The following discussion summarizes the financial position of Argan, Inc. and
its subsidiaries as of July 31, 2020, and the results of their operations for
the three and six months ended July 31, 2020 and 2019, and should be read in
conjunction with (i) the unaudited condensed consolidated financial statements
and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and
(ii) the consolidated financial statements and accompanying notes included in
our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 that
we filed with the SEC on April 14, 2020 (the "Annual Report").
Cautionary Statement Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. We have made statements in this Item 2
and elsewhere in this Quarterly Report on Form 10-Q that may constitute
"forward-looking statements." The words "believe," "expect," "anticipate,"
"plan," "intend," "foresee," "should," "would," "could," or other similar
expressions are intended to identify forward-looking statements. Our
forward-looking statements, including those relating to the potential effects of
the COVID-19 pandemic on our business, financial position and results of
operations, are based on our current expectations and beliefs concerning future
developments and their potential effects on us.
21
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
Argan is a holding company that conducts operations through its wholly-owned
subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we provide a full
range of engineering, procurement, construction, commissioning, operations
management, maintenance, development, technical and consulting services to the
power generation markets, including the renewable energy sector, for a wide
range of customers, including independent power project owners, public
utilities, equipment suppliers and global energy plant construction firms. 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 plants primarily located in the southeast region of
the US and that are based on its expertise in producing, delivering and
installing fabricated metal 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 US.
We may make additional acquisitions of and/or investments in companies with
potential for profitable growth that reflect more than one industrial focus. We
expect that they will be held in separate subsidiaries that will be operated in
a manner that best provides value for our stockholders.
Overview
The TeesREP Subcontract
In our Form 10-K Annual Report for Fiscal 2019, we disclosed that APC was
completing the mechanical installation of the boiler for a biomass-fired power
plant under construction in the UK, the TeesREP Project, and that the project
had encountered significant operational and contractual challenges. The
consolidated operating results for the year ended January 31, 2019 reflected
unfavorable gross profit adjustments related to this project. The disclosure
explained that the construction project was behind the schedule originally
established for the job and warned that the TeesREP Project may continue to
impact our consolidated operating results negatively until it reaches
completion.
By April 30, 2019, APC's estimates of the unfavorable financial impacts on
forecasted costs of the numerous and unique difficulties on this particular
project, including weather delays, inefficiencies due to unanticipated scope and
design changes from preliminary plans, project task re-sequencing and various
work interruptions, had escalated substantially from the estimates prepared for
the prior year-end. As a result, for the three-month period ended April 30,
2019, we recorded a loss related to this project in the amount of $27.6 million
and reversed profit in the amount of $0.7 million that had been recorded in
prior periods. For the three-month period ended July 31, 2019, APC recorded
additional loss related to the TeesREP Project in the amount of $3.4 million.
During the fourth quarter of Fiscal 2020, APC and its customer, the engineering,
procurement and construction services contractor on the TeesREP Project, agreed
to amended operational and commercial terms for the completion of the project.
At the time, this framework addressed the project schedule, payment terms, the
scope of the remaining effort, performance guarantees and other terms and
conditions for APC to reach substantial completion of its portion of the total
project.
22
Although this negotiation returned a meaningful amount of stability to the
continuation of the project efforts, the amendment did not resolve significant
past commercial differences.
Construction on the TeesREP Project was suspended on March 24, 2020 due to the
COVID-19 pandemic. At the time of the work suspension, APC had completed
approximately 90% of its subcontracted work. As a condition for resuming its
efforts on the TeesREP Project, APC entered into Amendment No. 2 to the
subcontract, effective June 1, 2020, covering new terms and conditions for
completion of the installation of the boiler. This agreement represents a global
settlement of past commercial differences with both parties making significant
concessions, and converts the billing arrangement for the remaining work to a
time-and-materials based scheme.
Despite the change to the billing arrangements, we have treated Amendment No. 2
as a continuation of the original subcontract because the arrangement continues
to represent a single performance obligation to our customer, the delivery of a
complete functioning and integrated boiler, that was only partially satisfied
when the modification to the subcontract occurred. The catch-up impact of the
accounting for the modification of the subcontract partially offset by
project-related charges recorded by APC resulted in a net improvement to gross
profit for the three months ended July 31, 2020 in the amount of $2.3 million.
We currently expect that the forecasted costs at completion for the TeesREP
Project will exceed projected revenues by approximately $32.3 million, which is
the amount of the expected loss that has been reflected in the condensed
consolidated financial statements as of July 31, 2020. The amount of the
remaining contract loss reserve as of July 31, 2020 was approximately $2.3
million; the comparable balance at January 31, 2020 was $5.8 million. These
balances were included in accrued expenses in the accompanying condensed
consolidated balance sheets. The total amounts of accounts receivable and
contract assets related to the TeesREP Project and included in the corresponding
condensed consolidated balance sheets were $11.2 million as of July 31, 2020 and
$19.2 million as of January 31, 2020.
Additionally, during the quarter ended July 31, 2020, we made changes in the
operational and financial leadership at APC. The new management team is focused
on completing the TeesREP Project, reducing costs, limiting future commercial
and project risks and achieving sustained profitability for the combined
operations of APC. We believe that the APC leadership changes, our active
management of this subcontract and the restructuring of the subcontract terms
and conditions have reduced the potential for future material loss on the
TeesREP Project. However, should APC encounter additional difficulties as it
resumes construction activity on the TeesREP Project, including future work
interruptions that may arise related to any resurgence of the COVID-19 outbreak
or any failure of the customer to make timely payment of billed amounts,
additional losses may be incurred that would be reflected in operating results
when identified and quantified.
Summary of Operating Results
Due substantially to the recovering revenues of GPS, consolidated revenues for
the three months ended July 31, 2020 were $87.5 million, which represented an
increase of $24.4 million, or 38.7%, from consolidated revenues of $63.1 million
reported for the three months ended July 31, 2019. The revenues of the power
industry services segment, including GPS, represented 78.9% and 44.2% of
consolidated revenues for the three months ended July 31, 2020 and 2019,
respectively. On the other hand, the revenues of TRC and SMC for the three
months ended July 31, 2020 declined by 49.8% and 9.0%, respectively, from the
comparable amounts reported for the three months ended July 31, 2019, and
together represented 21.1% of consolidated revenues for the quarter ended July
31, 2020.
We believe that all of our businesses were adversely impacted during the three
months ended July 31, 2020, to some degree, by continuing difficulties presented
by the COVID-19 outbreak. The results for APC were hurt by the slow resumption
of postponed Irish works projects and the suspension and restart of construction
activities on the TeesREP Project. The challenges of managing the continuing
activities of the Guernsey Power Station project during this period of various
health and safety restrictions resulted in project spending by GPS falling
slightly short of prior expectations. In addition, our consolidated revenues
suffered from the effects of project delays by customers of both TRC and SMC
attributable to the restrictive work environments caused by the pandemic.
