UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT |
For the Transition Period from to
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
| ||
(State or Other Jurisdiction of Incorporation) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(
(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.
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).
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 ☐
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
Title of Each Class |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered |
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:
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||
October 31, | October 31, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
REVENUES | $ | | $ | | $ | | $ | | |||||
Cost of revenues |
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GROSS PROFIT |
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Selling, general and administrative expenses |
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INCOME FROM OPERATIONS |
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Other income, net |
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INCOME BEFORE INCOME TAXES |
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Income tax expense |
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NET INCOME |
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Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||
COMPREHENSIVE INCOME | $ | | $ | | $ | | $ | | |||||
NET INCOME PER SHARE | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | |||||||||||||
Basic |
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Diluted |
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CASH DIVIDENDS PER SHARE | $ | | $ | | $ | | $ | |
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)
| October 31, |
| January 31, | |||
| 2022 |
| 2022 | |||
(Unaudited) | (Note 1) | |||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | | $ | | ||
Short-term investments | | | ||||
Accounts receivable, net |
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Contract assets |
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Other current assets |
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TOTAL CURRENT ASSETS |
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Property, plant and equipment, net |
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Goodwill |
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Other purchased intangible assets, net | | | ||||
Right-of-use, deferred tax and other assets | | | ||||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable | $ | | $ | | ||
Accrued expenses |
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Contract liabilities |
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TOTAL CURRENT LIABILITIES |
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Noncurrent liabilities | | | ||||
TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES | ||||||
STOCKHOLDERS’ EQUITY | ||||||
Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Retained earnings |
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Less treasury stock, at cost – | ( | ( | ||||
Accumulated other comprehensive loss | ( | ( | ||||
TOTAL STOCKHOLDERS’ EQUITY |
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Non-controlling interest |
| ( |
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TOTAL EQUITY |
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TOTAL LIABILITIES AND EQUITY | $ | | $ | |
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 NINE MONTHS ENDED OCTOBER 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, August 1, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net income |
| — | — | — | | — | — | — | | ||||||||||||||
Foreign currency translation loss | — | — | — | — | — | ( | — | ( | |||||||||||||||
Stock compensation expense | — | — | | — | — | — | — | | |||||||||||||||
Common stock repurchases | ( | — | — | — | ( | — | — | ( | |||||||||||||||
Cash dividends |
| — | — | — | ( | — | — | — | ( | ||||||||||||||
Balances, October 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Balances, August 1, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Net income | — | — | — | | — | — | — | | |||||||||||||||
Foreign currency translation loss | — | — | — | — | — | ( | — | ( | |||||||||||||||
Stock compensation expense | — | — | | — | — | — | — | | |||||||||||||||
Stock option exercises |
| | | | — | — | — | — | | ||||||||||||||
Cash dividends | — | — | — | ( | — | — | — | ( | |||||||||||||||
Balances, October 31, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Balances, February 1, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net income |
| — | — | — | | — | — | | |||||||||||||||
Foreign currency translation loss | — | — | — | — | — | ( | — | ( | |||||||||||||||
Stock compensation expense | — | — | | — | — | — | — | | |||||||||||||||
Stock option exercises and other share-based award settlements |
| | | | — | — | — | — | | ||||||||||||||
Common stock repurchases | ( | — | — | — | ( | — | — | ( | |||||||||||||||
Cash dividends |
| — | — | — | ( | — | — | — | ( | ||||||||||||||
Balances, October 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Balances, February 1, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||||
Net income | — | — | — | | — | — | — | | |||||||||||||||
Foreign currency translation loss | — | — | — | — | — | ( | — | ( | |||||||||||||||
Stock compensation expense | — | — | | — | — | — | — | | |||||||||||||||
Stock option exercises and other share-based award settlements | | | | — | — | — | — | | |||||||||||||||
Cash dividends | — | — | — | ( | — | — | — | ( | |||||||||||||||
Balances, October 31, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ARGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended October 31, | |||||
| 2022 |
| 2021 | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash (used in) provided by operating activities | ||||||
Stock compensation expense | | | ||||
Depreciation |
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Lease expense | | | ||||
Equity in (income) loss of solar energy investments | ( | | ||||
Amortization of purchased intangible assets |
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Deferred income tax (benefit) expense | ( | | ||||
Other |
| ( |
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Changes in operating assets and liabilities | ||||||
Accounts receivable |
| ( |
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Contract assets | ( | | ||||
Other assets |
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Accounts payable and accrued expenses |
| ( |
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Contract liabilities | ( | | ||||
Net cash (used in) provided by operating activities |
| ( |
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Purchases of short-term investments | ( | ( | ||||
Maturities of short-term investments | | | ||||
Purchases of property, plant and equipment |
| ( |
| ( | ||
Investments in solar energy projects |
| — |
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Net cash used in investing activities |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Common stock repurchases | ( | — | ||||
Payments of cash dividends |
| ( |
| ( | ||
Proceeds from the exercise of stock options |
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Net cash used in financing activities |
| ( |
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EFFECTS OF EXCHANGE RATE CHANGES ON CASH | ( | ( | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| ( |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | ||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | | $ | | ||
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
OCTOBER 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 other 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 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 operations 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 a variable interest entity. 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 each year. The condensed consolidated balance sheet as of October 31, 2022, the condensed consolidated statements of earnings and stockholders’ equity for the three and nine months ended October 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine months ended October 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 October 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 variable interest entity (the "VIE”) that was performing the project development activities related to the planned construction of a new natural gas-fired power plant. The account balances of the VIE have been 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 development costs of this project in the amount of $
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
Predominantly, all of the Company’s fixed-price contracts are considered to have a single performance obligation. Although multiple promises to transfer individual goods or services may exist, they are not typically distinct within the context of such contracts because contract promises included therein are interrelated or the contracts require the Company to perform critical integration so that the customer receives a completed project. Warranties provided under the Company’s contracts with customers are assurance-type primarily and are recorded as the corresponding contract work is performed.
