The following discussion summarizes the financial position of Argan, Inc. and
its subsidiaries as of October 31, 2022, and the results of their operations for
the three and nine month periods ended October 31, 2022 and 2021, 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 Fiscal 2022 that was filed with
the SEC on April 13, 2022 (the "Annual Report").
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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.
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 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 this Quarterly Report on Form 10-Q and our
Annual 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
The Company is primarily a construction firm that conducts operations through
its wholly-owned subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we
provide a full range of engineering, procurement, construction, commissioning,
operations management, maintenance, development, technical and consulting
services to the power generation market, including the renewable energy sector,
for a wide range of customers, including independent power project owners,
public utilities, global energy plant construction firms and other commercial
firms with significant power requirements. GPS and APC represent our power
industry services reportable segment. Through TRC, the industrial fabrication
and field services reportable segment provides on-site services that support
maintenance turnarounds, shutdowns and emergency mobilizations for industrial
operations primarily located in the southeast region of the U.S. and that are
based on its expertise in producing, delivering and installing fabricated steel
components such as piping systems and pressure vessels. Through 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 of the U.S.
We may make additional opportunistic acquisitions and/or investments by
identifying companies with significant potential for profitable growth and
realizable synergies with one or more of our existing businesses. However, we
may have more than one industrial focus depending on the opportunity and/or
needs of our customers. Significant acquired companies will be operated in a
manner that we believe will best provide long-term and enduring value for our
stockholders.
Overview
Operating Results
Consolidated revenues for the three months ended October 31, 2022 were $117.9
million, which represented a decrease of $6.6 million, or 5.3%, from
consolidated revenues of $124.5 million reported for the three months ended
October 31, 2021.
The revenues of the power industry services segment decreased by $8.9 million to
$90.7 million for the three months ended October 31, 2022, from $99.6 million
reported for the three months ended October 31, 2021. The revenues of this
reportable segment of our business represented 76.9% and 80.0% of corresponding
consolidated revenues for the three months ended October 31, 2022 and 2021,
respectively. The industrial services business reported revenues of $22.1
million for the three months ended October 31, 2022. This amount represented an
increase of $0.7 million, or 3.4%, from revenues of $21.4 million reported by
TRC for the three months ended October 31, 2021. Revenues provided by this
reportable business segment represented 18.8% and 17.2% of corresponding
consolidated revenues for the three months ended October 31, 2022 and 2021,
respectively.
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Consolidated gross profit for the three-month period ended October 31, 2022 was
$22.2 million, or approximately 18.8% of the corresponding consolidated
revenues, which reflected favorable contributions from all three reportable
business segments. For the three-month period ended October 31, 2021, the
consolidated gross profit was $26.1 million, which represented approximately
21.0% of the corresponding amount of consolidated revenues.
Selling, general and administrative expenses for the three months ended October
31, 2022 and 2021 were $12.7 million and $11.6 million, respectively.
Consolidated revenues for the nine months ended October 31, 2022 were $336.3
million, which represented a decrease of $47.5 million, or 12.4%, from
consolidated revenues of $383.8 million reported for the nine months ended
October 31, 2021.
The revenues of power industry services decreased by $39.8 million to $256.0
million for the nine months ended October 31, 2022, from $295.7 million reported
for the nine months ended October 31, 2021. The revenues of this reportable
segment of our business represented 76.1% and 77.1% of corresponding
consolidated revenues for the nine months ended October 31, 2022 and 2021,
respectively. The industrial services business reported revenues of $67.7
million for the nine months ended October 31, 2022. This amount represented a
decrease of $10.6 million, or 13.5%, from revenues of $78.2 million reported by
TRC for the nine months ended October 31, 2021. Revenues provided by this
reportable business segment represented 20.1% and 20.4% of corresponding
consolidated revenues for the nine months ended October 31, 2022 and 2021,
respectively.
Consolidated gross profit for the nine-month period ended October 31, 2022 was
$66.3 million, or 19.7% of the corresponding consolidated revenues, which also
reflected favorable contributions from all three reportable business segments.
For the nine-month period ended October 31, 2021, the consolidated gross profit
was $77.5 million, which represented approximately 20.2% of the corresponding
amount of consolidated revenues.
Selling, general and administrative expenses for the nine months ended October
31, 2022 and 2021 were $34.2 million and $31.8 million, respectively.
For the three months ended October 31, 2022, income tax expense was $2.6 million
which represented an effective income tax rate of 24.7% for the period. For the
three months ended October 31, 2021, income tax expense was $3.3 million which
represented an effective income tax rate of 20.9% for the period.
Due substantially to the unfavorable income tax expense adjustment recorded
during the nine months ended October 31, 2022 in the approximate amount of $6.2
million and related to the settlement of claims with the IRS as discussed in
Note 10 to our condensed consolidated financial statements, income tax expense
increased to $14.5 million for the period from $11.2 million for the nine months
ended October 31, 2021. Excluding the effect of the IRS settlement adjustment,
our effective income tax rate for the nine months ended October 31, 2022 was
24.5%. For the nine months ended October 31, 2021, our effective income tax rate
was 23.8%.