However, early performance on several large projects during the three months
ended July 31, 2020, added to project backlog by TRC late in the first quarter,
did contribute to a consecutive quarter increase of 71.3% in the revenues for
TRC.
23
Consolidated gross profit for the three months ended July 31, 2020 was $15.6
million, or 17.9% of the corresponding consolidated revenues, which reflected
the favorable impacts of the higher consolidated revenues and the catch-up
adjustment recorded in connection with the negotiation of Amendment No. 2 to the
TeesREP subcontract. Our gross profit reported for the three months ended July
31, 2019 was $3.0 million, or 4.7% of corresponding consolidated revenues.
Selling, general and administrative expenses for the three months ended July 31,
2020 and 2019 were $9.1 million and $10.0 million, respectively. Due to the
extremely low rates of return on amounts invested in cash equivalents during the
current year, other income declined to $0.5 million for the three months ended
July 31, 2020 from $1.6 million for the comparable quarter of the prior year
despite the increase in the amount of invested funds between years.
Due primarily to consolidated pre-tax book income reported for the three months
ended July 31, 2020 in the amount of $7.0 million, we reported income tax
expense in the amount of $1.4 million for the quarter. We recorded an income tax
benefit for the three months ended July 31, 2019 in the amount of approximately
$6.4 million which primarily reflected the estimated favorable tax impact of a
bad debt loss on loans made to APC from Argan, which were determined to be
uncollectible during the prior year quarter.
With results reflecting primarily the factors identified above, the consolidated
net income attributable to our stockholders was $5.6 million, or $0.36 per
diluted share, for the three months ended July 31, 2020. For the three months
ended July 31, 2019, we reported consolidated net income attributable to our
stockholders of $1.2 million, or $0.07 per diluted share.
The improved consolidated revenues for the quarter ended July 31, 2020 were the
primary driver for the increased consolidated revenues for the six-month period
ended July 31, 2020 which were $147.6 million; this amount represented a 31.1%
improvement from the amount of revenues for the six months ended July 31, 2019.
The revenues of the power industry services segment, including GPS, represented
79.7% and 42.7% of consolidated revenues for the six months ended July 31, 2020
and 2019, respectively. Last year, the majority of consolidated revenues were
contributed by the industrial services business of TRC which reported revenues
of $60.3 million for the six months ended July 31, 2019, or 53.6% of
consolidated revenues for the prior year period. Despite the consecutive quarter
improvement in the revenues of TRC, its revenues declined by 56.2% for the six
months ended July 31, 2020, as compared to the revenues of the comparable period
last year, and represented only 17.9% of consolidated revenues for the current
year period.
Consolidated gross profit for the six months ended July 31, 2020 was $19.6
million, or 13.3% of the corresponding consolidated revenues, which reflected
primarily the favorable impact of higher consolidated revenues. The significant
subcontract loss incurred by APC caused us to report a consolidated gross loss
of $18.1 million for the six months ended July 31, 2019.
The loss on the TeesREP Project also prompted us to record an impairment loss
related to the goodwill of APC in the amount of $2.1 million during the first
quarter last year, which amount is included in the reported results for the six
months ended July 31, 2019. Selling, general and administrative expenses were
$19.4 million and $19.6 million for the six months ended July 31, 2020 and 2019,
respectively. Other income, representing primarily income earned on temporary
cash investments, declined to $1.5 million for the six months ended July 31,
2020 from $3.9 million for the six months ended July 31, 2019.
For the six months ended July 31, 2020, we recorded an income tax benefit in the
amount of $3.1 million which reflected primarily the net operating loss
carryback benefit of $4.3 million most of which was recorded in the first
quarter of the current year. We recorded an income tax benefit for the six
months ended July 31, 2019 in the amount of approximately $6.9 million which
primarily reflected the favorable estimated tax impact of the bad debt loss
identified above. On the other hand, we did not record any income tax benefit
related to the large operating loss of APC's subsidiary in the UK for the six
months ended July 31, 2019.
For the six months ended July 31, 2020, our improved overall operating
performance resulted in net income attributable to our stockholders in the
amount of $4.8 million, or $0.31 per diluted share. Last year, due substantially
to the subcontract loss recorded for the TeesREP Project, we reported a net loss
attributable to our stockholders in the amount of $28.6 million, or $1.84 per
dilutive share.
24
Major Customer Contracts
During August 2019, GPS received a full notice to proceed with activities under
an EPC services contract to build an 1,875 MW combined cycle natural gas-fired
power plant in Guernsey County, Ohio. The Guernsey Power Station was jointly
developed by Caithness Energy, L.L.C. and Apex Power Group, LLC. The ramp-up of
activity on this project has favorably impacted our quarterly consolidated
operating results since then with its increasing revenues. Substantial
completion of this project is currently scheduled to occur by the end of
calendar year 2022.
In January 2020, GPS entered into an EPC services contract with Harrison Power,
LLC ("Harrison Power") to construct a 1,085 MW natural gas-fired power plant in
the Village of Cadiz, Harrison County, Ohio. The project is being developed by
EmberClear, the parent company of Harrison Power. On March 10, 2020, we
announced that in late February 2020 GPS entered into an EPC services contract
with ESC Brooke County Power I, LLC to construct the Brooke County Power plant,
a 920 MW natural gas-fired power generation facility, in Brooke County, West
Virginia. The facility is being developed by Energy Solutions Consortium, LLC.
On March 12, 2020, we announced that GPS had entered into an EPC services
contract with NTE Connecticut, LLC to construct the Killingly Energy Center, a
650 MW natural gas-fired power plant, in Killingly, Connecticut. The facility is
being developed by NTE Energy, LLC ("NTE"). We anticipate adding the value of
each of these new contracts to project backlog at times closer to their
financial close and expected start dates. We are cautiously optimistic that the
start of construction activities for at least two of these three projects will
occur between three and nine months from now. However, we cannot predict with
certainty when the projects will commence. The start dates for construction are
generally controlled by the project owners.
