ITEM 1. BUSINESS.
Argan, Inc. (“Argan”) conducts
operations through its wholly owned subsidiaries, Gemma Power Systems, LLC and affiliates (“GPS”), Atlantic Projects
Company Limited and affiliates (“APC”), The Roberts Company, Inc. (“TRC”) and Southern Maryland Cable,
Inc. (“SMC”) (together referred to as the “Company,” “we,” “us,” or “our”).
Through GPS and APC, we provide a full range of engineering, procurement, construction, commissioning, operations management, maintenance,
project development, technical and consulting services to the power generation and renewable energy markets. The wide range of
customers includes independent power producers, public utilities, power plant equipment suppliers and global energy plant construction
firms. Including its consolidated joint ventures and variable interest entities (“VIEs”), GPS and APC represent the
Company’s power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable
segment provides on-site services that support maintenance turnarounds, shutdowns and emergency mobilizations for industrial plants
primarily located in the southeast region of the United States (the “US”) and that are based on its expertise in producing,
delivering and installing fabricated steel components such as piping systems, pressure vessels and heat exchangers. Through SMC,
which conducts business as SMC Infrastructure Solutions, the telecommunications infrastructure services segment provides project
management, construction, installation and maintenance services to commercial, local government and federal government customers
primarily in the mid-Atlantic region of the US.
Holding Company Structure
Argan was organized as a Delaware corporation
in May 1961. We intend to make additional opportunistic acquisitions and/or investments by identifying companies with significant
potential for profitable growth. We may have more than one industrial focus. We expect that companies acquired in each of these
industrial groups will be held in separate subsidiaries that will be operated in a manner that best provides cash flows for the
Company and value for our stockholders. Argan is a holding company with no operations other than its continuing investments in
GPS, APC, TRC and SMC.
Power Industry Services
In most years, the most significant percentage
of our power industry services has been performed by GPS which is a full-service engineering, procurement and construction (“EPC”)
services firm that we have operated for over thirteen years since it was acquired by us in 2006. GPS has the proven abilities of
designing, building and commissioning large-scale energy projects in the US. The extensive design, construction, project management,
start-up and operating experience of GPS has grown with installed capacity exceeding 15 gigawatts of mostly domestic power-generating
capacity. Our power projects have included base-load combined-cycle facilities, simple-cycle peaking plants and boiler plant construction
and renovation efforts. We also have experience in the renewable energy sector by providing EPC contracting and other services
to the owners of alternative energy facilities, including biomass plants, wind farms and solar fields. Typically, the scope of
work for GPS includes complete plant engineering and design, the procurement of equipment and construction from site development
through electrical interconnection and plant testing. The durations of our construction projects typically range between 2 to 3
years. However, the length of certain significant construction projects may exceed three years.
This reportable business segment also includes
APC, a company formed in Dublin, Ireland, over 45 years ago, and its affiliated companies, which we acquired in May 2015. APC provides
turbine, boiler and large rotating equipment installation, commissioning and outage services to original equipment manufacturers,
global construction firms and plant owners worldwide. APC has successfully completed projects in more than 30 countries on six
continents. With its presence in Ireland and its other offices located in the United Kingdom (the “UK”), Hong Kong
and Atlanta, APC expanded our operations internationally for the first time.
The revenues of our power industry services
business segment were $135.7 million, $367.8 million and $814.5 million for the years ended January 31, 2020 (“Fiscal 2020”),
2019 (“Fiscal 2019”) and 2018 (“Fiscal 2018”), respectively, or 57%, 76% and 91% of our consolidated revenues
for the corresponding periods, respectively. The substantial portions of the revenues of this reportable segment reported for all
three of these years were derived from the performance of activities by GPS and APC under EPC services and other construction contracts
with the owners of power plant projects. For Fiscal 2020, the amounts of revenues recognized by GPS and APC were about the same.
During Fiscal 2020, we were focused on
securing contracts to build gas-fired power plants that were prominent in our business development pipeline of new projects as
we began the year. Since January 2019, GPS was awarded EPC services contracts for the construction of the following state-of-the-art
combined cycle natural gas-fired power plants:
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In January 2019, GPS entered into an EPC
services contract to construct a 1,875 MW power plant in Guernsey County, Ohio. Caithness Energy, L.L.C. (“Caithness”)
partnered with Apex Power Group, LLC to develop this project. During August 2019, GPS received a full notice to proceed (“FNTP”)
with engineering, procurement and construction activities under the contract for this project.
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In May 2019, GPS entered into an EPC services
contract to construct a 625 MW power plant in Harrison County, West Virginia. Caithness partnered with Energy Solutions Consortium,
LLC (“ESC”) to develop this project. A limited notice to proceed (“LNTP”) with certain preliminary activities
was received from the owners of this project. Construction activities for the facility are not scheduled to begin until financial
close is achieved.
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In January 2020, GPS entered into an EPC
services contract with Harrison Power, LLC (“Harrison Power”) to construct a 1,085 MW natural gas-fired power plant
in Harrison County, Ohio. The project is being developed by EmberClear, the parent company of Harrison Power. Construction activities
for the facility are scheduled to begin in 2020 once financial close is achieved.
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On March 10, 2020, we announced that in
late February 2020 GPS entered into an EPC services contract with ESC Brooke County Power I, LLC to construct Brooke County Power,
a 920 MW natural gas-fired power plant, in Brooke County, West Virginia. The facility is being developed by ESC and construction
activities are scheduled to start in 2020 once financial close is achieved.
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On March 12, 2020, we announced that GPS
recently entered into an EPC services contract with NTE Connecticut, LLC to construct Killingly Energy Center, a 650 MW natural
gas-fired power plant, in Killingly, Connecticut. The facility is being developed by NTE Energy, LLC (“NTE”). Construction
activities are scheduled to start in 2020 once financial close is achieved.
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During Fiscal 2020, our APC operation successfully
completed a gas-fired power plant construction project in Spalding, England, and a major turbine refurbishment project for the
Moneypoint Power Station, the largest source of electrical power in Ireland. At January 31, 2020, major project activity for our
power industry services business segment included the provision of EPC services to one other natural gas-fired power plant project
and the erection of the boiler, a critical component, for a biomass-fired power plant.
During Fiscal 2019, GPS reached substantial
completion for four natural gas-fired power plant EPC services projects, including a 1,040 MW facility built in Pennsylvania, a
785 MW facility built in Connecticut and two 475 MW facilities, one built in Ohio and the other in North Carolina.
During Fiscal 2018, GPS was engaged with
ramping-up the construction efforts on the four major power plant EPC projects to peak activity levels. In addition, it commenced
the provision of EPC services on the two other gas-fired facilities and APC began construction tasks related to the biomass power
plant project.
Project Backlog
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. Cancellations or reductions may occur that would reduce project backlog
and our expected future revenues. 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. At January 31, 2020, the project backlog for this reporting segment
was approximately $1.3 billion. The comparable backlog amount as of January 31, 2019 was approximately $1.1 billion.
During August 2019, GPS received a FNTP
with EPC activities under a contract to build a state-of-the-art, 1,875 MW, combined cycle natural gas-fired power plant in Guernsey
County, Ohio. The commencement of this project favorably impacted the consolidated financial statements during the latter portion
of Fiscal 2020 resulting in increased revenues for the power industry services segment as well as improved consolidated cash flow.
Completion of this project is currently scheduled to occur during 2022.
The project backlog amount as of January
31, 2020 identified above includes the value of the Guernsey Power Station, the project with Caithness located in Harrison, West
Virginia, and the project for NTE located in Reidsville, North Carolina. We announced that GPS entered into an EPC services contract
with NTE Carolinas II, LLC, an affiliate of NTE, to construct an approximately 500 MW natural gas-fired power plant in Rockingham
County, North Carolina, in March 2018. The Reidsville Energy Center will be similar to two gas-fired power plants substantially
completed by GPS for NTE during Fiscal 2019, the Kings Mountain Energy Center located in Kings Mountain, North Carolina, and the
Middletown Energy Center located in Middletown, Ohio. Due to project owner delays, including a grid connection dispute between
the project owner and a public utility, contract activities have not yet started for this new project. If the dispute with the
public utility is not resolved on terms that move the project forward, we will most likely remove the Reidsville Energy Center
from project backlog.
Including
all of the GPS power plant projects discussed above and the Chickahominy Power Station discussed below, the aggregate amount of
the rated power represented by the natural gas-fired power plants for which we have signed EPC services contracts is approximately
7.3 gigawatts with an aggregate contract value in excess of $3.0 billion. For those contracts not already included in project backlog,
we anticipate adding them closer to their respective expected start dates when the projects achieve remaining key development
milestones and obtain financing commitments. For all projects, the start date for construction is generally controlled by the project
owners.
Special Purpose Entities
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 prior years, we partnered with a developer to take principal positions in the initial stages of development for three
projects in the Marcellus Shale region of the eastern US. All three developmental efforts were successfully completed resulting
in GPS receiving the repayment of all project development loans and the related accrued interest, being paid success fees and building
three large-scale natural gas-fired power plants. GPS completed construction of two of the plants in Fiscal 2017 and the third
in Fiscal 2019.
In January
2018, we were deemed to be the primary beneficiary of a VIE that is performing the project development activities related to the
construction of the Chickahominy Power Station, a 1,740 MW natural gas-fired power plant, planned for Charles City County,
Virginia. Even though we are providing financial and technical support to the project development effort through a consolidated
VIE and project development milestones continue to be achieved, we have not included the value of this contract in our project
backlog. Due to several factors that are slowing the pace of the development of this project, including additional time being required
to secure the natural gas supply for the plant and to obtain the necessary equity financing, we currently cannot predict when construction
will commence, if at all. Consideration for the Company’s engineering and financial support includes the right to build the
power plant pursuant to a turnkey EPC services contract that has been negotiated and announced. The account balances of the VIE
are included in the consolidated financial statements, including development costs incurred by the VIE during Fiscal 2020 and Fiscal
2019, which are included in the balances for property, plant and equipment as of January 31, 2020 and 2019 in the amounts of $6.9
million and $2.1 million, respectively.
EPC contractors in our industry also periodically
execute certain contracts jointly with third parties through joint ventures, limited partnerships and limited liability companies
for the purpose of completing a project or program for a project owner. These special purpose entities are generally dissolved
upon completion of the corresponding project or program. Accordingly, GPS assigned its EPC contracts for two natural gas-fired
power plants to two separate joint ventures that were formed in order to build the power plants and to spread the bonding risk
of each project. The power plants were substantially completed during Fiscal 2017. Both joint ventures were dissolved in October
2018 and final cash distributions were made to the venture partners during Fiscal 2019. Due to the financial control of GPS, the
accounts of the joint ventures were included in the Company’s consolidated financial statements.
