| | 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,”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, $0.15 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: 15,548,71913,318,653 shares as of DecemberSeptember 1, 2017.2023.
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 | | Six Months Ended | | | | July 31, | | July 31, | | | | 2023 | | 2022 | | 2023 | | 2022 | | REVENUES | | $ | 141,349 | | $ | 118,110 | | $ | 245,024 | | $ | 218,387 | | Cost of revenues | | | 117,607 | | | 93,723 | | | 207,058 | | | 174,262 | | GROSS PROFIT | | | 23,742 | | | 24,387 | | | 37,966 | | | 44,125 | | Selling, general and administrative expenses | | | 10,501 | | | 10,984 | | | 21,092 | | | 21,559 | | INCOME FROM OPERATIONS | | | 13,241 | | | 13,403 | | | 16,874 | | | 22,566 | | Other income, net | | | 4,118 | | | 505 | | | 3,489 | | | 1,100 | | INCOME BEFORE INCOME TAXES | | | 17,359 | | | 13,908 | | | 20,363 | | | 23,666 | | Income tax expense | | | 4,592 | | | 9,686 | | | 5,487 | | | 11,959 | | NET INCOME | | | 12,767 | | | 4,222 | | | 14,876 | | | 11,707 | | Foreign currency translation adjustments | | | (185) | | | (687) | | | 255 | | | (1,951) | | Net unrealized losses on available-for-sale securities | | | (683) | | | — | | | (720) | | | — | | COMPREHENSIVE INCOME | | $ | 11,899 | | $ | 3,535 | | $ | 14,411 | | $ | 9,756 | | | | | | | | | | | | | | | | NET INCOME PER SHARE | | | | | | | | | | | | | | Basic | | $ | 0.95 | | $ | 0.30 | | $ | 1.11 | | $ | 0.81 | | Diluted | | $ | 0.94 | | $ | 0.30 | | $ | 1.10 | | $ | 0.80 | | | | | | | | | | | | | | | | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | | | | | | Basic | | | 13,403 | | | 14,134 | | | 13,408 | | | 14,516 | | Diluted | | | 13,542 | | | 14,247 | | | 13,544 | | | 14,616 | | | | | | | | | | | | | | | | CASH DIVIDENDS PER SHARE | | $ | 0.25 | | $ | 0.25 | | $ | 0.50 | | $ | 0.50 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. ARGAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | | 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 | |
(Dollars in thousands, except per share data) | | | | | | | | | July 31, | | January 31, | | | 2023 | | 2023 | | | (Unaudited) | | (Note 1) | ASSETS | | | | | | | CURRENT ASSETS | | | | | | | Cash and cash equivalents | | $ | 204,799 | | $ | 173,947 | Investments | | | 141,616 | | | 151,511 | Accounts receivable, net | | | 44,532 | | | 50,132 | Contract assets | | | 20,747 | | | 24,778 | Other current assets | | | 43,438 | | | 38,334 | TOTAL CURRENT ASSETS | | | 455,132 | | | 438,702 | Property, plant and equipment, net | | | 10,457 | | | 10,430 | Goodwill | | | 28,033 | | | 28,033 | Intangible assets, net | | | 2,413 | | | 2,609 | Deferred taxes, net | | | 3,910 | | | 3,689 | Right-of-use and other assets | | | 5,763 | | | 6,024 | TOTAL ASSETS | | $ | 505,708 | | $ | 489,487 | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | CURRENT LIABILITIES | | | | | | | Accounts payable | | $ | 31,530 | | $ | 56,375 | Accrued expenses | | | 67,620 | | | 49,867 | Contract liabilities | | | 116,456 | | | 96,261 | TOTAL CURRENT LIABILITIES | | | 215,606 | | | 202,503 | Noncurrent liabilities | | | 5,066 | | | 6,087 | TOTAL LIABILITIES | | | 220,672 | | | 208,590 | | | | | | | | COMMITMENTS AND CONTINGENCIES (see Notes 7 and 8) | | | | | | | | | | | | | | 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; 15,828,289 shares issued;13,353,653 and 13,441,590 shares outstanding at July 31, 2023 and January 31, 2023, respectively | | | 2,374 | | | 2,374 | Additional paid-in capital | | | 162,323 | | | 162,208 | Retained earnings | | | 216,009 | | | 207,832 | Less treasury stock, at cost – 2,474,636 and 2,386,699 shares at July 31, 2023 and January 31, 2023, respectively | | | (92,329) | | | (88,641) | Accumulated other comprehensive loss | | | (3,341) | | | (2,876) | TOTAL STOCKHOLDERS’ EQUITY | | | 285,036 | | | 280,897 | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 505,708 | | $ | 489,487 |
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, 2023 AND 2022 (Dollars in thousands) (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional | | | | | | | Accumulated | | | | | | | | | Outstanding | | Par | | Paid-in | | Retained | | Treasury | | Other Comprehensive | | Non-controlling | | Total | | | Shares | | Value | | Capital | | Earnings | | Stock | | Loss | | Interest | | Equity | Balances, May 1, 2023 | | 13,414,404 | | $ | 2,374 | | $ | 161,347 | | $ | 206,584 | | $ | (89,883) | | $ | (2,473) | | $ | — | | $ | 277,949 | Net income | | — | | | — | | | — | | | 12,767 | | | — | | | — | | | — | | | 12,767 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | — | | | (185) | | | — | | | (185) | Net unrealized losses on available-for-sale securities | | — | | | — | | | — | | | — | | | — | | | (683) | | | — | | | (683) | Stock compensation expense | | — | | | — | | | 1,184 | | | — | | | — | | | — | | | — | | | 1,184 | Stock option exercises and other share-based award settlements | | 16,381 | | | — | | | (208) | | | — | | | 611 | | | — | | | — | | | 403 | Common stock repurchases | | (77,132) | | | — | | | — | | | — | | | (3,057) | | | — | | | — | | | (3,057) | Cash dividends | | — | | | — | | | — | | | (3,342) | | | — | | | — | | | — | | | (3,342) | Balances, July 31, 2023 | | 13,353,653 | | $ | 2,374 | | $ | 162,323 | | $ | 216,009 | | $ | (92,329) | | $ | (3,341) | | $ | — | | $ | 285,036 | | | | | | | | | | | | | | | | | | | | | | | | | Balances, May 1, 2022 | | 14,585,908 | | $ | 2,374 | | $ | 159,170 | | $ | 192,463 | | $ | (47,482) | | $ | (3,715) | | $ | (797) | | $ | 302,013 | Net income | | — | | | — | | | — | | | 4,222 | | | — | | | — | | | — | | | 4,222 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | — | | | (687) | | | — | | | (687) | Stock compensation expense | | — | | | — | | | 1,059 | | | — | | | — | | | — | | | — | | | 1,059 | Common stock repurchases | | (701,713) | | | — | | | — | | | — | | | (26,091) | | | — | | | — | | | (26,091) | Cash dividends | | — | | | — | | | — | | | (3,480) | | | — | | | — | | | — | | | (3,480) | Balances, July 31, 2022 | | 13,884,195 | | $ | 2,374 | | $ | 160,229 | | $ | 193,205 | | $ | (73,573) | | $ | (4,402) | | $ | (797) | | $ | 277,036 | | | | | | | | | | | | | | | | | | | | | | | | | Balances, February 1, 2023 | | 13,441,590 | | $ | 2,374 | | $ | 162,208 | | $ | 207,832 | | $ | (88,641) | | $ | (2,876) | | $ | — | | $ | 280,897 | Net income | | — | | | — | | | — | | | 14,876 | | | — | | | — | | | — | | | 14,876 | Foreign currency translation gain | | — | | | — | | | — | | | — | | | — | | | 255 | | | — | | | 255 | Net unrealized losses on available-for-sale securities | | — | | | — | | | — | | | — | | | — | | | (720) | | | — | | | (720) | Stock compensation expense | | — | | | — | | | 2,218 | | | — | | | — | | | — | | | — | | | 2,218 | Stock option exercises and other share-based award settlements | | 81,851 | | | — | | | (2,103) | | | — | | | 3,050 | | | — | | | — | | | 947 | Common stock repurchases | | (169,788) | | | — | | | — | | | — | | | (6,738) | | | — | | | — | | | (6,738) | Cash dividends | | — | | | — | | | — | | | (6,699) | | | — | | | — | | | — | | | (6,699) | Balances, July 31, 2023 | | 13,353,653 | | $ | 2,374 | | $ | 162,323 | | $ | 216,009 | | $ | (92,329) | | $ | (3,341) | | $ | — | | $ | 285,036 | | | | | | | | | | | | | | | | | | | | | | | | | Balances, February 1, 2022 | | 15,257,688 | | $ | 2,368 | | $ | 158,190 | | $ | 188,690 | | $ | (20,405) | | $ | (2,451) | | $ | (797) | | $ | 325,595 | Net income | | — | | | — | | | — | | | 11,707 | | | — | | | — | | | — | | | 11,707 | Foreign currency translation loss | | — | | | — | | | — | | | — | | | — | | | (1,951) | | | — | | | (1,951) | Stock compensation expense | | — | | | — | | | 1,979 | | | — | | | — | | | — | | | — | | | 1,979 | Stock option exercises and other share-based award settlements | | 39,099 | | | 6 | | | 60 | | | — | | | — | | | — | | | — | | | 66 | Common stock repurchases | | (1,412,592) | | | — | | | — | | | — | | | (53,168) | | | — | | | — | | | (53,168) | Cash dividends | | — | | | — | | | — | | | (7,192) | | | — | | | — | | | — | | | (7,192) | Balances, July 31, 2022 | | 13,884,195 | | $ | 2,374 | | $ | 160,229 | | $ | 193,205 | | $ | (73,573) | | $ | (4,402) | | $ | (797) | | $ | 277,036 |
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, | | | 2023 | | 2022 | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | Net income | | $ | 14,876 | | $ | 11,707 | Adjustments to reconcile net income to net cash used in operating activities | | | | | | | Stock compensation expense | | | 2,218 | | | 1,979 | Depreciation | | | 1,035 | | | 1,556 | Lease expense | | | 884 | | | 1,319 | Changes in accrued interest on investments | | | (341) | | | (617) | Deferred income tax (benefit) expense | | | (196) | | | 373 | Amortization of intangible assets | | | 196 | | | 399 | Equity in loss (income) of solar energy investments | | | 98 | | | (1,070) | Other | | | 64 | | | 8 | Changes in operating assets and liabilities | | | | | | | Accounts receivable | | | 5,600 | | | 2,090 | Contract assets | | | 4,031 | | | (3,774) | Other assets | | | (5,176) | | | 9,252 | Accounts payable and accrued expenses | | | (8,931) | | | (16,124) | Contract liabilities | | | 20,195 | | | (63,874) | Net cash provided by (used in) operating activities | | | 34,553 | | | (56,776) | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | Purchases of short-term investments | | | (90,000) | | | (175,000) | Maturities of short-term investments | | | 159,750 | | | 90,000 | Purchases of available-for-sale securities | | | (60,261) | | | — | Purchases of property, plant and equipment | | | (1,031) | | | (638) | Net cash provided by (used in) investing activities | | | 8,458 | | | (85,638) | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | Common stock repurchases | | | (6,738) | | | (53,168) | Payments of cash dividends | | | (6,699) | | | (7,192) | Proceeds from the exercise of stock options | | | 947 | | | 66 | Net cash used in financing activities | | | (12,490) | | | (60,294) | | | | | | | | EFFECTS OF EXCHANGE RATE CHANGES ON CASH | | | 331 | | | (4,420) | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 30,852 | | | (207,128) | CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 173,947 | | | 350,472 | CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 204,799 | | $ | 143,344 | | | | | | | | SUPPLEMENTAL CASH FLOW INFORMATION (see 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, 20172023
(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, and technical and consulting services to the power generation and renewable energy markets for amarket. The wide range of customers includingincludes primarily independent power project owners,producers, public utilities, power plant equipment suppliers and global energy plant construction firms.other commercial firms with significant power requirements with customer projects located in the United States (the “U.S.”), the Republic of Ireland (“Ireland”) and the United Kingdom (the “U.K.”). GPS including its consolidated joint ventures, and APC represent ourthe Company’s power industry services reportable segment. Through TRC, the industrial fabrication and fieldconstruction services reportable segment provides on-site services that support new plant construction and additions, maintenance turnarounds, shutdowns and emergency mobilizations for industrial plantsoperations primarily located in the southern United StatesSoutheast region of the U.S. and that are based on its expertise in producing, deliveringmay include the fabrication, delivery and installing fabricatedinstallation of steel 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. Mid-Atlantic region of the U.S. Basis of Presentation and Significant Accounting Policies The condensed consolidated financial statements include the accounts of Argan, its wholly-owned subsidiaries and a variable interest entity (“VIE”) prior to its deconsolidation in the fourth quarter of the year ended January 31, 2023. 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, 2023, the condensed consolidated statements of earnings and stockholders’ equity for the three and six months ended July 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the six months ended July 31, 2023 and 2022 are unaudited. The condensed consolidated balance sheet as of January 31, 2023 has been derived from audited consolidated financial statements. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. 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 (“USU.S. 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, 2017.2023 (“Fiscal 2023”). 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. 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 fairlyfor a fair statement of the financial position of the Company as of OctoberJuly 31, 2017,2023, 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.
Recently Issued Accounting Pronouncements 6In March 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”), which provides an election to account for tax equity investments using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of the tax credits and other tax benefits received and presented net as a component of income tax expense. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company’s investments in energy tax credit structures entered into prior to Fiscal 2023 do not qualify for the proportional amortization method under this guidance.
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. Available-For-Sale Securities At each balance sheet date, available-for-sale (“AFS”) securities are recorded at fair value, with unrealized gains and losses, net of income taxes, reported as a component of accumulated other comprehensive loss. Interest income, accretion of discounts, amortization of premiums, realized gains and losses are included in other income or expense, as applicable, in the Company’s condensed consolidated statement of earnings. The Company determines the cost of securities sold based on the specific identification method. The Company determines the appropriate classification of AFS securities based on whether they represent the investment of cash available for current operations, as defined in Accounting Standards Codification (“ASC”) 210-10-45-1 and ASC 210-10-45-2. The classification of the AFS securities is reevaluated at each balance sheet date. The Company evaluates whether a decline in the fair value of AFS securities below amortized cost basis is credit-related or due to other factors. If the Company intends to sell the AFS security or it is more likely than not the Company would be required to sell the AFS security before recovery, impairment is recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. If a portion of the unrealized loss is credit-related, the impairment is recorded as an allowance on the balance sheet with a corresponding adjustment to earnings. Credit recovery is recorded as an adjustment to the allowance and earnings in the period in which credit conditions improve. Fair Values ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs are quoted prices for similar assets or liabilities in active markets; or quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – Inputs are unobservable inputs based on a company’s own assumptions. At July 31, 2023 and January 31, 2023, certain amounts of cash equivalents were invested in a money market fund with net assets invested in high-quality money market instruments. The money market fund was classified as Level 1 due to the short-term nature of these instruments and as their fair value is based on quoted prices in active markets for identical assets. As of July 31, 2023, all of the Company’s available-for-sale securities were U.S. Treasury notes and were classified as Level 2, as their fair value is measured based on quoted prices in active markets for similar assets. As of July 31, 2023 and January 31, 2023, the Company did not have any financial assets measured on a recurring basis using Level 3 inputs. The carrying value amounts presented in the condensed consolidated balance sheets for the Company’s other current assets, including cash, certificates of deposit (“CDs”), 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. The following table shows the Company’s financial instruments as of July 31, 2023 and January 31, 2023 that are measured and recorded at fair value on a recurring basis: Revenue Recognition — Revenues
| | | | | | | | | | | | | | | | | | | | | July 31, 2023 | | January 31, 2023 | | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | | Inputs | | Inputs | | Inputs | | Inputs | | Inputs | | Inputs | Money market fund | | $ | 127,064 | | $ | — | | $ | — | | $ | 68,647 | | $ | — | | $ | — | Available-for-sale securities | | | — | | | 59,992 | | | — | | | — | | | — | | | — | Totals | | $ | 127,064 | | $ | 59,992 | | $ | — | | $ | 68,647 | | $ | — | | $ | — |
Treasury Stock Treasury stock is recorded using the cost method. Incremental direct costs to purchase treasury stock, including excise tax, are included in the cost of the shares acquired. The Company uses the average cost method to account for treasury stock. For treasury stock provided for settlements or sold at a price higher than its cost, the gain is recorded to additional paid-in capital. For treasury stock provided for settlements or sold at a price lower than its cost, the loss is recorded to additional paid-in capital to the extent there are previous net gains included in additional paid-in capital. Any losses in excess of that amount are recorded to retained earnings. NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS The Company’s accounting for revenues on 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 |
The Company focuses on the transfer of the contractor’s control of the goods and/or services to the customer. When a performance obligation is satisfied over time, the related revenues are recognized over time. The 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 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 portionportions of estimated gross profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentagecost-to-cost approach. 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 in which it is identified and the loss amount becomes 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 Predominantly 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. Warranties provided under the Company’s contracts with customers are assurance-type primarily and are recorded as the corresponding contract work is performed. The transaction price for a customer contract represents the 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. The Company’s timing of revenue recognition may not be consistent with its rights to bill and collect cash from project owners and other customers. Most contracts require payments as the corresponding work progresses that are determined in the manner described therein. Those rights are generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of work or when services are performed. On most of the Company’s large contracts, milestone billings that occur early in the corresponding contract terms typically are made in advance of certain significant and related costs being incurred. This results in typically larger contract liability balances early in contract lives that decline over the terms of the corresponding contracts. During the six months ended July 31, 2023 and 2022, there were no unusual or one-time adjustments to contract liabilities. The balances of the Company’s accounts receivable represent amounts billed to customers that have yet to be collected and represent an unconditional right to receive cash from its customers. Contract assets include amounts that represent the rights to receive payment for goods or services that have been transferred to the customer, with the rights conditional upon something other than the passage of time. Contract liabilities include amounts that reflect obligations to provide goods or services for which theypayment has been received. The amounts of revenues recognized during the six months ended July 31, 2023 and 2022, that were included in the balances of contract liabilities as of January 31, 2023 and 2022, respectively, were approximately $87.0 million and $127.6 million, respectively. The amounts of revenues recognized during the three months ended July 31, 2023 and 2022 that were included in the balances of contract liabilities as of April 30, 2023 and 2022, respectively, were approximately $64.7 million and $83.2 million, respectively. Contract retentions are determined.billed amounts which, pursuant to the terms of the applicable contract, are not paid by customers until a defined phase of a contract or project has been completed and accepted. These retained amounts are reflected in contract assets or contract liabilities depending on the net contract position of the particular contract. Retention amounts and the length of retention periods may vary. Retainage amounts related to active contracts are considered current regardless of the term of the applicable contract; such amounts are generally collected by the completion of the applicable contract. The amounts retained by project owners and other customers under construction contracts at July 31, 2023 and January 31, 2023 were $28.1 million and $49.1 million, respectively. Variable Consideration UnpricedAmounts for unapproved change orders which represent 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,The Company also includes in the corresponding transaction price an estimate of the amount that it expects to receive from a claim based on management’s judgment regarding all reasonably available information. Once a final amount has been determined, the transaction price may be revised again to reflect the final resolution. At July 31, 2023 and January 31, 2023, the aggregate amounts of such unapproved change orders included in the transaction prices that were still pending customer approval were $12.8 million and $11.6 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 claimsare 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.
