The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of April 30, 2022, and the results of their operations for the three month periods ended April 30, 2022 and 2021, 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 2022 that was filed with the SEC on April 13, 2022 (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, 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.
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.
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, global energy plant construction firms and other commercial firms with significant power requirements. 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 significant acquired companies will be operated in a manner that best provides cash flows for the Company and value for our stockholders.
Consolidated revenues for the three months ended April 30, 2022 were $100.3 million, which represented a decrease of $26.0 million, or 20.6%, from consolidated revenues of $126.3 million reported for the three months ended April 30, 2021.
The revenues of the power industry services segment decreased by $23.2 million to $73.9 million for the three months ended April 30, 2022, from $97.2 million reported for the three months ended April 30, 2021. The revenues of this reportable segment of our business represented 73.7% and 76.9% of corresponding consolidated revenues for the three months ended April 30, 2022 and 2021, respectively. The industrial services business reported revenues of $22.5 million for the three months ended April 30, 2022. This amount represented a decrease of $4.2 million, or 15.7%, from revenues of $26.7 million reported by TRC for the three months ended April 30, 2021. Revenues provided by this reportable business segment represented 22.4% and 21.1% of corresponding consolidated revenues for the three months ended April 30, 2022 and 2021, respectively.
Consolidated gross profit for the three-month period ended April 30, 2022 was $19.7 million, or 19.6% of the corresponding consolidated revenues, which reflected primarily favorable contributions from the power industry services and industrial services segments. For the three-month period ended April 30, 2021, the consolidated gross profit was $23.7 million, which represented approximately 18.8% of the corresponding amount of consolidated revenues.
Selling, general and administrative expenses for the three months ended April 30, 2022 and 2021 were $10.6 million, or 10.6% of corresponding consolidated revenues, and $9.9 million, or 7.8% of corresponding consolidated revenues, respectively.
Due primarily to the decrease in consolidated pre-tax book income to $9.8 million for the three months ended April 30, 2022 from $14.5 million for the three months ended April 30, 2021, we reported income tax expense in the amount of $2.3 million for the current period. Income tax expense for the three months ended April 30, 2021 was $3.8 million.
For the three months ended April 30, 2022, our favorable overall operating profit performance resulted in net income attributable to our stockholders in the amount of $7.5 million, or $0.50 per diluted share. For the comparable period last year, we reported net income attributable to our stockholders in the amount of $10.8 million, or $0.67 per dilutive share.
The primary drivers of our financial performance for the three months ended April 30, 2022 and 2021 were the revenues and gross margin contributions associated with the construction projects of GPS. These projects represented the largest portion of our business for the periods.
All of our businesses have been adversely impacted, to some degree, by difficulties presented by the COVID-19 pandemic.
We believe that all of our operating companies have managed the challenges presented by this ongoing pandemic with relative success so far. A significant amount of effort has been spent by senior and project management to ensure the safety of our employees during the COVID-19 pandemic while we continued to satisfy our customer obligations. However, the resurgence of new COVID-19 virus variants represents uncertainty regarding our realizing expected financial results for the remainder of the year if new outbreaks prevent our work crews from completing project work as scheduled.
Engineering, Procurement and Construction Service Contracts
At April 30, 2022, our consolidated project backlog amount of $0.7 billion substantially consisted of the projects of the power industry services reporting segment. The comparable backlog amount as of January 31, 2022 was also $0.7 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 2 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 April 30, 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 near the end 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 Competitive Power Ventures, Inc., 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, is being 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, U.K., 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, referred to as the "Kilroot" project, 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.
We recently announced that, in May 2022, APC entered into engineering and construction services contracts with the Electricity Supply Board ("ESB") to construct three 65 MW aero-derivative gas turbine flexible generation power plants in and around Dublin, Ireland. Two of the power plants, the Poolbeg and Ringsend FlexGen Power Plants, will be located on the Poolbeg Peninsula, and the Corduff FlexGen Power Plant will be built in Goddamendy, Dublin. All three projects cleared the applicable capacity auction earlier this year and are expected to operate intermittently during peak periods of electricity demand and as back-up supply options when renewable electricity generation is limited. A full notice to proceed has been received and project activities have commenced. The completion of each power plant is expected to occur near the end of Fiscal 2024.
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 net electricity generation. For 2021, coal fueled 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 Energy Information Administration ("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 also 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. 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. These policy stances have continued during the war in the Ukraine and the recent surge in oil prices as the administration makes appeals to other countries to increase oil production while domestic production is challenged by supply chain and labor issues and the maintenance of restrictive regulations. Meanwhile, delays continue for the construction of pipelines needed to transport natural gas to liquid natural gas export facilities for shipment to Western Europe. Additionally, lenders, who have become more wary of funding oil-related ventures as environmental, social and governance ideas catch on in financial circles, are generally unwilling to provide capital for energy projects to increase the domestic production and transmission of oil and natural gas.