Materials and Labor
In connection with the engineering and
construction of traditional power plants, biodiesel plants and other renewable energy systems, we procure materials for installation
on our various projects. We are not dependent upon any one source for major equipment components, like heat recovery steam generation
units, steam turbines and air-cooled condensers, or any other construction materials that we use to complete a particular power
project. In general, we have not experienced significantly harmful schedule delays related to the procurement or delivery of the
necessary materials for our major projects in the past.
With our assistance, project owners frequently
procure and supply certain major components of the power plants such as heavy-duty natural gas turbines. We have significant experience
in delivering EPC projects with the latest turbine technology and working with all three major gas-fired turbine manufacturers
to meet each project owner’s specific power plant requirements. EPC project requirements may vary considerably. Our personnel
possess the skills and experience needed to overcome the plant design, development and construction challenges presented by each
EPC services project, thereby steadily eliminating uncertainties throughout the development lifecycle and construction phases of
each project.
We perform work on job sites in different
states and countries. The skilled craft labor pool is unique in each region due to a variety of factors, including union versus
non-union work environments, competing infrastructure projects located nearby our sites that utilize the same labor pool as us,
and decreased and aging labor pools resulting from demographic trends. As such, we take a carefully considered and tailored approach
at each job site to acquire and retain the required personnel resources when we need them, especially craft labor, and to maintain
optimum productivity on each of our projects. Depending on the project, we may utilize direct hires, subcontractors, existing internal
personnel, or a combination of the three. To date, we have managed to staff each of our jobs safely and effectively. However, to
staff each new project with the skilled craft labor needed to complete the job successfully, we are challenged by the widely reported
labor shortages in the construction industry, rising wages, demographic trends and other factors.
We source certain supplies, materials
and equipment from countries stricken by the COVID-19 pandemic, as do certain of the major original equipment manufacturers
for major components of natural gas-fired power plants. Disruptions to these supply chains, or the supply and productivity of
labor at job sites, due to the global COVID-19 pandemic could impact our schedules, and may ultimately affect our ability to
complete our large fixed-price contract projects in accordance with original schedules. We have protections in our contracts
with major customers that provide certain relief that helps to mitigate certain financial risks. These protections could be
limited depending on the underlying issues and the financial challenges of our customers. We are actively attempting to
manage these risks during this period of uncertainty regarding the duration and extent of the COVID-19 outbreak. The
extent of the operational and financial impacts on us probably will depend on how long and widespread the disruptions prove
to be. As we go forward, there may be unscheduled delays in the delivery of materials and equipment ordered by us or a
project owner or other unanticipated challenges to our ability to complete major job tasks when planned, among other impacts,
none of which are quantifiable at this time.
Competition
We compete with large and well capitalized
private and public firms in the construction and engineering services industry, including two of the largest construction firms
in the country, Bechtel Corporation and Kiewit Corporation. Other large competitors include, but are not limited to, Black &
Veatch, John Wood Group PLC, Burns & McDonnell Engineering Company and Zachry Group, global firms providing engineering, procurement,
construction and project management services. These and other competitors are multi-billion-dollar companies with thousands of
employees. We also may compete with regional construction services companies in the markets where planned projects might be located.
Typically, a condition for award is that the contractor perform on a fixed-price or lump-sum contract basis; smaller elements of
a contract may be billable on an allowance or cost-reimbursable basis. As explained below, there are risks of unrecovered costs,
among other features, associated with these types of contracts.
To compete with these firms, we emphasize
our proven track record as a cost-effective choice for the design, build and commissioning of natural gas-fired and alternative
energy power systems. Our successful experience includes the efficient completion of natural gas-fired combined cycle and simple
cycle power plants, wood/coal-fired plants, waste-to-energy plants, wind farms, solar fields and biofuel processing facilities,
all performed on an EPC contract basis. Through the power industry services segment, we provide a full range of competitively priced
development, consulting, engineering, procurement, construction, commissioning, operations management and maintenance services
to project owners. We are able to react quickly to their requirements while bringing a strong, experienced team to help navigate
through difficult technical, scheduling and construction issues. We believe that the cultures of GPS and APC encourage motivated,
creative, high energy and customer-focused teams that deliver results. Our projects are directed by dedicated on-site project management
teams and our project owner customers have direct access to our senior management at these companies.
The competitive landscape in the EPC services
market for natural gas-fired power plant construction has changed significantly over the last several years. While the 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 announced that they are exiting the market for a variety of reasons or have been acquired. Others
have announced intentions to avoid entering into fixed-price contracts.
Nonetheless, a recently published report
by a leading industry observer maintains that the engineering and construction sector is shifting towards more fixed-price contracts
despite their currently reported negative impacts on contractors and the construction industry. According to the report, the shift
to fixed-price contracts has occurred due to intense competition that has increased the bargaining power of project owners and
a change in the mix of projects typically completed on a fixed-price basis. However, construction and engineering companies are
consistently incurring more charges on fixed-price contracts, including some of the largest firms in the country and our competitors.
Competition has led to more aggressive
bidding on projects while contractors have accepted greater risks associated with the inability to anticipate unforeseen issues
and failure to include adequate contingencies to cover lower-than expected labor productivity, unfavorable execution challenges
and unusual weather events, for example.
As described more fully in later sections
of this report, we recorded a contract loss in the amount of $33.6 million on a major fixed-price construction subcontract in the
UK during Fiscal 2020 where we have suffered from many unforeseen events and circumstances. Nonetheless, we try to be particularly
selective in pursuing new project opportunities and will be reluctant to enter into fixed-price contracts that represent high risk
profiles. The track record of GPS has proven that fixed-price contracts can provide opportunities for higher margins if the corresponding
projects are completed at lower-than-planned costs. We are very confident that our project management teams have gained the experience
necessary for successful execution on these types of contracts as we go forward.
Customers
For Fiscal 2020, our most significant power
industry services customers were Guernsey Power Station LLC, the owner of the Guernsey Power Station project, and Técnicas
Reunidas UK Limited (“TR”), APC’s customer for the Tees Renewable Energy Project (“TeesREP”), which
is the loss project referenced above, located in Teesside, England. Each customer accounted for more than 10% of our consolidated
revenues and together they represented 37% of consolidated revenues for the year.
For Fiscal 2019, the Company’s most
significant power industry services customers were Exelon West Medway II; Moxie Freedom LLC; TR and NTE Carolinas LLC, each of
which accounted for more than 10% of our consolidated revenues and which together represented 51% of consolidated revenues for
the year.
For Fiscal 2018, the Company’s most
significant power industry services customers accounting for more than 10% of consolidated revenues were NTE Ohio LLC; CPV Towantic,
LLC; Moxie Freedom LLC and NTE Carolinas LLC. Together, these customers represented 84% of consolidated revenues for Fiscal 2018.
Regulation
Our power industry services operations
are subject to various federal, state, local and foreign laws and regulations including: licensing for contractors; building codes;
permitting and inspection requirements applicable to construction projects; regulations relating to worker safety and environmental
protection; and special bidding, procurement and employee compensation requirements. Many state and local regulations governing
construction require permits and licenses to be held by individuals who have passed an examination or met other requirements. We
believe that we have all the licenses required to conduct our current operations and that we are in substantial compliance with
applicable regulatory requirements.
The power plants that we build, and other
energy facilities including the pipelines required to supply natural gas fuel to them, are also subject to a myriad of federal
and state laws and regulations governing environmental protection, air quality, water quality and noise and height restrictions.
The growing preference for renewable energy sources and the elimination of fossil-fueled power plants by the populations of the
US and the UK may result in such restrictions becoming more severe in the future. The consequences may result in fewer gas-fired
power plants being constructed in the future than are currently forecast.
Relating to the COVID-19 pandemic, local
and national government health agencies in the US, the UK and the Republic of Ireland may continue to issue increasingly onerous
restrictions on places and/or events where people gather in close proximity to others. We do believe that our office-based employees
can continue to work effectively on a remote basis if necessary, for extended periods of time. However, such restrictions could
severely hamper our abilities to conduct construction activities on job-sites, or could shut-down such sites completely.
Industrial Fabrication and Field Services
TRC was founded in 1977 and is located
near Greenville, North Carolina. Its facilities include steel fabrication plants and support structures. TRC is principally an
industrial field services provider and steel pipe and vessel fabricator for industrial organizations primarily in the southeast
region of the US.
Historically, TRC was a profitable company
that incurred a pre-acquisition net loss in 2015, primarily due to it taking on large contracts before the acquisition that resulted
in significant losses. With the reengagement and leadership of TRC’s founder, our financial support and the substantial completion
of these loss contracts, we acquired TRC with the belief that it was positioned to succeed in the future with a return to profitable
operations. Significant efforts have been expended since the acquisition to sustain a financial turnaround with growing revenues
and profitable operating results. Although actual results for Fiscal 2019 were encouraging, results of operations sagged in Fiscal
2020. There can be no assurances that TRC will re-establish the positive trend in revenues or improve profitability in the future.
Since the acquisition, we have provided TRC with an additional $25.0 million in net cash so that it could fund the completion of
the work on loss contracts in progress on the date of the acquisition, enhance working capital in support of business growth and
stability, acquire capital equipment to assure efficient and competitive fabrication and field operations and support other general
corporate needs. Most of this cash was provided in the year period following the acquisition. The operating results for Fiscal
2020 and the resulting revisions to forecasted results caused us to record a goodwill impairment loss in the amount of $2.8 million,
which followed impairment losses recorded in Fiscal 2019 and Fiscal 2018 in the amounts of $1.5 million and $0.6 million, respectively.
TRC operates within its own reportable
business segment, industrial field services and fabrication. Its major customers include North America’s largest forest products
companies such as Weyerhaeuser Company and Domtar Corporation; large fertilizer companies such as Nutrien Ltd. (formerly Potash
Corp.); EPC firms such as Fluor Corporation and GPS; mining companies such as OceanaGold Corporation; a world leading supplier
of industrial gases, Air Liquide S.A., and various petrochemical companies. For Fiscal 2020, Fiscal 2019 and Fiscal 2018, TRC reported
revenues of $94.7 million, $101.7 million and $65.3 million, respectively, or approximately 40%, 21% and 7% of consolidated revenues
for the corresponding years, respectively.
Telecommunications Infrastructure
Services
SMC represents our telecommunications infrastructure
services reportable business segment and conducts business as SMC Infrastructure Solutions, which provides comprehensive technology
wiring and utility construction solutions to customers primarily in the mid-Atlantic region of the US. We perform both outside
and inside plant cabling.
Services provided to our outside premises
customers include trenchless directional boring and excavation for underground communication and power networks, aerial cabling
services, and the installation of buried cable, high and low voltage electric lines, and private area outdoor lighting systems.