We announced in March 2018 that GPS entered into an EPC services contract with
an affiliate of NTE to construct an approximately 500 MW natural gas-fired power
plant in Rockingham County, North Carolina. The Reidsville Energy Center will be
similar to two gas-fired power plants substantially completed by GPS for NTE
during Fiscal 2019, the Kings Mountain Energy Center located in Kings Mountain,
North Carolina, and the Middletown Energy Center located in Middletown, Ohio. At
the time, we expected this project to commence within a reasonable amount of
time. However, due to unforeseen project owner delays, including a grid
connection dispute between the project owner and a public utility, contract
activities have not yet started for this new project. If the current dispute
with the public utility is not resolved on terms that move the project forward,
we will most likely remove the value of the Reidsville Energy Center from
project backlog. In May 2019, GPS entered into an EPC services contract to
construct a 625 MW power plant in Harrison County, West Virginia. Caithness is
partnered with ESC to develop this project. As a limited notice to proceed with
certain preliminary activities was received from the owner of this project at
the time, the value of the contract was added to our project backlog. However,
construction activities for the facility are not likely to begin before January
31, 2021 and until financial close is achieved.
As announced in Fiscal 2019, GPS entered into an EPC services contract to
construct the Chickahominy Power Station, a 1,740 MW natural gas-fired power
plant, in Charles City County, Virginia. Even though we are providing financial
and technical support to the project development effort through a consolidated
VIE and project development milestones continue to be achieved, we have not
included the value of this contract in our project backlog. Due to several
factors that are slowing the pace of the development of this project, including
additional time being required to secure the natural gas supply for the plant
and to obtain the necessary equity financing, we currently cannot predict when
construction will commence, if at all.
The aggregate rated electrical output amount for the natural gas-fired power
plants for which we have signed EPC services contracts is approximately 7.3
gigawatts with an aggregate contract value in excess of $3.0 billion. We include
the value of an EPC services contract in project backlog when we believe that it
is probable that the project will commence within a reasonable timeframe, among
other factors. Our project backlog amount was approximately $1.2 billion and
$1.3 billion at July 31, 2020 and January 31, 2020, respectively. Our reported
amount of project backlog at a point in time represents the total value of
projects awarded to us that we consider to be firm as of that date less the
amounts of revenues recognized to date on the corresponding projects (project
backlog is larger than the value of remaining unsatisfied performance
obligations, or RUPO, on active contracts; see Note 2 to the accompanying
condensed consolidated financial statements). Cancellations or reductions may
occur that may reduce project backlog and our expected future revenues.
25
We have maintained that the delays in new business awards to GPS and the project
construction starts of certain previously awarded projects relate to a variety
of factors, especially in the northeast and mid-Atlantic regions of the US.
Currently, we believe that the ability of the owners of fully developed
gas-fired power plant projects to close on equity and permanent debt financing
has been challenged by uncertainty in the capital markets.
The viability of future revenue forecasts by power plant owners and operators,
particularly independent power producers, depends, to a significant degree, on
the amount of future capacity supply secured for a particular power source
located within the electricity region coordinated by PJM. For new power
projects, lack of visibility regarding future capacity revenue streams
complicates the search for equity and debt financing considerably. Most of our
recently completed and awarded EPC service contracts relate to the construction
of natural gas-fired power plants located within the geographic footprint of the
electric power system operated by PJM, the regional transmission organization
that coordinates the movement of wholesale electricity in all or parts of 13
states and the District of Columbia.
In December 2019, Federal regulators voted to effectively raise the bids of
subsidized resources selling their power into the PJM wholesale capacity market.
Clean energy advocates and other market observers feared the move by the
regulators would severely hinder incentives intended to bring new zero emissions
resources online, while favoring incumbent fossil fuels. PJM was provided 90
days to comply with the order and to provide regulators with a timeline for its
next capacity auction. PJM had previously suspended all activities and deadlines
relating to the base capacity auctions for the 2022/2023 and 2023/2024
electricity delivery years. PJM has submitted its compliance filing response to
FERC for review and approval, including a proposed plan for restarting the
capacity auctions. Uncertainty relating to PJM capacity auctions may continue to
disrupt capital markets. As a result, our commencement of the new EPC power
plant projects could be delayed until PJM releases new capacity auction bidding
rules approved by the FERC regulators and announces future capacity auction
schedules.
Besides the downturn in the demand for electric power during the COVID-19
outbreak in the US that is discussed below, other unfavorable factors include an
increase in the amount of power generating capacity provided by renewable energy
assets, improvements and decreasing prices in renewable energy storage solutions
and increased environmental activism. Protests against fossil-fuel related
energy projects continue to garner media attention and stir public skepticism
about new pipelines resulting in project delays due to onsite protest
demonstrations, indecision by local officials and lawsuits. For example, in July
2020, Dominion Energy and Duke Energy announced the abandonment of plans to
complete the major Atlantic Coast Pipeline, ending a seven-year effort to build
a 600-mile natural gas pipeline between West Virginia and eastern North
Carolina, citing that the economic viability of the project was threatened by
continuing delays and increasing cost uncertainty after a federal judge issued a
ruling preventing the use of an accelerated construction permitting process.
Although this recent pipeline cancellation decision is not expected to have any
direct unfavorable effect on any of the pending projects awarded to GPS, other
pipeline approval delays may jeopardize projects that are needed to bring
supplies of natural gas to planned gas-fired power plant sites, thereby
increasing the risk of future power plant project delays or cancellations.
In the New England and mid-Atlantic regions of the US, power plant operators are
challenged by the requirements of the Regional Greenhouse Gas Initiative, or
"RGGI," which is a cooperative effort by states in these regions to cap and
reduce power sector carbon dioxide emissions. In addition, various cities,
counties and states have adopted clean energy and carbon-free goals or
objectives with achievement expected by a certain future date, typically 10 to
30 years out. These aspirational goals may increase the risk of a new power
plant becoming a stranded asset long before the end of its 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 which
continue to be deferred by project owners.
We believe that it is important to note that the plans for two of our contracted
natural gas-fired power plant projects will adopt integrated "green" hydrogen
solution packages developed by a major gas turbine manufacturer. While the
plants will initially run on natural gas alone, the plants will eventually shift
to burning hydrogen, thereby establishing power-generation flexibility for these
plants.
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Market Outlook
Although the total amount of electricity generated by utility-scale power
facilities in calendar year 2019 declined by 1.3% from the total amount in 2018,
the 2019 amount was the second highest total annual amount of electricity
generated by utility-scale power plants since 2010. In the reference case
included in its Annual Energy Outlook 2020 released in January 2020, the US
Energy Information Administration (the "EIA") again forecasted slow but steady
growth in net electricity generation through 2050 with average annual increases
of slightly less than 1.0% per year. The growth rate is tempered by new
electricity-efficient devices and production processes replacing older,
less-efficient appliances, heating, cooling and ventilation systems and capital
equipment.
