Argan(AGX) - 2023 Q3 - Quarterly Report

FORM 10-Q Cover Page This section provides the standard SEC filing information for Argan, Inc., including its identification as an accelerated filer and details about its common stock Registrant Information This section provides the standard SEC filing information for Argan, Inc., including its identification as an accelerated filer and details about its common stock - Registrant: Argan, Inc[1][141] - Quarterly Period Ended: October 31, 2022[1][141] Title of Each Class | Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | | :------------------------ | :---------------- | :---------------------------------------- | | Common Stock, $0.15 par value | AGX | New York Stock Exchange | - Common stock outstanding as of December 6, 2022: 13,576,285 shares[2][142] PART I. FINANCIAL INFORMATION This part contains the company's unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Argan, Inc. and its subsidiaries, including statements of earnings, balance sheets, stockholders' equity, and cash flows, along with accompanying notes, providing a comprehensive overview of the company's financial position and performance Condensed Consolidated Statements of Earnings The company reported a significant decrease in net income for both the three and nine months ended October 31, 2022, compared to the prior year, driven by lower revenues and increased income tax expense Three Months Ended October 31, 2022 vs. 2021 (Dollars in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :----------------- | :----- | :----- | :--------- | :--------- | | Revenues | 117,875 | 124,451 | (6,576) | (5.3)% | | Gross Profit | 22,208 | 26,135 | (3,927) | (15.0)% | | Income from Operations | 9,541 | 14,545 | (5,004) | (34.4)% | | Net Income | 7,758 | 12,393 | (4,635) | (37.4)% | | Diluted EPS | $0.56 | $0.78 | ($0.22) | (28.2)% | Nine Months Ended October 31, 2022 vs. 2021 (Dollars in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :----------------- | :----- | :----- | :--------- | :--------- | | Revenues | 336,262 | 383,800 | (47,538) | (12.4)% | | Gross Profit | 66,333 | 77,501 | (11,168) | (14.4)% | | Income from Operations | 32,107 | 45,688 | (13,581) | (29.7)% | | Net Income | 19,465 | 36,029 | (16,564) | (46.0)% | | Diluted EPS | $1.36 | $2.25 | ($0.89) | (39.6)% | - Cash dividends per share remained constant at $0.25 for both the three and nine months ended October 31, 2022 and 2021[3][143] Condensed Consolidated Balance Sheets The company's total assets and total equity decreased significantly from January 31, 2022, to October 31, 2022, primarily due to a substantial reduction in cash and cash equivalents and an increase in treasury stock Balance Sheet Highlights (October 31, 2022 vs. January 31, 2022, Dollars in thousands) | Metric | Oct 31, 2022 | Jan 31, 2022 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | 136,065 | 350,472 | | Short-term investments | 150,566 | 90,026 | | Accounts receivable, net | 37,899 | 26,978 | | Contract assets | 11,551 | 4,904 | | Total Current Assets | 364,965 | 507,284 | | Total Assets | 410,903 | 553,585 | | Accounts payable | 45,268 | 41,822 | | Accrued expenses | 40,243 | 53,315 | | Contract liabilities | 49,031 | 127,890 | | Total Current Liabilities | 134,542 | 223,027 | | Total Liabilities | 139,163 | 227,990 | | Total Stockholders' Equity | 272,537 | 326,392 | | Treasury stock, at cost | (83,657) | (20,405) | - Cash and cash equivalents decreased by $214.4 million (61.2%) from January 31, 2022, to October 31, 2022[5][145] - Contract liabilities decreased significantly by $78.9 million (61.7%) from January 31, 2022, to October 31, 2022[6][146] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased by $53.8 million from February 1, 2022, to October 31, 2022, primarily due to common stock repurchases and cash dividends, partially offset by net income and stock compensation expense Changes in Stockholders' Equity (Nine Months Ended October 31, 2022, Dollars in thousands) | Item | Amount | | :------------------------- | :----- | | Balances, February 1, 2022 | 325,595 | | Net income | 19,465 | | Foreign currency translation loss | (2,601) | | Stock compensation expense | 3,055 | | Stock option exercises | 66 | | Common stock repurchases | (63,252) | | Cash dividends | (10,588) | | Balances, October 31, 2022 | 271,740 | - Common shares outstanding decreased from 15,257,688 at February 1, 2022, to 13,575,772 at October 31, 2022, primarily due to common stock repurchases[11][151] Condensed Consolidated Statements of Cash Flows The company experienced a significant net decrease in cash and cash equivalents for the nine months ended October 31, 2022, primarily due to cash used in operating, investing, and financing activities, a reversal from the net increase in the prior year Cash Flow Summary (Nine Months Ended October 31, 2022 vs. 2021, Dollars in thousands) | Activity | 2022 | 2021 | Change ($) | | :------------------------ | :-------- | :-------- | :--------- | | Net cash (used in) provided by operating activities | (72,988) | 41,699 | (114,687) |\n| Net cash used in investing activities | (62,332) | (5,208) | (57,124) |\n| Net cash used in financing activities | (73,774) | (10,435) | (63,339) |\n| Effects of exchange rate changes on cash | (5,313) | (1,164) | (4,149) |\n| Net (decrease) increase in cash and cash equivalents | (214,407) | 24,892 | (239,299) |\n| Cash and cash equivalents, end of period | 136,065 | 391,563 | (255,498) | - Operating cash flow shifted from a $41.7 million inflow in 2021 to a $73.0 million outflow in 2022[12][152] - Financing activities used substantially more cash in 2022 ($73.8 million) compared to 2021 ($10.4 million), primarily due to common stock repurchases of $63.3 million[12][152] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding the company's accounting policies, financial statement line items, and significant events, offering context to the condensed consolidated financial statements NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION Argan, Inc. operates through its wholly-owned subsidiaries in power industry services (GPS, APC), industrial fabrication and field services (TRC), and telecommunications infrastructure services (SMC), with a fiscal year ending January 31. The financial statements are unaudited interim reports prepared under SEC rules - Argan operates through three reportable segments: Power Industry Services (GPS, APC), Industrial Fabrication and Field Services (TRC), and Telecommunications Infrastructure Services (SMC)[16][156] - The company was deemed the primary beneficiary of a Variable Interest Entity (VIE) for a natural gas-fired power plant project, which was later canceled in March 2022 due to a lack of equity financing, resulting in a $7.9 million impairment loss in Fiscal 2022[21][22][161][162] NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS The company recognizes revenue primarily from long-term construction contracts (fixed-price or time-and-materials) over time, based on a five-step model. Contract assets and liabilities reflect the timing of revenue recognition and payments, with significant amounts of retained funds - Revenue recognition follows a five-step model, primarily for long-term construction contracts (fixed-price or time-and-materials) with revenue recognized over time as performance obligations are satisfied[23][163] - Contract retentions by project owners were $49.4 million at October 31, 2022, an increase from $40.4 million at January 31, 2022[24][164] - Remaining Unsatisfied Performance Obligations (RUPO) totaled $328.1 million at October 31, 2022, with approximately 30% expected to be recognized in the remainder of Fiscal 2023 and most of the rest in Fiscal 2024[28][168] Consolidated Revenues by Geographic Area (Dollars in thousands) | Geographic Area | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | 81,810 | 110,196 | 256,031 | 349,066 | | Republic of Ireland | 21,833 | 9,698 | 47,019 | 21,947 | | United Kingdom | 14,232 | 4,496 | 33,212 | 12,283 | | Other | — | 61 | — | 504 | | Consolidated Revenues | 117,875 | 124,451 | 336,262 | 383,800 | NOTE 3 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The company holds cash equivalents in money market funds and short-term investments in certificates of deposit (CDs) with Bank of America. The weighted average annual interest rate on CDs increased significantly to 2.5% at October 31, 2022, from 0.1% at January 31, 2022 Cash, Cash Equivalents and Short-Term Investments (Dollars in thousands) | Item | Oct 31, 2022 | Jan 31, 2022 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | 136,065 | 350,472 | | Short-term investments | 150,566 | 90,026 | - The weighted average annual interest rate of outstanding CDs increased to 2.5% at October 31, 2022, from 0.1% at January 31, 2022[31][171] NOTE 4 – ACCOUNTS AND NOTES RECEIVABLE The company extends credit without tangible collateral and monitors credit loss exposure. The allowance for credit losses remained stable at $2.4 million at both October 31, 2022, and January 31, 2022 - Allowance for credit losses was $2.4 million at both October 31, 2022, and January 31, 2022[32][172] NOTE 5 – PURCHASED INTANGIBLE ASSETS Goodwill balances primarily relate to GPS and TRC, remaining stable at $18.5 million and $9.5 million, respectively. Other purchased intangible assets, mainly for TRC, decreased slightly due to amortization - Goodwill balances for GPS and TRC were $18.5 million and $9.5 million, respectively, at both October 31, 2022, and January 31, 2022[33][173] Other Purchased Intangible Assets (Net, Dollars in thousands) | Asset Type | Oct 31, 2022 | Jan 31, 2022 | | :------------------- | :----------- | :----------- | | Trade name | 2,424 | 2,650 | | Process certifications | 23 | 226 | | Customer relationships | 283 | 