| | Delaware |
| 13-1947195 | (State or Other Jurisdiction of Incorporation) | | (I.R.S. Employer Identification No.) |
One Church Street, Suite 201, Rockville, Maryland20850 (Address of Principal Executive Offices) (Zip Code) (301) (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 Securities Exchange Act of 1934 (the “Exchange Act”) 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 xþ 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 xþ 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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” ”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act (check one).Act. Large accelerated filer o☐ Accelerated filer xþ 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☑ | | | | | Title of Each Class |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered | Common Stock, $.15 par value | | AGX | | New York Stock Exchange |
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: 15,548,71915,669,969 shares as of December 1, 2017.September 5, 2020.
ARGAN, INC. AND SUBSIDIARIES FORM 10-Q QUARTERLY REPORT
OCTOBER 31, 2017
INDEX
|
| Page No.
| | | | PART I.
| FINANCIAL INFORMATION
| 3
| | | | Item 1.
| Financial Statements
| 3
| | | | | Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended October 31, 2017 and 2016
| 3
| | | | | Condensed Consolidated Balance Sheets as of October 31, 2017 and January 31, 2017
| 4
| | | | | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2017 and 2016
| 5
| | | | | Notes to Condensed Consolidated Financial Statements
| 6
| | | | Item 2.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations
| 17
| | | | Item 3.
| Quantitative and Qualitative Disclosures about Market Risk
| 29
| | | | Item 4.
| Controls and Procedures
| 29
| | | | PART II.
| OTHER INFORMATION
| 29
| | | | Item 1.
| Legal Proceedings
| 29
| | | | Item 1A.
| Risk Factors
| 30
| | | | Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds
| 30
| | | | Item 3.
| Defaults upon Senior Securities
| 30
| | | | Item 4.
| Mine Safety Disclosures (not applicable to the Registrant)
| 30
| | | | Item 5.
| Other Information
| 30
| | | | Item 6.
| Exhibits
| 30
| | | | SIGNATURES
| | 31
| | | | CERTIFICATIONS
|
2
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) (Unaudited) | | Three Months Ended October 31, | | Nine Months Ended October 31, | | | | 2017 | | 2016 | | 2017 | | 2016 | | | | | | | | | | | | REVENUES | | $ | 232,945 | | $ | 175,444 | | $ | 723,237 | | $ | 468,287 | | Cost of revenues | | 195,227 | | 138,866 | | 594,016 | | 359,395 | | GROSS PROFIT | | 37,718 | | 36,578 | | 129,221 | | 108,892 | | Selling, general and administrative expenses | | 10,119 | | 9,848 | | 30,408 | | 24,429 | | Impairment loss (Note 7) | | — | | — | | — | | 1,979 | | INCOME FROM OPERATIONS | | 27,599 | | 26,730 | | 98,813 | | 82,484 | | Other income, net | | 1,692 | | 690 | | 4,221 | | 1,283 | | INCOME BEFORE INCOME TAXES | | 29,291 | | 27,420 | | 103,034 | | 83,767 | | Income tax expense | | 12,062 | | 8,194 | | 37,738 | | 27,122 | | NET INCOME | | 17,229 | | 19,226 | | 65,296 | | 56,645 | | Net income attributable to non-controlling interests | | — | | 1,153 | | 303 | | 6,668 | | NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | 17,229 | | 18,073 | | 64,993 | | 49,977 | | | | | | | | | | | | Foreign currency translation adjustments, net of tax | | (139 | ) | (326 | ) | 754 | | (192 | ) | COMPREHENSIVE INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | $ | 17,090 | | $ | 17,747 | | $ | 65,747 | | $ | 49,785 | | | | | | | | | | | | EARNINGS PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | | | | | | | | | Basic | | $ | 1.11 | | $ | 1.19 | | $ | 4.19 | | $ | 3.34 | | Diluted | | $ | 1.09 | | $ | 1.16 | | $ | 4.11 | | $ | 3.23 | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | | Basic | | 15,545 | | 15,137 | | 15,509 | | 14,974 | | Diluted | | 15,793 | | 15,601 | | 15,796 | | 15,490 | | | | | | | | | | | | CASH DIVIDENDS PER SHARE (Note 11) | | $ | 1.00 | | $ | 1.00 | | $ | 1.00 | | $ | 1.00 | |
| | | | | | | | | | | | | | | | Three Months Ended | | Six Months Ended | | | | July 31, | | July 31, | | | | 2020 | | 2019 | | 2020 | | 2019 | | REVENUES | | $ | 87,492 | | $ | 63,059 | | $ | 147,640 | | $ | 112,603 | | Cost of revenues | | | 71,862 | | | 60,094 | | | 128,001 | | | 130,664 | | GROSS PROFIT (LOSS) (Note 2) | | | 15,630 | | | 2,965 | | | 19,639 | | | (18,061) | | Selling, general and administrative expenses | | | 9,085 | | | 10,038 | | | 19,429 | | | 19,626 | | Impairment loss | | | — | | | — | | | — | | | 2,072 | | INCOME (LOSS) FROM OPERATIONS | | | 6,545 | | | (7,073) | | | 210 | | | (39,759) | | Other income, net | | | 451 | | | 1,642 | | | 1,539 | | | 3,894 | | INCOME (LOSS) BEFORE INCOME TAXES | | | 6,996 | | | (5,431) | | | 1,749 | | | (35,865) | | Income tax (expense) benefit (Note 10) | | | (1,397) | | | 6,411 | | | 3,057 | | | 6,932 | | NET INCOME (LOSS) | | | 5,599 | | | 980 | | | 4,806 | | | (28,933) | | Net loss attributable to non-controlling interests | | | (10) | | | (174) | | | (40) | | | (287) | | NET INCOME (LOSS) ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | | 5,609 | | | 1,154 | | | 4,846 | | | (28,646) | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | (83) | | | (6) | | | (329) | | | (1,060) | | COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | $ | 5,526 | | $ | 1,148 | | $ | 4,517 | | $ | (29,706) | | | | | | | | | | | | | | | | NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. (Note 11) | | | | | | | | | | | | | | Basic | | $ | 0.36 | | $ | 0.07 | | $ | 0.31 | | $ | (1.84) | | Diluted | | $ | 0.36 | | $ | 0.07 | | $ | 0.31 | | $ | (1.84) | | | | | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | | | | | | Basic | | | 15,653 | | | 15,633 | | | 15,648 | | | 15,608 | | Diluted | | | 15,788 | | | 15,757 | | | 15,767 | | | 15,608 | | | | | | | | | | | | | | | | CASH DIVIDENDS PER SHARE (Note 12) | | $ | 1.25 | | $ | 0.25 | | $ | 1.50 | | $ | 0.50 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. ARGAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) | | | | | | | | | July 31, | | January 31, | | | 2020 | | 2020 | | | (Unaudited) | | (Note 1) | ASSETS | | | | | | | CURRENT ASSETS | | | | | | | Cash and cash equivalents | | $ | 382,424 | | $ | 167,363 | Short-term investments | | | 25,204 | | | 160,499 | Accounts receivable, net | | | 29,660 | | | 37,192 | Contract assets | | | 26,523 | | | 33,379 | Other current assets (Note 10) | | | 39,645 | | | 23,322 | TOTAL CURRENT ASSETS | | | 503,456 | | | 421,755 | Property, plant and equipment, net | | | 21,692 | | | 22,539 | Goodwill | | | 27,943 | | | 27,943 | Other purchased intangible assets, net | | | 4,550 | | | 5,001 | Deferred taxes | | | — | | | 7,894 | Right-of-use and other assets | | | 3,466 | | | 2,408 | TOTAL ASSETS | | $ | 561,107 | | $ | 487,540 | | | | | | | | LIABILITIES AND EQUITY | | | | | | | CURRENT LIABILITIES | | | | | | | Accounts payable | | $ | 41,242 | | $ | 35,442 | Accrued expenses (Note 10) | | | 36,185 | | | 35,907 | Contract liabilities | | | 156,008 | | | 72,685 | TOTAL CURRENT LIABILITIES | | | 233,435 | | | 144,034 | Deferred taxes | | | 642 | | | — | Other noncurrent liabilities | | | 2,883 | | | 2,476 | TOTAL LIABILITIES | | | 236,960 | | | 146,510 | | | | | | | | COMMITMENTS AND CONTINGENCIES (Notes 7 and 8) | | | | | | | | | | | | | | STOCKHOLDERS’ EQUITY | | | | | | | Preferred stock, par value $0.10 per share – 500,000 shares authorized; 0 shares issued and outstanding | | | — | | | — | Common stock, par value $0.15 per share – 30,000,000 shares authorized; 15,673,202 and 15,638,202 shares issued at July 31 and January 31, 2020, respectively; 15,669,969 and 15,634,969 shares outstanding at July 31 and January 31, 2020, respectively | | | 2,351 | | | 2,346 | Additional paid-in capital | | | 150,847 | | | 148,713 | Retained earnings | | | 170,653 | | | 189,306 | Accumulated other comprehensive loss | | | (1,445) | | | (1,116) | TOTAL STOCKHOLDERS’ EQUITY | | | 322,406 | | | 339,249 | Non-controlling interests | | | 1,741 | | | 1,781 | TOTAL EQUITY | | | 324,147 | | | 341,030 | TOTAL LIABILITIES AND EQUITY | | $ | 561,107 | | $ | 487,540 |
The accompanying notes are an integral part of these condensed consolidated financial statements. ARGAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2020 AND 2019 (Dollars in thousands) (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional | | | | | Accumulated | | | | | | | | | Outstanding | | Par | | Paid-in | | Retained | | Other Comprehensive | | Non-controlling | | Total | | | Shares | | Value | | Capital | | Earnings | | Loss | | Interests | | Equity | Balances, May 1, 2020 | | 15,644,969 | | $ | 2,347 | | $ | 149,531 | | $ | 184,633 | | $ | (1,362) | | $ | 1,751 | | $ | 336,900 | Net income (loss) | | — | | | — | | | — | | | 5,609 | | | — | | | (10) | | | 5,599 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | (83) | | | — | | | (83) | Stock compensation expense | | — | | | — | | | 772 | | | — | | | — | | | — | | | 772 | Stock option exercises | | 25,000 | | | 4 | | | 544 | | | — | | | — | | | — | | | 548 | Cash dividends | | — | | | — | | | — | | | (19,589) | | | — | | | — | | | (19,589) | Balances, July 31, 2020 | | 15,669,969 | | $ | 2,351 | | $ | 150,847 | | $ | 170,653 | | $ | (1,445) | | $ | 1,741 | | $ | 324,147 | | | | | | | | | | | | | | | | | | | | | | Balances, May 1, 2019 | | 15,633,302 | | $ | 2,346 | | $ | 146,932 | | $ | 213,921 | | $ | (1,400) | | $ | (309) | | $ | 361,490 | Net income (loss) | | — | | | — | | | — | | | 1,154 | | | — | | | (174) | | | 980 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | Stock compensation expense | | — | | | — | | | 513 | | | — | | | — | | | — | | | 513 | Cash dividends | | — | | | — | | | — | | | (3,908) | | | — | | | — | | | (3,908) | Balances, July 31, 2019 | | 15,633,302 | | $ | 2,346 | | $ | 147,445 | | $ | 211,167 | | $ | (1,406) | | $ | (483) | | $ | 359,069 | | | | | | | | | | | | | | | | | | | | | | Balances, February 1, 2020 | | 15,634,969 | | $ | 2,346 | | $ | 148,713 | | $ | 189,306 | | $ | (1,116) | | $ | 1,781 | | $ | 341,030 | Net income (loss) | | — | | | — | | | — | | | 4,846 | | | — | | | (40) | | | 4,806 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | (329) | | | — | | | (329) | Stock compensation expense | | — | | | — | | | 1,414 | | | — | | | — | | | — | | | 1,414 | Stock option exercises | | 35,000 | | | 5 | | | 720 | | | — | | | — | | | — | | | 725 | Cash dividends | | — | | | — | | | — | | | (23,499) | | | — | | | — | | | (23,499) | Balances, July 31, 2020 | | 15,669,969 | | $ | 2,351 | | $ | 150,847 | | $ | 170,653 | | $ | (1,445) | | $ | 1,741 | | $ | 324,147 | | | | | | | | | | | | | | | | | | | | | | Balances, February 1, 2019 | | 15,573,869 | | $ | 2,337 | | $ | 144,961 | | $ | 247,616 | | $ | (346) | | $ | (196) | | $ | 394,372 | Net loss | | — | | | — | | | — | | | (28,646) | | | — | | | (287) | | | (28,933) | Foreign currency translation loss | | — | | | — | | | — | | | — | | | (1,060) | | | — | | | (1,060) | Stock compensation expense | | — | | | — | | | 926 | | | — | | | — | | | — | | | 926 | Stock option exercises | | 59,433 | | | 9 | | | 1,558 | | | — | | | — | | | — | | | 1,567 | Cash dividends | | — | | | — | | | — | | | (7,803) | | | — | | | — | | | (7,803) | Balances, July 31, 2019 | | 15,633,302 | | $ | 2,346 | | $ | 147,445 | | $ | 211,167 | | $ | (1,406) | | $ | (483) | | $ | 359,069 |
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) | | | | | | | | | Six Months Ended July 31, | | | 2020 | | 2019 | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | Net income (loss) | | $ | 4,806 | | $ | (28,933) | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | | | | | | | Deferred income tax expense (benefit) | | | 8,536 | | | (6,722) | Depreciation | | | 1,858 | | | 1,711 | Stock compensation expense | | | 1,414 | | | 926 | Lease expense | | | 793 | | | 382 | Amortization of purchased intangible assets | | | 451 | | | 592 | Changes in accrued interest on short-term investments | | | 295 | | | 299 | Impairment loss | | | — | | | 2,072 | Other | | | 104 | | | 43 | Changes in operating assets and liabilities | | | | | | | Accounts receivable | | | 7,532 | | | (9,835) | Contract assets | | | 6,856 | | | 6,615 | Other assets | | | (17,781) | | | 2,722 | Accounts payable and accrued expenses | | | 4,714 | | | (16,445) | Contract liabilities | | | 83,323 | | | (6,591) | Net cash provided by (used in) operating activities | | | 102,901 | | | (53,164) | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | Maturities of short-term investments | | | 145,000 | | | 104,000 | Purchases of short-term investments | | | (10,000) | | | (35,000) | Purchases of property, plant and equipment | | | (1,133) | | | (3,043) | Net cash provided by investing activities | | | 133,867 | | | 65,957 | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | Payments of cash dividends | | | (23,499) | | | (7,803) | Proceeds from the exercise of stock options | | | 725 | | | 1,567 | Net cash used in financing activities | | | (22,774) | | | (6,236) | | | | | | | | EFFECTS OF EXCHANGE RATE CHANGES ON CASH | | | 1,067 | | | (165) | NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 215,061 | | | 6,392 | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 167,363 | | | 164,318 | CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 382,424 | | $ | 170,710 | | | | | | | | SUPPLEMENTAL CASH FLOW INFORMATION (Notes 7 and 10) | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. 3
ARGAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | October 31, 2017 | | January 31, 2017 | | | | (Unaudited) | | (Note 1) | | | | | | | | ASSETS | | | | | | | | | | | | CURRENT ASSETS | | | | | | Cash and cash equivalents | | $ | 149,708 | | $ | 167,198 | | Short-term investments | | 333,973 | | 355,796 | | Accounts receivable | | 83,681 | | 54,836 | | Costs and estimated earnings in excess of billings | | 10,197 | | 3,192 | | Prepaid expenses and other current assets | | 6,236 | | 6,927 | | TOTAL CURRENT ASSETS | | 583,795 | | 587,949 | | Property, plant and equipment, net | | 15,257 | | 13,112 | | Goodwill | | 34,913 | | 34,913 | | Other intangible assets, net | | 7,405 | | 8,181 | | Deferred taxes | | 383 | | 241 | | Other assets | | 548 | | 92 | | TOTAL ASSETS | | $ | 642,301 | | $ | 644,488 | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | | | | CURRENT LIABILITIES | | | | | | Accounts payable | | $ | 114,448 | | $ | 101,944 | | Accrued expenses | | 31,005 | | 39,539 | | Billings in excess of costs and estimated earnings | | 146,863 | | 209,241 | | TOTAL CURRENT LIABILITIES | | 292,316 | | 350,724 | | Deferred taxes | | 1,788 | | 1,195 | | TOTAL LIABILITIES | | 294,104 | | 351,919 | | | | | | | | COMMITMENTS AND CONTINGENCIES (Notes 8 and 9) | | | | | | | | | | | | STOCKHOLDERS’ EQUITY | | | | | | Preferred stock, par value $0.10 per share — 500,000 shares authorized; no shares issued and outstanding | | — | | — | | Common stock, par value $0.15 per share — 30,000,000 shares authorized; 15,551,952 and 15,461,452 shares issued at October 31, 2017 and January 31, 2017, respectively; 15,548,719 and 15,458,219 shares outstanding at October 31, 2017 and January 31, 2017, respectively | | 2,333 | | 2,319 | | Additional paid-in capital | | 141,766 | | 135,426 | | Retained earnings | | 204,095 | | 154,649 | | Accumulated other comprehensive loss | | (8 | ) | (762 | ) | TOTAL STOCKHOLDERS’ EQUITY | | 348,186 | | 291,632 | | Non-controlling interests | | 11 | | 937 | | TOTAL EQUITY | | 348,197 | | 292,569 | | TOTAL LIABILITIES AND EQUITY | | $ | 642,301 | | $ | 644,488 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | Nine Months Ended October 31, | | | | 2017 | | 2016 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | Net income | | $ | 65,296 | | $ | 56,645 | | Adjustments to reconcile net income to net cash (used in) provided by operating activities | | | | | | Stock option compensation expense | | 3,573 | | 1,774 | | Depreciation | | 1,936 | | 1,444 | | Amortization of purchased intangible assets | | 776 | | 752 | | Deferred income tax expense (benefit) | | 475 | | (1,693 | ) | Other | | (317 | ) | (119 | ) | Impairment loss | | — | | 1,979 | | Changes in operating assets and liabilities | | | | | | Accounts receivable | | (31,453 | ) | 21,304 | | Prepaid expenses and other assets | | 758 | | (1,432 | ) | Accounts payable and accrued expenses | | 5,600 | | 50,099 | | Billings in excess of costs and estimated earnings, net | | (69,383 | ) | 54,558 | | Net cash (used in) provided by operating activities | | (22,739 | ) | 185,311 | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | Purchases of short-term investments | | (462,500 | ) | (375,000 | ) | Maturities of short-term investments | | 485,000 | | 214,000 | | Purchases of property, plant and equipment | | (4,006 | ) | (2,481 | ) | Loans made under notes receivable | | (200 | ) | — | | Net cash provided by (used in) investing activities | | 18,294 | | (163,481 | ) | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | Cash dividends paid | | (15,548 | ) | (15,260 | ) | Proceeds from the exercise of stock options | | 2,781 | | 10,988 | | Distributions to joint venture partners | | (1,229 | ) | (7,500 | ) | Net cash used in financing activities | | (13,996 | ) | (11,772 | ) | | | | | | | EFFECTS OF EXCHANGE RATE CHANGES ON CASH | | 951 | | (192 | ) | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (17,490 | ) | 9,866 | | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 167,198 | | 160,909 | | CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 149,708 | | $ | 170,775 | | | | | | | | SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | Cash paid for income taxes | | $ | 36,922 | | $ | 26,364 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ARGAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBERJuly 31, 20172020
(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 financially controlled joint ventures. Argan conducts operations through its wholly ownedwholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”), which provided 89% and 83% of consolidated revenues for the nine months ended October 31, 2017 and 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 cumulativelycollectively referred to as the “Company.”
