# ARGAN INC (AGX) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from ARGAN INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/100591/000155837022005383/agx-20220131x10k.htm Accession: 0001558370-22-005383 Filing date: 2022-04-13 Report date: 2022-01-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/AGX/ All MD&A years: /company/AGX/mda/ Next year: /company/AGX/mda/fy2023/ (FY 2023) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of January 31, 2022, and the results of their operations for Fiscal 2022 and Fiscal 2021, and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in Item 8 of this 2022 Annual Report. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended January 31, 2021, that was filed with the SEC on April 14, 2021, for a discussion of financial trends, variance drivers and other significant matters for Fiscal 2021 as compared to Fiscal 2020. Cautionary Statement Regarding Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this 2022 Annual Report that may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. Our forward-looking statements, including those relating to the potential effects of the COVID-19 pandemic on our business, financial position and results of operations, are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for existing operations and do not include the potential impact of any future acquisitions. - 32 - Table of Contents Our forward-looking statements, by their nature, involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in Item 1A of this 2022 Annual Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Business Description Argan is a holding company that conducts operations through its wholly-owned subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we provide a full range of engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation market, including the renewable energy sector, for a wide range of customers, including independent power project owners, public utilities, equipment suppliers and global energy plant construction firms. GPS and APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants primarily located in the southeast region of the U.S. and that are based on its expertise in producing, delivering and installing fabricated steel components such as piping systems and pressure vessels. Through SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the Mid-Atlantic region of the U.S. We intend to make additional opportunistic acquisitions and/or investments by identifying companies with significant potential for profitable growth and realizable synergies with one or more of our existing businesses. However, we may have more than one industrial focus depending on the opportunity. We expect that acquired companies will be maintained in separate subsidiaries that will be operated in a manner that best provides cash flows for the Company and value for our stockholders. Overview Operating Results Consolidated revenues for Fiscal 2022 were $509.4 million, which represented an increase of $117.1 million, or 29.9%, from consolidated revenues of $392.2 million reported for Fiscal 2021. The revenues of the power industry services segment increased by $78.7 million to $398.1 million for Fiscal 2022 from $319.4 million reported for Fiscal 2021. The revenues of this reportable segment of our business represented 78.2% of consolidated revenues for Fiscal 2022. For Fiscal 2021, the percentage share of consolidated revenues represented by this reportable segment was 81.4%. The industrial services business of TRC reported revenues of $97.9 million for Fiscal 2022. This amount represented an increase of $32.6 million, or 49.9%, from revenues of $65.3 million reported by TRC for Fiscal 2021. Revenues provided by this reportable business segment represented 19.2% and 16.6% of corresponding consolidated revenues for Fiscal 2022 and Fiscal 2021, respectively. The telecommunications infrastructure services business increased its revenues to $13.4 million for Fiscal 2022 from revenues of $7.6 million for Fiscal 2021, representing an increase of 76.4%. Revenues provided by this reportable segment represented 2.6% and 1.9% of corresponding consolidated revenues for Fiscal 2022 and Fiscal 2021, respectively. Consolidated gross profit improved by $37.6 million, or 60.5%, to $99.7 million for Fiscal 2022, or 19.6% of the corresponding consolidated revenues. The amount of consolidated gross profit reported for Fiscal 2021 was $62.1 million, or 15.8% of the corresponding consolidated revenues. The year-over-year improvement reflected primarily the favorable impacts of the higher consolidated revenues and favorable gross profit contributions from all three reportable business segments. Selling, general and administrative expenses for Fiscal 2022 and Fiscal 2021 were $47.3 million, or 9.3% of corresponding consolidated revenues, and $39.0 million, or 10.0% of corresponding consolidated revenues, respectively. Additionally, due to the unsuccessful project development efforts by our VIE, we recorded an impairment loss related to the capitalized project development costs of this project in the amount of $7.9 million during Fiscal 2022, of which $2.5 million was attributed to the non-controlling interest. - 33 - Table of Contents Due primarily to the consolidated pre-tax book income reported for Fiscal 2022 in the amount of $47.1 million, we reported income tax expense in the amount of $11.4 million for the year. For Fiscal 2021, we reported consolidated pre-tax book income of $24.9 million and recorded income tax expense in the amount of $1.1 million, which amount is net of a $4.4 million net operating loss (“NOL”) carryback benefit. For Fiscal 2022, our improved overall operating performance resulted in net income attributable to our stockholders in the amount of $38.2 million, or $2.40 per diluted share. For Fiscal 2021, we reported net income attributable to our stockholders in the amount of $23.9 million, or $1.51 per diluted share. The primary drivers of our improved operating performance for Fiscal 2022 were the increased revenues and steady gross margin contribution associated with the construction of the Guernsey Power Station, the new revenues and gross profit contributions of the solar facility EPC services project at Maple Hill, and the strong results of TRC and APC which both reported increased revenues and gross profit amounts for Fiscal 2022. Engineering, Procurement and Construction Service Contracts At January 31, 2022, our consolidated project backlog amount of $0.7 billion consisted substantially of the projects of the power industry services reporting segment. The comparable backlog amount as of January 31, 2021 was $0.8 billion. Our reported amount of project backlog at a point in time represents the total value of projects awarded to us that we consider to be firm as of that date less the amounts of revenues recognized to date on the corresponding projects (project backlog is larger than the value of remaining unsatisfied performance obligations, or RUPO, on active contracts; see Note 4 to the accompanying consolidated financial statements). Typically, we include the total value of EPC services and other major construction contracts in project backlog when we receive a corresponding notice to proceed from the project owner. However, we may include the value of an EPC services contract prior to the receipt of a notice to proceed if we believe that it is probable that the project will commence within a reasonable timeframe, among other factors. Projects that are awarded to us may remain included in our backlog for extended periods of time as customers experience project delays. However, cancellations or reductions may occur that would reduce project backlog and that could adversely affect our expected future revenues. A meaningful amount of the project backlog amount at January 31, 2022 was represented by the Guernsey Power Station, the largest single-phase, gas-fired, power plant construction project in the U.S. Substantial completion of this project is currently scheduled to occur during the second half of Fiscal 2023. Despite our commitment to the construction of state-of-the-art, natural gas-fired power plants as important elements of our country’s electricity-generation mix in the future, we have been directing certain business development efforts to winning projects for the erection of utility-scale wind farms and solar fields and for the construction of hydrogen-based and other renewable energy projects. We have successfully completed these types of projects in the past and we have renewed efforts to obtain new work in the renewable power sector that will complement our natural gas-fired EPC services projects going forward. These efforts led to our announcement in May 2021 that GPS entered into an EPC services contract with CPV Maple Hill Solar, LLC, an affiliate of CPV, to construct the Maple Hill Solar facility, which we believe will be among the largest solar-powered energy plants in Pennsylvania. Project activities were begun by GPS immediately. Project completion is currently scheduled to occur during the second half of Fiscal 2023. The unique Maple Hill Solar project, which is located in Cambria County, will be constructed using over 235,000 photovoltaic modules to generate approximately 100 MW of electrical power. The business development efforts conducted by our APC operations have resulted in a significant increase in the project backlog of this business. The most significant award occurred in October 2021 as APC entered into an engineering and construction services contract with EPUKI London, UK, to construct a 2 x 330 MW natural gas-fired power plant in Carrickfergus that is near Belfast, Northern Ireland, and that will replace coal-fired units at the site. The facility is being developed by EPNI Energy Limited. A notice to proceed was received and project activities have commenced. The overall completion of this project is expected to occur in the latter half of Fiscal 2024. For Fiscal 2022, meaningful amounts of revenues and gross profit were contributed by the U.K. operations of APC that have completed the installation of a synchronized condenser for the combined cycle, gas-fired, power plant located at the Isle of Grain site in the Kent region of the U.K. - 34 - Table of Contents The U.K. operating unit of APC also completed its subcontracted construction efforts consisting primarily of the mechanical installation of the boiler for TeesREP. With a power rating of 299 MW, TeesREP is one of the largest bio-mass-fueled power stations in the world that will burn primarily wood pellets in order to generate electricity sufficient to power 600,000 homes. The management of APC also grew its Irish operations during Fiscal 2022. For example, APC is performing the design and build of a dedicated power plant within a major data center. The size and