The outside premises services are primarily provided to state and local government agencies, regional communications service providers,
electric utilities and other commercial customers. The wide range of inside premises wiring services that we provide to our customers
include the structuring, cabling, terminations and connectivity that provide the physical transport for high speed data, voice,
video and security networks. These services are provided primarily to federal government facilities, including cleared facilities,
on a direct and subcontract basis. Such facilities typically require regular upgrades to their wiring systems in order to accommodate
improvements in security, telecommunications and network capabilities.
Consistently, a major portion of SMC’s
revenue-producing activity each year is performed pursuant to task or work orders issued under master agreements with SMC’s
major customers. Over the last three years, these major customers have included the city of Westminster, Maryland, certain state
government agencies in Maryland, counties and municipalities located in Maryland; DXC Technology Company; Science Applications
International Corporation (SAIC) and Southern Maryland Electric Cooperative, a local electricity cooperative. The revenues of SMC
were $8.6 million, $12.7 million and $13.0 million for Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively, or approximately
3%, 3% and 1% of our consolidated revenues for the corresponding years, respectively.
SMC operates in the fragmented and competitive
telecommunication and infrastructure services industry. We compete with providers ranging from regional companies to larger firms
servicing multiple regions, as well as large national and multi-national contractors. We believe that we compete favorably with
the other companies in our market space by emphasizing our high-quality reputation, outstanding customer base, security-cleared
personnel and highly motivated work force in competing for larger and more diverse contracts. Based on its reputation and quality
performance, SMC was selected on a sole source basis to perform outside premises and structured cabling work at several secure
overseas location which it completed successfully during Fiscal 2020 and Fiscal 2019.
Employees
The total number of personnel employed
by us is subject to the volume of construction in progress and the relative amount of work performed by subcontractors. We had
approximately 1,154 employees at January 31, 2020, substantially all of whom were full-time. We believe that our employee relations
are generally good.
Financing Arrangements
We have financing arrangements with Bank
of America (the “Bank”) that are described in an Amended Replacement Credit Agreement (the “Credit Agreement”),
dated May 15, 2017. The Credit Agreement provides a revolving loan with a maximum borrowing amount of $50.0 million that is available
until May 31, 2021 with interest at the 30-day LIBOR plus 2.0%. 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. At January 31, 2020, the Company had credit outstanding under
the Credit Agreement, but no borrowings, in the approximate amount of $9.9 million. Approximately 80% of the outstanding credit
was issued for the benefit of TR relating to the TeesREP project. Additionally, in support of the current project development activities
of the active VIE discussed above, the Bank issued a letter of credit in the approximate amount of $3.4 million, outside of the
scope of the Credit Agreement, for which the Company has provided cash collateral. 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 Bank requires that we comply with certain financial covenants at our fiscal
year-end and at each of our fiscal quarter-ends. The Credit Agreement includes other terms, covenants and events of default that
are customary for a credit facility of its size and nature. As of January 31, 2020, we were in compliance with the financial covenants
of the Credit Agreement. We believe we will continue to comply with the financial covenants of the Credit Agreement.
Safety, Risk Management, Insurance
and Performance Bonds
We are committed to ensuring that the employees
of each of our businesses perform their work in a safe environment. We regularly communicate with our employees to promote safety
and to instill safe work habits. GPS, APC, TRC and SMC each have an experienced full-time safety director committed to ensuring
a safe work place, as well as compliance with applicable permits, insurance and local and environmental laws. Our OSHA reportable
incident rates, weighted by hours worked for all of our subsidiaries, were 0.40 and 0.54 for calendar years 2019 and 2018, respectively;
our rates were significantly better than the national average rates in our industry (NAICS - 2379) for those years.
We retain qualified insurance brokerage
assistance in the regular evaluation of the adequacy of insurance coverage amounts and the annual negotiation of premium amounts
in the areas of property and casualty insurance, general liability, umbrella coverage, director and officer insurance and other
specialty coverages. We believe that our insurance coverage amounts are adequate, but not excessive, and provide the proper amount
of coverage where we believe insurable risks may exist.
Contracts with customers in each of our
reportable business segments may require performance bonds or other means of financial assurance to secure contractual performance.
We maintain material amounts of cash, cash equivalents and short-term investments, and, as indicated above, we have the commitment
of the Bank to issue irrevocable standby letters of credit up to an aggregate amount of $50.0 million in support of our bonding
collateral and other business requirements. As of January 31, 2020, the revenue value of our unsatisfied bonded performance obligations
was approximately $734 million. In addition, there were bonds outstanding in the aggregate amount of approximately $152 million
covering other risks including our warranty obligations related to EPC services projects completed by GPS during Fiscal 2019. Not
all of our projects require bonding.
Materials Filed with the Securities
and Exchange Commission
The public
may read any materials that we file with the Securities and Exchange Commission (the “SEC”) at the SEC’s public
reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov. We maintain
a website on the Internet at www.arganinc.com that includes access to financial data. Information on our website
is not incorporated by reference into this Annual Report on Form 10-K. Copies of our Annual Reports on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as well as our Proxy Statements, are available, as soon as reasonably practicable
after we electronically file such materials with, or furnish them to, the SEC, without charge and upon written request provided
to our Corporate Secretary at Argan, Inc., One Church Street, Suite 201, Rockville, Maryland 20850.
ITEM
1A. RISK FACTORS.
Our business is challenged by a changing
environment that involves many known and unknown risks and uncertainties. The risks described below discuss factors that have
affected and/or could affect us in the future. There may be others. We may be affected by risks that are currently unknown to
us or are immaterial at this time. If any such events did occur, our business, financial condition and results of operations could
be adversely affected in a material manner. Our future results may also be impacted by other risk factors listed from time to
time in our future filings with the SEC, including, but not limited to, our Annual Reports on Form 10-K and our Quarterly Reports
on Form 10-Q. As the most significant portion of our consolidated entity is represented by the power industry services reportable
business segment, the risk factor discussions included below are focused on that business. However, as a large number of these
same risks exist for our other reportable segments, (1) industrial fabrication and field services, and (2) telecommunications
infrastructure services, a review and assessment of the following risk factors should be performed with that in mind.
This section of our Form 10-K Annual Report
for the year ended January 31, 2020 (our “2020 Annual Report”) may include projections, assumptions and beliefs that
are intended to be “forward looking statements.” They should be read in light of our cautionary statement regarding
“forward looking statements” that is presented in Item 7 of our 2020 Annual Report.
Risks Related to Our Business
The completion of the TeesREP project
may require the booking of additional contract losses.
Management expects that the forecasted
costs for APC at the completion of the TeesREP project will exceed projected revenues by approximately $33.6 million. The entire
amount of this loss was recorded and reflected in our consolidated financial statements for the year ended January 31, 2020.
In December 2019, APC and its customer,
the engineering, procurement and construction services contractor on the TeesREP project, agreed to operational and commercial
terms for the completion of the project. This framework generally addresses project schedule, payment terms, scope, performance
guarantees and other terms and conditions for APC reaching substantial completion of its portion of the total project by mid-2020.
The framework does not resolve significant past commercial differences which may have to be addressed through applicable dispute
resolution mechanisms. It is not possible currently to predict precisely how, when and on what terms (if any) the past commercial
differences will be resolved. Failure to negotiate the favorable resolution of the commercial differences may cause us to record
additional losses on this project that may be material. Additional losses may also be incurred during the completion of the project
due to a variety of possible causes including weather delays, work stoppages, the COVID-19 pandemic, productivity declines, construction
schedule delays, the financial instability of our customer or other causes beyond the control of APC. Our failure to recover the
unforeseen costs that may be incurred by us related to such events may result in our recording additional losses. In summary,
until we have completed all activities on this project and have resolved all commercial differences with our customer, it is possible
that we may be required to record additional losses related to this project that may be material to our future consolidated results
of operations.
Future revenues and earnings are dependent
on the awards of new EPC projects, the receipt of corresponding full notices-to-proceed and our ability to successfully complete
the projects that we start.
The majority of the Company’s consolidated
revenues related to performance by the power industry services segment which provided 57%, 76% and 91% of consolidated revenues
for Fiscal 2020, 2019 and 2018, respectively. Due primarily to the favorable operating results of GPS, the major business component
of this segment, we have generated consolidated net income for nine of the last ten years. Revenues for the power industry services
reporting segment decreased from the prior year by 63% for Fiscal 2020 and 55% for Fiscal 2019. Fiscal 2020 operating results
for this segment were adversely affected in a material manner by the contract loss incurred by our APC subsidiary in the UK and
the delay in the project starts on EPC services contracts in the US. However, the aggregate amount of the rated output of electrical
power for the five planned gas-fired power plants for which we had signed EPC services contracts as of January 31, 2020 was 5.8
gigawatts. Subsequently, GPS signed EPC services contracts for two additional natural gas-fired power plants which will provide
an additional 1.6 gigawatts of electrical output. Our ability to achieve sustained profitable operations depends on many factors
including the ability of the power industry services business to gain significant new EPC projects, to obtain the corresponding
full notices-to-proceed and to complete its projects successfully.We have received a full notice to proceed for only one of these
new EPC projects and there is always a possibility that one or more of the other projects will not be built. Should we fail to
commence construction activities on some of these major projects during the year ending January 31, 2021 (“Fiscal 2021”),
the growth in revenues and profits that we expect for Fiscal 2021 will be adversely affected.
Our dependence on a few customers could
adversely affect us.
The size of the energy plant construction
projects of our power industry services segment frequently results in a limited number of projects contributing a substantial
portion of our consolidated revenues each year. For Fiscal 2020, the Company’s most significant customer relationships included
two power industry service customers which together accounted for 37% of consolidated revenues. For Fiscal 2019, the Company’s
most significant customer relationships included four power industry service customers which together accounted for 51% of consolidated
revenues. For Fiscal 2018, the Company’s most significant customer relationships included four power industry service customers
which together represented 84% of consolidated revenues. Should we fail to obtain the award of any one new major project that
we expect, substantial portions of future consolidated revenues and profits may be adversely affected.
Our dependence on large construction
contracts may result in uneven financial results.
Our power industry service activities
in any one fiscal reporting period are concentrated on a limited number of large construction projects for which we recognize
revenues over time as we transfer control of the project asset to the customer. To a substantial extent, our contract revenues
are based on the amounts of costs incurred. As the timing of equipment purchases, subcontractor services and other contract events
may not be evenly distributed over the terms of our contracts, the amount of total contract costs may vary from quarter to quarter,
creating uneven amounts of quarterly and/or annual consolidated revenues. In addition, the timing of contract commencements and
completions may exacerbate the uneven pattern. As a result of the foregoing, future reported amounts of consolidated revenues,
cash flow from operations, net income and earnings per share may vary in an uneven pattern and may not be indicative of the operating
results expected for any other fiscal period, thus rendering consecutive quarter comparisons of our consolidated operating results
a less meaningful way to assess the growth of our business.