For the three months ended October 31, 2022, our overall operating profit
performance resulted in net income in the amount of $7.8 million, or $0.56 per
diluted share. For the comparable period last year, we reported net income in
the amount of $12.4 million, or $0.78 per dilutive share. For the nine months
ended October 31, 2022 and 2021, net income was $19.5 million, or $1.36 per
diluted share, and $36.0 million, or $2.25 per diluted share, respectively. The
unfavorable income tax expense adjustment identified above reduced net income
per diluted share for the nine months ended October 31, 2022 by $0.43.
Project Backlog
At October 31, 2022, our consolidated project backlog amount of $0.8 billion
substantially consisted of the projects of the power industry services reporting
segment. The comparable backlog amount as of January 31, 2022 was $0.7 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 the corresponding projects.
Typically, we include the total value of EPC services and other major
construction contracts in project backlog when we receive a corresponding 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 that
it is probable that the project will commence within a
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reasonable timeframe, among other factors. Projects that are awarded to us may
remain included in our backlog for extended periods of time as customers
experience project delays. However, cancellations or reductions may occur that
would reduce project backlog and that could adversely affect our expected future
revenues.
In May 2019, GPS entered into an EPC services contract to construct a 625 MW
power plant in Harrison County, West Virginia. As a limited notice to proceed
with certain preliminary activities was received from the owner of this project
at the time (a repeat customer), the value of the contract was added to our
project backlog. However, meaningful development milestones have not been
achieved and management concluded that the value of this power plant should be
removed from project backlog as of October 31, 2022.
On the other hand, in October 2022, GPS added the EPC services contract value of
the Trumbull Energy Center, a 950 MW natural gas-fired power plant to be built
in Lordstown Ohio, to our project backlog as we had a fully executed EPC service
contract and we expected contract activities to commence imminently. As
disclosed in Note 15 to the condensed consolidated financial statements included
herein, we received the full notice to proceed with the project from the owner,
Clean Energy Future-Trumbull, LLC, in November 2022. Gemma has since commenced
activities for the project. 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, and contract
completion is scheduled for calendar year 2026.
A portion of consolidated project backlog at October 31, 2022 relates to the
Guernsey Power Station as GPS completes the commissioning process for this
project, the largest single-phase, gas-fired, power plant under construction in
the U.S. First fire has successfully occurred for all three of this plant's
natural gas-fired turbines. Substantial completion of this project is currently
expected to occur early in calendar 2023.
We are committed to the construction of state-of-the-art, natural gas-fired
power plants, which represents our core business, as important elements of our
country's electricity-generation mix in the future. In addition, we have been
directing certain business development efforts to winning projects for the
erection of utility-scale wind farms and solar fields and for the construction
of hydrogen-based energy and other industrial projects in order to diversify the
sources of revenues. We have successfully completed renewable 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.
These efforts led to the award of an EPC services contract to us by 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 second half 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 approximately 100 MW of electrical
power.
Together, the currently active projects of GPS, the Guernsey Power Station, the
Maple Hill Solar facility and the Trumbull Energy Center, represent nearly 3.0
gigawatts of potential electrical power and require the significant engagement
of the technical, project support and project management teams of GPS while they
assist APC with certain current projects and business development efforts.
The business development efforts conducted by our APC operations have resulted
in a significant increase in the project backlog of this business, which
amounted to approximately $154 million as of October 31, 2022. A significant
award occurred in October 2021 as APC entered into an engineering and
construction services contract with EPUKI London, U.K., to construct a 2 x 330
MW natural gas-fired power plant in Carrickfergus that is near Belfast, Northern
Ireland, in a structure that was initially designed to enclose coal-fired units.
Our project, referred to as the "Kilroot" project, is being developed by EPNI
Energy Limited. Full project activities are underway; the overall completion of
this project is expected to occur in the latter half of Fiscal 2024.
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 Goddamendy. All three projects cleared the
applicable capacity auction earlier this year and are expected to operate
intermittently during peak periods of electricity demand and
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as back-up supply options when renewable electricity generation is limited. A
full notice to proceed has been received and project activities have commenced.
The completion of each power plant is expected to occur near the end of Fiscal
2024.
The project backlog of TRC has been increased by over 100% since January 31,
2022 to approximately $97 million as of October 31, 2022, reflecting a business
development emphasis on the award of larger industrial field service projects.
The recent emphasis on field services 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.
We continue to pursue natural gas-fired power plant, renewable energy plant and
industrial construction opportunities in the U.S., Ireland and the U.K. However,
it is important to note that the start of new projects is primarily controlled
by project owners and that delays may occur that are beyond our control.
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 2010, coal-fired power plants accounted for about
45% of net electricity generation. For 2021, coal fueled approximately 22% of
net electricity generation. In December 2021, it was reported that the average
age of the active plants in the coal-fired fleet approximates 45 years old; 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 38% of the
electricity generated by utility-scale power plants in the U.S. in 2021,
representing an increase of 60% 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.
