ended July 31, 2016, and will likely incur losses for the remainder of the year. Given the events above, interim analyses were performed in order to determine whether an impairment loss had occurred related to the goodwill. Using the income and market approaches, the assessment analyses indicated that the carrying value of the business exceeded its fair value. As a result, APC recorded an estimated impairment loss related to goodwill of approximately $2.0 million that has been reflected in the condensed consolidated statements of earnings for the three and six months ended July 31, 2016. No impairment loss occurred during the comparable prior year periods.
Intangibleother purchased intangible assets other than goodwill, consisted of the following amounts atelements as of July 31, 2017 and January 31, 2016:2017.
|
|
|
| July 31, 2016 |
| January 31, |
| ||||||||
|
| Estimated |
| Gross |
| Accumulated |
| Net |
| 2016 |
| ||||
Trade Names |
|
|
|
|
|
|
|
|
|
|
| ||||
TRC |
| Indefinite |
| $ | 4,499 |
| $ | — |
| $ | 4,499 |
| $ | 4,499 |
|
GPS |
| 15 years |
| 3,643 |
| 2,343 |
| 1,300 |
| 1,421 |
| ||||
SMC |
| Indefinite |
| 181 |
| — |
| 181 |
| 181 |
| ||||
Process Certifications |
|
|
|
|
|
|
|
|
|
|
| ||||
TRC |
| 7 years |
| 1,897 |
| 181 |
| 1,716 |
| 1,852 |
| ||||
Customer Relationships |
|
|
|
|
|
|
|
|
|
|
| ||||
TRC |
| 10 years |
| 916 |
| 61 |
| 855 |
| 901 |
| ||||
APC |
| 4 years |
| 430 |
| 274 |
| 156 |
| 371 |
| ||||
Other Intangibles |
| various |
| 288 |
| 257 |
| 31 |
| 119 |
| ||||
Totals |
|
|
| $ | 11,854 |
| $ | 3,116 |
| $ | 8,738 |
| $ | 9,344 |
|
Amortization expense was $0.2 million and $0.1 million for the three months ended July 31, 2016 and 2015, respectively, and was $0.5 million and $0.2 million for the six months ended July 31, 2016 and 2015, respectively.
|
|
|
| July 31, 2017 |
| January 31, |
| ||||||||
|
| Estimated |
| Gross |
| Accumulated |
| Net |
| 2017 (net |
| ||||
Trade names - |
|
|
|
|
|
|
|
|
|
|
| ||||
GPS/TRC |
| 15 years |
| $ | 8,142 |
| $ | 3,085 |
| $ | 5,057 |
| $ | 5,328 |
|
SMC |
| indefinite |
| 181 |
| — |
| 181 |
| 181 |
| ||||
Process certifications - |
|
|
|
|
|
|
|
|
|
|
| ||||
TRC |
| 7 years |
| 1,897 |
| 452 |
| 1,445 |
| 1,581 |
| ||||
Customer relationships - |
|
|
|
|
|
|
|
|
|
|
| ||||
TRC/APC |
| 4-10 years |
| 1,346 |
| 373 |
| 973 |
| 1,072 |
| ||||
Other intangibles |
| various |
| 46 |
| 39 |
| 7 |
| 19 |
| ||||
Totals |
|
|
| $ | 11,612 |
| $ | 3,949 |
| $ | 7,663 |
| $ | 8,181 |
|
NOTE 9 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at July 31 and January 31, 2016:
|
| July 31, |
| January 31, |
| ||
|
| 2016 |
| 2016 |
| ||
Land and improvements |
| $ | 863 |
| $ | 863 |
|
Buildings and improvements |
| 5,156 |
| 5,111 |
| ||
Furniture, machinery and equipment |
| 9,685 |
| 8,510 |
| ||
Trucks and other vehicles |
| 3,263 |
| 2,906 |
| ||
|
| 18,967 |
| 17,390 |
| ||
Less - accumulated depreciation |
| 5,845 |
| 5,082 |
| ||
Property, plant and equipment, net |
| $ | 13,122 |
| $ | 12,308 |
|
Depreciation expense amounts were $0.5 million and $0.1 million for the three months ended July 31, 2016 and 2015, respectively, and were approximately $0.9 million and $0.3 million for the six months ended July 31, 2016 and 2015, respectively.
The Company also uses equipment and occupies facilities under non-cancelable operating leases and other rental agreements. Rent incurred on construction projects and included in the costs of revenues was $2.6 million and $3.8 million for the three months ended July 31, 2016 and 2015, respectively, and was $5.7 million and $8.4 million for the six months ended July 31, 2016 and 2015, respectively. Rent expense amounts included in selling, general and administrative expenses for the three and six months ended July 31, 2016 and 2015 were not material.
NOTE 108 — FINANCING ARRANGEMENTS
The Company maintains financing arrangements with the Bank that are described in aan Amended and Restated Replacement Credit Agreement effective August 10, 2015 (the “Credit Agreement”). The Credit Agreement,, which superseded the Company’s prior arrangements with the Bank,Bank. The Credit Agreement provides a revolving loan with a maximum borrowing amount of $10.0$50.0 million that is available until May 31, 20182021 with interest at the 30-day LIBOR plus 2.00%. The Company may also use the borrowing ability to cover standby letters ofother credit instruments issued by the Bank for the Company’s use in the ordinary course of business. There were no actual borrowingsThe Company has approximately $6.0 million of credit outstanding under the Credit Agreement as of July 31 or January 31, 2016. Borrowing availability in the total amount of approximately $4.4 million has been designated to cover several letters of credit issued by the Bank, with expiration dates ranging from September 23, 2016 to January 8, 2017, to cover insurance exposures and in support of the project development activities of a potential power plant owner.Agreement.
The Company has pledged the majority of its assets to secure theits financing arrangements. The Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Bank requires that the Company comply with certain financial covenants at its fiscal year-end and at each of its fiscal quarter-ends. The Credit Agreement includes other terms, covenants and events of default that are customary for a credit facility of its size and nature. As of July 31 2016,and January 31, 2017, the Company was in compliancecompliant with the financial covenants of the Credit Agreement.its financing arrangements.
TheA commercial bank that supports the activities of TRC has issued twoan outstanding irrevocable lettersletter of credit on its behalf in the amountsamount of $0.5 million and $0.4 million with a current expiration dates of June 30 and August 31, 2017, respectively, which are secured by a lien on the owned facility of TRC.date in January 2018.
NOTE 119 — CONTINGENCIESLEGAL MATTERS
In the normal course of business, the Company may have pending claims and legal proceedings. It is the opinion of management, based on information available at this time, that there are no current claims and proceedings that could have a material effect on the Company’s condensed consolidated financial statements other than the one discussed below. The material amounts of any legal fees expected to be incurred in connection with legal matters are accrued when such amounts are estimable.
PPS Engineers Matter
On February 1, 2016, TRC was sued in Person County, North Carolina, by a subcontractor, PPS Engineers, Inc. (“PPS”), in an attempt to force TRC to pay invoices for services rendered. Therendered in the total amount claimed by PPS in this lawsuit approximates $0.7of $2.3 million. PPS has placed liens on the property of the customers in several states where work was performed by PPS and it has also filed a claim against the bond issued on behalf of TRC relating to one significant project located in Tennessee in the amount of $1.6$2.5 million. On March 4, 2016, TRC filed responses to the claims of PPS. The positions of TRC are that PPS failed to deliver a number of items required by the applicable contract between the parties and that the invoices rendered by PPS covering the disputed services will not be paid until such deliverables are supplied. Further, TRC maintains that certain sums are owed to it by PPS for services, furniture, fixtures, equipment, and software that were supplied by TRC on behalf of PPS that total approximately $2.2 million. The amounts invoiced by PPS wereare accrued by TRC and the corresponding liability amount was included in accounts payable in the condensed consolidated balance sheetsheets as of July 31, 2016.2017 and January 31, 2017. TRC has not recorded an account receivable for the amounts it believes are owed to it by PPS. A mediation effort was attempted in 2016 but it was unproductive and an impasse was declared.
The Company intends to continue to defend against the claim of PPS and to pursue its claims against PPS with vigorous efforts.PPS. Due to the uncertainty of the ultimate outcomes of these legal proceedings, assurance cannot be provided by the Company that TRC will be successful in these efforts. Management does not believe that resolution of the matters discussed above will result in additional loss with material negative effect on the Company’s consolidated operating results in a future reporting period.
Self-Insurance
TRC has elected to retain portions of future losses, if any, through the use of self-insurance for exposures related to workers’ compensation and employee health insurance claims. Liabilities in excess of contractually limited amounts are the responsibility of an insurance carrier. To the extent that the Company is self-insured for these exposures, including claims incurred but not reported, liabilities have been accrued based upon the Company’s best estimates, with input from legal and insurance advisors. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the near-term. Management believes that reasonably possible losses, if any, for these matters, to the extent not otherwise disclosed and net of recorded accruals, will not have a material adverse effect on the Company’s future results of operations, financial position or cash flow. At July 31 and January 31, 2016, the aggregate amounts established to cover self-insured losses were included in the balances of accrued expenses in the condensed consolidated balance sheets.
Warranty Costs
Many of the Company’s construction contracts contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from six to eighteen months after the completion of construction. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, we have not experienced material unexpected warranty costs. However, provision for estimated warranty costs, (if any) is made in the period in which such costs become probable and is periodically adjusted to reflect actual experience. Warranty costs are estimated based on the Company’s experience with the type of work and any known risks relative to each completed project. At July 31 and January 31, 2016, the amounts established to cover future warranty costs under completed EPC contracts were included in the balances of accrued expenses in the condensed consolidated balance sheets.
NOTE 1210 — STOCK-BASED COMPENSATION
The Company’s board of directors may make awards under its 2011 Stock Plan (the “Stock Plan”) to officers, directors and key employees. Awards may include incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”), and restricted or unrestricted common stock. ISOs granted under the Stock Plan shall have an exercise price per share at least equal to the common stock’s market value per share at the date of grant, shall have a term no longer than ten years, and typically become fully exercisable one year from the date of grant. NSOs may be granted at an exercise price per share that differs from the common stock’s market value per share at the date of grant, may have up to a ten-year term, and typically become exercisable one year from the date of award.
As of July 31, 2016,2017, there were approximately 1.6 million1,071,650 shares of the Company’s common stock reserved for issuance under the Company’s stock option plans (including the Stock Plan and an expired predecessor plan), including approximately 0.6 million330,000 shares of the Company’s common stock available for future awards under the Stock Plan.
Summaries of activity under the Company’s stock option plans for the six months ended July 31, 20162017 and 2015,2016, along with the corresponding weighted average per share amounts, are presented below (shares in thousands):
|
| Shares |
| Exercise |
| Remaining |
| Fair Value |
| |||||||||||||
Outstanding, February 1, 2017 |
| 707 |
| $ | 39.04 |
| 7.82 |
| $ | 10.22 |
| |||||||||||
Granted |
| 125 |
| $ | 63.58 |
|
|
|
|
| ||||||||||||
Exercised |
| (80 | ) | $ | 30.48 |
|
|
|
|
| ||||||||||||
Forfeited |
| (10 | ) | $ | 71.75 |
|
|
|
|
| ||||||||||||
Outstanding, July 31, 2017 |
| 742 |
| $ | 43.66 |
| 7.79 |
| $ | 11.56 |
| |||||||||||
Exercisable, July 31, 2017 |
| 462 |
| $ | 28.84 |
| 6.72 |
| $ | 7.75 |
| |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Shares |
| Exercise |
| Remaining |
| Fair Value |
|
| Shares |
| Exercise |
| Remaining |
| Fair Value |
| ||||
Outstanding, February 1, 2016 |
| 1,064 |
| $ | 26.38 |
| 6.36 |
| $ | 6.91 |
|
| 1,064 |
| $ | 26.38 |
| 6.36 |
| $ | 6.91 |
|
Granted |
| 105 |
| $ | 36.09 |
|
|
|
|
|
| 105 |
| $ | 36.09 |
|
|
|
|
| ||
Exercised |
| (195 | ) | $ | 21.59 |
|
|
|
|
|
| (195 | ) | $ | 21.59 |
|
|
|
|
| ||
Outstanding, July 31, 2016 |
| 974 |
| $ | 28.39 |
| 7.03 |
| $ | 7.51 |
|
| 974 |
| $ | 28.39 |
| 7.03 |
| $ | 7.51 |
|
Exercisable, July 31, 2016 |
| 704 |
| $ | 25.55 |
| 6.55 |
| $ | 6.85 |
|
| 704 |
| $ | 25.55 |
| 6.55 |
| $ | 6.85 |
|
|
| Shares |
| Exercise |
| Remaining |
| Fair Value |
| ||
Outstanding, February 1, 2015 |
| 876 |
| $ | 22.34 |
| 7.08 |
| $ | 6.01 |
|
Granted |
| 135 |
| $ | 33.62 |
|
|
|
|
| |
Exercised |
| (59 | ) | $ | 16.82 |
|
|
|
|
| |
Forfeited |
| (6 | ) | $ | 17.33 |
|
|
|
|
| |
Outstanding, July 31, 2015 |
| 946 |
| $ | 24.33 |
| 7.20 |
| $ | 6.53 |
|
Exercisable, July 31, 2015 |
| 686 |
| $ | 20.85 |
| 6.60 |
| $ | 5.71 |
|
The changes in the number of non-vested options to purchase shares of common stock for the six months ended July 31, 20162017 and 2015,2016, and the weighted average fair value per share for each number, are presented below (shares in thousands):
|
| Shares |
| Fair Value |
| |
Nonvested, February 1, 2016 |
| 300 |
| $ | 8.97 |
|
Granted |
| 105 |
| $ | 9.66 |
|
Vested |
| (135 | ) | $ | 8.99 |
|
Nonvested, July 31, 2016 |
| 270 |
| $ | 9.22 |
|
|
| Shares |
| Fair Value |
|
| Shares |
| Fair Value |
| ||
Nonvested, February 1, 2015 |
| 306 |
| $ | 7.14 |
| ||||||
Non-vested, February 1, 2017 |
| 270 |
| $ | 14.93 |
| ||||||
Granted |
| 135 |
| $ | 8.99 |
|
| 125 |
| $ | 16.19 |
|
Vested |
| (181 | ) | $ | 6.28 |
|
| (105 | ) | $ | 9.66 |
|
Nonvested, July 31, 2015 |
| 260 |
| $ | 8.70 |
| ||||||
Forfeited |
| (10 | ) | $ | 19.14 |
| ||||||
Non-vested, July 31, 2017 |
| 280 |
| $ | 17.83 |
| ||||||
|
|
|
|
|
| |||||||
|
| Shares |
| Fair Value |
| |||||||
Non-vested, February 1, 2016 |
| 300 |
| $ | 8.97 |
| ||||||
Granted |
| 105 |
| $ | 9.66 |
| ||||||
Vested |
| (135 | ) | $ | 8.99 |
| ||||||
Non-vested, July 31, 2016 |
| 270 |
| $ | 9.22 |
|
Compensation expense amounts related to stock options were $0.6$1.2 million and $0.5$0.6 million for the three months ended July 31, 20162017 and 2015,2016, respectively, and were $1.3$2.3 million and $1.1$1.3 million for the six months ended July 31, 20162017 and 2015,2016, respectively. At July 31, 2016,2017, there was $1.1$2.7 million in unrecognized compensation cost related to outstanding stock options. The Company expects to recognize the compensation expense for these awards withinover the next twelve months. The total intrinsic values of the stock options exercised during the six months ended July 31, 2017 and 2016 and 2015 were $3.9$2.8 million and $1.1$3.9 million, respectively. At July 31, 2016,2017, the aggregate market values of the shares of common stock subject to outstanding and exercisable stock options that were “in-the-money” as of July 31, 2017 exceeded the aggregate exercise prices of such options by $17.3$16.5 million and $14.5$16.4 million, respectively.