configuration of the facility, consisting of up to nine (9) gas-fired turbines, is a first-of-a-kind facility within the Irish data center market. They are also completing construction activities for a major computer chip manufacturer. Both of these Irish projects are located near Dublin. As announced in Fiscal 2019, GPS entered into an EPC services contract to construct the Chickahominy Power Station, a 1,740 MW natural gas-fired power plant, in Charles City County, Virginia. We did not include the value of this contract in our project backlog. We provided financing through notes receivable from the consolidated VIE that was established by the project owner and that was dedicated to the development efforts. We also provided technical support to the project. Significant development milestones were achieved by the project owner. However, a planned gas pipeline expansion that the project owner believed would supply natural gas to the power plant was rejected by Virginia’s State Corporation Commission during Fiscal 2022, which led to cancellation by PJM of its interconnection service agreement with the project based on alleged failures of the project to meet required milestones. In February 2022, PJM received notice from FERC accepting PJM’s termination of the service agreement which effectively removed the Chickahominy Power Station from PJM’s planning queue. In summary, the project owner was unable to secure an alternative fuel-supply for the plant and the project lost its interconnection service commitment with PJM. Therefore, the project owner was unable to obtain the necessary equity financing for the project and we ceased providing project development funding. We concluded that the completion of the development of this project is significantly jeopardized and that it is doubtful that construction of this power plant will occur. Accordingly, consistent with the disclosure included in the Current Report on Form 8-K that we filed on January 24, 2022, we recorded an impairment loss during the fourth quarter of Fiscal 2022 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 issued a public statement that the project was cancelled. Market Outlook The overall growth of our power business has been substantially based on the number of combined cycle gas-fired power plants built by us, as many coal-fired plants have been shut down. In 2010, coal-fired power plants accounted for about 45% of total electricity generation. For 2021, coal accounted for approximately 22% of net electricity generation. On the other hand, natural-gas fired power plants provided approximately 38% of the electricity generated by utility-scale power plants in the U.S. in 2021, representing an increase of 60% from the amount of electrical power generated by natural gas-fired power plants in 2010, which provided approximately 24% of net electricity generation for 2010. Undoubtedly, the long-term historic decline in the use of coal as a power source in the U.S. was caused, to a significant extent, by the plentiful supply of domestic and generally inexpensive natural gas which made it the fuel of choice for power plant developers over this period. In the reference case of its Annual Energy Outlook 2022, the EIA projects average increases to utility-scale electricity generation in the U.S. of slightly less than 1% per year from 2022 through 2050. The shift from coal to natural gas as a power plant energy source in the U.S. is expected to continue as the EIA projects that coal-fired generation will decline by 45% from 2022 through 2050, and will represent only 11% of the net electricity generation mix by the end of this period. The net electricity generation from natural gas-fired power plants is projected to increase by 17% in the U.S. by 2050. The pace of the historic increase in the preference for natural gas as an electricity generating fuel source was energized, in part, by environmental activism and restrictive regulations targeting coal-fired power plants. Now, the environmentalist opposition against coal-fired power generation has expanded meaningfully to target all fossil fuel energy projects, including power plants and pipelines, and has evolved into powerful support for renewable energy sources. Protests against fossil-fuel related energy projects continue to garner media attention and stir public skepticism about new projects resulting in delays due to onsite protest demonstrations, indecision by local officials and lawsuits. During Fiscal 2021, a natural gas-fired power plant that we had been awarded the EPC services contract to build, the Brooke County Power project, was canceled by its developer. Although changing market conditions were cited as important factors in the - 35 - Table of Contents cancellation decision and despite strong local support for the project, the opposition by the governor of West Virginia was likely a factor in the declining enthusiasm for the project. Further, during Fiscal 2021, Dominion Energy and Duke Energy announced the abandonment of plans to complete the major Atlantic Coast Pipeline, ending a seven-year effort to build a 600-mile natural gas pipeline between West Virginia and eastern North Carolina, citing that the economic viability of the project was threatened by continuing delays and increasing cost uncertainty after a federal judge issued a ruling preventing the use of an accelerated construction permitting process. Most recently, as disclosed above, the developer cancelled the Chickahominy power station project, citing opposition from outside interests and onerous regulations largely advanced by the renewable energy movement. In the New England and Mid-Atlantic regions of the U.S., power plant operators are challenged by the requirements of the Regional Greenhouse Gas Initiative, or “RGGI,” which is a cooperative effort by states in these regions to cap and reduce power sector carbon dioxide emissions. In addition, various cities, counties and states have adopted clean energy and carbon-free goals or objectives with achievement expected by a certain future date, typically 10 to 30 years out. These aspirational goals may increase the risk of a new power plant becoming a stranded asset long before the end of its otherwise useful economic life, which is a risk that potential equity capital providers may be unwilling to take. The difficulty in obtaining project equity financing and the other factors identified above, may be adversely impacting the planning and initial phases for the construction of new natural gas-fired power plants. Perhaps the most significant uncertainty relates to the policies of the current U.S. Presidential administration. President Biden proposes to make the electricity production in the U.S. carbon free by 2035 and to put the country on the path to achieve net zero carbon emissions by 2050. As soon as he was elected, Mr. Biden caused the U.S. to re-join the Paris Climate Agreement and he cancelled the permit allowing the Keystone XL Pipeline to cross the border from Canada into the U.S. In addition, Mr. Biden ordered a pause on the U.S. government entering into new oil and natural gas leases on public lands or offshore waters to the extent possible, the launch of a rigorous review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters, and the identification of steps that can be taken to double renewable energy production from offshore wind by 2030. These policy stances have continued during the war in the Ukraine and the current surge in oil prices as the administration makes appeals to other countries to increase oil production.  Accordingly, the net amount of electricity generation in the U.S. provided by utility-scale wind and solar photovoltaic facilities continues to rise. Over the last two years, the net generation has increased by almost 35%. Together, such power facilities provided approximately 9%, 11% and 12% of the net amount of electricity generated by utility-scale power facilities in 2019, 2020 and 2021, respectively. In EIA’s 2022 reference case, net electricity generation from all renewable power sources is expected to increase by more than 161% and represent over 42% of such generation by 2050. Impetus for this growth is provided by both public concerns about climate change and U.S. government subsidies. Environmental activism has resulted in the passage of laws and the establishment of regulations that discourage new fossil-fuel burning power plants and provide income tax advantages that promote the growth of wind and solar power. Declines in the amount of renewable power plant component and power storage costs and an increase in the scale of energy storage capacity (i.e., battery farms) have also occurred. Over the next few years, EIA projects that new wind and photovoltaic solar capacity will continue to be added to the utility-scale power fleet in the U.S. at a brisk pace substantially attributable to declining equipment costs and the availability of valuable tax credits. As these credits decline and then expire early in the next decade as currently scheduled, the wind capacity additions are expected to slow. Although the special tax incentives related to solar power also expire, the continuing decline in the cost of solar power equipment is predicted to sustain the growth of photovoltaic solar power generation facilities. Nonetheless, we believe that relatively low natural gas prices will persist over the long-term. Together with the lower operating costs of natural gas-fired power plants, the higher energy generating efficiencies of modern gas turbines, and the requirements for grid resiliency should sustain the demand for modern combined cycle and simple cycle gas-fired power plants in the future. Natural gas is relatively clean burning, cost-effective and reliable. We believe that its benefits as a source of power are compelling, especially as a complement to the growing deployment of wind and solar powered energy sources. We continue to believe that the future long-term prospects for natural gas-fired power plant construction remain generally favorable as natural gas continues to be the primary source for power generation in our country. - 36 - Table of Contents New gas-fired power plants incorporate major advances in gas-fired turbine technologies that have provided increased power plant efficiencies while providing the quick starting capabilities and the reliability that are necessary to balance the inherent intermittencies of wind and solar power plants. It has been reported that renewables currently provide approximately 36% of electricity generation in California. Yet, the increasing dependence on intermittent renewable energy sources, especially solar, is making it harder to ensure reliable power in California as millions of its residents lost power during a late summer heat wave in 2020. With hopes of preventing future rolling blackouts in California, regulators