In the reference case of its Annual Energy Outlook 2022, the Energy Information
Administration ("EIA") projects average increases to utility-scale electricity
generation in the U.S. of slightly less than 1% per year from 2022 through 2050.
The shift from coal to natural gas as a power plant energy source in the U.S. is
expected to continue as the EIA projects that coal-fired generation will decline
by 45% from 2022 through 2050, and will represent only 11% of the net
electricity generation mix by the end of this period. The net electricity
generation from natural gas-fired power plants is projected to increase by 17%
in the U.S. by 2050, and will represent approximately 34% of the net electricity
generation mix by 2050.
Undoubtedly, the long-term 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. Now, the environmentalist opposition against
coal-fired power generation has expanded meaningfully to target all fossil fuel
energy projects, including both power plants and pipelines, and has evolved into
powerful support for renewable energy sources.
Protests against fossil-fuel related energy projects continue to garner media
attention and stir public skepticism about new projects which have resulted in
delays due to onsite protest demonstrations, indecision by local officials and
lawsuits. Various cities, counties and states have adopted clean energy and
carbon-free goals or objectives with achievement expected by a certain future
date, typically 10 to 30 years out. These aspirational goals may increase the
risk of a new power plant becoming a stranded asset long before the end of its
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. Additionally, lenders, who have become more wary of funding oil-related
ventures as environmental, social and governance ideas catch on in financial
circles, may be generally unwilling to provide capital for energy projects to
increase the domestic production and transmission of oil and natural gas.
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 current year rise in oil prices
as the administration made appeals to other countries to increase oil production
while domestic production is challenged by supply chain and labor issues and the
maintenance of restrictive regulations. Meanwhile,
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delays continue for the construction of pipelines needed to transport natural
gas to liquid natural gas export facilities for shipment to Western Europe.
In August 2022, President Biden signed the Inflation Reduction Act, 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 over a decade on
new workers and technology at the IRS, and funds hundreds of billions 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 use of fuel types, including hydrogen, nuclear,
renewables and fossil fuels. However, it appears that receipt 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 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.
Accordingly, the net amount of electricity generation in the U.S. provided by
utility-scale wind and solar photovoltaic facilities continues to rise. Over the
last two years, the net generation provided by these sources has increased by
almost 35%. Together, such power facilities provided approximately 9%, 11% and
12% of the net amount of electricity generated by utility-scale power facilities
in 2019, 2020 and 2021, respectively. In EIA's 2022 reference case, net
electricity generation from all renewable power sources is expected to increase
by more than 161% and represent over 42% of such generation by 2050. Impetus for
this growth is provided by both public concerns about climate change and U.S.
government subsidies. Environmental activism has resulted in the passage of laws
and the establishment of regulations that discourage new fossil-fuel burning
power plants and provide income tax advantages that promote the growth of wind
and solar power. Declines in the amount of renewable power plant component and
power storage costs and an increase in the scale of energy storage capacity
(i.e., battery farms and other energy storage technologies) have also occurred.
Over the next few years, 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 declining equipment costs and the
availability of valuable tax credits. As these tax credits were scheduled to
decline and then expire early in the next decade, the wind capacity additions
may slow. Although the special tax incentives related to solar power also
expire, the expected future decline in the cost of solar power equipment is
predicted to sustain the growth of photovoltaic solar power generation
facilities.
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 prices. However, reductions in
production levels during the pandemic, an increase in the amount of liquid
natural gas exports and heat-wave temperatures throughout the U.S., among other
factors including the Russian invasion of Ukraine, strained domestic natural gas
supplies and forced prices upwards. As a result, the price of natural gas in the
U.S. increased meaningfully during the beginning of the 2022 calendar year.
However, spot price declines are forecast to occur during the first quarter of
calendar year 2023 and generally stabilize for the year.
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 the electric power system operated by PJM, which
includes all or part of thirteen states and the District of Columbia. This
entity operates a capacity market which is a process to ensure long-term grid
reliability by securing the appropriate amount of power supply resources needed
to meet predicted future energy demands. Capacity payments represent meaningful
portions of the revenue streams of qualifying power plants. Capacity auction
for a particular delivery year were usually held during the month of May, three
years prior to the actual delivery year. However, the 2023/2024 auction,
scheduled for December 2021, was postponed 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
delivery year were significantly lower than for the previous auction. Capacity
auction prices are scheduled to be posted for 2024-2025 and 2025-2026 in
December 2022 and June 2023, respectively. We expect that the capacity prices
will rebound in the future as the PJM returns to a normal auction schedule with
revised and fair auction rules.
Nevertheless, we believe that the lower operating costs of natural gas-fired
power plants, the higher energy generating efficiencies of modern gas turbines,
and the requirements for grid resiliency should sustain the demand for modern
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combined cycle and simple cycle gas-fired power plants in the future. Natural
gas is relatively clean burning, generally cost-effective and reliable. 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 its benefits as a source of power are compelling, especially as
a complement to the deployment of wind and solar powered energy sources, and
that the future long-term prospects for natural gas-fired power plant
construction remain generally favorable as natural gas continues to be the
primary source for power generation in our country. The future availability of
less carbon-intense and higher efficiency natural gas in the U.S. should be a
significant factor in the economic assessment of future power generation
capacity additions, although the pace of new opportunities emerging may be
restrained and the starts of awarded EPC projects may be delayed or cancelled
due to the challenges described above.