For companies with limited stock option exercise experience, guidance provided by the SEC permits the use of a “simplified method” in developing the estimate of the expected term of a “plain-vanilla’’ share option, based on the average of the vesting period and the option term, which the Company used to estimate the expected terms of its stock options. However, the Company believes that its stock option exercise activity, particularly over the last two years, has become sufficient to provide it with a reasonable basis on which to estimate expected lives. Accordingly, the estimated expected life used in the determination of stock options awarded so far in calendar year 2017 was 3.35 years. The simplified method would have resulted in the use of 5.50 years as the estimated expected life of each of these stock options. As a result, the aggregate fair value of this group of stock options was reduced by $1.2 million, or approximately 24%. The effect of the change on the amount of stock option compensation expense recorded during the three and six months ended July 31, 2017 were reductions of $0.3 million and $0.5 million, respectively.
The fair valuevalues of each stock option granted in the six-month periods ended July 31, 2017 and 2016 and 2015 waswere estimated on the corresponding datedates of award using the Black-Scholes option-pricing model based on the following weighted average assumptions:
|
| Six Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
|
Dividend yield |
| 1.96 | % | 2.09 | % |
| 1.10 | % | 1.96 | % |
Expected volatility |
| 33.85 | % | 34.80 | % |
| 36.01 | % | 33.85 | % |
Risk-free interest rate |
| 1.36 | % | 1.43 | % |
| 1.57 | % | 1.36 | % |
Expected life (in years) |
| 5.50 |
| 5.22 |
|
| 3.35 |
| 5.50 |
|
NOTE 1311 — INCOME TAXES
The Company’s income tax expense amounts for the six months ended July 31, 20162017 and 20152016 differed from the expected income tax expensecorresponding amounts computed by applying the federal corporate income tax rate of 35% to the amounts of income before income taxes for the periods as shown in the table below.
|
| Six Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
Computed expected income tax expense |
| $ | 19,721 |
| $ | 13,820 |
|
| $ | 25,810 |
| $ | 19,721 |
|
Increase (decrease) resulting from: |
|
|
|
|
| |||||||||
State income taxes, net of federal tax benefit |
| 2,075 |
| 2,120 |
|
| 3,020 |
| 2,075 |
| ||||
Permanent differences, net |
| (3,896 | ) | (2,955 | ) | |||||||||
Other, net |
| 1,028 |
| (185 | ) | |||||||||
Domestic production activities deduction |
| (2,148 | ) | (1,584 | ) | |||||||||
Stock option exercises |
| (773 | ) | (986 | ) | |||||||||
Exclusion of non-controlling interests |
| (106 | ) | (1,930 | ) | |||||||||
Adjustments and other differences |
| (127 | ) | 1,632 |
| |||||||||
|
| $ | 18,928 |
| $ | 12,800 |
|
| $ | 25,676 |
| $ | 18,928 |
|
For the six months ended July 31, 2016 and 2015, the favorable income tax effects of permanent differences related primarily to the exclusion from taxable income of the income attributable to noncontrolling interest entities (which are considered partnerships for income tax reporting purposes), the domestic manufacturing deduction, and the recognition of the excess income tax benefits associated with stock options exercised during the current year, all offset partially in the current period by the unfavorable income tax effect of the impairment loss. For the six months ended July 31, 2016, the largest other reconciling item was the unfavorable foreign income tax rate differential.
As of July 31, 2016, the amount in2017 and January 31, 2017, the condensed consolidated balance sheet presented for accrued expensessheets included accrued income taxes and prepaid income taxes in the amountamounts of $1.8 million. The amount presented in the condensed consolidated balance sheet as of January 31, 2016 for prepaid expenses included income tax overpayments of $3.3 million.$2.2 million and $3.9 million, respectively. As of July 31, 2016,2017, the Company does not believe that it has any material uncertain income tax positions reflected in its accounts.
The income tax effects of temporary differences that gave rise to deferred tax assets and liabilities as of July 31, 2017 and January 31, 20162017 included the following:
|
| July 31, |
| January 31, |
|
| July 31, |
| January 31, |
| ||||
|
| 2016 |
| 2016 |
|
| 2017 |
| 2017 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
| ||||
Net operating loss (“NOL”) carryforwards |
| $ | 3,103 |
| $ | 3,345 |
|
| $ | 3,604 |
| $ | 3,487 |
|
Stock options |
| 2,323 |
| 2,354 |
|
| 2,271 |
| 1,594 |
| ||||
Purchased intangibles |
| 1,763 |
| 1,905 |
|
| 1,439 |
| 1,592 |
| ||||
Accrued expenses |
| 2,310 |
| 2,144 |
| |||||||||
Other |
| 1,049 |
| 328 |
| |||||||||
Accrued expenses and other |
| 2,074 |
| 2,052 |
| |||||||||
|
| 10,548 |
| 10,076 |
|
| 9,388 |
| 8,725 |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Purchased intangibles |
| (4,567 | ) | (4,428 | ) | |||||||||
Construction contracts |
| $ | (3,282 | ) | $ | (3,681 | ) |
| (3,228 | ) | (2,862 | ) | ||
Purchased intangibles |
| (4,421 | ) | (4,375 | ) | |||||||||
Property and equipment and other |
| (2,410 | ) | (2,244 | ) |
| (2,365 | ) | (2,389 | ) | ||||
|
| (10,113 | ) | (10,300 | ) |
| (10,160 | ) | (9,679 | ) | ||||
Net deferred tax assets (liabilities) |
| $ | 435 |
| $ | (224 | ) | |||||||
Net deferred tax liabilities |
| $ | (772 | ) | $ | (954 | ) |
The Company’s ability to realize deferred tax assets, including those related to the NOLs, discussed above, depends primarily upon the generation of sufficient future taxable income to allow for the utilization of the Company’s deductible temporary differences and tax planning strategies. If such estimates and assumptions change in the future, the Company may be required to record additional valuation
allowances against some or all of its deferred tax assets resulting in additional income tax expense in the condensed consolidated statement of earnings. At this time, based substantially on the strong earnings performance of the Company’s power industry services reporting segment, management believes that it is more likely than not that the Company will realize the benefits of its deferred tax assets.
The Company is subject to income taxes in the United States of America, the Republic of Ireland and in various other state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to federal, state and local income tax examinations by tax authorities for its fiscal years ended on or before January 31, 20112013 except for a few notable exceptions relevant to the Company including the Republic of Ireland, California and CaliforniaTexas where the open periods are one year longer.
NOTE 1412 — EARNINGS PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.
Reconciliations of the number of weighted average basic shares outstanding to the number of weighted average diluted shares outstanding and the computations of basic and diluted earnings per share for the three and six months ended July 31, 20162017 and 20152016 are as follows (shares in thousands):
|
| Three Months Ended July 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
|
|
|
|
|
| ||
Net income attributable to the stockholders of Argan, Inc. |
| $ | 19,674 |
| $ | 11,307 |
|
|
|
|
|
|
| ||
Weighted average number of shares outstanding - basic |
| 14,939 |
| 14,747 |
| ||
Effect of stock options (1) |
| 339 |
| 256 |
| ||
Weighted average number of shares outstanding - diluted |
| 15,278 |
| 15,003 |
| ||
Net income per share attributable to the stockholders of Argan, Inc.: |
|
|
|
|
| ||
Basic |
| $ | 1.32 |
| $ | 0.77 |
|
Diluted |
| $ | 1.29 |
| $ | 0.75 |
|
|
| Six Months Ended July 31, |
|
| Three Months Ended July 31, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to the stockholders of Argan, Inc. |
| $ | 31,904 |
| $ | 18,810 |
|
| $ | 27,139 |
| $ | 19,674 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of shares outstanding - basic |
| 14,899 |
| 14,693 |
|
| 15,514 |
| 14,939 |
| ||||
Effect of stock options (1) |
| 332 |
| 259 |
|
| 273 |
| 339 |
| ||||
Weighted average number of shares outstanding - diluted |
| 15,231 |
| 14,952 |
|
| 15,787 |
| 15,278 |
| ||||
Net income per share attributable to the stockholders of Argan, Inc.: |
|
|
|
|
| |||||||||
Net income per share attributable to the stockholders of Argan, Inc. |
|
|
|
|
| |||||||||
Basic |
| $ | 2.14 |
| $ | 1.28 |
|
| $ | 1.75 |
| $ | 1.32 |
|
Diluted |
| $ | 2.09 |
| $ | 1.26 |
|
| $ | 1.72 |
| $ | 1.29 |
|
|
|
|
|
|
| |||||||||
|
| Six Months Ended July 31, |
| |||||||||||
|
| 2017 |
| 2016 |
| |||||||||
|
|
|
|
|
| |||||||||
Net income attributable to the stockholders of Argan, Inc. |
| $ | 47,764 |
| $ | 31,904 |
| |||||||
|
|
|
|
|
| |||||||||
Weighted average number of shares outstanding - basic |
| 15,491 |
| 14,899 |
| |||||||||
Effect of stock options (1) |
| 297 |
| 332 |
| |||||||||
Weighted average number of shares outstanding - diluted |
| 15,788 |
| 15,231 |
| |||||||||
Net income per share attributable to the stockholders of Argan, Inc. |
|
|
|
|
| |||||||||
Basic |
| $ | 3.08 |
| $ | 2.14 |
| |||||||
Diluted |
| $ | 3.03 |
| $ | 2.09 |
|
(1) The numbers of antidilutive Antidilutive shares excluded from the diluted earnings per share computations were not material260,000 and 155,000 for the three and six month periodsmonths ended July 31, 2016 and 2015.2017, respectively. The comparable numbers for the prior year were not material.
NOTE 1513 — CONCENTRATIONCONCENTRATIONS OF REVENUES AND ACCOUNTS RECEIVABLE
During the three and six months ended July 31, 20162017 and 2015,2016, the majority of the Company’s consolidated revenues related to performance by the power industry services segment which provided 88%92% and 96%88% of consolidated revenues for the three months ended July 31, 20162017 and 2015,2016, respectively, and 86%92% and 96%86% of consolidated revenues for the six months ended July 31, 20162017 and 2015,2016, respectively.
The Company’s significant customer relationships for the three months ended July 31, 2017 included four power industry service customers which accounted for approximately 31%, 27%, 17% and 13% of consolidated revenues, respectively. The Company’s significant customer relationships for the three months ended July 31, 2016 included five customers which accounted for approximately 17%, 17%, 16%, 14% and 13% of consolidated revenues, respectively.
The Company’s significant customer relationships for the threesix months ended July 31, 20152017 included twofour power industry service customers which accounted for approximately 46%28%, 26%, 19% and 44%, respectively,15% of consolidated revenues, for the period.
respectively. The Company’s significant customer relationships for the six months ended July 31, 2016 included five customers which accounted for approximately 17%, 16%, 14%, 13% and 13% of consolidated revenues, respectively. The Company’s significant customer relationships for the six months ended July 31, 2015 included two customers which accounted for approximately 46% and 45%, respectively, of consolidated revenues for the period.
Accounts receivable balances from threefour major customers as of July 31, 20162017 represented 14%22%, 13%22%, 17% and 10%15% of the corresponding condensed consolidated balance as of July 31, 2016,2017, and accounts receivable balances from twofour major customers each represented 27%18%, 17%, 17% and 11% of the corresponding consolidated balance as of January 31, 2016.2017.
NOTE 1614 — SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s reportable segments, power industry services, industrial fabrication and field services, and telecommunications infrastructure services, are organized in separate business units with different management teams, customers, technologiestalents and services, and may include more than one operating segment. The intersegment revenues of our operations, and the related cost of revenues, are netted against the corresponding amounts of the segment receiving the intersegment services. For the three and six months ended July 31, 2017, intersegment revenues totaled approximately $0.1 million and $1.6 million, respectively. For the three and six months ended July 31, 2016, intersegment revenues were insignificant. Intersegment revenues for the aforementioned periods related to services provided by our industrial fabrication and field services segment to our power industry services segment.