Actual results could differ from the assumptions and estimates
used to prepare our financial statements.
To prepare consolidated financial statements
in conformity with accounting principles generally accepted in the US, we are required to make estimates, assumptions and judgments
as of the date of such financial statements, which affect the reported values of assets and liabilities, revenues and expenses,
and disclosures of contingent assets and liabilities. For example, we have recognized revenues over the life of a contract based
on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. We review
and make necessary revisions to such costs on a monthly basis. In addition, contract results may be impacted by our estimates
of the amounts of change orders that we expect to receive and our assessment of any contract disputes that may arise.
In accordance with the new accounting
rules governing revenue recognition, we recognize substantial portions of our revenues over time as performance obligations are
completed by us. In most cases, such progress will be measured in a manner similar to past accounting practices using a cost-to-cost
method. This methodology allows us to recognize revenues over the life of a contract by comparing the amount of the costs incurred
to date against the total amount of costs expected to be incurred, and using the resulting percentage to update the recorded amounts
of project-to-date revenues. The effects on revenues of changes to the amounts of contract values and estimated costs typically
will be recorded as catch-up adjustments when the amounts are known and can be reasonably estimated. These revisions can occur
at any time and could be material. Given the uncertainties associated with the types of customer contracts that we are awarded,
it is possible for contract values and actual costs to vary from estimates previously made, which may result in reductions or
reversals of previously recorded revenues and profits.
Other areas requiring significant estimates by our management
include:
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the
assessment of the value of goodwill and recoverability of other purchased intangible assets;
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the
determination of provisions for income taxes, the accounting for uncertain income tax positions and the establishment of valuation
allowances associated with deferred income tax assets;
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the
determination of the fair value of stock-based incentive awards;
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the
identification of the primary beneficiary of entities in which we may have variable interests;
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accruals
for estimated liabilities, including warranties and losses and expenses related to legal matters; and
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the
initial valuation of assets acquired and liabilities assumed in connection with business combinations.
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Our actual business and financial results
could differ from our estimates, which may impact future profits.
Project backlog amounts may be uncertain
indicators of future revenues as project realization may be subject to unexpected adjustments, delays and cancellations.
At January 31, 2020, the total value of
our project backlog was $1.3 billion. Project cancellations or scope modifications may occur that could reduce the amount of our
project backlog and the associated revenues and profits that we actually earn. Projects that are awarded to us may remain included
in our backlog for extended periods of time as customers experience project delays. Should any unexpected delay, suspension or
termination of the work under such contracts occur, our results of operations may be materially and adversely affected. For example,
in March 2018, GPS entered into an EPC services contract to build a 500 MW natural gas-fired power plant that was added to project
backlog. However, due to customer delays including a grid connection dispute, contract activities have not yet started. We cannot
guarantee that revenues projected by us based on our project backlog at January 31, 2020 will be recognized or will result in
profitable operating results.
If financing for new energy plants
is unavailable or too expensive, construction of such plants may not occur.
Historically, natural gas-fired power
plants have been constructed typically for large utility companies. To a large extent, the construction of new energy plants by
us is performed for independent power producers. This type of project owner may be challenged in obtaining the equity financing
necessary to commence the project. Accordingly, debt financing for the construction of new facilities may not be available or
it may become cost prohibitive, thereby adversely affecting the likelihood that the planned projects will be built and jeopardizing
potential sources of future revenues for us.
Unsuccessful efforts to develop energy
plant projects could result in write-offs and the loss of future business.
The development of a power plant construction
project is expensive with a total cost that could approximate or exceed $10 million. The commercial developers of power projects
may form single purpose entities, such as limited liability companies, limited partnerships or joint ventures, to perform the
development activities, which are often funded by outside sources. We periodically see business opportunities where we consider
providing financial support to the ownership of a new project, at least during the development phase, in order to improve the
probability of an EPC contract being awarded to us.
In the past, we have been successful in
lending funds to single purpose entities formed to develop gas-fired power plants. Each successful involvement resulted in repayment
of the loans to us and, more critically, the award to us of the EPC contacts for the construction of the corresponding plant.
In addition, the completed development efforts resulted in our receipt of success fees. Other project development support efforts
have not been successful, resulting in the write-off of loan and interest balances.
At present, we are supporting the development
efforts for certain new gas-fired power plant projects including funding provided under development loans and other forms of credit
support. There can be no assurances that we will benefit from the successful development of these projects or others that may
arise in the future. The failure of owners to complete the development of power plants could result in the loss of future potential
construction business and could result in write-off adjustments related to the balance of any project development costs or amounts
lent or credit extended to potential project owners. Further, our failure to obtain the opportunity to support future power plant
development projects and the potential to build the associated power plants could be detrimental to future growth. Large unfavorable
adjustments related to current and/or future developmental projects could have a material adverse impact on our operating results
for a future reporting period.
Future bonding requirements may adversely
affect our ability to compete for new energy plant construction projects.
Our construction contracts frequently
require that we obtain payment and performance bonds from surety companies on behalf of project owners as a condition to the contract
award. Historically, we have had a strong bonding capacity. However, under standard terms, surety companies issue bonds on a project-by-project
basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing any
bonds. Not all of our projects require bonding. As of January 31, 2020, the estimated value of future work covered by outstanding
performance bonds was approximately $734 million. In addition, there were bonds outstanding in the aggregate amount of approximately
$152 million covering other risks including our warranty obligations related to four EPC services projects substantially completed
by GPS during Fiscal 2019.
Market conditions, changes in our performance
or financial position, changes in our surety’s assessment of its own operating and financial risk or larger future projects
could cause our surety company to decline to issue, or substantially reduce the amount of bonds for our work and could increase
our bonding costs. These actions can be taken on short notice. If our surety company were to limit or eliminate our access to
new bonds, our alternatives would include seeking bonding capacity from other surety companies, joint venturing with other construction
firms, increasing business with clients that do not require bonds and posting other forms of collateral for project performance,
such as letters of credit, or cash.
We may be unable to make alternative arrangements
in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption, reduction or other
alteration in the availability of bonding capacity, we may be unable to compete for or work on certain projects.
Our results could be adversely affected
by natural disasters or other catastrophic events.
Natural disasters,
such as hurricanes, tornadoes, floods and other adverse weather and climate conditions; or other catastrophic events could disrupt
our operations, or the operations of one or more of our vendors or customers. In particular, these types of events could shut-down
our construction job sites or fabrication facilities for indefinite periods of time, break our product supply chain from the impacted
region or could cause our customers to delay or cancel projects, which could impact our ability to operate. To the extent any
of these events occur, our operations and financial results could be adversely affected.
Effects
of the coronavirus (COVID-19) outbreak will adversely impact our business (see Note 19 to the accompanying financial
statements for disclosure of subsequent events related to the outbreak).
Like many other companies, the
coronavirus outbreak is impacting our supply chain. The Company and certain of its major original equipment manufacturers
source certain supplies, materials and equipment from countries afflicted by the outbreak. Production disruptions
related to the spreading of this virus could impact our schedules, thereby affecting our ability to complete large
fixed-price contract projects in accordance with original schedules. Now that the outbreak has become a global pandemic, it
could further challenge our ability to conduct operations normally, especially at job sites where sustained labor
productivity is essential to the achievement of successful projects. We have protections in our contracts with major
customers that provide certain relief that helps to mitigate certain financial risks. The effectiveness of these protections
may be limited by underlying issues and financial challenges at our customers. We are actively attempting to manage these
various risks. However, due to the uncertainty regarding the duration and extent of the COVID-19 outbreak, the extent of
the operational and financial impacts on the Company will depend on how long and how disperse the disruptions prove to be in
a variety of areas, including the capital markets, the Company’s customers and supply chains, and the Company’s
labor force. The current impacts of the outbreak on the Company’s businesses are not quantifiable at this time.
Risks Related to Our Market
Continued disruption of PJM’s
Base Residual Auction schedule may delay the start of planned power projects.
PJM Interconnection
LLC (“PJM”), founded in 1927, ensures the reliability of the high-voltage electric power system serving 65 million
people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,
Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region’s
transmission grid; administers a competitive wholesale electricity market; and plans regional transmission expansion improvements
to maintain grid reliability and relieve congestion. PJM operates a capacity market, called the Reliability Pricing Model
(“RPM”), which is a process to ensure long-term grid reliability by securing the appropriate amount of power supply
resources needed to meet predicted future energy demands. An RPM base residual auction for a particular delivery year is
usually held during the month of May, three years prior to the actual delivery year.
The accuracy and viability of future power
revenue forecasts by power plant operators and project owners depends, to a significant degree, on the amount of future capacity
supply secured for a particular power source located within PJM’s region. For new power projects, lack of visibility regarding
future capacity revenue streams complicates the search for equity and debt financing considerably. Most of our recently completed
and awarded EPC service contracts relate to natural gas-fired power plants located in the PJM region.
In
December 2019, the Federal Energy Regulatory Commission (“FERC”) voted to effectively raise the bids of
subsidized resources selling their power into PJM’s wholesale capacity market. New resources receiving subsidies will now
be subject to a rule which raises the price floor for those resources attempting to sell their power into the wholesale market.
The move was intended to prevent potential unacceptable market distorting effects caused by state clean energy policies. Clean
energy advocates and other market observers fear FERC's move will severely hinder incentives intended to bring new zero emissions
resources online, while favoring incumbent fossil fuels. Pursuant to FERC’s requirements, PJM submitted its compliance filing
with FERC on March 18, 2020, attempting to balance disparate stakeholder input. In the filing, PJM proposes to run the 2022/2023
delivery year auction six months after FERC approves its compliance filing, as long as the auction is concluded no later than
March 2021, and to run subsequent auctions with as little as six months in between to help maintain an orderly process for each
auction while working to return to a normal auction schedule. PJM had previously suspended all auction activities and deadlines
relating to the RPM base residual auctions for the 2022/2023 and 2023/2024 electricity delivery years.
The uncertainty relating to PJM capacity
auctions may continue to disrupt capital markets for project owners. The commencement of new EPC service power plant projects
by us may be delayed until PJM receives FERC approval of new capacity auction bidding rules and definitive future capacity auction
schedules are announced.
The decline in electricity capacity
market prices may discourage future investment in new gas-fired power plant development.
The results for PJM’s most recent
capacity auction (posted in May 2018) included a general clearing price that increased by more than 82% from the corresponding
price in the previous year, but was still 15% below the price three years previous. With the exception of the most recent auction,
decreased capacity pricing reflects increased participation by new generation capacity resources mostly represented by new or
updated gas-fired power plants. The electricity generation units clearing the most recent auction did not include any new gas-fired
power plants. If future capacity auction clearing prices were to resume their fall in the US, power plant developers may be discouraged
from commencing the development and construction of new power plants which would adversely impact our business.