Throughout the U.S., the risk of electricity shortages is rising 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 struggling to keep up
with demand, a gap that could lead to additional rolling blackouts during heat
waves or other peak periods.
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, earlier this year, the highly publicized probe by the U.S. Commerce
Department into whether Chinese solar manufacturers are circumventing trade
tariffs on solar panels had the effect of halting imports of key components
needed to build new solar farms and effectively brought the U.S. solar industry
to a temporary standstill; nevertheless, work at our solar energy project in
Pennsylvania continued although at a slower-than-expected pace during the
current year.
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 sited where the resources
are optimal, often in remote locations where the transmission systems are not
robust. The costs associated with the necessary grid upgrades may be
prohibitive.
U.S. offshore wind projects progress inconsistently, facing challenges in the
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 commercial 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 about 40 years old. The newest reactor in the fleet entered service
in 2016, which was ten years after the previous one to begin operation. There
are two new reactors under construction in the U.S., Vogtle Units 3 and 4.
Co-owner Georgia Power projects that Unit 3 will enter service in the first
quarter of calendar year 2023. The completion of these two units is many years
behind schedule and the units are billions of dollars in excess of their initial
estimated cost.
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 offset the
intermittencies of renewable power sources. The increase by the U.S. in its use
of nuclear power for electricity generation could have unfavorable effects on
the demand for new natural gas-fired and additional renewable energy facilities
in the future.
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We 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 short 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
backup 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 Russian 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.
The foregoing discussion in our "Market Outlook" does focus on the state of the
domestic power market as the EPC services business of GPS provides the
predominant amount of our revenues. However, overseas power markets provide
important new power construction opportunities for us especially across Ireland
and the U.K.
While both of these countries are committed to the 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. 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 U.K. usually holds auctions for power capacity about four years in advance
of the delivery date and another auction for a smaller amount of capacity around
a year before delivery. Evidence of the shifting power priorities in the U.K.
are reflected in the results for Britain's auction to ensure enough electricity
capacity for 2022/2023 that were released earlier this year. Capacity cleared at
a record high price unlike the results for the most recent PJM capacity auction.
A total of nearly 5 gigawatts of capacity was procured in this auction, with
nearly 70% of the power associated with gas-fired plants.
Last year, the Irish government issued a policy statement on the security of the
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 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 recently entered into engineering and construction services
contracts 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 are expected to operate intermittently during peak periods of
electricity demand and as back-up supply options when renewable electricity
generation is limited. A full notice to proceed has been received and project
activities have commenced. Further, the Irish government has recognized that the
successful development of data 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 the large increase in electricity
demand presented by the growth of the data center industry represents an
evolving, significant risk to the security of the supply. Accordingly,
guidelines have been published recently with the intent to protect both
electricity consumers and the security of supply while continuing to allow data
centers to connect to the electricity system. Assessment criteria for
applications of data centers to obtain grid connections include, among other
27
items, the ability of data center applicants to bring onsite dispatchable power
generation (and/or storage) equivalent to or greater than their demand in order
to support the security of supply. It is expected that any dispatchable on-site
generation that uses fossil fuel sources developed by data center operators will
use natural gas as the fuel source. APC is nearing completion of 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 with its existing and new clients. The governments of
Ireland and the U.K. have already made funds available to develop and support
specific projects. The engineering and construction teams of APC are engaged in
continuous discussions with particular stakeholders in certain of these other
projects and APC's management believes that it will be part of their eventual
execution.
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 project
management manpower to GPS on several of its EPC services contracts. These
recent experiences have demonstrated that the two companies can combine
resources effectively. Considerations of the manner in which GPS and APC will
work together in the future are becoming more substantive in view of emerging
new business opportunities in the U.K. and Ireland, the strength of the
reputation of GPS for successfully completing large gas-fired power plant
projects in the U.S. and the growing recognition in the power community in
Ireland and the U.K. that APC is positioned and has the capability to build
larger and more complex power projects.
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 additional
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 engineering, procurement,
construction or equipment installation services contracts to us.
The competitive landscape for our core EPC services business related to natural
gas-fired power plants in the U.S. has changed significantly over the last five
years. While the domestic market remains dynamic, we are moving into an era
where there may be fewer competitors for new gas-fired power plant EPC services
project opportunities. Several major competitors have exited the market for a
variety 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. 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
continue to be based on reasonable assumptions.
Comparison of the Results of Operations for the Three Months Ended October 31,
2022 and 2021
We reported net income of $7.8 million, or $0.56 per diluted share, for the
three months ended October 31, 2022. For the comparable period of the prior
year, we reported net income of $12.4 million, or $0.78 per diluted share.