Through GPS and APC, the Company provides a full range of engineering, procurement, construction, commissioning, operations management, maintenance, project development, technical and other consulting services to the power generation andmarket, including the renewable energy markets for asector. The wide range of customers includingincludes independent power project owners,producers, public utilities, power plant equipment suppliers and global energy plant construction firms.firms with projects located in the continental United States (the “US”), the Republic of Ireland (“Ireland”) and the United Kingdom (the “UK”). Including consolidated variable interest entities (“VIEs”), GPS including its consolidated joint ventures, and APC represent ourthe Company’s power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southern United Statessoutheast region of the US and that are based on its expertise in producing, delivering and installing fabricated steelmetal components such as piping systems and pressure vessels, heat exchangers and piping systems.vessels. Through SMC, conductingwhich conducts 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.region of the US. Basis of Presentation and Significant Accounting Policies The condensed consolidated financial statements include the accounts of Argan, its wholly-owned subsidiaries and its financially controlled VIEs. All significant inter-company balances and transactions have been eliminated in consolidation. In Note 15,14, 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, 2020, the condensed consolidated statements of earnings and stockholders’ equity for the three and six months ended July 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the six months ended July 31, 2020 and 2019 are unaudited. The condensed consolidated balance sheet as of January 31, 2020 has been derived from audited financial statements. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the US 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, 2017.2020 (“Fiscal 2020”). The condensed consolidated balance sheet as of October 31, 2017, the condensed consolidated statements of earnings for the three and nine months ended October 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the nine months ended October 31, 2017 and 2016 are unaudited. The condensed consolidated balance sheet as of January 31, 2017 has been derived from audited financial statements. 6
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 OctoberJuly 31, 2017,2020, 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. 6Accounting Policies
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, which, among other changes, eliminates the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the expected loss for the entire year. In these instances, the estimated annual effective income tax rate shall be used to calculate the tax without limitation. The new standard also requires the recognition of a franchise (or similar) tax that is partially based on income as an income-based tax and the recording of any incremental tax that is incurred by the Company as a non-income based tax. The requirements of this new guidance, effective for the Company on February 1, 2021, are not expected to alter the Company’s current accounting for income taxes. In 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The requirements of this new standard cover, among other provisions, the methods that businesses shall use to estimate amounts of uncollectible notes and accounts receivable. Adoption of this new guidance, which became effective for the Company on February 1, 2020, did not affect the Company's consolidated financial statements. There are no other recently issued accounting pronouncements that have not yet been adopted that the Company considers material to its condensed consolidated financial statements. The carrying value amounts presented in the condensed consolidated balance sheets for the Company’s current assets, which primarily include cash and cash equivalents, short-term investments, accounts receivable and contract assets, and its current liabilities are reasonable estimates of their fair values due to the short-term nature of these items. Variable Interest Entity In January 2018, the Company was deemed to be the primary beneficiary of a VIE that is performing the project development activities related to the planned construction of a new natural gas-fired power plant. Consideration for the Company’s engineering and financial support includes the right to build the power plant pursuant to a turnkey engineering, procurement and construction (“EPC”) services contract that has been negotiated and announced. The account balances of the VIE are included in the condensed consolidated financial statements, including development costs incurred by the VIE during the three and six-month periods ended July 31, 2020 and 2019. The total amounts of the project development costs included in the balances for property, plant and equipment as of July 31 and January 31, 2020 were $7.3 million and $6.9 million, respectively. NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS The Company's recognition of revenues under contracts with customers is based on a single comprehensive five-step model that requires reporting entities to: | 2. | Identify the performance obligations of the contract, |
| 3. | Determine the transaction price of the contract, |
| 4. | Allocate the transaction price to the performance obligations, and |
Major provisions of the standard cover the determination of which goods and services are distinct and represent separate performance obligations, the evaluation of whether revenues should be recognized at a point in time or over time, and the appropriate treatment for variable consideration. Revenue Recognition — RevenuesThe Company’s revenues are recognized primarily under various types of long-term construction contracts, including those for which revenues are based on either a fixed price,fixed-price or a time-and-materials basis, and primarily recognized over time and materialsas performance obligations are satisfied due to the continuous transfer of control to the project owner or cost-plus-fee basis, with typical durations of one month to three years.other customer. Revenues from fixed pricefixed-price contracts, including a portion of estimated gross profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentagepercentage-of-completion method. If, at any time, the estimate of completion method.contract profitability indicates an anticipated loss on a contract, the Company will recognize the total loss in the reporting period that it is identified and an amount is estimable. Revenues from time and materialstime-and-materials contracts are recognized when the related services are provided to the customer. Revenues from cost-plus-fee construction
Almost all of the Company’s fixed-price contracts are considered to have a single performance obligation. Although multiple promises to transfer individual goods or services may exist, they are not typically distinct within the context of such contracts because contract promises included therein are interrelated or the contracts require the Company to perform critical integration so that the customer receives a completed project. The Company’s accounting for its assurance-type warranties provided under contracts with customers is conducted in accordance with the specific professional guidance established to cover such arrangements. The transaction price for a contract represents the accounting value of the contract awarded to the Company that is used to determine the amount of revenues recognized onas of the basisbalance sheet date. It may reflect amounts of costs incurredvariable consideration, which could be either increases or decreases to the transaction price. These adjustments can be made from time-to-time during the period plus the amount of fee earned. Changescontract performance as circumstances evolve related to total estimated contract costs or losses, if any, are recognizedsuch items as changes in the periodscope and price of contracts, claims, incentives and liquidated damages. Contract assets generally include amounts that represent the rights to receive payment for goods or services that have been transferred to the project owner, with the rights conditional upon something other than the passage of time. Contract liabilities generally include the amounts that reflect obligations to provide goods or services for which payment has been received. The balances of accounts receivable exclude billed amounts which, pursuant to the terms of the applicable contract, are not paid by project owners until a defined phase of a contract or project has been completed and accepted. These retained amounts are reflected in which theycontract assets or contract liabilities depending on the net contract position of the particular contract. Retention amounts and the length of retention periods may vary. Retention amounts related to active contracts are determined.considered current regardless of the term of the applicable contract; such amounts are generally collected by the completion of the applicable contract. The total of amounts retained by project owners under construction contracts at July 31 and January 31, 2020 were $27.2 million and $20.0 million, respectively. Unpriced change orders, which representVariable Consideration
Amounts for contract variations for which the Company has project ownerproject-owner directive for additional work or authorization forother scope changeschange, but not for the price associated with the corresponding change,additional effort, are reflectedincluded in revenuesthe transaction price when it is considered probable that the applicable costs will be recovered through a change inmodification to the contract price. There were no significant unpriced change orders included in the total contract value amounts used to determine revenues as of October 31, 2017. Amounts of identified change orders that are not yet considered probable as of the corresponding balance sheet date are excluded from forecasted revenues. Actual costs related to change orders are expensed as they are incurred. Contract results may be impacted by estimates of the amounts of change orders that we expect to receive. The effects of any resulting revisionsrevision to revenues and estimated costsa transaction price can be determined at any time and they could be material. In general, contract claims are reflectedThe Company may include in revenues only when an agreement onthe corresponding transaction price a portion of the amount claimed in a dispute that it expects to receive from a project owner. Once a settlement of the dispute has been reached with the project owner.owner, the transaction price may be revised again to reflect the final resolution. The aggregate amount of such contract variations included in the transaction prices that were used to determine project-to-date revenues at July 31, 2020 and January 31, 2020 were $8.9 million and $20.6 million, respectively. Variations related to the Company’s contracts typically represent modifications to the existing contracts and performance obligations, and do not represent new performance obligations. Actual costs related to any changes in the scope of the corresponding contract are expensed as they are incurred. Changes to total estimated contract costs and losses, if any, are reflected in operating results for the period in which they are determined. Fair Values — The carrying valueCompany’s long-term contracts typically have schedule dates and other performance objectives that if not achieved could subject the Company to liquidated damages. At the outset of each of the Company’s contracts, the potential amounts presentedof liquidated damages typically are not constrained, or subtracted, from the transaction price as the Company believes that it has included activities in its contract plan, and the associated costs, that will be effective in preventing such damages. Of course, circumstances may change as the Company executes the corresponding contract.
The transaction price is reduced by an applicable amount when the Company no longer considers it probable that a future reversal of revenues will not occur when the matter is resolved. The Company considers potential liquidated damages, the costs of other related items and potential mitigating factors in determining the adequacy of its regularly updated estimates of the amounts of gross profit expected to be earned on active projects. The Company records adjustments to revenues and profits on contracts, including those associated with contract variations and estimated cost changes, using a cumulative catch-up method. Under this method, the impact of an adjustment to the amount of revenues recognized to date is recorded in the period that the adjustment is identified. Estimated variable consideration amounts are determined by the Company based primarily on the single most likely amount in the range of possible consideration amounts. Revenues and profits in future periods of contract performance are recognized using the adjusted amounts of transaction price and estimated contract costs. Accounting for the Loss Subcontract In its Form 10-K Annual Report for the year ended January 31, 2019 (“Fiscal 2019”), the Company disclosed that APC was completing the mechanical installation of the boiler for a biomass-fired power plant under construction in Teesside, England (the “TeesREP Project”) that had encountered significant operational and contractual challenges. The consolidated operating results for the year ended January 31, 2019 reflected unfavorable gross profit adjustments related to this project. The disclosure explained that the construction project was behind the schedule originally established for the job and warned that the TeesREP Project may continue to impact the Company’s consolidated operating results negatively until it reaches completion. Subsequent to the release of the Company’s consolidated financial statements for Fiscal 2019, APC’s estimates of the costs of the unfavorable financial impacts of the difficulties on the TeesREP Project escalated substantially. For the three-month period ended April 30, 2019, the Company recorded a loss related to this project in the amount of $27.6 million and reversed profit in the amount of $0.7 million that had been recorded in prior periods. For the three-month period ended July 31, 2019, APC recorded additional loss related to the TeesREP Project in the amount of $3.4 million. Based on analyses that have been continually updated since then, management currently expects that the forecasted costs at completion for the TeesREP Project will exceed projected revenues by approximately $32.3 million, which is the amount of the expected loss that has been reflected in the condensed consolidated financial statements as of July 31, 2020. Construction activities on the TeesREP Project were suspended on March 24, 2020 due to the COVID-19 pandemic. At that time, APC had completed approximately 90% of its subcontracted work. As a condition for resuming its efforts on the TeesREP Project, APC entered into an amendment to the subcontract with its customer, effective June 1, 2020, covering the various terms and conditions for completion of the installation of the boiler (“Amendment No. 2”). The agreement represents a global settlement of past commercial differences with both parties making significant concessions, and converts the billing arrangements for the remaining work to a time-and-materials basis. Despite the change to the billing arrangements, Amendment No. 2 has been treated as a modification of the original subcontract as the arrangement continues to represent a single performance obligation to its customer, the delivery of a complete functioning and integrated boiler, that was only partially satisfied when the modification to the subcontract occurred. Accordingly, the accounting for the modification of the subcontract resulted in a reduction to the subcontract loss, recorded during the three months ended July 31, 2020, in the approximate amount of $4.2 million. Additionally, project-related adjustments in the total amount of approximately $1.9 million were made to the accounts of APC for the three months ended July 31, 2020, associated primarily with the unexpected complexity of the UK works and the current year suspension and restart of the construction activities, which represented primarily charges to costs of revenues. The amount of the remaining subcontract loss reserve as of July 31, 2020 was approximately $2.3 million; the comparable balance at January 31, 2020 was $5.8 million. These balances were included in accrued expenses in the accompanying condensed consolidated balance sheets. The total amounts of accounts receivable and contract assets related to the TeesREP Project and included in the condensed consolidated balance sheets were $11.2 million as of July 31, 2020 and $19.2 million as of January 31, 2020. Remaining Unsatisfied Performance Obligations (“RUPO”) The amount of RUPO represents the unrecognized revenue value of active contracts with customers as determined under the revenue recognition rules of US GAAP. Increases to RUPO during a reporting period represent the transaction prices associated with new contracts, as well as additions to the transaction prices of existing contracts. The amounts of such changes may vary significantly each reporting period based on the timing of major new contract awards and the occurrence and assessment of contract variations. At July 31, 2020, the Company had RUPO of $694.1 million. The largest portion of RUPO at any date usually relates to EPC service contracts with typical performance durations of 2 to 3 years. However, the length of certain significant construction projects may exceed three years. The Company estimates that approximately 31% of the RUPO amount at July 31, 2020 will be included in the amount of consolidated revenues that will be recognized during the final two quarters of the fiscal year ending January 31, 2021 (“Fiscal 2021”). Most of the remaining amount of the RUPO at July 31, 2020 is expected to be recognized in revenues over the following two fiscal years. Revenues for future periods will also include amounts related to customer contracts started or awarded subsequent to July 31, 2020. It is important to note that estimates may be changed in the future and that cancellations, deferrals, scope adjustments may occur related to work included in RUPO at July 31, 2020. Accordingly, RUPO may be adjusted to reflect project delays and cancellations, revisions to project scope and cost and foreign currency exchange fluctuations, or to revise estimates, as effects become known. Such adjustments may materially reduce future revenues below Company estimates. Disaggregation of Revenues The following table presents consolidated revenues for the Company’s cashthree and cash equivalents, short-term investments, accounts receivablesix months ended July 31, 2020 and accounts payable2019, disaggregated by the geographic area where the corresponding projects were located: | | | | | | | | | | | | | | | Three Months Ended | | Six Months Ended | | | July 31, | | July 31, | | | 2020 | | 2019 | | 2020 | | 2019 | United States | | $ | 83,510 | | $ | 37,650 | | $ | 132,375 | | $ | 77,416 | United Kingdom | | | 2,540 | | | 19,618 | | | 12,836 | | | 25,282 | Republic of Ireland | | | 1,442 | | | 5,748 | | | 2,429 | | | 9,751 | Other | | | — | | | 43 | | | — | | | 154 | Consolidated Revenues | | $ | 87,492 | | $ | 63,059 | | $ | 147,640 | | $ | 112,603 |
Each year, the majority of consolidated revenues are reasonable estimatesrecognized pursuant to fixed-price contracts with most of their fair values duethe remaining portions earned pursuant to the short-term nature of these instruments. The fair value amounts of reporting units (as needed for purposes of identifying indications of impairmenttime-and-material contracts. Consolidated revenues are disaggregated by reportable segment in Note 14 to goodwill) are determined by averaging valuations that are calculated using several market-based and income-based approaches deemed appropriate in the circumstances. NOTE 2 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There is no recently issued accounting guidance that has not yet been adopted that the Company considers material to its condensed consolidated financial statements except for the following:statements.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a new standard on revenue recognition, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), in order to create a principles-based revenue recognition framework that may affect nearly every revenue-generating entity. ASU 2014-09 and 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 completing its evaluation of the impacts of ASU 2014-09, as amended, on its consolidated financial statements. The Company expects to adopt the new standard using the allowable modified retrospective method which will result in a cumulative effect adjustment as of February 1, 2018. To date, the Company has examined an engineering, procurement and construction (“EPC”) contract of GPS that it believes is representative of the four other active EPC contracts of GPS, significant contracts that were awarded to TRC during the current year that the Company believes are representative of the large customer contracts that will be in place at the date of adoption, and the largest contract awarded to APC during the current year. Based on these reviews, it has come to preliminary conclusions on the impact of the new standard on the revenues of the Company using the 5-step process prescribed by ASU 2014-09, as amended. The Company does not believe that the adoption of the standard will have a significant impact on the revenue recognition patterns for its long-term contracts as compared to revenues 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 similar to 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, the Company will continue to evaluate the impacts of ASU 2014-09, as amended, on its large EPC and its smaller long-term contracts to ensure that its preliminary conclusions continue to remain accurate for future revenues. Additionally, the Company is continuing its assessment of the impact of ASU 2014-09, as amended, on its financial statement disclosures which are expected to be more extensive based on the requirements of the new standard.
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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 presented 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.
Goodwill
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment. Current guidance requires a public entity to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. The amendments in the new pronouncement remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment.
As early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017, the Company intends to use the new guidance in the determination of any goodwill impairment loss determined in connection with the Company’s annual testing as of November 1, 2017, and in the future. The effect of the adoption of this new standard is not expected to be material to the Company’s consolidated financial statements.
NOTE 3 — CONSTRUCTION JOINT VENTURES GPS assigned its EPC contracts for two natural gas-fired power plants 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 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 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 except for the provision of services under the related warranty obligations.
Due to the financial control by 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 the end of the fiscal year ended January 31, 2014). The shares of the profits of the joint ventures have been determined based on the percentages by which the Company believes profits will ultimately be shared by the joint venture partners.
NOTE 4 —– CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At July 31 and January 31, 2020, significant amounts of cash and cash equivalents were invested in a mutual fund with net assets invested in high-quality money market instruments. Such investments include US Treasury obligations; obligations of US government agencies, authorities, instrumentalities or sponsored enterprises; and repurchase agreements secured by US government obligations. Due to market conditions, returns on money market instruments are currently minimal. 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 OctoberJuly 31 2017 and January 31, 20172020 consisted solely of certificates of deposit purchased from Bank of America (the “Bank”) with weighted average initial maturities of 269194 days and 185165 days, respectively (the “CDs”). The Company has the intent and ability to hold these securitiesthe CDs until they mature, and they are carried at cost plus accrued interest which approximates fair value. The total carrying value amounts as of OctoberJuly 31 2017 and January 31, 20172020 included accrued interest of $1.5$0.2 million and $0.8$0.5 million, respectively. Interest income is recorded when earned and is included in other income. As of OctoberAt July 31 2017 and January 31, 2017,2020, the weighted average annual interest rates of the outstanding CDs classified as short-term investments were 1.36%1.6% and 1.13%1.8%, respectively. TheIn addition, the Company has a substantial portion of its cash on deposit in the US at the Bank in excess of federally insured limits at the Bank, has purchased CDs from the Bank, and has liquid mutual fund investments through an arrangement with the Bank.limits. Management does not believe that maintaining substantially all such assetsthe combined amount of the CD investments and the cash deposited with the Bank represents a material risk.
NOTE 5 — ACCOUNTS RECEIVABLE
Amounts retained by project owners under construction contracts The Company also maintain certain Euro-based bank accounts in Ireland and includedcertain pound sterling-based bank accounts in accounts receivable as of October 31, 2017 and January 31, 2017 were $65.0 million and $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. MostUK in support of the amount outstanding asoperations of October 31, 2017 will not be collected until the fiscal year ending January 31, 2019. Retainage amounts relatedAPC.
NOTE 4 – ACCOUNTS AND NOTES RECEIVABLE The Company generally extends credit to active contracts are classified as current assets regardlessa customer based on an evaluation of the termcustomer’s financial condition without requiring tangible collateral. Exposure to losses on accounts and notes receivable is expected to differ due to the varying financial condition of the applicable contract and amounts are generally collected by the completion of the applicable contract. each customer. The Company monitors its exposure to credit losses and maintainsmay establish an allowance for anticipated losses considered necessary under the circumstancesa credit loss based on historical experiencemanagement’s estimate of the loss that is expected to occur over the remaining life of the particular financial asset. As of July 31, 2020, there were outstanding invoices billed to one former customer and unbilled costs incurred on the related project, with uncollectedbalances included in accounts receivable and a review of its currently outstanding accounts and notes receivable. Thecontract assets, in the aggregate amount of $24.5 million, for which the allowance for uncollectible accounts asrecovery time will most likely depend on the resolution of Octoberthe outstanding legal dispute between the parties (see Note 8). At July 31 2017 and January 31, 2017 was approximately $2.5 million and $1.9 million, respectively, and it related primarily to project development loans made in prior years.2020, the amounts of credit losses expected by management were insignificant. The amounts of the provision amounts for uncollectible accountscredit losses for the three and ninesix months ended OctoberJuly 31, 2017 were $0.1 million2020 and $0.4 million, respectively. The Company did not record athe provision for uncollectible accounts for the three and ninesix months ended OctoberJuly 31, 2016.2019 were also insignificant. NOTE 6 — COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS5 – PURCHASED INTANGIBLE ASSETS 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 OctoberAt both July 31, 20172020 and January 31, 2017.
| | October 31,
2017 | | January 31,
2017 | | Costs charged to uncompleted contracts | | $ | 1,074,974 | | $ | 485,629 | | Estimated accrued earnings | | 177,065 | | 78,708 | | | | 1,252,039 | | 564,337 | | Less - billings to date | | 1,388,705 | | 770,386 | | | | $ | (136,666 | ) | $ | (206,049 | ) |
Amounts above are included in the accompanying condensed consolidated balance sheets under the following captions:
| | October 31,
2017 | | January 31,
2017 | | Costs and estimated earnings in excess of billings | | $ | 10,197 | | $ | 3,192 | | Billings in excess of costs and estimated earnings | | 146,863 | | 209,241 | | | | $ | (136,666 | ) | $ | (206,049 | ) |
Costs charged to contracts include amounts billed to the Company for delivered goods and services where payments have been retained from subcontractors and suppliers. Retained amounts as of October 31, 2017 and January 31, 2017, which were included in the Company’s balance of accounts payable as of those dates, totaled $34.6 million and $17.2 million, respectively. Generally, such amounts are expected to be paid prior to the completion of the applicable project.
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NOTE 7 — PURCHASED INTANGIBLE ASSETS
At October 31, 2017,2020, the goodwill balances included in the condensed consolidated balance sheets related to the acquisitions of GPS TRC and APCTRC were $18.5 million $14.4 million and $2.0$9.5 million, respectively. TRC’s management recently completed a reforecasting of its future financial results which provides essential data forPrimarily due to the required annual goodwill assessment of TRC as of November 1, 2017. The new forecast presents a less favorable outlook for TRC, which represents the Company’s Industrial Fabrication and Field Services reportable business segment, than in the past. With this new information and using preliminary valuation analyses, including discounted net after tax cash flow estimates, management determined that the goodwill associated with this business may be impaired. Based on this currently available data, management estimates that the amount of possible loss ranges from an immaterial amount to $5.5 million, with the estimated federal income tax rate representing the most significant variable affecting the range. Depending on the completionreduction of the goodwill assessment including the resolution of this uncertainty, the Company may be required to record an impairment loss related to the goodwill of TRC in the fourth quarter of the current year up to an amount of $5.5 million. However, the completion of the full valuationfair value of the business of TRC could materially change this outcome. Last year, APC deemed to have occurred as a result of the substantial contract loss discussed in Note 2 above, the Company recorded a goodwillan impairment loss in the first quarter ended April 30, 2019 in the amount of $2.1 million, which was the remaining balance of goodwill associated with APC. NaN other changes were made to the balances of goodwill during the nine monthssix-month periods ended OctoberJuly 31, 20162020 or 2019. Management does not believe that any events or circumstances that have occurred or arisen since January 31, 2020 require an updated assessment of approximately $2.0 million.the goodwill balances of either GPS or TRC.