The transaction price for a customer contract represents the value of the contract awarded to the Company that is used to determine the amount of revenues recognized 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 October 31, 2022 and January 31, 2022 were $
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 may be revised again to reflect the final resolution. At October 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 $
The Company’s long-term contracts typically have schedule dates and other performance objectives that if not achieved could subject the Company to liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by the achievement of a specified level of output or efficiency. Each applicable contract defines the conditions under which a project owner may be entitled to any liquidated damages. At the outset of each of the Company’s contracts, the potential amounts of liquidated damages typically are not subtracted from the transaction price as the Company believes that it has included activities in its contract plan, and the associated forecasted contract costs, that will be effective in preventing such damages. Of course, circumstances may change as the Company executes the corresponding contract. The transaction price is reduced by an applicable amount when the Company no longer considers it probable that a future reversal of revenues 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.
8
In other cases, the Company may have the grounds to assert liquidated damages against subcontractors, suppliers, project owners or other parties related to a project. Such circumstances may arise when the Company’s activities and progress are adversely affected by delayed or damaged materials, challenges with equipment performance or other events out of the Company’s control where the Company has rights to recourse, typically in the form of liquidated damages.
In general, the Company does not adjust the corresponding contract accounting until it is probable that the favorable cost relief will be realized. Such adjustments have been and could be material.
The Company records adjustments to revenues and profits on contracts, including those associated with contract variations and estimated cost changes, using a cumulative catch-up method. Under this method, the impact of an 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 approximately represents the unrecognized revenue value of active contracts with customers as determined under the revenue recognition rules of U.S. GAAP. It includes the unrecognized value of certain contracts that provide customers with the right to terminate a contract for convenience but not without incurring substantive termination costs.
At October 31, 2022, the Company had RUPO of $
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 October 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 to RUPO may materially reduce future revenues below Company estimates.
Disaggregation of Revenues
The following table presents consolidated revenues for the three and nine months ended October 31, 2022 and 2021, disaggregated by the geographic area where the corresponding projects were located:
| Three Months Ended October 31, |
| Nine Months Ended October 31, | ||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||||
United States | $ | | $ | | $ | | $ | | |||||
Republic of Ireland |
| |
| |
| |
| | |||||
United Kingdom |
| |
| |
| |
| | |||||
Other |
| — |
| |
| — |
| | |||||
Consolidated Revenues | $ | | $ | | $ | | $ | |
The major portions of the Company’s consolidated revenues are recognized pursuant to fixed-price contracts with most of the remaining portions earned pursuant to time-and-material contracts. Consolidated revenues are disaggregated by reportable segment in Note 14 to the condensed consolidated financial statements.
9
NOTE 3 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At October 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.
Short-term investments as of October 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
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 nine months ended October 31, 2022 and 2021 were insignificant. The allowance for credit losses at both October 31, 2022 and January 31, 2022 was $
NOTE 5 – PURCHASED INTANGIBLE ASSETS
At both October 31, 2022 and January 31, 2022, the goodwill balances related primarily to GPS and TRC, and were $
October 31, 2022 | January 31, | |||||||||||||
Estimated | Gross | Accumulated | Net | 2022, (net | ||||||||||
| Useful Life |
| Amounts |
| Amortization |
| Amounts |
| amounts) | |||||
| ||||||||||||||
Trade name | $ | | $ | | $ | | $ | | ||||||
Process certifications |
|
| | | | | ||||||||
Customer relationships | | | | | ||||||||||
Customer contracts | < | | | — | | |||||||||
Totals | $ | | $ | | $ | | $ | |
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 $
10
At October 31, 2022, the Company did not have any borrowings outstanding under the Credit Agreement. However, the Bank has issued letters of credit in the total outstanding amount of $
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 October 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 before the end of Fiscal 2023 in order to replace LIBOR with an equivalent benchmark rate. The Company does not expect that the change will materially impact its consolidated financial statements.