If the pace of future shutdown of existing
coal-fired power plants slows or future policy changes encourage coal-fired and/or nuclear power-plant operations, the demand
for our construction services could decline.
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 and the enthusiasm for nuclear-powered electricity generation has waned in the US. Over the last ten years, the
electricity-generation capacity represented by coal-fired power plants in the US declined by approximately 30%. During 2019, power
companies retired or converted roughly 15,100 megawatts (MW) of coal-fired electricity generation, enough to power about 15 million
homes. That retirement capacity reduction was second only to the record 19,300 MW of capacity shut down in 2015. In 1990, coal-fired
power plants accounted for about 52% of total electricity generation. By the end of 2019, coal accounted for less than 24% of
total electricity generation. The use of coal as a power source has been adversely affected primarily by the inexpensive
supply of natural gas. Most nuclear power plants were built before 1990. Nuclear energy’s share of total US electricity
generation has held steady at about 20% since 1990. The future of nuclear power plant construction is clouded. The abandonment
of the partially completed reactors at the V.C. Summer nuclear power generation plant in South Carolina was accompanied by the
project owner’s announcement of a reluctance to saddle customers with increasing costs. Just two nuclear power plant reactors
are under construction in the US today (the Vogtle plant units 3 and 4).
The pace of these changes has been energized
by environmental activism, environmental regulations targeting coal-fired power plants and public fear of nuclear power plants.
In the reference case of the Annual Energy Outlook 2020, the Energy Information Administration
(“EIA”) predicts that coal-fired and nuclear power generation capacity will decline approximately 47% and 20% by 2050,
respectively, and will represent only 14% and 13% shares of the electricity generation mix by 2050, respectively.
However, the policies and actions of the
federal government may present risks to our power industry services business. The administration of President Trump may continue
to reduce or eliminate environmental rules and regulations aimed at curbing greenhouse gas emissions and may support coal and
nuclear-fired power plants for the sake of grid resilience. Should the federal government weaken or eliminate anti-pollution regulations
or adopt policies that advance support for the operation of nuclear power plants, power plant operators may slow the rate of coal-fired
and nuclear-powered electricity generation plant shutdowns, thereby reducing the number of future gas-fired power plant construction
opportunities for us in the future.
Soft demand for electrical power may
cause deterioration in our financial outlook.
During 2018 and for the first time in
12 years, the total annual amount of electricity generated by utility-scale facilities in the US surpassed the total amount generated
in the peak power generation year of 2007 as the total amount of electricity generation was approximately 100.5% of the level
for 2007. The recently published government reference-case outlook forecasts average increases to utility-scale electricity generation
in the US of less than 1% per year through 2050.
However, for calendar year 2019, the total
amount of electricity generated by utility-scale power plants declined by 1.3%. Prior to 2018, total electric power generation
from all sources had decreased over three years. Power demand gains related to economic growth and population increases have been
offset by the effects of private electricity generation and energy efficient devices. The largest share of electricity generation
by utility-scale power sources in the US is fueled by natural gas. Further softening of future demand for electrical power in
the US, which will likely occur in the near term due to adverse impacts of the COVID-19 outbreak, could result in the delay, curtailment
or cancellation of future gas-fired power plant projects, thus decreasing the overall demand for our EPC services and adversely
impacting the financial outlook for our power industry services business.
Intense global competition for engineering,
procurement and construction contracts could reduce our market share.
The competitive landscape in the EPC services
market for natural gas-fired power plants has changed significantly over the last few years. Several significant competitors announced
their exit from the market for a variety of reasons. Others have announced intentions to avoid entering into fixed-price contracts
citing the disproportionate financial risks born by contractors. However, the market remains dynamic, and competitors include,
among others, Kiewit Corporation, Bechtel Corporation and Black & Veatch Corporation. These and other competitors are multibillion-dollar
companies with thousands of employees. Competing effectively in our market requires substantial financial resources, the availability
of skilled personnel and equipment when needed and the effective use of technology.
Competition places downward pressure on
our contract prices and profit margins and may force us to accept contractual terms and conditions that are not normal or customary,
thereby increasing the risk that we may incur losses on such contracts. Meaningful competition is expected to continue in our
market, presenting us with significant challenges to our achieving strong growth rates and acceptable profit margins. If we are
unable to meet these competitive challenges and start new projects that provide desirable margins, we could lose market share
to our competitors, experience overall reductions in future revenues and profits or incur losses.
Our revenues and profitability may
be adversely affected by a reduced level of activity in the hydrocarbon industry.
Changes in oil or natural gas prices or
activities in the hydrocarbon industry could adversely affect the demand for our services. The vast new supplies of natural gas
have caused, in part, low prices for natural gas in the US. Future predictions of power generation are based in large part on
the belief that natural gas supplies will remain plentiful resulting in a relatively low and stable price for natural gas in the
foreseeable future. However, future oil or natural gas prices that are too low may result in cutbacks in exploration, extraction
and production activities which may lead to reductions in future supplies of natural gas.
Subsequent to January 31, 2020, the global
price of oil became very unstable. In March 2020, the global price for a barrel of oil tumbled by 25% during one day, and the
price in the US hit an 18-year low. The continuing oil price war between Saudi Arabia and Russia showed no signs of abating. A
sustained depression in the price of oil may have the opposite effect on the future price of natural gas. The low price of oil
could result in the curtailment of all drilling activities, thereby decreasing supplies of natural gas and increasing natural
gas prices. A meaningful rise in natural gas prices, which could also be caused or exacerbated by the significant exporting of
liquefied natural gas, may adversely impact the favorable economic factors for project owners as they consider the construction
of natural gas-fired power plants in the future. Any reduction in the number of future power plant project construction or improvement
opportunities could adversely affect our power industry service business.
In addition, certain of our existing customers
have meaningful exposure to the oil business. Continued instability in the oil markets could negatively impact their businesses
and associated liquidity and potentially result in an inability to pay monies owed to us.
The continuous rise in renewables could
reduce the number of future gas-fired power plant projects.
The share of electricity generation in
the US provided by utility-scale wind and solar photovoltaic facilities continues to gradually increase. Together, such power
facilities provided approximately 9.6%, 9.9% and 10.8% of the total amount of electricity generated by utility-scale power facilities
in 2017, 2018 and 2019, respectively. In EIA’s 2020 reference case, electricity generating capacity from wind and solar
powered sources is expected to increase by more than 360%, representing over 30% of total capacity, by 2050. Impetus for this
growth has been provided by various factors including laws and regulations that discourage new fossil-fuel burning power plants,
environmental activism, income tax advantages that promote the growth of wind and solar power, the decline in the amount of renewable
power plant component and power storage costs and the increase in the scale of energy storage capacity. Should the pace of development
for renewable energy facilities, including wind and solar power plants, accelerate at faster rates than forecast, the number of
future natural gas-fired construction project opportunities for us may fall. We have successfully built utility-scale wind and
solar farms in the past, and we have renewed the pursuit of such projects as a core business development focus. Failure to obtain
future awards for the erection of wind and solar-powered utility-scale power projects could have adverse effects on our future
revenues, profits and cash flows.
Uncertain economic and political conditions
may increase the difficulty of forecasting future domestic business levels.
Certain regulatory and political conditions
in the US may make it more difficult for our customers, our subcontractors and suppliers and us to predict accurately future business
levels and to plan future business activities. For example, changes to policies have resulted in uncertainty regarding the future
of global trade due to actual and threatened trade restrictions in the US as well as possible retaliatory trade measures that
may be implemented by other countries. The availability of construction and manufacturing materials, such as steel, aluminum and
lumber, at predictable and reasonable prices when we need them is crucial to the ability of GPS and TRC to complete projects profitably,
particularly those performed under fixed-price contract basis. We cannot predict the outcome of these changing trade policies
or other unanticipated regulatory or political conditions or their ultimate effects on our ability to manage our businesses profitably.
Unexpected and adverse changes in the
foreign countries in which we operate could result in project disruptions, increased cost and potential losses.
Our business is also subject to international
economic and political conditions that change for reasons which are beyond our control. Such changes may have unfavorable consequences
for us. Operating in the international marketplace, which for us exists primarily in the Republic of Ireland and the UK, may expose
us to a number of risks including:
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abrupt
changes in domestic and/or foreign government policies, laws, treaties (including those
impacting trade), regulations or leadership;
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embargoes
or other trade restrictions, including sanctions;
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restrictions
on currency movement;
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tax
or tariff increases;
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currency
exchange rate fluctuations;
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changes
in labor conditions and difficulties in staffing and managing international operations;
and
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other
social, political and economic instability.
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Further, the ultimate impacts of the UK’s
exit from the European Economic Union (“Brexit”) on the economies of the UK and the Republic of Ireland and the stability
of their currencies are currently unknown.
Our level of exposure to these risks will
vary on each significant project we perform there, depending on the location and the particular stage of the project. To the extent
that our international business is affected by unexpected and adverse foreign economic changes, including trade retaliation from
certain countries, we may experience project disruptions and losses which could significantly reduce our consolidated revenues
and profits, or cause losses at the consolidated level.
Risks Related to the Regulatory
Environment
Future construction projects may depend
on the continuing acceptability of the hydraulic fracturing process in certain states.
The viability of the gas-fired power plants
that we build is based substantially on the availability of inexpensive natural gas supplies provided through the use of hydraulic
fracturing (“fracking”) combined with horizontal drilling techniques. Certain technological advancements led to the
widespread use of fracking and horizontal drilling enabling drillers to reach natural gas and oil deposits previously trapped
within shale rock formations deep under the earth’s surface. The access to new oil and gas reserves are transforming the
oil and gas industry in the US. In particular, the new supplies of natural gas have lowered the price of natural gas in the US
and reduced its volatility, making the operation of natural gas-fired power plants more economically appealing. However, the process
of fracking uses large volumes of highly pressurized water to break-up the shale rock formations and to free the trapped natural
gas and oil. This process is controversial due to concerns about the disposal of the waste water, the possible contamination of
nearby water supplies and the risk of potential seismic events.
As a result, not all states permit the
use of fracking. In addition, contenders for the Democratic Presidential nomination in 2020 threatened that the practice would
be further limited or suspended across the country. Should future evidence confirm the concerns, should a major contamination
or seismic episode occur in the future or should the political control of the White House change in 2020, the use of fracking
may be suspended, limited, or curtailed by state and/or federal authorities. As a result, the supply of inexpensive natural gas
may not be available in the future and the economic viability of gas-fired power plants may be jeopardized. A reduction in the
pace of the construction of new gas-fired power plants would have a significantly adverse effect on our future operating results.
We may be affected by regulatory responses to the fear of
climate change.
