Date: 9/8/2022 Form: 10-Q - Quarterly Report
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

July 31, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT

For the Transition Period from                      to                     

Commission File Number 001-31756

Graphic

(Exact Name of Registrant as Specified in Its Charter)

Delaware

    

13-1947195

(State or Other Jurisdiction of Incorporation)

(I.R.S. Employer Identification No.)

One Church Street, Suite 201, Rockville, Maryland 20850

(Address of Principal Executive Offices) (Zip Code)

(301) 315-0027

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the "Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ    No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  þ    No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,” "accelerated filer”, "smaller reporting company” and "emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   Accelerated filer þ  Non-accelerated filer   Smaller reporting company   Emerging growth company 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Title of Each Class

    

Trading Symbol(s)

    

Name of Each Exchange on Which Registered

Common Stock, $.15 par value

AGX

New York Stock Exchange

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Common stock, $0.15 par value: 13,884,195 shares as of September 6, 2022.

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

    

Three Months Ended

Six Months Ended

July 31, 

July 31, 

    

2022

    

2021

    

2022

    

2021

REVENUES

$

118,110

$

133,008

$

218,387

$

259,349

Cost of revenues

 

93,723

 

105,356

 

174,262

 

207,983

GROSS PROFIT

 

24,387

 

27,652

 

44,125

 

51,366

Selling, general and administrative expenses

 

10,984

 

10,331

 

21,559

 

20,223

INCOME FROM OPERATIONS

 

13,403

 

17,321

 

22,566

 

31,143

Other income (expense), net

 

505

 

(260)

 

1,100

 

452

INCOME BEFORE INCOME TAXES

 

13,908

 

17,061

 

23,666

 

31,595

Income tax expense

 

(9,686)

 

(4,191)

 

(11,959)

 

(7,959)

NET INCOME

 

4,222

 

12,870

 

11,707

 

23,636

Foreign currency translation adjustments

(687)

(139)

(1,951)

(257)

COMPREHENSIVE INCOME

$

3,535

$

12,731

$

9,756

$

23,379

NET INCOME PER SHARE

Basic

$

0.30

$

0.82

$

0.81

$

1.50

Diluted

$

0.30

$

0.81

$

0.80

$

1.48

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

Basic

 

14,134

 

15,769

 

14,516

 

15,748

Diluted

 

14,247

 

15,982

 

14,616

 

15,978

CASH DIVIDENDS PER SHARE

$

0.25

$

0.25

$

0.50

$

0.50

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

    

July 31, 

    

January 31, 

    

2022

    

2022

(Unaudited)

(Note 1)

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$

143,344

$

350,472

Short-term investments

175,643

90,026

Accounts receivable, net

 

24,888

 

26,978

Contract assets

 

8,678

 

4,904

Other current assets

 

25,640

 

34,904

TOTAL CURRENT ASSETS

 

378,193

 

507,284

Property, plant and equipment, net

 

9,507

 

10,460

Goodwill

 

28,033

 

28,033

Other purchased intangible assets, net

2,941

3,322

Right-of-use, deferred tax and other assets

4,396

4,486

TOTAL ASSETS

$

423,070

$

553,585

LIABILITIES AND EQUITY

CURRENT LIABILITIES

Accounts payable

$

38,180

$

41,822

Accrued expenses

 

39,816

 

53,315

Contract liabilities

 

64,016

 

127,890

TOTAL CURRENT LIABILITIES

 

142,012

 

223,027

Noncurrent liabilities

4,022

4,963

TOTAL LIABILITIES

 

146,034

 

227,990

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Preferred stock, par value $0.10 per share – 500,000 shares authorized; no shares issued and outstanding

 

 

Common stock, par value $0.15 per share – 30,000,000 shares authorized; 15,827,772 and 15,788,673 shares issued at July 31, 2022 and January 31, 2022, respectively; 13,884,195 and 15,257,688 shares outstanding at July 31, 2022 and January 31, 2022, respectively

 

2,374

 

2,368

Additional paid-in capital

 

160,229

 

158,190

Retained earnings

 

193,205

 

188,690

Less treasury stock, at cost – 1,943,577 and 530,985 shares at July 31, 2022 and January 31, 2022, respectively

(73,573)

(20,405)

Accumulated other comprehensive loss

(4,402)

(2,451)

TOTAL STOCKHOLDERS’ EQUITY

 

277,833

 

326,392

Non-controlling interest

 

(797)

 

(797)

TOTAL EQUITY

 

277,036

 

325,595

TOTAL LIABILITIES AND EQUITY

$

423,070

$

553,585

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2022 AND 2021

(Dollars in thousands)

(Unaudited)

Common Stock

Additional

Accumulated

    

Outstanding

    

Par

    

Paid-in

    

Retained

    

Treasury

    

Other Comprehensive

    

Non-controlling

    

Total

Shares

Value

Capital

Earnings

Stock

Loss

Interest

Equity

Balances, May 1, 2022

 

14,585,908

$

2,374

$

159,170

$

192,463

$

(47,482)

$

(3,715)

$

(797)

$

302,013

Net income

 