351 | | Customer contracts | — | 95 | | Totals | 2,730 | 3,322 | NOTE 6 – FINANCING ARRANGEMENTS The company's Credit Agreement with Bank of America was amended in April 2021, extending its expiration to May 31, 2024, and reducing the LIBOR-based borrowing rate. No borrowings were outstanding at October 31, 2022, but $8.2 million in letters of credit were issued for APC, a decrease from $21.5 million at January 31, 2022 - The Credit Agreement was amended to extend the expiration date to May 31, 2024, and reduced the borrowing rate to 30-day LIBOR plus 1.6%[34][174] - No borrowings were outstanding under the Credit Agreement at October 31, 2022[36][176] - Letters of credit outstanding totaled $8.2 million at October 31, 2022, supporting APC's activities, down from $21.5 million at January 31, 2022[36][176] - The company expects to amend the Credit Agreement before the end of Fiscal 2023 to replace LIBOR with an equivalent benchmark rate, with no material impact expected[36][176] NOTE 7 – COMMITMENTS The company's commitments include operating leases for office space and equipment, performance bonds and guarantees for projects, and assurance-type warranties for construction contracts - Operating lease expense for the three and nine months ended October 31, 2022, was $0.6 million and $1.9 million, respectively, a decrease from $1.1 million and $3.0 million in the prior year[37][177] Future Minimum Lease Payments for Operating Leases (as of October 31, 2022, Dollars in thousands) | Years Ending January 31, | Amount | | :----------------------- | :----- | | 2023 (remainder) | 396 | | 2024 | 600 | | 2025 | 395 | | 2026 | 249 | | 2027 | 231 | | Thereafter | 1,028 | | Total lease payments | 2,899 | | Less interest portion | 177 | | Present value of lease payments | 2,722 | - Estimated unsatisfied bonded performance obligations were approximately $0.1 billion at October 31, 2022, down from $0.2 billion at January 31, 2022[41][181] - A financial guarantee of $3.6 million was provided on behalf of GPS to an equipment manufacturer, with an estimated loss liability established in Fiscal 2022[41][181] NOTE 8 – LEGAL CONTINGENCIES Management believes no current claims or legal proceedings are expected to have a material adverse effect on the condensed consolidated financial statements - No current claims or legal proceedings are expected to have a material adverse effect on the condensed consolidated financial statements[44][184] NOTE 9 – STOCK-BASED COMPENSATION The company operates under the 2020 Stock Plan, awarding stock options and restricted stock units to employees and directors. Stock compensation expense increased for both the three and nine months ended October 31, 2022 - The 2020 Stock Plan has 1,939,402 shares of common stock reserved for issuance, with 236,146 shares available for future awards[44][184] Stock Compensation Expense (Dollars in thousands) | Period | 2022 | 2021 | | :---------------------- | :--- | :--- | | Three Months Ended Oct 31 | 1,100 | 900 | | Nine Months Ended Oct 31 | 3,100 | 2,500 | - Unrecognized compensation cost related to outstanding stock awards was $7.2 million at October 31, 2022, expected to be expensed over the next three years[49][189] Stock Option Activity (Nine Months Ended Oct 31, 2022, Shares in thousands) | Metric | Shares | Exercise Price (WA) | | :------------------------- | :----- | :------------------ | | Outstanding, Feb 1, 2022 | 1,405 | $44.35 | | Granted | 38 | $36.78 | | Exercised | (2) | $32.68 | | Forfeited | (36) | $48.98 | | Outstanding, Oct 31, 2022 | 1,405 | $44.04 | | Exercisable, Oct 31, 2022 | 1,188 | $44.76 | Restricted Stock Unit Activity (Nine Months Ended Oct 31, 2022, Shares in thousands) | Metric | Shares | Fair Value (WA) | | :------------------------- | :----- | :-------------- | | Outstanding, Feb 1, 2022 | 222 | $31.48 | | Awarded | 135 | $27.22 | | Issued | (37) | $38.51 | | Forfeited | (22) | $40.85 | | Outstanding, Oct 31, 2022 | 298 | $29.42 | NOTE 10 – INCOME TAXES Income tax expense for the nine months ended October 31, 2022, increased significantly due to an unfavorable $6.2 million adjustment from an IRS settlement related to research and development tax credits Income Tax Expense (Nine Months Ended October 31, Dollars in thousands) | Metric | 2022 | 2021 | | :----------------- | :------ | :------ | | Income tax expense | (14,510) | (11,228) | - An unfavorable adjustment of approximately $6.2 million related to the settlement of research and development tax credit claims with the IRS was included in income tax expense for the nine months ended October 31, 2022[56][196] - The company filed for a $12.7 million income tax refund by carrying back its Fiscal 2020 Net Operating Loss (NOL) under the CARES Act, which is still pending IRS processing[54][194] - The company's investment in solar energy projects generated approximately $1.1 million in income for the nine months