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.
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. However, reductions in production levels during the pandemic, an increase in the amount of liquid natural gas exports and current heat-wave temperatures in the South, among other factors, are straining domestic natural gas supplies. As a result, the price of natural gas in the U.S. has increased meaningfully since the beginning of the calendar year and is predicted to go higher during the summer.
Nevertheless, 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. 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. We believe that its benefits as a source of power are compelling, especially as a complement to the deployment of wind and solar powered energy sources and 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. The abundant availability of inexpensive, 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.
Throughout the U.S., the risk of electricity shortages is rising as traditional power plants are being retired more quickly than they can be replaced by renewable energy and battery storage. Power grids are feeling the strain as the U.S. makes the historic transition from conventional power plants fueled by coal and natural gas to cleaner forms of energy such as wind and solar power, and aging nuclear plants are slated for retirement. Electric-grid operators are warning that power-generating capacity is struggling to keep up with demand, a gap that could lead to additional rolling blackouts during heat waves or other peak periods as soon as this year.
California's grid operator recently stated that it anticipates a shortfall in supplies this summer, especially if extreme heat, wildfires or delays in bringing new power sources online exacerbate the constraints. The Midcontinent Independent System Operator, or "MISO", which oversees a large regional grid spanning much of the Midwest, expects that capacity shortages may force it to take emergency measures to meet summer demand and flagged the risk of outages. Texas has experienced tight electricity supply conditions during the current Southern heat wave. The challenge is that wind and solar farms do not produce electricity at all times and need large batteries to store their output for later use. While a large amount of battery storage is under development, regional grid operators have lately warned that the pace may not be fast enough to offset the closures of traditional power plants that can work around the clock.
Accelerating the build-out of renewable energy sources and batteries has become an especially difficult proposition amid supply-chain challenges and inflation. For example, the highly publicized probe by the U.S. Commerce Department into whether Chinese solar manufacturers are circumventing trade tariffs on solar panels had the effect of halting imports of key components needed to build new solar farms and effectively brought the U.S. solar industry to a temporary, but virtual, standstill, although work at our solar energy project in Pennsylvania continues.
In its 2022 Summer Reliability Assessment, the North American Electric Reliability Corporation, which presents forward-looking evaluations of power sufficiency, warned that an unprecedented array of risks that threaten electricity generation output demand or demand spikes could imperil the reliability of every North American bulk power system west of MISO this summer. The power generation shortfalls have forced certain grid operators to react by taking measures to keep aging fossil-fueled power plants online to assure adequate supplies of electricity.
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.
In February 2022, there were record-breaking sales of six offshore wind leases off the coasts of New York and New Jersey. This was followed by the federal government's defining up to eight additional areas for possible future offshore wind development off the coast of Oregon and the Mid-Atlantic coast in April 2022. However, U.S. offshore wind projects progress inconsistently, facing challenges in the areas of environmental and fishery impacts, grid connection complexities, transmission planning and federal permitting processes. Further, U.S. projects are confronted by shipping regulations that may limit the ability of developers to replicate successful European erection models. Proponents of clean energy also face political challenges from constituencies who oppose the impacts to wildlife and the environment that may be caused by clean energy infrastructure projects.
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.
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 clean-air concerns. 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, overseas power markets provide important new power construction opportunities for us especially across Ireland and the U.K.
While both of these 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 the significant Kilroot project 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.
Last year, the Irish government 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 battery storage and generation from renewable gases. 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.
As noted above, APC recently entered into engineering and construction services contracts with the ESB to construct three 65 MW aero-derivative gas turbine flexible generation power plants in and around Dublin, Ireland. All three projects are expected to operate intermittently during peak periods of electricity demand and as back-up supply options when renewable electricity generation is limited. A full notice to proceed has been received and project activities have commenced.
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. 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. Currently, APC is completing a project to install natural gas-fired power generation for a major data center in the Dublin area.
In our 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 the Company.
APC is actively pursuing other 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 other projects and APC is confident that it 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 a biomass-burning power plant and won the awards of the projects to build new gas-fired power plant units near Belfast and Dublin. 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 will work together in the future are becoming more substantive 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 Ireland and the U.K. that APC is positioned and has the capability to build larger and more complex power projects.
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 Three Months Ended April 30, 2022 and 2021
We reported net income attributable to our stockholders of $7.5 million, or $0.50 per diluted share, for the three months ended April 30, 2022. For the comparable period of the prior year we reported net income attributable to our stockholders of approximately $10.8 million, or $0.67 per diluted share.