Presented below are summarized operating results and certain financial position data of the Company’s reportable business segments for the three and six months ended July 31, 20162017 and 2015.2016. The “Other” columns include the Company’s corporate and unallocated expenses. With the acquisition of TRC in December 2015, the Company began operations in a new reportable segment, Industrial Fabrication and Field Services (see Note 3). Accordingly, financial information has been presented for this reportable segment for the three and six months ended July 31, 2016, and there is no information to be presented for this segment in the table below for the comparable prior year periods.
Three Months Ended July 31, 2016 |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||
Revenues |
| $ | 143,422 |
| $ | 17,327 |
| $ | 1,746 |
| $ | — |
| $ | 162,495 |
|
Cost of revenues |
| 100,035 |
| 17,117 |
| 1,331 |
| — |
| 118,483 |
| |||||
Gross profit |
| 43,387 |
| 210 |
| 415 |
| — |
| 44,012 |
| |||||
Impairment loss |
| 1,979 |
| — |
| — |
| — |
| 1,979 |
| |||||
Selling, general and administrative expenses |
| 4,065 |
| 1,487 |
| 301 |
| 1,681 |
| 7,534 |
| |||||
Income (loss) from operations |
| 37,343 |
| (1,277 | ) | 114 |
| (1,681 | ) | 34,499 |
| |||||
Other income, net |
| 525 |
| — |
| — |
| 31 |
| 556 |
| |||||
Income (loss) before income taxes |
| $ | 37,868 |
| $ | (1,277 | ) | $ | 114 |
| $ | (1,650 | ) | 35,055 |
| |
Income tax expense |
|
|
|
|
|
|
|
|
| 11,756 |
| |||||
Net income |
|
|
|
|
|
|
|
|
| $ | 23,299 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amortization of intangibles |
| $ | 104 |
| $ | 96 |
| $ | — |
| $ | — |
| $ | 200 |
|
Depreciation |
| 160 |
| 278 |
| 43 |
| 3 |
| 484 |
| |||||
Property, plant and equipment additions |
| 788 |
| 703 |
| 142 |
| 2 |
| 1,635 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets |
| $ | 303,789 |
| $ | 21,003 |
| $ | 5,379 |
| $ | 93,743 |
| $ | 423,914 |
|
Current liabilities |
| 207,634 |
| 13,206 |
| 687 |
| 2,172 |
| 223,699 |
| |||||
Goodwill |
| 20,548 |
| 14,232 |
| — |
| — |
| 34,780 |
| |||||
Total assets |
| 326,789 |
| 52,130 |
| 5,840 |
| 96,335 |
| 481,094 |
|
Three Months Ended July 31, 2015 |
| Power |
| Telecom |
| Other |
| Totals |
| ||||
Revenues |
| $ | 93,471 |
| $ | 3,963 |
| $ | — |
| $ | 97,434 |
|
Cost of revenues |
| 66,136 |
| 2,805 |
| — |
| 68,941 |
| ||||
Gross profit |
| 27,335 |
| 1,158 |
| — |
| 28,493 |
| ||||
Selling, general and administrative expenses |
| 2,849 |
| 415 |
| 1,584 |
| 4,848 |
| ||||
Income (loss) from operations |
| 24,486 |
| 743 |
| (1,584 | ) | 23,645 |
| ||||
Other income, net |
| 301 |
| — |
| (173 | ) | 128 |
| ||||
Income (loss) before income taxes |
| $ | 24,787 |
| $ | 743 |
| $ | (1,757 | ) | 23,773 |
| |
Income tax expense |
|
|
|
|
|
|
| 7,939 |
| ||||
Net income |
|
|
|
|
|
|
| $ | 15,834 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles |
| $ | 104 |
| $ | — |
| $ | — |
| $ | 104 |
|
Depreciation |
| 95 |
| 42 |
| 3 |
| 140 |
| ||||
Property, plant and equipment additions |
| 1,285 |
| 10 |
| 2 |
| 1,297 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
| $ | 22,887 |
| $ | — |
| $ | — |
| $ | 22,887 |
|
Total assets |
| 310,410 |
| 2,910 |
| 66,738 |
| 380,058 |
|
Six Months Ended July 31, 2016 |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||||||||||||||||||
Three Months Ended |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||||||||||||||||||
Revenues |
| $ | 251,521 |
| $ | 37,737 |
| $ | 3,585 |
| $ | — |
| $ | 292,843 |
|
| $ | 238,850 |
| $ | 17,058 |
| $ | 3,895 |
| $ | — |
| $ | 259,803 |
|
Cost of revenues |
| 183,733 |
| 34,105 |
| 2,691 |
| — |
| 220,529 |
|
| 189,266 |
| 16,096 |
| 3,034 |
| — |
| 208,396 |
| ||||||||||
Gross profit |
| 67,788 |
| 3,632 |
| 894 |
| — |
| 72,314 |
|
| 49,584 |
| 962 |
| 861 |
| — |
| 51,407 |
| ||||||||||
Impairment loss |
| 1,979 |
| — |
| — |
| — |
| 1,979 |
| |||||||||||||||||||||
Selling, general and administrative expenses |
| 7,298 |
| 3,121 |
| 628 |
| 3,534 |
| 14,581 |
|
| 6,135 |
| 1,758 |
| 398 |
| 2,508 |
| 10,799 |
| ||||||||||
Income (loss) from operations |
| 58,511 |
| 511 |
| 266 |
| (3,534 | ) | 55,754 |
|
| 43,449 |
| (796 | ) | 463 |
| (2,508 | ) | 40,608 |
| ||||||||||
Other income, net |
| 538 |
| — |
| — |
| 55 |
| 593 |
|
| 1,250 |
| — |
| — |
| 61 |
| 1,311 |
| ||||||||||
Income (loss) before income taxes |
| $ | 59,049 |
| $ | 511 |
| $ | 266 |
| $ | (3,479 | ) | 56,347 |
|
| $ | 44,699 |
| $ | (796 | ) | $ | 463 |
| $ | (2,447 | ) | 41,919 |
| ||
Income tax expense |
|
|
|
|
|
|
|
|
| 18,928 |
|
|
|
|
|
|
|
|
|
| 14,601 |
| ||||||||||
Net income |
|
|
|
|
|
|
|
|
| $ | 37,419 |
|
|
|
|
|
|
|
|
|
| $ | 27,318 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Amortization of intangibles |
| $ | 251 |
| $ | 270 |
| $ | — |
| $ | — |
| $ | 521 |
| ||||||||||||||||
Amortization of purchased intangible assets |
| $ | 88 |
| $ | 246 |
| $ | — |
| $ | — |
| $ | 334 |
| ||||||||||||||||
Depreciation |
| 289 |
| 539 |
| 84 |
| 6 |
| 918 |
|
| 184 |
| 384 |
| 67 |
| 3 |
| 638 |
| ||||||||||
Property, plant and equipment additions |
| 840 |
| 602 |
| 168 |
| 2 |
| 1,612 |
|
| 203 |
| 643 |
| 93 |
| — |
| 939 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Current assets |
| $ | 548,115 |
| $ | 18,003 |
| $ | 3,158 |
| $ | 73,351 |
| $ | 642,627 |
| ||||||||||||||||
Current liabilities |
| 342,569 |
| 10,131 |
| 1,261 |
| 737 |
| 354,698 |
| |||||||||||||||||||||
Goodwill |
| 20,548 |
| 14,365 |
| — |
| — |
| 34,913 |
| |||||||||||||||||||||
Total assets |
| 575,617 |
| 47,490 |
| 4,197 |
| 73,668 |
| 700,972 |
|
Six Months Ended July 31, 2015 |
| Power |
| Telecom |
| Other |
| Totals |
| ||||
Revenues |
| $ | 176,355 |
| $ | 6,566 |
| $ | — |
| $ | 182,921 |
|
Cost of revenues |
| 128,515 |
| 4,746 |
| — |
| 133,261 |
| ||||
Gross profit |
| 47,840 |
| 1,820 |
| — |
| 49,660 |
| ||||
Selling, general and administrative expenses |
| 6,432 |
| 718 |
| 3,237 |
| 10,387 |
| ||||
Income (loss) from operations |
| 41,408 |
| 1,102 |
| (3,237 | ) | 39,273 |
| ||||
Other income, net |
| 379 |
| — |
| (167 | ) | 212 |
| ||||
Income (loss) before income taxes |
| $ | 41,787 |
| $ | 1,102 |
| $ | (3,404 | ) | 39,485 |
| |
Income tax expense |
|
|
|
|
|
|
| 12,800 |
| ||||
Net income |
|
|
|
|
|
|
| $ | 26,685 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of purchased intangibles |
| $ | 164 |
| $ | — |
| $ | — |
| $ | 164 |
|
Depreciation |
| 170 |
| 82 |
| 6 |
| 258 |
| ||||
Property, plant and equipment additions |
| 2,410 |
| 91 |
| 2 |
| 2,503 |
|
Three Months Ended |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||
Revenues |
| $ | 143,422 |
| $ | 17,327 |
| $ | 1,746 |
| $ | — |
| $ | 162,495 |
|
Cost of revenues |
| 100,035 |
| 17,117 |
| 1,331 |
| — |
| 118,483 |
| |||||
Gross profit |
| 43,387 |
| 210 |
| 415 |
| — |
| 44,012 |
| |||||
Selling, general and administrative expenses |
| 4,065 |
| 1,487 |
| 301 |
| 1,681 |
| 7,534 |
| |||||
Impairment loss |
| 1,979 |
| — |
| — |
| — |
| 1,979 |
| |||||
Income (loss) from operations |
| 37,343 |
| (1,277 | ) | 114 |
| (1,681 | ) | 34,499 |
| |||||
Other income, net |
| 525 |
| — |
| — |
| 31 |
| 556 |
| |||||
Income (loss) before income taxes |
| $ | 37,868 |
| $ | (1,277 | ) | $ | 114 |
| $ | (1,650 | ) | 35,055 |
| |
Income tax expense |
|
|
|
|
|
|
|
|
| 11,756 |
| |||||
Net income |
|
|
|
|
|
|
|
|
| $ | 23,299 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amortization of purchased intangible assets |
| $ | 104 |
| $ | 96 |
| $ | — |
| $ | — |
| $ | 200 |
|
Depreciation |
| 160 |
| 278 |
| 43 |
| 3 |
| 484 |
| |||||
Property, plant and equipment additions |
| 788 |
| 703 |
| 142 |
| 2 |
| 1,635 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets |
| $ | 303,789 |
| $ | 21,003 |
| $ | 5,379 |
| $ | 93,743 |
| $ | 423,914 |
|
Current liabilities |
| 207,634 |
| 13,206 |
| 687 |
| 2,172 |
| 223,699 |
| |||||
Goodwill |
| 20,548 |
| 14,232 |
| — |
| — |
| 34,780 |
| |||||
Total assets |
| 326,789 |
| 52,130 |
| 5,840 |
| 96,335 |
| 481,094 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six Months Ended |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||
Revenues |
| $ | 449,639 |
| $ | 33,629 |
| $ | 7,024 |
| $ | — |
| $ | 490,292 |
|
Cost of revenues |
| 362,515 |
| 30,837 |
| 5,437 |
| — |
| 398,789 |
| |||||
Gross profit |
| 87,124 |
| 2,792 |
| 1,587 |
| — |
| 91,503 |
| |||||
Selling, general and administrative expenses |
| 11,340 |
| 3,404 |
| 711 |
| 4,834 |
| 20,289 |
| |||||
Income (loss) from operations |
| 75,784 |
| (612 | ) | 876 |
| (4,834 | ) | 71,214 |
| |||||
Other income, net |
| 2,420 |
| — |
| — |
| 109 |
| 2,529 |
| |||||
Income (loss) before income taxes |
| $ | 78,204 |
| $ | (612 | ) | $ | 876 |
| $ | (4,725 | ) | 73,743 |
| |
Income tax expense |
|
|
|
|
|
|
|
|
| 25,676 |
| |||||
Net income |
|
|
|
|
|
|
|
|
| $ | 48,067 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amortization of purchased intangible assets |
| $ | 175 |
| $ | 343 |
| $ | — |
| $ | — |
| $ | 518 |
|
Depreciation |
| 354 |
| 719 |
| 131 |
| 6 |
| 1,210 |
| |||||
Property, plant and equipment additions |
| 215 |
| 2,337 |
| 248 |
| 2 |
| 2,802 |
|
Six Months Ended |
| Power |
| Industrial |
| Telecom |
| Other |
| Totals |
| |||||
Revenues |
| $ | 251,521 |
| $ | 37,737 |
| $ | 3,585 |
| $ | — |
| $ | 292,843 |
|
Cost of revenues |
| 183,733 |
| 34,105 |
| 2,691 |
| — |
| 220,529 |
| |||||
Gross profit |
| 67,788 |
| 3,632 |
| 894 |
| — |
| 72,314 |
| |||||
Selling, general and administrative expenses |
| 7,298 |
| 3,121 |
| 628 |
| 3,534 |
| 14,581 |
| |||||
Impairment loss |
| 1,979 |
| — |
| — |
| — |
| 1,979 |
| |||||
Income (loss) from operations |
| 58,511 |
| 511 |
| 266 |
| (3,534 | ) | 55,754 |
| |||||
Other income, net |
| 538 |
| — |
| — |
| 55 |
| 593 |
| |||||
Income (loss) before income taxes |
| $ | 59,049 |
| $ | 511 |
| $ | 266 |
| $ | (3,479 | ) | 56,347 |
| |
Income tax expense |
|
|
|
|
|
|
|
|
| 18,928 |
| |||||
Net income |
|
|
|
|
|
|
|
|
| $ | 37,419 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amortization of purchased intangible assets |
| $ | 251 |
| $ | 270 |
| $ | — |
| $ | — |
| $ | 521 |
|
Depreciation |
| 289 |
| 539 |
| 84 |
| 6 |
| 918 |
| |||||
Property, plant and equipment additions |
| 840 |
| 602 |
| 168 |
| 2 |
| 1,612 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of July 31, 2016,2017, and the results of their operations for the three and six months ended July 31, 20162017 and 2015,2016, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 20162017 that was filed with the Securities and Exchange CommissionSEC on April 15, 2016.11, 2017.
