Argan Inc: Form 10-Q for the period ended Apr 30, 2025

The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of April 30, 2025, and the results of their operations for the three month periods ended April 30, 2025 and 2024, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for Fiscal 2025 that was filed with the SEC on March 27, 2025 (the “Annual Report”).

Cautionary Statement Regarding Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements.

Our forward-looking statements, 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 that do not include the potential impacts of any future acquisitions.

Our forward-looking statements, by their nature, involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in this Quarterly Report on Form 10-Q and our Annual Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business Description

The Company is primarily an engineering and construction firm that conducts operations through its wholly-owned subsidiaries across three distinct reportable business segments. Through our power industry services segment, we provide a full range of engineering, procurement, construction, commissioning, maintenance, project development and technical consulting services to the power generation market. The customers include primarily independent power producers, public utilities, power plant equipment suppliers and other commercial firms with significant power requirements. Customer projects are located in the U.S., Ireland and the U.K. Our industrial construction services segment provides on-site services that support new plant construction and additions, maintenance turnarounds, shutdowns and emergency mobilizations for industrial operations primarily located in the Southeast region of the U.S. and that may include the fabrication, delivery and installation of steel components such as piping systems and pressure vessels. Our 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 may 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 and/or needs of our customers. Significant acquired companies will be operated in a manner that we believe will best provide long-term and enduring value for our stockholders.

Market Outlook

The majority of our consolidated revenues relate to performance in the U.S. by the power industry services reportable business segment, which provides EPC services to design, build, and commission large-scale energy projects. In the U.S., electricity demand has reached its highest level in two decades, driven by the expansion of data centers supporting artificial intelligence technologies, the growing adoption of electric vehicles, and the reshoring of manufacturing activities. Keeping up with growing energy demand is further challenged by the aging fleet of traditional power facilities that are at or nearing the end of their operational lives. Throughout the U.S., the risk of electricity shortages grows as the retirement of traditional power plants outpaces their replacements. While renewable energy sources like solar and wind are expanding, they often cannot provide the same level of consistent, around-the-clock power generation as the retiring thermal plants. Natural gas-fired power plants are expected to remain a key component of future capacity additions due to their cost-effectiveness, reliability, and ability to support intermittent energy sources.

Utility-scale solar, wind, and battery storage projects continue to expand their share of electricity generation, supported by declining capital costs, improved energy storage systems that enhance grid reliability, and supportive tax incentives. Despite their increasing cost competitiveness and their rapid deployment over the past several years, the long-term trajectory of renewables could be influenced by shifts in energy policy and evolving regulatory frameworks.

Recent changes in U.S. trade policy, including the implementation of new or increased tariffs, have introduced cost and supply chain uncertainties affecting certain construction materials and equipment. Tariffs on imported materials, including steel and aluminum, could significantly impact the cost of building power plants. Tariff measures may also cause import delays, increasing lead times necessary for materials to arrive at our construction sites. The resulting rise in material costs and delivery delays could lead to higher overall project expenses and changes to project timelines. As the current U.S. administration’s approach to tariffs remains fluid at this time, the full extent of these effects remains uncertain. We continue to monitor developments closely, as prolonged or expanded trade restrictions could negatively affect project costs, timing, and customer demand.

Project Backlog

At April 30, 2025 and January 31, 2025, our consolidated project backlog amounts of $1.9 billion and $1.4 billion, respectively, consisted substantially of projects within our power industry services reporting segment.

Our reported project backlog at a point in time represents the expected revenue from the remaining work on projects where the scope is sufficiently defined and the contract value can be reasonably estimated. While the inclusion of contract values in project backlog involves management judgment based on the facts and circumstances, we typically include the value of the contract in project backlog upon receiving a notice to proceed from the project owner. In making the determination of project backlog, management may consider several factors, including terms of the contract, the degree of project financing and permitting, and historical experience with similar contracts. The start of new projects is primarily controlled by project owners and delays may occur that are beyond our control.

We are committed to the construction of state-of-the-art, natural gas-fired power plants, as important elements of our country’s electricity-generation mix now and in the future. We target natural gas-fired power plants, renewable energy plants and industrial construction opportunities in the U.S., Ireland and the U.K. Our vision is to safely contribute to the construction of the energy infrastructure and state-of-the-art industrial facilities that are essential to future economic prosperity in the areas where we operate. We intend to realize this vision with motivated, creative, high-energy and customer-driven teams that are committed to delivering the best possible project results each and every time.