4,222

4,222

Foreign currency translation loss

(687)

(687)

Stock compensation expense

1,059

1,059

Common stock repurchases

(701,713)

(26,091)

(26,091)

Cash dividends

 

(3,480)

(3,480)

Balances, July 31, 2022

 

13,884,195

$

2,374

$

160,229

$

193,205

$

(73,573)

$

(4,402)

$

(797)

$

277,036

Balances, May 1, 2021

15,769,440

$

2,366

$

155,007

$

172,934

$

(33)

$

(1,199)

$

1,741

$

330,816

Net income

12,870

12,870

Foreign currency translation loss

(139)

(139)

Stock compensation expense

930

930

Cash dividends

(3,942)

(3,942)

Balances, July 31, 2021

15,769,440

$

2,366

$

155,937

$

181,862

$

(33)

$

(1,338)

$

1,741

$

340,535

Balances, February 1, 2022

 

15,257,688

$

2,368

$

158,190

$

188,690

$

(20,405)

$

(2,451)

$

(797)

$

325,595

Net income

 

11,707

11,707

Foreign currency translation loss

(1,951)

(1,951)

Stock compensation expense

1,979

1,979

Stock option exercises and other share-based award settlements

 

39,099

6

60

66

Common stock repurchases

(1,412,592)

(53,168)

(53,168)

Cash dividends

 

(7,192)

(7,192)

Balances, July 31, 2022

 

13,884,195

$

2,374

$

160,229

$

193,205

$

(73,573)

$

(4,402)

$

(797)

$

277,036

Balances, February 1, 2021

15,702,969

$

2,356

$

153,315

$

166,110

$

(33)

$

(1,081)

$

1,741

$

322,408

Net income

23,636

23,636

Foreign currency translation loss

(257)

(257)

Stock compensation expense

1,609

1,609

Stock option exercises and other share-based award settlements

66,471

10

1,013

1,023

Cash dividends

(7,884)

(7,884)

Balances, July 31, 2021

15,769,440

$

2,366

$

155,937

$

181,862

$

(33)

$

(1,338)

$

1,741

$

340,535

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ARGAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

    

Six Months Ended July 31, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

11,707

$

23,636

Adjustments to reconcile net income to net cash (used in) provided by operating activities

Stock compensation expense

1,979

1,609

Depreciation

 

1,556

 

1,741

Lease expense

1,319

1,938

Equity in (income) loss of solar energy investments

(1,070)

325

Deferred income tax expense

373

1,001

Amortization of purchased intangible assets

 

399

 

453

Other

 

(609)

 

(96)

Changes in operating assets and liabilities

Accounts receivable

 

2,090

 

(14,407)

Contract assets

(3,774)

1,258

Other assets

 

9,252

 

(3,161)

Accounts payable and accrued expenses

 

(16,124)

 

(8,793)

Contract liabilities

(63,874)

41,680

Net cash (used in) provided by operating activities

 

(56,776)

 

47,184

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of short-term investments

(175,000)

Maturities of short-term investments

90,000

50,000

Purchases of property, plant and equipment

 

(638)

 

(1,011)

Investments in solar energy projects

 

 

(4,085)

Net cash (used in) provided by investing activities

 

(85,638)

 

44,904

CASH FLOWS FROM FINANCING ACTIVITIES

Common stock repurchases

(53,168)

Payments of cash dividends

 

(7,192)

 

(7,884)

Proceeds from the exercise of stock options

 

66

 

1,023

Net cash used in financing activities

 

(60,294)

 

(6,861)

EFFECTS OF EXCHANGE RATE CHANGES ON CASH

(4,420)

(483)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(207,128)

 

84,744

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

350,472

366,671

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

143,344

$

451,415

SUPPLEMENTAL CASH FLOW INFORMATION (see Notes 7 and 10)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

ARGAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2022

(Tabular dollar amounts in thousands, except per share data)

(Unaudited)

NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

Argan, Inc. ("Argan”) conducts operations through its wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates ("GPS”); The Roberts Company, Inc. ("TRC”); Atlantic Projects Company Limited and affiliates ("APC”) and Southern Maryland Cable, Inc. ("SMC”). Argan and these consolidated subsidiaries are hereinafter collectively referred to as the "Company.”

Through GPS and APC, the Company provides a full range of engineering, procurement, construction, commissioning, operations management, maintenance, project development, technical and other consulting services to the power generation market, including the renewable energy sector. The wide range of customers includes independent power producers, public utilities, power plant equipment suppliers and global energy plant construction firms with projects located in the United States (the "U.S.”), the Republic of Ireland ("Ireland”) and the United Kingdom (the "U.K.”). GPS and APC, including a consolidated variable interest entity ("VIE”), represent the Company’s power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southeastern region of the U.S. and that are based on its expertise in producing, delivering and installing fabricated metal components such as piping systems and pressure vessels. Through SMC, which conducts business as SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the Mid-Atlantic region of the U.S.

Basis of Presentation and Significant Accounting Policies

The condensed consolidated financial statements include the accounts of Argan, its wholly-owned subsidiaries and the VIE. All significant inter-company balances and transactions have been eliminated in consolidation.