Cautionary Statement Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements, by their nature, involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended January 31, 2016.2017. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Business Description
Argan, Inc. is a holding company that conducts operations through its wholly-owned subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we provide a full range of engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets for a wide range of customers including independent power project owners, public utilities, power plant equipment suppliers and global energy plant construction firms. GPS, including its consolidated joint ventures, and variable interest entities (see Note 4 to the condensed consolidated financial statements included herein), and APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment produces, deliversprovides on-site services that support maintenance turnarounds, shutdowns and installs fabricated steel components specializing in pressure vessels, heat exchangers and pipingemergency mobilizations for industrial plants primarily located in the southern United States. TRC also includes a plant services groupStates and that handles maintenance turnarounds, shutdownsare based on its expertise in producing, delivering and emergency mobilizations.installing fabricated steel components such as pressure vessels, heat exchangers and piping systems. Through SMC, now conducting business as SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the mid-Atlantic region.
At the holding company level, we intend to make additional acquisitions and/or investments by identifying companies with significant potential for profitable growth. We may have more than one industrial focus. We expect that companies acquired in each of these industrial groups will be held in separate subsidiaries that will be operated in a manner that best provides positive cash flows and value for our stockholders.
Overview
ForHighlights of our financial performance for the three and six months ended July 31, 2016, we report2017 included the strongest overall financial performance in our history.following:
· Revenues increased 66.8%60% to $162.5$259.8 million for the three months ended July 31, 20162017 as compared to $97.4$162.5 million for the corresponding prior year period.quarter. For the six-month period ended July 31, 2016,2017, revenues increased 60.1%67% to $292.8$490.3 million as compared to $182.9$292.8 million for the corresponding prior year period.
· Gross profit increased 17% to $51.4 million for the three months ended July 31, 2017 as compared to $44.0 million for the corresponding prior year quarter. Gross profit increased 27% to $91.5 million for the six-month
period ended July 31, 2017 as compared to $72.3 million for the corresponding prior year period. Our gross profit percentages remained robust at 27.1%were 19.8% and 24.7%18.7% for the three and six months ended July 31, 2016,2017, respectively.
· Net income attributable to the stockholders of Argan increased 74%38% to $19.7$27.1 million for the three months ended July 31, 20162017 as compared to $11.3$19.7 million for the comparable prior year period.quarter. For the six-month period ended July 31, 2016,2017, net income attributable to ourthe stockholders of Argan increased 70%50% to $31.9$47.8 million as compared to $18.8$31.9 million for the comparablecorresponding prior year period.
· EBITDA(1) attributable to the stockholders of Argan increased 66%33% to $32.1$42.7 million for the three months ended July 31, 20162017 as compared to $19.4$32.1 million for the corresponding prior year period.quarter. For the six-month period ended July 31, 2016,2017, EBITDA attributable to the stockholders of Argan increased 64%44% to $52.3$75.2 million as compared to $31.9$52.3 million for the six months ended July 31, 2015.corresponding prior year period.
· Our tangible net worth(2) increased 24%22% to $212.5$302.5 million as of July 31, 20162017 from $171.8$248.5 million as of January 31, 2016.2017.
· Our liquidity, or working capital(3), increased 23%21% to $200.2$287.9 million as of July 31, 20162017 from $162.9$237.2 million as of January 31, 2016.
· Our contract backlog increased 15% to $1.3 billion as of July 31, 2016 as compared to $1.1 billion as of January 31, 2016.
· We achieved substantial completion on the Panda Liberty and Panda Patriot projects in April and June 2016, respectively.
· During the six months ended July 31, 2016, we continued to ramp up work on five gas-fired power plant projects which are all expected to be completed during the fiscal year ending January 31, 2019.2017.
(1)
| EBITDA is a measure not recognized under accounting principles generally accepted in the United States. We have defined EBITDA as earnings before interest, taxes, depreciation and amortization. | |
(2) | We define tangible net worth as our total stockholders’ equity less goodwill and intangible assets, net. | |
(3) | We define working capital as our total current assets less our total current liabilities. |
Panda Power Plant Projects
Since 2013, we have performed engineering, procurement and construction (“EPC”) services for two natural gas-fired power plants, known as Panda Liberty and Panda Patriot. The EPC contracts were assigned to two separate joint ventures that were formed in order to perform the work for the applicable project and to spread the bonding risk of each project. The joint venture partner for both projects is a large, heavy civil contracting firm. We have no significant commitments under these
arrangements beyond those related to the completion of the EPC contracts including the provision of services in order to fulfill our warranty obligations. The joint venture partners are dedicating resources that are necessary to complete the projects and are being reimbursed for their costs. We are performing most of the activities of these two EPC contracts.
For the six months ended July 31, 2016 and 2015, we recognized revenues associated with EPC contract services provided to Panda Liberty and Panda Patriot that combined represented approximately 26% and 91% of consolidated revenues, respectively. We achieved substantial completionExecution on these projects in April and June 2016, respectively. These two projects are scheduled for final completion in calendar year 2016 and any remaining close out activity and resulting revenues should be limited for the remainder of the current fiscal year.
The corresponding joint venture agreements, as amended, provide that we have the majority interest in any profits, losses, assets and liabilities that may result from the performance of the EPC contracts. Due to our financial control of the joint ventures, their accounts have been included in our condensed consolidated financial statements since the commencement of activities under the EPC contracts near the end of the fiscal year ended January 31, 2014.
Contract Backlog
Contract backlog represents the total accumulated value of projects awarded less the amounts of revenues recognized to date on those contracts at a specific point in time. We believe contract backlog is an indicator of future revenues and earnings potential. Although contract backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce contract backlog and our expected future revenues. At July 31, 2016,2017, our total contract backlog was approximately $1.3$0.7 billion. Our total contract backlog as of January 31, 2016 was approximately $1.1 billion.
The following table summarizes our large EPC power plant projects:
Current Project |
| Location |
| Size of |
| Date FNTP |
| Scheduled |
|
Panda Liberty Power Project |
| Pennsylvania |
| 829 MW |
| August 2013 |
| 2016 |
|
Panda Patriot Power Project |
| Pennsylvania |
| 829 MW |
| December 2013 |
| 2016 |
|
Caithness Moxie Freedom Generating Station |
| Pennsylvania |
| 1,040 MW |
| November 2015 |
| 2018 |
|
CPV Towantic Energy Center |
| Connecticut |
| 785 MW |
| March 2016 |
| 2018 |
|
NTE Middletown Energy Center |
| Ohio |
| 475 MW |
| October 2015 |
| 2018 |
|
NTE Kings Mountain Energy Center |
| North Carolina |
| 475 MW |
| March 2016 |
| 2018 |
|
Exelon West Medway II Facility |
| Massachusetts |
| 200 MW |
| (2) |
| (2) |
|
Current Project | Location | Size of | Date FNTP | Scheduled | |||||
Caithness Moxie Freedom Generating Station | Pennsylvania | 1,040 MW | November 2015 | 2018 | |||||
CPV Towantic Energy Center | Connecticut | 785 MW | March 2016 | 2018 | |||||
NTE Middletown Energy Center | Ohio | 475 MW | October 2015 | 2018 | |||||
NTE Kings Mountain Energy Center | North Carolina | 475 MW | March 2016 | 2018 | |||||
Exelon West Medway II Facility | Massachusetts | 200 MW | April 2017 | 2018 | |||||
TeesREP Biomass Power Station | Teesside (England) | 299 MW | May 2017 | 2019 |
(1) Full Notice to Proceed (“FNTP”) represents the formal notice provided by the project ownercustomer instructing us to commence the activities covered by the corresponding EPC contract without limitation.
(2)The FNTP for this project is subject to Massachusetts regulatory approvals, and the scheduled completion date is yet to be determined.
Acquisition of The Roberts Company
On December 4, 2015, we acquired The Roberts Company (“TRC”), which was founded in 1977 and is headquartered near Greenville, North Carolina. TRC is principally an industrial fabricator and constructor serving both light and heavy industrial organizations primarilyfirst four projects identified in the southern United States. We paid $0.5 million to acquirechart above, all EPC contracts, were the member interestsmost significant drivers of TRC, and assumed approximately $16 million in debt obligations, which we paid off on the acquisition date. TRC continues to operate under its own name with its own management team. Historically, TRC has been primarily a profitable company that incurred a net loss in 2015 up to the date of its acquisition by us, primarily due to it taking on large contracts that resulted in significant losses. With the reengagement and leadership of TRC’s founder, John Roberts, our financial support and the substantial completion of these loss contracts, we acquired TRC with the belief that it is positioned to succeed in the future with a return to profitable operations. However, there can be no assurances that TRC will succeed in the future or will resume sustained profitability. Since the acquisition, we advanced an additional $22.5 million in cash to TRC in order to fund the completion of the work on the loss contracts, to enhance working capital and for other general corporate purposes. However, no advances were required during the quarter ended July 31, 2016. Currently, TRC operates as its own reportable business segment, Industrial Fabrication and Field Services.
Our condensed consolidated statements of earningsresults for the three and six months ended July 31, 2016 include the operating results of TRC,2017. Work has proceeded smoothly on these jobs which together represented approximately 88% and the balance sheet amounts of TRC are included in our condensed consolidated balance sheets as of July 31 and January 31, 2016.
Acquisition of Atlantic Projects Company Limited
On May 29, 2015, we acquired Atlantic Projects Company Limited, a private company incorporated in the Republic of Ireland, and its affiliated companies (together “APC”). Formed in Dublin over forty years ago, APC provides turbine, boiler and large rotating equipment installation, commissioning and outage services to original equipment manufacturers, global construction firms and plant owners worldwide. APC has successfully completed projects in more than thirty countries on six continents. With its presence in Ireland and its other offices located in Hong Kong, Singapore and New York, APC expands our operations internationally for the first time. APC operates under its own name and with its own management team as a member89% of our group of companies. The fair value of the consideration transferred to the former owners of APC was approximately $11.1 million.
In July 2016, work was suspended on APC’s largest project, which reflected over 90% of its backlog. Additionally, APC’s primary market is in the United Kingdom, which voted to leave the European Union on June 23, 2016 (“Brexit”). The resulting sterling pound drop, financial market uncertainty and recessionary pressures will likely impact the availability of financing for future power plant developments. APC’s second largest market is the Middle East, which has experienced decreased project activity due to capital constraints, resulting from decreased oil revenues. APC reported a second quarter loss and will likely incur losses for the remainder of the fiscal year. Given the events above, we conducted interim analyses in order to determine whether an impairment loss had occurred related to the goodwill. Using income and market approaches, the assessment analyses indicated that the carrying value of the business exceeded its fair value as of July 31, 2016. As a result, APC recorded an estimated impairment loss related to goodwill of approximately $2.0 million that has been included in the condensed consolidated statements of earningsrevenues for the three and six months ended July 31, 2016. No impairment was recorded2017, respectively. Revenues for each of these projects will decline over the next several quarters as they progress beyond peak construction in their project life-cycles. In August 2017, the comparable priorproject owner provided us with the necessary authorization under the turnkey EPC contract to start construction of a dual-fuel, simple cycle power plant in Medway, Massachusetts. The new facility will feature two 100 MW combustion turbine generators with state-of-the-art noise mitigating improvements. In May 2017, APC announced that it has received from Técnicas Reunidas, S.A. (“TR”) a contract for the erection of a biomass boiler, a critical component of a new power plant being constructed in Teesside, which is near the northeast coast of England. Work began this summer with completion scheduled in 2019. TR is a leading Spain-based global general contractor. However, despite these positive developments, we believe that the uncertainty surrounding the U.S. administration’s level of support for coal as part of the energy mix, the termination of current and planned nuclear power plant projects, the potential for future volatility in natural gas prices that may give a short-term boost to coal-fired power generation and disappointing energy auctions during the current year periods. Our annual reviewfor new power generating assets may be impacting the planning and initiation phases for the construction of goodwill carrying values for impairment will include a full business valuation of APC and corresponding impairment analyses as of November 1, 2016.new power plants which are being delayed by project owners.
Our condensed consolidated statements of earnings for the three and six months ended July 31, 2016 and 2015, include the operating results of APC since its acquisition on May 29, 2016, and the balance sheet amounts of APC are included in our condensed consolidated balance sheets as of July 31 and January 31, 2016.18
Outlook
The power industry has not fully recovered from the recessionary decline in the demand for power in the United States. Total electric power generation from all sources has decreased slightly for three of the last four years, including a 0.2% decline in 2015. For calendar year 2015, the total amount of electricity generated in the United States was approximately 98% of the peak power generation level of 2007. Recently published government forecasts project an annual increase in power generation of approximately 0.8% per year for the next 25 years.
For calendar year 2015, electricity generated in the United States by natural gas-fired power plants comprised 32.7% of total generation, which reflected an 18.5% annual increase in2016, the number of megawatt hours provided by these plants as the amount of electricity generated from natural gas used for power generation during 2015increased by 4% from the prior year and reached an all-time annual high. The number of megawatt hours provided by coal-fired plants declined by 14.3%8% in 20152016 compared to the amount of power provided in 2014. For the third and fourth quarters of calendar 2015, the shares of total electrical power generated by natural gas-fired plants actually exceeded the shares provided by coal-fired power plants, the first two times that this has occurred.2015. For 2016, the shares of total electricity generation provided by gas-fired power plants and coal-fired power plants are expected to be approximately 33.4% and 32.0%, respectively, meaning thatas natural gas will overtakeovertook coal as the leading source of power generation in the United States.States, the monthly amount of electricity generated by natural gas-fired power plants exceeded the corresponding monthly amounts provided by coal-fired power plants in ten of the twelve months. According to data released recently by the U.S. Energy Information Administration (“EIA”), natural gas was the source of 33.5%34% of the electrical power generated in the United States infor 2016; coal was 30%. However, for the first half of 2016;2017, while coal was 28.1%powered 30% of electricity generation, the natural gas electricity percentage declined to 29%. For the comparable period one year ago, 30.5%The overall age of the nation’s power was produced with natural gas.