there approved the acquisition of five emergency natural gas-fueled electricity generators with an aggregate power output of approximately 150 MW. Analysis of the causes of last winter’s widespread power outages in Texas during a frigid stretch of weather is complex. The residents of Texas suffered as the severe cold froze wind turbines and the lack of sun diminished the power contributions of solar powered facilities. However, natural gas-fired power plants in Texas were forced offline as well primarily due to frozen well-site equipment and the decisions by regulators to prioritize natural gas for residential use, which caused interruptions to the supply of natural gas to the plants. However, in both states, the significant amount of renewable power capacity failed to rise to the occasion. A diversity lesson from both power crises may be that fossil-fuel electricity generation sources remain critical elements of the power generation mix in order to assure grid reliability and the avoidance of power outages. Additionally, solar and wind energy plant developers continue to confront the problems caused by grid congestion, often unsuccessfully. Many of these projects have been canceled because renewable plants need to be sited where the resources are optimal, often in remote locations where the transmission systems are not robust. The costs associated with the necessary grid upgrades may be prohibitive. U.S. offshore wind projects progress inconsistently, facing challenges in the areas of environmental and fishery impacts, grid connection and capability and federal permitting processes. Further, projects are confronted by shipping regulations in the U.S. that may limit the ability of developers to replicate successful European construction and installation models. Proponents of clean energy also face political challenges. Voters in the state of Maine were energized by local residents seeking to preserve pristine woodlands and rejected a project that would transmit hydropower from Canada into New England. Renewed interest in nuclear power could result in the construction of new nuclear powered, carbon-free, electricity generation stations in the U.S. that would use smaller and more economical nuclear reactors. The deployment of small modular reactors could mean lower construction and electricity costs through the use of simpler power plant designs, standardized components and passive safety measures. Such plants could be built in less time than larger plants, utilize less space and represent a viable choice for reliable power to offset the intermittencies of renewable power sources. The increase by the U.S. in its use of nuclear power for electricity generation could have unfavorable effects on the demand for new natural gas-fired and additional renewable energy facilities in the future.   Major advances in the safe combination of horizontal drilling techniques and hydraulic fracturing led to the boom in natural gas supplies which have been available generally at consistently low prices. The abundant availability of cheap, less carbon-intense and higher efficiency natural gas in the U.S. should continue to be a significant factor in the economic assessment of future power generation capacity additions although the pace of new opportunities emerging may be restrained and the starts of awarded EPC projects may be delayed. We believe that it is also important to note that the plans for certain natural gas-fired power plant projects include the integration of hydrogen-burning capabilities. While the plants will initially burn natural gas alone, it is planned by the respective project owners that the plants will eventually burn a mixture of natural gas and green hydrogen, thereby establishing power-generation flexibility for these plants. We believe this is a winning combination that provides inexpensive and efficient power, enhances grid reliability and addresses the clean-air concerns of environmentalists. The building of state-of-the-art power plants with flex-fuel capability replaces coal-fired power plants in the short term with relatively clean gas-fired electricity generation. Further, such additions to the power generation fleet provide the potential for the plants to burn 100% green hydrogen gas, which would provide both base load power and long duration backup power, when the sun is not shining and the wind is not blowing, for extended periods of time and without certain harmful air emissions. The foregoing discussion in our “Market Outlook” does focus on the state of the domestic power market as the EPC services business of GPS provides the predominant amount of our revenues. However, we realize that overseas power markets may provide important new power construction opportunities for us in the future as the management of APC has growing enthusiasm for opportunities in the electricity generation markets across Ireland and the U.K. While both of these - 37 - Table of Contents countries are committed to the increase in energy consumption sourced from wind and the sun on the pathway to net zero emissions, there is a recognition that these sources of electrical power are inherently variable. Other technologies will be required to support these power sources and to provide electricity when power demands exceed the amount of electricity supplied by these renewables. The existence of the necessary power reserve will require conventional generation sources, typically natural gas-fired power plants. APC was awarded a significant contract late in Fiscal 2022 to build a clean burning natural gas-fired power plant in Northern Ireland so that existing coal-fired power sources there can be shut-down. The U.K. usually holds auctions for power capacity about four years in advance of the delivery date and another auction for a smaller amount of capacity around a year before delivery. Evidence of the shifting power generation priorities in the U.K. are reflected in the results for Britain's auction to ensure enough electricity capacity for 2022/23 that were released in February 2022. Capacity cleared at a record high price. A total of nearly 5 gigawatts of capacity was procured in this auction, with nearly 70% of the power associated with gas-fired plants, a provisional auction document showed. The Irish government recently issued a policy statement on the security of the electricity supply in Ireland which confirms the requirement for the development of new support technologies to deliver on its commitment to have 80% of the country’s electricity generated from renewables by 2030. The report emphasizes that this will require a combination of conventional generation (typically powered by natural gas), interconnection to other jurisdictions, demand flexibility and other technologies such as energy storage (i.e., batteries) and generation from renewable gases (i.e., biomethane and/or hydrogen produced from renewable sources). The Irish government has approved that the development of new conventional generation (including gas-fired and gasoil distillate-fired generation) is a national priority and should be permitted and supported in order to ensure the security of electricity supply while supporting the growth of renewable electricity generation. Since January 31, 2022, the Irish operations of APC have received limited notices to proceed with early activities related to the construction of two new gas-fired power plant facilities near Dublin. Further, the Irish government has recognized that the successful development of data centers in the country is a key aspect in promoting Ireland as a digital economy hot-spot in Europe. In the absence of data centers, Ireland would be experiencing much more modest electricity demand growth, consistent with population growth and the general development of industrial demand. However, the stewards of the electricity supply in Ireland recognize that the large increase in electricity demand presented by the growth of the data center industry represents an evolving, significant risk to the security of the supply. Accordingly, guidelines have been published recently with the intent to protect both electricity consumers and the security of supply while continuing to allow data centers to connect to the electricity system. Assessment criteria for applications of data centers to obtain grid connections include, among other items, the ability of data center applicants to bring onsite dispatchable power generation (and/or storage) equivalent to or greater than their demand in order to support the security of supply. It is expected that any dispatchable on-site generation that uses fossil fuel sources developed by data center operators will use natural gas as the fuel source; again, natural gas is considered to be a transitional fuel in Ireland’s efforts to meet its climate action plan targets. As identified above, earlier this year, APC was awarded a project to install natural gas-fired power generation for a major data center in the Dublin area. In a previous section of this 2022 Annual Report, we identified that there are risks to our businesses, particularly APC, related to the war in Ukraine. However, our APC business may benefit from an increased focus by European Union countries on the import of liquid natural gas as an alternative to piped supplies from Russia. The construction of new conversion facilities, pipelines and power plants could provide new construction opportunities for us. APC is actively pursuing new business opportunities in both the renewable and support sectors with its existing and new clients. The governments of Ireland and the U.K. have already made funds available to develop and support specific projects. The engineering and construction teams of APC are engaged in continuous discussions with particular stakeholders in certain of these projects and they are confident that APC will be part of their eventual execution. Over the past few years, GPS has provided top management guidance and project management expertise to APC as it completed its subcontract efforts for the TeesREP power plant and won the award of the project to build the new gas-fired power plant in Northern Ireland. APC has provided project management manpower to GPS on several of its EPC services contracts. These recent experiences have demonstrated that the two companies can combine resources effectively. Considerations of the manner in which GPS and APC can work together in the future are becoming more formal in view of emerging new business opportunities in the U.K. and Ireland, the strength of the reputation of GPS for successfully completing large gas-fired power plant projects in the U.S. and the growing recognition in the power community in the British and Irish islands that APC is committed to and capable of tackling larger and more complex power projects. - 38 - Table of Contents We are committed to the rational pursuit of new construction projects, including those with overseas locations and unique deployments of power-generation turbines, and the future growth of our revenues. This may result in additional decisions to make investments in the development and/or ownership of new projects. Because we believe in the strength of our balance sheet, we are willing to consider certain opportunities that include reasonable and manageable risks in order to assure the award of the related engineering, procurement, construction or equipment installation services contracts to us. The competitive landscape for our core EPC services business related to natural gas-fired power plants in the U.S. has changed significantly over the last five years. While the domestic market remains dynamic, we are moving into an era where there may be fewer competitors for new gas-fired power plant EPC services project opportunities. Several major competitors have exited the market for a variety of reasons or have been acquired. Others have announced intentions to avoid entering into fixed-price contracts. Nonetheless, the competition for new utility-scale gas-fired power plant construction opportunities is fierce and still includes multiple global firms.   