The otherCompany’s purchased intangible assets, other than goodwill, consisted of the following elements as of OctoberJuly 31 2017 and January 31, 2017.2020: | | | | October 31, 2017 | | January 31, | | | | Estimated
Useful Life | | Gross
Amount | | Accumulated
Amortization | | Net
Amount | | 2017 (net
amount) | | Trade names - | | | | | | | | | | | | GPS/TRC | | 15 years | | $ | 8,142 | | $ | 3,221 | | $ | 4,921 | | $ | 5,328 | | SMC | | indefinite | | 181 | | — | | 181 | | 181 | | Process certifications - | | | | | | | | | | | | TRC | | 7 years | | 1,897 | | 520 | | 1,377 | | 1,581 | | Customer relationships - | | | | | | | | | | | | TRC/APC | | 4-10 years | | 1,346 | | 423 | | 923 | | 1,072 | | Other intangibles | | various | | 46 | | 43 | | 3 | | 19 | | Totals | | | | $ | 11,612 | | $ | 4,207 | | $ | 7,405 | | $ | 8,181 | |
| | | | | | | | | | | | | | | | | | | July 31, 2020 | | January 31, | | | Estimated | | Gross | | Accumulated | | Net | | 2020, (net | | | Useful Life | | Amounts | | Amortization | | Amount | | amounts) | Trade names | | 15 years | | $ | 8,142 | | $ | 4,714 | | $ | 3,428 | | $ | 3,699 | Process certifications | | 7 years | | | 1,897 | | | 1,264 | | | 633 | | | 768 | Customer relationships | | 4-10 years | | | 1,346 | | | 857 | | | 489 | | | 534 | Totals | | | | $ | 11,385 | | $ | 6,835 | | $ | 4,550 | | $ | 5,001 |
NOTE 8 —6 – FINANCING ARRANGEMENTS The Company maintains financing arrangements with the Bank that are described in an Amended and Restated Replacement Credit Agreement (the “Credit Agreement”), dated May 15, 2017, which superseded the Company’s prior arrangements with the Bank.2017. The Credit Agreement provides a revolving loan with a maximum borrowing amount of $50.0 million that is available until May 31, 2021 with interest at the 30-day LIBORLondon Interbank Offered Rate (“LIBOR”) plus 2.00%2.0%. The Company may also use the borrowing ability to cover other credit instruments issued by the Bank for the Company’s use in the ordinary course of business. TheAs of July 31 and January 31, 2020, the Company has approximately $14.9 millionhad letters of credit outstanding under the Credit Agreement, but no borrowings.0 borrowings, in the approximate amounts of $1.7 million and $9.9 million, respectively. Additionally, in support of the current project development activities of the VIE described in Note 1, the Bank issued a letter of credit, outside the scope of the Credit Agreement, in the amount of $3.4 million for which the Company has provided cash collateral. The Company has pledged the majority of its assets to secure its 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 also includes other terms, covenants and events of default that are customary for a credit facility of its size and nature. As of OctoberJuly 31 and January 31, 2017,2020, the Company was compliantin compliance with the financial covenantscovenants. NOTE 7 – COMMITMENTS Leases The Company determines if a contract is or contains a lease at inception or upon modification of the contract. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company does not apply this accounting to those leases with terms of twelve (12) months or less and that do not include options to purchase the underlying assets that the Company is reasonably certain to exercise. The Company’s operating leases primarily cover office space that expire on various dates through May 2024 and certain equipment used by the Company in the performance of its financing arrangements.construction services contracts. Other construction equipment is rented, with periods of expected usage less than one year, or owned. Certain leases contain renewal options, which are included in expected lease terms if they are reasonably certain of being exercised by the Company. Other equipment leases are embedded in broader arrangements with subcontractors or construction equipment suppliers. The Company has no finance leases. None of the operating leases include significant amounts for incentives, rent holidays or price escalations. Under certain lease agreements, the Company is obligated to pay property taxes, insurance, and maintenance costs. Operating lease right-of-use assets and associated lease liabilities are recognized in the balance sheet at the lease commencement date based on the present value of future minimum lease payments to be made over the expected lease term. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate (LIBOR plus 2.0%) at the commencement date in determining the present value of future payments. The expected lease term includes an option to extend or to terminate the lease when it is reasonably certain that the Company will exercise such option. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Operating lease expense amounts for the six months ended July 31, 2020 and 2019 were $0.8 million and $0.4 million, respectively. Operating lease payments for the six months ended July 31, 2020 and 2019 were $0.8 million and $0.4 million, respectively. For operating leases as of July 31, 2020, the weighted average lease term is 34 months and the weighted average discount rate is 3.4%. The Company also uses equipment and occupies facilities under short-term rental agreements. Rent expense amounts incurred under operating leases and short-term rental agreements (including portions of the lease expense amounts disclosed above) and included in costs of revenues for the three and six months ended July 31, 2020 were $1.4 million and $2.0 million, respectively. Rent expense incurred under these types of arrangements and included in costs of revenues for the three and six months ended July 31, 2019 was $1.3 million and $2.3 million, respectively. Rent expense incurred under these types of arrangements (including portions of the lease expense amounts disclosed above) and included in selling, general and administrative expenses for the three months ended July 31, 2020 and 2019 was $0.2 million for both periods. Rent expense incurred under these types of arrangements and included in selling, general and administrative expenses for the six months ended July 31, 2020 and 2019 was $0.4 million for both periods. The following is a schedule of future minimum lease payments for the operating leases that were recognized in the condensed consolidated balance sheet as of July 31, 2020, including operating leases added during the three and six months ended July 31, 2020 in the amounts of approximately $1.1 million and $1.5 million, respectively, covering primarily certain construction-site assets required by GPS: | | | | Years Ending January 31, | Remainder of 2021 | | $ | 892 | 2022 | | | 1,396 | 2023 | | | 769 | 2024 | | | 242 | 2025 | | | 85 | Thereafter | | | 20 | Total lease payments | | | 3,404 | Less interest portion | | | 156 | Present value of lease payments | | | 3,248 | Less current portion (included in accrued expenses) | | | 2,742 | Non-current portion | | $ | 506 |
The future minimum lease payments presented above include amounts due under a long-term lease covering the primary offices and plant for TRC with the founder and current chief executive officer of TRC at an annual rate of $0.3 million through April 30, 2021. NOTE 9 — LEGAL MATTERSPerformance Bonds and Guarantees
In the normal course of business and for certain major projects, the Company may be required to obtain surety or performance bonding, to cause the issuance of letters of credit, or to provide parent company guarantees (or some combination thereof) in order to provide performance assurances to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about claims on guaranteed or bonded projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such losses. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of July 31, 2020 are not estimable. Argan has provided a parent company performance guarantee and has caused a performance bond to be issued to the EPC services contractor on the TeesREP Project, on behalf of APC, a major subcontractor. As of July 31, 2020, the Company has also provided a financial guarantee, subject to certain terms and conditions, on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business development efforts which did result in the award of an EPC services contract to GPS for the construction of a gas-fired plant project in March 2020. The fair value of this guarantee at July 31, 2020 is considered to be immaterial. Warranties The Company generally provides assurance-type warranties for work performed under its construction contracts. The warranties cover defects in equipment, materials, design or workmanship, and most warranty periods typically run from nine to twenty-four months after the completion of construction on a particular project. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, the Company has not experienced material unexpected warranty costs in the past. Warranty costs are estimated based on experience with the type of work and any known risks relative to each completed project. The accruals of liabilities, which are established to cover estimated future warranty costs, are recorded as the contracted work is performed, and they are included in the amounts of accrued expenses in the condensed consolidated balances sheets. The liability amounts may be periodically adjusted to reflect changes in the estimated size and number of expected warranty claims. NOTE 8 – LEGAL CONTINGENCIES In the normal course of business, the Company may have pending claims and legal proceedings. It isIn the opinion of management, based on information available at this time, that there are no current claims and proceedings that could have a material adverse effect on the Company’s condensed consolidated financial statements other thanexcept for the one discussedmatter described below. In January 2019, GPS filed a lawsuit against Exelon West Medway II, LLC and Exelon Generation Company, LLC (together referred to as “Exelon”) for Exelon’s breach of contract and failure to remedy various conditions which negatively impacted the schedule and the costs associated with the construction by GPS of a gas-fired power plant for Exelon in Massachusetts. As a result, the Company believes that Exelon has received the benefits of the construction efforts of GPS and the corresponding progress made on the project without making payments to GPS for the value received (see Note 4). In March 2019, Exelon provided GPS with a notice intending to terminate the EPC contract under which GPS had been providing services to Exelon. At that time, the construction project was nearly complete and both of the power generation units included in the plant had successfully reached first fire. The material amountscompletion of any legal fees expectedvarious prescribed performance tests and the clearance of punch-list items were the primary tasks necessary to be incurredaccomplished by GPS in connection with legal matters are accrued when such amounts are estimable. 10
On February 1, 2016, TRC was sued in Person County, North Carolina, by a subcontractor, PPS Engineers, Inc. (“PPS”), in an attemptorder to force TRC to pay invoices for services rendered in the total amount of $2.3 million. PPS has placed liens on the propertyachieve substantial completion of the customers in several states where work was performed by PPSpower plant. Nevertheless, and itamong other actions, Exelon provided contractual notice requiring GPS to vacate the construction site. Exelon 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 $2.5 million. On March 4, 2016, TRC filed responses to the claims of PPS. The positions of TRC areasserted that PPSGPS failed to deliver a numberfulfill certain obligations under the contract and was in default, withholding payments from GPS on invoices rendered to Exelon in accordance with the terms 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 are accrued by TRC and the corresponding liability amount was included in accounts payable in the condensed consolidated balance sheets as of October 31, 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.parties.
The CompanyWith vigor, GPS intends to continue to assert its rights under the EPC contract, to pursue the collection of amounts owed under the EPC contract and to defend itself against the claim of PPS and to pursue its claims against PPS. Due toallegations that GPS did not perform in accordance with the uncertaintycontract. During Fiscal 2021, most of the ultimate outcomeslitigation activities of thesethe legal proceedings, assurance cannot be providedteams has focused on pre-trial preparations. The difficulties experienced by the Company that TRC will be successfullegal teams in these efforts. Management does not believe that resolutioncompleting certain discovery activities, due in part to COVID-19 restrictions, resulted in the court granting an additional extension of the matters discussed above will result in additional loss with material negative effectdiscovery closing date to on the Company’s consolidated operating results in a future reporting period.or about October 2, 2020.
NOTE 10 —9 – STOCK-BASED COMPENSATION The Company’s board of directors may make awards under itsthe 2011 Stock Plan (the “Stock“2011 Plan”) or the 2020 Stock Plan (the “2020 Plan”) to officers, directors and key employees.employees (together, the “Stock Plans”). On June 23, 2020, the Company’s stockholders approved the adoption of the 2020 Plan, and the allocation of 500,000 shares of the Company’s common stock for issuance thereunder, which had been established by the Company’s board of directors earlier in the current year. The 2020 Plan will serve to replace the 2011 Plan; the Company’s authority to make awards pursuant to the 2011 Plan will expire on July 19, 2021. The features of the 2020 Plan are similar to those included in the 2011 Plan. Awards may include incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”), incentive stock options (“ISOs”), and restricted or unrestricted common stock. ISOs grantedThe specific provisions for each award made pursuant to the terms of the Stock Plans are documented in a written agreement between the Company and the awardee. All stock options awarded under the Stock PlanPlans shall have an exercise price per share at least equal to the common stock’s market value per share aton the date of grant,grant. Stock options shall have a termterms no longer than ten years, and typically become fully exercisable years. Typically, stock options are awarded with one year from-third of each stock option vesting on each of the datefirst three anniversaries 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.corresponding award date. As of OctoberJuly 31, 2017,2020, there were 1,061,650approximately 2,190,400 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 330,000Plans; this number includes 680,999 shares of the Company’s common stock available for future awards under the Stock Plan.awards. Summaries of stock option activity under the Company’s approved stock option plans for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, along with corresponding weighted average per share amounts, are presented below (shares in thousands): | | Shares | | Exercise
Price | | Remaining
Term (years) | | Fair Value | | | Outstanding, February 1, 2017 | | 707 | | $ | 39.04 | | 7.82 | | $ | 10.22 | | | | | | | | | | | | | | | | | | | | Exercise | | Remaining | | | | | | Shares | | Price | | Term (years) | | Fair Value | Outstanding, February 1, 2020 | | | 1,271 | | $ | 44.83 | | 7.18 | | $ | 11.06 | Granted | | 125 | | $ | 63.58 | | | | | | | 172 | | $ | 33.81 | | | | | | Exercised | | (90 | ) | $ | 30.74 | | | | | | | (35) | | $ | 20.82 | | | | | | Forfeited | | (10 | ) | $ | 71.75 | | | | | | | (16) | | $ | 47.62 | | | | | | Outstanding, October 31, 2017 | | 732 | | $ | 43.81 | | 7.59 | | $ | 11.61 | | | Exercisable, October 31, 2017 | | 452 | | $ | 28.75 | | 6.52 | | $ | 7.76 | | | Outstanding, July 31, 2020 | | | 1,392 | | $ | 44.04 | | 7.15 | | $ | 10.51 | Exercisable, July 31, 2020 | | | 843 | | $ | 46.38 | | 6.00 | | $ | 11.87 | | | | | | | | | | | | | | | | | | Exercise | | Remaining | | | | | | Shares | | Price | | Term (years) | | Fair Value | Outstanding, February 1, 2019 | | | 1,140 | | $ | 44.01 | | 7.54 | | $ | 11.22 | Granted | | | 92 | | $ | 50.30 | | | | | | Exercised | | | (59) | | $ | 26.36 | | | | | | Forfeited | | | (38) | | $ | 46.34 | | | | | | Outstanding, July 31, 2019 | | | 1,135 | | $ | 45.37 | | 7.36 | | $ | 11.45 | Exercisable, July 31, 2019 | | | 729 | | $ | 45.90 | | 6.41 | | $ | 11.97 |
| | Shares | | Exercise
Price | | Remaining
Term (years) | | Fair Value | | Outstanding, February 1, 2016 | | 1,064 | | $ | 26.38 | | 6.36 | | $ | 6.91 | | Granted | | 105 | | $ | 36.09 | | | | | | Exercised | | (444 | ) | $ | 24.77 | | | | | | Forfeited | | (5 | ) | $ | 36.73 | | | | | | Outstanding, October 31, 2016 | | 720 | | $ | 28.71 | | 7.21 | | $ | 7.62 | | Exercisable, October 31, 2016 | | 555 | | $ | 27.13 | | 6.55 | | $ | 7.16 | |
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The changes in the number of non-vested options to purchase shares of common stock for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, and the weighted average fair value per share for each number, are presented below (shares in thousands): | | Shares | | Fair Value | | Non-vested, February 1, 2017 | | 270 | | $ | 14.93 | | Granted | | 125 | | $ | 16.19 | | Vested | | (105 | ) | $ | 9.66 | | Forfeited | | (10 | ) | $ | 19.14 | | Non-vested, October 31, 2017 | | 280 | | $ | 17.83 | |
| | | | | | | | Shares | | Fair Value | Non-vested, February 1, 2020 | | 448 | | $ | 9.74 | Granted | | 172 | | $ | 5.68 | Vested | | (62) | | $ | 10.21 | Forfeitures | | (9) | | $ | 8.08 | Non-vested, July 31, 2020 | | 549 | | $ | 8.44 | | | | | | | | | Shares | | Fair Value | Non-vested, February 1, 2019 | | 375 | | $ | 10.05 | Granted | | 92 | | $ | 11.68 | Vested | | (33) | | $ | 8.74 | Forfeitures | | (28) | | $ | 11.27 | Non-vested, July 31, 2019 | | 406 | | $ | 10.50 |
| | Shares | | Fair Value | | Non-vested, February 1, 2016 | | 300 | | $ | 8.97 | | Granted | | 105 | | $ | 9.66 | | Vested | | (240 | ) | $ | 7.63 | | Non-vested, October 31, 2016 | | 165 | | $ | 9.17 | |
CompensationPursuant to the terms of the 2011 Plan and as described in the corresponding agreements with the executives, the Company awarded performance-based restricted stock units to 2 senior executives in April 2020, 2019 and 2018 covering 45,000, 36,000 and 36,000 maximum number of shares of common stock, respectively, plus a number of shares to be determined based on the amount of cash dividends deemed paid on shares earned pursuant to the awards. The release of the stock restrictions depends on the total return performance of the Company’s common stock measured against the performance of a peer-group of common stocks over three-year periods. The fair value amounts for restricted stock units were determined by using the per share market price of the Company’s common stock on the dates of award and the target number of shares for the awards (50% of the maximum number), by assigning equal probabilities to the thirteen possible payout outcomes at the ends of the three-year vesting periods, and by computing the weighted average of the outcome amounts. For each case, the estimated fair value amount was calculated to be 88.5% of the aggregate market value of the target number of shares on the award date.
The fair values of stock options and restricted stock units are recorded as stock compensation expense over the vesting periods of the corresponding awards. Expense amounts related to stock optionsawards were $1.3$1.4 million and $0.5$0.9 million for the threesix months ended OctoberJuly 31, 20172020 and 2016, respectively, and were $3.6 million and $1.8 million for the nine months ended October 31, 2017 and 2016,2019, respectively. At OctoberJuly 31, 2017,2020, there was $1.5$4.6 million in unrecognized compensation cost related to outstanding stock options. Theawards that the Company expects to recognize the compensation expense for these awards over the next twelve months. three years. The total intrinsic valuesvalue amounts of the stock options exercised during the ninesix months ended OctoberJuly 31, 20172020 and 20162019 were $3.1$0.8 million and $10.9$1.4 million, respectively. At OctoberJuly 31, 2017,2020, the aggregate market valuesvalue amounts of the shares of common stock subject to outstanding and exercisable stock options that were “in-the-money” as of October 31, 2017 exceeded the aggregate exercise prices of such options by $18.7$6.3 million and $18.1$4.3 million, respectively. For companies with limitedThe Company estimates the weighted average fair value of 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, basedoptions on the averagedate of award using a Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting periodrestrictions and the option term, which theare fully transferable. The Company used to estimate the expected terms ofbelieves that its stock options awarded in prior years. However, the Company’spast stock option exercise activity has becomeis sufficient to provide it with a reasonable basis onupon which to estimate the expected life of newly awarded stock options. Accordingly,Risk-free interest rates are determined by blending the estimatedrates for three to five year US Treasury notes. The dividend yield is based on the Company’s current annual regular dividend amount. The calculations of the expected life used involatility factors are based on the determinationmonthly closing prices of the Company’s common stock for the five-year periods preceding the dates of the corresponding awards.
The fair value amounts 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 19%. The effect of the change on the amount of stock option compensation expense recordedgranted during the three and ninesix months ended OctoberJuly 31, 2017 were reductions of $0.3 million2020 and $0.8 million, respectively. The fair values of each stock option granted in the nine-month periods ended October 31, 2017 and 20162019 were estimated on the corresponding dates of awardthe awards using the Black-Scholes option-pricing model based onreflecting the following weighted average assumptions:
| | Nine Months Ended October 31, | | | | | 2017 | | 2016 | | | | | | | | | | | | | Six Months Ended July 31, | | | | | 2020 | | 2019 | | Dividend yield | | 1.1 | % | 2.0 | % | | 3.0 | % | 2.0 | % | Expected volatility | | 36.0 | % | 33.9 | % | | 30.0 | % | 34.0 | % | Risk-free interest rate | | 1.6 | % | 1.4 | % | | 0.5 | % | 2.4 | % | Expected life (in years) | | 3.4 | | 5.5 | | | 3.4 | | 3.3 | |
NOTE 10 – INCOME TAXES NOTE 11 — CASH DIVIDENDSIncome Tax Expense Reconciliation
In September 2017, the Company’s board of directors declared a regular cash dividend of $1.00 per share of common stock, which was paid on October 31, 2017 to stockholders of record at the close of business on October 20, 2017. In addition, the Company announced that its board of directors intends to declare a regular quarterly cash dividend of $0.25 per share of common stock starting in the first quarter of its fiscal year ending January 31, 2019. In September 2016, the Company’s board of directors declared regular and special cash dividends of $0.70 and $0.30 per share of common stock, respectively, which were paid on October 28, 2016 to stockholders of record at the close of business on October 18, 2016.
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NOTE 12 — INCOME TAXES
The Company’s income tax expense amounts for the ninesix months ended OctoberJuly 31, 20172020 and 20162019 differed from corresponding amounts computed by applying the federal corporate income tax rate of 35%21% to the amounts of income (loss) before income taxes for the periods as shownpresented in the table below. | | Nine Months Ended October 31, | | | | 2017 | | 2016 | | Computed expected income tax expense | | $ | 36,062 | | $ | 29,318 | | Increase (decrease) resulting from: | | | | | | State income taxes, net of federal tax benefit | | 4,633 | | 3,296 | | Domestic production activities deduction | | (3,036 | ) | (2,345 | ) | Stock option exercises | | (866 | ) | (2,807 | ) | Exclusion of non-controlling interests | | (106 | ) | (2,334 | ) | Adjustments and other differences | | 1,051 | | 1,994 | | | | $ | 37,738 | | $ | 27,122 | |
| | | | | | | | | | Six Months Ended July 31, | | | | 2020 | | 2019 | | Computed expected income tax (expense) benefit | | $ | (367) | | $ | 7,532 | | Difference resulting from: | | | | | | | | Net operating loss carryback | | | 4,286 | | | — | | Net operating losses deemed unrealizable | | | (582) | | | (6,112) | | Foreign tax rate differential | | | (25) | | | (838) | | State income taxes, net of federal tax effect | | | (44) | | | 490 | | Stock options | | | 38 | | | 204 | | Bad debt loss | | | — | | | 5,016 | | Adjustments and other differences | | | (249) | | | 640 | | Income tax benefit | | $ | 3,057 | | $ | 6,932 | |
AsForeign income tax expense amounts for the six months ended July 31, 2020 and 2019 were not material. A valuation allowance in the amount of October$6.1 million was established against the deferred tax asset amount created by the net operating loss of APC’s subsidiary in the UK for the six months ended July 31, 20172019. Due to the incurrence of additional loss, the allowance amount was increased by $0.6 million during the six months ended July 31, 2020.