Despite the overall decline in the amount of electricity generated in the US in
2019 and the increases in the amounts of electricity provided by utility-scale
wind and solar power sources, the amount of electricity generated by natural
gas-fired power plants rose by 7.7% during 2019, and it represented 38.4% of the
total electric power generated in the US in 2019. The combined amount of power
generated by the wind and the sun represented 10.8% of total utility-scale power
generation in 2019. The amount of electricity generated from coal decreased by
15.7% in 2019 from its generation amount for 2018, and coal's share of the
total, utility-scale electricity generation mix declined from 27.4% for 2018 to
23.5% for 2019. During 2019, power companies retired or converted roughly 15,100
MW of coal-fired electricity generation, reported to be enough to power about 15
million homes. That retirement capacity reduction was second only to the record
19,300 MW of capacity shut down in 2015.
In summary, the share of the electrical power generation-mix in the US fueled by
natural gas, the sun and wind continued to rise during 2019, while the share
fueled by coal continued its fall. Over the ten-year period ended in 2019, the
amount of electrical power fueled by natural gas in the US increased by 72%
while the amount of utility-scale power generated by coal fell by 45%.
However, reduced economic activity in the US related to the COVID-19 pandemic
has caused significant changes in energy supply and demand patterns. In its
Short-Term Energy Outlook released in August 2020, EIA now forecasts that total
electric power sector generation in the US will decline by about 5% in 2020.
Most of the expected decline is predicted for coal-fired and nuclear generation.
The updated forecast for natural gas generation is that it will increase again
this year, reflecting currently favorable fuel costs and the addition of new
generating capacity, before declining in 2021 as the price of natural gas is
forecasted to rise. The ultimate adverse impacts of the COVID-19 outbreak in the
US on the forecast of electricity generation over the long-term are not known at
this time.
Renewable energy sources are forecasted to account for the largest portion of
new generating capacity in 2020, driving EIA's updated forecast of 10% growth in
renewable generation by this electric power sector. However, it will be
interesting to observe whether the recent power shortages in California will
reduce the pace of fossil-fuel-fired power plant eliminations planned by states
that are in pursuit of extremely high renewable energy portfolios. It has been
reported that renewables currently provide approximately 36% of electricity
generation in California. Yet, the recent experience is that the increasing
dependence on intermittent renewable energy sources, especially solar, is making
it harder to ensure reliable power in California as millions of its residents
have lost power during a late summer heat wave. The lesson may be that
fossil-fuel electricity generation sources remain critical elements of the power
generation mix in order to assure grid reliability by avoiding power outages.
In the pre-COVID-19 reference case of the 2020 outlook identified above, the EIA
predicted that coal-fired and nuclear power generating capacity would decline by
approximately 47% and 20% by 2050, respectively, representing only 13% and 12%
shares of the electricity generation mix by 2050, respectively. It is important
to note that most of the reduction in the coal-fired and nuclear capacity was
already predicted to occur in the period 2020-2025. As a result, natural
gas-fired power generating capacity was forecasted to increase by 26% over the
next five years and by 67% by 2050 (before any adjustments for adverse and
long-lasting effects of the COVID-19 pandemic on the demand for electricity). It
is logical that this outlook represented the driver for the realization by at
least certain power producers that the near-term addition of new natural
gas-fired power plants to the utility-scale power generation fleet in the US is
necessary. As a result, we have experienced meaningful growth in the number of
new EPC service contracts awarded to us.
27
In our view, the competitive landscape in the EPC services market for natural
gas-fired power plant construction has changed significantly. Several
significant competitors announced that they were exiting the market for a
variety of reasons. Others have announced intentions to avoid entering into
fixed-price contracts. While the competitive market remains dynamic, we expect
that there will be fewer competitors for new gas-fired power plant EPC project
opportunities in the foreseeable future.
We believe that the future long-term prospects for natural gas-fired power plant
construction remain generally favorable as natural gas is the primary source for
power generation in our country. 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 at consistently low prices. The
abundant availability of cheap, less carbon-intense and higher efficiency
natural gas should continue to be a significant factor in the economic
assessment of future power generation capacity additions. However, as identified
above, stability in the availability of natural gas supplies and natural gas
prices, particularly in the short-term, may be threatened due to pandemic-caused
uncertainties.
Despite the pandemic, we believe that the development of natural gas-fired power
generation facilities in the US should continue to provide new construction
opportunities for us although, in the near term, the pace of new opportunities
emerging may be restrained and the starts of awarded EPC projects may be
delayed. We are committed to the rational pursuit of new construction projects
and the future growth of our revenues. This may result in our decision to make
investments in the development and/or ownership of new projects. Because we
believe in the strength of our balance sheet, we are willing to consider certain
opportunities that include reasonable and manageable risks in order to assure
the award of the related EPC services contracts to us.
We believe that the Company has a reputation as an accomplished and
cost-effective provider of EPC and other large project construction contracting
services. We are convinced that the recent series of new EPC projects awarded to
us confirms the soundness of our belief. With the proven ability to deliver
completed power facilities, particularly combined cycle, natural gas-fired power
plants, we are focused on expanding our position in the power markets where we
expect investments to be made based on forecasts of electricity demand covering
decades into the future. We believe that our expectations are valid and that our
plans for the future continue to be based on reasonable assumptions.
In July 2020, confidence in our financial strength and the prospects for our
business going forward prompted our board of directors to declare and to pay a
special cash dividend in the amount of $1.00 per share (see Note 11 to the
accompanying condensed consolidated financial statements) and to authorize the
use of $25.0 million to repurchase shares of our common stock (see Item 2 in
Part II of this Quarterly Report on Form 10-Q).
28
Comparison of the Results of Operations for the Three Months Ended July 31, 2020
and 2019
We reported a net income attributable to our stockholders of $5.6 million, or
$0.36 per diluted share, for the three months ended July 31, 2020. For the
three months ended July 31, 2019, we reported a comparable net income amount of
$1.2 million, or $0.07 per diluted share.
The following schedule compares our operating results for the three months ended
July 31, 2020 and 2019 (dollars in thousands):
Three Months Ended July 31,
2020 2019 $ Change % Change
REVENUES
Power industry services $ 69,039 $ 27,890 $ 41,149 147.5 %
Industrial fabrication and field services 16,689 33,230 (16,541) (49.8)
Telecommunications infrastructure
services
1,764 1,939 (175) (9.0)
Revenues 87,492 63,059 24,433 38.7
COST OF REVENUES
Power industry services 55,610 28,906 26,704 92.4
Industrial fabrication and field services 14,896 29,528 (14,632) (49.6)
Telecommunications infrastructure
services
1,356 1,660 (304) (18.3)
Cost of revenues 71,862 60,094 11,768 19.6
GROSS PROFIT 15,630 2,965 12,665 427.2
Selling, general and administrative
expenses 9,085 10,038 (953) (9.5)
INCOME (LOSS) FROM OPERATIONS 6,545 (7,073) 13,618 NM
Other income, net 451 1,642 (1,191) (72.5)
INCOME (LOSS) BEFORE INCOME TAXES 6,996 (5,431) 12,427 NM
Income tax (expense) benefit (1,397) 6,411 (7,808) NM
NET INCOME 5,599 980 4,619 471.3
Net loss attributable to non-controlling
interests (10) (174) 164 94.3
NET INCOME ATTRIBUTABLE TO
THE STOCKHOLDERS OF ARGAN, INC. $ 5,609 $ 1,154 $ 4,455 386.0 %
N/M - Not meaningful.