In Note 14, the Company has provided certain financial information relating to the operating results and assets of its reportable segments based on the manner in which management disaggregates the Company’s financial reporting for purposes of making internal operating decisions.

The Company’s fiscal year ends on January 31 of each year. The condensed consolidated balance sheet as of July 31, 2022, the condensed consolidated statements of earnings and stockholders’ equity for the three and six months ended July 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three and six months ended July 31, 2022 and 2021 are unaudited. The condensed consolidated balance sheet as of January 31, 2022 has been derived from audited financial statements. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements, the notes thereto, and the independent registered public accounting firm’s report thereon, that are included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2022 ("Fiscal 2022”).

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, considered necessary to present fairly the financial position of the Company as of July 31, 2022, and its earnings and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

6

Accounting Policies

There are no recently issued accounting pronouncements that have not yet been adopted that the Company considers material to its condensed consolidated financial statements.

Fair Values

The carrying value amounts presented in the condensed consolidated balance sheets for the Company’s current assets, which primarily include cash and cash equivalents, short-term investments, accounts receivable and contract assets, and its current liabilities are reasonable estimates of their fair values due to the short-term nature of these items.

Variable Interest Entity

In January 2018, the Company was deemed to be the primary beneficiary of a VIE that is performing the project development activities related to the planned construction of a new natural gas-fired power plant. Consequently, the account balances of the VIE are included in the Company’s consolidated financial statements, including development costs incurred by the VIE during the project development period. Consideration for the Company’s engineering and financial support provided to the project included the right to build the power plant pursuant to a turnkey engineering, procurement and construction ("EPC”) services contract that was negotiated and announced.

GPS provided financing for the development efforts through notes receivable from the consolidated VIE that was established by the project owner. The project owner was unable to obtain the necessary equity financing for the project and GPS ceased providing project development funding. The repayment of the notes to GPS is overdue. Accordingly, the Company believes that the completion of the development of this project has been significantly jeopardized and that it is doubtful that construction of this power plant will occur. Accordingly, during the fourth quarter of Fiscal 2022, we recorded an impairment loss related to the capitalized project development costs of this project in the amount of $7.9 million, of which $2.5 million was attributed to the non-controlling interest. In March 2022, the project owner publicly announced the cancellation of this power plant project.

NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS

The Company’s accounting for revenues on contracts with customers is based on a single comprehensive five-step model that requires reporting entities to:

1.Identify the contract,
2.Identify the performance obligations of the contract,
3.Determine the transaction price of the contract,
4.Allocate the transaction price to the performance obligations, and
5.Recognize revenue.

The Company focuses on the transfer of the contractor’s control of the goods and/or services to the customer, as opposed to the transfer of risk and rewards. Major provisions of the current guidance cover the determination of which goods and services are distinct and represent separate performance obligations, the appropriate treatments for variable consideration, and the evaluation of whether revenues should be recognized at a point in time or over time.

When a performance obligation is satisfied over time, the related revenues are recognized over time. The Company’s revenues are recognized primarily under various types of long-term construction contracts, including those for which revenues are based on either a fixed-price or a time-and-materials basis, and primarily over time as performance obligations are satisfied due to the continuous transfer of control to the project owner or other customer.

Revenues from fixed-price contracts, including portions of estimated gross profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the cost-to-cost approach. If, at any time, the estimate of contract profitability indicates an anticipated loss on a contract, the Company will recognize the total loss in the reporting period in which it is identified and the loss amount becomes estimable. Revenues from time-and-materials contracts are recognized when the related services are provided to the customer.

7

Almost all of the Company’s fixed-price contracts are considered to have a single performance obligation. Although multiple promises to transfer individual goods or services may exist, they are not typically distinct within the context of such contracts because contract promises included therein are interrelated or the contracts require the Company to perform critical integration so that the customer receives a completed project. Warranties provided under the Company’s contracts with customers are assurance-type primarily and are recorded as the corresponding contract work is performed.

The transaction price for a contract represents the value of the contract awarded to the Company that is used to determine the amount of revenues recognized as of the balance sheet date. It may reflect amounts of variable consideration which could be either increases or decreases to the transaction price. These adjustments can be made from time-to-time during the period of contract performance as circumstances evolve related to such items as changes in the scope and price of contracts, claims, incentives and liquidated damages.

Contract assets include amounts that represent the rights to receive payment for goods or services that have been transferred to the project owner, with the rights conditional upon something other than the passage of time. Contract liabilities include amounts that reflect obligations to provide goods or services for which payment has been received. Contract retentions are billed amounts which, pursuant to the terms of the applicable contract, are not paid by project owners until a defined phase of a contract or project has been completed and accepted. These retained amounts are reflected in contract assets or contract liabilities depending on the net contract position of the particular contract. Retention amounts and the length of retention periods may vary. Retainage amounts related to active contracts are considered current regardless of the term of the applicable contract; such amounts are generally collected by the completion of the applicable contract. The amounts retained by project owners under construction contracts at July 31, 2022 and January 31, 2022 were $43.6 million and $40.4 million, respectively.