ended October 31, 2022, and recognized $3.3 million in investment tax credits during the nine months ended October 31, 2021[59][199] NOTE 11 – NET INCOME PER SHARE Diluted net income per share decreased to $0.56 for the three months and $1.36 for the nine months ended October 31, 2022, compared to $0.78 and $2.25 respectively in the prior year Net Income Per Share (Three Months Ended October 31) | Metric | 2022 | 2021 | | :---------- | :---- | :---- | | Basic EPS | $0.56 | $0.79 | | Diluted EPS | $0.56 | $0.78 | Net Income Per Share (Nine Months Ended October 31) | Metric | 2022 | 2021 | | :---------- | :---- | :---- | | Basic EPS | $1.36 | $2.29 | | Diluted EPS | $1.36 | $2.25 | - Antidilutive stock options covering 1,016,834 shares (three months) and 978,834 shares (nine months) were excluded from diluted EPS calculations for 2022[63][64][203][204] NOTE 12 – CASH DIVIDENDS AND COMMON STOCK REPURCHASES The company declared regular quarterly cash dividends of $0.25 per share. It repurchased 1,721,015 shares of common stock for $63.3 million during the nine months ended October 31, 2022, as part of its Share Repurchase Plan - Regular quarterly cash dividends of $0.25 per share were declared and paid[65][205] - The company repurchased 1,721,015 shares of common stock for approximately $63.3 million (average $36.75 per share) during the nine months ended October 31, 2022[65][205] - For the three months ended October 31, 2022, 308,423 shares were repurchased for approximately $10.1 million (average $32.69 per share)[65][205] NOTE 13 – CUSTOMER CONCENTRATIONS The power industry services segment continues to be the primary revenue driver, accounting for 76-80% of consolidated revenues. Customer concentration remains significant, with a few major customers contributing substantial portions of revenues, accounts receivable, and contract assets Consolidated Revenues by Segment (% of Total) | Segment | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Power Industry Services | 77% | 80% | 76% | 77% | | Industrial Services | 20% | 17% | 20% | 20% | - For the three months ended October 31, 2022, four power industry service customers accounted for 33%, 12%, 12%, and 12% of consolidated revenues[67][207] - As of October 31, 2022, accounts receivable from two major customers represented 35% and 13% of the consolidated balance, and the contract asset balance related to one major customer represented 19%[67][207] NOTE 14 – SEGMENT REPORTING The company reports across three segments: Power Industry Services, Industrial Fabrication and Field Services, and Telecommunications Infrastructure Services. Intersegment revenues were minimal for the three months ended October 31, 2022, but higher for the nine-month period in 2021 - Intersegment revenues were $0.3 million for the three months and $0.6 million for the nine months ended October 31, 2022[68][208] Segment Operating Results (Three Months Ended October 31, 2022, Dollars in thousands) | Segment | Revenues | Gross Profit | Income (loss) from operations | | :------------------------ | :------- | :----------- | :---------------------------- | | Power Services | 90,682 | 17,957 | 11,212 | | Industrial Services | 22,137 | 3,400 | 1,577 | | Telecom Services | 5,056 | 851 | 55 | | Other | — | — | (3,303) | | Totals | 117,875 | 22,208 | 9,541 | Segment Operating Results (Nine Months Ended October 31, 2022, Dollars in thousands) | Segment | Revenues | Gross Profit | Income (loss) from operations | | :------------------------ | :------- | :----------- | :---------------------------- | | Power Services | 255,958 | 52,973 | 34,555 | | Industrial Services | 67,660 | 10,692 | 5,425 | | Telecom Services | 12,644 | 2,668 | 299 | | Other | — | — | (8,172) | | Totals | 336,262 | 66,333 | 32,107 | NOTE 15 – SUBSEQUENT EVENT On November 3, 2022, GPS received full notice to proceed with the EPC contract for the 950 MW Trumbull Energy Center natural gas-fired power plant in Ohio, with construction beginning and completion scheduled for calendar 2026 - On November 3, 2022, GPS received full notice to proceed with the EPC contract for the 950 MW Trumbull Energy Center natural gas-fired power plant in Lordstown, Ohio[74][214] - Construction of the Trumbull Energy Center has begun, with completion scheduled for calendar 2026[74][214] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance and condition for the three and nine months ended October 31, 2022, discussing operating results, project backlog, market outlook, liquidity, and critical accounting policies Cautionary Statement Regarding Forward Looking Statements The company's forward-looking statements are subject to significant risks and uncertainties, and actual results may differ materially from projections. The company does not undertake to update these statements - Forward-looking statements are based on current expectations and beliefs but involve significant risks and