The Company’s long-term contracts typically have schedule dates and other performance objectives that if not achieved could subject the Company to liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by the achievement of a specified level of output or efficiency. Each applicable contract defines the conditions under which a project owner may be entitled to any liquidated damages. At the outset of each of the Company’s contracts, the potential amounts of liquidated damages typically are not subtracted from the transaction price as the Company believes that it has included activities in its contract plan, and the associated forecasted contract 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 onlywill 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. In other cases, the Company may have the grounds to assert liquidated damages against subcontractors, suppliers, project owners or other parties related to a project. Such circumstances may arise when the Company’s activities and progress are adversely affected by delayed or damaged materials, challenges with equipment performance or other events out of the Company’s control where the Company has rights to recourse, typically in the form of liquidated damages. In general, the Company does not adjust the corresponding contract accounting until it is probable that the favorable cost relief will be realized. Such adjustments have been and could be material. 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 agreement onadjustment to the amount has been reached with the project owner. Fair Values — The carrying value amounts presentedof revenues recognized to date is recorded in the condensed consolidated balance sheets forperiod that the Company’s cash and cash equivalents, short-term investments, accounts receivable and accounts payable are reasonable estimates of their fair values due to the short-term nature of these instruments. The fair valueadjustment is identified. Estimated variable consideration amounts of reporting units (as needed for purposes of identifying indications of impairment to goodwill) are determined by averaging valuations that are calculated using several market-based and income-based approaches deemed appropriatethe Company based primarily on the single most likely amount in the circumstances.
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. NOTE 2 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSRemaining Unsatisfied Performance Obligations (“RUPO”)
ThereSubstantially all of the Company’s customer contracts include the right for customers to terminate contracts for convenience. The value of future work the Company is no recently issued accounting guidance that hascontractually obligated to perform pursuant to active customer contracts should not yet been adoptedbe included in the disclosure of RUPO when the corresponding contracts include termination for convenience clauses without substantial penalties accruing to the customers upon such terminations. Management assesses whether the nature of the work being performed under contract is largely service-based and repetitive and should be considered a succession of one-month contracts for the duration of the identified term of the contract. Predominantly, the Company’s customers contract with the Company to construct assets, to fabricate materials or to perform emergency maintenance or outage services where management believes substantial penalties or costs would be incurred upon a termination for convenience including the costs of terminating subcontracts, canceling purchase orders and returning or otherwise disposing of delivered materials and equipment. The value of RUPO on customer contracts represents amounts based on contracts or orders received from customers that the Company considersbelieves are firm and where the parties are acting in accordance with their respective obligations. The cancellation or termination of contracts for the convenience of customers has not had a material to its condensedadverse effect on our 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,At July 31, 2023, the Company will be requiredhad RUPO of $0.7 billion. The largest portion of RUPO at any date usually relates 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”) contractservice and other construction contracts with typical performance durations of GPSone to three years. However, the length of certain significant construction projects may exceed three years. The Company estimates that it believes is representativeapproximately 37% of the four other active EPC contractsRUPO amount at July 31, 2023 will be included in the amount of GPS, significant contracts that were awarded to TRC during the current year that the Company believes are representative of the large customer contractsconsolidated revenues that will be in place at the date of adoption, and the largest contract awarded to APCrecognized 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.
7
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 endremainder of the fiscal year endedending January 31, 2014)2024 (“Fiscal 2024”). The sharesMost of the profitsremaining amount of the joint ventures have been determined based onRUPO amount at July 31, 2023 is expected to be recognized in revenues during the percentages by whichfiscal years ending January 31, 2025 and January 31, 2026.
It is important to note that estimates may be changed in the future and that cancellations, deferrals, or scope adjustments may occur related to work included in the amount of RUPO at July 31, 2023. 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 to RUPO may materially reduce future revenues below Company believes profits will ultimately be sharedestimates. Disaggregation of Revenues The following table presents consolidated revenues for the three and six months ended July 31, 2023 and 2022, disaggregated by the joint venture partners.geographic area where the corresponding projects were located: | | | | | | | | | | | | | | | | Three Months Ended July 31, | | | Six Months Ended July 31, | | | 2023 | | 2022 | | | 2023 | | 2022 | United States | | $ | 80,281 | | $ | 93,949 | | | $ | 147,800 | | $ | 174,221 | Republic of Ireland | | | 48,075 | | | 15,532 | | | | 70,656 | | | 25,186 | United Kingdom | | | 12,993 | | | 8,629 | | | | 26,568 | | | 18,980 | Consolidated Revenues | | $ | 141,349 | | $ | 118,110 | | | $ | 245,024 | | $ | 218,387 |
The major portions of the Company’s consolidated revenues are recognized pursuant to fixed-price contracts with most of the remaining portions earned pursuant to time-and-material contracts. Consolidated revenues are disaggregated by reportable segment in Note 14 to the condensed consolidated financial statements. NOTE 4 —3 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and Cash Equivalents The Company considers all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At July 31, 2023 and January 31, 2023, certain amounts of cash equivalents were invested in a money market fund with net assets invested in high-quality money market instruments. Such investments include U.S. Treasury obligations; obligations of U.S. government agencies, authorities, instrumentalities or sponsored enterprises; and repurchase agreements secured by U.S. government obligations. Dividend income related to money market investments is recorded when earned. The balances of accrued dividends at July 31, 2023 and January 31, 2023 were $0.6 million and $0.3 million, respectively. Investments The Company’s investments consisted of the following as of July 31, 2023 and January 31, 2023: | | | | | | | | | July 31, | | January 31, | | | 2023 | | 2023 | Short-term investments | | $ | 81,624 | | $ | 151,511 | Available-for-sale securities | | | 59,992 | | | — | Total investments | | $ | 141,616 | | $ | 151,511 |
Short-Term Investments Short-term investments as of OctoberJuly 31, 20172023 and January 31, 20172023 consisted solely of certificatesCDs with weighted average maturities of depositone year or less purchased from Bank of America, N.A. (the “Bank”) with weighted average initial maturities of 269 days and 185 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 October 31, 2017 and January 31, 2017 included accrued interest of $1.5 million and $0.8 million, respectively.interest. Interest income is recorded when earned and is included in other income. As of OctoberAt July 31, 20172023 and January 31, 2017,2023, the weighted average annual interest rates of the outstanding CDs classified as short-term investments were 1.36%5.3% and 1.13%2.5%, respectively. The balances of accrued interest on the CDs at July 31, 2023 and January 31, 2023 were $1.6 million and $1.8 million, respectively. Available-For-Sale Securities 8AFS securities as of July 31, 2023 consisted solely of U.S. Treasury notes with original maturities of two and three years. The Company’s AFS securities consisted of the following amounts of amortized cost, allowance for credit losses, gross unrealized gains and losses and estimated fair value by contractual maturity as of July 31, 2023:
| | | | | | | | | | | | | | | | | | July 31, 2023 | | | | | | Allowance for | | Gross | | Gross | | Estimated | | | Amortized | | Credit | | Unrealized | | Unrealized | | Fair | | | Cost | | Losses | | Gains | | Losses | | Value | U.S. Treasury notes: | | | | | | | | | | | | | | | | Due in one to two years | | $ | 25,162 | | $ | — | | $ | — | | $ | 276 | | $ | 24,886 | Due in two to three years | | | 35,550 | | | — | | | — | | | 444 | | | 35,106 | Totals | | $ | 60,712 | | $ | — | | $ | — | | $ | 720 | | $ | 59,992 |
As of July 31, 2023, interest receivable in the amount of $0.6 million is included in the balance of AFS securities. For the three and six months ended July 31, 2023, the change in net unrealized holding losses for the Company’s AFS securities reported in other comprehensive income was approximately $0.7 million for both periods. For the three and six months ended July 31, 2023, there were no sales of the Company’s AFS securities, and therefore, there were no amounts of gains or losses reclassified out of other comprehensive income into net income. The Company does not believe the unrealized losses represent credit losses based on the evaluation of evidence as of July 31, 2023, which includes an assessment of whether it is more likely than not the Company will be required to sell or intends to sell the investment before recovery of the investment’s amortized cost basis.
Concentration Risk The Company has a substantial portion of its cash on deposit in excess of federally insured limits at the Bank, has purchased CDs fromU.S. with the Bank and has liquid mutual fund investments through an arrangement withinvested in a money market fund. The Company also maintains certain Euro-based bank accounts in Ireland and certain pound sterling-based bank accounts in the Bank.U.K. in support of the operations of APC. Management does not believe that maintaining substantially all such assetsthe combined amount of the CDs and the cash deposited with the Bank, represents a material risk. NOTE 5 — ACCOUNTS RECEIVABLE
Amounts retained by project owners under construction contractscash invested in the money market fund, and includedcash balances maintained at financial institutions 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 amountsIreland and the lengthU.K., in excess of retention periods may vary. Mostgovernment-insured levels, represent material risks.
NOTE 4 – ACCOUNTS RECEIVABLE The Company generally extends credit to a customer based on an evaluation of the amount outstanding as of October 31, 2017 will not be collected until the fiscal year ending January 31, 2019. Retainage amounts related to activecustomer’s financial condition, without requiring tangible collateral. Customer payments on other construction, fabrication and field service contracts are classified as current assets regardlessgenerally due within 30 to 60 days of billing, depending on the negotiated terms of the termcorresponding contract. 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 anticipatedcredit losses considered necessary under the circumstances based on historical experience with uncollected accounts and a review of its currently outstanding accounts and notes receivable. The amountmanagement’s estimate of the loss that is expected to occur over the remaining life of the particular financial asset. The amounts of the provision for credit losses for the three and six months ended July 31, 2023 and 2022 were insignificant. The allowance for uncollectible accounts as of Octobercredit losses at July 31, 20172023 and January 31, 20172023 was approximately $2.5$1.8 million and $1.9 million, respectively,respectively. NOTE 5 – INTANGIBLE ASSETS At both July 31, 2023 and itJanuary 31, 2023, the goodwill balances related primarily to project development loans made in prior years. The provision amounts for uncollectible accounts for the threeGPS and nine months ended October 31, 2017TRC reporting units, and were $0.1$18.5 million and $0.4$9.5 million, respectively. The Company didManagement does not record a provision for uncollectible accounts for the three and nine months ended October 31, 2016. NOTE 6 — COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
The table below sets forth the aggregate amounts of costs charged to and earnings accrued on uncompleted contracts compared with the billings on those contracts through October 31, 2017 andbelieve that any events or circumstances occurred or arose since 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 as2023, that required an updated assessment 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, the goodwill balances included inof either the condensed consolidated balance sheets relatedGPS or TRC reporting units.
The Company’s intangible assets, other than goodwill, relate primarily to the acquisitions of GPS, TRCindustrial construction services segment and APC were $18.5 million, $14.4 million and $2.0 million, respectively. TRC’s management recently completed a reforecasting of its future financial results which provides essential data for 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 completion 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 valuation of the business of TRC could materially change this outcome. Last year, APC recorded a goodwill impairment loss during the nine months ended October 31, 2016 of approximately $2.0 million. The other purchased intangible assets consisted of the following elements as of OctoberJuly 31, 20172023 and January 31, 2017.2023:
| | | | 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, 2023 | | January 31, 2023 | | | Estimated | | Gross | | Accumulated | | Net | | Gross | | Accumulated | | Net | | | Useful Life | | Amounts | | Amortization | | Amounts | | Amounts | | Amortization | | Amounts | Trade names | | 15 years | | $ | 4,499 | | $ | 2,300 | | $ | 2,199 | | $ | 4,499 | | $ | 2,150 | | $ | 2,349 | Customer relationships | | 10 years | | | 916 | | | 702 | | | 214 | | | 916 | | | 656 | | | 260 | Totals | | | | $ | 5,415 | | $ | 3,002 | | $ | 2,413 | | $ | 5,415 | | $ | 2,806 | | $ | 2,609 |
NOTE 8 —6 – FINANCING ARRANGEMENTS TheDuring April 2021, the Company maintains financing arrangements with the Bank that are described in anamended its Amended and Restated Replacement Credit Agreement with the Bank (the “Credit Agreement”), dated which extended the expiration date of the Credit Agreement to May 15, 2017, which superseded31, 2024 and reduced the Company’s prior arrangementsborrowing rate. On March 6, 2023, the Company entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment modified the Credit Amendment, primarily, to replace the interest pricing with the Bank.Secured Overnight Financing Rate (“SOFR”) plus 1.6% and to add SOFR successor rate language. The Credit Agreement, providesas amended, includes the following features, among others: a lending commitment of $50.0 million including a revolving loan with a maximum borrowingand an accordion feature which allows for an additional commitment amount of $50.0$10.0 million, that is available until May 31, 2021 with interest at the 30-day LIBOR plus 2.00%.subject to certain conditions. 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.business as defined in the Credit Agreement. Additionally, the Credit Agreement, as amended, continues to include customary terms, covenants and events of default for a credit facility of its size and nature. The Company has approximately $14.9 million of creditintends to renew the Credit Agreement prior to its expiration date.
At July 31, 2023 and January 31, 2023, the Company did not have any borrowings outstanding under the Credit Agreement, but no borrowings.Agreement. However, the Bank has issued letters of credit in the total outstanding amount of $9.4 million at July 31, 2023, in support of the activities of APC under existing customer contracts. The comparable outstanding total amount of letters of credit at January 31, 2023 was $8.8 million. 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 BankCredit Agreement requires that the Company comply with certain financial covenants at its fiscal year-end and at each of its fiscal quarter-ends.quarter-end. The Credit Agreement, as amended, includes other terms, covenants and events of default that are customary for a credit facility of its size and nature.nature, including a requirement to achieve positive adjusted earnings before interest, taxes, depreciation and amortization, as defined, over each rolling twelve-month measurement period. As of OctoberJuly 31, 2023 and January 31, 2017,2023, the Company was compliantin compliance with the financial covenants of its financing arrangements.the Credit Agreement, as amended. NOTE 7 – COMMITMENTS NOTE 9 — LEGAL MATTERSLeases
The Company’s leases are primarily operating leases that cover office space, expiring on various dates through December 2031, and certain equipment used by the Company in the performance of its construction services contracts. Some of these equipment leases may be embedded in broader agreements with subcontractors or construction equipment suppliers. The Company has no material finance leases. None of the operating leases includes significant amounts for incentives, rent holidays or price escalations. Under certain leases, the Company is obligated to pay property taxes, insurance, and maintenance costs. For leases that contain both lease and non-lease components, fixed and variable payments are allocated to each component relative to observable or estimated standalone prices. Operating lease right-of-use assets and associated lease liabilities are recorded 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 at the commencement date in determining the present value of future payments. The expected lease term includes any option to extend or to terminate the lease when it is reasonably certain the Company will exercise such option. Right-of-use assets at July 31, 2023 and January 31, 2023, were $4.5 million and $4.8 million, respectively. Operating lease expense amounts are recorded on a straight-line basis over the expected lease terms. Operating lease expenses for the three and six months ended July 31, 2023 were $0.4 million and $0.9 million, respectively, and they were $0.5 million and $1.3 million for the three and six months ended July 31, 2022, respectively. Operating lease payments for the three and six months ended July 31, 2023 were $0.4 million and $0.9 million, respectively, and they were $0.5 million and $1.3 million for the three and six months ended July 31, 2022, respectively. 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, 2023: | | | | Years Ending January 31, | 2024 (remainder) | | $ | 879 | 2025 | | | 1,470 | 2026 | | | 1,194 | 2027 | | | 276 | 2028 | | | 221 | Thereafter | | | 817 | Total lease payments | | | 4,857 | Less imputed interest | | | 297 | Present value of lease payments | | | 4,560 | Less current portion (included in accrued expenses) | | | 1,535 | Noncurrent portion (included in noncurrent liabilities) | | $ | 3,025 |
For operating leases as of July 31, 2023, the weighted average lease term and weighted average discount rate were 53 months and 3.8%, respectively. For operating leases as of January 31, 2023, the weighted average lease term and weighted average discount rate were 58 months and 3.7%, respectively. The aggregate amounts of operating lease right-of-use assets added in exchange for lease obligations during the six months ended July 31, 2023 and 2022 were $0.7 million and $0.5 million, respectively. The Company also uses equipment and occupies other facilities under short-term rental agreements. The Company classifies as short-term leases any lease with an initial noncancellable term of twelve months or less that does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Rent expense amounts incurred under short-term rentals during the three and six months ended July 31, 2023 were $3.1 million and $6.8 million, respectively, and they were $3.0 million and $5.3 million for the three and six months ended July 31, 2022, respectively. Right-of-use assets and lease liabilities related to short-term leases are excluded from the consolidated balance sheets. Performance 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 such amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of July 31, 2023 are not estimable. As of July 31, 2023 and January 31, 2023, the estimated amounts of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, were approximately $0.5 billion and $0.6 billion, respectively. As of July 31, 2023 and January 31, 2023, the outstanding amount of bonds covering other risks, including warranty obligations related to completed activities, was not material. Not all of our projects require bonding. The Company also provided a financial guarantee, subject to certain terms and conditions, in the amount of $3.6 million in support of business development efforts. A liability was established for the estimated loss related to this guarantee during the year ended January 31, 2022 (“Fiscal 2022”). 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 couldare expected to have a material adverse effect on the Company’s condensed consolidated financial statements other than the one discussed below. The material amountsas of any legal fees expected to be incurred in connection with legal matters are accrued when such amounts are estimable.July 31, 2023. 10
NOTE 9 – STOCK-BASED COMPENSATION On February 1, 2016, TRC was sued in Person County, North Carolina, by a subcontractor, PPS Engineers, Inc. (“PPS”), in an attempt to force TRC to pay invoices for services rendered inJune 23, 2020, the total amount of $2.3 million. PPS has placed liens onCompany’s stockholders approved the propertyadoption of the customers in several states where work was performed by PPS and it has also filed a claim against the bond issued on behalf of TRC relating to one significant project located in Tennessee in the amount of $2.5 million. On March 4, 2016, TRC filed responses to the claims of PPS. The positions of TRC are that PPS failed to deliver a number of items required by the applicable contract between the parties and that the invoices rendered by PPS covering the disputed services will not be paid until such deliverables are supplied. Further, TRC maintains that certain sums are owed to it by PPS for services, furniture, fixtures, equipment, and software that were supplied by TRC on behalf of PPS that total approximately $2.2 million. The amounts invoiced by PPS are accrued by TRC2020 Stock Plan (the “2020 Plan”), and the corresponding liability amount was included in accounts payable in the condensed consolidated balance sheets asallocation 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. The Company intends to continue to defend against the claim of PPS and to pursue its claims against PPS. Due to the uncertainty500,000 shares of the ultimate outcomes of these legal proceedings, assurance cannot be provided by the Company that TRC will be successful in these efforts. Management does not believe that resolution of the matters discussed above will result in additional loss with material negative effect onCompany’s common stock for issuance thereunder. On June 20, 2023, the Company’s consolidated operating results in a future reporting period.