Sandow Lakes Power Station

In April 2025, we received a notice to proceed on an EPC services contract for a 1.2 GW combined-cycle natural gas-fired power plant in Lee County, Texas. Construction is expected to begin during the summer of Fiscal 2026, with an expected project completion date in 2028.

Tarbert Next Generation Power Station

In January 2025, we entered into an EPC services contract for an approximately 300 MW biofuel power plant located in County Kerry, Ireland. The Tarbert Next Generation Power Station will run on 100% sustainable biofuels, specifically hydrotreated vegetable oil, with the potential to convert to hydrogen. Enabling works are now underway ahead of full construction commencing Fiscal 2026 with planned completion towards the end of the calendar year 2027.

700 MW Combined-Cycle Project

In December 2024, we entered into an EPC services contract and received the corresponding full notice to proceed (“FNTP”) with a customer for an approximately 700 MW combined-cycle natural gas-fired power plant located in the U.S. Project activity commenced in the fourth quarter of Fiscal 2025. Project completion is scheduled for the fiscal year ending January 31, 2028.

Louisiana LNG Facility

In June 2024, we entered into a subcontract and received FNTP for the installation of five 90 MW gas turbines for the dedicated supply of power to a liquified natural gas (“LNG”) facility in Louisiana. This project, led by our power industry services segment, is a collaboration with our industrial construction services segment. Project completion is scheduled for the first half of Fiscal 2026.

405 MW Midwest Solar Project

In August 2024, we received FNTP on an EPC services contract to construct a utility-scale solar field in Illinois with the capacity to provide 405 MW of electrical power. Project completion is scheduled for the first half of Fiscal 2027.

Midwest Solar and Battery Projects

Between January and early May 2024, we received FNTPs for three state-of-the-art solar energy and battery energy storage facilities in Illinois. The three projects will cumulatively represent 160 MW of electrical power and 22 MW of energy storage. Two of these projects were completed in the fourth quarter of Fiscal 2025. Completion of the final project, which experienced certain regulatory delays, is expected to be completed within the next 12 months.

Trumbull Energy Center

In November 2022, we received FNTP on an EPC services contract for a 950 MW combined-cycle natural gas-fired power plant in Lordstown, Ohio. Project completion is scheduled for the first quarter of Fiscal 2027.

Industrial Construction Services Project Backlog

As of April 30, 2025, the industrial construction services segment’s project backlog was approximately $91.4 million as compared to $53.2 million on January 31, 2025. During the three months ended April 30, 2025, the industrial construction services segment added contracts to its project backlog related to a water treatment plant and other industries.

Comparison of the Results of Operations for the Three Months Ended April 30, 2025 and 2024

The following schedule compares our operating results for the three months ended April 30, 2025 and 2024 (dollars in thousands):

Revenues

Power Industry Services

The revenues of the power industry services business increased by 45.4%, or $50.1 million, to $160.4 million for the three months ended April 30, 2025 compared with revenues of $110.3 million for the three months ended April 30, 2024 as the quarterly construction activities increased for the 405 MW Midwest Solar Project, the Louisiana LNG Facility and the Trumbull Energy Center. The increase in revenues between quarters was partially offset by decreased construction activities associated with the Midwest Solar and Battery Projects, the Shannonbridge Power Project and the ESB FlexGen Peaker Plants, as those projects have partially or fully concluded. The revenues of this business segment represented approximately 82.8% of consolidated revenues for the quarter ended April 30, 2025 and 69.9% of consolidated revenues for the corresponding prior year quarter.

The primary drivers for this segment’s revenues for the three months ended April 30, 2024, were the construction of the Trumbull Energy Center, the Shannonbridge Power Project, and the ESB FlexGen Peaker Plants.

Industrial Construction Services

The revenues of industrial construction services decreased by $14.5 million, or 33.2%, to $29.2 million for the three months ended April 30, 2025 compared to revenues of $43.7 million for the three months ended April 30, 2024, as the amounts of field services construction activities and vessel fabrication work decreased between periods. For the three months ended April 30, 2025 and 2024, the revenues of this segment represented 15.1% and 27.7% of consolidated revenues for the corresponding periods.

Telecommunications Infrastructure Services

The revenues of telecommunications infrastructure services were $4.1 million for the three months ended April 30, 2025, compared with revenues of $3.7 million for the three months ended April 30, 2024.