uncertainties, and actual results may vary materially[77][217] - The company undertakes no obligation to publicly update or revise any forward-looking statements[77][217] Business Description Argan is a construction firm operating through subsidiaries in power industry services (GPS, APC), industrial fabrication and field services (TRC), and telecommunications infrastructure services (SMC), with a strategy to pursue opportunistic acquisitions for profitable growth and synergies - Argan is primarily a construction firm operating through GPS, APC (power industry services), TRC (industrial fabrication and field services), and SMC (telecommunications infrastructure services)[78][218] - The company seeks opportunistic acquisitions and/or investments in companies with significant potential for profitable growth and synergies[78][218] Overview Consolidated revenues and gross profit decreased for both the three and nine months ended October 31, 2022, primarily due to reduced activity in the power industry services segment, while SG&A expenses increased. Net income and diluted EPS also declined significantly Operating Results Consolidated revenues decreased by 5.3% for the three months and 12.4% for the nine months ended October 31, 2022, primarily due to reduced power industry services activity. Gross profit percentages slightly declined, and net income per diluted share decreased significantly - Consolidated revenues decreased by $6.6 million (5.3%) to $117.9 million for the three months ended October 31, 2022, and by $47.5 million (12.4%) to $336.3 million for the nine months ended October 31, 2022[79][80][219][220] - Power industry services revenues decreased by $8.9 million (8.9%) for the three months and $39.8 million (13.5%) for the nine months, while industrial services revenues increased by 3.4% for three months but decreased by 13.5% for nine months[79][80][219][220] - Consolidated gross profit percentage was 18.8% for the three months (down from 21.0%) and 19.7% for the nine months (down from 20.2%)[80][220] - Net income per diluted share was $0.56 for the three months (down from $0.78) and $1.36 for the nine months (down from $2.25), with the nine-month figure reduced by $0.43 due to an unfavorable income tax adjustment[80][220] Project Backlog Consolidated project backlog increased to $0.8 billion at October 31, 2022, from $0.7 billion at January 31, 2022, primarily driven by new power industry services contracts like the Trumbull Energy Center and Kilroot project, and increased industrial services backlog - Consolidated project backlog increased to $0.8 billion at October 31, 2022, from $0.7 billion at January 31, 2022, primarily from the power industry services segment[81][221] - New projects added to backlog include the Trumbull Energy Center (950 MW natural gas-fired power plant in Ohio), Maple Hill Solar facility (100 MW solar plant in Pennsylvania), Kilroot Power Station (2 x 330 MW natural gas-fired plant in Northern Ireland), and three 65 MW flexible generation power plants in Dublin, Ireland[83][85][223][225] - The project backlog of TRC (industrial fabrication and field services) increased by over 100% to approximately $97 million, focusing on larger industrial field service projects[85][225] - A 625 MW power plant project in Harrison County, West Virginia, was removed from backlog due to a lack of meaningful development milestones[83][223] Market Outlook The market outlook for the power business is characterized by a continued shift from coal to natural gas and renewables, with natural gas projected to remain a primary source. However, environmental activism, regulatory uncertainty, and supply chain disruptions pose challenges, while hydrogen-burning capabilities and small modular nuclear reactors offer future opportunities. Overseas markets in Ireland and the U.K. also present significant growth opportunities for conventional and flexible generation - The U.S. electricity generation mix is shifting from coal (45% in 2010 to 22% in 2021) to natural gas (24% in 2010 to 38% in 2021) and renewables. EIA projects coal to decline to 11% by 2050, natural gas to increase to 34%, and renewables to exceed 42%[86][87][226][227] - Challenges include environmental activism, restrictive regulations, difficulty in obtaining project equity financing, supply chain disruptions, and grid congestion, which may delay or cancel new energy projects[86][88][125][226][228][265] - Opportunities exist in modern natural gas-fired power plants (especially with hydrogen-burning capabilities), small modular nuclear reactors, and carbon capture/removal technologies. Overseas markets in Ireland and the U.K. also show strong demand for conventional and flexible power generation to support renewable growth[88][90][91][92][228][230][231][232] Comparison of the Results of Operations for the Three Months Ended October 31, 2022 and 2021 Net income decreased by 