Revenues
Power Industry Services
The revenues of the power industry services business increased by 147.5%, or
$41.1 million, to $69.0 million for the three months ended July 31, 2020
compared with revenues of $27.9 million for the three months ended July 31,
2019. The revenues of this business represented approximately 78.9% of
consolidated revenues for the quarter ended July 31, 2020 and 44.2% of
consolidated revenues for the prior year quarter. The primary driver for the
improved performance by this reportable segment for the current year quarter was
the increasing revenues associated with the construction of the Guernsey Power
Station. This project, which did not commence until the third quarter last year,
represented the significant portion of this segment's revenues for the three
months ended July 31, 2020. GPS reached substantial completion on four gas-fired
power plant projects late in Fiscal 2019 and concluded activities on a fifth
gas-fired power plant early in Fiscal 2020. As a result, the revenues of GPS
declined substantially for early portions of Fiscal 2020, including the quarter
ended July 31, 2019. The significant portions of revenues for this segment for
the three-month period ended July 31, 2019 were provided by the operations of
APC, including the TeesREP Project. The revenues of APC for the three months
ended July 31, 2020 were unfavorably affected by the slow resumption of
postponed Irish works projects and the suspension and restart of construction
activities on the TeesREP Project.
29
Industrial Fabrication and Field Services
The revenues of industrial fabrication and field services (representing the
business of TRC) provided 19.1% of consolidated revenues for the three months
ended July 31, 2020, which reflected a reduction in revenues of $16.5 million,
or 49.8%, to $16.7 million compared to revenues of $33.2 million for the
three months ended July 31, 2019. With the completion of several large projects
last year, TRC has been focused on rebuilding the amount of its project backlog.
New project awards have increased TRC's project backlog to approximately $37.4
million as of July 31, 2020 from $14.0 million at the beginning of Fiscal 2021.
The largest portion of the revenues of TRC continues to be provided by
industrial field services. The major customers of TRC include some of North
America's largest forest products companies, large fertilizer producers as well
as other chemical and energy companies with plants located in the southeast
region of the US.
Telecommunications Infrastructure Services
The revenues of this business segment (representing the business of SMC) were
$1.8 million for the three months ended July 31, 2020 compared with revenues of
$1.9 million for the three months ended July 31, 2019.
Cost of Revenues
With the increase in consolidated revenues for the three months ended July 31,
2020 compared with last year's second quarter, the consolidated cost of revenues
also increased between the quarters. These costs were $71.9 million and $60.1
million for the three months ended July 31, 2020 and 2019, respectively, an
increase of approximately 19.6%.
For the three months ended July 31, 2020, we reported a consolidated gross
profit of approximately $15.6 million which represented a gross
profit percentage of approximately 17.9% of corresponding consolidated revenues.
The gross profit for the three months ended July 31, 2020 was favorably impacted
by the catch-up adjustment recorded by APC with the negotiation of Amendment No.
2 to the TeesREP Project subcontract in the amount of $4.2 million, which was
partially offset by project-related charges in the amount of $1.9 million,
associated primarily with the unexpected complexity of APC's works in the UK and
the current year suspension and restart of construction activities. The
potentially adverse effects on the craft labor costs of the TeesREP Project of
the COVID-19 induced suspension of construction activities was substantially
mitigated by cost reimbursement payments received directly from the federal
government of the UK during the quarter ended July 31, 2020 in the amount of
$3.2 million. Our gross profit reported for the three months ended July 31, 2019
was $3.0 million, or 4.7% of corresponding consolidated revenues. Last year, the
TeesREP Project loss recorded by APC for the quarter ended July 31, 2019 in the
amount of $3.4 million had a significant unfavorable effect on our gross profit.
Selling, General and Administrative Expenses
These costs were $9.1 million and $10.0 million for the three months ended July
31, 2020 and 2019, respectively, representing 10.4% and 15.9% of consolidated
revenues for the corresponding periods, respectively. As disclosed earlier this
year, we expect these costs, expressed as a percentage of corresponding
revenues, to trend downward through the remaining quarters of Fiscal 2021 and
next year, primarily driven by the expected increase in consolidated revenues
over the same periods. The reduction in actual costs between the quarters was
due primarily to the increased utilization of staff by GPS on the Guernsey EPC
project.
Other Income
For the three months ended July 31, 2020 and 2019, the net amounts of other
income were $0.5 million and $1.6 million, respectively, which represented a
reduction of 72.5% between the comparable quarterly periods. The amounts
reported for this line item reflect primarily investment income earned on funds
maintained in a money market account and interest income earned on CDs. Although
the aggregate amount of invested funds has increased between the quarters and
since January 31, 2020, the significant drop in interest rates that has occurred
during the COVID-19 pandemic has had a meaningfully adverse effect on the
returns earned on our invested funds.
30
Income Taxes
We reported income tax expense for the three months ended July 31, 2020 in the
amount of approximately $1.4 million. We estimate that our annual effective
income tax rate for Fiscal 2021 before discrete items will approximate 25.8%.
This tax rate differs from the statutory federal tax rate of 21% due primarily
to the unfavorable effects of permanent differences relating to nondeductible
travel and entertainment expenses, certain nondeductible executive compensation
and interest income earned on our notes receivable from the VIE.
We reported an income tax benefit for the three months ended July 31, 2019 in
the amount of approximately $6.4 million which primarily reflected the favorable
tax impact of bad debt loss realized on loans made to APC from Argan, which were
determined to be uncollectible. We did not record any income tax benefit related
to the net loss reported by the subsidiary operations of APC located in the
United Kingdom for the quarter ended July 31, 2019.
Comparison of the Results of Operations for the Six Months Ended July 31, 2020
and 2019
We reported net income attributable to our stockholders of $4.8 million, or
$0.31 per diluted share, for the six months ended July 31, 2020. For the
six months ended July 31, 2019, we reported a net loss amount of $28.6 million,
or $1.84 per diluted share.