Net Operating Loss Carryback In an effort to combat the adverse economic impacts of the COVID-19 crisis, the US Congress passed the Coronavirus, Aid, Relief, and Economic Security Act ( the “CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that includes spending and tax breaks aimed at strengthening the US economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19. The CARES Act has provided many opportunities for taxpayers to evaluate their 2018 and 2019 income tax returns to identify potential tax refunds. One such area is the utilization of net operating losses (“NOLs”). The tax changes of the CARES Act remove the limitations on the future utilization of certain NOLs and re-establish a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include the Company’s domestic NOL for the year ended January 31, 2017,2020, which was approximately $39.5 million. Substantially all of this loss now may be carried back for application against the condensed consolidated balance sheets included prepaidCompany’s taxable income taxesfor the year ended January 31, 2015. The carryback provides a favorable rate benefit for the Company as the loss, which was incurred in a year where the statutory federal tax rate was 21%, will be carried back to a tax year where the tax rate was higher. The amount of this benefit, approximately $4.3 million, was recorded in the six-month period ended July 31, 2020. Research and Development Tax Credits During Fiscal 2019, the Company completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of $3.5research and development credits that may be available to reduce prior year income taxes. This study focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant amounts of income tax benefits that were not previously recognized in the Company’s operating results for any prior year reporting period. The amount of research and development tax credit benefit recognized during the fourth quarter of Fiscal 2019 was $16.2 million. As described below, the IRS is examining the research and development credits that were included in the amendments of the Company’s consolidated federal income tax returns for the years ended January 31, 2016 and 2017 that were filed in January 2019. The Company does not believe that any significant unfavorable changes to its income taxes will arise from the completion of these examinations. The amount of identified but unrecognized income tax benefits related to research and development credits as of July 31, 2020 was $5.0 million, and $3.9for which the Company has established a liability for uncertain income tax return positions, most of which is included in accrued expenses. The amount of the liability was also $5.0 million respectively.as of January 31, 2020. The final outcome of these uncertain tax positions is not yet determinable. However, the Company does not expect that the amount of unrecognized tax benefits will significantly change due to any settlement and/or expiration of statutes of limitation over the next 12 months. As of OctoberJuly 31, 2017,2020, the Company does not believe that it has any other material uncertain income tax positions reflected in its accounts. As of July 31 and January 31, 2020, the balances of other current assets in the condensed consolidated balance sheets included income tax refunds and prepaid income taxes in the net amounts of approximately $28.6 million and $14.5 million, respectively. The substantial portions of the income tax refunds are expected to be collected after the completion of the federal tax return examinations described below and the filing of the refund request related to the NOL carryback described above. Income Tax Returns The Company is subject to federal and state income taxes in the United States of America,US, and income taxes in Ireland and the Republic of Ireland, the United Kingdom and various other state and foreign jurisdictions.UK. Tax regulationstreatments within each jurisdiction are subject to the interpretation of the related tax laws and regulations andwhich require significant judgment to apply. The Company is no longer subject to income tax examinations by tax authorities for its fiscal years ended on or before January 31, 20142016 except for a fewseveral notable exceptions relevant to the Company including the Republic of Ireland, the United Kingdom, CaliforniaUK and Texasseveral states where the open periods are one year longer. The Company received notice from Internal Revenue Service on November 7, 2017 that itsIRS conducted an examination of the Company’s original federal consolidated income tax return for the tax year ended January 31, 2016 has been selected for audit. At this time,2016. The IRS represented to the Company does not have reasonthat no unfavorable adjustment items were noted during the examination. However, the Company has consented to expect any material changesan extension of the audit timeline which will enable the IRS to itsexamine the amendment to the income tax liability resultingreturn, which includes the research and development credit for the year. In addition, the IRS has commenced an examination of the Company’s amended consolidated income tax return for the year ended January 31, 2017. To date, the Company has provided supporting documentation related to the credits and written responses to certain questions as requested by the IRS. The Company expects that it may receive an initial communication of the IRS audit positions before the end of Fiscal 2021. Supplemental Cash Flow Information The amounts of cash paid for income taxes during the six months ended July 31, 2020 and 2019 were $3.1 million and $3.0 million, respectively. During the six months ended July 31, 2020 and 2019, the Company received cash refunds of previously paid income taxes from various taxing authorities in the outcometotal amounts of this audit.$0.8 million and $7.9 million, respectively. NOTE 13 — EARNINGS11 – CASH DIVIDENDS On June 23, 2020, the Company’s board of directors declared a regular quarterly cash dividend and a special cash dividend in the amounts of $0.25 and $1.00 per share of common stock, respectively, which were paid on July 31, 2020 to stockholders of record at the close of business on July 23, 2020. On April 9, 2020, the board of directors declared a regular quarterly cash dividend of $0.25 per share of common stock, which was paid to stockholders on April 30, 2020. Last year, the board of directors declared regular quarterly cash dividends, each in the amount of $0.25 per share of common stock, which were paid to stockholders on July 31, 2019 and April 30, 2019, respectively. NOTE 12 – NET INCOME (LOSS) 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 basicBasic and diluted earningsnet income (loss) per share for the three and nine months ended October 31, 2017 and 2016amounts are computed as follows (shares in thousands)thousands except in notes (1) below the charts):
| | Three Months Ended October 31, | | | | | 2017 | | 2016 | | | | | | | | | | | | | | | | | | | | | | Three Months Ended July 31, | | | | | 2020 | | 2019 | | | | | | | | | | | Net income attributable to the stockholders of Argan, Inc. | | $ | 17,229 | | $ | 18,073 | | | $ | 5,609 | | $ | 1,154 | | | | | | | | | Weighted average number of shares outstanding - basic | | 15,545 | | 15,137 | | | Effect of stock options (1) | | 248 | | 464 | | | Weighted average number of shares outstanding - diluted | | 15,793 | | 15,601 | | | | | | | | | | | | Weighted average number of shares outstanding – basic | | | | 15,653 | | | 15,633 | | Effect of stock awards (1) | | | | 135 | | | 124 | | Weighted average number of shares outstanding – diluted | | | | 15,788 | | | 15,757 | | | | | | | | | | | Net income per share attributable to the stockholders of Argan, Inc. | | | | | | | | | | | | | Basic | | $ | 1.11 | | $ | 1.19 | | | $ | 0.36 | | $ | 0.07 | | Diluted | | $ | 1.09 | | $ | 1.16 | | | $ | 0.36 | | $ | 0.07 | |
| (1) | For the three months ended July 31, 2020 and 2019, the weighted average numbers of shares determined on a dilutive basis exclude the effects of restricted stock units and antidilutive stock options covering aggregates of 761,000 and 530,000 shares of common stock, respectively. | |
| | | | | | | | | Six Months Ended July 31, | | | 2020 | | 2019 | | | | | | | | Net income (loss) attributable to the stockholders of Argan, Inc. | | $ | 4,846 | | $ | (28,646) | | | | | | | | Weighted average number of shares outstanding – basic | | | 15,648 | | | 15,608 | Effect of stock awards (1) | | | 119 | | | — | Weighted average number of shares outstanding – diluted | | | 15,767 | | | 15,608 | | | | | | | | Net income (loss) per share attributable to the stockholders of Argan, Inc. | | | | | | | Basic | | $ | 0.31 | | $ | (1.84) | Diluted | | $ | 0.31 | | $ | (1.84) |
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| | Nine Months Ended October 31, | | | | 2017 | | 2016 | | | | | | | | Net income attributable to the stockholders of Argan, Inc. | | $ | 64,993 | | $ | 49,977 | | | | | | | | Weighted average number of shares outstanding - basic | | 15,509 | | 14,974 | | Effect of stock options (1) | | 287 | | 516 | | Weighted average number of shares outstanding - diluted | | 15,796 | | 15,490 | | Net income per share attributable to the stockholders of Argan, Inc. | | | | | | Basic | | $ | 4.19 | | $ | 3.34 | | Diluted | | $ | 4.11 | | $ | 3.23 | |
(1) Antidilutive shares excluded from For the diluted computations were 155,000 for the three and ninesix months ended OctoberJuly 31, 2017. The comparable numbers for2020, the prior year were not material. NOTE 14 — CONCENTRATIONS OF REVENUES AND ACCOUNTS RECEIVABLE
Duringweighted average number of shares determined on a dilutive basis excludes the threeeffects of restricted stock units and nineantidilutive stock options covering an aggregate of 831,000 shares of common stock. For the six months ended OctoberJuly 31, 2017 and 2016,2019, all common stock equivalents, which covered 1,135,067 shares of common stock, were considered to be antidilutive as the Company incurred a net loss.
NOTE 13 – CUSTOMER CONCENTRATIONS The majority of the Company’s consolidated revenues relatedrelate to performance by the power industry services segment which provided 91%79% and 86%44% of consolidated revenues for the three months ended OctoberJuly 31, 20172020 and 2016,2019, respectively, and 92%80% and 86%43% of consolidated revenues for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, respectively. The industrial services segment represented 19% and 53% of consolidated revenues for the three months ended July 31, 2020 and 2019, respectively, and 18% and 54% of consolidated revenues for the six months ended July 31, 2020 and 2019, respectively. The Company’s most significant customer relationships for the three months ended OctoberJuly 31, 20172020 included three1 power industry service customerscustomer, which accounted for approximately 36%, 24% and 13%70% of consolidated revenues, respectively.revenues. The Company’s most significant customer relationships for the three months ended OctoberJuly 31, 20162019 included four customers1 power industry service customer and 1 industrial services customer which accounted for approximately 21%, 19%, 18%23% and 15%11% of consolidated revenues, respectively. The Company’s most significant customer relationships for the ninesix months ended OctoberJuly 31, 20172020 included four2 power industry service customers, which accounted for approximately 29%, 27%, 16%66% and 14%10% of consolidated revenues, respectively. The Company’s most significant customer relationships for the ninesix months ended OctoberJuly 31, 20162019 also included five2 power industry service customers which accounted for approximately 17%, 16%, 16%, 14%12% and 14%10% of consolidated revenues, respectively.respectively The accounts receivable balances from 4 major customers represented 25%, 18%, 10% and 10% of the corresponding consolidated balance as of July 31, 2020. Accounts receivable balances from four major customers as of October 31, 2017 represented 22%, 22%, 16% and 15% of the corresponding condensed consolidated balance as of October 31, 2017, and accounts receivable balances from four3 major customers represented 18%24%, 17%, 17%21% and 11%12% of the corresponding consolidated balance as of January 31, 2017.2020. The contract asset balances from 2 major customers represented 65% and 22% of the corresponding consolidated balance as of July 31, 2020. Contract asset balances from 2 major customers represented 51% and 31% of the corresponding consolidated balance as of January 31, 2020. NOTE 15 —14 – SEGMENT REPORTING Operating segments are defined asSegments represent components of an enterprise aboutfor which separatediscrete financial information is available that is evaluated regularly by the Company’s chief executive officer, who is the chief operating decision maker, or decision making group, in decidingdetermining how to allocate resources and in assessing performance. The Company’s reportable segments power industry services, industrial fabricationrecognize revenues and field services, and telecommunications infrastructure services,incur expenses, are organized in separate business units with different management teams, customers, talents and services, and may include more than one1 operating segment. The intersegment
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 ninesix months ended OctoberJuly 31, 2017,2020, intersegment revenues totaled approximately $0.2$1.1 million and $1.8$1.7 million, respectively. For the three and ninesix months ended OctoberJuly 31, 2016,2019, intersegment revenues were insignificant. Intersegment revenues for the aforementioned periods related to services provided by our industrial fabricationtotaled approximately $0.9 million and field services segment to our power industry services segment.$1.4 million. PresentedSummarized below are summarizedcertain operating results and certain financial position data of the Company’s reportable business segments for the three and ninesix months ended OctoberJuly 31, 20172020 and 2016.2019. The “Other” column in each summary includes the Company’s corporate and unallocated expenses.
| | | | | | | | | | | | | | | | Three Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2020 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 69,039 | | $ | 16,689 | | $ | 1,764 | | $ | — | | $ | 87,492 | Cost of revenues | | | 55,610 | | | 14,896 | | | 1,356 | | | — | | | 71,862 | Gross profit | | | 13,429 | | | 1,793 | | | 408 | | | — | | | 15,630 | Selling, general and administrative expenses | | | 4,868 | | | 1,713 | | | 470 | | | 2,034 | | | 9,085 | Income (loss) from operations | | | 8,561 | | | 80 | | | (62) | | | (2,034) | | | 6,545 | Other income, net | | | 438 | | | — | | | — | | | 13 | | | 451 | Income (loss) before income taxes | | $ | 8,999 | | $ | 80 | | $ | (62) | | $ | (2,021) | | | 6,996 | Income tax expense | | | | | | | | | | | | | | | (1,397) | Net income | | | | | | | | | | | | | | $ | 5,599 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | 60 | | $ | 166 | | $ | — | | $ | — | | $ | 226 | Depreciation | | | 174 | | | 646 | | | 100 | | | 1 | | | 921 | Property, plant and equipment additions | | | 313 | | | 94 | | | 42 | | | — | | | 449 | | | | | | | | | | | | | | | | | Current assets | | $ | 356,383 | | $ | 23,244 | | $ | 1,924 | | $ | 121,905 | | $ | 503,456 | Current liabilities | | | 219,315 | | | 12,568 | | | 853 | | | 699 | | | 233,435 | Goodwill | | | 18,476 | | | 9,467 | | | — | | | — | | | 27,943 | Total assets | | | 389,380 | | | 46,099 | | | 3,417 | | | 122,211 | | | 561,107 |
| | | | | | | | | | | | | | | | Three Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2019 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 27,890 | | $ | 33,230 | | $ | 1,939 | | $ | — | | $ | 63,059 | Cost of revenues | | | 28,906 | | | 29,528 | | | 1,660 | | | — | | | 60,094 | Gross (loss) profit | | | (1,016) | | | 3,702 | | | 279 | | | — | | | 2,965 | Selling, general and administrative expenses | | | 5,659 | | | 2,080 | | | 539 | | | 1,760 | | | 10,038 | (Loss) income from operations | | | (6,675) | | | 1,622 | | | (260) | | | (1,760) | | | (7,073) | Other income, net | | | 1,490 | | | — | | | — | | | 152 | | | 1,642 | (Loss) income before income taxes | | $ | (5,185) | | $ | 1,622 | | $ | (260) | | $ | (1,608) | | | (5,431) | Income tax benefit | | | | | | | | | | | | | | | 6,411 | Net income | | | | | | | | | | | | | | $ | 980 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | 83 | | $ | 165 | | $ | 45 | | $ | — | | $ | 293 | Depreciation | | | 173 | | | 606 | | | 101 | | | 2 | | | 882 | Property, plant and equipment additions | | | 812 | | | 236 | | | 10 | | | — | | | 1,058 | | | | | | | | | | | | | | | | | Current assets | | $ | 252,367 | | $ | 34,822 | | $ | 1,948 | | $ | 64,000 | | $ | 353,137 | Current liabilities | | | 45,061 | | | 12,258 | | | 777 | | | 618 | | | 58,714 | Goodwill | | | 18,476 | | | 12,290 | | | — | | | — | | | 30,766 | Total assets | | | 281,535 | | | 63,393 | | | 3,457 | | | 71,339 | | | 419,724 |
| | | | | | | | | | | | | | | | Six Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2020 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 117,651 | | $ | 26,433 | | $ | 3,556 | | $ | — | | $ | 147,640 | Cost of revenues | | | 101,320 | | | 23,878 | | | 2,803 | | | — | | | 128,001 | Gross profit | | | 16,331 | | | 2,555 | | | 753 | | | — | | | 19,639 | Selling, general and administrative expenses | | | 10,796 | | | 3,836 | | | 958 | | | 3,839 | | | 19,429 | Income (loss) from operations | | | 5,535 | | | (1,281) | | | (205) | | | (3,839) | | | 210 | Other income, net | | | 1,462 | | | — | | | — | | | 77 | | | 1,539 | Income (loss) before income taxes | | $ | 6,997 | | $ | (1,281) | | $ | (205) | | $ | (3,762) | | | 1,749 | Income tax benefit | | | | | | | | | | | | | | | 3,057 | Net income | | | | | | | | | | | | | | $ | 4,806 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | 120 | | | 331 | | | — | | | — | | $ | 451 | Depreciation | | | 344 | | $ | 1,313 | | $ | 199 | | $ | 2 | | | 1,858 | Property, plant and equipment additions | | | 693 | | | 304 | | | 136 | | | — | | | 1,133 |
| | | | | | | | | | | | | | | | Six Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2019 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 48,093 | | $ | 60,299 | | $ | 4,211 | | $ | — | | $ | 112,603 | Cost of revenues | | | 73,432 | | | 53,799 | | | 3,433 | | | — | | | 130,664 | Gross (loss) profit | | | (25,339) | | | 6,500 | | | 778 | | | — | | | (18,061) | Selling, general and administrative expenses | | | 11,305 | | | 3,941 | | | 1,050 | | | 3,330 | | | 19,626 | Impairment loss | | | 2,072 | | | — | | | — | | | — | | | 2,072 | (Loss) income from operations | | | (38,716) | | | 2,559 | | | (272) | | | (3,330) | | | (39,759) | Other income, net | | | 3,590 | | | — | | | — | | | 304 | | | 3,894 | (Loss) income before income taxes | | $ | (35,126) | | $ | 2,559 | | $ | (272) | | $ | (3,026) | | | (35,865) | Income tax benefit | | | | | | | | | | | | | | | 6,932 | Net loss | | | | | | | | | | | | | | $ | (28,933) | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | 170 | | $ | 331 | | $ | 91 | | $ | — | | $ | 592 | Depreciation | | | 341 | | | 1,166 | | | 201 | | | 3 | | | 1,711 | Property, plant and equipment additions | | | 1,874 | | | 1,051 | | | 107 | | | 11 | | | 3,043 |
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Three Months Ended
October 31, 2017 | | Power
Services | | Industrial
Services | | Telecom
Services | | Other | | Totals | | Revenues | | $ | 212,493 | | $ | 16,574 | | $ | 3,878 | | $ | — | | $ | 232,945 | | Cost of revenues | | 178,472 | | 13,797 | | 2,958 | | — | | 195,227 | | Gross profit | | 34,021 | | 2,777 | | 920 | | — | | 37,718 | | Selling, general and administrative expenses | | 5,464 | | 1,638 | | 452 | | 2,565 | | 10,119 | | Income (loss) from operations | | 28,557 | | 1,139 | | 468 | | (2,565 | ) | 27,599 | | Other income, net | | 1,623 | | — | | — | | 69 | | 1,692 | | Income (loss) before income taxes | | $ | 30,180 | | $ | 1,139 | | $ | 468 | | $ | (2,496 | ) | 29,291 | | Income tax expense | | | | | | | | | | 12,062 | | Net income | | | | | | | | | | $ | 17,229 | | | | | | | | | | | | | | Amortization of purchased intangible assets | | $ | 87 | | $ | 171 | | $ | — | | $ | — | | $ | 258 | | Depreciation | | 226 | | 425 | | 71 | | 4 | | 726 | | Property, plant and equipment additions | | 476 | | 463 | | 265 | | — | | 1,204 | | | | | | | | | | | | | | Current assets | | $ | 488,122 | | $ | 17,549 | | $ | 4,008 | | $ | 74,116 | | $ | 583,795 | | Current liabilities | | 280,538 | | 9,546 | | 1,525 | | 707 | | 292,316 | | Goodwill | | 20,548 | | 14,365 | | — | | — | | 34,913 | | Total assets | | 515,783 | | 46,854 | | 5,242 | | 74,422 | | 642,301 | |
Three Months Ended
October 31, 2016 | | Power
Services | | Industrial
Services | | Telecom
Services | | Other | | Totals | | Revenues | | $ | 151,094 | | $ | 21,550 | | $ | 2,800 | | $ | — | | $ | 175,444 | | Cost of revenues | | 118,407 | | 18,386 | | 2,073 | | — | | 138,866 | | Gross profit | | 32,687 | | 3,164 | | 727 | | — | | 36,578 | | Selling, general and administrative expenses | | 6,391 | | 1,410 | | 316 | | 1,731 | | 9,848 | | Income (loss) from operations | | 26,296 | | 1,754 | | 411 | | (1,731 | ) | 26,730 | | Other income, net | | 654 | | — | | — | | 36 | | 690 | | Income (loss) before income taxes | | $ | 26,950 | | $ | 1,754 | | $ | 411 | | $ | (1,695 | ) | 27,420 | | Income tax expense | | | | | | | | | | 8,194 | | Net income | | | | | | | | | | $ | 19,226 | | | | | | | | | | | | | | Amortization of purchased intangible assets | | $ | 135 | | $ | 97 | | $ | — | | $ | — | | $ | 232 | | Depreciation | | 169 | | 302 | | 51 | | 3 | | 525 | | Property, plant and equipment additions | | 101 | | 481 | | 286 | | — | | 868 | | | | | | | | | | | | | | Current assets | | $ | 410,143 | | $ | 19,269 | | $ | 2,649 | | $ | 67,909 | | $ | 499,970 | | Current liabilities | | 275,052 | | 13,336 | | 1,006 | | 1,139 | | 290,533 | | Goodwill | | 20,548 | | 14,365 | | — | | — | | 34,913 | | Total assets | | 435,208 | | 50,363 | | 3,297 | | 69,975 | | 558,843 | |
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Nine Months Ended
October 31, 2017 | | Power
Services | | Industrial
Services | | Telecom
Services | | Other | | Totals | | Revenues | | $ | 662,131 | | $ | 50,203 | | $ | 10,903 | | $ | — | | $ | 723,237 | | Cost of revenues | | 540,986 | | 44,634 | | 8,396 | | — | | 594,016 | | Gross profit | | 121,145 | | 5,569 | | 2,507 | | — | | 129,221 | | Selling, general and administrative expenses | | 16,804 | | 5,041 | | 1,163 | | 7,400 | | 30,408 | | Income (loss) from operations | | 104,341 | | 528 | | 1,344 | | (7,400 | ) | 98,813 | | Other income, net | | 4,043 | | — | | — | | 178 | | 4,221 | | Income (loss) before income taxes | | $ | 108,384 | | $ | 528 | | $ | 1,344 | | $ | (7,222 | ) | 103,034 | | Income tax expense | | | | | | | | | | 37,738 | | Net income | | | | | | | | | | $ | 65,296 | | | | | | | | | | | | | | Amortization of purchased intangible assets | | $ | 262 | | $ | 514 | | $ | — | | $ | — | | $ | 776 | | Depreciation | | 580 | | 1,144 | | 202 | | 10 | | 1,936 | | Property, plant and equipment additions | | 691 | | 2,800 | | 513 | | 2 | | 4,006 | |
Nine Months Ended
October 31, 2016 | | Power
Services | | Industrial
Services | | Telecom
Services | | Other | | Totals | | Revenues | | $ | 402,615 | | $ | 59,287 | | $ | 6,385 | | $ | — | | $ | 468,287 | | Cost of revenues | | 302,140 | | 52,491 | | 4,764 | | — | | 359,395 | | Gross profit | | 100,475 | | 6,796 | | 1,621 | | — | | 108,892 | | Selling, general and administrative expenses | | 13,688 | | 4,532 | | 944 | | 5,265 | | 24,429 | | Impairment loss | | 1,979 | | — | | — | | — | | 1,979 | | Income (loss) from operations | | 84,808 | | 2,264 | | 677 | | (5,265 | ) | 82,484 | | Other income, net | | 1,192 | | — | | — | | 91 | | 1,283 | | Income (loss) before income taxes | | $ | 86,000 | | $ | 2,264 | | $ | 677 | | $ | (5,174 | ) | 83,767 | | Income tax expense | | | | | | | | | | 27,122 | | Net income | | | | | | | | | | $ | 56,645 | | | | | | | | | | | | | | Amortization of purchased intangible assets | | $ | 385 | | $ | 367 | | $ | — | | $ | — | | $ | 752 | | Depreciation | | 459 | | 841 | | 135 | | 9 | | 1,444 | | Property, plant and equipment additions | | 944 | | 1,082 | | 453 | | 2 | | 2,481 | |
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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 OctoberJuly 31, 2017,2020, and the results of their operations for the three and ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, 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, 20172020 that waswe filed with the SEC on April 11, 2017.14, 2020 (the “Annual Report”). 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. TheseOur forward-looking statements, including those relating to the potential effects of the COVID-19 pandemic on our business, financial position and results of operations, 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, 2017.Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be 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 andmarkets, including the renewable energy marketssector, 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 APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southern United Statessoutheast region of the US and that are based on its expertise in producing, delivering and installing fabricated steelmetal components such as piping systems and pressure vessels, heat exchangers and piping systems.vessels. 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.region of the US. At the holding company level, we intend toWe may make additional acquisitions of and/or investments in companies with significant potential for profitable growth. We may havegrowth that reflect more than one industrial focus. We expect that acquired companiesthey will be held in separate subsidiaries that will be operated in a manner that best provides cash flows and value for our stockholders.