NOTE 10 — STOCK-BASED COMPENSATION
stockholders approved an allocation of an additional 500,000 shares for issuance under the 2020 Plan. The Company’s board of directors may make share-based awards under its 2011 Stockthe 2020 Plan (the “Stock Plan”) to officers, directors and key employees. The 2020 Plan replaced the 2011 Stock Plan (the “2011 Plan”); the Company’s authority to make awards pursuant to the 2011 Plan expired on July 19, 2021. Together, the 2020 Plan and the 2011 Plan are hereinafter referred to as the “Stock Plans.” 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, and restricted or unrestricted common stock. ISOs grantedThe specific provisions for each award are documented in a written agreement between the Company and the awardee. All stock options awarded under the Stock Plan shall Plans have an exercise priceprices per share at least equal to the common stock’s market value per share atof the Company’s common stock on the date of grant, shallgrant. Stock options 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, 2017,2023, there were 1,061,6502,325,701 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 586,225 shares of the Company’s common stock available for future awards under the Stock2020 Plan. Stock Options SummariesA summary of stock option activity under the Company’s stock option plansStock Plans for the ninesix months ended OctoberJuly 31, 2017 and 2016,2023, along with corresponding weighted average per share amounts, areis presented below (shares in thousands):
| | | | | | | | | | | | | | | | | Weighted | | Weighted | | | | | | | | Average | | Average | | | | | Weighted | | Remaining | | Grant Date | | | | | Average Exercise | | Contractual | | Fair Value | | | Shares | | Price Per Share | | Term (years) | | Per Share | Outstanding, February 1, 2023 | | 1,440 | | $ | 43.84 | | 5.46 | | $ | 10.11 | Granted | | 10 | | $ | 39.47 | | | | | | Exercised | | (45) | | $ | 21.04 | | | | | | Forfeited | | (1) | | $ | 33.81 | | | | | | Outstanding, July 31, 2023 | | 1,404 | | $ | 44.55 | | 5.16 | | $ | 10.28 | Exercisable, July 31, 2023 | | 1,276 | | $ | 45.01 | | 4.82 | | $ | 10.53 | | | | | | | | | | | | Outstanding, July 31, 2022 | | 1,431 | | $ | 44.08 | | 5.79 | | $ | 10.19 | Exercisable, July 31, 2022 | | 1,192 | | $ | 44.83 | | 5.27 | | $ | 10.74 |
| | Shares | | Exercise
Price | | Remaining
Term (years) | | Fair Value | | Outstanding, February 1, 2017 | | 707 | | $ | 39.04 | | 7.82 | | $ | 10.22 | | Granted | | 125 | | $ | 63.58 | | | | | | Exercised | | (90 | ) | $ | 30.74 | | | | | | Forfeited | | (10 | ) | $ | 71.75 | | | | | | Outstanding, October 31, 2017 | | 732 | | $ | 43.81 | | 7.59 | | $ | 11.61 | | Exercisable, October 31, 2017 | | 452 | | $ | 28.75 | | 6.52 | | $ | 7.76 | |
| | 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, 2017 and 2016,2023, and the weighted average fair value per share for each number, are presented below (shares in thousands): | | | | | | | | | | Weighted | | | | | Average | | | | | Grant Date | | | | | Fair Value | | | Shares | | Per Share | Non-vested, February 1, 2023 | | 194 | | $ | 7.27 | Granted | | 10 | | $ | 8.12 | Vested | | (75) | | $ | 6.62 | Forfeitures | | (1) | | $ | 5.68 | Non-vested, July 31, 2023 | | 128 | | $ | 7.72 | | | | | | | Non-vested, July 31, 2022 | | 239 | | $ | 7.45 |
| | 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, 2016 | | 300 | | $ | 8.97 | | Granted | | 105 | | $ | 9.66 | | Vested | | (240 | ) | $ | 7.63 | | Non-vested, October 31, 2016 | | 165 | | $ | 9.17 | |
CompensationThe total intrinsic value amount related to the stock options exercised during the six months ended July 31, 2023 was $0.9 million. The total intrinsic value amount related to the stock options exercised during the six months ended July 31, 2022 was not significant. The aggregate market value amounts of the shares of common stock subject to outstanding stock options and exercisable stock options that were “in-the-money” exceeded the aggregate exercise prices of such options at July 31, 2023 by $1.9 million and $1.8 million, respectively.
Restricted Stock Units The Company awards restricted stock units to senior executives, certain other key employees and members of the Company’s board of directors. Awardees earn the right to receive shares of common stock as certain performance goals are achieved and/or service periods are satisfied. Each restricted stock unit expires on the three-year anniversary of the award. During the six months ended July 31, 2023, the Company awarded total stock return performance-based restricted stock units (“PRSUs”) covering a target of 6,000 shares of common stock, earnings per share performance-based restricted stock units (“EPRSUs”) covering a target of 15,000 shares of common stock, renewable energy performance-based restricted stock units (“RPRSUs”) covering a target of 7,500 shares of common stock, time-based restricted stock units (“TRSUs”) covering 45,300 shares of common stock, and 1,354 shares based on the amount of cash dividends deemed paid on shares earned pursuant to the awards. During the six months ended July 31, 2022, the Company awarded PRSUs covering a target of 23,500 shares of common stock, RPRSUs covering a target of 7,500 shares of common stock and TRSUs covering 60,000 shares of common stock. The changes in the maximum number of shares of common stock issuable pursuant to outstanding restricted stock units for the six months ended July 31, 2023, and the weighted average fair value per share for each restricted stock unit, are presented below (shares in thousands): | | | | | | | | | | Weighted | | | | | Average | | | | | Grant Date | | | | | Fair Value | | | Shares | | Per Share | Outstanding, February 1, 2023 | | 310 | | $ | 30.80 | Awarded | | 96 | | $ | 30.68 | Issued | | (37) | | $ | 44.86 | Forfeited | | (49) | | $ | 15.57 | Outstanding, July 31, 2023 | | 320 | | $ | 30.34 | | | | | | | Outstanding, July 31, 2022 | | 280 | | $ | 29.46 |
Fair Value The fair value amounts of stock options and restricted stock units are recorded as stock compensation expense on a straight-line basis over the terms of the corresponding awards. Expense amounts related to stock optionsawards were $1.3$1.2 million and $0.5$1.1 million for the three months ended OctoberJuly 31, 20172023 and 2016, respectively, and2022, respectively. Expense amounts related to stock awards were $3.6$2.2 million and $1.8$2.0 million for the ninesix months ended OctoberJuly 31, 20172023 and 2016,2022, respectively. At OctoberJuly 31, 2017,2023, there was $1.5$7.2 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 valuesCompany estimates the weighted average fair value of the stock options exercised during the nine months ended October 31, 2017 and 2016 were $3.1 million and $10.9 million, respectively. At October 31, 2017, the aggregate market values of the shares of common stock subject to outstanding and exercisable stock options that were “in-the-money” as of October 31, 2017 exceeded the aggregate exercise prices of such options by $18.7 million and $18.1 million, respectively. For companies with limited stock option exercise experience, guidance provided by the SEC permits the use of a “simplified method” in developing the estimate of the expected term of a “plain-vanilla’’ share option, based on the averagedate of the vesting period and theaward using a Black-Scholes option term, which thepricing model. 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 rates for three-to-five year U.S. Treasury notes. The dividend yield is based on the Company’s current annual regular dividend amount. The calculations of the expected volatility factors are based on the monthly closing prices of the Company’s common stock for the five-year periods preceding the dates of the corresponding awards.
The fair value amounts for the PRSUs have been determined by using the per share market price of the common stock on the dates of award and, by assigning equal probabilities to the thirteen possible payout outcomes at the end of each three-year term, and by computing the weighted average of the outcome amounts. For each award, the estimated expected life used infair value amount was calculated to be 88.5% of the determinationaggregate market value of stock options awarded so far in calendar year 2017 was 3.35 years. The simplified method would have resulted in the usetarget number (which is 50% of 5.50 years as the estimated expected lifemaximum number) of each of these stock options. As a result,shares on the aggregateaward date. For the EPRSUs and RPRSUs, the fair value of this groupeach award equals the aggregate market price for the number of stock options was reduced by $1.2 million, or approximately 19%. The effectshares that, as of the change on the amountaward date, are probable of stock option compensation expense recorded during the three and nine months ended October 31, 2017 were reductions of $0.3 million and $0.8 million, respectively. The fair values of each stock option granted in the nine-month periods ended October 31, 2017 and 2016 were estimated on the corresponding dates of award using the Black-Scholes option-pricing modelvesting based on the following weighted average assumptions:performance conditions. For the TRSUs, the fair value of each award equals the aggregate market price for the number of shares covered by each award on the date of award.
16 | | Nine Months Ended October 31, | | | | 2017 | | 2016 | | Dividend yield | | 1.1 | % | 2.0 | % | Expected volatility | | 36.0 | % | 33.9 | % | Risk-free interest rate | | 1.6 | % | 1.4 | % | Expected life (in years) | | 3.4 | | 5.5 | |
NOTE 10 – INCOME TAXES NOTE 11 — CASH DIVIDENDSIncome Tax Expense Reconciliations
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.
12
NOTE 12 — INCOME TAXES
The Company’s income tax expense amounts for the ninesix months ended OctoberJuly 31, 20172023 and 20162022 differed from corresponding amounts computed by applying the federal corporate income tax rate of 35%21% to the amounts of income before income taxes for the periods as shownpresented below: | | | | | | | | | | Six Months Ended July 31, | | | | 2023 | | 2022 | | Computed expected income tax expense | | $ | 4,276 | | $ | 4,970 | | Difference resulting from: | | | | | | | | State income taxes, net of federal tax effect | | | 455 | | | 349 | | Unrecognized tax loss benefit | | | 529 | | | — | | GILTI | | | 505 | | | 225 | | Excess executive compensation | | | 400 | | | 445 | | Foreign tax rate differential | | | (643) | | | (120) | | Tax credits | | | (453) | | | (124) | | Research and development credits adjustment | | | — | | | 6,181 | | Other permanent differences and adjustments, net | | | 418 | | | 33 | | Income tax expense | | $ | 5,487 | | $ | 11,959 | |
Foreign income tax expense for the six months ended July 31, 2023 was $1.5 million. Foreign income tax expense for the six months ended July 31, 2022 was not material. Net Operating Loss (“NOL”) Carryback In an effort to combat the adverse economic impacts of the COVID-19 crisis, the U.S. 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 included spending and tax breaks aimed at strengthening the U.S. economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19. The tax changes of the CARES Act included a temporary suspension of the limitations on the future utilization of certain NOLs and re-established 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, 2020, which was approximately $39.5 million. The Company made the appropriate filing with the Internal Revenue Service (the “IRS”) requesting carryback refunds of income taxes paid for the years ended January 31, 2016 (“Fiscal 2016”) and 2015 (“Fiscal 2015”) in the table below.total amount of approximately $12.7 million during the fiscal year ended January 31, 2021 (“Fiscal 2021”). At the instruction of the IRS, amended income tax returns for Fiscal 2016 and Fiscal 2015 were filed during the second quarter of the current fiscal year; the IRS has not completed the review and approval of the Company’s amended tax returns and refund request. Research and Development Tax Credits | | 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 | |
During Fiscal 2022, 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 research tax credits that may have been available to reduce federal income taxes for Fiscal 2022 and Fiscal 2021. As a result, the Company filed amended federal income tax returns for those years including research and development tax credits in the total amount of $5.8 million, which was netted with a provision for uncertain tax return positions in the amount of $2.4 million, and recorded as a reduction of income tax expense in the fourth quarter of Fiscal 2023. Income Tax Refunds As of OctoberJuly 31, 20172023 and January 31, 2017,2023, the balances of other current assets in the condensed consolidated balance sheetssheet included income tax refunds receivable and prepaid income taxes in the total amounts of $3.5approximately $16.9 million and $3.9$15.3 million, respectively. As of October 31, 2017, the Company does not believe that it has any material uncertainThe income tax positions reflected inrefunds included the amount expected to be received from the IRS upon its accounts.review and approval of the Company’s NOL carryback refund request as described above. Income Tax Returns The Company is subject to federal and state income taxes in the United States of America,U.S., and income taxes in Ireland and the Republic of Ireland, the United Kingdom and various other state and foreign jurisdictions.U.K. Tax regulationstreatments within each jurisdiction are subject to the interpretation of the related tax laws and regulations andwhich require significant judgmentjudgments 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, 20142019, except for a fewseveral notable exceptions relevant to the Company including the Republic of Ireland, the United Kingdom, CaliforniaU.K. and Texasseveral states where the open periods are one year longer. In May 2023, the Company received notification that its amended federal income tax returns for Fiscal 2021 and Fiscal 2022 were selected for examination. Solar Energy Projects The Company received notice from Internal Revenue Service on November 7, 2017has invested in limited liability companies that its federalmake equity investments in solar energy projects that are eligible to receive energy tax credits. The passive investments have been accounted for using the equity method; the balances are included in other assets in our condensed consolidated balance sheets. Each tax return forcredit, when recognized, is recorded as a reduction of the tax year endedcorresponding investment balance with an offsetting reduction in the balance of accrued taxes payable in accordance with the deferral method. As of July 31, 2023, the Company had no remaining cash investment commitments related to these projects. At July 31, 2023 and January 31, 2016 has been selected for audit. At this time,2023, the Company does not have reasoninvestment account balances were $1.1 million and $1.2 million, respectively. These investments are expected to expect any material changes to its income tax liability resulting from the outcome of this audit.provide positive overall returns over their six-year expected lives. NOTE 13 — EARNINGS PER SHARE ATTRIBUTABLE TO THE STOCKHOLDERS OF ARGAN, INC.
Reconciliations of the number of weighted average basic shares outstanding to the number of weighted average diluted shares outstanding and the computations of basic and diluted earnings per share forDuring the three and ninesix months ended OctoberJuly 31, 20172023, the investment balance was adjusted to reflect the Company’s share of the losses of the investment entities in the amounts of less than $0.1 million and 2016$0.1 million, respectively. For the three and six months ended July 31, 2022, the investment balance was adjusted to reflect the Company’s share of the income of the investment entities in the amounts of approximately $0.5 million and $1.0 million, respectively. These net amounts have been included as other loss or income in the Company’s condensed consolidated statement of earnings for the corresponding periods.