Growing concerns about climate change
caused by greenhouse gas emissions may result in the imposition of additional environmental regulations on the operators of fossil-fuel
burning power plants. Legislation, international protocols or new regulations and other restrictions on emissions promulgated
by government agencies could affect those entities, including our customers in some cases, who are involved in the exploration,
production or refining of fossil fuels or emit greenhouse gases through the combustion of fossil fuels. Concerns about global
warming, climate change and other conditions provided motivation for the Green New Deal Resolution promoted by progressive members
of the US Congress which is supported by numerous environmental groups. The plan pushes for transitioning the US to use 100% renewable,
zero-emission energy sources and implementing the “social cost of carbon” within 10 years.
We cannot
predict when or whether any of these various proposals may be enacted or what their effect will be on or customers or on us.
Such policy changes could increase the costs of natural gas-fired power plant projects for our customers or decrease the cost
of competing renewable power projects through subsidies or other means, thereby, in some cases, ruining the economic or regulatory
viability of a future gas-fired power plant development project. The impact could be a reduction of the need for our services,
which would in turn have a material adverse impact on our business, financial condition, and results of operations.
The inability of power project developers
to receive or to avoid delay in receiving the applicable regulatory approvals relating to new power plants may result in lost
or postponed revenues for us.
The commencement and/or execution of the
types of projects performed by our power industry services reporting segment are subject to numerous regulatory permitting processes.
Applications for the variety of clean air, water purity and construction permits may be opposed by individuals or environmental
groups, resulting in delays and possible denial of the permits. There are no assurances that our project owner customers will
obtain the necessary permits for these projects, or that the necessary permits will be obtained in order to allow construction
work to proceed as scheduled. Failure to commence or complete construction work as anticipated could have material adverse impacts
on our future revenues, profits and cash flows.
The viability of new natural gas-fired
power plants depends on the availability of nearby sources of natural gas for fuel which may require the construction of new pipelines
for the delivery of gas to a power plant location. A planned plant may also depend on the erection of transmission lines for the
delivery of the newly generated electricity to the grid. Concerns about climate change have also resulted in increased environmental
activism that represents opposition to the regulatory approval of any fossil-fuel energy project. Approval delays and public opposition
to new oil and gas pipelines have become major potential hurdles for the developers of gas-fired power plants and other fossil
fuel facilities. The slowdown in permitting processes is due, at least in part, to the increase in environmental activism that
garners media attention and fosters public skepticism about new projects. In particular, pipeline projects are delayed by onsite
protest demonstrations, indecision by local officials and lawsuits. Approval difficulties may jeopardize projects that are needed
to bring supplies of natural gas to proposed gas-fired power plant sites or electricity to the grid thereby increasing the risk
of gas-fired power plant delays or cancellations.
We could be subject to compliance with environmental laws
and regulations that would add costs to our business.
Our operations are subject to compliance
with federal, state and local environmental laws and regulations, including those relating to discharges to air, water and land,
the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. Certain
environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental
Response, Compensation and Liability Act, impose strict, retroactive, and joint and several liability upon persons responsible
for releases of hazardous substances. We continually evaluate whether we must take additional steps to ensure compliance with
environmental laws, however, there can be no assurance that these requirements will not change and that compliance will not adversely
affect our operations in the future.
Work stoppages, union negotiations and other labor problems
could adversely affect us.
The performance
of certain large-scale construction contracts results in the hiring of employees represented by labor unions. We do make
sincere efforts to maintain favorable relationships and conduct good-faith negotiations with union officials. However, there can
be no assurances that such efforts will eliminate the possibilities of unfavorable conflicts in the future. A lengthy strike or
the occurrence of other work stoppages or slowdowns at any of our current or future construction project sites could have an adverse
effect on us, resulting in cost overruns and schedule delays that could be significant. In addition, it is possible that labor
incidents result in negative publicity for us thereby damaging our business reputation and perhaps harming our prospects for the
receipt of future construction contract awards in certain locales.
Risks Related to Our Operational Execution
We may experience reduced profits or
incur losses under fixed price contracts if costs increase above estimates.
Primarily, our business is performed under
long-term, fixed price contracts at prices that reflect our estimates of corresponding costs and schedules. Inaccuracies in these
estimates may lead to cost overruns that may not be paid by our project owner customers. If we fail to accurately estimate the
resources required and time necessary to complete these types of contracts, or if we fail to complete these contracts within the
costs and timeframes to which we have agreed, there could be material impacts on our financial results as well as our business
reputation.
Factors that could result in contract
cost overruns, project delays or other problems for us may include:
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delays
in the scheduled deliveries of machinery and equipment ordered by us or a project owner;
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difficulties
or delays in our obtaining permits, rights of way or approvals;
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unanticipated
technical problems, including design or engineering issues;
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inadequate
project execution tools for recording, tracking, forecasting and controlling future costs and schedules;
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unforeseen
increases in the costs of labor, warranties, raw materials, components or equipment, or our failure or inability to obtain
resources when needed;
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reliance
on historical cost and/or execution data that is not representative of current conditions;
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delays
or productivity issues caused by weather conditions, or other forces majeure (i.e., pandemics);
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incorrect
assumptions related to labor productivity, scheduling estimates or future economic conditions, including the impacts of inflation
on fixed-price contracts; and
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modifications
to projects that create unanticipated costs or delays.
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These risks tend to be exacerbated for
longer-term contracts because there is increased risk that the circumstances under which we based our original cost estimates
or project schedules will change with a resulting increase in costs or delays in achieving scheduled milestones. In such events,
our financial condition and results of operations could be negatively impacted. We try to mitigate these risks by reflecting in
our overall cost estimates the reasonable possibility that a number of different and potentially unfavorable outcomes might occur.
If certain risk scenarios transpire and a cost overrun occurs on a project, it is possible that our overall cost estimate can
absorb the cost overrun. There are no assurances that our estimates will be sufficient. If not, our misjudgments may lead to decreased
profits or losses. In some cases, as certain risk scenarios are eliminated or our concerns regarding certain potential cost and/or
schedule issues diminish, we may estimate that the likelihood of an unforeseen cost overrun has reduced and, accordingly, we may
increase the estimated gross margin on the project by decreasing the remaining overall cost estimate.
Our work on the TeesREP project in the
UK has been performed primarily pursuant to a fixed-price subcontract. Based on the completed analyses that have been updated
multiple times through Fiscal 2020, management expects that the forecasted costs for APC at contract completion will exceed projected
revenues by approximately $33.6 million. The entire amount of this loss was recorded and is reflected in our operating results
for Fiscal 2020. However, as stated above, it is reasonably possible that unforeseen future difficulties on this project resulting
in costs that cannot be recovered from the customer will cause us to record additional loss related to this project in the future.
If we guarantee the timely completion
or the performance of a project, we could incur additional costs to fulfill such obligations.
In many of our fixed price long-term contracts,
we guarantee that we will complete a project by a scheduled date. We sometimes provide that the project, when completed, will
also achieve certain performance standards. Subsequently, we may fail to complete the project on time or equipment that we install
may not meet guaranteed performance standards. In those cases, we may be held responsible for costs incurred by the customer resulting
from any delay or any modification to the plant made in order to achieve the performance standards, generally in the form of contractually
agreed-upon liquidated damages or obligations to re-perform substandard work. If we are required to pay such costs, the total
costs of the project would likely exceed our original estimate, and we could experience reduced profits or a loss related to the
applicable project.
We may be involved in litigation, liability claims and contract
disputes which could reduce our profits and cash flows.
We build large and complex energy plants
where design, construction or systems failures can result in substantial injury or damage to third parties. In addition, the nature
of our business results in project owners, subcontractors and vendors occasionally presenting claims against us for recovery of
costs that they incurred in excess of what they expected to incur, or for which they believe they are not contractually liable.
In other cases, project owners may withhold retention and/or contract payments, for which they believe they do not contractually
owe us or based on their interpretation of the contract, or even terminate the contract. We have been, are, and may be in the
future, named as a defendant in legal proceedings where parties may allege breach of contract and seek recovery for damages or
other remedies with respect to our projects or other matters (see Legal Proceedings in Item 3 below for allegations made against
us). These legal matters generally arise in the normal course of our business. In addition, from time to time, we and/or certain
of our current or former directors, officers or employees may be named as parties to other types of lawsuits.
Litigation can involve complex factual
and legal questions, and proceedings may occur over several years. As a result, it is typically not possible to predict the likely
outcome of legal actions with certainty, but it is likely that any significant lawsuit or other claim against us that involves
lengthy legal maneuvering may have a material adverse effect on us regardless of the outcome. Any claim that is successfully asserted
against us could result in our payment of significant sums for damages and other losses. Even if we were to prevail, any litigation
may be costly and time-consuming, and would likely divert the attention of our management and key personnel from our business
operations over multi-year periods. Either outcome may result in adverse effects on our financial condition, results of operations
and cash flows.
In accordance with customary industry
practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we
face. When it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of any
liability may exceed our policy limits or self-insurance reserves. Further, we may elect not to carry insurance related to particular
risks if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition,
we cannot insure fully against pollution and environmental risks. Our management liability insurance policies are on a “claims-made”
basis covering only claims actually made during the policy period currently in effect. In addition, even where insurance is maintained
for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any
such claims. Any liability not covered by our insurance, in excess of our insurance limits and self-insurance reserves or, if
covered by insurance but subject to a high deductible, could result in a significant loss for us, which claims may reduce our
future profits and cash available for operations.
Our failure to recover adequately on
contract variations submitted to project owners could have a material effect on our financial results.
We may submit contract variations to project
owners for additional costs exceeding the contract price or for amounts not included in the original contract price. For example,
in January 2019, we filed a lawsuit against a project owner for breach of contract and failure to remedy various conditions which
negatively affected the schedule and costs associated with the construction of a gas-fired power plant. APC has submitted a number
of meaningful contract variation requests to its customer on the TeesREP project. Both of these matters remained unresolved at
January 31, 2020. These variations occur due to matters such as owner-caused delays or changes from the initial project scope,
both of which may result in additional costs. At times, contract variation submissions can be the subject of lengthy arbitration
or litigation proceedings, and it is difficult to accurately predict when these differences will be fully resolved. When these
types of events occur and unresolved matters are pending, we have used existing liquidity to cover cost overruns pending their
resolution. The aggregate amount of contract variations included in the transaction prices that were used to determine project-to-date
revenues for all of our projects at January 31, 2020 was $20.6 million. A failure to promptly recover on these types of customer
submissions could have a negative impact on our liquidity and profitability in the future.
The shortage of skilled craft labor
may negatively impact our ability to execute on our long-term construction contracts.
Increased infrastructure spending and
general economic expansion has increased the demand for employees with the types of skills we desire. There is a risk that our
construction project schedules become unachievable or that labor expenses will increase unexpectedly as a result of a shortage
in the supply of skilled personnel available to us. Labor shortages, productivity decreases or increased labor costs could impair
our ability to maintain our business or grow our revenues. The inability to hire and retain qualified skilled employees in the
future, including workers in the construction crafts, could negatively impact our ability to complete our long-term construction
contracts successfully.