Overview HighlightsThe TeesREP Subcontract
In our Form 10-K Annual Report for Fiscal 2019, we disclosed that APC was completing the mechanical installation of the boiler for a biomass-fired power plant under construction in the UK, the TeesREP Project, and that the project had encountered significant operational and contractual challenges. The consolidated operating results for the year ended January 31, 2019 reflected unfavorable gross profit adjustments related to this project. The disclosure explained that the construction project was behind the schedule originally established for the job and warned that the TeesREP Project may continue to impact our consolidated operating results negatively until it reaches completion. By April 30, 2019, APC’s estimates of the unfavorable financial impacts on forecasted costs of the numerous and unique difficulties on this particular project, including weather delays, inefficiencies due to unanticipated scope and design changes from preliminary plans, project task re-sequencing and various work interruptions, had escalated substantially from the estimates prepared for the prior year-end. As a result, for the three-month period ended April 30, 2019, we recorded a loss related to this project in the amount of $27.6 million and reversed profit in the amount of $0.7 million that had been recorded in prior periods. For the three-month period ended July 31, 2019, APC recorded additional loss related to the TeesREP Project in the amount of $3.4 million. During the fourth quarter of Fiscal 2020, APC and its customer, the engineering, procurement and construction services contractor on the TeesREP Project, agreed to amended operational and commercial terms for the completion of the project. At the time, this framework addressed the project schedule, payment terms, the scope of the remaining effort, performance guarantees and other terms and conditions for APC to reach substantial completion of its portion of the total project. Although this negotiation returned a meaningful amount of stability to the continuation of the project efforts, the amendment did not resolve significant past commercial differences. Construction on the TeesREP Project was suspended on March 24, 2020 due to the COVID-19 pandemic. At the time of the work suspension, APC had completed approximately 90% of its subcontracted work. As a condition for resuming its efforts on the TeesREP Project, APC entered into Amendment No. 2 to the subcontract, effective June 1, 2020, covering new terms and conditions for completion of the installation of the boiler. This agreement represents a global settlement of past commercial differences with both parties making significant concessions, and converts the billing arrangement for the remaining work to a time-and-materials based scheme. Despite the change to the billing arrangements, we have treated Amendment No. 2 as a continuation of the original subcontract because the arrangement continues to represent a single performance obligation to our customer, the delivery of a complete functioning and integrated boiler, that was only partially satisfied when the modification to the subcontract occurred. The catch-up impact of the accounting for the modification of the subcontract partially offset by project-related charges recorded by APC resulted in a net improvement to gross profit for the three months ended July 31, 2020 in the amount of $2.3 million. We currently expect that the forecasted costs at completion for the TeesREP Project will exceed projected revenues by approximately $32.3 million, which is the amount of the expected loss that has been reflected in the condensed consolidated financial statements as of July 31, 2020. The amount of the remaining contract loss reserve as of July 31, 2020 was approximately $2.3 million; the comparable balance at January 31, 2020 was $5.8 million. These balances were included in accrued expenses in the accompanying condensed consolidated balance sheets. The total amounts of accounts receivable and contract assets related to the TeesREP Project and included in the corresponding condensed consolidated balance sheets were $11.2 million as of July 31, 2020 and $19.2 million as of January 31, 2020. Additionally, during the quarter ended July 31, 2020, we made changes in the operational and financial leadership at APC. The new management team is focused on completing the TeesREP Project, reducing costs, limiting future commercial and project risks and achieving sustained profitability for the combined operations of APC. We believe that the APC leadership changes, our active management of this subcontract and the restructuring of the subcontract terms and conditions have reduced the potential for future material loss on the TeesREP Project. However, should APC encounter additional difficulties as it resumes construction activity on the TeesREP Project, including future work interruptions that may arise related to any resurgence of the COVID-19 outbreak or any failure of the customer to make timely payment of billed amounts, additional losses may be incurred that would be reflected in operating results when identified and quantified. Summary of Operating Results Due substantially to the recovering revenues of GPS, consolidated revenues for the three months ended July 31, 2020 were $87.5 million, which represented an increase of $24.4 million, or 38.7%, from consolidated revenues of $63.1 million reported for the three months ended July 31, 2019. The revenues of the power industry services segment, including GPS, represented 78.9% and 44.2% of consolidated revenues for the three months ended July 31, 2020 and 2019, respectively. On the other hand, the revenues of TRC and SMC for the three months ended July 31, 2020 declined by 49.8% and 9.0%, respectively, from the comparable amounts reported for the three months ended July 31, 2019, and together represented 21.1% of consolidated revenues for the quarter ended July 31, 2020. We believe that all of our businesses were adversely impacted during the three months ended July 31, 2020, to some degree, by continuing difficulties presented by the COVID-19 outbreak. The results for APC were hurt by the slow resumption of postponed Irish works projects and the suspension and restart of construction activities on the TeesREP Project. The challenges of managing the continuing activities of the Guernsey Power Station project during this period of various health and safety restrictions resulted in project spending by GPS falling slightly short of prior expectations. In addition, our consolidated revenues suffered from the effects of project delays by customers of both TRC and SMC attributable to the restrictive work environments caused by the pandemic. However, early performance on several large projects during the three months ended July 31, 2020, added to project backlog by TRC late in the first quarter, did contribute to a consecutive quarter increase of 71.3% in the revenues for TRC. Consolidated gross profit for the three months ended July 31, 2020 was $15.6 million, or 17.9% of the corresponding consolidated revenues, which reflected the favorable impacts of the higher consolidated revenues and the catch-up adjustment recorded in connection with the negotiation of Amendment No. 2 to the TeesREP subcontract. Our gross profit reported for the three months ended July 31, 2019 was $3.0 million, or 4.7% of corresponding consolidated revenues. Selling, general and administrative expenses for the three months ended July 31, 2020 and 2019 were $9.1 million and $10.0 million, respectively. Due to the extremely low rates of return on amounts invested in cash equivalents during the current year, includeother income declined to $0.5 million for the following:three months ended July 31, 2020 from $1.6 million for the comparable quarter of the prior year despite the increase in the amount of invested funds between years. · Current year-to-dateDue primarily to consolidated pre-tax book income reported for the three months ended July 31, 2020 in the amount of $7.0 million, we reported income tax expense in the amount of $1.4 million for the quarter. We recorded an income tax benefit for the three months ended July 31, 2019 in the amount of approximately $6.4 million which primarily reflected the estimated favorable tax impact of a bad debt loss on loans made to APC from Argan, which were determined to be uncollectible during the prior year quarter.
With results for revenues, gross profit, income before income taxes andreflecting primarily the factors identified above, the consolidated net income attributable to our stockholders for the nine months ended October 31, 2017 are strong as they increased by 54%, 19%, 23% and 30%, respectively, from the corresponding amounts in the prior year period. The gross profit percentage was 17.9% for the current year-to-date period. · EBITDA(1) attributable to the stockholders of Argan increased 33% to $105.4 million for the nine months ended October 31, 2017 as compared to $79.3 million for the corresponding prior year period.
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· Our international subsidiary, APC, has begun to capitalize on the opportunities foreseen when we acquired this business in 2015. During the current year, it has been awarded two large construction-type contracts related to power plants in the United Kingdom with a combined contract value in excess of $109 million.
· During the third quarter, we declared and paid a regular cash dividend of $1.00 per share to our stockholders. In addition, we announced our intent to declare and pay a regular quarterly cash dividend of $0.25 per share, starting in the first quarter ending April 30, 2018.
· Our tangible net worth(2) increased 23% to $305.9 million as of October 31, 2017 from $248.5 million as of January 31, 2017.
· Our liquidity, or working capital(3), increased 23% to $291.5 million as of October 31, 2017 from $237.2 million as of January 31, 2017.
(1) EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure not recognized under US GAAP.
(2) We define tangible net worth as our total stockholders’ equity less goodwill and other intangible assets, net.
(3) We define working capital as our total current assets less our total current liabilities.
Our revenues for the three months ended October 31, 2017 increased by 33% to $232.9 million from $175.4 million for the three months ended October 31, 2016, providing EBITDA attributable to our stockholders for the current quarter of $30.3$5.6 million, or 13% of corresponding revenues. Gross profits for the three months ended October 31, 2017 increased by 3% to $37.7 million from $36.6 million for the three months ended October 31, 2016. However, our gross profit percentage declined to 16.2% from 20.8% as we increased our estimated costs to complete certain EPC projects due to, primarily, increased labor and subcontractor costs. The corresponding reduction in the amount of forecasted gross margins had an unfavorable effect on gross profit for the current quarter which caused, in part, our consolidated gross profit percentage to decrease to 17.9% for the nine months ended October 31, 2017 from 23.3% for the nine-month period ended October 31, 2016.
As explained below, the decline in the amount of income attributable to our joint venture partner and unfavorable discrete items for the current quarter caused our effective income tax rates to increase for current year periods compared with the corresponding periods last year. Income tax expense for the three months ended October 31, 2017 was $12.1 million, or 41.0% of income before income taxes. As a result, income tax expense for the nine months ended October 31, 2017 was pushed upwards to $37.7 million, or 36.6% of the corresponding amount of income before income taxes. Last year, the income tax rates for the comparable periods were 29.9% and 32.4%, respectively.
A decrease in gross profit percentage and an increase in income taxes, partially offset by increased revenues, were the primary causes of the decline in net income attributable to our stockholders to $17.2 million, or $1.09$0.36 per diluted share, for the three months ended OctoberJuly 31, 2017 from $18.1 million, or $1.16 per diluted share, for2020. For the three months ended OctoberJuly 31, 2016,2019, we reported consolidated net income attributable to our stockholders of $1.2 million, or $0.07 per diluted share.
The improved consolidated revenues for the quarter ended July 31, 2020 were the primary driver for the increased consolidated revenues for the six-month period ended July 31, 2020 which were $147.6 million; this amount represented a reduction31.1% improvement from the amount of 4.7%.revenues for the six months ended July 31, 2019. The revenues of the power industry services segment, including GPS, represented 79.7% and 42.7% of consolidated revenues for the six months ended July 31, 2020 and 2019, respectively. Last year, the majority of consolidated revenues were contributed by the industrial services business of TRC which reported revenues of $60.3 million for the six months ended July 31, 2019, or 53.6% of consolidated revenues for the prior year period. Despite the consecutive quarter improvement in the revenues of TRC, its revenues declined by 56.2% for the six months ended July 31, 2020, as compared to the revenues of the comparable period last year, and represented only 17.9% of consolidated revenues for the current year period. Consolidated gross profit for the six months ended July 31, 2020 was $19.6 million, or 13.3% of the corresponding consolidated revenues, which reflected primarily the favorable impact of higher consolidated revenues. The significant subcontract loss incurred by APC caused us to report a consolidated gross loss of $18.1 million for the six months ended July 31, 2019. The loss on the TeesREP Project also prompted us to record an impairment loss related to the goodwill of APC in the amount of $2.1 million during the first quarter last year, which amount is included in the reported results for the six months ended July 31, 2019. Selling, general and administrative expenses were $19.4 million and $19.6 million for the six months ended July 31, 2020 and 2019, respectively. Other income, representing primarily income earned on temporary cash investments, declined to $1.5 million for the six months ended July 31, 2020 from $3.9 million for the six months ended July 31, 2019. For the six months ended July 31, 2020, we recorded an income tax benefit in the amount of $3.1 million which reflected primarily the net operating loss carryback benefit of $4.3 million most of which was recorded in the first quarter of the current year. We recorded an income tax benefit for the six months ended July 31, 2019 in the amount of approximately $6.9 million which primarily reflected the favorable estimated tax impact of the bad debt loss identified above. On the other hand, we did not record any income tax benefit related to the large operating loss of APC’s subsidiary in the UK for the six months ended July 31, 2019. For the six months ended July 31, 2020, our improved overall operating performance resulted in net income attributable to our stockholders in the amount of $4.8 million, or $0.31 per diluted share. Last year, due substantially to the subcontract loss recorded for the TeesREP Project, we reported a net loss attributable to our stockholders in the amount of $28.6 million, or $1.84 per dilutive share. Execution on Contract BacklogMajor Customer Contracts
At October 31, 2017, ourDuring August 2019, GPS received a full notice to proceed with activities under an EPC services contract backlog was $509 million. The following table summarizes our largeto build an 1,875 MW combined cycle natural gas-fired power plant projects:
Current Project
|
| Location
|
| Facility Size
|
| FNTP Received(1)
|
| Scheduled Completion
| 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
| InterGen Spalding OCGT Expansion Project
| | Spalding (England)
| | 298 MW
| | November 2017
| | 2019
|
(1) Full Noticein Guernsey County, Ohio. The Guernsey Power Station was jointly developed by Caithness Energy, L.L.C. and Apex Power Group, LLC. The ramp-up of activity on this project has favorably impacted our quarterly consolidated operating results since then with its increasing revenues. Substantial completion of this project is currently scheduled to Proceed (“FNTP”) represents the formal notice providedoccur by the customer instructing usend of calendar year 2022.
In January 2020, GPS entered into an EPC services contract with Harrison Power, LLC (“Harrison Power”) to construct a 1,085 MW natural gas-fired power plant in the Village of Cadiz, Harrison County, Ohio. The project is being developed by EmberClear, the parent company of Harrison Power. On March 10, 2020, we announced that in late February 2020 GPS entered into an EPC services contract with ESC Brooke County Power I, LLC to construct the Brooke County Power plant, a 920 MW natural gas-fired power generation facility, in Brooke County, West Virginia. The facility is being developed by Energy Solutions Consortium, LLC. On March 12, 2020, we announced that GPS had entered into an EPC services contract with NTE Connecticut, LLC to construct the Killingly Energy Center, a 650 MW natural gas-fired power plant, in Killingly, Connecticut. The facility is being developed by NTE Energy, LLC (“NTE”). We anticipate adding the value of each of these new contracts to project backlog at times closer to their financial close and expected start dates. We are cautiously optimistic that the start of construction activities for at least two of these three projects will occur between three and nine months from now. However, we cannot predict with certainty when the projects will commence. The start dates for construction are generally controlled by the project owners. We announced in March 2018 that GPS entered into an EPC services contract with an affiliate of NTE to construct an approximately 500 MW natural gas-fired power plant in Rockingham County, North Carolina. The Reidsville Energy Center will be similar to two gas-fired power plants substantially completed by GPS for NTE during Fiscal 2019, the Kings Mountain Energy Center located in Kings Mountain, North Carolina, and the Middletown Energy Center located in Middletown, Ohio. At the time, we expected this project to commence within a reasonable amount of time. However, due to unforeseen project owner delays, including a grid connection dispute between the project owner and a public utility, contract activities covered byhave not yet started for this new project. If the corresponding contract.current dispute with the public utility is not resolved on terms that move the project forward, we will most likely remove the value of the Reidsville Energy Center from project backlog. In May 2019, GPS entered into an EPC services contract to construct a 625 MW power plant in Harrison County, West Virginia. Caithness is partnered with ESC to develop this project. As a limited notice to proceed with certain preliminary activities was received from the owner of this project at the time, the value of the contract was added to our project backlog. However, construction activities for the facility are not likely to begin before January 31, 2021 and until financial close is achieved. ContractAs announced in Fiscal 2019, GPS entered into an EPC services contract to construct the Chickahominy Power Station, a 1,740 MW natural gas-fired power plant, in Charles City County, Virginia. Even though we are providing financial and technical support to the project development effort through a consolidated VIE and project development milestones continue to be achieved, we have not included the value of this contract in our project backlog. Due to several factors that are slowing the pace of the development of this project, including additional time being required to secure the natural gas supply for the plant and to obtain the necessary equity financing, we currently cannot predict when construction will commence, if at all.
The aggregate rated electrical output amount for the natural gas-fired power plants for which we have signed EPC services contracts is approximately 7.3 gigawatts with an aggregate contract value in excess of $3.0 billion. We include the value of an EPC services contract in project backlog when we believe that it is probable that the project will commence within a reasonable timeframe, among other factors. Our project backlog amount was approximately $1.2 billion and $1.3 billion at July 31, 2020 and January 31, 2020, respectively. Our reported amount of project backlog at a point in time represents the total value of projects awarded to us that we consider to be firm as of that date less the amounts of revenues recognized to date on those contracts at a specific point in time. We believe contractthe corresponding projects (project backlog is an indicatorlarger than the value of future revenues and earnings potential. Although contract backlog reflects business that we considerremaining unsatisfied performance obligations, or RUPO, on active contracts; see Note 2 to be firm, cancellationsthe accompanying condensed consolidated financial statements). Cancellations or reductions may occur andthat may reduce contractproject backlog and our expected future revenues. Despite We have maintained that the delays in new business awards to APC that are identified above,GPS and the total 18
valueproject construction starts of our contract backlog has declined by half during the current year which substantially reflects the amountscertain previously awarded projects relate to a variety of revenues earned by GPS due to its performance on the first four projects identified above. New opportunities have been pursued and negotiations continue for several projects.
The first four projects identifiedfactors, especially in the chart above, all EPC contracts, were the most significant drivers of our financial results for the threenortheast and nine months ended October 31, 2017, which together represented approximately 82% and 87% of our consolidated revenues for the three and nine months ended October 31, 2017, 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 project 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 Spain-based global general contractor. In addition, in October 2017, APC was awarded a contract to perform certain engineering, procurement and construction services for InterGen, a company that develops, constructs and operates power projects around the world. The Spalding Energy Expansion plan includes APC’s project for the expansionmid-Atlantic regions of the existing gas-fired power station in Spalding (located in the East Midlands region of England) with an open cycle gas turbine unit with a planned capacity of 298 MW. Substantial completion for this project is also scheduled for 2019.
Despite these positive developments,US. Currently, we believe that the uncertainty surrounding the level of regulatory support for coal as partability of the owners of fully developed gas-fired power plant projects to close on equity and permanent debt financing has been challenged by uncertainty in the capital markets.