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
Operating lease expense amounts are recorded on a straight-line basis over the expected lease terms and were $
Payments for the occupancy by TRC of certain facilities, which were made to the founder and retired chief executive officer of TRC based on an annual rental rate of $
11
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 October 31, 2022:
Years Ending January 31, | |||
2023 (remainder) |
| $ | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
Total lease payments | | ||
Less interest portion | | ||
Present value of lease payments | | ||
| |||
$ | |
The Company also uses equipment and occupies other facilities under short-term rental agreements. Rent expense amounts incurred under short-term rental agreements were $
Performance Bonds and Guarantees
In the normal course of business and for certain major projects, the Company may be required to obtain surety or performance bonding, to cause the issuance of letters of credit, or to provide parent company guarantees (or some combination thereof) in order to provide performance assurances to clients on behalf of its contractor subsidiaries. As these subsidiaries are wholly-owned, any actual liability is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. When sufficient information about claims on guaranteed or bonded projects would be available and monetary damages or other costs or losses would be determined to be probable, the Company would record such losses. Any such amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress as of October 31, 2022 are not estimable.
As of October 31, 2022 and January 31, 2022, the estimated amounts of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, were approximately $
As of October 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 $
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
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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.
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
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 each award 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 market value per share of the Company’s common stock on the date of grant. Stock options have terms no longer than
As of October 31, 2022, there were
Stock Options
A summary of stock option activity under the Stock Plans for the nine months ended October 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 |
| | $ | |
| $ | | |||
Granted | | $ | | |||||||
Exercised | ( | $ | | |||||||
Forfeited | ( | $ | | |||||||
Outstanding, October 31, 2022 | | $ | |
| $ | | ||||
Exercisable, October 31, 2022 |
| | $ | | $ | | ||||
Outstanding, October 31, 2021 | | $ | |
| $ | | ||||
Exercisable, October 31, 2021 |
| | $ | |
| $ | |
The changes in the number of non-vested options to purchase shares of common stock for the nine months ended October 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 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Non-vested, October 31, 2022 |
| | $ | | |
Non-vested, October 31, 2021 |
| | $ | |
The total intrinsic value related to the stock options exercised during the nine months ended October 31, 2021 was $
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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
During the nine months ended October 31, 2022, the Company awarded performance-based restricted stock units covering
The changes in the maximum number of shares of common stock issuable pursuant to outstanding restricted stock units for the nine months ended October 31, 2022, and the weighted average fair value per share for each restricted stock unit, are presented below (shares in thousands):
| Shares |
| Fair Value | ||
Outstanding, February 1, 2022 |
| | $ | | |
Awarded |
| $ | | ||
Issued | ( | $ | | ||
Forfeited | ( | $ | | ||
Outstanding, October 31, 2022 |
| | $ | | |
Outstanding, October 31, 2021 |
| | $ | | |
Fair Value
The fair value amounts of stock options and restricted stock units are recorded as stock compensation expense on a straight-line basis over the terms of the corresponding awards. Expense amounts related to stock awards were $
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
The fair value amounts for the performance-based restricted stock units have been determined by using the per share market price of the common stock on the dates of award and, by assigning equal probabilities to the thirteen possible payout outcomes at the end of each
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NOTE 10 – INCOME TAXES
Income Tax Expense Reconciliations
The Company’s income tax amounts for the nine months ended October 31, 2022 and 2021 differed from corresponding amounts computed by applying the federal corporate income tax rate of
| Nine Months Ended October 31, | ||||||
| 2022 |
| 2021 | ||||
Computed expected income tax expense | $ | ( | $ | ( | |||
Difference resulting from: | |||||||
State income taxes, net of federal tax effect |
| ( |
| ( | |||
Research and development credits adjustment | ( | — | |||||
Deferred tax adjustments | ( | — | |||||
Other permanent differences and adjustments, net |
| ( |
| ( | |||
Income tax expense | $ | ( | $ | ( |
Foreign income tax expense amounts for the nine months ended October 31, 2022 and 2021 were not material.
Net Operating Loss ("NOL”) Carryback
In an effort to combat the adverse economic impacts of the COVID-19 crisis, the U.S. Congress passed the Coronavirus, Aid, Relief, and Economic Security Act (the "CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that included spending and tax breaks aimed at strengthening the U.S. economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19.
The tax changes of the CARES Act included a temporary suspension of the limitations on the future utilization of certain NOLs and re-established a carryback period for certain losses to
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
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 $
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2022, the Company made an unfavorable adjustment to its liability for uncertain income tax positions in the approximate amount of $
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 October 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 $
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 judgments 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 $
During the nine months ended October 31, 2022, the investment balance was adjusted to reflect the Company’s share of the income of the investment entities in the amount of approximately $
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 nine months ended October 31, 2022 and 2021 were $
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