The electricity-generation statistics for 2015 are consistent with the long-term power generation trends. Overfleet in our country has changed. Per the last 10EIA, the capacity-weighted average age of natural gas-fired generation capacity is 22 years, total power generation has increased bywhich is less than 1%hydro (64 years), coal (39 years) and coalnuclear (36 years). In fact, since the turn of the century, more than 53 GW of coal-fired capacity has remained the largest energy source for electricity generation. However, during this period, thebeen retired, most of which were older, smaller, less efficient coal-fired power plants. A nearly equal amount of electricity generated byolder and smaller natural gas-fired power sources increased by 75%, and the amountgeneration capacity has been retired as well. Almost 5 GW of electric power generated by coal-fired plants declined by 33%. The amount of electricity provided by
nuclear power plants increasedcapacity has been retired over the last 10 yearsfour years. The future of new nuclear power plant construction has been further clouded with the recent bankruptcy of Westinghouse, one of the few major nuclear providers of fuel, services, technology, plant design and equipment, and the recent decisions by only 2%. Electricalseveral utilities to either abandon construction or development of nuclear projects, leaving just one site under construction today (the Vogtle plant units 3 and 4) in the United States. Today, most of the utilized natural gas fleet and almost all of the wind and solar power generated by renewable energy sources (excluding hydroelectric sources)generation capacity has been built since 2000. During 2016, wind, solar and natural gas represented more than tripled over93% of the last ten years, but represents only 7% of total generation.utility-scale power generation capacity added to the power grid in the United States.
Current projections of future power generation assume the sustained increase in domestic natural gas production, which should lead to stable natural gas prices continuing into the future. The availability of competitively priced natural gas, the significant increases in the efficiency of combined cycle power plants, the existence of certain programs encouraging renewable fuel use, and the implementation of a series of environmental rules, primarily directed toward the reductions of air pollution and the emissions of greenhouse gases, should further reduce future coal use and continue to increase the shares of the power generation mix represented by natural gas-fired power plants, wind farms and solar fieldsfields. Even without the implementation of the Clean Power Plan, natural gas and other renewable energy sources.
sources are still predicted to be the top choices for new electricity generation plants in the future due to low natural gas prices in the United States. Announcements by electric utilities of the retirement of coal-fired and nuclear power plants continue, citing the availability of cheap natural gas, increasingly stringentexisting environmental regulations and the significant costs of refurbishment and relicensing. The future retirements of coal and nuclear plants willtypically result in the need for new capacity, and new natural gas-fired plants are relatively cheaper to build than coal, nuclear, or renewable plants, they are substantially more environmentally friendly than conventional coal-fired power plants, and they represent the most economical way to meet base loads and peak demands.
The expected increase in momentum towards more environmentally friendly power generation facilitiesOur industry sector has not occurred atfully recovered from the pace generally expected prior torecessionary decline in the latest recession. The Environmental Protection Agency has been stridently exercising an expansiondemand for power in the United States. For both calendar years 2016 and 2015, the total amount of regulatory power over air quality and electric power generation. However, the federal government has not passed comprehensive energy legislation that might include national renewable energy standards, incentives or mandates for the retirement of existing coal-fired power plants and caps on the volume of carbon emissions. Additional uncertainty was created when,electricity generated in February 2016, the United States Supreme Court decided to stay the implementationwas approximately 98% of the agency’s Clean Power Plan, which was finalized in August 2015, as it undergoes legal review. As a result, the requirement for states to draft compliance plans by September 2016 has been at least delayed, and states have longer periods of time in order to consider and make decisions regarding futurepeak power generation mixes. The future pacelevel of announcements2007. Total electric power generation from all sources has decreased slightly during three of coal-firedthe last five years, with only a slight increase in 2016. Government forecasts project an annual increase in power plant retirements may slow.generation of less than 1% per year for the next 25 years.
Nevertheless, asHowever, we have stated in the past, wecontinue to believe that the future prospects for natural gas-fired power plant construction are favorable.favorable as natural gas has generally become the primary source for power generation in the United States. Major advances in horizontal drilling and the practice of hydraulic fracturing have led to athe boom in natural gas supply. The abundant availability of cheap, less carbon-intense and higher efficiency natural gas should continue to be a significant factor in the economic assessment of future power plants. Currently effective emission standards have also become a significant obstacle for any plan to build a new coal-fired power plant. Despite the recent success in the Supreme Court, the coal industry fears that the pending regulations limiting carbon emissions may jeopardize the continuing operation of existing coal-fired power plants.
generation capacity additions. As indicated above, the demand for electric power in this country is expected to grow slowly but steadily over the long term. Increasing demandsDemands for electricity, the ample supply of natural gas, and the expectedcontinuing retirement of inefficient and old coal nuclear and oil-powerednuclear energy plants, should result in natural gas-fired and renewable energy plants, like wind, biomass and solar, representing the substantial majority of new power generation additions in the future and an increased share of the power generation mix. Currently,A recent construction industry forecast predicted that the business environment in our sector has improved substantially due to a combinationgrowth of an overall improved economy and the forward momentum of increasing the amount of electrical power generatedactivity in the United States from energy resources other than coal.power sector of the industry will be slow but steady over the next four years (the forecast horizon for this particular report). In summary, the development of renewablenatural gas-fired and natural gas-firedrenewable power generation facilities in the United States should continue to provide construction opportunities for us.us, although the pace of new opportunities emerging may decrease in the near term. We are encouraged by the results of the business development activities conducted by APC since its acquisition by us that are leading to new power industry construction opportunities outside of this country.
During the construction industry’s recovery from the recession, we19
We have been successful in the effective and efficient completion of our EPC and other projects and the control of costs while we pursue new construction business opportunities. Despite the intensely competitive business environment, we are committed to the rational pursuit of new construction projects which may result in our decision to make investments in the ownership of new projects, at least during the corresponding development phase. Because we believe in the strength of our balance sheet, we are willing to consider certain opportunities that include reasonable and manageable risks in order to assure the award of the related EPC contract to us.
With a growing reputation as a low costan accomplished and cost-effective provider of EPC contracting services and with the proven ability to deliver completed power facilities, particularly combined-cycle,combined cycle, natural gas-fired power plants, we are focused on expanding our position in the growing power markets where we expect investments to be made based on forecasts of increasing electricity demand covering decades into the future. Moreover, we believe that the EPC contract approach preferred by us, once considered an alternative
delivery method for power plant construction, is now an accepted industry practice in the United States as a strategy that gives project owners an end-to-end solution by putting nearly all aspects and phases of a project under a single contract.
We believe that our expectations are reasonablevalid and that our future plans continue to be based on reasonable assumptions. Our performance on current projects including the five latest EPC projects awarded to us, should provide a stable base of business activity forthrough the next few fiscal years. We are looking forward to ramping up activities on the new projects and to being able to take advantage ofyear as we pursue new opportunities that should continue to emerge in the improved domestic business environment.for all of our businesses.
Comparison of the Results of Operations for the Three Months Ended July 31, 20162017 and 20152016
We reported net income attributable to our stockholders of $19.7$27.1 million, or $1.29$1.72 per diluted share, for the three months ended July 31, 2016.2017. For the three months ended July 31, 2015,2016, we reported a comparable net income amount of $11.3$19.7 million, or $0.75$1.29 per diluted share.
The following schedule compares our operating results for the three months ended July 31, 20162017 and 20152016 (dollars in thousands).
|
| Three Months Ended July 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
REVENUES |
|
|
|
|
|
|
|
|
| |||
Power industry services |
| $ | 143,422 |
| $ | 93,471 |
| $ | 49,951 |
| 53.4 | % |
Industrial fabrication and field services |
| 17,327 |
| — |
| 17,327 |
| NM |
| |||
Telecommunications infrastructure services |
| 1,746 |
| 3,963 |
| (2,217 | ) | (55.9 | ) | |||
Revenues |
| 162,495 |
| 97,434 |
| 65,061 |
| 66.8 |
| |||
COST OF REVENUES |
|
|
|
|
|
|
|
|
| |||
Power industry services |
| 100,035 |
| 66,136 |
| 33,899 |
| 51.3 |
| |||
Industrial fabrication and field services |
| 17,117 |
| — |
| 17,117 |
| NM |
| |||
Telecommunications infrastructure services |
| 1,331 |
| 2,805 |
| (1,474 | ) | (52.5 | ) | |||
Cost of revenues |
| 118,483 |
| 68,941 |
| 49,542 |
| 71.9 |
| |||
GROSS PROFIT |
| 44,012 |
| 28,493 |
| 15,519 |
| 54.5 |
| |||
Impairment loss |
| 1,979 |
| — |
| 1,979 |
| NM |
| |||
Selling, general and administrative expenses |
| 7,534 |
| 4,848 |
| 2,686 |
| 55.4 |
| |||
INCOME FROM OPERATIONS |
| 34,499 |
| 23,645 |
| 10,854 |
| 45.9 |
| |||
Other income, net |
| 556 |
| 128 |
| 428 |
| 334.4 |
| |||
INCOME BEFORE INCOME TAXES |
| 35,055 |
| 23,773 |
| 11,282 |
| 47.5 |
| |||
Income tax expense |
| 11,756 |
| 7,939 |
| 3,817 |
| 48.1 |
| |||
NET INCOME |
| 23,299 |
| 15,834 |
| 7,465 |
| 47.1 |
| |||
Net income attributable to noncontrolling interests |
| 3,625 |
| 4,527 |
| (902 | ) | (19.9 | ) | |||
NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
| $ | 19,674 |
| $ | 11,307 |
| $ | 8,367 |
| 74.0 | % |
NM = Not Meaningful
|
| Three Months Ended July 31, |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
REVENUES |
|
|
|
|
|
|
|
|
| |||
Power industry services |
| $ | 238,850 |
| $ | 143,422 |
| $ | 95,428 |
| 66.5 | % |
Industrial fabrication and field services |
| 17,058 |
| 17,327 |
| (269 | ) | (1.6 | ) | |||
Telecommunications infrastructure services |
| 3,895 |
| 1,746 |
| 2,149 |
| 123.1 |
| |||
Revenues |
| 259,803 |
| 162,495 |
| 97,308 |
| 59.9 |
| |||
COST OF REVENUES |
|
|
|
|
|
|
|
|
| |||
Power industry services |
| 189,266 |
| 100,035 |
| 89,231 |
| 89.2 |
| |||
Industrial fabrication and field services |
| 16,096 |
| 17,117 |
| (1,021 | ) | (6.0 | ) | |||
Telecommunications infrastructure services |
| 3,034 |
| 1,331 |
| 1,703 |
| 127.9 |
| |||
Cost of revenues |
| 208,396 |
| 118,483 |
| 89,913 |
| 75.9 |
| |||
GROSS PROFIT |
| 51,407 |
| 44,012 |
| 7,395 |
| 16.8 |
| |||
Selling, general and administrative expenses |
| 10,799 |
| 7,534 |
| 3,265 |
| 43.3 |
| |||
Impairment loss |
| — |
| 1,979 |
| (1,979 | ) | (100.0 | ) | |||
INCOME FROM OPERATIONS |
| 40,608 |
| 34,499 |
| 6,109 |
| 17.7 |
| |||
Other income, net |
| 1,311 |
| 556 |
| 755 |
| 135.8 |
| |||
INCOME BEFORE INCOME TAXES |
| 41,919 |
| 35,055 |
| 6,864 |
| 19.6 |
| |||
Income tax expense |
| 14,601 |
| 11,756 |
| 2,845 |
| 24.2 |
| |||
NET INCOME |
| 27,318 |
| 23,299 |
| 4,019 |
| 17.2 |
| |||
Net income attributable to noncontrolling interests |
| 179 |
| 3,625 |
| (3,446 | ) | (95.1 | ) | |||
NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
| $ | 27,139 |
| $ | 19,674 |
| $ | 7,465 |
| 37.9 | % |
Revenues
Power Industry Services
The revenues of the power industry services business increased by $49.967%, or $95.4 million, to $238.9 million for the three months ended July 31, 2017 compared with revenues of $143.4 million for the three months ended July 31, 2016 compared with revenues of $93.5 million for the three months ended July 31, 2015.2016. The revenues of this business represented approximately 88%92% of consolidated revenues for the current quarter, and approximately 96%88% of consolidated revenues for the prior year quarter. The current quarter increase in revenues for the power industry services segment primarily reflected the peak construction activities of the five newfour EPC contracts,projects, which represented approximately 60%88% of consolidated revenues for the current quarter, andquarter. The percent complete for these four projects ranged from 61% to 77% as of
July 31, 2017. As these projects progress beyond peak construction in their life-cycles, the endlevel of quarterly revenues associated with each project construction activity forwill decline. All four jobs are currently scheduled to be completed on time during the Panda Liberty and Panda Patriot EPC contracts which represented 26% of consolidated revenues for the current quarter.fiscal year ending January 31, 2019. Last year, the combined revenues associated with these twofour natural gas-fired power plant projects that were all in their early phases represented approximately 90%58% of consolidated revenues for the second quarter. We reached substantial completion on theseAdditionally, construction activity related to two other natural gas-fired power plant projects that were completed later in April and June 2016, respectively, and any remaining close out activity and resultingthe prior year represented 26% of consolidated revenues should be limited for the rest of the fiscal year.three months ended July 31, 2016.