The viability of future revenue forecasts by power plant owners and operators, particularly independent power producers, depends, to a significant degree, on the amount of future capacity supply secured for a particular power source located within the electricity region coordinated by PJM. For new power projects, lack of visibility regarding future capacity revenue streams complicates the search for equity and debt financing considerably. Most of our recently completed and awarded EPC service contracts relate to the construction of natural gas-fired power plants located within the geographic footprint of the electric power system operated by PJM, the regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia. In December 2019, Federal regulators voted to effectively raise the bids of subsidized resources selling their power into the PJM wholesale capacity market. Clean energy mix,advocates and other market observers feared the move by the regulators would severely hinder incentives intended to bring new zero emissions resources online, while favoring incumbent fossil fuels. PJM was provided 90 days to comply with the order and to provide regulators with a timeline for its next capacity auction. PJM had previously suspended all activities and deadlines relating to the base capacity auctions for the 2022/2023 and 2023/2024 electricity delivery years. PJM has submitted its compliance filing response to FERC for review and approval, including a proposed plan for restarting the capacity auctions. Uncertainty relating to PJM capacity auctions may continue to disrupt capital markets. As a result, our commencement of the new EPC power plant projects could be delayed until PJM releases new capacity auction bidding rules approved by the FERC regulators and announces future capacity auction schedules. Besides the downturn in the demand for electric power during the COVID-19 outbreak in the US that is discussed below, other unfavorable factors include an increase in the amount of power generating capacity provided by renewable energy assets, improvements and the improvementsdecreasing prices in renewable energy storage solutions may be impacting the planning and initiation phases for the construction of new natural gas-fired power plants whichincreased environmental activism. Protests against fossil-fuel related energy projects continue to be delayed by project owners. Other unfavorable factors may include the potential for future volatility in natural gas prices that appears to be giving a short-term boost to coal-fired power generation and disappointing energy auctions during the current year for new power generating assets. In the current year, we have also seen approval delays and public opposition to new oil and gas pipelines develop as hurdles for gas-fired power plant developers. Interstate pipelines require the approval of the Federal Energy Regulatory Commission (“FERC”), whose members require a quorum to act. The lack of a quorum for a period of six months earlier this year left FERC unable to provide approval decisions on major energy projects. New members have been appointed and approved, but progress in reducing the number of pending decisions has been slow. In addition, a continued increase in environmental activism has garneredgarner media attention and stir public skepticism about new pipelines resulting in project delays due to onsite protest demonstrations, indecision by local officials and lawsuits. For example, in July 2020, Dominion Energy and Duke Energy announced the abandonment of plans to complete the major Atlantic Coast Pipeline, ending a seven-year effort to build a 600-mile natural gas pipeline between West Virginia and eastern North Carolina, citing that the economic viability of the project was threatened by continuing delays and increasing cost uncertainty after a federal judge issued a ruling preventing the use of an accelerated construction permitting process.
Although this recent pipeline cancellation decision is not expected to have any direct unfavorable effect on any of the pending projects awarded to GPS, other pipeline approval delays may jeopardize projects that are needed to bring supplies of natural gas to potentially newplanned gas-fired power plant sites, thereby increasing the risk of future power plant project delays or cancellations. Possible Impairment Loss
TRC’s management recently completedIn the New England and mid-Atlantic regions of the US, power plant operators are challenged by the requirements of the Regional Greenhouse Gas Initiative, or “RGGI,” which is a reforecastingcooperative effort by states in these regions to cap and reduce power sector carbon dioxide emissions. In addition, various cities, counties and states have adopted clean energy and carbon-free goals or objectives with achievement expected by a certain future date, typically 10 to 30 years out. These aspirational goals may increase the risk of a new power plant becoming a stranded asset long before the end of its future financial resultsotherwise useful economic life, which provides essential datais a risk that potential equity capital providers may be unwilling to take. The difficulty in obtaining project equity financing and the other factors identified above, may be adversely impacting the planning and initial phases for the required annual goodwill assessmentconstruction of TRC as of November 1, 2017. The new forecast presents a less favorable outlook for TRC,natural gas-fired power plants which represents our Industrial Fabrication and Field Services reportable business segment, than in the past. With this new information and using preliminary valuation analyses including discounted net after tax cash flow estimates, management determinedcontinue to be deferred by project owners.
We believe that it is important to note that the goodwill associated with this business may be impaired. Basedplans for two of our contracted natural gas-fired power plant projects will adopt integrated “green” hydrogen solution packages developed by a major gas turbine manufacturer. While the plants will initially run on this currently available data, management estimates thatnatural gas alone, the plants will eventually shift to burning hydrogen, thereby establishing power-generation flexibility for these plants. Market Outlook Although the total amount of possible loss rangeselectricity generated by utility-scale power facilities in calendar year 2019 declined by 1.3% from an immaterialthe total amount to $5.5 million, within 2018, the estimated federal income tax rate representing2019 amount was the most significant variable. Depending on the completion of the goodwill assessment including the resolution of this uncertainty, we may be required to record an impairment loss related to the goodwill of TRC in the fourth quarter of the current year up to ansecond highest total annual amount of $5.5 million. However,electricity generated by utility-scale power plants since 2010. In the completion ofreference case included in its Annual Energy Outlook 2020 released in January 2020, the full valuation of the business of TRC could materially change this outcome. 19
Outlook
Transition from Coal to Natural Gas Will Take Time
The U.S.US Energy Information Administration (the “EIA”) expects the share of total utility-scaleagain forecasted slow but steady growth in net electricity generation in the United States from natural gas will fall from anthrough 2050 with average annual increases of 34% in 2016 to about 31% in 2017 as a result of higher natural gas prices and increased generation from renewables and coal. Coal’s generation share is forecast to rise from 30% last year to 31% in 2017. This reversal of the relative electricity generation share position for coal and natural gas is forecast to be short lived. The projected annual generation shares for natural gas and coal in 2018 are predicted to be 32% and 31%, respectively. In 2016, natural gas overtook coal as the leading source of power generation in the United States. Electricity generation from renewable energy sources other than hydropower is predicted to grow from 8% in 2016 to about 9% in 2017 and 10% in 2018. Generation from nuclear energy accounts for almost 20% of total generation in each year from 2016 through 2018.
The Demand for Electrical Power Remains Modest
Government forecasts project an annual increase in power generation ofslightly less than 1%1.0% per year foryear. The growth rate is tempered by new electricity-efficient devices and production processes replacing older, less-efficient appliances, heating, cooling and ventilation systems and capital equipment.
Despite the next 25 years. However, our industry sector has not fully recovered from the recessionaryoverall decline in the demand for power in the United States. For both calendar years 2016 and 2015, the total amount of electricity generated in the United States was approximately 98% of the peak power generation level of 2007. Total electric power generation from all sources has decreased slightly during three of the last five years, with only a slight increaseUS in 2016. For 2017, EIA forecasts that total generation will decline again by approximately 1.5%, before increasing by 1.7% in 2018. Natural Gas-Fired Power Positioned to Fill the Gap
Since the year 2000, more than 53 GW of coal-fired capacity has been retired; most of the retired plants were older, smaller, less efficient coal-fired power plants. However, announcements by electric utilities of the retirement of coal-fired power plants continue, citing the availability of cheap natural gas, existing environmental regulations2019 and the significant costs of refurbishment and relicensing. Almost 5 GW of nuclear capacity has been retired over the last four to five years. The future of new nuclear power plant construction has been further clouded with the bankruptcy of Westinghouse, one of the few major nuclear providers of fuel, services, technology, plant design and equipment, and the decisions by several utilities to either abandon construction or development of nuclear projects, leaving just one site under construction today (the Vogtle plant units 3 and 4)increases in the United States. The retirementsamounts of coal and nuclear plants typically 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. Relatively clean burning, cost-effective and reliable, the benefits of natural gas as a source of power generation are undeniable. As the use of coal declines, the use of nuclear energy stalls, the integration of increasing amounts ofelectricity provided by utility-scale wind and solar power into energy grids continues,sources, the amount of electricity generated by natural gas-fired power providers should continue to value gas-firedplants rose by 7.7% during 2019, and it represented 38.4% of the total electric power generated in the US in 2019. The combined amount of power generated by the wind and the sun represented 10.8% of total utility-scale power generation in 2019. The amount of electricity generated from coal decreased by 15.7% in 2019 from its generation amount for 2018, and coal’s share of the total, utility-scale electricity generation especially when neededmix declined from 27.4% for 2018 to support23.5% for 2019. During 2019, power companies retired or converted roughly 15,100 MW of coal-fired electricity generation, reported to be enough to power about 15 million homes. That retirement capacity reduction was second only to the record 19,300 MW of capacity shut down in 2015.
In summary, the share of the electrical power generation-mix in the US fueled by natural gas, the sun and wind continued to rise during 2019, while the share fueled by coal continued its fall. Over the ten-year period ended in 2019, the amount of electrical power fueled by natural gas in the US increased by 72% while the amount of utility-scale power generated by coal fell by 45%. However, reduced economic activity in the US related to the COVID-19 pandemic has caused significant changes in energy supply and demand patterns. In its Short-Term Energy Outlook released in August 2020, EIA now forecasts that total electric power sector generation in the US will decline by about 5% in 2020. Most of the expected decline is predicted for coal-fired and nuclear generation. The updated forecast for natural gas generation is that it will increase again this year, reflecting currently favorable fuel costs and the addition of new generating capacity, before declining in 2021 as the price of natural gas is forecasted to rise. The ultimate adverse impacts of the COVID-19 outbreak in the US on the forecast of electricity generation over the long-term are not known at this time. Renewable energy sources are forecasted to account for the largest portion of new generating capacity in 2020, driving EIA’s updated forecast of 10% growth in renewable generation by this electric power sector. However, it will be interesting to observe whether the recent power shortages in California will reduce the pace of fossil-fuel-fired power plant eliminations planned by states that are in pursuit of extremely high renewable energy portfolios. It has been reported that renewables currently provide approximately 36% of electricity generation in California. Yet, the recent experience is that the increasing dependence on intermittent renewable energy supplies. Current projectionssources, especially solar, is making it harder to ensure reliable power in California as millions of futureits residents have lost power during a late summer heat wave. The lesson may be that fossil-fuel electricity generation assume the sustained increase in domestic natural gas production, which should lead to stable natural gas prices continuing into the future including the near term. 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 sharessources remain critical elements of the power generation mix in order to assure grid reliability by avoiding power outages.
In the pre-COVID-19 reference case of the 2020 outlook identified above, the EIA predicted that coal-fired and nuclear power generating capacity would decline by approximately 47% and 20% by 2050, respectively, representing only 13% and 12% shares of the electricity generation mix by 2050, respectively. It is important to note that most of the reduction in the coal-fired and nuclear capacity was already predicted to occur in the period 2020-2025. As a result, natural gas-fired power generating capacity was forecasted to increase by 26% over the next five years and by 67% by 2050 (before any adjustments for adverse and long-lasting effects of the COVID-19 pandemic on the demand for electricity). It is logical that this outlook represented the driver for the realization by at least certain power producers that the near-term addition of new natural gas-fired power plants wind farms and solar fields. Even withoutto the implementationutility-scale power generation fleet in the US is necessary. As a result, we have experienced meaningful growth in the number of new EPC service contracts awarded to us. In our view, the Clean Power Plan,competitive landscape in the EPC services market for natural gas and renewable energy sources are still predictedgas-fired power plant construction has changed significantly. Several significant competitors announced that they were exiting the market for a variety of reasons. Others have announced intentions to avoid entering into fixed-price contracts. While the competitive market remains dynamic, we expect that there will be the top choicesfewer competitors for new electricity generation plantsgas-fired power plant EPC project opportunities in the future primarily due to low natural gas prices.foreseeable future. We continue to believe that the future long-term prospects for natural gas-fired power plant construction areremain generally favorable as natural gas has generally becomeis the primary source for power generation in our country. Major advances in the safe combination of horizontal drilling techniques and the practice of hydraulic fracturing have led to the boom in natural gas supply.supplies which have been available at consistently low prices. 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 generation capacity additions. As indicatedHowever, as identified above, stability in the demand for electric power in this country is expected to grow slowly but steadily over the long term. Demands for electricity, the ample supplyavailability of natural gas supplies and the continuing retirement of inefficient and old coal and nuclear energy plants, should result in natural gas-fired and renewable energy plants representing the substantial majority of new power generation additionsgas prices, particularly in the future and an increased share ofshort-term, may be threatened due to pandemic-caused uncertainties. Despite the power generation mix. 20
In summary,pandemic, we believe that the development of natural gas-fired and renewable power generation facilities in the United StatesUS should continue to provide new construction opportunities for us although, in the near term, the pace of new opportunities emerging may decrease inbe restrained and the near term. We are encouraged by the resultsstarts of the business development activities conducted by APC since its acquisition by us that have lead to new power industry construction contracts outside of this country.
We Are Positioned to Succeed
We have been successful in the completion of our EPC and other projects. Our four largestawarded EPC projects continue to progress beyond the peak construction phases of their project life-cycles and toward completion. Consequently, the level of revenues associated with each one will continue to decline. While we are disappointed that we have not added a new major EPC contract to our backlog so far this year due, in part, to the intensely competitive business environment, wemay be delayed. We are committed to the rational pursuit of new construction projects and the future growth of our revenues. This may result in our decision to make investments in the development and/or ownership of new projects. 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 contractservices contracts to us. With
We believe that the Company has a growing reputation as an accomplished and cost-effective provider of EPC and other large project construction contracting services and withservices. We are convinced that the recent series of new EPC projects awarded to us confirms the soundness of our belief. With the proven ability to deliver completed power facilities, particularly combined cycle, natural gas-fired power plants, we are focused on expanding our position in the power markets where we expect investments to be made based on forecasts of electricity demand covering decades into the future. We believe that our expectations are valid and that our plans for the future plans continue to be based on reasonable assumptions. Our performance on current projects should provide In July 2020, confidence in our financial strength and the prospects for our business going forward prompted our board of directors to declare and to pay a stable basespecial cash dividend in the amount of business activity through$1.00 per share (see Note 11 to the next fiscal year as we pursue new opportunities that should continueaccompanying condensed consolidated financial statements) and to emerge for allauthorize the use of $25.0 million to repurchase shares of our businesses. Possible Changes to the United States Income Tax Code (the “US Tax Code”)
The United States Congress is considering sweeping revisions to the US Tax Code which would, among other changes, reduce the corporate income tax rate to as low as 20% from 35%, change international business tax rules and temporarily lower individual taxes. A final, reconciled bill would require passage by both the House and Senate before it would be presented to the President for signature. The outcomecommon stock (see Item 2 in Part II of this legislation is unknown, and the final impacts of itQuarterly Report on our business have not been determined, although we would expect them to be favorable.Form 10-Q).
Comparison of the Results of Operations for the Three Months Ended OctoberJuly 31, 20172020 and 20162019 We reported a net income attributable to our stockholders of $17.2$5.6 million, or $1.09$0.36 per diluted share, for the three months ended OctoberJuly 31, 2017.2020. For the three months ended OctoberJuly 31, 2016,2019, we reported a comparable net income amount of $18.1$1.2 million, or $1.16$0.07 per diluted share. The following schedule compares our operating results for the three months ended OctoberJuly 31, 20172020 and 20162019 (dollars in thousands).: | | Three Months Ended October 31, | | | | | 2017 | | 2016 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | | | Three Months Ended July 31, | | | | | 2020 | | 2019 | | $ Change | | % Change | | REVENUES | | | | | | | | | | | | | | | | | | | | | | Power industry services | | $ | 212,493 | | $ | 151,094 | | $ | 61,399 | | 40.6 | % | | $ | 69,039 | | $ | 27,890 | | $ | 41,149 | | 147.5 | % | Industrial fabrication and field services | | 16,574 | | 21,550 | | (4,976 | ) | (23.1 | ) | | | 16,689 | | | 33,230 | | | (16,541) | | (49.8) | | Telecommunications infrastructure services | | 3,878 | | 2,800 | | 1,078 | | 38.5 | | | | 1,764 | | | 1,939 | | | (175) | | (9.0) | | Revenues | | 232,945 | | 175,444 | | 57,501 | | 32.8 | | | | 87,492 | | | 63,059 | | | 24,433 | | 38.7 | | COST OF REVENUES | | | | | | | | | | | | | | | | | | | | | | Power industry services | | 178,472 | | 118,407 | | 60,065 | | 50.7 | | | | 55,610 | | | 28,906 | | | 26,704 | | 92.4 | | Industrial fabrication and field services | | 13,797 | | 18,386 | | (4,589 | ) | (25.0 | ) | | | 14,896 | | | 29,528 | | | (14,632) | | (49.6) | | Telecommunications infrastructure services | | 2,958 | | 2,073 | | 885 | | 42.7 | | | | 1,356 | | | 1,660 | | | (304) | | (18.3) | | Cost of revenues | | 195,227 | | 138,866 | | 56,361 | | 40.6 | | | | 71,862 | | | 60,094 | | | 11,768 | | 19.6 | | GROSS PROFIT | | 37,718 | | 36,578 | | 1,140 | | 3.1 | | | | 15,630 | | | 2,965 | | | 12,665 | | 427.2 | | Selling, general and administrative expenses | | 10,119 | | 9,848 | | 271 | | 2.8 | | | | 9,085 | | | 10,038 | | | (953) | | (9.5) | | INCOME FROM OPERATIONS | | 27,599 | | 26,730 | | 869 | | 3.3 | | | INCOME (LOSS) FROM OPERATIONS | | | | 6,545 | | | (7,073) | | | 13,618 | | NM | | Other income, net | | 1,692 | | 690 | | 1,002 | | 145.2 | | | | 451 | | | 1,642 | | | (1,191) | | (72.5) | | INCOME BEFORE INCOME TAXES | | 29,291 | | 27,420 | | 1,871 | | 6.8 | | | Income tax expense | | 12,062 | | 8,194 | | 3,868 | | 47.2 | | | INCOME (LOSS) BEFORE INCOME TAXES | | | | 6,996 | | | (5,431) | | | 12,427 | | NM | | Income tax (expense) benefit | | | | (1,397) | | | 6,411 | | | (7,808) | | NM | | NET INCOME | | 17,229 | | 19,226 | | (1,997 | ) | (10.4 | ) | | | 5,599 | | | 980 | | | 4,619 | | 471.3 | | Net income attributable to non-controlling interests | | — | | 1,153 | | (1,153 | ) | (100.0 | ) | | NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | $ | 17,229 | | $ | 18,073 | | $ | (844 | ) | (4.7 | )% | | Net loss attributable to non-controlling interests | | | | (10) | | | (174) | | | 164 | | 94.3 | | NET INCOME ATTRIBUTABLE TO | | | | | | | | | | | | | | THE STOCKHOLDERS OF ARGAN, INC. | | | $ | 5,609 | | $ | 1,154 | | $ | 4,455 | | 386.0 | % |
21N/M – Not meaningful.
Revenues Power Industry Services The revenues of the power industry services business increased by 41%147.5%, or $61.4$41.1 million, to $212.5$69.0 million for the three months ended OctoberJuly 31, 20172020 compared with revenues of $151.1$27.9 million for the three months ended OctoberJuly 31, 2016.2019. The revenues of this business represented approximately 91%78.9% of consolidated revenues for the current quarter ended July 31, 2020 and approximately 86%44.2% of consolidated revenues for the prior year quarter. The primary driver for the improved performance by this reportable segment for the current year quarter increase inwas the increasing revenues associated with the construction of the Guernsey Power Station. This project, which did not commence until the third quarter last year, represented the significant portion of this segment’s revenues for the power industry services segment primarily reflected the peak and post-peak construction activities ofthree months ended July 31, 2020. GPS reached substantial completion on four EPC projects, which together represented approximately 82% of consolidated revenues for the current quarter. The percent-complete for these four projects ranged from 76% to 87% as of October 31, 2017. As these projects continue to progress beyond peak construction in their life-cycles, the level of quarterly revenues associated with each project will continue to decline. All four jobs are currently scheduled to be completed during the fiscal year ending January 31, 2019. Last year, the combined revenues associated with these four natural gas-fired power plant projects which were alllate in earlier phases of construction, represented approximately 73% of consolidated revenues for the third quarter. Additionally, construction activity related to two other naturalFiscal 2019 and concluded activities on a fifth gas-fired power plant early in Fiscal 2020. As a result, the revenues of GPS declined substantially for early portions of Fiscal 2020, including the quarter ended July 31, 2019. The significant portions of revenues for this segment for the three-month period ended July 31, 2019 were provided by the operations of APC, including the TeesREP Project. The revenues of APC for the three months ended July 31, 2020 were unfavorably affected by the slow resumption of postponed Irish works projects that were completed last year represented 9%and the suspension and restart of construction activities on the TeesREP Project.
Industrial Fabrication and Field Services The revenues of industrial fabrication and field services (representing the business of TRC) provided 19.1% of consolidated revenues for the three months ended OctoberJuly 31, 2016. Industrial Fabrication and Field Services
The2020, which reflected a reduction in revenues of the industrial fabrication and field services business (representing the business$16.5 million, or 49.8%, to $16.7 million compared to revenues of TRC) decreased by 23%, or $5.0 million, to $16.6$33.2 million for the three months ended OctoberJuly 31, 2017 compared with revenues2019. With the completion of $21.6several large projects last year, TRC has been focused on rebuilding the amount of its project backlog. New project awards have increased TRC’s project backlog to approximately $37.4 million foras of July 31, 2020 from $14.0 million at the three months ended October 31, 2016.beginning of Fiscal 2021. The largest portion of TRC’sthe revenues continueof TRC continues to be provided by industrial field services, which included $7.3 million in revenue from a large mining company in the prior year period. TRC’sservices. The major customers of TRC include some of North America’s largest forest products companies, large fertilizer producers as well as other chemical and fertilizer producers.energy companies with plants located in the southeast region of the US.
Telecommunications Infrastructure Services The revenues of this business segment (representing the business of SMC) increased by approximately 39%, or $1.1 million, to $3.9were $1.8 million for the three months ended OctoberJuly 31, 20172020 compared with revenues of $2.8$1.9 million for the three months ended OctoberJuly 31, 2016, as SMC has been successful in increasing the revenues related to both outside premises and inside premises projects.2019. Cost of Revenues Due primarily toWith the substantial increase in consolidated revenues for the three months ended OctoberJuly 31, 20172020 compared with last year’s thirdsecond quarter, the corresponding consolidated cost of revenues also increased.increased between the quarters. These costs were $195.2$71.9 million and $138.9$60.1 million for the three months ended OctoberJuly 31, 20172020 and 2016, respectively. Gross2019, respectively, an increase of approximately 19.6%.