We believe that the Company has a reputation as an accomplished, dependable and cost-effective provider of EPC and other large project construction contracting services. With the proven ability to deliver completed power facilities, particularly combined cycle, natural gas-fired power plants, we are focused on expanding our position in the power markets of the U.S., Ireland and the U.K. where we expect investments to be made based on forecasts of electricity demand covering decades into the future. We believe that our expectations are valid and that our plans for the future continue to be based on reasonable assumptions. Comparison of the Results of Operations for the Years Ended January 31, 2022 and 2021 We reported net income attributable to our stockholders of $38.2 million, or $2.40 per share, for Fiscal 2022. For the prior year, we reported net income attributable to our stockholders of $23.9 million, or $1.51 per diluted share. The following schedule compares our operating results for Fiscal 2022 and Fiscal 2021 (dollars in thousands). [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended January 31,","\u200b"],["\u200b","\u200b","2022","","2021","","$ Change","","% Change","\u200b"],["REVENUES","\u200b","\u200b","","","\u200b","","","\u200b","","","","\u200b"],["Power industry services","\u200b","$","398,089","\u200b","$","319,353","\u200b","$","78,736","","24.7","%"],["Industrial fabrication and field services","\u200b","","97,890","\u200b","","65,263","\u200b","","32,627","","50.0","\u200b"],["Telecommunications infrastructure services","\u200b","","13,391","\u200b","","7,590","\u200b","","5,801","","76.4","\u200b"],["Revenues","\u200b","","509,370","\u200b","","392,206","\u200b","","117,164","","29.9","\u200b"],["COST OF REVENUES","\u200b","","","\u200b","","","\u200b","","","","","\u200b"],["Power industry services","\u200b","","317,130","\u200b","","266,993","\u200b","","50,137","","18.8","\u200b"],["Industrial fabrication and field services","\u200b","","81,391","\u200b","","57,257","\u200b","","24,134","","42.2","\u200b"],["Telecommunications infrastructure services","\u200b","","11,117","\u200b","","5,889","\u200b","","5,228","","88.8","\u200b"],["Cost of revenues","\u200b","","409,638","\u200b","","330,139","\u200b","","79,499","","24.1","\u200b"],["GROSS PROFIT","\u200b","","99,732","\u200b","","62,067","\u200b","","37,665","","60.7","\u200b"],["Selling, general and administrative expenses","\u200b","","47,321","\u200b","","39,041","\u200b","","8,280","","21.2","\u200b"],["Impairment losses","\u200b","\u200b","7,901","\u200b","\u200b","\u2014","\u200b","\u200b","7,901","\u200b","100.0","\u200b"],["INCOME FROM OPERATIONS","\u200b","","44,510","\u200b","","23,026","\u200b","","21,484","","93.3","\u200b"],["Other income, net","\u200b","","2,552","\u200b","","1,859","\u200b","","693","","37.3","\u200b"],["INCOME BEFORE INCOME TAXES","\u200b","","47,062","\u200b","","24,885","\u200b","","22,177","","89.1","\u200b"],["Income tax expense","\u200b","","(11,356)","\u200b","","(1,074)","\u200b","","(10,282)","","(957.4)","\u200b"],["NET INCOME","\u200b","","35,706","\u200b","","23,811","\u200b","","11,895","","50.0","\u200b"],["Net loss attributable to non-controlling interests","\u200b","","(2,538)","\u200b","","(40)","\u200b","","(2,498)","","NM","\u200b"],["NET INCOME ATTRIBUTABLE TO","\u200b","","","\u200b","","","\u200b","","","","","\u200b"],["THE STOCKHOLDERS OF ARGAN, INC.","\u200b","$","38,244","\u200b","$","23,851","\u200b","$","14,393","","60.3","\u200b"]] [[/GREPCENT_TABLE]] NM – Not meaningful. - 39 - Table of Contents Revenues Power Industry Services The revenues of the power industry services business increased by 24.7%, or $78.7 million, to $398.1 million for Fiscal 2022 compared with revenues of $319.4 million for Fiscal 2021. The revenues of this business represented 78.2% of consolidated revenues for Fiscal 2022 and 81.4% of consolidated revenues for the prior year. The primary drivers for the strong performance by this reportable segment for Fiscal 2022 were increased revenues associated with the construction of the Guernsey Power Station and the new Maple Hill Solar energy facility, which together represented 66.7% of consolidated revenues. Last year, the revenues of this segment included primarily revenues associated with the construction of the Guernsey Power Station project and the TeesREP project, which together represented 76.1% of consolidated revenues for Fiscal 2021. Industrial Fabrication and Field Services The revenues of industrial fabrication and field services (representing the business of TRC) increased by $32.6 million, or 50.0%, to $97.9 million for Fiscal 2022, providing 19.2% of consolidated revenues for Fiscal 2022. Revenues of TRC for Fiscal 2021 represented approximately 16.6% of corresponding consolidated revenues. The improved current year business of TRC reflects increased project activity for several customers, primarily in field services, as they loosened COVID-19 work restrictions. Telecommunications Infrastructure Services The revenues of this business segment (representing the business of SMC) were $13.4 million for Fiscal 2022 compared with revenues of $7.6 million for Fiscal 2021, which reflected strong performance by both the inside-premises and outside-premises groups as certain customers in this segment also loosened COVID-19 work restrictions. Cost of Revenues Due primarily to the increase in consolidated revenues for Fiscal 2022 compared with revenues for Fiscal 2021, consolidated cost of revenues also increased. These costs were $409.6 million and $330.1 million for Fiscal 2022 and Fiscal 2021, respectively. For Fiscal 2022, we reported a consolidated gross profit of approximately $99.7 million, which represented a gross profit percentage of approximately 19.6% of corresponding consolidated revenues. The gross profit for the period reflected primarily the profit contributions of efficient construction activities related to the major projects of the power industry services reporting segment, the improved business of the industrial services segment and the revenues associated with the settlement of a legal matter. The gross profit percentages of corresponding revenues for the power industry services, industrial services and the telecommunications infrastructure segments for Fiscal 2022 were 20.3%, 16.9% and 17.0%, respectively. For Fiscal 2021, we reported a consolidated gross profit of approximately $62.1 million which represented a gross profit percentage of approximately 15.8% of corresponding consolidated revenues. The gross profit percentages of corresponding revenues for the power industry services, industrial services and the telecommunications infrastructure segments for Fiscal 2021 were 16.4%, 12.3% and 22.4%, respectively. We believe that the gross margin percentages for Fiscal 2021 are indicative of the percentages that should be expected for Fiscal 2023. Selling, General and Administrative Expenses These costs were $47.3 million and $39.0 million for Fiscal 2022 and Fiscal 2021, respectively, representing 9.3% and 10.0% of consolidated revenues for the corresponding periods, respectively. The 21.2% increase in these expenses between years occurred within each of our reporting segments primarily due to increased personnel and associated costs, including cash incentive and stock compensation expenses, and business development costs. The costs for Fiscal 2022 also included the provision for credit losses in the amount of $2.4 million. The amount of the provision for credit losses for Fiscal 2021 was insignificant. - 40 - Table of Contents Impairment Loss During the fourth quarter of Fiscal 2022, we recorded an impairment loss related to the capitalized project development costs of the Chickahominy Power Station project in the amount of $7.9 million as discussed above, of which $2.5 million was attributed to the non-controlling interest. We did not record any goodwill or other intangible asset impairment losses during Fiscal 2022. Other Income For Fiscal 2022 and Fiscal 2021, the net amounts of other income were $2.6 million and $1.9 million, respectively, which represented an increase of 37.3% between the comparable periods. During Fiscal 2022, APC received research and development grant payments from the government of the U.K. related to certain qualifying works performed during Fiscal 2019 in the total amount of approximately $1.7 million. In addition, APC received COVID-19 relief from the Irish government, which amounted to approximately $1.1 million. This line item also included our share of the net loss reported by the solar fund investment for Fiscal 2022 in the amount of $0.5 million that is discussed in Note 13 to the accompanying consolidated financial statements. Typically, the amounts reported on this line include primarily income earned on funds maintained in money market accounts and interest income earned on bank certificates of deposit. Adverse economic reactions to the uncertainties of the COVID-19 pandemic commenced during the middle of Fiscal 2021, including sharp reductions in investment interest rates. Other income from earnings on our temporary investments of excess cash for Fiscal 2022 was insignificant although the aggregate amount of invested funds increased between the periods. For Fiscal 2021, the net amount of other income of $1.9 million included primarily earnings on our temporary investments of excess cash before the pandemic. Income Taxes We recorded income tax expense for Fiscal 2022 in the net amount of approximately $11.4 million due to our reporting pre-tax income for financial reporting purposes in the amount of $47.1 million for the year. Our annual effective income tax rate for Fiscal 2022 was 24.1%. This tax rate differs from the statutory federal tax rate of 21% due primarily to the effects of state income taxes and nondeductible executive compensation. For Fiscal 2021, we recorded income tax expense of $1.1 million, which amount was reduced significantly by the NOL carryback benefit in the approximate amount of $4.4 million that is also described in Note 13 to the accompanying consolidated financial statements. Liquidity and Capital Resources as of January 31, 2022 Our working capital increased by $14.2 million to $284.3 million as of January 31, 2022 from $270.1 million as of January 31, 2021, due primarily to the net income earned during Fiscal 2022 attributable to the stockholders of Argan, offset partially by the effects of cash payments for dividends and share repurchases. However, our balance of cash and cash equivalents declined by a net amount of $16.2 million during Fiscal 2022 as the net change in our operating assets and liabilities represented a use of cash of approximately $28.9 million for the year.   