The following schedule compares our operating results for the six months ended
July 31, 2020 and 2019 (dollars in thousands):
Six Months Ended July 31,
2020 2019 $ Change % Change
REVENUES
Power industry services $ 117,651 $ 48,093 $ 69,558 144.6 %
Industrial fabrication and field services 26,433 60,299 (33,866) (56.2)
Telecommunications infrastructure
services
3,556 4,211 (655) (15.6)
Revenues 147,640 112,603 35,037 31.1
COST OF REVENUES
Power industry services 101,320 73,432 27,888 38.0
Industrial fabrication and field services 23,878 53,799 (29,921) (55.6)
Telecommunications infrastructure
services
2,803 3,433 (630) (18.4)
Cost of revenues 128,001 130,664 (2,663) (2.0)
GROSS PROFIT (LOSS) 19,639 (18,061) 37,700 NM
Selling, general and administrative
expenses 19,429 19,626 (197) (1.0)
Impairment loss - 2,072 (2,072) (100.0)
INCOME (LOSS) FROM OPERATIONS 210 (39,759) 39,969 NM
Other income, net 1,539 3,894 (2,355) (60.5)
INCOME (LOSS) BEFORE INCOME TAXES 1,749 (35,865) 37,614 NM
Income tax benefit 3,057 6,932 (3,875) (55.9)
NET INCOME (LOSS) 4,806 (28,933) 33,739 NM
Net loss attributable to non-controlling
interests (40) (287) 247 86.1
NET INCOME (LOSS) ATTRIBUTABLE TO
THE STOCKHOLDERS OF ARGAN, INC. $ 4,846 $ (28,646) $ 33,492 NM
N/M - Not meaningful.
31
Revenues
Power Industry Services
The revenues of the power industry services business increased by 144.6%, or
$69.6 million, to $117.7 million for the six months ended July 31, 2020 compared
with revenues of $48.1 million for the six months ended July 31, 2019, primarily
due to the increasing revenues associated with the construction of the Guernsey
Power Station. The revenues of this business represented approximately 79.7% of
consolidated revenues for the six-month period ended July 31, 2020 and
approximately 42.7% of consolidated revenues for the comparable prior
year period. GPS reached substantial completion on four gas-fired power plant
projects late in Fiscal 2019 and concluded activities on a fifth gas-fired power
plant in the first quarter of Fiscal 2020. As a result, the revenues of GPS
declined substantially for the six months ended July 31, 2019 due to the lack of
any meaningful EPC project activity. Conversely, the revenues of APC declined
for the six months ended July 31, 2020 from the amount of revenues recognized
during the six months ended July 31, 2019, which represented the majority of
revenues for this segment last year, due primarily to the suspension of work on
the TeesREP Project and the postponement of Irish works in response to the
COVID-19 pandemic during the current year.
Industrial Fabrication and Field Services
The revenues of industrial fabrication and field services (representing the
business of TRC) provided 17.9% of consolidated revenues for the six months
ended July 31, 2020, which reflected a reduction in revenues of $33.9 million,
or 56.2%, to $26.4 million compared to revenues of $60.3 million for the
six months ended July 31, 2019. With the completion of several large projects
last year, the low level of activity on projects affected TRC's revenues most
unfavorably during the first quarter of the current year. However, as discussed
above, the quarterly revenues of TRC showed meaningful recovery during the
second quarter as customers have begun to resume normal plant operations and
commence projects suspended earlier this year due to the COVID-19 pandemic. New
project awards have increased TRC's current project backlog to approximately
$37.4 million as of July 31, 2020 from $14.0 million at January 31, 2020.
Telecommunications Infrastructure Services
The revenues of this business segment (representing the business of SMC) were
$3.6 million for the six months ended July 31, 2020 compared with revenues of
$4.2 million for the six months ended July 31, 2019.
Cost of Revenues
Despite the increase in consolidated revenues for the six months ended July 31,
2020 compared with last year's corresponding period, the consolidated cost of
revenues decreased between the periods, but only by 2.0%. These costs were
$128.0 million, represented substantially by projects costs incurred on the
Guernsey Power Station, and $130.7 million, represented substantially by project
costs incurred by TRC and APC, for the six months ended July 31, 2020 and 2019,
respectively. Last year, our cost of revenues included a charge in the amount of
$7.7 million in connection with the establishment of the TeesREP subcontract
loss reserve on the books of APC.
For the six months ended July 31, 2020, we reported a consolidated gross profit
of approximately $19.6 million which represented a gross profit percentage of
approximately 13.3% of corresponding consolidated revenues, and which reflected
the net favorable effect of the adjustments recorded by APC during the current
year quarter as discussed above. Despite these items, the consolidated gross
profit percentage for the six months ended July 31, 2020 was adversely affected
by the low level of revenues reported by TRC and the Irish operations of APC.
The loss incurred by APC on the TeesREP project in the amount of $30.9 million
for the six months ended July 31, 2019 had a significant unfavorable effect on
the Company's gross profit, which was the primary factor in our reporting a
consolidated gross loss for the six-month period in the amount of $18.1 million.
32
Selling, General and Administrative Expenses
These costs were $19.4 million and $19.6 million for the six months ended July
31, 2020 and 2019, respectively, representing 13.2% and 17.4% of consolidated
revenues for the corresponding periods, respectively. The amount for the
six months ended July 31, 2020 reflected the costs of maintaining intact the key
staff organizations at corporate headquarters, GPS, TRC and SMC during the
COVID-19 pandemic. We expect these costs, expressed as a percentage of
corresponding consolidated revenues, to trend downward through the remaining
quarters of Fiscal 2021 and next year, primarily driven by the expected increase
in consolidated revenues over the same periods. Last year, selling, general and
administrative expenses included the costs of maintaining core members of the
operations staff at GPS, before the start-up of new EPC projects, whose time is
typically charged to active projects to a greater degree.
Impairment Loss
APC recorded a substantial loss on the TeesREP Project during the first quarter
last year. We considered the recognition of a contract loss of this magnitude to
be an event triggering a re-assessment of the goodwill which resulted in our
conclusion that the remaining balance was impaired. Accordingly, an impairment
loss was recorded in the amount of $2.1 million which is reflected in our
consolidated operating results for the six months ended July 31, 2019.
Other Income
For the six months ended July 31, 2020 and 2019, the net amounts of other income
were $1.5 million and $3.9 million, respectively, which represented a reduction
of 60.5% between the comparable periods. Although the aggregate amount of
invested funds has increased between the comparable periods and since
January 31, 2020, the significant drop in interest rates that has occurred
during the COVID-19 pandemic has had a meaningful adverse effect on the returns
earned on our temporarily invested funds.
Income Taxes
We recorded an income tax benefit for the six months ended July 31, 2020 in the
amount of approximately $3.1 million, which reflected primarily the net
operating loss carryback benefit in the approximate amount of $4.3 million that
is discussed in the following paragraph.