For the three months ended July 31, 2020, we reported a consolidated gross profit amountsof approximately $15.6 million which represented a gross profit percentage of approximately 17.9% of corresponding consolidated revenues. The gross profit for the three months ended OctoberJuly 31, 2017 and 2016 were $37.7 million and $36.6 million, respectively. Our overall gross profit percentage2020 was favorably impacted by the catch-up adjustment recorded by APC with the negotiation of 16.2% of consolidated revenues was lower inAmendment No. 2 to the current quarter compared to a percentage of 20.8% for the prior year quarter, which reflected the favorable achievement of contractual final completion of two natural gas-fired power plant projects last year. These achievements eliminated a number of significant risks and the related estimated costs associated with them, resulting in increased gross margins. The current quarter gross profit percentage reflected continued execution on the peak and post-peak construction activities of four natural gas-fired power plant projects of GPS. However, while all of these projects are progressing, certain of the natural gas-fired power plant projects have experienced increased labor and subcontractor costs to amounts greater than originally estimated. The increase in forecasted costs to complete these contracts and the corresponding reductionsTeesREP Project subcontract in the amount of forecasted gross margins resulted$4.2 million, which was partially offset by project-related charges in a reduction to consolidatedthe amount of $1.9 million, associated primarily with the unexpected complexity of APC’s works in the UK and the current year suspension and restart of construction activities. The potentially adverse effects on the craft labor costs of the TeesREP Project of the COVID-19 induced suspension of construction activities was substantially mitigated by cost reimbursement payments received directly from the federal government of the UK during the quarter ended July 31, 2020 in the amount of $3.2 million. Our gross profit being realized in the current quarter. The aggregate gross profit percentage of the combined revenues of TRC, APC and SMC increased between the periods.
22
Selling, General and Administrative Expenses
These costsreported for the three months ended OctoberJuly 31, 20172019 was $3.0 million, or 4.7% of corresponding consolidated revenues. Last year, the TeesREP Project loss recorded by APC for the quarter ended July 31, 2019 in the amount of $3.4 million had a significant unfavorable effect on our gross profit.
Selling, General and 2016 represented approximately 4.3%Administrative Expenses These costs were $9.1 million and 5.6%$10.0 million for the three months ended July 31, 2020 and 2019, respectively, representing 10.4% and 15.9% of consolidated revenues for the corresponding periods, respectively. In general,As disclosed earlier this year, we expect these costs, expressed as a percentage of corresponding revenues, to trend downward through the remaining quarters of Fiscal 2021 and next year, primarily driven by the expected increase in consolidated revenues over the same periods. The reduction in actual costs is reflective of a larger organization necessary to support increased operations and to expand into new markets. Income Tax Expense
Forbetween the quarter ended October 31, 2017, we recorded income tax expense of $12.1 million reflecting an estimated annual effective income tax rate of approximately 36.7% (before the tax effect of discrete items for the current quarter), or $10.8 million, the catch-up effect in the current quarter of increasing the estimated rate from 36.2%, or $0.4 million, and the unfavorable effect of discrete adjustments to the income tax provision for the current quarter in the net amount of $0.9 million. The estimated annual income tax rate is higher than the federal income tax rate of 35%quarters was due primarily to the estimated unfavorable effectincreased utilization of state income taxes, offset partiallystaff by GPS on the domestic production activities deduction.Guernsey EPC project.
Other Income For the three months ended OctoberJuly 31, 2016, we recorded2020 and 2019, the net amounts of other income were $0.5 million and $1.6 million, respectively, which represented a reduction of 72.5% between the comparable quarterly periods. The amounts reported for this line item reflect primarily investment income earned on funds maintained in a money market account and interest income earned on CDs. Although the aggregate amount of invested funds has increased between the quarters and since January 31, 2020, the significant drop in interest rates that has occurred during the COVID-19 pandemic has had a meaningfully adverse effect on the returns earned on our invested funds. Income Taxes We reported income tax expense for the three months ended July 31, 2020 in the amount of $8.2 million reflecting anapproximately $1.4 million. We estimate that our annual effective income tax rate (before the tax effect offor Fiscal 2021 before discrete items forwill approximate 25.8%. This tax rate differs from the prior quarter) estimated atstatutory federal tax rate of 21% due primarily to the time to be approximately 35.2%. The estimated unfavorable effect of state income taxes were substantially offset by the favorable effects of permanent differences relating to nondeductible travel and entertainment expenses, certain nondeductible executive compensation and interest income earned on our notes receivable from the estimated amounts of permanent differences. Income tax expense for the third quarter last year also reflected the treatment of the excessVIE. We reported an income tax benefits associated with the large number of stock options exercised during the quarter as discrete items which reduced income tax expense by $2.0 million. The current year estimated annual effective income tax rate is higher than the prior year estimated annual rate primarily due to a slight increase in the effective state tax rate as well as the significant decrease in the income tax impact of our joint ventures. 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. For financial reporting purposes, the excluded income amounts attributable to the joint venture partner are treated as permanent differences between income before income taxes and taxable income resulting in a favorable effect on our effective income tax rate. The net income attributable to non-controlling interests (the joint venture partner) last year was significant.
Net Income Attributable to Non-controlling Interests
As discussed in Note 3 to the accompanying condensed consolidated financial statements, we entered separate 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 captioned net income attributable to non-controlling interests included in the accompanying statements of earningsbenefit for the three months ended OctoberJuly 31, 20162019 in the amount of $1.2 million. Thereapproximately $6.4 million which primarily reflected the favorable tax impact of bad debt loss realized on loans made to APC from Argan, which were no amountsdetermined to be uncollectible. We did not record any income tax benefit related to the net loss reported by the subsidiary operations of net income attributable to non-controlling interestAPC located in the United Kingdom for the current quarter. The reduction in the amount between quarters primarily reflects the contractual completion of the projects last year, with the provision of warranty services being the primary remaining obligations of the joint ventures.quarter ended July 31, 2019.
Comparison of the Results of Operations for the NineSix Months Ended OctoberJuly 31, 20172020 and 20162019 We reported net income attributable to our stockholders of $65.0$4.8 million, or $4.11$0.31 per diluted share, for the ninesix months ended OctoberJuly 31, 2017.2020. For the ninesix months ended OctoberJuly 31, 2016,2019, we reported a comparable net incomeloss amount of $50.0$28.6 million, or $3.23$1.84 per diluted share. 23
The following schedule compares our operating results for the ninesix months ended OctoberJuly 31, 20172020 and 20162019 (dollars in thousands).: | | Nine Months Ended October 31, | | | | | 2017 | | 2016 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | | | Six Months Ended July 31, | | | | | 2020 | | 2019 | | $ Change | | % Change | | REVENUES | | | | | | | | | | | | | | | | | | | | | | Power industry services | | $ | 662,131 | | $ | 402,615 | | $ | 259,516 | | 64.5 | % | | $ | 117,651 | | $ | 48,093 | | $ | 69,558 | | 144.6 | % | Industrial fabrication and field services | | 50,203 | | 59,287 | | (9,084 | ) | (15.3 | ) | | | 26,433 | | | 60,299 | | | (33,866) | | (56.2) | | Telecommunications infrastructure services | | 10,903 | | 6,385 | | 4,518 | | 70.8 | | | | 3,556 | | | 4,211 | | | (655) | | (15.6) | | Revenues | | 723,237 | | 468,287 | | 254,950 | | 54.4 | | | | 147,640 | | | 112,603 | | | 35,037 | | 31.1 | | COST OF REVENUES | | | | | | | | | | | | | | | | | | | | | | Power industry services | | 540,986 | | 302,140 | | 238,846 | | 79.1 | | | | 101,320 | | | 73,432 | | | 27,888 | | 38.0 | | Industrial fabrication and field services | | 44,634 | | 52,491 | | (7,857 | ) | (15.0 | ) | | | 23,878 | | | 53,799 | | | (29,921) | | (55.6) | | Telecommunications infrastructure services | | 8,396 | | 4,764 | | 3,632 | | 76.2 | | | | 2,803 | | | 3,433 | | | (630) | | (18.4) | | Cost of revenues | | 594,016 | | 359,395 | | 234,621 | | 65.3 | | | | 128,001 | | | 130,664 | | | (2,663) | | (2.0) | | GROSS PROFIT | | 129,221 | | 108,892 | | 20,329 | | 18.7 | | | GROSS PROFIT (LOSS) | | | | 19,639 | | | (18,061) | | | 37,700 | | NM | | Selling, general and administrative expenses | | 30,408 | | 24,429 | | 5,979 | | 24.5 | | | | 19,429 | | | 19,626 | | | (197) | | (1.0) | | Impairment loss | | — | | 1,979 | | (1,979 | ) | (100.0 | ) | | | — | | | 2,072 | | | (2,072) | | (100.0) | | INCOME FROM OPERATIONS | | 98,813 | | 82,484 | | 16,329 | | 19.8 | | | INCOME (LOSS) FROM OPERATIONS | | | | 210 | | | (39,759) | | | 39,969 | | NM | | Other income, net | | 4,221 | | 1,283 | | 2,938 | | 229.0 | | | | 1,539 | | | 3,894 | | | (2,355) | | (60.5) | | INCOME BEFORE INCOME TAXES | | 103,034 | | 83,767 | | 19,267 | | 23.0 | | | Income tax expense | | 37,738 | | 27,122 | | 10,616 | | 39.1 | | | NET INCOME | | 65,296 | | 56,645 | | 8,651 | | 15.3 | | | Net income attributable to non-controlling interests | | 303 | | 6,668 | | (6,365 | ) | (95.5 | ) | | NET INCOME ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC. | | $ | 64,993 | | $ | 49,977 | | $ | 15,016 | | 30.0 | % | | INCOME (LOSS) BEFORE INCOME TAXES | | | | 1,749 | | | (35,865) | | | 37,614 | | NM | | Income tax benefit | | | | 3,057 | | | 6,932 | | | (3,875) | | (55.9) | | NET INCOME (LOSS) | | | | 4,806 | | | (28,933) | | | 33,739 | | NM | | Net loss attributable to non-controlling interests | | | | (40) | | | (287) | | | 247 | | 86.1 | | NET INCOME (LOSS) ATTRIBUTABLE TO | | | | | | | | | | | | | | THE STOCKHOLDERS OF ARGAN, INC. | | | $ | 4,846 | | $ | (28,646) | | $ | 33,492 | | NM | |
N/M – Not meaningful. Revenues Power Industry Services The revenues of the power industry services business increased by 65%144.6%, or $259.5$69.6 million, to $662.1$117.7 million for the ninesix months ended OctoberJuly 31, 20172020 compared with revenues of $402.6$48.1 million for the ninesix months ended OctoberJuly 31, 2016.2019, primarily due to the increasing revenues associated with the construction of the Guernsey Power Station. The revenues of this business represented approximately 92%79.7% of consolidated revenues for the current nine-monthsix-month period ended July 31, 2020 and approximately 86%42.7% of consolidated revenues for the correspondingcomparable prior year period. The increase in revenues for the power industry services segment primarily reflected the ramped-up, peak and post-peak construction activities ofGPS reached substantial completion on four natural gas-fired power plant construction projects late in Fiscal 2019 and concluded activities on a fifth gas-fired power plant in the first quarter of Fiscal 2020. As a result, the revenues of GPS declined substantially for the six months ended July 31, 2019 due to the lack of any meaningful EPC project activity. Conversely, the revenues of APC declined for the six months ended July 31, 2020 from the amount of revenues recognized during the six months ended July 31, 2019, which represented approximately 87%the majority of revenues for this segment last year, due primarily to the suspension of work on the TeesREP Project and the postponement of Irish works in response to the COVID-19 pandemic during the current year. Industrial Fabrication and Field Services The revenues of industrial fabrication and field services (representing the business of TRC) provided 17.9% of consolidated revenues for the current nine-month period. Last year, the combined revenues associated with these four projects, which were all in their earlier phases, represented approximately 62% of consolidated revenues for the ninesix months ended OctoberJuly 31, 2016. Construction activity related to two other natural-gas fired power plant projects that were completed last year represented 20% of consolidated revenues for the nine months ended October 31, 2016. Industrial Fabrication and Field Services
The2020, which reflected a reduction in revenues of the industrial fabrication and field services segment decreased by 15%$33.9 million, or 56.2%, or $9.1to $26.4 million compared to $50.2revenues of $60.3 million for the ninesix months ended OctoberJuly 31, 2017 compared with2019. With the completion of several large projects last year, the low level of activity on projects affected TRC’s revenues most unfavorably during the first quarter of the current year. However, as discussed above, the quarterly revenues of $59.3 million for the nine months ended October 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 completedshowed meaningful recovery during the nine months ended Octobersecond quarter as customers have begun to resume normal plant operations and commence projects suspended earlier this year due to the COVID-19 pandemic. New project awards have increased TRC’s current project backlog to approximately $37.4 million as of July 31, 2016.2020 from $14.0 million at January 31, 2020.
Telecommunications Infrastructure Services The revenues of this business segment increased by approximately 71%, or $4.5 million, to $10.9(representing the business of SMC) were $3.6 million for the ninesix months ended OctoberJuly 31, 20172020 compared with revenues of $6.4$4.2 million for the ninesix months ended OctoberJuly 31, 2016, as SMC has been successful in increasing the revenues related to both outside premises, including $4.7 million related to a fiber-to-the-home project for a municipal customer, and inside premises projects.2019. 24
Cost of Revenues Due primarily toDespite the substantial increase in consolidated revenues for the ninesix months ended OctoberJuly 31, 20172020 compared with last year’s comparablecorresponding period, the corresponding consolidated cost of revenues also increased.decreased between the periods, but only by 2.0%. These costs were $594.0$128.0 million, represented substantially by projects costs incurred on the Guernsey Power Station, and $359.4$130.7 million, represented substantially by project costs incurred by TRC and APC, for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, respectively. GrossLast year, our cost of revenues included a charge in the amount of $7.7 million in connection with the establishment of the TeesREP subcontract loss reserve on the books of APC.
For the six months ended July 31, 2020, we reported a consolidated gross profit amounts for the corresponding nine-month periods were $129.2of approximately $19.6 million and $108.9 million, respectively. Our overallwhich represented a gross profit percentage of 17.9%approximately 13.3% of corresponding consolidated revenues, was lower inand which reflected the net favorable effect of the adjustments recorded by APC during the current period compared to a percentage of 23.3% for the prior year nine-month period, which primarily reflected the favorable achievement of the contractual final completion of two power plant projectsquarter as identified above. Current period gross profit percentages substantially reflected continued execution of construction activities on four EPC natural gas-fired power plant projects of GPS and the gross margin reduction realized in the current quarter that is discussed above. The aggregateDespite these items, the consolidated gross profit percentage for the six months ended July 31, 2020 was adversely affected by the low level of revenues reported by TRC and the combined revenuesIrish operations of TRC,APC. The loss incurred by APC and SMC increased betweenon the periods.TeesREP project in the amount of $30.9 million for the six months ended July 31, 2019 had a significant unfavorable effect on the Company’s gross profit, which was the primary factor in our reporting a consolidated gross loss for the six-month period in the amount of $18.1 million. Selling, General and Administrative Expenses These costs were $30.4$19.4 million and $24.4$19.6 million for the ninesix months ended OctoberJuly 31, 20172020 and 2016,2019, respectively, representing approximately 4.2%13.2% and 5.2%17.4% of consolidated revenues for the corresponding periods, respectively. Approximately $3.8 millionThe amount for the six months ended July 31, 2020 reflected the costs of maintaining intact the key staff organizations at corporate headquarters, GPS, TRC and SMC during the COVID-19 pandemic. We expect these costs, expressed as a percentage of corresponding consolidated revenues, to trend downward through the remaining quarters of Fiscal 2021 and next year, primarily driven by the expected increase in consolidated revenues over the same periods. Last year, selling, general and administrative expenses included the costs of maintaining core members of the increase betweenoperations staff at GPS, before the periodsstart-up of new EPC projects, whose time is typically charged to active projects to a greater degree. Impairment Loss APC recorded a substantial loss on the TeesREP Project during the first quarter last year. We considered the recognition of a contract loss of this magnitude to be an event triggering a re-assessment of the goodwill which resulted in our conclusion that the remaining balance was due to an overall increase in incentive compensation costs and salary expense. In addition, stock option compensation expense for the nine months ended October 31, 2017 increased by approximately $1.8 million between the periods, driven primarily by the increased market price of our common stock. Impairment Loss
Last year, the revenues of APC declined and it reported operating losses. 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 pound sterling drop, financial market uncertainty and recessionary pressures were thought to likely impact the availability of financing for future power plant developments. Given these circumstances at the time, analyses were performed mid-year in order to determine whetherimpaired. Accordingly, an impairment loss related to goodwill had been incurred. Using income and market approaches,was recorded in the assessment analysis indicated thatamount of $2.1 million which is reflected in our consolidated operating results for the carrying value of the business exceeded its fair value. As a result, APC recorded an impairment loss during the ninesix months ended OctoberJuly 31, 2016 of approximately $2.0 million.2019.
Other Income Tax Expense For the ninesix months ended OctoberJuly 31, 2017, we2020 and 2019, the net amounts of other income were $1.5 million and $3.9 million, respectively, which represented a reduction of 60.5% between the comparable periods. Although the aggregate amount of invested funds has increased between the comparable periods and since January 31, 2020, the significant drop in interest rates that has occurred during the COVID-19 pandemic has had a meaningful adverse effect on the returns earned on our temporarily invested funds. Income Taxes We recorded an income tax expensebenefit for the six months ended July 31, 2020 in the amount of $37.7approximately $3.1 million, reflectingwhich reflected primarily the estimatednet operating loss carryback benefit in the approximate amount of $4.3 million that is discussed in the following paragraph. In a response to the COVID-19 health crisis, the US Congress passed the CARES Act that was signed into law on March 27, 2020. This wide-ranging legislation was enacted as an emergency economic stimulus package including spending and tax breaks aimed at strengthening the US economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19. The CARES Act has provided many opportunities for taxpayers to evaluate their 2018 and 2019 income tax returns to identify potential tax refunds. One such area is the utilization of NOLs. The tax changes of the CARES Act removed the limitations on the future utilization of certain NOLs and re-established a carryback period for certain losses to five years. The losses eligible for carryback under the CARES Act include our consolidated NOL for Fiscal 2020, which was approximately $39.5 million. Substantially all of this loss now may be carried back for application against our taxable income for the year ended January 31, 2015. This provides a favorable rate benefit for us as the loss, which was incurred in a year where the statutory federal tax rate was 21%, will be carried back to a tax year where the tax rate was higher. We estimate that our annual effective income tax rate of approximately 36.7% (before the income tax effect offor Fiscal 2021 before discrete items forwill approximate 25.8%. This tax rate differs from the current period) that is identified above. The net favorable effect of discrete items on income tax expense for the nine months ended October 31, 2017 was not significant. For the nine months ended October 31, 2016, we recorded income tax expense of $27.1 million reflecting an estimated annual effective incomestatutory federal tax rate of approximately 35.2%. In addition,21% due primarily to the net effectunfavorable effects of discrete items last year reducedcertain permanent differences as discussed above.
We recorded an income tax expense by $2.4 millionbenefit for the period primarily due to the treatment of the excess income tax benefits associated with the large number of stock options exercised during the period as discrete items. Net Income Attributable to Non-controlling Interests
Our joint venture partner’s share amounts of the earnings of the construction joint ventures were $0.3 million and $6.7 million, respectively. The reductionsix months ended July 31, 2019 in the amount between periodsof approximately $6.9 million which primarily reflected the contractual completiontax benefit of the projects last year. Current year activity relatesloss incurred by our domestic operations. We did not record any income tax benefit related to changes in estimated costs to fulfill warranty obligations.the net loss reported by APC’s UK operations for the period.
Liquidity and Capital Resources as of OctoberJuly 31, 20172020 As of OctoberAt July 31 2017 and January 31, 2017,2020, our balances of cash and cash equivalents were $149.7$382.4 million and $167.2$167.4 million, respectively. During this same period, our working capital increaseddecreased by $54.3$7.7 million to $291.5$270.0 million as of OctoberJuly 31, 20172020 from $237.2$277.7 million as of January 31, 2017.2020.