Supplemental Cash Flow Information The amounts of cash paid for income taxes during the six months ended July 31, 2023 and 2022 were $3.7 million and $1.3 million, respectively. During the six months ended July 31, 2023 and 2022, the Company did not receive any income tax refunds that were material. NOTE 11 – NET INCOME PER SHARE Basic and diluted net income per share amounts are computed as follows (shares in thousands)thousands except in the note): | | | | | | | | | Three Months Ended July 31, | | | 2023 | | 2022 | Net income | | $ | 12,767 | | $ | 4,222 | | | | | | | | Weighted average number of shares outstanding – basic | | | 13,403 | | | 14,134 | Effect of stock awards (1) | | | 139 | | | 113 | Weighted average number of shares outstanding – diluted | | | 13,542 | | | 14,247 | | | | | | | | Net income per share | | | | | | | Basic | | $ | 0.95 | | $ | 0.30 | Diluted | | $ | 0.94 | | $ | 0.30 |
| (1) | For the three months ended July 31, 2023 and 2022, the weighted average numbers of shares determined on a dilutive basis exclude the effects of antidilutive stock options covering an aggregate of 785,167 and 876,734 shares of common stock, respectively. | |
18 | | Three Months Ended October 31, | | | | 2017 | | 2016 | | | | | | | | Net income attributable to the stockholders of Argan, Inc. | | $ | 17,229 | | $ | 18,073 | | | | | | | | 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 | | Net income per share attributable to the stockholders of Argan, Inc. | | | | | | Basic | | $ | 1.11 | | $ | 1.19 | | Diluted | | $ | 1.09 | | $ | 1.16 | |
| | | | | | | | | Six Months Ended July 31, | | | 2023 | | 2022 | Net income | | $ | 14,876 | | $ | 11,707 | | | | | | | | Weighted average number of shares outstanding – basic | | | 13,408 | | | 14,516 | Effect of stock awards (1) | | | 136 | | | 100 | Weighted average number of shares outstanding – diluted | | | 13,544 | | | 14,616 | | | | | | | | Net income per share | | | | | | | Basic | | $ | 1.11 | | $ | 0.81 | Diluted | | $ | 1.10 | | $ | 0.80 |
| (1) | For the six months ended July 31, 2023 and 2022, the weighted average numbers of shares determined on a dilutive basis exclude the effects of antidilutive stock options covering an aggregate of 818,501 and 876,734 shares of common stock, respectively. | |
NOTE 12 – CASH DIVIDENDS AND TREASURY STOCK 13
| | 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 fromOn June 20, 2023, Argan’s board of directors declared a regular quarterly cash dividend in the diluted computations were 155,000 foramount of $0.25 per share of common stock, which was paid on July 31, 2023 to stockholders of record at the three and nineclose of business on July 21, 2023. On April 10, 2023, Argan’s board of directors declared a regular quarterly cash dividend in the amount of $0.25 per share of common stock, which was paid on April 28, 2023 to stockholders of record at the close of business on April 20, 2023. During the six months ended OctoberJuly 31, 2017. The comparable numbers2022, the board of directors declared two regular quarterly cash dividends, each in the amount of $0.25 per share of common stock, which were paid to stockholders on April 29, 2022 and July 29, 2022.
Pursuant to its established program and authorizations provided by Argan’s board of directors, the Company repurchased shares of its common stock during the six months ended July 31, 2023 and 2022. During these periods, the Company repurchased 169,788 shares and 1,412,592 shares of common stock, all on the open market, for aggregate prices of approximately $6.7 million, or $39.45 per share, and $53.2 million, or $37.64 per share, respectively. For the prior year weresix months ended July 31, 2023, the Company used 81,851 of the repurchased shares to settle stock option exercises and other share-based awards. For the six months ended July 31, 2022, no treasury stock was used to settle stock option exercises and other share-based awards. In August 2022, the Inflation Reduction Act (the “IRA”) was signed into law, which introduced a 1% excise tax on shares repurchased after December 31, 2022. For the six months ended July 31, 2023, the excise tax was not material. NOTE 14 —13 – CUSTOMER CONCENTRATIONS OF REVENUES AND ACCOUNTS RECEIVABLE During the three and nine months ended October 31, 2017 and 2016, theThe majority of the Company’s consolidated revenues relatedrelate to performance by the power industry services segment which provided 91%75% and 86%77% of consolidated revenues for the three months ended OctoberJuly 31, 20172023 and 2016,2022, respectively, and 92%72% and 86%76% of consolidated revenues for the ninesix months ended OctoberJuly 31, 20172023 and 2016,2022, respectively.
The industrial construction services segment represented 23% and 20% of consolidated revenues for the three months ended July 31, 2023 and 2022, respectively, and 26% and 21% of consolidated revenues for the six months ended July 31, 2023 and 2022, respectively. The Company’s most significant customer relationships for the three months ended OctoberJuly 31, 20172023 included three power industry service customers, which accounted for approximately 36%21%, 24%20%, and 13%12% of consolidated revenues, respectively.revenues. The Company’s most significant customer relationships for the three months ended OctoberJuly 31, 20162022 included four customers which accounted for approximately 21%, 19%, 18% and 15% of consolidated revenues, respectively. The Company’s significant customer relationships for the nine months ended October 31, 2017 included fourtwo power industry service customers, which accounted for approximately 29%, 27%, 16%47% and 14%10% of consolidated revenues, respectively.revenues. The Company’s most significant customer relationships for the ninesix months ended OctoberJuly 31, 20162023 included fivethree power industry service customers and one industrial construction services customer, which accounted for approximately19%, 17%, 16%, 16%, 14%11% and 14%11% of consolidated revenues, respectively.revenues. The Company’s most significant customer relationship for the six months ended July 31, 2022 included one power industry service customer, which accounted for 47% of consolidated revenues.
The accounts receivable balances from three major customers represented 35%, 15% and 10% of the corresponding consolidated balance as of July 31, 2023. 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 fourthree major customers represented 18%36%, 17%, 17%12% and 11%12% of the corresponding consolidated balance as of January 31, 2017.2023. The contract asset balances from three major customers represented 30%, 15% and 13% of the corresponding consolidated balance as of July 31, 2023. Contract asset balances from one major customer represented 70% of the corresponding consolidated balance as of January 31, 2023. 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 one 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, intersegment revenues totaled approximately $0.2 million2023 and $1.8 million, respectively. For the three and nine months ended October 31, 2016,2022, intersegment revenues were insignificant. Intersegment revenues for the aforementioned periods related to services provided by our industrial fabrication and field services segment to our power industry services segment.not material. 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, 20172023 and 2016.2022. The “Other” column in each summary includes the Company’s corporate and unallocated expenses.
| | | | | | | | | | | | | | | | Three Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2023 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 105,345 | | $ | 32,756 | | $ | 3,248 | | $ | — | | $ | 141,349 | Cost of revenues | | | 87,094 | | | 28,076 | | | 2,437 | | | — | | | 117,607 | Gross profit | | | 18,251 | | | 4,680 | | | 811 | | | — | | | 23,742 | Selling, general and administrative expenses | | | 5,596 | | | 1,446 | | | 727 | | | 2,732 | | | 10,501 | Income (loss) from operations | | | 12,655 | | | 3,234 | | | 84 | | | (2,732) | | | 13,241 | Other income (loss), net | | | 3,607 | | | — | | | (3) | | | 514 | | | 4,118 | Income (loss) before income taxes | | $ | 16,262 | | $ | 3,234 | | $ | 81 | | $ | (2,218) | | | 17,359 | Income tax expense | | | | | | | | | | | | | | | 4,592 | Net income | | | | | | | | | | | | | | $ | 12,767 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | — | | $ | 98 | | $ | — | | $ | — | | $ | 98 | Depreciation | | | 128 | | | 260 | | | 99 | | | 1 | | | 488 | Property, plant and equipment additions | | | 148 | | | 220 | | | 18 | | | — | | | 386 | | | | | | | | | | | | | | | | | Current assets | | $ | 319,196 | | $ | 45,590 | | $ | 4,273 | | $ | 86,073 | | $ | 455,132 | Current liabilities | | | 183,405 | | | 28,996 | | | 1,717 | | | 1,488 | | | 215,606 | Goodwill | | | 18,476 | | | 9,467 | | | 90 | | | — | | | 28,033 | Total assets | | | 346,192 | | | 63,074 | | | 7,264 | | | 89,178 | | | 505,708 |
14
| | | | | | | | | | | | | | | | Three Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2022 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 91,327 | | $ | 23,022 | | $ | 3,761 | | $ | — | | $ | 118,110 | Cost of revenues | | | 71,225 | | | 19,551 | | | 2,947 | | | — | | | 93,723 | Gross profit | | | 20,102 | | | 3,471 | | | 814 | | | — | | | 24,387 | Selling, general and administrative expenses | | | 6,058 | | | 1,685 | | | 808 | | | 2,433 | | | 10,984 | Income (loss) from operations | | | 14,044 | | | 1,786 | | | 6 | | | (2,433) | | | 13,403 | Other income (loss), net | | | 437 | | | — | | | (1) | | | 69 | | | 505 | Income (loss) before income taxes | | $ | 14,481 | | $ | 1,786 | | $ | 5 | | $ | (2,364) | | | 13,908 | Income tax expense | | | | | | | | | | | | | | | 9,686 | Net income | | | | | | | | | | | | | | $ | 4,222 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | — | | $ | 165 | | $ | 68 | | $ | — | | $ | 233 | Depreciation | | | 138 | | | 508 | | | 100 | | | 1 | | | 747 | Property, plant and equipment additions | | | 42 | | | 336 | | | 22 | | | — | | | 400 | | | | | | | | | | | | | | | | | Current assets | | $ | 258,771 | | $ | 31,960 | | $ | 4,745 | | $ | 82,717 | | $ | 378,193 | Current liabilities | | | 124,320 | | | 15,055 | | | 1,991 | | | 646 | | | 142,012 | Goodwill | | | 18,476 | | | 9,467 | | | 90 | | | — | | | 28,033 | Total assets | | | 282,783 | | | 49,097 | | | 8,198 | | | 82,992 | | | 423,070 |
| | | | | | | | | | | | | | | | Six Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2023 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 175,521 | | $ | 63,063 | | $ | 6,440 | | $ | — | | $ | 245,024 | Cost of revenues | | | 147,429 | | | 54,638 | | | 4,991 | | | — | | | 207,058 | Gross profit | | | 28,092 | | | 8,425 | | | 1,449 | | | — | | | 37,966 | Selling, general and administrative expenses | | | 11,310 | | | 2,906 | | | 1,430 | | | 5,446 | | | 21,092 | Income (loss) from operations | | | 16,782 | | | 5,519 | | | 19 | | | (5,446) | | | 16,874 | Other income (loss), net | | | 5,697 | | | — | | | (3) | | | (2,205) | | | 3,489 | Income (loss) before income taxes | | $ | 22,479 | | $ | 5,519 | | $ | 16 | | $ | (7,651) | | | 20,363 | Income tax expense | | | | | | | | | | | | | | | 5,487 | Net income | | | | | | | | | | | | | | $ | 14,876 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | — | | $ | 196 | | $ | — | | $ | — | | $ | 196 | Depreciation | | | 256 | | | 564 | | | 213 | | | 2 | | | 1,035 | Property, plant and equipment additions | | | 537 | | | 476 | | | 18 | | | — | | | 1,031 |
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 | |
| | | | | | | | | | | | | | | | Six Months Ended | | Power | | Industrial | | Telecom | | | | | July 31, 2022 | | Services | | Services | | Services | | Other | | Totals | Revenues | | $ | 165,276 | | $ | 45,523 | | $ | 7,588 | | $ | — | | $ | 218,387 | Cost of revenues | | | 130,260 | | | 38,231 | | | 5,771 | | | — | | | 174,262 | Gross profit | | | 35,016 | | | 7,292 | | | 1,817 | | | — | | | 44,125 | Selling, general and administrative expenses | | | 11,673 | | | 3,444 | | | 1,573 | | | 4,869 | | | 21,559 | Income (loss) from operations | | | 23,343 | | | 3,848 | | | 244 | | | (4,869) | | | 22,566 | Other income, net | | | 1,021 | | | — | | | 1 | | | 78 | | | 1,100 | Income (loss) before income taxes | | $ | 24,364 | | $ | 3,848 | | $ | 245 | | $ | (4,791) | | | 23,666 | Income tax expense | | | | | | | | | | | | | | | 11,959 | Net income | | | | | | | | | | | | | | $ | 11,707 | | | | | | | | | | | | | | | | | Amortization of intangibles | | $ | — | | $ | 331 | | $ | 68 | | $ | — | | $ | 399 | Depreciation | | | 280 | | | 1,052 | | | 222 | | | 2 | | | 1,556 | Property, plant and equipment additions | | | 94 | | | 487 | | | 57 | | | — | | | 638 |
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 | |
15
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 | |
NOTE 15 — SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION 16Other current assets consisted of the following at July 31, 2023 and January 31, 2023:
| | | | | | | | | July 31, | | January 31, | | | 2023 | | 2023 | Income tax refunds receivable and prepaid income taxes | | $ | 16,895 | | $ | 15,327 | Raw materials inventory | | | 12,836 | | | 11,903 | Prepaid expenses | | | 6,848 | | | 4,541 | Other | | | 6,859 | | | 6,563 | Total other current assets | | $ | 43,438 | | $ | 38,334 |
Accrued expenses consisted of the following at July 31, 2023 and January 31, 2023: | | | | | | | | | July 31, | | January 31, | | | 2023 | | 2023 | Accrued compensation | | $ | 13,085 | | $ | 18,286 | Accrued project costs | | | 43,995 | | | 17,448 | Lease liabilities | | | 1,535 | | | 1,567 | Other | | | 9,005 | | | 12,566 | Total accrued expenses | | $ | 67,620 | | $ | 49,867 |
On March 7, 2023, the Company determined that it had been a victim of a complex criminal scheme, which resulted in fraudulently-induced outbound wire transfers to a third-party account. As a result of the event, the Company incurred a loss of approximately $3.0 million. The Company retained specialized legal counsel and a cybersecurity services firm to assist in an independent forensic investigation of the incident and the efforts to recover the funds. As a result, the Company incurred legal, audit and other professional fees in the aggregate amount of $0.2 million related to this event and has recovered approximately $0.4 million through legal efforts and insurance proceeds as of July 31, 2023. The Company continues to pursue efforts to recover additional funds. The total amount of the fraud loss and the professional fees, net with funds recovered, of approximately $2.8 million is included in other income, net in the condensed consolidated statements of earnings for the six months ended July 31, 2023.
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, 2017,2023, and the results of their operations for the three and nine monthssix month periods ended OctoberJuly 31, 20172023 and 2016,2022, 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, 2017Fiscal 2023 that was filed with the SEC on April 11, 2017. 17, 2023 (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,” “estimate,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These Our forward-looking statements, 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.The Company is primarily a holding companyconstruction firm that conducts operations through its wholly-owned subsidiaries, GPS, APC, SMCTRC and TRC.SMC. Through GPS and APC, we provide a full range of engineering, procurement, construction, commissioning, operations management, maintenance, project development and technical and consulting services to the power generation andmarket, including the renewable energy marketssector, for a wide range of customers, including independent power project owners, public utilities, power plant heavy equipment suppliers and global energy plant construction firms.other commercial firms with significant power requirements. GPS including its consolidated joint ventures, and APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and fieldconstruction services reportable segment provides primarily on-site services that support new plant construction and additions, maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southern United StatesSoutheast region of the U.S. and that are based on its expertise in producing, deliveringmay include the fabrication, delivery and installing fabricatedinstallation of steel components such as piping systems and pressure vessels, heat exchangers and piping systems.vessels. Through SMC, now 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.Mid-Atlantic region of the U.S.
At the holding company level, we intend toWe may make additional opportunistic acquisitions of and/or investments inby identifying companies with significant potential for profitable growth. Wegrowth and realizable synergies with one or more of our existing businesses. However, we may have more than one industrial focus. We expect thatfocus depending on the opportunity and/or needs of our customers. Significant acquired companies will be held in separate subsidiaries that will be operated in a manner that we believe will best provides cash flowsprovide long-term and enduring value for our stockholders.
Overview OverviewOperating Results
Highlights for the current year include the following:
· Current year-to-date results for revenues, gross profit, income before income taxes and 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.
17
· 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.
OurConsolidated revenues for the three months ended OctoberJuly 31, 2017 increased by 33% to $232.92023 were $141.3 million, which represented an increase of $23.2 million, or 19.7%, from $175.4consolidated revenues of $118.1 million reported for the three months ended OctoberJuly 31, 2016, providing EBITDA attributable2022. The overall improvement in revenues was due to our stockholdersincreases in revenues between quarters for both the power industry and industrial construction services reportable segments.
Consolidated gross profit for the current quarter of $30.3three-month period ended July 31, 2023 was $23.7 million, or 13%approximately 16.8% of the corresponding consolidated revenues, which reflected positive contributions from all three reportable businesssegments. For the three-month period ended July 31, 2022, the consolidated gross profit was $24.4 million, which represented approximately 20.6% of the corresponding amount of consolidated revenues. Gross profits Selling, general and administrative expenses for the three months ended OctoberJuly 31, 2017 increased by 3% to $37.72023 and 2022 were $10.5 million, from $36.6or 7.4% of corresponding consolidated revenues, and $11.0 million, or 9.3% of corresponding consolidated revenues, respectively. Other income, net, for the three months ended OctoberJuly 31, 2016. However, our gross profit percentage declined2023 was $4.1 million, which substantially related to 16.2% from 20.8% as we increased our estimated costs to complete certain EPC projects due to, primarily, increased laborincome earned during the period on funds invested in a money market fund, CDs and subcontractor costs. The corresponding reductionU.S. Treasury notes. For the three months ended July 31, 2023, income tax expense was $4.6 million which represented an effective income tax rate of 26.5%. For the three months ended July 31, 2022, income tax expense was $9.7 million, which included an unfavorable adjustment in the approximate amount of forecasted gross margins had an unfavorable$6.2 million that was related to the settlement of research and development credit claims with the IRS. Excluding the effect on gross profit forof 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 causedIRS settlement, our effective income tax rates to increase for current year periods compared with the corresponding periods last year. Income tax expenserate for the three months ended OctoberJuly 31, 20172022 was $12.125.2%.
Consolidated revenues for the six months ended July 31, 2023 were $245.0 million, which represented an increase of $26.6 million, or 41.0%12.2%, from consolidated revenues of income before income taxes. As a result, income tax expense$218.4 million reported for the ninesix months ended OctoberJuly 31, 20172022 with the increase reflecting primarily the revenue increases achieved for the second quarter. Consolidated gross profit for the six-month period ended July 31, 2023 was pushed upwards to $37.7$38.0 million, or 36.6%approximately 15.5% of the corresponding consolidated revenues, which reflected positive contributions from all three reportable businesssegments. For the six-month period ended July 31, 2022, the consolidated gross profit was $44.1 million, which represented approximately 20.2% of the corresponding amount of income before income taxes. Last year, the income tax ratesconsolidated revenues. Selling, general and administrative expenses for the comparable periodssix months ended July 31, 2023 and 2022 were 29.9%$21.1 million, or 8.6% of corresponding consolidated revenues, and 32.4%,$21.6 million, or 9.9% of corresponding consolidated revenues, respectively. A decreaseOther income, net, for the six months ended July 31, 2023 was $3.5 million, which reflected income earned during the period on funds invested in gross profit percentagea money market fund, CDs and an increase in income taxes,U.S. Treasury notes, partially offset by increased revenues, were the primary causeswire-transfer fraud loss that occurred in the first quarter of Fiscal 2024, its partial recovery, and related professional fees (see Note 15 to the accompanying condensed consolidated financial statements). Other income, net, for the six months ended July 31, 2022 was $1.1 million, which included primarily earnings associated with our solar fund investments.