Variable Consideration

Amounts for contract variations for which the Company has project-owner directive for additional work or other scope change, but not for the price associated with the corresponding additional effort, are included in the transaction price when it is considered probable that the applicable costs will be recovered through a modification to the contract price. The effects of any revision to a transaction price can be determined at any time and they could be material. The Company includes in the corresponding transaction price an estimate of the amount that it expects to receive from a claim based on management’s judgement regarding all reasonably available information. Once a final amount has been determined, the transaction price will be revised again to reflect the final resolution. At July 31, 2022 and January 31, 2022, the aggregate amounts of such contract variations included in the transaction prices that were still pending customer acceptance were $4.3 million and $7.5 million, respectively. Variations related to the Company’s contracts typically represent modifications to the existing contracts and performance obligations, and do not represent new performance obligations. Actual costs related to any changes in the scope of the corresponding contract are expensed as they are incurred. Changes to total estimated contract costs and losses, if any, are reflected in operating results for the period in which they are determined.

The Company’s long-term contracts typically have schedule dates and other performance objectives that if not achieved could subject the Company to liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by the achievement of a specified level of output or efficiency. Each applicable contract defines the conditions under which a project owner may be entitled to any liquidated damages. At the outset of each of the Company’s contracts, the potential amounts of liquidated damages typically are not subtracted from the transaction price as the Company believes that it has included activities in its contract plan, and the associated costs, that will be effective in preventing such damages. Of course, circumstances may change as the Company executes the corresponding contract. The transaction price is reduced by an applicable amount when the Company no longer considers it probable that a future reversal of revenues will not occur when the matter is resolved. The Company considers potential liquidated damages, the costs of other related items and potential mitigating factors in determining the adequacy of its regularly updated estimates of the amounts of gross profit expected to be earned on active projects.

In other cases, the Company may have the grounds to assert liquidated damages against subcontractors, suppliers, project owners or other parties related to a project. Such circumstances may arise when the Company’s activities and progress are adversely affected by delayed or damaged materials, challenges with equipment performance or other events out of the Company’s control where the Company has rights to recourse, typically in the form of liquidated damages.

8

In general, the Company does not adjust the corresponding contract accounting until it is probable that the favorable cost relief will be realized. Such adjustments have been and could be material.

The Company records adjustments to revenues and profits on contracts, including those associated with contract variations and estimated cost changes, using a cumulative catch-up method. Under this method, the impact of an adjustment to the amount of revenues recognized to date is recorded in the period that the adjustment is identified. Estimated variable consideration amounts are determined by the Company based primarily on the single most likely amount in the range of possible consideration amounts. Revenues and profits in future periods of contract performance are recognized using the adjusted amounts of transaction price and estimated contract costs.

Remaining Unsatisfied Performance Obligations ("RUPO”)

The amount of RUPO represents the unrecognized revenue value of active contracts with customers as determined under the revenue recognition rules of U.S. GAAP. Increases to RUPO during a reporting period represent the transaction prices associated with new contracts, as well as additions to the transaction prices of existing contracts. The amounts of such changes may vary significantly each reporting period based on the timing of major new contract awards and the occurrence and assessment of contract variations.

At July 31, 2022, the Company had RUPO of $372.0 million. The largest portion of RUPO at any date usually relates to EPC service contracts with typical performance durations of one to three years. However, the length of certain significant construction projects may exceed three years. The Company estimates that approximately 51% of the RUPO amount at July 31, 2022 will be included in the amount of consolidated revenues that will be recognized during the remainder of the fiscal year ending January 31, 2023 ("Fiscal 2023”). Most of the remaining amount of the RUPO amount at July 31, 2022 is expected to be recognized in revenues during the fiscal year ending January 31, 2024 ("Fiscal 2024”). Revenues for future periods will also include customer contract amounts added to RUPO subsequent to July 31, 2022.

It is important to note that estimates may be changed in the future and that cancellations, deferrals, or scope adjustments may occur related to work included in the amount of RUPO at July 31, 2022. Accordingly, RUPO may be adjusted to reflect project delays and cancellations, revisions to project scope and cost and foreign currency exchange fluctuations, or to revise estimates, as effects become known. Such adjustments may materially reduce future revenues below Company estimates.

Disaggregation of Revenues

The following table presents consolidated revenues for the three and six months ended July 31, 2022 and 2021, disaggregated by the geographic area where the corresponding projects were located:

    

Three Months Ended July 31, 

    

Six Months Ended July 31, 

2022

    

2021

2022

    

2021

United States

$

93,949

$

123,380

$

174,221

$

238,871

Republic of Ireland

 

15,532

 

7,556

 

25,186

 

12,249

United Kingdom

 

8,629

 

1,630

 

18,980

 

7,787

Other

 

 

442

 

 

442

Consolidated Revenues

$

118,110

$

133,008

$

218,387

$

259,349

The major portion of the Company’s consolidated revenues are recognized pursuant to fixed-price contracts with most of the remaining portions earned pursuant to time-and-material contracts. Consolidated revenues are disaggregated by reportable segment in Note 14 to the condensed consolidated financial statements.