Our dependence upon third parties to
complete many of our contracts may adversely affect our performance under current and future construction contracts.
Certain of the work performed under our
energy plant construction contracts is actually performed by third-party subcontractors we hire. We also rely on third-party manufacturers
or suppliers to provide much of the equipment and most of the materials (such as copper, concrete and steel) needed to complete
our construction projects. If we are unable to hire qualified subcontractors or find qualified equipment manufacturers or suppliers,
our ability to successfully complete a project could be adversely impacted. If the price we are required to pay for subcontractors
or equipment and supplies exceeds the corresponding amount that we have estimated, we may suffer a loss on the contract. If a
supplier, manufacturer or subcontractor fails to provide supplies, equipment or services as required under a negotiated contract
for any reason, we may be required to self-perform unexpected work or obtain these supplies, equipment or services on an expedited
basis or at a higher price than anticipated from a substitute source, which could impact contract profitability in an adverse
manner. Unresolved disputes with a subcontractor or supplier regarding the scope of work or performance may escalate, resulting
in arbitration proceedings or legal actions (see Legal Proceedings in Item 3 below). Unfavorable outcomes of such disputes may
also impact contract profitability in an adverse manner. In addition, if a subcontractor fails to pay its subcontractors, suppliers
or employees, liens may be placed on our project requiring us to incur the costs of reimbursing such parties in order to have
the liens removed or to commence litigation.
If we are unable to collect amounts
billed to project owners as scheduled, our cash flows may be adversely affected.
Many of our contracts require us to satisfy
specified design, engineering, procurement or construction milestones in order to receive payment for work completed or equipment
or supplies procured prior to achievement of the applicable contract milestone. As a result, under these types of arrangements,
we may incur significant costs or perform significant amounts of services prior to receipt of payment. If the project owner determines
not to proceed with the completion of the project, terminates the contract, delays in making payment of billed amounts or defaults
on its payment obligations, we may face delays or other difficulties in collecting payment of amounts due to us for the costs
previously incurred or for the amounts previously expended to purchase equipment or supplies. The lawsuit that we filed in January
2019 as discussed above, among other recoveries, seeks to compel a project owner to make payments to us for overdue outstanding
invoices that were billed in accordance with the corresponding EPC contract. Such problems may impact the planned cash flows of
affected projects and result in unanticipated reductions in the amounts of future cash flows from operations.
Failure to maintain safe work sites
could result in significant losses as we work on projects that are inherently dangerous.
We often work on large-scale and complex
projects, sometimes in geographically remote locations. Our project sites can place our employees and others near large and/or
mechanized equipment, high voltage electrical equipment, moving vehicles, dangerous processes or highly regulated materials, and
in challenging environments. Safety is a primary focus of our business and is critical to our reputation. Often, we are responsible
for safety on the project sites where we work. Many of our customers require that we meet certain safety criteria to be eligible
to bid on contracts. Further, regulatory changes implemented by OSHA or similar government agencies could impose additional costs
on us. We maintain programs with the primary purpose of implementing effective health, safety and environmental procedures throughout
our Company. If we fail to implement appropriate safety procedures and/or if our procedures fail, our employees or others may
suffer injuries. The failure to comply with such procedures, client contracts or applicable regulations could subject us to losses
and liability, and adversely impact our ability to obtain projects in the future. Our OSHA reportable incident rates, weighted
by hours worked for all of our subsidiaries, were 0.40 and 0.54 for calendar 2019 and 2018, respectively. Our actual rates were
significantly better than the national averages in our industry (NAICS - 2379) for those years.
Future acquisitions and/or investments
may not occur which could limit the growth of our business, and the integration of acquired companies may not be successful.
We are a holding company with no operations
other than our investments in GPS, APC, TRC and SMC. We want to make additional acquisitions and/or investments that would provide
positive cash flow to us and value to our stockholders. However, additional companies meeting these criteria and that provide
products and/or services in growth industries and that are available for purchase at attractive prices are difficult to find.
Discussions with the principal(s) of potential acquisition targets may be protracted and ultimately terminated for a variety of
reasons. Further, due diligence investigations of attractive target companies may uncover unfavorable data, and the negotiation
and consummation of acquisition agreements may not be successful.
We cannot readily predict the timing or
size of any future acquisitions or the capital we will need for these transactions. However, it is likely that any potential future
acquisition or strategic investment transaction would require the use of cash and/or shares of our common stock as components
of the purchase price. Using cash for acquisitions may limit our financial flexibility and make us more likely to seek additional
capital through future debt or equity financings. Our ability to obtain such additional financing in the future may depend upon
prevailing capital market conditions, the strength of our future operating results and financial condition as well as conditions
in our business, and the amount of outside financing sought by us. These factors may affect our efforts to arrange additional
financing on terms that are acceptable to us. Our ability to use shares of our common stock as future acquisition consideration
may be limited by a variety of factors, including the future market price of shares of our common stock and a potential seller’s
assessment of the liquidity of our common stock. If adequate funds or the use of our common stock are not available to us, or
are not available on acceptable terms, we may not be able to take advantage of desirable acquisitions or other investment opportunities
that would benefit our business. Even if we do complete acquisitions in the future, acquired companies may fail to achieve the
results we anticipate including the expected gross profit percentages.
In general, we keep each of our subsidiary
operations separate and distinct. However, we do integrate certain aspects to drive synergies and cost reductions. In the future,
we may not be able to successfully integrate such acquired companies with our other operations without substantial costs, delays
or other operational or financial problems including:
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diversion of management’s attention from other important operational matters;
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difficulties integrating the operations and personnel of acquired companies;
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inability to retain key personnel of acquired companies;
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risks associated with unanticipated events or liabilities;
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the potential disruptions to our current business;
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unforeseen difficulties in the maintenance of uniform standards, controls, procedures and policies, including an effective system of internal control over financial reporting; and
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impairment losses related to acquired goodwill and other intangible assets.
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As discussed in Note 7 to the accompanying
consolidated financial statements, circumstances have caused us to record impairment losses related to the goodwill of TRC during
the last three fiscal years in the aggregate amount of $4.9 million, and related to the goodwill of APC in the amount of $2.1 million
during Fiscal 2020. Since Fiscal 2016, the year that both APC and TRC were acquired, we have recorded impairment losses representing
34% of the goodwill amount originally established for TRC and 100% of the original amount of goodwill related to APC. The continuing
inability of either TRC or APC to achieve sustained profitable operating results will adversely affect our future consolidated
operating results, including gross profits, gross profit percentages and cash flows from operations and, in the case of TRC, may
result in additional goodwill impairment losses.
If one of our acquired companies suffers
performance problems, the reputation of our Company could be materially and adversely affected. Future acquisitions could result
in issuances of equity securities that would reduce our stockholders’ ownership interests, the issuance of sizable amounts
of debt and the incurrence of contingent liabilities. In summary, integrating acquired companies involves a number of special risks.
Our failure to overcome such risks could materially and adversely affect our business, financial condition and future results of
operations. Further, we may conclude that the divestiture of a troubled business will satisfy the best interests of our stockholders.
Any divesting transaction could result in a material loss for us.
Our failure to protect our management
information systems against security breaches could adversely affect our business and results of operations.
Our computer systems face the threat of
unauthorized access, computer hackers, viruses, malicious code, cyberattacks, phishing and other security incursions and system
disruptions, including attempts to improperly access our confidential and proprietary information as well as the confidential and
proprietary information of our customers and other business partners. A party who circumvents our security measures, or those of
our clients, contractors or other vendors, could misappropriate confidential or proprietary information, improperly manipulate
data, or cause damage or interruptions to systems.
Various privacy and security laws in the
US and abroad, including the General Data Protection Regulation (“GDPR”) in the European Union (the “EU”),
require us to protect sensitive and confidential information and data from disclosure and we are bound by our client and other
contracts, as well as our own business practices, to protect confidential and proprietary information and data (whether it be ours
or a third party’s information entrusted to us) from unauthorized disclosure. We believe that we have deployed industry-accepted
security measures and technology to securely maintain confidential and proprietary information retained within our information
systems, including compliance with GDPR, specifically at APC. However, these measures and technology may not adequately prevent
unanticipated security breaches. There can be no assurance that our efforts will prevent these threats. Further, as these security
threats continue to evolve, we may be required to devote additional resources to protect, prevent, detect and respond against such
threats. We do believe that our business represents a low value target for cyberterrorists as we are not a company in the high
technology space and we do not maintain large files of sensitive or confidential personal information. However, we do maintain
a cybersecurity insurance policy to help protect ourselves from various types of losses relating to computer security breaches.
We are fortunate to report that we are
unaware of any meaningful security breaches at any of our business locations. Nonetheless, any significant breach of our information
security could damage our reputation, result in litigation and/or regulatory fines and penalties, or have other material adverse
effects on our business, financial condition, results of operations or cash flows.
Should our management information systems
become unavailable for any significant period of time, our business could be harmed.
The efficient operation of our business
is dependent on computer hardware and software systems. We are heavily reliant on computer, information and communications technology
and related systems, some of which are hosted by third party providers, in order to operate effectively. We may experience system
availability disruptions that may or may not occur as the result of planned procedures. Unplanned interruptions may include natural
disasters, power loss, telecommunications failures, acts of terrorism, computer viruses, physical or electronic break-ins and similar
cybersecurity intrusions as discussed above. Any of these or other events could delay or prevent necessary operations (including
the processing of transactions and the reporting of financial results). While we believe that our reasonable safeguards will protect
us from serious disruptions in the availability of our information technology assets, these safeguards may not be sufficient. We
may also be required to expend significant resources to protect against or alleviate damage caused by systems interruptions and
delays.
We do evaluate the need to upgrade and/or
replace our systems and network infrastructure to protect our computing environment, to stay current on vendor-supported products,
to improve the efficiency of our systems and for other business reasons. The implementation of new systems and information technology
could adversely impact our operations by imposing substantial capital expenditures, demands on management time and risks of delays
or difficulties in transitioning to new systems. The unavailability of the information systems or the failure of the systems to
perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead
costs, causing our business to suffer. Any significant interruption or failure of our information systems could disrupt the conduct
of our business in a meaningful manner, possibly causing material adverse effects on our business, financial condition, results
of operations or cash flows.
Changes in our effective tax rate and
tax positions may vary.
We are subject to income taxes in the US
and several foreign jurisdictions and significant judgment is required in order to determine our worldwide provision for income
taxes for each quarterly and annual reporting period. In the ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Our tax estimates and tax positions could be materially affected by many factors
including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation,
regulations and related interpretations, our global mix of earnings, the realization of deferred tax assets, changes in uncertain
tax positions and changes in our tax strategies.