In a response to the COVID-19 health crisis, the US Congress passed the CARES
Act that was signed into law on March 27, 2020. This wide-ranging legislation
was enacted as an emergency economic stimulus package including spending and tax
breaks aimed at strengthening the US economy and funding a nationwide effort to
curtail the effects of the outbreak of COVID-19. The CARES Act has provided many
opportunities for taxpayers to evaluate their 2018 and 2019 income tax returns
to identify potential tax refunds. One such area is the utilization of NOLs. The
tax changes of the CARES Act removed the limitations on the future utilization
of certain NOLs and re-established a carryback period for certain losses to
five years. The losses eligible for carryback under the CARES Act include our
consolidated NOL for Fiscal 2020, which was approximately $39.5 million.
Substantially all of this loss now may be carried back for application against
our taxable income for the year ended January 31, 2015. This provides a
favorable rate benefit for us as the loss, which was incurred in a year where
the statutory federal tax rate was 21%, will be carried back to a tax year where
the tax rate was higher.
We estimate that our annual effective income tax rate for Fiscal 2021 before
discrete items will approximate 25.8%. This tax rate differs from the statutory
federal tax rate of 21% due primarily to the unfavorable effects of certain
permanent differences as discussed above.
We recorded an income tax benefit for the six months ended July 31, 2019 in the
amount of approximately $6.9 million which primarily reflected the tax benefit
of the loss incurred by our domestic operations. We did not record any income
tax benefit related to the net loss reported by APC's UK operations for the
period.
33
Liquidity and Capital Resources as of July 31, 2020
At July 31 and January 31, 2020, our balances of cash and cash equivalents were
$382.4 million and $167.4 million, respectively. During this same period, our
working capital decreased by $7.7 million to $270.0 million as of July 31, 2020
from $277.7 million as of January 31, 2020.
The net amount of cash provided by operating activities for the six months ended
July 31, 2020 was $102.9 million. Our net income for the six months ended July
31, 2020, adjusted favorably by the net amount of non-cash income and expense
items, represented a source of cash in the total amount of $18.3 million.
However, the sources of cash from operations for the current year period
included primarily a temporary increase in the balance of contract liabilities
associated with the early phases of the Guernsey Power Station construction and
new project awards at TRC in the amount of $83.3 million. Reductions in the
balances of accounts receivable and contract assets, primarily at the TRC and
APC operations, provided cash in the amounts of $7.5 million and $6.9 million,
respectively. In addition, the combined level of accounts payable and accrued
expenses increased by $4.7 million during the six months ended July 31, 2020, a
source of cash for the period.
As discussed above, our income tax accounting for the six months ended July 31,
2020 reflects an entry to record the carryback of our net operating loss
incurred for the year ended January 31, 2020 to our tax year ended January 31,
2015. The loss carryback should result in a refund of federal income taxes in
the amount of $12.6 million. This tax refund receivable has been included in the
balance of other current assets as of July 31, 2020, which was the primary cause
of the increase in this balance of $17.8 million during the period, a use of
cash.
Another primary source of cash for the six months ended July 31, 2020 was the
net maturities of short-term investments, certificates of deposit issued by the
Bank, in the amount of $135.0 million. Non-operating activities used cash during
the six months ended July 31, 2020, including the payment of regular and special
cash dividends in the total amount of $23.5 million. During the six-month period
ended July 31, 2020, capital expenditures were reduced by approximately 62.8% to
$1.1 million from a capital expenditures amount of $3.0 million for the six
months ended July 31, 2019. Partially offsetting these uses of cash, we received
cash proceeds related to the exercise of stock options during the six months
ended July 31, 2020 in the amount of $0.7 million. As of July 31, 2020, there
were no restrictions with respect to inter-company payments from GPS, TRC, APC
or SMC to the holding company. However, during the prior year, certain loans
made by Argan to APC were determined to be uncollectible.
Last year, the net amount of cash used by operating activities for the
six months ended July 31, 2019 was $53.2 million. Our net loss for the period,
offset partially by the favorable adjustments related to non-cash income and
expense items, used cash in the total amount of $29.6 million. Due substantially
to the increased activity at TRC last year, accounts receivable increased during
the six months ended July 31, 2019, representing a use of cash in the amount of
$9.8 million. The Company also used cash during the six months ended July 31,
2019 in the amount of $16.4 million to reduce the level of accounts payable and
accrued expenses. The net balance of contract assets and liabilities did not
change materially during the six-month period ended July 31, 2019. Due primarily
to the receipt of refunds of excess estimated income tax payment amounts, the
balance of other assets decreased by $2.7 million during the six months ended
July 31, 2019, a source of cash.
The primary source of cash required to fund operations during the six months
ended July 31, 2019 was the net maturity of short-term investments in the amount
of $69.0 million. Cash proceeds in the amount of $1.6 million were received from
the exercise of stock options during the six-month period ended July 31, 2019.
Non-operating activities used cash during the six months ended July 31, 2019,
including primarily the payment of a quarterly cash dividends in the total
amount of $7.8 million. As indicated above, our operating subsidiaries used cash
during the six-month period ended July 31, 2019 in the amount of $3.0 million to
fund capital expenditures.
At July 31, 2020, most of our balance of cash and cash equivalents was invested
in a money market fund with most of its total assets invested in cash, US
Treasury obligations and repurchase agreements secured by US Treasury
obligations. The major portion 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 UK in support of
the operations of APC.
34
Our Credit Agreement, which expires on May 31, 2021, 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 2.0%, and an accordion
feature which allows for an additional commitment amount of $10.0 million,
subject to certain conditions. We may 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, 2020, we had $1.7 million of
outstanding letters of credit issued under the Credit Agreement. However, we had
no outstanding borrowings. Additionally, in connection with the current project
development activities by a VIE, the Bank issued a letter of credit, outside the
scope of the Credit Agreement, in the approximate amount of $3.4 million for
which the Company has provided cash collateral.
We have pledged the majority of our assets to secure the financing arrangements.
The Bank's consent is not required for acquisitions, divestitures, cash
dividends or significant investments as long as certain conditions are met. The
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. At July 31 and January 31, 2020, we were compliant with the
financial 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 contractor subsidiaries.
For certain projects, we are required by project owners to provide guarantees
related to our services or work. If our services under a guaranteed project
would not be completed or would be determined to have resulted in a material
defect or other material deficiency, then we could be responsible for monetary
damages or other legal remedies. Certain project owners may request that we
obtain surety bonds for their benefit in connection with EPC services contract
performance obligations. As is typically required by any surety bond, the
Company would be obligated to reimburse the issuer of any surety bond issued on
behalf of a subsidiary for any cash payments made thereunder. The commitments
under performance bonds generally end concurrently with the expiration of the
related contractual obligation. Not all of our projects require bonding.