NOTE 3 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

At July 31, 2022 and January 31, 2022, certain amounts of cash equivalents were invested in money market funds with net assets invested in high-quality money market instruments. Such investments include U.S. Treasury obligations; obligations of U.S. government agencies, authorities, instrumentalities or sponsored enterprises; and repurchase agreements secured by U.S. government obligations. The Company considers all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

9

Short-term investments as of July 31, 2022 and January 31, 2022 consisted solely of certificates of deposit purchased from Bank of America (the "Bank”) with weighted average initial maturities of less than one year (the "CDs”). The Company has the intent and ability to hold the CDs until they mature, and they are carried at cost plus accrued interest. Interest income is recorded when earned and is included in other income. At July 31, 2022 and January 31, 2022, the weighted average annual interest rates of the outstanding CDs were 0.9% and 0.1%, respectively.

The Company has a substantial portion of its cash on deposit in the U.S. with the Bank. The Company also maintains 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. Management does not believe that the combined amount of the CDs and the cash deposited with the Bank and cash balances maintained at financial institutions in Ireland and the U.K., in excess of government-insured levels, represent material risks.

NOTE 4 – ACCOUNTS AND NOTES RECEIVABLE

The Company generally extends credit to a customer based on an evaluation of the customer’s financial condition, without requiring tangible collateral. Exposure to losses on accounts and notes receivable is expected to differ due to the varying financial condition of each customer. The Company monitors its exposure to credit losses and may establish an allowance for credit losses based on management’s estimate of the loss that is expected to occur over the remaining life of the particular financial asset. The amounts of any credit losses for the three and six months ended July 31, 2022 and 2021 were insignificant. The amount of the allowance for credit losses at both July 31, 2022 and January 31, 2022 was $2.4 million.

NOTE 5 – PURCHASED INTANGIBLE ASSETS

At both July 31, 2022 and January 31, 2022, the goodwill balances related primarily to GPS and TRC were $18.5 million and $9.5 million, respectively. Management does not believe that any events or circumstances that have occurred or arisen since January 31, 2022, require an updated assessment of the goodwill balances of either GPS or TRC.

The Company’s purchased intangible assets, other than goodwill, related primarily to TRC and consisted of the following elements as of July 31, 2022 and January 31, 2022:

July 31, 2022

January 31, 

Estimated

Gross

Accumulated

Net

2022, (net

    

Useful Life

    

Amounts

    

Amortization

    

Amounts

    

amounts)

 

Trade name

15 years

$

4,499

$

2,000

$

2,499

$

2,650

Process certifications

 

7 years

 

1,897

1,807

90

226

Customer relationships

10 years

916

610

306

351

Customer contracts

< 1 year

114

68

46

95

Totals

$

7,426

$

4,485

$

2,941

$

3,322

NOTE 6 – FINANCING ARRANGEMENTS

During April 2021, the Company amended its Amended and Restated Replacement Credit Agreement with the Bank (the "Credit Agreement”). The amendment 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. The Company may also use the borrowing ability to cover other credit instruments issued by the Bank for the Company’s use in the ordinary course of business as defined in the Credit Agreement.

At July 31, 2022, the Company did not have any borrowings outstanding under the Credit Agreement. However, the Bank has issued outstanding letters of credit in the total amount of $15.1 million in support of the activities of APC under existing customer contracts. In connection with the project development activities of the VIE that is described in Note 1, the Bank issued a letter of credit, outside the scope of the Credit Agreement, in the approximate amount of $3.4 million as of July 31, 2022 and January 31, 2022, for which the Company has provided cash collateral. As of July 31, 2022, no amounts have been drawn against this letter of credit.

10

The Company has pledged the majority of its assets to secure its financing arrangements. The Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Bank requires that the Company comply with certain financial covenants at its fiscal year-end and at each of its fiscal quarter-ends. The Credit Agreement 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. As of July 31, 2022 and January 31, 2022, the Company was in compliance with the covenants of the Credit Agreement.

The Company expects to amend the Credit Agreement during 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.

NOTE 7 – COMMITMENTS

Leases

The Company’s leases are primarily operating leases that cover office space, expiring on various dates through September 2031, and certain equipment used by the Company in the performance of its construction services contracts. Some of these equipment leases may be embedded in broader agreements with subcontractors or construction equipment suppliers. The Company has no material finance leases. None of the operating leases include significant amounts for incentives, rent holidays or price escalations. Under certain leases, the Company is obligated to pay property taxes, insurance, and maintenance costs.

Operating lease right-of-use assets and associated lease liabilities are recorded in the balance sheet at the lease commencement date based on the present value of future minimum lease payments to be made over the expected lease term. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate (currently LIBOR plus 1.6%) at the commencement date in determining the present value of future payments. The expected lease term includes any option to extend or to terminate the lease when it is reasonably certain the Company will exercise such option.