28
The following schedule compares our operating results for the three months ended
October 31, 2022 and 2021 (dollars in thousands):
Three Months Ended October 31,
2022 2021 $ Change % Change
REVENUES
Power industry services $ 90,682 $ 99,560 $ (8,878) (8.9) %
Industrial fabrication and field services 22,137 21,402 735 3.4
Telecommunications infrastructure services 5,056 3,489 1,567 44.9
Revenues
117,875 124,451 (6,576) (5.3)
COST OF REVENUES
Power industry services 72,725 76,517 (3,792) (5.0)
Industrial fabrication and field services 18,737 18,703 34 0.2
Telecommunications infrastructure services 4,205 3,096 1,109 35.8
Cost of revenues
95,667 98,316 (2,649) (2.7)
GROSS PROFIT 22,208 26,135 (3,927) (15.0)
Selling, general and administrative expenses 12,667 11,590 1,077 9.3
INCOME FROM OPERATIONS 9,541 14,545 (5,004) (34.4)
Other income, net 768 1,117 (349) (31.2)
INCOME BEFORE INCOME TAXES 10,309 15,662 (5,353) (34.2)
Income tax expense (2,551) (3,269) 718 22.0
NET INCOME $ 7,758 $ 12,393 $ (4,635) (37.4) %
Revenues
Power Industry Services
The revenues of the power industry services segment, representing the businesses
of GPS and APC, decreased by 8.9%, or $8.9 million, to $90.7 million for the
three months ended October 31, 2022 compared with revenues of $99.6 million for
the three months ended October 31, 2021 as the quarterly construction activities
associated with the Guernsey Power Station project and Equinix data center
project have passed peak levels. The reduction in revenues between the quarters
was partially offset by increasing revenues at several projects including the
Kilroot Power Station, the ESB FlexGen peaker plants and the Maple Hill Solar
energy facility. The revenues of this business segment represented approximately
76.9% of consolidated revenues for the quarter ended October 31, 2022 and 80.0%
of consolidated revenues for the corresponding prior year quarter.
The primary driver for the revenues of this segment for the three months ended
October 31, 2021 were the revenues associated with the construction of the
Guernsey Power Station as the construction activities on this project were at
peak levels.
Industrial Fabrication and Field Services
The revenues of our industrial fabrication and field services segment,
representing the business of TRC, increased by $0.7 million, or 3.4%, to $22.1
million for the three months ended October 31, 2022 compared to revenues of
$21.4 million for the three months ended October 31, 2021 as the amounts of
field services and pipe fabrication work increased between periods and were
partially offset by declining revenues in vessel fabrication work. For the three
months ended October 31, 2022 and 2021, the revenues of this segment represented
18.8% and 17.2% of consolidated revenues for the corresponding periods.
TRC's performance for the three-month period ended October 31, 2021 was
particularly strong as it reflected significant increases in revenues earned on
field services activities during the period, as well as increases in revenues
associated with pipe and vessel fabrication works. The major customers of TRC
include some of North America's largest fertilizer producers, as well as other
chemical, mining, forest products, construction and energy companies with
plants, facilities and other sites located primarily in the southeastern region
of the U.S.
29
Telecommunications Infrastructure Services
The revenue results of this business segment, which represent the business of
SMC, were $5.1 million for the three-month period ended October 31, 2022, an
increase of $1.6 million, or 44.9%, from the amount of revenues earned during
the three months ended October 31, 2021. The improvement in revenues between the
periods related to increased project activities for outside-premises customers,
and new revenues provided by the customers of Lee Telecom, Inc. ("LTI"), a
company acquired by SMC in December 2021.
Cost of Revenues
With the decrease in consolidated revenues for the three months October 31, 2022
compared with last year's third quarter ended October 31, 2021, the consolidated
cost of revenues also decreased between the quarters. These costs were $95.7
million and $98.3 million for the three-month periods ended October 31, 2022 and
2021, respectively, representing a decrease of approximately 2.7%.
For the three-month period ended October 31, 2022, we reported a consolidated
gross profit of approximately $22.2 million which represented a gross
profit percentage of approximately 18.8% of corresponding consolidated revenues.
The gross profit percentages of corresponding revenues for the power industry
services, industrial services and the telecommunications infrastructure segments
were 19.8%, 15.4% and 16.8%, respectively, for the quarter ended October 31,
2022.
Our consolidated gross profit reported for the three-month period ended October
31, 2021 was $26.1 million, which represented a gross profit percentage of
approximately 21.0% of corresponding consolidated revenues. The gross profit
percentages of corresponding revenues for the power industry services,
industrial services and the telecommunications infrastructure segments were
23.1%, 12.6% and 11.3%, respectively, for the quarter ended October 31, 2021.
Selling, General and Administrative Expenses
These costs were $12.7 million and $11.6 million for the three months ended
October 31, 2022 and 2021, respectively, representing an increase of $1.1
million between the quarters, or 9.3%, which was due primarily to the accrual of
costs associated with the retirement of the Company's former chief executive
officer in August 2022.