The net amount of cash provided by operating activities for Fiscal 2022 was $28.4 million. Our net income for Fiscal 2022, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $57.3 million. The sources of cash from operations for Fiscal 2022 also included a decrease in the balance of contract assets of $21.7 million, primarily due to the settlement of a legal matter by GPS (see Note 11 of the accompanying consolidated financial statements). Reduction in the balances of contract liabilities and accounts payables and accrued expenses, in the amounts of $44.2 million and $5.7 million, respectively, represented uses of cash during Fiscal 2022. Non-operating activities used cash during Fiscal 2022, including $20.4 million used to repurchase shares of our common stock pursuant to our share repurchase program (see Item 5 in Part II of this Annual Report). Additionally, we used cash in the amount of $15.7 million for the payment of regular cash dividends. Our investment in solar energy projects used cash in the amount of $5.0 million and capital expenditures totaled $1.4 million during Fiscal 2022. Partially offsetting these uses of cash, we received cash proceeds related to the exercise of stock options during Fiscal 2022 in the amount of $1.4 million. As of January 31, 2022, there were no restrictions with respect to inter-company payments between GPS, TRC, APC, SMC and the holding company. - 41 - Table of Contents During Fiscal 2021, our balance of cash and cash equivalents increased by $199.3 million to $366.7 million while our working capital decreased by $7.6 million to $270.1 million as of January 31, 2021 from $277.7 million as of January 31, 2020 due primarily to the amount of regular and special cash dividends paid during the year. The net amount of cash provided by operating activities for Fiscal 2021 was $176.0 million. Our net income for Fiscal 2021, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $41.5 million. The sources of cash from operations for Fiscal 2021 also included a temporary increase in the balance of contract liabilities associated with the early phases of construction activities on projects of GPS and TRC in the amount of $99.4 million. A reduction in the balances of accounts receivable and contract assets, primarily at the TRC and APC operations, provided cash in the amounts of $8.5 million and $6.7 million, respectively. In addition, the combined level of accounts payable and accrued expenses increased by $31.4 million during Fiscal 2021, a source of cash for the year. Fiscal 2021 also reflected an entry to record the carryback of our NOL incurred for Fiscal 2020 to prior income tax years. The loss carryback should result in a refund of federal income taxes in the amount of $12.7 million. This tax refund receivable was included in the balance of other current assets as of January 31, 2021, which was the primary cause of the net increase in this balance of $11.5 million during Fiscal 2021, which represented a use of cash. Primary sources of cash for Fiscal 2021 were the net maturities of short-term investments, certificates of deposit issued by the Bank, in the amount of $70.0 million. Non-operating activities used cash during Fiscal 2021, including the payment of regular and special cash dividends in the total amount of $47.0 million. During Fiscal 2021, capital expenditures were reduced by approximately 76.1% to $1.7 million from a capital expenditures amount of $7.1 million for Fiscal 2020. We also used cash in the amount of $1.3 million during Fiscal 2021 to make an investment in a solar energy project. Partially offsetting these uses of cash, we received cash proceeds related to the exercise of stock options during Fiscal 2021 in the amount of $1.6 million. At January 31, 2022, most of our balance of cash and cash equivalents was invested in government and prime money market funds with most of their total assets invested in cash, U.S. Treasury obligations and repurchase agreements secured by U.S. Treasury obligations. The major portion of our domestic operating bank account balances are maintained with the Bank. We do maintain certain Euro-based bank accounts in the Ireland and certain pound sterling-based bank accounts in the U.K. in support of the operations of APC. The original term of our Amended and Restated Replacement Credit Agreement with the Bank was scheduled to expire on May 31, 2021. During April 2021, the Company and the Bank agreed to an amendment to the Credit Agreement which extended the expiration date of the Credit Agreement to May 31, 2024 and reduced the borrowing rate. The Credit Agreement, as amended, includes the following features, among others: a lending commitment of $50.0 million including a revolving loan with interest at the 30-day LIBOR plus 1.6% (reduced from 2.0%), and an accordion feature which allows for an additional commitment amount of $10.0 million, subject to certain conditions. We may also use the borrowing ability to cover other credit instruments issued by the Bank for our use in the ordinary course of business as defined by the Bank. At January 31, 2022, we had no outstanding borrowings, however the Bank has issued letters of credit in the total outstanding amount of $21.5 million in support of the activities of APC under new customer contracts. In connection with the project development activities of the VIE, the Bank issued a letter of credit, outside the scope of the Credit Agreement, in the approximate amount of $3.4 million for which we have provided cash collateral. 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. We have pledged the majority of our assets to secure the financing arrangements. The Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Credit Agreement, as amended, requires that we comply with certain financial covenants at our fiscal year-end and at each fiscal quarter-end, and includes other terms, covenants and events of default that are customary for a credit facility of its size and nature, including a requirement to achieve positive adjusted earnings before interest, taxes, depreciation and amortization, as defined, over each rolling twelve-month measurement period. At January 31, 2022 and 2021, we were compliant with the covenants of the Credit Agreement, as amended. - 42 - Table of Contents In the normal course of business and for certain major projects, we may be required to obtain surety or performance bonding, to provide parent company guarantees, or to cause the issuance of letters of credit (or some combination thereof) in order to provide performance assurances to clients on behalf of one of our subsidiaries. If our services under a guaranteed project would not be completed or would be determined to have resulted in a material defect or other material deficiency, then we could be responsible for monetary damages or other legal remedies. As is typically required by any surety bond, we would be obligated to reimburse the issuer of any surety bond issued on behalf of a subsidiary for any cash payments made thereunder. The commitments under performance bonds generally end concurrently with the expiration of the related contractual obligation. Not all of our projects require bonding. As of January 31, 2022, the value of the Company’s unsatisfied bonded performance obligations, covering all of its subsidiaries, was approximately $235.1 million. In addition, as of January 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; the majority of these bonds expire at various dates during Fiscal 2023. We have also provided a financial guarantee on behalf of GPS to an original equipment manufacturer in the amount of $3.6 million to support project developmental efforts. During Fiscal 2022, the Company established a liability for an estimated loss related to this guarantee. When sufficient information about claims related to our performance on projects would be available and monetary damages or other costs or losses would be determined to be probable, we would record such losses. As our subsidiaries are wholly-owned, any actual liability related to contract performance is ordinarily reflected in the financial statement account balances determined pursuant to the Company’s accounting for contracts with customers. Any amounts that we may be required to pay in excess of the estimated costs to complete contracts in progress as of January 31, 2022 are not estimable. Returns on money market instruments and certificates of deposit are currently minimal due to market conditions. With the desire to increase the amount of return on its available cash, the Company invested approximately $5.0 million during Fiscal 2022, in a limited liability company that makes equity investments in solar energy projects that are eligible to receive energy tax credits (see Note 13 to the accompanying consolidated financial statements). During Fiscal 2021, we made a similar investment in the amount of $1.3 million. The Fiscal 2022 investment is expected to provide an overall return of approximately 20% over the six-year expected life of our investment. It is likely that we will evaluate opportunities to make other solar energy investments of this type in the future. We believe that cash on hand, our cash equivalents, cash that will be provided from the maturities of short-term investments and cash generated from our future operations, with or without funds available under our Credit Agreement, will be adequate to meet our general business needs in the foreseeable future. In general, we maintain significant liquid capital in our consolidated balance sheet to ensure the maintenance of our bonding capacity and to provide parent company performance guarantees for EPC and other construction projects. However, any significant future acquisition, investment or other unplanned cost or cash requirement, may require us to raise additional funds through the issuance of debt and/or equity securities. There can be no assurance that such financing will be available on terms acceptable to us, or at all. Contractual Obligations During 2022, there was no significant change in the nature or amounts of our contractual obligations. The amount of contract obligations disclosed as of January 31, 2021 was $8.2 million. The two largest items included in this total, operating leases and deferred compensation, are amounts included as liabilities in our consolidated balance sheet. The remainder of the disclosed amount related primarily to open service arrangements. Outstanding commitments represented by open purchase orders and subcontracts related to our construction contracts have not been included in the disclosed amounts as such amounts are expected to be funded through contract billings to customers. We do not have any significant obligations for materials or subcontracted services beyond those required to completed construction contracts awarded to us.   - 43 - Table of Contents Special Purpose Entities As is common in our industry, EPC contractors and third parties form joint ventures, limited partnerships and limited liability companies for purposes of executing a project or program for a project owner. These teaming arrangements are typically dissolved upon completion of the project or program. In addition, we may obtain interests in VIEs formed by its owners for a specific purpose. The evaluation of whether such interests represent our financial control of a VIE requires analysis and judgement. We concluded that we are the primary beneficiary of a VIE formed by an independent firm for the purpose of developing a natural gas-fired power plant in Virginia. As a result, the VIE is included in our consolidated financial statements until we determine that our financial control of the entity has passed to another party. Pursuant to agreements negotiated with the developer, we lent funds to the VIE to cover certain costs of the project development effort. The development phase activities of the VIE were focused on 1) obtaining the necessary permits to build and operate the power plant, 2) completing arrangements to connect the power plant to the fuel supply and the electricity grid, 3) engaging energy plant operators in negotiations for the purchase of project ownership interests, and 4) securing permanent financing for the project. For consolidated reporting purposes, these costs have been presented as project development costs and included in property, plant and equipment. During Fiscal 2022, as described in Note 3 to the accompanying consolidated financial statements, we recorded an impairment loss related to these costs in the amount of $7.9 million, of which $2.5 million was attributed to the non-controlling interest. We have entered into similar support arrangements with other independent parties in the past that resulted in the successful development of three separate gas-fired power plant projects where we were paid project development fees in the total amount of $29.6 million, and where our loans in the amount of $11.7 million were repaid in full plus interest in the amount of $2.3 million. In each of these cases, we deconsolidated the corresponding VIE when we were no longer the primary beneficiary. We may enter into other support arrangements in the future in connection with power plant development opportunities when they arise and when we are confident that providing early financial support for the projects will lead to the award of the corresponding EPC contracts to us. Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) We believe that EBITDA is a meaningful presentation that enables us to assess and compare our operating cash flow performance on a consistent basis by removing from our operating results the impacts of our capital structure, the effects of the accounting methods used to compute depreciation and amortization and the effects of operating in different income tax jurisdictions. Further, we believe that EBITDA is widely used by investors and analysts as a measure of performance. However, as EBITDA is not a measure of performance calculated in accordance with U.S. GAAP, we do not believe that this measure should be considered in isolation from, or as a substitute for, the results of our operations presented in accordance with US GAAP that are included in our consolidated financial statements. In addition, our EBITDA does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. The following table presents the determinations of EBITDA for Fiscal 2022 and Fiscal 2021, respectively (amounts in thousands). [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2022","","2021"],["Net income, as reported","\u200b","$","35,706","\u200b","$","23,811"],["Income tax expense","\u200b","","11,356","\u200b","","1,074"],["Depreciation","\u200b","","3,367","\u200b","","3,715"],["Amortization of purchased intangible assets","\u200b","","870","\u200b","","904"],["EBITDA","\u200b","","51,299","\u200b","","29,504"],["EBITDA of non-controlling interests","\u200b","","(2,538)","\u200b","","(40)"],["EBITDA attributable to the stockholders of Argan, Inc.","\u200b","$","53,837","\u200b","$","29,544"]] [[/GREPCENT_TABLE]] - 44 - Table of Contents As we believe that our net cash flow provided by or used in operations is the most directly comparable performance measure determined in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), the following table reconciles the amounts of EBITDA for the applicable years, as presented above, to the corresponding amounts of net cash flows provided by operating activities that are presented in our consolidated statements of cash flows for Fiscal 2022 and Fiscal 2021 (amounts in thousands). [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","2022","\u200b","\u200b","2021"],["EBITDA","\u200b","$","51,299","\u200b","$","29,504"],["Current income tax (expense) benefit","\u200b","","(11,564)","\u200b","","6,571"],["Stock compensation expense","\u200b","","3,459","\u200b","","2,938"],["Impairment loss","\u200b","\u200b","7,901","\u200b","\u200b","\u2014"],["Other non-cash items","\u200b","","6,196","\u200b","","2,461"],["(Increase) decrease in accounts receivable","\u200b","","(480)","\u200b","","8,463"],["Increase in other assets","\u200b","","(241)","\u200b","","(11,467)"],["(Decrease) increase in accounts payable and accrued expenses","\u200b","","(5,742)","\u200b","","31,442"],["Change in contracts in progress, net","\u200b","","(22,413)","\u200b","","106,101"],["Net cash provided by operating activities","\u200b","$","28,415","\u200b","$","176,013"]] [[/GREPCENT_TABLE]] Critical Accounting Policies and Estimates We consider the accounting policies discussed below related to revenue recognition on long-term construction contracts; income tax reporting; the valuation of goodwill; and the financial reporting associated with any significant claims or legal matters to be most critical to the understanding of our financial position and results of operations, as well as the accounting and reporting for special purpose entities including variable interest entities. Critical accounting policies are those related to the areas where we have made what we consider to be particularly subjective or complex judgments in arriving at estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. These estimates, judgments, and assumptions affect the reported amounts of assets, liabilities and equity, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions. We do periodically review these critical accounting policies and estimates with the audit committee of our board of directors. Revenue Recognition Our revenues are primarily derived from construction contracts that can span several quarters or years. We enter into EPC and other long-term construction contracts principally on the basis of competitive bids or in conjunction with our support of the development of power plant projects. The types of contracts may vary. However, the EPC contracts of our power industry services reporting segment, and most other large contracts awarded to our other companies, are fixed-price contracts. Revenues are recognized primarily over time as performance obligations are satisfied due to the continuous transfer of control to the project owner or other customer. The accuracy of our revenues and profit recognition in a given period depends on the accuracy of our estimates of the forecasted contract value, or transaction price, and the cost to complete the work for each project. Central to accounting for revenues from contracts with customers is a five-step revenue recognition model that requires reporting entities to: [[GREPCENT_TABLE]] [["","1.","Identify the contract,"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2.","Identify the performance obligations of the contract,"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","3.","Determine the transaction price of the contract,"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","4.","Allocate the transaction price to the performance obligations, and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","5.","Recognize revenue."]] [[/GREPCENT_TABLE]] - 45 - Table of Contents The guidance focuses on the transfer of the control of the goods and/or services to the customer, as opposed to the transfer of risk and rewards. Major provisions cover the determination of which goods and services are distinct and represent separate performance obligations, the appropriate treatment of variable consideration, and the evaluation of whether revenues should be recognized at a point in time or over time. In general, application of the rules requires us to make important judgements and meaningful estimates that may have significant impact on the amounts of revenues recognized by us for any reporting period. Revenues from fixed price contracts, including a portion of estimated profit, are recognized over time, based on costs incurred and estimated total contract costs using the percentage-of-completion method. The cost and profit estimates are determined at least quarterly for all significant contracts pursuant to a detailed “bottoms-up” review process. The results of the process are subjected to reviews by senior management at each subsidiary. The percentage-of-completion method measures the ratio of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. This requires us to prepare on-going estimates of the cost to complete each contract as the project progresses. In preparing these estimates, we make significant judgments and assumptions about our significant costs, including materials, labor and equipment, and we evaluate contingencies based on possible schedule variances, production delays or other productivity factors. Actual costs may vary from the costs we estimate. Variations from estimated contract costs, along with other risks inherent in fixed-price contracts, may result in actual revenues and gross profits differing from those we estimate and could result in losses on projects or other significant unfavorable impacts on our operating results for any fiscal quarter or year. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined, without regard to the percentage of completion. There are a number of factors that can contribute to changes in estimated contract costs, revenues and profitability. The most significant of these are identified in the first item included in the Risks Related to our Operational Execution section of Part I, Item 1A. of this Annual Report entitled Risk Factors. Crucial to the compliance with the accounting standard covering the recognition of revenues on contracts with customers is the identification of the promises made to the customer by us that are included in the contract. If a promise is distinct, as that concept is defined in the accounting standard, it represents a separate performance obligation. Contracts may have multiple performance obligations. The amounts of revenue associated with each promise are recognized when, or as, the performance obligations are satisfied. However, complex contracts may include only one performance obligation if the multiple promises are not distinct within the context of the contract. For example, if the promises that could be considered distinct are interrelated or require us to perform integration so that the customer receives a complete product, the contract is considered to include only one performance obligation. Most of our long-term contracts have a single performance obligation as the promises to transfer individual goods or services are not separately identifiable from other promises within the context of the contract. Our EPC contracts require us to deliver a complete and functioning power plant, not just functioning components. The transaction price of a contract represents the value 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 variations in the scope and price of contracts, claims, incentives and liquidated damages. The Company may include an estimated amount of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenues recognized on the particular contract will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s determination of the amount of variable consideration to be included in the transaction price of a particular contract is based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The effect of any revisions to the transaction price on the amount of previously recognized revenues that is due to the addition or reduction of variable consideration is recorded currently as an adjustment to revenues on a cumulative catch-up basis. In the event that any amounts of variable consideration that are reflected in the transaction price of a contract are not resolved in the Company’s favor, there could be reductions in, or reversals of, previously recognized revenues. In most significant instances, modifications to our contracts do not represent the addition of new performance obligations. ​ - 46 - Table of Contents Contract results may be impacted by estimates of the amounts of contract variations that we expect to receive. The effects of any resulting revisions to revenues and estimated costs can be determined at any time and they could be material. As of January 31, 2021, the aggregate amount of contract variations reflected in estimated contract transaction prices was $16.6 million, including $6.8 million related to our EPC services contract with Exelon. During Fiscal 2022, this amount was recovered in full in connection with the settlement of the litigation with Exelon. As of January 31, 2022, the aggregate amount of contract variations reflected in estimated transaction prices was $7.5 million. Our long-term contracts typically have schedule dates and other performance obligations that, if not achieved, could subject us to liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by achievement of a specified level of output or efficiency. Each contract defines the conditions under which a project owner may make a claim for liquidated damages. The amounts of liquidated damages owed to a project owner pursuant to the terms of a contract would represent reductions of the transaction price of the corresponding contract. 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 has reflected the associated costs in its forecasts of completed 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. In general, we consider potential liquidated damages, the costs of other related items and potential mitigating factors in determining the estimates of forecasted revenues and the adequacy of our estimates of the cost to complete contracts. Goodwill In connection with the acquisitions of GPS, TRC and APC, we recorded substantial amounts of goodwill and other purchased intangible assets including contractual and other customer relationships, non-compete agreements, trade names and certain fabrication process certifications. We utilized the assistance of a professional appraisal firm in the initial determinations of goodwill and the other purchased intangible assets for these acquisitions which were all determined to have finite useful lives. At January 31, 2022, the goodwill balances related to the acquisitions of GPS, TRC and SMC were $18.5 million, $9.5 million and $0.1 million, respectively, which together represented approximately 5.1% of consolidated total assets. The Company performs its required annual assessments of the carrying value of goodwill balances as of November 1 each year. We also test for impairment of goodwill more frequently if events or changes in circumstances indicate that the carrying value of goodwill might be impaired. In accordance with current accounting guidance, we perform testing for the impairment of goodwill by comparing the estimated fair value of a reporting unit with the carrying amount of the unit reflected in the consolidated financial statements, including goodwill. If the carrying amount of the reporting unit exceeds its estimated fair value, an impairment loss is recorded for the excess, not to exceed the total amount of goodwill allocated to the reporting unit. The balance of goodwill related to TRC and included in the consolidated balance sheet as of January 31, 2022 was $9.5 million. We performed a goodwill impairment assessment for TRC as of November 1, 2021 with the assistance of a professional business valuation firm. It was determined that the estimated fair value of TRC exceeded the corresponding carrying value by approximately $8.9 million; accordingly, there was no impairment loss recorded as of that date. The estimated fair value amount for TRC determined as of November 1, 2021 reflected a weighting of results determined using various business valuation approaches consistent with prior year valuations. As in the past, the majority of the weighted average fair value was based on the result of modeling discounted future net-after-tax cash flows of the business. The discounted cash flows of TRC were based on a management forecast of operating results. Last year, the result of a similarly completed assessment of TRC indicated that the excess of its estimated fair value over carrying value was $1.5 million. Judgments inherent in these approaches include the determination of appropriate discount rates, the amount and timing of expected future cash flows, growth rates for revenues and gross margins, and appropriate benchmark companies. The estimated future cash flows used for TRC were based on five-year financial forecasts developed internally by management. - 47 - Table of Contents Our discount rate assumptions were based on an assessment of the equity cost of capital and the appropriate capital structure for our reporting unit. Material assumptions used in the impairment assessment included the weighted average cost of capital percent and terminal growth rates. The widening of the excess of estimated fair value over carrying value for TRC during Fiscal 2022 was due primarily to an improved forecast of future results. In view of the strong results reported by TRC during Fiscal 2022, we believe that the current forecast of the operating results of TRC is based on reasonable assumptions and, in particular, the following factors. The average amount of annual revenues during the five-year period ending January 31, 2027 is forecasted to be $102.2 million, with a terminal revenues annual growth rate of 3% thereafter. The actual amount of revenues recognized by TRC for Fiscal 2022 was $97.9 million. Annual earnings before interest and taxes are forecast to increase from 4.8% of revenues for the year ending January 31, 2023 to 6.2% of revenues by the year ending January 31, 2027, with a terminal percentage of 6.8% of corresponding revenues. The actual amount of such earnings for Fiscal 2022 was 11.6% of corresponding revenues. Should unfavorable operating results in the future indicate that the forecast for TRC is too optimistic, we may reduce it. This could result in a shrinking of the excess or even a future impairment loss. In certain situations, we use an alternative approach which allows us to first assess qualitative factors to decide whether it is necessary to perform the quantitative goodwill impairment test. We are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than the corresponding carrying value. The professional guidance includes discussions of the types of factors which should be considered in conducting the qualitative assessment including macroeconomic, industry, market and entity-specific factors. Using this approach, we concluded that it was more likely than not that the fair value of the GPS reporting unit exceeded the corresponding carrying value as of November 1, 2021. Therefore, completion of the quantitative impairment assessment was considered to be unnecessary. No events associated with the business of GPS occurred in the period from the assessment date through January 31, 2022 that would cause us to reconsider that conclusion. Uncertain Income Tax Positions As we have disclosed in the “Research and Development Tax Credits” section of Note 13 to the accompanying consolidated financial statements, during Fiscal 2019 we completed a detailed review of the activities of our engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development credits available to reduce prior year income taxes. This extensive study focused on the costs incurred on specific projects during the three-year period ended January 31, 2018. Based on the results of the study, we identified and estimated significant amounts of income tax benefits that were not previously recognized in our financial results for any prior year reporting