Operating lease expense amounts are recorded on a straight-line basis over the expected lease terms and were $0.5 million and $1.3 million for the three and six months ended July 31, 2022, respectively, and were $1.1 million and $1.9 million for the three and six months ended July 31, 2021, respectively. Operating lease payments for the three and six months ended July 31, 2022 were $0.5 million and $1.3 million, respectively, and they were $1.1 million and $1.9 million for the three and six months ended July 31, 2021, respectively. For operating leases as of July 31, 2022, the weighted average lease term is 60 months and the weighted average discount rate is 2.4%. The aggregate amounts of operating leases added during the six months ended July 31, 2022 and 2021 were $0.5 million and $0.8 million, respectively.

The following is a schedule of future minimum lease payments for the operating leases that were recognized in the condensed consolidated balance sheet as of July 31, 2022.

Years Ending January 31, 

2023 (remainder)

    

$

640

2024

540

2025

380

2026

250

2027

231

Thereafter

1,025

Total lease payments

3,066

Less interest portion

182

Present value of lease payments

2,884

Less current portion (included in accrued expenses)

894

Non-current portion (included in noncurrent liabilities)

$

1,990

Payments for the occupancy by TRC of its primary offices and plant, which are made to the founder and retired chief executive officer of TRC based on an annual rental rate of $0.5 million, are being made on a month-to-month rental basis.

11

The Company also uses equipment and occupies other facilities under short-term rental agreements. Rent expense amounts incurred under short-term rental agreements were $3.0 million and $5.3 million, respectively for the three and six months ended July 31, 2022. Rent expense amounts incurred under these types of arrangements for the three and six months ended July 31, 2021 was $2.5 million and $4.9 million, respectively.

Performance Bonds and Guarantees

In the normal course of business and for certain major projects, the Company may be required to obtain surety or performance bonding, to cause the issuance of letters of credit, or to provide parent company guarantees (or some combination thereof) in order to provide performance assurances to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about claims on guaranteed or bonded projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such losses. Any amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of July 31, 2022 are not estimable.

As of July 31, 2022, the value of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, was approximately $139.6 million. In addition, as of July 31, 2022, there were bonds outstanding in the aggregate amount of approximately $1.0 million covering other risks including warranty obligations related to completed activities; these bonds expire at various dates over the next two years. Not all of our projects require bonding.

As of July 31, 2022 and January 31, 2022, the Company had also provided a financial guarantee, subject to certain terms and conditions, on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million in support of business development efforts. A liability was established for the estimated loss related to this guarantee during Fiscal 2022.

Warranties

The Company generally provides assurance-type warranties for work performed under its construction contracts. The warranties cover defects in equipment, materials, design or workmanship, and most warranty periods typically run from nine to twenty-four months after the completion of construction on a particular project. Because of the nature of the Company’s projects, including project owner inspections of the work both during construction and prior to substantial completion, the Company has not experienced material unexpected warranty costs in the past. Warranty costs are estimated based on experience with the type of work and any known risks relative to each completed project. The accruals of liabilities, which are established to cover estimated future warranty costs, are recorded as the contracted work is performed, and they are included in the amounts of accrued expenses in the condensed consolidated balances sheets. The liability amounts may be periodically adjusted to reflect changes in the estimated size and number of expected warranty claims.

NOTE 8 – LEGAL CONTINGENCIES

In the normal course of business, the Company may have pending claims and legal proceedings. In the opinion of management, based on information available at this time, there are no current claims and proceedings that are expected to have a material adverse effect on the condensed consolidated financial statements as of July 31, 2022.

NOTE 9 – STOCK-BASED COMPENSATION

On June 23, 2020, the Company’s stockholders approved the adoption of the 2020 Stock Plan (the "2020 Plan”), and the allocation of 500,000 shares of the Company’s common stock for issuance thereunder. The Company’s board of directors may make share-based awards under the 2020 Plan to officers, directors and key employees. The 2020 Plan replaced the 2011 Stock Plan (the "2011 Plan”); the Company’s authority to make awards pursuant to the 2011 Plan expired on July 19, 2021. Together, the 2020 Plan and the 2011 Plan are hereinafter referred to as the "Stock Plans.”

The features of the 2020 Plan are similar to those included in the 2011 Plan. Awards may include nonqualified stock options, incentive stock options, and restricted or unrestricted stock. The specific provisions for awards are documented in a written agreement between the Company and the awardee. All stock options awarded under the Stock Plans have exercise prices per share at least equal to the common stock’s market value on the date of grant. Stock options have terms no longer than ten years. Typically, stock options are awarded with one-third of each stock option vesting on each of the first three anniversaries of the corresponding award date.

12

As of July 31, 2022, there were 1,963,635 shares of common stock reserved for issuance under the Stock Plans; this number includes 252,146 shares of common stock available for future awards under the 2020 Plan.