Cost of Revenues

Due primarily to the increase in consolidated revenues for the three months ended April 30, 2025 compared with revenues for the three months ended April 30, 2024, consolidated cost of revenues also increased. These costs were $156.8 million and $139.7 million for the three-month periods ended April 30, 2025 and 2024, respectively.

For the three-month period ended April 30, 2025, we reported a consolidated gross profit of approximately $36.9 million, which represented a gross profit percentage of approximately 19.0% of corresponding consolidated revenues. For the three-month period ended April 30, 2024, we reported a consolidated gross profit of approximately $17.9 million, which represented a gross profit percentage of approximately 11.4% of corresponding consolidated revenues. The gross profit percentage increased between periods primarily due to the changing mix of projects and contract types. In the prior fiscal year, during the three months ended April 30, 2024, gross profit was negatively impacted by losses recorded on an overseas project (see Note 9 to the accompanying condensed consolidated financial statements), which reduced margins by approximately $2.6 million. The gross profit percentages of corresponding revenues for the power industry services, industrial construction services and the telecommunications infrastructure services segments were 20.6%, 10.8% and 18.0%, respectively, for the quarter ended April 30, 2025. The gross profit percentages of corresponding revenues for the power industry services, industrial construction services and the telecommunications infrastructure services segments were 10.2%, 13.3% and 22.9%, respectively, for the quarter ended April 30, 2024.

Selling, General and Administrative Expenses

These costs were $12.5 million and $11.4 million for the three months ended April 30, 2025 and 2024, respectively, and represented 6.5% and 7.2% of corresponding consolidated revenues, respectively.

Other Income, Net

For the three months ended April 30, 2025 and 2024, the net amounts of other income were $5.4 million and $4.8 million, respectively, which represented an increase of 13.6% between the comparable periods, as the weighted average balances of investments are meaningfully higher this year, and earnings related to cash and cash equivalent balances increased during the three months ended April 30, 2025 as well.

Income Tax Expense

We recorded income tax expense for the three months ended April 30, 2025 in the net amount of approximately $7.2 million primarily due to our reporting pre-tax income for financial reporting purposes in the amount of $29.8 million for the quarter. Our effective income tax rate for the three months ended April 30, 2025 was 24.3%. This effective tax rate differed from the statutory federal tax rate of 21% due primarily to the unfavorable estimated effects of state income taxes.

We recorded income tax expense for the three months ended April 30, 2024 in the net amount of approximately $3.4 million. Our effective income tax rate for the three months ended April 30, 2024 was 30.3%. This effective tax rate differs from the statutory federal tax rate of 21% due primarily to an unrecognized tax loss benefit for the prior year quarter and the typically unfavorable estimated effects of state income taxes.

Liquidity and Capital Resources as of April 30, 2025

At April 30, 2025 and January 31, 2025, our balances of cash and cash equivalents were $189.3 million and $145.3 million, respectively, which represented an increase of $44.0 million during the current fiscal quarter.

The net amount of cash provided by operating activities for the three months ended April 30, 2025 was $35.3 million. Our net income for the three months ended April 30, 2025, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $25.9 million. The decrease of accounts receivable in the amount of $69.3 million, which represented a source of cash during the period, was due primarily to the collection of project-related receivables for the power industry services reportable segment. The decrease in contract liabilities of $15.4 million represented a use of cash, primarily due to the net effect of certain power industry services projects nearing completion and the early phase of construction activities at certain projects. The decrease in the combined level of accounts payable and accrued expenses in the amount of $39.6 million represented a use of cash during the period as well. The increase in contract assets of $1.9 million and the increase of other assets of $2.9 million represented uses of cash during the period.

During the three months ended April 30, 2025, our primary source of cash from investing activities was the net maturities of CDs issued by the Bank, in the amount of $37.5 million. We used $12.2 million, net of maturities, to invest in available-for-sale securities consisting of U.S. Treasury notes. We also used $0.4 million for purchases of property, plant, and equipment.

For the three months ended April 30, 2025, we used $18.0 million in cash for financing activities, including $6.8 million used to repurchase shares of common stock pursuant to our share purchase program and $5.1 million used for the payment of regular cash dividends. We also used $6.1 million for share-based award settlements, which represented payments for withholding taxes reimbursed by shares of common stock. As of April 30, 2025, there were no restrictions with respect to intercompany payments between the holding company and all subsidiaries.