On behalf of APC, Argan has provided a parent company performance guarantee to
its customer, the EPC services contractor on the TeesREP Project. During the
quarter ended July 31, 2020 and in connection with the negotiation of Amendment
No. 2, the Company replaced an outstanding letter of credit in the amount of
$7.6 million with a surety bond as the support for the parent company
performance guarantee (see Note 7 to the accompanying condensed consolidated
financial statements).
As of July 31, 2020, the revenue value of the Company's unsatisfied bonded
performance obligations was less than the value of RUPO disclosed in Note 2 to
the accompanying condensed consolidated financial statements. In addition, as of
July 31, 2020, there were bonds outstanding in the aggregate amount of
approximately $64.4 million covering other risks including warranty obligations
related to projects completed by GPS; these bonds expire at various dates during
the years ending January 31, 2021 and 2022.
When sufficient information about claims related to our performance on projects
would be available and monetary damages or other costs or losses would be
determined to be probable, we would record such guaranteed losses. As our
subsidiaries are wholly-owned, any actual liability related to contract
performance is ordinarily reflected in the financial statement account balances
determined pursuant to the Company's accounting for contracts with customers.
Any amounts that we may be required to pay in excess of the estimated costs to
complete contracts in progress as of July 31, 2020 are not estimable.
We 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 which resulted in the award of an EPC services contract to
GPS.
35
We believe that cash on hand, cash that will be provided from the remaining
maturities of short-term investments and cash generated from our future
operations, with or without funds available under our line of credit, will be
adequate to meet our general business needs in the foreseeable future. For the
six months ended July 31, 2020, to assure an optimum level of liquidity during
this period of uncertainty and to mitigate the market risks represented by the
COVID-19 pandemic, management decided to temporarily maintain larger balances of
cash and cash equivalents relative to short-term investments with minimal
opportunity cost.
In general, we maintain significant liquid capital on our balance sheet to help
ensure our ability to maintain bonding capacity and to provide parent company
performance guarantees for EPC and other construction projects. Any future
acquisitions, or other significant unplanned cost or cash requirement, may
require us to raise additional funds through the issuance of debt and/or equity
securities. There can be no assurance that such financing will be available on
terms acceptable to us, or at all.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
We believe that EBITDA is a meaningful presentation that enables us to assess
and compare our operating cash flow performance on a consistent basis by
removing from our operating results the impacts of our capital structure, the
effects of the accounting methods used to compute depreciation and amortization
and the effects of operating in different income tax jurisdictions. Further, we
believe that EBITDA is widely used by investors and analysts as a measure of
performance.
However, as EBITDA is not a measure of performance calculated in accordance with
US GAAP, we do not believe that this measure should be considered in isolation
from, or as a substitute for, the results of our operations presented in
accordance with US GAAP that are included in our condensed consolidated
financial statements. In addition, our EBITDA does not necessarily represent
funds available for discretionary use and is not necessarily a measure of our
ability to fund our cash needs.
The following table presents the determinations of EBITDA for the three and six
months ended July 31, 2020 and 2019, respectively (amounts in thousands):
Three Months Ended
July 31,
2020 2019
Net income, as reported $ 5,599 $ 980
Income tax expense (benefit) 1,397 (6,411)
Depreciation 921 882
Amortization of purchased intangible assets 226 293
EBITDA 8,143 (4,256)
EBITDA of non-controlling interests (10) (174)
EBITDA attributable to the stockholders of Argan, Inc. $ 8,153 $ (4,082)
Six Months Ended
July 31,
2020 2019
Net income (loss), as reported $ 4,806 $ (28,933)
Income tax benefit (3,057) (6,932)
Depreciation 1,858 1,711
Amortization of purchased intangible assets 451 592
EBITDA 4,058 (33,562)
EBITDA of non-controlling interests (40) (287)
EBITDA attributable to the stockholders of Argan, Inc. $ 4,098 $ (33,275)
36
As we believe that our net cash flow provided by or used in operations is the
most directly comparable performance measure determined in accordance with US
GAAP, the following table reconciles the amounts of EBITDA for the applicable
periods, as presented above, to the corresponding amounts of net cash flows
provided by or used in operating activities that are presented in our condensed
consolidated statements of cash flows for the six months ended July 31, 2020 and
2019 (amounts in thousands).
Six Months Ended
July 31,
2020 2019
EBITDA $ 4,058 $ (33,562)
Current income tax benefit 11,593 210
Stock option compensation expense 1,414 926
Impairment loss - 2,072
Other non-cash items 1,192 724
Decrease (increase) in accounts receivable 7,532 (9,835)
(Increase) decrease in other assets (17,781) 2,722
Increase (decrease) in accounts payable and accrued expenses 4,714 (16,445)
Change in contracts in progress, net
90,179 24
Net cash provided by (used in) operating activities $ 102,901 $ (53,164)Critical Accounting Policies
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 consider the accounting policies related to revenue recognition on long-term
construction contracts; income tax reporting; the accounting for business
combinations; the subsequent valuation of goodwill, other indefinite-lived
assets and long-lived assets; the valuation of employee common stock-based
awards; and the financial reporting associated with any significant claims or
legal matters to be most critical to the understanding of our financial position
and results of operations, as well as the accounting and reporting for special
purpose entities including joint ventures and variable interest entities. An
expanded discussion of our critical accounting policies is included in Item 7 of
Part II of our Annual Report. During the six-month period ended July 31, 2020,
there have been no material changes in the way we apply the critical accounting
policies described therein.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for
Income Taxes, which, among other changes, eliminates the exception to the
general methodology for calculating income taxes in an interim period when
a year-to-date loss exceeds the expected loss for the entire year. In these
instances, the estimated annual effective income tax rate shall be used to
calculate the tax without limitation. The new standard also requires the
recognition of a franchise (or similar) tax that is partially based on income as
an income-based tax and the recording of any incremental tax that is incurred by
us as a non-income based tax. The requirements of this new guidance, effective
for us on February 1, 2021, are not expected to alter our accounting for income
taxes.
In 2016, the FASB also issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments. The requirements of this new standard cover, among other
provisions, the methods that businesses shall use to estimate amounts of credit
losses. As subsequently amended, the adoption of this new guidance, which became
effective for us on February 1, 2020, did not affect our consolidated financial
statements.
37
There are no other recently issued accounting pronouncements that have not yet
been adopted that we consider material to our consolidated financial statements.
As required for us, we adopted ASU 2016-02, Leases, as of February 1, 2019.
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