The net amount of cash provided by operating activities for the six months ended July 31, 2020 was $102.9 million. Our net income for the six months ended July 31, 2020, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $18.3 million. However, the sources of cash from operations for the current year period included primarily a temporary increase in the balance of contract liabilities associated with the early phases of the Guernsey Power Station construction and new project awards at TRC in the amount of $83.3 million. Reductions in the balances of accounts receivable and contract assets, primarily at the TRC and APC operations, provided cash in the amounts of $7.5 million and $6.9 million, respectively. In addition, the combined level of accounts payable and accrued expenses increased by $4.7 million during the six months ended July 31, 2020, a source of cash for the period. As discussed above, our income tax accounting for the six months ended July 31, 2020 reflects an entry to record the carryback of our net operating loss incurred for the year ended January 31, 2020 to our tax year ended January 31, 2015. The loss carryback should result in a refund of federal income taxes in the amount of $12.6 million. This tax refund receivable has been included in the balance of other current assets as of July 31, 2020, which was the primary cause of the increase in this balance of $17.8 million during the period, a use of cash. Another primary source of cash for the six months ended July 31, 2020 was the net maturities of short-term investments, certificates of deposit issued by the Bank, in the amount of $135.0 million. Non-operating activities used cash during the six months ended July 31, 2020, including the payment of regular and special cash dividends in the total amount of $23.5 million. During the six-month period ended July 31, 2020, capital expenditures were reduced by approximately 62.8% to $1.1 million from a capital expenditures amount of $3.0 million for the six months ended July 31, 2019. Partially offsetting these uses of cash, we received cash proceeds related to the exercise of stock options during the six months ended July 31, 2020 in the amount of $0.7 million. As of July 31, 2020, there were no restrictions with respect to inter-company payments from GPS, TRC, APC or SMC to the holding company. However, during the prior year, certain loans made by Argan to APC were determined to be uncollectible. Last year, the net amount of cash used by operating activities for the ninesix months ended OctoberJuly 31, 20172019 was $22.7$53.2 million. Even thoughOur net incomeloss for the period, includingoffset partially by the favorable adjustments related to non-cash income and expense items, providedused cash in the total amount of $71.7 million, cash use exceeded this amount primarily due$29.6 million. Due substantially to our four major EPC projects. Because these projects are well past the peak of their respective milestone billing schedules, we experienced net decreasesincreased activity at TRC last year, accounts receivable increased during the period in the amounts of billings on current projects in excess of corresponding costs and estimated earnings, which representedsix months ended July 31, 2019, representing a use of cash in the amount of $69.4$9.8 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 increasedThe Company also used cash during the ninesix months ended OctoberJuly 31, 2017, which represented a use of cash2019 in the amount of $31.5 million. On$16.4 million to reduce the other hand, we experienced a net increase during the period in the amountslevel of accounts payable and accrued expenses, which representedexpenses. The net balance of contract assets and liabilities did not change materially during the six-month period ended July 31, 2019. Due primarily to the receipt of refunds of excess estimated income tax payment amounts, the balance of other assets decreased by $2.7 million during the six months ended July 31, 2019, a source of cash in the amount of $5.6 million.cash. OurThe primary source of this cash required to fund operations during the ninesix months ended OctoberJuly 31, 20172019 was the net maturity of CDsshort-term investments in the amount of $22.5$69.0 million. In addition,Cash proceeds in the amount of $1.6 million were received from the exercise of stock options to purchase 90,500 shares of our common stock provided us withduring the six-month period ended July 31, 2019. Non-operating activities used cash proceeds induring the approximate amount of $2.8 million. Non-operating activity cash uses includedsix months ended July 31, 2019, including primarily the declaration and payment of a quarterly cash dividend of $15.5 million during the current period, and we also used cash as our consolidated joint ventures made distributions to our joint venture partnerdividends in the total amount of $1.2$7.8 million. OurAs indicated above, our operating subsidiaries used cash during the currentsix-month period ended July 31, 2019 in the amount of $4.0$3.0 million forto fund capital expenditures.
During the nine months ended OctoberAt July 31, 2016,2020, most of our combined balance of cash and cash equivalents increasedwas invested in a money market fund with most of its total assets invested in cash, US Treasury obligations and repurchase agreements secured by $9.9 million to $170.8 million as of October 31, 2016 from a balance of $160.9 million as of January 31, 2016. During this same period,US Treasury obligations. The major portion our working capital increased by $46.5 million to $209.4 million as of October 31, 2016 from $162.9 million as of January 31, 2016. Net income fordomestic operating bank account balances are maintained with the nine months ended October 31, 2016, including the favorable adjustments related to noncash expense items, provided cashBank. We do maintain certain Euro-based bank accounts in Ireland and certain pound sterling-based bank accounts in the total amountUK in support of $60.8 million. In addition, we experienced a net decreasethe operations of $21.3 million in accounts receivable during the period primarily due to the receipt of retainages on two other natural gas-fired power plant projects as we achieved final completion during the prior year period. We had a net increase of $54.6 million in the amount of billings on current projects that temporarily exceeded the corresponding amounts of costs and estimated earnings, which primarily reflected the early-stage activities of GPS on its four significant EPC contracts which were new at that time. Our net accounts payable and accrued expenses were also impacted with increased early-stage activities related to several of our subcontractors and suppliers, increasing this balance by $50.1 million during the nine months ended October 31, 2016. Primarily due to these factors, the net amount of cash provided by operating activities for the nine-month period ended October 31, 2016 was $185.3 million. The exercise of stock options during the prior year nine-month period provided us with cash proceeds in the amount of $11.0 million.APC.
Our primary use of this cash during the nine months ended October 31, 2016 was the net purchase of CDs in the amount of $161.0 million. Other non-operating activity cash uses during the prior year period included the declaration and payment of a cash dividend of $15.3 million and the distribution of cash to our joint venture partner in the total amount of $7.5 million. Our operating subsidiaries used cash during the prior year period in the amount of $2.5 million for capital expenditures. On May 15, 2017, we entered into the Credit Agreement, withwhich expires on May 31, 2021, includes the Bank as the lender, which replacedfollowing features, among others: a predecessor agreement by modifying its features to, among other things:
· increase the Bank’s lending commitment amount from $10 million to $50of $50.0 million including a revolving loan with interest at the 30-day LIBOR plus 2.00%;
· add2.0%, and an accordion feature which allows for an additional commitment amount of $10$10.0 million, subject to certain conditions; and
· extendconditions. We may use the maturity date three years from Mayborrowing ability to cover other credit instruments issued by the Bank for our use in the ordinary course of business as defined by the Bank. At July 31, 2018 to May 31, 2021, which effectively provided a four-year2020, we had $1.7 million of outstanding letters of credit commitment.
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Asissued under the Credit Agreement. However, we had no outstanding borrowings. Additionally, in connection with the predecessor agreement, wecurrent project development activities by a VIE, the Bank issued a letter of credit, outside the scope of the Credit Agreement, in the approximate amount of $3.4 million for which the Company has provided cash collateral.
We have pledged the majority of our assets to secure the 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 will continue to requireCredit Agreement requires that we comply with certain financial covenants at our fiscal year-end and at each of our fiscal quarter-ends. The Credit Agreementquarter-end, and includes other terms, covenants and events of default that are customary for a credit facility of its size and nature. As of OctoberAt July 31 2017 and January 31, 2017,2020, we were compliant with the financial covenants of the Credit AgreementAgreement. In the normal course of business and predecessor agreement, respectively.for certain major projects, we may be required to obtain surety or performance bonding, to provide parent company guarantees, or to cause the issuance of letters of credit (or some combination thereof) in order to provide performance assurances to clients on behalf of one of our contractor subsidiaries. For certain projects, we are required by project owners to provide guarantees related to our services or work. If our services under a guaranteed project would not be completed or would be determined to have resulted in a material defect or other material deficiency, then we could be responsible for monetary damages or other legal remedies. Certain project owners may request that we obtain surety bonds for their benefit in connection with EPC services contract performance obligations. As is typically required by any surety bond, the Company would be obligated to reimburse the issuer of any surety bond issued on behalf of a subsidiary for any cash payments made thereunder. The commitments under performance bonds generally end concurrently with the expiration of the related contractual obligation. Not all of our projects require bonding. On behalf of APC, Argan has provided a parent company performance guarantee to its customer, the EPC services contractor on the TeesREP Project. During the quarter ended July 31, 2020 and in connection with the negotiation of Amendment No. 2, the Company replaced an outstanding letter of credit in the amount of $7.6 million with a surety bond as the support for the parent company performance guarantee (see Note 7 to the accompanying condensed consolidated financial statements). As of July 31, 2020, the revenue value of the Company’s unsatisfied bonded performance obligations was less than the value of RUPO disclosed in Note 2 to the accompanying condensed consolidated financial statements. In addition, as of July 31, 2020, there were bonds outstanding in the aggregate amount of approximately $64.4 million covering other risks including warranty obligations related to projects completed by GPS; these bonds expire at various dates during the years ending January 31, 2021 and 2022. When sufficient information about claims related to our performance on projects would be available and monetary damages or other costs or losses would be determined to be probable, we would record such guaranteed losses. As our subsidiaries are wholly-owned, any actual liability related to contract performance is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. Any amounts that we may be required to pay in excess of the estimated costs to complete contracts in progress as of July 31, 2020 are not estimable. We may use the borrowing abilityhave also provided a financial guarantee on behalf of GPS to cover other credit issued by the Bank for our usean original equipment manufacturer in the ordinary courseamount of business. As of October 31, 2017, we had approximately $14.9$3.6 million of credit outstanding under the Credit Agreement although we had no outstanding borrowings. At October 31, 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 United States Treasury obligations. Most of our domestic operating bank accounts are maintained with the Bank. We do maintain certain Euro-based bank accountsto support project developmental efforts which resulted in the Republicaward of Ireland and insignificant bank accounts in other countries in support of the operations of APC.an EPC services contract to GPS.
We believe that cash on hand, cash that will be provided from the remaining 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. For the six months ended July 31, 2020, to assure an optimum level of liquidity during this period of uncertainty and to mitigate the market risks represented by the COVID-19 pandemic, management decided to temporarily maintain larger balances of cash and cash equivalents relative to short-term investments with minimal opportunity cost. In particular,general, we maintain significant liquid capital on our balance sheet to help ensure our ability to maintain and obtain bonding capacity for current and futureto provide parent company performance guarantees for 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)(“EBITDA”) We 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. The following tables present the determinations of EBITDA for the three and nine months ended October 31, 2017 and 2016, respectively (amounts in thousands).
| | Three Months Ended October 31, | | | | 2017 | | 2016 | | Net income, as reported | | $ | 17,229 | | $ | 19,226 | | Income tax expense | | 12,062 | | 8,194 | | Depreciation | | 726 | | 525 | | Amortization of purchased intangible assets | | 258 | | 232 | | EBITDA | | 30,275 | | 28,177 | | Less EBITDA attributable to non-controlling interests | | — | | 1,153 | | EBITDA attributable to the stockholders of Argan, Inc. | | $ | 30,275 | | $ | 27,024 | |
| | Nine Months Ended October 31, | | | | 2017 | | 2016 | | Net income, as reported | | $ | 65,296 | | $ | 56,645 | | Income tax expense | | 37,738 | | 27,122 | | Depreciation | | 1,936 | | 1,444 | | Amortization of purchased intangible assets | | 776 | | 752 | | EBITDA | | 105,746 | | 85,963 | | Less EBITDA attributable to non-controlling interests | | 303 | | 6,668 | | EBITDA attributable to the stockholders of Argan, Inc. | | $ | 105,443 | | $ | 79,295 | |
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As Further, we believe that our net cash flow providedEBITDA is widely used by operations is the most directly comparable performanceinvestors and analysts as a measure determined in accordance with US GAAP, the following table reconciles the amounts of EBITDA for the applicable periods,performance.
However, as presented above, to the corresponding amounts of net cash flows (used in) provided by operating activities that are presented in our condensed consolidated statements of cash flows for the nine months ended October 31, 2017 and 2016 (amounts in thousands). | | Nine Months Ended October 31, | | | | 2017 | | 2016 | | EBITDA | | $ | 105,746 | | $ | 85,963 | | Current income tax expense | | (37,263 | ) | (28,815 | ) | Impairment loss | | — | | 1,979 | | Stock option compensation expense | | 3,573 | | 1,774 | | Other noncash items | | (317 | ) | (119 | ) | (Increase) decrease in accounts receivable | | (31,453 | ) | 21,304 | | (Decrease) increase in billings in excess of costs and estimated earnings, net | | (69,383 | ) | 54,558 | | Decrease (increase) in prepaid expenses and other assets | | 758 | | (1,432 | ) | Increase in accounts payable and accrued expenses | | 5,600 | | 50,099 | | Net cash (used in) provided by operating activities | | $ | (22,739 | ) | $ | 185,311 | |
As EBITDA is not a measure of performance calculated in accordance with US 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.
The following table presents the determinations of EBITDA for the three and six months ended July 31, 2020 and 2019, respectively (amounts in thousands): | | | | | | | | | Three Months Ended | | | July 31, | | | 2020 | | 2019 | Net income, as reported | | $ | 5,599 | | $ | 980 | Income tax expense (benefit) | | | 1,397 | | | (6,411) | Depreciation | | | 921 | | | 882 | Amortization of purchased intangible assets | | | 226 | | | 293 | EBITDA | | | 8,143 | | | (4,256) | EBITDA of non-controlling interests | | | (10) | | | (174) | EBITDA attributable to the stockholders of Argan, Inc. | | $ | 8,153 | | $ | (4,082) |
| | | | | | | | | Six Months Ended | | | July 31, | | | 2020 | | 2019 | Net income (loss), as reported | | $ | 4,806 | | $ | (28,933) | Income tax benefit | | | (3,057) | | | (6,932) | Depreciation | | | 1,858 | | | 1,711 | Amortization of purchased intangible assets | | | 451 | | | 592 | EBITDA | | | 4,058 | | | (33,562) | EBITDA of non-controlling interests | | | (40) | | | (287) | EBITDA attributable to the stockholders of Argan, Inc. | | $ | 4,098 | | $ | (33,275) |
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, 2020 and 2019 (amounts in thousands). | | | | | | | | | Six Months Ended | | | July 31, | | | 2020 | | 2019 | EBITDA | | $ | 4,058 | | $ | (33,562) | Current income tax benefit | | | 11,593 | | | 210 | Stock option compensation expense | | | 1,414 | | | 926 | Impairment loss | | | — | | | 2,072 | Other non-cash items | | | 1,192 | | | 724 | Decrease (increase) in accounts receivable | | | 7,532 | | | (9,835) | (Increase) decrease in other assets | | | (17,781) | | | 2,722 | Increase (decrease) in accounts payable and accrued expenses | | | 4,714 | | | (16,445) | Change in contracts in progress, net | | | 90,179 | | | 24 | Net cash provided by (used in) operating activities | | $ | 102,901 | | $ | (53,164) |
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 purpose 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 arriving at 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, andthe 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. We consider the accounting policies related to revenue recognition on long-term construction contracts; income tax reporting; the accounting for business combinations; the subsequent valuation of goodwill, other indefinite-lived assets and long-lived assets; the valuation of employee common stock-based awards; and the financial reporting associated with any significant claims or 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 purpose entities including joint ventures and variable interest entities. 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, 2017.Report. During the nine-monthsix-month period ended OctoberJuly 31, 2017,2020, there have been no material changes in the way we apply the critical accounting policies described therein. Recently Issued Accounting Pronouncements Note 2In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which, among other changes, eliminates the exception to the accompanying condensed consolidated financial statements presents descriptionsgeneral methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the expected loss for the entire year. In these instances, the estimated annual effective income tax rate shall be used to calculate the tax without limitation. The new standard also requires the recognition of pending accounting pronouncements issueda franchise (or similar) tax that is partially based on income as an income-based tax and the recording of any incremental tax that is incurred by the FASB that are relevant to our future financial reporting. These include Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which was issued in May 2014 and which has been amended multiple times, ASU 2016-02, Leases, which was issued in February 2016 and ASU 2017-04, Intangibles — Goodwill and Other: Simplifying the Testus as a non-income based tax. The requirements of this new guidance, effective for Goodwill Impairment. ASU 2014-09 represents an effort to create a new, principles-based revenue recognition framework for all companies that will be adopted by us on February 1, 2018.2021, are not expected to alter our accounting for income taxes.
In 2016, the FASB also issued ASU 2016-02,2016-13, Measurement of Credit Losses on Financial Instruments. The requirements of this new standard cover, among other provisions, the methods that businesses shall use to estimate amounts of credit losses. As subsequently amended, the adoption of this new guidance, which will be adopted bybecame effective for us on February 1, 2019, will require the recognition on the balance sheet of all operating leases with terms greater than one year.2020, did not affect our consolidated financial statements. There are no other recently issued accounting pronouncements that have not yet been adopted that we consider material to our consolidated financial statements. As required for us, we adopted ASU 2017-04 removes the second step in the goodwill impairment test, and we intend to use the new guidance, if applicable, for our annual testing 2016-02, Leases, as of NovemberFebruary 1, 2017.2019. 28
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 OctoberJuly 31, 2017,2020, we had no outstanding borrowings under our financing arrangements with the Bank (see Note 86 to the accompanying condensed consolidated financial statements), which providesprovide a revolving loan with a maximum borrowing amount of $50$50.0 million that is available until May 31, 2021 with interest at 30-day LIBOR plus 2.00%2.0%. As of OctoberDuring the six months ended July 31, 2017, our balance of short-term investments, which consisted entirely of CDs, was $333 million (excluding accrued interest) with a weighted average initial maturity term of 269 days. This exposes2020 and 2019, we did not enter into derivative financial instruments for trading, speculation or other purposes that would expose us to market risk. Financial markets around the globe are preparing for the discontinuation of LIBOR at the end of 2021 as the widely used indicator of basis for short-term lending rates. The transition from LIBOR is market-driven, not a certainchange required by regulation. The US and other countries are currently working to replace LIBOR with alternative reference rates. We do not expect that the replacement of LIBOR as the basis for the determination of our short-term borrowing rate will have significant effects on the financial arrangements with the Bank or our financial reporting. We maintain a substantial amount of risk should interest rates suddenly rise. However, we believe that this risk is minimal, and mitigated somewhat byour temporarily investable funds in a money market account (see Note 3 of the manner in which we have scheduled the future maturity dates. As of October 31, 2017, the weighted average interest rate on our CDs was 1.36%. The accompanying condensed consolidated financial statements are presentedstatements). The balance of these funds, which was included in US Dollars. The financial results reported by APCcash and includedcash equivalents in our condensed consolidated financial statementsbalance sheet as of July 31, 2020, was $298.8 million with earnings based on an annual yield of 0.05%. The significant drop in interest rates during the six months ended July 31, 2020 has caused a significant reduction in the investment returns earned on these funds by us. At January 31, 2020, our money market funds were providing earnings based on an annual yield of 1.49%.
With the consolidation of APC, we are affected by foreign currency volatility. Thesubject to the effects of translating the financial statements of APC from its functional currency (Euros) into the Company’sour reporting currency (US Dollars)dollars). Such effects are recognized as translation adjustments in accumulated other comprehensive loss. Whenloss, which is net of tax when applicable. APC remeasures transactions and subsidiary financial statements denominated in local currencies to Euros. Gains and losses on the US Dollar depreciates against the Euro, the reported assets, liabilities, revenues, costs and earnings of APC, after translation into US Dollars,remeasurements are greater than what they would have been had the value of the US Dollar appreciated against the Euro or if there had been no changerecorded in the exchange rate. During the nine-month period ended October 31, 2017, the US Dollar depreciated against the Euro. 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 thoseincome line 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. We incurred a net foreign currency transaction loss for the nine months ended October 31, 2017 that was insignificant.condensed consolidated statements of earnings.
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 or fuel.these commodities. 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 of 1934 (the “Exchange Act”)) as of OctoberJuly 31, 2017.2020. 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 OctoberJuly 31, 2017,2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at theto provide reasonable assurance level.that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC, and the material information related to the Company and its consolidated subsidiaries is made known to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure in the reports. 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 OctoberJuly 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II PART II
ITEM 1. LEGAL PROCEEDINGS Included in Note 98 to the condensed consolidated financial statements that are included in Item 1 of Part I of this Quarterly Report on Form 10-Q is athe discussion of the status of a specific legal proceedings for the nine-month period ended Octoberproceeding as of July 31, 2017.2020. In the normal course of business, the Companywe 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. 29
ITEM 1A.RISK FACTORS There have been no material changes from ourto the risk factors as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2017.Report. ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS NoneOn June 24, 2020, we made a filing on Current Report Form 8-K announcing that our board of directors authorized the repurchase of up to $25.0 million of our issued and outstanding common stock through June 2022 (the “Repurchase Plan”). The repurchases may occur in the open market, through investment banking institutions, privately-negotiated transactions, or direct purchases, and the timing and amount of stock repurchased will depend on market and business conditions, applicable legal and credit requirements and other corporate considerations. To date, there have not been any purchases made under the Repurchase Plan.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES None ITEM 4.MINE SAFETY DISCLOSURES (not applicable to us)applicable) ITEM 5.OTHER INFORMATION None ITEM 6.EXHIBITS Exhibit No.
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| Title
| Exhibit No. | | | Exhibit 10.1
| | Separation Agreement, dated as of November 7, 2017, by and between Daniel L. Martin and Gemma Power Systems, LLC, its subsidiaries and affiliate entities and its parent company, Argan, Inc.Title
| Exhibit 31.1 | | Certification of Chief Executive Officer, pursuant to Rule 13a-14(c) under the Securities Exchange Act of 19341934. | Exhibit 31.2 | | Certification of Chief Financial Officer, pursuant to Rule 13a-14(c) under the Securities Exchange Act of 19341934. | Exhibit 32.1 | | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 13501350. * | Exhibit 32.2 | | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 13501350. * | | | | Exhibit 101.INS#101: Exhibit 101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Exhibit 101.SCH#101.SCH | | Inline XBRL Schema DocumentTaxonomy Extension Schema. | Exhibit 101.CAL#101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentLinkbase. | Exhibit 101.LAB#101.LAB | | Inline XBRL Labels Linkbase DocumentTaxonomy Label Linkbase. | Exhibit 101.PRE#101.PRE | | Inline XBRL Taxonomy Presentation Linkbase DocumentLinkbase. | Exhibit 101.DEF#101.DEF | | Inline XBRLTaxonomy Extension Definition Document. | Exhibit 104 | | Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL Definition Linkbase Documenttags are embedded within the Inline XBRL document. |
* | The certification is being furnished and shall not be considered filed as part of this report. |
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SIGNATURES 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.
| | | ARGAN, INC. | | | | December 6, 2017September 9, 2020
| By: | /s/ Rainer H. Bosselmann | | | Rainer H. Bosselmann | | | Chairman of the Board and Chief Executive Officer | | | | | | December 6, 2017September 9, 2020
| By: | /s/ David H. Watson | | | David H. Watson | | | Senior Vice President, Chief Financial Officer, | | | Treasurer and Secretary |
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