Other Income, Net
We reported other income, net, in the amount of $0.8 million for the three
months ended October 31, 2022, which included primarily income earned on funds
maintained in money market accounts and interest income earned on CDs, as
interest rates have increased meaningfully between periods. We reported other
income, net, in the amount of $1.1 million for the three months ended October
31, 2021, which reflected primarily a cost reimbursement grant from the Irish
government related to the COVID-19 pandemic.
Income Taxes
We incurred income tax expense for the three months ended October 31, 2022 in
the amount of approximately $2.6 million, which represents an effective tax rate
of 24.7% for the period and which reflects a currently estimated annual
effective income tax rate of 23.8%. This estimated tax rate differs from the
statutory federal tax rate of 21% due primarily to the unfavorable estimated
effects of state income taxes and permanent differences, including certain
nondeductible executive compensation and global intangible low taxed income
("GILTI"). For the three months ended October 31, 2021, we reported income tax
expense in the amount of approximately $3.3 million, which represented an
effective income tax rate of 20.9% for the period.
Comparison of the Results of Operations for the Nine Months Ended October 31,
2022 and 2021
We reported net income of $19.5 million, or $1.36 per diluted share, for the
nine months ended October 31, 2022. For the nine months ended October 31, 2021,
we reported net income of $36.0 million, or $2.25 per diluted share.
30
The following schedule compares our operating results for the nine months ended
October 31, 2022 and 2021 (dollars in thousands):
Nine Months Ended October 31,
2022 2021 $ Change % Change
REVENUES
Power industry services $ 255,958 $ 295,736 $ (39,778) (13.5) %
Industrial fabrication and field services 67,660 78,213 (10,553) (13.5)
Telecommunications infrastructure services 12,644 9,851 2,793 28.4
Revenues
336,262 383,800 (47,538) (12.4)
COST OF REVENUES
Power industry services 202,985 233,682 (30,697) (13.1)
Industrial fabrication and field services 56,968 64,519 (7,551) (11.7)
Telecommunications infrastructure services 9,976 8,098 1,878 23.2
Cost of revenues 269,929 306,299 (36,370) (11.9)
GROSS PROFIT 66,333 77,501 (11,168) (14.4)
Selling, general and administrative expenses 34,226 31,813 2,413 7.6
INCOME FROM OPERATIONS 32,107 45,688 (13,581) (29.7)
Other income, net 1,868 1,569 299 19.1
INCOME BEFORE INCOME TAXES 33,975 47,257 (13,282) (28.1)
Income tax expense (14,510) (11,228) (3,282) (29.2)
NET INCOME $ 19,465 $ 36,029 $ (16,564) (46.0) %
Revenues
Power Industry Services
The revenues of the power industry services segment decreased by 13.5%, or $39.8
million, to $256.0 million for the nine months ended October 31, 2022 compared
with revenues of $295.7 million for the nine months ended October 31, 2021 as
the construction activities associated with the Guernsey Power Station project
have passed peak levels. The reduction in revenues between the periods was
partially offset by an increase in the revenues of the Maple Hill solar energy
facility and several APC projects including the Kilroot Power Station, the ESB
FlexGen peaker plants and the Equinix data center project. The revenues of this
business segment represented approximately 76.1% of consolidated revenues for
the nine months ended October 31, 2022 and 77.1% of consolidated revenues for
the nine-month period ended October 31, 2021.
The primary drivers for the revenues of this segment for the nine months ended
October 31, 2021 were the revenues associated with the construction of the
Guernsey Power Station and the Maple Hill Solar energy facility.
Industrial Fabrication and Field Services
The revenues of our industrial fabrication and field services segment decreased
by $10.6 million, or 13.5%, to $67.7 million for the nine months ended October
31, 2022 compared to revenues of $78.2 million for the nine months ended October
31, 2021 as the amount of pipe and vessel fabrication and field services
declined. For the nine months ended October 31, 2022 and 2021, the revenues of
this segment represented 20.1% and 20.4% of consolidated revenues for the
corresponding periods.
Telecommunications Infrastructure Services
The revenue results of this business segment were $12.6 million for the
nine-month period ended October 31, 2022, an increase of $2.8 million, or 28.4%,
from the amount of revenues earned during the nine months ended October 31,
2021. The improvement was due primarily to the addition of the revenues of LTI
to current year results.
31
Cost of Revenues
With the decrease in consolidated revenues for the nine months ended October 31,
2022 compared with last year's nine-month period ended October 31, 2021, the
consolidated cost of revenues also decreased between the periods. These costs
were $269.9 million and $306.3 million for the nine months ended October 31,
2022 and 2021, respectively, representing a decrease of approximately 11.9%.
For the nine-month period ended October 31, 2022, we reported a consolidated
gross profit of approximately $66.3 million, which represented a gross
profit percentage of approximately 19.7% of corresponding consolidated revenues.
The gross profit percentages of corresponding revenues for the power industry
services, industrial services and the telecommunications infrastructure segments
were 20.7%, 15.8% and 21.1%, respectively, for the nine months ended October 31,
2022.