Industrial Fabrication and Field Services
The revenues of the industrial fabrication and field services business decreased by 2%, or $0.3 million, to $17.1 million for this segment reflect the second full quarterthree months ended July 31, 2017 compared with revenues of activity as we acquired TRC on December 4, 2015.$17.3 million for the three months ended July 31, 2016. The largest portion of TRC’s revenues continue to be provided by industrial field services, and TRC’s major customers include some of North America’s largest forest products companies such as Weyerhaeuser, Resolute, Domtar and Georgia Pacific, mining companies and large crop nutrient processors. During the quarter ended July 31, 2016, TRC primarily completed its contracts that caused the large pre-acquisition losses and intends to focus on growing contract backlog with the addition of new, profitable projects.fertilizer producers.
Telecommunications Infrastructure Services
The revenues of this reportable business segment decreasedincreased by approximately 56%123%, or $2.1 million, for the current quarter compared with the corresponding period last year. Inyear as SMC has been successful in increasing the prior year quarter, revenues earned in connection with underground cabling work performed at multiple commuter train stations of the Maryland Transit Administration (“MTA”)related to both outside premises and completed last year represented approximately 39% of SMC’s revenues, for which there was no comparable project in the current quarter.inside premises projects.
Cost of Revenues
Due primarily to the substantial increase in consolidated revenues for the three months ended July 31, 20162017 compared with last year’s second quarter, the corresponding consolidated cost of revenues also increased. These costs were $118.5$208.4 million and $68.9$118.5 million for the three months ended July 31, 2017 and 2016, respectively. Gross profit amounts for the three months ended July 31, 2017 and 2015, respectively, with the increase associated primarily with new EPC contracts2016 were $51.4 million and the addition of the costs of revenues for APC and TRC.$44.0 million, respectively. Our overall gross profit percentage of 27.1%19.8% of consolidated revenues was lower in the current quarter compared to a percentage of 29.2%27.1% for the secondprior year quarter, last year due towhich primarily reflected the new businessachievement of GPS and the addition of APC and TRC. However, for both the three months ended July 31, 2016 and 2015, gross profits were elevated when compared to other recent quarters due to adjustments that resulted in reduced estimated costs to complete the two power plants for Panda. Specifically, in the current quarter, we negotiated a settlement with the project owner related to the outstanding claims and we reached substantial completion on bothof two natural gas-fired power plant projects (April 30 and June 14, 2016).last year. These achievements eliminated a number of significant risks, including potential schedule liquidated damages, and the related estimated costs associated with them, resulting in increased gross margins. Current quarter gross profit percentages primarily reflected continued successful execution on the peak construction activities of four natural-gas fired power plant projects of GPS. The gross profit percentage of the combined revenues of TRC, APC and SMC increased between the periods.
Selling, General and Administrative Expenses
These costs were $10.8 million and $7.5 million for the three months ended July 31, 2017 and 2016, respectively, representing approximately 4.2% and 4.6% of consolidated revenues for the corresponding periods, respectively. In general, the increase in costs is reflective of a larger organization necessary to support increased operations and growing revenues and to expand into new markets. Approximately half of the increase between the quarters was incurred by GPS reflecting increased incentive compensation costs and salary expense. In addition, stock option compensation expense for the three months ended July 31, 2017 increased by approximately $0.6 million between the quarters, driven primarily by the general increase in the market price of our common stock over the last three years.
Impairment Loss
In July 2016, work was suspended on APC’s largest project at the time, which represented over 90% of APC’s contract backlog. Additionally, APC’s primary market is in the United Kingdom, which voted to leave the European Union on June 23, 2016 (“Brexit”). The resulting sterling pound drop, financial market uncertainty and recessionary pressures willwere thought to likely impact the availability of financing for future power plant developments. APC’s second largest market is the Middle East, which has experienced decreased project activity due to capital constraints, resulting from decreased oil revenues. APC’sThe revenues of APC declined and it reported operating resultslosses for the three and six months ended July 31, 2016 included2016. Given these circumstances at the unfavorable net effect of adjustments related to the suspended project which reduced APC’s gross profit by $0.8 million. APC will likely incur losses for the remainder of the fiscal year. Given the events above, we conducted interimtime, analyses were performed mid-year in order to determine whether an impairment loss had occurred related to the goodwill of APC.had been incurred. Using the income and market approaches, the assessment analysesanalysis indicated that the carrying value of the business exceeded its fair value as of July 31, 2016.value. As a result, APC recorded an estimated impairment loss related to goodwillduring the quarter ended July 31, 2016 of approximately $2.0 million that has been included in the condensed consolidated statement of earnings for the three months ended July 31, 2016.million. No impairment loss occurred in the priorcurrent year quarter.
Selling, General and Administrative Expenses21
These costs were $7.5 million and $4.8 million for the three months ended July 31, 2016 and 2015, respectively, representing approximately 4.6% and 5.0% of consolidated revenues for the corresponding periods, respectively. The increase of $2.7 million reflected the addition of costs for APC and TRC which were $2.2 million combined for the current quarter, compared to $0.6 million for APC in the prior year quarter. The remaining net increase of $1.1 million between quarters was due primarily to additional human capital costs incurred in the current quarter related to the increased project work.
Income Tax Expense
For the quarter ended July 31, 2017, we recorded income tax expense of $14.6 million reflecting an estimated annual effective income tax rate of approximately 36.2% (before the tax effect of discrete items for the current quarter). This rate differs from the expected federal income tax rate of 35% due primarily to the estimated unfavorable effect of state income taxes, offset substantially by the domestic production activities deduction. For the three months ended July 31, 2016, we recorded income tax expense of $11.8 million reflecting an estimated annual effective income tax rate of approximately 34.3%35.3%. This rate differs fromIn addition, the expected federalexcess income tax rate of 35.0% due primarily to
the favorable effect of permanent differences including the domestic production activities deduction and the exclusion of income attributable to our joint venture partner from our taxable income, partially offset by the unfavorablebenefit associated with stock options exercised reduced income tax effect ofexpense by $1.0 million for the impairment loss. three months ended July 31, 2016. The excess income tax benefit recorded for the three months ended July 31, 2017 was $0.5 million as stock option exercise activity has declined between the years.
As the construction joint ventures that are discussed below are treated as partnerships for income tax reporting purposes, we report only our share of the taxable income of the entities. In addition,For financial reporting purposes, the excessexcluded income amounts attributable to the joint venture partners are treated as permanent differences between income before income taxes and taxable income resulting in a favorable effect on our effective income tax benefit associated with stock options exercised during the current quarter reduced income tax expense by $1.0 million for the three months ended July 31, 2016. The net effect of these items was offset almost completely by the unfavorable effect of state income taxes.
For the three months ended July 31, 2015, we recorded income tax expense of $7.9 million reflecting an annualrate. Our effective income tax rate estimated to be approximately 32.3% atestimates are trending upwards as the time. This rate differed fromearnings of the expected federal income tax ratetwo joint ventures (and therefore the portions of 35.0% due primarilysuch amounts attributable to the favorable permanent effect of excluding the income attributable to our joint venture partner from our taxable income. Our effective tax rate also reflectedpartner) have declined with the permanent benefitcompletion of the domestic production activities deduction. These factors were partially offset byconstruction of the unfavorable effect of state income taxes. Our actual annual effective income tax rate for the year ended January 31, 2016 was 33.5%.corresponding power plants last year.
Net Income Attributable to NoncontrollingNon-controlling Interests
As discussed in Note 43 to the accompanying condensed consolidated financial statements, we entered intoseparate construction joint ventures related to two power plant construction projects. Because we have financial control, the joint ventures are included in our condensed consolidated financial statements. Our joint venture partner’s share of the earnings is reflected in the line item “netcaptioned net income attributable to noncontrolling interests” ofnon-controlling interests included in the accompanying statements of earnings for the three months ended July 31, 2017 and 2016 and 2015. Forin the quarters, these amounts were $3.6of $0.2 million and $4.5$3.6 million, respectively. The reduction in the amount between quarters primarily reflects the reductioncontractual completion of the projects last year. Current year activity relates to changes in project activity during the current quarter as both of these projects have achieved substantial completion. There are no joint ventures relatedestimated costs to the five new EPC contracts of GPS.complete warranty requirements.
Comparison of the Results of Operations for the Six Months Ended July 31, 20162017 and 20152016
We reported net income attributable to our stockholders of $31.9$47.8 million, or $2.09 per diluted share, and $18.8 million, or $1.26$3.03 per diluted share, for the six months ended July 31, 2017. For the six months ended July 31, 2016, and 2015, respectively.we reported a comparable net income amount of $31.9 million, or $2.09 per diluted share. The following schedule compares our operating results for the periodssix months ended July 31, 2017 and 2016 (dollars in thousands).
|
| Six Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||||||||||
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| 2016 |
| 2015 |
| $ Change |
| % Change |
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| 2017 |
| 2016 |
| $ Change |
| % Change |
| ||||||
REVENUES |
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|
|
| ||||||
Power industry services |
| $ | 251,521 |
| $ | 176,355 |
| $ | 75,166 |
| 42.6 | % |
| $ | 449,639 |
| $ | 251,521 |
| $ | 198,118 |
| 78.8 | % |
Industrial fabrication and field services |
| 37,737 |
| — |
| 37,737 |
| NM |
|
| 33,629 |
| 37,737 |
| (4,108 | ) | (10.9 | ) | ||||||
Telecommunications infrastructure services |
| 3,585 |
| 6,566 |
| (2,981 | ) | (45.4 | ) |
| 7,024 |
| 3,585 |
| 3,439 |
| 95.9 |
| ||||||
Revenues |
| 292,843 |
| 182,921 |
| 109,922 |
| 60.1 |
|
| 490,292 |
| 292,843 |
| 197,449 |
| 67.4 |
| ||||||
COST OF REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Power industry services |
| 183,733 |
| 128,515 |
| 55,218 |
| 43.0 |
|
| 362,515 |
| 183,733 |
| 178,782 |
| 97.3 |
| ||||||
Industrial fabrication and field services |
| 34,105 |
| — |
| 34,105 |
| NM |
|
| 30,837 |
| 34,105 |
| (3,268 | ) | (9.6 | ) | ||||||
Telecommunications infrastructure services |
| 2,691 |
| 4,746 |
| (2,055 | ) | (43.3 | ) |
| 5,437 |
| 2,691 |
| 2,746 |
| 102.0 |
| ||||||
Cost of revenues |
| 220,529 |
| 133,261 |
| 87,268 |
| 65.5 |
|
| 398,789 |
| 220,529 |
| 178,260 |
| 80.8 |
| ||||||
GROSS PROFIT |
| 72,314 |
| 49,660 |
| 22,654 |
| 45.6 |
|
| 91,503 |
| 72,314 |
| 19,189 |
| 26.5 |
| ||||||
Selling, general and administrative expenses |
| 20,289 |
| 14,581 |
| 5,708 |
| 39.1 |
| |||||||||||||||
Impairment loss |
| 1,979 |
| — |
| 1,979 |
| NM |
|
| — |
| 1,979 |
| (1,979 | ) | (100.0 | ) | ||||||
Selling, general and administrative expenses |
| 14,581 |
| 10,387 |
| 4,194 |
| 40.4 |
| |||||||||||||||
INCOME FROM OPERATIONS |
| 55,754 |
| 39,273 |
| 16,481 |
| 42.0 |
|
| 71,214 |
| 55,754 |
| 15,460 |
| 27.7 |
| ||||||
Other income, net |
| 593 |
| 212 |
| 381 |
| 179.7 |
|
| 2,529 |
| 593 |
| 1,936 |
| 326.6 |
| ||||||
INCOME BEFORE INCOME TAXES |
| 56,347 |
| 39,485 |
| 16,862 |
| 42.7 |
|
| 73,743 |
| 56,347 |
| 17,396 |
| 30.9 |
| ||||||
Income tax expense |
| 18,928 |
| 12,800 |
| 6,128 |
| 47.9 |
|
| 25,676 |
| 18,928 |
| 6,748 |
| 35.7 |
| ||||||
NET INCOME |
| 37,419 |
| 26,685 |
| 10,734 |
| 40.2 |
|
| 48,067 |
| 37,419 |
| 10,648 |
| 28.5 |
| ||||||
Net income attributable to noncontrolling interests |
| 5,515 |
| 7,875 |
| (2,360 | ) | (30.0 | ) |
| 303 |
| 5,515 |
| (5,212 | ) | (94.5 | ) | ||||||
NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. |
| $ | 31,904 |
| $ | 18,810 |
| $ | 13,094 |
| 69.6 | % |
| $ | 47,764 |
| $ | 31,904 |
| $ | 15,860 |
| 49.7 | % |
NM = Not Meaningful
Revenues
Power Industry Services
The revenues of the power industry services business increased by $75.179%, or $198.1 million, to $449.6 million for the six months ended July 31, 2017 compared with revenues of $251.5 million for the six months ended July 31, 2016 compared with revenues of $176.4 million for the six months ended July 31, 2015.2016. The revenues of this business represented approximately 86%92% of consolidated revenues for the current six-month period, and approximately 96%86% of consolidated revenues for the corresponding prior year period. The increase in revenues for the power industry services segment primarily reflected the ramped-up and peak construction activities of the five new EPC contracts,four natural gas-fired power plant construction projects, which represented approximately 57% of consolidated revenues for the six months ended July 31, 2016, and the end of project construction activity of the Panda power plant projects which represented 26%89% of consolidated revenues for the current six-month period. Last year, the combined revenues associated with these two Panda power plantfour projects, which were all in their early phases, represented approximately 91%56% of consolidated revenues for the six months ended July 31, 2015. We have experienced a significant decrease2016. Construction activity related to two other natural-gas fired power plant projects that were completed later in revenue concentrationthe year represented 26% of consolidated revenues for the six months ended July 31, 2016, where no single project represents more than 17.4% of our consolidated revenues. Additionally, we reached substantial completion on the two Panda projects in April and June 2016, respectively, and any remaining close-out activity and resulting revenues should be limited for the remainder of the current fiscal year.2016.