For the six months ended July 31, 2023, income tax expense was $5.5 million which represented an effective income tax rate of 26.9%. For the six months ended July 31, 2022, income tax expense was $12.0 million, which included the unfavorable adjustment amount identified above. Excluding the effect of the decline in netadjustment, our effective income attributable to our stockholders to $17.2 million, or $1.09 per diluted share,tax rate for the six months ended July 31, 2022 was 24.4%. For the three months ended OctoberJuly 31, 2017 from $18.12023, our overall operating profit performance resulted in net income in the amount of $12.8 million, or $1.16$0.94 per diluted share. For the comparable period last year, we reported net income in the amount of $4.2 million, or $0.30 per dilutive share. For the six months ended July 31, 2023 and 2022, net income was $14.9 million, or $1.10 per diluted share, for the three months ended October 31, 2016, a reduction of 4.7%. and $11.7 million, or $0.80 per diluted share, respectively. Execution on ContractProject Backlog
At OctoberJuly 31, 2017,2023, our contractconsolidated project backlog amount of $0.8 billion consisted substantially of the projects of the power industry services reporting segment. The comparable consolidated backlog amount as of January 31, 2023 was $509 million. The following table summarizes our large 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 Notice to Proceed (“FNTP”) represents the formal notice provided by the customer instructing us to commence the activities covered by the corresponding contract.
Contractalso $0.8 billion. 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 thosethe corresponding projects.
Typically, we include the total value of EPC services and other major construction contracts atin project backlog when we receive a specific point in time. Wecorresponding notice to proceed from the project owner. However, we may include the value of an EPC services contract prior to the receipt of a notice to proceed if we believe contract backlogthat it is an indicator of future revenues and earnings potential. Although contract backlog reflects businessprobable that we consider to be firm,the project will commence within a reasonable timeframe, among other factors. However, cancellations or reductions may occur and maythat would reduce contractproject backlog and that could adversely affect our expected future revenues. Despite We are committed to the new awards to APC that are identified above, the total 18
valueconstruction of state-of-the-art, natural gas-fired power plants, which represents our core business, as important elements of our contract backlog has declined by half duringcountry’s electricity-generation mix now and in the current year which substantially reflects the amounts of revenues earned by GPS due to its performance on the first four projects identified above. New opportunitiesfuture. In addition, we have been pursued and negotiations continue for several projects.
The first fourdirecting certain business development efforts to winning projects identified in the chart above, all EPC contracts, were the most significant drivers of our financial results for the three 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 componentutility-scale wind farms and solar fields and
for the construction of ahydrogen-based energy and other industrial projects in order to diversify the sources of revenues. We have successfully completed alternative energy projects in the past and we have renewed efforts to obtain new work in other sectors of the power market that will complement our natural gas-fired EPC services projects going forward. During the first quarter of Fiscal 2024, we achieved the substantial completion milestone for the Guernsey Power Station, which is located in Cambridge, Ohio, pursuant to an EPC services contract with Caithness Energy, L.L.C. This 1,875 MW, combined cycle power plant remains the largest single-phase, gas-fired, electricity-generation plant in the U.S. A small portion of our consolidated project backlog at July 31, 2023 relates to this project as GPS completes the final stages of the commissioning process, including all punch-list items and demobilization efforts, as well as the closeout of commercial matters with the customer, certain subcontractors and equipment suppliers. Final completion of this project is currently expected to occur during the third quarter of Fiscal 2024. We are also nearing completion of efforts under an EPC services contract with CPV Maple Hill Solar, LLC, an affiliate of Competitive Power Ventures, Inc., to construct the Maple Hill Solar facility, which we believe will be among the largest solar-powered energy plants in Pennsylvania. Project completion is currently scheduled to occur during the fourth quarter of Fiscal 2024. The unique Maple Hill Solar project, which is located in Cambria County, is being constructed using over 235,000 photovoltaic modules to generate up to approximately 100 MW of electrical power. In October 2022, GPS added the EPC services contract value of the Trumbull Energy Center, a 950 MW natural gas-fired power plant now under construction in Teesside,Lordstown, Ohio. We received the full notice to proceed with the project from the owner, Clean Energy Future-Trumbull, LLC, in November 2022. This combined cycle power station will consist of two Siemens Energy SGT6-8000H gas fired, high efficiency, combustion turbines with two heat recovery steam generators and a single steam turbine. Project completion is scheduled for late in the year ending January 31, 2026. In August 2023, GPS executed Limited Notices to Proceed (“LNTPs”) with Vistra Energy for three solar and battery projects in Illinois. Under the LNTPs, GPS has commenced early engineering and design activities as well as procurement of major equipment for construction of state-of-the-art solar energy and battery energy storage facilities. The projects will represent 160 MW of electrical power and 22 MW of energy storage and are reflected in project backlog as of July 31, 2023. Together, the Trumbull Energy Center, the Guernsey Power Station, the Maple Hill Solar facility and the Illinois solar and battery projects represent over 3.0 gigawatts of potential electrical power. Additionally, the technical, project support and project management teams of GPS continue to assist APC with certain current projects and business development efforts. The business development efforts conducted by our APC operations have continued to strengthen and broaden the project backlog of this business, which is near the northeast coastamounted to approximately $142 million as of England. Work began this summer with completion scheduled in 2019. TR is a Spain-based global general contractor. In addition,July 31, 2023. A significant award occurred in October 2017,2021 as APC was awarded a contract to perform certainentered into an engineering procurement and construction services for InterGen,contract with EPUKI London, U.K., to construct a company that develops, constructs and operates power projects around the world. The Spalding Energy Expansion plan includes APC’s project for the expansion of the existing2 x 330 MW natural gas-fired power stationplant in Spalding (locatedCarrickfergus that is near Belfast, Northern Ireland, in a structure that was initially designed to enclose coal-fired units. Our project, referred to as the East Midlands region“Kilroot” project, is being developed by EPNI Energy Limited. Full project activities are underway; however, there have been a number of England)unanticipated challenges related to this job that continue to meaningfully impact the contract, costs and schedule negatively. Even with an open cycle gas turbine unit with a planned capacitythese difficulties, the overall completion of 298 MW. Substantial completion for this project is also scheduledexpected to occur early next year. In May 2022, APC entered into engineering and construction services contracts with Ireland’s Electricity Supply Board (“ESB”) to construct three 65 MW aero-derivative gas turbine flexible generation power plants in and around the city of Dublin, Ireland. Two of the power plants, the Poolbeg and Ringsend FlexGen Power Plants, will be located on the Poolbeg Peninsula, and the Corduff FlexGen Power Plant will be built in nearby Goddamendy. All three projects cleared the applicable capacity auction in Fiscal 2023 and are expected to operate intermittently during peak periods of electricity demand and as back-up supply options when renewable electricity generation is limited. The completion of each power facility is expected to occur near the end of Fiscal 2024. Additionally, APC entered into an EPC services contract with GE Vernova for 2019.the Shannonbridge Project, an open-cycle thermal power facility in County Offaly, Ireland that will have the capacity to generate approximately 264 MW of temporary emergency electrical power (the “Shannonbridge Power Project”). The Shannonbridge Power Project, an initiative of EirGrid and the Electricity Supply Board of Ireland, aims to enhance the region’s power infrastructure and to ensure a reliable electricity supply during critical situations and emergencies. GPS is teaming with APC in performance of this contract. Work on this project commenced early this year pursuant to the receipt of a series of LNTPs. In August 2023, APC received the full notice to proceed on this project, with a targeted completion date of early Fiscal 2025, and is reflected in project backlog as of July 31, 2023. The project backlog of TRC has been increased by 135% over the last twelve months to approximately $140 million as of July 31, 2023, reflecting a business development emphasis on the award of larger industrial field service construction projects from continuing and new customers. The recent emphasis on construction opportunities influenced the strategic decision to consolidate the pipe and vessel fabrication facilities to reduce fixed costs, streamline operations and better support a growing and scalable business model. Despite these positive developments, we believeIt is important to note that the uncertainty surroundingstart of new projects is primarily controlled by project owners and that delays may occur that are beyond our control. However, we continue to pursue natural gas-fired power plant, renewable energy plant and industrial construction opportunities in the level of regulatory support for coal as partU.S., Ireland and the U.K. Our vision is to safely contribute to the construction of the energy mix,infrastructure and state-of-the-art industrial facilities that are essential to future economic prosperity in the areas where we operate. We intend to realize this vision with motivated, creative, high-energy and customer-driven teams that are committed to delivering the best possible project results each and every time.
Market Outlook The overall growth of our power business has been substantially based on the number of combined cycle gas-fired power plants built by us, as many coal-fired plants have been shut down in the U.S. In 2010, coal-fired power plants accounted for about 45% of net electricity generation in the U.S. For 2022, coal fueled approximately 20% of net electricity generation. It has been reported that the average age of the active plants in the coal-fired fleet approximates 45 years old with an average life span of 50 years; the last coal-fired power plant built in the U.S. was constructed in 2015. On the other hand, natural-gas fired power plants provided approximately 39% of the electricity generated by utility-scale power plants in the U.S. in 2022, representing an increase of 69% from the amount of electrical power generated by natural gas-fired power plants in 2010, which provided approximately 24% of net electricity generation for 2010. The average age of utility-scale natural gas-fired power plants in the U.S. is approximately 22 years old with an average life span of 30 years. Major advances in the safe combination of horizontal drilling techniques and hydraulic fracturing led to the boom in natural gas supplies which have been available generally at consistently low and stable prices. However, reductions in production levels during the pandemic and an increase in the amount of liquid natural gas exports, among other factors including the Russian invasion of Ukraine, strained domestic natural gas supplies and forced prices upward. As a result, the price of natural gas in the U.S. increased meaningfully during the 2022 calendar year. However, spot prices have declined during the first half of 2023 and are forecasted to stabilize through the remainder of 2023 before rising again in calendar year 2024. When sudden power generatingneeds emerge and natural gas prices are relatively high, power producers often choose to increase coal-fired power to satisfy the short term demands for electricity. In the reference case of its Annual Energy Outlook 2023, the Energy Information Administration (“EIA”) projects that economic growth paired with increasing electrification in end-user sectors will result in the stable growth of electricity demand in the U.S. through 2050. Declining capital costs for solar panels, wind turbines and battery storage, as well as government subsidies like those included in the Inflation Reduction Act of 2022 (the “IRA”), will result in renewables becoming increasingly cost effective compared with the alternatives when the costs of building new power capacity provided by renewable energy assetsare considered. Renewables are increasingly meeting power demand through 2050 as they become more competitive with natural gas, coal and the improvements in renewable energy storage solutions may be impacting the planning and initiation phases for the construction of new natural gas-fired power plants which continue to be delayed by project owners. Other unfavorable factors may include the potential for future volatilitynuclear power. Uncertainty in natural gas prices that appearsleads to be givingdifferent unfavorable projections for combined cycle units in the short term, but in the long term, natural gas demand from the electric power sector stabilizes. As a short-term boostresult of the renewables growth, U.S. coal-fired generation capacity will continue to decline sharply to about 54% of current levels by 2030, with a gradual decline thereafter. The historic decline in the use of coal as a power source in the U.S. was caused, to a significant extent, by the plentiful supply of domestic and generally inexpensive natural gas which made it the fuel of choice for power plant developers over this period. The pace of the historic increase in the preference for natural gas as an electricity generating fuel source also was energized, in part, by environmental activism and restrictive regulations targeting coal-fired power plants. However, the environmentalist opposition against coal-fired power generation has expanded meaningfully to target all fossil fuel energy projects, including both power plants and disappointingpipelines, and has evolved into powerful support for renewable energy auctions during the current year for new power generating assets.sources. 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 majorProtests against fossil-fuel related 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 garneredprojects garner media attention and stir public skepticism about new pipelines resultingprojects which have resulted in project delays due to onsite protest demonstrations, indecision by local officials and lawsuits. Pipeline approval delaysVarious 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 jeopardizeincrease the risk of a new power plant becoming a stranded asset long before the end of its otherwise useful economic life, which is 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 construction of new natural gas-fired power plants. Lenders, who have become more wary of funding fossil-fuel ventures as environmental, social and governance ideals influence financing decisions, may be generally unwilling to provide capital for energy projects to increase the domestic production and transmission of oil and natural gas. In addition, insurance underwriters may require oil and gas industry clients to implement plans to reduce methane emissions, that are among the most severe greenhouse gases, and will not provide insurance coverage for oil and gas projects in government-protected conservation areas that do not allow for sustainable use.
We believe that significant uncertainty relates to the policies of the current U.S. Presidential administration. President Biden proposes to make the electricity production in the U.S. carbon free by 2035 and to put the country on the path to achieve net zero carbon emissions by 2050. These policy stances continued during the invasion of Ukraine and the concurrent rise in oil prices as the administration made appeals to other countries to increase oil production while domestic production was challenged by supply chain and labor issues and the maintenance of restrictive regulations. Meanwhile, delays continue for the construction of pipelines needed to bring supplies oftransport natural gas to potentiallyliquid natural gas export facilities for shipment to Western Europe. In August 2022, President Biden signed the IRA, a climate and healthcare bill that imposes new taxes on corporations with net profits for financial reporting in excess of $1.0 billion, spends billions of dollars over a decade on new workers and technology at the IRS, and funds hundreds of billions of dollars in tax subsidies intended to combat climate change among other measures. According to certain commentary, the legislation will cause investment in technologies needed for leaner production and the use of fuel types, including hydrogen, nuclear, renewables and fossil fuels. However, it appears that receipt of the majority of the tax subsidies will be conditioned on the extent that taxpayers “buy American” and/or pay prevailing wages, among other requirements. Existing supply chains and skilled labor pools may lack the capacity to meet the demand that the incentives are intended to create. Therefore, the subsidies may not provide the intended economic incentives to renewable and other energy project owners. It is not clear that the legislation, for which the rules and regulations have not yet been finalized, will provide assistance to current and future project owners of fossil-fuel power projects as intended. In May 2023, the Biden administration proposed new rules for the Environmental Protection Agency (the “EPA”) that are intended to drastically reduce greenhouse gases from coal- and gas-fired power plant sites thereby increasingplants that officials admit will cost such plants billions of dollars to comply fully by 2042. The new EPA rules would give owners of energy plants, that are providing base load power, flexibility in choosing the riskmeans to achieve the emission targets. Alternatives could include the installation of power plant project delayscarbon-capture systems that remove carbon dioxide from flue gases that are the by-product of fossil-fuel combustion or cancellations. Possible Impairment Loss
TRC’s management recently completed a reforecastingthe blending of its future financial results which provides essential datacleaner fuels such as hydrogen. A public comment period for the required annual goodwill assessmentproposed rules ended in early August 2023; final rules are expected in 2024.