The following schedule compares our operating results for the three months ended April 30, 2022 and 2021 (dollars in thousands):
Industrial fabrication and field services 22,501 26,658 (4,157) (15.6) Telecommunications infrastructure services 3,827 2,511 1,316 52.4 Revenues
Industrial fabrication and field services 18,680 21,969 (3,289) (15.0) Telecommunications infrastructure services 2,824 1,989
The revenues of the power industry services segment, representing the businesses of GPS and APC, decreased by 23.9%, or $23.2 million, to $73.9 million for the three months ended April 30, 2022 compared with revenues of $97.2 million for the three months ended April 30, 2021 as the quarterly construction activities associated with the Guernsey Power Station project have passed peak levels and APC completed its construction activities associated with the Teesside Renewable Energy Project ("TeesREP") last year. The reduction in revenues between the quarters also was impacted by a slowdown in construction activities associated with the Maple Hill solar energy project as it was adversely effected by the disruption in the supply of photovoltaic panels that is expected to be temporary. The revenues of this business segment represented approximately 73.7% of consolidated revenues for the quarter ended April 30, 2022 and 76.9% of consolidated revenues for the corresponding prior year quarter.
The primary driver for the revenues of this segment for the three months ended April 30, 2021 were the revenues associated with the construction of the Guernsey Power Station as the construction activities on this project were at peak levels.
Industrial Fabrication and Field Services
The revenues of our industrial fabrication and field services segment (representing the business of TRC) decreased by $4.2 million, or 15.6%, to $22.5 million for the three months ended April 30, 2022 compared to revenues of $26.7 million for the three months ended April 30, 2021 as the amount of pipe and fabrication declined. For the three months ended April 30, 2022 and 2021, the revenues of this segment represented 22.4% and 21.1% of consolidated revenues for the corresponding periods.
TRC's performance for the three-month period ended April 30, 2021 was particularly strong as it reflected significant increases in revenues earned on field services activities during the period, as well as increases in revenues associated with pipe and vessel fabrication works. The major customers of TRC include some of North America's largest fertilizer producers, as well as other chemical, mining, forest products, construction and energy companies with plants, facilities and other sites located primarily in the southeastern region of the U.S.
The revenue results of this business segment (representing the business of SMC) were $3.8 million for the three-month period ended April 30, 2022, an increase of $1.3 million, or 52.4%, from the amount of revenues earned during the three months ended April 30, 2021. The improvement in revenues between the quarters related to increased project activities for both outside-premises and inside-premises customers, including the customers of Lee Telecom, Inc., a company acquired by SMC in December 2021.
With the decrease in consolidated revenues for the three months ended April 30, 2022 compared with last year's first quarter ended April 30, 2021, the consolidated cost of revenues also decreased between the quarters. These costs were $80.5 million and $102.6 million for the three month periods ended April 30, 2022 and 2021, respectively, representing a decrease of approximately 21.5%.
For the three-month period ended April 30, 2022, we reported a consolidated gross profit of approximately $19.7 million which represented a gross profit percentage of approximately 19.7% of corresponding consolidated revenues. The gross profit percentages of corresponding revenues for the power industry services, industrial services and the telecommunications infrastructure segments were 20.2%, 17.0% and 26.2%, respectively, for the quarter ended April 30, 2022.
Our consolidated gross profit reported for the three-month period ended April 30, 2021 was $23.7 million, which represented a gross profit percentage of approximately 18.8% of corresponding consolidated revenues. The gross profit percentages of corresponding revenues for the power industry services, industrial services and the telecommunications infrastructure segments were 19.0%, 17.6% and 20.8%, respectively, for the quarter ended April 30, 2021.
Selling, General and Administrative Expenses
These costs were $10.6 million and $9.9 million for the three months ended April 30, 2022 and 2021, respectively, representing an increase of $0.7 million between the quarters, or 6.9%, which occurred within each of our reporting segments primary due to increased professional fees and stock compensation expense.
We reported other income, net, in the amount of $0.6 million for the three months ended April 30, 2022 which included primarily earnings associated with our solar fund investments. In April 2021, APC received a research and development credit payment from the government of the U.K. related to certain qualifying works performed on TeesREP during Fiscal 2019. Net of related costs, the payment amount of $0.7 million, much like a grant, was included in other income for the three months ended April 30, 2021.
We incurred income tax expense for the three months ended April 30, 2022 in the amount of approximately $2.3 million, which reflects an estimated annual effective income tax rate of 23.7% for the current year, before discrete items. This estimated tax rate differs from the statutory federal tax rate of 21% due primarily to the unfavorable effects of state income taxes and estimated permanent differences for the year including certain nondeductible executive compensation and global intangible low taxed income ("GILTI").