A change in tax laws, treaties or regulations,
or their interpretation, in any country in which we operate could result in a higher tax rate on our pre-tax earnings. The results
of current or future income tax return audits could result in unfavorable adjustments to the amounts of income taxes previously
recorded and/or paid. Any such future event or determination related to income taxes could have a material impact on our net earnings
and cash flows from operations.
We are periodically audited by income tax
authorities. Currently, the Internal Revenue Service (the “IRS”) is conducting examinations of the amendments to our
federal consolidated tax returns for Fiscal 2016 and Fiscal 2017 with a focus on the significant amounts of research and development
credits claimed by us in the amended income tax returns for each year. 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 that may be available to reduce prior year income taxes. This study focused on project costs incurred during
the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant
amounts of income tax benefits that were not previously recognized in our operating results for any prior year reporting period.
We recorded an aggregate income tax benefit in the amount of $16.6 million related to the research and development credits during
Fiscal 2019.
We evaluate our income tax positions using
the more-likely-than-not threshold in order to determine the amount of benefit to be recognized. We do not anticipate any significant
changes to the income tax benefit recorded; however, the IRS is conducting examinations, as noted above, and, if previously recognized
tax positions no longer meet the more-likely-than-not threshold, the related benefit amounts will be derecognized in the first
financial reporting period in which that threshold is no longer met, which could materially and adversely affect our future financial
condition and operating results.
Foreign currency risks could have an
adverse impact on our revenues, earnings, net assets and backlog.
Certain of the contracts of APC subject
us to foreign currency risk, particularly when project revenues are denominated in a currency different than the contract costs.
In addition, our cash balances, though predominately held in US dollars, may consist of different currencies at various points
in time in order to execute our projects globally and meet transactional requirements. In the future, we may attempt to minimize
our exposure to foreign currency risk by obtaining contract provisions that protect us from foreign currency fluctuations and/or
by using derivatives as hedging instruments. However, these actions may not always eliminate all foreign currency risk and, as
a result, our profitability on certain projects could be adversely affected.
Revenues, costs and earnings of foreign
subsidiaries with functional currencies other than the US dollar are translated into dollars for consolidated reporting purposes.
Our monetary assets and liabilities denominated in foreign currencies are subject to currency fluctuations when measured period
to period for financial reporting purposes. In addition, the US dollar value of APC’s project backlog may from time to time
increase or decrease due to foreign currency volatility. The future amounts of revenues and earnings of foreign subsidiaries could
be affected by foreign currency volatility. If the dollar depreciates against a foreign subsidiary’s non-US dollar functional
currency, we will report greater consolidated revenues, earnings, net assets and backlog amounts in dollars than we would if the
dollar appreciates against the same foreign currency or if there is no change in the exchange rate. During Fiscal 2020, the US
dollar appreciated against the Euro, which is the functional currency of APC. There can be no assurance that the dollar will not
appreciate against the Euro to a greater extent in future reporting periods which would reduce the amounts of APC’s revenues,
earnings and net assets included in our consolidated financial statements, and the reported amount of our project backlog.
A weaker British pound compared to
the US dollar during a reporting period causes local currency results of our UK contracts, denominated in the British pound,
to be translated into fewer dollars. Despite Brexit fears, the British pound strengthened against the Euro and depreciated
only slightly against the US dollar during Fiscal 2020. Future volatility in exchange rates may occur as the UK exits from
the EU. In the longer term, any impact from Brexit on our international operations will depend, in part, on the outcome of
tariff, trade, regulatory and other negotiations and could adversely affect our results of operations.
We could be adversely affected by violations
of the Foreign Corrupt Practices Act and similar anti-bribery laws.
The US Foreign Corrupt Practices Act, the
UK Bribery Act of 2010 and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries
from making improper payments to officials or others for the purpose of obtaining or retaining business. Our policies mandate compliance
with these anti-bribery laws. We may operate in parts of the world that have experienced corruption to some degree and, in certain
circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We train our personnel concerning
anti-bribery laws and issues, and we also inform our partners, subcontractors, suppliers and others who work for us or on our behalf
that they must comply with anti-bribery law requirements. We also have procedures and controls in place to monitor compliance.
We cannot assure that our internal controls
and procedures always will protect us from the possible reckless or criminal acts committed by our employees or others. If we are
found to be liable for anti-bribery law violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence
of others including our partners, subcontractors or suppliers), we could suffer from criminal or civil penalties or other sanctions,
including contract cancellations or debarment, and loss of reputation, any of which could have a material adverse effect on our
business. Litigation or investigations relating to alleged or suspected violations of anti-bribery laws, even if such litigation
or investigations demonstrate ultimately that we did not violate anti-bribery laws, could be costly and could divert management’s
attention away from other aspects of our business.
Our continued success requires us to
retain and hire talented personnel.
During Fiscal 2020, we reached agreement
with William F. Griffin, the co-founder of GPS, on the terms of the change in his role from Chief Executive Officer to Non-Executive
Chairman of GPS, effective November 15, 2019. The change in Mr. Griffin’s role was an important step in the leadership transition
that was planned to occur at GPS.
Its Co-Presidents, Charles Collins IV and
Terrence Trebilcock, have assumed policy-making leadership roles at GPS and are now included among our named executive officers.
Mr. Griffin will continue to advise, to mentor, to support, and to engage in various key activities at GPS as needed. The change
in role allowed Mr. Griffin to provide valuable guidance to APC’s management on the TeesREP project and other matters. In
addition, Mr. Griffin remains a key contributing member of our Board of Directors. We believe that our future success is substantially
dependent on the continued service and performance of the members of our current executive team and the senior management members
of our businesses, including Messrs. Griffin, Collins and Trebilcock, and John Roberts, the chief executive officer and founder
of TRC.
Undoubtedly, unforeseen future changes
in our management will occur. Therefore, we cannot be certain that any key executive or manager will continue in such capacity
while performing at a high level for any particular period of time, nor can we be certain that events will permit us to complete
smooth management transitions should they occur. Our ability to operate productively and profitably, particularly in the power
industry, may be limited by the sudden loss of key personnel or our inability to attract, employ, retain and train skilled personnel
necessary to meet our future requirements. We cannot be certain that we will be able to maintain experienced management teams and
adequately skilled groups of employees necessary to execute our long-term construction contracts successfully and to support our
future growth strategy. The loss of key personnel, the inability to complete management transitions without significant loss of
effectiveness, or the inability to hire and retain qualified employees in the future could negatively impact our ability to manage
our business in the future.
Risks Related to an Investment in Our Securities
Our acquisition strategy may result
in dilution to our stockholders.
We may make future acquisitions of other
businesses that require the use of cash and issuances of common stock. To the extent that we intend to use cash for any acquisition,
we may be required to raise additional equity and/or obtain debt financing. Equity financing may result in dilution for our then
current stockholders. Stock issuances and financing, if obtained, may not be on terms favorable to us and could result in substantial
dilution to our stockholders at the time(s) of these transactions.
Future stock option exercises and restricted
stock issuances may dilute the ownership of the Company’s current stockholders.
As of January 31, 2020, the closing market
price for a share of our common stock was $42.11. The average of the monthly closing prices for our common stock for Fiscal 2020
was $42.79 per share. During Fiscal 2020, the exercise of stock options by our employees and directors resulted in the issuance
of 61,100 shares of our common stock at a weighted average purchase price of $26.67 per share. As of January 31, 2020, there were
outstanding options to purchase 1,271,000 shares of our common stock at a weighted average purchase price of $44.83 per share,
including 420,000 shares related to in-the-money exercisable stock options with a weighted average purchase price of $31.14 per
share. Future exercises of options to purchase shares of common stock at prices below prevailing market prices may result in ownership
dilution for current stockholders.
Further, in April 2019 and 2018, we awarded
performance-based restricted stock units to two senior executives covering up to 36,000 shares of common stock at each date plus
a number of shares to be determined based on the amount of cash dividends deemed paid on shares earned pursuant to the awards.
The release of the stock restrictions will depend on the total shareholder return performance of the Company’s common stock
measured against the performance of a peer-group of common stocks over three-year periods.
Our officers, directors and certain
unaffiliated stockholders have substantial control over the Company.
As of January 31, 2020, our executive officers
and directors as a group owned approximately 8.2% of our voting shares including an aggregate of 546,328 shares of common stock
that may be purchased upon the exercise of stock options held by our executive officers and directors (and deemed exercisable at
January 31, 2020), a total of 327,411 shares of common stock beneficially owned by Rainer H. Bosselmann (our chairman of the board
and chief executive officer) and a total of 286,150 shares beneficially owned by William F. Griffin, (a co-founder of GPS and member
of our board of directors). An additional 1.8% of the outstanding shares are controlled by Allen & Company entities (“Allen”).
One of our independent directors is an officer of Allen. In addition, five other stockholders owned approximately 40.4% of our
shares in total as of December 31, 2019. These groups of stockholders may have significant influence over corporate actions such
as the election of directors, amendments to our certificate of incorporation, the consummation of any merger, the sale of all or
substantially all of our assets or other actions requiring stockholder approval.
We may not pay cash dividends in the
future.
Our board of directors evaluates our ongoing
operational and financial performance in order to determine what role strategically aligned dividends should play in creating shareholder
value. We paid four regular quarterly dividends of $0.25 per share for a total of $1.00 per share during Fiscal 2020 and 2019,
a regular dividend of $1.00 per share during Fiscal 2018, regular and special cash dividends of $0.70 and $0.30 per share, respectively,
for a total of $1.00 per share during Fiscal 2017, a regular cash dividend in the amount of $0.70 per share during Fiscal 2016,
and we paid special cash dividends during earlier years. However, there can be no assurance that the evaluations of our board of
directors will result in the payment of cash dividends in the future.
As our common stock is thinly traded at times, the stock
price may be volatile and investors may have difficulty disposing of their investments at prevailing market prices.
Our common stock is listed for trading
on the NYSE stock exchange and trades under the symbol AGX. Despite the listing on this national stock exchange, our common stock
may trade thinly and sporadically at times and no assurances can be given that a larger market will ever develop, or if developed,
that it will be maintained.
Provisions of our certificate
of incorporation and Delaware law could deter takeover attempts.
Provisions of our certificate of incorporation
and Delaware law could delay, prevent, or make more difficult a merger, tender offer or proxy contest involving us. Among other
things, our board of directors may issue up to 500,000 shares of our preferred stock and may determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights, of these shares. The issuance of preferred stock by us could
adversely affect the rights of holders of common stock by, among other factors, establishing dividend rights, liquidation rights
and voting rights that are superior to the rights of the holders of the common stock. In addition, Delaware law limits transactions
between us and persons that acquire significant amounts of our stock without approval of our board of directors.