37.4% to $7.8 million, or $0.56 per diluted share, for the three months ended October 31, 2022, compared to the prior year, primarily due to lower revenues in power industry services and increased SG&A expenses Revenues Consolidated revenues decreased by 5.3% YoY. Power industry services revenues declined due to projects passing peak levels, while industrial fabrication and field services and telecommunications infrastructure services saw increases Revenues by Segment (Three Months Ended October 31, Dollars in thousands) | Segment | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------- | :----- | :----- | :--------- | :--------- | | Power industry services | 90,682 | 99,560 | (8,878) | (8.9)% | | Industrial fabrication and field services | 22,137 | 21,402 | 735 | 3.4% | | Telecommunications infrastructure services | 5,056 | 3,489 | 1,567 | 44.9% | | Total Revenues | 117,875 | 124,451 | (6,576) | (5.3)% | - Power industry services revenues decreased due to the Guernsey Power Station and Equinix data center projects passing peak construction levels[96][236] - Telecommunications infrastructure services revenues increased significantly by 44.9%, partly due to the acquisition of Lee Telecom, Inc. in December 2021[99][239] Cost of Revenues Consolidated cost of revenues decreased by 2.7% in line with lower revenues. Gross profit percentage declined to 18.8% from 21.0% in the prior year - Consolidated cost of revenues decreased by 2.7% to $95.7 million for the three months ended October 31, 2022[100][240] - Consolidated gross profit percentage decreased to 18.8% from 21.0% in the prior year[100][240] Segment Gross Profit Percentages (Three Months Ended October 31) | Segment | 2022 | 2021 | | :--------------------------------- | :---- | :---- | | Power industry services | 19.8% | 23.1% | | Industrial fabrication and field services | 15.4% | 12.6% | | Telecommunications infrastructure services | 16.8% | 11.3% | Selling, General and Administrative Expenses SG&A expenses increased by 9.3% to $12.7 million, primarily due to costs associated with the retirement of the former CEO - Selling, general and administrative expenses increased by $1.1 million (9.3%) to $12.7 million, primarily due to costs associated with the retirement of the Company's former chief executive officer[101][241] Other Income, Net Other income, net, decreased to $0.8 million, primarily from increased interest income on money market accounts and CDs, partially offset by a prior-year COVID-19 relief grant - Other income, net, was $0.8 million, down from $1.1 million in the prior year, reflecting increased interest income from money market accounts and CDs, partially offset by a prior-year COVID-19 relief grant[102][242] Income Taxes Income tax expense decreased to $2.6 million, with an effective tax rate of 24.7%, reflecting an estimated annual effective rate of 23.8% due to state income taxes and permanent differences - Income tax expense was $2.6 million, representing an effective tax rate of 24.7% for the three months ended October 31, 2022[103][243] - The estimated annual effective income tax rate is 23.8%, differing from the statutory federal rate of 21% due to state income taxes and permanent differences[103][243] Comparison of the Results of Operations for the Nine Months Ended October 31, 2022 and 2021 Net income decreased by 46.0% to $19.5 million, or $1.36 per diluted share, for the nine months ended October 31, 2022, primarily due to lower revenues across power and industrial segments, increased SG&A, and an unfavorable tax adjustment Revenues Consolidated revenues decreased by 12.4% YoY. Power industry services and industrial fabrication and field services experienced declines, while telecommunications infrastructure services grew due to an acquisition Revenues by Segment (Nine Months Ended October 31, Dollars in thousands) | Segment | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------- | :----- | :----- | :--------- | :--------- | | Power industry services | 255,958 | 295,736 | (39,778) | (13.5)% | | Industrial fabrication and field services | 67,660 | 78,213 | (10,553) | (13.5)% | | Telecommunications infrastructure services | 12,644 | 9,851 | 2,793 | 28.4% | | Total Revenues | 336,262 | 383,800 | (47,538) | (12.4)% | - Power industry services revenues decreased as construction activities for the Guernsey Power Station project passed peak levels, partially offset by increases from the Maple Hill solar energy facility and several APC projects[107][247] - Telecommunications infrastructure services revenues increased by 28.4%, primarily due to the addition of revenues from Lee Telecom, Inc. (LTI) acquired in December 2021[109][249] Cost of Revenues Consolidated cost of revenues decreased by 11.9% in line with lower revenues. Gross profit percentage slightly declined to 19.7% from 20.2% in the prior year - Consolidated cost of revenues decreased by 11.9% to $269.9 million for the nine months ended October 31, 2022[110][250] - Consolidated gross profit percentage decreased to 19.7% from 20.2% in the prior year[110][250] Segment Gross Profit Percentages (Nine Months Ended October 31) | Segment | 2022 | 2021 | | :--------------------------------- | :---- | :---- | | Power industry services | 20.7% | 21.0% | | Industrial fabrication and field services | 15.8% | 17.5% | | Telecommunications infrastructure services | 21.1% | 17.8% | Selling, General and Administrative Expenses SG&A expenses increased by 7.6% to $34.2 million, driven by executive retirement costs, increased stock compensation, and professional fees - Selling, general and administrative expenses increased by $2.4 million (7.6%) to $34.2 million, primarily due to executive retirement costs, increased stock compensation expense, and professional fees[111][251] Other Income, Net Other income, net, increased to $1.9 million, primarily from solar fund investments and interest income, offsetting a prior-year R&D credit payment and solar fund loss - Other income, net, was $1.9 million, up from $1.6 million in the prior year, primarily due to the company's share of earnings from solar fund investments and interest income from money market accounts and CDs[112][252] - The prior year (2021) included a $0.7 million research and development credit payment from the U.K. government and a $0.4 million net loss from a solar fund investment[112][252] Income Taxes Income tax expense increased to $14.5 million, including a $6.2 million unfavorable adjustment from an IRS settlement. The effective tax rate (excluding adjustment) was 24.5% - Income tax expense was $14.5 million, including an unfavorable $6.2 million adjustment related to the settlement of research and development claims with the IRS[113][253] - Excluding the IRS settlement adjustment, the effective income tax rate for the nine months ended October 31, 2022, was 24.5%, compared to 23.8% in the prior year[113][253] Liquidity and Capital Resources as of October 31, 2022 Cash and cash equivalents decreased significantly by $214.4 million to $136.1 million, primarily due to cash used in operating, investing (short-term investments), and financing activities (stock repurchases and dividends). Net liquidity also decreased, but the company believes current resources are adequate for foreseeable business needs - Cash and cash equivalents decreased by $214.4 million to $136.1 million at October 31, 2022, from $350.5 million at January 31, 2022[114][254] - Net cash used in operating activities was $73.0 million for the nine months ended October 31, 2022, a significant shift from $41.7 million provided in the prior year[114][254] - Cash used in financing activities totaled $73.8 million, including $63.3 million for common stock repurchases and $10.6 million for cash dividends[115][255] - Net liquidity (working capital) decreased by $53.8 million to $230.4 million at October 31, 2022[115][255] - The company believes its cash on hand, cash equivalents, short-term investments, and future operations will be adequate to meet general business needs, but significant future acquisitions may require additional financing[116][256] Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") EBITDA decreased for both the three and nine months ended October 31, 2022, reflecting the decline in net income. EBITDA is presented as a non-GAAP measure to assess operating performance EBITDA (Dollars in thousands) | Period | 2022 | 2021 | | :---------------------- | :----- | :----- | | Three Months Ended Oct 31 | 11,261 | 16,708 | | Nine Months Ended Oct 31 | 36,882 | 50,497 | - EBITDA is a non-GAAP measure used to assess and compare operating performance by removing the impacts of capital structure, depreciation, amortization, and income taxes[119][259] Critical Accounting Policies The company's critical accounting policies involve subjective judgments and estimates, particularly for revenue recognition on long-term contracts, income tax reporting, business combinations, asset valuations, and legal matters. No material changes occurred in these policies during the quarter - Critical accounting policies include revenue recognition on long-term construction contracts, income tax reporting, business combinations, valuation of goodwill and other long-lived assets, and financial reporting for significant claims or legal matters[120][260] - No material changes in the application of critical accounting policies occurred during the three months ended October 31, 2022[120][260] Recently Issued Accounting Pronouncements There are no recently issued accounting pronouncements that the company considers material to its consolidated financial statements that have not yet been adopted - No recently issued accounting pronouncements are considered material to the consolidated financial statements that have not yet been