For the three months ended April 30, 2021, we reported income tax expense in the amount of approximately $3.8 million, which reflected an estimated annual effective income tax rate of approximately 25.1% for the year, before discrete items, that was estimated at the time. This tax rate differed from the statutory federal tax rate of 21% due primarily to the unfavorable effects of state income taxes and permanent differences, including certain nondeductible executive compensation and the non-deductible portions of the out-of-pocket travel and living expenses incurred by the large numbers of our project and craft employees who were working at offsite project locations.
Liquidity and Capital Resources as of April 30, 2022
At April 30 and January 31, 2022, our balances of cash and cash equivalents were $192.3 million and $350.5 million, respectively, which represented a decrease of $158.2 million. During the three months between these dates, our working capital decreased by $22.9 million to $261.3 million as of April 30, 2022 from $284.3 million as of January 31, 2022.
The net amount of cash used in operating activities for the three months ended April 30, 2022 was $39.7 million. Our net income for the three months ended April 30, 2022, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $9.8 million. However, reductions in the balance of contract liabilities and the combined level of accounts payable and accrued expenses in the amounts of $20.9 million and $15.2 million, respectively, represented uses of cash. Both of these reductions related primarily to the decline in the construction activity of the Guernsey Power Station project. Likewise, the increase in the amounts of accounts receivable, contract assets, prepaid expenses and other assets, in the total amount of $13.3 million, represented a use of cash during the period.
During the three months ended April 30, 2022, we also used cash to increase the level of our short-term investments, which consist entirely of CDs issued by the Bank, by $85.0 million. We also used $30.7 million cash in financing activities during the three months ended April 30, 2022, including $27.1 million used to repurchase shares of our common stock pursuant to our Share Repurchase Plan, and $3.7 million used for the payment of regular cash dividends. As of April 30, 2022, there were no restrictions with respect to inter-company payments between GPS, TRC, APC, SMC and the holding company. However, certain loans made by Argan to APC have been determined to be uncollectible.
During the three months ended April 30, 2021, our balance of cash and cash equivalents increased by a net amount of $30.0 million. The net amount of cash provided by operating activities for the three months ended April 30, 2021 was $17.3 million. Our net income for the period, adjusted favorably by the net amount of non-cash income and expense items, represented a source of cash in the total amount of $13.8 million. The sources of cash from operations also included the temporary increase in the balance of contract liabilities associated with projects at GPS and TRC in the amount of $27.5 million.
A reduction in the combined level of accounts payable and accrued expenses and an increase in the amount of accounts receivable, in the respective amounts of $21.6 million and $3.7 million, represented uses of cash for the three months ended April 30, 2021.
Other primary sources of cash for the three months ended April 30, 2021 were the net maturities of short-term investments and the proceeds associated with the exercise of stock options in the amounts of $20.0 million and $1.0 million, respectively. Non-operating activities also used cash during the three months ended April 30, 2021, including the payment of a regular cash dividend in the amount of $3.9 million, payments made to a solar energy investment company in the amount of $3.5 million and capital expenditures in the amount of $0.8 million.
At April 30, 2022, most of our balance of cash and cash equivalents was invested in a money market fund with most of its 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 Ireland and certain pound sterling-based bank accounts in the U.K. in support of the operations of APC.
The original term of our 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 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 April 30, 2022, we had no outstanding borrowings, however, the Bank has issued letters of credit in the total outstanding amount of $21.1 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 again 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 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 April 30, 2022 and January 31, 2022, we were compliant with the covenants of the Credit Agreement.
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. Not all of our projects require bonding.
As of April 30, 2022, the value of the Company's unsatisfied bonded performance obligations, covering all of its subsidiaries, was approximately $187.0 million. In addition, as of April 30, 2022, there were bonds outstanding in the aggregate amount of approximately $1.1 million covering other risks including warranty obligations related to completed activities; the majority of these bonds expire at various dates over the next two years.
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. A liability was established for the estimated loss related to this guarantee during Fiscal 2022.
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 April 30, 2022 are not estimable.
Returns on money market instruments and certificates of deposit are currently limited due to market conditions. With the desire to increase the amount of return on its available cash, the Company has invested approximately $6.3 million in limited liability companies that makes equity investments in solar energy projects that are eligible to receive energy tax credits. 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.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
EBITDA attributable to the stockholders of Argan, Inc. $ 10,733 $ 15,644
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 condensed 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.
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.
We consider the accounting policies related to revenue recognition on long-term construction contracts; income tax reporting; the accounting for business combinations; the subsequent valuation of goodwill, other indefinite-lived assets and long-lived assets; 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 joint ventures and variable interest entities. An expanded discussion of our critical accounting policies is included in Item 7 of Part II of our Annual Report. During the three months ended April 30, 2022, there have been no material changes in the way we apply the critical accounting policies described therein.
There are no recently issued accounting pronouncements that have not yet been adopted that we consider material to our consolidated financial statements.
© Edgar Online, source Glimpses