Industrial Fabrication and Field Services
The revenues for this reportableof the industrial fabrication and field services business segment reflect six months of activity in the current year as we acquired TRC on December 4, 2015. TRC’s major customers include some of North America’s largest forest products companies, such as Weyerhaeuser, Resolute, Domtar and Georgia Pacific, mining companies and large crop nutrient processors. Duringdecreased by 11%, or $4.1 million, to $33.6 million for the six months ended July 31, 2016,2017 compared with revenues of $37.7 million for the six months ended July 31, 2016. The largest portion of TRC’s revenues were provided by industrial field services. The decrease in revenues is primarily attributable to revenues included in the prior year period associated with large loss projects with former customers that were in-process on the date of our acquisition of TRC and which were primarily completed its contracts that causedduring the large pre-acquisition losses and intends to focus on growing contract backlog with the addition of new, profitable projects.six months ended July 31, 2016.
Telecommunications Infrastructure Services
The revenues of this reportable business segment decreasedincreased by approximately 45%96%, or $3.4 million, for the six months ended July 31, 20162017 compared with the corresponding period last year. Inyear as SMC has been successful in increasing the prior year period, revenues earned in connection with underground cabling work performed at multiple commuter train stations of the MTA and completed last year represented approximately 37% of SMC’s revenues. There was no correspondingrelated to both outside premises, including $3.2 million related to a fiber-to-the-home project for the six months ended July 31, 2016.a municipal customer, and inside premises projects.
Cost of Revenues
Due primarily to the substantial increase in consolidated revenues for the six months ended July 31, 20162017 compared with last year’s period, the corresponding consolidated cost of revenues also increased. These costs were $220.5$398.8 million and $133.3$220.5 million for the six months ended July 31, 2017 and 2016, respectively. Gross profit amounts for the corresponding six-month periods were $91.5 million and 2015, respectively, with the increase associated primarily with new EPC contracts and the addition of the costs of revenues for APC and TRC.$72.3 million, respectively. Our overall gross profit percentage of 24.7%18.7% of consolidated revenues was lower in the six months ended July 31, 2016current period compared to a percentage of 27.1%24.7% for the comparable prior year six-month period, due towhich primarily reflected the new businesssubstantial completion of GPS andtwo power plant projects as identified above. Current period gross profit percentages primarily reflected continued successful execution of construction activities on four EPC natural gas-fired power plant projects of GPS. The gross profit percentage of the additioncombined revenues of TRC, APC and TRC. However, for bothSMC increased between the six months ended July 31, 2016 and 2015, gross profits are elevated when compared to other recent periods due to adjustments that resulted in reduced estimated costs to complete the two Panda power plant projects. Specifically, in the current period, we negotiated a settlement with the project owner related to the outstanding claims and we reached substantial completion on both Panda projects. These achievements eliminated a number of significant risks and the related estimated costs associated with them, resulting in increased gross margins.
Impairment Loss
As discussed above, APC reported a second quarter net loss, reflecting reductions to gross profit and the estimated impairment loss related to goodwill in the amount of $2.0 million. It will likely incur losses for the remainder of the year.periods.
Selling, General and Administrative Expenses
These costs were $14.6$20.3 million and $10.4$14.6 million for the six months ended July 31, 20162017 and 2015,2016, respectively, representing approximately 5.0%4.1% and 5.7%5.0% of consolidated revenues for the corresponding periods, respectively. The increase of $4.2 million reflected the additionApproximately half of the selling, general$5.7 million increase between the periods was incurred by GPS reflecting increased incentive compensation costs and administrative costs for APC and TRC which were $4.5 million combinedsalary expense. In addition, stock option compensation expense for the six months ended July 31, 2016, compared to $0.62017 increased by approximately $1.0 million forbetween the periods, driven primarily by the increased market price of our common stock.
Impairment Loss
As discussed above, APC recorded a goodwill impairment loss of approximately $2.0 million last year; accordingly, it was included in the prior year period.statement of earnings for the six months ended July 31, 2016.
Income Tax Expense
For the six months ended July 31, 2017, we recorded income tax expense of $25.7 million reflecting an estimated annual effective income tax rate of approximately 36.2% (before the income tax effect of discrete items for the current period). This rate differed from the expected federal income tax rate of 35% due primarily to the estimated unfavorable effect of state income taxes, offset substantially by the domestic production activities deduction. For the six months ended July 31, 2016, we recorded income tax expense of $18.9 million reflecting an estimated annual effective income tax rate of approximately 34.3%35.3%. This rate differs slightly from the expected federal income tax rate of 35.0% due primarily to the favorable effect of permanent differences including the domestic production activities deduction and the exclusion of income attributable to our joint venture partner from our taxable income, partially offset in the current period by the unfavorable income tax effect of the impairment loss. In addition, theThe excess income tax benefit amounts associated with stock options exercised during the current yearsix months ended July 31, 2017 and 2016 reduced income tax expense by $0.8 million and $1.1 million, for the six months ended July 31, 2016. These favorable effects were offset almost completely by the unfavorable effect of state income taxes.
For the six months ended July 31, 2015, we recorded income tax expense of $12.8 million reflecting an annual effective income tax rate estimated to be approximately 32.3% at the time. This rate differed from the expected federal income tax rate of 35% due primarily to the favorable permanent effect of excluding the income attributable to our joint venture partner (which was more significant last year) from our taxable income. Our effective tax rate also reflected the permanent benefit of the domestic production activities deduction. These factors were partially offset by the unfavorable effect of state income taxes. Our actual annual effective income tax rate for the year ended January 31, 2016 was 33.5%.respectively.
Net Income Attributable to NoncontrollingNon-controlling Interests
As discussed in Note 4, we entered separate construction joint ventures related to the two Panda power plant projects. Because we have financial control, the joint ventures are included inabove, our condensed consolidated financial statements. Our joint venture partner’s share of the earnings of the construction joint ventures, which is reflected in the line item “netcaptioned net income attributable to noncontrolling interests” ofnon-controlling interests included in the accompanying statements of earnings for the six months ended July 31, 2017 and 2016, and 2015 in the amounts of $5.5were $0.3 million and $7.9$5.5 million, respectively. The reduction in the amount between periods primarily reflects decreased endthe contractual completion of projectthe projects last year. Current year activity on the two Panda power projectsrelates to changes in the six months ended July 31, 2016 as comparedestimated costs to greater activity in the prior year period. There are no joint ventures related to the five other new EPC contracts.complete warranty requirements.
Liquidity and Capital Resources as of July 31, 20162017
As of July 31, 2017 and January 31, 2017, our balances of cash and cash equivalents were $153.2 million and $167.2 million, respectively. During this same period, our working capital increased by $50.7 million to $287.9 million as of July 31, 2017 from $237.2 million as of January 31, 2017.
The net amount of cash provided by operating activities for the six months ended July 31, 2017 was $34.6 million as net income for the period, including the favorable adjustments related to non-cash expense items, provided cash in the total amount of $51.9 million. Because our four major EPC projects are 61% to 77% complete, we experienced net decreases during the period in the amounts of billings on current projects in excess of corresponding costs and estimated earnings, which represented a use of cash in the amount of $23.7 million. In general, we expect this unfavorable cash-flow trend to continue until the projects are completed and new EPC projects are added to the backlog. Primarily due to increasing project owner retainage amounts on current construction contracts, accounts receivable increased during the six months ended July 31, 2017, which represented a use of cash in the amount of $17.7 million. On the other hand, we experienced a net increase during the period in the amounts of accounts payable and accrued expenses, which represented a source of cash in the amount of $21.5 million.
Our primary use of this cash during the six months ended July 31, 2017 was the net purchase of CDs in the amount of $47.5 million. Our operating subsidiaries used cash during the current period in the amount of $2.8 million for capital expenditures. During the six months ended July 31, 2017, the exercise of options to purchase 80,500 shares of our common stock provided us with cash proceeds in the approximate amount of $2.5 million.
During the six months ended July 31, 2016, our combined balance of cash and cash equivalents increased by $1.9 million to $162.8 million as of July 31, 2016 from a balance of $160.9 million as of January 31, 2016. During this same period, our working capital increased by $37.3 million to $200.2 million as of July 31, 2016 from $162.9 million as of January 31, 2016.
Net income for the six months ended July 31, 2016, including the favorable net amount of adjustments related to noncashnon-cash expense items, provided cash in the total amount of $41.9 million. In addition, we experienced a net decrease of $31.5 million in accounts receivable during the period primarily due to the receipt of retainages on the Panda Liberty and Panda Patriottwo natural gas-fired power plant projects as wewhich achieved substantial completion during the period. We had a net increase of $16.3 million in the amount of billings on current projects that temporarily exceedsexceeded the corresponding amounts of costs and estimated earnings, which primarily reflected the early-stageearly stage activities of GPS on its new EPCfour major current construction contracts. Our net accounts payable and accrued expenses were also impacted withby increased early-stageearly stage activities related to several of our subcontractors and suppliers, increasing this balance and providing cash by $24.0 million during the six months ended July 31, 2016. Primarily due to these factors, the net amount of cash provided by operating activities for the six-month periodsix months ended July 31, 2016 was $112.7 million. The exercise of options to purchase 195,350 shares of our common stock options during the currentprior year period provided us with cash proceeds in the amount of $4.2 million.
Our primary use of this cash during the current periodsix months ended July 31, 2016 was the net purchase of short-term investments (bank CDs)CDs in the amount of $106.0 million. Additionally, we used cash as our consolidated joint ventures made distributions to our joint venture partner in the total amount of $7.5 million. The amount of cash remaining in the joint ventures as of July 31, 2016 was $38.4 million, which will be used to cover future remaining costs on the Panda Liberty and Panda Patriot projects as they finish up activities under their respective EPC contracts, with any remaining cash ultimately getting distributed to the joint venture partners. We also used cash during the current period in the amount of $1.6 million for capital expenditures by the operating subsidiaries.
DuringOn May 15, 2017, we entered into the six months ended July 31, 2015, we made net short-term investments totaling $117.0 million. These purchases contributed significantlyCredit Agreement with the Bank as the lender, which replaced a predecessor agreement by modifying its features to, the decrease of $151.6 million in cash and cash equivalents during the six-month period ended July 31, 2015 to a balance of $182.1 million as of July 31, 2015. The balance of cash and cash equivalents was $333.7 million as of January 31, 2015. In addition, the amounts of billings on current projects that temporarily exceed the corresponding
amounts of costs and estimate earnings decreased during last year’s first six months as work progressed representing a use of cash in the amount of $46.0 million. Progress on active contracts and the payment of cash bonuses accrued at January 31, 2015 contributed primarily to the decline in the balance of accounts payable and accrued liabilities during the six months ended July 31, 2015, which represented a net use of cash in the amount of $4.2 million.among other things:
However, our working capital increased by $29.5· increase the Bank’s lending commitment amount from $10 million to $178.5$50 million as of July 31, 2015 from $148.9 million as of January 31, 2015, as our net income for the six months ended July 31, 2015 in the amount of $26.7 million represented a source of cash.
The acquisition of APC required the use of cash in the amount of $4.2 million; this amount was net of cash acquired. We also expended cash to make capital expenditures in the amount of $2.5 million during the six months ended July 31, 2015 including capitalized power plant project development costs incurred by Moxie Freedom prior to its deconsolidation during the second quarter.
Last year, we renegotiated our financing arrangements with Bank of America (the “Bank”); the replacement agreement was completed in August 2015. It provides a revolving loan with a maximum borrowinginterest at the 30-day LIBOR plus 2.00%;
· add an accordion feature which allows for an additional commitment amount of $10.0$10 million, that is available untilsubject to certain conditions; and
· extend the maturity date three years from May 31, 2018 with interest at LIBOR plus 2.00%. We may also use the borrowing ability to cover standby letters ofMay 31, 2021, which effectively provides for a four-year credit issued by the Bank for us in the ordinary course of business. There were no actual borrowings outstanding under Bank financing arrangements as of July 31, 2016 or January 31, 2016. Borrowing availability in the total amount of approximately $4.4 million has been designated to cover several letters of credit issued by the Bank, with expiration dates ranging from September 23, 2016 to January 8, 2017, in order to cover insurance exposures and to support the project development activities of a potential power plant owner, leaving approximately $5.6 million available for use currently.commitment.
The Company hasAs with the predecessor agreement, we have pledged the majority of itsour assets to secure the financing arrangements. However, theThe Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Bank requireswill continue to require that we comply with certain financial covenants at our fiscal year-end and at each of our fiscal quarter-ends. We were in compliance with theses financialThe Credit Agreement includes other terms, covenants asand events of default that are customary for a credit facility of its size and nature. As of July 31, 2016. Management believes that the Company will continue to comply2017 and January 31, 2017, we were compliant with its financial covenants under the replacement financing arrangements.
If the Company’s performance results in our noncompliance with any of the financial covenants we would most likely seekof the Credit Agreement and predecessor agreement, respectively. We may use the borrowing ability to modify the financing arrangements, but there can be no assurance thatcover other credit issued by the Bank would not exercise its rights and remediesfor our use in the ordinary course of business. As of July 31, 2017, we had approximately $6.0 million of credit outstanding under the financing arrangements including accelerating the payment of all then outstanding senior debt due and payable.Credit Agreement.
In addition, theA different commercial bank that has supportedsupports the activities of TRC has issued twoan outstanding irrevocable lettersletter of credit on its behalf in the amountsamount of $0.5 million and $0.4 million with a current expiration dates of June 30, 2017 and August 31, 2017, respectively, which are secured by a lien on the owned facility of TRC.date in January 2018.
At July 31, 2016,2017, most of our balance of cash and cash equivalents was invested in a high-quality money market fund with at least 80% of its net assets invested in U.S. Treasury obligations and repurchase agreements secured by U.S.United States Treasury obligations. Most of our domestic operating bank accounts are maintained with the Bank. The Company doesWe do maintain certain Euro-based bank accounts in the Republic of Ireland and insignificant bank accounts in other countries in support of the operations of APC.