Our consolidated gross profit reported for the nine-month period ended October
31, 2021 was $77.5 million, which represented a gross profit percentage of
approximately 20.2% of corresponding consolidated revenues. The gross profit
percentages of corresponding revenues for the power industry services,
industrial services and the telecommunications infrastructure segments were
21.0%, 17.5% and 17.8%, respectively, for the nine-month period ended October
31, 2021.
Selling, General and Administrative Expenses
These costs were $34.2 million and $31.8 million for the nine months ended
October 31, 2022 and 2021, respectively, representing an increase of $2.4
million between the periods, or 7.6%, due primarily to the executive retirement
costs described above, increased stock compensation expense and increased
professional fees.
Other Income, Net
We reported other income, net, in the amount of $1.9 million for the nine months
ended October 31, 2022 which included primarily our share of earnings associated
with our solar fund investments and income earned on funds maintained in money
market accounts and interest income earned on CDs.
We reported other income, net, in the amount of $1.6 million for the nine months
ended October 31, 2021 due substantially to two transactions related to APC. In
addition to the COVID-19 relief received from the Irish government as discussed
above, APC received a research and development credit payment last year from the
government of the U.K. related to certain qualifying works performed during
Fiscal 2019 in the amount of $0.7 million. This line item also reflected our
share of the net loss reported by a solar fund investment in the amount of $0.4
million.
Income Taxes
We incurred income tax expense for the nine months ended October 31, 2022 in the
amount of approximately $14.5 million, including the aforementioned unfavorable
adjustment in the amount of $6.2 million related to the settlement of research
and development claims with the IRS. Excluding the effect of this adjustment,
our effective income tax rate for the nine-months ended October 31, 2022 was
24.5%. As indicated above, we estimate that our annual effective income tax rate
for the year ending January 31, 2023 will approximate 23.8%. This estimated
annual effective tax rate differs from the statutory federal tax rate of 21% due
primarily to the unfavorable effects of state income taxes and permanent
differences, including certain nondeductible executive compensation and overseas
income deemed to be GILTI.
For the nine months ended October 31, 2021, we reported income tax expense in
the amount of approximately $11.2 million, which represented an actual effective
income tax rate of 23.8% for the period. This effective tax rate differed from
the statutory federal tax rate of 21% due primarily to the unfavorable effect of
state income taxes and permanent differences.
Liquidity and Capital Resources as of October 31, 2022
At October 31 and January 31, 2022, our balances of cash and cash equivalents
were $136.1 million and $350.5 million, respectively, which represented a
decrease of $214.4 million.
The net amount of cash used in operating activities for the nine months ended
October 31, 2022 was $73 million. Our net income for the nine months ended
October 31, 2022, adjusted favorably by the net amount of non-cash income and
expense
32
items, represented a source of cash in the total amount of $25.2 million.
However, reductions in the balance of contract liabilities and the combined
level of accounts payable and accrued expenses in the amounts of $78.9 million
and $8.0 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 and accounts receivable in the amounts of $6.6 million and $10.9 million,
respectively, represented uses of cash during the period. The decrease in the
amount of other assets in the amount of $6.2 million, represented a source of
cash during the period.
During the nine months ended October 31, 2022, we also used cash to increase the
level of our short-term investments, which consist entirely of CDs issued by the
Bank, by $59.8 million and to make capital expenditures in the amount of $2.6
million. We also used $73.8 million cash in financing activities during the nine
months ended October 31, 2022, including $63.3 million used to repurchase shares
of common stock pursuant to our Share Repurchase Plan, and $10.6 million used
for the payment of regular cash dividends. As of October 31, 2022, there were no
restrictions with respect to intercompany payments between GPS, TRC, APC, SMC
and the holding company.
During the nine months ended October 31, 2021, our balance of cash and cash
equivalents increased by a net amount of $24.9 million. The net amount of cash
provided by operating activities for the nine months ended October 31, 2021 was
$41.7 million. Our net income for the period, adjusted favorably by the net
amount of non-cash income and expense items, represented a source of cash in the
total amount of $45.6 million. The sources of cash from operations also included
a decrease in the balance of contract assets in the amount of $16.7 million. A
reduction in the combined level of accounts payable and accrued expenses and an
increase in accounts receivable during the nine-month period ended October 31,
2021, in the respective amounts of $20.0 million and $7.1 million, represented
uses of cash for the period. Contract liabilities increased by $4.4 million
during the nine months ended October 31, 2021, representing a source of cash.
The amount of prepaid expenses and other assets decreased by $2.1 million during
the nine months ended October 31, 2021, which also represented a source of cash
for the period.
Another source of cash for the nine months ended October 31, 2021 were the
proceeds associated with the exercise of stock options in the amount of $1.4
million. Non-operating activities used cash during the nine months ended October
31, 2021, including the payment of regular cash dividends in the amount of $11.8
million, investment payments made to a solar energy fund in the amount of $4.1
million and capital expenditures in the amount of $1.1 million.