Stock Options

A summary of stock option activity under the Stock Plans for the six months ended July 31, 2022, along with corresponding weighted average per share amounts, is presented below (shares in thousands):

Exercise

Remaining

    

Shares

    

Price

    

Term (years)

    

Fair Value

Outstanding, February 1, 2022

 

1,405

$

44.35

 

6.17

$

10.31

Granted

38

$

36.78

Exercised

(2)

$

32.68

Forfeited

(10)

$

56.27

Outstanding, July 31, 2022

1,431

$

44.08

 

5.79

$

10.19

Exercisable, July 31, 2022

 

1,192

$

44.83

5.27

$

10.74

Outstanding, July 31, 2021

1,398

$

44.42

 

6.51

$

10.41

Exercisable, July 31, 2021

 

1,022

$

45.34

 

5.76

$

11.20

The changes in the number of non-vested options to purchase shares of common stock for the six months ended July 31, 2022, and the weighted average fair value per share for each number, are presented below (shares in thousands):

    

Shares

    

Fair Value

Non-vested, February 1, 2022

 

295

$

7.80

Granted

 

38

$

6.68

Vested

 

(94)

$

8.24

Non-vested, July 31, 2022

 

239

$

7.45

Non-vested, July 31, 2021

 

376

$

8.27

The total intrinsic value amount of the stock options exercised during the six months ended July 31, 2021 was $0.3 million; the amount was not significant for the six months ended July 31, 2022. At July 31, 2022, the aggregate market value amounts of the shares of common stock subject to outstanding and exercisable stock options that were "in-the-money” exceeded the aggregate exercise prices of such options by $0.5 million and $0.3 million, respectively.

Restricted Stock Units

The Company awards restricted stock units to senior executives, members of the Company’s board of directors and certain other employees. Awardees earn the right to receive shares of common stock as certain performance goals are achieved and/or service periods are satisfied. Each restricted stock unit expires on the three-year anniversary of the award.

During the six months ended July 31, 2022, the Company awarded 47,000 performance-based restricted stock units, 7,500 renewable performance-based restricted stock units, 60,000 time-based restricted stock units and 2,604 shares based on the amount of cash dividends deemed paid on shares earned pursuant to the awards. During the six months ended July 31, 2021, the Company awarded 49,000 performance-based restricted stock units, 10,000 renewable performance-based restricted stock units and 49,500 time-based restricted stock units.

13

The changes in the maximum number of restricted stock units for the six months ended July 31, 2022, and the weighted average fair value per share for each number, are presented below (shares in thousands):

    

Shares

    

Fair Value

Outstanding, February 1, 2022

 

222

$

31.48

Awarded

 

117

$

26.97

Issued

(37)

$

38.51

Forfeited

(22)

$

40.85

Outstanding, July 31, 2022

 

280

$

29.46

Outstanding, July 31, 2021

 

190

$

29.73

Fair Value

The fair value amounts of stock options and restricted stock units are recorded as stock compensation expense over the terms of the corresponding awards. Expense amounts related to stock awards were $1.1 million and $0.9 million for the three months ended July 31, 2022 and 2021, respectively. Expense amounts related to stock awards were $2.0 million and $1.6 million for the six months ended July 31, 2022 and 2021, respectively. At July 31, 2022, there was $7.5 million in unrecognized compensation cost related to outstanding stock awards that the Company expects to expense over the next three years.

The Company estimates the weighted average fair value of stock options on the date of award using a Black-Scholes option pricing model. The Company believes that its past stock option exercise activity is sufficient to provide it with a reasonable basis upon which to estimate the expected life of newly awarded stock options. Risk-free interest rates are determined by blending the rates for three-to-five year U.S. Treasury notes. The dividend yield is based on the Company’s current annual regular dividend amount. The calculations of the expected volatility factors are based on the monthly closing prices of the Company’s common stock for the five-year periods preceding the dates of the corresponding awards.

The fair value amounts for the performance-based restricted stock units have been determined by using the per share market price of the Company’s common stock on the dates of award and, by assigning equal probabilities to the thirteen possible payout outcomes at the end of each three-year term, and by computing the weighted average of the outcome amounts. For each award, the estimated fair value amount was calculated to be 88.5% of the aggregate market value of the target number (which is 50% of the maximum number) of shares on the award date. For the renewable performance-based restricted stock units, the fair value of each award was determined to be 50% of the aggregate market value of the shares of common stock covered by the award on the date of the award. For the time-based restricted stock units, the fair value of each award equals the aggregate market price for the number of shares covered by each award on the date of award.

NOTE 10 – INCOME TAXES

Income Tax Expense Reconciliations

The Company’s income tax amounts for the six months ended July 31, 2022 and 2021 differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the income before income taxes for the periods as presented below:

    

Six Months Ended July 31, 

    

2022

    

2021

Computed expected income tax expense

$

(4,970)

$

(6,635)

Difference resulting from:

State income taxes, net of federal tax effect

 

(349)

 

(719)

Research and development credits adjustment

(6,181)

Deferred tax adjustments

(66)

(283)

Other permanent differences and adjustments, net

 

(393)

 

(322)

Income tax expense

$

(11,959)

$

(7,959)

Foreign income tax expense amounts for the six months ended July 31, 2022 and 2021 were not material.      

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Net Operating Loss ("NOL”) Carryback

In an effort to combat the adverse economic impacts of the COVID-19 crisis, the U.S. Congress passed the Coronavirus, Aid, Relief, and Economic Security Act ( the "CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that included spending and tax breaks aimed at strengthening the U.S. economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19.