We believe that cash on hand, cash that will be provided over the next six months withfrom the maturities of short-term investments and cash generated from our future operations, with or without funds available under our line of credit, will be adequate to meet our general business needs in the foreseeable future. In particular, we maintain significant liquid capital on our balance sheet to help ensure our ability to maintain and obtain bonding capacity for current and future EPC and other construction projects. Any future acquisitions, or other significant unplanned cost or cash requirement, may require us to raise additional funds through the issuance of debt and/or equity securities. There can be no assurance that such financing will be available on terms acceptable to us, or at all.
Earnings before Interest, Taxes, Depreciation and Amortization (Non-GAAP Measurement)
The following tables present the determinations of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)EBITDA for the three and six months ended July 31, 20162017 and 2015,2016, respectively (amounts in thousands).
|
| Three Month Ended July 31, |
|
| Three Months Ended July 31, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
Net income, as reported |
| $ | 23,299 |
| $ | 15,834 |
|
| $ | 27,318 |
| $ | 23,299 |
|
Interest expense |
| — |
| 74 |
| |||||||||
Income tax expense |
| 11,756 |
| 7,939 |
|
| 14,601 |
| 11,756 |
| ||||
Depreciation |
| 484 |
| 139 |
|
| 638 |
| 484 |
| ||||
Amortization of purchased intangible assets |
| 200 |
| 104 |
|
| 334 |
| 200 |
| ||||
EBITDA |
| 35,739 |
| 24,090 |
|
| 42,891 |
| 35,739 |
| ||||
Noncontrolling interests - |
|
|
|
|
| |||||||||
Net income |
| 3,625 |
| 4,527 |
| |||||||||
Interest expense |
| — |
| 107 |
| |||||||||
Income tax expense |
| — |
| 86 |
| |||||||||
EBITDA of noncontrolling interests |
| 3,625 |
| 4,720 |
| |||||||||
Less EBITDA attributable to non-controlling interests |
| 179 |
| 3,625 |
| |||||||||
EBITDA attributable to the stockholders of Argan, Inc. |
| $ | 32,114 |
| $ | 19,370 |
|
| $ | 42,712 |
| $ | 32,114 |
|
|
| Six Month Ended July 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
Net income, as reported |
| $ | 37,419 |
| $ | 26,685 |
|
Interest expense |
| — |
| 118 |
| ||
Income tax expense |
| 18,928 |
| 12,800 |
| ||
Depreciation |
| 918 |
| 258 |
| ||
Amortization of purchased intangible assets |
| 521 |
| 164 |
| ||
EBITDA |
| 57,786 |
| 40,025 |
| ||
Noncontrolling interests - |
|
|
|
|
| ||
Net income |
| 5,515 |
| 7,875 |
| ||
Interest expense |
| — |
| 219 |
| ||
Income tax benefit |
| — |
| 44 |
| ||
EBITDA of noncontrolling interests |
| 5,515 |
| 8,138 |
| ||
EBITDA attributable to the stockholders of Argan, Inc. |
| $ | 52,271 |
| $ | 31,887 |
|
|
| Six Months Ended July 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
Net income, as reported |
| $ | 48,067 |
| $ | 37,419 |
|
Income tax expense |
| 25,676 |
| 18,928 |
| ||
Depreciation |
| 1,210 |
| 918 |
| ||
Amortization of purchased intangible assets |
| 518 |
| 521 |
| ||
EBITDA |
| 75,471 |
| 57,786 |
| ||
Less EBITDA attributable to non-controlling interests |
| 303 |
| 5,515 |
| ||
EBITDA attributable to the stockholders of Argan, Inc. |
| $ | 75,168 |
| $ | 52,271 |
|
As we believe that our net cash flow provided by operations is the most directly comparable performance measure determined in accordance with US GAAP, the following table reconciles the amounts of EBITDA for the applicable periods, as presented above, to the corresponding amounts of net cash flows provided by operating activities that are presented in our condensed consolidated statements of cash flows for the six months ended July 31, 2017 and 2016 (amounts in thousands).
|
| Six Months Ended July 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
EBITDA |
| $ | 75,471 |
| $ | 57,786 |
|
Current income tax expense |
| (25,829 | ) | (18,939 | ) | ||
Impairment loss |
| — |
| 1,979 |
| ||
Stock option compensation expense |
| 2,315 |
| 1,270 |
| ||
Other noncash items |
| (78 | ) | (202 | ) | ||
(Increase) decrease in accounts receivable |
| (17,726 | ) | 31,484 |
| ||
(Decrease) increase in billings in excess of costs and estimated earnings, net |
| (23,662 | ) | 16,293 |
| ||
Decrease (increase) in prepaid expenses and other assets |
| 2,600 |
| (993 | ) | ||
Increase in accounts payable and accrued expenses |
| 21,485 |
| 24,029 |
| ||
Net cash provided by operating activities |
| $ | 34,576 |
| $ | 112,707 |
|
We also believe that EBITDA is a meaningful presentation that is widely used by investors and analysts as a measure of performance. It enables us to assess and compare our operating cash flow performance on a consistent basis by removing from our operating results the impacts of our capital structure, the effects of the accounting methods used to compute depreciation and amortization and the effects of operating in different income tax jurisdictions. Further, we believe that EBITDA is widely used by investors and analysts as a measure of performance.
As EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles in the United States (“US GAAP”),GAAP, we do not believe that this measure should be considered in isolation from, or as a substitute for, the results of our operations presented in accordance with US GAAP that are included in our condensed consolidated financial statements. In addition, our EBITDA does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs.
As we believe that our net cash flow provided by or used in operations is the most directly comparable performance measure determined in accordance with US GAAP, the following table reconciles the amounts of EBITDA for the applicable periods, as presented above, to the corresponding amounts of net cash flows provided by or used in operating activities that are presented in our condensed consolidated statements of cash flows for the six months ended July 31, 2016 and 2015 (amounts in thousands).
|
| Six Months Ended July 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
EBITDA |
| $ | 57,786 |
| $ | 40,025 |
|
Current income tax expense |
| (18,939 | ) | (12,615 | ) | ||
Impairment loss |
| 1,979 |
| — |
| ||
Stock option compensation expense |
| 1,270 |
| 1,057 |
| ||
Other noncash items |
| (202 | ) | (264 | ) | ||
Interest expense |
| — |
| (118 | ) | ||
Decrease (increase) in accounts receivable |
| 31,484 |
| (5,774 | ) | ||
Changes related to the timing of scheduled billings |
| 16,293 |
| (46,032 | ) | ||
Increase in prepaid expenses and other assets |
| (993 | ) | (1,133 | ) | ||
Increase (decrease) in accounts payable and accrued expenses |
| 24,029 |
| (4,232 | ) | ||
Net cash provided by (used in) operating activities |
| $ | 112,707 |
| $ | (29,086 | ) |
Critical Accounting Policies
We consider the accounting policies related to revenue recognition on long-term construction contracts; the accounting for business combinations, the subsequent valuation of goodwill, other indefinite-lived assets and long-lived assets; the valuation of employee stock options; income tax reporting and the financial reporting associated with any significant legal matters to be most critical to the understanding of our financial position and results of operations, as well as the accounting and reporting for special interestpurpose entities including joint ventures and variable interest entities. Critical accounting policies are those related to the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions.
These estimates, judgments, and assumptions affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.
An expanded discussion of our critical accounting policies is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended January 31, 2016.2017. During the six-month period ended July 31, 2016,2017, there have been no material changes in the way we apply the critical accounting policies described therein.
Recently Issued Accounting Pronouncements
Note 2 to the accompanying condensed consolidated financial statements presents descriptions of pending accounting pronouncements issued by the Financial Accounting Standards Board (the “FASB”)FASB that are not yet effective and that may be relevant to our future financial reporting. Most importantly, theseThese include Accounting Standards Update 2014-09, (“ASU 2014-09”), Revenue from Contracts with Customers, which was issued in May 28, 2014 and which has been amended multiple times, and Accounting Standards Update 2016-02, (“ASU 2016-02”), Leases, which was issued in February 2016. ASU 2014-09 represents an effort to create a new, principle-based revenue recognition framework.framework for all companies that will be adopted by us on February 1, 2018. ASU 2016-02, which will be adopted by us on February 1, 2019, will require the recognition on the balance sheet of all operating leases with terms greater than one year on the balance sheet.year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our results of operations may be subject to risks related to fluctuations in interest rates. As of July 31, 2016,2017, we had no outstanding borrowings under our replacement financing arrangements with the Bank of America (see Note 108 to the accompanying condensed consolidated financial statements), which now provide a revolving loan with a maximum borrowing amount of $10.0$50 million that is available until May 31, 20182021 with interest at LIBOR plus 2.00%. As of July 31, 2016,2017, our balance of short-term investments, which consisted entirely of certificates of deposit,CDs, was $220.0$403 million (excluding accrued interest) with a weighted average initial maturity term of 165252 days. This exposes us to a certain amount of risk should interest rates suddenly rise. However, we believe that this risk is minimal, and mitigated somewhat by the manner in which we have scheduled the future maturity dates. As of July 31, 2016,2017, the weighted average interest rate on our short-term investments of $220.0 millionCDs was 0.81%1.27%.
The accompanying condensed consolidated financial statements are presented in US Dollars. The financial results reported by APC and included in our condensed consolidated financial statements are affected by foreign currency volatility. The effects of translating the financial statements of APC from its functional currency (Euros) into the Company’s reporting currency (US Dollars) are recognized as translation adjustments in accumulated other comprehensive income (loss) which is net of tax, where applicable.. When the US Dollar appreciatesdepreciates against the Euro, the reported assets, liabilities, revenues, costs and earnings of APC, after translation into US Dollars, are lowergreater than what they would have been had the value of the US Dollar depreciatedappreciated against the Euro or if there had been no change in the exchange rates.rate. During the six-month period ended July 31, 2016,2017, the US Dollar depreciated against the Euro. The resulting other comprehensive net income for the period was approximately $0.1 million. We generally do not hedge our exposure to potential foreign currency translation adjustments.
Another form of exposure to fluctuating exchange rates relates to the effects of transacting in currencies other than those of our entity’s functional currencies. We do not engage in currency speculation, and we generally do not utilize foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency related operating exposures. NetWe incurred a net foreign currency transaction gains and losses were included in the other income, net, section of the Company’s condensed consolidated statement of earningsloss for the six months ended July 31, 2016; such amount2017 that was a net loss of $0.1 million.insignificant.
In addition, we are subject to fluctuations in prices for commodities including copper, concrete, steel products and fuel. Although we attempt to secure firm quotes from our suppliers, we generally do not hedge against increases in prices for copper, concrete, steel andor fuel. Commodity price risks may have an impact on our results of operations due to the fixed-price nature of many of our contracts. We attempt to include the anticipated amounts of price increases or decreases in the costs of our bids.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934 (the “Exchange Act”) as of July 31, 2016.2017. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of July 31, 2016,2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal controls over financial reporting. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the fiscal quarter ended July 31, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the second and fourth quarters of fiscal 2016, the Company acquired Atlantic Projects Company Limited and affiliates and The Roberts Company, respectively. The Company is currently in process of integrating both entities pursuant to the Sarbanes-Oxley Act of 2002. The Company is evaluating changes to processes, information technology systems and other components of internal controls over financial reporting as part of its ongoing integration activities, and as a result, controls will be changed as needed. We have not yet determined whether the integration of these entities will result in a significant change to our internal control over financial reporting.
OTHER INFORMATION
Included in Note 119 to the condensed consolidated financial statements that are included in Item 1 of Part I of this Quarterly Report on Form 10-Q is a discussion of specific legal proceedings for the six-month period ended July 31, 2016.2017. In the normal course of business, the Company may have other pending claims and legal proceedings. It is our opinion, based on information available at this time, that any other current claim or proceeding will not have a material effect on our condensed consolidated financial statements.
Investing inThere have been no material changes from our securities involves a high degree of risk. Our business, financial position and future results of operations may be impacted in a materially adverse manner by risks associated with the execution of our strategic plan and the creation of a profitable and cash-flow positive business in a period of weak recovery from a significant economic recession and major disruptions in the financial markets, our ability to obtain capital or to obtain capital on terms acceptable to us, the successful integration of acquired companies into our consolidated operations, our ability to successfully manage diverse operations remotely located, our ability to successfully compete in highly competitive industries, the successful resolution of ongoing litigation and disagreements with customers, our dependence upon key managers and employees and our ability to retain them, potential fluctuations in quarterly operating results and a series of risks associated with our power industry services business, among other risks.
Before investing in our securities, please consider these and other risks more fully describedrisk factors as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2016. There have been no material revisions to the risk factors that are described therein. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.2017.
Our future results may also be impacted by other risk factors listed from time to time in our future filings with the Securities and Exchange Commission (the “SEC”), including, but not limited to, our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K. These documents are available free of charge from the SEC or from our corporate headquarters. Access to these documents is also available on our website. For more information about us and the announcements we make from time to time, you may visit our website at www.arganinc.com.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES (not applicable to us)
None
Exhibit No. |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
| Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 |
Exhibit 32.2 |
| Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 |
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Exhibit 101.INS# |
| XBRL Instance Document |
Exhibit 101.SCH# |
| XBRL Schema Document |
Exhibit 101.CAL# |
| XBRL Calculation Linkbase Document |
Exhibit 101.LAB# |
| XBRL Labels Linkbase Document |
Exhibit 101.PRE# |
| XBRL Presentation Linkbase Document |
Exhibit 101.DEF# |
| XBRL Definition Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ARGAN, INC. | ||
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September 7, | By: | /s/ Rainer H. Bosselmann | |
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| Rainer H. Bosselmann | |
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| Chairman of the Board and Chief Executive Officer |
September 7, | By: | /s/ David H. Watson | |
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| David H. Watson | |
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| Senior Vice President, Chief Financial Officer, | |
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| Treasurer and Secretary |