In June 2023, President Biden signed the debt ceiling bill which included reforms for certain elements of TRC asthe permitting process for energy projects. The bill imposes certain timelines for federal agencies to review and to approve elements of November 1, 2017. The new forecast presentsmajor energy projects and includes provisions designating a less favorable outlook for TRC, which represents our Industrial Fabrication and Field Services reportable business segment, than insingle agency to take 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. Dependinglead on the completionenvironmental review process. Such streamlining of the goodwill assessment includingcurrent permitting process for energy generating facilities could ease certain constraints on the resolutionpower industry. Regarding emissions, it is important to note that in its 2023 reference case, EIA projects that U.S. energy-related carbon dioxide emissions will decline by a little over 30% below the 2005 emissions level by 2030. We believe that a significant portion of this uncertainty, we may be required to record an impairment lossthe reduction related to the goodwillshift from coal-fired to natural gas-fired power generation has already occurred as described above. It appears that from 2005 to 2022, the energy-related emissions declined by approximately 20%. The EIA credits the impacts of TRCthe IRA, updates to technology costs and performance across the energy system and changes in the fourth quartermacroeconomic outlook with maintaining the reduction percentage versus the 2005 level of emissions at approximately 30% from now through 2050. In addition, the current year up to an amountEIA indicates that further emissions reductions are limited by longer-term growth in U.S. transportation and industrial activity. The EIA in its report does not include emissions from the power industry among the reasons for the lack of $5.5 million. However, the completion of the full valuation of the business of TRC could materially change this outcome. 19
Outlook
Transitionfurther emission reductions from Coal to Natural Gas Will Take Time
2030 through 2050. The U.S. Energy Information Administration (the “EIA”) expects the sharenet amount of total utility-scale electricity generation in the United States fromU.S. provided by utility-scale wind and solar photovoltaic facilities continues to rise. Together, such power facilities provided approximately 12%, 13% and 15% of the net amount of electricity generated by utility-scale power facilities in 2020, 2021 and 2022, respectively. EIA projects that new wind and photovoltaic solar capacity will continue to be added to the utility-scale power fleet in the U.S. at a brisk pace substantially attributable to declines in the amount of renewable power plant component and power storage costs, an increase in the scale of energy storage capacity (i.e., battery farms and other energy storage technologies), the availability of valuable tax credits and the overall political commitment to renewable energy. Most of our recently completed and awarded EPC service contracts relate to the construction of natural gas-fired power plants located within the Mid-Atlantic geographic footprint of PJM Interconnection (“PJM”), which operates a capacity market to ensure long-term grid reliability by securing the appropriate amount of power supply resources needed to meet predicted future energy demands in the Mid-Atlantic region of the U.S. Capacity payments represent meaningful portions of the revenue streams of qualifying power plants. The capacity auction for a particular delivery year was usually held during the month of May, three years prior to the actual delivery year. However, the 2023/2024 auction, rescheduled to December 2021, was delayed until January 2022 and then was postponed again until June 2022. The auction results included increased capacity powered by nuclear, solar and natural gas energy sources, and decreased capacity provided by coal and wind energy sources. However, prices for the 2023/2024 and 2024/2025 delivery years were significantly lower than each previous auction. In June 2023, the Federal Energy Regulatory Commission (“FERC”) issued an order accepting PJM’s proposal for the 2025/2026 capacity auction, scheduled to be held in June 2023, to be postponed until June 2024. Thereafter, the capacity auctions through the 2028/2029 delivery year will fallbe held every six months through May 2026, so that market design rule changes proposed by stakeholders might be implemented for all future auctions. These new rules for capacity market enhancements are expected to be filed by October 2023. Uncertainty in this market, including the difficulties experienced by PJM in perfecting a capacity auction design that all of its stakeholders consider to be fair, the repeated capacity auction delays, and the shrinking annual capacity auction prices, may discourage potential power plant owners from an averagecommencing the development of 34%new power plants in 2016this area thereby reducing potential new business opportunities for us. In February 2023, PJM released a position paper that supported the growing concern that the reliability of power grids is being eroded by the rush 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 reversalrenewable power. While acknowledging the reality of the relativepower transition in the PJM system, it warned that its research highlighted three trends that present increasing reliability risks during the transition due to a potential timing mismatch between load growth, resource retirements and the pace of new electricity generating plant additions. The paper indicates that the growth rate of electricity demand in the PJM footprint is likely to increase from electrification (i.e., shifts to electric-powered automobiles, electric appliances, etc.) coupled with the proliferation of high-demand data centers in the region. Coal-fired and old gas-fired power generation share position forfacilities are being retired at a rapid pace due to government and private sector policies as well as economics. The risk is that these retirements may outpace the construction of new power-generating facilities as PJM’s interconnection queue includes primarily intermittent and limited-duration renewable energy resources. Given the operating characteristics of these types of facilities, PJM will need multiple megawatts of renewable power and accompanying battery storage to replace a single megawatt of thermal generation. In summary, throughout the U.S., the risk of electricity shortages is real as traditional power plants are being retired more quickly than they can be replaced by renewable energy and battery storage. Power grids are feeling the strain as the U.S. makes the historic transition from conventional power plants fueled by coal and natural gas to cleaner forms of energy such as wind and solar power, and aging nuclear plants are slated for retirement. Electric-grid operators are warning that power-generating capacity is forecaststruggling to keep up with demand, a gap that could lead to additional rolling blackouts during heat waves or other peak power periods. In the U.S., local electricity grids are connected to form larger networks and to improve reliability and economic efficiency and are known as Regional Transmission Operators (“RTOs”) and Independent System Operators (“ISOs”). They are members of three main interconnections, the Eastern Interconnection, the Western Interconnection and the Electric Reliability Council of Texas. These interconnectors cover wide swaths of the U.S. Although the three interconnections operate independently of each other and have very limited transfers of power between them, the operation of interconnections is conducted by balancing authorities, which ensures that power supply and demand are balanced to maintain the reliability of applicable power systems. All RTOs, including PJM, and ISOs in the U.S. are balancing authorities. Consequently, reliability threats to certain individual RTOs and ISOs represent threats to entire interconnection organizations. The challenge is that wind and solar farms do not produce electricity at all times and they need large batteries to store their output for later use. While large battery storage capacity is under development, regional grid operators have warned that the pace may not be fast enough to offset the closures of traditional power plants that can work around the clock. Accelerating the build-out of renewable energy sources and batteries has become an especially difficult proposition amid supply-chain challenges and inflation. For example, during Fiscal 2023, the highly publicized probe by the U.S. Commerce Department into whether Chinese solar manufacturers were circumventing trade tariffs on solar panels had the effect of halting imports of key components needed to build new solar farms and effectively brought most of the U.S. solar industry to a temporary standstill. As a result of this probe, the U.S. determined that certain Chinese solar manufacturers were dodging U.S. tariffs by finishing their products in Cambodia, Malaysia, Thailand and Vietnam, countries that account for approximately 80% of solar panel supplies. In August 2023, the Commerce Department of the U.S. decided to impose tariffs on solar imports from Southeast Asia. Critics of this action claim that the tariffs will scramble supply chains, delay projects and reduce profits for solar farm developers. Additionally, solar and wind energy plant developers continue to confront the problems caused by grid congestion, often unsuccessfully. Many of these projects have been canceled because renewable plants need to be short lived.sited where the resources are optimal, often in remote locations where the transmission systems are not robust as power is consumed substantially in urban areas. The projected annual generation shares for natural gas and coal in 2018 are predicted tocosts associated with the necessary grid upgrades may be 32% and 31%, respectively. In 2016, natural gas overtook coal as the leading source of power generationprohibitive. U.S. offshore wind projects progress inconsistently, facing challenges in the United States. areas of environmental and fishery impacts, grid connection complexities, transmission planning and federal permitting processes. Further, U.S. projects are confronted by shipping regulations that may limit the ability of developers to replicate successful European erection models. Proponents of clean energy also face political challenges from constituencies who oppose the impacts to wildlife and the environment that may be caused by clean energy infrastructure projects. Electricity generation from renewable energy sources other than hydropowercommercial nuclear power plants in the U.S. began in 1958. At the end of 2021, the U.S. had 93 operating commercial nuclear reactors at 55 nuclear power plants in 28 states. The average age of these nuclear reactors is predictedabout 40 years old with most plants authorized to grow from 8%operate for another 20 years. In 2009, construction began on two nuclear reactors in the U.S., Vogtle Units 3 and 4, projects that have since experienced significant construction delays and billions of dollars in cost overruns. In August 2023, Vogtle Unit 3 commenced commercial operation, which marks the first nuclear reactor commissioned in the U.S. since the Tennessee Valley Authority’s Watts Bar 2 in 2016, which was twenty years after the previous one began operation. Renewed interest in nuclear power could result in the construction of new nuclear powered, carbon-free, electricity generation stations in the U.S. that would use smaller and more economical nuclear reactors. The deployment of small modular reactors could mean lower construction and electricity costs through the use of simpler power plant designs, standardized components and passive safety measures. Such plants could be built in less time than larger plants, utilize less space and represent a viable choice for reliable power to about 9%offset the intermittencies of renewable power sources. The increase by the U.S. in 2017 and 10% in 2018. Generation fromits use of nuclear energy accountspower for almost 20% of totalelectricity generation in each year from 2016 through 2018. The Demand for Electrical Power Remains Modest
Government forecasts project an annual increase in power generation of less than 1% per year for the next 25 years. However, our industry sector has not fully recovered from the recessionary decline incould have unfavorable effects on 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 increase 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 regulations 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) in the United States. The retirements 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, orand additional renewable plants, they are substantially more environmentally friendly than conventional coal-firedenergy facilities in the future, but could provide balance-of-plant construction opportunities for GPS.
Nevertheless, we believe that the lower operating costs of natural gas-fired power plants, the higher energy generating efficiencies of modern gas turbines, and they represent the most economical way to meet base loadsrequirements for grid resiliency should sustain the demand for modern combined cycle and peak demands. Relativelysimple cycle gas-fired power plants in the future. Natural gas is relatively clean burning, generally cost-effective, reliable and reliable,abundant. New gas-fired power plants incorporate major advances in gas-fired turbine technologies that have provided increased power plant efficiencies while providing the quick starting capabilities and the reliability that are necessary to balance the inherent intermittencies of wind and solar power plants. We believe that the benefits of natural gas as a source of power generation are undeniable. Ascompelling, especially as a complement to the use of coal declines, the use of nuclear energy stalls, the integration of increasing amountsdeployment of wind and solar power intopowered energy grids continues, power providers should continue to value gas-fired electricity generation, especially when needed to support intermittent renewable energy supplies. Current projections of future power generation assume the sustained increase in domestic natural gas production, which should lead to stable natural gas prices continuing intosources, and that 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 shares of the power generation mix represented by natural gas-fired power plants, wind farms and solar fields. Even without the implementation of the Clean Power Plan, natural gas and renewable energy sources are still predicted to be the top choices for new electricity generation plants in the future primarily due to low natural gas prices.
We continue to believe that the futurelong-term prospects for natural gas-fired power plant construction areremain generally favorable as natural gas has generally becomecontinues to be the primary source for power generation in our country. Major advances in horizontal drilling and the practice of hydraulic fracturing have led to the boom in natural gas supply. The abundantfuture availability of cheap, less carbon-intense and higher efficiency natural gas in the U.S. should continue to be a significant factor in the economic assessment of future power generation capacity additions. As indicated above, the demand for electric power in this country is expected to grow slowly but steadily over the long term. Demands for electricity, the ample supply of natural gas, 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 additions, in the future and an increased share of the power generation mix.
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In summary, the development of natural gas-fired and renewable power generation facilities in the United States should continue to provide construction opportunities for us, although the pace of new opportunities emerging may decreasebe restrained and the starts of awarded EPC projects may be delayed or cancelled due to the challenges described above.
We also believe that it is also important to note that the plans for certain natural gas-fired power plant projects include the integration of hydrogen-burning capabilities. While the plants will initially burn natural gas alone, it is planned by the respective project owners that the plants will eventually burn a mixture of natural gas and green hydrogen, thereby establishing power-generation flexibility for these plants. We believe this is a winning combination that provides inexpensive and efficient power, enhances grid reliability and addresses clean-air concerns. The building of state-of-the-art power plants with flex-fuel capability replaces coal-fired power plants in the near term. We are encouragedshort term with relatively clean gas-fired electricity generation. Further, such additions to the power generation fleet provide the potential for the plants to burn 100% green hydrogen gas, which would provide both base load power and long duration back-up power, when the sun is not shining or the wind is not blowing, for extended periods of time and without certain harmful air emissions. It has been stated that the current scramble for electricity, regardless of source, caused by the resultsRussian invasion of Ukraine has clarified that the 100% transition to renewable energy is in the distant future and has prompted, in part, renewed interest in not only carbon capture techniques, but carbon removal technologies as well. Carbon capture processes grab carbon from smokestacks and other sources of dense greenhouse gases, thereby reducing harmful emissions. Carbon-removal technologies are more demanding as they remove carbon out of the more diffuse open air in order to store it for centuries. Governments, including the U.S., are taking initial steps to boost this industry. The success of this industry could reduce the climate-change fear associated with natural gas-fired power plants. We intend to execute an “all-of-the-above” approach in pursuing the construction of future facilities that support the energy transition, which we see as a continuation of our historical commitment to building cleaner energy plants. The business development activities conducted by APC sincefootprint for TRC encompasses the Southeast region of the U.S. where there are many business-friendly local and state governments that welcome industrial production facilities. It is notable that significant events like the COVID-19 pandemic and the commitment to renewable energy in the U.S. are resulting in meaningful new business opportunities for TRC in its acquisition by usregion. The national focus on infrastructure improvements, biotechnology advancements and energy storage have resulted in firms that have leadare focused on these trends recently choosing TRC to participate in major construction projects in the region. The foregoing discussion in this “Market Outlook” does focus on the state of the domestic power market as the EPC services business of GPS historically provides the predominant amount of our revenues. However, overseas power markets provide important new power industry construction contracts outsideopportunities for us especially across Ireland and the U.K. While both of this country. We Are Positionedthese countries are committed to Succeed
We have been successfulthe increase in energy consumption sourced from wind and the sun on the pathway to net zero emissions, there is a recognition that these sources of electrical power are inherently variable. Other technologies will be required to support these power sources and to provide electricity when power demands exceed the amount of electricity supplied by these renewables. The existence of the necessary power reserve will require conventional generation sources, typically natural gas-fired power plants but including nuclear power in the completionU.K. APC was awarded the significant Kilroot project late in Fiscal 2022 to build a clean burning natural gas-fired power plant in Northern Ireland so that existing coal-fired power sources there can be replaced.
The Irish government has issued a policy statement on the security of our EPCthe electricity supply in Ireland which confirms the requirement for the development of new support technologies to deliver on its commitment to have 80% of the country’s electricity generated from renewables by 2030. The report emphasizes that this will require a combination of conventional generation (typically powered by natural gas), interconnection to other jurisdictions, demand flexibility and other projects. Our four largest EPC technologies such as battery storage and generation from renewable gases. The Irish government has approved that the development of new conventional generation (including gas-fired and gasoil distillate-fired generation) is a national priority and should be permitted and supported in order to ensure the security of electricity supply while supporting the growth of renewable electricity generation. As noted above, APC entered into engineering and construction services contracts during Fiscal 2023 with the ESB to construct three 65 MW aero-derivative gas turbine flexible generation power plants around the city of Dublin, Ireland. All three projects continueare expected to progress beyondoperate intermittently during peak periods of electricity demand and as back-up supply options when renewable electricity generation is limited. Additionally, the peak construction phasesShannonbridge Project, for which APC received full notice to proceed in August 2023 to construct eight turbine units capable of their project life-cyclesproducing 264 MW of power, is an initiative of EirGrid and toward completion. Consequently, the levelESB that aims to ensure reliable electricity supply during critical situations and emergencies. Further, the Irish government recognized that the successful development of revenues associated with each one will continue to decline. While we are disappointeddata centers in the country is a key aspect in promoting Ireland as a digital economy hot-spot in Europe. The stewards of the electricity supply in Ireland recognize that we have not added a new major EPC contract to our backlog so far this year due,the large increase in part,electricity demand presented by the growth of the data center industry represents an evolving, significant risk to the intenselysecurity of the supply. During Fiscal 2023, APC completed a project to install natural gas-fired power generation for a major data center in the Dublin area. APC is actively pursuing other new business opportunities in both the renewable and support sectors of power generation with its existing and new clients. Over the past few years, GPS has provided top management guidance and project management expertise to APC as it completed its subcontract efforts for a biomass-burning power plant and won the awards of the projects to build new gas-fired power plant units near Belfast and Dublin. APC has provided manpower to GPS on several of its EPC services contracts. These recent experiences have demonstrated that the two companies can combine resources effectively. We believe that GPS and APC working together is a competitive advantage as we pursue emerging new business environment, weopportunities in Ireland and the U.K. GPS is teaming with APC in the performance of the Shannonbridge Project. We are committed to the rational pursuit of new construction projects, including those with overseas locations and unique deployments of power-generation turbines, and the future growth of our revenues. This may result in our decisionadditional decisions 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 contractor equipment installation services contracts to us. With The competitive landscape for our core EPC services business related to natural gas-fired power plants in the U.S. remains dynamic, although there are fewer competitors for new gas-fired power plant EPC services project opportunities. Several major competitors have exited the market for a growingvariety of reasons or have been acquired. Others have announced intentions to avoid entering into fixed-price contracts. Nonetheless, the competition for new utility-scale gas-fired power plant construction opportunities is fierce and still includes multiple global firms. We believe that the Company has a reputation as an accomplished, dependable and cost-effective provider of EPC and other large project construction contracting services and withservices. 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 of the U.S., Ireland and the U.K. 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 a stable base of business activity through the next fiscal year as we pursue new opportunities that should continue to emerge for all 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 outcome of this legislation is unknown, and the final impacts of it on our business have not been determined, although we would expect them to be favorable.
Comparison of the Results of Operations for the Three Months Ended OctoberJuly 31, 20172023 and 20162022 We reported net income attributable to our stockholders of $17.2$12.8 million, or $1.09$0.94 per diluted share, for the three months ended OctoberJuly 31, 2017.2023. For the three months ended October 31, 2016,comparable period of the prior year, we reported a comparable net income amount of $18.1$4.2 million, or $1.16$0.30 per diluted share. The following schedule compares our operating results for the three months ended OctoberJuly 31, 20172023 and 20162022 (dollars in thousands).: | | Three Months Ended October 31, | | | | 2017 | | 2016 | | $ Change | | % Change | | REVENUES | | | | | | | | | | Power industry services | | $ | 212,493 | | $ | 151,094 | | $ | 61,399 | | 40.6 | % | Industrial fabrication and field services | | 16,574 | | 21,550 | | (4,976 | ) | (23.1 | ) | Telecommunications infrastructure services | | 3,878 | | 2,800 | | 1,078 | | 38.5 | | Revenues | | 232,945 | | 175,444 | | 57,501 | | 32.8 | | COST OF REVENUES | | | | | | | | | | Power industry services | | 178,472 | | 118,407 | | 60,065 | | 50.7 | | Industrial fabrication and field services | | 13,797 | | 18,386 | | (4,589 | ) | (25.0 | ) | Telecommunications infrastructure services | | 2,958 | | 2,073 | | 885 | | 42.7 | | Cost of revenues | | 195,227 | | 138,866 | | 56,361 | | 40.6 | | GROSS PROFIT | | 37,718 | | 36,578 | | 1,140 | | 3.1 | | Selling, general and administrative expenses | | 10,119 | | 9,848 | | 271 | | 2.8 | | INCOME FROM OPERATIONS | | 27,599 | | 26,730 | | 869 | | 3.3 | | Other income, net | | 1,692 | | 690 | | 1,002 | | 145.2 | | INCOME BEFORE INCOME TAXES | | 29,291 | | 27,420 | | 1,871 | | 6.8 | | Income tax expense | | 12,062 | | 8,194 | | 3,868 | | 47.2 | | NET INCOME | | 17,229 | | 19,226 | | (1,997 | ) | (10.4 | ) | 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 | )% |
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| | | | | | | | | | | | | | | Three Months Ended July 31, | | | | 2023 | | 2022 | | $ Change | | % Change | | REVENUES | | | | | | | | | | | | | Power industry services | | $ | 105,345 | | $ | 91,327 | | $ | 14,018 | | 15.3 | % | Industrial construction services | | | 32,756 | | | 23,022 | | | 9,734 | | 42.3 | | Telecommunications infrastructure services | | | 3,248 | | | 3,761 | | | (513) | | (13.6) | | Revenues | | | 141,349 | | | 118,110 | | | 23,239 | | 19.7 | | COST OF REVENUES | | | | | | | | | | | | | Power industry services | | | 87,094 | | | 71,225 | | | 15,869 | | 22.3 | | Industrial construction services | | | 28,076 | | | 19,551 | | | 8,525 | | 43.6 | | Telecommunications infrastructure services | | | 2,437 | | | 2,947 | | | (510) | | (17.3) | | Cost of revenues | | | 117,607 | | | 93,723 | | | 23,884 | | 25.5 | | GROSS PROFIT | | | 23,742 | | | 24,387 | | | (645) | | (2.6) | | Selling, general and administrative expenses | | | 10,501 | | | 10,984 | | | (483) | | (4.4) | | INCOME FROM OPERATIONS | | | 13,241 | | | 13,403 | | | (162) | | (1.2) | | Other income, net | | | 4,118 | | | 505 | | | 3,613 | | 715.4 | | INCOME BEFORE INCOME TAXES | | | 17,359 | | | 13,908 | | | 3,451 | | 24.8 | | Income tax expense | | | 4,592 | | | 9,686 | | | (5,094) | | (52.6) | | NET INCOME | | $ | 12,767 | | $ | 4,222 | | $ | 8,545 | | 202.4 | % |
Revenues Power Industry Services The revenues of the power industry services businesssegment, representing the businesses of GPS and APC, increased by 41%15.3%, or $61.4$14.0 million, to $212.5$105.3 million for the three months ended OctoberJuly 31, 20172023 compared with revenues of $151.1$91.3 million for the three months ended OctoberJuly 31, 2016.2022 as the quarterly construction activities increased for the Shannonbridge Power Project, the Trumbull Energy Center, The ESB FlexGen peaker plants, and the Kilroot Power Station. The increase in revenues between quarters was partially offset by decreased construction activities associated with the Guernsey Power Station project and Maple Hill Solar energy facility, as those projects are generally near or at completion. The revenues of this business segment represented approximately 91%74.5% of consolidated revenues for the current quarter ended July 31, 2023 and approximately 86%77.3% of consolidated revenues for the corresponding prior year quarter. The current quarter increase in revenuesprimary driver for the power industry servicesrevenues of this segment primarily reflected the peak and post-peak construction activities of 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 all in earlier phases of construction, represented approximately 73% of consolidated revenues for the third quarter. Additionally, construction activity related to two other natural gas-fired power plant projects that were completed last year represented 9% of consolidated revenues for the three months ended OctoberJuly 31, 2016.2022 were the revenues associated with the construction of the Guernsey Power Station.