At October 31, 2022, a portion of our balance of cash and cash equivalents was
invested in a money market fund with most of its total assets invested in cash,
U.S. Treasury obligations and repurchase agreements secured by U.S. Treasury
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 nine months ended October 31, 2022, our net liquidity
decreased by $53.8 million to $230.4 million as of October 31, 2022 from $284.3
million as of January 31, 2022, due primarily to common stock repurchases and
cash dividends, partially offset by our net income for the period. As we have no
debt service, our fixed asset acquisitions in a reporting period are typically
low, and net liquidity includes our short-term investments, our levels of
working capital are not subjected to the volatility that affects our levels of
cash and cash equivalents.
The original term of our Credit Agreement with the Bank was scheduled to expire
on May 31, 2021. During April 2021, the Company and the Bank agreed to an
amendment to the Credit Agreement which extended the expiration date of the
Credit Agreement to May 31, 2024 and reduced the borrowing rate. The Credit
Agreement includes the following features, among others: a lending commitment of
$50.0 million including a revolving loan with interest at the 30 day LIBOR plus
1.6% (reduced from 2.0%), and an accordion feature which allows for an
additional commitment amount of $10.0 million, subject to certain conditions. 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 October 31, 2022, we had no outstanding borrowings; however, the Bank has
issued letters of credit in the total outstanding amount of $8.2 million in
support of the activities of APC under new customer contracts. In connection
with the project development activities of the VIE, the Bank issued a letter of
credit, outside the scope of the Credit Agreement, in the approximate amount of
$3.4 million for
33
which we have provided cash collateral. The Company expects to amend the Credit
Agreement again before the end of Fiscal 2023 in order to replace LIBOR with an
equivalent benchmark rate. The Company does not expect that the change will
materially impact its consolidated financial statements.
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
Credit Agreement requires that we comply with certain financial covenants at our
fiscal year-end and at each fiscal quarter-end, and includes other terms,
covenants and events of default that are customary for a credit facility of its
size and nature, including a requirement to achieve positive adjusted earnings
before interest, taxes, depreciation and amortization, as defined, over each
rolling twelve-month measurement period. At October 31, 2022 and January 31,
2022, we were compliant with the covenants of the Credit Agreement.
In the normal course of business and 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 October 31, 2022 and January 31, 2022, the estimated amounts of the
Company's unsatisfied bonded performance obligations, covering all of its
subsidiaries, were approximately $0.1 billion and $0.2 billion, respectively. As
of October 31, 2022 and January 31, 2022, the outstanding amounts of bonds
covering other risks, including warranty obligations related to completed
activities, were not material. Not all of our projects require bonding.
We have also provided a financial guarantee on behalf of GPS to an original
equipment manufacturer in the amount of $3.6 million to support 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 our performance on projects
would be available and monetary damages or other costs or losses would be
determined to be probable, we would record such losses. As our subsidiaries are
wholly-owned, any actual liability related to contract performance is ordinarily
reflected in the financial statement account balances determined pursuant to the
Company's accounting for contracts with customers. Any amounts that we may be
required to pay in excess of the estimated costs to complete contracts in
progress as of October 31, 2022 are not estimable.
Until recently, returns on money market instruments and certificates of deposit
were limited for some time due to market conditions. With the desire to increase
the amount of return on its available cash, 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 cash generated from our future
operations, with or without funds available under our Credit Agreement, will be
adequate to meet our general business needs in the foreseeable future. In
general, we maintain significant liquid capital in our consolidated balance
sheet to ensure the maintenance of our bonding capacity and to provide parent
company performance guarantees for EPC and other construction projects.
However, any significant future acquisition, investment or other 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.
34
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The tables following immediately below present the determinations of EBITDA for
the three and nine months ended October 31, 2022 and 2021, respectively (amounts
in thousands).
Three Months Ended
October 31,
2022 2021
Net income, as reported $ 7,758 $ 12,393
Income tax expense 2,551 3,269
Depreciation 740 819
Amortization of purchased intangible assets 212 227
EBITDA $ 11,261 $ 16,708
Nine Months Ended
October 31,
2022 2021
Net income, as reported $ 19,465 $ 36,029
Income tax expense 14,510 11,228
Depreciation 2,296 2,560
Amortization of purchased intangible assets 611 680
EBITDA
$ 36,882 $ 50,497
We believe that EBITDA is a meaningful presentation that enables us to assess
and compare our operating performance on a consistent basis by removing from our
operating results the impacts of our capital structure, the effects of the
accounting methods used to compute depreciation and amortization and the effects
of operating in different income tax jurisdictions. Further, we believe that
EBITDA is widely used by investors and analysts as a measure of performance.
However, as EBITDA is not a measure of performance calculated in accordance with
U.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 U.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
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,
the 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; the accounting for business
combinations; the subsequent valuation of goodwill, other indefinite-lived
assets and long-lived assets; 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 typically, as well as the
accounting and reporting for special purpose entities including joint ventures
and variable interest entities. An expanded discussion of our critical
accounting policies is included in Item 7 of Part II of our Annual Report.
During the three months ended October 31, 2022, there have been no material
changes in the way we apply the critical accounting policies described therein.
35
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that have not yet been
adopted that we consider material to our consolidated financial statements.
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