period. Under current professional accounting guidance, income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Fiscal 2019 was the initial reporting period in which we had sufficient data on which to make an evaluation and to reach a conclusion on the amount of income tax credit benefits related to prior year project costs that, more likely than not, qualified as research and development costs under the Internal Revenue Code and the rules and regulations of certain states. The net amount of the credits that we recognized in income taxes during Fiscal 2019 was $16.2 million, as subsequently reduced by $0.4 million. Based on our judgement, the amount of income tax benefits related to identified research and development income tax credits that we assessed as not meeting the threshold criteria for recognition was $5.1 million, for which we established a liability related to uncertain income tax return positions that was included in accrued expenses as of January 31, 2019. During Fiscal 2020, this amount was adjusted modestly; the liability amount as of January 31, 2022 and 2021 was $5.0 million. The research and development credits were included in amendments to our consolidated federal income tax returns for Fiscal 2016 and Fiscal 2017, that were filed in January 2019, and our consolidated federal income tax return for Fiscal 2018, that was filed in November 2018. During Fiscal 2022, the IRS issued its revenue agents reports that disagree with our credit amounts. The differences in amounts are meaningful. After a careful review of a preliminary reports received from the IRS, the preparation of an acknowledgement-of-facts responses, analysis of the final reports and consultation with subject experts, we have concluded that our arguments are sound based on our analysis of the facts, our understanding of the tax code and related regulations and our understanding - 48 - Table of Contents of the applicable case law, and that the reports do not present any new facts relating to the issues or make any new arguments that would cause us to make any adjustments to our accounting for the research and development claims as of January 31, 2022. We have formally protested the findings of the IRS examiner and are pursuing our income tax positions with the IRS through the established appeals process. We expect that our appeals hearing will occur during Fiscal 2023. We have updated the evaluation of our income tax positions using the more-likely-than-not threshold in order to confirm the adequacy of the liability amount carried in the balance sheet as of January 31, 2022 for uncertain income tax positions. We have not adjusted the liability amount during Fiscal 2022 as we do not anticipate any significant changes to the net amount of the income tax benefits recorded for research and development credits claimed for Fiscal 2016 through Fiscal 2018. However, if negotiations with the IRS or legal decisions cause us to believe that our previously recognized tax positions no longer meet the more-likely-than-not threshold, the related net tax benefit amount will be derecognized in the first financial reporting period in which that threshold is no longer met. Any unfavorable adjustment to our taxes could reverse a substantial portion of the amount of net research and development credits recognized of $16.2 million, which could materially and adversely affect our future financial condition and operating results. Deferred Tax Assets and Liabilities Our consolidated balance sheet as of January 31, 2022 includes net deferred tax assets in the amount of approximately $0.5 million. The components of our deferred taxes are presented in Note 13 to the accompanying consolidated financial statements. These amounts reflect differences in the periods in which certain transactions are recognized for financial and income tax reporting purposes. We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized on a jurisdiction-by-jurisdiction basis. Our ability to realize our deferred tax assets, including those related to the past NOLs incurred in the U.K., that applicable income tax rules will allow us to use in order to offset future amounts of applicable taxable income, depends primarily upon the generation of sufficient future taxable income to allow for the realization of our deductible temporary differences. If such estimates and assumptions regarding income amounts change in the future, we may be required to record additional valuation allowances against some or all of the deferred tax assets resulting in additional income tax expense in our consolidated statement of earnings. During Fiscal 2020, a valuation allowance in the amount of $7.1 million was established against the deferred tax asset amount created by the NOL of APC’s subsidiary in the U.K. for Fiscal 2020. However, we believe that the results of operations in the U.K. have begun a turnaround that should enable APC to utilize portions of the unrecognized NOL benefits in the future. A deferred tax asset in the amount of $8.3 million was recorded as of January 31, 2020 associated with the income tax benefit of our domestic NOL for Fiscal 2020 without any corresponding valuation allowance. Among other changes, the CARES Act re-established a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include our domestic loss for Fiscal 2020, which was approximately $39.5 million. We have made the appropriate filing with the IRS requesting carryback refunds of income taxes paid for the years ended January 31, 2017, 2016 and 2015. With the enactment of the CARES Act, the asset amount was moved to income taxes receivable representing a complete utilization of the NOL within one year of its occurrence. At this time, we believe that the historically strong earnings performance of our power industry services segment will provide sufficient income during the years when most of our other deferred tax assets become deductible in the U.S. in order for us to realize the applicable temporary income tax differences. Accordingly, we believe that it is more likely than not that we will realize the benefit of significantly all of our net deferred tax assets. Variable Interest Entities This Item 7 of the 2022 Annual Report and Note 3 of the accompanying consolidated financial statements include discussions of “Special Purpose Entities” that include variable interest entities. Determinations are made by management regarding the accounting and disclosures for these entities including, for example, the identification of variable interests and the consideration of control over the primary activities of the entities. During Fiscal 2022, the most important determination related to the valuation of project development costs in our consolidated balance sheet. As explained in the sections of this 2022 Annual Report identified above, we recorded an impairment loss in the amount of $7.9 million during Fiscal 2022 as we came to the conclusions that the related natural gas-fired power plant project was not viable and that our costs would not be recovered. In March 2022, the project owner made a public announcement that the power plant project, planned to be built in Virginia, was cancelled. - 49 - Table of Contents Legal Contingencies We do become involved in legal matters where litigation has been initiated or claims have been made against us. At this time, we do not believe that any material loss is probable related to any current matters. We do maintain accrued expense balances for the estimated amounts of legal costs expected to be billed related to any significant matter. We review the status of each matter and assess the adequacy of the accrued expense balances at the end of each fiscal quarter, and make adjustments to the balances if necessary. Should our assessments of the outcomes of outstanding legal matters change, significant losses or additional costs may be recorded. During Fiscal 2022, the significant legal matter described below, for which we have been providing regular disclosure in our filings, was settled. In January 2019, GPS filed a lawsuit against Exelon West Medway II, LLC and Exelon Generation Company, LLC (together referred to as “Exelon”) for Exelon’s breach of contract and failure to remedy various conditions which negatively impacted the schedule and the costs associated with the construction by GPS of a gas-fired power plant for Exelon in Massachusetts. Subsequently, Exelon provided GPS with a notice intending to terminate the EPC contract under which GPS had been providing services to Exelon and served us with contractual notice requiring GPS to vacate the construction site. At that time, the construction project was nearly complete and both of the power generation units included in the plant had successfully reached first fire. The completion of various prescribed performance tests and the clearance of punch-list items were the primary tasks necessary to be accomplished by GPS in order to achieve substantial completion of the power plant. Exelon asserted that GPS failed to fulfill certain obligations under the contract and was in default, withholding payments from GPS on invoices rendered to Exelon in accordance with the terms of the contract between the parties. Our firm belief that Exelon received the benefits of the construction efforts of GPS and the corresponding progress made on the project without making payments to GPS for the value received was reflected in our accounting for the project that we maintained throughout the duration of the dispute. There were outstanding invoices billed to Exelon and unbilled costs incurred on the project, with substantial balances included in both accounts receivable and contract assets as of January 31, 2021. The final settlement of all outstanding claims between the parties resulting in Exelon making a payment to GPS in the amount of $27.5 million, which amount was in excess of the total carrying amount of the related accounts receivable and contract assets. The excess amount was included in revenues for Fiscal 2022. Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, Simplifying the Accounting for Income Taxes, which, among other changes, eliminates the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the expected loss for the entire year. In these instances, the estimated annual effective income tax rate shall be used to calculate the tax without limitation. The new standard also requires the recognition of a franchise (or similar) tax that is partially based on income as an income-based tax and the recording of any incremental tax that is incurred by us as a non-income-based tax. The requirements of this new guidance, effective for us on February 1, 2021, did not alter our accounting for income taxes. There are no other recently issued accounting pronouncements that have not yet been adopted that we consider material to our consolidated financial statements.