The tax changes of the CARES Act included a temporary suspension of the limitations on the future utilization of certain NOLs and re-established a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include the Company’s domestic NOL for the year ended January 31, 2020 ("Fiscal 2020”), which was approximately $39.5 million. The Company made the appropriate filing with the Internal Revenue Service (the "IRS”) requesting carryback refunds of income taxes paid for the years ended January 31, 2017 ("Fiscal 2017”), 2016 ("Fiscal 2016”) and 2015 in the total amount of approximately $12.7 million during the fiscal year ended January 31, 2021 ("Fiscal 2021”); the IRS has not completed the processing of the Company’s refund request.

Research and Development Tax Credits

During the year ended January 31, 2019 ("Fiscal 2019”), the Company completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development tax credits that may have been available to reduce prior year income taxes. This study focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant amounts of income tax benefits that were not previously recognized in the Company’s operating results for any prior year reporting period. The net amount of federal and state research and development tax credit benefit recognized in Fiscal 2019 was $16.6 million. During Fiscal 2020, deferred tax assets related to the research and development tax credits were reduced by $0.4 million. The Company recorded a corresponding liability for uncertain income tax return positions related to identified but unrecognized research and development tax credit benefits in the amount of $5.0 million. Most of this liability was included in accrued expenses as of January 31, 2022.

During Fiscal 2021, the IRS concluded examinations of the Company’s consolidated federal income tax returns for Fiscal 2016, as amended; Fiscal 2017, as amended; and the year ended January 31, 2018 ("Fiscal 2018”) with its focus on the research and development tax credits included therein.

In January 2021, the IRS issued its final revenue agents reports that documented its understanding of the facts, attempted to summarize the Company’s arguments in support of the research and development claims and stated its position which disagreed with the Company’s treatment of a substantial amount of the costs that supported the Company’s claims. In March 2021, the Company submitted a formal protest of the findings of the IRS examiner and requested an appeals hearing.

At the conclusion of the hearing that occurred in May 2022, the Company agreed to accept a settlement offer from the IRS in the amount of approximately $7.9 million, before interest. As a result, during the three-month period ended July 31, 2022, the Company made an unfavorable adjustment to its liability for uncertain income tax positions in the approximate amount of $6.2 million. This amount is also included in income tax expense for the three and six months ended July 31, 2022.

The Company has also formally protested the conclusions reached by two states, where the Company filed tax returns reflecting the benefits of certain research and development credits, that the credits are not allowable. The Company expects that any unfavorable adjustments related to the ultimate settlement of the income tax disputes with the states will not be significant.

Income Tax Refunds

As of July 31, 2022 and January 31, 2022, the balances of other current assets in the condensed consolidated balance sheet included income tax refunds receivable and prepaid income taxes in the total amounts of approximately $14.9 million and $29.5 million, respectively. The income tax refunds included the amounts that were expected to be received from the IRS upon completion of the tax return examination appeals process and the amount expected to be received from the IRS upon its processing of the Company’s NOL carryback refund request as described above.

15

Income Tax Returns

The Company is subject to federal and state income taxes in the U.S., and income taxes in Ireland and the U.K. Tax treatments within each jurisdiction are subject to the interpretation of the related tax laws and regulations which require significant judgment to apply. The Company is no longer subject to income tax examinations by authorities for its fiscal years ended on or before the end of Fiscal 2018 except for several notable exceptions including Ireland, the U.K. and several states where the open periods are one year longer.

Solar Energy Projects

The Company has invested in limited liability companies that make equity investments in solar energy projects that are eligible to receive energy tax credits, including $4.1 million that was invested during the six months ended July 31, 2021. The passive investments have been accounted for using the equity method and the balances are included in other assets in our condensed consolidated balance sheets. Each tax credit, when recognized, is recorded as a reduction of the corresponding investment balance with an offsetting reduction in the balance of accrued taxes payable in accordance with the deferral method. Investment tax credits in the approximate amount of $3.0 million were recognized during the six months ended July 31, 2021. At July 31, 2022 and January 31, 2022, the investment account balances were $1.2 million and $0.2 million, respectively. These investments are expected to provide positive overall returns over their six-year expected lives.

During the three and six months ended July 31, 2022, the investment balance was adjusted to reflect the Company’s share of the income of the investment entities in the amounts of approximately $0.5 million and $1.0 million, respectively, which amounts have been included as other income in the Company’s condensed consolidated statements of earnings for the corresponding periods.

The Company has also established deferred taxes related to the difference in the book and tax bases of the investments.

Supplemental Cash Flow Information

The amounts of cash paid for income taxes during the six months ended July 31, 2022 and 2021 were $1.3 million and $7.5 million (including the $4.1 million solar energy investment described above), respectively. The amounts of income tax refunds received during the six months ended July 31, 2022 and 2021 were not material.

NOTE 11 – NET INCOME PER SHARE

Basic and diluted net income per share amounts are computed as follows (shares in thousands except in the note):