Industrial Fabrication and FieldConstruction Services The revenues of theour industrial fabrication and fieldconstruction services business (representingsegment, representing the business of TRC) decreasedTRC, increased by 23%$9.7 million, or 42.3%, or $5.0 million, to $16.6$32.8 million for the three months ended OctoberJuly 31, 20172023 compared withto revenues of $21.6$23.0 million for the three months ended OctoberJuly 31, 2016. The largest portion2022 as the amounts of TRC’s revenues continue to be provided by industrial field services which included $7.3 million in revenue from a large mining company inand vessel fabrication work increased meaningfully between periods. For the prior year period. TRC’sthree months ended July 31, 2023 and 2022, the revenues of this segment represented 23.2% and 19.5% of consolidated revenues for the corresponding periods. The major customers of TRC include someone of North America’s largest fertilizer producers, as well as chemical, mining, forest products, construction, energy and manufacturing companies with plants, facilities and fertilizer producers.other sites located primarily in the Southeast region of the U.S. TRC also has two significant projects underway for field service work at water treatment facilities. Telecommunications Infrastructure Services The revenuesrevenue results of this business segment, (representingwhich represent the business of SMC) increased by approximately 39%, or $1.1 million, to $3.9SMC, were $3.2 million for the three-month period ended July 31, 2023, a decrease of $0.5 million, or 13.6%, from the amount of revenues earned during the three months ended OctoberJuly 31, 2017 compared with revenues of $2.8 million for the three months ended October 31, 2016, as SMC has been successful in increasing the revenues related to both outside premises and inside premises projects. 2022. Cost of Revenues Due primarily toWith the substantial increase in consolidated revenues for the three months ended OctoberJuly 31, 20172023 compared with last year’s thirdsecond quarter ended July 31, 2022, the corresponding consolidated cost of revenues also increased.increased between the quarters. These costs were $195.2$117.6 million and $138.9$93.7 million for the three-month periods ended July 31, 2023 and 2022, respectively, representing an increase of approximately 25.5%.
For the three-month period ended July 31, 2023, we reported a consolidated gross profit of approximately $23.7 million which represented a gross profit percentage of approximately 16.8% of corresponding consolidated revenues, a decrease from the three-month period ended July 31, 2022 primarily due to changes in the mix of our revenues and unfavorable profit adjustments on an APC project. The gross profit percentages of corresponding revenues for the power industry services, industrial construction services and the telecommunications infrastructure services segments were 17.3%, 14.3% and 25.0%, respectively, for the quarter ended July 31, 2023. Our consolidated gross profit reported for the three-month period ended July 31, 2022 was $24.4 million, which represented a gross profit percentage of approximately 20.6% of corresponding consolidated revenues. The gross profit percentages of corresponding revenues for the power industry services, industrial construction services and the telecommunications infrastructure services segments were 22.0%, 15.1% and 21.6%, respectively, for the quarter ended July 31, 2022. Selling, General and Administrative Expenses These costs were $10.5 million and $11.0 million for the three months ended OctoberJuly 31, 20172023 and 2016,2022, respectively, and represented 7.4% and 9.3% of corresponding consolidated revenues, respectively. Gross profit amounts Other Income, Net Other income, net, for the three months ended OctoberJuly 31, 20172023 was $4.1 million, which reflected income earned during the period on funds invested in a money market account, CDs and 2016 were $37.7 million and $36.6 million, respectively. Our overall gross profit percentage of 16.2% of consolidated revenues was lowerU.S. Treasury notes in the current quarter compared to a percentagetotal amount 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 lastapproximately $3.3 million, as investment returns are meaningfully higher this 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 reductionsWe reported other income, net, in the amount of forecasted gross margins resulted in a reduction to consolidated 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.
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Selling, General and Administrative Expenses
These costs$0.5 million for the three months ended OctoberJuly 31, 2017 and 2016 represented approximately 4.3% and 5.6% of consolidated revenues for the corresponding periods, respectively. In general, the increase in costs is reflective of a larger organization necessary to support increased operations and to expand into new markets.
2022, which included primarily earnings associated with our solar fund investments. Income Tax ExpenseTaxes For the quarter ended October 31, 2017, we recordedWe incurred income tax expense for the three months ended July 31, 2023 in the amount of $12.1approximately $4.6 million, reflectingwhich represents 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 income26.5%. This effective tax rate is higher thandiffers from the statutory federal income tax rate of 35%21% due primarily to the unfavorable estimated unfavorable effecteffects of state income taxes offset partially byand permanent differences, including certain nondeductible executive compensation and an increased amount of global intangible low taxed income (“GILTI”) for the domestic production activities deduction.
current fiscal quarter. For the three months ended OctoberJuly 31, 2016,2022, we recordedreported income tax expense in the amount of $8.2approximately $9.7 million, reflectingincluding an annual effective income tax rate (beforeunfavorable adjustment in the taxapproximate amount of $6.2 million that was related to the settlement of the research and development credit claims with the IRS. Excluding the effect of discrete items for the prior quarter) estimated at the time to be approximately 35.2%. The estimated unfavorable effect of state income taxes were substantially offset by the favorable effects of the estimated amounts of permanent differences. Income tax expense for the third quarter last year also reflected the treatment of the excess 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 onthis adjustment, 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 earningsrate for the three months ended OctoberJuly 31, 2016 in the amount of $1.2 million. There were no amounts of net income attributable to non-controlling interest 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.
2022 was 25.2%. Comparison of the Results of Operations for the NineSix Months Ended OctoberJuly 31, 20172023 and 20162022 We reported net income attributable to our stockholders of $65.0$14.9 million, or $4.11$1.10 per diluted share, for the ninesix months ended OctoberJuly 31, 2017.2023. For the nine months ended October 31, 2016,comparable period of the prior year, we reported a comparable net income amount of $50.0$11.7 million, or $3.23$0.80 per diluted share. The following schedule compares our operating results for the ninesix months ended OctoberJuly 31, 20172023 and 20162022 (dollars in thousands).: | | Nine Months Ended October 31, | | | | 2017 | | 2016 | | $ Change | | % Change | | REVENUES | | | | | | | | | | Power industry services | | $ | 662,131 | | $ | 402,615 | | $ | 259,516 | | 64.5 | % | Industrial fabrication and field services | | 50,203 | | 59,287 | | (9,084 | ) | (15.3 | ) | Telecommunications infrastructure services | | 10,903 | | 6,385 | | 4,518 | | 70.8 | | Revenues | | 723,237 | | 468,287 | | 254,950 | | 54.4 | | COST OF REVENUES | | | | | | | | | | Power industry services | | 540,986 | | 302,140 | | 238,846 | | 79.1 | | Industrial fabrication and field services | | 44,634 | | 52,491 | | (7,857 | ) | (15.0 | ) | Telecommunications infrastructure services | | 8,396 | | 4,764 | | 3,632 | | 76.2 | | Cost of revenues | | 594,016 | | 359,395 | | 234,621 | | 65.3 | | GROSS PROFIT | | 129,221 | | 108,892 | | 20,329 | | 18.7 | | Selling, general and administrative expenses | | 30,408 | | 24,429 | | 5,979 | | 24.5 | | Impairment loss | | — | | 1,979 | | (1,979 | ) | (100.0 | ) | INCOME FROM OPERATIONS | | 98,813 | | 82,484 | | 16,329 | | 19.8 | | Other income, net | | 4,221 | | 1,283 | | 2,938 | | 229.0 | | 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 | % |
| | | | | | | | | | | | | | | Six Months Ended July 31, | | | | 2023 | | 2022 | | $ Change | | % Change | | REVENUES | | | | | | | | | | | | | Power industry services | | $ | 175,521 | | $ | 165,276 | | $ | 10,245 | | 6.2 | % | Industrial construction services | | | 63,063 | | | 45,523 | | | 17,540 | | 38.5 | | Telecommunications infrastructure services | | | 6,440 | | | 7,588 | | | (1,148) | | (15.1) | | Revenues | | | 245,024 | | | 218,387 | | | 26,637 | | 12.2 | | COST OF REVENUES | | | | | | | | | | | | | Power industry services | | | 147,429 | | | 130,260 | | | 17,169 | | 13.2 | | Industrial construction services | | | 54,638 | | | 38,231 | | | 16,407 | | 42.9 | | Telecommunications infrastructure services | | | 4,991 | | | 5,771 | | | (780) | | (13.5) | | Cost of revenues | | | 207,058 | | | 174,262 | | | 32,796 | | 18.8 | | GROSS PROFIT | | | 37,966 | | | 44,125 | | | (6,159) | | (14.0) | | Selling, general and administrative expenses | | | 21,092 | | | 21,559 | | | (467) | | (2.2) | | INCOME FROM OPERATIONS | | | 16,874 | | | 22,566 | | | (5,692) | | (25.2) | | Other income, net | | | 3,489 | | | 1,100 | | | 2,389 | | 217.2 | | INCOME BEFORE INCOME TAXES | | | 20,363 | | | 23,666 | | | (3,303) | | (14.0) | | Income tax expense | | | 5,487 | | | 11,959 | | | (6,472) | | (54.1) | | NET INCOME | | $ | 14,876 | | $ | 11,707 | | $ | 3,169 | | 27.1 | % |
Revenues Power Industry Services The revenues of the power industry services businesssegment, increased by 65%$10.3 million, or 6.2%, or $259.5 million, to $662.1$175.5 million for the ninesix months ended OctoberJuly 31, 20172023 compared with revenues of $402.6$165.3 million for the ninesix months ended OctoberJuly 31, 2016.2022 as the current year construction activities increased for the Shannonbridge Power Project, the Trumbull Energy Center, The ESB FlexGen peaker plants, and the Kilroot Power Station. The increase in revenues between years was partially offset by decreased construction activities associated with the Guernsey Power Station project, the Maple Hill Solar energy facility and APC’s Equinix data center project, as those projects are generally near or at completion. The revenues of this business segment represented approximately 92%71.6% of consolidated revenues for the current nine-monthsix-month period ended July 31, 2023 and approximately 86%75.7% of consolidated revenues for the six-month period ended July 31, 2022. The primary driver for the revenues of this segment for the six months ended July 31, 2022 were the revenues associated with the construction of the Guernsey Power Station. Industrial Construction Services The revenues of our industrial construction services segment, increased by $17.5 million, or 38.5%, to $63.1 million for the six months ended July 31, 2023 compared to revenues of $45.5 million for the six months ended July 31, 2022 as the amounts of field services and, particularly, vessel fabrication work in support of field services increased between periods. For the six months ended July 31, 2023 and 2022, the revenues of this segment represented 25.7% and 20.8% of consolidated revenues for the corresponding prior year period. periods. Telecommunications Infrastructure Services The revenue results of this business segment, were $6.4 million for the six-month period ended July 31, 2023, a decrease of $1.2 million, or 15.1%, from the amount of revenues earned during the six months ended July 31, 2022. Cost of Revenues With the increase in consolidated revenues for the six months July 31, 2023 compared with last year’s six-month period ended July 31, 2022, the consolidated cost of revenues also increased between the periods. These costs were $207.1 million and $174.3 million for the six-month periods ended July 31, 2023 and 2022, respectively, representing an increase of approximately 18.8%. For the six-month period ended July 31, 2023, we reported a consolidated gross profit of approximately $38.0 million which represented a gross profit percentage of approximately 15.5% of corresponding consolidated revenues, a decrease from the six-month period ended July 31, 2022 primarily due to changes in our revenue mix and unfavorable profit adjustments on an APC project. The gross profit percentages of corresponding revenues for the power industry services, segment primarily reflectedindustrial construction services and the ramped-up, peaktelecommunications infrastructure services segments were 16.0%, 13.4% and post-peak construction activities of four natural gas-fired power plant construction projects,22.5%, respectively, for the six months ended July 31, 2023. Our consolidated gross profit reported for the six-month period ended July 31, 2022 was $44.1 million, which represented approximately 87% 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 nine months ended October 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
The revenues of the industrial fabrication and field services segment decreased by 15%, or $9.1 million, to $50.2 million for the nine months ended October 31, 2017 compared with 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 completed during the nine months ended October 31, 2016.
Telecommunications Infrastructure Services
The revenues of this business segment increased by approximately 71%, or $4.5 million, to $10.9 million for the nine months ended October 31, 2017 compared with revenues of $6.4 million for the nine months ended October 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.
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Cost of Revenues
Due primarily to the substantial increase in consolidated revenues for the nine months ended October 31, 2017 compared with last year’s comparable period, the corresponding consolidated cost of revenues also increased. These costs were $594.0 million and $359.4 million for the nine months ended October 31, 2017 and 2016, respectively. Gross profit amounts for the corresponding nine-month periods were $129.2 million and $108.9 million, respectively. Our overall gross profit percentage of 17.9%approximately 20.2% of corresponding consolidated revenues was lower in 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 projects as identified above. Current periodrevenues. The gross profit percentages substantially reflected continued execution of corresponding revenues for the power industry services, industrial construction activities on four EPC natural gas-fired power plant projects of GPSservices and the gross margin reduction realized intelecommunications infrastructure services segments were 21.2%, 16.0% and 23.9%, respectively, for the current quarter that is discussed above. The aggregate gross profit percentage of the combined revenues of TRC, APC and SMC increased between the periods.
six months ended July 31, 2022. Selling, General and Administrative Expenses These costs were $30.4$21.1 million and $24.4$21.6 million for the ninesix months ended OctoberJuly 31, 20172023 and 2016,2022, respectively, representing approximately 4.2% and 5.2%represented 8.6% and 9.9% of corresponding consolidated revenues, respectively. Other Income, Net Other income, net, for the corresponding periods, respectively. Approximately $3.8six months ended July 31, 2023 was $3.5 million, which reflected income earned during the period on invested funds in the total amount of approximately $5.7 million, as investment returns are meaningfully higher this year, partially offset by the increase betweenwire-transfer fraud loss of $3.0 million that occurred in the periods was duefirst quarter of Fiscal 2024 and $0.2 million in related professional fees. Also included in other income, net, are approximately $0.4 million in funds that have been recovered from the wire-transfer fraud loss through legal efforts and insurance proceeds (see Note 15 to an overall increasethe accompanying condensed consolidated financial statements). We reported other income, net, in incentive compensation costs and salary expense. In addition, stock option compensationthe amount of $1.1 million for the six months ended July 31, 2022, which included primarily earnings associated with our solar fund investments. Income Taxes We incurred income tax expense for the ninesix months ended OctoberJuly 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 is2023 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 whether an impairment loss related to goodwill had been incurred. Using income and market approaches, the assessment analysis indicated that the carrying value of the business exceeded its fair value. As a result, APC recorded an impairment loss during the nine months ended October 31, 2016amount of approximately $2.0 million.
Income Tax Expense
For the nine months ended October 31, 2017, we recorded income tax expense of $37.7$5.5 million, reflecting the estimated annualwhich represents an effective income tax rate of approximately 36.7% (before26.9%. This estimated tax rate differs from the statutory federal tax rate of 21% due primarily to the unfavorable estimated effects of state income tax effecttaxes and permanent differences, including certain nondeductible executive compensation and an increased amount of discrete itemsGILTI for the current period) that is identified above. The net favorable effect of discrete items onyear. For the six months ended July 31, 2022, we reported income tax expense forin the nine months ended October 31, 2017 was not significant.