At April 30, 2025, a portion of our balance of cash and cash equivalents was invested in a money market fund with most of its net assets invested in cash, U.S. Treasury obligations, other obligations issued by U.S. Government agencies and sponsored enterprises, and repurchase agreements secured by U.S. government obligations. The majority of our domestic operating bank account balances are maintained with the Bank. We do maintain certain Euro-based bank accounts in Ireland and certain pound sterling-based bank accounts in the U.K. in support of our overseas operations.

In order to monitor the actual and necessary levels of liquidity for our business, we focus on net liquidity, or working capital, in addition to our cash balances. During the three months ended April 30, 2025, our net liquidity increased by $13.7 million to $315.1 million from $301.4 million as of January 31, 2025, due primarily to our net income, partially offset by the payment of cash dividends, common stock repurchases, and net cash paid for withholding taxes due to stock-based award net settlements. As we have no debt service, as our fixed asset acquisitions in a reporting period are typically low, and as our net liquidity includes our short-term investments and AFS investments, our levels of working capital are not subjected to the volatility that affects our levels of cash and cash equivalents.

We believe that cash on hand, our cash equivalents, cash that will be provided from the maturities of short-term investments and other debt securities 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.

Financing Arrangements

On May 24, 2024, we executed with the Bank the Credit Agreement with an expiration date of May 31, 2027. The Credit Agreement has a base lending commitment amount of $35.0 million and establishes the interest rate for revolving loans at SOFR plus 1.85%. In addition to the base commitment, the credit facility includes an accordion feature that allows for an additional commitment amount of $30.0 million, subject to certain conditions. We may use the borrowing ability to cover other credit instruments issued by the Bank for our use in the ordinary course of business as defined in the Credit Agreement. Further, on May 31, 2024, we entered into a companion facility, in the amount of $25.0 million, pursuant to which an overseas subsidiary of the Company may cause the Bank’s European entity to issue letters of credit on its behalf that are secured by a blanket parent company guarantee issued by the Company to the Bank.

At April 30, 2025, we did not have any borrowings outstanding under the Credit Agreement. However, the Bank has issued a letter of credit in the total outstanding amount of $0.3 million at April 30, 2025.

We have pledged the majority of the Company’s assets to secure its financing arrangements. The Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Credit Agreement requires that we comply with certain financial covenants at its fiscal year-end and at each fiscal quarter-end. The Credit Agreement includes other terms, covenants and events of default that are customary for a credit facility of its size and nature, including a requirement to achieve positive adjusted earnings before interest, taxes, depreciation and amortization, as defined, over each rolling twelve-month measurement period. As of April 30, 2025, we were in compliance with the covenants and other requirements of the Credit Agreement.

Performance Bonds and Guarantees

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 provided 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.

As of April 30, 2025, the estimated amount of our unsatisfied bonded performance obligations, covering all of our subsidiaries, was approximately $0.6 billion. In addition, as of April 30, 2025, the outstanding amount of bonds covering other risks, including warranty obligations and contract payment retentions related to completed activities, was $45.7 million.

When sufficient information about claims related to 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 April 30, 2025 are not estimable.

Solar Energy Project Investments

We make investments in limited liability companies that make equity investments in solar energy projects that are eligible to receive energy tax credits, for which we have received substantially all of the income tax benefits associated with those investments. During the three months ended April 30, 2025, we did not make any cash payments to any solar tax credit entities. As of April 30, 2025, we have $11.5 million remaining of cash investment commitments related to a solar fund, which we expect to fulfill in Fiscal 2026. It is likely that we will evaluate opportunities to make other solar energy investments in the future.

Development Financing

We selectively participate in power plant project development and related financing activities 1) to maintain a proprietary pipeline for future EPC services contract opportunities, 2) to secure exclusive rights to EPC contracts, and 3) to generate profits through interest income and project development success fees.

In Fiscal 2025, we funded a loan to a special purpose entity in the amount of $5.0 million to support the development phase of a natural gas-fired power plant, which remains outstanding as of April 30, 2025. 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 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 U.S. 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 the three months ended April 30, 2025 and 2024, respectively (amounts in thousands).

Critical Accounting Policies

There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report filed with the SEC on March 27, 2025.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying condensed consolidated financial statements for discussion on recently issued accounting pronouncements.

There have been no material changes in our exposure to market risk during the three months ended April 30, 2025.

For a broader discussion of the Company’s exposure to market risks, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the Annual Report.

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of April 30, 2025. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of April 30, 2025, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC, and the material information related to the Company and its consolidated subsidiaries is made known to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure in the reports.

Changes in internal controls over financial reporting. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the fiscal quarter ended April 30, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.