adopted[122][262] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to interest rate risk on its investable cash and foreign currency translation risk due to overseas operations. Commodity price risks and supply chain disruptions also pose challenges to fixed-price contracts - The company had no outstanding borrowings under its $50.0 million revolving loan at October 31, 2022, but its investable cash (CDs and money market funds) had a weighted average annual interest rate of 2.57%[123][263] - The company is subject to foreign currency translation effects, particularly from the Euro's depreciation against the U.S. dollar, which has reduced reported cash, revenues, and backlog for APC[123][263] - Commodity price risks (steel, copper, concrete, fuel) impact fixed-price contracts, with mitigation strategies including securing firm quotes and early procurement of materials[125][265] - Global supply chain disruptions are impacting project owners' confidence in commencing new work, potentially affecting future revenue levels[125][265] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of October 31, 2022, providing reasonable assurance for timely and accurate reporting. No significant changes in internal controls over financial reporting occurred during the quarter - Management concluded that disclosure controls and procedures were effective as of October 31, 2022, providing reasonable assurance for timely and accurate reporting[126][266] - No significant changes in internal control over financial reporting occurred during the fiscal quarter ended October 31, 2022[126][266] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits ITEM 1. LEGAL PROCEEDINGS Management believes that no current legal claims or proceedings will have a material effect on the company's condensed consolidated financial statements - No current claims or legal proceedings are expected to have a material adverse effect on the condensed consolidated financial statements[127][267] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's Annual Report - No material changes to the risk factors disclosed in the company's Annual Report[128][268] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company increased its Share Repurchase Plan authorization to $100 million and repurchased 308,423 shares for $10.1 million during the three months ended October 31, 2022. Since November 2021, a total of 2,248,767 shares have been repurchased for an average price of $37.19 per share - The Share Repurchase Plan authorization was increased from $75 million to $100 million on September 8, 2022[129][269] Share Repurchases (Three Months Ended October 31, 2022, Dollars in thousands) | Period | Total Number of Shares Repurchased | Average Price per Share Paid | | :----------------- | :--------------------------------- | :--------------------------- | | August 1 - 31, 2022 | — | — | | September 1 - 30, 2022 | 164,200 | $32.70 | | October 1 - 31, 2022 | 144,223 | $32.68 | | Total | 308,423 | $32.69 | - Since November 2021, the company has repurchased 2,248,767 shares of common stock at an average price of $37.19 per share[131][271] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported - No defaults upon senior securities[132][272] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - This item is not applicable[132][272] ITEM 5. OTHER INFORMATION Key executive leadership changes occurred in August 2022, with David H. Watson promoted to CEO, Rainer H. Bosselmann retiring as CEO but remaining on the board, William F. Leimkuhler appointed Chairman, and Richard H. Deily promoted to CFO - David H. Watson was promoted to President and Chief Executive Officer, effective August 16, 2022[133][273] - Rainer H. Bosselmann retired as CEO and Chairman but continues to serve as a board member, with a retirement agreement for $225,000 per annum for three years[133][273] - William F. Leimkuhler was appointed Chairman of the Board, and Richard H. Deily was promoted to Chief Financial Officer, both effective August 16, 2022[133][273] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including XBRL interactive data files and employment/retirement agreements - Exhibits include XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Label Linkbase, Presentation Linkbase, and Definition Document[135][275] - Key agreements referenced include the Retirement Agreement for Rainer H. Bosselmann and Employment Agreements for David H. Watson and Richard H. Deily[137][277] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy of the report Signatories The report is signed by David H. Watson, President and Chief Executive Officer, and Richard H. Deily, Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary, on December 7, 2022 - The report was signed by David H. Watson, President and Chief Executive Officer, and Richard H. Deily, Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary[139][279] - Date of signing: December 7, 2022[139][279]