Foramount of approximately $12.0 million, including the nine months ended October 31, 2016, we recorded income tax expenseaforementioned unfavorable adjustment in the amount of $27.1$6.2 million reflecting an estimated annualrelated to the settlement of research and development claims with the IRS. Excluding the effect of this adjustment, our effective income tax rate of approximately 35.2%. In addition, the net effect of discrete items last year reduced income tax expense by $2.4 million 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.
six-months ended July 31, 2022 was 24.4%. 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 reduction in the amount between periods primarily reflected the contractual completion of the projects last year. Current year activity relates to changes in estimated costs to fulfill warranty obligations.
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Liquidity and Capital Resources as of OctoberJuly 31, 20172023 As of OctoberAt July 31 2017 and January 31, 2017,2023, our balances of cash and cash equivalents were $149.7$204.8 million and $167.2$173.9 million, respectively. During this same period, our working capital increased by $54.3 million to $291.5 million as of October 31, 2017 from $237.2 million as of January 31, 2017.
The net amount of cash used by operating activities for the nine months ended October 31, 2017 was $22.7 million. Even though net income for the period, including the favorable adjustments related to non-cash expense items, provided cash in the total amount of $71.7 million, cash use exceeded this amount primarily due to our four major EPC projects. Because these projects are well past the peak of their respective milestone billing schedules, we experienced net decreases during the period in the amounts of billings on current projects in excess of corresponding costs and estimated earnings,respectively, which represented a use of cash in the amount of $69.4 million. In general, we expect this unfavorable cash-flow trend to continue until the projects are completed and new EPC projects are added to the backlog. Primarily due to increasing project owner retainage amounts on current construction contracts, accounts receivable increased during the nine months ended October 31, 2017, which represented a use of cash in the amount of $31.5 million. On the other hand, we experienced a net increase during the period in the amounts of accounts payable and accrued expenses, which represented a source of cash in the amount of $5.6 million.
Our primary source of this cash during the nine months ended October 31, 2017 was the net maturity of CDs in the amount of $22.5 million. In addition, the exercise of options to purchase 90,500 shares of our common stock provided us with cash proceeds in the approximate amount of $2.8 million. Non-operating activity cash uses included the declaration and payment of a 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 partner in the total amount of $1.2 million. Our operating subsidiaries used cash during the current period in the amount of $4.0 million for capital expenditures.
During the nine months ended October 31, 2016, our combined balance of cash and cash equivalents increased 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, 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 for the nine months ended October 31, 2016, including the favorable adjustments related to noncash expense items, provided cash in the total amount of $60.8 million. In addition, we experienced a net decrease 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 netan 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$30.9 million.
The net amount of cash provided by operating activities for the nine-month periodsix months ended OctoberJuly 31, 20162023 was $185.3$34.6 million. The exercise of stock options duringOur net income for the prior year nine-month period provided us with cash proceeds insix months ended July 31, 2023, adjusted favorably by the net amount of $11.0 million. Our primary usenon-cash income and expense items, represented a source 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$18.8 million. Our operating subsidiaries usedThe reduction in the balance of contract assets of $4.0 million, represented a source of cash and was primarily due to project retentions being collected as the Guernsey Power Station reached substantial completion during the prior year period, partially offset by an increase in contract assets related to the Kilroot project. The $5.6 million decrease in contract receivables during the period represented a source of cash, primarily due to collections of receivables and the billing of project retentions related to the Guernsey Power Station, partially offset by APC project billings reflecting increased construction activity. The increase in contract liabilities of $20.2 million represented a source of cash, primarily due to the net effect of the early phase of construction activities on a
GPS project and the post peak phase of certain APC projects. However, reductions in the combined level of accounts payables and accrued expenses in the amount of $2.5$8.9 million forand the increase of other assets of $5.2 million, represented uses of cash during the period. During the six months ended July 31, 2023, our primary source of cash from investing activities was the net maturities of CDs issued by the Bank, in the amount of $69.8 million. We used $60.3 million of these proceeds to invest in available-for-sale U.S. Treasury notes. We also used $1.0 million to make capital expenditures. For the six months ended July 31, 2023, we used $12.5 million cash in financing activities, including $6.7 million used to repurchase shares of common stock pursuant to our share repurchase program and $6.7 million used for the payment of regular cash dividends. We received proceeds from the exercise of stock options in the amount of $0.9 million, which represented a source of cash. As of July 31, 2023, there were no restrictions with respect to intercompany payments between the holding company, GPS, TRC, APC and SMC. On May 15, 2017,During the six months ended July 31, 2022, our balance of cash and cash equivalents decreased by a net amount of $207.2 million and our working capital decreased by $48.1 million to $236.2 million as of July 31, 2022 from $284.3 million as of January 31, 2022.
The net amount of cash used in operating activities for the six months ended July 31, 2022 was $56.8 million. Our net income for the six months ended July 31, 2022, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $15.7 million. However, reductions in the balance of contract liabilities and the combined level of accounts payable and accrued expenses in the amounts of $63.9 million and $16.1 million, respectively, represented uses of cash. Both of these reductions related primarily to the decline in the construction activity of the Guernsey Power Station project, partially offset by an increase in contract liabilities at several APC projects. Additionally, the increase in contract assets in the amount of $3.8 million represented a use of cash during the period. The decreases in the amounts of accounts receivable and other assets in the amounts of $2.1 million and $9.3 million, represented sources of cash during the period. During the six months ended July 31, 2022, we entered intoused cash to purchase CDs issued by the Bank in the amount of $85.0 million. We also used $60.3 million cash in financing activities during the six months ended July 31, 2022, including $53.2 million used to repurchase shares of our common stock and $7.2 million used for the payment of regular cash dividends. At July 31, 2023, a portion of our balance of cash and cash equivalents was invested in certificates of deposit and a money market fund with most of its net assets invested in cash, U.S. Treasury obligations and repurchase agreements secured by U.S. government obligations. The major portion of our domestic operating bank account balances are maintained with the Bank. We do maintain certain Euro-based bank accounts in Ireland and certain pound sterling-based bank accounts in the U.K. in support of the operations of APC. In order to monitor the actual and necessary levels of liquidity for our business, we focus on net liquidity, or working capital, in addition to our cash balances. During the six months ended July 31, 2023, our net liquidity increased by $3.3 million to $239.5 million from $236.2 million as of January 31, 2023, due primarily to our net income for the period, partially offset by common stock repurchases and the payment of cash dividends. As we have no debt service, as our fixed asset acquisitions in a reporting period are typically low, and as our net liquidity includes our short-term investments and available-for-sale U.S. Treasury notes, our levels of working capital are not subjected to the volatility that affects our levels of cash and cash equivalents. During April 2021, we amended our Credit Agreement with the Bank which extended the expiration date of the Credit Agreement to May 31, 2024 and reduced the borrowing rate. On March 6, 2023, we entered into the Second Amendment to the Credit Agreement. The Second Amendment modified the Credit Agreement to, primarily, replace the interest pricing with a rate of SOFR plus 1.6% and add SOFR successor rate language. The Credit Agreement, as amended, includes 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%;
· addand an accordion feature which allows for an additional commitment amount of $10$10.0 million, subject to certain conditions;conditions. Additionally, the Credit Agreement, as amended, continues to include customary terms, covenants and
· extend events of default for a credit facility of its size and nature. Prior to the maturity date three years from May 31, 2018expiration of the current term of the Credit Agreement, we expect to May 31, 2021, which effectively provided a four-year credit commitment.
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Asreach agreement with the predecessor agreement,Bank to extend it.
We may also use the borrowing 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, 2023, we had no outstanding borrowings. However, the Bank has issued letters of credit in the total outstanding amount of $9.4 million in support of the activities of APC under new customer contracts. 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, as amended, 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 Octobernature, including a requirement to achieve positive adjusted earnings before interest, taxes, depreciation and amortization, as defined, over each rolling twelve-month measurement period. At July 31, 2017 and January 31, 2017,2023, we were compliant with the financial covenants of the Credit Agreement, as amended. In the normal course of business and predecessor agreement,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 subsidiaries. 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. As is typically required by any surety bond, we would be obligated to reimburse the issuer of any surety bond provided 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. As of July 31, 2023 and January 31, 2023, the estimated amounts of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, were approximately $0.5 billion and $0.6 billion, respectively. As of July 31, 2023 and January 31, 2023, the outstanding amounts of bonds covering other risks, including warranty obligations related to completed activities, were not material. We may use the borrowing ability to cover other credit issued by the Bank for our usehave also provided a financial guarantee in the ordinary courseamount of business.$3.6 million to support certain project developmental efforts. A liability was established for the estimated loss related to this guarantee during Fiscal 2022. When sufficient information about claims related to performance on projects would be available and monetary damages or other costs or losses would be determined to be probable, we would record such losses. As of October 31, 2017, we had approximately $14.9 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 accountssubsidiaries are maintained with the Bank. We do maintain certain Euro-based bank accountswholly-owned, any actual liability related to contract performance is ordinarily reflected in the Republic of Ireland and insignificant bank accountsfinancial statement account balances determined pursuant to the Company’s accounting for contracts with customers. Any amounts that we may be required to pay in other countries in supportexcess of the operationsestimated costs to complete contracts in progress as of APC.July 31, 2023 are not estimable.
The Company made prior year investments of approximately $6.3 million in limited liability companies that make equity investments in solar energy projects that are eligible to receive energy tax credits. It is likely that we will evaluate opportunities to make other solar energy investments of this type in the future. We believe that cash on hand, our cash equivalents, cash that will be provided from the maturities of short-term investments and other debt securities and cash generated from our future operations, with or without funds available under our line of credit,Credit Agreement, as amended, will be adequate to meet our general business needs in the foreseeable future. In particular,general, we maintain significant liquid capital onin our consolidated balance sheet to help ensure the maintenance of our ability to maintain and obtain bonding capacity for current and futureto provide parent company performance guarantees for EPC and other construction projects. Any However, any significant future acquisitions,acquisition, investment 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”) The table following immediately below presents the determinations of EBITDA for the three and six months ended July 31, 2023 and 2022, respectively (amounts in thousands). | | | | | | | | | Three Months Ended | | | July 31, | | | 2023 | | 2022 | Net income, as reported | | $ | 12,767 | | $ | 4,222 | Income tax expense | | | 4,592 | | | 9,686 | Depreciation | | | 488 | | | 747 | Amortization of intangible assets | | | 98 | | | 233 | EBITDA | | $ | 17,945 | | $ | 14,888 |
| | | | | | | | | Six Months Ended | | | July 31, | | | 2023 | | 2022 | Net income, as reported | | $ | 14,876 | | $ | 11,707 | Income tax expense | | | 5,487 | | | 11,959 | Depreciation | | | 1,035 | | | 1,556 | Amortization of intangible assets | | | 196 | | | 399 | EBITDA | | $ | 21,594 | | $ | 25,621 |
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 USU.S. 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 USU.S. 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.
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 do periodically review these critical accounting policies and estimates with the audit committee of our board of directors. We consider the accounting policies related to revenue recognition on long-term construction contracts; income tax reporting; 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. 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-month periodsix months ended OctoberJuly 31, 2017,2023, there have been no material changes in the way we apply the critical accounting policies described therein. Recently Issued Accounting Pronouncements Other than ASU 2023-02 that is related to the accounting for investment tax credits and that is discussed in Note 21 to the accompanying condensed consolidated financial statements, presents descriptions of pendingthere are no recently issued accounting pronouncements issued by the FASB that are relevanthave not yet been adopted that we believe may be material to our futureconsolidated 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 Test 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. ASU 2016-02, which will be adopted by us on February 1, 2019, will require the recognition on the balance sheet of all operating leases with terms greater than one year. 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 as of November 1, 2017.statements. 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, 2017,2023, 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, 20212024 with interest at LIBORSOFR plus 2.00%1.6%. As of OctoberDuring the three 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 exposes2023 and 2022, we did not enter into any material derivative financial instruments for trading, speculation or other purposes that would expose us to market risk. We maintain a certainsubstantial amount of risk should interest rates suddenly rise. However, we believe that this risk is minimal,our temporarily investable cash in certificates of deposit, a money market fund and mitigated somewhat byU.S. Treasury notes (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). As of July 31, 2023, the weighted average number of days remaining until maturity for the certificates of deposit and U.S Treasury notes was 498 days. The weighted average annual interest rate of our certificates of deposit of $80.0 million, the money market fund balance of $127.1 million, and the U.S. Treasury notes face value of $60.0 million was 5.0%. To illustrate the potential impact of changes in US Dollars. The financialthe overall interest rate associated with our investable cash balance at July 31, 2023 on our annual results reported by APC and included inof operations, we present the following hypothetical analysis. It assumes that our condensed consolidated financial statementsbalance sheet as of July 31, 2023 remains constant, and no further actions are affected by foreign currency volatility. Thetaken to alter our existing interest rate sensitivity, including reinvestments (dollars in thousands).
| | | | | | | | | | | | Increase (Decrease) in | | Increase (Decrease) in | | Net Increase (Decrease) in | Basis Point Change | | Interest Income | | Interest Expense | | Income (Pre-Tax) | Up 300 basis points | | $ | 9,546 | | $ | — | | $ | 9,546 | Up 200 basis points | | | 6,364 | | | — | | | 6,364 | Up 100 basis points | | | 3,182 | | | — | | | 3,182 | Down 100 basis points | | | (3,182) | | | — | | | (3,182) | Down 200 basis points | | | (6,364) | | | — | | | (6,364) | Down 300 basis points | | | (9,546) | | | — | | | (9,546) |
With the consolidation of APC, we are subject to the effects of translating the financial statements of APC from its functional currency (Euros) into the Company’sour reporting currency (US Dollars)(U.S. dollars). The effects of translation 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 againstremeasurements are recorded in the Euro,other (loss) income line of our condensed consolidated statement of earnings. In the reported assets, liabilities, revenues, costs and earnings“Risk Factors” section of APC, after translation into US Dollars, are greater than what they would have been had the valueour Annual Report, we included discussion of the US Dollar appreciated againstrisks to our fixed price contracts if actual contract costs rise above the Euroestimated amounts of such costs that support corresponding contract prices. Identified as factors that could cause contract cost overruns, project delays or if there had been no changeother unfavorable effects on our contracts, among other circumstances and events, are delays in the exchange rate. Duringscheduled deliveries of machinery and equipment ordered by us or project owners, unforeseen increases in the nine-month period ended October 31, 2017,costs of labor, warranties, raw materials, components or equipment or the US Dollar depreciated against the Euro. We generally do not hedge our exposurefailure or inability to potential foreign currency translation adjustments.obtain resources when needed. Another form of exposure to fluctuating exchange rates relates to the effects of transacting in currencies other than those of our entity’s functional currencies. We do not engage in currency speculation, and we generally do not utilize foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency related operating exposures. We incurred a net foreign currency transaction loss for the nine months ended October 31, 2017 that was insignificant.
In addition, we are subject to fluctuations in prices for commodities including steel products, 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. In times of increased supply cost volatility, we may take other steps to reduce our risks. For example, we may hold quotes related to materials in our industrial construction services segment for very short periods. For major fixed price contracts in our power industry services segment, we may mitigate material cost risks by procuring the majority of the equipment and construction supplies during the early phases of a project. The profitability of our active jobs has not suffered meaningfully from the periodic global surges in non-residential construction material costs.
Our operations have been challenged by the well-publicized global supply chain disruptions. While management of the risks associated with the inability to obtain machinery, equipment and other materials when needed continues to require our best efforts, we are concerned that the supply chain uncertainties may be impacting project owners’ confidence in commencing new work which may adversely affect our expected levels of revenues until the supply chain disruptions substantially dissipate. 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, 2017.2023. 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, 2017,2023, 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, 20172023 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 9 to the condensed consolidated financial statements that are included in Item 1 of Part I of this Quarterly Report on Form 10-Q is a discussion of specific legal proceedings for the nine-month period ended October 31, 2017. 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.
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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 Our board of directors has authorized management to spend up to $125 million in the repurchase of shares of our common stock in the open market or through investment banking institutions, privately-negotiated transactions, or direct purchases (the “Share Repurchase Plan”). The timing and amount of stock repurchase transactions will depend on market and business conditions, applicable legal and credit requirements and other corporate considerations. In accordance with the SEC’s Rule 10b5-1, and pursuant to the Share Repurchase Plan, we have allowed, and may in the future allow, the repurchase of our common stock during trading blackout periods by an investment banking firm or other institution agent acting on our behalf pursuant to predetermined parameters. Information related to our share repurchases for the three months ended July 31, 2023 follows: | | | | | | | | | | | | | | | | | | | Approximate Dollar | | | | | | | | Total Number of | | Value of Shares That May Yet | | | | | | | Shares Purchased as Part of | | Be Purchased under the | | | Total Number of | | Average Price per | | Publicly Announced | | Plans or Programs | Period | | Shares Repurchased | | Share Paid | | Plans or Programs | | (Dollars in Thousands) | May 1 - 31, 2023 | | 3,932 | | $ | 39.96 | | 3,932 | | $ | 32,574 | June 1 - 30, 2023 | | 21,701 | | $ | 39.98 | | 21,701 | | $ | 31,706 | July 1 - 31, 2023 | | 51,499 | | $ | 38.88 | | 51,499 | | $ | 29,704 | Total | | 77,132 | | | | | 77,132 | | | |
NoneUnder the Share Repurchase Plan and as of July 31, 2023, the Company has repurchased 2,553,254 shares of its common stock since November 2021 (when it began to make such repurchases) at an average price of $37.32 per share.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES None ITEM 4.MINE SAFETY DISCLOSURES(not applicable to us) Not 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, 2017
| By:
| /s/ Rainer H. Bosselmann
| | | Rainer H. Bosselmann
| | | Chairman of the Board and Chief Executive Officer
| | | | | | DecemberSeptember 6, 20172023
| By: | /s/ David H. Watson | | | David H. Watson | | | President and Chief Executive Officer | | | September 6, 2023 | By: | /s/ Richard H. Deily | | | Richard H. Deily | | | Senior Vice President, Chief Financial Officer, | | | Treasurer and Corporate Secretary |
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